<PAGE>
PROSPECTUS
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This Prospectus describes "The New Retirement--Nicholas-Applegate/Aetna Annuity"
group and individual deferred variable annuity contracts ("Contracts") issued by
Aetna Life Insurance and Annuity Company (the "Company"). The Contracts are
available as (1) nonqualified deferred annuity contracts, (2) Individual
Retirement Annuities under Section 408(b) of the Internal Revenue Code, or (3)
qualified contracts issued in connection with certain employer sponsored
retirement plans. (Availability of Contracts of the type identified in items (2)
and (3) may be subject to state regulatory approval.) In most states, group
Contracts are offered, generally to certain broker-dealers or banks which have
agreed to act as Distributors of the Contracts. Individuals who have established
accounts with those broker-dealers or banks are eligible to participate in the
Contract. Individual Contracts are offered only in those states where the group
Contracts are not authorized for sale. (See "Purchase.")
The securities offered in this Prospectus are distributed through the Company as
the Underwriter and by registered broker-dealers or banks selected by it as
Distributors. (See "Purchase.")
The Contracts provide that contributions may be allocated to the ALIAC
Guaranteed Account (the "Guaranteed Account"), a credited interest option, or to
one or more of the Subaccounts of Variable Annuity Account B, a separate account
of the Company. The Subaccounts invest directly in shares of the following
Funds:
- Nicholas-Applegate Core Growth Series
- Nicholas-Applegate Diversified Income
Series
- Nicholas-Applegate Emerging Growth Series
- Nicholas-Applegate International Fixed
Income Series
- Nicholas-Applegate International Growth
Series
- Nicholas-Applegate Value Series
- Aetna Variable Encore Fund
Except as specifically mentioned, this Prospectus describes only investments
through the Separate Account. The Guaranteed Account is described in the
Appendix to this Prospectus, as well as in the Guaranteed Account's prospectus.
The availability of the Funds and the Guaranteed Account is subject to
applicable regulatory authorization. (See "Investment Options.")
This Prospectus provides investors with the information about the Separate
Account that they should know before investing in the Contracts. Additional
information about the Separate Account is contained in a Statement of Additional
Information ("SAI") which is available at no charge. The SAI has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.
The Table of Contents for the SAI is printed on page 21 of this Prospectus. An
SAI may be obtained by indicating the request on your application or enrollment
form or by calling the number listed under the "Inquiries" section of the
Prospectus Summary.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS AND THE ALIAC GUARANTEED ACCOUNT. ALL PROSPECTUSES SHOULD BE READ AND
RETAINED FOR FUTURE REFERENCE.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF OR GUARANTEED BY ANY BANK, NOR
ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION ARE DATED MAY 20,
1996
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
DEFINITIONS...................................................... DEFINITIONS - 1
PROSPECTUS SUMMARY............................................... SUMMARY - 1
FEE TABLE........................................................ FEE TABLE - 1
THE COMPANY...................................................... 1
VARIABLE ANNUITY ACCOUNT B....................................... 1
INVESTMENT OPTIONS............................................... 1
The Funds.................................................... 1
Fund Investment Advisers..................................... 2
Credited Interest Option..................................... 2
PURCHASE......................................................... 3
Contract Availability........................................ 3
Purchasing Interests in the Contract......................... 3
Purchase Payments............................................ 3
Contract Rights.............................................. 4
Designations of Beneficiary and Annuitant.................... 4
Right to Cancel.............................................. 4
CHARGES AND DEDUCTIONS........................................... 5
Daily Deductions from the Separate Account................... 5
Mortality and Expense Risk Charge....................... 5
Administrative Charge................................... 5
Maintenance Fee.............................................. 5
Deferred Sales Charge........................................ 5
Fund Expenses................................................ 6
Premium and Other Taxes...................................... 6
CONTRACT VALUATION............................................... 7
TRANSFERS........................................................ 7
Dollar Cost Averaging Program................................ 8
Account Rebalancing Program.................................. 8
WITHDRAWALS...................................................... 8
ADDITIONAL WITHDRAWAL OPTIONS.................................... 9
DEATH BENEFIT DURING ACCUMULATION PERIOD......................... 9
Death Benefit Amount......................................... 9
Death Benefit Payment Options................................ 10
ANNUITY PERIOD................................................... 11
Annuity Period Elections..................................... 11
Partial Annuitization........................................ 11
Annuity Options.............................................. 12
Annuity Payments............................................. 12
Charges Deducted During the Annuity Period................... 13
Death Benefit Payable During the Annuity Period.............. 13
TAX STATUS....................................................... 13
Introduction................................................. 13
Taxation of the Company...................................... 13
Tax Status of the Contract................................... 14
Taxation of Annuity Contracts................................ 15
Contracts Used with Certain Retirement Plans................. 17
</TABLE>
<PAGE>
<TABLE>
<S> <C>
MISCELLANEOUS.................................................... 19
Distribution................................................. 19
Delay or Suspension of Payments.............................. 19
Performance Reporting........................................ 20
Voting Rights................................................ 20
Modification of the Contract................................. 20
Transfers of Ownership; Assignment........................... 20
Involuntary Terminations..................................... 21
Legal Matters and Proceedings................................ 21
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.............. 21
APPENDIX--ALIAC GUARANTEED ACCOUNT............................... 22
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. THE COMPANY DOES NOT AUTHORIZE ANY
PERSON TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
OFFERING CONTAINED IN THIS PROSPECTUS EXCEPT AS OTHERWISE CONTAINED HEREIN.
<PAGE>
DEFINITIONS
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The following terms are defined as they are used in this Prospectus:
ACCOUNT: A record that identifies contract values accumulated on each
Certificate Holder's behalf during the Accumulation Period.
ACCOUNT VALUE: The total dollar value of amounts held in an Account as of each
Valuation Date during the Accumulation Period.
ACCOUNT YEAR: A period of twelve months measured from the date on which an
Account is established (the effective date) or from an anniversary of such
effective date.
ACCUMULATION PERIOD: The period during which Purchase Payment(s) credited to an
Account are invested to fund future annuity payments.
ACCUMULATION UNIT: A measure of the value of each Subaccount before Annuity
payments begin.
ADJUSTED ACCOUNT VALUE: The Account Value, plus or minus the aggregate market
value adjustment for amounts allocated to the Guaranteed Account.
ANNUITANT: The person on whose life or life expectancy the Annuity payments are
based.
ANNUITY: A series of payments for life, a definite period or a combination of
the two.
ANNUITY DATE: The date on which Annuity payments begin.
ANNUITY PERIOD: The period during which Annuity payments are made.
ANNUITY UNIT: A measure of the value of each Subaccount selected during the
Annuity Period.
BENEFICIARY(IES): The person or persons who are entitled to receive any death
benefit proceeds. Under Nonqualified Contracts, Individual Retirement Annuities
and Section 403(b) Contracts, Beneficiary refers to the beneficiary named under
the Contract. Under Qualified Contracts sold in conjunction with 401(a) or 457
Plans, Beneficiary refers to the beneficiary under the plan.
CERTIFICATE: The document issued to a Certificate Holder for an Account
established under a group contract.
CERTIFICATE HOLDER (YOU): A person or entity who purchases an individual
Contract or acquires an interest under a group Contract. For Nonqualified
Contracts, we reserve the right to limit ownership to natural persons.
COMPANY (WE, US): Aetna Life Insurance and Annuity Company.
CONTRACT: The group and individual deferred, variable annuity contracts offered
by this Prospectus.
DISTRIBUTOR(S): The registered broker-dealer(s), or banks that may be acting as
broker-dealers without separate registration under the Securities Exchange Act
of 1934, which have entered into selling agreements with the Company to offer
and sell the Contracts. The Company may also serve as a Distributor.
FUND(S): An open-end registered management investment company whose shares are
purchased by the Separate Account to fund the benefits provided by the Contract.
GROUP CONTRACT HOLDER: The entity to which a group Contract is issued.
HOME OFFICE: The Company's principal executive offices located at 151 Farmington
Avenue, Hartford, Connecticut 06156.
INDIVIDUAL CONTRACT HOLDER: A person or entity who has purchased an individual
variable annuity contract (also referred to as a "Certificate Holder"). For
Nonqualified Contracts, we reserve the right to limit ownership to natural
persons.
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DEFINITIONS - 1
<PAGE>
INDIVIDUAL RETIREMENT ANNUITY: An individual or group variable deferred annuity
intended to qualify under Code Section 408(b).
NONQUALIFIED CONTRACT: A contract established 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(S): The gross payment(s) made to the Company under an Account.
QUALIFIED CONTRACTS: Contracts available for use with plans entitled to special
federal income tax treatment under Code Sections 401(a), 403(b), 408(b) or 457.
REGISTERED REPRESENTATIVE: The individual who is registered with a broker-dealer
acting as Distributor to offer and sell securities, or who is an employee of a
bank acting as Distributor that is exempt from broker-dealer registration under
the Securities Exchange Act of 1934. Registered Representatives must also be
licensed as insurance agents to sell variable annuity contracts.
SEPARATE ACCOUNT: Variable Annuity Account B, a separate account established for
the purpose of funding variable annuity contracts issued by the Company.
SUBACCOUNT(S): The portion of the assets of the Separate Account that is
allocated to a particular Fund. Each Subaccount invests in the shares of only
one corresponding Fund.
SURRENDER VALUE: The amount payable upon the withdrawal of all or any portion of
an Account Value.
UNDERWRITER: The registered broker-dealer which contracts with other registered
broker-dealers, or with banks exempt from broker-dealer registration, to offer
and sell the Contracts. The Company will serve as Underwriter.
VALUATION DATE: The date and time at which the value of the Subaccount is
calculated. Currently, this calculation occurs at the close of business of the
New York Stock Exchange on any normal business day, Monday through Friday, that
the New York Stock Exchange is open.
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DEFINITIONS - 2
<PAGE>
PROSPECTUS SUMMARY
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CONTRACTS OFFERED
The Contracts described in this Prospectus are group and individual deferred
variable annuity contracts issued by Aetna Life Insurance and Annuity Company
(the "Company"). The purpose of the Contract is to accumulate values and to
provide benefits upon retirement. The Contracts are currently available for (1)
individual nonqualified purchases; (2) Individual Retirement Annuities; and (3)
purchases made in conjunction with employer sponsored retirement plans under
Sections 401(a), 403(b) or 457 of the Code. (Availability of Contracts of the
type identified in items (2) and (3) may be subject to state regulatory
approval. See "Purchase.")
In most states, group Contracts are offered, generally to certain
broker-dealers or banks which have agreed to act as Distributors of the
Contracts. Individuals who have established accounts with those broker-dealers
or banks are eligible to participate in the Contract. Individual Contracts are
offered only in those states where the group Contracts are not authorized for
sale. Joint Certificate Holders are allowed only on Nonqualified Contracts. A
joint Certificate Holder must be the spouse of the other joint Certificate
Holder. In New York and Pennsylvania, the joint Certificate Holders do not need
to be spouses. References to "Certificate Holders" in this Prospectus mean both
of the Certificate Holders on joint Accounts.
CONTRACT PURCHASE
You may purchase an interest in the Contract by completing an application or
enrollment form and submitting it to the Company. Purchase Payments can be
applied to the Contract either through a lump-sum payment or through ongoing
contributions. (See "Purchase.")
FREE LOOK PERIOD
You may cancel the Contract or Certificate within 10 days after you receive
it (or longer if required by state law) by returning it to the Company along
with a written notice of cancellation. Unless state law requires otherwise, the
amount you will receive upon cancellation will reflect the investment
performance of the Subaccounts into which your Purchase Payments were deposited.
In some cases this may be more or less than the amount of your Purchase
Payments. Under a Contract issued as an Individual Retirement Annuity, you will
receive a refund of your Purchase Payment. (See "Purchase--Right to Cancel.")
INVESTMENT OPTIONS
The Company has established Variable Annuity Account B, a registered unit
investment trust, for the purpose of funding the variable portion of the
Contracts. The Separate Account is divided into Subaccounts which invest
directly in shares of the Funds described herein. The Contract allows investment
in any or all of the Subaccounts, as well as in the Guaranteed Account described
below. For a complete list of the Funds available under the Contracts, and a
description of the investment objectives of each of the Funds and their
investment advisers, see "Investment Options--The Funds" in this Prospectus, as
well as the prospectuses for each of the Funds.
The Guaranteed Account is the credited interest option available under the
Contract which allows you to earn a fixed rate of interest, if held for the
guaranteed term. (See the Appendix to this Prospectus.)
CHARGES AND DEDUCTIONS
Certain charges are associated with these Contracts. These charges include
daily deductions from the Separate Account (the mortality and expense risk
charge and an administrative charge), as well as any annual maintenance fee,
transfer fees and premium and other taxes. The Funds also incur certain fees and
expenses which are deducted directly from the Funds. A deferred sales charge may
apply upon a full or partial withdrawal of the Account Value. (See the Fee Table
and "Charges and Deductions.")
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SUMMARY - 1
<PAGE>
TRANSFERS
Prior to the Annuity Date, and subject to certain limitations, Account
Values may be transferred among the Subaccounts and the Guaranteed Account.
Currently transfers are without charge. However, the Company reserves the right
to charge up to $10 if more than 12 transfers are made in a calendar year.
Transfers can be requested in writing or by telephone in accordance with the
Company's transfer procedures. (Transfers from the Guaranteed Account may be
restricted and subject to a market value adjustment. See the Appendix.)
The Company also offers a Dollar Cost Averaging Program and an Account
Rebalancing Program. The Dollar Cost Averaging Program permits the automatic
transfer of amounts from any of the Subaccounts and the one-year Guaranteed
Account term to any of the other Subaccounts on a monthly or quarterly basis.
The Account Rebalancing Program allows Certificate Holders to have portions of
their Account Value automatically reallocated annually to a specified
percentage. (See "Transfers.")
WITHDRAWALS
All or a part of the Account Value may be withdrawn prior to the Annuity
Date by properly completing a disbursement form and sending it to the Company.
Certain charges may be assessed upon withdrawal. Amounts withdrawn from the
Guaranteed Account may be subject to a market value adjustment. (See the
Appendix.) The taxable portion of the withdrawal may also be subject to income
tax and a federal tax penalty. (See "Withdrawals.")
The Contract also offers certain Additional Withdrawal Options during the
Accumulation Period to persons meeting certain criteria. Additional Withdrawal
Options are not available in all states and may not be suitable in every
situation. (See "Additional Withdrawal Options.")
GUARANTEED DEATH BENEFIT
These Contracts contain a guaranteed death benefit feature. Upon the death
of the Annuitant, the Account Value may be increased under certain
circumstances. (See "Death Benefit During Accumulation Period.")
After Annuity Payments have commenced, a death benefit may be payable to the
Beneficiary depending upon the terms of the Contract and the Annuity Option
selected. (See "Death Benefit Payable During the Annuity Period.")
THE ANNUITY PERIOD
On the Annuity Date, you may elect to begin receiving Annuity Payments.
Annuity Payments can be made on either a fixed, variable or combination fixed
and variable basis. If a variable payout is selected, the payments will continue
to vary with the investment performance of the Subaccount(s) selected. The
Company reserves the right to limit the number of Subaccounts that may be
available during the Annuity Period. (See "Annuity Period.")
TAXES
Earnings are not generally taxed until you or your Beneficiary(ies) actually
receive a distribution from the Contract. A 10% federal tax penalty may be
imposed on certain withdrawals. (See "Tax Status.")
INQUIRIES
Questions, inquiries or requests for additional information can be directed
to your agent or local representative, or you may contact the Company as
follows:
<TABLE>
<S> <C>
- Write to: Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156-5996
Attention: Customer Service
- Call Customer Service: 1-800-531-4547 (for automated transfers or changes
in the allocation of Account Values, call:
1-800-262-3862)
</TABLE>
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SUMMARY - 2
<PAGE>
FEE TABLE
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This Fee Table describes the various charges and expenses associated with the
Contract. No sales charge is paid upon purchase of the Contract. All costs that
are borne directly or indirectly under the Subaccounts and Funds are shown
below. Some expenses may vary as explained under "Charges and Deductions." The
charges and expenses shown below do not include premium taxes that may be
applicable. For more information regarding expenses paid out of assets of a
particular Fund, see the Fund's prospectus.
DIRECT CHARGES. These charges are deducted directly from the Account Value. They
include:
DEFERRED SALES CHARGE. The deferred sales charge is deducted as a
percentage of each Purchase Payment withdrawn. The amount of the deferred sales
charge is calculated as follows:
<TABLE>
<S> <C> <C> <C>
CONTRACTS OR CERTIFICATES ISSUED IN NEW YORK:
<CAPTION>
YEARS FROM RECEIPT OF DEFERRED SALES YEARS FROM RECEIPT OF DEFERRED SALES
PURCHASE PAYMENT CHARGE DEDUCTION PURCHASE PAYMENT CHARGE DEDUCTION
----------------------- ------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Less than 2 6% Less than 1 7%
2 or more but less than 1 or more but less than
4 5% 2 6%
4 or more but less than 2 or more but less than
5 4% 3 5%
5 or more but less than 3 or more but less than
6 3% 4 4%
6 or more but less than 4 or more but less than
7 2% 5 3%
5 or more but less than
7 or more 0% 6 2%
6 or more but less than
7 1%
7 or more 0%
</TABLE>
ANNUAL MAINTENANCE FEE.................................... $ 30.00
The maintenance fee will generally be deducted annually
from each Account. The maintenance fee is waived when the
Account Value is $50,000 or more on the date the
maintenance fee is due. The amount shown is the MAXIMUM
maintenance fee that can be deducted under the Contract.
TRANSFER CHARGE........................................... $ 0.00
We currently allow 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.
INDIRECT CHARGES. Each Subaccount pays these expenses out of its assets. The
charges are reflected in the Subaccount's daily Accumulation Unit Value and are
not charged directly to an Account. They include:
DURING THE ACCUMULATION PERIOD:
MORTALITY AND EXPENSE RISK CHARGE......................... 1.25 %
ADMINISTRATIVE CHARGE..................................... 0.10 %*
------
TOTAL SUBACCOUNT ANNUAL EXPENSES........................ 1.35 %
------
------
* 0.15% for Contracts or Certificates issued in the state of New York, which
results in total Subaccount annual expenses of 1.40%
DURING THE ANNUITY PERIOD:
MORTALITY AND EXPENSE RISK CHARGE......................... 1.25 %
ADMINISTRATIVE CHARGE..................................... 0.00 %
-----
We currently do not impose an Administrative Charge during
the Annuity Period. However, we reserve the right to deduct
a daily charge of not more than 0.25% per year from the
Subaccounts.
TOTAL SUBACCOUNT ANNUAL EXPENSES........................ 1.25 %
-----
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FEE TABLE - 1
<PAGE>
ANNUAL EXPENSES OF THE FUNDS
The following table illustrates the advisory fees and other expenses applicable
to the Funds. Except as noted, the following figures are a percentage of average
net assets and, except where otherwise indicated, are based on figures for
the year ended December 31, 1995. A Fund's "Other Expenses" include operating
costs of the Fund. The expenses shown below are reflected in the Fund's net
asset value and are not deducted from the Account Value.
<TABLE>
<CAPTION>
INVESTMENT
ADVISORY FEES OTHER EXPENSES TOTAL
(AFTER EXPENSE (AFTER EXPENSE ANNUAL FUND
REIMBURSEMENT) REIMBURSEMENT) EXPENSES
-------------- -------------- -----------
<S> <C> <C> <C>
Nicholas-Applegate Core Growth Series(1) 0.75% 0.25% 1.00%
Nicholas-Applegate Diversified Income Series(1) 0.45% 0.00% 0.45%
Nicholas-Applegate Emerging Growth Series(1) 1.00% 0.25% 1.25%
Nicholas-Applegate International Fixed Income
Series(1) 0.60% 0.35% 0.95%
Nicholas-Applegate International Growth Series(1) 1.00% 0.40% 1.40%
Nicholas-Applegate Value Series(1) 0.75% 0.25% 1.00%
Aetna Variable Encore Fund(2) 0.25% 0.10% 0.35%
</TABLE>
--------------------------
(1) 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%; Diversified
Income--0.45%; Emerging Growth--1.25%; International Fixed Income--0.95%;
International Growth--1.40%; Value--1.00%. Without such an arrangement, the
"Other Expenses" and "Total Annual Fund Expenses" are estimated to be as
follows: Core Growth--0.56% and 1.31%; Diversified Income--0.27% and 0.72%;
Emerging Growth--0.61% and 1.61%; International Fixed Income--1.15% and
1.75%; International Growth-- 0.61% and 1.61%; and Value--0.56% and 1.31%.
During the course of this period, expenses may be more or less than the
amount shown.
(2) As of May 1, 1996, the Company will provide administrative services to the
Fund and will assume the Fund's ordinary recurring direct costs under an
Administrative Services Agreement. The "Other Expenses" shown are not based
on figures for the year ended December 31, 1995, but reflect the fee payable
under this Agreement.
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FEE TABLE - 2
<PAGE>
HYPOTHETICAL ILLUSTRATION (EXAMPLE)
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. For the
purposes of these Examples, the maximum maintenance fee of $30.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.12%.
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
-------------------------------------------------- ------------------------
IF YOU DO NOT WITHDRAW
THE ACCOUNT VALUE, OR IF
IF YOU WITHDRAW THE ENTIRE ACCOUNT VALUE AT THE YOU ANNUITIZE AT THE END
OF THE PERIODS SHOWN,
END OF THE PERIODS SHOWN, YOU WOULD PAY THE YOU WOULD PAY THE
FOLLOWING EXPENSES (NO
FOLLOWING EXPENSES, INCLUDING ANY APPLICABLE DEFERRED SALES CHARGE IS
DEFERRED SALES CHARGE: REFLECTED):*
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Nicholas-Applegate Core Growth Series $ 87 $ 122 $ 158 $ 281 $ 25 $ 77
Nicholas-Applegate Diversified Income Series $ 81 $ 105 $ 130 $ 224 $ 20 $ 60
Nicholas-Applegate Emerging Growth Series $ 89 $ 129 $ 171 $ 305 $ 28 $ 84
Nicholas-Applegate International Fixed Income
Series $ 86 $ 120 $ 156 $ 276 $ 25 $ 75
Nicholas-Applegate International Growth Series $ 90 $ 134 $ 178 $ 320 $ 29 $ 89
Nicholas-Applegate Value Series $ 87 $ 122 $ 158 $ 281 $ 25 $ 77
Aetna Variable Encore Fund $ 80 $ 102 $ 125 $ 214 $ 18 $ 57
<CAPTION>
5 YEARS 10 YEARS
----------- -----------
<S> <C> <C>
Nicholas-Applegate Core Growth Series $ 132 $ 281
Nicholas-Applegate Diversified Income Series $ 104 $ 224
Nicholas-Applegate Emerging Growth Series $ 144 $ 305
Nicholas-Applegate International Fixed Income
Series $ 129 $ 276
Nicholas-Applegate International Growth Series $ 151 $ 320
Nicholas-Applegate Value Series $ 132 $ 281
Aetna Variable Encore Fund $ 99 $ 214
</TABLE>
--------------------------
* This Example would not apply if a nonlifetime variable annuity option is
selected, and a lump sum settlement is requested within three years after
annuity payments start, since 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. (Refer to Example A.)
<TABLE>
<CAPTION>
CONTRACTS OR CERTIFICATES ISSUED IN NEW YORK
----------------------------------------------------------------------------
EXAMPLE C EXAMPLE D
-------------------------------------------------- ------------------------
IF YOU DO NOT WITHDRAW
THE ACCOUNT VALUE, OR IF
IF YOU WITHDRAW THE ENTIRE ACCOUNT VALUE AT THE YOU ANNUITIZE AT THE END
OF THE PERIODS SHOWN,
END OF THE PERIODS SHOWN, YOU WOULD PAY THE YOU WOULD PAY THE
FOLLOWING EXPENSES (NO
FOLLOWING EXPENSES, INCLUDING ANY APPLICABLE DEFERRED SALES CHARGE IS
DEFERRED SALES CHARGE: REFLECTED):*
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Nicholas-Applegate Core Growth Series $ 87 $ 112 $ 151 $ 286 $ 26 $ 78
Nicholas-Applegate Diversified Income Series $ 82 $ 95 $ 123 $ 230 $ 20 $ 62
Nicholas-Applegate Emerging Growth Series $ 89 $ 119 $ 163 $ 310 $ 28 $ 86
Nicholas-Applegate International Fixed Income Series $ 87 $ 110 $ 148 $ 281 $ 25 $ 77
Nicholas-Applegate International Growth Series $ 91 $ 124 $ 170 $ 324 $ 30 $ 90
Nicholas-Applegate Value Series $ 87 $ 112 $ 151 $ 286 $ 26 $ 78
Aetna Variable Encore Fund $ 81 $ 92 $ 118 $ 219 $ 19 $ 59
<CAPTION>
5 YEARS 10 YEARS
----------- -----------
<S> <C> <C>
Nicholas-Applegate Core Growth Series $ 134 $ 286
Nicholas-Applegate Diversified Income Series $ 106 $ 230
Nicholas-Applegate Emerging Growth Series $ 146 $ 310
Nicholas-Applegate International Fixed Income Series $ 132 $ 281
Nicholas-Applegate International Growth Series $ 154 $ 324
Nicholas-Applegate Value Series $ 134 $ 286
Aetna Variable Encore Fund $ 101 $ 219
</TABLE>
--------------------------
* This Example would not apply if a nonlifetime variable annuity option is
selected, and a lump sum settlement is requested within three years after
annuity payments start, since 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. (Refer to Example C.)
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FEE TABLE - 3
<PAGE>
THE COMPANY
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Aetna Life Insurance and Annuity Company (the "Company") is the issuer of
the Contract, and as such, it is responsible for providing the insurance and
annuity benefits under the Contract. The Company is a stock life insurance
company organized under the insurance laws of the State of Connecticut in 1976.
Through a merger, it succeeded to the business of Aetna Variable Annuity Life
Insurance Company (formerly Participating Annuity Life Insurance Company, an
Arkansas life insurance company organized in 1954). The Company is engaged in
the business of issuing life insurance policies and variable annuity contracts
in all states of the United States. The Company's principal executive offices
are located at 151 Farmington Avenue, Hartford, Connecticut 06156.
The Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc.,
which is in turn a wholly owned subsidiary of Aetna Retirement Services, Inc.
and an indirect wholly owned subsidiary of Aetna Life and Casualty Company.
VARIABLE ANNUITY ACCOUNT B
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The Company established Variable Annuity Account B (the "Separate Account")
in 1976 as a segregated asset account for the purpose of funding its variable
annuity contracts. The Separate Account is registered as a unit investment trust
under the Investment Company Act of 1940 (the "1940 Act"), and meets the
definition of "separate account" under federal securities laws. The Separate
Account is divided into "subaccounts" which do not invest directly in stocks,
bonds or other investments. Instead, each Subaccount buys and sells shares of a
corresponding Fund.
Although the Company holds title to the assets of the Separate Account, such
assets are not chargeable with liabilities of any other business conducted by
the Company. Income, gains or losses of the Separate Account are credited to or
charged against the assets of the Separate Account without regard to other
income, gains or losses of the Company. All obligations arising under the
Contracts are general corporate obligations of the Company.
INVESTMENT OPTIONS
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THE FUNDS
Purchase Payments may be allocated to one or more of the Subaccounts as
designated on the application or enrollment form. In turn, the Subaccounts
invest in the corresponding Funds at net asset value.
The availability of Funds may be subject to regulatory authorization. In
addition, the Company may add or withdraw Funds, as permitted by applicable law.
Not all Funds may be available in all jurisdictions or under all Contracts.
Subject to state regulatory approval, if the shares of any Fund should no
longer be available for investment by the Separate Account or if in the judgment
of the Company, further investment in such shares should become inappropriate in
view of the purpose of the Contract, we may cease to make such Fund shares
available for investment under the Contract prospectively. The Company may,
alternatively, substitute shares of another Fund for shares already acquired.
The Company reserves the right to substitute shares of another Fund for shares
already acquired without a proxy vote. Any elimination, substitution or addition
of Funds will be done in accordance with applicable state and federal securities
laws.
The investment results of the Funds described below are likely to differ
significantly and there is no assurance that any of the Funds will achieve their
respective investment objectives. 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).
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-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 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 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.
-NICHOLAS-APPLEGATE INTERNATIONAL GROWTH SERIES seeks to maximize long-term
capital appreciation. It invests in an international portfolio of equity
securities of foreign companies.
-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.
-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.
FUND INVESTMENT ADVISERS
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.
RISKS ASSOCIATED WITH INVESTMENT IN THE FUNDS. Some of the Funds may use
instruments known as derivatives as part of their investment strategies. The use
of certain derivatives may involve high risk of volatility to a Fund, and the
use of leverage in connection with such derivatives can also increase risk of
losses. Some of the Funds may also invest in foreign or international securities
which involve greater risks than U.S. investments.
More comprehensive information, including a discussion of potential risks,
is found in the respective Fund prospectuses which accompany this Prospectus.
You should read the Fund prospectuses and consider carefully, and on a
continuing basis, which Fund or combination of Funds is best suited to your
long-term investment objectives.
CONFLICTS OF INTEREST (MIXED AND SHARED FUNDING). Shares of the Funds are
sold to each of the Subaccounts for funding the variable annuity contracts
issued by the Company. Shares of the Funds may also be sold to other insurance
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 contracts
issued by the Company or by third parties. This is referred to as "mixed
funding."
Because the Funds available under the Contract are sold to fund variable
annuity contracts and variable life insurance policies issued by us or by other
companies, certain conflicts of interest could arise. If a conflict of interest
were to occur, one of the separate accounts might withdraw its investment in a
Fund, which might force that Fund to sell portfolio securities at
disadvantageous prices, causing its per share value to decrease. Each Fund's
Board of Directors or Trustees has agreed to monitor events in order to identify
any material irreconcilable conflicts which might arise and to determine what
action, if any, should be taken to address such conflict.
CREDITED INTEREST OPTION
Purchase Payments may be allocated to the ALIAC Guaranteed Account (the
"Guaranteed Account"). Through the Guaranteed Account, we guarantee stipulated
rates of interest for stated periods of time. Amounts must remain in the
Guaranteed Account for specified periods to receive the quoted interest rates,
or a market value adjustment (which may be positive or negative) will be
applied. (See the Appendix.)
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PURCHASE
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CONTRACT AVAILABILITY
The Contracts are offered as (1) nonqualified deferred annuity contracts;
(2) Individual Retirement Annuities; or (3) Qualified Contracts used in
conjunction with certain employer sponsored retirement plans. Individual
Retirement Annuities are currently available as rollovers, and may permit
ongoing contributions subject to state regulatory approval. Additionally,
availability of the Qualified Contracts described under item (3) is subject to
state regulatory approval.
Eligible persons seeking to invest and accumulate money for retirement can
purchase individual interests in group Contracts, or, where required by state
law, they may purchase individual Contracts. In most states, group Contracts are
offered, generally to certain broker-dealers which have agreed to act as
distributors of the Contracts, and individual accounts are established by the
Company for each Certificate Holder. In some states, an individual Contract will
be owned by the Certificate Holder. In both cases, a Certificate Holder's
interest in the Contract is known as his or her "Account."
The maximum issue age for the Annuitant is 90 (age 80 for those Contracts
issued in the state of New York, and age 85 for those Contracts issued in the
state of Pennsylvania).
JOINT CERTIFICATE HOLDERS. Nonqualified Contracts may be purchased by
spouses as joint Certificate Holders. In New York and Pennsylvania, the joint
Certificate Holders do not need to be spouses. References to "Certificate
Holders" in this Prospectus mean both of the Certificate Holders on joint
Accounts. Tax law prohibits the purchase of Qualified Contracts by joint
Certificate Holders.
PURCHASING INTERESTS IN THE CONTRACT
GROUP CONTRACTS. Groups will generally consist of those eligible
individuals who have established an Account with a broker-dealer or a bank which
has agreed to act as a Distributor for the Contracts. The Contract application
must be completed by the prospective group Contract Holder and sent to the
Company at its Home Office. Once we approve the Contract application, a group
Contract is issued to the group Contract Holder. Certificate Holders may
purchase interests in a group Contract by submitting an enrollment form. Once
the enrollment form is accepted a Certificate will be issued.
INDIVIDUAL CONTRACTS. Certain states will not allow a group Contract due to
provisions in their insurance laws. In those states where individual Contracts
are offered, eligible persons will submit an individual application to the
Company. In those states, an individual will be issued a Contract rather than a
Certificate.
Regardless of whether you have purchased a group or individual Contract, the
Company must accept or reject the application or enrollment form within two
business days of receipt. If these items are incomplete, the Company may hold
any forms and accompanying Purchase Payments for five days. Purchase Payments
may be held for longer periods only with the consent of the Certificate Holder,
pending acceptance of the application or enrollment form. If the application or
enrollment form is rejected, the application or enrollment form and any Purchase
Payments will be returned to the Certificate Holder.
PURCHASE PAYMENTS
You may make Purchase Payments under the Contract in one lump sum, through
periodic payments or as a transfer from a pre-existing plan.
The minimum initial Purchase Payment amount is $5,000 for Nonqualified
Contracts and $1,500 for Qualified Contracts. Additional Purchase Payments made
to an existing Contract must be at least $500, or if made by automatic check
plan, $50 per month. Additional Purchase Payments are subject to the terms and
conditions published by us at the time of the subsequent payment. A Purchase
Payment of more than $1,000,000 will be allowed only with the Company's consent.
We also reserve the right to reject any Purchase Payment to a prospective or
existing Account without advance notice.
For Qualified Contracts the Code imposes a maximum limit on annual Purchase
Payments which may be excluded from a participant's gross income. (See "Tax
Status.")
ALLOCATION OF PURCHASE PAYMENTS. Purchase Payments will initially be
allocated to the Subaccounts or the Guaranteed Account as specified on the
application or enrollment form. Changes in such allocation may be
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<PAGE>
made in writing or by telephone transfer. Allocations must be in whole
percentages, and there may be limitations on the number of investment options
that can be selected during the Accumulation Period. (See "Transfers.")
CONTRACT RIGHTS
Under individual Contracts, Certificate Holders have all Contract rights.
Under group Contracts, the group Contract Holder has title to the Contract
and generally only the right to accept or reject any modifications to the
Contract. You have all other rights to your Account under the Contract. However,
under a Nonqualified 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.")
Joint Certificate Holders have equal rights under the Contract and with
respect to their Account. On the death of a joint Certificate Holder prior to
the Annuity Date, the surviving Certificate Holder may retain all ownership
rights under the Contract or elect to have the proceeds distributed. (See "Death
Benefit.") All rights under the Contract must be exercised by both joint
Certificate Holders with the exception of transfers among investment options; at
our discretion, one joint Certificate Holder can select additional investment
options or change investment options after the Account has been established.
DESIGNATIONS OF BENEFICIARY AND ANNUITANT
You generally designate the beneficiary under the Contract on the
application or enrollment form. However, for Qualified Contracts issued in
conjunction with a Code Section 401(a) qualified pension or profit sharing plan
or a Code Section 457 deferred compensation plan, the employer or trustee must
be both the Certificate Holder and the beneficiary under the Contract, and the
participant on whose behalf the Account was established must be the Annuitant.
Under such plans the participant is generally allowed to designate a beneficiary
under the plan, and the Certificate Holder may direct that we pay any death
proceeds to the plan beneficiary. "Beneficiary" as used in this Prospectus
refers to the person who is ultimately entitled to receive such proceeds.
For Qualified Contracts issued in conjunction with a Code Section 403(b) tax
deferred annuity program subject to the Employee Retirement Income Security Act
(ERISA), the spouse of a married participant must be the Beneficiary of at least
50% of the Account Value. If the married participant is age 35 or older, the
participant may name an alternate Beneficiary provided the participant furnishes
a waiver and spousal consent which meets the requirements of ERISA Section 205.
The participant on whose behalf the Account was established must be the
Annuitant.
For Qualified Contracts issued as an Individual Retirement Annuity, you must
be the Annuitant. For Nonqualified Contracts, you may (but need not) select a
different person as the Annuitant. (See "Purchase-- Contract Availability.")
RIGHT TO CANCEL
You may cancel the Contract or Certificate without penalty by returning it
to the Company with a written notice of your intent to cancel. In most states,
you have ten days to exercise this right; some states allow you longer. Unless
state law requires otherwise, the amount you will receive upon cancellation will
reflect the investment performance of the Subaccounts into which your Purchase
Payments were deposited. In some cases this may be more or less than the amount
of your Purchase Payments; therefore, you bear the entire investment risk for
amounts allocated among the Subaccounts during the free look period. Under
Contracts issued as Individual Retirement Annuities, you will receive a refund
of your Purchase Payment. Account Values will be determined as of the Valuation
Date on which we receive your request for cancellation at our Home Office.
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CHARGES AND DEDUCTIONS
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DAILY DEDUCTIONS FROM THE SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. The Company makes a daily deduction from
each of the Subaccounts for the mortality and expense risk charge. The charge is
equal, on an annual basis, to 1.25% of the daily net assets of the Subaccounts
and compensates the Company for the assumption of the mortality and expense
risks under the Contract. The mortality risks are those assumed for our promise
to make lifetime payments according to annuity rates specified in the Contract.
The expense risk is the risk that the actual expenses for costs incurred under
the Contract will exceed the maximum costs that can be charged under the
Contract.
If the amount deducted for mortality and expense risks is not sufficient to
cover the mortality costs and expense shortfalls, the loss is borne by the
Company. If the deduction is more than sufficient, the excess may be used to
recover distribution expenses relating to the Contracts and as a source of
profit to the Company. The Company expects to make a profit from the mortality
and expense risk charge.
ADMINISTRATIVE CHARGE. During the Accumulation Period, the Company makes a
daily deduction from each of the Subaccounts for an administrative charge. The
charge is equal, on an annual basis, to 0.10% of the daily net assets of the
Subaccounts (0.15% of the daily net assets for those Contracts or Certificates
issued in the state of New York) and compensates the Company for administrative
expenses that exceed revenues from the maintenance fee described below. The
charge is set at a level which does not exceed the average expected cost of the
administrative services to be provided while the Contract is in force. The
Company does not expect to make a profit from this charge.
During the Annuity Period, the Company reserves the right to make a
deduction for the administrative charge of an amount equal, on an annual basis,
to a maximum of 0.25% of the daily net assets of the Subaccounts. There is
currently no administrative charge during the Annuity Period. Once an Annuity
Option is elected, the charge will be established and will be effective during
the entire Annuity Period.
MAINTENANCE FEE
During the Accumulation Period, the Company will deduct an annual
maintenance fee from the Account Value. The maintenance fee is to reimburse the
Company for some of its administrative expenses relating to the establishment
and maintenance of the Accounts.
The maximum maintenance fee deducted under the Contract is $30. The
maintenance fee will be deducted on a pro rata basis from each investment option
in which you have an interest. If your entire Account Value is withdrawn, the
full maintenance fee will be deducted at the time of withdrawal. The maintenance
fee will not be deducted (either annually or upon withdrawal) if your Account
Value is $50,000 or more on the day the maintenance fee is due.
DEFERRED SALES CHARGE
Withdrawals of all or a portion of the Account Value may be subject to a
deferred sales charge. The deferred sales charge is a percentage of Purchase
Payments withdrawn from the Subaccounts and the Guaranteed Account and is based
on the number of years which have elapsed since the Purchase Payment was made.
The deferred sales charge for each Purchase Payment is determined by multiplying
the Purchase Payment withdrawn by the appropriate percentage, in accordance with
the schedule set forth in the tables below.
Withdrawals are taken first against Purchase Payments, then against any
increase in value. However, the deferred sales charge only applies to the
Purchase Payment (not to any associated changes in value). To satisfy a partial
withdrawal, the deferred sales charge is calculated as if the Purchase Payments
are withdrawn from the Subaccounts in the same order they were applied to the
Account. Partial withdrawals from the Guaranteed Account will be treated as
described in the Appendix and
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the prospectus for the Guaranteed Account. The total charge will be the sum of
the charges applicable for all of the Purchase Payments withdrawn.
<TABLE>
<CAPTION>
YEARS SINCE RECEIPT OF DEFERRED SALES
PURCHASE PAYMENT CHARGE DEDUCTION
---------------------------- ---------------------
<S> <C>
Less than 2 6%
2 or more but less than 4 5%
4 or more but less than 5 4%
5 or more but less than 6 3%
6 or more but less than 7 2%
7 or more 0%
</TABLE>
CONTRACTS OR CERTIFICATES ISSUED IN NEW YORK
<TABLE>
<CAPTION>
YEARS SINCE RECEIPT OF DEFERRED SALES
PURCHASE PAYMENT CHARGE DEDUCTION
---------------------------- ---------------------
<S> <C>
Less than 1 7%
1 or more but less than 2 6%
2 or more but less than 3 5%
3 or more but less than 4 4%
4 or more but less than 5 3%
5 or more but less than 6 2%
6 or more but less than 7 1%
7 or more 0%
</TABLE>
A deferred sales charge will not be deducted from any portion of a Purchase
Payment withdrawn if the withdrawal is:
- applied to provide Annuity benefits;
- paid to a Beneficiary due to the Annuitant's death before Annuity Payments
start, up to a maximum of the Purchase Payment(s) in the Account on the
Annuitant's date of death;
- made due to the election of an Additional Withdrawal Option (see "Additional
Withdrawal Options");
- paid upon a full withdrawal where the Account Value is $2,500 or less and no
amount has been withdrawn during the prior 12 months; or
- paid if we close out your Account when the value is less than $2,500.
After the first Account Year, you may withdraw all or a portion of your
Purchase Payments without a deferred sales charge, provided that (1) such
withdrawal occurs within three years of the Annuitant's admission to a licensed
nursing care facility (including non-licensed facilities in New Hampshire) and
(2) the Annuitant has spent at least 45 consecutive days in such facility. This
waiver of deferred sales charge does not apply if the Annuitant is in a nursing
care facility at the time the Account is established. It will also not apply if
otherwise prohibited by state law.
The Company does not anticipate that the deferred sales charge will cover
all sales and administrative expenses which it incurs in connection with the
Contract. The difference will be covered by the general assets of the Company
which are attributable, in part, to mortality and expense risk charges under the
Contract described above.
FREE WITHDRAWALS. At least 12 months after the date the first Purchase
Payment is applied to your Account, you may withdraw up to 10% of your current
Account Value (up to 15% of your current Account Value for Contracts or
Certificates issued in the state of New York) during each calendar year without
imposition of a deferred sales charge. The free withdrawal applies only to the
first partial or full withdrawal in each calendar year. The free withdrawal
amount will be based on the Account Value calculated on the Valuation Date next
following our receipt of your request for withdrawal. If your withdrawal exceeds
the applicable free withdrawal allowance, we will deduct a deferred sales charge
on the excess amount. (See the Appendix for a discussion of withdrawals from the
Guaranteed Account.) This provision may not be exercised if you have elected the
Systematic Withdrawal Option or Estate Conservation Option. (See "Additional
Withdrawal Options.")
FUND EXPENSES
Each Fund incurs certain expenses which are paid out of its net assets.
These expenses include, among other things, the investment advisory or
"management" fee. The expenses of the Funds are set forth in the Fee Table in
this Prospectus and described more fully in the accompanying Fund prospectuses.
PREMIUM AND OTHER TAXES
Several states and municipalities impose a premium tax on Annuities. These
taxes currently range from 0% to 4%. Ordinarily, any state premium tax will be
deducted from the Account Value when it is applied to an Annuity Option.
However, we reserve the right to deduct state premium tax from the Purchase
Payment(s) or from the Account Values at any time, but no earlier than when we
have a tax liability under state law.
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
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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.
CONTRACT VALUATION
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ACCOUNT VALUE
Until the Annuity Date, the Account Value is the total dollar value of
amounts held in the Account as of any Valuation Date. The Account Value at any
given time is based on the value of the units held in each Subaccount, plus the
value of amounts held in the Guaranteed Account.
ACCUMULATION UNITS
The value of your interests in a Subaccount is expressed as the number of
"Accumulation Units" that you hold multiplied by an "Accumulation Unit Value"
(or "AUV") for each unit. The AUV on any Valuation Date is determined by
multiplying the value on the immediately preceding Valuation Date by the net
investment factor of that Subaccount for the period between the immediately
preceding Valuation Date and the current Valuation Date. (See "Net Investment
Factor" below.) The Accumulation Unit Value will be affected by the investment
performance, expenses and charges of the applicable Fund and is reduced each day
by a percentage that accounts for the daily assessment of mortality and expense
risk charges and the administrative charge.
Initial Purchase Payments will be credited to your Account as described
under "Purchasing Interests in the Contract." Each subsequent Purchase Payment
(or amount transferred) will be credited to your Account at the AUV computed on
the next Valuation Date following our receipt of your payment or transfer
request. The value of an Accumulation Unit may increase or decrease.
NET INVESTMENT FACTOR
The net investment factor is used to measure the investment performance of a
Subaccount from one Valuation Date to the next. The net investment factor for a
Subaccount for any valuation period is equal to the sum of 1.0000 plus the net
investment rate. The net investment rate equals:
(a) the net assets of the Fund held by the Subaccount on the current Valuation
Date, minus
(b) the net assets of the Fund held by the Subaccount on the preceding Valuation
Date, plus or minus
(c) taxes or provisions for taxes, if any, attributable to the operation of the
Subaccount;
(d) divided by the total value of the Subaccount's Accumulation and Annuity
Units on the preceding Valuation Date;
(e) minus a daily charge at the annual effective rate of 1.25% for mortality and
expense risks, and an administrative charge of 0.10% (0.15% for those
Contracts or Certificates issued in the state of New York) during the
Accumulation Period and up to 0.25% during the Annuity Period (currently 0%
during the Annuity Period).
The net investment rate may be either positive or negative.
TRANSFERS
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At any time prior to the Annuity Date, you can transfer amounts held under
your Account from one Subaccount to another. Transfers from the Guaranteed
Account may be subject to certain restrictions and to a market value adjustment.
(See the Appendix.) A request for transfer can be made either in writing or by
telephone. The telephone transfer privilege is available automatically; no
special election is necessary. All transfers must be in accordance with the
terms of the Contract.
The Company currently allows unlimited transfers of accumulated amounts to
available investment options. Twelve free transfers are allowed per calendar
year. Thereafter, the Company reserves the right to charge up to $10 for each
additional transfer. The Company
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currently does not impose this charge. The total number of investment options
that you may select during the Accumulation Period may be limited, as set forth
on your application or enrollment form. Any transfer will be based on the
Accumulation Unit Value next determined after the Company receives a valid
transfer request at its Home Office. Transfers are currently not available
during the Annuity Period; however, they may become available during the second
half of 1996. (See "Annuity Options.")
DOLLAR COST AVERAGING PROGRAM
You may establish automated transfers of Account Values on a monthly or
quarterly basis through the Company's 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. The Dollar Cost Averaging Program permits the transfer of
amounts from any of the variable funding options and the one-year Guaranteed
Term to any of the variable investment options. A market value adjustment will
not be applied to dollar cost averaging transfers from the one-year Guaranteed
Term. (See the Appendix for a discussion of the restrictions and features
attributable to the Guaranteed Account.)
Dollar cost averaging does not ensure a profit nor guarantee against loss in
a declining market. You should consider your financial ability to continue
purchases through periods of low price levels. For additional information,
please refer to the "Inquiries" section of the Prospectus Summary, which
describes how you can obtain further information.
The Dollar Cost Averaging Program is not available to individuals who have
elected an Additional Withdrawal Option or the Account Rebalancing Program.
ACCOUNT REBALANCING PROGRAM
The Account Rebalancing Program allows you to have portions of your Account
Value automatically reallocated annually to a specified percentage. Only Account
Values accumulating in the Subaccounts can be rebalanced. You may participate in
this program by completing the Account Rebalancing section of the application or
enrollment form, or by sending a written request to the Company at its Home
Office.
The Account Rebalancing Program is not available to Certificate Holders who
have elected the Dollar Cost Averaging Program, and the Account Rebalancing
Program does not ensure a profit nor guarantee against loss in a declining
market.
WITHDRAWALS
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All or a portion of your Account Value may be withdrawn at any time during
the Accumulation Period, subject to the withdrawal restrictions under Section
403(b) Contracts described below. To request a withdrawal, you must properly
complete a disbursement form and send it to our Home Office. Payments for
withdrawal requests will be made in accordance with SEC requirements, but
normally not later than seven calendar days following our receipt of a
disbursement form.
Withdrawals may be requested in one of the following forms:
-FULL WITHDRAWAL OF AN ACCOUNT: The amount paid for a full withdrawal will be
the Adjusted Account Value minus any applicable deferred sales charge and
maintenance fee due.
-PARTIAL WITHDRAWALS: (Percentage): The amount paid will be the percentage of
the Adjusted Account Value requested minus any applicable deferred sales
charge.
-PARTIAL WITHDRAWALS: (Specified Dollar Amount): The amount paid will be the
dollar amount requested. However, the amount withdrawn from your Account will
equal the amount you request plus any applicable deferred sales charge and plus
or minus any applicable market value adjustment.
For any partial withdrawal, the value of the Accumulation Units canceled
will be withdrawn proportionately from the Guaranteed Account or each Subaccount
in which your Account is invested, unless you request otherwise in writing. All
amounts paid will be based on your Account Value as of the next Valuation Date
after we receive a request for withdrawal at our Home Office, or on such later
date as the disbursement form may specify. Taxes or tax penalties may be due on
the amount withdrawn. (See "Tax Status.")
The tax treatment of withdrawals from each Nonqualified Contract may be
affected if you own other
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annuity contracts issued by us (or our affiliates) that were purchased on or
after October 21, 1988. (See "Tax Status.")
WITHDRAWAL RESTRICTIONS FROM 403(B) PLANS. Under Section 403(b) Contracts,
the withdrawal of salary reduction contributions and earnings on such
contributions is generally prohibited prior to the participant's death,
disability, attainment of age 59 1/2, separation from service or financial
hardship. (See "Tax Status.")
ADDITIONAL WITHDRAWAL OPTIONS
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The Company offers certain withdrawal options under the Contract that are
not considered Annuity Options ("Additional Withdrawal Options"). To exercise
these options, your Account Value must meet the minimum dollar amounts and age
criteria applicable to that option.
The Additional Withdrawal Options currently available under the Contract
include the following:
-SWO--SYSTEMATIC WITHDRAWAL OPTION. SWO is a series of partial withdrawals from
your Account based on a payment method you select. It is designed for those who
want a periodic income while retaining investment flexibility for amounts
accumulated under a Contract.
-ECO--ESTATE CONSERVATION OPTION. 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. ECO is only available under Qualified
Contracts. Under ECO, the Company calculates the minimum distribution amount
required by law , generally at age 70 1/2, and pays you that amount once a
year. (See "Tax Status.")
Other Additional Withdrawal Options may be added from time to time.
Additional information relating to any of the Additional Withdrawal Options may
be obtained from your local representative or from the Company at its Home
Office.
If you select one of the Additional Withdrawal Options, you will retain all
of the rights and flexibility permitted under the Contract during the
Accumulation Period. Your Account Value will continue to be subject to the
charges and deductions described in this Prospectus.
Once you elect an Additional Withdrawal Option, you may revoke it any time
by submitting a written request to our Home Office. Once an option is revoked,
it may not be elected again, nor may any other Additional Withdrawal Option be
elected unless permitted by the Code. The Company reserves the right to
discontinue the availability of one or all of these Additional Withdrawal
Options at any time, and/or to change the terms of future elections.
DEATH BENEFIT DURING ACCUMULATION PERIOD
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A death benefit will be payable to the Beneficiary(ies) if the Certificate
Holder or the Annuitant dies before annuity payments have commenced. Upon the
death of a joint Certificate Holder prior to the Annuity Date, the surviving
Certificate Holder, if any, will become the designated Beneficiary. Any other
Beneficiary designation on record with the Company at the time of death will be
treated as a contingent Beneficiary.
The amount of death benefit proceeds will be determined as of the date of
death. Under some circumstances, the amount of the death benefit is guaranteed,
as described below.
DEATH BENEFIT AMOUNT
Upon the death of the Annuitant, the death benefit proceeds will be the
greatest of:
(1) the total Purchase Payment(s) applied to the Account, minus the sum of all
amounts withdrawn, annuitized or deducted from such Account;
(2) the highest step-up value as of the date of death. The step-up value is
determined on each anniversary of the Effective Date, up to the Annuitant's
75th birthday (85th birthday for Contracts or Certificates issued in New
York). Each step-up value is calculated as the Account Value on the
Effective Date anniversary, increased by Purchase Payments applied,
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and decreased by partial withdrawals, annuitizations and deductions taken
from the Account since the Effective Date anniversary; or
(3) the Account Value as of the date of death.
The excess, if any, of the guaranteed death benefit value over the Account
Value is determined as of the date of death. Any excess amount will be deposited
and allocated to the Aetna Variable Encore Fund Subaccount. The Account Value on
the claim date plus any excess amount deposited into the Account becomes the
Certificate Holder's Account Value. The claim date is the date we receive valid
proof of death and the Beneficiary's claim at our Home Office.
Upon the death of a spousal Beneficiary who continued the Account in his or
her own name, the amount of the death benefit proceeds will be equal to the
Adjusted Account Value, less any deferred sales charge applicable to any
Purchase Payments made after we receive proof of death.
Under Nonqualified Contracts only, if the Certificate Holder is not the
Annuitant and dies, the amount of death benefit proceeds will be equal to the
Adjusted Account Value on the claim date. Full or partial withdrawals may be
subject to a deferred sales charge.
For amounts held in the Guaranteed Account, see the Appendix for a
discussion of the calculation of death benefit proceeds.
DEATH BENEFIT PAYMENT OPTIONS
Death benefit proceeds may be paid to the Beneficiary as described below. If
you die and no Beneficiary exists, the death benefit will be paid in a lump sum
to your estate. Prior to any election, the Account Value will remain in the
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 option (subject
to a market value adjustment, as applicable). The Code requires that
distributions begin within a certain time period, as described below. If no
elections are made, no distributions will be made. Failure to commence
distribution within those time periods can result in tax penalties.
NONQUALIFIED CONTRACTS
Under a Nonqualified Contract, if you die, or if you are a nonnatural person
and the Annuitant dies, and the Beneficiary is your surviving spouse, he or she
automatically becomes the successor Certificate Holder. The successor
Certificate Holder may exercise all rights under the Account and (1) continue in
the Accumulation Period; (2) elect to apply some or all of the Adjusted Account
Value to any of the Annuity Options; or (3) receive at any time a lump sum
payment equal to all or a portion of the Adjusted Account Value. If you die and
you are not the Annuitant, any applicable deferred sales charge will be applied
if a lump sum is elected. Under the Code, distributions are not required until
the successor Certificate Holder's death.
If you die and the Beneficiary is not your surviving spouse, he or she may
elect option (2) or (3) above. According to the Code, any portion of the
Adjusted Account Value not distributed in installments over the life or life
expectancy beginning within one year of your death, must be paid within five
years of your death. (See "Tax Status of the Contract.")
If you are a natural person but not the Annuitant and the Annuitant dies,
the Beneficiary may elect to apply the Adjusted Account Value to an Annuity
Option within 60 days or to receive a lump sum payment equal to the Adjusted
Account Value, subject to state regulatory approval. If the Beneficiary does not
elect an Annuity Option within 60 days of the date of death, the gain, if any,
will be includable in the Beneficiary's income in the year the Annuitant dies.
If SWO is in effect, payments will cease at the Certificate Holder's or
Annuitant's death. A Beneficiary, however, may elect to continue SWO.
QUALIFIED CONTRACTS
Under a Qualified Contract, the death benefit is paid at the death of the
participant, who is the Annuitant under the Contract. The Beneficiary has the
following options: (1) apply some or all of the Adjusted Account Value to any of
the Annuity Options, subject to the distribution rules in Code Section
401(a)(9), or (2) receive at any time a lump sum payment equal to all or a
portion of the Adjusted Account Value. If the Account was established in
conjunction with a Section 401(a) qualified pension or profit sharing plan or a
Section 457 deferred compensation plan, payment will be made, as directed by the
Certificate Holder, to either the Certificate Holder or to the plan beneficiary.
If ECO or SWO is in effect and the participant dies before the required
beginning date for minimum
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distributions, payments will cease. A Beneficiary, or the Certificate Holder on
behalf of a plan Beneficiary, may elect ECO or SWO provided the election would
satisfy the Code minimum distribution rules.
If ECO or SWO is in effect and the participant dies after the required
beginning date for minimum distributions, payments will continue as permitted
under the Code minimum distribution rules, unless the option is revoked.
Death benefit payments must satisfy the distribution rules in Code Section
401(a)(9). (See "Tax Status of the Contract.")
ANNUITY PERIOD
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ANNUITY PERIOD ELECTIONS
You must notify us in writing of the date you want Annuity Payments to start
(the "Annuity Date") and the Annuity Option elected. Payments may not begin
earlier than one year after purchase, or, unless we 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 (fifth anniversary for
Contracts issued in Pennsylvania). For Contracts or Certificates issued in New
York, Annuity Payments may not begin later than the time period specified in
(a).
Annuity Payments will not begin until you have selected an Annuity Date and
an Annuity Option. Until a date and option are elected, the Account will
continue in the Accumulation Period.
The Code generally requires that for Qualified Contracts, minimum annual
distributions of the Account Value must begin by April 1st of the calendar year
following the calendar year in which a participant attains age 70 1/2. In
addition, distributions must be in a form and amount sufficient to satisfy the
Code requirements. These requirements may be satisfied by the election of
certain Annuity Options or Additional Withdrawal Options. (See "Tax Status.")
For Nonqualified Contracts, failure to select an Annuity Option and an Annuity
Date, or postponement of the Annuity Date past the Annuitant's 85th birthday or
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 prior to the Annuity Date, you must notify us in writing of
the following:
- the date on which you would like Annuity Payments to begin;
- the Annuity Option under which you want payments to be calculated and paid;
- whether the payments are to be made monthly, quarterly, semi-annually or
annually; and
- the investment option(s) used to provide Annuity Payments (i.e., a fixed
Annuity using the general account or a variable Annuity using any of the
Subaccounts available at the time of annuitization). The Company has reserved
the right to limit which and how may Subaccounts will be available as
investment options during the Annuity Period. As of the date of this
Prospectus, no more than four Subaccounts may be elected; however, additional
Subaccounts may be available under some Annuity Options in the future. ("See
Annuity Options.")
Once Annuity Payments begin, the Annuity Option may not be changed, nor may
transfers currently be made among the investment option(s) selected. (See
"Annuity Options" below for more information about transfers during the Annuity
Period.)
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 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.
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ANNUITY OPTIONS
You may choose one of the following Annuity Options:
LIFETIME ANNUITY OPTIONS:
-OPTION 1--Life Annuity--An annuity with payments ending on the Annuitant's
death.
-OPTION 2--Life Annuity with Guaranteed Payments-- An annuity with payments
guaranteed for 5, 10, 15 or 20 years, or such other periods as the Company may
offer at the time of annuitization.
-OPTION 3--Life Income Based Upon the Lives of Two Annuitants--An Annuity will
be paid during the lives of the Annuitant and a second Annuitant, with 100%,
66 2/3% or 50% of the payment to continue after the first death, or 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.
-OPTION 4--Life Income Based Upon the Lives of Two Annuitants--An annuity with
payments for a minimum of 120 months, with 100% of the payment to continue
after the first death.
If Option 1 or 3 is elected, it is possible that only one Annuity Payment
will be made if the Annuitant under Option 1, or the surviving Annuitant under
Option 3, should die prior to the due date of the second Annuity Payment. Once
lifetime Annuity Payments begin, the Certificate Holder cannot elect to receive
a lump-sum settlement.
NONLIFETIME ANNUITY OPTION:
Under the nonlifetime option, payments may be made for generally 5-30 years,
as selected. If this option is elected on a variable basis, the Certificate
Holder may request at any time during the payment period that the present value
of all or any portion of the remaining variable payments be paid in one sum.
However, any lump-sum elected before three years of payments have been completed
will be treated as a withdrawal during the Accumulation Period and any
applicable deferred sales charge will be assessed. (See "Charges and
Deductions-- Deferred Sales Charge.") If the nonlifetime option is elected on a
fixed basis, you cannot elect to receive a lump-sum settlement.
We may also offer additional Annuity Options under your Contract from time
to time. Later in 1996, subject to state regulatory approval, the Company
expects to offer additional Annuity Options and enhanced versions of the Annuity
Options listed above. These additional Annuity Options and enhanced versions of
the existing options will have additional Subaccounts available and will allow
transfers between Subaccounts during the Annuity Period. Please refer to the
Contract or Certificate, or call the number listed in the "Inquiries" section of
the Prospectus Summary, to determine which options are available and the terms
of such options. It is not expected that these additional or enhanced options
will be made available to those who have already commenced receiving Annuity
Payments.
ANNUITY PAYMENTS
DATE PAYOUTS START. When payments start, the age of the Annuitant plus the
number of years for which payments are guaranteed must not exceed 95. For
Qualified Contracts only, Annuity Payments may not extend beyond (a) the life of
the Annuitant, (b) the joint lives of the Annuitant and beneficiary, (c) a
period certain greater than the Annuitant's life expectancy, or (d) a period
certain greater than the joint life expectancies of the Annuitant and
Beneficiary.
AMOUNT OF EACH ANNUITY PAYMENT. The amount of each payment depends on how
you allocate your Account Value between fixed and variable payouts. No election
may be made that would result in the first Annuity Payment of less than $50, or
total yearly Annuity Payments of less than $250 (less if required by state law).
If the Account Value on the Annuity 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.
If Annuity Payments are to be made on a variable basis, the first and
subsequent payments will vary depending on the assumed net investment rate
selected (3 1/2% 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 exceeds 5% on an annualized basis. Annuity Payments
would decline if the rate were below 5%. Use of the 3 1/2% assumed rate causes a
lower first payment, but subsequent payments would increase more rapidly or
decline more slowly as changes occur in the net investment rate. (See
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the Statement of Additional Information for further discussion on the impact of
selecting an assumed net investment rate.)
CHARGES DEDUCTED DURING THE ANNUITY PERIOD
We make a daily deduction for mortality and expense risks from any amounts
held on a variable basis. 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. This 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. (See "Charges and Deductions.")
DEATH BENEFIT PAYABLE DURING THE ANNUITY PERIOD
If an Annuitant dies after Annuity Payments have begun, any death benefit
payable will depend on the terms of the Contract and the Annuity Option
selected. If Option 1 or Option 3 was elected, Annuity Payments will cease on
the death of the Annuitant under Option 1 or the death of the surviving
Annuitant under Option 3.
If Lifetime Option 2 or Option 4 was elected and the death of the Annuitant
under Option 2, or the surviving Annuitant under Option 4, occurs prior to the
end of the guaranteed minimum payment period, we will pay to the Beneficiary in
a lump sum, unless otherwise requested, the present value of the guaranteed
annuity payments remaining.
If the nonlifetime option was elected, and the Annuitant dies before all
payments are made, the value of any remaining payments may be paid in a lump-sum
to the Beneficiary (unless otherwise requested), and no deferred sales charge
will be imposed.
If the Annuitant dies after Annuity Payments have begun and if there is a
death benefit payable under the Annuity Option elected, the remaining value must
be distributed to the Beneficiary at least as rapidly as under the original
method of distribution.
Any lump-sum payment paid under the applicable lifetime or nonlifetime
Annuity Options will be made within seven calendar days after proof of death
acceptable to us, and a request for payment are received at our Home Office. The
value of any death benefit proceeds will be determined as of the next Valuation
Date after we receive acceptable proof of death and a request for payment.
TAX STATUS
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INTRODUCTION
The following provides a general discussion and is not intended as tax
advice. This discussion reflects the Company's understanding of current federal
income tax law. Such laws may change in the future, and it is possible that any
change could be retroactive (i.e., effective prior to the date of the change).
The Company makes no guarantee regarding the tax treatment of any contract or
transaction involving a Contract.
The Contract may be purchased on a non-tax qualified basis ("Nonqualified
Contract") or purchased and used in connection with certain retirement
arrangements entitled to special income tax treatment under Section 401(a),
403(b), 408(b) or 457 of the Code ("Qualified Contracts"). The ultimate effect
of federal income taxes on the amounts held under a Contract, on Annuity
Payments, and on the economic benefit to the Contract Holder, Certificate Holder
or Beneficiary may depend upon the tax status of the individual concerned. Any
person concerned about these tax implications should consult a competent tax
adviser before initiating any transaction.
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, it will not be
taxed separately as a "regulated investment company" under the Code. Investment
income and realized capital gains are automatically applied to increase reserves
under the Contracts. Under existing federal income tax law, the Company believes
that the Separate Account investment income and realized net capital gains will
not be taxed to the extent that such income and gains are applied to increase
the reserves under the Contracts.
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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 interpretation thereof result in the Company
being taxed on income or gains attributable to the Separate Account, then the
Company may impose a charge against the Separate Account (with respect to some
or all Contracts) in order to set aside provisions to pay such taxes.
TAX STATUS OF THE CONTRACT
DIVERSIFICATION. Section 817(h) of the Code requires that with respect to
Nonqualified 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 addition, 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 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 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 DISTRIBUTIONS--NONQUALIFIED CONTRACTS: 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 in effect
at the time of the Certificate Holder'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 Account may be continued with the surviving spouse as the new
Certificate Holder.
The Nonqualifed 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.
The discussion under "Taxation of Annuities" below is based on the
assumption that the Contract qualifies as an annuity contract for federal income
tax purposes.
REQUIRED DISTRIBUTIONS--QUALIFIED CONTRACTS: The Code has required
distribution rules for Section 401(a), 403(b) and 457 Plans and Individual
Retirement Annuities. Distributions must generally begin by April 1 of the
calendar year following the calendar year in which the participant attains age
70 1/2. For governmental or church 401(a), 403(b) or 457 plans, distributions
must begin by April 1 of the calendar year following the calendar year the
participant attains age 70 1/2 or retires, whichever occurs later. Under 403(b)
plans, if the Company maintains separate records, distribution of amounts held
as of December 31, 1986 must generally begin by the end of the calendar year in
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which the participant attains age 75 (or retires, if later, for governmental or
church plans). However, special rules require that some or all of the balance be
distributed earlier if any distributions are taken in excess of the minimum
required amount.
To comply with these provisions, distributions must be in a form and amount
sufficient to satisfy the minimum distribution and minimum distribution
incidental death benefit rules specified in Section 401(a) (9) of the Code.
In general, annuity payments must be distributed over the participant's life
or the joint lives of the participant and beneficiary, or over a period not
greater than the participant's life expectancy or the joint life expectancies of
the participant and beneficiary. Also, any distribution under a Section 457 Plan
payable over a period of more than one year must be made in substantially
nonincreasing amounts.
If the participant dies on or after the required beginning date for minimum
distributions, distributions to the beneficiary must be made at least as rapidly
as the method of distribution in effect at the time of the participant's death.
However, if the required minimum distribution is calculated each year based on
the participant's single life expectancy or the joint life expectancies of the
participant and beneficiary, the regulations for Code Section 401(a)(9) provide
specific rules for calculating the required minimum distributions at the
participant's death. For example, if ECO was elected with the calculation based
on the participant's single life expectancy, and the life expectancy is
recalculated each year, the recalculated life expectancy becomes zero in the
calendar year following the participant's death and the entire remaining
interest must be distributed to the beneficiary by December 31 of the year
following the participant's death. However, a spousal beneficiary, other than
under a Section 457 Plan, has certain rollover rights which can only be
exercised in the year of the participant's death. The rules are complex and the
participant should consult a tax adviser before electing the method of
calculation to satisfy the minimum distribution requirements.
If the participant dies before the required beginning date for minimum
distributions, the entire interest must be distributed by December 31 of the
calendar year containing the fifth anniversary of the date of the participant's
death. Alternatively, payments may be made over the life of the beneficiary or
over a period not extending beyond the life expectancy of the beneficiary, not
to exceed 15 years for a non-spousal beneficiary under a Section 457 Plan,
provided the distribution begins to a non-spouse beneficiary by December 31 of
the calendar year following the calendar year of the participant's death. If
payments are made to a spousal beneficiary, distributions must begin by the
later of December 31 of the calendar year following the calendar year of the
death or December 31 of the calendar year in which the participant would have
attained age 70 1/2.
An exception applies for a spousal beneficiary under an Individual
Retirement Annuity. In lieu of taking a distribution under these rules, a
spousal Beneficiary may elect to treat the Account as his or her own IRA and
defer taking a distribution until his or her age 70 1/2. The surviving spouse is
deemed to have made such an election if the surviving spouse makes a rollover to
or from the Account or fails to take a distribution within the required time
period.
If the participant or beneficiary fails to take the required minimum
distribution for any tax year, a 50% excise tax is imposed on the required
amount that was not distributed.
TAXATION OF ANNUITY CONTRACTS
IN GENERAL: Section 72 of the Code governs taxation of annuities in
general. The Company believes that a Certificate Holder under a Nonqualified
Contract who is a natural person generally is not taxed on increases in the
Account Value until distribution occurs by withdrawing all or part of such
Account Value (e.g., withdrawals or Annuity Payments under the Annuity Option
elected). The taxable portion of a distribution (in the form of a single sum
payment or an Annuity) is taxable as ordinary income.
NON-NATURAL HOLDERS OF A NONQUALIFIED CONTRACT: If the Certificate Holder is
not a natural person, a Nonqualified Contract is not treated as an annuity for
income tax purposes and the "income on the contract" for the taxable year is
currently taxable as ordinary income. "Income on the contract" is any increase
over the year in the Surrender Value, adjusted for amounts previously
distributed and amounts previously included in income. There are some exceptions
to the rule and a non-natural person should consult with its tax adviser prior
to purchasing this Contract. A non-natural person exempt from federal income
taxes should consult with its tax adviser regarding treatment of "income on the
contract" for purposes of the unrelated business income tax.
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The following discussion generally applies to Qualified Contracts or
Nonqualified Contracts owned by a natural person.
WITHDRAWALS: In the case of a withdrawal under a Qualified 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 a Qualified Contract, the
"investment in the contract" can be zero. Special tax rules may be available for
certain distributions from a Qualified Contract.
With respect to Nonqualified 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 adviser with respect to the potential tax
consequences of any MVA that arises as a result of a partial withdrawal.
Full withdrawals of a Nonqualified 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 adviser regarding deductibility of the unrecovered
amount.
PENALTY TAX: In the case of a distribution pursuant to a Nonqualified
Contract, or a Qualified Contract other than a Qualified Contract sold in
conjunction with a Code Section 457 Plan, there may be imposed a federal income
tax penalty equal to 10% of the amount treated as taxable income.
In general, there is no penalty tax on distributions from a Nonqualified
Contract: (1) made on or after the date on which the taxpayer attains age
59 1/2; (2) made as a result of the death of the Certificate Holder; (3)
attributable to the taxpayer's total and permanent disability; (4) received in
substantially equal periodic payments (at least annually) over the life or life
expectancy of the taxpayer or the joint lives or joint life expectancies of the
taxpayer and a "designated beneficiary"; or (5) allocable to "investment in the
contract" before August 14, 1982.
If a distribution is made from a Qualified Contract sold in conjunction with
a Section 401(a) Plan or Section 403(b) Plan, the penalty tax will not apply on
distributions made when the participant (a) attains age 59 1/2, (b) becomes
permanently and totally disabled, (c) dies, (d) separates from service with the
plan sponsor at or after age 55, (e) rolls over the distribution amount to
another plan of the same type in accordance with the terms of the Code, or (f)
takes the distributions in substantially equal periodic payments (at least
annually) over his or her life or life expectancy or the joint lives or joint
life expectancies of the participant and plan beneficiary, provided the
participant has separated from service with the plan sponsor. In addition, the
penalty tax does not apply for the amount of a distribution equal to
unreimbursed medical expenses incurred by the participant that qualify for
deduction as specified in the Code. The Code may impose other penalty taxes in
other circumstances.
In general, the same exceptions described in the preceding paragraph will
apply to distributions made
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from an Individual Retirement Annuity. However, the exceptions for separation
from service under (d) above and unreimbursed medical expenses will not apply.
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.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF THE CONTRACT: A transfer of
ownership of a Contract, the designation of an Annuitant, payee or other
Beneficiary who is not also a Certificate Holder, the selection of certain
Annuity Dates, or the exchange of a Contract may result in certain tax
consequences. The assignment, pledge, or agreement to assign or pledge any
portion of the Account Value generally will be treated as a distribution. The
assignment or transfer of ownership of a Qualified Contract generally is not
allowed. 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.
CONTRACTS USED WITH CERTAIN RETIREMENT PLANS
QUALIFIED CONTRACTS IN GENERAL
The Qualified Contract is designed for use as an Individual Retirement
Annuity or as a Contract used in connection with certain employer sponsored
retirement plans. The tax rules applicable to participants and beneficiaries in
Qualified Contracts 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.
The Company makes no attempt to provide more than general information about
use of the Contracts with the various types of retirement plans. Participants
and beneficiaries under Qualified Contracts may be subject to the terms and
conditions of the retirement plans themselves, in addition to the terms and
conditions of the Contract issued in connection with such plans. Some retirement
plans are subject to distribution and other requirements that are not
incorporated in the provisions of the Contracts. Purchasers are responsible for
determining that contributions, distributions and other transactions with
respect to the Contracts satisfy applicable laws, and should consult their legal
counsel and tax adviser regarding the suitability of the Contract.
SECTION 457 PLANS. Code Section 457 provides for certain deferred
compensation plans. These plans may be offered with respect to service for state
governments, local governments, political subdivisions, agencies,
instrumentalities and certain affiliates of such entities, and tax exempt
organizations. These plans are subject to various restrictions on contributions
and distributions. The plans may permit participants to specify the form of
investment for their deferred compensation account. In general, all investments
are owned by the sponsoring employer and are subject to the claims of the
general creditors of the employer. Depending on the terms of the particular
plan, the employer may be entitled to draw on deferred amounts for purposes
unrelated to its Section 457 plan obligations. In general, all amounts received
under a Section 457 plan are taxable and reportable to the IRS as taxable
income. Also, all amounts except death benefit proceeds are subject to federal
income tax withholding as wages. If we make payments directly to a participant
on behalf of the employer as owner, we will withhold federal taxes (and state
taxes, if applicable).
The Code imposes a maximum limit on annual Purchase Payments which may be
excluded from the
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<PAGE>
participant's gross income. Such limit is generally the lesser of $7,500 or
33 1/3% of the participant's includible compensation (25% of gross
compensation).
SECTION 401(A) PLANS. Section 401(a) permits corporate employers to
establish various types of retirement plans for employees, and permits self-
employed individuals to establish various types of retirement plans for
themselves and for their employees. These retirement plans may permit the
purchase of the Contract to accumulate retirement savings under the plans.
Adverse tax consequences to the plan, to the participant or to both may result
if this Contract is assigned or transferred to an individual except to a
participant as a means to provide benefit payments.
The Code imposes a maximum limit on annual Purchase Payments that may be
excluded from a participant's gross income. Such limit must be calculated under
the Plan by the employer in accordance with Section 415 of the Code. This limit
is generally the lesser of 25% of the participant's compensation or $30,000. In
addition, Purchase Payments will be excluded from a participant's gross income
only if the Section 401(a) Plan meets certain nondiscrimination requirements.
All distributions will be taxed as they are received unless the distribution
is rolled over to another plan of the same type or to an individual retirement
annuity/account ("IRA") in accordance with the Code, or unless the participant
has made after-tax contributions to the plan, which are not taxed upon
distribution. The Code has specific rules that apply, depending on the type of
distribution received, if after-tax contributions were made.
In general, payments received by a beneficiary after the participant's death
are taxed in the same manner as if the participant had received those payments,
except that a limited death benefit exclusion may apply.
SECTION 403(B) PLANS. Under Section 403(b), contributions made by public
school systems or nonprofit healthcare organizations and other Section 501(c)(3)
tax exempt organizations to purchase annuity contracts for their employees are
generally excludable from the gross income of the employee.
In order to be excludable from taxable income, total annual contributions
made by the participant and his or her employer cannot exceed either of two
limits set by the Code. The first limit, under Section 415, is generally the
lesser of 25% of includible compensation or $30,000. The second limit, which is
the exclusion allowance under Section 403(b), is usually calculated according to
a formula that takes into account the participant's length of employment and any
pretax contributions to certain other retirement plans. These two limits apply
to the participant's contributions as well as to any contributions made by the
employer on behalf of the participant. There is an additional limit that
specifically limits salary reduction contributions to generally no more than
$9,500 annually (subject to indexing); a participant's own limit may be higher
or lower, depending on certain conditions. In addition, Purchase Payments will
be excluded from a participant's gross income only if the Plan meets certain
nondiscrimination requirements.
Section 403(b)(11) restricts the distribution under Section 403(b) contracts
of: (1) salary reduction contributions made after December 31, 1988; (2)
earnings on those contributions; and (3) earnings during such period on amounts
held as of December 31, 1988. Distribution of those amounts may only occur upon
death of the participant, attainment of age 59 1/2, separation from service,
total and permanent disability, or financial hardship. In addition, income
attributable to salary reduction contributions may not be distributed in the
case of hardship.
INDIVIDUAL RETIREMENT ANNUITIES AND SIMPLIFIED EMPLOYEE PENSION
PLANS. Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity,
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. Employers may establish Simplified Employee Pension (SEP) Plans and
contribute to an IRA owned by the employee. Purchasers of a Qualified Contract
for use with IRAs will be provided with supplemental information required by the
Internal Revenue Service. Purchasers should seek competent advice as to the
suitability of the Contract for use with IRAs.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for
the recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients may be provided
the opportunity to elect not to have tax withheld from distributions; however,
certain distributions from Section 401(a) Plans and Section 403(b) tax-deferred
annuities are subject to mandatory 20% federal income tax withholding. We will
report to the IRS the taxable portion of all distributions.
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MISCELLANEOUS
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DISTRIBUTION
The Company will serve as the Principal Underwriter for the securities sold
by this Prospectus. The Company is registered as a broker-dealer with the
Securities and Exchange Commission ("SEC") 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 or with banks that may
be acting as broker-dealers without separate registration under the Securities
Exchange Act of 1934 pursuant to legal and regulatory exceptions
("Distributors"), to offer and sell the Contracts. The Company and one or more
of its affiliates may also sell the Contracts directly. All individuals offering
and selling the Contracts must either be registered representatives of a
broker-dealer, or employees of a bank exempt from registration under the
Securities Exchange Act of 1934, and 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 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.
PAYMENT OF COMMISSIONS. Commissions will be paid to Distributors who sell
the Contracts. Distributors 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.
DELAY OR SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of payment
for any benefit or values (a) on any Valuation Date on which the New York Stock
Exchange ("Exchange") is closed (other than customary weekend and holiday
closings) or when trading on the Exchange is restricted; (b) when an emergency
exists, as determined by the SEC, so that disposal of securities held in the
Subaccounts is not reasonably practicable or is not reasonably practicable for
the value of the Subaccount's assets; or (c) during such other periods as the
SEC may by order permit for the protection of investors. The conditions under
which restricted trading or an emergency exists shall be determined by the rules
and regulations of the SEC.
PERFORMANCE REPORTING
From time to time, the Company may advertise different types of historical
performance for the Subaccounts of the Separate Account. The Company may
advertise the "standardized average annual total returns" of the Subaccounts,
calculated in a manner prescribed by the SEC, as well as the "non-standardized
returns." "Standardized average annual total returns" are computed according to
a formula in which a hypothetical investment of $1,000 is applied to the
Subaccount and then related to the ending redeemable values over the most recent
one, five and ten-year periods (or since inception, if less than ten years).
Standardized returns will reflect the reduction of all recurring charges during
each period (e.g., mortality and expense risk charges, annual maintenance fees,
administrative charge and any applicable deferred sales charge).
"Non-standardized returns" 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
monthly, quarterly, year-to-date and three-year periods.
The Company may also advertise certain ratings, rankings or other
information related to the Company, the Subaccounts or the Funds. Further
details regarding performance reporting and advertising are described in the
Statement of Additional Information.
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<PAGE>
VOTING RIGHTS
Each Contract Holder may direct us in the voting of shares at shareholders'
meetings of the appropriate Funds(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 Account Values(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 Certificate Holder under a group Contract, you have a fully
vested (100%) interest in the benefits provided to you under your Account.
Therefore, you may instruct the group Contract Holder how to direct the Company
to cast the votes for the portion or the value of valuation reserve attributable
to your 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 Account.
MODIFICATION OF THE CONTRACT
The Company may change the Contract as required by federal or state law. In
addition, the Company may, upon 30 days written notice to the Contract Holder,
make other changes to group Contracts that would apply only to individuals who
become Certificate Holders under that Contract after the effective date of such
changes. If the Contract Holder does not agree to a change, no new Certificate
Holders will be covered under the Contract. Certain changes will require the
approval of appropriate state or federal regulatory authorities.
TRANSFERS OF OWNERSHIP; ASSIGNMENT
Assignments or transfers of ownership of a Qualified Contract generally are
not allowed except as permitted under the Code, incident to a divorce. The
prohibition does not apply to a Qualified Contract sold in conjunction with (1)
a Section 457 deferred compensation plan, or (2) a Section 401(a) plan where the
Contract is owned by a trustee. We will accept assignments or transfers of
ownership of a Nonqualified Contract or a Qualified Contract where assignments
or transfers of ownership are not prohibited, 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.
No assignment of a Contract will be binding on us unless made in writing and
sent to us at our Home Office. The Company will use reasonable procedures to
confirm that the assignment is authentic, including verification of signature.
If the Company fails to follow its procedures, it would be liable for any losses
to you directly resulting from the failure. Otherwise, we are not responsible
for the validity of any assignment. The rights of the Certificate Holder and the
interest of the Annuitant and any Beneficiary will be subject to the rights of
any assignee of record.
INVOLUNTARY TERMINATIONS
We reserve the right to terminate any Account with a value of $2,500 or less
immediately following a partial withdrawal. However, an Individual Retirement
Annuity may only be closed out when Purchase Payments have not been received for
a 24-month period and the paid-up annuity benefit at maturity would be less than
$20 per month. If such right is exercised, you will be given 90 days advance
written notice. No deferred sales charge will be deducted for involuntary
terminations. The Company does not intend to exercise this right in cases where
the Account Value is reduced to $2,500 or less solely due to investment
performance.
LEGAL MATTERS AND PROCEEDINGS
The Company knows of no material legal proceedings pending to which the
Separate Account or the Company is a party or which would materially affect the
Separate Account. 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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<PAGE>
CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
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The Statement of Additional Information contains more specific information on
the Separate Account and the Contract, as well as the financial statements of
the Separate Account and the Company. A list of the contents of the SAI is set
forth below:
General Information and History
Variable Annuity Account B
Offering and Purchase of Contracts
Performance Data
General
Average Annual Total Return Quotations
Annuity Payments
Sales Material and Advertising
Independent Auditors
Financial Statements of the Separate Account
Financial Statements of the Company
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APPENDIX
ALIAC GUARANTEED ACCOUNT
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THE ALIAC GUARANTEED ACCOUNT (THE "GUARANTEED ACCOUNT") IS A CREDITED INTEREST
OPTION AVAILABLE DURING THE ACCUMULATION PERIOD UNDER THE CONTRACTS. THIS
APPENDIX IS A SUMMARY OF THE GUARANTEED ACCOUNT AND IS NOT INTENDED TO REPLACE
THE GUARANTEED ACCOUNT PROSPECTUS. YOU SHOULD READ THE ACCOMPANYING GUARANTEED
ACCOUNT PROSPECTUS CAREFULLY BEFORE INVESTING.
The Guaranteed Account is a credited interest option in which we guarantee
stipulated rates of interest for stated periods of time on amounts directed 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 for one year. Guaranteed interest rates will never be
less than an annual effective rate of 3%.
During a 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. 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.
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, 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 the
Certificate Holder receiving an amount which is less than the amount paid into
the Guaranteed Account
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.
As a Guaranteed Term matures, assets accumulating under the Guaranteed
Account may be (a) transferred to a new Guaranteed Term, (b) transferred to
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
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.
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<PAGE>
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
MVA will be applied to transfers made due to annuitization under one of the
lifetime Annuity Options described in item (2) above.
The Certificate Holder may select a maximum of 18 different investment
options during the Accumulation Period. 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 investment
option.
Transfers of the 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 Account.
By notifying us at least 30 days prior to the Annuity Date, you may elect a
variable annuity and have amounts that have been accumulating under the
Guaranteed Account transferred to one or more of the Subaccounts available
during the Annuity Period. 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.
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:
(1) the aggregate MVA amount (i.e., the sum of all market value adjusted
amounts calculated due to a withdrawal of amounts) which may be greater
or less than the Account Value of those amounts; or
(2) the applicable portion of the 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
Account Value of those amounts.
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<PAGE>
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 20, 1996
The New Retirement
Nicholas-Applegate/Aetna Annuity
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the current prospectus for Variable Annuity Account
B (the "Separate Account") dated May 20, 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
Customer Service
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. . . . . . . . . . . . . 1
Variable Annuity Account B . . . . . . . . . . . . . . . 1
Offering and Purchase of Contracts . . . . . . . . . . . 2
Performance Data . . . . . . . . . . . . . . . . . . . . 2
General . . . . . . . . . . . . . . . . . . . . . . . 2
Average Annual Total Return Quotations. . . . . . . . 3
Annuity Payments . . . . . . . . . . . . . . . . . . . . 3
Sales Material and Advertising . . . . . . . . . . . . . 4
Independent Auditors . . . . . . . . . . . . . . . . . . 5
Financial Statements of the Separate Account . . . . . . S-1
Financial Statements of the 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 under the insurance laws of the State
of Connecticut in 1976. Through a merger, it succeeded to the business of
Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity
Life Insurance Company organized in 1954). As of December 31, 1995, the
Company had assets of $27.1 billion (subject to $25.5 billion of customer and
other liabilities, $1.6 billion of shareholder equity) which includes $11
billion in assets held in the Company's separate accounts. The Company had
$22 billion in assets under management, including $8 billion in its mutual
funds. As of December 31, 1994, it ranked among the top 2% of all U.S. life
insurance companies by size. The Company is a wholly owned subsidiary of
Aetna Retirement Holdings, Inc., which is in turn a wholly owned subsidiary
of Aetna Retirement Services, Inc. and an indirect wholly owned subsidiary of
Aetna Life and Casualty Company. The Company is engaged in the business of
issuing life insurance policies and annuity contracts in all states of the
United States. The Company's Home Office is located at 151 Farmington
Avenue, Hartford, Connecticut 06156.
In addition to serving as the principal underwriter and the depositor for the
Separate Account, the Company is also a registered investment adviser under
the Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934. The Company provides investment advice to
several of the registered management investment companies offered as variable
investment options under the Contracts funded by the Separate Account (see
"Variable Annuity Account B" below).
Other than the mortality and expense risk charges and administrative 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 each of the
Subaccounts 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 Subaccounts. 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 Diversified Income Series
Nicholas-Applegate Emerging Growth Series
Nicholas-Applegate International Fixed Income Series
Nicholas-Applegate International Growth Series
Nicholas-Applegate Value Series
Aetna Variable Encore Fund
1
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Complete descriptions of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, are contained in the
prospectuses and statements of additional information for each of the Funds.
OFFERING AND PURCHASE OF CONTRACTS
The Company is both the depositor and the principal underwriter for the
securities sold by the prospectus. The Company offers the Contracts through
life insurance agents licensed to sell variable annuities who are Registered
Representatives as defined in the Prospectus. 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 "Purchase" and
"Contract Valuation."
PERFORMANCE DATA
GENERAL
From time to time, the Company may advertise different types of historical
performance for the Subaccounts of the Separate Account available under the
Contracts. 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 "non-standardized
returns," 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 various Subaccounts under the Contract, and then
related to the ending redeemable values over one, 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 the Contracts
described in the Prospectus.
The non-standardized figures will be calculated in a similar manner, except
that they 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 monthly,
quarterly, year-to-date and three-year periods.
If a Fund was in existence prior to the date it became available under the
Contract, standardized and non-standardized total returns may include periods
prior to such date. 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.
Investment results of the Subaccounts will fluctuate over time, and any
presentation of the Subaccounts' total return quotations for any prior period
should not be considered as a representation of how the Subaccounts will
perform in any future period. Additionally, the Account Value upon
redemption may be more or less than your original cost.
2
<PAGE>
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - STANDARDIZED AND NON-STANDARDIZED
The tables shown below reflect the average annual standardized and
non-standardized total return quotation figures for the periods ended
December 31, 1995 for the Subaccounts available under the Contract. Table A
reflects the total return quotations for Contracts issued nationwide (other
than Contracts or Certificates issued in the state of New York). Table B
reflects the total return quotations for Contracts or Certificates issued in
the state of New York. As the Nicholas-Applegate Series currently has no
performance history, the tables below show Average Annual Return Quotations
for the Aetna Variable Encore Fund Subaccount only.
<TABLE>
<CAPTION>
TABLE A
----------------------------------------------------------------------------
FUND
INCEPTION
($30 MAINTENANCE FEE) STANDARDIZED NON-STANDARDIZED DATE
--------------------------------------------------------------------------------------------------------
SUBACCOUNT 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 (1.78%) 2.70% 4.71% 4.50% 2.91% 3.17% 4.71% 09/01/75
--------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceeding the Tables for an explanation of
the charges included in the Standardized and Non-Standardized figures. These
figures represent historical perfromance and should not be considered a
projection of future perfromance.
CONTRACTS OR CERTIFICATES ISSUED IN NEW YORK
TABLE B
<TABLE>
<CAPTION>
TABLE A
----------------------------------------------------------------------------
FUND
INCEPTION
($30 MAINTENANCE FEE) STANDARDIZED NON-STANDARDIZED DATE
--------------------------------------------------------------------------------------------------------
SUBACCOUNT 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 (1.83%) 2.82% 4.66% 4.45% 2.86% 3.12% 4.66% 09/01/75
--------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceeding the Tables for an explanation of
the charges included in the Standardized and Non-Standardized figures. These
figures represent historical perfromance and should not be considered a
projection of future perfromance.
ANNUITY PAYMENTS
When Annuity payments are to begin, the value of the Account is determined
using Accumulation Unit values as of the tenth Valuation Date 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
<PAGE>
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 Subaccount(s) (with a ten Valuation Date lag which
gives the Company time to process Annuity payments) and a mathematical
adjustment which offsets the assumed net investment rate of 3.5% or 5% per
annum.
The operation of all these factors can be illustrated by the following
hypothetical example. These procedures will be performed separately for the
investment options selected during the Annuity Period.
EXAMPLE:
Assume that, at the date Annuity payments are to begin, there are 3,000
Accumulation Units credited under a particular Account and that the value of
an Accumulation Unit for the tenth Valuation Date 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 Date on 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 Subaccount is
1.0015000 as of the tenth Valuation Date 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 Date (assume
such value to be $13.504376) to produce an Annuity Unit value of $13.523359
for the Valuation Date on 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.
SALES MATERIAL AND ADVERTISING
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
4
<PAGE>
contracts and other types of savings or investment products, including, but
not limited to, personal savings accounts and certificates of deposit.
We may distribute sales literature that compares the percentage change in
Accumulation Unit values for any of the Subaccounts to established market
indices such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average or to the percentage change in values of other management
investment companies that have investment objectives similar to the
Subaccount being compared.
We may publish in advertisements and reports, 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 Services, Inc. The purpose of the ratings is to reflect
our 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.
The Company may provide in advertising, sales literature, periodic
publications or other materials information on various topics of interest to
current and prospective Certificate Holders. These topics may include the
relationship between sectors of the economy and the economy as a whole and
its effect on various securities markets, investment strategies and
techniques (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer and account rebalancing), the
advantages and disadvantages of investing in tax-deferred and taxable
investments, customer profiles and hypothetical purchase and investment
scenarios, financial management and tax and retirement planning, and
investment alternatives to certificates of deposit and other financial
instruments, including comparison between the Contracts and the
characteristics of and market for such financial instruments.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103, are
the independent auditors for the Separate Account and for the Company. The
services provided to the Separate Account include primarily the examination
of the Separate Account's financial statements and the review of filings made
with the SEC.
5
<PAGE>
FINANCIAL STATEMENTS
VARIABLE ANNUITY ACCOUNT B
INDEX
Independent Auditors' Report . . . . . . . . . . . . . S-2
Statement of Assets and Liabilities. . . . . . . . . . S-3
Statement of Operations. . . . . . . . . . . . . . . . S-8
Statements of Changes in Net Assets. . . . . . . . . . S-10
Notes to Financial Statements . . . . . . . . . . . . S-11
Condensed Financial Information . . . . . . . . . . . S-13
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, 1995, and the related statement of operations for the year then
ended, statements of changes in net assets for each of the years in the two-year
period then ended and condensed financial information for the year ended
December 31, 1995. 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 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, 1995, 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 the Aetna Life Insurance and Annuity Company Variable Annuity
Account B as of December 31, 1995, the results of its operations for the year
then ended, changes in its net assets for each of the years in the two-year
period then ended and condensed financial information for the year ended
December 31, 1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 16, 1996
S-2
<PAGE>
VARIABLE ANNUITY ACCOUNT B
STATEMENT OF ASSETS AND LIABILITIES - December 31, 1995
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 20,401,661 shares at $29.06 per share (cost $600,834,096)..............................$ 592,782,223
Aetna Income Shares; 6,006,058 shares at $13.00 per share (cost $74,865,329) ............................... 78,089,373
Aetna Variable Encore Fund; 6,101,341 shares at $13.30 per share (cost $78,645,161) ........................ 81,132,779
Aetna Investment Advisers Fund, Inc.; 7,664,725 shares at $14.50 per share (cost $98,736,185)............... 111,155,405
Aetna GET Fund, Series B; 1,128,914 shares at $12.40 per share (cost $11,433,593) .......................... 14,000,173
Aetna Ascent Variable Portfolio; 32,179 shares at $10.80 per share (cost $341,813) ......................... 347,383
Aetna Crossroads Variable Portfolio; 43,426 shares at $10.74 per share (cost $458,196) ..................... 466,405
Aetna Legacy Variable Portfolio; 30,419 shares at $10.64 per share (cost $321,970) ......................... 323,579
Alger American Funds:
Alger American Balanced Portfolio; 50,517 shares at $13.64 per share (cost $687,406)...................... 689,050
Alger American Growth Portfolio; 346,280 shares at $31.16 per share(cost $10,853,903) .................... 10,790,086
Alger American Income and Growth Portfolio; 57,421 shares at $17.79 per share (cost $1,028,289)........... 1,021,520
Alger American Leveraged AllCap Portfolio; 112,151 shares at $17.43 per share (cost $1,922,235)........... 1,954,796
Alger American MidCap Growth Portfolio; 167,570 shares at $19.44 per share (cost $3,250,372).............. 3,257,565
Alger American Small Capitalization Portfolio; 646,138 shares at $39.41 per share (cost $25,418,034)...... 25,464,317
Calvert Responsibly Invested Balanced Portfolio; 203,667 shares at $1.70 per share (cost $360,358).......... 346,846
Fidelity Investments Variable Insurance Products Funds:
Equity-Income Portfolio; 800,426 shares at $19.27 per share (cost $14,457,609)............................ 15,424,209
Growth Portfolio; 521,413 shares at $29.20 per share (cost $15,259,452)................................... 15,225,262
High Income Portfolio; 100,193 shares at $12.05 per share (cost $1,192,297)............................... 1,207,326
Overseas Portfolio; 117,982 shares at $17.05 per share (cost $1,960,157).................................. 2,011,591
Fidelity Investments Variable Insurance Products Funds II:
Asset Manager Portfolio; 86,288 shares at $15.79 per share (cost $1,264,129).............................. 1,362,489
Contrafund Portfolio; 867,434 shares at $13.78 per share (cost $11,830,403)............................... 11,953,244
Index 500 Portfolio; 28,699 shares at $75.71 per share (cost $2,101,954).................................. 2,172,818
Investment Grade Bond Portfolio; 56,547 shares at $12.48 per share (cost $694,235)........................ 705,701
Insurance Management Series:
Corporate Bond Fund; 1,213,125 shares at $9.79 per share (cost $11,647,482)............................... 11,876,490
Equity Growth and Income Fund; 2,084,810 shares at $12.80 per share (cost $23,768,678).................... 26,685,566
Growth Stock Fund; 17,464 shares at $10.30 per share (cost $176,265)...................................... 179,879
International Stock Fund; 156,864 shares at $10.35 per share (cost $1,580,366)............................ 1,623,538
Prime Money Fund; 5,774,492 shares at $1.00 per share (cost $5,775,674)................................... 5,774,492
U.S. Government Bond Fund; 438,127 shares at $10.29 per share (cost $4,432,728)........................... 4,508,328
Utility Fund; 797,832 shares at $11.03 per share (cost $8,000,336)........................................ 8,800,082
Janus Aspen Series:
Aggressive Growth Portfolio; 693,818 shares at $17.08 per share (cost $10,685,497)........................ 11,850,406
Balanced Portfolio; 55,709 shares at $13.03 per share (cost $699,844)..................................... 725,884
Flexible Income Portfolio; 141,156 shares at $11.11 per share (cost $1,538,432)........................... 1,568,241
Growth Portfolio; 190,925 shares at $13.45 per share (cost $2,483,088).................................... 2,567,940
Short-Term Bond Portfolio; 74,706 shares at $10.03 per share (cost $747,969).............................. 749,299
Worldwide Growth Portfolio; 365,442 shares at $15.31 per share (cost $5,341,275).......................... 5,594,914
Lexington Emerging Markets Fund; 36,371 shares at $9.38 per share (cost $345,183)........................... 341,159
Lexington Natural Resources Trust; 166,302 shares at $11.30 per share (cost $1,690,491)..................... 1,879,208
S-3
<PAGE>
<CAPTION>
<S> <C>
Neuberger & Berman Advisers Management Trust - Growth Portfolio; 323,147 shares at $25.86
per share (cost $8,279,416) .............................................................................. 8,356,574
Scudder Variable Life Investment Fund - International Portfolio; 893,880 shares
at $11.82 per share (cost $9,913,254)..................................................................... 10,565,665
TCI Portfolios, Inc.:
TCI Balanced; 69,585 shares at $7.04 per share (cost $473,338) ........................................... 489,878
TCI Growth; 4,503,433 shares at $12.06 per share (cost $46,105,299) ...................................... 54,311,402
TCI International; 113,062 shares at $5.33 per share (cost $586,969) ..................................... 602,619
--------------
NET ASSETS ...................................................................................................$1,130,935,704
--------------
--------------
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES - December 31, 1995 (continued)
Net assets represented by:
<TABLE>
<CAPTION>
ACCUMULATION
UNIT
UNITS VALUE
----- -----
<S> <C> <C> <C>
Reserves for annuity contracts in accumulation and payment period:
AETNA VARIABLE FUND:
Non-Qualified 1964 ................................................... 5,159.1 $149.975........ $773,737
Non-Qualified I ...................................................... 157,693.1 169.682........ 26,757,709
Non-Qualified II ..................................................... 91,497.4 119.527........ 10,936,439
Non-Qualified III .................................................... 129,657.4 114.464........ 14,841,063
Non-Qualified V ......................................................30,554,956.8 13.972........ 426,924,429
Non-Qualified VI ..................................................... 538,384.8 13.060........ 7,031,177
Non-Qualified VII .................................................... 3,068,782.3 14.001........ 42,967,268
Reserves for annuity contracts in payment period (Note 1) .............................................. 62,550,401
AETNA INCOME SHARES:
Non-Qualified I ...................................................... 7,341.1 46.171........ 338,944
Non-Qualified II ..................................................... 46,936.3 48.232........ 2,263,808
Non-Qualified III .................................................... 11,092.5 46.616........ 517,093
Non-Qualified V ...................................................... 4,853,662.2 12.212........ 59,271,792
Non-Qualified VI ..................................................... 36,561.4 11.140........ 407,298
Non-Qualified VII .................................................... 988,198.5 12.037........ 11,894,717
Reserves for annuity contracts in payment period (Note 1) .............................................. 3,395,721
AETNA VARIABLE ENCORE FUND:
Non-Qualified I ...................................................... 19,658.0 37.683........ 740,766
Non-Qualified II ..................................................... 53,953.2 38.335........ 2,068,303
Non-Qualified III .................................................... 21,094.2 36.081........ 761,100
Non-Qualified V ...................................................... 4,354,271.6 11.007........ 47,927,808
Non-Qualified VI ..................................................... 8,053.2 10.728........ 86,394
Non-Qualified VII .................................................... 2,694,033.8 10.968........ 29,548,408
AETNA INVESTMENT ADVISERS FUND, INC.:
Non-Qualified I ...................................................... 38,200.7 18.002........ 687,677
Non-Qualified II ..................................................... 101,130.6 17.932........ 1,813,429
Non-Qualified III .................................................... 26,617.3 17.889........ 476,148
Non-Qualified V ...................................................... 6,430,772.1 13.803........ 88,762,468
S-4
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Non-Qualified VI ..................................................... 14,277.8 11.589........ 165,459
Non-Qualified VII .................................................... 919,744.2 13.602........ 12,510,415
Reserves for annuity contracts in payment period (Note 1) .............................................. 6,739,809
AETNA GET FUND, SERIES B:
Non-Qualified V ...................................................... 1,089,582.2 12.849........ 14,000,173
AETNA ASCENT VARIABLE PORTFOLIO:
Non-Qualified V ...................................................... 16,790.9 10.652........ 178,853
Non-Qualified VII .................................................... 15,831.9 10.645........ 168,530
AETNA CROSSROADS VARIABLE PORTFOLIO:
Non-Qualified V ...................................................... 16,953.1 10.594........ 179,603
Non-Qualified VII .................................................... 27,089.2 10.587........ 286,802
AETNA LEGACY VARIABLE PORTFOLIO:
Non-Qualified V ...................................................... 2,222.3 10.443........ 23,208
Non-Qualified VII .................................................... 28,777.7 10.438........ 300,371
ALGER AMERICAN FUNDS:
ALGER AMERICAN BALANCED PORTFOLIO:
Non-Qualified VII .................................................... 54,737.3 12.588........ 689,050
ALGER AMERICAN GROWTH PORTFOLIO:
Non-Qualified V ...................................................... 275,493.6 10.157........ 2,798,288
Non-Qualified VII .................................................... 615,696.6 12.980........ 7,991,798
ALGER AMERICAN INCOME AND GROWTH PORTFOLIO:
Non-Qualified VII .................................................... 95,828.9 10.660........ 1,021,520
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO:
Non-Qualified VII .................................................... 159,378.8 12.265........ 1,954,796
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO:
Non-Qualified VII .................................................... 233,109.8 13.974........ 3,257,565
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO:
Non-Qualified V ...................................................... 1,364,900.9 13.714........ 18,718,117
Non-Qualified VII .................................................... 507,425.1 13.295........ 6,746,200
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO:
Non-Qualified V ...................................................... 25,730.0 13.480........ 346,846
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS:
EQUITY - INCOME PORTFOLIO:
Non-Qualified V ...................................................... 294,244.1 11.054........ 3,252,637
Non-Qualified VII..................................................... 913,516.8 13.324........ 12,171,572
GROWTH PORTFOLIO:
Non-Qualified V ...................................................... 288,576.0 10.066........ 2,904,786
Non-Qualified VII..................................................... 885,545.2 13.913........ 12,320,476
HIGH INCOME PORTFOLIO:
Non-Qualified VII..................................................... 112,818.5 10.701........ 1,207,326
OVERSEAS PORTFOLIO:
Non-Qualified V ...................................................... 33,813.3 10.052........ 339,882
Non-Qualified VII..................................................... 150,017.4 11.143........ 1,671,709
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS II
ASSET MANAGER PORTFOLIO:
Non-Qualified VII..................................................... 116,810.0 11.664........ 1,362,489
CONTRAFUND PORTFOLIO:
Non-Qualified V ...................................................... 379,862.0 10.468........ 3,976,320
Non-Qualified VII..................................................... 684,272.2 11.658........ 7,976,924
INDEX 500 PORTFOLIO:
Non-Qualified VII..................................................... 191,671.3 11.336........ 2,172,818
S-5
<PAGE>
<CAPTION>
<S> <C> <C> <C>
INVESTMENT GRADE BOND PORTFOLIO:
Non-Qualified VII..................................................... 66,574.4 10.600........ 705,701
INSURANCE MANAGEMENT SERIES:
CORPORATE BOND FUND:
Non-Qualified VII..................................................... 1,020,320.8 11.640........ 11,876,490
EQUITY GROWTH AND INCOME FUND:
Non-Qualified VII..................................................... 2,057,363.9 12.971........ 26,685,566
GROWTH STOCK FUND:
Non-Qualified VII..................................................... 17,503.1 10.277........ 179,879
INTERNATIONAL STOCK FUND:
Non-Qualified VII..................................................... 158,318.6 10.255........ 1,623,538
PRIME MONEY FUND:
Non-Qualified VII..................................................... 554,933.5 10.406........ 5,774,492
U.S. GOVERNMENT BOND FUND:
Non-Qualified VII..................................................... 417,293.2 10.804........ 4,508,328
UTILITY FUND:
Non-Qualified VII..................................................... 727,600.6 12.095........ 8,800,082
JANUS ASPEN SERIES:
AGGRESSIVE GROWTH PORTFOLIO:
Non-Qualified V....................................................... 723,838.5 12.992........ 9,404,275
Non-Qualified VII..................................................... 187,583.5 13.040........ 2,446,131
BALANCED PORTFOLIO:
Non-Qualified V....................................................... 7,771.5 10.835........ 84,204
Non-Qualified VII..................................................... 53,016.1 12.104........ 641,680
FLEXIBLE INCOME PORTFOLIO:
Non-Qualified V....................................................... 84,047.6 12.094........ 1,016,439
Non-Qualified VII..................................................... 45,713.6 12.071........ 551,802
GROWTH PORTFOLIO:
Non-Qualified V....................................................... 26,022.4 10.870........ 282,874
Non-Qualified VII..................................................... 176,110.7 12.975........ 2,285,066
SHORT-TERM BOND PORTFOLIO:
Non-Qualified V....................................................... 2,677.9 10.325........ 27,650
Non-Qualified VII..................................................... 67,034.3 10.765........ 721,649
WORLDWIDE GROWTH PORTFOLIO:
Non-Qualified V....................................................... 227,582.2 10.893........ 2,479,004
Non-Qualified VII..................................................... 252,485.1 12.341........ 3,115,910
LEXINGTON EMERGING MARKETS FUND:
Non-Qualified VII..................................................... 36,773.1 9.277........ 341,159
LEXINGTON NATURAL RESOURCES TRUST:
Non-Qualified V ...................................................... 162,462.2 10.479........ 1,702,501
Non-Qualified VII .................................................... 16,932.5 10.436........ 176,707
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST - GROWTH PORTFOLIO:
Non-Qualified V ...................................................... 526,542.1 15.871........ 8,356,574
SCUDDER VARIABLE LIFE INVESTMENT FUND:
INTERNATIONAL PORTFOLIO:
Non-Qualified V ...................................................... 720,017.3 14.674........ 10,565,665
TCI PORTFOLIOS, INC.:
TCI BALANCED:
Non-Qualified VII..................................................... 40,406.8 12.124........ 489,878
S-6
<PAGE>
<CAPTION>
<S> <C> <C> <C>
TCI GROWTH:
Non-Qualified II ..................................................... 82,191.6 13.224........ 1,086,884
Non-Qualified III .................................................... 24,926.7 13.107........ 326,719
Non-Qualified V ...................................................... 2,735,782.0 14.091........ 38,549,513
Non-Qualified VI ..................................................... 10,258.8 11.884........ 121,912
Non-Qualified VII .................................................... 1,014,612.2 14.021........ 14,226,374
TCI INTERNATIONAL:
Non-Qualified VII...................................................... 57,691.1 10.446........ 602,619
--------------
$1,130,935,704
--------------
--------------
</TABLE>
See Notes to Financial Statements.
S-7
<PAGE>
VARIABLE ANNUITY ACCOUNT B
STATEMENT OF OPERATIONS - Year Ended December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Dividends: (Notes 1 and 3)
Aetna Variable Fund.................................................................... $97,535,899
Aetna Income Shares.................................................................... 4,800,986
Aetna Variable Encore Fund............................................................. 61,853
Aetna Investment Advisers Fund, Inc.................................................... 7,359,482
Aetna GET Fund, Series B .............................................................. 359,007
Aetna Ascent Variable Portfolio........................................................ 7,378
Aetna Crossroads Variable Portfolio.................................................... 8,108
Aetna Legacy Variable Portfolio........................................................ 5,625
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
Calvert Responsibly Invested Balanced Portfolio..................... .................. 30,986
Fidelity Investments Variable Insurance Products Fund - Equity-Income Portfolio........ 126,924
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
Fidelity Investments Variable Insurance Products Fund II - Contrafund Portfolio........ 146,072
Insurance Management Series - Corporate Bond Fund...................................... 425,532
Insurance Management Series - Equity Growth and Income Fund............................ 249,502
Insurance Management Series - Prime Money Fund......................................... 225,699
Insurance Management Series - U.S. Government Bond Fund................................ 98,938
Insurance Management Series - Utility Fund............................................. 186,623
Janus Aspen Series - Aggressive Growth Portfolio....................................... 113,664
Janus Aspen Series - Balanced Portfolio................................................ 5,931
Janus Aspen Series - Flexible Income Portfolio......................................... 51,680
Janus Aspen Series - Growth Portfolio.................................................. 41,839
Janus Aspen Series - Short-Term Bond Portfolio......................................... 15,670
Janus Aspen Series - Worldwide Growth Portfolio........................................ 17,957
Lexington Emerging Markets Fund........................................................ 3,323
Lexington National Resources Trust..................................................... 7,842
Neuberger & Berman Advisers Management Trust - Growth Portfolio........................ 111,452
Scudder Variable Life Investment Fund - International Portfolio........................ 40,450
TCI Portfolios, Inc. - TCI Balanced.................................................... 5,359
TCI Portfolios, Inc. - TCI Growth...................................................... 47,667
Total investment income ............................................................ 112,097,675
Valuation period deductions (Note 2)................................................... (11,786,592)
Net investment income ................................................................. 100,311,083
S-8
<PAGE>
<CAPTION>
<S> <C> <C>
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1 and 4)
Proceeds from sales .................................................................$495,934,611
Cost of investments sold ............................................................ 463,921,121
Net realized gain ................................................................. 32,013,490
Net unrealized gain (loss) on investments:
Beginning of year ................................................................... (44,356,052)
End of year ......................................................................... 28,746,944
Net unrealized gain ............................................................... 73,102,996
Net realized and unrealized gain on investments ....................................... 105,116,486
------------
Net increase in net assets resulting from operations .................................. $205,427,569
------------
------------
</TABLE>
See Notes to Financial Statements.
S-9
<PAGE>
VARIABLE ANNUITY ACCOUNT B
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
---- ----
<S> <C> <C>
FROM OPERATIONS:
Net investment income ................................................ $100,311,083 $74,514,904
Net realized and unrealized gain (loss) on investments ............... 105,116,486 (89,424,840)
-------------- ------------
Net increase (decrease) in net assets resulting from operations .... 205,427,569 (14,909,936)
-------------- ------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments .......................... 178,474,387 170,170,873
Sales and administrative charges deducted by the Company ............. (34,250) (8,045)
-------------- ------------
Net variable annuity contract purchase payments .................... 178,440,137 170,162,828
Transfers from the Company for mortality guarantee adjustments........ 1,565,140 537,027
Transfers from (to) the Company's fixed account options .............. 4,144,061 (6,000,310)
Redemptions by contract holders ...................................... (46,390,791) (32,737,461)
Annuity payments ..................................................... (9,198,421) (7,564,589)
Other ................................................................ 1,143,373 (127,555)
-------------- ------------
Net increase in net assets from unit transactions .................. 129,703,499 124,269,940
-------------- ------------
Change in net assets ................................................. 335,131,068 109,360,004
NET ASSETS:
Beginning of year .................................................... 795,804,636 686,444,632
-------------- ------------
End of year .......................................................... $1,130,935,704 $795,804,636
-------------- ------------
-------------- ------------
</TABLE>
See Notes to Financial Statements.
S-10
<PAGE>
VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS - December 31, 1995
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, 1995:
<TABLE>
<CAPTION>
<S> <C>
Aetna Variable Fund Insurance Management Series:
Aetna Income Shares - Corporate Bond Fund
Aetna Variable Encore Fund - Equity Growth and Income Fund
Aetna Investment Advisers Fund, Inc. - Growth Stock Fund
Aetna GET Fund, Series B - International Stock Fund
Aetna Ascent Variable Portfolio - Prime Money Fund
Aetna Crossroads Variable Portfolio - U.S. Government Bond Fund
Aetna Legacy Variable Portfolio - Utility Fund
Alger American Funds: Janus Aspen Series:
- Alger American Balanced Portfolio - Aggressive Growth Portfolio
- Alger American Growth Portfolio - Balanced Portfolio
- Alger American Income and Growth Portfolio - Flexible Income Portfolio
- Alger American Leveraged AllCap Portfolio - Growth Portfolio
- Alger American MidCap Growth Portfolio - Short-Term Bond Portfolio
- Alger American Small Capitalization Portfolio - Worldwide Growth Portfolio
Calvert Responsibly Invested Balanced Portfolio Lexington Emerging Markets Fund:
Fidelity Investments Variable Insurance Products Fund: Lexington Natural Resources Trust
- Equity-Income Portfolio Neuberger & Berman Advisers Management Trust:
- Growth Portfolio - Growth Portfolio
- High Income Portfolio Scudder Variable Life Investment Fund:
- Overseas Portfolio - International Portfolio
Fidelity Investments Variable Insurance Products Fund II: TCI Portfolios, Inc.:
- Asset Manager Portfolio - TCI Balanced
- Contrafund Portfolio - TCI Growth
- Index 500 Portfolio - TCI International
- Investment Grade Bond Portfolio
</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.
S-11
<PAGE>
VARIABLE ANNUITY ACCOUNT B
NOTES TO FINANCIAL STATEMENTS - December 31, 1995 (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 each Fund's undistributed net
investment income and accumulated net realized gain on investments is
included in net unrealized gain 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 year ended Decmeber 31, 1995 aggregated
$725,949,193 and $495,934,611, respectively.
5. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Although actual results
could differ from these estimates, any such differences are expected to be
immaterial to the net assets of the Account.
S-12
<PAGE>
VARIABLE ANNUITY ACCOUNT B
CONDENSED FINANCIAL INFORMATION
CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Increase
Value at Value at in Value of
Beginning End of Accumulation
of Year Year Unit
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AETNA VARIABLE FUND:
Non-Qualified 1964 ....................................... $114.828 $149.975 30.61%
Non-Qualified I .......................................... 129.838 169.682 30.69%
Non-Qualified II ......................................... 91.515 119.527 30.61%
Non-Qualified III ........................................ 87.638 114.464 30.61%
Non-Qualified V .......................................... 10.698 13.972 30.61%
Non-Qualified VI ......................................... 9.993 13.060 30.69%
Non-Qualified VII ........................................ 10.737 14.001 30.40%
-------------------------------------------------------------------------------------------------------
AETNA INCOME SHARES:
Non-Qualified I .......................................... $39.514 $46.171 16.85%
Non-Qualified II ......................................... 41.302 48.232 16.78%
Non-Qualified III ........................................ 39.919 46.616 16.78%
Non-Qualified V .......................................... 10.457 12.212 16.78%
Non-Qualified VI ......................................... 9.534 11.140 16.85%
Non-Qualified VII ........................................ 10.324 12.037 16.59%
-------------------------------------------------------------------------------------------------------
AETNA VARIABLE ENCORE FUND:
Non-Qualified I .......................................... $35.958 $37.683 4.80%
Non-Qualified II ......................................... 36.602 38.335 4.73%
Non-Qualified III ........................................ 34.450 36.081 4.73%
Non-Qualified V .......................................... 10.509 11.007 4.73%
Non-Qualified VI ......................................... 10.237 10.728 4.80%
Non-Qualified VII ........................................ 10.489 10.968 4.57%
-------------------------------------------------------------------------------------------------------
AETNA INVESTMENT ADVISERS FUND, INC.:
Non-Qualified I .......................................... $14.299 $18.002 25.90%
Non-Qualified II ......................................... 14.252 17.932 25.82%
Non-Qualified III ........................................ 14.218 17.889 25.82%
Non-Qualified V .......................................... 10.971 13.803 25.81%
Non-Qualified VI ......................................... 10.000 11.589 15.89% (4)
Non-Qualified VII ........................................ 10.828 13.602 25.62%
-------------------------------------------------------------------------------------------------------
AETNA GET FUND, SERIES B:
Non-Qualified V .......................................... $10.159 $12.849 26.48%
-------------------------------------------------------------------------------------------------------
AETNA ASCENT VARIABLE PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.652 6.52% (7)
Non-Qualified VII ........................................ 10.000 10.645 6.45% (7)
-------------------------------------------------------------------------------------------------------
AETNA CROSSROADS VARIABLE PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.594 5.94% (7)
Non-Qualified VII ........................................ 10.000 10.587 5.87% (7)
-------------------------------------------------------------------------------------------------------
AETNA LEGACY VARIABLE PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.443 4.43% (8)
Non-Qualified VII ........................................ 10.000 10.438 4.38% (8)
-------------------------------------------------------------------------------------------------------
</TABLE>
S-13
<PAGE>
VARIABLE ANNUITY ACCOUNT B
CONDENSED FINANCIAL INFORMATION
CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
(continued)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Increase
Value at Value at in Value of
Beginning End of Accumulation
of Year Year Unit
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ALGER AMERICAN FUNDS:
ALGER AMERICAN BALANCED PORTFOLIO:
Non-Qualified VII ........................................ $10.000 $12.588 25.88% (1)
-------------------------------------------------------------------------------------------------------
ALGER AMERICAN GROWTH PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.157 1.57% (7)
Non-Qualified VII ........................................ 10.000 12.980 29.80% (2)
-------------------------------------------------------------------------------------------------------
ALGER AMERICAN INCOME AND GROWTH PORTFOLIO:
Non-Qualified VII ........................................ $10.000 $10.660 6.60% (5)
-------------------------------------------------------------------------------------------------------
ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO:
Non-Qualified VII ........................................ $10.000 $12.265 22.65% (5)
-------------------------------------------------------------------------------------------------------
ALGER AMERICAN MIDCAP GROWTH PORTFOLIO:
Non-Qualified VII ........................................ $10.000 $13.974 39.74% (1)
-------------------------------------------------------------------------------------------------------
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO:
Non-Qualified V .......................................... $9.622 $13.714 42.52%
Non-Qualified VII ........................................ 10.000 13.295 32.95% (3)
-------------------------------------------------------------------------------------------------------
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO:
Non-Qualified V .......................................... $10.518 $13.480 28.17%
-------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS:
EQUITY - INCOME PORTFOLIO:
Non-Qualified V .......................................... $10.000 $11.054 10.54% (7)
Non-Qualified VII ........................................ 10.002 13.324 33.21%
-------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.066 0.66% (7)
Non-Qualified VII ........................................ 10.423 13.913 33.48%
-------------------------------------------------------------------------------------------------------
HIGH INCOME PORTFOLIO:
Non-Qualified VII ........................................ $10.000 $10.701 7.01% (5)
-------------------------------------------------------------------------------------------------------
OVERSEAS PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.052 0.52% (7)
Non-Qualified VII ........................................ 10.000 11.143 11.43% (1)
-------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS II:
ASSET MANAGER PORTFOLIO:
Non-Qualified VII ........................................ $10.000 $11.664 16.64% (1)
-------------------------------------------------------------------------------------------------------
CONTRAFUND PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.468 4.68% (7)
Non-Qualified VII ........................................ 10.000 11.658 16.58% (5)
-------------------------------------------------------------------------------------------------------
INDEX 500 PORTFOLIO:
Non-Qualified VII ........................................ $10.000 $11.336 13.36% (5)
-------------------------------------------------------------------------------------------------------
INVESTMENT GRADE BOND PORTFOLIO:
Non-Qualified VII ........................................ $10.000 $10.600 6.00% (6)
-------------------------------------------------------------------------------------------------------
INSURANCE MANAGEMENT SERIES:
CORPORATE BOND FUND:
Non-Qualified VII ........................................ $9.814 $11.640 18.61%
-------------------------------------------------------------------------------------------------------
</TABLE>
S-14
<PAGE>
VARIABLE ANNUITY ACCOUNT B
CONDENSED FINANCIAL INFORMATION
CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
(continued)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Increase
(Decrease)
Value at Value at in Value of
Beginning End of Accumulation
of Year Year Unit
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY GROWTH AND INCOME FUND:
Non-Qualified VII ....................................... $9.838 $12.971 31.84%
-------------------------------------------------------------------------------------------------------
GROWTH STOCK FUND:
Non-Qualified VII ........................................ $10.000 $10.277 2.77% (9)
-------------------------------------------------------------------------------------------------------
INTERNATIONAL STOCK FUND:
Non-Qualified VII ........................................ $10.000 $10.255 2.55% (4)
-------------------------------------------------------------------------------------------------------
PRIME MONEY FUND:
Non-Qualified VII ........................................ $10.033 $10.406 3.71%
-------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT BOND FUND:
Non-Qualified VII ........................................ $10.073 $10.804 7.25%
-------------------------------------------------------------------------------------------------------
UTILITY FUND:
Non-Qualified VII ........................................ $9.881 $12.095 22.40%
-------------------------------------------------------------------------------------------------------
JANUS ASPEN SERIES:
AGGRESSIVE GROWTH PORTFOLIO:
Non-Qualified V .......................................... $10.319 $12.992 25.91%
Non-Qualified VII ........................................ 10.374 13.040 25.71%
-------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.835 8.35% (7)
Non-Qualified VII ........................................ 10.000 12.104 21.04% (1)
-------------------------------------------------------------------------------------------------------
FLEXIBLE INCOME PORTFOLIO:
Non-Qualified V .......................................... $9.886 $12.094 22.33%
Non-Qualified VII ........................................ 9.884 12.071 22.13%
-------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.870 8.70% (7)
Non-Qualified VII ........................................ 10.109 12.975 28.35%
-------------------------------------------------------------------------------------------------------
SHORT TERM BOND PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.325 3.25% (7)
Non-Qualified VII ........................................ 10.000 10.765 7.65% (1)
-------------------------------------------------------------------------------------------------------
WORLDWIDE GROWTH PORTFOLIO:
Non-Qualified V .......................................... $10.000 $10.893 8.93% (7)
Non-Qualified VII ........................................ 10.000 12.341 23.41% (3)
-------------------------------------------------------------------------------------------------------
LEXINGTON EMERGING MARKETS FUND:
Non-Qualified VII ........................................ $9.795 $9.277 (5.28%)
-------------------------------------------------------------------------------------------------------
LEXINGTON NATURAL RESOURCES TRUST:
Non-Qualified V .......................................... $9.079 $10.479 15.42%
Non-Qualified VII ........................................ 9.056 10.436 15.24%
-------------------------------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST - GROWTH PORTFOLIO:
Non-Qualified V .......................................... $12.199 $15.871 30.10%
-------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND - INTERNATIONAL
PORTFOLIO:
Non-Qualified V .......................................... $13.372 $14.674 9.74%
-------------------------------------------------------------------------------------------------------
</TABLE>
S-15
<PAGE>
VARIABLE ANNUITY ACCOUNT B
CONDENSED FINANCIAL INFORMATION
CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
(continued)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Increase
Value at Value at in Value of
Beginning End of Accumulation
of Year Year Unit
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TCI PORTFOLIOS, INC.:
TCI BALANCED:
Non-Qualified VII ........................................ $10.152 $12.124 19.42%
-------------------------------------------------------------------------------------------------------
TCI GROWTH:
Non-Qualified II ......................................... $10.213 $13.224 29.47%
Non-Qualified III ........................................ 10.123 13.107 29.47%
Non-Qualified V .......................................... 10.883 14.091 29.47%
Non-Qualified VI ......................................... 10.000 11.884 18.84% (4)
Non-Qualified VII ........................................ 10.847 14.021 29.27%
-------------------------------------------------------------------------------------------------------
TCI INTERNATIONAL:
Non-Qualified VII ........................................ $9.441 $10.446 10.64%
-------------------------------------------------------------------------------------------------------
</TABLE>
NON-QUALIFIED 1964 Individual contract issued from December 1, 1964 to
March 14, 1967.
NON-QUALIFIED I Individual contract issued in connection with deferred
compensation plans from March 15, 1967 through April
30, 1975; other individual contracts issued from March
15, 1967 through October 31, 1975; and group contracts
issued from March 15, 1967 to December 31, 1975.
NON-QUALIFIED II Individual contracts issued in connection with deferred
compensation plans since May 1, 1975; other individual
contracts issued since November 1, 1975; and group
contracts issued since January 1, 1976.
NON-QUALIFIED III Group contracts issued in connection with deferred
compensation plans for tax-exempt organizations
(non-governmental only) since May 3, 1982.
NON-QUALIFIED V Group Aetna Plus contracts issued in connection
with Deferred Compensation Plans issued since
August 28, 1992.
NON-QUALIFIED VI Certain existing contracts that were converted to ACES,
the new administrative system (previously valued under
Non-Qualified I).
NON-QUALIFIED VII Certain individual and group contracts issued as
non-qualified deferred annuity contracts or Individual
Retirement Annuity contracts issued since May 4, 1994.
1 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during January 1995 when
the fund became available under the contract.
2 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during February 1995 when
the fund became available under the contract.
3 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during April 1995 when
the fund became available under the contract.
S-16
<PAGE>
VARIABLE ANNUITY ACCOUNT B
CONDENSED FINANCIAL INFORMATION
CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
(continued)
--------------------------------------------------------------------------------
4 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during May 1995 when the
fund became available under the contract.
5 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during June 1995 when the
fund became available under the contract.
6 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during July 1995 when the
fund became available under the contract.
7 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during August 1995 when
the fund became available under the contract.
8 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during September 1995
when the fund became available under the contract.
9 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during November 1995 when
the fund became available under the contract.
S-17
<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, 1995, 1994 and 1993.............................. F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994... F-4
Consolidated Statements of Changes in Shareholder's Equity for
the Years Ended
December 31, 1995, 1994 and 1993.............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993.............................. F-6
Notes to Consolidated Financial Statements....................... F-7
</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, 1995 and 1994,
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, 1995. 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 as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, 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.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 6, 1996
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Premiums............................................. $ 130.8 $ 124.2 $ 82.1
Charges assessed against policyholders............... 318.9 279.0 251.5
Net investment income................................ 1,004.3 917.2 911.9
Net realized capital gains........................... 41.3 1.5 9.5
Other income......................................... 42.0 10.3 9.5
-------- -------- --------
Total revenue...................................... 1,537.3 1,332.2 1,264.5
-------- -------- --------
Benefits and expenses:
Current and future benefits.......................... 915.3 854.1 818.4
Operating expenses................................... 318.7 235.2 207.2
Amortization of deferred policy acquisition costs.... 43.3 26.4 19.8
-------- -------- --------
Total benefits and expenses........................ 1,277.3 1,115.7 1,045.4
-------- -------- --------
Income before federal income taxes..................... 260.0 216.5 219.1
Federal income taxes................................. 84.1 71.2 76.2
-------- -------- --------
Net income............................................. $ 175.9 $ 145.3 $ 142.9
-------- -------- --------
-------- -------- --------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Balance Sheets
(millions)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
-------------------------------------------------------
Investments:
Debt securities, available for sale:
(amortized cost: $11,923.7 and $10,577.8)........... $12,720.8 $10,191.4
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $51.3 and
$43.3)............................................ 57.6 47.2
Investment in affiliated mutual funds (cost: $173.4
and $187.1)....................................... 191.8 181.9
Common stock (cost: $6.9 at December 31, 1995)..... 8.2 --
Short-term investments............................... 15.1 98.0
Mortgage loans....................................... 21.2 9.9
Policy loans......................................... 338.6 248.7
Limited partnership.................................. -- 24.4
--------- ---------
Total investments................................ 13,353.3 10,801.5
Cash and cash equivalents.............................. 568.8 623.3
Accrued investment income.............................. 175.5 142.2
Premiums due and other receivables..................... 37.3 75.8
Deferred policy acquisition costs...................... 1,341.3 1,164.3
Reinsurance loan to affiliate.......................... 655.5 690.3
Other assets........................................... 26.2 15.9
Separate Accounts assets............................... 10,987.0 7,420.8
--------- ---------
Total assets..................................... $27,144.9 $20,934.1
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
-------------------------------------------------------
Liabilities:
Future policy benefits............................... $ 3,594.6 $ 2,912.7
Unpaid claims and claim expenses..................... 27.2 23.8
Policyholders' funds left with the Company........... 10,500.1 8,949.3
--------- ---------
Total insurance reserve liabilities.............. 14,121.9 11,885.8
Other liabilities.................................... 259.2 302.1
Federal income taxes:
Current............................................ 24.2 3.4
Deferred........................................... 169.6 233.5
Separate Accounts liabilities........................ 10,987.0 7,420.8
--------- ---------
Total liabilities................................ 25,561.9 19,845.6
--------- ---------
--------- ---------
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)................ 132.5 (189.0)
Retained earnings.................................... 1,040.1 867.1
--------- ---------
Total shareholder's equity....................... 1,583.0 1,088.5
--------- ---------
Total liabilities and shareholder's equity..... $27,144.9 $20,934.1
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Shareholder's equity, beginning of year................ $ 1,088.5 $ 1,246.7 $ 990.1
Net change in unrealized capital gains (losses)........ 321.5 (303.5) 113.7
Net income............................................. 175.9 145.3 142.9
Common stock dividends declared........................ (2.9) -- --
--------- --------- ---------
Shareholder's equity, end of year...................... $ 1,583.0 $ 1,088.5 $ 1,246.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income........................................... $ 175.9 $ 145.3 $ 142.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income.............. (33.3) (17.5) (11.1)
Decrease (increase) in premiums due and other
receivables....................................... 25.4 1.3 (5.6)
Increase in policy loans........................... (89.9) (46.0) (36.4)
Increase in deferred policy acquisition costs...... (177.0) (105.9) (60.5)
Decrease in reinsurance loan to affiliate.......... 34.8 27.8 31.8
Net increase in universal life account balances.... 393.4 164.7 126.4
Increase in other insurance reserve liabilities.... 79.0 75.1 86.1
Net increase in other liabilities and other
assets............................................ 15.0 53.9 7.0
Decrease in federal income taxes................... (6.5) (11.7) (3.7)
Net accretion of discount on bonds................. (66.4) (77.9) (88.1)
Net realized capital gains......................... (41.3) (1.5) (9.5)
Other, net......................................... -- (1.0) 0.2
---------- ---------- ----------
Net cash provided by operating activities........ 309.1 206.6 179.5
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale................. 4,207.2 3,593.8 473.9
Equity securities.................................. 180.8 93.1 89.6
Mortgage loans..................................... 10.7 -- --
Limited partnership................................ 26.6 -- --
Investment maturities and collections of:
Debt securities available for sale................. 583.9 1,289.2 2,133.3
Short-term investments............................. 106.1 30.4 19.7
Cost of investment purchases in:
Debt securities.................................... (6,034.0) (5,621.4) (3,669.2)
Equity securities.................................. (170.9) (162.5) (157.5)
Short-term investments............................. (24.7) (106.1) (41.3)
Mortgage loans..................................... (21.3) -- --
Limited partnership................................ -- (25.0) --
---------- ---------- ----------
Net cash used for investing activities........... (1,135.6) (908.5) (1,151.5)
---------- ---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment
contracts........................................... 1,884.5 1,737.8 2,117.8
Withdrawals of investment contracts.................. (1,109.6) (948.7) (1,000.3)
Dividends paid to shareholder........................ (2.9) -- --
---------- ---------- ----------
Net cash provided by financing activities........ 772.0 789.1 1,117.5
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents... (54.5) 87.2 145.5
Cash and cash equivalents, beginning of year........... 623.3 536.1 390.6
---------- ---------- ----------
Cash and cash equivalents, end of year................. $ 568.8 $ 623.3 $ 536.1
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flow information:
Income taxes paid, net............................... $ 90.2 $ 82.6 $ 79.9
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries
(collectively, the "Company") is a provider of financial services and life
insurance products in the United States. The Company has two business segments,
financial services and life insurance.
The financial services products include individual and group annuity contracts
which offer a variety of funding and distribution options for personal and
employer-sponsored retirement plans that qualify under Internal Revenue Code
Sections 401, 403, 408 and 457, and individual and group non-qualified annuity
contracts. These contracts may be immediate or deferred and are offered
primarily to individuals, pension plans, small businesses and employer-sponsored
groups in the health care, government, education (collectively "not-for-profit"
organizations) and corporate markets. Financial services also include pension
plan administrative services.
The life insurance products include universal life, variable 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.
BASIS OF PRESENTATION
The consolidated financial statements include Aetna Life Insurance and Annuity
Company and its wholly owned subsidiaries, Aetna Insurance Company of America
and Aetna Private Capital, Inc. Aetna Life Insurance and Annuity Company is a
wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is a
wholly owned subsidiary of Aetna Life and Casualty Company ("Aetna"). Two
subsidiaries, Systematized Benefits Administrators, Inc. ("SBA"), and Aetna
Investment Services, Inc. ("AISI"), which were previously reported in the
consolidated financial statements were distributed in the form of dividends to
ARSI in December of 1995. The impact to the Company's financial statements of
distributing these dividends was immaterial.
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 1994 and 1993 financial
information to conform to the 1995 presentation.
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.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those estimates.
CASH AND CASH EQUIVALENT
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, 1995 and 1994, 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 Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Limited Partnership
The Company's limited partnership investment was carried at the amount invested
plus the Company's share of undistributed operating results and unrealized gains
(losses), which approximates fair value. The Company disposed of the limited
partnership during 1995.
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 10.00%. 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 6.38% in 1995 and
4.00% to 5.85% in 1994. For all other fixed options, the interest credited
ranged from 5.00% to 7.00% in 1995 and 5.00% to 7.50% in 1994.
Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the 1971
Individual Annuity Mortality Table, the 1983 Individual Annuity Mortality Table,
the
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1983 Group Annuity Mortality Table and, in some cases, mortality improvement
according to scales G and H, 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.
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 $322.2 million for 1995 (fair value
$343.9 million) and $149.7 million for 1994 (fair value $146.3 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 both 1995
and 1994. 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 Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS
Investments in debt securities available for sale as of December 31, 1995 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... $ 539.5 $ 47.5 $ -- $ 587.0
Obligations of states and political
subdivisions................................ 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial.................................. 2,764.4 110.3 2.1 2,872.6
Utilities.................................. 454.4 27.8 1.0 481.2
Other...................................... 2,177.7 159.5 1.2 2,336.0
--------- ---------- ----- ---------
Total U.S. Corporate securities............ 5,396.5 297.6 4.3 5,689.8
Foreign securities:
Government................................. 316.4 26.1 2.0 340.5
Financial.................................. 534.2 45.4 3.5 576.1
Utilities.................................. 236.3 32.9 -- 269.2
Other...................................... 215.7 15.1 -- 230.8
--------- ---------- ----- ---------
Total Foreign securities................... 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Residential pass-throughs.................. 556.7 99.2 1.8 654.1
Residential CMOs........................... 2,383.9 167.6 2.2 2,549.3
--------- ---------- ----- ---------
Total Residential mortgage-backed
securities................................ 2,940.6 266.8 4.0 3,203.4
Commercial/Multifamily mortgage-backed
securities.................................. 741.9 32.3 0.2 774.0
--------- ---------- ----- ---------
Total Mortgage-backed securities........... 3,682.5 299.1 4.2 3,977.4
Other asset-backed securities................ 961.2 35.5 0.5 996.2
--------- ---------- ----- ---------
Total debt securities available for sale..... $11,923.7 $811.6 $14.5 $12,720.8
--------- ---------- ----- ---------
--------- ---------- ----- ---------
</TABLE>
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS (CONTINUED)
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 asset-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>
At December 31, 1995 and 1994, net unrealized appreciation (depreciation) of
$797.1 million and $(386.4) million, respectively, on available for sale debt
securities included $619.1 million and $(308.6) 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 Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of debt securities for the year ended December
31, 1995 are shown below by contractual maturity. Actual maturities may differ
from contractual maturities because securities may be restructured, called, or
prepaid.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ---------
(MILLIONS)
<S> <C> <C>
Due to mature:
One year or less..................................... $ 348.8 $ 351.1
After one year through five years.................... 2,100.2 2,159.5
After five years through ten years................... 2,516.0 2,663.4
After ten years...................................... 2,315.0 2,573.2
Mortgage-backed securities........................... 3,682.5 3,977.4
Other asset-backed securities........................ 961.2 996.2
--------- ---------
Total................................................ $11,923.7 $12,720.8
--------- ---------
--------- ---------
</TABLE>
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Cash
collateral, which is in excess of the market value of the loaned securities, is
deposited by the borrower with a lending agent, and retained and invested by the
lending agent to generate additional income for the Company. The market value of
the loaned securities is monitored on a daily basis with additional collateral
obtained or refunded as the market value fluctuates. At December 31, 1995, the
Company had loaned securities (which are reflected as invested assets on the
Consolidated Balance Sheets) with a market value of approximately $264.5
million.
At December 31, 1995 and 1994, debt securities carried at $7.4 million and $7.0
million, respectively, were on deposit as required by regulatory authorities.
The valuation reserve for mortgage loans was $3.1 million at December 31, 1994.
There was no valuation reserve for mortgage loans at December 31, 1995. The
carrying value of non-income producing investments was $0.1 million and $0.2
million at December 31, 1995 and 1994, respectively.
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS (CONTINUED)
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, 1995 are as follows:
<TABLE>
<CAPTION>
AMORTIZED
DEBT SECURITIES COST FAIR VALUE
---------- ----------
(MILLIONS)
<S> <C> <C>
General Electric Corporation........................... $ 314.9 $ 329.3
General Motors Corporation............................. 273.9 284.5
Associates Corporation of North America................ 230.2 239.1
Society National Bank.................................. 203.5 222.3
Ciesco, L.P............................................ 194.9 194.9
Countrywide Funding.................................... 171.2 172.7
Baxter International................................... 168.9 168.9
Time Warner............................................ 158.6 166.1
Ford Motor Company..................................... 156.7 162.6
</TABLE>
The portfolio of debt securities at December 31, 1995 and 1994 included $662.5
million and $318.3 million, respectively, (5% and 3%, respectively, of the debt
securities) 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.
The increase in below investment grade securities is the result of a change in
investment strategy, which has reduced the Company's holdings in residential
mortgage-back securities and increased the Company's holdings in corporate
securities. Residential mortgage-back securities are subject to higher
prepayment risk and lower credit risk, while corporate securities earning a
comparable yield are subject to higher credit risk and lower prepayment risk. We
expect the percentage of below investment grade securities will increase in
1996, but we expect that the overall average quality of the portfolio of debt
securities will remain at AA-. Of these below investment grade assets, $14.5
million and $31.8 million, at December 31, 1995 and 1994, 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 $2.5 billion and $2.6 billion at
December 31, 1995 and 1994, respectively. 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, 1995
and 1994, approximately 79% and 85%, respectively, of the Company's CMO holdings
consisted of sequential and planned amortization class debt securities which are
subject to less prepayment and extension risk than other CMO instruments. At
December 31, 1995 and 1994, approximately 81% and 82%, respectively, 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.
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
2. INVESTMENTS (CONTINUED)
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, 1995 and 1994, approximately 3% and 4%, 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 was
mitigated somewhat by 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 somewhat by holding offsetting
positions in POs. During dramatic decreases in interest rates POs would generate
future cash flows much quicker than originally anticipated.
Investments in available for sale equity securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------ ---------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
1995
Equity Securities................ $231.6 $ 27.2 $ 1.2 $ 257.6
------ ----- --- ----------
1994
Equity Securities................ $230.5 $ 6.5 $ 7.9 $ 229.1
------ ----- --- ----------
</TABLE>
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
$61.1 million, $(29.1) million and $(54.8) million for the years ended December
31, 1995, 1994, and 1993, 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
$7.3 million and $(50.7) million at the end of December 31, 1995 and 1994,
respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt securities
are included in net realized capital gains (losses) and amounted to $3.1
million, $1.1 million and $(98.5) million, of which $2.2 million, $0.8 million
and $(91.5) million were allocable to experience-rated contractholders, for the
years ended December 31, 1995, 1994 and 1993, respectively. The 1993 losses were
primarily related to writedowns of interest-only mortgage-backed securities to
their fair value.
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED)
Net realized capital gains (losses) on investments, net of amounts allocated to
experience-rated contracts, were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ------
(MILLIONS)
<S> <C> <C> <C>
Debt securities........................................ $32.8 $ 1.0 $ 9.6
Equity securities...................................... 8.3 0.2 0.1
Mortgage loans......................................... 0.2 0.3 (0.2)
----- ----- ------
Pretax realized capital gains.......................... $41.3 $ 1.5 $ 9.5
----- ----- ------
After-tax realized capital gains....................... $25.8 $ 1.0 $ 6.2
----- ----- ------
</TABLE>
Gross gains of $44.6 million, $26.6 million and $33.3 million and gross losses
of $11.8 million, $25.6 million and $23.7 million were realized from the sales
of investments in debt securities in 1995, 1994 and 1993, 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>
1995 1994 1993
------ -------- ------
(MILLIONS)
<S> <C> <C> <C>
Debt securities........................................ $255.9 $ (242.1) $164.3
Equity securities...................................... 27.3 (13.3) 10.6
Limited partnership.................................... 1.8 (1.8) --
------ -------- ------
285.0 (257.2) 174.9
Deferred federal income taxes (See Note 6)............. (36.5) 46.3 61.2
------ -------- ------
Net change in unrealized capital gains (losses)........ $321.5 $ (303.5) $113.7
------ -------- ------
------ -------- ------
</TABLE>
Net unrealized capital gains (losses) allocable to experience-rated contracts of
$515.0 million and $104.1 million at December 31, 1995 and $(260.9) million and
$(47.7) million at December 31, 1994 are reflected on the Consolidated Balance
Sheet in Policyholders' Funds Left With the Company and Future Policy Benefits,
respectively, and are not included in shareholder's equity.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED)
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>
1995 1994 1993
------ ------- -------
(MILLIONS)
<S> <C> <C> <C>
Debt securities
Gross unrealized capital gains....................... $179.3 $ 27.4 $ 164.3
Gross unrealized capital losses...................... (1.3) (105.2) --
------ ------- -------
178.0 (77.8) 164.3
Equity securities
Gross unrealized capital gains....................... 27.2 6.5 12.0
Gross unrealized capital losses...................... (1.2) (7.9) (0.1)
------ ------- -------
26.0 (1.4) 11.9
Limited Partnership
Gross unrealized capital gains....................... -- -- --
Gross unrealized capital losses...................... -- (1.8) --
------ ------- -------
Deferred federal income taxes (See Note 6)............. 71.5 108.0 61.7
------ ------- -------
Net unrealized capital gains (losses).................. $132.5 $(189.0) $ 114.5
------ ------- -------
------ ------- -------
</TABLE>
4. NET INVESTMENT INCOME
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------ ------
(MILLIONS)
<S> <C> <C> <C>
Debt securities........................................ $ 891.5 $823.9 $828.0
Preferred stock........................................ 4.2 3.9 2.3
Investment in affiliated mutual funds.................. 14.9 5.2 2.9
Mortgage loans......................................... 1.4 1.4 1.5
Policy loans........................................... 13.7 11.5 10.8
Reinsurance loan to affiliate.......................... 46.5 51.5 53.3
Cash equivalents....................................... 38.9 29.5 16.8
Other.................................................. 8.4 6.7 7.7
-------- ------ ------
Gross investment income................................ 1,019.5 933.6 923.3
Less investment expenses............................... (15.2) (16.4) (11.4)
-------- ------ ------
Net investment income.................................. $1,004.3 $917.2 $911.9
-------- ------ ------
-------- ------ ------
</TABLE>
Net investment income includes amounts allocable to experience-rated
contractholders of $744.2 million, $677.1 million and $661.3 million for the
years ended December 31, 1995, 1994 and 1993, respectively. Interest credited to
contractholders is included in Current and Future Benefits.
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.
The amount of dividends that may be paid to the shareholder in 1996 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$70.0 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 $70.0 million, $64.9 million and $77.6
million for the years ended December 31, 1995, 1994 and 1993, respectively.
Statutory shareholder's equity was $670.7 million and $615.0 million as of
December 31, 1995 and 1994, respectively.
At December 31, 1995 and 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.
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>
1995 1994 1993
----- ----- -------
(MILLIONS)
<S> <C> <C> <C>
Current taxes (benefits):
Income from operations............................... $82.9 $78.7 $ 87.1
Net realized capital gains........................... 28.5 (33.2) 18.1
----- ----- -------
111.4 45.5 105.2
----- ----- -------
Deferred taxes (benefits):
Income from operations............................... (14.4) (8.0) (14.2)
Net realized capital gains........................... (12.9) 33.7 (14.8)
----- ----- -------
(27.3) 25.7 (29.0)
----- ----- -------
Total................................................ $84.1 $71.2 $ 76.2
----- ----- -------
----- ----- -------
</TABLE>
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
6. FEDERAL INCOME TAXES (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>
1995 1994 1993
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Income before federal income taxes..................... $260.0 $216.5 $219.1
Tax rate............................................... 35% 35% 35%
------ ------ ------
Application of the tax rate............................ 91.0 75.8 76.7
------ ------ ------
Tax effect of:
Excludable dividends................................. (9.3) (8.6) (8.7)
Tax reserve adjustments.............................. 3.9 2.9 4.7
Reinsurance transaction.............................. (0.5) 1.9 (0.2)
Tax rate change on deferred liabilities.............. -- -- 3.7
Other, net........................................... (1.0) (0.8) --
------ ------ ------
Income tax expense................................... $ 84.1 $ 71.2 $ 76.2
------ ------ ------
------ ------ ------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Deferred tax assets:
Insurance reserves................................... $290.4 $211.5
Net unrealized capital losses........................ -- 136.3
Unrealized gains allocable to experience-rated
contracts........................................... 216.7 --
Investment losses not currently deductible........... 7.3 15.5
Postretirement benefits other than pensions.......... 7.7 8.4
Other................................................ 32.0 28.3
------ ------
Total gross assets..................................... 554.1 400.0
Less valuation allowance............................... -- 136.3
------ ------
Deferred tax assets, net of valuation.................. 554.1 263.7
Deferred tax liabilities:
Deferred policy acquisition costs.................... 433.0 385.2
Unrealized losses allocable to experience-rated
contracts........................................... -- 108.0
Market discount...................................... 4.4 3.6
Net unrealized capital gains......................... 288.2 --
Other................................................ (1.9) 0.4
------ ------
Total gross liabilities................................ 723.7 497.2
------ ------
Net deferred tax liability............................. $169.6 $233.5
------ ------
------ ------
</TABLE>
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
6. FEDERAL INCOME TAXES (CONTINUED)
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. As of December 31, 1995, no valuation allowance was required for
unrealized capital gains and losses. The reversal of the valuation allowance had
no impact on net income in 1995.
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, 1995. 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 challenges. 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
Projected Unit Credit 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 1993 through 1995, 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 1993 through
1995, 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.
The cost to the Company associated with the Aetna postretirement plans for 1995,
1994 and 1993 were $1.4 million, $1.0 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.
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
7. BENEFIT PLANS (CONTINUED)
The cost to the Company associated to the agents' postretirement plans for 1995,
1994 and 1993 were $0.8 million, $0.7 million and $0.6 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 $4.9 million, $3.3 million and $3.1 million in 1995, 1994 and 1993,
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 with the Aetna stock plans for 1995,
1994 and 1993, was $6.3 million, $1.7 million and $0.4 million, respectively.
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 .25% 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
$128.1 million, $104.6 million and $93.6 million in 1995, 1994 and 1993,
respectively. The Company may waive advisory fees at its discretion.
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 $655.5 million and $690.3 million as of
December 31, 1995 and 1994, 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 $663.5 million and $630.3 million as of December 31,
1995 and 1994, respectively, and is based upon the fair value of the underlying
assets. Premiums of $28.0 million, $32.8 million and $33.3 million and current
and future benefits of $43.0 million, $43.8 million and $55.4 million were
assumed in 1995, 1994 and 1993, respectively.
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
8. RELATED PARTY TRANSACTIONS (CONTINUED)
Investment income of $46.5 million, $51.5 million and $53.3 million was
generated from the reinsurance loan to affiliate in 1995, 1994 and 1993,
respectively. Net income of approximately $18.4 million, $25.1 million and $13.6
million resulted from this agreement in 1995, 1994 and 1993, 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 $28.0 million and $24.2 million were
maintained for this contract as of December 31, 1995 and 1994, 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 were $3.2 million, $1.3 million and
$0.6 million for 1995, 1994 and 1993, respectively.
The Company received no capital contributions in 1995, 1994 or 1993.
The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.
Premiums due and other receivables include $5.7 million and $27.6 million due
from affiliates in 1995 and 1994, respectively. Other liabilities include $12.4
million and $27.9 million due to affiliates for 1995 and 1994, 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.
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.
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
9. REINSURANCE (CONTINUED)
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 8 above.
<TABLE>
<CAPTION>
CEDED TO ASSUMED
DIRECT OTHER FROM OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
--------- ------------- ------------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
1995
Premiums:
Life Insurance....................................... $ 28.8 $ 8.6 $ 28.0 $ 48.2
Accident and Health Insurance........................ 7.5 7.5 -- --
Annuities............................................ 82.1 -- 0.5 82.6
--------- ----- ----- ---------
Total earned premiums................................ $ 118.4 $ 16.1 $ 28.5 $ 130.8
--------- ----- ----- ---------
--------- ----- ----- ---------
1994
Premiums:
Life Insurance....................................... $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health Insurance........................ 9.3 9.3 -- --
Annuities............................................ 69.9 -- 0.2 70.1
--------- ----- ----- ---------
Total earned premiums................................ $ 106.5 $ 15.3 $ 33.0 $ 124.2
--------- ----- ----- ---------
--------- ----- ----- ---------
1993
Premiums:
Life Insurance....................................... $ 22.4 $ 5.6 $ 33.3 $ 50.1
Accident and Health Insurance........................ 12.9 12.9 -- --
Annuities............................................ 31.3 -- 0.7 32.0
--------- ----- ----- ---------
Total earned premiums................................ $ 66.6 $ 18.5 $ 34.0 $ 82.1
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
10. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................................. $ 568.8 $ 568.8 $ 623.3 $ 623.3
Short-term investments.................................... 15.1 15.1 98.0 98.0
Debt securities........................................... 12,720.8 12,720.8 10,191.4 10,191.4
Equity securities......................................... 257.6 257.6 229.1 229.1
Limited partnership....................................... -- -- 24.4 24.4
Mortgage loans............................................ 21.2 21.9 9.9 9.9
Liabilities:
Investment contract liabilities:
With a fixed maturity................................... 989.1 1,001.2 826.7 833.5
Without a fixed maturity................................ 9,511.0 9,298.4 8,122.6 7,918.2
</TABLE>
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.
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
10. FINANCIAL INSTRUMENTS (CONTINUED)
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.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS)
During 1995, the Company received $0.4 million for writing call options on
underlying securities. As of December 31, 1995 there were no option contracts
outstanding.
At December 31, 1995, the Company had a forward swap agreement with a notional
amount of $100.0 million and a fair value of $0.1 million.
The Company did not have transactions in derivative instruments in 1994.
The Company also holds investments in certain debt and equity securities with
derivative characteristics (i.e., 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 $13.4 billion
investment portfolio, as of December 31, 1995 was as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
(MILLIONS) COST VALUE
----------- -----------
<S> <C> <C>
Collateralized mortgage obligations......................... $ 2,383.9 $ 2,549.3
Principal-only strips (included above)...................... 38.7 50.0
Interest-only strips (included above)....................... 10.7 20.7
Structured Notes (1)........................................ 95.0 100.3
</TABLE>
(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.
11. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of counterparties
to honor these commitments may result in either higher or lower replacement
cost. Also, there is likely to be a change in
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993
11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
the value of the securities underlying the commitments. At December 31, 1995,
the Company had commitments to purchase investments of $31.4 million. The fair
value of the investments at December 31, 1995 approximated $31.5 million. There
were no outstanding forward commitments at December 31, 1994.
LITIGATION
There were no material legal proceedings pending against the Company as of
December 31, 1995 or December 31, 1994 which were beyond the ordinary course of
business. The Company is involved in lawsuits arising, for the most part, in the
ordinary course of its business operations as an insurer.
12. SEGMENT INFORMATION
The Company's operations are reported through two major business segments: Life
Insurance and Financial Services.
Summarized financial information for the Company's principal operations was as
follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Financial services........................................ $ 1,129.4 $ 946.1 $ 892.8
Life insurance............................................ 407.9 386.1 371.7
----------- ----------- -----------
Total revenue............................................. $ 1,537.3 $ 1,332.2 $ 1,264.5
----------- ----------- -----------
Income before federal income taxes:
Financial services........................................ $ 158.0 $ 119.7 $ 121.1
Life insurance............................................ 102.0 96.8 98.0
----------- ----------- -----------
Total income before federal income taxes.................. $ 260.0 $ 216.5 $ 219.1
----------- ----------- -----------
Net income:
Financial services........................................ $ 113.8 $ 85.5 $ 86.8
Life insurance............................................ 62.1 59.8 56.1
----------- ----------- -----------
Net income.................................................. $ 175.9 $ 145.3 $ 142.9
----------- ----------- -----------
Assets under management, at fair value:
Financial services........................................ $ 23,224.3 $ 17,785.2 $ 16,600.5
Life insurance............................................ 2,698.1 2,171.7 2,175.5
----------- ----------- -----------
Total assets under management............................. $ 25,922.4 $ 19,956.9 $ 18,776.0
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-26
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
VARIABLE ANNUITY ACCOUNT B
VARIABLE ANNUITY CONTRACTS
ISSUED BY
AETNA LIFE INSURANCE AND ANNUITY COMPANY
FORM NO. 62473(S)-2 ALIAC ED. MAY 1996
