As filed with the Securities and Exchange Registration No. 33-75998
Commission on April 15, 1997 Registration No. 811-2512
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
Post-Effective Amendment No. 6 To
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
and Amendment to
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Variable Annuity Account B of Aetna Life Insurance and Annuity Company
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06156
Depositor's Telephone Number, including Area Code: (860) 273-7834
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1997 pursuant to paragraph (b) of Rule 485
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of securities under the Securities Act of 1933.
Registrant filed a Rule 24f-2 Notice for the fiscal year ended December 31, 1996
on February 28, 1997.
<PAGE>
VARIABLE ANNUITY ACCOUNT B
CROSS REFERENCE SHEET
FORM N-4
ITEM NO. PART A (PROSPECTUS) LOCATION
1 Cover Page.......................... Cover Page
2 Definitions......................... Definitions
3 Synopsis............................ Prospectus Summary; Fee Table
4 Condensed Financial Information..... Condensed Financial Information
5 General Description of Registrant, The Company; Variable Annuity
Depositor, and Portfolio Companies.. Account B; The Funds
6 Deductions.......................... Charges and Deductions;
Distribution
7 General Description of Variable
Annuity Contracts................... Purchase; Miscellaneous
8 Annuity Period...................... Annuity Period
9 Death Benefit....................... Death Benefit During
Accumulation Period; Death
Benefit Payable During the
Annuity Period
10 Purchases and Contract Value........ Purchase; Contract Valuation
11 Redemptions......................... Right to Cancel; Withdrawals
12 Taxes............................... Tax Status
13 Legal Proceedings................... Miscellaneous - Legal Matters
and Proceedings
14 Table of Contents of the Statement Contents of the Statement of
of Additional Information........... Additional Information
<PAGE>
FORM N-4 PART B (STATEMENT OF ADDITIONAL INFORMATION)
ITEM NO. LOCATION
15 Cover Page.......................... Cover page
16 Table of Contents................... Table of Contents
17 General Information and History..... General Information and
History
18 Services............................ General Information and
History; Independent Auditors
19 Purchase of Securities Being
Offered............................. Offering and Purchase of
Contracts
20 Underwriters........................ Offering and Purchase of
Contracts
21 Calculation of Performance Data..... Performance Data; Average
Annual Total Return
Quotations
22 Annuity Payments.................... Annuity Payments
23 Financial Statements................ Financial Statements
Part C (Other Information)
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
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The Contracts offered in connection with this Prospectus are individual
non-qualified deferred variable annuity contracts issued by Aetna Life Insurance
and Annuity Company ("Company"). Both Installment Purchase Payment Contracts and
Single Purchase Payment Contracts are described herein. The Contracts are
designed to provide retirement benefits to individuals who either are not
participating in formal retirement plans, or are participating in formal
retirement plans but wish to personally supplement their benefits. The Contracts
may receive favorable tax deferred treatment under Federal income tax law.
The Contracts provide that contributions may be allocated to the Fixed 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:
<TABLE>
<CAPTION>
<S> <C>
[bullet] Aetna Variable Fund [bullet] Fidelity VIP Equity-Income Portfolio
[bullet] Aetna Income Shares [bullet] Fidelity VIP Growth Portfolio
[bullet] Aetna Variable Encore Fund [bullet] Fidelity VIP Overseas Portfolio
[bullet] Aetna Investment Advisers Fund, Inc. [bullet] Janus Aspen Aggressive Growth Portfolio
[bullet] Aetna Ascent Variable Portfolio [bullet] Janus Aspen Balanced Portfolio
[bullet] Aetna Crossroads Variable Portfolio [bullet] Janus Aspen Flexible Income Portfolio
[bullet] Aetna Legacy Variable Portfolio [bullet] Janus Aspen Growth Portfolio
[bullet] Alger American Growth Portfolio [bullet] Janus Aspen Short-Term Bond Portfolio
[bullet] Alger American Small Cap Portfolio [bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] American Century VP Capital Appreciation [bullet] Lexington Natural Resources Trust
(formerly TCI Growth) [bullet] Neuberger & Berman Growth Portfolio
[bullet] Fidelity VIP II Contrafund Portfolio [bullet] Scudder International Portfolio Class A Shares
</TABLE>
Except as specifically mentioned, this Prospectus describes only investments
through the Separate Account. A brief description of the Fixed Account is
contained in the Appendix to this Prospectus.
The availability of the Funds and the Fixed Account is subject to applicable
regulatory authorization. Not all Funds (or the Credited Interest Option) may be
available in all jurisdictions or under all Contracts. (See "Investment
Options.")
This Prospectus provides investors with the information that they should know
about the Separate Account before investing in the Contract. 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 Contents for the SAI is found in this Prospectus. An SAI may be obtained by
calling the number listed under the "Inquiries" section of the Prospectus
Summary. You may also obtain an SAI for any of the Funds by calling that phone
number.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION AND OTHER INFORMATION
ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (SEC) CAN BE FOUND IN THE SEC'S WEB SITE AT http://www.sec.gov.
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 1, 1997.
<PAGE>
TABLE OF CONTENTS
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DEFINITIONS ................................. DEFINITIONS - 1
PROSPECTUS SUMMARY ........................... SUMMARY - 1
FEE TABLE .................................... FEE TABLE - 1
CONDENSED FINANCIAL INFORMATION ............ AUV HISTORY - 1
THE COMPANY ............................................. 1
VARIABLE ANNUITY ACCOUNT B .............................. 1
INVESTMENT OPTIONS .................................... 1
The Funds ............................................. 1
Credited Interest Option .............................. 4
PURCHASE ................................................ 4
Contract Availability ................................. 4
Contract Purchase .................................... 4
Purchase Payments .................................... 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 .................................... 6
Contract Value ....................................... 6
Accumulation Units .................................... 6
Net Investment Factor ................................. 7
TRANSFERS ............................................. 7
Dollar Cost Averaging Program ........................ 7
WITHDRAWALS ............................................. 7
Reinvestment Privilege .............................. 8
ADDITIONAL WITHDRAWAL OPTIONS ........................... 8
DEATH BENEFIT DURING ACCUMULATION PERIOD ............... 8
ANNUITY PERIOD .......................................... 9
Annuity Period Elections .............................. 9
Partial Annuitization ................................. 9
Annuity Options ....................................... 9
Annuity Payments .................................... 10
Charges Deducted During the Annuity Period ............ 10
Death Benefit Payable During the Annuity Period ...... 10
TAX STATUS ............................................. 11
Introduction .......................................... 11
Taxation of the Company .............................. 11
<PAGE>
Tax Status of the Contracts ......................... 11
Taxation of Annuities ............................... 12
MISCELLANEOUS ........................................... 13
Distribution ........................................ 13
Delay or Suspension of Payments ...................... 14
Performance Reporting ............................... 14
Voting Rights ........................................ 14
Modification of the Contract ......................... 14
Transfer of Ownership; Assignment ................... 14
Legal Matters and Proceedings ......................... 15
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION .... 16
APPENDIX--FIXED ACCOUNT ............................... 17
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:
Accumulation Period: The period during which Purchase Payment(s) credited to a
Contract are invested to fund future annuity payments.
Accumulation Unit: A measure of the value of each Subaccount before annuity
payments begin.
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.
Code: Internal Revenue Code of 1986, as amended.
Company (We, Us): Aetna Life Insurance and Annuity Company.
Contracts: The individual non-qualified deferred, variable annuity contracts
described in this Prospectus.
Contract Holder (You): The person or entity to whom the Contract is issued.
Contract Value: The total dollar value of amounts held in a Contract as of each
Valuation Date during the Accumulation Period.
Contract Year: A period of twelve months measured from the date on which a
Contract is established (the effective date) or from an anniversary of such
effective date.
Credited Interest Option: The fixed interest option under the Contract. The
Credited Interest Option currently available is the Fixed Account, which is
described in the Appendix to this Prospectus. Amounts allocated to the Credited
Interest Option are included in the Contract Value.
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.
Home Office: The Company's principal executive offices located at 151 Farmington
Avenue, Hartford, Connecticut 06156.
Purchase Payment(s): The gross payment(s) made to the Company under a Contract.
Purchase Payment Periods: For "Installment Purchase Payment Contracts," the
period of time for completion of the agreed upon annual number and amount of
Purchase Payments. For example, if it is determined that the Purchase Payment
Period will consist of 12 payments per year and only 11 payments are made, the
Purchase Payment Period is not completed until the twelfth Purchase Payment is
made.
Separate Account: Variable Annuity Account B, a separate account established by
the Company 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.
Valuation Date: The date and time at which the Accumulation Unit Value and
Annuity Unit Value of a Subaccount is calculated. Currently, this calculation
occurs after 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 - 1
<PAGE>
PROSPECTUS SUMMARY
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CONTRACTS OFFERED
The Contracts offered in connection with this Prospectus are individual
non-qualified deferred variable annuity contracts issued by Aetna Life Insurance
and Annuity Company ("Company"). Both Installment Purchase Payment Contracts and
Single Purchase Payment Contracts are described herein. The Contracts are
designed to provide retirement benefits to individuals who either are not
participating in formal retirement plans, or are participating in formal
retirement plans but wish to personally supplement their benefits. The Contracts
may receive favorable tax deferred treatment under Federal income tax law.
CONTRACT PURCHASE
The Contracts may be purchased by completing the application and submitting
it to the Company. The minimum Purchase payment for a Single Purchase Payment
Contract is $5,000. Installment Purchase Payments must be at least $100 per
month ($1,200 annually) and may not be less than $25 per payment. (See
"Purchase.")
FREE LOOK PERIOD
You may cancel the Contract no later than 10 days after receiving it (or
longer if required by state law) by returning it to us 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. (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 in this Prospectus. The Contract
allows investment in any of the Subaccounts, as well as in the Fixed Account
described below. The total number of investment options that you may select
during the Accumulation Period is limited to 18. 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, and a description
of the limitations on the number of funding options, see "Investment
Options--The Funds" in this Prospectus, as well as the prospectuses for each of
the Funds.
The Contract also provides for investment in the Fixed Account, which
allows you to earn fixed rates of interest. (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
charges and an administrative charge), as well as any annual maintenance fee 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 Contract Value. (See the Fee Table and
"Charges and Deductions.")
TRANSFERS
Prior to the Annuity Date, and subject to certain limitations, Contract
Values may be transferred among the Subaccounts and the Fixed Account without
charge. Transfers can be requested in writing or by telephone in accordance with
the Company's transfer procedures. (See the Appendix for a full description of
the restrictions applicable to transfers from the Fixed Account.) (See
"Transfers.")
WITHDRAWALS
All or a part of the Contract 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. (See "Withdrawals.")
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SUMMARY - 1
<PAGE>
The Contract also offers Additional Withdrawal Options during the
Accumulation Period to persons meeting certain criteria. The Additional
Withdrawal Options are not available in all states and may not be suitable in
every situation. (See "Additional Withdrawal Options.")
DEATH BENEFIT
A death benefit is payable if you die before the Annuity Date. Death
benefit proceeds will be paid to the beneficiary in an amount equal to the
Contract Value. Until the election of a method of payment, the Contract Value
will remain invested under the Contract. The beneficiary may elect to receive
the proceeds in a lump sum or under any of the payment options available under
the Contract. However, the Code requires that distributions begin within a
certain time period. (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 "Annuity Period--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 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
Contributions and 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:
[bullet] Write to: Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156-1258
Attention: Customer Service
[bullet] Call Customer Service: 1-800-531-4547 (for automated transfers
or changes in the allocation of Account
Values, call: 1-800-262-3862)
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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 during the Accumulation Period. For amounts deducted during the Annuity
Period, see "Annuity Period--Charges Deducted During the Annuity Period." 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. Charges
shown do not include premium taxes that may be applicable. For more information
regarding fees and expenses paid out of the assets of a particular Fund, see the
Fund's prospectus.
CONTRACT HOLDER TRANSACTION EXPENSES
Deferred Sales Charge (as a percentage of the amount withdrawn)*
<TABLE>
<CAPTION>
INSTALLMENT PURCHASE PAYMENT CONTRACTS: SINGLE PURCHASE PAYMENT CONTRACTS:
Purchase Payment Deferred Sales Contract Years Deferred Sales
Periods Completed Charge Deduction Completed Charge Deduction
- ----------------- ----------------- -------------- -----------------
<S> <C> <C> <C>
Less than 5 5% Less than 5 5%
5 or more but less than 7 4% 5 or more but less than 6 4%
7 or more but less than 9 3% 6 or more but less than 7 3%
9 or more but less than 10 2% 7 or more but less than 8 2%
10 or more 0% 8 or more but less than 9 1%
9 or more 0%
</TABLE>
Annual Contract Maintenance Fee Installment Purchase Payment Contract $20.00**
Single Purchase Payment Contract .... $ 0.00
*The total amount deducted for the deferred sales charge will not exceed 8.5%
of the total Purchase Payments applied to the Contract.
**The maintenance fee will generally be deducted annually from each Installment
Purchase Payment Contract during the Accumulation Period. The maintenance fee,
to the extent permitted by state law, is also deducted upon termination of the
Contract.
SEPARATE ACCOUNT ANNUAL EXPENSES
(Daily deductions, equal to the percentage shown on an annual basis, made from
amounts allocated to the variable options under each Contract)
Mortality and Expense Risk ....................................... 1.25%
Administrative Charge .......................................... 0.00%***
----------
Total Separate Account Charges ................................. 1.25%
==========
*** We currently do not impose an Administrative Charge. However, we reserve the
right to deduct a daily charge of not more than 0.25% per year from the
Subaccounts.
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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, these figures are a percentage of each Fund's
average net assets and are based on figures for the year ended December 31,
1996. A Fund's "Other Expenses" include operating costs of the Fund. These
expenses are reflected in the Fund's net asset value and are not deducted from
your Contract Value.
<TABLE>
<CAPTION>
Investment Other Total
Advisory Fees(1) Expenses Fund
(after expense (after expense Annual
reimbursement) reimbursement) Expenses
------------------- --------------- ----------
<S> <C> <C> <C>
Aetna Variable Fund(2) 0.50% 0.06% 0.56%
Aetna Income Shares(2) 0.40% 0.08% 0.48%
Aetna Variable Encore Fund(2) 0.25% 0.10% 0.35%
Aetna Investment Advisers Fund, Inc.(2) 0.50% 0.08% 0.58%
Aetna Ascent Variable Portfolio(2) 0.60% 0.15% 0.75%
Aetna Crossroads Variable Portfolio(2) 0.60% 0.15% 0.75%
Aetna Legacy Variable Portfolio(2) 0.60% 0.15% 0.75%
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Small Cap Portfolio 0.85% 0.03% 0.88%
American Century VP Capital Appreciation(3) 1.00% 0.00% 1.00%
Fidelity VIP II Contrafund Portfolio(4) 0.61% 0.13% 0.74%
Fidelity VIP Equity-Income Portfolio(4) 0.51% 0.07% 0.58%
Fidelity VIP Growth Portfolio(4) 0.61% 0.08% 0.69%
Fidelity VIP Overseas Portfolio(4) 0.76% 0.17% 0.93%
Janus Aspen Aggressive Growth Portfolio(5) 0.72% 0.04% 0.76%
Janus Aspen Balanced Portfolio(5) 0.79% 0.15% 0.94%
Janus Aspen Flexible Income Portfolio(5) 0.65% 0.19% 0.84%
Janus Aspen Growth Portfolio(5) 0.65% 0.04% 0.69%
Janus Aspen Short-Term Bond Portfolio(5) 0.47% 0.19% 0.66%
Janus Aspen Worldwide Growth Portfolio(5) 0.66% 0.14% 0.80%
Lexington Natural Resources Trust 1.00% 0.42% 1.42%
Neuberger & Berman Growth Portfolio(6) 0.83% 0.09% 0.92%
Scudder International Portfolio Class A Shares 0.86% 0.19% 1.05%
</TABLE>
- ------------------
(1) Certain of the unaffiliated Fund advisers reimburse the Company for
administrative costs incurred in connection with administering the Funds as
variable funding options under the Contract. These reimbursements are paid
out of the investment advisory fees and are not charged to investors.
(2) The Company provides administrative services to the Fund and assumes the
Fund's ordinary recurring direct costs under an Administrative Services
Agreement. The new Administrative Services Agreement became effective on May
1, 1996 for Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore
Fund, Aetna Investment Advisers Fund, Inc., Aetna Ascent Variable Portfolio,
Aetna Crossroads Variable Portfolio, and Aetna Legacy Variable Portfolio.
Therefore, the "Other Expenses" shown are not based on actual figures for
the year ended December 31, 1996, but reflect the fee payable under that
Agreement.
Effective August 1, 1996, Investment Advisory Fees were increased for Aetna
Variable Fund, Aetna Income Shares, Aetna Investment Advisers Fund, Inc.,
Aetna Ascent Variable Portfolio, Aetna Crossroads Variable Portfolio, and
Aetna Legacy Variable Portfolio. The Advisory Fees shown above are not based
on actual figures for the year ended December 31, 1996, but reflect the
increased Investment Advisory Fees.
(3) The Portfolio's investment adviser pays all expenses of the Portfolio except
brokerage commissions, taxes, interest, fees and expenses of the
non-interested person directors (including counsel fees) and extraordinary
expenses. These expenses have historically represented a very small
percentage (less than 0.01%) of total net assets in a fiscal year.
(4) A portion of the brokerage commissions that certain funds pay was used to
reduce expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses would
have been 0.56% for Equity Income Portfolio, 0.67% for Growth Portfolio,
0.92% for Overseas Portfolio and 0.71% for Contrafund Portfolio.
(5) The fees and expenses shown above are based on gross expenses of the Shares
before expense offset arrangements for the fiscal year ended December 31,
1996. The information for each Portfolio other than the Flexible Income
Portfolio is net of fee waivers or reductions from Janus Capital. Fee
reductions for the Aggressive Growth, Balanced, Growth, and Worldwide Growth
Portfolios reduce the management fee to the level of the corresponding Janus
retail fund. Other waivers, if applicable, are first applied against the
management fee and then against other expenses. Without such waivers or
reductions, the Management Fee, Other Expenses
- ------------------------------------------------------------------------------
FEE TABLE - 2
<PAGE>
and Total Fund Annual Expenses would have been 0.79%, 0.04% and 0.83% for
Aggressive Growth Portfolio; 0.92%, 0.15% and 1.07% for Balanced Portfolio;
0.79%, 0.04% and 0.83% for Growth Portfolio; 0.65%, 0.19% and 0.84% for
Short-Term Bond Portfolio; and 0.77%, 0.14% and 0.91% for Worldwide Growth
Portfolio, respectively. Janus Capital may modify or terminate the waivers
or reductions at any time upon at least 90 days' notice to the Portfolio's
Board of Trustees.
(6) Neuberger & Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investable assets in a
corresponding series ("Series") of Advisers Management Trust. The figures
reported under "Investment Advisory Fees" include the aggregate of the
administration fees paid by the Portfolio and the management fees paid by
its corresponding Series. Similarly, "Other Expenses" includes all other
expenses of the Portfolio and its corresponding Series.
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 $20.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.011%.
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
------------------------------------------- -------------------------------------------
If you withdraw your entire Contract If you do not withdraw your Contract
Value at the end of the periods shown, Value, or if you annuitize at the end of
you would pay the following expenses, the periods shown, you would pay the
including any applicable deferred sales following expenses (no deferred sales
charge: charge is reflected):*
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
--------- ---------- ---------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund $70 $112 $157 $214 $19 $57 $99 $214
Aetna Income Shares $69 $110 $153 $205 $18 $55 $94 $205
Aetna Variable Encore Fund $68 $106 $147 $191 $16 $51 $88 $191
Aetna Investment Advisers Fund, Inc. $70 $113 $158 $216 $19 $58 $100 $216
Aetna Ascent Variable Portfolio $72 $118 $166 $234 $20 $63 $108 $234
Aetna Crossroads Variable Portfolio $72 $118 $166 $234 $20 $63 $108 $234
Aetna Legacy Variable Portfolio $72 $118 $166 $234 $20 $63 $108 $234
Alger American Growth Portfolio $72 $119 $168 $238 $21 $64 $110 $238
Alger American Small Cap Portfolio $73 $121 $173 $247 $22 $67 $115 $247
American Century VP Capital Appreciation $74 $125 $178 $260 $23 $71 $121 $260
Fidelity VIP II Contrafund Portfolio $72 $117 $166 $233 $20 $63 $108 $233
Fidelity VIP Equity-Income Portfolio $70 $113 $158 $216 $19 $58 $100 $216
Fidelity VIP Growth Portfolio $71 $116 $163 $228 $20 $61 $105 $228
Fidelity VIP Overseas Portfolio $74 $123 $175 $252 $22 $69 $118 $252
Janus Aspen Aggressive Growth Portfolio $72 $118 $167 $235 $21 $63 $109 $235
Janus Aspen Balanced Portfolio $74 $123 $175 $253 $22 $69 $118 $253
Janus Aspen Flexible Income Portfolio $73 $120 $171 $243 $21 $66 $113 $243
Janus Aspen Growth Portfolio $71 $116 $163 $228 $20 $61 $105 $228
Janus Aspen Short-Term Bond Portfolio $71 $115 $162 $224 $20 $60 $104 $224
Janus Aspen Worldwide Growth Portfolio $72 $119 $169 $239 $21 $65 $111 $239
Lexington Natural Resources Trust $78 $137 $198 $301 $27 $83 $142 $301
Neuberger & Berman Growth Portfolio $74 $123 $174 $251 $22 $68 $117 $251
Scudder International Portfolio Class A
Shares $75 $126 $181 $265 $23 $72 $124 $265
</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.)
- -------------------------------------------------------------------------------
FEE TABLE - 3
<PAGE>
CONDENSED FINANCIAL INFORMATION
(Selected data for accumulation units outstanding throughout each period)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
The condensed financial information presented below for each of the years in the
ten-year period ended December 31, 1996 (as applicable), is derived from the
financial statements of the Separate Account, which financial statements have
been audited by KPMG Peat Marwick LLP, independent auditors. The financial
statements as of and for the year ended December 31, 1996 and the independent
auditors' report thereon, are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------- ---------------- --------------- ----------
<S> <C> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $13.972 $10.698 $10.940 $10.378
Value at end of period $17.173 $13.972 $10.698 $10.940
Increase (decrease) in value of
accumulation unit(1) 22.91% 30.61% (2.21)% 5.41%
Number of accumulation units
outstanding at end of period 15,372,944 30,554,957 11,117,383 879,670
AETNA INCOME SHARES
Value at beginning of period $12.212 $10.457 $11.006 $10.160
Value at end of period $12.493 $12.212 $10.457 $11.006
Increase (decrease) in value of
accumulation unit(1) 2.30% 16.78% (4.99)% 8.33%
Number of accumulation units
outstanding at end of period 1,947,629 4,853,662 1,988,960 166,913
AETNA VARIABLE ENCORE FUND
Value at beginning of period $11.007 $10.509 $10.223 $10.031
Value at end of period $11.453 $11.007 $10.509 $10.223
Increase (decrease) in value of
accumulation unit(1) 4.05% 4.73% 2.79% 1.91%
Number of accumulation units
outstanding at end of period 1,984,269 4,354,272 1,822,449 90,782
AETNA INVESTMENT ADVISERS FUND, INC.
Value at beginning of period $13.803 $10.971 $11.164 $10.286
Value at end of period $15.698 $13.803 $10.971 $11.164
Increase (decrease) in value of
accumulation unit(1) 13.73% 25.81% (1.73)% 8.54%
Number of accumulation units
outstanding at end of period 3,885,730 6,430,772 3,541,703 318,711
AETNA ASCENT VARIABLE PORTFOLIO
Value at beginning of period $10.652 $10.000(7)
Value at end of period $12.999 $10.652
Increase (decrease) in value of
accumulation unit(1) 22.04% 6.52%
Number of accumulation units
outstanding at end of period 99,589 16,791
AETNA CROSSROADS VARIABLE PORTFOLIO
Value at beginning of period $10.594 $10.000(7)
Value at end of period $12.430 $10.594
Increase (decrease) in value of
accumulation unit(1) 17.32% 5.94%
Number of accumulation units
outstanding at end of period 74,128 16,953
AETNA LEGACY VARIABLE PORTFOLIO
Value at beginning of period $10.443 $10.000(7)
Value at end of period $11.776 $10.443
Increase (decrease) in value of
accumulation unit(1) 12.76% 4.43%
Number of accumulation units
outstanding at end of period 25,977 2,222
ALGER AMERICAN GROWTH PORTFOLIO
Value at beginning of period $10.157 $10.000(8)
Value at end of period $11.370 $10.157
Increase (decrease) in value of
accumulation unit(1) 11.93% 1.57%
Number of accumulation units
outstanding at end of period 190,593 275,494
</TABLE>
<TABLE>
<CAPTION>
1992 1991 1990 1989 1988 1987
---------------- ----------- ---------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $84.249 $67.496 $66.174 $51.900 $45.839 $43.994
Value at end of period $10.378(2) $84.249 $67.496 $66.174 $51.900 $45.839
Increase (decrease) in value of
accumulation unit(1) (2) 24.82% 2.00% 27.50% 13.22% 4.19%
Number of accumulation units
outstanding at end of period 3,107 908,777 810,126 831,547 887,039 1,020,744
AETNA INCOME SHARES
Value at beginning of period $37.815 $32.066 $29.752 $26.291 $24.734 $23.888
Value at end of period $10.160(3) $37.815 $32.066 $29,752 $26.291 $24.734
Increase (decrease) in value of
accumulation unit(1) (3) 17.93% 7.78% 13.16% 6.29% 3.54%
Number of accumulation units
outstanding at end of period 4,196 427,893 358,454 366,176 383,856 377,078
AETNA VARIABLE ENCORE FUND
Value at beginning of period $34.122 $32.431 $30.285 $28.029 $26.401 $25.028
Value at end of period $10.031(4) $34.122 $32.431 $30.285 $28.029 $26.401
Increase (decrease) in value of
accumulation unit(1) (4) 5.21% 7.09% 8.05% 6.17% 5.49%
Number of accumulation units
outstanding at end of period 2,808 548,425 722,438 653,619 720,726 898,557
AETNA INVESTMENT ADVISERS FUND, INC.
Value at beginning of period $12.717 $10.882 $10.423 $10.000(5)
Value at end of period $10.286(6) $12.717 $10.882 $10.423
Increase (decrease) in value of
accumulation unit(1) (6) 16.86% 4.40% 4.23%
Number of accumulation units
outstanding at end of period 6,537 1,324,822 984,798 639,219
AETNA ASCENT VARIABLE PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
AETNA CROSSROADS VARIABLE PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
AETNA LEGACY VARIABLE PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
ALGER AMERICAN GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
</TABLE>
- -------------------------------------------------------------------------------
AUV HISTORY - 1
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------ --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
ALGER AMERICAN SMALL CAP PORTFOLIO
Value at beginning of period $13.714 $ 9.622 $10.307 $10.000(9)
Value at end of period $14.109 $13.714 $ 9.622 $10.307
Increase (decrease) in value of
accumulation unit(1) 2.88% 42.52% (6.64)% 3.07%
Number of accumulation units
outstanding at end of period 881,881 1,364,901 441,809 31,855
AMERICAN CENTURY VP CAPITAL APPRECIATION*
Value at beginning of period $14.091 $10.883 $11.159 $10.232
Value at end of period $13.298 $14.091 $10.883 $11.159
Increase (decrease) in value of
accumulation unit(1) (5.63)% 29.47% (2.48)% 9.06%
Number of accumulation units
outstanding at end of period 1,337,306 2,735,782 1,123,366 261,107
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $10.468 $10.000(7)
Value at end of period $12.540 $10.468
Increase (decrease) in value of
accumulation unit(1) 19.79% 4.68%
Number of accumulation units
outstanding at end of period 273,189 379,862
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $11.054 $10.000(7)
Value at end of period $12.475 $11.054
Increase (decrease) in value of
accumulation unit(1) 12.86% 10.54%
Number of accumulation units
outstanding at end of period 208,072 294,244
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $10.066 $10.000(7)
Value at end of period $11.402 $10.066
Increase (decrease) in value of
accumulation unit(1) 13.27% 0.66%
Number of accumulation units
outstanding at end of period 199,720 288,576
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $10.052 $10.000(7)
Value at end of period $11.238 $10.052
Increase (decrease) in value of
accumulation unit(1) 11.80% 0.52%
Number of accumulation units
outstanding at end of period 38,994 33,813
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $12.992 $10.319 $10.000(11)
Value at end of period $13.850 $12.992 $10.319
Increase (decrease) in value of
accumulation unit(1) 6.60% 25.91% 3.19%
Number of accumulation units
outstanding at end period 590,904 723,839 131,702
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $10.835 $10.000(7)
Value at end of period $12.431 $10.835
Increase (decrease) in value of
accumulation unit(1) 14.73% 8.35%
Number of accumulation units
outstanding at end period 74,184 7,772
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $12.094 $9.886 $10.000(11)
Value at end of period $13.040 $12.094 $9.886
Increase (decrease) in value of
accumulation unit(1) 7.83% 22.33% (1.14)%
Number of accumulation units
outstanding at end of period 96,128 84,048 15,893
</TABLE>
<TABLE>
<CAPTION>
1992
------------
<S> <C>
ALGER AMERICAN SMALL CAP PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
AMERICAN CENTURY VP CAPITAL APPRECIATION*
Value at beginning of period $10.000(13)
Value at end of period $10.232
Increase (decrease) in value of
accumulation unit(1) 2.32%
Number of accumulation units
outstanding at end of period 4,284
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end period
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end period
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
</TABLE>
- -------------------------------------------------------------------------------
AUV HISTORY - 2
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993
---------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $10.870 $10.000(7)
Value at end of period $12.716 $10.870
Increase (decrease) in value of
accumulation unit(1) 16.98% 8.70%
Number of accumulation units
outstanding at end period 132,465 26,022
JANUS ASPEN SHORT-TERM BOND PORTFOLIO
Value at beginning of period $10.325 $10.000(7)
Value at end of period $10.602 $10.325
Increase (decrease) in value of
accumulation unit(1) 2.68% 3.25%
Number of accumulation units
outstanding at end period 10,382 2,678
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $10.893 $10.000(7)
Value at end of period $13.880 $10.893
Increase (decrease) in value of
accumulation unit(1) 27.43% 8.93%
Number of accumulation units
outstanding at end period 520,275 227,582
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $10.479 $ 9.079 $9.716 $10.000(12)
Value at end of period $13.132 $10.479 $9.079 $9.716
Increase (decrease) in value of
accumulation unit(1) 25.31% 15.42% (6.56)% (2.84)%
Number of accumulation units
outstanding at end of period 115,869 162,462 141,076 27,908
NEUBERGER & BERMAN GROWTH PORTFOLIO
Value at beginning of period $15.871 $12.199 $12.990 $10.123
Value at end of period $17.105 $15.871 $12.199 $12.990
Increase (decrease) in value of
accumulation unit(1) 7.78% 30.10% (6.09)% 28.32%
Number of accumulation units
outstanding at end of period 320,078 526,542 228,370 71,556
SCUDDER INTERNATIONAL PORTFOLIO CLASS A SHARES
Value at beginning of period $14.674 $13.372 $13.654 $10.051
Value at end of period $16.633 $14.674 $13.372 $13.654
Increase (decrease) in value of
accumulation unit(1) 13.35% 9.74% (2.07)% 35.85%
Number of accumulation units
outstanding at end of period 472,099 720,017 652,630 144,303
<CAPTION>
1992
--------------
<S> <C>
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end period
JANUS ASPEN SHORT-TERM BOND PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end period
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end period
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
NEUBERGER & BERMAN GROWTH PORTFOLIO
Value at beginning of period $10.000(10)
Value at end of period $10.123
Increase (decrease) in value of
accumulation unit(1) 1.23%
Number of accumulation units
outstanding at end of period 2,275
SCUDDER INTERNATIONAL PORTFOLIO CLASS A SHARES
Value at beginning of period $10.000(10)
Value at end of period $10.051
Increase (decrease) in value of
accumulation unit(1) 0.51%
Number of accumulation units
outstanding at end of period 324
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value during a calendar year,
and dividing the result by the beginning Accumulation Unit value. These
figures do not reflect the deferred sales charges or the fixed dollar annual
maintenance fee, if any. Inclusion of these charges would reduce the
investment results shown.
(2) The Accumulation Unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the Accumulation Unit value of the Fund was $85.546. On the date
of conversion, additional units were issued so that account values were not
changed as a result of the conversion. The percentage change in the
Accumulation Unit value from the beginning of the year to the date of
conversion was 1.54%; the percentage change in the Accumulation Unit value
from the date of conversion to the end of the year was 3.78%.
(3) The Accumulation Unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the Accumulation Unit value of the Fund was $39.496. On the date
of conversion, additional units were issued so that account values were not
changed as a result of the conversion. The percentage change in the
Accumulation Unit value from the beginning of the year to the date of
conversion was 4.45%; the percentage change in the Accumulation Unit value
from the date of conversion to the end of the year was 1.60%.
(4) The Accumulation Unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the Accumulation Unit value of the Fund was $34.828. On the date
of conversion, additional units were issued so that account values were not
changed as a result of the conversion. The percentage change in the
Accumulation Unit value from the beginning of the year to the date of
conversion was 2.07%; the percentage change in the Accumulation Unit value
from the date of conversion to the end of the year was 0.31%.
(5) The initial Accumulation Unit value was established at $10.000 on June 23,
1989, the date on which the Fund commenced operations.
(6) The Accumulation Unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the Accumulation Unit value of the Fund was $12.991. On the date
of conversion, additional units were issued so that account values were not
changed as a result of the conversion. The percentage change in the
Accumulation Unit value from the beginning of the year to the date of
conversion was 2.15%; the percentage change in the Accumulation Unit value
from the date of conversion to the end of the year was 2.86%.
(7) The initial Accumulation Unit value was established at $10.000 during August
1995, when the Fund became available under the Contract.
- -------------------------------------------------------------------------------
AUV HISTORY - 3
<PAGE>
(8) The initial Accumulation Unit value was established at $10.000 during
September 1995, when the Fund became available under the Contract.
(9) The initial Accumulation Unit value was established at $10.000 on September
17, 1993, the date on which the Portfolio became available under the
Contract.
(10) The initial Accumulation Unit value was established at $10.000 on November
2, 1992, the date on which the Fund/Portfolio became available under the
Contract.
(11) The initial Accumulation Unit value was established at $10.000 during
October 1994, when the funds were first received in this option.
(12) The initial Accumulation Unit value was established at $10.000 on May 26,
1993, the date on which the Fund became available under the Contract.
(13) The initial Accumulation Unit value was established at $10.000 on August
21, 1992, the date on which the Fund became available under the Contract.
* Formerly TCI Portfolios, Inc.--TCI Growth
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AUV HISTORY - 4
<PAGE>
THE COMPANY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 Inc.
VARIABLE ANNUITY ACCOUNT B
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 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
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THE FUNDS
Purchase Payments may be allocated to one or more of the Subaccounts as
designated on the application. In turn, the Subaccounts invest in the
corresponding Funds at net asset value.
The availability of Funds may be subject to applicable regulatory
authorization. In addition, the Company may add, withdraw or substitute Funds,
subject to the conditions in the Contract and in compliance with regulatory
requirements. Not all Funds may be available in all jurisdictions or under all
Contracts. The total number of investment options that you may select during the
Accumulation Period is limited to 18. Each Subaccount selected and the Fixed
Account counts as one option once you have made an allocation to it, even if you
no longer have amounts allocated to that option.
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.
[bullet] Aetna Variable Fund seeks to maximize total return through investments
in a diversified portfolio of common stocks and securities convertible
into common stock.(1)
[bullet] Aetna Income Shares seeks to maximize total return, consistent with
reasonable risk, through investments in a diversified portfolio
consisting primarily of debt securities.(1)
[bullet] 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.(1)
[bullet] Aetna Investment Advisers Fund, Inc. is a managed fund which seeks to
maximize investment return consistent with reasonable safety of
principal by investing in one or more of the following asset classes:
stocks, bonds and cash equivalents based on the Company's judgment of
which
- -------------------------------------------------------------------------------
1
<PAGE>
of those sectors or mix thereof offers the best investment
prospects.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Ascent Variable Portfolio
seeks to provide capital appreciation by allocating its investments
among equities and fixed income securities. The Portfolio is managed
for investors who generally have an investment horizon exceeding 15
years, and who have a high level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Crossroads Variable Portfolio
seeks to provide total return (i.e., income and capital appreciation,
both realized and unrealized) by allocating its investments among
equities and fixed income securities. The Portfolio is managed for
investors who generally have an investment horizon exceeding 10 years
and who have a moderate level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Legacy Variable Portfolio
seeks to provide total return consistent with preservation of capital
by allocating its investments among equities and fixed income
securities. The Portfolio is managed for investors who generally have
an investment horizon exceeding five years and who have a low level of
risk tolerance.(1)
[bullet] Alger American Fund--Alger American Growth Portfolio seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities. The Portfolio primarily invests in
equity securities of companies which have a market capitalization of $1
billion or greater.(2)
[bullet] Alger American Fund--Alger American Small Capitalization Portfolio
seeks long-term capital appreciation. Except during temporary defensive
periods, the Portfolio invests at least 65% of its total assets in
equity securities of companies that, at the time of purchase of such
securities, have total market capitalization within the range of
companies included in the Russell 2000 Growth Index ("Russell Index")
and the S&P SmallCap 600 Index ("S&P Index"), updated quarterly. As of
March 31, 1997, the range of market capitalization of the companies in
the Russell Index was $10 million to $1.94 billion; the range of market
capitalization of the companies in the S&P Index at that date was $32
million to $2.58 billion. The combined range was $10 million to $2.58
billion.(2)
[bullet] American Century VP Capital Appreciation (formerly TCI Growth) seeks
capital growth. The Fund seeks to achieve its objective by investing in
common stocks (including securities convertible into common stocks) and
other securities that meet certain fundamental and technical standards
of selection and, in the opinion of the Fund's investment manager, have
better than average potential for appreciation.(3)
[bullet] Fidelity Investments' Variable Insurance Products Fund II--Contrafund
Portfolio seeks maximum total return over the long term by investing
mainly in equity securities of companies that are undervalued or
out-of-favor.(4)
[bullet] Fidelity Investments' Variable Insurance Products Fund--Equity-Income
Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In selecting investments, the Fund
also considers the potential for capital appreciation.(4)
[bullet] Fidelity Investments' Variable Insurance Products Fund-- Growth
Portfolio seeks capital appreciation by investing mainly in common
stocks, although its investments are not restricted to any one type of
security.(4)
[bullet] Fidelity Investments' Variable Insurance Products Fund--Overseas
Portfolio seeks long-term growth by investing mainly in foreign
securities (at least 65% of the Fund's total assets in securities of
issuers from at least three countries outside of North America).
Foreign investments involve greater risks than U.S. investments,
including political and economic risks and the risk of currency
fluctuation.(4)
[bullet] Janus Aspen Series--Aggressive Growth Portfolio is a nondiversified
portfolio that seeks long-term growth of capital. The Portfolio pursues
its investment objective by normally investing at least 50% of its
equity assets in securities issued by medium-sized companies. Medium-
sized companies are those whose market capitalizations fall within the
range of companies in the S&P MidCap 400 Index, which as of December
30, 1996 included companies with capitalizations between approximately
$192 million and $6.5 billion, but which is expected to change on a
regular basis.(5)
[bullet] Janus Aspen Series--Balanced Portfolio seeks long-term capital growth,
consistent with preservation of capital and balanced by current income.
The Portfolio pursues its investment objective by, under normal
circumstances, investing 40%-60% of its assets in securities selected
primarily for their growth potential and 40%-60% of its assets in
securities selected primarily for their income potential.(5)
- -------------------------------------------------------------------------------
2
<PAGE>
[bullet] Janus Aspen Series--Flexible Income Portfolio seeks to obtain maximum
total return, consistent with preservation of capital. Total return is
expected to result from a combination of current income and capital
appreciation. The Portfolio invests in all types of income producing
securities and may have substantial holdings of debt securities rated
below investment grade (e.g., junk bonds).(5)
[bullet] Janus Aspen Series--Growth Portfolio seeks long-term growth of capital
in a manner consistent with the preservation of capital. The Portfolio
pursues its investment objective by investing in common stocks of
companies of any size.(5)
[bullet] Janus Aspen Series--Short-Term Bond Portfolio seeks as high a level of
current income as is consistent with preservation of capital. The
Portfolio pursues its investment objective by investing primarily in
short- and intermediate-term fixed income securities.(5)
[bullet] Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth
of capital in a manner consistent with preservation of capital. The
Portfolio pursues its investment objective primarily through
investments in common stocks of foreign and domestic issuers.(5)
[bullet] Lexington Natural Resources Trust is a nondiversified portfolio that
seeks long-term growth of capital through investment primarily in
common stocks of companies which own or develop natural resources and
other basic commodities or supply goods and services to such
companies.(6)
[bullet] Neuberger & Berman Advisers Management Trust-- Growth Portfolio seeks
capital growth without regard to income through investments in common
stocks of companies believed to be under-valued and have above- average
potential for capital appreciation. The Portfolio is heavily
diversified among a number of stocks to limit risk.(7)
[bullet] Scudder Variable Life Investment Fund--International Portfolio Class A
Shares seeks long-term growth of capital primarily through diversified
holdings of marketable foreign equity investments.(8)
Investment Advisers for each of the Funds:
(1) Aetna Life Insurance and Annuity Company (adviser);
Aeltus Investment Management, Inc. (subadviser)
(2) Fred Alger Management, Inc.
(3) American Century Investment Management, Inc.
(4) Fidelity Management & Research Company
(5) Janus Capital Corporation
(6) Lexington Management Corporation (adviser); Market
Systems Research Advisors, Inc. serves as the
subadviser for the Lexington Natural Resources Trust
(7) Neuberger & Berman Management Inc. (Investment Manager); Neuberger & Berman,
LLC (Subadviser)
(8) Scudder, Stevens & Clark, Inc.
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 current Prospectus for each Fund which is distributed with and
accompanies 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. Additional prospectuses and
Statements of Additional Information for this Prospectus and for each of the
Funds can be obtained from the Company's Home Office at the address and
telephone number listed under the "Inquiries" section of the Prospectus Summary.
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
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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 Fixed Account, which is the
Credited Interest Option available under the Contract. The Fixed Account is a
part of the Company's general account and guarantees a minimum interest rate, as
specified in the Contract. The Company may credit higher interest rates from
time to time. Transfers from the Fixed Account are limited. (See Appendix.)
PURCHASE
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CONTRACT AVAILABILITY
The Contracts are designed to provide retirement benefits to individuals
who either are not participating in formal retirement plans, or are
participating in formal retirement plans but wish to personally supplement their
benefits.
This Contract may be aggregated with other annuity contracts purchased by
you from us (and our affiliates) on or after October 21, 1988, for purposes of
determining the taxable portion of payments from this Contract. (See "Tax
Status.")
CONTRACT PURCHASE
Prospective Contract Holders may purchase a Contract by submitting an
application to the Company. The Company must accept or reject the application
within two business days of receipt. If the application is 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
Contract Holder, pending acceptance of the forms. Any Purchase Payment
accompanying the application, or received prior to the acceptance of the
application, will be invested as of the date of acceptance. If the application
is rejected, the application and any Purchase Payments will be returned to the
Contract Holder.
PURCHASE PAYMENTS
Two types of Contracts are available. Continuing, periodic payments will
be placed in "Installment Purchase Payment Contracts." Lump-sum transfers of
amounts accumulated under a pre-existing plan may be placed in "Single Purchase
Payment Contracts." The minimum Purchase Payment for a new Single Purchase
Payment Contract is $5,000. Installment Purchase Payments must be at least $100
per month ($1,200 annually) and may not be less than $25 per payment.
Allocation of Purchase Payments. Purchase Payments were initially
allocated to the Subaccounts or the Fixed Account as specified on the
application. Changes in such allocation may be made in writing or by telephone
transfer. Allocations must be in whole percentages, and there are limitations on
the number of investment options that can be selected during the Accumulation
Period. (See "Investment Options--The Funds.")
RIGHT TO CANCEL
You may cancel the Contract 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 a longer free-look period.
When we receive your request for cancellation, we will return your Contract
Value, unless the laws of the state in which the Contract was issued require
that we return the initial Purchase Payment (if greater than the Contract
Value). In states that do not require a return of Purchase Payments, you bear
the entire investment risk for amounts allocated among the Subaccounts during
the free look period. Contract 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
ourpromise 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. The Company reserves the right, upon 30 days'
notice, to make a deduction from each of the Subaccounts for an administrative
charge. The administrative charge 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.
Under the Contract, the amount of the administrative charge may be of an
amount up to, on an annual basis, 0.25% of the daily net assets of the
Subaccounts. There is currently no administrative charge during the Accumulation
Period or Annuity Period. The charge in effect at the time of election of an
Annuity Option will be applicable during the entire Annuity Period.
MAINTENANCE FEE
During the Accumulation Period, the Company will deduct an annual
maintenance fee of $20 from Installment Purchase Contracts on each Contract Year
anniversary. No maintenance fee is deducted from Single Purchase Payment
Contracts. The maintenance fee is to reimburse the Company for some of its
administrative expenses relating to the establishment and maintenance of the
Contracts.
The maintenance fee will be deducted on a pro rata basis from each
Subaccount or Credited Interest Option in which you have an interest. The
maintenance fee will also be deducted upon termination of the Contract, to the
extent permitted by state law.
DEFERRED SALES CHARGE
Withdrawals of all or a portion of the Contract Value may be subject to a
deferred sales charge. The deferred sales charge is a percentage of the amounts
withdrawn from the Subaccounts and the Fixed Account.
For Installment Purchase Payment Contracts, the deferred sales charge is
based on the number of completed Purchase Payment Periods. For Single Purchase
Payment Contracts, it is based on the number of Contract years that have elapsed
since the Contract effective date. The amount of the deferred sales charge is
determined in accordance with the schedule set forth in the following tables:
SINGLE PURCHASE PAYMENT CONTRACT:
Contract Years Deferred Sales
Completed Charge Deduction
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Less than 5 5%
5 or more but less than 6 4%
6 or more but less than 7 3%
7 or more but less than 8 2%
8 or more but less than 9 1%
9 or more 0%
INSTALLMENT PURCHASE PAYMENT CONTRACT:
Purchase Payment Deferred Sales
Periods Completed Charge Deduction
- ----------------------------- ------------------
Less than 5 5%
5 or more but less than 7 4%
7 or more but less than 9 3%
9 or more but less than 10 2%
More than 10 0%
A deferred sales charge will not be deducted from any portion of the
Contract Value if the withdrawal is:
[bullet] applied to provide Annuity benefits;
[bullet] taken on or after the tenth anniversary of the effective date of the
Contract;
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[bullet] paid due to your death;
[bullet] made due to the election of the Systematic Withdrawal Option (see
"Additional Withdrawal Option"); or
[bullet] paid due to a full withdrawal where the Contract Value is $2,500 or
less and no amount has been withdrawn during the prior 12 months; or
[bullet] taken from an Installment Purchase Payment Contract if you are at least
age 59-1/2 and have completed nine Purchase Payment Periods.
The deduction for the deferred sales charge will not exceed 8.5% of the
total Purchase Payments actually made to the Contract. 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 the mortality and expense risk charge described above.
Free Withdrawals. Up to 10% of the current Contract Value may be withdrawn
during each calendar year without imposition of a deferred sales charge. The
free withdrawal applies only to the first partial withdrawal in each calendar
year. The 10% amount will be based on the Contract Value calculated on the
Valuation Date next following our receipt of your request for withdrawal. This
provision does not apply to a full withdrawal of the Contract or if SWO is
elected. This provision also does not apply for those Contracts issued in the
state of Washington. (See "Additional Withdrawal Options.")
In the instances cited above, no deferred sales charge is deducted.
However, the withdrawn amount may be subject to the 10% penalty tax.
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 prospectus.
PREMIUM AND OTHER TAXES
Several states and municipalities impose a premium tax on Annuities. These
taxes currently range from 0% to 4%. The Company reserves the right to deduct
premium tax against Purchase Payments or Contract Values at any time, but no
earlier than 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
option based upon our determination of when such tax is due. We will absorb any
municipal premium tax which is assessed at 1% or less. We reserve the right,
however, to reflect this added expense in our Annuity purchase rates for
residents of such municipalities.
The Company's current practice is to deduct for premium taxes at the time
of complete withdrawal or annuitization. In addition to the premium tax, the
Company reserves the right to assess a charge for any state or federal taxes due
against the Contract or the Separate Account assets. (See "Tax Status.")
CONTRACT VALUATION
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Contract Value. Until the Annuity Date, the Contract Value is the total
dollar value of amounts held under your Contract as of any Valuation Date. The
Contract 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 Fixed 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" ("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
"Contract Valuation--Net Investment Factor.") 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 (if any).
Initial Purchase Payments will be credited to your Contract as described
under "Purchase-Contract Purchase." Each subsequent Purchase Payment (or amount
transferred) received by the
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Company by the close of business of the New York Stock Exchange will be credited
to your Contract 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, divided by;
d) the total value of the Subaccount's Accumulation and Annuity Units on
the preceding Valuation Date, minus;
e) a daily charge at the annual effective rate of 1.25% for mortality and
expense risks, and an administrative charge which will not exceed
0.25% (currently 0%) on an annual basis.
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 Contract from one Subaccount to another. Transfers between the Fixed
Account and the Subaccounts are subject to certain restrictions. (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 without charge. The total number of investment
options that you may select during the Accumulation Period is limited. (See
"Investment Options--The Funds.") The transfer amount may not be less than $500.
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
not available during the Annuity Period.
DOLLAR COST AVERAGING PROGRAM
You may establish automated transfers of Contract Values on a monthly or
quarterly basis through the Company's Dollar Cost Averaging Program. There is no
additional charge for the Program. Dollar Cost Averaging is a system for
investing a fixed amount of money at regular intervals over a period of time.
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. Please refer to the "Inquiries"
section of the Prospectus Summary which describes how you can obtain further
information.
WITHDRAWALS
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All or a portion of the Contract Value may be withdrawn at any time during
the Accumulation Period. 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:
[bullet] Full Withdrawal of a Contract: The amount paid upon a full withdrawal
will be the Contract Value allocated to the Subaccounts and the Fixed
Account, minus any applicable deferred sales charge and maintenance fee
due.
[bullet] Partial Withdrawals (Percentage): The amount paid will be the
percentage of the Contract Value requested minus any applicable
deferred sales charge.
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[bullet] Partial Withdrawal (Specified Dollar Amount): The amount paid will be
the dollar amount requested. However, the amount withdrawn from the
Contract will equal the amount requested plus any applicable deferred
sales charge.
For any partial withdrawal, amounts will be withdrawn proportionately from
each Subaccount or the Fixed Account in which your Contract is invested, unless
you request otherwise in writing. All amounts paid will be based on Contract
Values 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.
Tax treatment of withdrawals from this Contract may be modified if you own
other annuity contracts issued by us (and our affiliates) that were purchased on
or after October 12, 1988. (See "Tax Status--Multiple Contracts.")
REINVESTMENT PRIVILEGE
You may elect to reinvest all or a portion of the proceeds received from a
full withdrawal of your Contract within 30 days after such withdrawal has been
made. Accumulation Units will be credited to the Contract for the amount
reinvested, as well as any maintenance fee and any deferred sales charge imposed
at the time of withdrawal. Any maintenance fee which falls due after the
withdrawal and before the reinvestment will be deducted from the amounts
reinvested. Reinvested amounts will be reallocated to the applicable investment
options in the same proportion as they were allocated at the time of withdrawal.
Accumulation Units will be credited to your Contract based on the Accumulation
Unit Value next computed following our receipt of your request along with the
amount to be reinvested. The reinvestment privilege may be used only once. If
you are contemplating reinvestment, you should seek competent advice regarding
the tax consequences associated with such a transaction.
ADDITIONAL WITHDRAWAL OPTIONS
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The Company offers a withdrawal option under the Contract that is not
considered an annuity option ("Additional Withdrawal Option"). To exercise this
option, the Contract Value must meet the minimum dollar amounts and age criteria
applicable to that option.
[bullet] SWO--Systematic Withdrawal Option. SWO is a series of partial
withdrawals from the Contract 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.
Other Additional Withdrawal Options may be added from time to time.
Additional information relating to the Additional Withdrawal Option may be
obtained from your local representative or from the Company at its Home Office.
If you select an Additional Withdrawal Option, you will retain all of the
rights and flexibility permitted under the Contract during the Accumulation
Period. Your Contract Value will continue to be subject to the charges and
deductions described in this Prospectus. Taking a withdrawal under an Additional
Withdrawal Option may have tax consequences. Any person concerned about tax
implications should consult a competent tax advisor prior to electing an option.
Once you elect an Additional Withdrawal Option, you may revoke it any time
by submitting a written request to our Home Office. Once the option is revoked,
it may not be elected again. The Company reserves the right to discontinue the
availability of SWO or any other Additional Withdrawal Options at any time,
and/or to change the terms of future elections.
DEATH BENEFIT DURING ACCUMULATION PERIOD
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The Contract provides that a death benefit is payable to the
beneficiary(ies) upon your death before the Annuity Date. The amount of the
death benefit will be equal to the Contract Value. Death benefit proceeds may be
paid to the beneficiary:
[bullet] in a lump sum; or
[bullet] in accordance with any of the Annuity Options available under the
Contract.
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The beneficiary may instead elect one of the following two options;
however, the Code limits how long the death benefit proceeds may be left in
these options (see below):
[bullet] to leave the Contract Value invested in the Contract; or
[bullet] to leave the Contract Value on deposit in the Company's general
account, and to receive monthly, quarterly, semi- annual or annual
interest payments at the interest rate then being credited on such
deposits. The balance on deposit can be withdrawn at any time or
applied to an Annuity Option.
When paying the beneficiary, we will determine the Contract Value on the
Valuation Date following the date on which we receive proof of death acceptable
to the Company. Interest, if any, will be paid from the date of death at a rate
no less than required by law. We will mail payment to the beneficiary within
seven days after we receive proof of death.
The Code requires that distribution of death proceeds begin within a
certain period of time. Generally, either payments must begin within one year of
your death, or the entire value of your benefits must be distributed within five
years following your death. An exception to this provision applies if the
beneficiary is your surviving spouse, in which case the beneficiary will be
treated as a successor Contract Holder of the Contract. This successor Contract
Holder may exercise all rights to the Contract. Under the Code, no distributions
from the Contract are required until the death of this successor Contract
Holder. In no event may payments extend beyond the life expectancy of the
beneficiary or any period certain greater than the beneficiary's life
expectancy. If no elections are made, no distributions will be made. Failure to
commence distributions within the above time periods can result in tax
penalties. Regardless of the method of payment, death benefit proceeds will
generally be taxed to the beneficiary in the same manner as if you had received
those payments. (See "Tax Status.")
ANNUITY PERIOD
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ANNUITY PERIOD ELECTIONS
At least 30 days prior to the Annuity Date, you must notify us in writing
of the following:
[bullet] the date on which you would like to start receiving annuity payments;
[bullet] the Annuity Option under which you want your payments to be calculated
and paid;
[bullet] whether the payments are to be made monthly, quarterly, semi-annually
or annually; and
[bullet] the investment option(s) used to provide annuity payments (i.e., a
fixed annuity using the general account or any of the Subaccounts
available at the time of annuitization). As of the date of this
Prospectus, Aetna Variable Fund, Aetna Income Shares and Aetna
Investment Advisers Fund, Inc. are the only Subaccounts available.
Until a date and option are elected, the Account will continue in the
Accumulation Period. Once Annuity Payments begin, the Annuity Option may not be
changed, nor may transfers be made among the investment option(s) selected.
PARTIAL ANNUITIZATION
You may elect an Annuity Option with respect to a portion of your Contract
Value, while leaving the remaining portion of your Contract 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 Contract.
ANNUITY OPTIONS
You may choose one of the following Annuity Options:
Lifetime Annuity Options:
[bullet] Option 1--Life Annuity--An annuity with payments ending on the
Annuitant's death.
[bullet] 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.
[bullet] Option 3--Life Income based Upon the Lives of Two Payees--An annuity
will be paid during the lives of the Annuitant and a second Annuitant,
with 100%, 662/3% or 50% of the payment to continue after the first
death, or 100% of the payment to continue at the death of the
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second Annuitant and 50% of the payment to continue at the death of the
Annuitant.
[bullet] Option 4--Life Income based Upon the Lives of Two Payees--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 Annuitant cannot elect to receive a
lump-sum settlement.
Nonlifetime Annuity Options:
[bullet] Option 1--Payments for a Specified Period--payments will continue for a
specified period of time, as provided for under your Contract.
An annuity may be selected on a fixed or variable basis and payments may
be made for 3-30 years. If a nonlifetime option is elected on a variable basis,
the Annuitant 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.") The nonlifetime option is not available on
a variable basis under a Contract which provides for immediate annuity benefits.
We may also offer additional Annuity Options under your Contract from time
to time.
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.
Amount of Each Annuity Payment. The amount of each payment depends on the
size of your Contract Value, how you allocate it between fixed and variable
payouts, and the annuity option chosen. No election may be made that would
result in the first Annuity payment of less than $20, or total yearly Annuity
payments of less than $100. If your Contract Value on the Annuity Date is
insufficient to elect an option for the minimum amount specified, a lump-sum
payment must be elected.
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 the SAI
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. (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.
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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. Under Options 2 and 4, such value will be reduced by any payments made
after the date of death.
TAX STATUS
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INTRODUCTION
The following provides a general discussion of the federal tax treatment
of the Contract 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 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 or beneficiary may depend upon the tax status of the individual
concerned. Any person concerned about these tax implications or any state, local
or any other tax consequences 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.
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
the Contracts, the investments of the Funds be "adequately diversified" in
accordance with Treasury Regulations in order for the Contracts to qualify as
annuity contracts under federal tax law. The Separate Account, through the
Funds, intends to comply with the diversification requirements prescribed by the
Treasury in Reg. Sec. 1.817-5, which affects how the Funds' assets may be
invested.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In these circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of investment control over the
assets. The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, a Contract Holder has additional flexibility in allocating premium
payments and account values. In addition, the number of funds provided under the
Contract is significantly greater than the number of funds offered in contracts
on which rulings have been issued. These differences could result in a Contract
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 Contract Holder from being considered the
owner of a pro rata share of the assets of the Separate Account.
Required Distributions: In order to be treated as an annuity contract for
federal income tax purposes, section 72(s) of the Code requires that the
Contracts provide that (a) if any Contract Holder dies on or after the annuity
date but prior to the time the entire interest in the Contract has been
distributed, the remaining portion of such interest will be distributed at least
as rapidly as under the method of distribution being used as of the date of such
Contract
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11
<PAGE>
Holder's death; and (b) if any Contract Holder dies prior to the annuity date,
the entire interest in the Contract will be distributed within five years after
the date of such Contract Holder's death. These requirements will be considered
satisfied as to any portion of a Contract 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 Contract Holder's death. The "designated beneficiary"
refers to a natural person designated by the Contract 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 Contract
Holder, the Contract may be continued with the surviving spouse as the new
Contract Holder.
The 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 following discussion is based on the assumption that the Contract
qualifies as an annuity contract for federal income tax purposes.
TAXATION OF ANNUITIES
In General: Section 72 of the Code governs taxation of annuities in
general. The Company believes that a Contract Holder who is a natural person
generally is not taxed on increases in the Contract Value until distribution
occurs by withdrawing all or part of such Contract Value (e.g., withdrawals or
Annuity payments under the Annuity Option elected). For this purpose, the
assignment, pledge, or agreement to assign or pledge any portion of the Contract
Value generally will be treated as a distribution. The taxable portion of a
distribution (in the form of a single sum payment or an annuity) is taxable as
ordinary income.
Non-Natural Holders of a Contract. If the Contract Holder is not a natural
person, a 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 advisor 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.
The following discussion generally applies to a Contract owned by a
natural person.
Withdrawals: Partial withdrawals, including withdrawals under the
Systematic Withdrawal Option, are generally treated as taxable income to the
extent that the Contract Value immediately before the withdrawal exceeds the
"investment in the contract" at that time. Full surrenders of a Contract are
treated as taxable income to the extent that the amount received exceeds the
"investment in the contract".
Annuity Payments: Although the tax consequences may vary depending on the
Annuity payment elected under the Contract, in general, only the portion of the
Annuity payment that represents the amount by which the Contract Value exceeds
the "investment in the contract" will be taxed; after the "investment in the
contract" is recovered, the full amount of any additional Annuity payments is
taxable. For variable annuity payments, the taxable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
However, the entire distribution will be taxable once the recipient has
recovered the dollar amount of his or her "investment in the contract". For
fixed annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the Annuity payments for the term of the
payments; however, the remainder of each Annuity payment is taxable. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional Annuity payments is taxable. If Annuity payments cease as a result of
an Annuitant's death before full recovery of the "investment in the contract,"
consult a competent tax advisor regarding deductibility of the unrecovered
amount.
Penalty Tax: In the case of a distribution, there may be imposed a federal
income tax penalty equal to 10% of the amount treated as taxable income. In
general, however, there is no penalty tax on distributions: (1) made on or after
the date on which the taxpayer attains age 591/2; (2) made as a result of death
or disability of a Contract Holder;
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12
<PAGE>
(3) received in substantially equal periodic payments for the lives or life
expectancies of the Contract Holder and a "designated beneficiary".
Taxation of Death Benefit Proceeds: Amounts may be distributed from the
Contract because of the death of a Contract 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 Contract Holder, the selection of certain Annuity
Dates, or the exchange of a Contract may result in certain tax consequences that
are not discussed herein. 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 non-qualified annuity contracts that are
issued on or after October 12, 1988 by the Company (or its affiliates) to the
same owner during any calendar year are treated as one annuity contract for the
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.
Withholding: Annuity distributions generally are subject to withholding
for the recipient's federal income tax liability at rates that vary according to
the type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions.
MISCELLANEOUS
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DISTRIBUTION
The Company serves 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 and is a member of the National Association
of Securities Dealers, Inc. (NASD). As principal underwriter, the Company
contracts with one or more registered broker-dealers ("Distributors"), including
at least one affiliate of the Company, to offer and sell the Contracts. All
persons offering and selling the Contracts must be registered representatives of
the Distributors and must also be licensed as insurance agents to sell variable
annuity contracts. These registered representatives may also provide services to
Contract Holders in connection with establishing their Contracts.
Payment of Commissions. Persons offering and selling the Contracts may
receive commissions in connection with the sale of the Contracts. The maximum
percentage amount that the Company will ever pay as commission with respect to
any given Purchase Payment is with respect to those made during the first year
of Purchase Payments under an Account. The percentage amount will range from 1%
to 71/2% of those Purchase Payments. The Company may also pay renewal
commissions and service fees on Purchase Payments made after the first year. The
average of all payments made by the Company is estimated to equal approximately
3% of the total Purchase Payments made over the life of an average Contract. In
addition, some sales personnel may receive various types of non-cash
compensation as special sales incentives, including trips and educational and/or
business seminars. Supervisory and other management personnel of the Company may
receive compensation that will vary based on the relative profitability to the
Company of the funding options you select. Funding options that invest in Funds
advised by the Company or its affiliates are generally more profitable to the
Company. The Company may also reimburse the Distributor for certain expenses.
The name of the Distributor and the registered representative responsible for
your Contract are set forth in your application. Commissions and sales related
expenses are paid by the Company and are not deducted from Purchase Payments.
(See "Charges and Deductions--Deferred Sales Charge.")
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13
<PAGE>
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 it is not reasonably practicable
for the Company fairly to determine 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,
the 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.
VOTING RIGHTS
In accordance with the Company's view of present applicable law, it will
vote the shares of each of the Funds held by the Separate Account at regular and
special meetings of Fund shareholders in accordance with instructions received
from Contract Holders. The Company will vote shares for which it has not
received instructions in the same proportion as it votes shares for which it has
received instructions.
Contract Holders will receive periodic reports relating to the Fund(s) in
which they have an interest, as well as any proxy materials and a form on which
to give voting instructions. Voting instructions will be solicited by written
communication at least 14 days before such meeting. The number of votes to which
each person may give direction will be determined as of the record date set by
the Fund.
The number of votes each Contract Holder may cast during the Accumulation
Period is equal to the portion of the Contract Value attributable to that Fund,
divided by the net asset value of one share of that Fund. During the Annuity
Period, the number of votes is equal to the valuation reserve applicable to the
portion of the Contract attributable to that Fund, divided by the net asset
value of one share of that Fund. In determining the number of votes, fractional
votes will be recognized. Where the Contract Value or valuation reserve relates
to more than one Fund, the calculation of votes will be performed separately for
each Fund.
MODIFICATION OF THE CONTRACT
The Company may change the Contract as required by federal or state law.
In addition, the Company may, upon 30 day's written notice to the Contract
Holder, make changes to certain provisions of the Contract if it deems an
amendment appropriate. However, no change will affect the amount or terms of any
annuity which begins before the change, and certain provisions of the Contract
may not be changed. Certain changes will require the approval of appropriate
state or federal regulatory authorities.
TRANSFER OF OWNERSHIP; ASSIGNMENT
No assignment of a Contract will be binding on us unless made in writing
and sent to us at our Home Office. The Company will use reasonable procedures to
confirm that the assignment is authentic, including verification of signature.
If the Company fails to follow its procedures, it would be liable for any losses
to you directly resulting from the failure. Otherwise, we are not responsible
for the validity of any assignment. The rights of the Contract Holder and the
interest of the Annuitant and any beneficiary will be subject to the rights of
any assignee of record.
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14
<PAGE>
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 Counsel to the Company.
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15
<PAGE>
CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
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- -------------------------------------------------------------------------------
The Statement of Additional Information (SAI) 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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16
<PAGE>
APPENDIX
FIXED ACCOUNT
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- -------------------------------------------------------------------------------
The following summarizes material information concerning the Fixed Account.
Amounts allocated to the Fixed Account are held in the Company's general account
that supports general insurance and annuity obligations. Interests in the Fixed
Account have not been registered with the SEC in reliance on exemptions under
the Securities Act of 1933, as amended. Disclosure in the Prospectus regarding
the Fixed Account, may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of such statements. Disclosure in this Appendix regarding the Fixed
Account has not been reviewed by the SEC.
The Fixed Account guarantees the minimum interest rate specified in the
Contract (this minimum interest rate cannot be changed by the Company). The
Company may credit a higher interest rate from time to time. The Company's
determination of interest rates reflects the investment income earned on
invested assets and the amortization of any capital gains and/or losses realized
on the sale of invested assets. Under the Fixed Account, the Company assumes the
risk of investment gain or loss by guaranteeing Purchase Payment values and
promising a minimum interest rate and Annuity Payment.
Under certain emergency conditions, the Company may defer payment:
(a) for a period of up to 6 months (unless not allowed by state law); and
(b) as provided by federal law.
Amounts applied to the Fixed Account will earn the interest rate in effect
when actually applied to the Fixed Account.
The Fixed Account will reflect a compound interest rate credited by us. The
interest rate quoted is an annual effective yield. We make no deductions from
the credited interest rate for mortality and expense risks; these risks are
considered in determining the credited rate.
TRANSFERS AMONG INVESTMENT OPTIONS
Transfers from the Fixed Account to any other available investment
options(s) are allowed in each calendar year during the Accumulation Period. The
amount which may be transferred may vary at our discretion; however, it will
never be less than 10% of the amount held under the Fixed Account.
By notifying us at our Home Office at least 30 days before Annuity Payments
begin, you may elect to have amounts which have been accumulating under the
Fixed Account transferred to one or more of the Subaccounts available during the
Annuity Period to provide variable Annuity Payments.
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17
<PAGE>
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VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated May 1, 1997
Individual Variable Annuity Contracts
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 1, 1997.
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
1-800-525-4225
Read the prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the prospectus.
TABLE OF CONTENTS
Page
General Information and History......................................... 2
Variable Annuity Account B.............................................. 2
Offering and Purchase of Contracts...................................... 3
Performance Data........................................................ 3
General........................................................... 3
Average Annual Total Return Quotations............................ 4
Annuity Payments........................................................ 7
Sales Material and Advertising.......................................... 8
Independent Auditors.................................................... 8
Financial Statements of the Separate Account............................ S-1
Financial Statements of Aetna Life Insurance and Annuity Company........ F-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company which was organized 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, 1996, the Company had
$30.1 billion invested through its products, including $15.0 billion in its
separate accounts (of which the Company oversees the management of $10.5
billion) and $1.1 billion in its mutual funds offered outside of its separate
accounts. As of December 31, 1995, it ranked among the top 2% of all U.S. life
insurance companies based on assets. 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 Inc. 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 expense
charge described in the prospectus, all expenses incurred in the operations of
the Separate Account are borne by the Company. See "Charges and Deductions" in
the prospectus. The Company receives reimbursement for certain administrative
costs from some unaffiliated sponsors of the Funds used as funding options under
the Contract. These fees generally range up to 0.25%.
The assets of the Separate Account are held by the Company. The Separate Account
has no custodian. However, the Funds in whose shares the assets of the Separate
Account are invested each have custodians, as discussed in their respective
prospectuses.
VARIABLE ANNUITY ACCOUNT B
Variable Annuity Account B (the "Separate Account") is a separate account
established by the Company for the purpose of funding variable annuity contracts
issued by the Company. The Separate Account is registered with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940, as amended. Purchase Payments made under the Contract may be
allocated to one or more of the Subaccounts. Each Subaccount invests in the
shares of only one of the Funds listed below. The Company may make additions to,
deletions from or substitutions of available investment options as permitted by
law and subject to the conditions in the Contract. The availability of the Funds
is subject to applicable regulatory authorization. Not all Funds are available
in all jurisdictions or under all Contracts.
2
<PAGE>
The Funds currently available under the Contract are as follows:
Aetna Variable Fund
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Aetna Ascent Variable Portfolio
Aetna Crossroads Variable Portfolio
Aetna Legacy Variable Portfolio
Alger American Growth Portfolio
Alger American Small Cap Portfolio
American Century VP Capital Appreciation
(formerly TCI Growth)
Fidelity VIP II Contrafund Portfolio
Fidelity VIP Equity - Income Portfolio
Fidelity VIP Growth Portfolio
Fidelity VIP Overseas Portfolio
Janus Aspen Aggressive Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Flexible Income Portfolio
Janus Aspen Growth Portfolio
Janus Aspen Short-Term Bond Portfolio
Janus Aspen Worldwide Growth Portfolio
Lexington Natural Resources Trust
Neuberger & Berman Growth Portfolio
Scudder International Portfolio Class A Shares
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 of the Company or of other registered broker-dealers who have
sales agreements with the Company. The offering of the Contracts is continuous.
A description of the manner in which Contracts are purchased may be found in the
prospectus under the sections titled "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 redeemable value is then divided by the initial
investment and this quotient is taken to the Nth root (N represents the number
of years in the period) and 1 is subtracted from the result which is then
expressed as a percentage, carried to at least the nearest hundredth of a
percent. The standardized figures use the actual returns of the Fund since
inception and then adjust them to reflect the deduction of all recurring charges
under the Contracts during each period (e.g., mortality and expense risk
charges, maintenance fees, administrative expense charges, and deferred sales
charges). These charges will be deducted on a pro rata basis in the case of
fractional periods. The maintenance fee
3
<PAGE>
is converted to a percentage of assets based on the average account size under
the Contracts described in the prospectus. The total return figures shown below
may be different from the actual historical total return under your Contract
because for periods prior to 1994, the Subaccount's investment performance was
based on the performance of the underlying Fund plus any cash held by the
Subaccount.
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.
Investment results of the Funds 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 Contract Value upon redemption may be more or less
than your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
The set of tables shown below represents the two variations in contract payment
type. Table A reflects the average annual standardized and non-standardized
total return quotation figures for the periods ended December 31, 1996 for the
Subaccounts under Single Payment Contracts issued by the Company. Table B
reflects the average annual standardized and non-standardized total return
quotation figures for the periods ended December 31, 1996 for the Subaccounts
under Installment Payment Contracts with a $20 annual maintenance fee. For those
Subaccounts where results are not available for the full calendar period
indicated, the percentage shown is an average annual return since inception
(denoted with an *).
4
<PAGE>
<TABLE>
<CAPTION>
TABLE A
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SINGLE PAYMENT CONTRACT FUND
($0 MAINTENANCE FEE) STANDARDIZED NON-STANDARDIZED INCEPTION
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>
16.76% 10.86% 12.81% 22.91% 16.22% 11.76% 12.81%
Aetna Variable Fund 05/01/75
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(2.82%) 4.59% 7.48% 2.30% 4.28% 5.44% 7.48%
Aetna Income Shares 05/15/73
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(1.15%) 2.33% 4.77% 4.05% 3.84% 3.16% 4.77%
Aetna Variable Encore Fund 08/01/75
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8.05% 9.00% 9.48%* 13.73% 12.00% 9.89% 9.91%*
Aetna Investment Advisers Fund, Inc. 04/03/89
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15.94% 17.53%* n/a 22.04% 21.64%* n/a n/a
Aetna Ascent Variable Portfolio 07/05/95
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11.46% 13.67%* n/a 17.32% 17.64%* n/a n/a
Aetna Crossroads Variable Portfolio 07/05/95
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7.13% 9.99%* n/a 12.77% 13.84%* n/a n/a
Aetna Legacy Variable Portfolio 07/05/95
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6.34% 14.26% 16.76%* 11.93% 14.74% 15.19% 17.21%*
Alger American Growth Portfolio 01/09/89
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(2.26%) 8.75% 18.30%* 2.88% 11.46% 9.64% 18.74%*
Alger American Small Cap Portfolio 09/21/88
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American Century VP Capital (10.24%) 4.00% 9.20%* (5.52%) 6.09% 4.86% 9.44%*
Appreciation 11/20/87
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13.72% 25.41%* n/a 19.71% 28.68%* n/a n/a
Fidelity VIP II Contrafund Portfolio 01/03/95
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7.21% 15.58% 12.33% 12.86% 16.78% 16.52% 12.33%
Fidelity VIP Equity-Income Portfolio 10/09/86
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7.61% 12.82% 13.73% 13.27% 14.36% 13.74% 13.73%
Fidelity VIP Growth Portfolio 10/09/86
- ------------------------------------------------------------------------------------------------------------------------------------
6.15% 6.92% 6.38%* 11.74% 6.76% 7.80% 6.59%*
Fidelity VIP Overseas Portfolio 02/13/87
- ------------------------------------------------------------------------------------------------------------------------------------
1.27% 17.94%* n/a 6.60% 15.53% 19.78%* n/a
Janus Aspen Aggressive Growth 9/13/93
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
9.00% 11.43%* n/a 14.73% 12.09% 13.18%* n/a
Janus Aspen Balanced Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
2.44% 6.49%* n/a 7.83% 8.89% 8.16%* n/a
Janus Aspen Flexible Income Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
11.13% 12.97%* n/a 16.98% 15.14% 14.74%* n/a
Janus Aspen Growth Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
(2.45%) 1.52%* n/a 2.68% 3.45% 3.11%* n/a
Janus Aspen Short-Term Bond Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
21.06% 19.75%* n/a 27.43% 17.14% 21.63%* n/a
Janus Aspen Worldwide Growth Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
19.04% 7.70% 7.80%* 25.31% 10.56% 8.58% 8.65%*
Lexington Natural Resources Trust 10/14/91
- ------------------------------------------------------------------------------------------------------------------------------------
2.39% 7.58% 10.06% 7.78% 9.58% 8.47% 10.06%
Neuberger & Berman Growth Portfolio 09/10/84
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio 7.68% 8.79% 8.35%* 13.35% 6.80% 9.68% 8.57%*
Class A Shares 05/01/87
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the Tables for an explanation of the
charges included in the Standardized and Non-Standardized figures. These figures
represent historical performance and should not be considered a projection of
future performance.
5
<PAGE>
TABLE B
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INSTALLMENT PURCHASE PAYMENT ACCOUNT: FUND
($20 MAINTENANCE FEE) STANDARDIZED NON-STANDARDIZED INCEPTION
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>
16.75% 10.61% 12.80% 22.89% 16.21% 11.75% 12.80%
Aetna Variable Fund 05/01/75
- ------------------------------------------------------------------------------------------------------------------------------------
(2.83%) 4.36% 7.47% 2.29% 4.27% 5.43% 7.47%
Aetna Income Shares 05/15/73
- ------------------------------------------------------------------------------------------------------------------------------------
(1.16%) 2.10% 4.76% 4.04% 3.83% 3.15% 4.76%
Aetna Variable Encore Fund 08/01/75
- ------------------------------------------------------------------------------------------------------------------------------------
8.04% 8.76% 9.18%* 13.72% 11.99% 9.88% 9.90%*
Aetna Investment Advisers Fund, Inc. 04/03/89
- ------------------------------------------------------------------------------------------------------------------------------------
15.93% 17.52%* n/a 22.03% 21.63%* n/a n/a
Aetna Ascent Variable Portfolio 07/05/95
- ------------------------------------------------------------------------------------------------------------------------------------
11.45% 13.66%* n/a 17.31% 17.63%* n/a n/a
Aetna Crossroads Variable Portfolio 07/05/95
- ------------------------------------------------------------------------------------------------------------------------------------
7.12% 9.98%* n/a 12.75% 13.83%* n/a n/a
Aetna Legacy Variable Portfolio 07/05/95
- ------------------------------------------------------------------------------------------------------------------------------------
6.33% 14.01% 16.44%* 11.92% 14.73% 15.18% 17.20%*
Alger American Growth Portfolio 01/09/89
- ------------------------------------------------------------------------------------------------------------------------------------
(2.27%) 8.51% 17.99%* 2.87% 11.45% 9.63% 18.73%*
Alger American Small Cap Portfolio 09/21/88
- ------------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital (10.25%) 3.77% 8.82%* (5.53%) 6.08% 4.84% 9.43%*
Appreciation 11/20/87
- ------------------------------------------------------------------------------------------------------------------------------------
13.71% 25.40%* n/a 19.70% 28.67%* n/a n/a
Fidelity VIP II Contrafund Portfolio 01/03/95
- ------------------------------------------------------------------------------------------------------------------------------------
7.20% 15.32% 12.32% 12.85% 16.77% 16.51% 12.32%
Fidelity VIP Equity-Income Portfolio 10/09/86
- ------------------------------------------------------------------------------------------------------------------------------------
7.60% 12.57% 13.72% 13.26% 14.34% 13.73% 13.72%
Fidelity VIP Growth Portfolio 10/09/86
- ------------------------------------------------------------------------------------------------------------------------------------
6.14% 6.69% 6.03%* 11.73% 6.75% 7.79% 6.58%*
Fidelity VIP Overseas Portfolio 02/13/87
- ------------------------------------------------------------------------------------------------------------------------------------
1.26% 17.93%* n/a 6.59% 15.52% 19.77%* n/a
Janus Aspen Aggressive Growth 9/13/93
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
8.99% 11.42%* n/a 14.72% 12.08% 13.17%* n/a
Janus Aspen Balanced Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
2.43% 6.48%* n/a 7.82% 8.88% 8.15%* n/a
Janus Aspen Flexible Income Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
11.12% 12.96%* n/a 16.96% 15.13% 14.73%* n/a
Janus Aspen Growth Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
(2.46%) 1.51%* n/a 2.67% 3.44% 3.10%* n/a
Janus Aspen Short-Term Bond Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
21.05% 19.74%* n/a 27.42% 17.13% 21.62%* n/a
Janus Aspen Worldwide Growth Portfolio 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
19.03% 7.46% 7.57%* 25.30% 10.55% 8.57% 8.64%*
Lexington Natural Resources Trust 10/14/91
- ------------------------------------------------------------------------------------------------------------------------------------
2.38% 7.35% 10.04% 7.77% 9.57% 8.46% 10.04%
Neuberger & Berman Growth Portfolio 09/10/84
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio 7.67% 8.55% 7.99%* 13.34% 6.79% 9.67% 8.56%*
Class A Shares 05/01/87
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the Tables for an explanation of the
charges included in the Standardized and Non-Standardized figures. These figures
represent historical performance and should not be considered a projection of
future performance.
6
<PAGE>
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 3.5% 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 period prior to retirement was
$13.650000. This produces a total value of $40,950.
Assume also that no premium tax is payable and that the Annuity table in the
Contract provides, for the option elected, a first monthly variable Annuity
Payment of $6.68 per $1000 of value applied; the Annuitant's first monthly
payment would thus be 40.950 multiplied by $6.68, or $273.55.
Assume then that the value of an Annuity Unit for the valuation period in which
the first payment was due was $13.400000. When this value is divided into the
first monthly payment, the number of Annuity Units is determined to be 20.414.
The value of this number of Annuity Units will be paid in each subsequent month.
If the net investment factor with respect to the appropriate 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 period (assume such value to be
$13.504376) to produce an Annuity Unit value of $13.523359 for the valuation
period in which the second payment is due.
7
<PAGE>
The second monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359,
which produces a payment of $276.07.
*If an assumed net investment rate of 5% is elected, the appropriate factor to
neutralize such assumed rate would be .9998663.
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
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. We may illustrate in advertisements the performance of the
underlying funds, if accompanied by performance which also shows the performance
of such funds reduced by applicable charges under the Separate Account. We may
also show in advertisements the portfolio holdings of the underlying funds,
updated at various intervals. 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 Contract 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.
8
<PAGE>
FINANCIAL STATEMENTS
VARIABLE ANNUITY ACCOUNT B
Index
Statement of Assets and Liabilities......................... S-2
Statements of Operations and Changes in Net Assets.......... S-6
Notes to Financial Statements .............................. S-7
Independent Auditors' Report................................ S-15
S-1
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 22,674,496 shares (cost $674,480,933) .............................................. $ 734,460,247
Aetna Income Shares; 5,554,723 shares (cost $69,738,402) ................................................ 70,118,035
Aetna Variable Encore Fund; 8,093,492 shares (cost $107,322,605) ........................................ 106,781,998
Aetna Investment Advisers Fund, Inc; 8,423,410 shares (cost $112,230,262) ............................... 127,344,696
Aetna GET Fund, Series B; 1,148,634 shares (cost $11,845,728) ........................................... 16,333,339
Aetna GET Fund, Series C; 907,283 shares (cost $9,136,442) .............................................. 9,281,276
Aetna Ascent Variable Portfolio; 446,824 shares (cost $5,362,215) ....................................... 5,638,668
Aetna Crossroads Variable Portfolio; 442,088 shares (cost $5,144,208) ................................... 5,295,700
Aetna Legacy Variable Portfolio; 549,727 shares (cost $6,140,411) ....................................... 6,186,987
Aetna Variable Index Plus Portfolio; 182,043 shares (cost $1,989,418) ................................... 1,985,372
Alger American Funds:
Balanced Portfolio; 408,798 shares (cost $4,238,672) .................................................. 3,777,291
Growth Portfolio; 1,268,424 shares (cost $41,195,068) ................................................. 43,545,003
Income and Growth Portfolio; 768,597 shares (cost $7,300,499) ......................................... 6,471,587
Leveraged AllCap Portfolio; 589,862 shares (cost $11,198,918) ......................................... 11,419,728
MidCap Portfolio; 929,402 shares (cost $19,160,303) ................................................... 19,842,727
Small Capitalization Portfolio; 1,436,114 shares (cost $59,246,689) ................................... 58,751,429
Calvert Responsibly Invested Balanced Portfolio; 336,323 shares (cost $597,518) ......................... 596,637
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 3,446,529 shares (cost $66,707,023) .......................................... 72,480,497
Growth Portfolio; 1,860,260 shares (cost $54,670,184) ................................................. 57,928,484
High Income Portfolio; 1,174,877 shares (cost $13,895,035) ............................................ 14,709,464
Overseas Portfolio; 515,036 shares (cost $8,959,583) .................................................. 9,703,271
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 350,352 shares (cost $5,447,282) ............................................. 5,931,464
Contrafund Portfolio; 3,414,168 shares (cost $50,327,864) ............................................. 56,538,618
Index 500 Portfolio; 307,196 shares (cost $25,139,330) ................................................ 27,380,370
Investment Grade Bond Portfolio; 389,026 shares (cost $4,585,849) ..................................... 4,761,677
Insurance Management Series:
American Leaders Fund II; 4,005,705 shares (cost $52,316,587) ......................................... 61,127,055
Growth Strategies Fund II; 561,108 shares (cost $6,448,785) ........................................... 7,182,178
High Income Bond Fund II; 2,651,478 shares (cost $26,128,555) ......................................... 27,151,137
International Equity Fund II; 531,863 shares (cost $5,627,988) ........................................ 5,935,590
Prime Money Fund II; 7,744,318 shares (cost $7,744,318) ............................................... 7,744,318
US Government Securities Fund II; 758,792 shares (cost $7,582,811) .................................... 7,656,209
Utility Fund II; 1,420,364 shares (cost $15,043,602) .................................................. 16,774,494
Janus Aspen Series:
Aggressive Growth Portfolio; 1,729,280 shares (cost $31,007,236) ...................................... 31,542,060
Balanced Portfolio; 797,173 shares (cost $11,400,361) ................................................. 11,774,244
Flexible Income Portfolio; 457,937 shares (cost $5,073,822) ........................................... 5,147,217
Growth Portfolio; 1,346,496 shares (cost $19,790,729) ................................................. 20,884,154
Short-Term Bond Portfolio; 192,639 shares (cost $1,947,988) ........................................... 1,920,611
Worldwide Growth Portfolio; 3,419,377 shares (cost $61,321,568) ....................................... 66,472,691
Lexington Emerging Markets Fund; 249,599 shares (cost $2,582,550) ....................................... 2,515,960
Lexington Natural Resources Trust Fund; 332,525 shares (cost $4,213,645) ................................ 4,751,784
MFS Funds:
Emerging Growth Series; 679,608 shares (cost $9,083,804) .............................................. 8,998,008
Research Series; 516,109 shares (cost $6,571,748) ..................................................... 6,776,512
Total Return Series; 307,540 shares (cost $4,144,359) ................................................. 4,216,370
Value Series; 19,591 shares (cost $207,906) ........................................................... 208,841
Worldwide Government Series; 38,555 shares (cost $398,609) ............................................ 407,913
Neuberger & Berman Advisers Management Trust -
Growth Portfolio; 319,727 shares (cost $8,249,239) .................................................... 8,242,574
Scudder Variable Life Investment Fund -
International Portfolio; 909,444 shares (cost $10,539,678) ............................................ 12,050,127
</TABLE>
S-2
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1996 (continued):
<TABLE>
<CAPTION>
<S> <C>
TCI Portfolios, Inc:
Balanced Fund; 396,732 shares (cost $2,846,031) ....................................................... $ 2,991,356
Growth Fund; 4,332,926 shares (cost $45,957,552) ...................................................... 44,369,162
International Fund; 789,697 shares (cost $4,330,759) .................................................. 4,706,594
--------------
NET ASSETS (cost $1,726,620,671) ......................................................................... $1,848,811,724
==============
Net assets represented by:
Reserves for annuity contracts in accumulation and payment period: (Notes 1 and 5)
Aetna Variable Fund:
Annuity contracts in accumulation ...................................................................... $ 644,728,031
Annuity contracts in payment period .................................................................... 89,732,216
Aetna Income Shares:
Annuity contracts in accumulation ...................................................................... 66,534,546
Annuity contracts in payment period .................................................................... 3,583,489
Aetna Variable Encore Fund:
Annuity contracts in accumulation ...................................................................... 106,781,998
Aetna Investment Advisers Fund, Inc:
Annuity contracts in accumulation ...................................................................... 119,402,212
Annuity contracts in payment period .................................................................... 7,942,484
Aetna GET Fund, Series B:
Annuity contracts in accumulation ...................................................................... 16,333,339
Aetna GET Fund, Series C:
Annuity contracts in accumulation ...................................................................... 9,281,276
Aetna Ascent Variable Portfolio:
Annuity contracts in accumulation ...................................................................... 5,638,668
Aetna Crossroads Variable Portfolio:
Annuity contracts in accumulation ...................................................................... 5,295,700
Aetna Legacy Variable Portfolio:
Annuity contracts in accumulation ...................................................................... 6,186,987
Aetna Variable Index Plus Portfolio:
Annuity contracts in accumulation ...................................................................... 1,985,372
Alger American Funds:
Balanced Portfolio:
Annuity contracts in accumulation ...................................................................... 3,777,291
Growth Portfolio:
Annuity contracts in accumulation ...................................................................... 43,545,003
Income and Growth Portfolio:
Annuity contracts in accumulation ...................................................................... 6,471,587
Leveraged AllCap Portfolio:
Annuity contracts in accumulation ...................................................................... 11,419,728
MidCap Portfolio:
Annuity contracts in accumulation ...................................................................... 19,842,727
Small Capitalization Portfolio:
Annuity contracts in accumulation ...................................................................... 58,751,429
Calvert Responsibly Invested Balanced Portfolio:
Annuity contracts in accumulation ...................................................................... 596,637
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Annuity contracts in accumulation ...................................................................... 72,480,497
Growth Portfolio:
Annuity contracts in accumulation ...................................................................... 57,928,484
High Income Portfolio:
Annuity contracts in accumulation ...................................................................... 14,709,464
Overseas Portfolio:
Annuity contracts in accumulation ...................................................................... 9,703,271
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Annuity contracts in accumulation ...................................................................... 5,931,464
</TABLE>
S-3
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1996 (continued):
<TABLE>
<CAPTION>
<S> <C>
Contrafund Portfolio:
Annuity contracts in accumulation ....................................................................... $ 56,538,618
Index 500 Portfolio:
Annuity contracts in accumulation ....................................................................... 27,380,370
Investment Grade Bond Portfolio:
Annuity contracts in accumulation ....................................................................... 4,761,677
Insurance Management Series:
American Leaders Fund II:
Annuity contracts in accumulation ....................................................................... 61,127,055
Growth Strategies Fund II:
Annuity contracts in accumulation ....................................................................... 7,182,178
High Income Bond Fund II:
Annuity contracts in accumulation ....................................................................... 27,151,137
International Equity Fund II:
Annuity contracts in accumulation ....................................................................... 5,935,590
Prime Money Fund II:
Annuity contracts in accumulation ....................................................................... 7,744,318
US Government Securities Fund II:
Annuity contracts in accumulation ....................................................................... 7,656,209
Utility Fund II:
Annuity contracts in accumulation ....................................................................... 16,774,494
Janus Aspen Series:
Aggressive Growth Portfolio:
Annuity contracts in accumulation ....................................................................... 31,542,060
Balanced Portfolio:
Annuity contracts in accumulation ....................................................................... 11,774,244
Flexible Income Portfolio:
Annuity contracts in accumulation ....................................................................... 5,147,217
Growth Portfolio:
Annuity contracts in accumulation ....................................................................... 20,884,154
Short-Term Bond Portfolio:
Annuity contracts in accumulation ....................................................................... 1,920,611
Worldwide Growth Portfolio:
Annuity contracts in accumulation ....................................................................... 66,472,691
Lexington Emerging Markets Fund:
Annuity contracts in accumulation ....................................................................... 2,515,960
Lexington Natural Resources Trust Fund:
Annuity contracts in accumulation ....................................................................... 4,751,784
MFS Funds:
Emerging Growth Series:
Annuity contracts in accumulation ....................................................................... 8,998,008
Research Series:
Annuity contracts in accumulation ....................................................................... 6,776,512
Total Return Series:
Annuity contracts in accumulation ....................................................................... 4,216,370
Value Series:
Annuity contracts in accumulation ....................................................................... 208,841
Worldwide Government Series:
Annuity contracts in accumulation ....................................................................... 407,913
Neuberger & Berman Advisers Management Trust - Growth Portfolio:
Annuity contracts in accumulation ....................................................................... 8,242,574
Scudder Variable Life Investment Fund - International Portfolio:
Annuity contracts in accumulation ....................................................................... 12,050,127
TCI Portfolios, Inc:
Balanced Fund:
Annuity contracts in accumulation ....................................................................... 2,991,356
</TABLE>
S-4
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1996 (continued):
<TABLE>
<CAPTION>
<S> <C>
Growth Fund:
Annuity contracts in accumulation ......................................................................... $ 44,369,162
International Fund:
Annuity contracts in accumulation ......................................................................... 4,706,594
--------------
$1,848,811,724
==============
</TABLE>
See Notes to Financial Statements
S-5
<PAGE>
Variable Annuity Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---- ----
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ..................................................................... $ 120,367,178 $ 112,097,675
Expenses: (Notes 2 and 5)
Valuation Period Deductions ................................................... (17,483,870) (11,786,592)
--------------- ---------------
Net investment income ............................................................ 102,883,308 100,311,083
--------------- ---------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ............................................................ 365,025,974 495,934,611
Cost of investments sold ....................................................... 347,598,566 463,921,121
--------------- ---------------
Net realized gain ............................................................ 17,427,408 32,013,490
Net unrealized gain (loss) on investments: (Note 5)
Beginning of year .............................................................. 28,746,944 (44,356,052)
End of year .................................................................... 122,191,053 28,746,944
--------------- ---------------
Net change in unrealized gain ................................................ 93,444,109 73,102,996
--------------- ---------------
Net realized and unrealized gain on investments .................................. 110,871,517 105,116,486
--------------- ---------------
Net increase in net assets resulting from operations ............................. 213,754,825 205,427,569
--------------- ---------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments ...................................... 538,586,667 178,474,387
Sales and administrative charges deducted by the Company ......................... (17,370) (34,250)
--------------- ---------------
Net variable annuity contract purchase payments .............................. 538,569,297 178,440,137
Transfers from the Company for mortality guarantee adjustments ................... 690,779 1,565,140
Transfers from the Company's fixed account options ............................... 50,549,121 4,144,061
Redemptions by contract holders .................................................. (73,738,526) (46,390,791)
Annuity Payments ................................................................. (12,108,943) (9,198,421)
Other ............................................................................ 159,467 1,143,373
--------------- ---------------
Net increase in net assets from unit transactions (Note 5) ................... 504,121,195 129,703,499
--------------- ---------------
Change in net assets ............................................................. 717,876,020 335,131,068
NET ASSETS:
Beginning of year ................................................................ 1,130,935,704 795,804,636
--------------- ---------------
End of year ...................................................................... $ 1,848,811,724 $ 1,130,935,704
=============== ===============
</TABLE>
See Notes to Financial Statements
S-6
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1996
1. Summary of Significant Accounting Policies
Variable Annuity Account B ("Account") is a separate account established by
Aetna Life Insurance and Annuity Company registered under the Investment
Company Act of 1940 as a unit investment trust. The Account is sold
exclusively for use with variable annuity contracts that may be entitled to
tax-deferred treatment under specific sections of the Internal Revenue Code
of 1986, as amended.
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.
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, 1996:
<TABLE>
<CAPTION>
<S> <C>
Aetna Variable Fund Insurance Management Series:
Aetna Income Shares [bullet] American Leaders Fund II
Aetna Variable Encore Fund [bullet] Growth Strategies Fund II
Aetna Investment Advisers Fund, Inc. [bullet] High Income Bond Fund II
Aetna GET Fund, Series B [bullet] International Equity Fund II
Aetna GET Fund, Series C [bullet] Prime Money Fund II
Aetna Ascent Variable Portfolio [bullet] U.S. Government Securities Fund II
Aetna Crossroads Variable Portfolio [bullet] Utility Fund II
Aetna Legacy Variable Portfolio Janus Aspen Series:
Aetna Variable Index Plus Portfolio [bullet] Aggressive Growth Portfolio
Alger American Funds: [bullet] Balanced Portfolio
[bullet] Balanced Portfolio [bullet] Flexible Income Portfolio
[bullet] Growth Portfolio [bullet] Growth Portfolio
[bullet] Income and Growth Portfolio [bullet] Short-Term Bond Portfolio
[bullet] Leveraged AllCap Portfolio [bullet] Worldwide Growth Portfolio
[bullet] MidCap Portfolio Lexington Fund Emerging Markets Fund
[bullet] Small Capitalization Portfolio Lexington Natural Resources Trust Fund
Calvert Responsibly Invested Balanced Portfolio MFS Funds:
Fidelity Investments Variable Insurance Products Fund: [bullet] Emerging Growth Series
[bullet] Equity-Income Portfolio [bullet] Research Series
[bullet] Growth Portfolio [bullet] Total Return Series
[bullet] High Income Portfolio [bullet] Value Series
[bullet] Overseas Portfolio [bullet] World Government Series
Fidelity Investments Variable Insurance Products Fund II: Neuberger & Berman Advisers Management Trust -
[bullet] Asset Manager Portfolio [bullet] Growth Portfolio
[bullet] Contrafund Portfolio Scudder Variable Life Investment Fund -
[bullet] Index 500 Portfolio [bullet] International Portfolio
[bullet] Investment Grade Bond Portfolio [bullet] TCI Portfolios, Inc.:
[bullet] Balanced Fund
[bullet] Growth Fund
[bullet] International Fund
</TABLE>
S-7
<PAGE>
Notes to Financial Statements - December 31, 1996 (continued):
b. Other
Investment transactions are accounted for on a trade date basis and
dividend income is recorded on the ex-dividend date. The cost of
investments sold is determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of Aetna Life Insurance and Annuity Company ("Company") which is
taxed as a life insurance company under the Internal Revenue Code of 1986,
as amended.
d. Annuity Reserves
Annuity reserves held in the Separate Accounts are computed for currently
payable contracts according to the Progressive Annuity, a49, 1971
Individual Annuity Mortality, 1971 Group Annuity Mortality, 83a, and 1983
Group Annuity Mortality tables using various assumed interest rates not to
exceed seven percent. Mortality experience is monitored by the Company.
Charges to annuity reserves for mortality experience are reimbursed to the
Company if the reserves required are less than originally estimated. If
additional reserves are required, the Company reimburses the Account.
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 (distributions in excess of net investment income) and accumulated
net realized gain (loss) on investments is included in net unrealized gain
(loss) in the Statements of Operations and Changes in Net Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the years ended December 31, 1996 and December
31, 1995 aggregated $972,030,476 and $365,025,974; $725,949,193 and
$495,934,611, respectively.
S-8
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1996 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets - Year Ended December 31, 1996
- --------------------------------------------------------------------------------------------------------------------------------
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund: $77,000,986 ($7,148,689) $96,146,932 $97,318,697 ($1,171,765)
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares: 4,527,825 (813,024) 19,585,006 18,826,116 758,890
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 5,358,925 (1,043,955) 78,888,315 76,637,102 2,251,213
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 11,247,847 (1,372,478) 16,403,009 13,386,571 3,016,438
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 1,055,590 (226,340) 915,330 681,610 233,720
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 46,499 (14,753) 361,353 354,510 6,843
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 235,037 (27,609) 317,740 277,917 39,823
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 257,055 (29,943) 362,140 312,870 49,270
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 363,749 (38,623) 406,948 384,407 22,541
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 10,290 (2,403) 139,030 133,438 5,592
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 775,351 (33,904) 244,368 332,405 (88,037)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 758,872 (394,360) 6,990,444 6,528,212 462,232
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Income and Growth Portfolio: 2,009,995 (55,929) 390,051 732,537 (342,486)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 61,186 (116,503) 4,991,495 4,605,949 385,546
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
MidCap Portfolio: 190,158 (166,087) 3,198,308 3,039,709 158,599
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: 184,900 (588,663) 31,506,275 29,929,826 1,576,449
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Calvert Responsibly Invested 44,676 (3,984) 141,022 137,780 3,242
Balanced Portfolio:
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable
Insurance Products Fund:
Equity-Income Portfolio: 940,850 (608,164) 4,030,269 3,343,817 686,452
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 1,412,110 (540,670) 2,600,136 2,280,711 319,425
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio: 178,909 (112,363) 1,318,057 1,318,142 (85)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-9
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1996 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets-Year Ended December 31, 1996 (Continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Net
Net Unrealized Increase
Gain (Loss) Net (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund: ($8,051,873) $59,979,314 $68,031,187 $4,966,306
Annuity contracts in accumulation $530,231,821 $644,728,031
Annuity contracts in payment period 62,550,401 89,732,216
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares: 3,224,044 379,633 (2,844,411) ($9,600,618)
Annuity contracts in accumulation 74,693,652 66,534,546
Annuity contracts in payment period 3,395,721 3,583,489
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 2,487,618 (540,607) (3,028,225) $22,111,260
Annuity contracts in accumulation 81,132,780 106,781,998
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 12,419,220 15,114,435 2,695,215 $602,270
Annuity contracts in accumulation 104,415,595 119,402,212
Annuity contracts in payment period 6,739,809 7,942,484
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 2,566,580 4,487,610 1,921,030 ($650,835)
Annuity contracts in accumulation 14,000,174 16,333,339
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 0 144,834 144,834 $9,097,853
Annuity contracts in accumulation 0 9,281,276
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 5,570 276,453 270,883 $4,773,151
Annuity contracts in accumulation 347,383 5,638,668
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 8,209 151,493 143,284 $4,409,627
Annuity contracts in accumulation 466,407 5,295,700
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 1,609 46,576 44,967 $5,470,774
Annuity contracts in accumulation 323,579 6,186,987
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 0 (4,046) (4,046) $1,975,940
Annuity contracts in accumulation (1) 1,985,372
- ------------------------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 1,644 (461,380) (463,024) $2,897,855
Annuity contracts in accumulation 689,050 3,777,291
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: (63,817) 2,349,936 2,413,753 $29,514,421
Annuity contracts in accumulation 10,790,085 43,545,003
- ------------------------------------------------------------------------------------------------------------------------------------
Income and Growth Portfolio: (6,769) (828,912) (822,143) $4,660,630
Annuity contracts in accumulation 1,021,520 6,471,587
- ------------------------------------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 32,561 220,810 188,249 $8,946,454
Annuity contracts in accumulation 1,954,796 11,419,728
- ------------------------------------------------------------------------------------------------------------------------------------
MidCap Portfolio: 7,193 682,424 675,231 $15,727,261
Annuity contracts in accumulation 3,257,565 19,842,727
- ------------------------------------------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: 46,283 (495,260) (541,543) $32,655,969
Annuity contracts in accumulation 25,464,317 58,751,429
- ------------------------------------------------------------------------------------------------------------------------------------
Calvert Responsibly Invested (13,512) (881) 12,631 $193,226
Balanced Portfolio:
Annuity contracts in accumulation 346,846 596,637
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable
Insurance Products Fund:
Equity-Income Portfolio: 966,600 5,773,475 4,806,875 $51,230,275
Annuity contracts in accumulation 15,424,209 72,480,497
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: (34,190) 3,258,300 3,292,490 $38,219,867
Annuity contracts in accumulation 15,225,262 57,928,484
- ------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio: 15,029 814,429 799,400 $12,636,277
Annuity contracts in accumulation 1,207,326 14,709,464
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-10
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1996 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets - Year Ended December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Overseas Portfolio: $75,181 ($91,010) $880,668 $813,434 $67,234
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio: 119,231 (54,259) 540,553 465,407 75,146
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 146,164 (428,708) 5,044,449 4,308,117 736,332
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 143,406 (203,362) 6,086,685 5,356,843 729,842
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 45,797 (42,799) 882,619 925,636 (43,017)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 857,970 (631,122) 6,368,961 4,596,688 1,772,273
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 405 (44,481) 119,084 103,727 15,357
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 1,647,290 (260,987) 5,863,283 5,644,702 218,581
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
International Equity Fund II: 10,567 (51,003) 250,169 236,027 14,142
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II: 289,134 (87,958) 12,400,851 12,398,826 2,025
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 367,608 (86,361) 5,011,311 5,085,345 (74,034)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Utility Fund II: 547,259 (186,219) 1,034,753 867,262 167,491
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 243,931 (266,292) 6,134,481 4,875,603 1,258,878
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 181,099 (68,277) 2,812,822 2,536,688 276,134
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 304,512 (43,754) 1,127,628 1,090,808 36,820
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 324,844 (141,840) 1,249,735 1,041,911 207,824
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: 79,326 (23,159) 2,910,009 2,872,811 37,198
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 642,050 (384,732) 4,899,145 3,899,490 999,655
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 0 (27,131) 1,463,410 1,431,864 31,546
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 15,653 (38,378) 2,192,808 1,809,743 383,065
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-11
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1996 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets-Year Ended December 31, 1996 (Continued)
- ------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss) Net
----------- Change in
Beginning End Unrealized
of Year of Year Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Overseas Portfolio: $51,434 $743,689 $692,255
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio: 98,360 484,182 385,822
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 122,841 6,210,754 6,087,913
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 70,864 2,241,040 2,170,176
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 11,466 175,829 164,363
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 2,916,888 8,810,467 5,893,579
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 3,614 733,393 729,779
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 229,008 1,022,582 793,574
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
International Equity Fund II: 43,172 307,602 264,430
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Prime Money Fund II: (1,182) 0 1,182
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 75,600 73,398 (2,202)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Utility Fund II: 799,746 1,730,892 931,146
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 1,164,909 534,823 (630,086)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 26,040 373,883 347,843
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 29,809 73,395 43,586
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 84,852 1,093,423 1,008,571
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: 1,330 (27,376) (28,706)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 253,639 5,151,123 4,897,484
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: (4,024) (66,591) (62,567)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 188,717 538,139 349,422
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1996 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets-Year Ended December 31, 1996 (Continued)
- ----------------------------------------------------------------------------------------------------------------
Net
Increase
(Decrease) Net Assets
In Net Assets ------------------------------------
from Unit Beginning End
Transactions of Year of Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Overseas Portfolio: $6,948,020
Annuity contracts in accumulation $2,011,591 $9,703,271
- ----------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio: $4,043,035
Annuity contracts in accumulation 1,362,489 5,931,464
- ----------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: $38,043,675
Annuity contracts in accumulation 11,953,242 56,538,618
- ----------------------------------------------------------------------------------------------------------------
Index 500 Portfolio: $22,367,490
Annuity contracts in accumulation 2,172,818 27,380,370
- ----------------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: $3,931,632
Annuity contracts in accumulation 705,701 4,761,677
- ----------------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: $26,548,788
Annuity contracts in accumulation 26,685,567 61,127,055
- ----------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: $6,301,239
Annuity contracts in accumulation 179,879 7,182,178
- ----------------------------------------------------------------------------------------------------------------
High Income Bond Fund II: $12,876,189
Annuity contracts in accumulation 11,876,490 27,151,137
- ----------------------------------------------------------------------------------------------------------------
International Equity Fund II: $4,073,916
Annuity contracts in accumulation 1,623,538 5,935,590
- ----------------------------------------------------------------------------------------------------------------
Prime Money Fund II: $1,765,443
Annuity contracts in accumulation 5,774,492 7,744,318
- ----------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: $2,942,870
Annuity contracts in accumulation 4,508,328 7,656,209
- ----------------------------------------------------------------------------------------------------------------
Utility Fund II: $6,514,735
Annuity contracts in accumulation 8,800,082 16,774,494
- ----------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: $19,085,222
Annuity contracts in accumulation 11,850,407 31,542,060
- ----------------------------------------------------------------------------------------------------------------
Balanced Portfolio: $10,311,561
Annuity contracts in accumulation 725,884 11,774,244
- ----------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: $3,237,811
Annuity contracts in accumulation 1,568,242 5,147,217
- ----------------------------------------------------------------------------------------------------------------
Growth Portfolio: $16,916,813
Annuity contracts in accumulation 2,567,942 20,884,154
- ----------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: $1,106,654
Annuity contracts in accumulation 749,298 1,920,611
- ----------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: $54,723,321
Annuity contracts in accumulation 5,594,913 66,472,691
- ----------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: $2,232,953
Annuity contracts in accumulation 341,159 2,515,960
- ----------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: $2,162,813
Annuity contracts in accumulation 1,879,209 4,751,784
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
S-12
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1996 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets - Year Ended December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Valuation Proceeds Cost of
Period from Investments
Dividends Deductions Sales Sold
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Funds:
Emerging Growth Series: $73,635 ($33,243) $190,630 $186,959
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Research Series: 94,710 (22,219) 253,406 258,774
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return Series: 87,973 (13,218) 140,628 132,113
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Value Series: 4,089 (372) 496 486
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
World Government Series: 0 (1,705) 19,663 19,513
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Advisers
Management Trust-
Growth Portfolio: 770,877 (98,063) 3,864,131 3,857,033
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life
Investment Fund-
International Portfolio: 276,128 (136,107) 4,557,311 4,016,790
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc.:
Balanced Fund: 67,198 (24,832) 247,893 231,495
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Growth Fund: 6,228,055 (611,968) 19,145,021 17,607,144
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
International Fund: 62,276 (41,867) 397,143 365,001
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Total Variable Annuity Account B $120,367,178 ($17,483,870) $365,025,974 $347,598,566
==================================================================================================================================
</TABLE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1996 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets-Year Ended December 31, 1996 (Continued)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss) Net
Net ----------- Change in
Realized Beginning End Unrealized
Gain (Loss) of Year of Year Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Funds:
Emerging Growth Series: $3,671 $0 ($85,796) ($85,796)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Research Series: (5,368) 0 204,764 204,764
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return Series: 8,515 0 72,010 72,010
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Value Series: 10 0 935 935
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
World Government Series: 150 0 9,304 9,304
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Advisers
Management Trust-
Growth Portfolio: 7,098 77,158 (6,666) (83,824)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life
Investment Fund-
International Portfolio: 540,521 652,411 1,510,449 858,038
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc.:
Balanced Fund: 16,398 16,540 145,325 128,785
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Growth Fund: 1,537,877 8,206,103 (1,588,390) (9,794,493)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
International Fund: 32,142 15,650 375,835 360,185
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------------------
Total Variable Annuity Account B $17,427,408 $28,746,944 $122,191,053 $93,444,109
==================================================================================================================================
</TABLE>
S-13
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1996 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets-Year Ended December 31, 1996 (Continued)
- ------------------------------------------------------------------------------------------------------------------
Net
Increase
(Decrease) Net Assets
In Net Assets ------------------------------------
from Unit Beginning End
Transactions of Year of Year
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MFS Funds:
Emerging Growth Series: $9,039,741
Annuity contracts in accumulation $0 $8,998,008
- ------------------------------------------------------------------------------------------------------------------
Research Series: $6,504,625
Annuity contracts in accumulation 0 6,776,512
- ------------------------------------------------------------------------------------------------------------------
Total Return Series: $4,061,090
Annuity contracts in accumulation 0 4,216,370
- ------------------------------------------------------------------------------------------------------------------
Value Series: $204,179
Annuity contracts in accumulation 0 208,841
- ------------------------------------------------------------------------------------------------------------------
World Government Series: $400,164
Annuity contracts in accumulation 0 407,913
- ------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Advisers
Management Trust-
Growth Portfolio: ($710,088)
Annuity contracts in accumulation 8,356,574 8,242,574
- ------------------------------------------------------------------------------------------------------------------
Scudder Variable Life
Investment Fund-
International Portfolio: ($54,117)
Annuity contracts in accumulation 10,565,664 12,050,127
- ------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc.:
Balanced Fund: $2,313,929
Annuity contracts in accumulation 489,878 2,991,356
- ------------------------------------------------------------------------------------------------------------------
Growth Fund: ($7,301,710)
Annuity contracts in accumulation 54,311,401 44,369,162
- ------------------------------------------------------------------------------------------------------------------
International Fund: $3,691,239
Annuity contracts in accumulation 602,619 4,706,594
- ------------------------------------------------------------------------------------------------------------------
Total Variable Annuity Account B $504,121,195 $1,130,935,704 $1,848,811,724
==================================================================================================================
</TABLE>
S-14
<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, 1996, and the related statements of operations and 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, 1996. 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, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company Variable Annuity Account B
as of December 31, 1996, the results of its operations and the 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, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 14, 1997
S-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 F-3
Consolidated Balance Sheets as of December 31, 1996
and 1995 F-4
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiaries as of December 31, 1996 and 1995,
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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 4, 1997
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Revenue:
Premiums $133.6 $212.7 $191.6
Charges assessed against policyholders 396.5 318.9 279.0
Net investment income 1,045.6 1,004.3 917.2
Net realized capital gains 19.7 41.3 1.5
Other income 45.4 42.0 10.3
------- ------- -------
Total revenue 1,640.8 1,619.2 1,399.6
------- ------- -------
Benefits and expenses:
Current and future benefits 968.6 997.2 921.5
Operating expenses 342.2 310.8 225.7
Amortization of deferred policy
acquisition costs 69.8 48.0 31.5
Severance and facilities charges 61.3 -- --
------- ------- -------
Total benefits and expenses 1,441.9 1,356.0 1,178.7
------- ------- -------
Income before income taxes 198.9 263.2 220.9
Income taxes 57.8 87.3 75.6
------- ------- -------
Net income $141.1 $175.9 $145.3
======= ======= =======
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
December 31,
-------------------------
1996 1995
---- ----
Assets
- ------
Investments:
Debt securities, available for sale:
(amortized cost: $12,539.1 and $11,923.7) $12,905.5 $12,720.8
Equity securities, available for sale:
Non-redeemable preferred stock
(cost: $107.6 and $51.3) 119.0 57.6
Investment in affiliated mutual funds
(cost: $77.3 and $173.4) 81.1 191.8
Common stock (cost: $0.0 and $6.9) 0.3 8.2
Short-term investments 34.8 15.1
Mortgage loans 13.0 21.2
Policy loans 399.3 338.6
--------- ---------
Total investments 13,553.0 13,353.3
Cash and cash equivalents 459.1 568.8
Accrued investment income 159.0 175.5
Premiums due and other receivables 26.6 37.3
Deferred policy acquisition costs 1,515.3 1,341.3
Reinsurance loan to affiliate 628.3 655.5
Other assets 33.7 26.2
Separate Account assets 15,318.3 10,987.0
--------- ---------
Total assets $31,693.3 $27,144.9
========= =========
Liabilities and Shareholder's Equity
- -------------------------------------
Liabilities:
Future policy benefits $3,617.0 $3,594.6
Unpaid claims and claim expenses 28.9 27.2
Policyholders' funds left with the Company 10,663.7 10,500.1
--------- ---------
Total insurance reserve liabilities 14,309.6 14,121.9
Other liabilities 354.7 257.2
Income taxes:
Current 20.7 26.2
Deferred 80.5 169.6
Separate Account liabilities 15,318.3 10,987.0
--------- ---------
Total liabilities 30,083.8 25,561.9
--------- ---------
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 418.0 407.6
Net unrealized capital gains 60.5 132.5
Retained earnings 1,128.2 1,040.1
--------- ---------
Total shareholder's equity 1,609.5 1,583.0
--------- ---------
Total liabilities and shareholder's equity $31,693.3 $27,144.9
========= =========
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
Years Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
Shareholder's equity, beginning of year $1,583.0 $1,088.5 $1,246.7
Capital contributions 10.4 -- --
Net change in unrealized capital gains (losses) (72.0) 321.5 (303.5)
Net income 141.1 175.9 145.3
Other changes (49.5) -- --
Common stock dividends declared (3.5) (2.9) --
-------- -------- --------
Shareholder's equity, end of year $1,609.5 $1,583.0 $1,088.5
======== ======== ========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $141.1 $175.9 $145.3
Adjustments to reconcile net income to net
cash (used for) provided by operating activities:
Decrease (increase) in accrued investment income 16.5 (33.3) (17.5)
Decrease in premiums due and other receivables 1.6 25.4 1.3
Increase in policy loans (60.7) (89.9) (46.0)
Increase in deferred policy acquisition costs (174.0) (177.0) (105.9)
Decrease in reinsurance loan to affiliate 27.2 34.8 27.8
Net increase in universal life account balances 243.2 393.4 164.7
(Decrease) increase in other insurance
reserve liabilities (211.5) 79.0 75.1
Net increase in other liabilities and other assets 3.1 13.0 52.5
Decrease in income taxes (26.7) (4.5) (10.3)
Net accretion of discount on investments (68.0) (66.4) (77.9)
Net realized capital gains (19.7) (41.3) (1.5)
Other, net 1.1 -- (1.0)
-------- -------- --------
Net cash (used for) provided by operating activities (126.8) 309.1 206.6
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,182.2 4,207.2 3,593.8
Equity securities 190.5 180.8 93.1
Mortgage loans 8.7 10.7 --
Limited partnership -- 26.6 --
Investment maturities and collections of:
Debt securities available for sale 885.2 583.9 1,289.2
Short-term investments 35.0 106.1 30.4
Cost of investment purchases in:
Debt securities available for sale (6,534.3) (6,034.0) (5,621.4)
Equity securities (118.1) (170.9) (162.5)
Short-term investments (54.7) (24.7) (106.1)
Mortgage loans -- (21.3) --
Limited partnership -- -- (25.0)
Other, net (17.6) -- --
-------- -------- --------
Net cash used for investing activities (423.1) (1,135.6) (908.5)
-------- -------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,579.5 1,884.5 1,737.8
Withdrawals of investment contracts (1,146.2) (1,109.6) (948.7)
Additional capital contributions 10.4 -- --
Dividends paid to shareholder (3.5) (2.9) --
-------- -------- --------
Net cash provided by financing activities 440.2 772.0 789.1
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (109.7) (54.5) 87.2
Cash and cash equivalents, beginning of year 568.8 623.3 536.1
-------- -------- --------
Cash and cash equivalents, end of year $459.1 $568.8 $623.3
======== ======== ========
Supplemental cash flow information:
Income taxes paid, net $85.5 $92.8 $85.9
======== ======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
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 individual life insurance.
Financial services products include annuity contracts that offer a variety
of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403,
408 and 457, and non-qualified annuity contracts. These contracts may be
deferred or immediate ("payout annuities"). Financial services also include
investment advisory services, financial planning and pension plan
administrative services.
Individual life insurance products include universal life, variable
universal life, traditional whole life and term insurance.
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 Holdings, Inc.
("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement
Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have
been made to 1995 and 1994 financial information to conform to the 1996
presentation.
Future Application of Accounting Standards
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was
issued in June 1996. This statement provides accounting and reporting
standards for transfers of financial assets and extinguishments of
liabilities. Transactions covered by this statement would include
securitizations, sales of partial interests in assets, repurchase
agreements and securities lending. This statement requires that after a
transfer of financial assets, an entity would recognize any assets it
controls and liabilities it has incurred. An entity would not recognize
assets when control has been surrendered or liabilities have been
satisfied. Portions of this statement are effective for each of 1997 and
1998 financial statements and early adoption is not permitted. The Company
does not expect adoption of this statement to have a material effect on its
financial position or results of operations.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
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 Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased.
Investments
All of the Company's debt and equity securities are classified as available
for sale and carried at fair value. These securities are written down (as
realized capital losses) for other than temporary declines in value.
Unrealized capital gains and losses related to available for sale other
than amounts allocable to experience rated contractholders, are reflected
in shareholder's equity, net of related taxes.
Fair values for debt and equity securities are based on quoted market
prices or dealer quotations. Where quoted market prices or dealer
quotations are not available, fair values are measured utilizing quoted
market prices for similar securities or by using discounted cash flow
methods. Cost for mortgage-backed securities is adjusted for unamortized
premiums and discounts, which are amortized using the interest method over
the estimated remaining term of the securities, adjusted for anticipated
prepayments.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds primarily 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 are carried at unpaid principal balances,
net of impairment reserves. Sales of mortgage loans are recorded on the
closing date.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which
approximates amortized cost.
F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that qualify as
hedges are deferred and recognized as an adjustment to the hedged asset or
liability. Deferred gains or losses on such futures contracts are amortized
over the life of the acquired asset or liability as a yield adjustment or
through net realized capital gains or losses upon disposal of an asset.
Changes in the fair value of futures contracts that do not qualify as
hedges are recorded in net realized capital gains or losses. Hedge
designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying
the hedge, and that high correlation be maintained throughout the hedge
period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and
excess gains and losses on the hedging instrument are reflected in net
realized capital gains or losses.
Swap agreements which are designated as interest rate risk management
instruments at inception are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such
agreements is reported in net investment income. There is no recognition in
the Consolidated Balance Sheets for changes in the fair value of the
agreement.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs,
all of which vary with and are primarily related to the production of new
and renewal business, consist principally of commissions, certain expenses
of underwriting and issuing contracts, and certain agency expenses. For
fixed ordinary life contracts, such costs are amortized over expected
premium-paying periods (up to 20 years). For universal life and certain
annuity contracts, such costs are amortized in proportion to estimated
gross profits and adjusted to reflect actual gross profits over the life of
the contracts (up to 20 years).
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross
profits are not adequate to cover related losses and expenses.
Insurance Reserve Liabilities
Future Policy Benefits include reserves for universal life, immediate
annuities with life contingent payouts and traditional life insurance
contracts. Reserves for universal life contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon.
Reserves for immediate annuities with life contingent payouts and
traditional life insurance contracts are computed on the basis of assumed
investment yield, mortality, and expenses, including a margin for adverse
deviations. Such assumptions generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 12.00%.
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.
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Policyholders' Funds Left With the Company include reserves for deferred
annuity investment contracts and immediate annuities without life
contingent payouts. Reserves on such contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon (rates
range from 4.00% to 7.00%), net of adjustments for investment experience
that the Company is entitled to reflect in future credited interest.
Reserves on contracts subject to experience rating reflect the rights of
contractholders, plan participants and the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges,
actuarial margin and other fees are recorded as revenue in charges assessed
against policyholders. Other amounts received for these contracts are
reflected as deposits and are not recorded as revenue. Life insurance
premiums, other than premiums for universal life and certain annuity
contracts, are recorded as premium revenue when due. Related policy
benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the
contracts. When annuity payments begin under contracts with life contingent
payouts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity, reflected as an offsetting amount in both premiums and current and
future benefits in the Consolidated Statements of Income.
Separate Accounts
Assets held under variable universal 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, the Aetna Series Fund Inc., or the
Aetna Generation Funds (collectively, "Funds"), 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. Since the Company bears
the investment risk where the contract is held to maturity, the assets of
the Separate Account supporting the guaranteed interest option are carried
at an amortized cost of $515.6 million for 1996 (fair value $523.0 million)
and $322.2 million for 1995 (fair value $343.9 million). Reserves relating
to the guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 4.10% to 8.00% in 1996 and 4.50% to
8.38% in 1995.
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Separate Accounts assets and liabilities are shown as separate captions in
the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains and losses of the Separate Accounts
are not reflected in the Consolidated Statements of Income (with the
exception of realized capital gains and 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.
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 expenses/benefits result from changes during the year
in cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $ 1,072.4 $ 20.5 $ 4.5 $ 1,088.4
States, municipalities and political
subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other 141.5 3.0 -- 144.5
--------- --------- --------- ---------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
--------- --------- --------- ---------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
--------- --------- --------- ---------
Total residential mortgage-
backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-
backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
--------- --------- --------- ---------
Total Debt Securities $12,539.1 $ 432.6 $ 66.2 $12,905.5
========= ========= ========= =========
</TABLE>
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
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. government and government
agencies and authorities $ 539.5 $ 47.5 $ -- $ 587.0
States, municipalities and political
subdivisions 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial 2,764.4 110.3 2.1 2,872.6
Food & fiber 310.8 20.8 0.6 331.0
Healthcare & consumer products 766.0 59.2 0.2 825.0
Media & broadcast 191.7 10.0 -- 201.7
Natural resources 186.9 12.6 0.2 199.3
Transportation & capital goods 602.4 46.7 0.2 648.9
Utilities 454.4 27.8 1.0 481.2
Other 119.9 10.2 -- 130.1
--------- --------- --------- ---------
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
Utilities 236.3 32.9 269.2
Other 749.9 60.5 3.5 806.9
--------- --------- --------- ---------
Total foreign securities 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Pass-throughs 556.7 99.2 1.8 654.1
Collateralized mortgage obligations 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
Other asset-backed securities 961.2 35.5 0.5 996.2
--------- --------- --------- ---------
Total Debt Securities $11,923.7 $ 811.6 $ 14.5 $12,720.8
========= ========= ========= =========
</TABLE>
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
At December 31, 1996 and 1995, net unrealized appreciation of $366.4
million and $797.1 million, respectively, on available for sale debt
securities included $288.5 million and $619.1 million, respectively,
related to experience rated contracts, which were not reflected in
shareholder's equity but in Future Policy Benefits and Policyholders' Funds
Left With the Company.
The amortized cost and fair value of debt securities for the year ended
December 31, 1996 are shown below by contractual maturity. Actual
maturities may differ from contractual maturities because securities may be
restructured, called, or prepaid.
Amortized Fair
Cost Value
--------- -----
(millions)
Due to mature:
One year or less $ 424.4 $ 425.7
After one year through five years 2,162.4 2,194.2
After five years through ten years 2,467.4 2,509.6
After ten years 2,568.4 2,675.4
Mortgage-backed securities 4,028.7 4,204.3
Other asset-backed securities 887.8 896.3
--------- ---------
Total $12,539.1 $12,905.5
========= =========
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Collateral, primarily cash, 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, 1996 and 1995, the Company had loaned
securities (which are reflected as invested assets) with a market value of
approximately $444.7 million and $264.5 million, respectively.
At December 31, 1996 and 1995, debt securities carried at $7.6 million and
$7.4 million, respectively, were on deposit as required by regulatory
authorities.
The carrying value of non-income producing investments was $0.9 million and
$0.1 million at December 31, 1996 and 1995, respectively.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 1996.
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Included in the Company's total debt securities were residential
collateralized mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
Fair Amortized Fair Amortized
Value Cost Value Cost
----- ---- ----- ----
(millions)
<S> <C> <C> <C> <C>
Total residential CMOs (1) $2,309.0 $2,227.8 $2,549.4 $2,383.9
======== ======== ======== ========
Percentage of total:
Supporting experience rated products 84.2% 85.3%
Supporting remaining products 15.8% 14.7%
-------- --------
100.0% 100.0%
======== ========
</TABLE>
(1) At December 31, 1996 and 1995, approximately 71% and 81%,
respectively, of the Company's residential CMO holdings were backed by
government agencies such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees
of risk from changes in interest rates and, for nonagency-backed CMOs,
defaults. The principal risks inherent in holding CMOs are prepayment and
extension risks related to dramatic decreases and increases in interest
rates resulting in the repayment of principal from the underlying mortgages
either earlier or later than originally anticipated.
At December 31, 1996 and 1995, approximately 68% and 79%, respectively, of
the Company's CMO holdings were in planned amortization class ("PAC") and
sequential structure tranches, which are subject to less prepayment and
extension risk than other types of CMO instruments. At December 31, 1996
and 1995, approximately 3% of the Company's CMO holdings were in the
interest-only ("IOs") and principal-only ("POs") tranches, which are
subject to more prepayment and extension risks than other types of CMO
instruments. Remaining CMO holdings are in other tranches that have
prepayment and extension risks which fall between the degree of risk
associated with PACs and sequentials, and IOs and POs.
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in available for sale equity securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ---------- ---------- -----
(millions)
1996
Equity Securities $ 184.9 $ 16.3 $ 0.8 $ 200.4
======= ======= ======= =======
1995
Equity Securities $ 231.6 $ 27.2 $ 1.2 $ 257.6
======= ======= ======= =======
3. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 13.0 $ 13.2 $ 21.2 $ 21.9
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 1,014.1 $ 1,028.8 $ 989.1 $ 1,001.2
Without a fixed maturity 9,649.6 9,427.6 9,511.0 9,298.4
</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 future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot
be substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the instrument. In
evaluating the Company's management of interest rate, price and liquidity
risks, the fair values of all assets and liabilities should be taken into
consideration, not only those presented above.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar
loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans.
Investment contract liabilities (included in Policyholders' Funds Left With
the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under
such contracts to delay payment of withdrawals which may ultimately result
in paying an amount different than that determined to be payable on demand.
Off-Balance-Sheet and Other Financial Instruments (including Derivative
Financial Instruments)
The Company uses off-balance-sheet and other financial instruments
primarily to manage portfolio risks, including interest rate,
prepayment/call, credit, price, and liquidity risks. In 1996, Treasury
futures contracts were used to manage interest rate risk in the Company's
bond portfolio and stock index futures contracts were used to manage price
risk in the Company's equity portfolio. In 1996 and 1995, interest rate
swaps and forward commitments to enter into interest rate swaps,
respectively, were also used to manage interest rate risk in the Company's
bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell
underlying assets at a specified future date. Futures contracts trade on
organized exchanges and, therefore, have minimal credit risk. Cash
settlements are made daily based on changes in the prices of the underlying
assets. There were no futures contracts open as of December 31, 1996 and
1995.
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to
exchange interest amounts calculated by reference to an agreed notional
principal amount. Generally, no cash is exchanged at the outset of the
contract and no principal payments are made. A single net payment is
usually made by one counterparty at each due date or upon termination of
the contract. The Company would be exposed to credit-related losses in the
event of nonperformance by counterparties to financial instruments,
however, the Company controls its exposure to credit risk through credit
approvals, credit limits and regular monitoring procedures. The credit
exposure of interest rate swaps is represented by the fair value (market
value) of contracts with a positive fair value (market value) at the
reporting date. There were no interest rate swap agreements open as of
December 31, 1996. At December 31, 1995, the Company had an open forward
swap agreement with a notional amount of $100.0 million and a fair value of
$0.1 million.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1996.
As of December 31, 1996 and 1995, there were no option contracts
outstanding.
The Company also had investments in certain debt instruments with
derivative characteristics, including those whose market value is at least
partially determined by, among other things, levels of or changes in
domestic and/or foreign interest rates (short or long term), exchange
rates, prepayment rates, equity markets or credit ratings/spreads. The
amortized cost and fair value of these securities, included in the debt
securities portfolio, as of December 31, 1996 was as follows:
Amortized Fair
Cost Value
---- -----
(millions)
Residential collateralized mortgage obligations $ 2,227.8 $ 2,309.0
Principal-only strips (included above) 44.5 53.3
Interest-only strips (included above) 10.3 22.8
Other structured securities with derivative
characteristics (1) 126.3 129.2
(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.
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
1996 1995 1994
---- ---- ----
(millions)
Debt securities $ 945.3 $ 891.5 $ 823.9
Preferred stock 5.9 4.2 3.9
Investment in affiliated mutual funds 14.3 14.9 5.2
Mortgage loans 2.2 1.4 1.4
Policy loans 18.4 13.7 11.5
Reinsurance loan to affiliate 44.1 46.5 51.5
Cash equivalents 29.4 38.9 29.5
Other 2.1 8.4 6.7
-------- -------- --------
Gross investment income 1,061.7 1,019.5 933.6
Less investment expenses (16.1) (15.2) (16.4)
-------- -------- --------
Net investment income $1,045.6 $1,004.3 $ 917.2
======== ======== ========
Net investment income includes amounts allocable to experience rated
contractholders of $787.6 million, $744.2 million and $677.1 million for
the years ended December 31, 1996, 1995 and 1994, respectively. Interest
credited to contractholders is included in Current and Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995,
the Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services,
Inc., to Aetna Retirement Services, Inc. (the Company's former parent).
The amount of dividends that may be paid to the shareholder in 1997 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$71.1 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus those
amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which differ in certain respects
from generally accepted accounting principles. Statutory net income was
$57.8 million, $70.0 million and $64.9 million for the years ended December
31, 1996, 1995 and 1994, respectively. Statutory capital and surplus was
$713.6 million and $670.7 million as of December 31, 1996 and 1995,
respectively.
As of December 31, 1996 the Company does not utilize any statutory
accounting practices which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains on investments were as follows:
1996 1995 1994
---- ---- ----
(millions)
Debt securities $ 11.1 $ 32.8 $ 1.0
Equity securities 8.6 8.3 0.2
Mortgage loans -- 0.2 0.3
-------- -------- -------
Pretax realized capital gains $ 19.7 $ 41.3 $ 1.5
======== ======= =======
After tax realized capital gains $ 13.0 $ 25.8 $ 1.0
======== ======= =======
Net realized capital gains of $53.1 million and $61.1 million for 1996 and
1995, respectively, and net realized capital losses of $29.1 million for
1994, allocable to experience rated contracts, were deducted from net
realized capital gains (losses) and an offsetting amount was reflected in
policyholder funds' left with the Company. Net unamortized gains were $53.3
million and $7.3 million at December 31, 1996 and 1995, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities for other than temporary declines in value are included in net
realized capital gains (losses) and amounted to $(3.3) million, $3.1
million and $1.1 million, of which $(3.2) million, $2.2 million and $0.8
million were allocable to experience rated contractholders, for the years
ended December 31, 1996, 1995 and 1994, respectively. There was no
valuation reserve for mortgage loans at December 31, 1996 or at December
31, 1995.
Proceeds from the sale of available for sale debt securities and the
related gross gains and losses were as follows:
1996 1995 1994
---- ---- ----
(millions)
Proceeds on Sales $5,182.2 $4,207.2 $3,593.8
Gross gains 24.3 44.6 26.6
Gross losses 13.2 11.8 25.6
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in shareholder's equity related to changes in unrealized capital
gains (losses), (excluding those related to experience rated
contractholders), were as follows:
1996 1995 1994
---- ---- ----
(millions)
Debt securities $ (100.1) $ 255.9 $ (242.1)
Equity securities (10.5) 27.3 (13.3)
Limited partnership -- 1.8 (1.8)
-------- -------- --------
(110.6) 285.0 (257.2)
Deferred income taxes (See Note 8) (38.6) (36.5) 46.3
-------- -------- --------
Net change in unrealized
capital gains (losses) $ (72.0) $ 321.5 $ (303.5)
======== ======== ========
Net unrealized capital gains allocable to experience rated contracts of
$245.2 million and $43.3 million at December 31, 1996 and $515.0 million
and $104.1 million at December 31, 1995 are reflected on the Consolidated
Balance Sheets in Policyholders' Funds Left With the Company and Future
Policy Benefits, respectively, and are not included in shareholder's
equity.
Shareholder's equity included the following unrealized capital gains
(losses), which are net of amounts allocable to experience rated
contractholders, at December 31:
1996 1995 1994
---- ---- ----
(millions)
Debt securities
Gross unrealized capital gains $101.7 $179.3 $ 27.4
Gross unrealized capital losses (23.8) (1.3) (105.2)
------ ------ --------
77.9 178.0 (77.8)
Equity securities
Gross unrealized capital gains 16.3 27.2 6.5
Gross unrealized capital losses (0.8) (1.2) (7.9)
------ ------ --------
15.5 26.0 (1.4)
Limited Partnership -- -- --
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- -- (1.8)
------ ------ --------
-- -- (1.8)
Deferred income taxes (See Note 8) 32.9 71.5 108.0
------ ------ --------
Net unrealized capital gains (losses) $ 60.5 $132.5 $(189.0)
====== ====== ========
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, included
the following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased Corporate
(Millions) Severance Write-Off Property Other Allocation Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial Services $ 29.1 $ 1.0 $ 1.3 $ 1.7 $ -- $ 33.1
Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2
Corporate Allocation -- -- -- -- 14.0 14.0
---------------------------------------------------------------
Total Company $ 41.6 $ 1.4 $ 1.8 $ 2.5 $ 14.0 $ 61.3
- --------------------------------------------------------------------------------------------
</TABLE>
In the third quarter of 1996, the Company recorded a $30.7 million after
tax ($47.3 million pretax) charge principally related to actions taken or
expected to be taken to improve its cost structure relative to its
competitors. The severance portion of the charge is based on a plan to
eliminate 702 positions (primarily customer service, sales and information
technology support staff). The facilities portion of the charge is based on
a plan to consolidate sales/service field offices.
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions
taken or expected to be taken to reduce the level of corporate expenses and
other costs previously absorbed by Aetna's property-casualty operations.
The cost allocated to the Company associated with this charge was $9.1
million after tax ($14.0 million pretax).
The activity during 1996 within the severance and facilities reserve
(pretax, in millions) and the number of positions eliminated related to
such actions were as follows:
Reserve Positions
---------------------------------------------------------------------------
Beginning of year $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
-------------------------------
End of year $ 47.9 524
---------------------------------------------------------------------------
(1) Includes $8.0 million of severance-related actions and $4.1 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed
by March 31, 1998. The corporate allocation actions and the vacating of the
leased office space are expected to be substantially completed in 1997.
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return and
combined Connecticut and New York state income tax returns 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 used in the consolidated
returns.
Income taxes for the years ended December 31, consist of:
1996 1995 1994
---- ---- ----
(millions)
Current taxes (benefits):
Income Taxes:
Federal $ 50.9 $ 82.9 $ 78.7
State 3.7 3.2 4.4
Net realized capital gains (losses) 25.3 28.5 (33.2)
------ ------ ------
79.9 114.6 49.9
------ ------ ------
Deferred taxes (benefits):
Income Taxes:
Federal (3.5) (14.4) (8.0)
Net realized capital gains (losses) (18.6) (12.9) 33.7
------ ------ ------
(22.1) (27.3) 25.7
------ ------ ------
Total $ 57.8 $ 87.3 $ 75.6
====== ====== ======
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes for the following
reasons:
1996 1995 1994
---- ---- ----
(millions)
Income before income taxes $198.9 $263.2 $220.9
Tax rate 35% 35% 35%
------ ------ ------
Application of the tax rate 69.6 92.1 77.3
------ ------ ------
Tax effect of:
State income tax, net of federal benefit 2.4 2.1 2.9
Excludable dividends (8.7) (9.3) (8.6)
Other, net (5.5) 2.4 4.0
------ ------ ------
Income taxes $ 57.8 $ 87.3 $ 75.6
====== ====== ======
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1996 1995
---- ----
(millions)
Deferred tax assets:
Insurance reserves $ 344.6 $ 290.4
Unrealized gains allocable to
experience rated contracts 100.8 216.7
Investment losses 7.5 7.3
Postretirement benefits other
than pensions 27.0 7.7
Deferred compensation 25.0 18.9
Pension 7.6 5.7
Other 29.3 9.2
------- -------
Total gross assets 541.8 555.9
Deferred tax liabilities:
Deferred policy acquisition costs 482.1 433.0
Market discount 6.8 4.4
Net unrealized capital gains 133.7 288.2
Other (0.3) (0.1)
------- -------
Total gross liabilities 622.3 725.5
------- -------
Net deferred tax liability $ 80.5 $ 169.6
======= =======
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. Valuation allowances are provided when it is
not considered more likely than not that deferred tax assets will be
realized. As of December 31, 1996 and 1995, no valuation allowances were
required for unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax
return purposes under the Deficit Reduction Act of 1984. The balance in
such account was approximately $17.2 million at December 31, 1996. 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.
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1990. Discussions
are being held with the Service with respect to proposed adjustments.
Management believes there are adequate defenses against, or sufficient
reserves to provide for, any such adjustments. The Service has commenced
its examinations for the years 1991 through 1994.
9. Benefit Plans
Employee Pension Plans - The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to the amounts that are tax-deductible. As of
December 31, 1996, Aetna's accrued pension cost has been allocated to its
subsidiaries, including the Company, under an allocation based on eligible
salaries. Data on a separate company basis regarding the proportionate
share of the projected benefit obligation and plan assets is not available.
The accumulated benefit obligation and plan assets are recorded by Aetna.
As of the measurement date (i.e., September 30), the accumulated plan
assets exceeded accumulated plan benefits. Allocated pretax charges to
operations for the pension plan (based on the Company's total salary cost
as a percentage of Aetna's total salary cost) were $4.3 million, $6.1
million and $5.5 million for the years ended December 31, 1996, 1995 and
1994, respectively.
Employee Postretirement Benefits - In addition to providing pension
benefits, Aetna currently provides health care and life insurance benefits,
subject to certain caps, for retired employees. A comprehensive medical and
dental plan is offered to all full-time employees retiring at age 50 with
15 years of service or at age 65 with 10 years of service. Retirees are
generally required to contribute to the plans based on their years of
service with Aetna. The costs to the Company associated with the Aetna
postretirement plans for 1996, 1995 and 1994 were $1.8 million, $1.4
million and $1.0 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$77.7 million of accrued liabilities, primarily related to the pension and
postretirement benefit plans described above, that had been previously
recorded by Aetna. The after tax amount of this transfer (approximately
$50.5 million) is reported as a reduction in retained earnings.
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. As of the measurement
date (i.e., September 30), the accumulated plan assets exceeded accumulated
plan benefits.
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
Agent Postretirement Benefits - The Company, in conjunction with Aetna,
also provides certain postretirement health care and life insurance
benefits for certain agents. The costs to the Company associated with the
agents' postretirement plans for 1996, 1995 and 1994 were $0.7 million,
$0.8 million and $0.7 million, respectively.
Incentive Savings Plan - Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which
may be invested in common stock of Aetna or certain other investments, are
matched, up to 5% of compensation, by Aetna. Pretax charges to operations
for the incentive savings plan were $5.4 million, $4.9 million and $3.3
million in 1996, 1995 and 1994, respectively.
Stock Plans - Aetna has a stock incentive plan that provides for stock
options, deferred contingent common stock or equivalent cash awards or
restricted stock to certain key employees. Executive and middle management
employees may be granted options to purchase common stock of Aetna at or
above the market price on the date of grant. Options generally become 100%
vested three years after the grant is made, with one-third of the options
vesting each year. Aetna does not recognize compensation expense for stock
options granted at or above the market price on the date of grant under its
stock incentive plans. In addition, executives may be granted incentive
units which are rights to receive common stock or an equivalent value in
cash. The incentive units may vest within a range from 0% to 175% at the
end of a four year period based on the attainment of performance goals. The
costs to the Company associated with the Aetna stock plans for 1996, 1995
and 1994, were $8.1 million, $6.3 million and $1.7 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$1.1 million of deferred tax benefits related to stock options. This amount
is reported as an increase in retained earnings.
10. 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 .10% to
1.90% 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 .85% of their average daily net assets. The Company
also receives fees (expressed as a percentage of the average daily net
assets) from the variable life and annuity mutual funds and The Aetna
Series Fund for providing administration services, and from The Aetna
Series Fund for providing 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
$185.4 million, $128.1 million and $104.6 million in 1996, 1995 and 1994,
respectively. The Company may waive advisory fees at its discretion.
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting
as Subadvisor of all affiliated mutual funds and of most of the General
Account assets. Fees paid by the Company to Aeltus, included in both
Charges Assessed Against Policyholders and Net Investment Income, on an
annual basis, range from .06% to .55% of the average daily net assets under
management. For the year ended December 31, 1996, the Company paid $16.0
million in such fees.
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. An additional $6.1 million commission, paid by
the Company to Aetna Life in 1996, was capitalized as deferred policy
acquisition costs. The Company maintained insurance reserves of $628.3
million and $655.5 million as of December 31, 1996 and 1995, 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 $625.3 million and $663.5 million as of December 31, 1996 and 1995,
respectively, and is based upon the fair value of the underlying assets.
Premiums of $25.3 million, $28.0 million and $32.8 million and current and
future benefits of $39.5 million, $43.0 million and $43.8 million were
assumed in 1996, 1995 and 1994, respectively.
Investment income of $44.1 million, $46.5 million and $51.5 million was
generated from the reinsurance loan to affiliate in 1996, 1995 and 1994,
respectively. Net income of approximately $8.1 million, $18.4 million and
$25.1 million resulted from this agreement in 1996, 1995 and 1994,
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 $28.9 million and
$28.0 million were maintained for this contract as of December 31, 1996 and
1995, 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 $5.2
million, $3.2 million and $1.3 million for 1996, 1995 and 1994,
respectively.
F-27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1995 or
1994.
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995,
the Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services,
Inc., to Aetna Retirement Services, Inc. (the Company's former parent).
Premiums due and other receivables include $2.8 million and $5.7 million
due from affiliates in 1996 and 1995, respectively. Other liabilities
include $10.7 million and $12.4 million due to affiliates for 1996 and
1995, 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.
11. 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-28
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 10 above.
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
------ --------- --------- ------
(millions)
1996
Premiums:
Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
======= ======= ======= =======
Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6
======= ======= ======= =======
1995
Premiums:
Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
======= ======= ======= =======
Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7
======= ======= ======= =======
1994
Premiums:
Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health Insurance 9.3 9.3 -- --
Annuities 137.3 -- 0.2 137.5
======= ======= ======= =======
Total earned premiums $ 173.9 $ 15.3 $ 33.0 $ 191.6
======= ======= ======= =======
12. 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 the value
of the securities underlying the commitments. At December 31, 1996, the
Company had commitments to purchase investments of $17.9 million. The fair
value of the investments at December 31, 1996 approximated $18.3 million.
F-29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities (Continued)
Litigation
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in liability for amounts
material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
F-30
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance.
Summarized financial information for the Company's principal operations was
as follows:
(Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue:
Financial Services $ 1,195.1 $ 1,211.3 $ 1,013.5
Individual Life Insurance 445.7 407.9 386.1
---------------------------------
Total revenue $ 1,640.8 $ 1,619.2 $ 1,399.6
- --------------------------------------------------------------------------------
Income before income taxes: (2)
Financial Services $ 129.9 $ 160.1 $ 122.5
Individual Life Insurance 83.0 103.1 98.4
---------------------------------
Total income before income taxes $ 212.9 $ 263.2 $ 220.9
- --------------------------------------------------------------------------------
Net income: (2)
Financial Services $ 94.3 $ 113.8 $ 85.5
Individual Life Insurance 55.9 62.1 59.8
---------------------------------
Net income $ 150.2 $ 175.9 $ 145.3
- --------------------------------------------------------------------------------
Assets under management: (3)
Financial Services $27,268.1 $22,534.4 $18,122.9
Individual Life Insurance 2,830.5 2,590.9 2,220.5
- --------------------------------------------------------------------------------
Total assets under management $30,098.6 $25,125.3 $20,343.4
- --------------------------------------------------------------------------------
(1) The 1996 results include severance and facilities charges of $30.7 million,
after tax. Of this charge $21.5 million related to the Financial Services
segment and $9.2 million related to the Individual Life Insurance segment.
(2) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the Financial Services
and Individual Life Insurance segments. (Refer to Note 7).
(3) Excludes net unrealized capital gains (losses) of $366.4 million, $797.1
million and $(386.4) million at December 31, 1996, 1995 and 1994,
respectively.
F-31
<PAGE>
Form No. SAI. 75998-97 ALIAC Ed. May 1997
<PAGE>
VARIABLE ANNUITY ACCOUNT B
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A:
Condensed Financial Information
(2) Included in Part B:
Financial Statements of Variable Annuity Account B:
- Statement of Assets and Liabilities as of December 31, 1996
- Statements of Operations and Changes in Net Assets for the
years ended December 31, 1996 and 1995
- Notes to Financial Statements
- Independent Auditors' Report
Financial Statements of the Depositor:
- Independent Auditors' Report
- Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994
- Consolidated Balance Sheets as of December 31, 1996 and 1995
- Consolidated Statements of Changes in Shareholder's Equity
for the years ended December 31, 1996, 1995 and 1994
- Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
- Notes to Consolidated Financial Statements
(b) Exhibits
(1) Resolution of the Board of Directors of Aetna Life Insurance
and Annuity Company establishing Variable Annuity Account B(1)
(2) Not applicable
(3.1) Form of Broker-Dealer Agreement(2)
(3.2) Alternative Form of Wholesaling Agreement and Related Selling
Agreement(2)
(4.1) Form of Variable Annuity Contract (IRA-CDA-IA)(3)
(4.2) Form of Variable Annuity Contract (I-CDA-HD)(4)
(5) Form of Variable Annuity Contract Application (707.00.1B)(3)
(6.1) Certification of Incorporation and By-Laws of Aetna Life
Insurance and Annuity Company(5)
(6.2) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company(4)
(7) Not applicable
(8.1) Fund Participation Agreement (Amended and Restated) between
Aetna Life Insurance and Annuity Company, Alger American Fund
and Fred Alger Management, Inc. dated March 31, 1995(2)
(8.2) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund and Fidelity
Distributors Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995, January 1,
1996 and March 1, 1996(4)
(8.3) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund II and
Fidelity Distributors Corporation dated February 1, 1994 and
amended on December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996 and March 1,1996(4)
(8.4) Service Agreement between Aetna Life Insurance and Annuity
Company and Fidelity Investments Institutional Operations
Company dated as of November 1, 1995(6)
(8.5) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company and Janus Aspen Series dated April 19, 1994
and amended March 1, 1996(2)
(8.6) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company and Lexington Management Corporation regarding
Natural Resources Trust dated December 1, 1988 and amended
February 11, 1991(2)
(8.7) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company and Advisers Management Trust (now Neuberger &
Berman Advisers Management Trust) dated April 14, 1989 and as
assigned and modified on May 1, 1995(2)
(8.8) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company and Scudder Variable Life Investment Fund
dated April 27, 1992 and amended February 19, 1993 and August
13, 1993(2)
(8.9) Amendment dated as of February 20, 1996 to Fund Participation
Agreement between Aetna Life Insurance and Annuity Company and
Scudder Variable Life Investment Fund dated April 27, 1992 as
amended February 19, 1993 and August 13, 1993(6)
(8.10) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company, Investors Research Corporation and TCI
Portfolios, Inc. dated July 29, 1992 and amended December 22,
1992 and June 1, 1994(2)
(9) Opinion of Counsel(7)
(10.1) Consent of Independent Auditors
(10.2) Consent of Counsel
(11) Not applicable
(12) Not applicable
(13) Schedule for Computation of Performance Data(3)
(14) Financial Data Schedule
(15.1) Powers of Attorney(8)
(15.2) Authorizations for Signatures(2)
(27) Financial Data Schedule
1. Incorporated by reference to Post-Effective Amendment No. 6 to Registration
Statement on Form N-4 (File No. 33-75986), as filed electronically on April
22, 1996.
2. Incorporated by reference to Post-Effective Amendment No. 5 to Registration
Statement on Form N-4 (File No. 33-75986), as filed electronically on April
12, 1996.
3. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-4 (File No. 33-75998), as filed electronically on April
28, 1995.
4. Incorporated by reference to Post-Effective Amendment No. 12 to Registration
Statement on Form N-4 (File No. 33-75964), as filed electronically on
February 11, 1997.
5. Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form N-4 (File No. 33-60477), as filed electronically on April
15, 1996.
6. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-4 (File No. 33-88720), as filed electronically on June
28, 1996.
7. Incorporated by Registrant's Rule 24f-2 Notice for the fiscal year ended
December 31, 1996, as filed electronically with the Securities and Exchange
Commission on February 28, 1997.
8. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form S-2 (File No. 33-60477), as filed electronically on April
4, 1997.
<PAGE>
Item 25. Directors and Officers of the Depositor
Name and Principal
Business Address* Positions and Offices with Depositor
Daniel P. Kearney Director and President
Timothy A. Holt Director, Senior Vice President and
Chief Financial Officer
Christopher J. Burns Director and Senior Vice President
Laura R. Estes Director and Senior Vice President
J. Scott Fox Director and Senior Vice President
Gail P. Johnson Director and Vice President
John Y. Kim Director and Senior Vice President
Shaun P. Mathews Director and Vice President
Glen Salow Director and Vice President
Creed R. Terry Director and Vice President
Deborah Koltenuk Vice President and Treasurer, Corporate Controller
Frederick D. Kelsven Vice President and Chief Compliance Officer
Kirk P. Wickman Vice President, General Counsel and Secretary
* The principal business address of all directors and officers listed is 151
Farmington Avenue, Hartford, Connecticut 06156.
Item 26. Persons Controlled by or Under Common Control with the Depositor
or Registrant
Incorporated herein by reference to Item 26 of Post-Effective Amendment
No. 2 to the Registration Statement on Form N-4 (File No. 33-61897), as filed
electronically on April 11, 1997.
Item 27. Number of Contract Owners
As of February 28, 1997, there were 49,006 individuals holding interests in
variable annuity contracts funded through Variable Annuity Account B.
Item 28. Indemnification
Reference is hereby made to Section 33-771(f) of the Connecticut General
Statutes ("C.G.S.") regarding indemnification of directors and Section 33-776(4)
regarding indemnification of officers, employees and agents of Connecticut
corporations. These statutes provide in general that Connecticut corporations
incorporated prior to January 1, 1997 shall indemnify their officers, directors,
employees and agents against "liability" (defined as the obligation to pay a
judgment, settlement, penalty, fine, excise tax in the case of an employee
benefit plan or reasonable expenses incurred with respect to a proceeding). In
the case of a proceeding by or in the right of the corporation, indemnification
is limited to reasonable expenses incurred in connection with the proceeding
against the corporation to which the individual was named a party. The
corporation's obligation to provide such indemnification does not apply unless
(1) the individual has met the standard of conduct set forth in Section 33-771;
and (2) a determination is made (by majority vote of a quorum of the board of
directors who were not parties to the proceeding, or if a quorum cannot be
obtained, by a committee of the board selected as described in Section
33-775(b)(2); by special legal counsel selected by the board of directors or
members thereof as described in Section 33-775(b)(3); by shareholders) that the
individual met the standard set forth in Section 33-771; or (3) the court, upon
application by the individual, determines in view of all the circumstances that
such person is reasonably entitled to be indemnified. Also, unless limited by
its Certificate of Incorporation, a corporation must indemnify an individual who
was wholly successful on the merits or otherwise against reasonable expenses
incurred by him in connection with a proceeding to which he was a party because
of his relationship as director, officer, employee or agent of the corporation.
The statute does specifically authorize a corporation to procure indemnification
insurance on behalf of an individual who is or was a director, officer, employer
or agent of the corporation. Consistent with the statute, Aetna Inc. has
procured insurance from Lloyd's of London and several major United States excess
insurers for its directors and officers and the directors and officers of its
subsidiaries, including the Depositor.
Item 29. Principal Underwriter
(a) In addition to serving as the principal underwriter and depositor for
the Registrant, Aetna Life Insurance and Annuity Company (Aetna) also
acts as the principal underwriter and investment adviser for Aetna
Variable Encore Fund, Aetna Variable Fund, Aetna Series Fund, Inc.,
Aetna Generation Portfolios, Inc., Aetna Income Shares, Aetna
Investment Advisers Fund, Inc., Aetna GET Fund, and Aetna Variable
Portfolios, Inc. (all management investment companies registered under
the Investment Company Act of 1940 (1940 Act)). Additionally, Aetna
acts as the principal underwriter and depositor for Variable Life
Account B of Aetna, Variable Annuity Account C of Aetna and Variable
Annuity Account G of Aetna (separate accounts of Aetna registered as
unit investment trusts under the 1940 Act). Aetna is also the principal
underwriter for Variable Annuity Account I of Aetna Insurance Company
of America (AICA) (a separate account of AICA registered as a unit
investment trust under the 1940 Act).
(b) See Item 25 regarding the Depositor.
(c) Compensation as of December 31, 1996:
(1) (2) (3) (4) (5)
Name of Net Underwriting Compensation on
Principal Discounts and Redemption or Brokerage
Underwriter Commissions Annuitization Commissions Compensation*
Aetna Life Insurance $288,029 $17,661,810
and Annuity Company
* Compensation shown in column 5 includes deductions for mortality and
expense risk guarantees and contract charges assessed to cover costs
incurred in the sales and administration of the contracts issued under
Variable Annuity Account B.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules under it relating to the securities
described in and issued under this Registration Statement are located at the
home office of the Depositor as follows:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
Item 31. Management Services
Not applicable
Item 32. Undertakings
Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement on
Form N-4 as frequently as is necessary to ensure that the audited
financial statements in the registration statement are never more than
sixteen months old for as long as payments under the variable annuity
contracts may be accepted;
(b) to include as part of any application to purchase a contract offered by
a prospectus which is part of this registration statement on Form N-4,
a space that an applicant can check to request a Statement of
Additional Information; and
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form N-4 promptly
upon written or oral request.
(d) Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
(e) Aetna Life Insurance and Annuity Company represents that the fees and
charges deducted under the contracts covered by this registration
statement, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed
by the insurance company.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, Variable Annuity Account B of Aetna Life Insurance and
Annuity Company, certifies that it meets the requirements of Securities Act Rule
485(b) for effectiveness of this Post-Effective Amendment No. 6 to its
Registration Statement on Form N-4 (File No. 33-75998) and has caused this
Post-Effective Amendment No 6 to its Registration Statement on Form N-4 (File
No. 33-75998) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hartford, State of Connecticut, on the 15th day of
April, 1997.
VARIABLE ANNUITY ACCOUNT B OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
By: AETNA LIFE INSURANCE AND ANNUITY COMPANY
(Depositor)
By: Daniel P. Kearney*
---------------------------------
Daniel P. Kearney
President
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 6 to the Registration Statement on Form N-4 (File No. 33-75998) has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
Daniel P. Kearney* Director and President )
- ------------------------- (principal executive officer) )
Daniel P. Kearney )
)
Timothy A. Holt* Director, Senior Vice President ) April
- ------------------------- and Chief Financial Officer ) 15, 1997
Timothy A. Holt )
)
Christopher J. Burns* Director )
- ------------------------- )
Christopher J. Burns )
)
Laura R. Estes* Director )
- ------------------------- )
Laura R. Estes )
)
J. Scott Fox* Director )
- ------------------------- )
J. Scott Fox )
<PAGE>
)
Gail P. Johnson* Director )
- ------------------------- )
Gail P. Johnson )
)
John Y. Kim* Director )
- ------------------------- )
John Y. Kim )
)
Shaun P. Mathews* Director )
- ------------------------- )
Shaun P. Mathews )
)
Glen Salow* Director )
- ------------------------- )
Glen Salow )
)
Creed R. Terry* Director )
- ------------------------- )
Creed R. Terry )
)
Deborah Koltenuk* Vice President and Treasurer, )
- ------------------------- Corporate Controller )
Deborah Koltenuk )
By: /s/ Julie E. Rockmore
----------------------------
Julie E. Rockmore
*Attorney-in-Fact
<PAGE>
VARIABLE ANNUITY ACCOUNT B
EXHIBIT INDEX
Exhibit No. Exhibit Page
99-B.1 Resolution of the Board of Directors of Aetna Life *
Insurance and Annuity Company establishing Variable
Annuity Account B
99-B.3.1 Form of Broker-Dealer Agreement *
99-B.3.2 Alternative Form of Wholesaling Agreement and Related *
Selling Agreement
99-B.4.1 Form of Variable Annuity Contract (IRA-CDA-IA) *
99-B.4.2 Form of Variable Annuity Contract (I-CDA-HD) *
99-B.5 Form of Variable Annuity Contract Application *
(707.00.1B)
99-B.6.1 Certification of Incorporation and By-Laws of Depositor *
99-B.6.2 Amendment of Certificate of Incorporation of Depositor *
99-B.8.1 Fund Participation Agreement (Amended and Restated) *
between Aetna Life Insurance and Annuity Company, Alger
American Fund and Fred Alger Management, Inc. dated
March 31, 1995
99-B.8.2 Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company, Variable Insurance
Products Fund and Fidelity Distributors Corporation
dated February 1, 1994 and amended on December 15, 1994,
February 1, 1995, May 1, 1995, January 1, 1996 and March
1, 1996
99-B.8.3 Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company, Variable Insurance
Products Fund II and Fidelity Distributors Corporation
dated February 1, 1994 and amended on December 15, 1994,
February 1. 1995, May 1, 1995, January 1, 1996 and March
1,1996
99-B.8.4 Service Agreement between Aetna Life Insurance and *
Annuity Company and Fidelity Investments Institutional
Operations Company dated as of November 1, 1995
*Incorporated by reference
<PAGE>
Exhibit No. Exhibit Page
99-B.8.5 Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company and Janus Aspen Series
dated April 19, 1994 and amended March 1, 1996
99-B.8.6 Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company and Lexington Management
Corporation regarding Natural Resources Trust dated
December 1, 1988 and amended February 11, 1991
99-B.8.7 Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company and Advisers Management
Trust (now Neuberger & Berman Advisers Management Trust)
dated April 14, 1989 and as assigned and modified on May
1, 1995
99-B.8.8 Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company and Scudder Variable Life
Investment Fund dated April 27, 1992 and amended
February 19, 1993 and August 13, 1993
99-B.8.9 Amendment dated as of February 20, 1996 to Fund *
Participation Agreement between Aetna Life Insurance
and Annuity Company and Scudder Variable Life Investment
Fund dated April 27, 1992 as amended February 19, 1993
and August 13, 1993
99-B.8.10 Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company, Investors Research
Corporation and TCI Portfolios, Inc. dated July 29, 1992
and amended December 22, 1992 and June 1, 1994
99-B.9 Opinion of Counsel *
99-B.10.1 Consent of Independent Auditors ________
99-B.10.2 Consent of Counsel ________
99-B.13 Schedule for Computation of Performance Data *
99-B.15.1 Powers of Attorney *
*Incorporated by reference
<PAGE>
Exhibit No. Exhibit Page
99-B.15.2 Authorizations for Signatures *
27 Financial Data Schedule ________
*Incorporated by reference
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of Aetna Life Insurance and Annuity Company and Contract
Owners of Aetna Variable Annuity Account B:
We consent to the use of our reports dated February 4, 1997 and February 14,
1997 included herein and to the references to our Firm under the captions
"Condensed Financial Information" in the Prospectus and "Independent Auditors"
in the Statement of Additional Information.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
April 14, 1997
[Aetna Letterhead]
[Aetna Logo]
151 Farmington Avenue
Hartford, CT 06156
April 15, 1997 Susan E. Bryant
Counsel
Law Division, RE4A
Investments & Financial Services
(860) 273-7834
Fax: (860) 273-0356
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Variable Annuity Account B of Aetna Life Insurance and Annuity Company
Post-Effective Amendment No. 6 to Registration Statement on Form N-4
File Nos. 33-75998 and 811-2512
Dear Sir or Madam:
As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I hereby
consent to the use of my opinion dated February 28, 1997 (incorporated herein by
reference to the 24f-2 Notice for the fiscal year ended December 31, 1996 filed
on behalf of Variable Annuity Account B of Aetna Life Insurance and Annuity
Company on February 28, 1997) as an exhibit to this Post-Effective Amendment No.
6 to Registration Statement on Form N-4 (File No. 33-75998).
Sincerely,
/s/ Susan E. Bryant
Susan E. Bryant
Counsel
Aetna Life Insurance and Annuity Company
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000103005
<NAME> Aetna Variable Annuity Account B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1,726,620,671
<INVESTMENTS-AT-VALUE> 1,848,811,724
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,848,811,724
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,848,811,724
<DIVIDEND-INCOME> 120,367,178
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 17,483,870
<NET-INVESTMENT-INCOME> 102,883,308
<REALIZED-GAINS-CURRENT> 17,427,408
<APPREC-INCREASE-CURRENT> 93,444,109
<NET-CHANGE-FROM-OPS> 213,754,825
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
