As filed with the Securities and Exchange Registration No. 333-09515
Commission on April 15, 1997 Registration No. 811-2512
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
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POST-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
and Amendment to
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
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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)
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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 PART A
ITEM NO. (PROSPECTUS) LOCATION
1 Cover Page............................ Cover Page
2 Definitions........................... Definitions
3 Synopsis.............................. Prospectus Summary; Fee Table
4 Condensed Financial Information....... Not applicable
5 General Description of Registrant,
Depositor, and Portfolio Companies.... The Company; The Separate Account;
Investment Options
6 Deductions and Expenses............... Charges and Deductions; Distribution
7 General Description of Variable
Annuity Contracts..................... The Variable Annuity Contract;
Annuity Payments; Death Benefit;
Investment Options; Miscellaneous
8 Annuity Period........................ Annuity Payments
9 Death Benefit......................... Death Benefit
10 Purchases and Contract Value.......... Purchase; Annuity Payments-Valuation
of Annuity Unit Values
11 Redemptions........................... Withdrawals-Access to Your Money;
Purchase-Free Look Period
12 Taxes................................. Taxes
13 Legal Proceedings..................... Other Information - Legal Matters
and Proceedings
14 Table of Contents of the Statement
of Additional Information............. Contents of the Statement of
Additional Information
<PAGE>
FORM N-4 PART B
ITEM NO. (STATEMENT OF ADDITIONAL INFORMATION) LOCATION
15 Cover Page............................ Cover Page
16 Table of Contents..................... Table of Contents
17 General Information and History....... General Information and History
18 Services.............................. General Information and History;
Independent Auditors
19 Purchase of Securities Being Offered.. Offering and Purchase of Contracts
20 Underwriters.......................... Offering and Purchase of Contracts
21 Calculation of Performance Data....... Performance Data; Average Annual
Total Return Quotations
22 Annuity Payments...................... Not Applicable
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>
A FIXED AND VARIABLE SINGLE PREMIUM IMMEDIATE ANNUITY
ISSUED BY AETNA LIFE INSURANCE AND ANNUITY COMPANY
PROSPECTUS
================================================================================
The Contract offered in connection with this Prospectus is a combination fixed
and/or variable single premium immediate annuity contract (the "Contract")
issued by Aetna Life Insurance and Annuity Company (the "Company"). The Contract
is designed to provide regular income payments for a certain period or for life
(with or without a guaranteed period) commencing immediately after purchase
under the payment method that you select.
The Contract provides that your Purchase Payment may be allocated to a fixed
dollar option and/or 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:
[bullet] Aetna Variable Fund
[bullet] Aetna Income Shares
[bullet] Aetna Investment Advisers Fund, Inc.
[bullet] Aetna Legacy Variable Portfolio
[bullet] Aetna Variable Growth Portfolio
[bullet] Aetna Variable Index Plus Portfolio
[bullet] Aetna Variable Small Company Portfolio
[bullet] Alger American Small Cap Portfolio
[bullet] Janus Aspen Growth Portfolio
[bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Neuberger & Berman Growth Portfolio
The availability of the Funds is subject to applicable regulatory authorization.
Not all Funds may be available in all jurisdictions or under all Contracts.
This Prospectus provides information that you should know before purchasing the
Contract. Additional information about the Contract and the Separate Account is
contained in a Statement of Additional Information ("SAI") dated May 1, 1997.
The SAI has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. The Table of Contents for the SAI is printed
on page 11 of this Prospectus. For a free copy of the SAI, call us at (800)
238-6273 or write us at: 151 Farmington Avenue, Hartford, Connecticut 06156,
Attention: ARS Settlements. You may also obtain an SAI for any of the Funds by
calling that phone number.
PLEASE KEEP THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS IS VALID ONLY
WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF THE FUNDS.
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 IS DATED MAY 1, 1997.
<PAGE>
TABLE OF CONTENTS
================================================================================
DEFINITIONS ........................ DEFINITIONS - 1
PROSPECTUS SUMMARY ............... SUMMARY - 1
FEE TABLE ........................ FEE TABLE - 1
THE VARIABLE ANNUITY CONTRACT .................. 1
ANNUITY PAYMENTS ................................. 1
Annuity Elections .............................. 1
Annuity Options .............................. 1
Annuity Payments .............................. 2
Valuation of Annuity Unit Values ............... 2
PURCHASE ....................................... 3
Purchase Payments .............................. 3
How to Purchase .............................. 3
Allocation of Purchase Payment ............... 3
Free Look Period .............................. 3
INVESTMENT OPTIONS .............................. 3
Fund Availability and Substitution ............ 4
Transfers Among Subaccounts ..................... 4
CHARGES AND DEDUCTIONS ........................... 5
Mortality and Expense Risk Charge ............ 5
Administrative Charge ........................ 5
Withdrawal Charge .............................. 5
Fund Expenses ................................. 5
Premium and Other Taxes ........................ 6
TAXES .......................................... 6
Introduction ................................. 6
Taxation of Annuity Payments .................. 6
Taxation of Withdrawals ........................ 6
Distributions--Tax-Deferred Annuities ......... 7
Tax Penalty .................................... 7
Nonnatural Owners .............................. 7
WITHDRAWALS--ACCESS TO YOUR MONEY ............... 8
Commutation .................................... 8
Commuted Value ................................. 8
PERFORMANCE .................................... 8
DEATH BENEFIT .................................... 8
Death Benefit Commutation ..................... 9
OTHER INFORMATION .............................. 9
The Company .................................... 9
The Separate Account ........................... 9
Distribution ................................. 9
Ownership .................................... 9
Beneficiary .................................... 10
<PAGE>
Delay or Suspension of Payments ................ 10
Voting Rights .................................. 10
Modification of the Contract ................... 10
Legal Matters and Proceedings ................... 10
Financial Statements ............................ 10
CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION .................................... 11
APPENDIX A--THE FIXED DOLLAR OPTION ............. 12
<PAGE>
DEFINITIONS
================================================================================
The following terms are defined as they are used in this Prospectus:
Annuitant/Joint Annuitant: An individual named in the contract (1) whose life
determines the amount or continuation of life-contingent payments, and/or (2)
whose death results in the payment of death benefits.
Annuity Payment(s): A series of payments for life, a certain period or a
combination of the two.
Beneficiary(ies): The person or persons who are designated by the Contract
Holder to receive any death benefit proceeds payable under the Contract.
Commutation: The right to receive in a lump sum the present value of all or a
portion of future Guaranteed Payments under a Period Certain Annuity. This right
may be subject to a withdrawal charge.
Commuted Value: The present value of any future Guaranteed Payments which have
not yet been paid under the Contract.
Company (We, Us): Aetna Life Insurance and Annuity Company.
Contract: The individual single premium immediate annuity contract offered in
connection with this Prospectus.
Contract Effective Date: The date that the money is applied to the Contract and
all paperwork is received in good order at the Company's Home Office.
Contract Holder (You): The person to whom the Contract is issued. The Company
reserves the right to limit ownership to natural persons.
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.
Guaranteed Payment: A payment that is due whether or not the Annuitant, or Joint
Annuitant (if applicable), is alive on the Payment Due Date.
Home Office: The Company's principal executive offices located at 151 Farmington
Avenue, Hartford, Connecticut 06156.
Life Annuity: An annuity with payments that are based solely on whether or not
the Annuitant, or Joint Annuitant (if applicable), is alive on the Payment Due
Date.
Payee: A person who receives Annuity Payments. The Contract Holder shall be the
Payee unless the Contract Holder designates otherwise in writing.
Payment Due Date: The date on which each Annuity Payment is scheduled to be
paid. Such date can be either monthly, quarterly, semi-annually or annually, at
the election of the Contract Holder.
Period Certain Annuity: An annuity with a specified number of Guaranteed
Payments that are payable whether or not the Annuitant, or Joint Annuitant (if
applicable), is alive on the Payment Due Date.
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 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
================================================================================
THE VARIABLE ANNUITY CONTRACT
The fixed and variable single premium immediate annuity contract offered by
the Company represents a contract between you and Aetna Life Insurance and
Annuity Company. The purpose of the Contract is to provide regular income
payments for a certain period or for life (with or without a guaranteed period)
commencing immediately after purchase under the payment method that you select.
PURCHASE
You may purchase the Contract with a single Purchase Payment of $5,000 or
more. Your registered representative can help you fill out the proper forms.
The Contract is available to persons who wish to receive annuity income
payments. Contracts may be issued on a nonqualified basis. Contracts may also be
issued in connection with employer sponsored Section 401(a), Section 403(b) and
Section 457 plans, or as an Individual Retirement Annuity (IRA). (Contracts sold
in New York are not available for Section 457 plans.)
The maximum issue age is 75. The Company reserves the right to modify the
maximum issue age. (See "Purchase".)
FREE LOOK PERIOD
If you cancel the Contract within 10 days after receiving it (or whatever
period is required in your state), we will return your money without assessing a
withdrawal charge. You will receive whatever your Contract is worth on the day
we receive your request, less any Annuity Payments already made. This amount may
be more or less than your original Purchase Payment. (See "Purchase--Free Look
Period.")
ANNUITY PAYMENTS
Annuity Payments may 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. You have the
right to select the payment plan, or "Annuity Option," under which Annuity
Payments are to be made. These Options can provide payments for life or for the
joint lives of two Annuitants, with or without a Guaranteed Period, or for a
certain period or number of payments. (See "Annuity Payments.")
INVESTMENT OPTIONS
You can put all or some of your money in up to four Subaccounts. These
Subaccounts invest directly in shares of the following Funds:
[bullet] Aetna Variable Fund
[bullet] Aetna Income Shares
[bullet] Aetna Investment Advisers Fund, Inc.
[bullet] Aetna Legacy Variable Portfolio
[bullet] Aetna Variable Growth Portfolio
[bullet] Aetna Variable Index Plus Portfolio
[bullet] Aetna Variable Small Company Portfolio
[bullet] Alger American Small Cap Portfolio
[bullet] Janus Aspen Growth Portfolio
[bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Neuberger & Berman Growth Portfolio
Each of the Funds is fully described in a separate Fund prospectus.
Depending on market conditions, you can make or lose money in any of these
Funds.
You can also put all or some of your money into a fixed dollar option which
guarantees a fixed payment, as specified in the Contract. The fixed dollar
option is described in Appendix A to the Prospectus. Transfers are currently not
permitted into or out of the fixed dollar option. (See "Investment Options" in
this Prospectus, as well as the prospectuses for each of the Funds.)
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SUMMARY - 1
<PAGE>
TRANSFERS
You may make transfers among the Subaccounts at any time. The Company
reserves the right to limit such transfers to four (4) in any calendar year.
Aetna may establish a minimum transfer amount. See "Investment
Options--Transfers.")
CHARGES AND DEDUCTIONS
The Contract has insurance features and investment features, and there are
costs related to each. These charges include daily deductions from the Separate
Account (the mortality and expense risk charge and an administrative charge), as
well as fees and expenses which are deducted directly from the Funds. (See the
Fee Table and "Charges and Deductions.")
WITHDRAWALS
Under a variable Period Certain Annuity, you may elect to receive the
Commuted Value of all or a portion of future Guaranteed Payments, less any
applicable withdrawal charge. The Commuted Value will be determined as of the
Valuation Date next following the Company's receipt of your written request for
Commutation. Withdrawals during the free look period will not incur a withdrawal
charge. Withdrawals may also be subject to income tax and a federal tax penalty.
(See "Withdrawals--Access to Your Money.")
DEATH BENEFIT
A death benefit may be payable if your Contract is issued under certain
Annuity Options. The death benefit is the right to receive any remaining
Guaranteed Payments. The death benefit is payable upon the death of the
Annuitant, or the survivor if there is a Joint Annuitant. Under Lifetime Annuity
Options with Guaranteed Payments, the Beneficiary may elect, within six months
of such death, to receive the Commuted Value of any remaining Guaranteed
Payments. However, under a Period Certain Annuity, the Beneficiary may make such
election at any time. No withdrawal charge will apply to the Commuted Value of
the death benefit. (See "Death Benefit.")
TAXES
All or a portion of each Annuity Payment will generally be includable in
gross income and subject to federal income tax. A 10% federal tax penalty may be
imposed on certain Annuity Payments or withdrawals. (See "Taxes.")
INQUIRIES
Questions or requests for additional information may 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
Attention: ARS Settlements
[bullet] Telephone: 1-800-238-6273
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SUMMARY - 2
<PAGE>
FEE TABLE
================================================================================
This information is intended to help you understand the various costs and
expenses incurred under your Contract. The table reflects expenses of the
Subaccounts as well as of the Funds. Some expenses may vary as explained under
"Charges and Deductions." 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
WITHDRAWAL CHARGE
Under a variable Period Certain Annuity, Commutations are subject to the
following charges:
Number of years from Withdrawal Charge
Contract Effective Date % of Commuted Value(1)
------------------------------ -----------------------
Fewer than 1 5%
1 or more but fewer than 2 5%
2 or more but fewer than 3 4%
3 or more but fewer than 4 4%
4 or more, but fewer than 5 3%
5 or more, but fewer than 6 2%
6 or more, but fewer than 7 1%
7 or more 0%
- ------------------
(1) The Company will monitor the applicable deductions for the Withdrawal Charge
to ensure it will never exceed 8.5% of the Purchase Payment.
SEPARATE ACCOUNT ANNUAL EXPENSES
Each Subaccount pays these expenses out of its assets. The charges are
reflected in the Subaccount's daily Unit Value and are not charged directly to
you. The Separate Account charges include:
Mortality and Expense Risk Charge ............ 1.25%
Administrative Charge(2) ..................... 0.00%
=======
Total Separate Account Annual Expenses ...... 1.25%
- ------------------
(2) We currently do not impose an administrative charge. However, we reserve the
right to deduct a daily charge from the Subaccounts, equivalent on an annual
basis to not more than 0.25%.
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FEE TABLE - 1
<PAGE>
ANNUAL EXPENSES OF THE FUNDS
The following table illustrates the advisory fees and other expenses applicable
to the Funds. These figures are a percentage of each Fund's average net assets
and, except as noted, are based on figures for the year ended December 31, 1996.
A Fund's "Other Expenses" include operating costs of the Fund. Advisory fees and
other expenses are deducted from each Fund's net asset value and are not
deducted from the value of your Contract.
<TABLE>
<CAPTION>
Investment
Advisory Fees(1) Other Expenses
(after expense (after expense Total Fund
reimbursement) reimbursement) Annual 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 Investment Advisers Fund, Inc.(2) 0.50% 0.08% 0.58%
Aetna Legacy Variable Portfolio(2) 0.60% 0.15% 0.75%
Aetna Variable Growth Portfolio(2) 0.60% 0.15% 0.75%
Aetna Variable Index Plus Portfolio(2) 0.35% 0.15% 0.50%
Aetna Variable Small Company Portfolio(2) 0.75% 0.15% 0.90%
Alger American Small Cap Portfolio 0.85% 0.03% 0.88%
Janus Aspen Growth Portfolio(3) 0.65% 0.04% 0.69%
Janus Aspen Worldwide Growth Portfolio(3) 0.66% 0.14% 0.80%
Neuberger & Berman Growth Portfolio(4) 0.83% 0.09% 0.92%
</TABLE>
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(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 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 Investment
Advisers Fund, Inc. and Aetna Legacy Variable Portfolio. Therefore, for
these Funds the "Other Expenses" are not based on actual figures for the
year ended December 31, 1996, but reflect the fee payable under that
Agreement. The Administrative Services Agreement was in effect for Aetna
Variable Growth Portfolio, Aetna Variable Index Plus Portfolio and Aetna
Variable Small Company Portfolio since their inception.
Effective August 1, 1996, Investment Advisory Fees were increased for Aetna
Variable Fund, Aetna Income Shares, Aetna Investment Advisers Fund, Inc. 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 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 is net of fee waivers or reductions
from Janus Capital. Fee reductions for the Growth and Worldwide Growth
Portfolios reduce the management fee to the levels 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 and Total Fund Annual
Expenses would have been 0.79%, 0.04% and 0.83% for Growth Portfolio; and
0.77%, 1.14% 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.
(4) Neuberger & Berman Advisers Management Trust is divided into portfolios
("Portfolios"), each of which invests all of its net investment 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.
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FEE TABLE - 2
<PAGE>
HYPOTHETICAL ILLUSTRATION
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 Single Premium Immediate Annuity Contract
and 5% return on assets. For the purposes of these Examples, the calculations
assume that Annuity Payments are made based on a 15 year Period Certain Annuity
with a 3.5% Assumed Annual Net Return Rate.
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
----------------------------------------- -----------------------------------------
If you withdraw your entire Commuted If you do not withdraw your Commuted
Value at the end of the periods shown, Value you would pay the following
you would pay the following expenses, expenses (no withdrawal charge is
including any applicable withdrawal reflected):
charge:
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 $65 $83 $ 92 $127 $18 $50 $78 $127
Aetna Income Shares $64 $81 $ 89 $122 $17 $48 $74 $122
Aetna Investment Advisers Fund, Inc. $65 $84 $ 93 $129 $18 $50 $79 $129
Aetna Legacy Variable Portfolio $67 $88 $100 $140 $19 $55 $86 $140
Aetna Variable Growth Portfolio $67 $88 $100 $140 $19 $55 $86 $140
Aetna Variable Index Plus Portfolio $64 $81 $ 90 $124 $17 $48 $75 $124
Aetna Variable Small Company Portfolio $68 $92 $106 $149 $21 $59 $92 $149
Alger American Small Cap Portfolio $68 $91 $105 $148 $21 $58 $91 $148
Janus Aspen Growth Portfolio $66 $86 $ 97 $136 $19 $53 $83 $136
Janus Aspen Worldwide Growth Portfolio $67 $89 $109 $143 $20 $56 $88 $143
Neuberger & Berman Growth Portfolio $68 $92 $106 $151 $21 $59 $92 $151
</TABLE>
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FEE TABLE - 3
<PAGE>
THE VARIABLE ANNUITY CONTRACT
================================================================================
The fixed and variable single premium immediate annuity contract offered
by the Company represents a contract between you and Aetna Life Insurance and
Annuity Company, an insurance company. The purpose of the Contract is to provide
regular income payments for a certain period or for life (with or without a
guaranteed period) commencing immediately after purchase under the payment
method that you select.
You must select one of the annuity income options described under "Annuity
Payments" below. Additionally, you may allocate your Purchase Payment to up to
four of the eleven different Subaccounts listed under "Investment Options," or
to the fixed dollar option described in Appendix A to the Prospectus.
Specific information on how to purchase a Contract and to whom the
Contract is available is discussed under "Purchase."
ANNUITY PAYMENTS
================================================================================
ANNUITY ELECTIONS
Under the Contract, the Company will make regular income payments to you
or to a Payee you designate in writing. You can choose to have payments made on
a monthly, quarterly, semi-annual or annual basis. The first payment will
generally be due on the last day of the payment period you select. If an annual
frequency is elected, the payment will be due one day before one year after the
Contract Effective Date. An alternate first payment date may be elected subject
to the Company's approval and compliance with IRS regulations.
If you choose to have any portion of your Annuity Payments come from the
Subaccounts, the dollar amount of your payment will depend upon three things:
(1) the value of that portion of your Contract that is allocated to the
Subaccounts on the Annuity Date; (2) the Assumed Annual Net Return Rate that you
select; and (3) the performance of the Subaccounts that you select. If the net
return rate of the Subaccounts exceeds the Assumed Annual Net Return Rate stated
in your Contract, your Annuity Payments will increase. Conversely, if the net
return rate of the Subaccounts is less than the Assumed Annual Net Return Rate,
your Annuity Payments will decrease.
ANNUITY OPTIONS
You must choose one of the following Annuity Options. The option may not
be changed after the Contract is issued.
The options are listed in two groups: Lifetime and Nonlifetime. A Lifetime
Annuity Option means that Annuity Payments are based on the life of one or two
Annuitants and will continue for as long as such Annuitant(s) is alive. A
Nonlifetime Annuity Option means that Annuity Payments are guaranteed to
continue for a certain period; the continuation of payments under such option is
not based on the continued life of the Annuitant(s).
LIFETIME ANNUITY OPTIONS:
[bullet] Option 1--Single Life Annuity--A stream of Annuity Payments that is
payable for the life of the Annuitant. Payments cease upon the death of
the Annuitant.
[bullet] Option 2--Single Life Annuity with Guaranteed Payments--A stream of
Annuity Payments that is payable for the life of the Annuitant. If the
Annuitant dies prior to the payment of all of the Guaranteed Payments,
any remaining payments will be made to the Beneficiary.
[bullet] Option 3--Joint and Survivor Annuity--A stream of Annuity Payments that
is payable for the lives of the Annuitant and Joint Annuitant. Upon the
death of either Annuitant, payments continue for the life of the
survivor at the full or reduced amount depending upon the option
elected. Payments cease upon the death of the survivor.
[bullet] Option 4--Joint and Full Survivor Annuity with Guaranteed Payments--A
stream of Annuity Payments that is payable for the lives of the
Annuitant and the Joint Annuitant. Upon the death of either Annuitant,
the full payment continues for the life of the survivor. If the
survivor dies prior to the payment of all of the Guaranteed Payments,
any remaining Guaranteed Payments will be paid to the Beneficiary.
[bullet] Option 5--Joint and Contingent Annuity--A stream of Annuity Payments
that is payable for the lives of the Annuitant and the Joint Annuitant.
If the Annuitant is the
- --------------------------------------------------------------------------------
1
<PAGE>
first to die, payments continue for the life of the Joint Annuitant at
a reduced amount. If the Joint Annuitant is the first to die, the full
payment continues for the life of the Annuitant. Payments cease upon
the death of the survivor.
If you elect Lifetime Option 1, 3 or 5, it is possible that no Annuity
Payments would be made if the Annuitant under Option 1, or the survivor
under Option 3 or 5, dies prior to the first Annuity Payment Date.
Lifetime Annuity Options do not provide for any withdrawal rights.
NONLIFETIME ANNUITY OPTIONS:
[bullet] Option 6-Period Certain-A stream of Annuity Payments that continues for
a certain period of time, as provided under your Contract. Payments are
guaranteed for the number of Guaranteed Payments selected, and cease
after the selected number of Guaranteed Payments have been made.
If Option 6 is elected on a variable basis, you may request to receive
the Commuted Value at any time. Any such withdrawal may be subject to a
withdrawal charge. (See "Charges and Deductions--Withdrawal Charge.")
ANNUITY PAYMENTS
Duration of Payments. Guaranteed Payments under a qualified annuity
contract may not extend beyond (a) the life expectancy of the Annuitant, or (b)
the joint life expectancies of the Annuitant and Beneficiary. In any event,
qualified contract Annuity Payments must comply with the minimum distribution
requirements of Code Section 401(a)(9).
Amount of Each Annuity Payment. The amount of each payment depends on (1)
the amount of your Purchase Payment, (2) how you allocate the Purchase Payment
between the fixed dollar option and the Subaccounts, and (3) the Annuity Option
and any features chosen. The initial Annuity Payment must be at least $50 per
month, or aggregate to $250 per year for payments of any other frequency.
For any portion of your Annuity Payments that is made on a variable basis,
the first and subsequent payments will vary depending on the Assumed Annual Net
Return Rate (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 return rate on the Subaccounts in which you have invested exceeds
5% on an annualized basis. Annuity Payments would decline if the net return rate
was below 5%. Use of the 3-1/2% Assumed Annual Net Return Rate causes a lower
first payment, but subsequent payments would increase more rapidly or decline
more slowly as changes occur in the net return rate. (See the Statement of
Additional Information for further discussion on the impact of selecting an
Assumed Annual Net Return Rate.)
VALUATION OF ANNUITY UNIT VALUES
The amount of any Annuity Payment from a Subaccount is determined by
multiplying the number of "Annuity Units" that you hold, by an Annuity 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
return factor of that Subaccount for the period between the immediately
preceding Valuation Date and the current Valuation Date (see "Net Return
Factor" below), and by a factor to reflect the Assumed Annual Net Return Rate.
The AUV 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).
Net Return Factor. The net return factor is used to measure the investment
performance of a Subaccount from one Valuation Date to the next. The net return
factor for a Subaccount for any valuation period is equal to the sum of 1.000000
plus the net return rate. The net return rate equals:
(a) the value of the shares of the Fund held by the Subaccount on the current
Valuation Date, minus
(b) the value of the shares of the Fund held by the Subaccount on the preceding
Valuation Date, plus or minus
(c) taxes (or reserves for taxes) attributable to the operation of the
Subaccount (if any);
(d) divided by the total value of the Subaccount's Annuity Units on the
preceding Valuation Date;
(e) minus a daily charge at the annual effective rate of 1.25% for mortality and
expense risks and up to 0.25% for administrative expenses (currently 0%).
A net return rate may be more or less than 0%.
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PURCHASE
================================================================================
PURCHASE PAYMENTS
A "Purchase Payment" is the money that you give us to buy the Contract.
The minimum amount that we will accept is $5,000. The Contract is designed to be
a single premium contract, which means that no additional payments may be made
under the Contract. The Company reserves the right to establish a maximum
Purchase Payment amount and to reject any Purchase Payment exceeding the
maximum.
The Contract is available to persons who wish to receive annuity income
payments. Contracts may be issued on a nonqualified basis. Contracts may also be
issued in connection with employer sponsored Section 401(a), Section 403(b) and
Section 457 plans, or as an Individual Retirement Annuity (IRA). (Contracts sold
in New York are not available for Section 457 plans.)
The maximum issue age is (75). The Company reserves the right to modify
the maximum issue age.
HOW TO PURCHASE
You 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 Payment for five days. A Purchase Payment may be held for
longer periods only with your consent, 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 Payment will be
returned.
ALLOCATION OF PURCHASE PAYMENT
Your Purchase Payment less applicable premium taxes ("Net Purchase
Payment") will be allocated among the investment options that you designate on
your application. You may select up to four Subaccounts from the available fund
choices. You may also select a fixed dollar option and allocate all or a portion
of your Purchase Payment to the Company's general account. Allocations must be
in whole percentages. You may change your fund choices after the Contract is
issued by calling or writing to the Company at its Home Office. The Company
reserves the right to restrict fund transfers to no more than four in any
calendar year and to establish a minimum transfer amount.
FREE LOOK PERIOD
If you change your mind about owning this Contract, you have the right to
cancel it within 10 days of receiving it (or such longer period of time as may
be required by your state). To exercise your right to cancel, both the Contract
and a written notice of cancellation should be sent to the Company at its Home
Office. (For Contracts issued in the state of New York, your exercise of this
right is deemed to occur on the earlier of the date we receive the Contract or
the notice of cancellation.) If you cancel the Contract during this time period,
you will not be assessed with a withdrawal charge. Following cancellation, you
will receive back whatever your Contract is worth on the day we receive your
request for cancellation, less any Annuity Payments already made. In certain
states (or if you have purchased the Contract as an IRA), we may be required to
give you back your entire Purchase Payment.
INVESTMENT OPTIONS
================================================================================
The Contract offers eleven different variable investment options through
the Separate Account. 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. Your Purchase Payment
may be allocated to up to four of the Subaccounts as designated on the
application. You may also allocate all or a portion of your Purchase Payment to
the fixed dollar 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 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
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3
<PAGE>
based on the Company's judgment of which of those sectors or mix
thereof offers the best investment prospects.(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] Aetna Variable Portfolios, Inc.--Aetna Variable Growth Portfolio seeks
growth of capital through investment in a diversified portfolio of
common stocks and securities convertible into common stocks believed to
offer growth potential.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Index Plus Portfolio
seeks to outperform the total return performance of publicly traded
common stocks represented by the S&P 500.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Small Company Portfolio
seeks growth of capital primarily through investment in a diversified
portfolio of common stocks and securities convertible into common
stocks of companies with smaller market capitalizations. Companies with
smaller market capitalizations generally will have market
capitalization at the times of purchase of $1 billion or less.(1)
[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] 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.(3)
[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.(3)
[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.(4)
Investment Advisers for each of the Funds:
(1) Aetna Life Insurance and Annuity Company (investment adviser); Aeltus
Investment Management, Inc. (sub-adviser)
(2) Fred Alger Management, Inc.
(3) Janus Capital Corporation
(4) Neuberger & Berman Management Inc. (investment manager); Neuberger &
Berman, L.P. (sub-adviser)
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 on the cover of this Prospectus.
FUND AVAILABILITY AND SUBSTITUTION
The availability of Funds may be subject to regulatory authorization. In
addition, the Company may add or withdraw Funds, as permitted by applicable law.
Not all Funds may be available in all jurisdictions or under all Contracts.
If the shares of any Fund should no longer be available for investment by
the Separate Account, or if, in the judgment of the Company, further investments
in such shares should become inappropriate under this type of Contract, we may
cease to make such Fund shares available for investment under the Contract on a
prospective basis. In addition, the Company may substitute shares of another
Fund for shares already acquired. The Company reserves the right to substitute
shares of another Fund for shares already acquired without a proxy vote. Any
elimination, substitution or addition of Funds will be done in accordance with
applicable state or federal securities laws.
TRANSFERS AMONG SUBACCOUNTS
Generally, you may make transfers among the Subaccounts at any time. The
Company reserves the right to limit such transfers to four (4) in any calendar
year. Transfers are currently not permitted into or out of the fixed dollar
option.
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CHARGES AND DEDUCTIONS
================================================================================
There are charges and other expenses associated with the Contract that
reduce the amount of your Annuity Payments. These charges and expenses are as
follows:
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 mortality and/or expense risks under the Contract. The
mortality risks are those assumed for any promise to make lifetime payments. 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 may also be used 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 to make a deduction from each of the
Subaccounts for an administrative charge. Under the Contract, the administrative
charge may be an amount equal, on an annual basis, to not more than 0.25% of the
daily net assets of the Subaccounts. There is currently no administrative charge
assessed under the Contract. Once an administrative charge is established for
your Contract, it may not be increased.
If an administrative charge is assessed, it will be 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.
WITHDRAWAL CHARGE
The withdrawal charge is, in effect, a deferred sales charge. It is
imposed upon the surrender (Commutation) or withdrawal (partial Commutation) of
the remaining Guaranteed Payments under a Period Certain Annuity at any time
before the last Guaranteed Payment is made and while the Annuitant is living.
The amount paid is equal to the Commuted Value minus the applicable withdrawal
charge. The withdrawal charge is imposed to reimburse the Company for
unrecovered acquisition and distribution costs.
The schedule for the calculation of the withdrawal charge is:
Withdrawal Charge
Number of Years from Percentage of
Contract Effective Date Commuted Value
------------------------------ ------------------
Fewer than 1 5%
1 or more, but fewer than 2 5%
2 or more, but fewer than 3 4%
3 or more, but fewer than 4 4%
4 or more, but fewer than 5 3%
5 or more, but fewer than 6 2%
6 or more, but fewer than 7 1%
7 or more 0%
Reduction or Elimination of the Withdrawal Charge. We may reduce or
eliminate the withdrawal charge when sales of the Contract are made to
individuals or a group of individuals in such a manner that results in savings
of sales expenses. The entitlement to such a reduction in the withdrawal charge
will be based on the following criteria:
(a) the size and type of group of individuals to whom the Contract is offered;
or
(b) whether there is a prior or existing relationship with the Company such as
being an employee of the Company or one of its affiliates, receiving
distributions or making internal transfers from other Contracts issued by
the Company or one of its affiliates, or making transfers of amounts held
under qualified plans sponsored by the Company or an affiliate.
Any reduction or elimination of the withdrawal charge will not be unfairly
discriminatory against any person.
FUND EXPENSES
Each Fund incurs certain expenses which are paid out of its net assets.
These expenses include, among other things, the investment advisory or
"management" fee. The expenses of the Funds are set forth in the Fee Table in
this Prospectus and described more fully in the accompanying Fund prospectuses.
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<PAGE>
PREMIUM AND OTHER TAXES
Several states and municipalities impose a premium tax based on the amount
of your Purchase Payment. These taxes currently range from 0% to 3.5%. The
Company will deduct premium taxes from your Purchase Payment at the Contract
Effective Date. Under certain circumstances, the Company reserves the right not
to deduct premium taxes where the Purchase Payment is provided through an
internal transfer from an annuity or other contract issued by the Company (or
one of its affiliates) under which the Company previously deducted premium tax.
TAXES
================================================================================
INTRODUCTION
The Company has prepared the following as a general discussion on federal
taxes. This discussion is not intended as tax advice to any individual. Any
person concerned about tax implications should consult a tax adviser before
investing and before electing any Commutation feature permitted under the
Contract.
TAXATION OF ANNUITY PAYMENTS
Nonqualified Contracts. Section 72 of the Internal Revenue Code ("Code")
governs taxation of annuities. In general, under a nonqualified contract, only
the portion of the Annuity Payment that represents the amount by which the
expected return 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 non-taxable
portion of each payment is generally determined by dividing the "investment in
the contract" (generally, your Purchase Payment) by the total number of expected
Annuity Payments. For fixed Annuity Payments, the non-taxable portion is
determined by a ratio your "investment in the contract" bears to the total
dollar amount of expected Annuity Payments. Under either a variable or a fixed
annuity, once the "investment in the contract" has been fully recovered, the
full amount of each additional Annuity Payment is taxable. If Annuity Payments
cease as a result of an Annuitant's death before full recovery of the
"investment in the contract," you should consult a competent tax adviser
regarding deductibility of the unrecovered amount.
Qualified Contracts. The taxation of Annuity Payments under a nonqualified
contract described above does not apply to "qualified" contracts. Qualified
contracts are contracts issued in conjunction with an Individual Retirement
Annuity (IRA), a Code Section 403(b) Tax Deferred Annuity, a Code Section 457
deferred compensation plan or a Code Section 401(a) or 401(k) pension or profit
sharing plan. Generally, the entire Annuity Payment received is taxable. Any
portion of the Annuity Payment attributable to after-tax employee contributions
to the plan is not taxable. Any portion of an Annuity Payment that is an
"eligible rollover distribution" and that is properly rolled over to another
plan of the same type or to an IRA also is not taxable. An Annuity Payment made
in connection with a Section 403(b) Tax Deferred Annuity or a Section 401(a) or
401(k) pension or profit-sharing plan can be an "eligible rollover
distribution" only if made under a Period Certain Annuity having a period of
less than ten years and only to the extent that the Annuity Payment (1) is not
attributable to after-tax contributions or (2) is not a required minimum
distribution under Code Section 401(a)(9). If any portion of an eligible roll-
over distribution is paid to the employee, the Company is required to withhold
20% of that amount as federal income tax withholding.
TAXATION OF WITHDRAWALS
If the Commuted Value of all or any portion of the Guaranteed Payments is
withdrawn or distributed as a death benefit, the amount received will be taxed
as "an amount not received as an annuity."
Nonqualified Contracts. If received under a nonqualified contract, the
Commuted Value is generally includable in gross income to the extent that there
is income on the contract. Income on the contract means the excess of the
Commuted Value of the contract (determined without regard to any withdrawal
charge) immediately before the amount is received over the investment in the
contract at such time.
Qualified Contracts. Generally, any distribution under a qualified
contract is fully taxable upon receipt. If the distribution is made in
connection with a Section 403(b) Tax Deferred Annuity or a Section 401(a)
pension or profit sharing plan, it may not be taxable if attributable to after-
tax contributions or if the distribution is an "eligible rollover distribution"
(as defined above) that is properly rolled over to another contract or plan of
the same type or to an IRA.
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<PAGE>
DISTRIBUTIONS--TAX-DEFERRED ANNUITIES
The Code limits the distribution of amounts contributed on or after
January 1, 1989 under a salary reduction agreement to a Section 403(b) Tax
Deferred Annuity. In general, such distributions can only be made if the
participant has attained age 59-1/2, separates from service, dies or becomes
disabled (as defined in the Code).
TAX PENALTY
The Code provides that any amount received under a qualified or
nonqualified annuity contract may be subject to a premature distribution penalty
equal to 10% of the amount that is includable in income.
Because some of the exceptions to the 10% penalty discussed below require
that the payment or distribution be part of a series of "substantially equal
periodic payments," your selection of an increasing annuity or receipt of the
Commuted Value may be subject to the 10% penalty unless one of the other
exceptions applies. You should consult with a tax adviser to determine how this
will affect your tax liability.
Nonqualified Contracts. There is an exception to the tax penalty for
nonqualified contracts if the payment is made under an immediate annuity
contract. An immediate annuity is defined as a contract that (1) is purchased
with a single premium, (2) has an annuity starting date no later than one year
from the date of purchase, and (3) provides for a series of substantially equal
periodic payments to be made no less frequently than annually over the annuity
period. However, the IRS has ruled that where an immediate annuity contract is
received in exchange for a deferred annuity contract pursuant to a Section 1035
exchange, the immediate annuity contract does not qualify for this exception to
the 10% penalty.
In addition to the immediate annuity exception, the 10% penalty also does
not apply to (1) payments made on or after the date the taxpayer becomes age
59-1/2, (2) any payment attributable to the taxpayer becoming disabled (as
defined by the Code), (3) any payment made on or after the death of the Contract
Holder, or (4) any payment which is part of a series of substantially equal
periodic payments made at least annually for the life or life expectancy of the
taxpayer or the joint lives or joint life expectancies of the taxpayer and his
designated Beneficiary. (Modification of the series of payments prior to the
later of age 59-1/2 or 5 years may result in an additional tax in the year of
modification equal to the penalty which would have been imposed, plus interest,
if the exception had not applied.)
Qualified Contracts. The 10% penalty may apply to amounts received under a
qualified contract, other than a contract issued in conjunction with a Section
457 deferred compensation plan. The 10% penalty does not apply to distributions
that are (1) made on or after the date the employee attains age 59-1/2, (2) made
to a Beneficiary on or after the death of the employee, (3) attributable to the
employee's disability (as defined by the Code), (4) made to an employee after
separation from service after age 55 (not applicable to an IRA), or (5) part of
a series of substantially equal periodic payments made at least annually for the
life or life expectancy of the employee or the joint lives or joint life
expectancies of the employee and a designated Beneficiary. (Modification of the
series of payments prior to the later of age 59-1/2 or 5 years may result in an
additional tax in the year of modification equal to the penalty which would have
been imposed, plus interest, if the exception had not applied.)
NONNATURAL OWNERS
If a nonqualified contract is owned by a person who is not a natural
person, the contract is not treated as an annuity contract for income tax
purposes and the "income on the contract" for the taxable year is currently
taxable as ordinary income. This rule does not apply to an immediate annuity,
which is defined in the same way as for 10% penalty purposes. (See "Tax Penalty"
above.) Therefore, if you elect an increasing annuity or elect to receive the
Commuted Value, you should consult with a tax adviser to determine how this will
affect your tax liability.
This rule also does not apply to a trust or other entity which holds the
contract solely as an agent for a natural person (other than an employer which
holds for the benefit of employees). The rule also does not apply to qualified
contracts (other than a contract held in connection with a Section 457 deferred
compensation plan).
A tax-exempt organization should consult with its tax adviser regarding
treatment of "income on the contract" for purposes of the unrelated business
income tax.
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WITHDRAWALS--ACCESS TO YOUR MONEY
================================================================================
COMMUTATION
If you elect a Period Certain Annuity, you may elect to receive the
Commuted Value of all or a portion of the Guaranteed Payments, less any
applicable withdrawal charge. Commuted Value means the present value of any
remaining Guaranteed Payments which have not yet been paid under the Contract.
If a portion of the Guaranteed Payments under a variable Period Certain Annuity
is commuted, the remaining Annuity Payments will be reduced pro rata from all of
the Subaccounts unless you designate otherwise. Commutations may be subject to a
withdrawal charge as described in "Charges and Deductions."
COMMUTED VALUE
Under the Period Certain Annuity, the Commuted Value is equal to the
present value of the remaining Guaranteed Payments calculated using the Assumed
Annual Net Return Rate stated in the Contract. All Commuted Values will be
determined as of the Valuation Date next following the date on which a written
request for Commutation is received in good order by the Company at its Home
Office.
PERFORMANCE
================================================================================
The Company may illustrate the hypothetical values of Annuity Payments
made from each of the Subaccounts over certain time periods based on the
historical net asset values of the Funds. These numbers reflect the mortality
and expense risk charge, the administrative expense charge (if any), as well as
the advisory fees and other expenses of the Funds. The Company may also
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, administrative expense
charge (if any) and any applicable withdrawal charge). "Non-standardized
returns" will be calculated in a similar manner, except that non-standardized
figures will not reflect the deduction of any applicable withdrawal 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 or three-year periods.
The Company may advertise certain ratings, rankings or other information
related to the Company, the Subaccounts or the Funds. Further details regarding
performance reporting are described in the Separate Account's Statement of
Additional Information.
DEATH BENEFIT
================================================================================
The following describes the death benefit provision applicable to variable
Annuity Payments under the Contract. For information on the death benefit
provision applicable to the fixed dollar option under the Contract, please refer
to Appendix A.
A death benefit may be payable if your Contract is issued under (i) a
Single Life Annuity with Guaranteed Payments (Option 2), (ii) a Joint and Full
Survivor Annuity with Guaranteed Payments (Option 4), or (iii) a Period Certain
Annuity (Option 6). The death benefit is payable upon the death of the
Annuitant, or the death of the survivor if there is a Joint Annuitant.
If the Annuitant dies, or if the survivor under a Joint Annuity Option
dies, any remaining Guaranteed Payments will be paid to the Beneficiary in the
form specified in the Contract. Such payments will be paid at least as rapidly
as under the method of distribution then in effect. Under Options 2 and 4, the
Beneficiary may elect, within six months of such death, to receive the Commuted
Value of any remaining Guaranteed Payments. Under Option 6, the Beneficiary may
make such election at any time. No withdrawal charge will apply to the Commuted
Value of the death benefit.
If the Contract Holder who is not the Annuitant dies, Annuity Payments
will continue to be paid to the Payee in the
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<PAGE>
form specified in the Contract. If no Payee survives the death of the Contract
Holder, Annuity Payments will be made to the Annuitant. Such payments will be
paid at least as rapidly as under the method of distribution then in effect.
DEATH BENEFIT COMMUTATION
The Commuted Value under this death benefit provision will be determined
on the next Valuation Date after the Company receives acceptable proof of death
and a request for payment in good order at its Home Office. The Commuted Value
is equal to the present value of any remaining Guaranteed Payments calculated
using the Assumed Annual Net Return Rate stated in the Contract.
OTHER INFORMATION
================================================================================
THE COMPANY
Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company organized in 1976 under the insurance laws of the State of
Connecticut. 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 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 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 SEPARATE ACCOUNT
The Company has established a separate account, Variable Annuity Account
B, for the purpose of funding its variable annuity contracts. The Board of
Directors of the Company adopted a resolution in 1976 to establish the Separate
Account under Connecticut insurance law. 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 the federal securities laws.
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.
DISTRIBUTION
The Company acts as the Principal Underwriter for the securities sold by
this Prospectus, and as the distributor of the Contracts.
Compensation will be paid to broker-dealers who sell the Contracts.
Broker-dealers will be paid commissions of up to 3.5% of the Purchase Payment.
Under certain circumstances, such broker-dealers may also be paid additional
compensation of up to 0.5%. 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 names of the broker-dealer and the registered representative
responsible for your Contract are set forth on your application. Commissions and
sales related expenses are paid by the Company and are not deducted from your
Purchase Payment. To the extent that the withdrawal charge is insufficient to
cover the actual costs of distribution, the Company may use any of its corporate
assets, including any profit from the mortality and expense risk charge, to make
up any difference.
OWNERSHIP
The Contract is owned by the Contract Holder (You). You have all title to
the Contract, as well as all rights to amounts held in the Contract during the
lifetime of the Annuitant, and the Joint Annuitant (if applicable). Any choices
selected under the Contract must be made by you in writing, unless otherwise
allowed by the Company. Until we receive amendments to any such choices, we will
rely on any previous choices made.
- --------------------------------------------------------------------------------
9
<PAGE>
Ownership of the Contract may be changed to the extent permitted by law.
You should immediately notify the Company, in writing, of any change in
ownership. No such ownership change will be binding until such notification is
received and recorded by the Company at its Home Office.
BENEFICIARY
If the Contract provides for any Guaranteed Payments following the death
of the Annuitant and the Joint Annuitant (if applicable), you have the right to
name a Beneficiary. The Beneficiary is the person entitled to receive any death
benefit proceeds. The Company will pay any death benefit proceeds based on the
last written Beneficiary designation on file at its Home Office as of the date
of death.
Changes in Beneficiary Designations. The designated Beneficiary may be
changed at any time during the lifetime of the Annuitant and the Joint Annuitant
(if applicable). Such change must be submitted to the Company in writing, and
except for Contracts issued in New York, will become effective as of the date
written notice of the change is received and recorded by the Company. For
Contracts issued in New York, the change will become effective as of the date
the notice is signed. However, the Company's obligation to pay death benefits
shall be fully discharged upon payment to the Beneficiary named in the written
notice of Beneficiary designation last received by the Company as of the date of
such payment. Some restrictions may apply to Beneficiary changes under qualified
contracts.
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.
VOTING RIGHTS
The Company is the legal owner of the shares of the Funds. However, we
believe that when a Fund solicits proxies in conjunction with a vote of
shareholders, we are required to obtain from you and other owners instructions
as to how to vote those shares. When we receive those instructions, we will vote
all of the shares we own in proportion to those instructions. This will also
include any shares that the Company owns on its own behalf. Should we determine
that we are no longer required to comply with the above, we will vote the shares
in our own right.
MODIFICATION OF THE CONTRACT
The Company reserves the right to modify the Contract to meet the
requirements of state or federal laws or regulations. The Company will notify
you in writing of any changes.
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.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and of the Separate
Account have been included in the Statement of Additional Information.
- --------------------------------------------------------------------------------
10
<PAGE>
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
================================================================================
The following items are the contents of the Statement of Additional
Information:
General Information and History
Variable Annuity Account B
Offering and Purchase of Contract
Performance Data
Annuity Payments
Sales Material and Advertising
Independent Auditors
Financial Statements of the Separate Account
Financial Statements of the Company
- --------------------------------------------------------------------------------
11
<PAGE>
APPENDIX A
THE FIXED DOLLAR OPTION
================================================================================
The following summarizes material information concerning the fixed dollar
option. Amounts allocated to the fixed dollar option are held in the Company's
general account that supports general insurance and annuity obligations.
Interests in the fixed dollar option have not been registered with the SEC in
reliance upon exemptions under the Securities Act of 1933, as amended.
Disclosure in the Prospectus regarding the fixed dollar option 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 dollar option has not been reviewed by the
SEC.
THE FIXED DOLLAR OPTION
In addition to allocating your Purchase Payment to the Subaccounts
described in the Prospectus, you may choose to allocate all or a portion of your
Purchase Payment to the fixed dollar option. If you choose the fixed dollar
option, your Annuity Payments will remain fixed as specified in your Contract
over the term of the Contract unless you elect an Increasing Annuity.
There is no right of Commutation for Annuity Payments supported by the
fixed dollar option under any Lifetime Annuity Option. You may purchase a right
of Commutation for Annuity Payments supported by the fixed dollar option under a
Period Certain Annuity. The right of Commutation is described under
"Withdrawals--Access to Your Money."
ANNUITY OPTIONS
All of the Annuity Options described under "Investment Options" in the
Prospectus are available for the fixed dollar option. If you allocate all or a
portion of your Purchase Payment to a fixed dollar option, you may also elect
one of the following features in connection with the portion of your Annuity
Payments that are derived from the fixed dollar option:
(a) a Cash Refund feature that offers a death benefit in connection with certain
Lifetime Annuity Options. If the Annuitant dies, or the survivor dies if
there is a Joint Annuitant, the Beneficiary will receive a lump sum payment
equal to the Net Purchase Payment allocated to the fixed dollar option less
the total amount of fixed annuity payments paid prior to such death. The
Cash Refund feature may be elected only with a Single Life Annuity (Option
1) or a Joint and Full Survivor Annuity (Option 3) that has no reduction in
payment to the survivor.
(b) an Increasing Annuity under which the Annuity Payments supported by the
fixed dollar option will increase by a stated percentage compounded
annually. You must elect 1, 2 or 3% as the stated percentage. The feature is
not available under Contracts purchased in conjunction with Section 457
deferred compensation plans.
Annuity Payments. The amount of each Annuity Payment depends on (1) the Net
Purchase Payment you allocate to the fixed dollar option, and (2) the Annuity
Option and features chosen.
CHARGES AND DEDUCTIONS
If you have elected a Period Certain Annuity and have purchased a right of
Commutation, a withdrawal charge may apply to any Commuted Value you receive.
This charge is, in effect, a deferred sales charge. It is imposed upon any
Commutation of a Period Certain Annuity before the last Guaranteed Payment is
made, and while the Annuitant is living. The amount paid upon Commutation is
equal to the Commuted Value minus the applicable withdrawal charge. This charge
is imposed to reimburse the Company for unrecovered acquisition and distribution
costs.
- --------------------------------------------------------------------------------
12
<PAGE>
The following sets forth the schedule for the calculation of the
withdrawal charge.
Withdrawal Charge
Number of Years from Percentage of
Contract Effective Date Commuted Value
---------------------------- ------------------
1 or more, but fewer than 2 5%
2 or more, but fewer than 3 4%
3 or more, but fewer than 4 4%
4 or more, but fewer than 5 3%
5 or more, but fewer than 6 2%
6 or more, but fewer than 7 1%
7 or more 0%
Reduction or Elimination of the Withdrawal Charge. We may reduce or
eliminate the withdrawal charge when sales of the Contract are made to
individuals or a group of individuals in such a manner that results in savings
of sales expenses. The entitlement to such a reduction in the withdrawal charge
will be based on the following criteria:
(a) the size and type of group of individuals to whom the Contract is offered;
or
(b) whether there is a prior or existing relationship with the Company such as
being an employee of the Company or one of its affiliates, receiving
distributions or making internal transfers from other Contracts issued by
the Company or one of its affiliates, or making transfers of amounts held
under qualified plans sponsored by the Company or an affiliate.
Any reduction or elimination of the withdrawal charge will not be unfairly
discriminatory against any person.
WITHDRAWALS--ACCESS TO YOUR MONEY
Commutation. If you elect a fixed Period Certain Annuity with a right of
Commutation, you may elect to receive the Commuted Value of all or a portion of
the remaining Guaranteed Payments, less any applicable withdrawal charge. Such
Commutations may be elected once each calendar year. No Commutations are allowed
from a fixed dollar option in the first Contract year. In subsequent contract
years, full or partial Commutations are allowed, provided that under a partial
Commutation the remaining Annuity Payments would equal $50 or more. If a portion
of the Guaranteed Payments is commuted, the remaining Annuity Payments will be
reduced proportionately. Commutations are subject to a withdrawal charge.
Commuted Value. Under a fixed Period Certain Annuity, the Commuted Value
is equal to the present value of the remaining Guaranteed Payments calculated
using the adjusted contract rate.
The adjusted contract rate equals:
(Rate of Return) + CY - IY
where:
[bullet] Rate of Return is the Fixed Annuity Present Value Interest Rate shown
in the Contract;
[bullet] CY is the Commutation Yield; and
[bullet] IY is the Issue Yield.
CY is determined as follows:
(1) CY is the average of the yields, as published in the Wall Street Journal on
the Friday before the date of Commutation, of the three (or more if the
Company deems necessary) noncallable, noninflation adjusted Treasury Notes
or Bonds maturing on or closest to the Commutation Duration Date.
(2) The Commutation Duration Date is the date (month and year) obtained when the
Commutation Duration is added to the date of Commutation.
(3) Commutation Duration equals 1 plus the number of whole years from the date
of Commutation until the final Guaranteed Payment is due, divided by 2. Any
resulting fraction will be rounded up to the next whole number.
IY is determined as follows:
(1) IY is the average of the yields, as published in the Wall Street Journal on
the Friday before the Contract Effective Date, of the three (or more if the
Company deems necessary) noncallable, noninflation adjusted Treasury Notes
or Bonds maturing on or closest to the Issue Duration Date.
(2) The Issue Duration Date (month and year) is obtained when the Issue Duration
is added to the Contract Effective Date.
(3) Issue Duration equals 1 plus the number of whole years from issue until the
final payment is due, divided by 2. Any resulting fraction will be rounded
up to the next whole number.
- --------------------------------------------------------------------------------
13
<PAGE>
DEATH BENEFIT
The death benefit is payable upon the death of the Annuitant, or the death
of the survivor if there is a Joint Annuitant, and if there are remaining
Guaranteed Payments. Any remaining Guaranteed Payments will be paid to the
Beneficiary in the form specified in the Contract. Such payments will be paid at
least as rapidly as under the method of distribution then in effect. Within six
months of such death, the Beneficiary may elect to receive the Commuted Value of
any remaining Guaranteed Payments. However, under a Period Certain Annuity where
you have purchased a right of Commutation, the Beneficiary may make such
election at any time. No withdrawal charge will apply to the Commuted Value of
the death benefit.
If a Cash Refund feature is elected, the death benefit is payable in one
sum to the Beneficiary.
If the Contract Holder who is not the Annuitant dies, Annuity Payments
will continue to be paid to the Payee in the form specified in the Contract. If
no Payee survives the death of the Contract Holder, Annuity Payments will be
made to the Annuitant. Such payments will be paid at least as rapidly as under
the method of distribution then in effect.
Death Benefit Commutation. The Commuted Value of the death benefit will be
determined as of the Valuation Date next following the Company's receipt at its
Home Office of proof of death acceptable to the Company and a request for
payment in good order. If the Contract is issued as a Period Certain Annuity
with a right of Commutation, the Commuted Value will be determined as described
under "Withdrawal--Access to Your Money" in this Appendix. If the Contract is
issued as a Life Annuity with Guaranteed Payments or a Period Certain where you
have not purchased a right of Commutation, the rate used to determined the
Commuted Value of the remaining Guaranteed Payments will be the Fixed Annuity
Present Value Interest Rate shown in the Contract.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated May 1, 1997
A Fixed and Variable Single Premium Immediate Annuity Contract
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
Attn: ARS Settlements
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-238-6273
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.................................................... 4
Sales Material and Advertising...................................... 5
Independent Auditors................................................ 6
Financial Statements of the Separate Account........................ S-1
Financial Statements of Aetna Life Insurance and Annuity Company.... F-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company which was organized 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 charge and administrative charge
described in the prospectus, all expenses incurred in the operations of the
Separate Account are borne by the Company. (See "Charges and Deductions" in the
prospectus.) The 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 of 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 Variable Small Company Portfolio
Aetna Income Shares Alger American Small Cap Portfolio
Aetna Investment Advisers Fund, Inc. Janus Aspen Growth Portfolio
Aetna Legacy Variable Portfolio Janus Aspen Worldwide Growth Portfolio
Aetna Variable Growth Portfolio Neuberger & Berman Growth Portfolio
Aetna Variable Index Plus Portfolio
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 is in the
prospectus.
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 under a deferred annuity contract to the various Subaccounts
available 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 during each period that apply to the
Contracts described in this prospectus (e.g., mortality and expense risk
charges, administrative expense charges (if any), and the withdrawal charge
schedule applicable to commutations under a variable Period Certain Annuity).
These charges will be deducted on a pro rata basis in the case of fractional
periods.
The non-standardized figures will be calculated in a similar manner, except that
they will not reflect the deduction of any applicable withdrawal 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.
3
<PAGE>
Investment results of the Subaccounts will fluctuate over time, and any
presentation of the Subaccounts' total return quotations for any prior period
should not be considered as a representation of how the Subaccounts will perform
in any future period. Additionally, the amount available upon redemption may be
more or less than your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
The table shown below reflects the average annual standardized and
non-standardized total return quotation figures for the periods ended December
31, 1996 for the Subaccounts. 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 *).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUND
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>
Aetna Variable Fund 16.75% 11.30% 12.80% 22.89% 16.21% 11.75% 12.80% 05/01/75
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares (2.82%) 5.01% 7.47% 2.29% 4.27% 5.44% 7.47% 05/15/73
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc. 8.04% 9.44% 9.91%* 13.72% 11.99% 9.88% 9.91%* 04/03/89
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio 7.12% 9.98%* n/a 12.75% 13.83%* n/a n/a 07/05/95
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio 3.78%* n/a n/a 9.24%* n/a n/a n/a 09/16/96
- ------------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap Portfolio (2.27%) 9.19% 18.73%* 2.87% 11.45% 9.63% 18.73%* 09/21/88
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 11.12% 13.32%* n/a 16.97% 15.13% 14.73%* n/a 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth
Portfolio 21.05% 20.12%* n/a 27.42% 17.13% 21.62%* n/a 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Growth Portfolio 2.38% 8.02% 10.05% 7.77% 9.57% 8.46% 10.05% 09/10/84
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
ANNUITY PAYMENTS
Your variable Annuity Payment will fluctuate as the Annuity Unit value(s)
fluctuates with the investment experience of the selected Subaccount(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.
A fixed number of Annuity Units is determined in each of the designated
Subaccounts on the Contract Effective Date. The number of Annuity Units, which
does not change thereafter, is calculated by
4
<PAGE>
dividing (a) by (b), where (a) is the amount of the Annuity Payment as if the
Annuity Payment was calculated as of the Contract Effective Date, and (b) is the
Annuity Unit value for that investment option on the Contract Effective Date.
The first payment will be calculated ten Valuation Dates prior to the payment
due date which depends upon the payment frequency you have selected. As noted
above, Annuity Unit values fluctuate from one Valuation Date to the next; such
fluctuations reflect changes in the net investment factor for the applicable
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 each
Subaccount selected.
EXAMPLE:
Assume that you purchase a Single Premium Immediate Annuity Contract with a
$50,000 premium. The payment option that you select has a payment factor of
$6.68 per $1,000 of value applied. Also assume that no premium tax is payable.
If a payment was determined as of the Contract Effective Date, that payment
would be calculated by multiplying $6.68 per $1,000 by 50.000. This would
produce an initial payment of $334.00.
Assume that the value of the Annuity Unit on the Contract Effective Date is
13.400000. The payment calculated as of the Contract Effective Date is divided
by the Annuity Unit value to determine the number of Annuity Units (that is,
$334.00/13.400000 = 24.925 Annuity Units). The number of Annuity Units will
remain constant over the term of your contract as determined by your annuity
option. The value of each payment will be determined on the tenth Valuation Date
prior to the payment due date by multiplying the number of Annuity Units by that
date's Annuity Unit value.
Payments will subsequently fluctuate depending upon the net investment
performance that occurs between payment Valuation Dates less a factor that
represents the Assumed Annual Net Return Rate. This offsets the Assumed Annual
Net Return Rate built into the number of Annuity Units determined above.
Annuity Unit values are calculated on a daily basis by multiplying the Annuity
Unit Value by the daily net investment factor and by the daily Assumed Annual
Net Return Rate. The factor for a 3.5% Assumed Annual Net Return Rate is
0.9999058 and for 5.0%, 0.9998663. The new payment is calculated by multiplying
the number of Annuity Units by the new Annuity Unit value.
SALES MATERIAL AND ADVERTISING
The Company may illustrate the hypothetical values of Annuity Payments made from
each of the Subaccounts over certain time periods based on the historical net
asset values of the Funds.
The Company may also include hypothetical illustrations in its sales literature
that explain the mathematical principles of compounded interest, tax deferred
accumulation, and the mechanics of variable annuity contracts. The Company may
also discuss the difference between variable annuity
5
<PAGE>
contracts and savings or investment products, including, but not limited to,
personal savings accounts and certificates of deposit.
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, 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.
6
<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-16
S-1
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1996:
<TABLE>
<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>
<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>
<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>
<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>
<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.09515-97 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:
Not Applicable
(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) Form of Variable Annuity Contracts (A050SP96)(3)
(5) Form of Variable Annuity Contract Application (82926(7/96))(3)
(6.1) Certificate of Incorporation and By-Laws of Aetna Life Insurance
and Annuity Company(4)
(6.2) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company(5)
(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)
<PAGE>
(8.2) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company and Janus Aspen Series dated April 19, 1994 and
amended March 1, 1996(2)
(8.3) 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)
(9) Opinion of Counsel(6)
(10.1) Consent of Independent Auditors
(10.2) Consent of Counsel
(11) Not applicable
(12) Not applicable
(13) Schedule for Computation of Performance Data(7)
(14) Not applicable
(15.1) Powers of Attorney(8)
(15.2) Authorization 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 Registration Statement on Form N-4 (File No.
333-09515), as filed electronically on August 2, 1996.
4. Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form S-6 (File No. 33-60477), as filed electronically on April
15, 1996.
5. 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.
6. Incorporated by reference to 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.
7. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-4 (File No. 333-09515), as filed electronically on
December 23, 1996.
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
<PAGE>
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
<PAGE>
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;
<PAGE>
(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) The Company hereby represents that it is relying upon and will comply
with the provisions of Paragraphs (1) through (4) of the SEC Staff's
No-Action Letter dated November 22, 1988 with respect to language
concerning withdrawal restrictions applicable to plans established
pursuant to Section 403(b) of the Internal Revenue Code. See American
Counsel of Life Insurance; SEC No-Action Letter, [1989 Transfer Binder]
Fed. SEC. L. Rep. (CCH) [Paragraph] 78,904 at 78,523 (November 22,
1988).
(e) 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.
(f) 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. 1 to its
Registration Statement on Form N-4 (File No. 333-09515) and has duly caused this
Post-Effective Amendment No. 1 to its Registration Statement on Form N-4 (File
No. 333-09515) 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. 1 to the Registration Statement on Form N-4 (File No. 333-09515) 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 )
- ----------------------------------- and Chief Financial Officer )
Timothy A. Holt )
)
Christopher J. Burns* Director ) April
- ------------------------------------ )
Christopher J. Burns ) 15, 1997
)
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 Form of Variable Annuity Contracts (A050SP96) *
99-B.5 Form of Variable Annuity Contract Application (82826(7/96)) *
99-B.6.1 Certificate 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 and Janus Aspen Series dated April 19,
1994 and amended March 1, 1996
99-B.8.3 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.9 Opinion of Counsel *
99-B.10.1 Consent of Independent Auditors _______
99-B.10.2 Consent of Counsel _______
*Incorporated by reference
<PAGE>
Exhibit
No. Exhibit Page
99-B.13 Schedule for Computation of Performance Data
99-B.15.1 Powers of Attorney *
99-B.15.2 Authorization 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 reference to our Firm under the caption
"Independent Auditors" in the Statement of Additional Information.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
April 15, 1997
[Aetna Letterhead] 151 Farmington Avenue
Hartford, CT 06156
[Aetna Logo]
Susan E. Bryant
Counsel
Law Division, RE4A
Investments & Financial Services
(860) 273-7834
Fax: (860) 273-0356
April 15, 1997
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. 1 to Registration Statement on Form N-4
File Nos. 333-09515 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.
1 to Registration Statement on Form N-4 (File No. 333-09515).
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 Acct. 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
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<NET-ASSETS> 1,848,811,724
<DIVIDEND-INCOME> 120,367,178
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<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
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