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] 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 December 26,
1996. 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.
PLEASE KEEP THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS IS VALID
ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF THE FUNDS.
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 DECEMBER 26, 1996
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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 ................................................ 4
CHARGES AND DEDUCTIONS ..................................... 4
Mortality and Expense Risk Charge ........................ 4
Administrative Charge .................................... 5
Withdrawal Charge ........................................ 5
Fund Expenses ............................................ 5
Premium and Other Taxes .................................. 5
TAXES ...................................................... 6
Introduction ............................................. 6
Taxation of Annuity Payments ............................. 6
Taxation of Withdrawals .................................. 6
Distributions--Tax-Deferred Annuities .................... 6
Tax Penalty .............................................. 6
Nonnatural Owners ........................................ 7
WITHDRAWALS--ACCESS TO YOUR MONEY .......................... 7
Commutation .............................................. 7
Commuted Value ........................................... 8
PERFORMANCE ................................................ 8
DEATH BENEFIT .............................................. 8
Death Benefit Commutation ................................ 8
OTHER INFORMATION .......................................... 9
The Company .............................................. 9
The Separate Account ..................................... 9
Distribution ............................................. 9
Ownership ................................................ 9
Beneficiary .............................................. 9
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Delay or Suspension of Payments .......................... 9
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
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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 value of the Subaccount is
calculated. Currently, this calculation occurs at the close of business of
the New York Stock Exchange on any normal business day, Monday through
Friday, that the New York Stock Exchange is open.
DEFINITIONS - 1
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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).
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] 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.)
SUMMARY - 1
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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
SUMMARY - 2
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FEE TABLE
This information is intended to help you understand the various costs and
expenses incurred directly or indirectly 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.
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(1) 0.00%
=======
Total Separate Account Annual Expenses 1.25%
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(2)
--------------------------------- -------------------------
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) 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%.
(2) The Company will monitor the applicable deductions for the Withdrawal
Charge to ensure it will never exceed 8.5% of the Purchase Payment.
FEE TABLE - 1
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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, 1995. 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.
Investment
Advisory
Fees(1) Other Expenses
(after expense (after expense Total Fund
reimbursement) reimbursement) Annual Expenses
-------------- -------------- ----------------
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%
Alger American Small
Cap Portfolio 0.85% 0.07% 0.92%
Janus Aspen Growth
Portfolio(3) 0.65% 0.13% 0.78%
Janus Aspen Worldwide
Growth Portfolio(3) 0.68% 0.22% 0.90%
Neuberger & Berman
Growth Portfolio(4) 0.84% 0.10% 0.94%
(1) Certain of the unaffiliated Fund advisers reimburse the Company for
administrative costs incurred in connection with administering the
Funds as variable funding options under the Contract. These
reimbursements are paid out of the investment advisory fees and are
not charged to investors.
(2) As of May 1, 1996, the Company provides administrative services to the
Fund and assumes the Fund's ordinary recurring direct costs under an
Administrative Services Agreement. The "Other Expenses" shown are not
based on figures for the year ended December 31, 1995, but reflect the
fee payable under this Agreement. The investment advisory fees reflect
the fees in effect as of August 1, 1996.
(3) The information for each Portfolio is net of fee waivers or reductions
from Janus Capital Corporation. Fee reductions for the Growth and
Worldwide Growth Portfolios reduce the management fee to the level of
the corresponding Janus retail fund. Other waivers, if applicable, are
first applied against the management fee and then against other
expenses. Without such waivers, the Investment Advisory Fees, Other
Expenses and Total Fund Annual Expenses for the Portfolios for the
fiscal year ended December 31, 1995 would have been: 0.85%, 0.13% and
0.98%, respectively, for Janus Aspen Growth Portfolio; and 0.87%,
0.22% and 1.09%, respectively, for Janus Aspen Worldwide Growth
Portfolio. Janus Capital may modify or terminate the waivers or
reductions at any time upon 90 days' notice to the Portfolio's Board
of Trustees.
(4) Neuberger & Berman Advisers Management Trust (the "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. Expenses in the table reflect expenses of the
Portfolio and include the Portfolio's pro rata portion of the
operating expenses of the Portfolio's corresponding Series. The
Portfolio pays Neuberger & Berman Management Inc. ("NBMI") an
administration fee based on the Portfolio's net asset value. The
corresponding Series of the Portfolio pays NBMI a management fee based
on the Series' average daily net assets. Accordingly, this table
combines management fees at the Series level and administration fees
at the Portfolio level in a unified fee rate. (See "Expenses" in the
Trust's prospectus.)
FEE TABLE - 2
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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.
EXAMPLE A
-----------------------------------------
If you withdraw your entire Commuted
Value at the end of the periods shown,
you would pay the following expenses,
including any applicable withdrawal
charge:
1 year 3 years 5 years 10 years
------- -------- -------- ----------
Aetna Variable Fund $65 $83 $ 99 $127
Aetna Income Shares $64 $81 $ 96 $122
Aetna Investment Advisers
Fund, Inc. $65 $84 $100 $129
Aetna Legacy Variable
Portfolio $67 $88 $107 $140
Alger American Small Cap
Portfolio $68 $92 $113 $151
Janus Aspen Growth Portfolio $67 $89 $108 $142
Janus Aspen Worldwide Growth
Portfolio $68 $92 $113 $149
Neuberger & Berman Growth
Portfolio $68 $93 $114 $152
EXAMPLE B
-----------------------------------------
If you do not withdraw your Commuted
Value you would pay the following
expenses (no withdrawal charge is
reflected):
1 year 3 years 5 years 10 years
------- -------- -------- ----------
Aetna Variable Fund $18 $50 $78 $127
Aetna Income Shares $17 $48 $74 $122
Aetna Investment Advisers
Fund, Inc. $18 $50 $79 $129
Aetna Legacy Variable
Portfolio $19 $55 $86 $140
Alger American Small Cap
Portfolio $21 $59 $92 $151
Janus Aspen Growth Portfolio $20 $56 $87 $142
Janus Aspen Worldwide Growth
Portfolio $21 $59 $92 $149
Neuberger & Berman Growth
Portfolio $21 $60 $93 $152
FEE TABLE - 3
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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 eight 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
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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 value of your interest in a Subaccount is expressed as the number of
"Annuity Units" that you hold, multiplied 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.) 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%.
2
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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).
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. 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 8 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 based on the Company's
judgment of which
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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] Alger American Fund--Alger American Small Capitalization Portfolio
seeks capital return through investment in common stock of smaller
companies offering the potential for significant price gain. The
Portfolio invests at least 65% of its net assets in equity
securities of companies that have total market capitalization of
less than $1 billion at the time of purchase.(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 appreciation without regard to income. The Portfolio
generally invests in securities believed to have the maximum
potential for long-term capital appreciation. The Portfolio expects
to be almost fully invested in common stocks, often of companies
that may be temporarily out of favor in the market.(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 respective Fund prospectuses which accompany this Prospectus.
You should read the Fund prospectuses and consider carefully, and on a
continuing basis, which Fund or combination of Funds is best suited to your
long-term investment objectives.
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.
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.
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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.
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.
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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.
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.
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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.
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."
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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, 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 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.
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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%.
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.
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 will not become effective until written notice of the change is
received by the Company. 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
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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.
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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
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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.
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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 December 26, 1996
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 December 26, 1996.
A free prospectus is available upon request from the local Aetna Life
Insurance and Annuity Company office or by writing to or calling:
Aetna Life Insurance and Annuity Company
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 ................................ 2
Performance Data .................................................. 3
General .......................................................... 3
Average Annual Total Return Quotations ........................... 3
Annuity Payments .................................................. 4
Sales Material and Advertising .................................... 5
Independent Auditors .............................................. 5
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, 1995, the
Company had assets of $27.1 billion (subject to $25.5 billion of customer and
other liabilities, $1.6 billion of shareholder equity) which includes $11
billion in assets held in the Company's separate accounts. The Company had
$22 billion in assets under management, including $8 billion in its mutual
funds. As of December 31, 1994, it ranked among the top 2% of all U.S. life
insurance companies by size. The Company is a wholly owned subsidiary of
Aetna Retirement Holdings, Inc., which is in turn a wholly owned subsidiary
of Aetna Retirement Services, Inc., and an indirect wholly owned subsidiary
of Aetna 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. The assets of each of the
Subaccounts of the Separate Account will be invested exclusively in shares of
the mutual funds described in the Prospectus. Purchase Payments made under
the Contract may be allocated to one or more of the Subaccounts. The Company
may make additions to or deletions from, or substitutions of available
investment options as permitted by law. The availability of the Funds is
subject to applicable regulatory authorization. Not all Funds are available
in all jurisdictions or under all Contracts. The Funds currently available
under the Contract are as follows:
Aetna Variable Fund Alger American Small Cap Portfolio
Aetna Income Shares Janus Aspen Growth Portfolio
Aetna Investment Advisers Fund, Inc. Janus Aspen Worldwide Growth
Portfolio
Aetna Legacy Variable Portfolio Neuberger & Berman Growth 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.
2
<PAGE>
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 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 standardized figures 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.
If a Fund was in existence prior to the date it became available under the
Contract, standardized and non-standardized total returns may include periods
prior to such date. These figures are calculated by adjusting the actual
returns of the Fund to reflect the charges that would have been assessed
under the Contract had that Fund been available under the Contract during
that period.
Investment results of the Subaccounts will fluctuate over time, and any
presentation of the Subaccounts' total return quotations for any prior period
should not be considered as a representation of how the Subaccounts will
perform in any future period. Additionally, the 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, 1995 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 *).
Standardized
-----------------------------------------------------------------------
SUBACCOUNT 1 Year 5 Years 10 Years
-----------------------------------------------------------------------
Aetna Variable Fund 24.07% 11.65% 12.30%
-----------------------------------------------------------------------
Aetna Income Shares 10.93% 8.06% 8.56%
-----------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc. 19.36% 10.05% 9.19%*
-----------------------------------------------------------------------
Aetna Legacy Variable Portfolio 2.27%* N/A N/A
-----------------------------------------------------------------------
Alger American Small Cap Portfolio 35.39% 18.61% 21.08%*
-----------------------------------------------------------------------
Janus Aspen Growth Portfolio 22.12% 11.83%* N/A
-----------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 19.49% 17.07%* N/A
-----------------------------------------------------------------------
Neuberger & Berman Growth Portfolio 23.58% 16.14% 12.89%*
-----------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund
Non-Standardized Inception
Date
----------------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund 30.60% 10.41% 12.10% 12.30% 04/30/75
----------------------------------------------------------------------------------------------
Aetna Income Shares 16.77% 6.31% 8.50% 8.56% 06/01/78
----------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc. 25.64% 10.29% 10.50% 9.36% 06/23/89
----------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio 7.65%* N/A N/A N/A 07/03/95
----------------------------------------------------------------------------------------------
Alger American Small Cap Portfolio 42.51% 14.61% 19.09% 21.08%* 09/21/88
----------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 28.55% 13.83%* N/A N/A 09/13/93
----------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 25.78% 19.17%* N/A N/A 09/13/93
----------------------------------------------------------------------------------------------
Neuberger & Berman Growth Portfolio 30.09% 16.16% 16.61% 12.89%* 12/31/85
----------------------------------------------------------------------------------------------
</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.
3
<PAGE>
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 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.
4
<PAGE>
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 dollar cost averaging,
compounded interest, tax deferred accumulation, and the mechanics of variable
annuity contracts. The Company may also discuss the difference between
variable annuity contracts and other types of savings or investment products,
including, but not limited to, personal savings accounts and certificates of
deposit.
We may publish in advertisements and reports, the ratings and other
information assigned to us by one or more independent rating organizations
such as A.M. Best Company, Duff & Phelps, Standard & Poor's Corporation and
Moody's Investors Services, Inc. The purpose of the ratings is to reflect our
financial strength and/or claims-paying ability. We may also quote ranking
services such as Morningstar's Variable Annuity/Life Performance Report and
Lipper's Variable Insurance Products Performance Analysis Service (VIPPAS),
which rank variable annuity or life Subaccounts or their underlying funds by
performance and/or investment objective. From time to time, we will quote
articles from newspapers and magazines or other publications or reports,
including, but not limited to The Wall Street Journal, Money magazine, USA
Today and The VARDS Report.
The Company may provide in advertising, sales literature, periodic
publications or other materials information on various topics of interest to
current and prospective Contract Holders. These topics may include the
relationship between sectors of the economy and the economy as a whole and
its effect on various securities markets, investment strategies and
techniques (such as value investing, market timing, dollar cost averaging,
asset allocation, constant ratio transfer and account rebalancing), the
advantages and disadvantages of investing in tax-deferred and taxable
investments, customer profiles and hypothetical purchase and investment
scenarios, financial management and tax and retirement planning, and
investment alternatives to certificates of deposit and other financial
instruments, including comparison between the Contracts and the
characteristics of and market for such financial instruments.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103, are
the independent auditors for the Separate Account and for the Company. The
services provided to the Separate Account include primarily the examination
of the Separate Account's financial statements and the review of filings made
with the SEC.
5
<PAGE>
FINANCIAL STATEMENTS
VARIABLE ANNUITY ACCOUNT B
Index
Independent Auditors' Report ............ S-2
Statement of Assets and Liabilities ..... S-3
Statement of Operations ................. S-7
Statements of Changes in Net Assets ..... S-8
Notes to Financial Statements ........... S-9
Condensed Financial Information ......... S-11
S-1
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and
Contracts Owners of Variable Annuity Account B:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Annuity Account B (the "Account")
as of December 31, 1995, and the related statement of operations for the year
then ended, statements of changes in net assets for each of the years in the
two-year period then ended and condensed financial information for the year
ended December 31, 1995. These financial statements and condensed financial
information are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements and
condensed financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
condensed financial information are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned as of December 31, 1995, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of the Aetna Life Insurance and Annuity Company Variable Annuity
Account B as of December 31, 1995, the results of its operations for the year
then ended, changes in its net assets for each of the years in the two-year
period then ended and condensed financial information for the year ended
December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 16, 1996
S-2
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities--December 31, 1995
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 20,401,661 shares at $29.06 per share
(cost $600,834,096) $ 592,782,223
Aetna Income Shares; 6,006,058 shares at $13.00 per share
(cost $74,865,329) 78,089,373
Aetna Variable Encore Fund; 6,101,341 shares at $13.30 per
share (cost $78,645,161) 81,132,779
Aetna Investment Advisers Fund, Inc.; 7,664,725 shares at
$14.50 per share (cost $98,736,185) 111,155,405
Aetna GET Fund, Series B; 1,128,914 shares at $12.40 per
share (cost $11,433,593) 14,000,173
Aetna Ascent Variable Portfolio; 32,179 shares at $10.80
per share (cost $341,813) 347,383
Aetna Crossroads Variable Portfolio; 43,426 shares at
$10.74 per share (cost $458,196) 466,405
Aetna Legacy Variable Portfolio; 30,419 shares at $10.64
per share (cost $321,970) 323,579
Alger American Funds:
Alger American Balanced Portfolio; 50,517 shares at
$13.64 per share (cost $687,406) 689,050
Alger American Growth Portfolio; 346,280 shares at $31.16
per share (cost $10,853,903) 10,790,086
Alger American Income and Growth Portfolio; 57,421 shares
at $17.79 per share (cost $1,028,289) 1,021,520
Alger American Leveraged AllCap Portfolio; 112,151 shares
at $17.43 per share (cost $1,922,235) 1,954,796
Alger American MidCap Growth Portfolio; 167,570 shares at
$19.44 per share (cost $3,250,372) 3,257,565
Alger American Small Capitalization Portfolio; 646,138
shares at $39.41 per share
(cost $25,418,034) 25,464,317
Calvert Responsibly Invested Balanced Portfolio; 203,667
shares at $1.70 per share (cost $360,358) 346,846
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 800,426 shares at $19.27 per
share (cost $14,457,609) 15,424,209
Growth Portfolio; 521,413 shares at $29.20 per share
(cost $15,259,452) 15,225,262
High Income Portfolio; 100,193 shares at $12.05 per share
(cost $1,192,297) 1,207,326
Overseas Portfolio; 117,982 shares at $17.05 per share
(cost $1,960,157) 2,011,591
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 86,288 shares at $15.79 per
share (cost $1,264,129) 1,362,489
Contrafund Portfolio; 867,434 shares at $13.78 per share
(cost $11,830,403) 11,953,244
Index 500 Portfolio; 28,699 shares at $75.71 per share
(cost $2,101,954) 2,172,818
Investment Grade Bond Portfolio; 56,547 shares at $12.48
per share (cost $694,235) 705,701
Insurance Management Series:
Corporate Bond Fund; 1,213,125 shares at $9.79 per share
(cost $11,647,482) 11,876,490
Equity Growth and Income Fund; 2,084,810 shares at $12.80
per share (cost $23,768,678) 26,685,566
Growth Stock Fund; 17,464 shares at $10.30 per share
(cost $176,265) 179,879
International Stock Fund; 156,864 shares at $10.35 per
share (cost $1,580,366) 1,623,538
Prime Money Fund; 5,774,492 shares at $1.00 per share
(cost $5,775,674) 5,774,492
U.S. Government Bond Fund; 438,127 shares at $10.29 per
share (cost $4,432,728) 4,508,328
Utility Fund; 797,832 shares at $11.03 per share (cost
$8,000,336) 8,800,082
Janus Aspen Series:
Aggressive Growth Portfolio; 693,818 shares at $17.08 per
share (cost $10,685,497) 11,850,406
Balanced Portfolio; 55,709 shares at $13.03 per share
(cost $699,844) 725,884
Flexible Income Portfolio; 141,156 shares at $11.11 per
share (cost $1,538,432) 1,568,241
Growth Portfolio; 190,925 shares at $13.45 per share
(cost $2,483,088) 2,567,940
Short-Term Bond Portfolio; 74,706 shares at $10.03 per
share (cost $747,969) 749,299
Worldwide Growth Portfolio; 365,442 shares at $15.31 per
share (cost $5,341,275) 5,594,914
Lexington Emerging Markets Fund; 36,371 shares at $9.38
per share (cost $345,183) 341,159
Lexington Natural Resources Trust; 166,302 shares at
$11.30 per share (cost $1,690,491) 1,879,208
Neuberger & Berman Advisers Management Trust--Growth
Portfolio; 323,147 shares at $25.86 per share (cost
$8,279,416) 8,356,574
Scudder Variable Life Investment Fund--International
Portfolio; 893,880 shares at $11.82 per share (cost
$9,913,254) 10,565,665
TCI Portfolios, Inc.:
TCI Balanced; 69,585 shares at $7.04 per share (cost
$473,338) 489,878
TCI Growth; 4,503,433 shares at $12.06 per share (cost
$46,105,299) 54,311,402
TCI International; 113,062 shares at $5.33 per share
(cost $586,969) 602,619
----------------
NET ASSETS $1,130,935,704
================
S-3
<PAGE>
Statement of Assets and Liabilities--December 31, 1995 (continued)
Net assets represented by:
Accumulation
Unit
Units Value
---------- ----------
Reserves for annuity contracts in
accumulation and payment period:
Aetna Variable Fund:
Non-Qualified 1964 5,159.1 $149.975 $ 773,737
Non-Qualified I 157,693.1 169.682 26,757,709
Non-Qualified II 91,497.4 119.527 10,936,439
Non-Qualified III 129,657.4 114.464 14,841,063
Non-Qualified V 30,554,956.8 13.972 426,924,429
Non-Qualified VI 538,384.8 13.060 7,031,177
Non-Qualified VII 3,068,782.3 14.001 42,967,268
Reserves for annuity contracts in
payment period (Note 1) 62,550,401
Aetna Income Shares:
Non-Qualified I 7,341.1 46.171 338,944
Non-Qualified II 46,936.3 48.232 2,263,808
Non-Qualified III 11,092.5 46.616 517,093
Non-Qualified V 4,853,662.2 12.212 59,271,792
Non-Qualified VI 36,561.4 11.140 407,298
Non-Qualified VII 988,198.5 12.037 11,894,717
Reserves for annuity contracts in
payment period (Note 1) 3,395,721
Aetna Variable Encore Fund:
Non-Qualified I 19,658.0 37.683 740,766
Non-Qualified II 53,953.2 38.335 2,068,303
Non-Qualified III 21,094.2 36.081 761,100
Non-Qualified V 4,354,271.6 11.007 47,927,808
Non-Qualified VI 8,053.2 10.728 86,394
Non-Qualified VII 2,694,033.8 10.968 29,548,408
Aetna Investment Advisers Fund,
Inc.:
Non-Qualified I 38,200.7 18.002 687,677
Non-Qualified II 101,130.6 17.932 1,813,429
Non-Qualified III 26,617.3 17.889 476,148
Non-Qualified V 6,430,772.1 13.803 88,762,468
Non-Qualified VI 14,277.8 11.589 165,459
Non-Qualified VII 919,744.2 13.602 12,510,415
Reserves for annuity contracts in
payment period (Note 1) 6,739,809
Aetna GET Fund, Series B:
Non-Qualified V 1,089,582.2 12.849 14,000,173
Aetna Ascent Variable Portfolio:
Non-Qualified V 16,790.9 10.652 178,853
Non-Qualified VII 15,831.9 10.645 168,530
Aetna Crossroads Variable
Portfolio:
Non-Qualified V 16,953.1 10.594 179,603
Non-Qualified VII 27,089.2 10.587 286,802
Aetna Legacy Variable Portfolio:
Non-Qualified V 2,222.3 10.443 23,208
Non-Qualified VII 28,777.7 10.438 300,371
S-4
<PAGE>
Alger American Funds:
Alger American Balanced Portfolio:
Non-Qualified VII 54,737.3 $ 12.588 $ 689,050
Alger American Growth Portfolio:
Non-Qualified V 275,493.6 10.157 2,798,288
Non-Qualified VII 615,696.6 12.980 7,991,798
Alger American Income and Growth
Portfolio:
Non-Qualified VII 95,828.9 10.660 1,021,520
Alger American Leveraged AllCap
Portfolio:
Non-Qualified VII 159,378.8 12.265 1,954,796
Alger American MidCap Growth
Portfolio:
Non-Qualified VII 233,109.8 13.974 3,257,565
Alger American Small
Capitalization Portfolio:
Non-Qualified V 1,364,900.9 13.714 18,718,117
Non-Qualified VII 507,425.1 13.295 6,746,200
Calvert Responsibly Invested
Balanced Portfolio:
Non-Qualified V 25,730.0 13.480 346,846
Fidelity Investments Variable
Insurance Products Fund:
Equity--Income Portfolio:
Non-Qualified V 294,244.1 11.054 3,252,637
Non-Qualified VII 913,516.8 13.324 12,171,572
Growth Portfolio:
Non-Qualified V 288,576.0 10.066 2,904,786
Non-Qualified VII 885,545.2 13.913 12,320,476
High Income Portfolio:
Non-Qualified VII 112,818.5 10.701 1,207,326
Overseas Portfolio:
Non-Qualified V 33,813.3 10.052 339,882
Non-Qualified VII 150,017.4 11.143 1,671,709
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio:
Non-Qualified VII 116,810.0 11.664 1,362,489
Contrafund Portfolio:
Non-Qualified V 379,862.0 10.468 3,976,320
Non-Qualified VII 684,272.2 11.658 7,976,924
Index 500 Portfolio:
Non-Qualified VII 191,671.3 11.336 2,172,818
Investment Grade Bond Portfolio:
Non-Qualified VII 66,574.4 10.600 705,701
Insurance Management Series:
Corporate Bond Fund:
Non-Qualified VII 1,020,320.8 11.640 11,876,490
Equity Growth and Income Fund:
Non-Qualified VII 2,057,363.9 12.971 26,685,566
Growth Stock Fund:
Non-Qualified VII 17,503.1 10.277 179,879
International Stock Fund:
Non-Qualified VII 158,318.6 10.255 1,623,538
Prime Money Fund:
Non-Qualified VII 554,933.5 10.406 5,774,492
U.S. Government Bond Fund:
Non-Qualified VII 417,293.2 10.804 4,508,328
Utility Fund:
Non-Qualified VII 727,600.6 12.095 8,800,082
S-5
<PAGE>
Janus Aspen Series:
Aggressive Growth Portfolio:
Non-Qualified V 723,838.5 $ 12.992 $ 9,404,275
Non-Qualified VII 187,583.5 13.040 2,446,131
Balanced Portfolio:
Non-Qualified V 7,771.5 10.835 84,204
Non-Qualified VII 53,016.1 12.104 641,680
Flexible Income Portfolio:
Non-Qualified V 84,047.6 12.094 1,016,439
Non-Qualified VII 45,713.6 12.071 551,802
Growth Portfolio:
Non-Qualified V 26,022.4 10.870 282,874
Non-Qualified VII 176,110.7 12.975 2,285,066
Short-Term Bond Portfolio:
Non-Qualified V 2,677.9 10.325 27,650
Non-Qualified VII 67,034.3 10.765 721,649
Worldwide Growth Portfolio:
Non-Qualified V 227,582.2 10.893 2,479,004
Non-Qualified VII 252,485.1 12.341 3,115,910
Lexington Emerging Markets Fund:
Non-Qualified VII 36,773.1 9.277 341,159
Lexington Natural Resources Trust:
Non-Qualified V 162,462.2 10.479 1,702,501
Non-Qualified VII 16,932.5 10.436 176,707
Neuberger & Berman Advisers
Management Trust Growth Portfolio:
Non-Qualified V 526,542.1 15.871 8,356,574
Scudder Variable Life Investment
Fund International Portfolio:
Non-Qualified V 720,017.3 14.674 10,565,665
TCI Portfolios, Inc.:
TCI Balanced:
Non-Qualified VII 40,406.8 12.124 489,878
TCI Growth:
Non-Qualified II 82,191.6 13.224 1,086,884
Non-Qualified III 24,926.7 13.107 326,719
Non-Qualified V 2,735,782.0 14.091 38,549,513
Non-Qualified VI 10,258.8 11.884 121,912
Non-Qualified VII 1,014,612.2 14.021 14,226,374
TCI International:
Non-Qualified VII 57,691.1 10.446 602,619
-------------
$1,130,935,704
=============
See Notes to Financial Statements.
S-6
<PAGE>
Variable Annuity Account B
Statement of Operations--Year Ended December 31, 1995
INVESTMENT INCOME:
Dividends: (Notes 1 and 3)
Aetna Variable Fund $ 97,535,899
Aetna Income Shares 4,800,986
Aetna Variable Encore Fund 61,853
Aetna Investment Advisers Fund, Inc. 7,359,482
Aetna GET Fund, Series B 359,007
Aetna Ascent Variable Portfolio 7,378
Aetna Crossroads Variable Portfolio 8,108
Aetna Legacy Variable Portfolio 5,625
Alger American Fund--Alger American Balanced Portfolio 267
Alger American Fund--Alger American Growth Portfolio 1,379
Alger American Fund--Alger American MidCap Portfolio 2
Calvert Responsibly Invested Balanced Portfolio 30,986
Fidelity Investments Variable Insurance Products
Fund--Equity-Income Portfolio 126,924
Fidelity Investments Variable Insurance Products Fund--Growth
Portfolio 1,403
Fidelity Investments Variable Insurance Products
Fund--Overseas Portfolio 106
Fidelity Investments Variable Insurance Products Fund
II--Asset Manager Portfolio 3,070
Fidelity Investments Variable Insurance Products Fund
II--Contrafund Portfolio 146,072
Insurance Management Series--Corporate Bond Fund 425,532
Insurance Management Series--Equity Growth and Income Fund 249,502
Insurance Management Series--Prime Money Fund 225,699
Insurance Management Series--U.S. Government Bond Fund 98,938
Insurance Management Series--Utility Fund 186,623
Janus Aspen Series--Aggressive Growth Portfolio 113,664
Janus Aspen Series--Balanced Portfolio 5,931
Janus Aspen Series--Flexible Income Portfolio 51,680
Janus Aspen Series--Growth Portfolio 41,839
Janus Aspen Series--Short-Term Bond Portfolio 15,670
Janus Aspen Series--Worldwide Growth Portfolio 17,957
Lexington Emerging Markets Fund 3,323
Lexington National Resources Trust 7,842
Neuberger & Berman Advisers Management Trust--Growth
Portfolio 111,452
Scudder Variable Life Investment Fund--International
Portfolio 40,450
TCI Portfolios, Inc.--TCI Balanced 5,359
TCI Portfolios, Inc.--TCI Growth 47,667
--------------
Total investment income 112,097,675
Valuation period deductions (Note 2) (11,786,592)
--------------
Net investment income 100,311,083
--------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1 and 4)
Proceeds from sales $495,934,611
Cost of investments sold 463,921,121
-------------
Net realized gain 32,013,490
Net unrealized gain (loss) on investments:
Beginning of year (44,356,052)
End of year 28,746,944
-------------
Net unrealized gain 73,102,996
--------------
Net realized and unrealized gain on investments 105,116,486
--------------
Net increase in net assets resulting from operations $205,427,569
==============
See Notes to Financial Statements.
S-7
<PAGE>
Variable Annuity Account B
Statements of Changes in Net Assets
Year Ended
December 31,
-------------------------------
1995 1994
------------- --------------
FROM OPERATIONS:
Net investment income $ 100,311,083 $ 74,514,904
Net realized and unrealized gain (loss)
on investments 105,116,486 (89,424,840)
------------- --------------
Net increase (decrease) in net assets
resulting from operations 205,427,569 (14,909,936)
------------- --------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase
payments 178,474,387 170,170,873
Sales and administrative charges
deducted by the Company (34,250) (8,045)
------------- --------------
Net variable annuity contract purchase
payments 178,440,137 170,162,828
Transfers from the Company for
mortality guarantee adjustments 1,565,140 537,027
Transfers from (to) the Company's fixed
account options 4,144,061 (6,000,310)
Redemptions by contract holders (46,390,791) (32,737,461)
Annuity payments (9,198,421) (7,564,589)
Other 1,143,373 (127,555)
------------- --------------
Net increase in net assets from unit
transactions 129,703,499 124,269,940
------------- --------------
Change in net assets 335,131,068 109,360,004
NET ASSETS:
Beginning of year 795,804,636 686,444,632
------------- --------------
End of year $1,130,935,704 $795,804,636
============= ==============
S-8
<PAGE>
Variable Annuity Account B
Notes to Financial Statements--December 31, 1995
1. Summary of Significant Accounting Policies
Variable Annuity Account B ("Account") is registered under the Investment
Company Act of 1940 as a unit investment trust. The Account is sold
exclusively for use with annuity contracts that may be entitled to
tax-deferred treatment under specific sections of the Internal Revenue Code
of 1986, as amended.
The accompanying financial statements of the Account have been prepared in
accordance with generally accepted accounting principles.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset value
per share as determined by each Fund on December 31, 1995:
Aetna Variable Fund
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Aetna GET Fund, Series B
Aetna Ascent Variable Fund
Aetna Crossroads Variable Fund
Aetna Legacy Variable Fund
Alger American Funds:
[bullet] Alger American Balanced Portfolio
[bullet] Alger American Growth Portfolio
[bullet] Alger American Income and Growth Portfolio
[bullet] Alger American Leveraged AllCap Portfolio
[bullet] Alger American MidCap Growth Portfolio
[bullet] Alger American Small Capitalization Portfolio
Calvert Responsibly Invested Balanced Portfolio
Fidelity Investments Variable Insurance Products Fund:
[bullet] Equity-Income Portfolio
[bullet] Growth Portfolio
[bullet] High Income Portfolio
[bullet] Overseas Portfolio
Fidelity Investments Variable Insurance Products Fund II:
[bullet] Asset Manager
[bullet] Contrafund Portfolio
[bullet] Index 500 Portfolio
[bullet] Investment Grade Bond Portfolio
Insurance Management Series:
[bullet] Corporate Bond Fund
[bullet] Equity Growth and Income Fund
[bullet] Growth Stock Fund
[bullet] International Stock Fund
[bullet] Prime Money Fund
[bullet] U.S. Government Bond Fund
[bullet] Utility Fund
Janus Aspen Series:
[bullet] Aggressive Growth Portfolio
[bullet] Balanced Portfolio
[bullet] Flexible Income Portfolio
[bullet] Growth Portfolio
[bullet] Short-Term Bond Portfolio
[bullet] Worldwide Growth Portfolio
Lexington Emerging Markets Fund
Lexington Natural Resources Trust
Neuberger & Berman Advisers
Management Trust:
[bullet] Growth Portfolio
Scudder Variable Life Investment Fund:
[bullet] International Portfolio
TCI Portfolios, Inc.:
[bullet] TCI Balanced
[bullet] TCI Growth
[bullet] TCI International
b. Other
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of Aetna Life Insurance and Annuity Company ("Company") which is
taxed as a life insurance company under the Internal Revenue Code of 1986, as
amended.
d. Annuity Reserves
Annuity reserves held in the Separate Accounts are computed for currently
payable contracts according to the Progressive Annuity, a49, 1971 Individual
Annuity Mortality, 1971 Group Annuity Mortality, 83a, and 1983 Group Annuity
Mortality tables using various assumed interest rates not to exceed seven
percent. Mortality experience is monitored by the Company. Charges to annuity
reserves for mortality experience are reimbursed to the Company if the
reserves required are less than originally estimated. If additional reserves
are required, the Company reimburses the Account.
S-9
<PAGE>
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made in
accordance with the terms of the contracts and are paid to the Company.
3. Dividend Income
On an annual basis, the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions to the
Account are automatically reinvested in shares of the Funds. The Account's
proportionate share of each Fund's undistributed net investment income and
accumulated net realized gain on investments is included in net unrealized
gain in the Statement of Operations.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the year ended December 31, 1995 aggregated
$725,949,193 and $495,934,611, respectively.
5. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported therein. Although actual results could differ
from these estimates, any such differences are expected to be immaterial to
the net assets of the Account.
S-10
<PAGE>
Variable Annuity Account B
Condensed Financial Information
CHANGE IN VALUE OF ACCUMULATION UNIT--JANUARY 1, 1995 TO DECEMBER 31, 1995
Increase
Value at in Value of
Beginning Value at Accumulation
of Year End of Year Unit
- -----------------------------------------------------------------------------
Aetna Variable Fund:
Non-Qualified 1964 $114.828 $149.975 30.61%
Non-Qualified I 129.838 169.682 30.69%
Non-Qualified II 91.515 119.527 30.61%
Non-Qualified III 87.638 114.464 30.61%
Non-Qualified V 10.698 13.972 30.61%
Non-Qualified VI 9.993 13.060 30.69%
Non-Qualified VII 10.737 14.001 30.40%
- -----------------------------------------------------------------------------
Aetna Income Shares:
Non-Qualified I $ 39.514 $ 46.171 16.85%
Non-Qualified II 41.302 48.232 16.78%
Non-Qualified III 39.919 46.616 16.78%
Non-Qualified V 10.457 12.212 16.78%
Non-Qualified VI 9.534 11.140 16.85%
Non-Qualified VII 10.324 12.037 16.59%
- -----------------------------------------------------------------------------
Aetna Variable Encore Fund:
Non-Qualified I $ 35.958 $ 37.683 4.80%
Non-Qualified II 36.602 38.335 4.73%
Non-Qualified III 34.450 36.081 4.73%
Non-Qualified V 10.509 11.007 4.73%
Non-Qualified VI 10.237 10.728 4.80%
Non-Qualified VII 10.489 10.968 4.57%
- -----------------------------------------------------------------------------
Aetna Investment Advisers Fund,
Inc.:
Non-Qualified I $ 14.299 $ 18.002 25.90%
Non-Qualified II 14.252 17.932 25.82%
Non-Qualified III 14.218 17.889 25.82%
Non-Qualified V 10.971 13.803 25.81%
Non-Qualified VI 10.000 11.589 15.89%(4)
Non-Qualified VII 10.828 13.602 25.62%
- -----------------------------------------------------------------------------
Aetna GET Fund, Series B:
Non-Qualified V $ 10.159 $ 12.849 26.48%
- -----------------------------------------------------------------------------
Aetna Ascent Variable Portfolio:
Non-Qualified V $ 10.000 $ 10.652 6.52%(7)
Non-Qualified VII 10.000 10.645 6.45%(7)
- -----------------------------------------------------------------------------
Aetna Crossroads Variable
Portfolio:
Non-Qualified V $ 10.000 $ 10.594 5.94%(7)
Non-Qualified VII 10.000 10.587 5.87%(7)
- -----------------------------------------------------------------------------
Aeta Legacy Variable Portfolio
Non-Qualified V $ 10.000 $ 10.443 4.43%(8)
Non-Qualified VII 10.000 10.438 4.38%(8)
- -----------------------------------------------------------------------------
Alger American Funds:
Alger American Balanced
Portfolio:
Non-Qualified VII $ 10.000 $ 12.588 25.88%(1)
- -----------------------------------------------------------------------------
Alger American Growth Portfolio:
Non-Qualified V $ 10.000 $ 10.157 1.57%(7)
Non-Qualified VII 10.000 12.980 29.80%(2)
- -----------------------------------------------------------------------------
S-11
<PAGE>
Increase
Value at in Value of
Beginning Value at Accumulation
of Year End of Year Unit
- -----------------------------------------------------------------------------
Alger American Income and Growth
Portfolio:
Non-Qualified VII $10.000 $10.660 6.60%(5)
- -----------------------------------------------------------------------------
Alger American Leveraged AllCap
Portfolio:
Non-Qualified VII $10.000 $12.265 22.65%(5)
- -----------------------------------------------------------------------------
Alger American MidCap Growth
Portfolio:
Non-Qualified VII $10.000 $13.974 39.74%(1)
- -----------------------------------------------------------------------------
Alger American Small
Capitalization Portfolio:
Non-Qualified V $ 9.622 $13.714 42.52%
Non-Qualified VII 10.000 13.295 32.95%(3)
- -----------------------------------------------------------------------------
Calvert Responsibly Invested
Balanced Portfolio:
Non-Qualified V $10.518 $13.480 28.17%
- -----------------------------------------------------------------------------
Fidelity Investments Variable
Insurance Products Fund:
Equity--Income Portfolio:
Non-Qualified V $10.000 $11.054 10.54%(7)
Non-Qualified VII 10.002 13.324 33.21%
- -----------------------------------------------------------------------------
Growth Portfolio:
Non-Qualified V $10.000 $10.066 0.66%(7)
Non-Qualified VII 10.423 13.913 33.48%
- -----------------------------------------------------------------------------
High Income Portfolio:
Non-Qualified VII $10.000 $10.701 7.01%(5)
- -----------------------------------------------------------------------------
Overseas Portfolio:
Non-Qualified V $10.000 $10.052 0.52%(7)
Non-Qualified VII 10.000 11.143 11.43%(1)
- -----------------------------------------------------------------------------
Fidelity Investments Variable
Insurance Products Funds II:
Asset Manager Portfolio:
Non-Qualified VII $10.000 $11.664 16.64%(1)
- -----------------------------------------------------------------------------
Contrafund Portfolio:
Non-Qualified V $10.000 $10.468 4.68%(7)
Non-Qualified VII 10.000 11.658 16.58%(5)
- -----------------------------------------------------------------------------
Index 500 Portfolio:
Non-Qualified VII $10.000 $11.336 13.36%(5)
- -----------------------------------------------------------------------------
Investment Grade Bond Portfolio:
Non-Qualified VII $10.000 $10.600 6.00%(6)
- -----------------------------------------------------------------------------
Insurance Management Series:
Corporate Bond Fund:
Non-Qualified VII $ 9.814 $11.640 18.61%
- -----------------------------------------------------------------------------
Equity Growth and Income Fund:
Non-Qualified VII $ 9.838 $12.971 31.84%
- -----------------------------------------------------------------------------
Growth Stock Fund:
Non-Qualified VII $10.000 $10.277 2.77%(9)
- -----------------------------------------------------------------------------
International Stock Fund:
Non-Qualified VII $10.000 $10.255 2.55%(4)
- -----------------------------------------------------------------------------
Prime Money Fund:
Non-Qualified VII $10.033 $10.406 3.71%
- -----------------------------------------------------------------------------
U.S. Government Bond Fund:
Non-Qualified VII $10.073 $10.804 7.25%
- -----------------------------------------------------------------------------
Utility Fund:
Non-Qualified VII $ 9.881 $12.095 22.40%
- -----------------------------------------------------------------------------
S-12
<PAGE>
Increase
Value at in Value of
Beginning Value at Accumulation
of Year End of Year Unit
- ---------------------------------- --------- ------------ -------------
Janus Aspen Series:
Aggressive Growth Portfolio:
Non-Qualified V $10.319 $12.992 25.91%
Non-Qualified VII 10.374 13.040 25.71%
- ---------------------------------- --------- ------------ -------------
Balanced Portfolio:
Non-Qualified V $10.000 $10.835 8.35%(7)
Non-Qualified VII 10.000 12.104 21.04%(1)
- ---------------------------------- --------- ------------ -------------
Flexible Income Portfolio:
Non-Qualified V $ 9.886 $12.094 22.33%
Non-Qualified VII 9.884 12.071 22.13%
- ---------------------------------- --------- ------------ -------------
Growth Portfolio:
Non-Qualified V $10.000 $10.870 8.70%(7)
Non-Qualified VII 10.109 12.975 28.35%
- ---------------------------------- --------- ------------ -------------
Short Term Bond Portfolio:
Non-Qualified V $10.000 $10.325 3.25%(7)
Non-Qualified VII 10.000 10.765 7.65%(1)
- ---------------------------------- --------- ------------ -------------
Worldwide Growth Portfolio:
Non-Qualified V $10.000 $10.893 8.93%(7)
Non-Qualified VII 10.000 12.341 23.41%(3)
- ---------------------------------- --------- ------------ -------------
Lexington Emerging Markets Fund:
Non-Qualified VII $ 9.795 $ 9.277 (5.28%)
- ---------------------------------- --------- ------------ -------------
Lexington Natural Resources Trust:
Non-Qualified V $ 9.079 $10.479 15.42%
Non-Qualified VII 9.056 10.436 15.24%
- ---------------------------------- --------- ------------ -------------
Neuberger & Berman Advisers
Management Trust--Growth
Portfolio:
Non-Qualified V $12.199 $15.871 30.10%
- ---------------------------------- --------- ------------ -------------
Scudder Variable Life Investment
Fund--
International Portfolio:
Non-Qualified V $13.372 $14.674 9.74%
- ---------------------------------- --------- ------------ -------------
TCI Portfolios, Inc.:
TCI Balanced:
Non-Qualified VII $10.152 $12.124 19.42%
- ---------------------------------- --------- ------------ -------------
TCI Growth:
Non-Qualified II $10.213 $13.224 29.47%
Non-Qualified III 10.123 13.107 29.47%
Non-Qualified V 10.883 14.091 29.47%
Non-Qualified VI 10.000 11.884 18.84%(4)
Non-Qualified VII 10.847 14.021 29.27%
- ---------------------------------- --------- ------------ -------------
TCI International:
Non-Qualified VII $ 9.441 $10.446 10.64%
- ---------------------------------- --------- ------------ -------------
S-13
<PAGE>
NON-QUALIFIED 1964 Individual contract issued from December 1, 1964 to
March 14, 1967.
NON-QUALIFIED I Individual contract issued in connection with deferred
compensation plans from March 15, 1967 through April
30, 1975; other individual contracts issued from March
15, 1967 through October 31, 1975; and group contracts
issued from March 15, 1967 to December 31, 1975.
NON-QUALIFIED II Individual contracts issued in connection with
deferred compensation plans since May 1, 1975; other
individual contracts issued since November 1, 1975;
and group contracts issued since January 1, 1976.
NON-QUALIFIED III Group contracts issued in connection with deferred
compensation plans for tax-exempt organizations
(non-governmental only) since May 3, 1982.
NON-QUALIFIED V Group Aetna Plus contracts issued in connection with
Deferred Compensation Plans issued since August 28,
1992.
NON-QUALIFIED VI Certain existing contracts that were converted to
ACES, the new administrative system (previously valued
under Non-Qualified I).
NON-QUALIFIED VII Certain individual and group contracts issued as
non-qualified deferred annuity contracts or Individual
Retirement Annuity contracts issued since May 4, 1994.
1- Reflects less than a full year of performance activity. The
initial Accumulation Unit Value was established at $10.000
during January 1995 when the fund became available under the
contract.
2- Reflects less than a full year of performance activity. The
initial Accumulation Unit Value was established at $10.000
during February 1995 when the fund became available under the
contract.
3- Reflects less than a full year of performance activity. The
initial Accumulation Unit Value was established at $10.000
during April 1995 when the fund became available under the
contract.
4- Reflects less than a full year of performance activity. The
initial Accumulation Unit Value was established at $10.000
during May 1995 when the fund became available under the
contract.
5- Reflects less than a full year of performance activity. The
initial Accumulation Unit Value was established at $10.000
during June 1995 when the fund became available under the
contract.
6- Reflects less than a full year of performance activity. The
initial Accumulation Unit Value was established at $10.000
during July 1995 when the fund became available under the
contract.
7- Reflects less than a full year of performance activity. The
initial Accumulation Unit Value was established at $10.000
during August 1995 when the fund became available under the
contract.
8- Reflects less than a full year of performance activity. The
initial Accumulation Unit Value was established at $10.000
during September 1995 when the fund became available under the
contract.
9- Reflects less than a full year of performance activity. The
initial Accumulation Unit Value was established at $10.000
during November 1995 when the fund became available under the
contract.
S-14
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Aetna Life Insurance and Annuity Company and Subsidiaries
Index
Page
--------
Independent Auditors' Report .................................. F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994, and 1993 ............................ F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994 . F-4
Consolidated Statements of Shareholder's Equity for the Years
Ended December 31, 1995, 1994 and 1993 ....................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 ............................. F-6
Notes to Consolidated Financial Statements .................... F-7
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aetna
Life Insurance and Annuity Company and Subsidiaries as of December 31, 1995
and 1994, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for certain investments in debt and
equity securities.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 6, 1996
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
-------------------------------
1995 1994 1993
-------- -------- ---------
Revenue:
Premiums $ 130.8 $ 124.2 $ 82.1
Charges assessed against
policyholders 318.9 279.0 251.5
Net investment income 1,004.3 917.2 911.9
Net realized capital gains 41.3 1.5 9.5
Other income 42.0 10.3 9.5
-------- -------- ---------
Total revenue 1,537.3 1,332.2 1,264.5
-------- -------- ---------
Benefits and expenses:
Current and future benefits 915.3 854.1 818.4
Operating expenses 318.7 235.2 207.2
Amortization of deferred policy
acquisition costs 43.3 26.4 19.8
-------- -------- ---------
Total benefits and expenses 1,277.3 1,115.7 1,045.4
-------- -------- ---------
Income before federal income taxes 260.0 216.5 219.1
Federal income taxes 84.1 71.2 76.2
-------- -------- ---------
Net income $ 175.9 $ 145.3 $ 142.9
======== ======== =========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Balance Sheets
(millions)
December 31,
------------------------
Assets 1995 1994
- ------ ---------- -----------
Investments:
Debt securities, available for sale:
(amortized cost: $11,923.7 and $10,577.8) $12,720.8 $10,191.4
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $51.3
and $43.3) 57.6 47.2
Investment in affiliated mutual funds
(cost: $173.4 and $187.1) 191.8 181.9
Common stock (cost: $6.9 at December 31,
1995) 8.2 --
Short-term investments 15.1 98.0
Mortgage loans 21.2 9.9
Policy loans 338.6 248.7
Limited partnership -- 24.4
---------- -----------
Total investments 13,353.3 10,801.5
Cash and cash equivalents 568.8 623.3
Accrued investment income 175.5 142.2
Premiums due and other receivables 37.3 75.8
Deferred policy acquisition costs 1,341.3 1,164.3
Reinsurance loan to affiliate 655.5 690.3
Other assets 26.2 15.9
Separate Accounts assets 10,987.0 7,420.8
---------- -----------
Total assets $27,144.9 $20,934.1
========== ===========
Liabilities and Shareholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits $ 3,594.6 $ 2,912.7
Unpaid claims and claim expenses 27.2 23.8
Policyholders' funds left with the Company 10,500.1 8,949.3
Total insurance reserve liabilities 14,121.9 11,885.8
Other liabilities 259.2 302.1
Federal income taxes:
Current 24.2 3.4
Deferred 169.6 233.5
Separate Accounts liabilities 10,987.0 7,420.8
---------- -----------
Total liabilities 25,561.9 19,845.6
---------- -----------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and
outstanding) 2.8 2.8
Paid-in capital 407.6 407.6
Net unrealized capital gains (losses) 132.5 (189.0)
Retained earnings 1,040.1 867.1
Total shareholder's equity 1,583.0 1,088.5
---------- -----------
Total liabilities and shareholder's equity $27,144.9 $20,934.1
========== ===========
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
Years Ended December 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
Shareholder's equity, beginning of
year $1,088.5 $1,246.7 $ 990.1
Net change in unrealized capital
gains (losses) 321.5 (303.5) 113.7
Net income 175.9 145.3 142.9
Common stock dividends declared (2.9) -- --
--------- --------- ---------
Shareholder's equity, end of year $1,583.0 $1,088.5 $1,246.7
========= ========= =========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Cash Flows
(millions)
Years Ended December 31,
-------------------------------------
1995 1994 1993
---------- ---------- -----------
Cash Flows from Operating
Activities:
Net income $ 175.9 $ 145.3 $ 142.9
Adjustments to reconcile net income
to net cash provided by
operating activities:
Increase in accrued investment
income (33.3) (17.5) (11.1)
Decrease (increase) in premiums due
and other receivables 25.4 1.3 (5.6)
Increase in policy loans (89.9) (46.0) (36.4)
Increase in deferred policy
acquisition costs (177.0) (105.9) (60.5)
Decrease in reinsurance loan to
affiliate 34.8 27.8 31.8
Net increase in universal life
account balances 393.4 164.7 126.4
Increase in other insurance reserve
liabilities 79.0 75.1 86.1
Net increase in other liabilities
and other assets 15.0 53.9 7.0
Decrease in federal income taxes (6.5) (11.7) (3.7)
Net accretion of discount on bonds (66.4) (77.9) (88.1)
Net realized capital gains (41.3) (1.5) (9.5)
Other, net -- (1.0) 0.2
---------- ---------- -----------
Net cash provided by operating
activities 309.1 206.6 179.5
---------- ---------- -----------
Cash Flows from Investing
Activities:
Proceeds from sales of:
Debt securities available for sale 4,207.2 3,593.8 473.9
Equity securities 180.8 93.1 89.6
Mortgage loans 10.7 -- --
Limited partnership 26.6 -- --
Investment maturities and
collections of:
Debt securities available for sale 583.9 1,289.2 2,133.3
Short-term investments 106.1 30.4 19.7
Cost of investment purchases in:
Debt securities (6,034.0) (5,621.4) (3,669.2)
Equity securities (170.9) (162.5) (157.5)
Short-term investments (24.7) (106.1) (41.3)
Mortgage loans (21.3) -- --
Limited partnership -- (25.0) --
---------- ---------- -----------
Net cash used for investing
activities (1,135.6) (908.5) (1,151.5)
---------- ---------- -----------
Cash Flows from Financing
Activities:
Deposits and interest credited for
investment contracts 1,884.5 1,737.8 2,117.8
Withdrawals of investment contracts (1,109.6) (948.7) (1,000.3)
Dividends paid to shareholder (2.9) -- --
---------- ---------- -----------
Net cash provided by financing
activities 772.0 789.1 1,117.5
---------- ---------- -----------
Net (decrease) increase in cash and
cash equivalents (54.5) 87.2 145.5
Cash and cash equivalents,
beginning of year 623.3 536.1 390.6
---------- ---------- -----------
Cash and cash equivalents, end of
year $ 568.8 $ 623.3 $ 536.1
========== ========== ===========
Supplemental cash flow information:
Income taxes paid, net $ 90.2 $ 82.6 $ 79.9
========== ========== ===========
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries
(collectively, the "Company") is a provider of financial services and life
insurance products in the United States. The Company has two business
segments, financial services and life insurance.
The financial services products include individual and group annuity
contracts which offer a variety of funding and distribution options for
personal and employer-sponsored retirement plans that qualify under Internal
Revenue Code Sections 401, 403, 408 and 457, and individual and group
non-qualified annuity contracts. These contracts may be immediate or deferred
and are offered primarily to individuals, pension plans, small businesses and
employer-sponsored groups in the health care, government, education
(collectively "not-for-profit" organizations) and corporate markets.
Financial services also include pension plan administrative services.
The life insurance products include universal life, variable universal life,
interest sensitive whole life and term insurance. These products are offered
primarily to individuals, small businesses, employer sponsored groups and
executives of Fortune 2000 companies.
Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiaries, Aetna Insurance Company of
America and Aetna Private Capital, Inc.
Aetna Life Insurance and Annuity Company is a wholly owned subsidiary of
Aetna Retirement Services, Inc. ("ARSI"). ARSI is a wholly owned subsidiary
of Aetna Life and Casualty Company ("Aetna"). Two subsidiaries, Systematized
Benefits Administrators, Inc. ("SBA"), and Aetna Investment Services, Inc.
("AISI"), which were previously reported in the consolidated financial
statements were distributed in the form of dividends to ARSI in December of
1995. The impact to the Company's financial statements of distributing these
dividends was immaterial.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Intercompany transactions have been
eliminated. Certain reclassifications have been made to 1994 and 1993
financial information to conform to the 1995 presentation.
Accounting Changes
Accounting for Certain Investments in Debt and Equity Securities
On December 31, 1993, the Company adopted Financial Accounting Standard
("FAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, which requires the classification of debt securities into three
categories: "held to maturity", which are carried at amortized cost;
"available for sale", which are carried at fair value with changes in fair
value recognized as a component of shareholder's equity; and "trading", which
are carried at fair value with immediate recognition in income of changes in
fair value.
Initial adoption of this standard resulted in a net increase of $106.8
million, net of taxes of $57.5 million, to net unrealized gains in
shareholder's equity. These amounts exclude gains and losses allocable to
experience-rated (including universal life) contractholders. Adoption of FAS
No. 115 did not have a material effect on deferred policy acquisition costs.
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 ninety days or less when purchased.
F-7
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
Investments
Debt Securities
At December 31, 1995 and 1994, all of the Company's debt securities are
classified as available for sale and carried at fair value. These securities
are written down (as realized losses) for other than temporary decline in
value. Unrealized gains and losses related to these securities, after
deducting amounts allocable to experience-rated contractholders and related
taxes, are reflected in shareholder's equity.
Fair values for debt securities are based on quoted market prices or dealer
quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for
similar securities or by using discounted cash flow methods. Cost for
mortgage-backed securities is adjusted for unamortized premiums and
discounts, which are amortized using the interest method over the estimated
remaining term of the securities, adjusted for anticipated prepayments.
Purchases and sales of debt securities are recorded on the trade date.
Equity Securities
Equity securities are classified as available for sale and carried at fair
value based on quoted market prices or dealer quotations. Equity securities
are written down (as realized losses) for other than temporary declines in
value. Unrealized gains and losses related to such securities are reflected
in shareholder's equity. Purchases and sales are recorded on the trade date.
The investment in affiliated mutual funds represents an investment in the
Aetna Series Fund, Inc., a retail mutual fund which has been seeded by the
Company, and is carried at fair value.
Mortgage Loans and Policy Loans
Mortgage loans and policy loans are carried at unpaid principal balances net
of valuation reserves, which approximates fair value, and are generally
secured. Purchases and sales of mortgage loans are recorded on the closing
date.
Limited Partnership
The Company's limited partnership investment was carried at the amount
invested plus the Company's share of undistributed operating results and
unrealized gains (losses), which approximates fair value. The Company
disposed of the limited partnership during 1995.
Short-Term Investments
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with an original maturity of over ninety days and
less than one year, are considered available for sale and are carried at fair
value, which approximates amortized cost.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business have been deferred. These
costs, all of which vary with and are primarily related to the production of
new business, consist principally of commissions, certain expenses of
underwriting and issuing contracts and certain agency expenses. For fixed
ordinary life contracts, such costs are amortized over expected
premium-paying periods. For universal life and certain annuity contracts,
such costs are amortized in proportion to estimated gross profits and
adjusted to reflect actual gross profits. These costs are amortized over
twenty years for annuity pension contracts, and over the contract period for
universal life contracts.
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross profits
would not be adequate to cover related losses and expenses.
Insurance Reserve Liabilities
The Company's liabilities include reserves related to fixed ordinary life,
fixed universal life and fixed annuity contracts. Reserves for future policy
benefits for fixed ordinary life contracts are computed on the basis of
assumed investment yield, assumed mortality, withdrawals and expenses,
including a margin for adverse deviation, which generally vary by plan, year
of issue and policy duration. Reserve interest rates range from 2.25% to
10.00%. Assumed investment yield is based on the Company's experience.
Mortality and withdrawal rate assumptions are based on relevant Aetna
experience and are periodically reviewed against both industry standards and
experience.
F-8
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
Reserves for fixed universal life (included in Future Policy Benefits) and
fixed deferred annuity contracts (included in Policyholders' Funds Left With
the Company) are equal to the fund value. The fund value is equal to
cumulative deposits less charges plus credited interest thereon, without
reduction for possible future penalties assessed on premature withdrawal. For
guaranteed interest options, the interest credited ranged from 4.00% to 6.38%
in 1995 and 4.00% to 5.85% in 1994. For all other fixed options, the interest
credited ranged from 5.00% to 7.00% in 1995 and 5.00% to 7.50% in 1994.
Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the 1971
Individual Annuity Mortality Table, the 1983 Individual Annuity Mortality
Table, the 1983 Group Annuity Mortality Table and, in some cases, mortality
improvement according to scales G and H, at assumed interest rates ranging
from 3.5% to 9.5%. Reserves relating to contracts with life contingencies are
included in Future Policy Benefits. For other contracts, the reserves are
reflected in Policyholders' Funds Left With the Company.
Unpaid claims for all lines of insurance include benefits for reported losses
and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
Premiums are recorded as revenue when due for fixed ordinary life contracts.
Charges assessed against policyholders' funds for cost of insurance,
surrender charges, actuarial margin and other fees are recorded as revenue
for universal life and certain annuity contracts. Policy benefits and
expenses are recorded in relation to the associated premiums or gross profit
so as to result in recognition of profits over the expected lives of the
contracts.
Separate Accounts
Assets held under variable universal life, variable life and variable annuity
contracts are segregated in Separate Accounts and are invested, as designated
by the contractholder or participant under a contract, in shares of Aetna
Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna
Investment Advisers Fund, Inc., Aetna GET Fund, or The Aetna Series Fund
Inc., which are managed by the Company or other selected mutual funds not
managed by the Company.
Separate Accounts assets and liabilities are carried at fair value except for
those relating to a guaranteed interest option which is offered through a
Separate Account. The assets of the Separate Account supporting the
guaranteed interest option are carried at an amortized cost of $322.2 million
for 1995 (fair value $343.9 million) and $149.7 million for 1994 (fair value
$146.3 million), since the Company bears the investment risk where the
contract is held to maturity. Reserves relating to the guaranteed interest
option are maintained at fund value and reflect interest credited at rates
ranging from 4.5% to 8.38% in both 1995 and 1994. Separate Accounts assets
and liabilities are shown as separate captions in the Consolidated Balance
Sheets.
Deposits, investment income and net realized and unrealized capital gains
(losses) of the Separate Accounts are not reflected in the Consolidated
Statements of Income (with the exception of realized capital gains (losses)
on the sale of assets supporting the guaranteed interest option). The
Consolidated Statements of Cash Flows do not reflect investment activity of
the Separate Accounts.
Federal Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. The Company is taxed at regular corporate rates after adjusting income
reported for financial statement purposes for certain items. Deferred income
tax benefits result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
F-9
<PAGE>
2. Investments
Investments in debt securities available for sale as of December 31, 1995
were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(millions)
U.S. Treasury securities
and obligations of
government agencies
and corporations $ 539.5 $ 47.5 $ -- $ 587.0
Obligations of states
and political
subdivisions 41.4 12.4 -- 53.8
U.S. Corporate
securities:
Financial 2,764.4 110.3 2.1 2,872.6
Utilities 454.4 27.8 1.0 481.2
Other 2,177.7 159.5 1.2 2,336.0
---------- ---------- ---------- ----------
Total U.S. Corporate
securities 5,396.5 297.6 4.3 5,689.8
Foreign securities:
Government 316.4 26.1 2.0 340.5
Financial 534.2 45.4 3.5 576.1
Utilities 236.3 32.9 -- 269.2
Other 215.7 15.1 -- 230.8
---------- ---------- ---------- ----------
Total Foreign
securities 1,302.6 119.5 5.5 1,416.6
Residential
mortgage-backed
securities:
Residential
pass-throughs 556.7 99.2 1.8 654.1
Residential CMOs 2,383.9 167.6 2.2 2,549.3
---------- ---------- ---------- ----------
Total Residential
mortgage-backed
securities 2,940.6 266.8 4.0 3,203.4
Commercial/Multifamily
mortgage-backed
securities 741.9 32.3 0.2 774.0
---------- ---------- ---------- ----------
Total Mortgage-backed
securities 3,682.5 299.1 4.2 3,977.4
Other asset-backed
securities 961.2 35.5 0.5 996.2
---------- ---------- ---------- ----------
Total debt securities
available for sale $11,923.7 $811.6 $14.5 $12,720.8
========== ========== ========== ==========
F-10
<PAGE>
2. Investments (Continued)
Investments in debt securities available for sale as of December 31, 1994
were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(millions)
U.S. Treasury securities
and obligations of U.S.
government agencies
and corporations $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9
Obligations of states
and political
subdivisions 37.9 1.2 -- 39.1
U.S. Corporate
securities:
Financial 2,216.9 3.8 109.4 2,111.3
Utilities 100.1 -- 7.9 92.2
Other 1,344.3 6.0 67.9 1,282.4
---------- ---------- ---------- ----------
Total U.S. Corporate
securities 3,661.3 9.8 185.2 3,485.9
Foreign securities:
Government 434.4 1.2 33.9 401.7
Financial 368.2 1.1 23.0 346.3
Utilities 204.4 2.5 9.5 197.4
Other 46.3 0.8 1.5 45.6
---------- ---------- ---------- ----------
Total Foreign
securities 1,053.3 5.6 67.9 991.0
Residential
mortgage-backed
securities:
Residential
pass-throughs 627.1 81.5 5.0 703.6
Residential CMOs 2,671.0 32.9 139.4 2,564.5
---------- ---------- ---------- ----------
Total Residential
mortgage-backed
securities 3,298.1 114.4 144.4 3,268.1
Commercial/Multifamily
mortgage-backed
securities 435.0 0.2 21.3 413.9
---------- ---------- ---------- ----------
Total Mortgage-backed
securities 3,733.1 114.6 165.7 3,682.0
Other asset-backed
securities 696.1 0.2 16.8 679.5
---------- ---------- ---------- ----------
Total debt securities
available for sale $10,577.8 $133.4 $519.8 $10,191.4
========== ========== ========== ==========
At December 31, 1995 and 1994, net unrealized appreciation (depreciation) of
$797.1 million and $(386.4) million, respectively, on available for sale debt
securities included $619.1 million and $(308.6) million, respectively,
related to experience-rated contractholders, which were not included in
shareholder's equity.
The amortized cost and fair value of debt securities for the year ended
December 31, 1995 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be
restructured, called, or prepaid.
Amortized Fair
Cost Value
---------- ----------
(millions)
Due to mature:
One year or less $ 348.8 $ 351.1
After one year through five years 2,100.2 2,159.5
After five years through ten years 2,516.0 2,663.4
After ten years 2,315.0 2,573.2
Mortgage-backed securities 3,682.5 3,977.4
Other asset-backed securities 961.2 996.2
---------- ----------
Total $11,923.7 $12,720.8
========== ==========
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Cash
collateral, which is in excess of the market value of the loaned securities,
is deposited by the borrower with a lending agent, and retained and invested
by the lending agent to generate additional income for the Company. The
market value of the loaned securities is monitored on a daily basis with
additional collateral obtained or refunded as the market value fluctuates. At
December 31, 1995, the Company had loaned securities (which are reflected as
invested assets on the Consolidated Balance Sheets) with a market value of
approximately $264.5 million.
F-11
<PAGE>
2. Investments (Continued)
At December 31, 1995 and 1994, debt securities carried at $7.4 million and
$7.0 million, respectively, were on deposit as required by regulatory
authorities.
The valuation reserve for mortgage loans was $3.1 million at December 31,
1994. There was no valuation reserve for mortgage loans at December 31, 1995.
The carrying value of non-income producing investments was $0.1 million and
$0.2 million at December 31, 1995 and 1994, respectively.
Investments in a single issuer, other than obligations of the U.S.
government, with a carrying value in excess of 10% of the Company's
shareholder's equity at December 31, 1995 are as follows:
Debt Securities
Amortized Fair
Cost Value
--------- --------
(millions)
General Electric Corporation $314.9 $329.3
General Motors Corporation 273.9 284.5
Associates Corporation of North America 230.2 239.1
Society National Bank 203.5 222.3
Ciesco, L.P. 194.9 194.9
Countrywide Funding 171.2 172.7
Baxter International 168.9 168.9
Time Warner 158.6 166.1
Ford Motor Company 156.7 162.6
The portfolio of debt securities at December 31, 1995 and 1994 included
$662.5 million and $318.3 million, respectively, (5% and 3%, respectively, of
the debt securities) of investments that are considered "below investment
grade". "Below investment grade" securities are defined to be securities that
carry a rating below BBB-/Baa3, by Standard & Poors/Moody's Investor
Services, respectively. The increase in below investment grade securities is
the result of a change in investment strategy, which has reduced the
Company's holdings in residential mortgage-back securities and increased the
Company's holdings in corporate securities. Residential mortgage-back
securities are subject to higher prepayment risk and lower credit risk, while
corporate securities earning a comparable yield are subject to higher credit
risk and lower prepayment risk. We expect the percentage of below investment
grade securities will increase in 1996, but we expect that the overall
average quality of the portfolio of debt securities will remain at AA-. Of
these below investment grade assets, $14.5 million and $31.8 million, at
December 31, 1995 and 1994, respectively, were investments that were
purchased at investment grade, but whose ratings have since been downgraded.
Included in residential mortgage-back securities are collateralized mortgage
obligations ("CMOs") with carrying values of $2.5 billion and $2.6 billion at
December 31, 1995 and 1994, respectively. The principal risks inherent in
holding CMOs are prepayment and extension risks related to dramatic decreases
and increases in interest rates whereby the CMOs would be subject to
repayments of principal earlier or later than originally anticipated. At
December 31, 1995 and 1994, approximately 79% and 85%, respectively, of the
Company's CMO holdings consisted of sequential and planned amortization class
debt securities which are subject to less prepayment and extension risk than
other CMO instruments. At December 31, 1995 and 1994, approximately 81% and
82%, respectively, of the Company's CMO holdings were collateralized by
residential mortgage loans, on which the timely payment of principal and
interest was backed by specified government agencies (e.g., GNMA, FNMA,
FHLMC).
If due to declining interest rates, principal was to be repaid earlier than
originally anticipated, the Company could be affected by a decrease in
investment income due to the reinvestment of these funds at a lower interest
rate. Such prepayments may result in a duration mismatch between assets and
liabilities which could be corrected as cash from prepayments could be
reinvested at an appropriate duration to adjust the mismatch.
Conversely, if due to increasing interest rates, principal was to be repaid
slower than originally anticipated, the Company could be affected by a
decrease in cash flow which reduces the ability to reinvest expected
principal repayments at higher interest rates. Such slower payments may
result in a duration mismatch between assets and liabilities which could be
corrected as available cash flow could be reinvested at an appropriate
duration to adjust the mismatch.
At December 31, 1995 and 1994, approximately 3% and 4%, respectively, of the
Company's CMO holdings consisted of interest-only strips ("IOs") or
principal-only strips ("POs"). IOs receive payments of interest and POs
receive payments of principal on the underlying pool of mortgages. The risk
inherent in holding POs is extension risk related to dramatic increases in
interest rates whereby the future payments due on POs could be repaid much
slower than originally anticipated. The extension risks inherent in holding
POs was mitigated somewhat by offsetting positions in IOs. During dramatic
increases in interest rates, IOs would generate more future payments than
originally anticipated.
F-12
<PAGE>
2. Investments (Continued)
The risk inherent in holding IOs is prepayment risk related to dramatic
decreases in interest rates whereby future IO cash flows could be much less
than originally anticipated and in some cases could be less than the original
cost of the IO. The risks inherent in IOs are mitigated somewhat by holding
offsetting positions in POs. During dramatic decreases in interest rates POs
would generate future cash flows much quicker than originally anticipated.
Investments in available for sale equity securities were as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
------- ---------- ---------- --------
(millions)
1995
- ----
Equity Securities $231.6 $27.2 $1.2 $257.6
======= ========== ========== ========
1994
- ----
Equity Securities $230.5 $ 6.5 $7.9 $229.1
======= ========== ========== ========
3. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between proceeds received
from investments sold or prepaid, and amortized cost. Net realized capital
gains as reflected in the Consolidated Statements of Income are after
deductions for net realized capital gains (losses) allocated to
experience-rated contracts of $61.1 million, $(29.1) million and $(54.8)
million for the years ended December 31, 1995, 1994, and 1993, respectively.
Net realized capital gains (losses) allocated to experience-rated contracts
are deferred and subsequently reflected in credited rates on an amortized
basis. Net unamortized gains (losses), reflected as a component of
Policyholders' Funds Left With the Company, were $7.3 million and $(50.7)
million at the end of December 31, 1995 and 1994, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities are included in net realized capital gains (losses) and amounted
to $3.1 million, $1.1 million and $(98.5) million, of which $2.2 million,
$0.8 million and $(91.5) million were allocable to experience-rated
contractholders, for the years ended December 31, 1995, 1994 and 1993,
respectively. The 1993 losses were primarily related to writedowns of
interest-only mortgage-backed securities to their fair value.
Net realized capital gains (losses) on investments, net of amounts allocated
to experience-rated contracts, were as follows:
1995 1994 1993
------ ----- -------
(millions)
Debt securities $32.8 $1.0 $ 9.6
Equity securities 8.3 0.2 0.1
Mortgage loans 0.2 0.3 (0.2)
------ ----- -------
Pretax realized capital gains $41.3 $1.5 $ 9.5
====== ===== =======
After-tax realized capital gains $25.8 $1.0 $ 6.2
====== ===== =======
Gross gains of $44.6 million, $26.6 million and $33.3 million and gross
losses of $11.8 million, $25.6 million and $23.7 million were realized from
the sales of investments in debt securities in 1995, 1994 and 1993,
respectively.
Changes in unrealized capital gains (losses), excluding changes in unrealized
capital gains (losses) related to experience-rated contracts, for the years
ended December 31, were as follows:
1995 1994 1993
------- --------- --------
(millions)
Debt securities $255.9 $(242.1) $164.3
Equity securities 27.3 (13.3) 10.6
Limited partnership 1.8 (1.8) --
------- --------- --------
285.0 (257.2) 174.9
Deferred federal income taxes (See
Note 6) (36.5) 46.3 61.2
------- --------- --------
Net change in unrealized capital
gains (losses) $321.5 $(303.5) $113.7
======= ========= ========
Net unrealized capital gains (losses) allocable to experience-rated contracts
of $515.0 million and $104.1 million at December 31, 1995 and $(260.9)
million and $(47.7) million at December 31, 1994 are reflected on the
Consolidated Balance Sheet in Policyholders' Funds Left With the Company and
Future Policy Benefits, respectively, and are not included in shareholder's
equity.
F-13
<PAGE>
3. Capital Gains and Losses on Investment Operations (Continued)
Shareholder's equity included the following unrealized capital gains
(losses), which are net of amounts allocable to experience-rated
contractholders, at December 31:
1995 1994 1993
------- --------- --------
(millions)
Debt securities
Gross unrealized capital gains $179.3 $ 27.4 $164.3
Gross unrealized capital losses (1.3) (105.2) --
------- --------- --------
178.0 (77.8) 164.3
Equity securities
Gross unrealized capital gains 27.2 6.5 12.0
Gross unrealized capital losses (1.2) (7.9) (0.1)
------- --------- --------
26.0 (1.4) 11.9
Limited Partnership
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- (1.8) --
------- --------- --------
-- (1.8) --
Deferred federal income taxes (See Note 6) 71.5 108.0 61.7
------- --------- --------
Net unrealized capital gains (losses) $132.5 $(189.0) $114.5
======= ========= ========
4. Net Investment Income
Sources of net investment income were as follows:
1995 1994 1993
--------- ------- --------
(millions)
Debt securities $ 891.5 $823.9 $828.0
Preferred stock 4.2 3.9 2.3
Investment in affiliated mutual funds 14.9 5.2 2.9
Mortgage loans 1.4 1.4 1.5
Policy loans 13.7 11.5 10.8
Reinsurance loan to affiliate 46.5 51.5 53.3
Cash equivalents 38.9 29.5 16.8
Other 8.4 6.7 7.7
--------- ------- --------
Gross investment income 1,019.5 933.6 923.3
Less investment expenses (15.2) (16.4) (11.4)
--------- ------- --------
Net investment income $1,004.3 $917.2 $911.9
========= ======= ========
Net investment income includes amounts allocable to experience-rated
contractholders of $744.2 million, $677.1 million and $661.3 million for the
years ended December 31, 1995, 1994 and 1993, respectively. Interest credited
to contractholders is included in Current and Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.
The amount of dividends that may be paid to the shareholder in 1996 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$70.0 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's equity those amounts determined in
conformity with statutory accounting practices prescribed or permitted by the
Department, which differ in certain respects from generally accepted
accounting principles. Statutory net income was $70.0 million, $64.9 million
and $77.6 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Statutory shareholder's equity was $670.7 million and $615.0
million as of December 31, 1995 and 1994, respectively.
At December 31, 1995 and December 31, 1994, the Company does not utilize any
statutory accounting practices which are not prescribed by insurance
regulators that, individually or in the aggregate, materially affect
statutory shareholder's equity.
F-14
<PAGE>
6. Federal Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. Aetna allocates to each member an amount approximating the tax it
would have incurred were it not a member of the consolidated group, and
credits the member for the use of its tax saving attributes in the
consolidated return.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was
enacted which resulted in an increase in the federal corporate tax rate from
34% to 35% retroactive to January 1, 1993. The enactment of OBRA resulted in
an increase in the deferred tax liability of $3.4 million at date of
enactment, which is included in the 1993 deferred tax expense.
Components of income tax expense (benefits) were as follows:
1995 1994 1993
------- ------- --------
(millions)
Current taxes (benefits):
Income from operations $ 82.9 $ 78.7 $ 87.1
Net realized capital gains 28.5 (33.2) 18.1
------- ------- --------
111.4 45.5 105.2
------- ------- --------
Deferred taxes (benefits):
Income from operations (14.4) (8.0) (14.2)
Net realized capital gains (12.9) 33.7 (14.8)
------- ------- --------
(27.3) 25.7 (29.0)
------- ------- --------
Total $ 84.1 $ 71.2 $ 76.2
======= ======= ========
Income tax expense was different from the amount computed by applying the
federal income tax rate to income before federal income taxes for the
following reasons:
1995 1994 1993
------- ------- --------
(millions)
Income before federal income taxes $260.0 $216.5 $219.1
Tax rate 35% 35% 35%
------- ------- --------
Application of the tax rate 91.0 75.8 76.7
------- ------- --------
Tax effect of:
Excludable dividends (9.3) (8.6) (8.7)
Tax reserve adjustments 3.9 2.9 4.7
Reinsurance transaction (0.5) 1.9 (0.2)
Tax rate change on deferred liabilities -- -- 3.7
Other, net (1.0) (0.8) --
------- ------- --------
Income tax expense $ 84.1 $ 71.2 $ 76.2
======= ======= ========
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1995 1994
------- --------
(millions)
Deferred tax assets:
Insurance reserves $290.4 $211.5
Net unrealized capital losses -- 136.3
Unrealized gains allocable to experience-rated
contracts 216.7 --
Investment losses not currently deductible 7.3 15.5
Postretirement benefits other than pensions 7.7 8.4
Other 32.0 28.3
------- --------
Total gross assets 554.1 400.0
Less valuation allowance -- 136.3
------- --------
Deferred tax assets, net of valuation 554.1 263.7
Deferred tax liabilities:
Deferred policy acquisition costs 433.0 385.2
Unrealized losses allocable to experience-rated
contracts -- 108.0
Market discount 4.4 3.6
Net unrealized capital gains 288.2 --
Other (1.9) 0.4
------- --------
Total gross liabilities 723.7 497.2
------- --------
Net deferred tax liability $169.6 $233.5
======= ========
F-15
<PAGE>
6. Federal Income Taxes (Continued)
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. At December 31, 1994, $81.0 million of net unrealized
capital losses were reflected in shareholder's equity without deferred tax
benefits. As of December 31, 1995, no valuation allowance was required for
unrealized capital gains and losses. The reversal of the valuation allowance
had no impact on net income in 1995.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax return
purposes under the Deficit Reduction Act of 1984. The balance in such account
was approximately $17.2 million at December 31, 1995. This amount would be
taxed only under certain conditions. No income taxes have been provided on
this amount since management believes the conditions under which such taxes
would become payable are remote.
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1986. Discussions
are being held with the Service with respect to proposed adjustments.
However, management believes there are adequate defenses against, or
sufficient reserves to provide for, such challenges. The Service has
commenced its examinations for the years 1987 through 1990.
7. Benefit Plans
Employee Pension Plans--The Company, in conjunction with Aetna, has
non-contributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over sixty consecutive months of
highest earnings in a 120 month period). Contributions are determined using
the Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to the amounts that are currently deductible for
tax reporting purposes. The accumulated benefit obligation and plan assets
are recorded by Aetna. The accumulated plan assets exceed accumulated plan
benefits. There has been no funding to the plan for the years 1993 through
1995, and therefore, no expense has been recorded by the Company.
Agent Pension Plans--The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides pension
benefits based on annual commission earnings. The accumulated plan assets
exceed accumulated plan benefits. There has been no funding to the plan for
the years 1993 through 1995, and therefore, no expense has been recorded by
the Company.
Employee Postretirement Benefits--In addition to providing pension benefits,
Aetna also provides certain postretirement health care and life insurance
benefits, subject to certain caps, for retired employees. Medical and dental
benefits are offered to all full-time employees retiring at age 50 with at
least 15 years of service or at age 65 with at least 10 years of service.
Retirees are required to contribute to the plans based on their years of
service with Aetna.
The cost to the Company associated with the Aetna postretirement plans for
1995, 1994 and 1993 were $1.4 million, $1.0 million and $0.8 million,
respectively.
Agent Postretirement Benefits--The Company, in conjunction with Aetna, also
provides certain postemployment health care and life insurance benefits for
certain agents.
The cost to the Company associated to the agents' postretirement plans for
1995, 1994 and 1993 were $0.8 million, $0.7 million and $0.6 million,
respectively.
Incentive Savings Plan--Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which may
be invested in common stock of Aetna or certain other investments, are
matched, up to 5% of compensation, by Aetna. Pretax charges to operations for
the incentive savings plan were $4.9 million, $3.3 million and $3.1 million
in 1995, 1994 and 1993, respectively.
Stock Plans--Aetna has a stock incentive plan that provides for stock options
and deferred contingent common stock or cash awards to certain key employees.
Aetna also has a stock option plan under which executive and middle
management employees of Aetna may be granted options to purchase common stock
of Aetna at the market price on the date of grant or, in connection with
certain business combinations, may be granted options to purchase common
stock on different terms. The cost to the Company associated with the Aetna
stock plans for 1995, 1994 and 1993, was $6.3 million, $1.7 million and $0.4
million, respectively.
F-16
<PAGE>
8. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable life and annuity contracts. Under the
insurance contracts, the Separate Accounts pay the Company a daily fee which,
on an annual basis, ranges, depending on the product, from .25% to 1.80% of
their average daily net assets. The Company also receives fees from the
variable life and annuity mutual funds and The Aetna Series Fund for serving
as investment adviser. Under the advisory agreements, the Funds pay the
Company a daily fee which, on an annual basis, ranges, depending on the fund,
from .25% to 1.00% of their average daily net assets. The advisory agreements
also call for the variable funds to pay their own administrative expenses and
for The Aetna Series Fund to pay certain administrative expenses. The Company
also receives fees (expressed as a percentage of the average daily net
assets) from The Aetna Series Fund for providing administration, shareholder
services and promoting sales. The amount of compensation and fees received
from the Separate Accounts and Funds, included in Charges Assessed Against
Policyholders, amounted to $128.1 million, $104.6 million and $93.6 million
in 1995, 1994 and 1993, respectively. The Company may waive advisory fees at
its discretion.
The Company may, from time to time, make reimbursements to a Fund for some or
all of its operating expenses. Reimbursement arrangements may be terminated
at any time without notice.
Since 1981, all domestic individual non-participating life insurance of Aetna
and its subsidiaries has been issued by the Company. Effective December 31,
1988, the Company entered into a reinsurance agreement with Aetna Life
Insurance Company ("Aetna Life") in which substantially all of the
non-participating individual life and annuity business written by Aetna Life
prior to 1981 was assumed by the Company. A $108.0 million commission, paid
by the Company to Aetna Life in 1988, was capitalized as deferred policy
acquisition costs. The Company maintained insurance reserves of $655.5
million and $690.3 million as of December 31, 1995 and 1994, respectively,
relating to the business assumed. In consideration for the assumption of this
business, a loan was established relating to the assets held by Aetna Life
which support the insurance reserves. The loan is being reduced in accordance
with the decrease in the reserves. The fair value of this loan was $663.5
million and $630.3 million as of December 31, 1995 and 1994, respectively,
and is based upon the fair value of the underlying assets. Premiums of $28.0
million, $32.8 million and $33.3 million and current and future benefits of
$43.0 million, $43.8 million and $55.4 million were assumed in 1995, 1994 and
1993, respectively.
Investment income of $46.5 million, $51.5 million and $53.3 million was
generated from the reinsurance loan to affiliate in 1995, 1994 and 1993,
respectively. Net income of approximately $18.4 million, $25.1 million and
$13.6 million resulted from this agreement in 1995, 1994 and 1993,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life for the purchase and administration of a life contingent
single premium variable payout annuity contract. In addition, the Company
also is responsible for administering fixed annuity payments that are made to
annuitants receiving variable payments. Reserves of $28.0 million and $24.2
million were maintained for this contract as of December 31, 1995 and 1994,
respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement with
Aetna Life to reinsure amounts in excess of this limit, up to a maximum of
$8.0 million on any new individual life business, on a yearly renewable term
basis. Premium amounts related to this agreement were $3.2 million, $1.3
million and $0.6 million for 1995, 1994 and 1993, respectively.
The Company received no capital contributions in 1995, 1994 or 1993.
The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.
Premiums due and other receivables include $5.7 million and $27.6 million due
from affiliates in 1995 and 1994, respectively. Other liabilities include
$12.4 million and $27.9 million due to affiliates for 1995 and 1994,
respectively.
Substantially all of the administrative and support functions of the Company
are provided by Aetna and its affiliates. The financial statements reflect
allocated charges for these services based upon measures appropriate for the
type and nature of service provided.
F-17
<PAGE>
9. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its exposure
to large losses in all aspects of its insurance business. Such reinsurance
permits recovery of a portion of losses from reinsurers, although it does not
discharge the primary liability of the Company as direct insurer of the risks
reinsured. The Company evaluates the financial strength of potential
reinsurers and continually monitors the financial condition of reinsurers.
Only those reinsurance recoverables deemed probable of recovery are reflected
as assets on the Company's Consolidated Balance Sheets.
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 8 above.
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
------- ---------- ---------- --------
(millions)
1995
- ----
Premiums:
Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 82.1 -- 0.5 82.6
------- ---------- ---------- --------
Total earned premiums $118.4 $16.1 $28.5 $130.8
======= ========== ========== ========
1994
- ----
Premiums:
Life Insurance $ 27.3 $ 6.0 $32.8 $ 54.1
Accident and Health Insurance 9.3 9.3 -- --
Annuities 69.9 -- 0.2 70.1
------- ---------- ---------- --------
Total earned premiums $106.5 $15.3 $33.0 $124.2
======= ========== ========== ========
1993
- ----
Premiums:
Life Insurance $ 22.4 $ 5.6 $33.3 $ 50.1
Accident and Health Insurance 12.9 12.9 -- --
Annuities 31.3 -- 0.7 32.0
------- ---------- ---------- --------
Total earned premiums $ 66.6 $18.5 $34.0 $ 82.1
======= ========== ========== ========
10. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:
1995 1994
--------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ----------
(millions)
Assets:
Cash and cash equivalents $ 568.8 $ 568.8 $ 623.3 $ 623.3
Short-term investments 15.1 15.1 98.0 98.0
Debt securities 12,720.8 12,720.8 10,191.4 10,191.4
Equity securities 257.6 257.6 229.1 229.1
Limited partnership -- -- 24.4 24.4
Mortgage loans 21.2 21.9 9.9 9.9
Liabilities:
Investment contract
liabilities:
With a fixed maturity 989.1 1,001.2 826.7 833.5
Without a fixed maturity 9,511.0 9,298.4 8,122.6 7,918.2
F-18
<PAGE>
10. Financial Instruments (Continued)
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of expected future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot be
substantiated by comparison to independent markets, nor can the disclosed
value be realized in immediate settlement of the instrument. In evaluating
the Company's management of interest rate and liquidity risk, the fair values
of all assets and liabilities should be taken into consideration, not only
those above.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Short-term instruments: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices are not available, the carrying
amounts reported in the Consolidated Balance Sheets approximates fair value.
Short-term instruments have a maturity date of one year or less and include
cash and cash equivalents, and short-term investments.
Debt and equity securities: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair value is estimated by using quoted market prices for similar
securities or discounted cash flow methods.
Mortgage loans: Fair value is estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans
would be made to similar borrowers. The rates reflect management's assessment
of the credit quality and the remaining duration of the loans. The fair value
estimate of mortgage loans of lower quality, including problem and
restructured loans, is based on the estimated fair value of the underlying
collateral.
Investment contract liabilities (included in Policyholders' Funds Left With
the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in
paying an amount different than that determined to be payable on demand.
Off-Balance-Sheet Financial Instruments (including Derivative Financial
Instruments)
During 1995, the Company received $0.4 million for writing call options on
underlying securities. As of December 31, 1995 there were no option contracts
outstanding.
At December 31, 1995, the Company had a forward swap agreement with a
notional amount of $100.0 million and a fair value of $0.1 million.
The Company did not have transactions in derivative instruments in 1994.
The Company also holds investments in certain debt and equity securities with
derivative characteristics (i.e., including the fact that their market value
is at least partially determined by, among other things, levels of or changes
in interest rates, prepayment rates, equity markets or credit
ratings/spreads). The amortized cost and fair value of these securities,
included in the $13.4 billion investment portfolio, as of December 31, 1995
was as follows:
(Millions) Amortized Cost Fair Value
-------------- -----------
Collateralized mortgage obligations $2,383.9 $2,549.3
Principal-only strips (included above) 38.7 50.0
Interest-only strips (included above) 10.7 20.7
Structured Notes (1) 95.0 100.3
(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-19
<PAGE>
11. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value of
the securities underlying the commitments. At December 31, 1995, the Company
had commitments to purchase investments of $31.4 million. The fair value of
the investments at December 31, 1995 approximated $31.5 million. There were
no outstanding forward commitments at December 31, 1994.
Litigation
There were no material legal proceedings pending against the Company as of
December 31, 1995 or December 31, 1994 which were beyond the ordinary course
of business. The Company is involved in lawsuits arising, for the most part,
in the ordinary course of its business operations as an insurer.
12. Segment Information
The Company's operations are reported through two major business segments:
Life Insurance and Financial Services.
Summarized financial information for the Company's principal operations was
as follows:
(Millions) 1995 1994 1993
- ----------------------------------------------------------------------------
Revenue:
Financial services $ 1,129.4 $ 946.1 $ 892.8
Life insurance 407.9 386.1 371.7
---------- ---------- -----------
Total revenue $ 1,537.3 $ 1,332.2 $ 1,264.5
- ----------------------------------------------------------------------------
Income before federal income taxes:
Financial services $ 158.0 $ 119.7 $ 121.1
Life insurance 102.0 96.8 98.0
---------- ---------- -----------
Total income before federal
income taxes $ 260.0 $ 216.5 $ 219.1
- ----------------------------------------------------------------------------
Net income:
Financial services $ 113.8 $ 85.5 $ 86.8
Life insurance 62.1 59.8 56.1
---------- ---------- -----------
Net income $ 175.9 $ 145.3 $ 142.9
- ----------------------------------------------------------------------------
Assets under management, at fair
value:
Financial services $23,224.3 $17,785.2 $16,600.5
Life insurance 2,698.1 2,171.7 2,175.5
- ----------------------------------------------------------------------------
Total assets under management $25,922.4 $19,956.9 $18,776.0
- ----------------------------------------------------------------------------
F-20
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
VARIABLE ANNUITY ACCOUNT B
VARIABLE ANNUITY CONTRACTS
issued by
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Form No. 09515(S)-1 ALIAC Ed. December 1996
