PROSPECTUS
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The Contracts offered in connection with this Prospectus are group deferred
variable annuity contracts ("Contracts") issued by Aetna Life Insurance and
Annuity Company (the "Company"). The Contracts are available through
participation in (1) employer-sponsored deferred compensation plans sponsored by
tax-exempt organizations for deferrals not subject to Section 457 of the
Internal Revenue Code of 1986, as amended ("Code") or by taxable organizations
for their employees and/or independent contractors ("Non-Section 457 Plans"); or
(2) employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals that are subject to Code Section 457 for their
employees and/or independent contractors ("Section 457 Plans") (collectively
referred to as "Plans"). Only group contracts are currently offered for sale;
however, "Contracts" shall also refer to employer-owned individual Contracts
issued in connection with Plans in the past.
The Contracts provide that contributions may be allocated to one or more of the
Credited Interest Options or to one or more of the Subaccounts of Variable
Annuity Account B, a separate account of the Company. The Subaccounts invest
directly in shares of the following Funds:
[bullet] Aetna Ascent VP (formerly known as Aetna Ascent Variable Portfolio)
[bullet] Aetna Balanced VP, Inc. (formerly known as Aetna Investment Advisers
Fund, Inc.)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP
[bullet] Aetna Crossroads VP (formerly known as Aetna Crossroads Variable
Portfolio)
[bullet] Aetna Growth VP (formerly known as Aetna Variable Growth Portfolio)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP
[bullet] Aetna High Yield VP
[bullet] Aetna Index Plus Large Cap VP (formerly known as Aetna Variable Index
Plus Portfolio)
[bullet] Aetna Index Plus Mid Cap VP
[bullet] Aetna Index Plus Small Cap VP
[bullet] Aetna International VP
[bullet] Aetna Legacy VP (formerly known as Aetna Legacy Variable Portfolio)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP
[bullet] Aetna Real Estate Securities VP
[bullet] Aetna Small Company VP (formerly known as Aetna Variable Small Company
Portfolio)
[bullet] Aetna Value Opportunity VP (formerly known as Aetna Variable Capital
Appreciation Portfolio)
[bullet] Calvert Social Balanced Portfolio (formerly known as Calvert
Responsibly Invested Portfolio)
[bullet] Fidelity VIP Equity-Income Portfolio
[bullet] Fidelity VIP Growth Portfolio
[bullet] Fidelity VIP Overseas Portfolio
[bullet] Fidelity VIP II Contrafund Portfolio
[bullet] Janus Aspen Aggressive Growth Portfolio
[bullet] Janus Aspen Balanced Portfolio
[bullet] Janus Aspen Flexible Income Portfolio
[bullet] Janus Aspen Growth Portfolio
[bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Lexington Natural Resources Trust*
[bullet] Oppenheimer Global Securities Fund
[bullet] Oppenheimer Strategic Bond Fund
[bullet] Portfolio Partners MFS Emerging Equities Portfolio
[bullet] Portfolio Partners MFS Research Growth Portfolio
[bullet] Portfolio Partners MFS Value Equity Portfolio
[bullet] Portfolio Partners Scudder International Growth Portfolio
[bullet] Portfolio Partners T. Rowe Price Growth Equity Portfolio
* This Fund is only available for investment by Participants who established an
account under the Contract before May 1, 1998. As soon as all such Participants
have redirected their allocations to other investment options, the Fund will be
closed to all new investment (except reinvested dividends and capital gains
earned on amounts already invested in the Fund through the Separate Account).
The Credited Interest Options currently available under the Contract are the
Guaranteed Accumulation Account, the Fixed Account and the Fixed Plus Account.
Except as specifically mentioned, this Prospectus describes only investments
through the Separate Account. A brief description of each of the Credited
Interest Options is contained in Appendices to this Prospectus. Additional
information concerning the Guaranteed Accumulation Account is contained in a
separate prospectus.
The availability of the Funds and the Credited Interest Options is subject to
applicable regulatory authorization. Not all Funds or Credited Interest Options
may be available in all jurisdictions, under all Contracts, or in all Plans.
Please check with your employer to determine option availability. (See
"Investment Options.")
This Prospectus provides investors with the information that they should know
about the Separate Account before investing in the Contract through the
Separate Account. Additional information about the Separate Account is
contained in a Statement of Additional Information ("SAI") which is available
at no charge. The SAI has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Table of Contents for
the SAI is printed on page 19 of this Prospectus. An SAI may be obtained by
indicating the request on the enrollment form or on the prospectus receipt
contained in this Prospectus, or by calling the number listed under the
"Inquiries" section of the Prospectus Summary. You may also obtain an SAI for
any of the Funds by calling that phone number.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS AND GUARANTEED ACCUMULATION ACCOUNT. ALL PROSPECTUSES SHOULD BE READ
AND RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION AND OTHER INFORMATION
ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION (SEC) CAN BE FOUND IN THE SEC'S WEB SITE AT
http://www.sec.gov.
THE SECURITIES OFFERED BY THIS PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION ARE DATED MAY 1,
1998.
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TABLE OF CONTENTS
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DEFINITIONS ......................................................DEFINITIONS--1
PROSPECTUS SUMMARY ...................................................SUMMARY--1
FEE TABLE ..........................................................FEE TABLE--1
CONDENSED FINANCIAL INFORMATION ............................................. 1
THE COMPANY ................................................................. 1
VARIABLE ANNUITY ACCOUNT B .................................................. 1
INVESTMENT OPTIONS .......................................................... 1
The Funds .................................................................. 1
Credited Interest Options .................................................. 4
PURCHASE .................................................................... 5
Contract Availability ...................................................... 5
Contract Purchase .......................................................... 5
Purchase Payments .......................................................... 5
Right to Cancel ............................................................ 6
Transfer Credits ........................................................... 6
CHARGES AND DEDUCTIONS ...................................................... 6
Daily Deductions from the Separate Account ................................. 6
Maintenance Fee ............................................................ 7
Deferred Sales Charge ...................................................... 7
Fund Expenses .............................................................. 8
Premium and Other Taxes .................................................... 8
CONTRACT VALUATION .......................................................... 9
Account Value .............................................................. 9
Accumulation Units ......................................................... 9
Net Investment Factor ...................................................... 9
TRANSFERS ................................................................... 9
Dollar Cost Averaging Program .............................................. 10
WITHDRAWALS ................................................................. 10
SYSTEMATIC DISTRIBUTION OPTIONS ............................................. 10
DEATH BENEFIT DURING ACCUMULATION PERIOD .................................... 11
ANNUITY PERIOD .............................................................. 12
Annuity Period Elections ................................................... 12
Annuity Options ............................................................ 12
Annuity Payments ........................................................... 13
Charges Deducted During the Annuity Period ................................. 13
Death Benefit Payable During the Annuity Period ............................ 13
TAX STATUS .................................................................. 14
Introduction ............................................................... 14
Taxation of the Company .................................................... 14
Tax Status of the Contract ................................................. 14
Contracts Used With Certain Retirement Plans ............................... 14
Section 457 Plans .......................................................... 15
Plans of Non-Section 457 Tax-Exempt Organizations and Taxable Organizations 15
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MISCELLANEOUS ............................................... 16
Voting Rights .............................................. 16
Modification of the Contract ............................... 17
Distribution ............................................... 17
Performance Reporting ...................................... 17
Transfer of Ownership; Assignment .......................... 18
Delay or Suspension of Payments ............................ 18
Legal Matters and Proceedings .............................. 18
YEAR 2000 .................................................. 18
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ......... 19
APPENDIX I--GUARANTEED ACCUMULATION ACCOUNT ................. 20
APPENDIX II--FIXED ACCOUNT .................................. 21
APPENDIX III--FIXED PLUS ACCOUNT ............................ 22
APPENDIX IV--CONDENSED FINANCIAL INFORMATION ................ 24
NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
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DEFINITIONS
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As used in this Prospectus, the following terms have the meanings shown:
Account: A record established for each Participant, as directed by the Contract
Holder, to identify contract values during the Accumulation Period.
Account Year: A period of twelve months measured from the date on which an
Account is established (the effective date) or from an anniversary of such
effective date.
Account Value: The total dollar value of amounts held in an Account as of any
Valuation Date during the Accumulation Period.
Accumulation Period: The period during which Purchase Payment(s) credited to an
Account are invested to fund future Annuity payments.
Accumulation Unit: A measure of the value of each Subaccount before Annuity
payments begin.
Aggregate Purchase Payment(s): The sum of all Purchase Payment(s) made under a
Contract.
Annuitant: The person on whose life or life expectancy the Annuity payments are
based.
Annuity: A series of payments for life, for a definite period or a combination
of the two.
Annuity Period: The period during which Annuity payments are made.
Annuity Unit: A measure of the value of each Subaccount selected during the
Annuity Period.
Code: The Internal Revenue Code of 1986, as amended.
Company (we, us): Aetna Life Insurance and Annuity Company.
Contracts: The group and individual deferred, variable annuity contracts
described in this Prospectus.
Contract Beneficiary: The Contract Holder is the Contract Beneficiary.
Contract Holder: The entity which owns the Contract and to which the Contract
is issued.
Credited Interest Options: The fixed interest options under the Contract. The
Credited Interest Options currently consist of the Guaranteed Accumulation
Account, the Fixed Account and the Fixed Plus Account, each of which is
described in an appendix to this Prospectus. Amounts allocated to the Credited
Interest Options are included in the Account Value.
Fund(s): An open-end management investment company whose shares are purchased
by the Separate Account to fund the benefits provided by the Contracts.
Home Office: The Company's principal executive offices located at 151
Farmington Avenue, Hartford, Connecticut 06156.
Non-Section 457 Plan(s): Employer-sponsored deferred compensation plans
sponsored by tax-exempt organizations for deferrals not subject to Code Section
457 and by taxable organizations for their employees and/or independent
contractors.
Participant (you): A person participating in a Plan maintained by an eligible
organization. The terms of the Plan govern Participant benefits.
Plan(s): Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations and/or taxable organizations for their employees or independent
contractors (or both).
Plan Account: The record established for a Contract Holder of the net Purchase
Payments accumulated under a Contract where Accounts are not maintained.
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DEFINITIONS - 1
<PAGE>
Plan Beneficiary: The person entitled to receive benefits under the Plan in the
event of the Participant's death.
Purchase Payment(s): The gross payment(s) made to the Company under a Contract.
Purchase Payment Period: For "Installment Purchase Payment Accounts" the period
of time for completion of the agreed upon annual number and amount of Purchase
Payments. For example, if it is determined that the Purchase Payment Period
will consist of 12 payments per year and only 11 payments are made, the
Purchase Payment Period is not completed until the twelfth Purchase Payment is
made.
Section 457 Plan(s): Employer-sponsored deferred compensation plans sponsored
by non-governmental tax-exempt organizations for deferrals that are subject to
Code Section 457 for their employees and/or independent contractors.
Separate Account: Variable Annuity Account B, a separate account established by
the Company for the purpose of funding variable annuity contracts issued by the
Company.
Subaccount(s): The portion of the assets of the Separate Account that is
allocated to a particular Fund. Each Subaccount invests in the shares of only
one corresponding Fund.
Valuation Date: The date and time at which the Accumulation Unit Value and
Annuity Unit Value of a Subaccount is calculated. Currently, this calculation
occurs after the close of business of the New York Stock Exchange on any normal
business day, Monday through Friday, that the New York Stock Exchange is open.
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DEFINITIONS - 2
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PROSPECTUS SUMMARY
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CONTRACTS OFFERED
The Contracts offered in connection with this Prospectus are group
deferred variable annuity contracts issued by Aetna Life Insurance and Annuity
Company (the "Company"). The purpose of the Contract is to accumulate values
and to provide benefits upon retirement to Participants under:
(1) Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals not subject to Code Section 457 and by taxable
organizations for their employees and/or independent contractors
("Non-Section 457 Plans"), and
(2) Employer-sponsored deferred compensation plans sponsored by non-governmental
tax-exempt organizations for deferrals that are subject to Code Section 457
for their employees and/or independent contractors ("Section 457 Plans").
CONTRACT PURCHASE
The Contract may be purchased by eligible organizations on behalf of a
group made up of their employees and/or independent contractors. An Account is
established for eligible employees by completing the enrollment form (and any
other required forms) and submitting them to the Company. Purchase Payments can
be applied to the Contract either through a lump-sum transfer from a
pre-existing plan or through periodic salary reductions or employer
contributions. (See "Purchase.")
FREE LOOK PERIOD
Contract Holders have the right to cancel their Contract within 10 days
after receiving it (or as otherwise allowed by state law) by returning it to us
along with a written notice of cancellation. Unless state law requires
otherwise, the amount received upon cancellation under this provision will
reflect the investment performance of the Purchase Payments deposited in the
Separate Account while invested. In certain cases, this may be less than the
amount of the Purchase Payments. (See "Purchase--Right to Cancel.")
INVESTMENT OPTIONS
The Company has established Variable Annuity Account B, a registered unit
investment trust, for the purpose of funding the variable portion of the
Contracts. The Separate Account is divided into Subaccounts which invest
directly in shares of the Funds described herein. The Contract allows
investment in any or all of the Subaccounts, as well as in the Credited
Interest Options described below. The total number of investment options that
may be selected at any one time is limited. For a complete list of the Funds
available under the Contracts, a description of the investment objectives of
each of the Funds and their investment advisers, and a description of the
limitations on the number of investment options, see "Investment Options--The
Funds" in this Prospectus, as well as the prospectuses for each of the Funds.
The Contract also provides for investment in Credited Interest Options,
which earn fixed rates of interest. The fixed options available under the
Contract are the Guaranteed Accumulation Account ("GAA"), the Fixed Account,
and the Fixed Plus Account. (See the appendices to this Prospectus.)
CHARGES AND DEDUCTIONS
Certain charges are associated with these Contracts. These charges include
daily deductions from the Separate Account (the mortality and expense risk
charge and an administrative charge), any annual maintenance fee, and premium
and other taxes. The Funds also incur certain fees and expenses which are
deducted directly from the Funds. A deferred sales charge may apply upon a full
or partial withdrawal of the Account Value. (See the Fee Table and "Charges and
Deductions.")
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SUMMARY - 1
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TRANSFERS
Prior to the Annuity Date, and subject to certain limitations, Account
Values may be transferred among the Subaccounts and the Credited Interest
Options without charge. Transfers can be requested in writing or by telephone
in accordance with the Company's transfer procedures. (See Appendices I, II and
III for a full description of the restrictions applicable to transfers from the
Credited Interest Options.) (See "Transfers.")
WITHDRAWALS
The Contract Holder may withdraw all or a part of the Account Value prior
to the Annuity Date by properly completing a disbursement form and sending it
to the Company. Limitations apply to withdrawals from the Fixed Plus Account.
Certain charges may be assessed upon withdrawal. The withdrawals may also be
subject to income tax. (See "Withdrawals.")
The Contract also offers certain Systematic Distribution Options during
the Accumulation Period to persons meeting certain criteria. Systematic
Distribution Options are not available in all states and may not be suitable in
every situation. (See "Systematic Distribution Options.")
DEATH BENEFIT
The Contract provides that a death benefit is payable to the Contract
Beneficiary upon the death of the Participant before the Annuity Date. The
Contract Holder may direct that we make such payment to the Plan Beneficiary.
The amount of the death benefit will be equal to the Account Value. Until the
election of a method of payment, the Account Value will remain invested under
the Contract. The Contract Holder on behalf of a Plan Beneficiary may elect to
receive the proceeds in a lump-sum or under any of the payment options
available under the Contract. However, the Code requires that distributions
begin within a certain time period. (See "Death Benefit During Accumulation
Period.")
After Annuity Payments have commenced, a death benefit may be payable to
the Contract Beneficiary depending upon the terms of the Contract and the
Annuity Option selected. (See "Annuity Period--Death Benefit Payable During the
Annuity Period.")
THE ANNUITY PERIOD
On the Annuity Date, the Contract Holder, on your behalf, may elect to
begin receiving Annuity Payments on either a fixed, variable or combination of
fixed and variable basis. If a variable payout is selected, the payments will
vary with the investment performance of the Subaccount(s) selected. The Company
reserves the right to limit the number of Subaccounts that may be available
during the Annuity Period. (See "Annuity Period.")
TAXES
Contributions and earnings are not generally taxed until paid or made
available under the employer's Plan. Withholding for income tax may be imposed
on certain withdrawals. (See "Tax Status.")
INQUIRIES
Questions, inquiries or requests for additional information can be
directed to your agent or local representative, or you may contact the Company
as follows:
[bullet] Write to: Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156-1277
Attention: Customer Service
[bullet] Call Customer Service: 1-800-525-4225 (for automated transfers
or changes in the allocation of Account
Values, call: 1-800-262-3862)
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SUMMARY - 2
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FEE TABLE
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This Fee Table describes the various charges and expenses associated with the
Contract during the Accumulation Period. For amounts deducted during the
Annuity Period, see "Annuity Period--Charges Deducted During the Annuity
Period." No sales charge is paid when the Contract is purchased. Some expenses
may vary as explained under "Charges and Deductions." The charges and expenses
shown below do not include premium taxes that may be applicable. For more
information regarding expenses paid out of assets of a particular Fund, see the
Fund's prospectus.
CONTRACT HOLDER TRANSACTION EXPENSES
Deferred Sales Charge. (as a percentage of the amount withdrawn)*:
INSTALLMENT PURCHASE PAYMENT ACCOUNTS
Purchase Payment
Periods Completed Deduction
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Less than 5 5%
5 or more but less than 7 4%
7 or more but less than 9 3%
9 or more but less than 10 2%
More than 10 0%
SINGLE PURCHASE PAYMENTS ACCOUNTS
Account Years Completed Deduction
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Less than 5 5%
5 or more but less than 6 4%
6 or more but less than 7 3%
7 or more but less than 8 2%
8 or more but less than 9 1%
9 or more 0%
<TABLE>
<S> <C>
Annual Contract Maintenance Fee--Installment Purchase Payment Accounts ... $ 20.00**
--Single Purchase Payment Accounts ........ $ 0.00
</TABLE>
* The total amount deducted for the deferred sales charge will not exceed 8.5%
of the total Purchase Payments applied to the Account.
** The maintenance fee will generally be deducted annually from each
Installment Purchase Payment Account during the Accumulation Period. The
amount of the maintenance fee may be reduced or eliminated. See "Charges
and Deductions Maintenance Fee." The amount shown is the maximum
maintenance fee that can be deducted under the Contract.
SEPARATE ACCOUNT ANNUAL EXPENSES (Daily deductions, equal to the percentage
shown on an annual basis, made from amounts allocated to the variable options
under each Contract.)
For all Contracts except those for which an administrative expense charge is
imposed (see "Charges and Deductions"), Separate Account annual expenses are:
Mortality and Expense Risk Charge ......... 1.25%
Administrative Expense Charge ............. 0.00%
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Total Separate Account Charges ........... 1.25%
====
For Contracts for which an administrative expense charge is imposed (see
"Charges and Deductions"), Separate Account annual expenses are:
Mortality and Expense Risk Charge ......... 1.25%
Administrative Expense Charge ............. 0.25%
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Total Separate Account Charges ........... 1.50%
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FEE TABLE - 1
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FUND ANNUAL EXPENSES
The following table illustrates the advisory fees and other expenses
applicable to the Funds. Except as noted, the following figures are a
percentage of average net assets and, except where otherwise indicated, are
based on figures for the year ended December 31, 1997. A Fund's "Other
Expenses" include operating costs of the Fund. The expenses shown below are
reflected in the Fund's net asset value and are not deducted from the
Individual Account Current Value under the Contract.
<TABLE>
<CAPTION>
Investment
Advisory Fees(1) Other Expenses
(after expense (after expense Total Fund
reimbursement) reimbursement) Annual Expenses
------------------ ---------------- ----------------
<S> <C> <C> <C>
Aetna Ascent VP(2)(3) 0.57% 0.23% 0.80%
Aetna Balanced VP, Inc.(3) 0.50% 0.10% 0.60%
Aetna Bond VP(3) 0.40% 0.10% 0.50%
Aetna Crossroads VP(2)(3) 0.55% 0.25% 0.80%
Aetna Growth VP(2)(3) 0.16% 0.64% 0.80%
Aetna Growth and Income VP(3) 0.50% 0.09% 0.59%
Aetna High Yield VP(2)(3) 0.47% 0.33% 0.80%
Aetna Index Plus Large Cap VP(2)(3) 0.32% 0.23% 0.55%
Aetna Index Plus Mid Cap VP(2)(3) 0.27% 0.33% 0.60%
Aetna Index Plus Small Cap VP(2)(3) 0.27% 0.33% 0.60%
Aetna International VP(2)(3) 0.77% 0.38% 1.15%
Aetna Legacy VP(2)(3) 0.49% 0.31% 0.80%
Aetna Money Market VP(3) 0.25% 0.10% 0.35%
Aetna Real Estate Securities VP(2)(3) 0.62% 0.33% 0.95%
Aetna Small Company VP(2)(3) 0.35% 0.60% 0.95%
Aetna Value Opportunity VP(2)(3) 0.20% 0.60% 0.80%
Calvert Social Balanced Portfolio(4) 0.69% 0.12% 0.81%
Fidelity VIP Equity-Income Portfolio(5) 0.50% 0.08% 0.58%
Fidelity VIP Growth Portfolio(5) 0.60% 0.09% 0.69%
Fidelity VIP Overseas Portfolio(5) 0.75% 0.17% 0.92%
Fidelity VIP II Contrafund Portfolio(5) 0.60% 0.11% 0.71%
Janus Aspen Aggressive Growth Portfolio(6) 0.73% 0.03% 0.76%
Janus Aspen Balanced Portfolio(6) 0.76% 0.07% 0.83%
Janus Aspen Flexible Income Portfolio 0.65% 0.10% 0.75%
Janus Aspen Growth Portfolio(6) 0.65% 0.05% 0.70%
Janus Aspen Worldwide Growth Portfolio(6) 0.66% 0.08% 0.74%
Lexington Natural Resources Trust 1.00% 0.25% 1.25%
Oppenheimer Global Securities Fund 0.70% 0.06% 0.76%
Oppenheimer Strategic Bond Fund 0.75% 0.08% 0.83%
Portfolio Partners MFS Emerging Equities Portfolio(7)(8) 0.68% 0.13% 0.81%
Portfolio Partners MFS Research Growth Portfolio(7)(8) 0.70% 0.15% 0.85%
Portfolio Partners MFS Value Equity Portfolio(7) 0.65% 0.25% 0.90%
Portfolio Partners Scudder International Growth Portfolio(7) 0.80% 0.20% 1.00%
Portfolio Partners T. Rowe Price Growth Equity Portfolio(7) 0.60% 0.15% 0.75%
</TABLE>
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(1) Certain of the 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) Effective May 1, 1998, the Portfolios' adviser has agreed to waive a portion
of its fee or to reimburse certain expenses so that aggregate expenses do
not exceed the total expenses shown above. These fee waiver/expense
reimbursement arrangements will increase total return and may be modified or
terminated at any time.
Without these fee waiver/expense reimbursement arrangements Management Fees
and Total Expenses for the Portfolio would be higher. Management Fees and
Total Expenses would be as follows: 0.60% and 0.83% for Ascent VP; 0.60% and
0.85% for Crossroads VP; 0.60% and 1.24% for Growth VP; 0.65% and 0.98% for
High Yield VP; 0.35% and 0.58% for Index Plus Large Cap VP; 0.40% and 0.73%
for Index Plus Mid Cap VP; 0.40% and 0.73% for Index Plus Small Cap VP;
0.85% and 1.23% for International VP; 0.60% and 0.91% for Legacy VP; 0.75%
and 1.08% for Real Estate Securities VP; 0.75% and 1.35% for Small Company
VP; and 0.60% and 1.20% for Value Opportunity VP, respectively.
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FEE TABLE - 2
<PAGE>
(3) Prior to May 1, 1998, the investment adviser provided administrative
services to the Fund and assumed the Fund's ordinary recurring direct costs
under an Administrative Services Agreement. Effective May 1, 1998, the
investment adviser will continue to provide administrative services to the
Fund but will no longer assume all of the Fund's ordinary recurring direct
costs under the Administrative Services Agreement. The Administrative Fee is
0.075% on the first $5 billion in assets and 0.050% on all assets over $5
billion. The "Other Expenses" shown are not based on actual figures for the
year ended December 31, 1997, but reflect the fee payable under the new
Administrative Services Agreement and estimates of the Fund's ordinary
recurring direct costs.
High Yield VP, Index Plus Mid Cap VP, Index Plus Small Cap VP, International
VP and Real Estate Securities VP commenced operations in December 1997,
therefore, estimates are based on expenses incurred for similar funds.
Actual expenses incurred may be more or less than the amounts shown above.
(4) The figures above are based on expenses for the fiscal year 1997, and have
been restated to reflect an increase in transfer agency expenses of 0.01%
for the Portfolio expected to be incurred in 1998. "Management Fees"
includes a performance adjustment which, depending on performance, could
cause the fee to be as high as 0.85% or as low as 0.55%. "Other Expenses"
reflect an indirect fee of 0.03% (relating to an expense offset arrangement
with the Portfolio's custodian). Net fund operating expenses after
reductions for fees paid indirectly (again, restated) would be 0.78%.
(5) A portion of the brokerage commissions that certain Funds pay was used to
reduce Fund expenses. In addition, certain Funds have entered into
arrangements with their custodian whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses would have been 0.57% for
Equity-Income Portfolio; 0.67% for Growth Portfolio; 0.90% for Overseas
Portfolio: and 0.68% for Contrafund Portfolio.
(6) Management fees for Aggressive Growth, Balanced, Growth and Worldwide Growth
Portfolios reflect a reduced fee schedule effective July 1, 1997. The
management fees shown above are based on the new rate applied to net assets
as of December 31, 1997. Other expenses are based on gross expenses of the
Shares before expense offset arrangements for the fiscal year ended December
31, 1997. The information for each Portfolio is net of fee waivers or
reductions from Janus Capital. Fee reductions for the Aggressive Growth,
Balanced, Growth and Worldwide Growth Portfolios reduce the management fee
to the level of the corresponding Janus retail fund. Other waivers, if
applicable, are first applied against the management fee and then against
other expenses. Without such waivers or reductions, the Management Fee,
Other Expenses and Total Operating Expenses for the Shares would have been
0.74%, 0.04%, and 0.78% for Aggressive Growth Portfolio; 0.77%, 0.06%, and
0.83% for Balanced Portfolio; 0.74%, 0.04%, and 0.78% for Growth Portfolio;
and 0.72%, 0.09%, and 0.81% for Worldwide Growth Portfolio, respectively.
Janus Capital may modify or terminate the waivers or reductions at any time
upon at least 90 days' notice to the Trustees.
(7) Each Portfolio's aggregate expenses are contractually limited to the
advisory and administrative fees disclosed above. The investment adviser
will not seek an increase in its advisory or administrative fee at any time
prior to May 1, 1999.
(8) The advisory fee is 0.70% of the first $500 million in assets and 0.65% on
the excess.
- --------------------------------------------------------------------------------
FEE TABLE - 3
<PAGE>
HYPOTHETICAL ILLUSTRATION (EXAMPLE)
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
WITHOUT ADMINISTRATIVE EXPENSE CHARGE:
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. This
example assumes that no administrative expense charge is imposed. For the
purposes of these Examples, the maximum maintenance fee of $20.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.007%.
<TABLE>
<CAPTION>
EXAMPLE A
---------------------------------------
If you withdraw your entire Account
Value at the end of the periods shown,
you would pay the following expenses,
including any applicable deferred
sales charge:
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Aetna Ascent VP $72 $119 $168 $239
Aetna Balanced VP, Inc. $70 $113 $159 $218
Aetna Bond VP $69 $110 $154 $207
Aetna Crossroads VP $72 $119 $168 $239
Aetna Growth VP $72 $119 $168 $239
Aetna Growth and Income VP $70 $113 $158 $217
Aetna High Yield VP $72 $119 $168 $239
Aetna Index Plus Large Cap VP $70 $112 $156 $212
Aetna Index Plus Mid Cap VP $70 $113 $159 $218
Aetna Index Plus Small Cap VP $70 $113 $159 $218
Aetna International VP $76 $129 $185 $274
Aetna Legacy VP $72 $119 $168 $239
Aetna Money Market VP $68 $106 $147 $191
Aetna Real Estate Securities VP $74 $123 $176 $254
Aetna Small Company VP $74 $123 $176 $254
Aetna Value Opportunity VP $72 $119 $168 $239
Calvert Social Balanced Portfolio $72 $119 $169 $240
Fidelity VIP Equity-Income Portfolio $70 $113 $158 $216
Fidelity VIP Growth Portfolio $71 $116 $163 $227
Fidelity VIP Overseas Portfolio $73 $122 $174 $251
Fidelity VIP II Contrafund Portfolio $71 $116 $164 $229
Janus Aspen Aggressive Growth Portfolio $72 $118 $167 $234
Janus Aspen Balanced Portfolio $73 $120 $170 $242
Janus Aspen Flexible Income Portfolio $72 $118 $166 $233
Janus Aspen Growth Portfolio $71 $116 $164 $228
Janus Aspen Worldwide Growth Portfolio $72 $117 $166 $232
Lexington Natural Resources Trust $77 $132 $190 $284
Oppenheimer Global Securities Fund $72 $118 $167 $234
Oppenheimer Strategic Bond Fund $73 $120 $170 $242
Portfolio Partners MFS Emerging Equities Portfolio $72 $119 $169 $240
Portfolio Partners MFS Research Growth Portfolio $73 $120 $171 $244
Portfolio Partners MFS Value Equity Portfolio $73 $122 $173 $249
Portfolio Partners Scudder International Growth
Portfolio $74 $125 $178 $259
Portfolio Partners T. Rowe Price Growth Equity
Portfolio $72 $118 $166 $233
<CAPTION>
EXAMPLE B
--------------------------------------
If you do not withdraw your Account
Value, or if you annuitize at the end of
the periods shown, you would pay the
following expenses (no deferred sales
charge is reflected):*
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Aetna Ascent VP $21 $64 $111 $239
Aetna Balanced VP, Inc. $19 $58 $100 $218
Aetna Bond VP $18 $55 $ 95 $207
Aetna Crossroads VP $21 $64 $111 $239
Aetna Growth VP $21 $64 $111 $239
Aetna Growth and Income VP $19 $58 $100 $217
Aetna High Yield VP $21 $64 $111 $239
Aetna Index Plus Large Cap VP $18 $57 $ 98 $212
Aetna Index Plus Mid Cap VP $19 $58 $100 $218
Aetna Index Plus Small Cap VP $19 $58 $100 $218
Aetna International VP $24 $75 $128 $274
Aetna Legacy VP $21 $64 $111 $239
Aetna Money Market VP $16 $51 $ 87 $191
Aetna Real Estate Securities VP $22 $69 $118 $254
Aetna Small Company VP $22 $69 $118 $254
Aetna Value Opportunity VP $21 $64 $111 $239
Calvert Social Balanced Portfolio $21 $65 $111 $240
Fidelity VIP Equity-Income Portfolio $19 $58 $ 99 $216
Fidelity VIP Growth Portfolio $20 $61 $105 $227
Fidelity VIP Overseas Portfolio $22 $68 $117 $251
Fidelity VIP II Contrafund Portfolio $20 $62 $106 $229
Janus Aspen Aggressive Growth Portfolio $20 $63 $109 $234
Janus Aspen Balanced Portfolio $21 $65 $112 $242
Janus Aspen Flexible Income Portfolio $20 $63 $108 $233
Janus Aspen Growth Portfolio $20 $61 $106 $228
Janus Aspen Worldwide Growth Portfolio $20 $63 $108 $232
Lexington Natural Resources Trust $25 $78 $133 $284
Oppenheimer Global Securities Fund $20 $63 $109 $234
Oppenheimer Strategic Bond Fund $21 $65 $112 $242
Portfolio Partners MFS Emerging Equities Portfolio $21 $65 $111 $240
Portfolio Partners MFS Research Growth Portfolio $21 $66 $113 $244
Portfolio Partners MFS Value Equity Portfolio $22 $68 $116 $249
Portfolio Partners Scudder International Growth
Portfolio $23 $71 $121 $259
Portfolio Partners T. Rowe Price Growth Equity
Portfolio $20 $63 $108 $233
</TABLE>
- ------------------
* This Example would not apply if a nonlifetime variable Annuity option is
selected, and a lump-sum settlement is requested within three years after
Annuity payments start, since the lump-sum payment will be treated as a
withdrawal during the Accumulation Period and will be subject to any deferred
sales charge that would then apply. (Refer to Example A.)
- --------------------------------------------------------------------------------
FEE TABLE - 4
<PAGE>
HYPOTHETICAL ILLUSTRATION (EXAMPLE)
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
WITH ADMINISTRATIVE EXPENSE CHARGE:
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. This
example assumes that an administrative expense charge of 0.25% annually is
imposed. For the purposes of these Examples, the maximum maintenance fee of
$20.00 that can be deducted under the Contract has been converted to a
percentage of assets equal to 0.007%.
<TABLE>
<CAPTION>
EXAMPLE A
---------------------------------------
If you withdraw your entire Account
Value at the end of the periods shown,
you would pay the following expenses,
including any applicable deferred
sales charge:
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Aetna Ascent VP $75 $126 $180 $264
Aetna Balanced VP, Inc. $73 $120 $171 $244
Aetna Bond VP $72 $118 $166 $233
Aetna Crossroads VP $75 $126 $180 $264
Aetna Growth VP $75 $126 $180 $264
Aetna Growth and Income VP $73 $120 $170 $243
Aetna High Yield VP $75 $126 $180 $264
Aetna Index Plus Large Cap VP $72 $119 $168 $239
Aetna Index Plus Mid Cap VP $73 $120 $171 $244
Aetna Index Plus Small Cap VP $73 $120 $171 $244
Aetna International VP $78 $136 $197 $299
Aetna Legacy VP $75 $126 $180 $264
Aetna Money Market VP $70 $113 $159 $218
Aetna Real Estate Securities VP $76 $130 $188 $279
Aetna Small Company VP $76 $130 $188 $279
Aetna Value Opportunity VP $75 $126 $180 $264
Calvert Social Balanced Portfolio $75 $126 $181 $265
Fidelity VIP Equity-Income Portfolio $73 $120 $170 $242
Fidelity VIP Growth Portfolio $74 $123 $175 $253
Fidelity VIP Overseas Portfolio $76 $130 $186 $276
Fidelity VIP II Contrafund Portfolio $74 $124 $176 $255
Janus Aspen Aggressive Growth Portfolio $74 $125 $179 $260
Janus Aspen Balanced Portfolio $75 $127 $182 $267
Janus Aspen Flexible Income Portfolio $74 $125 $178 $259
Janus Aspen Growth Portfolio $74 $123 $176 $254
Janus Aspen Worldwide Growth Portfolio $74 $124 $178 $258
Lexington Natural Resources Trust $79 $139 $202 $309
Oppenheimer Global Securities Fund $74 $125 $179 $260
Oppenheimer Strategic Bond Fund $75 $127 $182 $267
Portfolio Partners MFS Emerging Equities Portfolio $75 $126 $181 $265
Portfolio Partners MFS Research Growth Portfolio $75 $128 $183 $269
Portfolio Partners MFS Value Equity Portfolio $76 $129 $185 $274
Portfolio Partners Scudder International
Growth Portfolio $77 $132 $190 $284
Portfolio Partners T. Rowe Price Growth Equity
Portfolio $74 $125 $178 $259
<CAPTION>
EXAMPLE B
--------------------------------------
If you do not withdraw your Account
Value, or if you annuitize at the end of
the periods shown, you would pay the
following expenses (no deferred sales
charge is reflected):*
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Aetna Ascent VP $23 $72 $123 $264
Aetna Balanced VP, Inc. $21 $66 $113 $244
Aetna Bond VP $20 $63 $108 $233
Aetna Crossroads VP $23 $72 $123 $264
Aetna Growth VP $23 $72 $123 $264
Aetna Growth and Income VP $21 $66 $113 $243
Aetna High Yield VP $23 $72 $123 $264
Aetna Index Plus Large Cap VP $21 $64 $111 $239
Aetna Index Plus Mid Cap VP $21 $66 $113 $244
Aetna Index Plus Small Cap VP $21 $66 $113 $244
Aetna International VP $27 $83 $141 $299
Aetna Legacy VP $23 $72 $123 $264
Aetna Money Market VP $19 $58 $100 $218
Aetna Real Estate Securities VP $25 $77 $131 $279
Aetna Small Company VP $25 $77 $131 $279
Aetna Value Opportunity VP $23 $72 $123 $264
Calvert Social Balanced Portfolio $23 $72 $124 $265
Fidelity VIP Equity-Income Portfolio $21 $65 $112 $242
Fidelity VIP Growth Portfolio $22 $69 $118 $253
Fidelity VIP Overseas Portfolio $25 $76 $129 $276
Fidelity VIP II Contrafund Portfolio $22 $69 $119 $255
Janus Aspen Aggressive Growth Portfolio $23 $71 $121 $260
Janus Aspen Balanced Portfolio $24 $73 $125 $267
Janus Aspen Flexible Income Portfolio $23 $71 $121 $259
Janus Aspen Growth Portfolio $22 $69 $118 $254
Janus Aspen Worldwide Growth Portfolio $23 $70 $120 $258
Lexington Natural Resources Trust $28 $86 $146 $309
Oppenheimer Global Securities Fund $23 $71 $121 $260
Oppenheimer Strategic Bond Fund $24 $73 $125 $267
Portfolio Partners MFS Emerging Equities Portfolio $23 $72 $124 $265
Portfolio Partners MFS Research Growth Portfolio $24 $74 $126 $269
Portfolio Partners MFS Value Equity Portfolio $24 $75 $128 $274
Portfolio Partners Scudder International
Growth Portfolio $25 $78 $133 $284
Portfolio Partners T. Rowe Price Growth Equity
Portfolio $23 $71 $121 $259
</TABLE>
- ------------------
* This Example would not apply if a nonlifetime variable Annuity option is
selected, and a lump-sum settlement is requested within three years after
Annuity payments start, since the lump-sum payment will be treated as a
withdrawal during the Accumulation Period and will be subject to any deferred
sales charge that would then apply. (Refer to Example A.)
- --------------------------------------------------------------------------------
FEE TABLE - 5
<PAGE>
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Condensed Financial Information for the accumulation units under the
Contract is shown in Appendix IV.
THE COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aetna Life Insurance and Annuity Company (the "Company") is the issuer of
the Contract, and as such, it is responsible for providing the insurance and
annuity benefits under the Contract. The Company is a stock life insurance
company organized under the insurance laws of the State of Connecticut in 1976.
Through a merger, it succeeded to the business of Aetna Variable Annuity Life
Insurance Company (formerly Participating Annuity Life Insurance Company), an
Arkansas life insurance company organized in 1954. The Company is engaged in
the business of issuing life insurance policies and variable annuity contracts
in all states of the United States. The Company's principal executive offices
are located at 151 Farmington Avenue, Hartford, Connecticut 06156.
The Company is a wholly owned subsidiary of Aetna Retirement Holdings,
Inc., which is in turn a wholly owned subsidiary of Aetna Retirement Services,
Inc., and an indirect wholly owned subsidiary of Aetna Inc.
VARIABLE ANNUITY ACCOUNT B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company established Variable Annuity Account B (the "Separate
Account") in 1976 as a segregated asset account for the purpose of funding its
variable annuity contracts. The Separate Account is registered as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act"), and
meets the definition of "separate account" under federal securities laws. The
Separate Account is divided into "Subaccounts" which do not invest directly in
stocks, bonds or other investments. Instead, each Subaccount buys and sells
shares of a corresponding Fund.
Although the Company holds title to the assets of the Separate Account,
such assets are not chargeable with liabilities arising out 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 obligations of the Company.
INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE FUNDS
The Contract Holder (or you if allowed by the Contract Holder) may
allocate Purchase Payments to one or more of the Subaccounts as designated on
the enrollment form. In turn, the Subaccounts invest in the corresponding Funds
at net asset value. The total number of investment options that you may select
at any one time is limited to 18. Each Subaccount selected, the Fixed Account,
Fixed Plus Account and each classification of the Guaranteed Accumulation
Account counts as one option.
The Contract Holder may decide to offer only a select number of Funds
under its Plan or may decide to change the Funds it offers. In addition, the
Company may add, withdraw or substitute Funds, subject to the conditions in the
Contract and to compliance with regulatory requirements. The availability of the
Funds may also be subject to applicable regulatory authorization. Not all Funds
may be available in all jurisdictions, under all Contracts, or in all Plans.
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 Balanced VP, Inc. (formerly Aetna Investment Advisers Fund,
Inc.) seeks to maximize investment return, consistent with reasonable
safety of principal
- --------------------------------------------------------------------------------
1
<PAGE>
by investing in a diversified portfolio of one or more of the following
asset classes: stocks, bonds and cash equivalents, based on the
investment adviser's judgment of which of those sectors or mix thereof
offers the best investment prospects.(1)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP seeks to maximize total
return, consistent with reasonable risk, through investments in a
diversified portfolio consisting primarily of debt securities.(1)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP seeks to maximize
total return through investments in a diversified portfolio of common
stocks and securities convertible into common stock.(1)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP seeks to
provide high current return, consistent with preservation of capital
and liquidity, through investment in high-quality money market
instruments. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government.(1)
[bullet] Aetna Generation Portfolios, Inc.-Aetna Ascent VP (formerly Aetna
Ascent Variable Portfolio) seeks to provide capital appreciation. The
Portfolio is designed for investors who have an investment horizon
exceeding 15 years and who have a high level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.-Aetna Crossroads VP (formerly Aetna
Crossroads Variable Portfolio) seeks to provide total return (i.e.,
income and capital appreciation, both realized and unrealized). The
Portfolio is designed for investors who have an investment horizon
exceeding 10 years and who have a moderate level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.-Aetna Legacy VP (formerly Aetna
Legacy Variable Portfolio) seeks to provide total return consistent
with preservation of capital. The Portfolio is designed for investors
who have an investment horizon exceeding five years and who have a low
level of risk tolerance.(1)
[bullet] Aetna Variable Portfolios, Inc.-Aetna Growth VP (formerly Aetna
Variable Growth Portfolio) seeks growth of capital through investment
in a diversified portfolio of common stocks and securities convertible
into common stocks believed to offer growth potential.(1)
[bullet] Aetna Variable Portfolios, Inc.-Aetna High Yield VP seeks high current
income and growth of capital primarily through investment in a
diversified portfolio of fixed income securities rated lower than BBB-
by Standard and Poor's Corporation or lower than Baa3 by Moody's
Investors Service, Inc.(1)
[bullet] Aetna Variable Portfolios, Inc.-Aetna Index Plus Large Cap VP
(formerly Aetna Variable Index Plus Portfolio) seeks to outperform the
total return performance of publicly traded common stocks represented
in the S&P 500 Composite Stock Price Index.(1)
[bullet] Aetna Variable Portfolios, Inc.-Aetna Index Plus Mid Cap VP seeks to
outperform the total return performance of publicly traded common
stocks represented in the S&P 400.(1)
[bullet] Aetna Variable Portfolios, Inc.-Aetna Index Plus Small Cap VP seeks to
outperform the total return performance of publicly traded common
stocks represented by the S&P SmallCap 600 Index, a stock market index
composed of 600 common stocks selected by Standard and Poor's
Corporation.(1)
[bullet] Aetna Variable Portfolios, Inc.-Aetna International VP seeks long-term
capital growth primarily through investment in a diversified portfolio
of common stocks principally traded in countries outside of the United
States. Aetna International VP will not target any given level of
current income.(1)
[bullet] Aetna Variable Portfolios, Inc.-Aetna Real Estate Securities VP seeks
maximum total return primarily through investment in a diversified
portfolio of equity securities issued by real estate companies, the
majority of which are real estate investment trusts (REITs).(1)
[bullet] Aetna Variable Portfolios, Inc.-Aetna Small Company VP (formerly Aetna
Variable Small Company Portfolio) seeks growth of capital primarily
through investment in a diversified portfolio of common stocks and
securities convertible into common stocks of companies with smaller
market capitalizations.(1)
[bullet] Aetna Variable Portfolios, Inc.-Aetna Value Opportunity VP (formerly
Aetna Variable Capital Appreciation Portfolio) seeks growth of capital
primarily through investment in a diversified portfolio of common
stocks and securities convertible into common stock.(1)
- --------------------------------------------------------------------------------
2
<PAGE>
[bullet] Calvert Social Balanced Portfolio (formerly Calvert Responsibly
Invested Balanced Portfolio) is a nondiversified portfolio that seeks
to achieve a total return above the rate of inflation through an
actively managed, nondiversified portfolio of common and preferred
stocks, bonds and money market instruments which offer income and
capital growth opportunity and which satisfy the social criteria
established for the Portfolio.(2)
[bullet] Fidelity Investments Variable Insurance Products Fund--Equity-Income
Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In selecting investments, the Fund
also considers the potential for capital appreciation.(3)
[bullet] Fidelity Investments Variable Insurance Products Fund--Growth
Portfolio seeks capital appreciation by investing mainly in common
stocks, although its investments are not restricted to any one type of
security.(3)
[bullet] Fidelity Investments Variable Insurance Products Fund--Overseas
Portfolio seeks long-term growth by investing mainly in foreign
securities (at least 65% of the Fund's total assets in securities of
foreign issuers). Foreign investments involve greater risks than U.S.
investments, including political and economic risks and the risk of
currency fluctuation.(3)
[bullet] Fidelity Investments Variable Insurance Products Fund II--Contrafund
Portfolio seeks maximum total return over the long-term by investing
mainly in securities of companies whose value the investment adviser
believes is not fully recognized by the public.(3)
[bullet] Janus Aspen Series--Aggressive Growth Portfolio is a nondiversified
portfolio that seeks long-term growth of capital. The Portfolio
pursues its investment objective by normally investing at least 50% of
its equity assets in securities issued by medium-sized companies.
Medium-sized companies are those whose market capitalizations fall
within the range of companies in the S&P MidCap 400 Index, which as of
December 31, 1997 included companies with capitalizations between
approximately $213 million and $13.7 billion, but which is expected to
change on a regular basis.(4)
[bullet] Janus Aspen Series--Balanced Portfolio seeks long-term capital growth,
consistent with preservation of capital and balanced by current income.
The Portfolio pursues its investment objective by, under normal
circumstances, investing 40%-60% of its assets in securities selected
primarily for their growth potential and 40%-60% of its assets in
securities selected primarily for their income potential.(4)
[bullet] Janus Aspen Series--Flexible Income Portfolio seeks to obtain maximum
total return, consistent with preservation of capital. The Portfolio
pursues its investment objective primarily through investments in
income-producing securities. Total return is expected to result from a
combination of current income and capital appreciation. The Portfolio
invests in all types of income-producing securities and may have
substantial holdings of debt securities rated below investment grade
(e.g., junk bonds).(4)
[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 primarily in common
stocks of issuers of any size. This Portfolio generally invests in
larger, more established issuers.(4)
[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.(4)
[bullet] Lexington Natural Resources Trust is a nondiversified portfolio that
seeks long-term growth of capital through investment primarily in
common stocks of companies which own or develop natural resources and
other basic commodities or supply goods and services to such
companies.
This Fund is only available for investment by Participants who
established an Individual Account under the Contract before May 1,
1998. As soon as all such Participants have redirected their
allocations to other investment options, the Fund will be closed to all
new investment (except reinvested dividends and capital gains earned on
amounts already invested in the Fund through the Separate Account).
[bullet] Oppenheimer Global Securities Fund seeks long-term capital appreciation
by investing a substantial portion of its assets in securities of
foreign issuers, "growth-type" companies, cyclical industries and
special situations which are considered to have appreciation
possibilities but which may be considered to be speculative.(6)
[bullet] Oppenheimer Strategic Bond Fund seeks a high level of current income
principally derived from interest on debt securities and seeks to
enhance such income by writing covered call options on debt
securities. The Fund intends to invest principally in (i) foreign
government and corporate debt securities, (ii) securities of the U.S.
Government and its agencies and instrumentalities ("U.S. Government
securities"), and (iii) lower-rated high yield domestic debt
- --------------------------------------------------------------------------------
3
<PAGE>
securities, commonly known as "junk bonds," which are subject to a
greater risk of loss of principal and nonpayment of interest than
higher-rated securities. These securities may be considered to be
speculative. Current income is not an objective.(6)
[bullet] Portfolio Partners, Inc.--MFS Emerging Equities Portfolio seeks to
provide long-term growth of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the Portfolio's
investment objective.(7a)
[bullet] Portfolio Partners, Inc.--MFS Research Growth Portfolio seeks
long-term growth of capital and future income.(7a)
[bullet] Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation. Dividend income, if any, is a consideration incidental
to the Portfolio's objective of capital appreciation.(7a)
[bullet] Portfolio Partners, Inc.--Scudder International Growth Portfolio seeks
long-term growth of capital primarily through a diversified portfolio
of marketable foreign equity securities.(7b)
[bullet] Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term growth of capital and, secondarily, to increase dividend
income by investing primarily in common stocks of well established
growth companies.(7c)
Investment Advisers for each of the Funds:
(1) Aeltus Investment Management, Inc.
(2) Calvert Asset Management Company, Inc.
(3) Fidelity Management & Research Company
(4) Janus Capital Corporation
(5) Lexington Management Corporation (adviser);
Market Systems Research Advisors, Inc. (subadviser)
(6) OppenheimerFunds, Inc.
(7) Aetna Life Insurance and Annuity Company (adviser);
(a) Massachusetts Financial Services Company (subadviser)
(b) Scudder Kemper Investments, Inc. (subadviser)
(c) T. Rowe Price Associates, Inc. (subadviser)
Risks Associated with Investment in the Funds. Some of the Funds may use
instruments known as derivatives as part of their investment strategies. The
use of certain derivatives may involve high risk of volatility to a Fund, and
the use of leverage in connection with such derivatives can also increase risk
of losses. Some of the Funds may also invest in foreign or international
securities which involve greater risks than U.S. investments.
More comprehensive information, including a discussion of potential risks, is
found in the current prospectus for each Fund which is distributed with and
accompanies this Prospectus. You should read the Fund prospectuses and consider
carefully, and on a continuing basis, which Fund or combination of Funds is
best suited to your long-term investment objectives. Additional prospectuses
and Statements of Additional Information for this Prospectus and for each of
the Funds can be obtained from the Company's Home Office at the address and
telephone number listed under the "Inquiries" section of the Prospectus
Summary.
Conflicts of Interest (Mixed and Shared Funding). Shares of the Funds are sold
to each of the Subaccounts for funding the variable annuity contracts issued by
the Company. Shares of the Funds may also be sold to other insurance companies
for the same purpose. This is referred to as "shared funding." Shares of the
Funds may also be used for funding variable life insurance contracts issued by
the Company or by third parties. This is referred to as "mixed funding."
Because the Funds available under the Contract are sold to fund variable
annuity contracts and variable life insurance policies issued by us or by other
companies, certain conflicts of interest could arise. If a conflict of interest
were to occur, one of the separate accounts might withdraw its investment in a
Fund, which might force that Fund to sell portfolio securities at
disadvantageous prices, causing its per share value to decrease. Each Fund's
Board of Directors or Trustees has agreed to monitor events in order to
identify any material irreconcilable conflicts which might arise and to
determine what action, if any, should be taken to address such conflict.
CREDITED INTEREST OPTIONS
Purchase Payments may be allocated to one or more of the Credited
Interest Options available under the Contract, as described below. The Contract
Holder may elect not to offer all Credited Interest Options under its Plan.
[bullet] The Guaranteed Accumulation Account (GAA) is a credited interest
option through which we guarantee stipulated rates of interest for
stated periods of time. Amounts must remain in the GAA for the full
guaranteed term to receive the quoted interest rates, or a market
value adjustment (which may be positive or negative) will be applied.
(See Appendix I.)
- --------------------------------------------------------------------------------
4
<PAGE>
[bullet] The Fixed Account is a part of the Company's general account. The
Fixed Account guarantees a minimum interest rate, as specified in the
Contract. The Company may credit higher interest rates from time to
time. Transfers from the Fixed Account are limited. (See Appendix II.)
[bullet] The Fixed Plus Account is also a part of the Company's general account
and guarantees a minimum interest rate, as specified in the Contract.
The Company may credit higher interest rates at its discretion.
Withdrawals and transfers from the Fixed Plus Account are limited.
(See Appendix III.)
PURCHASE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTRACT AVAILABILITY
The Contracts are designed for (1) employer-sponsored deferred
compensation plans sponsored by tax-exempt organizations for deferrals not
subject to Section 457 of the Internal Revenue Code of 1986, as amended ("Code")
or by taxable organizations for their employees and/or independent contractors
("Non- Section 457 Plans"); or (2) employer-sponsored deferred compensation
plans sponsored by non-governmental tax-exempt organizations for deferrals that
are subject to Code Section 457 for their employees and/or independent
contractors ("Section 457 Plans"). The Contract is generally owned by the
employer, and an Account is established for each Participant, as directed by the
Contract Holder, to identify contract values during the Accumulation Period. A
Participant's record under the Contract is known as his or her "Account."
The Contract is available to Plans subject to Code Section 457 only if
the Plan is not sponsored by a governmental employer. For such Section 457
Plans and for all Non-Section 457 Plans, all amounts of compensation deferred,
all property and rights purchased with such amounts, and all income
attributable to such amounts, property or rights remains solely the property
and rights of the employer, and is subject to the claims of the employer's
general creditors. The Contract will therefore be part of the employer's
general assets, subject to the claims of its general creditors. Benefits
available to you are governed exclusively by the provisions of the Plan and are
backed only by the general assets of the employer. Some of the options and
elections available under the Contract may not be available to you under the
provisions of your Plan. Contact your employer for information regarding your
Plan.
CONTRACT PURCHASE
Eligible organizations may acquire a Contract by submitting an
application to the Company. Once we approve the forms, a Contract is issued to
the employer as the Contract Holder. You may participate in the Plan by
submitting an enrollment form to the Company.
The Company must accept or reject the application or enrollment form
within two business days of receipt. If the application or enrollment form is
incomplete, the Company may hold any forms and accompanying Purchase Payments
for five days. Purchase Payments may be held for a longer period pending
acceptance of the forms only with consent of the Participant, or under certain
circumstances described below, with the consent of the group Contract Holder.
Under limited circumstances the Company may agree, with respect to a particular
Plan, to hold Purchase Payments for longer than the five business days, based
on the consent of the group Contract Holder, in which case these Purchase
Payments will be deposited in the Aetna Money Market VP Subaccount until the
forms are completed.
PURCHASE PAYMENTS
Generally, two types of Purchase Payments may be made under the Contract,
and depending upon which type of payment is made, different Accounts may be
established for each payment type. Continuing, periodic payments will be placed
in "Installment Purchase Payment Accounts." Installment Purchase Payments must
be at least $100 per month ($1,200 annually) per Participant. No payment may be
less than $25. Lump-sum transfers of amounts accumulated under a pre-existing
plan may be placed in "Single Purchase Payment Accounts" in accordance with the
Company's procedures in effect at the time of purchase.
The Code imposes a maximum limit on annual Purchase Payments which may be
excluded from a Participant's gross income for Section 457 Plan Participants.
Such limit is generally the lesser of $8,000 as adjusted to reflect changes in
the cost of living, or 331/2% of your includible compensation (25% of gross
compensation).
For Contracts sold to taxable organizations, this Contract may be
aggregated with other Annuity contracts purchased by the Contract Holder from
us (and our affiliates) on or after October 21, 1988 for purposes of
determining the taxable portion of payments from this Contract. (See "Tax
Status.")
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Allocation of Purchase Payments. Purchase Payments will initially be
allocated to the Subaccounts or Credited Interest Options as specified by the
Contract Holder (or you, if authorized by the Contract Holder) on the
enrollment form. Changes in such allocation may be made in writing or by
telephone transfer. Allocations must be in whole percentages, and there may be
limitations on the number of investment options that can be selected at any one
time. (See "Investment Options--The Funds.")
RIGHT TO CANCEL
The Contract Holder may cancel participation under the Contract without
penalty by returning it to the Company with a written notice of cancellation.
In most states, Contract Holders have ten days to exercise this right; some
states allow a longer free look period. When we receive the request for
cancellation, we will return the Account Value, unless the laws of the state in
which the Contract was issued require that we return the initial Purchase
Payment (if greater than the Account Value). In states that do not require a
return of Purchase Payments, the purchaser bears the entire investment risk for
amounts allocated among the Subaccounts during the free look period. Account
Values will be determined as of the Valuation Date on which we receive the
request for cancellation at our Home Office.
TRANSFER CREDITS
The Company may provide a transfer credit on "transferred assets,"
subject to certain conditions and state approvals. Transferred assets are the
value of contributions made on your behalf under this Plan or a prior plan
before such amounts are applied to this Contract. The transfer credit equals a
percentage of the transferred assets remaining in the Contract after a
specified period of time. Once a transfer credit is applied to your Contract,
all provisions of the Contract apply. This benefit is provided on a
nondiscriminatory basis. If a transfer credit is due under the Contract, you
will be provided with additional information specific to the Contract.
CHARGES AND DEDUCTIONS
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DAILY DEDUCTIONS FROM THE SEPARATE ACCOUNT
Mortality and Expense Risk Charge. The Company makes a daily deduction
from each of the Subaccounts for the mortality and expense risk charge. The
charge is equal, on an annual basis, to 1.25% of the daily net assets of the
Subaccounts and compensates the Company for the assumption of mortality and
expense risks under the Contract. The mortality risks are those assumed for our
promise to make lifetime payments according to Annuity rates specified in the
Contract. The expense risk is the risk that the actual expenses for costs
incurred under the Contract will exceed the maximum costs that can be charged
under the Contract.
If the amount deducted for mortality and expense risks is not sufficient
to cover the mortality costs and expense shortfalls, the loss is borne by the
Company. If the deduction is more than sufficient, the excess may be used to
recover distribution expense relating to the Contracts and as a source of
profit for the Company. The Company expects to make a profit from the mortality
and expense risk charge.
Administrative Expense Charge. The Company reserves the right to make a
deduction from each of the Subaccounts for an administrative expense charge.
The administrative expense charge compensates the Company for administrative
expenses that exceed revenues from the maintenance fee described below. The
charge is set at a level which does not exceed the average expected cost of the
administrative services to be provided while the Contract is in force. The
Company does not expect to make a profit from this charge.
Effective April 4, 1997, the administrative expense charge during the
Accumulation Period equals, on an annual basis, 0.25% of the daily net assets
allocated to the Subaccounts for Contracts effective prior to October 31, 1996
where the number of Participants with assets in the Contract is less than 30 as
of November 30, 1996 and the Contract Holder has chosen not to elect one of the
Company's electronic standards for cash collection and application of
Participant contribution data. There is currently no administrative expense
charge assessed during the Accumulation Period for any other Contracts.
In addition, the administrative expense charge will not be imposed for
Participants who enrolled in a group Contract or became covered under an
individual Contract prior to November 5, 1984.
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MAINTENANCE FEE
During the Accumulation Period, the Company will deduct an annual
maintenance fee from each Installment Purchase Payment Account on its
anniversary date. The maintenance fee is to reimburse the Company for some of
its administrative expenses relating to the establishment and maintenance of
the Accounts.
The maximum maintenance fee that can be deducted under the Contract is
$20. However, under group Contracts, the maintenance fee may be reduced or
eliminated depending upon certain criteria described below. The maintenance fee
will be deducted on a pro rata basis from each Subaccount and Credited Interest
Option in which the Account is invested. If the Account Value is withdrawn, the
full maintenance fee will be deducted at the time of withdrawal.
Reduction or Elimination of the Maintenance Fee. The annual maintenance
fee may be reduced or eliminated under various conditions as agreed to by us
and the Contract Holder in writing. Any reduction or elimination of the annual
maintenance fee will reflect differences in administrative costs and services
after taking into consideration factors such as the following:
[bullet] the size, characteristics, and nature of the group to which a Contract
is issued;
[bullet] the level of our anticipated expenses in administering the Contract,
such as billing for Purchase Payments, producing periodic reports,
providing for the direct payment of Contract charges rather than having
them deducted from Contract Values, and any other factors pertaining to
the level and expense of administrative services which will be provided
under the Contract.
Any reduction or elimination of maintenance fees will not be unfairly
discriminatory against any person. We will make any reduction in annual
maintenance fees according to our own rules in effect at the time an
application for a Contract is approved. We reserve the right to change these
rules from time to time.
DEFERRED SALES CHARGE
Withdrawals of all or a portion of the Account Value may be subject to a
deferred sales charge. The deferred sales charge is a percentage of the amount
withdrawn from the Subaccounts, the Fixed Account or the Guaranteed
Accumulation Account. No deferred sales charge is deducted from amounts
withdrawn from the Fixed Plus Account. For Installment Purchase Payment
Accounts, the deferred sales charge is based on the number of completed
Purchase Payment Periods. For Single Purchase Payment Accounts, it is based on
the number of Account Years that have elapsed since the Account's effective
date. The amount of the deferred sales charge is determined in accordance with
the schedule set forth in the following tables:
INSTALLMENT PURCHASE PAYMENT ACCOUNTS
Purchase Payment Deferred Sales
Periods Completed Charge Deduction
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Less than 5 5%
5 or more but less than 7 4%
7 or more but less than 9 3%
9 or more but less than 10 2%
More than 10 0%
SINGLE PURCHASE PAYMENT ACCOUNTS
Account Years Deferred Sales
Completed Charge Deduction
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Less than 5 5%
5 or more but less than 6 4%
6 or more but less than 7 3%
7 or more but less than 8 2%
8 or more but less than 9 1%
9 or more 0%
If you transfer the total account value under another deferred
compensation annuity contract issued by the Company to an Account under this
Contract, the effective date of the new Account will be the same effective date
as your former contract for purposes of calculating the applicable deferred
sales charge under this Contract.
A deferred sales charge will not be deducted from any portion of the
Account Value which is:
[bullet] applied to provide Annuity benefits;
[bullet] withdrawn on or after the tenth anniversary of the effective date of
the Account or Plan Account;
[bullet] paid due to the death of the Participant;
[bullet] withdrawn due to the election of a Systematic Distribution
Option (see "Systematic Distribution Options");
[bullet] paid where the Account Value is $3,500 or less and no amount has been
withdrawn or used to purchase Annuity benefits during the prior 12
months. If more than one Account is being fully withdrawn on behalf of
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a Participant, all Account Values will be added together to determine
eligibility for the $3,500 exemption. This provision is not available
under Plan Accounts (where Accounts are not maintained by the Company)
or applicable to the withdrawal of all Accounts under one Contract
established with the Company;
[bullet] withdrawn from an Installment Purchase Payment Account by a Participant
who is at least age 59 1/2 and who has completed nine Purchase Payment
Periods; or
[bullet] for Section 457 Plans only, withdrawn due to a hardship resulting from
an unforeseeable emergency, as specified in the Code.
The deduction for the deferred sales charge will not exceed 8.5% of the
total Purchase Payments actually made to the Account. The Company does not
anticipate that the deferred sales charge will cover all sales and
administrative expenses which it incurs in connection with the Contract; the
difference will be covered by the general assets of the Company which are
attributable, in part, to the mortality and expense risk charge described
above.
Reduction or Elimination of the Deferred Sales Charge. For a particular
Plan, we may reduce, waive or eliminate the deferred sales charge. Any
reduction, waiver or elimination of such charges will reflect differences or
expected differences in the amounts of unrecovered distribution costs or
services of the types that the charge is intended to defray. When considering
whether to reduce or eliminate such charges or to grant such a waiver, we will
take into account factors which may include the following:
[bullet] the number of Participants under the Plan;
[bullet] the expected level of assets or cash flow under the Plan;
[bullet] the level of agent involvement in sales activities;
[bullet] the level of our sales-related expenses;
[bullet] the specific distribution provisions under the Plan;
[bullet] the Plan's purchase of one or more other variable Annuity contracts
from us and the features of those contracts;
[bullet] the level of employer involvement in determining eligibility for
distributions under the Contract; and
[bullet] our assessment of financial risk to the Company relating to surrenders.
Any reduction, waiver or elimination of deferred sales charges will not
be unfairly discriminatory against any person.
We may also negotiate provisions regarding the deferred sales charge with
respect to Contracts issued to certain employer groups or associations which
have negotiated on behalf of its employees. All variations in, or elimination
of, provisions regarding the deferred sales charge resulting from such
negotiations will be offered uniformly to all employees within the group. For
specific information on fees applicable to your Account please call the number
listed under the "Inquiries" section of the Prospectus Summary.
We will make any reduction in deferred sales charge according to our own
rules in effect at the time an application for a Contract is approved. We
reserve the right to change these rules from time to time.
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 illustrated in the Fee Table in
this Prospectus and described more fully in the accompanying Fund prospectuses.
PREMIUM AND OTHER TAXES
Several states and municipalities impose a premium tax on Annuities.
These taxes currently range from 0% to 4%. The Company reserves the right to
deduct premium tax against Purchase Payments or Account Values at any time, but
no earlier than when we have a tax liability under state law. The Company's
current practice is to deduct for premium taxes at the time of complete
withdrawal or annuitization. In addition to the premium tax, the Company
reserves the right to assess a charge for any state or federal taxes due
against the Contract or the Separate Account assets.
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<PAGE>
CONTRACT VALUATION
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ACCOUNT VALUE
Until the Annuity Date, the Account Value is the total dollar value of
amounts held in the Account as of any Valuation Date. The Account Value at any
given time is based on the value of the units held in each Subaccount, plus the
value of amounts held in any of the Credited Interest Options.
ACCUMULATION UNITS
The value of your interests in a Subaccount is expressed as the number of
"Accumulation Units" that you hold multiplied by an "Accumulation Unit Value"
(or "AUV") for each unit. The AUV on any Valuation Date is determined by
multiplying the value on the immediately preceding Valuation Date by the net
investment factor of that Subaccount for the period between the immediately
preceding Valuation Date and the current Valuation Date. (See "Net Investment
Factor" below.) The Accumulation Unit Value will be affected by the investment
performance, expenses and charges of the applicable Fund and is reduced each
day by a percentage that accounts for the daily assessment of mortality and
expense risk charge and the administrative charge (if any).
Initial Purchase Payments will be credited to your Account at the AUV
next computed following our acceptance of the enrollment form, as described
under "Purchase--Contract Purchase." Each subsequent Purchase Payment (or
amount transferred) received by the Company by the close of business of the New
York Stock Exchange will be credited to your Account at the AUV next computed
following our receipt of your payment or transfer request. The value of an
Accumulation Unit may increase or decrease.
NET INVESTMENT FACTOR
The net investment factor is used to measure the investment performance
of a Subaccount from one Valuation Date to the next. The net investment factor
for a Subaccount for any valuation period is equal to the sum of 1.0000 plus
the net investment rate. The net investment rate equals:
(a) the net assets of the Fund held by the Subaccount on the current
Valuation Date, minus
(b) the net assets of the Fund held by the Subaccount on the preceding
Valuation Date, plus or minus
(c) taxes or provisions for taxes, if any, attributable to the operation
of the Subaccount;
(d) divided by the total value of the Subaccount's Accumulation and
Annuity Units 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% as an administrative
expense charge.
The net investment rate may be either positive or negative.
TRANSFERS
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At any time prior to the Annuity Date, the Contract Holder, or you (if
permitted by the Contract Holder), can transfer amounts held under the Contract
from one Subaccount to another. Transfers between the Credited Interest Options
and the Subaccounts are subject to certain restrictions. (See Appendices I, II
and III.) A request for transfer can be made either in writing or, subject to
the Contract Holder's approval, by telephone. All transfers must be in
accordance with the terms of the Contract and your Plan, as applicable.
The Company currently allows unlimited transfers of accumulated amounts
to available investment options without charge. The transfer amount may not be
less than $500. The total number of investment options in which you may invest
at any one time is limited. (See "Investment Options--The Funds.") Any transfer
will be based on the Accumulation Unit Value next determined after the Company
receives a valid transfer request at its Home Office. Transfers are not
available during the Annuity Period.
Subject to the Contract Holder's approval, you have the right to make
transfers among Funds by telephone. We have enacted procedures to prevent
abuses of Account transactions by telephone, including requiring the use of a
personal identification number (PIN) to execute transactions. You are
responsible
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<PAGE>
for safeguarding your PIN, and for keeping Account information confidential.
Although the Company's failure to follow reasonable procedures may result in
the Company's liability for any losses due to unauthorized or fraudulent
telephone transfers, the Company will not be liable for following instructions
communicated by telephone which it reasonably believes to be genuine. Any
losses incurred pursuant to actions taken by the Company in reliance on
telephone instructions reasonably believed to be genuine shall be borne by you.
To ensure authenticity, we record all calls on the 800 line. Note: All Account
information and transactions permitted are subject to the terms of the Plan(s).
DOLLAR COST AVERAGING PROGRAM
You may establish automated transfers of Account Values on a monthly or
quarterly basis through the Company's Dollar Cost Averaging Program, if
available under your Plan. There is no additional charge for the Program.
Dollar Cost Averaging is a system for investing a fixed amount of money at
regular intervals over a period of time. Dollar Cost Averaging does not ensure
a profit nor guarantee against loss in a declining market. You should consider
your financial ability to continue purchases through periods of low price
levels. For additional information, please refer to the "Inquiries" section of
the Prospectus Summary which describes how you can obtain further information.
Effective May 1, 1998, dollar cost averaging is not permitted into the
Lexington Natural Resources Trust.
WITHDRAWALS
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Subject to the limitations on withdrawals from the Fixed Plus Account,
the Contract Holder may withdraw all or a portion of the Account Value at any
time during the Accumulation Period. To request a withdrawal, the Contract
Holder, on your behalf, must properly complete a disbursement form and send it
to our Home Office. Payments for withdrawal requests will be made in accordance
with SEC requirements, but normally not later than seven calendar days
following our receipt of a disbursement form. Under a 457 Plan, payout
elections may not be changed once payments have commenced.
Withdrawals may be requested in one of the following forms:
[bullet] Full Withdrawal of the Contract or an Account: The amount paid for a
full withdrawal will be the Account Value(s) allocated to the
Subaccounts, the Guaranteed Accumulation Account (plus or minus a
market value adjustment) (see Appendix I), and the Fixed Account,
minus any applicable deferred sales charge and maintenance fee due,
plus the amount available for withdrawal from the Fixed Plus Account
(see Appendix III).
[bullet] Partial Withdrawals (Percentage): The amount paid will be the
percentage of the Account Value(s) requested minus any applicable
deferred sales charge; however, the amount available for withdrawal
from the Fixed Plus Account is limited (see Appendix III).
[bullet] Partial Withdrawal (Specified Dollar Amount): The amount paid will be
the dollar amount requested. However, the amount withdrawn from the
Account will equal the amount requested plus any applicable deferred
sales charge. The amount available for withdrawal from the Fixed Plus
Account is limited (see Appendix III).
For any partial withdrawal, amounts will be withdrawn proportionately
from each Subaccount or Credited Interest Option in which the Account is
invested unless otherwise requested in writing. All amounts paid will be based
on Account Values next determined after we receive a request for withdrawal at
our Home Office, or on such later date as the disbursement form may specify.
SYSTEMATIC DISTRIBUTION OPTIONS
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The Company offers certain withdrawal options under the Contract that are
not considered annuity options ("Systematic Distribution Options"). To exercise
these options, the Account Value must meet the minimum dollar amounts and age
criteria applicable to that option.
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The Systematic Distribution Options currently available under the
Contract include the following:
[bullet] SWO--Systematic Withdrawal Option. SWO is a series of partial
withdrawals from the Account based on a payment method you select. It
is designed for those who want a periodic income while retaining
investment flexibility for amounts accumulated under a Contract.
[bullet] ECO--Estate Conservation Option. ECO is available to Section 457 Plan
Participants only. It offers the same investment flexibility as SWO
but is designed for those who want to receive only the minimum
distribution that the Code requires each year. Under ECO, the Company
calculates the minimum distribution amount required by law at age
70-1/2 (or retirement, if later), and pays you that amount once a year.
(See "Tax Status.")
Other Systematic Distribution Options may be added from time to time.
Additional information relating to any of the Systematic Distribution Options
may be obtained from your local representative or from the Company at its Home
Office.
If you select one of the Systematic Distribution Options, the Account
will retain all of the rights and flexibility permitted under the Contract
during the Accumulation Period. The Account Value will continue to be subject
to the charges and deductions described in this Prospectus. Taking a withdrawal
under one of these Systematic Distribution Options may have tax consequences.
Any person concerned about tax implications should consult a competent tax
advisor prior to electing an option.
Once elected, a Systematic Distribution Option may be revoked by the
Contract Holder at any time by submitting a written request to our Home Office.
Any revocation will apply only to the amount not yet paid. Once an option is
revoked, it may not be elected again, nor may any other Systematic Distribution
Option be elected. The Company reserves the right to discontinue the
availability of one or all of these Systematic Distribution Options at any
time, and/or to change the terms of future elections. To determine whether the
Systematic Distribution Options are available under your Plan, and to assess
the terms and conditions that may apply, you should check with your employer.
DEATH BENEFIT DURING ACCUMULATION PERIOD
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The Contract provides that a death benefit is payable to the Contract
Beneficiary(ies) upon the death of the Participant before the Annuity Date. The
Contract Holder may direct that we make such payment to the Plan Beneficiary.
The amount of the death benefit will be equal to the Account Value. Death
benefit proceeds may be paid:
[bullet] in a lump sum;
[bullet] in accordance with any of the Annuity Options available under the
Contract; or
[bullet] under any Systematic Distribution Option available under the Contract
(if the Plan Beneficiary is your spouse).
The Contract Holder on behalf of a Plan Beneficiary may instead elect to
leave the Account Value invested in the Contract. However, the Code limits how
long the death benefit proceeds may be left in this option (see below).
When paying the Contract Beneficiary, we will determine the Account Value
on the Valuation Date following the date on which we receive proof of death
acceptable to the Company. Interest, if any, will be paid from the date of
death at a rate no less than required by law. We will mail payment to the
Contract Beneficiary within seven days after we receive proof of death.
The Code requires that distribution of death proceeds begin within a
certain period of time. For Non-Section 457 Plans, if required by the Code, the
entire value must be distributed within five years after the date of death
unless an Annuity option is elected within one year.
For Section 457 Plans, generally, either payments must begin by December
31 of the year following the year of your death, or the entire value of your
benefits must be distributed by December 31 of the fifth year following the
year of your death. If your Plan Beneficiary is your spouse, he or she is not
required to begin distributions until the year you would have attained age
70-1/2. In no event may payments extend beyond the life expectancy of the Plan
Beneficiary or any period certain greater than the Plan Beneficiary's life
expectancy.
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If no elections are made, no distributions will be made. Failure to
commence distributions within the above time periods can result in tax
penalties. Regardless of the method of payment, death benefit proceeds will
generally be taxed to the beneficiary in the same manner as if you had received
those payments. (See "Tax Status.")
ANNUITY PERIOD
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ANNUITY PERIOD ELECTIONS
For Section 457 Plans, the Code requires that minimum annual
distributions of the Account Value must begin by April 1st of the calendar year
following the calendar year in which a Participant attains age 70-1/2 or
retires, if later. In addition, distributions must be in a form and amount
sufficient to satisfy the Code requirements. These requirements may be
satisfied by the election of certain Annuity options or Systematic Distribution
Options. (See "Tax Status.")
At least 30 days prior to the Annuity Date, the Contract Holder must
notify us in writing of the following:
[bullet] the date on which you would like to start receiving Annuity payments;
[bullet] the Annuity option under which you want your payments to be calculated
and paid;
[bullet] whether the payments are to be made monthly, quarterly, semi-annually
or annually; and
[bullet] the investment option(s) used to provide Annuity payments (i.e., a
fixed Annuity using the general account or any of the Subaccounts
available at the time of annuitization). As of the date of this
Prospectus, Aetna Growth and Income VP, Aetna Bond VP and Aetna
Balanced VP, Inc. are the only Subaccounts available.
Annuity payments will not begin until an Annuity option has been
selected. Until a date and option are elected, the Account or Plan Account will
continue in the Accumulation Period. Once Annuity payments begin, the Annuity
option may not be changed, nor may transfers be made among the investment
options(s) selected.
ANNUITY OPTIONS
The Contract Holder may choose one of the following Annuity options:
Lifetime Annuity Options:
Option 1--Life Annuity--An Annuity with payments ending on the Annuitant's
death.
Option 2--Life Annuity with Guaranteed Payments--An annuity with payments
guaranteed for 5, 10, 15 or 20 years, or such other periods as the Company may
offer at the time of annuitization.
Option 3--Life Income based Upon the Lives of Two Payees--An Annuity will be
paid during the lives of the Annuitant and a second Annuitant, with 100%,
66-2/3% or 50% of the payment to continue after the first death, or 100% of the
payment to continue at the death of the second Annuitant and 50% of the payment
to continue at the death of the Annuitant.
Option 4--Life Income based Upon the Lives of Two Payees--An Annuity with
payments for a minimum of 120 months, with 100% of the payment to continue
after the first death.
If Option 1 or 3 is elected, it is possible that only one Annuity payment
will be made if the Annuitant under Option 1, or the surviving Annuitant under
Option 3, should die prior to the due date of the second Annuity payment. Once
lifetime Annuity payments begin, the Annuitant cannot elect to receive another
form of benefit.
Nonlifetime Annuity Options:
Option 1--Payments for a Specified Period--payments will continue for a
specified period of time, as provided for under your Contract.
Under the nonlifetime option, the type of Annuity (fixed or variable) and
the number of years that may be selected are determined by the investment
options used prior to annuitization. For amounts held in the Fixed Plus
Account, the Annuity must be paid on a fixed basis and payments may be made for
5-30 years. For amounts held in the Subaccounts, the Guaranteed Accumulation
Account or the Fixed Account, an Annuity may be selected on a fixed or variable
basis and payments may be made for 3-30 years. If this option is elected on a
variable basis, the Contract Holder may request at any time during the payment
period that the present value of all or any portion of the remaining variable
payments be paid in one sum. However, any lump-sum elected before three years
of payments have been completed
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will be treated as a withdrawal during the Accumulation Period and any
applicable deferred sales charge will be assessed. (See "Charges and Deductions
Deferred Sales Charge.") The nonlifetime option is not available on a variable
basis under a Contract which provides for immediate Annuity benefits.
We may also offer additional Annuity options under the Contract from time
to time.
ANNUITY PAYMENTS
Date Payouts Start. When payments start, the age of the Annuitant plus the
number of years for which payments are guaranteed must not exceed 95. Annuity
payments may not extend beyond (a) the life of the Annuitant, (b) the joint
lives of the Annuitant and Plan Beneficiary, (c) a period certain greater than
the Annuitant's life expectancy, or (d) a period certain greater than the joint
life expectancies of the Annuitant and Plan Beneficiary.
Amount of Each Annuity Payment. The amount of each payment depends on the
size of the Account Value, how you allocate it between fixed and variable
payouts, and the Annuity option chosen. No election may be made that would
result in the first Annuity payment of less than $20, or total yearly Annuity
payments of less than $100. If the Account or Plan Account Value on the Annuity
Date is insufficient to elect an option for the minimum amount specified, a
lump-sum payment must be elected.
If Annuity Payments are to be made on a variable basis, the first and
subsequent payments will vary depending on the assumed net investment rate
selected (3-1/2% or 5% per annum). Selection of a 5% rate causes a higher first
payment, but Annuity Payments will increase thereafter only to the extent that
the net investment rate exceeds 5% on an annualized basis. Annuity Payments
would decline if the rate were below 5%. Use of the 3-1/2% assumed rate causes a
lower first payment, but subsequent payments would increase more rapidly or
decline more slowly as changes occur in the net investment rate. (See the
Statement of Additional Information for further discussion on the impact of
selecting an assumed net investment rate.)
CHARGES DEDUCTED DURING THE ANNUITY PERIOD
We make a daily deduction for mortality and expense risks from any
amounts held on a variable basis. Therefore, electing the nonlifetime option on
a variable basis will result in a deduction being made even though we assume no
mortality risk. We may also deduct a daily administrative charge from amounts
held under the variable options. (See "Charges and Deductions.")
DEATH BENEFIT PAYABLE DURING THE ANNUITY PERIOD
If an Annuitant dies after Annuity Payments have begun, any death benefit
payable will depend on the terms of the Contract and the Annuity option
selected. If Option 1 or Option 3 was elected, Annuity Payments will cease on
the death of the Annuitant under Option 1 or the death of the surviving
Annuitant under Option 3.
If Lifetime Option 2 or Option 4 was elected and the death of the
Annuitant under Option 2, or the surviving Annuitant under Option 4, occurs
prior to the end of the guaranteed minimum payment period, we will pay to the
beneficiary in a lump-sum, unless otherwise requested, the present value of the
guaranteed Annuity payments remaining.
If the nonlifetime option was elected, and the Annuitant dies before all
payments are made, the value of any remaining payments may be paid in a
lump-sum to the Plan Beneficiary (unless otherwise requested), and no deferred
sales charge will be imposed.
For Non-Section 457 Plans, if required by the Code, and if there is a
death benefit payable under the Annuity option elected, the remaining values
must be distributed at least as rapidly as under the original method of
distribution.
For Section 457 Plans, if there is a death benefit payable under the
Annuity option elected, Annuity Payments must be distributed to your
beneficiary at least as rapidly as under the original method of distribution
and in substantially nonincreasing amounts.
Any lump-sum payment paid under the applicable lifetime or nonlifetime
Annuity options will be made within seven calendar days after proof of death
acceptable to us, and a request for payment are received at our Home Office.
The value of any death benefit proceeds will be determined as of the next
Valuation Date after we receive acceptable proof of death and a request for
payment. Under Options 2 and 4, such value will be reduced by any payments made
after the date of death.
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TAX STATUS
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INTRODUCTION
The following provides a general discussion and is not intended as tax
advice. This discussion reflects the Company's understanding of current federal
income tax law. Such laws may change in the future, and it is possible that any
change could be retroactive (i.e., effective prior to the date of the change).
This discussion does not consider any applicable state or other tax laws. The
Company makes no guarantee regarding the tax treatment of any Contract or
transaction involving a Contract. The ultimate effect of federal income taxes on
the amounts held under a Contract, on Annuity payments, and on the economic
benefit to the Contract Holder, Participant or Plan Beneficiary may depend upon
the tax status of the individual concerned. Any person concerned about these tax
implications should consult a competent tax advisor before initiating any
transaction.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under the Code. Since
the Separate Account is not an entity separate from the Company, it will not be
taxed separately as a "regulated investment company" under the Code. Investment
income and realized capital gains are automatically applied to increase
reserves under the Contracts. Under existing federal income tax law, the
Company believes that the Separate Account's investment income and realized net
capital gains will not be taxed to the extent that such income and gains are
applied to increase the reserves under the Contracts.
The Company does not anticipate that it will incur any federal income tax
liability attributable to the Separate Account and, therefore, the Company does
not intend to make provisions for any such taxes. However, if changes in the
federal tax laws or interpretations thereof result in the Company being taxed
on income or gains attributable to the Separate Account, then the Company may
impose a charge against the Separate Account (with respect to some or all
Contracts) in order to set aside provisions to pay such taxes.
TAX STATUS OF THE CONTRACT
With respect to Contracts sold to taxable organizations, Section 817(h)
of the Code requires that the investments of the Funds be "adequately
diversified" in accordance with Treasury Regulations in order for the Contracts
to qualify as annuity contracts with federal tax law. The Separate Account,
through the Funds, intends to comply with the diversification requirements
prescribed by the Treasury in Reg. Sec. 1.817-5, which affect how the Fund's
assets may be invested.
In certain circumstances, owners of variable annuity contracts that are
taxable organizations may be considered the owners, for federal income tax
purposes, of the assets of the separate accounts used to support their
contracts. In these circumstances, income and gains from the separate account
assets would be includible in the variable contract owner's gross income. One
of the circumstances that has raised this issue is the number of funding
options available under the Contract. The Company reserves the right to modify
the Contract as necessary to attempt to prevent a Contract Holder from being
considered the owner of a pro rata share of the assets of the Separate Account.
CONTRACTS USED WITH CERTAIN RETIREMENT PLANS
In General: The Contract may be purchased and used in connection with:
(1) Employer-sponsored deferred compensation plans sponsored by tax-exempt
organizations for deferrals not subject to Code Section 457 and by taxable
organizations for their employees and/or independent contractors; and
(2) Employer-sponsored deferred compensation plans sponsored by non-governmental
tax-exempt organizations for deferrals that are subject to Code Section 457
for their employees and/or independent contractors.
The Company makes no attempt to provide more than general information
about use of the Contracts with the various types of retirement plans.
Participants as well as beneficiaries are cautioned that the rights of any
person to any benefits under the Contracts may be subject to the terms and
conditions of the plans themselves, in addition to the terms and conditions of
the Contract issued in connection with such plans. Some retirement plans are
subject to distribution and other requirements that are not incorporated in the
provisions of the Contracts. Purchasers are responsible for determining that
contributions, distributions and other transactions with respect to the
Contracts satisfy applicable laws and should consult their legal counsel and
tax advisor regarding the suitability of the Contract.
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SECTION 457 PLANS
Section 457 provides for certain deferred compensation plans. These plans
may be offered with respect to service for state governments, local
governments, political subdivisions, agencies, instrumentalities and certain
affiliates of such entities, and non-governmental tax exempt organizations.
These plans are subject to various restrictions on contributions and
distributions. The plans may permit participants to specify the form of
investment for their deferred compensation account. The Contract is made
available to plans subject to Code Section 457 only if the plan is sponsored by
a non-government tax exempt employer. Under such plans, all amounts of
compensation deferred, all property and rights purchased with such amounts and
all income attributable to such amounts, property, and rights remains solely
the property and rights of the employer and is subject to the claims of the
employer's general creditors. Depending on the terms of the particular plan,
the employer may be entitled to draw on deferred amounts for purposes unrelated
to its Section 457 plan obligations. In general, all amounts received under a
Section 457 plan are taxable and reportable to the IRS as taxable income. This
includes payments for death benefits, periodic and nonperiodic distribution.
Also, all amounts except death benefit proceeds are subject to federal income
tax withholding as wages. If we make payments directly to a Participant on
behalf of the employer as Contract Holder, we will withhold federal taxes
(state taxes, if applicable).
The Code imposes a maximum limit on annual Purchase Payments which may be
excluded from your gross income. For Section 457 plan participants, the current
limit is generally the lesser of $8,000, as adjusted to reflect changes in the
cost of living, or 33-1/3% of your includible compensation (25% of gross
compensation).
Minimum Distribution Requirements. The Code has required distribution
rules for Section 457 plans. Distributions must generally begin by April 1 of
the calendar year following the calendar year in which you attain age 70-1/2 or
retire, whichever occurs later.
In general, annuity payments must be distributed over your life or the
joint lives of you and your Plan Beneficiary, or over a period not greater than
your life expectancy or the joint life expectancies of you and your Plan
Beneficiary. Also, any distribution payable over a period of more than one year
must be made in substantially non-increasing amounts.
If you die after the required minimum distribution has commenced,
distributions to your Plan Beneficiary must be made at least as rapidly as under
the method of distribution in effect at the time of your death. However, if the
minimum required distribution is calculated each year based on your single life
expectancy or the joint life expectancies of you and your Plan Beneficiary, the
regulations for Code Section 401(a)(9) provide specific rules for calculating
the minimum required distributions at your death. For example, if you have
elected ECO with the calculation based on your single life expectancy, and the
life expectancy is recalculated each year, your recalculated life expectancy
becomes zero in the calendar year following your death and the entire remaining
interest must be distributed to your Plan Beneficiary by December 31 of the year
following your death. The rules are complex and you should consult your tax
advisor before electing the method of calculation to satisfy the minimum
distribution requirements.
If you die before the required minimum distribution has commenced, your
entire interest must be distributed by December 31 of the calendar year
containing the fifth anniversary of the date of your death. Alternatively,
payments may be made over the life of the Plan Beneficiary or over a period not
extending beyond the life expectancy of the Plan Beneficiary (not to exceed 15
years for a non-spousal Plan Beneficiary) provided the distribution begins by
December 31 of the calendar year following the calendar year of your death. If
the Plan Beneficiary is your spouse, distribution must begin by the later of
December 31 of the calendar year following the calendar year of your death or
December 31 of the calendar year in which you would have attained age 70-1/2.
If you fail to receive the minimum required distribution for any tax
year, a 50% excise tax is imposed on the required amount that was not
distributed.
PLANS OF NON-SECTION 457 TAX-EXEMPT ORGANIZATIONS AND TAXABLE ORGANIZATIONS
Effective January 1, 1987, certain rules applicable to deferred
compensation plans of state and local governments (Section 457 of the Code)
were extended to deferred compensation plans sponsored by tax-exempt employers.
While no limitation is imposed on deferrals under deferred compensation plans
of taxable employers, each participant in a plan subject to Section 457
currently has a maximum allowable annual deferral of $8,000, as
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adjusted to reflect changes in the cost of living, or 33-1/3% of the
participant's includible compensation (25% of gross compensation). However, the
Code does allow the following "grandfathering" provisions for those who were
participants in tax-exempt employer deferred compensation plans, as of August
16, 1986.
(1) Section 457 shall not apply to amounts deferred from taxable years beginning
before January 1, 1987.
(2) Section 457 shall not apply to amounts deferred from taxable years beginning
after December 31, 1986 provided (a) a deferral agreement was in writing on
August 16, 1986, and (b) as of August 16, 1986, the agreement provided for a
deferral of a fixed amount or of an amount determined pursuant to a fixed
formula, and (c) the agreement has not been modified as to amount or formula
after August 16, 1986.
Only individuals may participate under a Section 457 plan subject to the
Section 457 rules. Therefore, corporations may not participate in tax-exempt
employer deferred compensation plans unless they qualify under the
"grandfathering" provisions.
Any reference in this Prospectus to Section 457 plans relates only to
contributions subject to Section 457 of the Code and these references do not
apply to "grandfathered" contributions.
In general, all amounts received under these plans are taxable and,
except for death benefit payments, are subject to federal income tax
withholding as wages. This includes payments for periodic and nonperiodic
distributions. Under plans sponsored by taxable organizations, such payments
made to a participant are generally deductible by the contract holder as
compensation paid to the participant. If we make payments directly to a
Participant or beneficiary on behalf of the employer as Contract Holder, we
will report to the IRS the taxable income and we will withhold federal taxes
(and state taxes, if applicable) for payments to Participants.
The owner of a Contract who is not a natural person must generally
include in income any increase in the excess of the Account Value over the
"investment in the contract" during the taxable year. There are some exceptions
to this rule and prospective owners that are not natural persons may wish to
discuss this with a competent tax advisor.
For contracts sold to taxable organizations, Section 72(e)(11) of the
Code provides that annuity contracts issued by the same insurer (and its
affiliates) to the same contract holder during a calendar year shall be treated
as a single annuity contract. This means that any amount received under this
contract, or any other contract subject to this provision, prior to the
contract's Annuity starting date will be taxable (and possibly subject to the
10% penalty tax) to the extent of the combined income in all such contracts.
For purposes of this section, immediate annuity contracts, and contracts used
to fund qualified pension and profit-sharing plans under Section 401(a) of the
Code, Annuity plans under Sections 403(a) or 403(b) of the Code, and individual
retirement annuities and accounts under Section 408 of the Code are not
aggregated.
MISCELLANEOUS
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VOTING RIGHTS
Each Contract Holder may direct us in the voting of shares at meetings of
shareholders of the appropriate Fund(s). The number of votes to which each
Contract Holder may give direction will be determined as of the record date.
The number of votes each Contract Holder is entitled to direct with
respect to a particular Fund during the Accumulation Period is equal to the
portion of the current value of the Contract attributable to that Fund, divided
by the net asset value of one share of that Fund. During the Annuity Period,
the number of votes is equal to the valuation reserve applicable to the portion
of the Contract attributable to that Fund, divided by the net asset value of
one share of that Fund. In determining the number of votes, fractional votes
will be recognized. Where the value of the Contract or valuation reserve
relates to more than one Fund, the calculation of votes will be performed
separately for each Fund.
Each Contract Holder will receive a notice of each meeting of
shareholders of that Fund, together with any proxy solicitation materials, and
a statement of the number of votes attributable to the Contract. Votes
attributable to Contract Holders who do not direct us
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will be cast by us in the same proportion as the votes for which we have
received directions.
MODIFICATION OF THE CONTRACT
The Company may change the Contract as required by federal or state law.
In addition, the Company may, upon 30 days written notice to the Contract
Holder, make other changes to group Contracts that would apply only to
individuals who become Participants under that Contract after the effective
date of such changes. If the Contract Holder does not agree to a change, no new
Participants will be covered under the Contract. Certain changes will require
the approval of appropriate state or federal regulatory authorities.
DISTRIBUTION
The Company will serve as Principal Underwriter for the securities sold
by this Prospectus. The Company is registered as a broker-dealer with the
Securities and Exchange Commission and is a member of the National Association
of Securities Dealers, Inc. (NASD). As Underwriter, the Company will contract
with one or more registered broker-dealers ("Distributors"), including at least
one affiliate of the Company, to offer and sell the Contracts. All persons
offering and selling the Contracts must be registered representatives of the
Distributors and must also be licensed as insurance agents to sell variable
annuity contracts. These registered representatives may also provide services
to Participants in connection with establishing their Accounts under the
Contract.
Persons offering and selling the Contracts may receive commissions in
connection with the sale of the Contracts. The maximum percentage amount that
the Company will ever pay as commission with respect to any given Purchase
Payment is with respect to those made during the first year of Purchase
Payments under an Account. That percentage amount will range from 1% to 6% of
those Purchase Payments. The Company may also pay renewal commissions on
Purchase Payments made after the first year and, under group contracts,
asset-based service fees. The average of all payments made by the Company is
estimated to equal approximately 3% of the total Purchase Payments made over
the life of an average Contract. In addition, some sales personnel may receive
various types of non-cash compensation as special sales incentives, including
trips and educational and/or business seminars. Supervisory and other
management personnel of the Company may receive compensation that will vary
based on the relative profitability to the Company of the funding options you
select. Funding options that invest in Funds advised by the Company or its
affiliates are generally more profitable to the Company. The Company may also
reimburse the Distributor for certain actual expenses. The name of the
Distributor and the registered representative responsible for your Account are
set forth on your enrollment form. Commissions and sales related expenses are
paid by the Company and are not deducted from Purchase Payments. (See "Charges
and Deductions--Deferred Sales Charge.")
Occasionally, we may pay commissions and fees to Distributors which are
affiliated or associated with the Contract Holder or the Participants. We may
also enter into agreements with some entities associated with the Contract
Holder or Participants in which we would agree to pay the entity for certain
services in connection with administering the Contracts. In both these
circumstances there may be an understanding that the Distributor or entity
would endorse the Company as a provider of the Contract. You will be notified
if you are purchasing a Contract that is subject to these arrangements.
PERFORMANCE REPORTING
From time to time, the Company may advertise different types of
historical performance for the Subaccounts of the Separate Account. The Company
may advertise the "standardized average annual total returns" of the
Subaccounts, calculated in a manner prescribed by the SEC, as well as the
"non-standardized returns." "Standardized average annual total returns" are
computed according to a formula in which a hypothetical investment of $1,000 is
applied to the Subaccount and then related to the ending redeemable values over
the most recent one, five and ten-year periods (or since contributions were
first received in the Subaccount, if less than the full period). Standardized
returns will reflect the reduction of all recurring charges during each period
(e.g., mortality and expense risk charge, annual maintenance fee,
administrative expense charge (if any) and any applicable deferred sales
charge). "Non-standardized returns" will be calculated in a similar manner,
except that non-standardized figures will not reflect the deduction of any
applicable deferred sales charge (which would decrease the level of performance
shown if reflected in these calculations). The non-standardized figures may
also include monthly, quarterly, year to date and three-year periods and may be
computed from the Fund inception dates.
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The Company may also advertise certain ratings, rankings or other
information related to the Company, the Subaccounts or the Funds. Further
details regarding performance reporting and advertising are described in the
Statement of Additional Information.
TRANSFER OF OWNERSHIP; ASSIGNMENT
No assignment of a Contract will be binding on us unless made in writing
and sent to us at our Home Office. The Company will use reasonable procedures
to confirm that the assignment is authentic, including verification of
signature. If the Company fails to follow its procedures, it would be liable
for any losses to you directly resulting from the failure. Otherwise, we are
not responsible for the validity of any assignment. The rights of the Owner and
the interest of the Annuitant and any Beneficiary will be subject to the rights
of any assignee of record.
DELAY OR SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of payment
for any benefit or values (a) on any Valuation Date on which the New York Stock
Exchange ("Exchange") is closed (other than customary weekend and holiday
closings) or when trading on the Exchange is restricted; (b) when an emergency
exists, as determined by the SEC, so that disposal of securities held in the
Subaccounts is not reasonably practicable or it is not reasonably practicable
for the Company fairly to determine the value of the Subaccount's assets; or
(c) during such other periods as the SEC may by order permit for the protection
of investors. The conditions under which restricted trading or an emergency
exists shall be determined by the rules and regulations of the SEC.
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.
YEAR 2000
As a healthcare and financial services enterprise, Aetna Inc. (referred
to collectively with its affiliates and subsidiaries as Aetna), is dependent on
computer systems and applications to conduct its business. Aetna has developed
and is currently executing a comprehensive risk-based plan designed to make its
computer systems, applications and facilities Year 2000 ready. The plan covers
four stages including (i) inventory, (ii) assessment, (iii) remediation and
(iv) testing and certification. At year end 1997, Aetna, including the Company,
had substantially completed the inventory and assessment stages. The
remediation process is currently underway and targeted for completion by
December 31, 1998. Testing and certification of these systems and applications
are targeted for completion by mid-1999. The costs of these efforts will not
affect the Separate Account.
The Company, its affiliates and the mutual funds that serve as investment
options for the Separate Account also have relationships with investment
advisers, broker-dealers, transfer agents, custodians or other securities
industry participants or other service providers that are not affiliated with
Aetna. Aetna, including the Company, is initiating communication with its
critical external relationships to determine the extent to which Aetna may be
vulnerable to such parties' failure to resolve their own Year 2000 issues.
Where practicable, Aetna and the Company will assess and attempt to mitigate
their risks with respect to the failure of these parties to be Year 2000
ready. There can be no assurance that failure of third parties to complete
adequate preparations in a timely manner, and any resulting systems
interruptions or other consequences, would not have an adverse effect, directly
or indirectly, on the Separate Account, including, without limitation, its
operation or the valuation of its assets and units.
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CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
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The Statement of Additional Information (SAI) contains more specific
information on the Separate Account and the Contract, as well as the financial
statements of the Separate Account and the Company. A list of the contents of
the SAI is set forth below:
General Information and History
Variable Annuity Account B
Offering and Purchase of Contracts
Performance Data
General
Average Annual Total Return Quotations
Annuity Payments
Sales Material and Advertising
Independent Auditors
Financial Statements of the Separate Account
Financial Statements of the Company
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APPENDIX I
GUARANTEED ACCUMULATION ACCOUNT
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This appendix is a summary of the Guaranteed Accumulation Account ("GAA")
and is not intended to replace the GAA prospectus. You should read the
accompanying GAA prospectus carefully before investing.
The GAA is a Credited Interest Option available during the Accumulation
Period under the Contracts. Amounts allocated to the GAA are held by the
Company as described in the GAA prospectus.
GAA is a Credited Interest Option in which we guarantee stipulated rates
of interest for stated periods of time on amounts directed to GAA. The interest
rate stipulated is an annual effective yield; that is, it reflects a full
year's interest. Interest is credited daily at a rate that will provide the
guaranteed annual effective yield over the period of one year. This option
guarantees the minimum interest rate specified in the Contract.
During a specified period of time (the "deposit period"), amounts may be
applied to any or all available Guaranteed Terms within the Short-Term and
Long-Term Classifications. Short-Term GAA has Guaranteed Terms from one to
three years, and Long-Term GAA has Guaranteed Terms from three to ten years.
Purchase Payments must remain in GAA for the full Guaranteed Term to
receive the quoted interest rates. Withdrawals or transfers from a Guaranteed
Term before the end of that Guaranteed Term may be subject to a market value
adjustment ("MVA"). An MVA reflects the change in the value of the investment
due to changes in interest rates since the date of deposit. When interest rates
increase after the date of deposit, the value of the investment decreases, and
the MVA is negative. Conversely, when interest rates decrease after the date of
deposit, the value of the investment increases, and the MVA is positive. It is
possible that a negative MVA could result in you receiving an amount that is
less than the amount paid into GAA.
As a Guaranteed Term matures, assets accumulating under GAA may be (a)
transferred to a new Guaranteed Term, (b) transferred to the other available
investment options, or (c) withdrawn. Amounts withdrawn may be subject to a
deferred sales charge and/or federal tax liabilities.
By notifying us at our Home Office at least 30 days prior to the Annuity
Date, you may elect a variable Annuity and have amounts that have been
accumulating under GAA transferred to one or more of the Subaccounts available
during the Annuity Period. GAA cannot be used as an investment option during
the Annuity Period.
MORTALITY AND EXPENSE RISK CHARGE
We make no deductions from the credited interest rate for mortality and
expense risks; these risks are considered in determining the credited rate.
TRANSFERS
Amounts applied to a Guaranteed Term during a deposit period may not be
transferred to any other funding option or to another Guaranteed Term during
that deposit period or for 90 days after the close of that deposit period.
Transfers are permitted from Guaranteed Terms of one classification to
available Guaranteed Terms of another classification. We will apply an MVA to
GAA transfers made before the end of a Guaranteed Term. Transfers of GAA values
due to a maturity are not subject to an MVA.
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APPENDIX II
FIXED ACCOUNT
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The following summarizes material information concerning the Fixed
Account. Amounts allocated to the Fixed Account are held in the Company's
general account that supports general insurance and annuity obligations.
Interests in the Fixed Account have not been registered with the SEC in
reliance on exemptions under the Securities Act of 1933, as amended. Disclosure
in the Prospectus regarding the Fixed Account, may, however, be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of such statements. Disclosure in this
appendix regarding the Fixed Account has not been reviewed by the SEC.
The Fixed Account guarantees the minimum interest rate specified in the
Contract. The Company may credit a higher interest rate from time to time. The
current rate is subject to change at any time, but will never fall below the
guaranteed minimum. The Company's determination of interest rates reflects the
investment income earned on invested assets and the amortization of any capital
gains and/or losses realized on the sale of invested assets. Under the Fixed
Account, the Company assumes the risk of investment gain or loss by
guaranteeing Account Values and promising a minimum interest rate and Annuity
payment.
Under certain emergency conditions, we may defer payment of a Fixed
Account withdrawal value (a) for a period of up to six months, or (b) as
provided by federal law.
In addition, if allowed by state law, the Company may pay any Fixed
Account withdrawal value in equal payments, with interest, over a period not to
exceed 60 months, when:
(a) the Fixed Account withdrawal value for the Contract or for the total of the
Accounts under the Contract exceeds $250,000 on the day prior to the
withdrawal; and
(b) the sum of the current Fixed Account withdrawal and the total of all Fixed
Account withdrawals from the Contract or any Account under the Contract
within the past 12 calendar months exceeds 20% of the amount in the Fixed
Account on the day prior to the current withdrawal.
Interest, as used above, will not be more than two percentage points below
any rate determined prospectively by the Board of Directors for this class of
Contract. In no event will the interest rate be less than the minimum stated in
the Contract.
Amounts applied to the Fixed Account will earn the interest rate in effect
when actually applied to the Fixed Account.
The Fixed Account will reflect a compound interest rate credited by us.
The interest rate quoted is an annual effective yield. We make no deductions
from the credited interest rate for mortality and expense risks; these risks
are considered in determining the credited rate.
If a withdrawal is made from the Fixed Account, a deferred sales charge
may apply. (See "Charges and Deductions--
Deferred Sales Charge.")
TRANSFERS AMONG INVESTMENT OPTIONS
Transfers from the Fixed Account to any other available investment
option(s) are allowed in each calendar year during the Accumulation Period. The
amount which may be transferred may vary at our discretion; however, it will
never be less than 10% of the amount held under the Fixed Account. Transfers to
the Fixed Plus Account (if available under the Contract) will be permitted
without regard to this limitation.
By notifying us at our Home Office at least 30 days before Annuity
payments begin, you may elect to have amounts which have been accumulating
under the Fixed Account transferred to one or more of the Subaccounts available
during the Annuity Period to provide variable Annuity payments.
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APPENDIX III
FIXED PLUS ACCOUNT
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The following summarizes material information concerning the Fixed Plus
Account. Amounts allocated to the Fixed Plus Account are held in the Company's
general account that supports insurance and Annuity obligations. Interests in
the Fixed Plus Account have not been registered with the SEC in reliance on
exemptions under the Securities Act of 1933, as amended. Disclosure in this
Prospectus regarding the Fixed Plus Account may, however, be subject to certain
generally applicable provisions of the federal securities laws relating to the
accuracy and completeness of the statements. Disclosure in this appendix
regarding the Fixed Plus Account has not been reviewed by the SEC.
FIXED PLUS ACCOUNT
The Fixed Plus Account guarantees that amounts allocated to this option
will earn the minimum Fixed Plus interest rate specified in the Contract. We
may credit a higher interest rate from time to time. Our determination of
interest rates reflects the investment income earned on invested assets and the
amortization of any capital gains and/or losses realized on the sale of
invested assets. Under this option, we assume the risk of investment gain or
loss by guaranteeing Net Purchase Payment values and promising a minimum
interest rate and Annuity payment.
The Fixed Plus Account will reflect a compound interest rate credited by
us. The interest rate quoted is an annual effective yield. Amounts applied to
the Fixed Plus Account will earn the Fixed Plus interest rate in effect when
actually applied to the Fixed Plus Account. We make no deductions from the
credited interest rate for mortality and expense risks; these risks are
considered in determining the credited rate.
Beginning on the tenth Account Year, we will credit amounts held in the
Fixed Plus Account with an interest rate that is at least 0.25% higher than the
then-declared interest rate for the Fixed Plus Accounts for Accounts that have
not reached their tenth anniversary.
We reserve the right to limit Net Purchase Payment(s) and/or transfers to
the Fixed Plus Account.
FIXED PLUS ACCOUNT WITHDRAWALS
The amount eligible for partial withdrawal is 20% of the amount held in
the Fixed Plus Account on the day we receive a written request in our Home
Office, reduced by any Fixed Plus Account withdrawals, transfers or
annuitizations made in the prior 12 months. In calculating the 20% limit, we
reserve the right to include payments made due to the election of any
Systematic Distribution Option.
The 20% limit is waived if the partial withdrawal is due to annuitization
under a fixed lifetime or nonlifetime Annuity option or a variable lifetime
Annuity option, or due to death. The waiver upon death will only be exercised
once and must occur within six months after the Participant's date of death.
For this waiver to apply, any such partial withdrawal must also be made pro
rata from all funding options used under the Account.
If a full withdrawal is requested, we will pay any amounts held in the
Fixed Plus Account, with interest, in five annual payments that will be equal
to:
1. One-fifth of the Fixed Plus Account value on the day the request is
received, reduced by any Fixed Plus Account withdrawals, transfers or
annuitizations made in the prior 12 months;
2. One-fourth of the remaining Fixed Plus Account value twelve months later;
3. One-third of the remaining Fixed Plus Account value twelve months later;
4. One-half of the remaining Fixed Plus Account value twelve months later; and
5. The balance of the Fixed Plus Account value twelve months later.
- --------------------------------------------------------------------------------
22
<PAGE>
Once we receive a request for a full withdrawal from an Account, no
further withdrawals or transfers will be permitted from the Fixed Plus Account.
A full withdrawal from the Fixed Plus Account may be canceled at any time
before the end of the five-payment period.
We will waive the Fixed Plus Account full withdrawal provision, if the
withdrawal is made:
(a) due to your death, before Annuity payments begin, within 6 months of the
date of death;
(b) due to the election of a fixed lifetime or nonlifetime Annuity option or a
variable lifetime Annuity option;
(c) when the Fixed Plus Account value is $3,500 or less (and no withdrawals,
transfers or annuitizations have been made from the Account within the prior
12 months).
TRANSFERS AMONG INVESTMENT OPTIONS
The amount eligible for transfer from the Fixed Plus Account is 20% of the
amount held in the Fixed Plus Account on the day we receive a written request
in our Home Office, reduced by any Fixed Plus Account withdrawals, transfers or
annuitizations made in the prior 12 months. In calculating the 20% limit, we
reserve the right to include payments made due to the election of a Systematic
Distribution Option. We will waive the 20% transfer limit when the value in the
Fixed Plus Account is $1,000 or less.
By notifying us at our Home Office at least 30 days before Annuity
payments begin, the Contract Holder may elect to have amounts which have been
accumulating under the Fixed Plus Account transferred to one or more of the
Subaccounts available during the Annuity Period, to provide lifetime variable
Annuity payments.
SWO
The Systematic Withdrawal Option may not be elected if you have requested
a Fixed Plus Account transfer or withdrawal within the prior 12-month period.
- --------------------------------------------------------------------------------
23
<PAGE>
APPENDIX IV
CONDENSED FINANCIAL INFORMATION
(Selected data for accumulation units outstanding throughout each period)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The condensed financial information presented below for each of the periods in
the ten-year period ended December 31, 1997 (as applicable), is derived from
the financial statements of the Separate Account, which have been audited by
KPMG Peat Marwick LLP, independent auditors. The financial statements and the
independent auditors' report thereon for the year ended December 31, 1997 are
included in the Statement of Additional Information.
TABLE I
(FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.25%)
<TABLE>
<CAPTION>
1997 1996
--------------------- -----------------
<S> <C> <C>
AETNA ASCENT VP
Value at beginning of period $12.999 $10.652
Value at end of period $15.392 $12.999
Increase (decrease) in value of accumulation unit(1) 18.40% 22.04%
Number of accumulation units outstanding at end of period 317,579 99,589
AETNA BALANCED VP, INC.
Value at beginning of period $15.698 $13.803
Value at end of period $18.989 $15.698
Increase (decrease) in value of accumulation unit(1) 20.96% 13.73%
Number of accumulation units outstanding at end of period 3,174,738 3,885,730
AETNA BOND VP
Value at beginning of period $12.493 $12.212
Value at end of period $13.361 $12.493
Increase (decrease) in value of accumulation unit(1) 6.96% 2.30%
Number of accumulation units outstanding at end of period 1,168,988 1,947,629
AETNA CROSSROADS VP
Value at beginning of period $12.430 $10.594
Value at end of period $14.432 $12.430
Increase (decrease) in value of accumulation unit(1) 16.11% 17.32%
Number of accumulation units outstanding at end of period 175,559 74,128
AETNA GROWTH PORTFOLIO
Value at beginning of period $14.437
Value at end of period $13.173
Increase (decrease) in value of accumulation unit(1) (8.75)%(6)
Number of accumulation units outstanding at end of period 2,695
AETNA GROWTH AND INCOME VP
Value at beginning of period $17.173 $13.972
Value at end of period $22.028 $17.173
Increase (decrease) in value of accumulation unit(1) 28.27% 22.91%
Number of accumulation units outstanding at end of period 10,689,845 15,372,944
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $10.924 $10.000(8)
Value at end of period $14.444 $10.924
Increase (decrease) in value of accumulation unit(1) 32.23% 9.24%
Number of accumulation units outstanding at end of period 266,429 89,498
<CAPTION>
1995 1994 1993
----------------- --------------------- -------------
<S> <C> <C> <C>
AETNA ASCENT VP
Value at beginning of period $10.000(2)
Value at end of period $10.652
Increase (decrease) in value of accumulation unit(1) 6.52%
Number of accumulation units outstanding at end of period 16,791
AETNA BALANCED VP, INC.
Value at beginning of period $10.971 $11.164 $10.286
Value at end of period $13.803 $10.971 $11.164
Increase (decrease) in value of accumulation unit(1) 25.81% (1.73)% 8.54%
Number of accumulation units outstanding at end of period 6,430,772 3,541,703 318,711
AETNA BOND VP
Value at beginning of period $10.457 $11.006 $10.160
Value at end of period $12.212 $10.457 $11.006
Increase (decrease) in value of accumulation unit(1) 16.78% (4.99)% 8.33%
Number of accumulation units outstanding at end of period 4,853,662 1,988,960 166,913
AETNA CROSSROADS VP
Value at beginning of period $10.000(2)
Value at end of period $10.594
Increase (decrease) in value of accumulation unit(1) 5.94%
Number of accumulation units outstanding at end of period 16,953
AETNA GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
AETNA GROWTH AND INCOME VP
Value at beginning of period $10.698 $10.940 $10.378
Value at end of period $13.972 $10.698 $10.940
Increase (decrease) in value of accumulation unit(1) 30.61% (2.21)% 5.41%
Number of accumulation units outstanding at end of period 30,554,957 11,117,383 879,670
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
<CAPTION>
1992 1991 1990 1989
---------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
AETNA ASCENT VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
AETNA BALANCED VP, INC.
Value at beginning of period $12.717 $10.882 $10.423 $10.000(4)
Value at end of period $10.286(3) $12.717 $10.882 $10.423
Increase (decrease) in value of accumulation unit(1) (3) 16.86% 4.40% 4.23%
Number of accumulation units outstanding at end of period 6,537 1,324,822 984,798 639,219
AETNA BOND VP
Value at beginning of period $37.815 $32.066 $29.752 $26.291
Value at end of period $10.160(5) $37.815 $32.066 $29,752
Increase (decrease) in value of accumulation unit(1) (5) 17.93% 7.78% 13.16%
Number of accumulation units outstanding at end of period 4,196 427,893 358,454 366,176
AETNA CROSSROADS VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
AETNA GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
AETNA GROWTH AND INCOME VP
Value at beginning of period $84.249 $67.496 $66.174 $51.900
Value at end of period $10.378(7) $84.249 $67.496 $66.174
Increase (decrease) in value of accumulation unit(1) (7) 24.82% 2.00% 27.50%
Number of accumulation units outstanding at end of period 3,107 908,777 810,126 831,547
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
<CAPTION>
1988
------------
<S> <C>
AETNA ASCENT VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
AETNA BALANCED VP, INC.
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
AETNA BOND VP
Value at beginning of period $24.734
Value at end of period $26.291
Increase (decrease) in value of accumulation unit(1) 6.29%
Number of accumulation units outstanding at end of period 383,856
AETNA CROSSROADS VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
AETNA GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
AETNA GROWTH AND INCOME VP
Value at beginning of period $45.839
Value at end of period $51.900
Increase (decrease) in value of accumulation unit(1) 13.22%
Number of accumulation units outstanding at end of period 887,039
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of accumulation unit(1)
Number of accumulation units outstanding at end of period
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997 1996 1995 1994
------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
AETNA LEGACY VP
Value at beginning of period $11.776 $10.443 $10.000(2)
Value at end of period $13.317 $11.776 $10.443
Increase (decrease) in value of
accumulation unit(1) 13.08 12.76% 4.43%
Number of accumulation units
outstanding at end of period 133,741 25,977 2,222
AETNA MONEY MARKET VP
Value at beginning of period $11.453 $11.007 $10.509 $10.223
Value at end of period $11.930 $11.453 $11.007 $10.509
Increase (decrease) in value of
accumulation unit(1) 4.16% 4.05% 4.73% 2.79%
Number of accumulation units
outstanding at end of period 974,714 1,984,269 4,354,272 1,822,449
AETNA SMALL COMPANY VP
Value at beginning of period $13.503
Value at end of period $13.654
Increase (decrease) in value of
accumulation unit(1) 1.12%(6)
Number of accumulation units
outstanding at end of period 17,392
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $12.904
Value at end of period $13.261
Increase (decrease) in value of
accumulation unit(1) 2.77%(6)
Number of accumulation units
outstanding at end of period 6,194
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $14.992 $13.480 $10.518 $11.010
Value at end of period $17.779 $14.992 $13.480 $10.518
Increase (decrease) in value of
accumulation unit(1) 18.59% 11.22% 28.17% (4.47)%
Number of accumulation units
outstanding at end of period 20,122 6,303 25,730 752
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $12.475 $11.054 $10.000(2)
Value at end of period $15.784 $12.475 $11.054
Increase (decrease) in value of
accumulation unit(1) 26.53% 12.86% 10.54%
Number of accumulation units
outstanding at end of period 328,562 208,072 294,244
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $11.402 $10.066 $10.000(2)
Value at end of period $13.904 $11.402 $10.066
Increase (decrease) in value of
accumulation unit(1) 21.95% 13.27% 0.66%
Number of accumulation units
outstanding at end of period 229,060 199,720 288,576
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $11.238 $10.052 $10.000(2)
Value at end of period $12.381 $11.238 $10.052
Increase (decrease) in value of
accumulation unit(1) 10.17% 11.80% 0.52%
Number of accumulation units
outstanding at end of period 51,781 38,994 33,813
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $12.540 $10.468 $10.000(2)
Value at end of period $15.374 $12.540 $10.468
Increase (decrease) in value of
accumulation unit(1) 22.60% 19.79% 4.68%
Number of accumulation units
outstanding at end of period 465,699 273,189 379,862
<CAPTION>
1993 1992 1991 1990 1989 1988
------------ ------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
AETNA LEGACY VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
AETNA MONEY MARKET VP
Value at beginning of period $10.031 $34.122 $32.431 $30.285 $28.029 $26.401
Value at end of period $10.223 $10.031(9) $34.122 $32.431 $30.285 $28.029
Increase (decrease) in value of
accumulation unit(1) 1.91% (9) 5.21% 7.09% 8.05% 6.17%
Number of accumulation units
outstanding at end of period 90,782 2,808 548,425 722,438 653,619 720,726
AETNA SMALL COMPANY VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
AETNA VALUE OPPORTUNITY VP
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $10.296 $10.000(10)
Value at end of period $11.010 $10.296
Increase (decrease) in value of
accumulation unit(1) 6.93% 2.96%
Number of accumulation units
outstanding at end of period 1,383 82
FIDELITY VIP EQUITY-INCOME
PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
FIDELITY VIP II CONTRAFUND
PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------- ----------------
<S> <C> <C> <C>
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $13.850 $12.992 $10.319
Value at end of period $15.410 $13.850 $12.992
Increase (decrease) in value of
accumulation unit(1) 11.26% 6.60% 25.91%
Number of accumulation units
outstanding at end of period 469,230 590,904 723,839
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $12.431 $10.835 $10.000(2)
Value at end of period $14.990 $12.431 $10.835
Increase (decrease) in value of
accumulation unit(1) 20.58% 14.73% 8.35%
Number of accumulation units
outstanding at end of period 193,429 74,184 7,772
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $13.040 $12.094 $9.886
Value at end of period $14.393 $13.040 $12.094
Increase (decrease) in value of
accumulation unit(1) 10.37% 7.83% 22.33%
Number of accumulation units
outstanding at end of period 109,812 96,128 84,048
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $12.716 $10.870 $10.000(2)
Value at end of period $15.414 $12.716 $10.870
Increase (decrease) in value of
accumulation unit(1) 21.22% 16.98% 8.70%
Number of accumulation units
outstanding at end of period 179,226 132,465 26,022
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $13.880 $10.893 $10.000(2)
Value at end of period $16.745 $13.880 $10.893
Increase (decrease) in value of
accumulation unit(1) 20.64% 27.43% 8.93%
Number of accumulation units
outstanding at end of period 953,522 520,275 227,582
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $13.132 $10.479 $9.079
Value at end of period $13.896 $13.132 $10.479
Increase (decrease) in value of
accumulation unit(1) 5.82% 25.31% 15.42%
Number of accumulation units
outstanding at end of period 149,149 115,869 162,462
PORTFOLIO PARTNERS MFS EMERGING EQUITIES PORTFOLIO
Value at beginning of period $15.411
Value at end of period $15.219
Increase (decrease) in value of
accumulation unit(1) (1.24)%(6)
Number of accumulation units
outstanding
at end of period 742,913
PORTFOLIO PARTNERS MFS RESEARCH GROWTH PORTFOLIO
Value at beginning of period $12.995
Value at end of period $12.744
Increase (decrease) in value of
accumulation unit(1) (1.93)%(6)
Number of accumulation units
outstanding at end of period 664,979
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $21.038
Value at end of period $21.343
Increase (decrease) in value of
accumulation unit(1) 1.45% (6)
Number of accumulation units
outstanding at end of period 296,540
<CAPTION>
1994 1993 1992 1991 1990 1989 1988
------------------ ------------------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
JANUS ASPEN AGGRESSIVE GROWTH
PORTFOLIO
Value at beginning of period $10.000(11)
Value at end of period $10.319
Increase (decrease) in value of
accumulation unit(1) 3.19%
Number of accumulation units
outstanding at end of period 131,702
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
JANUS ASPEN FLEXIBLE INCOME
PORTFOLIO
Value at beginning of period $10.000(11)
Value at end of period $9.886
Increase (decrease) in value of
accumulation unit(1) (1.14)%
Number of accumulation units
outstanding at end of period 15,893
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
JANUS ASPEN WORLDWIDE GROWTH
PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $9.716 $10.000(12)
Value at end of period $9.079 $9.716
Increase (decrease) in value of
accumulation unit(1) (6.56)% (2.84)%
Number of accumulation units
outstanding at end of period 141,076 27,908
PORTFOLIO PARTNERS MFS EMERGING
EQUITIES PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding
at end of period
PORTFOLIO PARTNERS MFS RESEARCH
GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS MFS VALUE
EQUITY PORTFOLIO
Value at beginning of period
Value at end of period
Increase (decrease) in value of
accumulation unit(1)
Number of accumulation units
outstanding at end of period
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------------------- ------ ------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL GROWTH PORTFOLIO
Value at beginning of period $17.682
Value at end of period $17.903
Increase (decrease) in value of
accumulation unit(1) 1.25%(6)
Number of accumulation units
outstanding at end of period 411,600
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH EQUITY PORTFOLIO
Value at beginning of period $14.112
Value at end of period $14.400
Increase (decrease) in value of
accumulation unit(1) 2.04%(6)
Number of accumulation units
outstanding at end of period 231,297
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the
result by the beginning Accumulation Unit value. These figures do not
reflect the deferred sales charges or the fixed dollar annual maintenance
fee, if any. Inclusion of these charges would reduce the investment
results shown.
(2) The initial Accumulation Unit value was established at $10.000 during
August 1995, when the Fund became available under the Contract.
(3) The Accumulation Unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the Accumulation Unit value of the Fund was $12.991. On the date
of conversion, additional units were issued so that Account Values were not
changed as a result of the conversion. The percentage change in the
Accumulation Unit value from the beginning of the year to the date of
conversion was 2.15%; the percentage change in the Accumulation Unit value
from the date of conversion to the end of the year was 2.86%.
(4) The initial Accumulation Unit value was established at $10.000 on June 23,
1989, the date on which the Fund commenced operations.
(5) The Accumulation Unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the Accumulation Unit value of the Fund was $39.496. On the date
of conversion, additional units were issued so that account values were not
changed as a result of the conversion. The percentage change in the
Accumulation Unit value from the beginning of the year to the date of
conversion was 4.45%; the percentage change in the Accumulation Unit value
from the date of conversion to the end of the year was 1.60%.
(6) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
(7) The Accumulation Unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the Accumulation Unit value of the Fund was $85.546. On the date
of conversion, additional units were issued so that account values were not
changed as a result of the conversion. The percentage change in the
Accumulation Unit value from the beginning of the year to the date of
conversion was 1.54%; the percentage change in the Accumulation Unit value
from the date of conversion to the end of the year was 3.78%.
(8) The initial Accumulation Unit value was established at $10.000 during
September 1996, when the Portfolio became available under the Contract.
(9) The Accumulation Unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the Accumulation Unit value of the Fund was $34.828. On the date
of conversion, additional units were issued so that account values were not
changed as a result of the conversion. The percentage change in the
Accumulation Unit value from the beginning of the year to the date of
conversion was 2.07%; the percentage change in the Accumulation Unit value
from the date of conversion to the end of the year was 0.31%.
(10) The initial Accumulation Unit value was established at $10.000 on November
2, 1992, the date on which the Fund/Portfolio became available under the
Contract.
(11) The initial Accumulation Unit value was established at $10.000 during
October 1994, when the Funds were first received in this option.
(12) The initial Accumulation Unit value was established at $10.000 on May 26,
1993, the date on which the Fund became available under the Contract.
- --------------------------------------------------------------------------------
27
<PAGE>
CONDENSED FINANCIAL INFORMATION
(Selected data for accumulation units outstanding throughout each period)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The condensed financial information presented below for the period ended
December 31, 1997, is derived from the financial statements of the Separate
Account, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The financial statements and the independent auditors' report thereon
for the year ended December 31, 1997 are included in the Statement of
Additional Information.
TABLE II
(FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.50%,
INCLUDING A 0.25% ADMINISTRATIVE EXPENSE CHARGE BEGINNING APRIL 7, 1997)
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
AETNA ASCENT VP
Value at beginning of period $12.994
Value at end of period $15.364
Increase (decrease) in value of accumulation unit(1) 18.24%(2)
Number of accumulation units outstanding at end of period 911
AETNA BALANCED VP, INC.
Value at beginning of period $15.823
Value at end of period $18.954
Increase (decrease) in value of accumulation unit(1) 19.79%(2)
Number of accumulation units outstanding at end of period 25,112
AETNA BOND VP
Value at beginning of period $12.417
Value at end of period $13.337
Increase (decrease) in value of accumulation unit(1) 7.41%(2)
Number of accumulation units outstanding at end of period 36,018
AETNA CROSSROADS VP
Value at beginning of period $12.428
Value at end of period $14.406
Increase (decrease) in value of accumulation unit(1) 15.91%(2)
Number of accumulation units outstanding at end of period 7,855
AETNA GROWTH AND INCOME VP
Value at beginning of period $17.728
Value at end of period $21.988
Increase (decrease) in value of accumulation unit(1) 24.03%(2)
Number of accumulation units outstanding at end of period 188,162
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $11.345
Value at end of period $14.418
Increase (decrease) in value of accumulation unit(1) 27.09%(2)
Number of accumulation units outstanding at end of period 11,672
AETNA LEGACY VP
Value at beginning of period $12.076
Value at end of period $13.292
Increase (decrease) in value of accumulation unit(1) 10.07%(3)
Number of accumulation units outstanding at end of period 397
AETNA MONEY MARKET VP
Value at beginning of period $11.572
Value at end of period $11.908
Increase (decrease) in value of accumulation unit(1) 2.91%(2)
Number of accumulation units outstanding at end of period 23,882
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $12.668
Value at end of period $15.755
Increase (decrease) in value of accumulation unit(1) 24.37%(2)
Number of accumulation units outstanding at end of period 9,385
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $11.373
Value at end of period $13.879
Increase (decrease) in value of accumulation unit(1) 22.03%(2)
Number of accumulation units outstanding at end of period 8,432
</TABLE>
- --------------------------------------------------------------------------------
28
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $11.356
Value at end of period $12.358
Increase (decrease) in value of accumulation unit(1) 8.83%(2)
Number of accumulation units outstanding at end of period 2,264
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $12.473
Value at end of period $15.346
Increase (decrease) in value of accumulation unit(1) 23.04%(2)
Number of accumulation units outstanding at end of period 19,168
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $12.282
Value at end of period $15.382
Increase (decrease) in value of accumulation unit(1) 25.24%(2)
Number of accumulation units outstanding at end of period 10,357
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $12.742
Value at end of period $14.963
Increase (decrease) in value of accumulation unit(1) 17.43%(2)
Number of accumulation units outstanding at end of period 7,255
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $13.043
Value at end of period $14.367
Increase (decrease) in value of accumulation unit(1) 10.15%(2)
Number of accumulation units outstanding at end of period 2,833
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $12.975
Value at end of period $15.386
Increase (decrease) in value of accumulation unit(1) 18.58%(2)
Number of accumulation units outstanding at end of period 3,305
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $14.460
Value at end of period $16.714
Increase (decrease) in value of accumulation unit(1) 15.59%(2)
Number of accumulation units outstanding at end of period 23,481
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $12.300
Value at end of period $13.870
Increase (decrease) in value of accumulation unit(1) 12.77%(2)
Number of accumulation units outstanding at end of period 4,339
PORTFOLIO PARTNERS MFS EMERGING EQUITIES PORTFOLIO
Value at beginning of period $15.386
Value at end of period $15.192
Increase (decrease) in value of accumulation unit(1) (1.26)%(4)
Number of accumulation units outstanding at end of period 11,491
PORTFOLIO PARTNERS MFS RESEARCH GROWTH PORTFOLIO
Value at beginning of period $12.975
Value at end of period $12.721
Increase (decrease) in value of accumulation unit(1) (1.95)%(4)
Number of accumulation units outstanding at end of period 17,743
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $21.005
Value at end of period $21.304
Increase (decrease) in value of accumulation unit(1) (1.42)%(4)
Number of accumulation units outstanding at end of period 2,468
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL GROWTH PORTFOLIO
Value at beginning of period $17.653
Value at end of period $17.870
Increase (decrease) in value of accumulation unit(1) 1.23%(4)
Number of accumulation units outstanding at end of period 4,502
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH EQUITY PORTFOLIO
Value at beginning of period $14.090
Value at end of period $14.374
Increase (decrease) in value of accumulation unit(1) 2.02%(4)
Number of accumulation units outstanding at end of period 14,429
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the
result by the beginning Accumulation Unit value. These figures do not
reflect the deferred sales charges or the fixed dollar annual maintenance
fee, if any. Inclusion of these charges would reduce the investment
results shown.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during April 1997.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during May 1997.
(4) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
30
<PAGE>
CONDENSED FINANCIAL INFORMATION
(Selected data for accumulation units outstanding throughout each period)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The condensed financial information presented below for the period ended
December 31, 1997, is derived from the financial statements of the Separate
Account, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The financial statements and the independent auditors' report thereon
for the year ended December 31, 1997 are included in the Statement of
Additional Information.
TABLE III
(FOR CONTRACTS CONTAINING LIMITS ON FEES)
<TABLE>
<CAPTION>
1997
--------------------
<S> <C>
AETNA ASCENT VP
Value at beginning of period $13.943
Value at end of period $15.422
Increase (decrease) in value of accumulation unit(1) 10.61%(2)
Number of accumulation units outstanding at end of period 23,868
AETNA BALANCED VP, INC.
Value at beginning of period $16.898
Value at end of period $19.016
Increase (decrease) in value of accumulation unit(1) 12.53%(2)
Number of accumulation units outstanding at end of period 477,504
AETNA BOND VP
Value at beginning of period $12.747
Value at end of period $13.373
Increase (decrease) in value of accumulation unit(1) 4.91%(2)
Number of accumulation units outstanding at end of period 489,431
AETNA CROSSROADS VP
Value at beginning of period $13.178
Value at end of period $14.461
Increase (decrease) in value of accumulation unit(1) 9.74%(2)
Number of accumulation units outstanding at end of period 10,798
AETNA GROWTH AND INCOME VP
Value at beginning of period $19.527
Value at end of period $22.060
Increase (decrease) in value of accumulation unit(1) 12.97%(2)
Number of accumulation units outstanding at end of period 4,106,796
AETNA LEGACY VP
Value at beginning of period $12.335
Value at end of period $13.343
Increase (decrease) in value of accumulation unit(1) 8.18%(2)
Number of accumulation units outstanding at end of period 2,254
AETNA MONEY MARKET VP
Value at beginning of period $11.654
Value at end of period $11.930
Increase (decrease) in value of accumulation unit(1) 2.37%(2)
Number of accumulation units outstanding at end of period 580,412
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $14.017
Value at end of period $15.784
Increase (decrease) in value of accumulation unit(1) 12.60%(2)
Number of accumulation units outstanding at end of period 35,342
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $12.498
Value at end of period $13.904
Increase (decrease) in value of accumulation unit(1) 11.26%(2)
Number of accumulation units outstanding at end of period 3,029
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $13.535
Value at end of period $15.374
Increase (decrease) in value of accumulation unit(1) 13.59%(2)
Number of accumulation units outstanding at end of period 13,675
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $13.806
Value at end of period $15.410
Increase (decrease) in value of accumulation unit(1) 11.62%(2)
Number of accumulation units outstanding at end of period 19,818
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $13.554
Value at end of period $14.990
Increase (decrease) in value of accumulation unit(1) 10.60%(2)
Number of accumulation units outstanding at end of period 2,819
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $13.985
Value at end of period $15.414
Increase (decrease) in value of accumulation unit(1) 10.22%(2)
Number of accumulation units outstanding at end of period 750
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $15.851
Value at end of period $16.745
Increase (decrease) in value of accumulation unit(1) 5.64%(2)
Number of accumulation units outstanding at end of period 44,433
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $13.610
Value at end of period $13.896
Increase (decrease) in value of accumulation unit(1) 2.10%(2)
Number of accumulation units outstanding at end of period 1,753
PORTFOLIO PARTNERS MFS EMERGING EQUITIES PORTFOLIO
Value at beginning of period $15.411
Value at end of period $15.219
Increase (decrease) in value of accumulation unit(1) (1.24)%(3)
Number of accumulation units outstanding at end of period 11,848
PORTFOLIO PARTNERS MFS RESEARCH GROWTH PORTFOLIO
Value at beginning of period $12.995
Value at end of period $12.744
Increase (decrease) in value of accumulation unit(1) (1.93)%(3)
Number of accumulation units outstanding at end of period 141,582
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $21.038
Value at end of period $21.343
Increase (decrease) in value of accumulation unit(1) (1.45)%(3)
Number of accumulation units outstanding at end of period 8,563
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL GROWTH PORTFOLIO
Value at beginning of period $17.682
Value at end of period $17.903
Increase (decrease) in value of accumulation unit(1) 1.25%(3)
Number of accumulation units outstanding at end of period 3,986
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH EQUITY PORTFOLIO
Value at beginning of period $14.112
Value at end of period $14.400
Increase (decrease) in value of accumulation unit(1) 2.04%(3)
Number of accumulation units outstanding at end of period 3,310
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the
result by the beginning Accumulation Unit value. These figures do not
reflect the deferred sales charges or the fixed dollar annual maintenance
fee, if any. Inclusion of these charges would reduce the investment
results shown.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during June 1997.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
32
<PAGE>
For Master Applications Only
I hereby acknowledge receipt of an Account B Group Deferred Variable Annuity
Prospectus dated May 1, 1998 for Employer-Sponsored Deferred Compensation
Plans, as well as all current prospectuses pertaining to the variable
investment options available under the Contracts.
- --- Please send an Account B Statement of Additional Information (Form No.
SAI.75996-98) dated May 1, 1998.
- --------------------------------------------------------------------------------
CONTRACT HOLDER'S SIGNATURE
- --------------------------------------------------------------------------------
DATE
PROS.75996-98
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated May 1, 1998
Group and Individual Variable Annuity Contracts Available under Section 457
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Variable Annuity Account B (the
"Separate Account") dated May 1, 1998.
A free prospectus is available upon request from the local Aetna Life Insurance
and Annuity Company office or by writing to or calling:
Aetna Life Insurance and Annuity Company
Customer Service
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-525-4225
Read the prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the prospectus.
TABLE OF CONTENTS
Page
General Information and History.......................................... 2
Variable Annuity Account B............................................... 2
Offering and Purchase of Contracts....................................... 3
Performance Data......................................................... 3
General.............................................................. 3
Average Annual Total Return Quotations............................... 4
Annuity Payments......................................................... 9
Sales Material and Advertising........................................... 10
Independent Auditors..................................................... 10
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, 1997, the Company
had $40.7 billion invested through its products, including $22.3 billion
in its separate accounts (of which the Company, or an affilate oversees the
management of $17.6 billion) and $1.3 billion in its mutual funds offered
outside of its separate accounts. The Company is ranked among the top 2% of all
U.S. life insurance companies based on assets as of December 31, 1996.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 and in the District of Columbia. The Company's Home Office
is located at 151 Farmington Avenue, Hartford, Connecticut 06156.
In addition to serving as the principal underwriter and the depositor for the
Separate Account, the Company is also a registered investment adviser under the
Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934. The Company provides investment advice to
several of the registered management investment companies offered as variable
investment options under the Contracts funded by the Separate Account (see
"Variable Annuity Account B" below).
Other than the mortality and expense risk charges and administrative expense
charge described in the prospectus, all expenses incurred in the operations of
the Separate Account are borne by the Company. See "Charges and Deductions" in
the prospectus. The Company receives reimbursement for certain administrative
costs from some advisers of the Funds used as funding options under the
Contract. These fees generally range up to 0.25%.
The assets of the Separate Account are held by the Company. The Separate Account
has no custodian. However, the Funds in whose shares the assets of the Separate
Account are invested each have custodians, as discussed in their respective
prospectuses.
VARIABLE ANNUITY ACCOUNT B
Variable Annuity Account B (the "Separate Account") is a separate account
established by the Company for the purpose of funding variable annuity contracts
issued by the Company. The Separate Account is registered with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940, as amended. Purchase Payments made under the Contract may be
allocated to one or more of the Subaccounts. Each Subaccount invests in the
shares of only one of the Funds listed below. The Company may make additions to,
deletions from or substitutions of available investment options as permitted by
law and subject to the conditions in the Contract. The availability of the Funds
is subject to applicable regulatory authorization. Not all Funds are available
in all jurisdictions, under all Contracts, or under all Plans.
2
<PAGE>
The Funds currently available under the Contract are as follows:
[bullet] Aetna Ascent VP (formerly known as Aetna Ascent Variable Portfolio)
[bullet] Aetna Balanced VP, Inc. (formerly known as Aetna Investment Advisers
Fund, Inc.)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP
[bullet] Aetna Crossroads VP (formerly known as Aetna Crossroads Variable
Portfolio)
[bullet] Aetna Growth VP (formerly known as Aetna Variable Growth Portfolio)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP (formerly known as
Aetna Variable Index Plus Portfolio)
[bullet] Aetna High Yield VP
[bullet] Aetna Index Plus Large Cap VP
[bullet] Aetna Index Plus Mid Cap VP
[bullet] Aetna Index Plus Small Cap VP
[bullet] Aetna International VP
[bullet] Aetna Legacy VP (formerly known as Aetna Legacy Variable Portfolio)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP
[bullet] Aetna Real Estate Securities VP
[bullet] Aetna Small Company VP (formerly known as Aetna Variable Small Company
Portfolio)
[bullet] Aetna Value Opportunity VP (formerly known as Aetna Variable Capital
Appreciation Portfolio)
[bullet] Calvert Social Balanced Portfolio (formerly known as Calvert
Responsibly Invested Balanced Portfolio)
[bullet] Fidelity VIP Equity-Income Portfolio
[bullet] Fidelity VIP Growth Portfolio
[bullet] Fidelity VIP Overseas Portfolio
[bullet] Fidelity VIP II Contrafund Portfolio
[bullet] Janus Aspen Aggressive Growth Portfolio
[bullet] Janus Aspen Balanced Portfolio
[bullet] Janus Aspen Flexible Income Portfolio
[bullet] Janus Aspen Growth Portfolio
[bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Lexington Natural Resources Trust*
[bullet] Oppenheimer Global Securities Fund
[bullet] Oppenheimer Strategic Bond Fund
[bullet] Portfolio Partners MFS Emerging Equities Portfolio
[bullet] Portfolio Partners MFS Research Growth Portfolio
[bullet] Portfolio Partners MFS Value Equity Portfolio
[bullet] Portfolio Partners Scudder International Growth Portfolio
[bullet] Portfolio Partners T. Rowe Price Growth Equity Portfolio
*This Fund is only available for investment by Participants who established an
account under the Contract before May 1, 1998. As soon as all such Participants
have redirected their allocations to other investment options, the Fund will be
closed to all new investment (except reinvested dividends and capital gains
earned on amounts already invested in the Fund through the Separate Account).
Complete descriptions of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, are contained in the
prospectuses and statements of additional information for each of the Funds.
OFFERING AND PURCHASE OF CONTRACTS
The Company is both the depositor and the principal underwriter for the
securities sold by the prospectus. The Company offers the Contracts through life
insurance agents licensed to sell variable annuities who are registered
representatives of the Company or of other registered broker-dealers who have
sales agreements with the Company. The offering of the Contracts is continuous.
A description of the manner in which Contracts are purchased may be found in the
prospectus under the sections titled "Purchase" and "Contract Valuation."
PERFORMANCE DATA
GENERAL
From time to time, the Company may advertise different types of historical
performance for the Subaccounts of the Separate Account available under the
Contracts issued by the Company in connection with Plans described in the
prospectus. The Company may advertise the "standardized average annual total
returns," calculated in a manner prescribed by the Securities and Exchange
Commission (the "standardized return"), as well as "non-standardized returns,"
both of which are described below.
The standardized and non-standardized total return figures are computed
according to a formula in which a hypothetical initial Purchase Payment of
$1,000 is applied to the various Subaccounts under the Contract, and then
related to the ending redeemable values over one, five and ten year periods (or
fractional periods thereof). The redeemable value is then divided by the initial
investment and this quotient is taken to the Nth root (N represents the number
of years in the period) and 1 is subtracted from the result which is then
expressed as a percentage, carried to at least the nearest hundredth of a
percent. The standardized figures use the actual returns of the Fund since the
date contributions were first received in the Fund under the Separate Account
and then adjust them to reflect the deduction of all recurring charges under the
Contracts during each period (e.g., mortality and expense risk charges,
maintenance fees, administrative expense charges if applicable during the
3
<PAGE>
period shown, and deferred sales charges). These charges will be deducted on a
pro rata basis in the case of fractional periods. The maintenance fee is
converted to a percentage of assets based on the average account size under the
Contracts described in the prospectus. The total return figures shown below may
be different from the actual historical total return under your Contract because
for periods prior to 1994, the Subaccount's investment performance was based on
the performance of the underlying Fund plus any cash held by the Subaccount.
The non-standardized figures will be calculated in a similar manner, except that
they will not reflect the deduction of any applicable deferred sales charge
(which would decrease the level of performance shown if reflected in these
calculations). The non-standardized figures may also include monthly, quarterly,
year-to-date and three year periods, and may include returns calculated from the
Funds inception date and/or the date contributions were first received in the
Fund under the Separate Account.
Investment results of the Subaccounts will fluctuate over time, and any
presentation of the Subaccounts' total return quotations for any prior period
should not be considered as a representation of how the Subaccounts will perform
in any future period. Additionally, the Account Value upon redemption may be
more or less than your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
Each set of tables shown below represents the variations in contract payment
type and in the maintenance fees assessed under different plans. Table A
reflects the average annual standardized and non-standardized total return
quotation figures for the periods ended December 31, 1997 for the Subaccounts
under Single Payment Accounts issued by the Company. Table B reflects the
average annual standardized and non-standardized total return quotation figures
for the periods ended December 31, 1997 for the Subaccounts under Installment
Payment Accounts with a $20 annual maintenance fee. The Company may also
advertise returns based on a $15 annual maintenance fee. Both sets of returns
below reflect the 0.25% administrative expense charge applicable under some
Contracts. The Company may also advertise total return quotations where the
administrative expense charge is not reflected.
For the Subaccounts funded by the Portfolio Partners portfolios, two sets of
performance returns are shown for each Subaccount: one showing performance based
solely on the performance of the Portfolio Partners portfolio from November 28,
1997, the date the Portfolio commenced operations; and one quotation based on
(a) performance through November 26, 1997 of the fund it replaced under many
Company contracts and; (b) after November 26, 1997, based on the performance of
the Portfolio Partners portfolio.
For those Subaccounts where results are not available for the full calendar
period indicated, performance for such partial periods is shown in the column
labeled "Since Inception". For standardized performance, the "Since Inception"
column shows the average annual return since the date contributions were first
received in the Fund under the Separate Account. For nonstandardized
performance, the "Since Inception" column shows average annual total return
since the Fund's inception date.
4
<PAGE>
TABLE A
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Date
Contributions
Single Payment Account First
($0 Maintenance Fee) STANDARDIZED Received
Under the
Separate
Account
- ------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 5 Years 10 Years Inception*
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP 12.20% 16.82% 08/31/95
- ------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 14.63% 11.82% 10.84% 06/30/89
- ------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 1.35% 4.49% 7.60%
- ------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 10.03% 13.68% 08/31/95
- ------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 12.88% 05/30/97
- ------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 21.56% 15.01% 14.90%
- ------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 25.30% 26.06% 10/31/96
- ------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 7.16% 10.43% 08/31/95
- ------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) (1.29%) 2.42% 4.38%
- ------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 14.46% 05/30/97
- ------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 14.60% 05/30/97
- ------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio 12.38% 10.31% 10.51% 11/30/92
- ------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 19.89% 21.54% 12/30/94
- ------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio 15.56% 20.29% 12/30/94
- ------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio 4.40% 9.83% 01/31/95
- ------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 16.18% 18.83% 06/30/95
- ------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 5.44% 10.87% 10/31/94
- ------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 14.27% 17.03% 01/31/95
- ------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 4.59% 10.12% 10/31/94
- ------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 14.87% 17.38% 07/29/94
- ------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 14.32% 24.36% 04/28/95
- ------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust 0.28% 6.10% 05/26/93
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio (6.20%) 11/28/97
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners 2.22% 8.82% 09/30/93
MFS Emerging Equities(3)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio (6.86%) 11/28/97
- ------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/ (9.18%) 3.40% 5.00% 08/31/92
Portfolio Partners MFS Research Growth(3)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio (3.65%) 11/28/97
- ------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Growth/ Portfolio Partners 18.24% 10.42% 10.61% 11/30/92
MFS Value Equity(3)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International (3.83%) 11/28/97
Growth Portfolio
- ------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/ 2.00% 11.10% 9.25% 08/31/92
Portfolio Partners Scudder International Growth(3)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth Equity (3.08%) 11/28/97
Portfolio
- ------------------------------------------------------------------------------------------------------------------------
Alger American Growth/ Portfolio Partners 20.02% 21.29% 02/28/95
T. Rowe Price Growth Equity(3)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
* Reflects performance from the date contributions were first received in the
Fund under the Separate Account.
(1) These Funds have been available through the Separate Account for more than
ten years.
(2) The current yield for the Subaccount for the 7-day period ended December 31,
1997 (on an annualized basis) was 3.98%. The current yield reflects the
deduction of all charges under the Contract that are deducted from the total
return quotations shown above except the maximum 5% deferred sales charge.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The
<PAGE>
replaced Fund may not have been available under all Contracts. The "Date
Contributions First Received Under Separate Account" refers to the
applicable date for the replaced Fund.
5
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Single Payment Account Fund
($0 Maintenance Fee) NON-STANDARDIZED Inception
Date
- -------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP 18.11% 20.03% 07/05/95
- -------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 20.66% 19.72% 12.74% 10.85% 04/03/89
- -------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 6.69% 8.24% 5.34% 7.60%
- -------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 15.82% 16.73% 07/05/95
- -------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 31.03% 30.99% 12/13/96
- -------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 27.96% 26.91% 15.95% 14.90%
- -------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 31.90% 32.59% 09/16/96
- -------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 12.80% 13.25% 07/05/95
- -------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) 3.91% 4.06% 3.26% 4.38%
- -------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 32.49% 33.43% 12/27/96
- -------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 37.29% 37.81% 12/13/96
- -------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio(1) 18.29% 18.83% 11.22% 10.75%
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio(1) 26.20% 23.66% 18.38% 15.00%
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio(1) 21.64% 22.38% 16.25% 15.45%
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio(1) 9.89% 9.81% 12.43% 8.00%
- -------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Contrafund Portfolio 22.29% 26.30% 01/03/95
- -------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 10.99% 14.02% 17.45% 09/13/93
- -------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 20.28% 19.17% 14.57% 09/13/93
- -------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 10.10% 13.06% 8.40% 09/13/93
- -------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 20.92% 21.86% 15.93% 09/13/93
- -------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 20.34% 24.28% 21.09% 09/13/93
- -------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust 5.55% 14.95% 9.12% 7.92% 10/14/91
- -------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund 20.60% 12.12% 17.04% 10.59% 11/12/90
- -------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund 7.09% 10.33% 6.03% 05/03/93
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio (1.27%) 11/28/97
- -------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners 7.60% 16.23% 10.54% 17.22% 09/21/88
MFS Emerging Equities(3)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio (1.96%) 11/28/97
- -------------------------------------------------------------------------------------------------------------------------
AC VP Capital Appreciation/Portfolio Partners (4.40%) 5.18% 4.25% 7.11%
MFS Research Growth(3)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio 1.28% 11/28/97
- -------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Growth/Portfolio 24.46% 20.20% 11.33% 12.95%
Partners MFS Value Equity(3)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International 1.44% 11/28/97
Growth Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/ 7.37% 9.94% 12.01% 10.13%
Portfolio Partners Scudder International Growth(3)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth 1.89% 11/28/97
Equity Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners 26.34% 23.76% 17.98% 17.93% 01/09/89
T. Rowe Price Growth Equity(3)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
** Reflects performance from the Fund's inception date.
(1) These Funds have been in operation for more than ten years.
(2) The current yield for the Subaccount for the 7-day period ended December 31,
1997 (on an annualized basis) was 3.98%. The current yield reflects the
deduction of all charges under the Contract that are deducted from the total
return quotations shown above. As in the table above, the maximum 5%
deferred sales charge is not reflected.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced Fund may not have been available under all
Contracts. The "Fund Inception Date" refers to the applicable date for the
replaced Fund. If no date is shown, the replaced Fund has been in operation
for more than ten years.
6
<PAGE>
<TABLE>
TABLE B
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Date
Contributions
Installment Payment Account First
($20 Maintenance Fee) STANDARDIZED Received
Under the
Separate
Account
- --------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 5 Year 10 Year Inception*
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP 12.20% 16.81% 08/31/95
- --------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 14.62% 11.58% 10.30% 06/30/89
- --------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 1.35% 4.26% 7.59%
- --------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 10.02% 13.68% 08/31/95
- --------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 12.87% 05/30/97
- --------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 21.55% 14.76% 14.90%
- --------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 25.29% 26.05% 10/31/96
- --------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 7.15% 10.43% 08/31/95
- --------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) (1.30%) 2.20% 4.37%
- --------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 14.46% 05/30/97
- --------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 14.59% 05/30/97
- --------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio 12.37% 10.08% 10.28% 11/30/92
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 19.89% 21.53% 12/30/94
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio 15.55% 20.28% 12/30/94
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio 4.39% 9.82% 01/31/95
- --------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 16.17% 18.82% 06/30/95
- --------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 5.43% 10.86% 10/31/94
- --------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 14.26% 17.02% 01/31/95
- --------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 4.59% 10.11% 10/31/94
- --------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 14.87% 17.37% 07/29/94
- --------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 14.31% 24.35% 04/28/95
- --------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust 0.27% 6.10% 05/26/93
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio (6.21%) 11/28/97
- --------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners 2.21% 8.82% 09/30/93
MFS Emerging Equities(3)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio (6.86%) 11/28/97
- --------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/Portfolio (9.19%) 3.18% 4.79% 08/31/92
Partners MFS Research Growth(3)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio (3.65%) 11/28/97
- --------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Growth/ Portfolio Partners 18.23% 10.18% 10.37% 11/30/92
MFS Value Equity(3)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth (3.84%) 11/28/97
Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/ 1.99% 10.86% 9.03% 08/31/92
Portfolio Partners Scudder International Growth(3)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth Equity (3.09%) 11/28/97
Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners 20.02% 21.28% 02/28/95
T. Rowe Price Growth Equity(3)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
* Reflects performance from the date contributions were first received in the
Fund under the Separate Account.
(1) These Funds have been available through the Separate Account for more than
ten years.
(2) The current yield for the Subaccount for the 7-day period ended December 31,
1997 (on an annualized basis) was 3.910%. The current yield reflects the
deduction of all charges under the Contract that are deducted from the total
return quotations shown above except the maximum 5% deferred sales charge.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The
<PAGE>
replaced Fund may not have been available under all Contracts. The "Date
Contributions First Received Under Separate Account" refers to the
applicable date for the replaced Fund.
7
<PAGE>
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Installment Payment Account NON-STANDARDIZED Fund
($20 Maintenance Fee) Inception
Date
- ------------------------------------------------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP 18.10% 20.02% 07/05/95
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 20.65% 19.71% 12.73% 10.84% 04/03/89
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 6.68% 8.24% 5.34% 7.59%
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 15.82% 16.73% 07/05/95
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP(1) 31.02% 30.98% 12/13/96
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP 27.95% 26.90% 15.95% 14.90%
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 31.89% 32.58% 09/16/96
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 12.79% 13.24% 07/05/95
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) 3.90% 4.05% 3.25% 4.37%
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 32.48% 33.42% 12/27/96
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 37.28% 37.81% 12/13/96
- ------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio 18.28% 18.82% 11.21% 10.74%
- ------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 26.20% 23.65% 18.37% 14.99%
- ------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio 21.64% 22.38% 16.25% 15.44%
- ------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio 9.89% 9.81% 12.42% 7.99%
- ------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 22.29% 26.29% 01/03/95
- ------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 10.98% 14.01% 17.45% 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 20.28% 19.16% 14.56% 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 10.09% 13.05% 8.39% 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 20.91% 21.85% 15.92% 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 20.33% 24.27% 21.09% 09/13/93
- ------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust 5.55% 14.95% 9.11% 7.91% 10/14/91
- ------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund 20.60% 12.11% 17.04% 10.59% 11/12/90
- ------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund 7.08% 10.33% 6.03% 05/03/93
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio (1.28%) 11/28/97
- ------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners 7.59% 16.22% 10.54% 17.21% 09/21/88
MFS EmergingEquities(3)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio (1.97%) 11/28/97
- ------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/Portfolio (4.41%) 5.18% 4.24% 7.10%
Partners MFS Research Growth(3)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio 1.27% 11/28/97
- ------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Growth/Portfolio Partners 24.46% 20.19% 11.32% 12.94%
MFS Value Equity(3)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth 1.43% 11/28/97
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/Portfolio 7.36% 9.93% 12.00% 10.12%
Partners Scudder International Growth(3)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth Equity Portfolio 1.88% 11/28/97
- ------------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners 26.33% 23.75% 17.97% 17.92% 01/09/89
T. Rowe Price Growth Equity(3)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
** Reflects performance from the Fund's inception date.
(1) These Funds have been in operation for more than ten years.
(2) The current yield for the Subaccount for the 7-day period ended December 31,
1997 (on an annualized basis) was 3.910%. The current yield reflects the
deduction of all charges under the Contract that are deducted from the total
return quotations shown above. As in the table above, the maximum 5%
deferred sales charge is not reflected.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced Fund may not have been available under all
Contracts. The "Fund Inception Date" refers to the applicable date for the
replaced Fund. If no date is shown, the replaced Fund has been in operation
for more than ten years.
8
<PAGE>
ANNUITY PAYMENTS
When Annuity payments are to begin, the value of the Account is determined using
Accumulation Unit values as of the tenth Valuation Date before the first Annuity
payment is due. Such value (less any applicable premium tax) is applied to
provide an Annuity in accordance with the Annuity and investment options
elected.
The Annuity option tables found in the Contract show, for each form of Annuity,
the amount of the first Annuity payment for each $1,000 of value applied.
Thereafter, variable Annuity payments fluctuate as the Annuity Unit value(s)
fluctuates with the investment experience of the selected investment option(s).
The first payment and subsequent payments also vary depending on the assumed net
investment rate selected (3.5% or 5% per annum). Selection of a 5% rate causes a
higher first payment, but Annuity payments will increase thereafter only to the
extent that the net investment rate increases by more than 5% on an annual
basis. Annuity payments would decline if the rate failed to increase by 5%. Use
of the 3.5% assumed rate causes a lower first payment, but subsequent payments
would increase more rapidly or decline more slowly as changes occur in the net
investment rate.
When the Annuity Period begins, the Annuitant is credited with a fixed number of
Annuity Units (which does not change thereafter) in each of the designated
investment options. This number is calculated by dividing (a) by (b), where (a)
is the amount of the first Annuity payment based on a particular investment
option, and (b) is the then current Annuity Unit value for that investment
option. As noted, Annuity Unit values fluctuate from one Valuation Date to the
next; such fluctuations reflect changes in the net investment factor for the
appropriate Subaccount(s) (with a ten Valuation Date lag which gives the Company
time to process Annuity payments) and a mathematical adjustment which offsets
the assumed net investment rate of 3.5% or 5% per annum.
The operation of all these factors can be illustrated by the following
hypothetical example. These procedures will be performed separately for the
investment options selected during the Annuity Period.
EXAMPLE:
- --------
Assume that, at the date Annuity payments are to begin, there are 3,000
Accumulation Units credited under a particular Account and that the value of an
Accumulation Unit for the tenth Valuation Date prior to retirement was
$13.650000. This produces a total value of $40,950.
Assume also that no premium tax is payable and that the Annuity table in the
Contract provides, for the option elected, a first monthly variable Annuity
payment of $6.68 per $1000 of value applied; the Annuitant's first monthly
payment would thus be 40.950 multiplied by $6.68, or $273.55.
Assume then that the value of an Annuity Unit for the Valuation Date on which
the first payment was due was $13.400000. When this value is divided into the
first monthly payment, the number of Annuity Units is determined to be 20.414.
The value of this number of Annuity Units will be paid in each subsequent month.
If the net investment factor with respect to the appropriate Subaccount is
1.0015000 as of the tenth Valuation Date preceding the due date of the second
monthly payment, multiplying this factor by .9999058* (to neutralize the assumed
net investment rate of 3.5% per annum built into the number of Annuity Units
determined above) produces a result of 1.0014057. This is then multiplied by the
Annuity Unit value for the prior Valuation Date (assume such value to be
$13.504376) to produce an Annuity Unit value of $13.523359 for the Valuation
Date in which the second payment is due.
9
<PAGE>
The second monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359,
which produces a payment of $276.07.
*If an assumed net investment rate of 5% is elected, the appropriate factor to
neutralize such assumed rate would be .9998663.
SALES MATERIAL AND ADVERTISING
The Company may include hypothetical illustrations in its sales literature that
explain the mathematical principles of dollar cost averaging, compounded
interest, tax deferred accumulation, and the mechanics of variable annuity
contracts. The Company may also discuss the difference between variable annuity
contracts and other types of savings or investment products, including, but not
limited to, personal savings accounts and certificates of deposit.
We may distribute sales literature that compares the percentage change in
Accumulation Unit values for any of the Subaccounts to established market
indices such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average or to the percentage change in values of other management
investment companies that have investment objectives similar to the Subaccount
being compared.
We may publish in advertisements and reports, the ratings and other information
assigned to us by one or more independent rating organizations such as A.M. Best
Company, Duff & Phelps, Standard & Poor's Corporation and Moody's Investors
Services, Inc. The purpose of the ratings is to reflect our financial strength
and/or claims-paying ability. We may also quote ranking services such as
Morningstar's Variable Annuity/Life Performance Report and Lipper's Variable
Insurance Products Performance Analysis Service (VIPPAS), which rank variable
annuity or life Subaccounts or their underlying funds by performance and/or
investment objective. We may categorize the underlying Funds in terms of the
asset classes they represent and use such categories in marketing materials for
the Contracts. We may illustrate in advertisements the performance of the
underlying funds, if accompanied by performance which also shows the performance
of such funds reduced by applicable charges under the Separate Account. We may
also show in advertisements the portfolio holdings of the underlying funds,
updated at various intervals. From time to time, we will quote articles from
newspapers and magazines or other publications or reports, including, but not
limited to The Wall Street Journal, Money magazine, USA Today and The VARDS
Report.
The Company may provide in advertising, sales literature, periodic publications
or other materials information on various topics of interest to current and
prospective Contract Holders or Participants. 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.
10
<PAGE>
FINANCIAL STATEMENTS
VARIABLE ANNUITY ACCOUNT B
Index
Statement of Assets and Liabilities.................................... S-2
Statements of Operations and Changes in Net Assets..................... S-6
Notes to Financial Statements.......................................... S-7
Independent Auditors' Report .......................................... S-25
S-1
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 30,411,094 shares (cost $955,207,313) ...................... $1,022,883,150
Aetna Income Shares; 5,674,428 shares (cost $72,136,754) ........................ 72,918,472
Aetna Variable Encore Fund; 9,348,762 shares (cost $123,509,269) ................ 124,939,137
Aetna Investment Advisers Fund, Inc.; 10,156,919 shares (cost $141,710,363) ..... 162,842,121
Aetna GET Fund, Series B; 1,326,295 shares (cost $14,665,182) ................... 20,859,924
Aetna GET Fund, Series C; 866,713 shares (cost $8,784,556) ...................... 10,929,107
Aetna Ascent Variable Portfolio; 1,448,001 shares (cost $19,409,307) ............ 20,443,736
Aetna Crossroads Variable Portfolio; 1,552,948 shares (cost $19,616,465) ........ 20,320,625
Aetna Legacy Variable Portfolio; 1,652,443 shares (cost $19,438,586) ............ 19,994,608
Aetna Variable Portfolio, Inc.:
Capital Appreciation Portfolio; 328,354 shares (cost $4,457,675) ............... 3,912,594
Growth Portfolio; 326,907 shares (cost $4,163,981) ............................. 3,218,910
Index Plus Portfolio; 2,014,660 shares (cost $26,897,404) ...................... 28,239,788
Small Company Portfolio; 478,249 shares (cost $6,406,805) ...................... 6,107,129
Alger American Funds:
Balanced Portfolio; 525,665 shares (cost $4,964,549) ........................... 5,656,151
Income and Growth Portfolio; 1,287,394 shares (cost $11,439,405) ............... 14,148,460
Leveraged AllCap Portfolio; 616,315 shares (cost $12,739,767) .................. 14,280,009
American Century Investments:
Balanced Fund; 563,499 shares (cost $4,180,851) ................................ 4,643,230
International Fund; 855,695 shares (cost $5,491,134) ........................... 5,852,955
Calvert Social Balanced Portfolio; 490,079 shares (cost $912,050) ............... 971,337
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 5,712,922 shares (cost $118,902,067) .................. 138,709,740
Growth Portfolio; 2,167,158 shares (cost $65,817,036) .......................... 80,401,549
High Income Portfolio; 2,598,408 shares (cost $32,563,692) ..................... 35,286,379
Overseas Portfolio; 677,325 shares (cost $12,543,713) .......................... 13,004,643
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 652,031 shares (cost $10,605,372) ..................... 11,743,075
Contrafund Portfolio; 5,407,595 shares (cost $89,625,610) ...................... 107,827,442
Index 500 Portfolio; 673,020 shares (cost $66,103,932) ......................... 76,986,772
Investment Grade Bond Portfolio; 523,741 shares (cost $6,191,022) .............. 6,578,182
Insurance Management Series:
American Leaders Fund II; 5,952,606 shares (cost $86,738,072) .................. 116,849,662
Equity Income Fund II; 1,619,705 shares (cost $19,027,165) ..................... 19,938,571
Growth Strategies Fund II; 1,406,137 shares (cost $19,150,654) ................. 22,709,106
High Income Bond Fund II; 4,859,621 shares (cost $49,449,772) .................. 53,212,853
International Equity Fund II; 1,136,596 shares (cost $13,007,527) .............. 13,946,028
Prime Money Fund II; 7,530,487 shares (cost $7,530,487) ........................ 7,530,487
U.S. Government Securities Fund II; 1,252,067 shares (cost 12,683,585) ......... 13,196,784
Utility Fund II; 1,840,648 shares (cost $20,501,843) ........................... 26,302,858
Janus Aspen Series:
Aggressive Growth Portfolio; 1,867,831 shares (cost $33,789,408) ............... 38,383,925
Balanced Portfolio; 1,782,815 shares (cost $27,682,920) ........................ 31,145,778
Flexible Income Portfolio; 894,277 shares (cost $10,167,023) ................... 10,534,588
Growth Portfolio; 2,203,400 shares (cost $34,954,619) .......................... 40,718,827
Worldwide Growth Portfolio; 6,953,978 shares (cost $144,443,276) ............... 162,653,541
Lexington Emerging Markets Fund; 318,004 shares (cost $3,542,964) ............... 2,833,416
Lexington Natural Resources Trust Fund; 464,813 shares (cost $6,752,492) ........ 6,930,364
</TABLE>
S-2
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1997 (continued):
<TABLE>
<S> <C>
MFS Funds:
Total Return Series; 1,140,943 shares (cost $16,998,729) ............................ $ 18,973,878
Worldwide Government Series; 129,706 shares (cost $1,330,232) ....................... 1,324,295
Oppenheimer Funds:
Capital Appreciation Fund; 90,044 shares (cost $3,554,414) .......................... 3,688,200
Global Securities Fund; 125,453 shares (cost $2,681,784) ............................ 2,680,937
Growth & Income Fund; 616,565 shares (cost $12,222,979) ............................. 12,688,907
Strategic Bond Fund; 604,043 shares (cost $3,113,874) ............................... 3,092,701
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio; 2,221,275 shares (cost $96,046,526) ............ 95,292,694
PPI MFS Research Growth Portfolio; 6,783,433 shares (cost $67,030,057) .............. 65,867,130
PPI MFS Value Equity Portfolio; 515,803 shares (cost $15,207,018) ................... 15,427,681
PPI Scudder International Growth Portfolio; 897,175 shares (cost $12,454,736) ....... 12,650,163
PPI T. Rowe Price Growth Equity Portfolio; 2,067,651 shares (cost $88,372,335) ...... 90,170,258
--------------
NET ASSETS (cost $2,666,918,351) ..................................................... $2,922,442,857
==============
Net assets represented by:
Reserves for annuity contracts in accumulation and payment period: (Notes 1 and 5)
</TABLE>
<TABLE>
<S> <C>
Aetna Variable Fund:
Annuity contracts in accumulation ........... $892,006,381
Annuity contracts in payment period ......... 130,876,769
Aetna Income Shares:
Annuity contracts in accumulation ........... 69,236,488
Annuity contracts in payment period ......... 3,681,984
Aetna Variable Encore Fund:
Annuity contracts in accumulation ........... 124,939,137
Aetna Investment Advisers Fund, Inc.:
Annuity contracts in accumulation ........... 150,761,384
Annuity contracts in payment period ......... 12,080,737
Aetna GET Fund, Series B:
Annuity contracts in accumulation ........... 20,859,924
Aetna GET Fund, Series C:
Annuity contracts in accumulation ........... 10,929,107
Aetna Ascent Variable Portfolio:
Annuity contracts in accumulation ........... 20,443,736
Aetna Crossroads Variable Portfolio:
Annuity contracts in accumulation ........... 20,250,904
Annuity contracts in payment period ......... 69,721
Aetna Legacy Variable Portfolio:
Annuity contracts in accumulation ........... 18,710,015
Annuity contracts in payment period ......... 1,284,593
Aetna Variable Portfolio, Inc.:
Capital Appreciation Portfolio:
Annuity contracts in accumulation ........... 3,912,594
Growth Portfolio:
Annuity contracts in accumulation ........... 3,210,344
Annuity contracts in payment period ......... 8,566
Index Plus Portfolio:
Annuity contracts in accumulation ........... 28,074,705
Annuity contracts in payment period ......... 165,083
</TABLE>
S-3
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1997 (continued):
<TABLE>
<S> <C>
Small Company Portfolio:
Annuity contracts in accumulation .................... $ 6,059,783
Annuity contracts in payment period .................. 47,346
Alger American Funds:
Balanced Portfolio:
Annuity contracts in accumulation .................... 5,656,151
Income and Growth Portfolio:
Annuity contracts in accumulation .................... 14,148,460
Leveraged AllCap Portfolio:
Annuity contracts in accumulation .................... 14,280,009
American Century Investments:
Balanced Fund:
Annuity contracts in accumulation .................... 4,643,230
International Fund:
Annuity contracts in accumulation .................... 5,852,955
Calvert Social Balanced Portfolio:
Annuity contracts in accumulation .................... 971,337
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Annuity contracts in accumulation .................... 138,709,740
Growth Portfolio:
Annuity contracts in accumulation .................... 80,401,549
High Income Portfolio:
Annuity contracts in accumulation .................... 35,217,837
Annuity contracts in payment period .................. 68,542
Overseas Portfolio:
Annuity contracts in accumulation .................... 13,004,643
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Annuity contracts in accumulation .................... 11,743,075
Contrafund Portfolio:
Annuity contracts in accumulation .................... 107,827,442
Index 500 Portfolio:
Annuity contracts in accumulation .................... 76,986,772
Investment Grade Bond Portfolio:
Annuity contracts in accumulation .................... 6,578,182
Insurance Management Series:
American Leaders Fund II:
Annuity contracts in accumulation .................... 116,800,911
Annuity contracts in payment period .................. 48,751
Equity Income Fund II:
Annuity contracts in accumulation .................... 19,938,571
Growth Strategies Fund II:
Annuity contracts in accumulation .................... 22,709,106
High Income Bond Fund II:
Annuity contracts in accumulation .................... 53,212,853
International Equity Fund II:
Annuity contracts in accumulation .................... 13,946,028
Prime Money Fund II:
Annuity contracts in accumulation .................... 7,530,487
</TABLE>
S-4
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1997 (continued):
<TABLE>
<S> <C>
U.S. Government Securities Fund II:
Annuity contracts in accumulation ........... $ 13,196,784
Utility Fund II:
Annuity contracts in accumulation ........... 26,302,858
Janus Aspen Series:
Aggressive Growth Portfolio:
Annuity contracts in accumulation ........... 38,383,925
Balanced Portfolio:
Annuity contracts in accumulation ........... 31,145,778
Flexible Income Portfolio:
Annuity contracts in accumulation ........... 10,534,588
Growth Portfolio:
Annuity contracts in accumulation ........... 40,072,928
Annuity contracts in payment period ......... 645,899
Worldwide Growth Portfolio:
Annuity contracts in accumulation ........... 160,658,096
Annuity contracts in payment period ......... 1,995,445
Lexington Emerging Markets Fund:
Annuity contracts in accumulation ........... 2,833,416
Lexington Natural Resources Trust Fund:
Annuity contracts in accumulation ........... 6,930,364
MFS Funds:
Total Return Series:
Annuity contracts in accumulation ........... 18,973,878
Worldwide Government Series:
Annuity contracts in accumulation ........... 1,324,295
Oppenheimer Funds:
Capital Appreciation Fund:
Annuity contracts in accumulation ........... 3,688,200
Global Securities Fund:
Annuity contracts in accumulation ........... 2,680,937
Growth & Income Fund:
Annuity contracts in accumulation ........... 12,688,907
Strategic Bond Fund:
Annuity contracts in accumulation ........... 3,092,701
Portfolio Partners, Inc:
PPI MFS Emerging Equities Portfolio:
Annuity contracts in accumulation ........... 94,796,247
Annuity contracts in payment period ......... 496,447
PPI MFS Research Growth Portfolio:
Annuity contracts in accumulation ........... 65,867,130
PPI MFS Value Equity Portfolio:
Annuity contracts in accumulation ........... 15,049,606
Annuity contracts in payment period ......... 378,075
PPI Scudder International Growth Portfolio:
Annuity contracts in accumulation ........... 12,650,163
PPI T. Rowe Price Growth Equity Portfolio:
Annuity contracts in accumulation ........... 90,170,258
--------------
$2,922,442,857
==============
</TABLE>
See Notes to Financial Statements
S-5
<PAGE>
Variable Annuity Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
----- ----
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ............................................................. $ 278,833,116 $ 120,367,178
Expenses: (Notes 2 and 5)
Valuation period deductions ........................................... (29,243,851) (17,483,870)
-------------- --------------
Net investment income .................................................. 249,589,265 102,883,308
-------------- --------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ................................................... 1,004,789,371 365,025,974
Cost of investments sold .............................................. 933,728,508 347,598,566
-------------- --------------
Net realized gain .................................................... 71,060,863 17,427,408
-------------- --------------
Net unrealized gain on investments: (Note 5)
Beginning of Year ..................................................... 122,191,053 28,746,944
End of Year ........................................................... 255,524,506 122,191,053
-------------- --------------
Net change in unrealized gain ........................................ 133,333,453 93,444,109
-------------- --------------
Net realized and unrealized gain on investments ........................ 204,394,316 110,871,517
-------------- --------------
Net increase in net assets resulting from operations ................... 453,983,581 213,754,825
-------------- --------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments ............................ 571,517,770 538,586,667
Sales and administrative charges deducted by the Company ............... (16,265) (17,370)
-------------- --------------
Net variable annuity contract purchase payments ...................... 571,501,505 538,569,297
Transfers from the Company for mortality guarantee adjustments ......... 371,835 690,779
Transfers from the Company's fixed account options ..................... 144,526,667 50,549,121
Redemptions by contract holders ........................................ (82,942,177) (73,738,526)
Annuity Payments ....................................................... (16,137,431) (12,108,943)
Other .................................................................. 2,327,153 159,467
-------------- --------------
Net increase in net assets from unit transactions (Note 5) ........... 619,647,552 504,121,195
-------------- --------------
Change in net assets ................................................... 1,073,631,133 717,876,020
NET ASSETS:
Beginning of Year ...................................................... 1,848,811,724 1,130,935,704
-------------- --------------
End of Year ............................................................ $2,922,442,857 $1,848,811,724
============== ==============
</TABLE>
See Notes to Financial Statements
S-6
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997
1. Summary of Significant Accounting Policies
Variable Annuity Account B (the "Account") is a separate account established
by Aetna Life Insurance and Annuity Company (the "Company") registered under
the Investment Company Act of 1940 as a unit investment trust. The Account is
sold exclusively for use with variable annuity contracts that may be entitled
to tax-deferred treatment under specific sections of the Internal Revenue
Code of 1986, as amended.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported therein. Although actual results could differ
from these estimates, any such differences are expected to be immaterial to
the net assets of the Account.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset value
per share as determined by each Fund on December 31, 1997:
<TABLE>
<S> <C>
Aetna Variable Fund Insurance Management Series:
Aetna Income Shares [bullet] American Leaders Fund II [bullet]
Aetna Variable Encore Fund [bullet] Equity Income Fund II
Aetna Investment Advisers Fund, Inc. [bullet] Growth Strategies Fund II
Aetna GET Fund, Series B [bullet] High Income Bond Fund II
Aetna GET Fund, Series C [bullet] International Equity Fund II
Aetna Ascent Variable Portfolio [bullet] Prime Money Fund II
Aetna Crossroads Variable Portfolio [bullet] U.S. Government Securities Fund II
Aetna Legacy Variable Portfolio [bullet] Utility Fund II
Aetna Variable Portfolio, Inc.: Janus Aspen Series:
[bullet] Capital Appreciation Portfolio [bullet] Aggressive Growth Portfolio
[bullet] Growth Portfolio [bullet] Balanced Portfolio
[bullet] Index Plus Portfolio [bullet] Flexible Income Portfolio
[bullet] Small Company Portfolio [bullet] Growth Portfolio
Alger American Funds: [bullet] Worldwide Growth Portfolio
[bullet] Balanced Portfolio Lexington Emerging Markets Fund
[bullet] Income and Growth Portfolio Lexington Natural Resources Trust Fund
[bullet] Leveraged AllCap Portfolio MFS Funds:
American Century Investments: [bullet] Total Return Series
[bullet] Balanced Fund [bullet] Worldwide Government Series
[bullet] International Fund Oppenheimer Funds:
Calvert Social Balanced Portfolio [bullet] Capital Appreciation Fund
Fidelity Investments Variable Insurance Products Fund: [bullet] Global Securities Fund
[bullet] Equity-Income Portfolio [bullet] Growth & Income Fund
[bullet] Growth Portfolio [bullet] Strategic Bond Fund
[bullet] High Income Portfolio Portfolio Partners, Inc.:
[bullet] Overseas Portfolio [bullet] PPI MFS Emerging Equities Portfolio
Fidelity Investments Variable Insurance Products Fund II: [bullet] PPI MFS Research Growth Portfolio
[bullet] Asset Manager Portfolio [bullet] PPI MFS Value Equity Portfolio
[bullet] Contrafund Portfolio [bullet] PPI Scudder International Growth Portfolio
[bullet] Index 500 Portfolio [bullet] PPI T. Rowe Price Growth Equity Portfolio
[bullet] Investment Grade Bond Portfolio
</TABLE>
b. Other
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by specific identification.
S-7
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of the Company which is taxed as a life insurance company under
the Internal Revenue Code of 1986, as amended.
d. Annuity Reserves
Annuity reserves held in the Separate Accounts are computed for currently
payable contracts according to the Progressive Annuity, a49, 1971 Individual
Annuity Mortality, 1971 Group Annuity Mortality, 83a, and 1983 Group Annuity
Mortality tables using various assumed interest rates not to exceed seven
percent. Mortality experience is monitored by the Company. Charges to annuity
reserves for mortality experience are reimbursed to the Company if the
reserves required are less than originally estimated. If additional reserves
are required, the Company reimburses the Account.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made in
accordance with the terms of the contracts and are paid to the Company.
3. Dividend Income
On an annual basis, the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions to the
Account are automatically reinvested in shares of the Funds. The Account's
proportionate share of each Fund's undistributed net investment income
(distributions in excess of net investment income) and accumulated net
realized gain (loss) on investments is included in net unrealized gain (loss)
in the Statements of Operations and Changes in Net Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the years ended December 31, 1997 and 1996
aggregated $1,874,026,188 and $1,004,789,371; $972,030,476 and $365,025,974,
respectively.
S-8
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund: $206,171,606 ($9,508,053) $64,103,032 $51,274,099 $12,828,933
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna Income Shares: 4,333,850 (737,718) 12,717,950 11,951,670 766,280
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 4,149,350 (1,373,114) 187,177,845 187,281,193 (103,348)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 20,983,218 (1,660,805) 12,262,658 9,696,803 2,565,855
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 3,422,687 (286,592) 1,109,194 713,521 395,673
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 169,021 (119,214) 963,591 833,090 130,501
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 1,293,085 (171,542) 2,422,808 2,093,544 329,264
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 1,366,067 (170,121) 1,119,794 921,119 198,675
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 1,122,530 (176,596) 1,280,095 1,125,823 154,272
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna Variable Portfolio, Inc.:
Capital Appreciation Portfolio: 621,617 (11,486) 125,792 110,176 15,616
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 848,691 (9,678) 592,546 560,620 31,926
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Index Plus Portfolio: 1,110,445 (154,416) 2,229,246 1,790,247 438,999
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Small Company Portfolio: 366,132 (19,387) 261,692 230,152 31,540
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 142,299 (73,798) 1,098,365 1,473,706 (375,341)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Net
Net Unrealized
Gain (Loss) Net Increase (Decrease) Net Assets
- -------------------------------------- Change in In Net Assets -------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$59,979,314 $67,675,837 $7,696,523 $71,233,894
$644,728,031 $892,006,381
89,732,216 130,876,769
- ---------------------------------------------------------------------------------------------------------------
379,633 781,718 402,085 (1,964,060)
66,534,546 69,236,488
3,583,489 3,681,984
- ---------------------------------------------------------------------------------------------------------------
(540,607) 1,429,868 1,970,475 13,513,776
106,781,998 124,939,137
- ---------------------------------------------------------------------------------------------------------------
15,114,435 21,131,758 6,017,323 7,591,834
119,402,212 150,761,384
7,942,484 12,080,737
- ---------------------------------------------------------------------------------------------------------------
4,487,610 6,194,743 1,707,133 (712,316)
16,333,339 20,859,924
- ---------------------------------------------------------------------------------------------------------------
144,834 2,144,550 1,999,716 (532,193)
9,281,276 10,929,107
- ---------------------------------------------------------------------------------------------------------------
276,453 1,034,430 757,977 12,596,284
5,638,668 20,443,736
- ---------------------------------------------------------------------------------------------------------------
151,493 704,161 552,668 13,077,636
5,295,700 20,250,904
0 69,721
- ---------------------------------------------------------------------------------------------------------------
46,576 556,022 509,446 12,197,969
6,186,987 18,710,015
0 1,284,593
- ---------------------------------------------------------------------------------------------------------------
0 (545,082) (545,082) 3,831,929
0 3,912,594
- ---------------------------------------------------------------------------------------------------------------
0 (945,071) (945,071) 3,293,042
0 3,210,344
0 8,566
- ---------------------------------------------------------------------------------------------------------------
(4,046) 1,342,384 1,346,430 23,512,958
1,985,372 28,074,705
0 165,083
- ---------------------------------------------------------------------------------------------------------------
0 (299,676) (299,676) 6,028,520
0 6,059,783
0 47,346
- ---------------------------------------------------------------------------------------------------------------
(461,380) 691,602 1,152,982 1,032,718
3,777,291 5,656,151
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
S-10
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5.
Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation
Period
Dividends Deductions
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Funds (continued):
Growth Portfolio: (1) $506,477 ($685,927)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Income and Growth Portfolio: 401,543 (156,768)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 0 (196,601)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
MidCap Growth Portfolio: (1) 350,028 (308,858)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Small Capitalization Portfolio: (2) 2,260,717 (722,118)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
American Century Investments:
Balanced Fund: 199,265 (58,943)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Capital Appreciation Fund: (3) 725,963 (365,809)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
International Fund: 176,899 (85,324)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 67,562 (7,128)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 7,870,976 (1,400,361)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Growth Portfolio: 2,159,319 (938,752)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
High Income Portfolio: 1,270,071 (337,944)
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------
Overseas Portfolio: 863,493 (164,196)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 761,827 (120,783)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Contrafund Portfolio: 1,931,363 (1,125,088)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Index 500 Portfolio: 1,159,193 (771,581)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 277,920 (79,205)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alger American Funds (continued):
Growth Portfolio: (1) $78,591,434 $64,519,617 $14,071,817
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Income and Growth Portfolio: 2,602,037 3,401,714 (799,677)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 7,570,244 6,461,486 1,108,758
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
MidCap Growth Portfolio: (1) 49,795,194 45,404,313 4,390,881
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: (2) 118,175,863 114,437,088 3,738,775
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
American Century Investments:
Balanced Fund: 704,536 619,119 85,417
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Capital Appreciation Fund: (3) 47,909,593 51,060,683 (3,151,090)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
International Fund: 4,226,767 3,417,937 808,830
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 212,241 199,799 12,442
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 17,887,517 15,251,625 2,635,892
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Growth Portfolio: 10,659,015 9,711,716 947,299
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
High Income Portfolio: 4,857,948 4,277,783 580,165
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------
Overseas Portfolio: 5,725,552 5,116,905 608,647
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 1,009,159 904,890 104,269
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 13,933,668 10,543,199 3,390,469
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 17,678,295 13,392,232 4,286,063
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 1,100,211 1,085,995 14,216
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
</TABLE>
S-11
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2,349,936 $0 ($2,349,936) ($55,087,434)
$43,545,003 $0
- ----------------------------------------------------------------------------------------------------------
(828,912) 2,709,055 3,537,967 4,693,808
6,471,587 14,148,460
- ----------------------------------------------------------------------------------------------------------
220,810 1,540,243 1,319,433 628,691
11,419,728 14,280,009
- ----------------------------------------------------------------------------------------------------------
682,424 0 (682,424) (23,592,354)
19,842,727 0
- ----------------------------------------------------------------------------------------------------------
(495,260) 0 495,260 (64,524,063)
58,751,429 0
- ----------------------------------------------------------------------------------------------------------
145,325 462,379 317,054 1,109,081
2,991,356 4,643,230
- ----------------------------------------------------------------------------------------------------------
(1,588,390) 0 1,588,390 (43,166,616)
44,369,162 0
- ----------------------------------------------------------------------------------------------------------
375,835 361,821 (14,014) 259,970
4,706,594 5,852,955
- ----------------------------------------------------------------------------------------------------------
(881) 59,286 60,167 241,657
596,637 971,337
- ----------------------------------------------------------------------------------------------------------
5,773,475 19,807,673 14,034,198 43,088,538
72,480,497 138,709,740
- ----------------------------------------------------------------------------------------------------------
3,258,300 14,584,513 11,326,213 8,978,986
57,928,484 80,401,549
- ----------------------------------------------------------------------------------------------------------
814,429 2,722,687 1,908,258 17,156,365
14,709,464 35,217,837
0 68,542
- ----------------------------------------------------------------------------------------------------------
743,689 460,930 (282,759) 2,276,187
9,703,271 13,004,643
- ----------------------------------------------------------------------------------------------------------
484,182 1,137,702 653,520 4,412,778
5,931,464 11,743,075
- ----------------------------------------------------------------------------------------------------------
6,210,754 18,201,832 11,991,078 35,101,002
56,538,618 107,827,442
- ----------------------------------------------------------------------------------------------------------
2,241,040 10,882,841 8,641,801 36,290,926
27,380,370 76,986,772
- ----------------------------------------------------------------------------------------------------------
175,829 387,160 211,331 1,392,243
4,761,677 6,578,182
- ----------------------------------------------------------------------------------------------------------
</TABLE>
S-12
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5.
Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Insurance Management Series:
American Leaders Fund II: $2,033,587 ($1,272,645) $2,239,581 $1,354,167 $885,414
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund II: 52,763 (108,244) 188,614 167,057 21,557
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 63,162 (214,573) 650,403 461,919 188,484
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 2,232,254 (576,880) 5,856,816 5,388,542 468,274
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
International Equity Fund II: 8,680 (138,835) 787,960 678,156 109,804
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II: 365,689 (107,783) 7,931,948 7,931,971 (23)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 366,225 (147,271) 3,825,499 3,747,648 77,851
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Utility Fund II: 838,523 (291,277) 1,512,321 1,157,193 355,128
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (419,040) 19,586,639 19,136,007 450,632
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 786,909 (294,871) 2,053,281 1,687,149 366,132
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 528,359 (93,943) 1,111,581 1,079,357 32,224
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 967,832 (429,682) 2,254,366 1,752,378 501,988
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (4) 62,602 (36,643) 13,023,397 12,927,175 96,222
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 2,077,847 (1,645,928) 21,615,276 15,329,845 6,285,431
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 2,717 (53,043) 4,235,697 4,177,632 58,065
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 209,099 (85,086) 3,246,699 2,653,024 593,675
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-13
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8,810,467 $30,111,589 $21,301,122 $32,775,129
$61,127,055 $116,800,911
0 48,751
- --------------------------------------------------------------------------------------------------------
0 911,406 911,406 19,061,089
0 19,938,571
- --------------------------------------------------------------------------------------------------------
733,393 3,558,451 2,825,058 12,664,797
7,182,178 22,709,106
- --------------------------------------------------------------------------------------------------------
1,022,582 3,763,082 2,740,500 21,197,568
27,151,137 53,212,853
- --------------------------------------------------------------------------------------------------------
307,602 938,501 630,899 7,399,890
5,935,590 13,946,028
- --------------------------------------------------------------------------------------------------------
0 0 0 (471,714)
7,744,318 7,530,487
- --------------------------------------------------------------------------------------------------------
73,398 513,199 439,801 4,803,969
7,656,209 13,196,784
- --------------------------------------------------------------------------------------------------------
1,730,892 5,801,015 4,070,123 4,555,867
16,774,494 26,302,858
- --------------------------------------------------------------------------------------------------------
534,823 4,594,517 4,059,694 2,750,579
31,542,060 38,383,925
- --------------------------------------------------------------------------------------------------------
373,883 3,462,858 3,088,975 15,424,389
11,774,244 31,145,778
- --------------------------------------------------------------------------------------------------------
73,395 367,565 294,170 4,626,561
5,147,217 10,534,588
- --------------------------------------------------------------------------------------------------------
1,093,423 5,764,208 4,670,785 14,123,750
20,884,154 40,072,928
0 645,899
- --------------------------------------------------------------------------------------------------------
(27,376) 0 27,376 (2,070,168)
1,920,611 0
- --------------------------------------------------------------------------------------------------------
5,151,123 18,210,266 13,059,143 76,404,357
66,472,691 160,658,096
0 1,995,445
- --------------------------------------------------------------------------------------------------------
(66,591) (709,548) (642,957) 952,674
2,515,960 2,833,416
- --------------------------------------------------------------------------------------------------------
538,139 177,872 (360,267) 1,821,159
4,751,784 6,930,364
- --------------------------------------------------------------------------------------------------------
</TABLE>
S-14
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MFS Funds:
Emerging Growth Series: (2) $0 ($232,144) $37,594,997 $34,076,137 $3,518,860
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Research Series: (3) 0 (273,185) 37,686,630 34,109,865 3,576,765
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Total Return Series: 0 (154,993) 689,861 564,440 125,421
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Value Series: (5) 0 (19,996) 4,332,717 3,942,044 390,673
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Worldwide Government Series: 15,502 (12,983) 124,845 123,607 1,238
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Advisers Management Trust:
Growth Portfolio: (5) 741,183 (92,357) 17,383,777 16,347,694 1,036,083
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Capital Appreciation Fund: 0 (13,374) 8,964,190 9,092,515 (128,325)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Global Securities Fund: 0 (12,451) 850,938 802,777 48,161
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Growth & Income Fund: 37,178 (35,759) 188,084 164,087 23,997
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Strategic Bond Fund: 84,234 (10,842) 122,739 121,006 1,733
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio: 0 (120,211) 43,880,815 44,111,392 (230,577)
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 0 (82,490) 37,923,531 37,983,794 (60,263)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 0 (16,913) 4,632,658 4,633,034 (376)
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 0 (12,760) 259,410 255,379 4,031
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Portfolio: 0 (115,952) 33,484,569 33,491,822 (7,253)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund:
International Portfolio: (6) 275,557 (123,791) 16,445,650 14,417,831 2,027,819
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($85,796) $0 $85,796 ($12,370,520)
$8,998,008 $0
- -------------------------------------------------------------------------------------------------------
204,764 0 (204,764) (9,875,328)
6,776,512 0
- -------------------------------------------------------------------------------------------------------
72,010 1,975,149 1,903,139 12,883,941
4,216,370 18,973,878
- -------------------------------------------------------------------------------------------------------
935 0 (935) (578,583)
208,841 0
- -------------------------------------------------------------------------------------------------------
9,304 (5,937) (15,241) 927,866
407,913 1,324,295
- -------------------------------------------------------------------------------------------------------
(6,666) 0 6,666 (9,934,149)
8,242,574 0
- -------------------------------------------------------------------------------------------------------
0 133,786 133,786 3,696,113
0 3,688,200
- -------------------------------------------------------------------------------------------------------
0 (846) (846) 2,646,073
0 2,680,937
- -------------------------------------------------------------------------------------------------------
0 465,927 465,927 12,197,564
0 12,688,907
- -------------------------------------------------------------------------------------------------------
0 (21,173) (21,173) 3,038,749
0 3,092,701
- -------------------------------------------------------------------------------------------------------
0 (753,832) (753,832) 96,397,314
0 94,796,247
0 496,447
- -------------------------------------------------------------------------------------------------------
0 (1,162,926) (1,162,926) 67,172,809
0 65,867,130
- -------------------------------------------------------------------------------------------------------
0 220,662 220,662 15,224,308
0 15,049,606
0 378,075
- -------------------------------------------------------------------------------------------------------
0 195,427 195,427 12,463,465
0 12,650,163
- -------------------------------------------------------------------------------------------------------
0 1,797,922 1,797,922 88,495,541
0 90,170,258
- -------------------------------------------------------------------------------------------------------
1,510,449 0 (1,510,449) (12,719,263)
12,050,127 0
-------------------------------------------------------------------------------------------------------
</TABLE>
S-16
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Variable Annuity Account B $278,833,116 ($29,243,851) $1,004,789,371 $933,728,508 $71,060,863
=======================================================================================================================
</TABLE>
(1) - Effective November 28, 1997, this funds assets were transferred to the PPI
T. Rowe Price Growth Equity Portfolio.
(2) - Effective November 28, 1997, this funds assets were transferred to the PPI
MFS Emerging Equities Portfolio.
(3) - Effective November 28, 1997, this funds assets were transferred to PPI MFS
Research Growth Fund.
(4) - Effective November 28, 1997, this funds assets were transferred to the
Aetna Variable Encore Fund.
(5) - Effective November 28, 1997, this funds assets were transferred to the PPI
MFS Value Equity Portfolio.
(6) - Effective November 28, 1997, this funds assets were transferred to the PPI
Scudder International Growth Portfolio.
S-17
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$122,191,053 $255,524,506 $133,333,453 $619,647,552 $1,848,811,724 $2,922,442,857
=======================================================================================================================
</TABLE>
S-18
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation
Period
Dividends Deductions
- ------------------------------------------------------------------------------------
<S> <C> <C>
Aetna Variable Fund: $77,000,986 ($7,148,689)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------
Aetna Income Shares: 4,527,825 (813,024)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 5,358,925 (1,043,955)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 11,247,847 (1,372,478)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 1,055,590 (226,340)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 46,499 (14,753)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 235,037 (27,609)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 257,055 (29,943)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 363,749 (38,623)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 10,290 (2,403)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 775,351 (33,904)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Growth Portfolio: 758,872 (394,360)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Income and Growth Portfolio: 2,009,995 (55,929)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 61,186 (116,503)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
MidCap Portfolio: 190,158 (166,087)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Small Capitalization Portfolio: 184,900 (588,663)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Portfolio: 44,676 (3,984)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Variable Fund: $96,146,932 $97,318,697 ($1,171,765)
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna Income Shares: 19,585,006 18,826,116 758,890
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 78,888,315 76,637,102 2,251,213
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 16,403,009 13,386,571 3,016,438
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 915,330 681,610 233,720
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 361,353 354,510 6,843
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 317,740 277,917 39,823
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 362,140 312,870 49,270
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 406,948 384,407 22,541
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 139,030 133,438 5,592
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 244,368 332,405 (88,037)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Growth Portfolio: 6,990,444 6,528,212 462,232
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Income and Growth Portfolio: 390,051 732,537 (342,486)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 4,991,495 4,605,949 385,546
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
MidCap Portfolio: 3,198,308 3,039,709 158,599
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: 31,506,275 29,929,826 1,576,449
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Portfolio: 141,022 137,780 3,242
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($8,051,873) $59,979,314 $68,031,187 $4,966,306
$530,231,821 $644,728,031
62,550,401 89,732,216
- ---------------------------------------------------------------------------------------------------------------
3,224,044 379,633 (2,844,411) (9,600,618)
74,693,652 66,534,546
3,395,721 3,583,489
- ---------------------------------------------------------------------------------------------------------------
2,487,618 (540,607) (3,028,225) 22,111,260
81,132,780 106,781,998
- ---------------------------------------------------------------------------------------------------------------
12,419,220 15,114,435 2,695,215 602,270
104,415,595 119,402,212
6,739,809 7,942,484
- ---------------------------------------------------------------------------------------------------------------
2,566,580 4,487,610 1,921,030 (650,835)
14,000,174 16,333,339
- ---------------------------------------------------------------------------------------------------------------
0 144,834 144,834 9,097,853
0 9,281,276
- ---------------------------------------------------------------------------------------------------------------
5,570 276,453 270,883 4,773,151
347,383 5,638,668
- ---------------------------------------------------------------------------------------------------------------
8,209 151,493 143,284 4,409,627
466,407 5,295,700
- ---------------------------------------------------------------------------------------------------------------
1,609 46,576 44,967 5,470,774
323,579 6,186,987
- ---------------------------------------------------------------------------------------------------------------
0 (4,046) (4,046) 1,975,940
(1) 1,985,372
- ---------------------------------------------------------------------------------------------------------------
1,644 (461,380) (463,024) 2,897,855
689,050 3,777,291
- ---------------------------------------------------------------------------------------------------------------
(63,817) 2,349,936 2,413,753 29,514,421
10,790,085 43,545,003
- ---------------------------------------------------------------------------------------------------------------
(6,769) (828,912) (822,143) 4,660,630
1,021,520 6,471,587
- ---------------------------------------------------------------------------------------------------------------
32,561 220,810 188,249 8,946,454
1,954,796 11,419,728
- ---------------------------------------------------------------------------------------------------------------
7,193 682,424 675,231 15,727,261
3,257,565 19,842,727
- ---------------------------------------------------------------------------------------------------------------
46,283 (495,260) (541,543) 32,655,969
25,464,317 58,751,429
- ---------------------------------------------------------------------------------------------------------------
(13,512) (881) 12,631 193,226
346,846 596,637
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
S-20
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation
Period
Dividends Deductions
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: $940,850 ($608,164)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Growth Portfolio: 1,412,110 (540,670)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
High Income Portfolio: 178,909 (112,363)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Overseas Portfolio: 75,181 (91,010)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 119,231 (54,259)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Contrafund Portfolio: 146,164 (428,708)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Index 500 Portfolio: 143,406 (203,362)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 45,797 (42,799)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 857,970 (631,122)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Growth Strategies Fund II: 405 (44,481)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
High Income Bond Fund II: 1,647,290 (260,987)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
International Equity Fund II: 10,567 (51,003)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Prime Money Fund II: 289,134 (87,958)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 367,608 (86,361)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Utility Fund II: 547,259 (186,219)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 243,931 (266,292)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Balanced Portfolio: 181,099 (68,277)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: $4,030,269 $3,343,817 $686,452
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Growth Portfolio: 2,600,136 2,280,711 319,425
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
High Income Portfolio: 1,318,057 1,318,142 (85)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Overseas Portfolio: 880,668 813,434 67,234
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 540,553 465,407 75,146
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 5,044,449 4,308,117 736,332
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 6,086,685 5,356,843 729,842
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 882,619 925,636 (43,017)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 6,368,961 4,596,688 1,772,273
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 119,084 103,727 15,357
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 5,863,283 5,644,702 218,581
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
International Equity Fund II: 250,169 236,027 14,142
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Prime Money Fund II: 12,400,851 12,398,826 2,025
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 5,011,311 5,085,345 (74,034)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Utility Fund II: 1,034,753 867,262 167,491
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 6,134,481 4,875,603 1,258,878
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Balanced Portfolio: 2,812,822 2,536,688 276,134
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
</TABLE>
S-21
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$966,600 $5,773,475 $4,806,875 $51,230,275
$15,424,209 $72,480,497
- ----------------------------------------------------------------------------------------------------
(34,190) 3,258,300 3,292,490 38,219,867
15,225,262 57,928,484
- ----------------------------------------------------------------------------------------------------
15,029 814,429 799,400 12,636,277
1,207,326 14,709,464
- ----------------------------------------------------------------------------------------------------
51,434 743,689 692,255 6,948,020
2,011,591 9,703,271
- ----------------------------------------------------------------------------------------------------
98,360 484,182 385,822 4,043,035
1,362,489 5,931,464
- ----------------------------------------------------------------------------------------------------
122,841 6,210,754 6,087,913 38,043,675
11,953,242 56,538,618
- ----------------------------------------------------------------------------------------------------
70,864 2,241,040 2,170,176 22,367,490
2,172,818 27,380,370
- ----------------------------------------------------------------------------------------------------
11,466 175,829 164,363 3,931,632
705,701 4,761,677
- ----------------------------------------------------------------------------------------------------
2,916,888 8,810,467 5,893,579 26,548,788
26,685,567 61,127,055
- ----------------------------------------------------------------------------------------------------
3,614 733,393 729,779 6,301,239
179,879 7,182,178
- ----------------------------------------------------------------------------------------------------
229,008 1,022,582 793,574 12,876,189
11,876,490 27,151,137
- ----------------------------------------------------------------------------------------------------
43,172 307,602 264,430 4,073,916
1,623,538 5,935,590
- ----------------------------------------------------------------------------------------------------
(1,182) 0 1,182 1,765,443
5,774,492 7,744,318
- ----------------------------------------------------------------------------------------------------
75,600 73,398 (2,202) 2,942,870
4,508,328 7,656,209
- ----------------------------------------------------------------------------------------------------
799,746 1,730,892 931,146 6,514,735
8,800,082 16,774,494
- ----------------------------------------------------------------------------------------------------
1,164,909 534,823 (630,086) 19,085,222
11,850,407 31,542,060
- ----------------------------------------------------------------------------------------------------
26,040 373,883 347,843 10,311,561
725,884 11,774,244
- ----------------------------------------------------------------------------------------------------
</TABLE>
S-22
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation
Period
Dividends Deductions
<S> <C> <C>
Flexible Income Portfolio: $ 304,512 ($43,754)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Growth Portfolio: 324,844 (141,840)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Short-Term Bond Portfolio: 79,326 (23,159)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Worldwide Growth Portfolio: 642,050 (384,732)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 0 (27,131)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 15,653 (38,378)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
MFS Funds:
Emerging Growth Series: 73,635 (33,243)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Research Series: 94,710 (22,219)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Total Return Series: 87,973 (13,218)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Value Series: 4,089 (372)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
World Government Series: 0 (1,705)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Neuberger & Berman Advisers Management Trust:
Growth Portfolio: 770,877 (98,063)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Scudder Variable Life Investment Fund:
International Portfolio: 276,128 (136,107)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
TCI Portfolios, Inc.:
Balanced Fund: 67,198 (24,832)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Growth Fund: 6,228,055 (611,968)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
International Fund: 62,276 (41,867)
Annuity contracts in accumulation
Total Variable Annuity Account B $120,367,178 ($17,483,870)
==================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Flexible Income Portfolio: $1,127,628 $1,090,808 $36,820
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Growth Portfolio: 1,249,735 1,041,911 207,824
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: 2,910,009 2,872,811 37,198
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 4,899,145 3,899,490 999,655
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 1,463,410 1,431,864 31,546
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 2,192,808 1,809,743 383,065
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
MFS Funds:
Emerging Growth Series: 190,630 186,959 3,671
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Research Series: 253,406 258,774 (5,368)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Total Return Series: 140,628 132,113 8,515
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Value Series: 496 486 10
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
World Government Series: 19,663 19,513 150
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Neuberger & Berman Advisers Management Trust:
Growth Portfolio: 3,864,131 3,857,033 7,098
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund:
International Portfolio: 4,557,311 4,016,790 540,521
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
TCI Portfolios, Inc.:
Balanced Fund: 247,893 231,495 16,398
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Growth Fund: 19,145,021 17,607,144 1,537,877
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
International Fund: 397,143 365,001 32,142
Annuity contracts in accumulation
Total Variable Annuity Account B $365,025,974 $347,598,566 $17,427,408
===============================================================================================
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$29,809 $73,395 $43,586 $3,237,811
$1,568,242 $5,147,217
----------------------------------------------------------------------------------------------------------------
84,852 1,093,423 1,008,571 16,916,813
2,567,942 20,884,154
----------------------------------------------------------------------------------------------------------------
1,330 (27,376) (28,706) 1,106,654
749,298 1,920,611
----------------------------------------------------------------------------------------------------------------
253,639 5,151,123 4,897,484 54,723,321
5,594,913 66,472,691
----------------------------------------------------------------------------------------------------------------
(4,024) (66,591) (62,567) 2,232,953
341,159 2,515,960
----------------------------------------------------------------------------------------------------------------
188,717 538,139 349,422 2,162,813
1,879,209 4,751,784
----------------------------------------------------------------------------------------------------------------
0 (85,796) (85,796) 9,039,741
0 8,998,008
----------------------------------------------------------------------------------------------------------------
0 204,764 204,764 6,504,625
0 6,776,512
----------------------------------------------------------------------------------------------------------------
0 72,010 72,010 4,061,090
0 4,216,370
----------------------------------------------------------------------------------------------------------------
0 935 935 204,179
0 208,841
----------------------------------------------------------------------------------------------------------------
0 9,304 9,304 400,164
0 407,913
----------------------------------------------------------------------------------------------------------------
77,158 (6,666) (83,824) (710,088)
8,356,574 8,242,574
----------------------------------------------------------------------------------------------------------------
652,411 1,510,449 858,038 (54,117)
10,565,664 12,050,127
----------------------------------------------------------------------------------------------------------------
16,540 145,325 128,785 2,313,929
489,878 2,991,356
----------------------------------------------------------------------------------------------------------------
8,206,103 (1,588,390) (9,794,493) (7,301,710)
54,311,401 44,369,162
----------------------------------------------------------------------------------------------------------------
15,650 375,835 360,185 3,691,239
602,619 4,706,594
----------------------------------------------------------------------------------------------------------------
$28,746,944 $122,191,053 $93,444,109 $504,121,195 $1,130,935,704 $1,848,811,724
=========== ============ =========== ============ ============== ==============
</TABLE>
S-24
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and
Contract Owners of Variable Annuity Account B:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Annuity Account B (the "Account") as
of December 31, 1997, and the related statements of operations and changes in
net assets for each of the years in the two-year period then ended and condensed
financial information for the year ended December 31, 1997. 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 and condensed financial information. Our procedures
included confirmation of securities owned as of December 31, 1997, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company Variable Annuity Account B
as of December 31, 1997, the results of its operations and 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, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 27, 1998
S-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements
------------------------------------------
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Balance Sheets as of December 31, 1997
and 1996 F-4
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 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 Subsidiary as of December 31, 1997 and 1996,
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, 1997. 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 statements 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 Subsidiary at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1998
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
--------------------------------
1997 1996 1995
------- ------- -------
Revenue:
Premiums $267.1 $133.6 $212.7
Charges assessed against policyholders 475.0 396.5 318.9
Net investment income 1,080.5 1,045.6 1,004.3
Net realized capital gains 36.0 19.7 41.3
Other income 39.7 45.4 42.0
------- ------- -------
Total revenue 1,898.3 1,640.8 1,619.2
------- ------- -------
Benefits and expenses:
Current and future benefits 1,127.8 968.6 997.2
Operating expenses 347.4 342.2 310.8
Amortization of deferred policy
acquisition costs 128.4 69.8 48.0
Severance and facilities charges -- 61.3 --
------- ------- -------
Total benefits and expenses 1,603.6 1,441.9 1,356.0
------- ------- -------
Income before income taxes 294.7 198.9 263.2
Income taxes 89.4 57.8 87.3
------- ------- -------
Net income $205.3 $141.1 $175.9
======= ======= =======
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
Assets 1997 1996
- ------ ---- ----
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(amortized cost: $12,912.2 and $12,539.1) $13,463.8 $12,905.5
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $131.7 and $107.6) 147.6 119.0
Investment in affiliated mutual funds (cost: $78.1 and $77.3) 83.0 81.1
Common stock (cost: $0.2 and $0.0) .6 .3
Short-term investments 95.6 34.8
Mortgage loans 12.8 13.0
Policy loans 469.6 399.3
--------- --------
Total investments 14,273.0 13,553.0
Cash and cash equivalents 565.4 459.1
Accrued investment income 163.0 159.0
Premiums due and other receivables 63.7 26.6
Deferred policy acquisition costs 1,654.6 1,515.3
Reinsurance loan to affiliate 397.2 628.3
Other assets 46.8 33.7
Separate accounts assets 22,982.7 15,318.3
--------- --------
Total assets $40,146.4 $31,693.3
========= ========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $3,763.7 $3,617.0
Unpaid claims and claim expenses 38.0 28.9
Policyholders' funds left with the Company 11,143.5 10,663.7
--------- --------
Total insurance reserve liabilities 14,945.2 14,309.6
Other liabilities 312.8 354.7
Income taxes:
Current 12.4 20.7
Deferred 72.0 80.5
Separate accounts liabilities 22,970.0 15,318.3
--------- --------
Total liabilities 38,312.4 30,083.8
--------- --------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Accumulated other comprehensive income 92.9 60.5
Retained earnings 1,320.3 1,128.2
--------- --------
Total shareholder's equity 1,834.0 1,609.5
--------- --------
Total liabilities and shareholder's equity $40,146.4 $31,693.3
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,609.5 $1,583.0 $1,088.5
Comprehensive income
Net income 205.3 141.1 175.9
Other comprehensive income, net of tax
Unrealized gains (losses) on securities ($50.1
million, $(110.8) million and $494.6 million, 32.4 (72.0) 321.5
pretax, respectively)
-------- -------- --------
Total comprehensive income 237.7 69.1 497.4
-------- -------- --------
Capital contributions -- 10.4 0.0
Other changes 4.1 (49.5) 0.0
Common stock dividends (17.3) (3.5) (2.9)
-------- -------- --------
Shareholder's equity, end of year $1,834.0 $1,609.5 $1,583.0
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $205.3 $141.1 $175.9
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
(Increase) decrease in accrued investment income (4.0) 16.5 (33.3)
(Increase) decrease in premiums due and other receivables (33.3) 1.6 25.4
Increase in policy loans (70.3) (60.7) (89.9)
Increase in deferred policy acquisition costs (139.3) (174.0) (177.0)
Decrease in reinsurance loan to affiliate 231.1 27.2 34.8
Net increase in universal life account balances 286.4 243.2 393.4
(Decrease) increase in other insurance reserve liabilities (249.6) (211.5) 79.0
Net (decrease) increase in other liabilities and other assets (41.7) 3.1 13.0
Decrease in income taxes (31.4) (26.7) (4.5)
Net accretion of discount on investments (66.4) (68.0) (66.4)
Net realized capital gains (36.0) (19.7) (41.3)
Other, net -- 1.1 --
-------- -------- --------
Net cash provided by (used for) operating activities 50.8 (126.8) 309.1
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,311.3 5,182.2 4,207.2
Equity securities 103.1 190.5 180.8
Mortgage loans 0.2 8.7 10.7
Limited partnership -- -- 26.6
Investment maturities and collections of:
Debt securities available for sale 1,212.7 885.2 583.9
Short-term investments 89.3 35.0 106.1
Cost of investment purchases in:
Debt securities available for sale (6,732.8) (6,534.3) (6,034.0)
Equity securities (113.3) (118.1) (170.9)
Short-term investments (149.9) (54.7) (24.7)
Mortgage loans -- -- (21.3)
Other, net -- (17.6) --
-------- -------- --------
Net cash used for investing activities (279.4) (423.1) (1,135.6)
-------- -------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,621.2 1,579.5 1,884.5
Withdrawals of investment contracts (1,256.3) (1,146.2) (1,109.6)
Capital contribution to Separate Account (25.0) -- --
Return of capital from Separate Account 12.3 -- --
Capital contribution from HOLDCO -- 10.4 --
Dividends paid to shareholder (17.3) (3.5) (2.9)
-------- -------- --------
Net cash provided by financing activities 334.9 440.2 772.0
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 106.3 (109.7) (54.5)
Cash and cash equivalents, beginning of year 459.1 568.8 623.3
-------- -------- --------
Cash and cash equivalents, end of year $565.4 $459.1 $568.8
======== ======== ========
Supplemental cash flow information:
Income taxes paid, net $119.6 $85.5 $92.8
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiary
(collectively, the "Company") are providers of financial services and life
insurance products in the United States. The Company has two business
segments: financial services and individual life insurance.
Financial services products include annuity contracts that offer a variety
of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403,
408 and 457, and non-qualified annuity contracts. These contracts may be
deferred or immediate ("payout annuities"). Financial services also include
investment advisory services and pension plan administrative services.
Individual life insurance products include universal life, variable
universal life, traditional whole life and term insurance.
Basis of Presentation
---------------------
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiary, Aetna Insurance Company of
America. Aetna Life Insurance and Annuity Company is a wholly owned
subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a
wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate
parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have
been made to 1996 and 1995 financial information to conform to the 1997
presentation.
New Accounting Standard
-----------------------
As of December 31, 1997 the Company adopted Financial Accounting Standard
("FAS") No. 130, Reporting Comprehensive Income. This statement establishes
standards for the reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
encompasses all changes in shareholder's equity (except those arising from
transactions with shareholders) and includes net income and net unrealized
capital gains or losses on available-for-sale securities. As this new
standard only requires additional information in a financial statement, it
does not affect the Company's financial position or results of operations.
Future Application of Accounting Standards
------------------------------------------
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in June 1996 and provides
accounting and reporting standards for transfers of financial assets and
extinguishments of liabilities.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Future Application of Accounting Standards (Continued)
FAS No. 125 is effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending are not effective until January 1, 1998. Provisions effective in
1997 did not have a material effect on the Company's financial position or
results of operations. The Company does not expect adoption of this
statement for provisions effective in 1998 to have a material effect on its
financial position or results of operations.
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments, which provides guidance for
determining when an insurance or other enterprise should recognize a
liability for guaranty-fund and other insurance related assessments and
guidance for measuring the liability. This statement is effective for 1999
financial statements with early adoption permitted. The Company does not
expect adoption of this statement to have a material effect on its
financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from reported results
using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased.
Investments
Debt and equity securities are classified as available for sale and carried
at fair value. These securities are written down (as realized capital
losses) for other than temporary declines in value. Unrealized capital
gains and losses related to available for sale investments, other than
amounts allocable to experience rated contractholders, are reflected in
shareholder's equity, net of related taxes.
Fair values for debt and equity securities are based on quoted market
prices or dealer quotations. Where quoted market prices or dealer
quotations are not available, fair values are measured utilizing quoted
market prices for similar securities or by using discounted cash flow
methods. Cost for mortgage-backed securities is adjusted for unamortized
premiums and discounts, which are amortized using the interest method over
the estimated remaining term of the securities, adjusted for anticipated
prepayments.
F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
The company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of a loaned domestic security and 105% of the market value of
a loaned foreign security. The collateral is deposited by the borrower with
a lending agent, and retained and invested by the lending agent according
to the Company's guidelines to generate additional income. The market value
of the loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market value of the loaned
securities fluctuates. At December 31, 1997 and 1996, the Company loaned
securities (which are reflected as invested assets) with a market value of
approximately $385.1 million and $444.7 million, respectively.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds represents an investment in Aetna
managed mutual funds which have been seeded by the Company, and is carried
at fair value.
Mortgage loans and policy loans are carried at unpaid principal balances,
net of impairment reserves. Sales of mortgage loans are recorded on the
closing date.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which
approximates amortized cost.
The Company utilizes futures contracts, swap agreements and warrants for
other than trading purposes in order to manage investment returns and price
risk and to align maturities, interest rates, and funds availability with
its obligations. (Refer to Note 3.)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that qualify as
hedges are deferred and recognized as an adjustment to the hedged asset or
liability. Deferred gains or losses on such futures contracts are amortized
over the life of the acquired asset or liability as a yield adjustment or
through net realized capital gains or losses upon disposal of an asset.
Changes in the fair value of futures contracts that do not qualify as
hedges are recorded in net realized capital gains or losses. Hedge
designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying
the hedge, and that high correlation be maintained throughout the hedge
period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and
excess gains and losses on the hedging instrument are reflected in net
realized capital gains or losses.
Interest rate swap agreements which are designated as interest rate risk
management instruments at inception are accounted for using the accrual
method. Accordingly, the difference between amounts
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
paid and received on such agreements is reported in net investment income.
There is no recognition in the Consolidated Balance Sheets for changes in
the fair value of the agreement.
Warrants represent the right to purchase specific securities and are
accounted for as hedges. Upon exercise, the cost of the warrants are added
to the basis of the securities purchased.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs,
all of which vary with and are primarily related to the production of new
and renewal business, consist principally of commissions, certain expenses
of underwriting and issuing contracts, and certain agency expenses. For
fixed ordinary life contracts, such costs are amortized over expected
premium-paying periods (up to 20 years). For universal life and certain
annuity contracts, such costs are amortized in proportion to estimated
gross profits and adjusted to reflect actual gross profits over the life of
the contracts (up to 20 years). Deferred policy acquisition costs are
written off to the extent that it is determined that future policy premiums
and investment income or gross profits are not adequate to cover related
losses and expenses.
Insurance Reserve Liabilities
Future policy benefits include reserves for universal life, immediate
annuities with life contingent payouts and traditional life insurance
contracts. Reserves for universal life contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon.
Reserves for immediate annuities with life contingent payouts and
traditional life insurance contracts are computed on the basis of assumed
investment yield, mortality, and expenses, including a margin for adverse
deviations. Such assumptions generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 12.00% for all
years presented. 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.
Policyholders' funds left with the Company include reserves for deferred
annuity investment contracts and immediate annuities without life
contingent payouts. Reserves on such contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon (rates
range from 3.50% to 9.50% for all years presented) net of adjustments for
investment experience that the Company is entitled to reflect in future
credited interest. Reserves on contracts subject to experience rating
reflect the rights of contractholders, plan participants and the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges,
actuarial margin and other fees are recorded as revenue in charges assessed
against policyholders. Other amounts received for these contracts are
reflected as deposits and are not recorded as revenue. Life insurance
premiums, other than premiums for universal life and certain annuity
contracts, are recorded as premium revenue when due. Related policy
benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the
contracts. When annuity payments with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity and reflected as an offsetting amount in both premiums and current
and future benefits in the Consolidated Statements of Income.
Separate Accounts
Assets held under variable universal life and variable annuity contracts
are segregated in Separate Accounts and are invested, as designated by the
contractholder or participant under a contract, in shares of mutual funds
which are managed by the Company, or other selected mutual funds not
managed by the Company.
Separate Accounts assets and liabilities are carried at fair value except
for those relating to a guaranteed interest option. Since the Company bears
the investment risk where the contract is held to maturity, the assets of
the Separate Account supporting the guaranteed interest option are carried
at an amortized cost of $658.6 million for 1997 (fair value $668.7 million)
and $515.6 million for 1996 (fair value $523.0 million). Reserves relating
to the guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 4.10% to 8.00% in both 1997 and in
1996.
Separate Accounts assets and liabilities are shown as separate captions in
the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains and losses of the Separate Accounts
are not reflected in the Consolidated Statements of Income (with the
exception of realized capital gains and losses on the sale of assets
supporting the guaranteed interest option). The Consolidated Statements of
Cash Flows do not reflect investment activity of the Separate Accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. The Company is taxed at regular corporate rates after adjusting
income reported for financial statement purposes for certain items.
Deferred income tax expenses/benefits result from changes during the year
in cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $1,219.7 $74.0 $0.1 $1,293.6
States, municipalities and political
subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Financial 2,370.7 84.6 1.3 2,454.0
Food & fiber 195.4 9.3 -- 204.7
Healthcare & consumer products 728.5 27.0 2.6 752.9
Media & broadcast 252.9 14.7 0.1 267.5
Natural resources 143.5 5.5 - 149.0
Transportation & capital goods 528.2 33.2 0.1 561.3
Utilities 521.3 23.5 0.9 543.9
Other corporate securities 96.9 3.2 - 100.1
---------- -------- -------- -----------
Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4
Foreign Securities:
Government 612.5 36.7 23.6 625.6
Utilities 177.5 28.7 -- 206.2
Other 857.9 27.7 42.8 842.8
---------- -------- -------- -----------
Total foreign securities 1,647.9 93.1 66.4 1,674.6
Residential mortgage-backed securities:
Pass-throughs 784.4 71.3 2.0 853.7
Collateralized mortgage obligations 2,280.5 137.4 2.0 2,415.9
---------- -------- -------- -----------
Total residential mortgage-
backed securities 3,064.9 208.7 4.0 3,269.6
Commercial/Multifamily mortgage-
backed securities 1,127.8 34.0 0.4 1,161.4
Other asset-backed securities 1,014.2 17.1 0.4 1,030.9
---------- -------- -------- -----------
Total Debt Securities $12,912.2 $627.9 $76.3 $13,463.8
========== ======== ======== ===========
</TABLE>
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Debt securities available for sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $1,072.4 $20.5 $4.5 $1,088.4
States, municipalities and political
subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other corporate securities 141.5 3.0 -- 144.5
--------- --------- -------- ---------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
--------- -------- --------- ---------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
--------- --------- -------- ---------
Total residential mortgage-
backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-
backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
--------- -------- --------- --------
Total Debt Securities $12,539.1 $432.6 $66.2 $12,905.5
========= ======== ========= ========
</TABLE>
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
At December 31, 1997 and 1996, net unrealized appreciation of $551.6
million and $366.4 million, respectively, on available-for-sale debt
securities included $429.3 million and $288.5 million, respectively,
related to experience rated contracts, which were not reflected in
shareholder's equity but in future policy benefits and policyholders' funds
left with the Company.
The carrying and fair value of debt securities for the year ended December
31, 1997 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 $367.3 $367.6
After one year through five years 2,165.1 2,195.4
After five years through ten years 2,367.3 2,407.0
After ten years 2,805.6 3,031.9
Mortgage-backed securities 4,192.7 4,431.0
Other asset-backed securities 1,014.2 1,030.9
--------- ---------
Total $12,912.2 $13,463.8
========= =========
At December 31, 1997 and 1996, debt securities carried at $8.2 million and
$7.6 million, respectively, were on deposit as required by regulatory
authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 1997.
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1997 1996
--------------------- ------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
-------- -------- -------- --------
(millions)
<S> <C> <C> <C> <C>
Total residential CMOs(1) $2,415.9 $2,280.5 $2,309.0 $2,227.8
======== ======== ======== ========
Percentage of total:
Supporting experience rated products 81.6% 84.2%
Supporting remaining products 18.4% 15.8%
----- -----
100.0% 100.0%
===== =====
</TABLE>
(1) At December 31, 1997 and 1996, approximately 73% and 71%,
respectively, of the Company's residential CMO holdings were
backed by government agencies such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees
of risk from changes in interest rates and, for nonagency-backed CMOs,
defaults. The principal risks inherent in holding CMOs are prepayment and
extension risks related to dramatic decreases and increases in interest
rates resulting in the repayment of principal from the underlying mortgages
either earlier or later than originally anticipated. At December 31, 1997
and 1996, approximately 4% and 3%, respectively, of the Company's CMO
holdings were invested in types of CMOs which are subject to more
prepayment and extension risk than traditional CMOs (such as interest- or
principal-only strips).
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in equity securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(millions)
1997
Equity Securities $210.0 $21.3 $0.1 $231.2
====== ===== ==== ======
1996
Equity Securities $184.9 $16.3 $0.8 $200.4
====== ===== ==== ======
3. Financial Instruments
Estimated Fair Value
--------------------
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1997 and 1996 were as follows:
1997 1996
-------------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- ------ -------- -----
(millions)
Assets:
Mortgage loans $ 12.8 $ 12.4 $ 13.0 $ 13.2
Liabilities:
Investment contract
liabilities:
With a fixed maturity $ 1,030.3 $1,005.4 $1,014.1 $1,028.8
Without a fixed
maturity 10,113.2 9,587.5 9,649.6 9,427.6
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial instrument,
such as estimates of timing and amount of future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot
be substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the instrument. In
evaluating the Company's management of interest rate, price and liquidity
risks, the fair values of all assets and liabilities should be taken into
consideration, not only those presented above.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Estimated Fair Value (Continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar
loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans.
Investment contract liabilities (included in policyholders' funds left with
the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under
such contracts to delay payment of withdrawals which may ultimately result
in paying an amount different than that determined to be payable on demand.
Off-Balance-Sheet and Other Financial Instruments (including Derivative
Instruments)
The Company uses off-balance-sheet and other financial instruments
primarily to manage portfolio risks, including interest rate,
prepayment/call, credit, price, and liquidity risks. In 1997 and 1996,
Treasury futures contracts were used to manage interest rate risk in the
Company's bond portfolio; and, in 1996, stock index futures contracts were
used to manage price risk in the Company's equity portfolio. In 1996 and
1995, interest rate swaps and forward commitments to enter into interest
rate swaps, respectively, were also used to manage interest rate risk in
the Company's bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell
securities at a specified future date and at a specified price or yield.
Futures contracts trade on organized exchanges and, therefore, have minimal
credit risk. Cash settlements are made daily based on changes in the prices
of the underlying assets. There were no futures contracts open as of
December 31, 1997 and 1996.
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to
exchange interest amounts calculated by reference to an agreed notional
principal amount. Generally, no cash is exchanged at the outset of the
contract and no principal payments are made. A single net payment is
usually made by one counterparty at each due date or upon termination of
the contract. The Company would be
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments (Including Derivative
Instruments) (Continued)
exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, however, the Company controls its
exposure to credit risk through credit approvals, credit limits and regular
monitoring procedures. The credit exposure of interest rate swaps is
represented by the fair value (market value) of contracts with a positive
fair value (market value) at the reporting date. There were no interest
rate swap agreements open as of December 31, 1997 and 1996.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1997
and 1996.
Warrants:
Warrants are instruments giving the Company the right, but not the
obligation to buy a security at a given price during a specified period. As
of December 31, 1997 and 1996, the Company had open warrants to purchase
equity securities with a fair value of $0.6 million and $0.3 million,
respectively.
Debt Instruments with Derivative Characteristics:
The Company also had investments in certain debt instruments with
derivative characteristics, including those whose market value is at least
partially determined by, among other things, levels of or changes in
domestic and/or foreign interest rates (short or long term), exchange
rates, prepayment rates, equity markets or credit ratings/spreads. The
amortized cost and fair value of these securities, included in the debt
securities portfolio, as of December 31, 1997 was as follows:
Amortized Fair
Cost Value
--------- ----
(millions)
Residential collateralized mortgage
obligations $2,280.5 $2,415.9
Principal-only strips (included above) 59.0 67.0
Interest-only strips (included above) 12.8 24.3
Other structured securities with derivative
characteristics (1) 107.4 105.2
(1) Represents non-leveraged instruments whose fair values and credit
risk are based on underlying securities, including fixed income
securities and interest rate swap agreements.
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $962.8 $945.3 $891.5
Nonredeemable preferred stock 13.7 5.9 4.2
Investment in affiliated
mutual funds 4.9 14.3 14.9
Mortgage loans 1.3 2.2 1.4
Policy loans 19.9 18.4 13.7
Reinsurance loan to affiliate 37.5 44.1 46.5
Cash equivalents 44.2 29.4 38.9
Other 10.0 2.1 8.4
-------- -------- --------
Gross investment income 1,094.3 1,061.7 1,019.5
Less investment expenses (13.8) (16.1) (15.2)
-------- -------- --------
Net investment income $1,080.5 $1,045.6 $1,004.3
======== ======== ========
Net investment income includes amounts allocable to experience rated
contractholders of $823.1 million, $787.6 million and $744.2 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Interest
credited to contractholders is included in current and future benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively.
The amount of dividends that may be paid to the shareholder in 1998 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$77.6 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus those
amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which differ in certain respects
from generally accepted accounting principles. Statutory net income was
$80.5 million, $57.8 million and $70.0 million for the years ended December
31, 1997, 1996 and 1995, respectively. Statutory capital and surplus was
$778.7 million and $713.6 million as of December 31, 1997 and 1996,
respectively.
As of December 31, 1997 the Company does not utilize any statutory
accounting practices which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains on investments were as follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $22.5 $11.1 $32.8
Equity securities 9.9 8.6 8.3
Other 3.6 -- 0.2
------ -------- ------
Pretax realized capital gains $36.0 $19.7 $41.3
====== ======== ======
After tax realized capital gains $23.2 $13.0 $25.8
====== ======== ======
Net realized capital gains of $96.1 million, $53.1 million and $61.1
million for 1997, 1996 and 1995, respectively, allocable to experience
rated contracts, were deducted from net realized capital gains and an
offsetting amount was reflected in policyholders' funds left with the
Company. Net unamortized gains were $138.1 million and $53.3 million at
December 31, 1997 and 1996, respectively.
Proceeds from the sale of available-for-sale debt securities and the
related gross gains and losses were as follows:
1997 1996 1995
----- ----- ----
(millions)
Proceeds on Sales $5,311.3 $5,182.2 $4,207.2
Gross Gains 25.8 24.3 44.6
Gross Losses 3.3 13.2 11.8
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities)
(excluding those related to experience rated contractholders) were as
follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $44.3 $(100.1) $255.9
Equity securities 5.6 (10.5) 27.3
Limited partnership -- -- 1.8
----- ------- ------
49.9 (110.6) 285.0
Increase (decrease) in deferred
income taxes (See Note 8) 17.5 (38.6) (36.5)
----- ------- ------
Net changes in accumulated other
comprehensive income $32.4 $(72.0) $321.5
===== ======= ======
Net unrealized capital gains allocable to experience rated contracts of
$356.7 million and $72.6 million at December 31, 1997 and $245.2 million
and $43.3 million at December 31, 1996 are reflected on the Consolidated
Balance Sheets in policyholders' funds left with the Company and future
policy benefits, respectively, and are not included in shareholder's
equity.
Shareholder's equity included the following accumulated other comprehensive
income, which are net of amounts allocable to experience rated
contractholders, at December 31:
1997 1996 1995
---- ---- ----
(millions)
Debt securities
Gross unrealized capital gains $140.6 $101.7 $179.3
Gross unrealized capital losses (18.4) (23.8) (1.3)
----- ----- -----
122.2 77.9 178.0
Equity securities
Gross unrealized capital gains 21.2 16.3 27.2
Gross unrealized capital losses (0.1) (0.8) (1.2)
---- ---- -----
21.1 15.5 26.0
Deferred income taxes (See Note 8) 50.4 32.9 71.5
---- ---- -----
Net accumulated other
comprehensive income $92.9 $60.5 $132.5
==== ==== =====
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to
experience rated contractholders) were as follows:
1997 1996 1995
---- ---- ----
(millions)
Unrealized holding gains (losses)
arising during the period (1) $98.8 $(14.8) $390.5
Less: reclassification adjustment
for gains and other items included
in net income (2) 66.4 57.2 69.0
----- ------ ------
Net unrealized gains (losses)
on securities $32.4 $(72.0) $321.5
===== ====== ======
(1) Pretax unrealized holding gains (losses) arising during the
period were $152.0 million, ($22.8) million and $600.8 million
for 1997, 1996 and 1995, respectively.
(2) Pretax reclassification adjustments for gains and other items
included in net income were $102.4 million, $87.7 million and
$107.5 million for 1997, 1996 and 1995, respectively.
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, included
the following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased Corporate
(Millions) Severance Write-off Property Other Allocation Total
-------------------------- --------- --------- --------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Financial Services $29.1 $1.0 $1.3 $1.7 $ -- $33.1
Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2
Corporate Allocation -- -- -- -- 14.0 14.0
--------- --------- --------- ----- ---------- ---------
Total Company $41.6 $1.4 $1.8 $2.5 $14.0 $61.3
-------------------------- --------- --------- --------- ----- ---------- ---------
</TABLE>
In the third quarter of 1996, the Company recorded a $30.7 million after
tax ($47.3 million pretax) charge principally related to actions taken or
expected to be taken to improve its cost structure relative to its
competitors. The severance portion of the charge is based on a plan to
eliminate 702 positions (primarily customer service, sales and information
technology support staff). The facilities portion of the charge is based on
a plan to consolidate sales/service field offices.
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges (Continued)
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions
taken or expected to be taken to reduce the level of corporate expenses and
other costs previously absorbed by Aetna's property-casualty operations,
which were sold in April 1996. The cost allocated to the Company associated
with this charge was $9.1 million after tax ($14.0 million pretax).
Activity for 1997 and 1996 within the severance and facilities reserve
(pretax, in millions) and the number of positions eliminated related to
such actions were as follows:
(Millions) Reserve Positions
----------------------------------- ---------- ---------
Balance at December 31, 1995 $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
---------- ---------
Balance at December 31, 1996 47.9 524
Actions taken (1) (27.1) (163)
---------- ---------
Balance at December 31, 1997 $20.8 361
========== =========
(1) Includes $15.9 million and $8.0 million in 1997 and 1996,
respectively, of severance-related actions and $7.9 million and $4.1
million in 1997 and 1996, respectively, of corporate
allocation-related actions.
The Company's severance actions are expected to be substantially completed
by September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return, the
Illinois Unitary return and the Connecticut and the New York combined state
income tax returns of Aetna. Aetna allocates to each member an amount
approximating the tax it would have incurred were it not a member of the
consolidated group, and credits the member for the use of its tax saving
attributes used in the consolidated federal income tax return.
Income taxes for the years ended December 31, consist of:
1997 1996 1995
---- ---- ----
(millions)
Current taxes:
Income Taxes:
Federal income tax $64.5 $50.9 $82.9
State income tax 3.7 3.7 3.2
Net realized capital gains 45.6 25.3 28.5
----- ---- ----
113.8 79.9 114.6
----- ---- -----
Deferred taxes (benefits):
Income taxes:
Federal 8.4 (3.5) (14.4)
Net realized capital gains (losses) (32.8) (18.6) (12.9)
----- ----- -----
(24.4) (22.1) (27.3)
----- ----- -----
Total $89.4 $57.8 $87.3
===== ===== =====
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes for the following
reasons:
1997 1996 1995
---- ---- ----
(millions)
Income before income taxes $294.7 $198.9 $263.2
Tax rate 35% 35% 35%
------- ------- -------
Application of the tax rate 103.1 69.6 92.1
------- ------- -------
Tax effect of:
State income tax, net of
federal benefit 2.4 2.4 2.1
Excludable dividends (15.9) (8.7) (9.3)
Other, net (0.2) (5.5) 2.4
------- ------- --------
Income taxes $89.4 $57.8 $87.3
======= ======= ========
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1997 1996
---- ----
(millions)
Deferred tax assets:
Insurance reserves $415.8 $344.6
Unrealized gains allocable to
experience rated contracts 150.1 100.8
Investment losses 6.6 7.5
Postretirement benefits other
than pensions 26.3 27.0
Deferred compensation 31.2 25.0
Pension (3.6) 7.6
Restructuring charge 9.5 17.6
Depreciation 3.9 2.6
Other 8.8 9.1
--------- --------
Total gross assets 648.6 541.8
Deferred tax liabilities:
Deferred policy acquisition costs 515.6 482.1
Market discount 5.1 6.8
Net unrealized capital gains 200.5 133.7
Other (0.6) (0.3)
--------- ---------
Total gross liabilities 720.6 622.3
--------- ---------
Net deferred tax liability $72.0 $80.5
========= =========
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. As of December 31, 1997 and 1996, no
valuation allowances were required for unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax
return purposes under the Deficit Reduction Act of 1984. The balance in
such account was approximately $17.2 million at December 31, 1997. This
amount would be taxed only under certain conditions. No income taxes have
been provided on this amount since management believes the conditions under
which such taxes would become payable are remote.
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1990. Discussions
are being held with the Service with respect to proposed adjustments.
Management believes there are adequate defenses against, or sufficient
reserves to provide for, any such adjustments. The Service has commenced
its examinations for the years 1991 through 1994.
9. Benefit Plans
Employee Pension Plans - The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to amounts that are tax-deductible. As of
December 31, 1997, Aetna's accrued pension cost has been allocated to its
subsidiaries, including the Company, under an allocation based on eligible
salaries. Data on a separate company basis regarding the proportionate
share of the projected benefit obligation and plan assets is not available.
The accumulated benefit obligation and plan assets are recorded by Aetna.
As of the measurement date (i.e., September 30), the accumulated plan
assets exceeded accumulated plan benefits. Allocated pretax charges to
operations for the pension plan (based on the Company's total salary cost
as a percentage of Aetna's total salary cost) were $2.7 million, $4.3
million and $6.1 million for the years ended December 31, 1997, 1996 and
1995, respectively.
Employee Postretirement Benefits - In addition to providing pension
benefits, Aetna currently provides certain health care and life insurance
benefits for retired employees. A comprehensive medical and dental plan is
offered to all full-time employees retiring at age 50 with 15 years of
service or at age 65 with 10 years of service. There is a cap on the
portion of the cost paid by the Company relating to medical and dental
benefits. Retirees are generally required to contribute to the plans based
on their years of service with Aetna. The costs to the Company associated
with the Aetna postretirement plans for 1997, 1996 and 1995 were $2.7
million, $1.8 million and $1.4 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$77.7 million of accrued liabilities, primarily related to the pension and
postretirement benefit plans described above, that had been previously
recorded by Aetna. The after tax amount of this transfer (approximately
$50.5 million) is reported as a reduction in retained earnings. In 1997,
other changes in shareholder's equity includes an additional $0.8 million
reduction reflecting revisions to the allocation of these accrued
liabilities.
Agent Pension Plans - The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides
pension benefits based on annual commission earnings. As of the measurement
date (i.e., September 30), the accumulated plan assets exceeded accumulated
plan benefits.
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
Agent Postretirement Benefits - The Company, in conjunction with Aetna,
also provides certain postretirement health care and life insurance
benefits for certain agents. The costs to the Company associated with the
agents' postretirement plans for 1997, 1996 and 1995 were $0.6 million,
$0.7 million and $0.8 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 $4.4 million, $5.4 million and $4.9
million in 1997, 1996 and 1995, respectively.
Stock Plans - Aetna has a stock incentive plan that provides for stock
options, deferred contingent common stock or equivalent cash awards or
restricted stock to certain key employees. Executive and middle management
employees may be granted options to purchase common stock of Aetna at or
above the market price on the date of grant. Options generally become 100%
vested three years after the grant is made, with one-third of the options
vesting each year. Aetna does not recognize compensation expense for stock
options granted at or above the market price on the date of grant under its
stock incentive plans. In addition, executives may be granted incentive
units which are rights to receive common stock or an equivalent value in
cash. The incentive units may vest within a range from 0% to 175% at the
end of a four year period based on the attainment of performance goals. The
costs to the Company associated with the Aetna stock plans for 1997, 1996
and 1995, were $2.9 million, $8.1 million and $6.3 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$1.1 million of deferred tax benefits related to stock options. This amount
is reported as an increase in retained earnings. In 1997, other changes in
shareholder's equity include an additional increase of $2.3 million
reflecting revisions to the allocation of the deferred tax benefit.
10. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality
and expense risks pertaining to variable life and annuity contracts. Under
the insurance contracts, the Separate Accounts pay the Company a daily fee
which, on an annual basis, ranges, depending on the product, from 0.10% to
1.90% of their average daily net assets. The Company also receives fees
from Aetna managed mutual funds for serving as investment adviser. Under
the advisory agreements, these funds pay the Company a daily fee which, on
an annual basis, ranges, depending on the fund, from 0.25% to 0.85% of
their average daily net assets. The Company also receives fees (expressed
as a percentage of the average daily net assets) from some of its funds for
providing administration services, and from The Aetna Series Fund for
providing shareholder services and promoting sales. The amount of
compensation and fees received from the Separate Accounts and mutual funds,
included in charges assessed against policyholders, amounted to $271.2
million, $186.8 million and $128.1 million in 1997, 1996 and 1995,
respectively. The Company may waive advisory fees at its discretion.
F-27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting
as Subadvisor for affiliated mutual funds and adviser for most of the
General Account assets. Fees paid by the Company to Aeltus, included in
both charges assessed against policyholders and net investment income, on
an annual basis, range from 0.06% to 0.55% of the average daily net assets
under management. For the years ended December 31, 1997 and 1996, the
Company paid $45.5 million and $16.0 million in such fees.
The Company may, from time to time, make reimbursements to an Aetna managed
mutual 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 $6.1 million and a $108.0
million commission, paid by the Company to Aetna Life in 1996 and 1988,
respectively, was capitalized as deferred policy acquisition costs. 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. Effective January 1, 1997, this agreement has been amended to
transition (based on underlying investment rollover in Aetna Life) from a
modified coinsurance to a coinsurance arrangement. As a result of this
change, reserves will be ceded to the Company from Aetna Life as investment
rollover occurs and the loan previously established will be reduced. The
Company maintained insurance reserves of $574.5 million ($397.2 million
relating to the modified coinsurance agreement and $177.3 million relating
to the coinsurance agreement) and $628.3 million as of December 31, 1997
and 1996, respectively, relating to the business assumed. The fair value of
the loan relating to assets held by Aetna Life was $412.3 million and
$625.3 million as of December 31, 1997 and 1996, respectively, and is based
upon the fair value of the underlying assets. Premiums of $176.7 million,
$25.3 million and $28.0 million and current and future benefits of $183.9
million, $39.5 million and $43.0 million were assumed in 1997, 1996 and
1995, respectively.
Investment income of $37.5 million, $44.1 million and $46.5 million was
generated from the reinsurance loan to affiliate in 1997, 1996 and 1995,
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 $32.5 million and
$28.9 million were maintained for this contract as of December 31, 1997 and
1996, 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
F-28
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
limit, up to a maximum of $8.0 million on any new individual life business,
on a yearly renewable term basis. Premium amounts related to this agreement
were $5.9 million, $5.2 million and $3.2 million for 1997, 1996 and 1995,
respectively.
Effective October 1, 1997, the Company entered into a reinsurance agreement
with Aetna Life to assume amounts in excess of $0.2 million for certain of
its participating life insurance, on a yearly renewable term basis. Premium
amounts related to this agreement were $0.7 million in 1997.
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1997 or
1995.
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively. In 1995, the Company dividended $2.9
million in the form of two of its subsidiaries, Systematized Benefits
Administrators, Inc. and Aetna Investment Services, Inc., to Aetna
Retirement Services, Inc. (the Company's former parent).
Premiums due and other receivables include $37.0 million and $2.8 million
due from affiliates in 1997 and 1996, respectively. Other liabilities
include $1.2 million and $10.7 million due to affiliates for 1997 and 1996,
respectively.
As of December 31, 1997, Aetna transferred to the Company $2.5 million
based on its decision not to settle state tax liabilities for the years
1996 and 1997. This amount has been reported as an other increase in
retained earnings.
Substantially all of the administrative and support functions of the
Company are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures
appropriate for the type and nature of service provided.
11. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverables deemed
probable of recovery are reflected as assets on the Company's Consolidated
Balance Sheets.
F-29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 10 above.
<TABLE>
<CAPTION>
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
(millions)
------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
1997
----
Premiums:
Life Insurance $ 35.7 $15.1 $177.4 $198.0
Accident and Health Insurance 5.6 5.6 -- --
Annuities 67.9 -- 1.2 69.1
------- ------------- ----------- ---------
Total earned premiums $109.2 $20.7 $178.6 $267.1
======= ============= =========== =========
1996
----
Premiums:
Life Insurance $ 34.6 $11.2 $25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
------- ------------- ----------- ---------
Total earned premiums $125.2 $17.5 $25.9 $133.6
======= ============= =========== =========
1995
----
Premiums:
Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
------- ------------- ----------- ---------
Total earned premiums $200.3 $16.1 $28.5 $212.7
======= ============= =========== =========
</TABLE>
12. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments. At December 31, 1997, the
Company had commitments to purchase investments of $38.7 million. The fair
value of the investments at December 31, 1997 approximated $39.0 million.
F-30
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities (Continued)
Litigation
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in liability for amounts
material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance. Summarized financial
information for the Company's principal operations was as follows:
1997 1996 1995
--------- --------- ---------
(millions)
Revenue:
Financial Services $1,277.9 $1,195.1 $1,211.3
Individual Life Insurance 620.4 445.7 407.9
--------- --------- ---------
Total revenue $1,898.3 $1,640.8 $1,619.2
========= ========= =========
Income before income taxes: (2)
Financial Services $188.2 $129.9 $160.1
Individual Life Insurance 106.5 83.0 103.1
--------- --------- ---------
Total income before
income taxes $294.7 $212.9 $263.2
========= ========= =========
Net income: (2)
Financial Services $137.5 $94.3 $113.8
Individual Life Insurance 67.8 55.9 62.1
--------- --------- ---------
Net income $205.3 $150.2 $175.9
========= ========= =========
Assets under management: (3)
Financial Services (4) $37,609.3 $27,268.1 $22,534.4
Individual Life Insurance 3,096.1 2,830.5 2,590.9
--------- --------- ---------
Total assets under management 40,705.4 $30,098.6 $25,125.3
========= ========= =========
(1) The 1996 results include severance and facilities charges of
$30.7 million, after tax. Of this charge $21.5 million related to
the Financial Services segment and $9.2 million related to the
Individual Life Insurance segment.
(2) Excludes any effect of the corporate facilities and severance
charge recorded in 1996 which is not directly allocable to the
Financial Services and Individual Life Insurance segments. (Refer
to Note 7).
(3) Excludes net unrealized capital gains (losses) of $551.5 million,
$366.4 million and $797.1 million at December 31, 1997, 1996 and
1995, respectively.
(4) The December 31, 1997 balance includes the transfer of $4,078.5
million of assets under management that were previously reported
by an affiliate.
F-31
<PAGE>
Form No. SAI.75996-98 ALIAC Ed. MAY 1998
<PAGE>
