PROSPECTUS
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The Contracts offered in connection with this Prospectus are the group and
individual deferred variable annuity contracts ("Contracts") issued by Aetna
Life Insurance and Annuity Company (the "Company"). The Contracts are offered
only in those states where the Contract has been approved for sale in that
state. The Contracts are offered as (1) nonqualified deferred annuity
contracts, including Contracts offered to a custodian for an Individual
Retirement Account under Section 408(a) of the Internal Revenue Code of 1986,
as amended (the "Code") (we reserve the right to limit ownership of
nonqualified Contracts to natural persons); (2) Individual Retirement Annuities
("IRA"), including Roth IRAs, other than "SIMPLE IRAs" as defined in Section
408(p) of the Code (may be subject to approval by state regulatory agencies);
or (3) Qualified Contracts used in conjunction with certain employer sponsored
retirement plans (may be subject to approval by the Company and state
regulatory agencies). In most states, group Contracts are offered, generally to
certain broker-dealers or banks which have agreed to act as Distributors of the
Contracts. Individuals who have established accounts with those broker-dealers
or banks are eligible to become participants under the Contract. Individual
Contracts are offered only in those states where the group Contracts are not
authorized for sale. (See "Purchase.")
Purchase Payments may be allocated 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 Balanced VP, Inc.
[bullet] Aetna Income Shares d/b/a Aetna Bond VP
[bullet] Aetna Growth VP
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP
[bullet] Aetna Index Plus Large Cap VP
[bullet] Aetna International VP
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP
[bullet] Aetna Real Estate Securities VP
[bullet] Aetna Small Company VP
[bullet] AIM V.I. Capital Appreciation Fund
[bullet] AIM V.I. Growth Fund
[bullet] AIM V.I. Growth and Income Fund
[bullet] AIM V.I. Value Fund
[bullet] Fidelity VIP Equity-Income Portfolio
[bullet] Fidelity VIP High Income Portfolio
[bullet] Fidelity VIP II Contrafund Portfolio
[bullet] Janus Aspen Aggressive Growth Portfolio
[bullet] Janus Aspen Balanced Portfolio
[bullet] Janus Aspen Growth Portfolio
[bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] MFS Total Return Series
[bullet] Oppenheimer Aggressive Growth Fund
[bullet] Oppenheimer Growth & Income 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
In most states, the Contracts also provide that Purchase Payments may be
allocated to the Guaranteed Account, a credited interest option. In certain
states where the Guaranteed Account is not available, Purchase Payments may be
allocated to the Fixed Account.
Except as specifically mentioned, this Prospectus describes only investments
through the Separate Account. The Guaranteed Account is described in Appendix A
to this Prospectus, as well as in the Guaranteed Account's prospectus. The
Fixed Account is described in Appendix B to this Prospectus. The availability
of the Funds, the Guaranteed Account and the Fixed Account is subject to
applicable regulatory authorization; not all options may be available in all
jurisdictions or under all Contracts. (See "Investment Options.")
This Prospectus provides investors with the information about the Separate
Account that they should know before investing in the Contracts. Additional
information about the Separate Account is contained in a Statement of
Additional Information ("SAI") which is available at no charge. The SAI has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. The Table of Contents for the SAI is printed on page 47 of
this Prospectus. An SAI for this Prospectus and for any Fund prospectus may be
obtained by indicating the request on your Application or by calling the number
listed under the "Inquiries" section of the Prospectus Summary.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE CURRENT PROSPECTUSES OF
THE FUNDS AND THE GUARANTEED ACCOUNT. ALL PROSPECTUSES SHOULD BE RETAINED FOR
FUTURE REFERENCE.
THE CONTRACTS ARE NOT DEPOSITS WITH, OBLIGATIONS OF OR GUARANTEED BY ANY BANK,
NOR ARE THEY INSURED BY THE FDIC; THEY ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION AND OTHER INFORMATION
ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION CAN BE FOUND IN THE SEC'S WEB SITE AT http://www.sec.gov.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus and the Statement of Additional Information are Dated August
19, 1998.
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2
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
DEFINITIONS ............................................................ 5
PROSPECTUS SUMMARY ..................................................... 7
FEE TABLE .............................................................. 11
CONDENSED FINANCIAL INFORMATION ........................................ 21
THE COMPANY ............................................................ 21
VARIABLE ANNUITY ACCOUNT B ............................................. 21
INVESTMENT OPTIONS ..................................................... 21
The Funds ............................................................ 21
Guaranteed Account Option ............................................ 22
Fixed Account Option ................................................. 22
PURCHASE ............................................................... 22
Contract Availability ................................................ 22
Purchasing Interests in the Contract ................................. 23
Purchase Payments .................................................... 23
Contract Rights ...................................................... 24
Designations of Beneficiary and Annuitant ............................ 24
Right to Cancel ...................................................... 24
CHARGES AND DEDUCTIONS ................................................. 25
Daily Deductions from the Separate Account ........................... 25
Mortality and Expense Risk Charge .................................. 25
Administrative Charge .............................................. 25
Maintenance Fee ...................................................... 25
Reduction or Elimination of Administrative Charge and Maintenance Fee 26
Deferred Sales Charge ................................................ 26
Reduction or Elimination of the Deferred Sales Charge ................ 27
Fund Expenses ........................................................ 27
Premium and Other Taxes .............................................. 27
CONTRACT VALUATION ..................................................... 28
Account Value ........................................................ 28
Accumulation Units ................................................... 28
Net Investment Factor ................................................ 28
SUBACCOUNT TRANSFERS ................................................... 28
Telephone Transfers .................................................. 29
Dollar Cost Averaging Program ........................................ 29
Account Rebalancing Program .......................................... 29
WITHDRAWALS ............................................................ 30
SYSTEMATIC DISTRIBUTION OPTIONS ........................................ 31
DEATH BENEFIT DURING ACCUMULATION PERIOD ............................... 31
</TABLE>
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3
<PAGE>
<TABLE>
<S> <C>
Death Benefit Amount .................................................. 31
Death of a Spousal Beneficiary who Continues the Account ............ 33
Death of a Certificate Holder who is not the Annuitant .............. 33
Death Benefit Payment Options ......................................... 33
Nonqualified Contracts .............................................. 33
Qualified Contracts ................................................. 34
TRANSFERS BETWEEN OPTION PACKAGES ....................................... 34
ANNUITY PERIOD .......................................................... 36
Annuity Period Elections .............................................. 36
Partial Annuitization ................................................. 36
Annuity Payout Options ................................................ 36
Annuity Payments ...................................................... 37
Charges Deducted During the Annuity Period ............................ 38
Death Benefit Payable During the Annuity Period ....................... 38
TAX STATUS .............................................................. 38
Introduction .......................................................... 38
Taxation of the Company ............................................... 38
Tax Status of the Contract ............................................ 39
Taxation of Annuity Contracts ......................................... 40
Contracts Used with Certain Retirement Plans .......................... 42
Individual Retirement Annuities and Simplified Employee Pension Plans . 43
Withholding ........................................................... 43
MISCELLANEOUS ........................................................... 43
Distribution .......................................................... 43
Delay or Suspension of Payments ....................................... 44
Performance Reporting ................................................. 44
Voting Rights ......................................................... 45
Modification of the Contract .......................................... 45
Transfers of Ownership; Assignment .................................... 45
Involuntary Terminations .............................................. 45
Legal Matters and Proceedings ......................................... 46
Year 2000 ............................................................. 46
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ..................... 47
APPENDIX A--ALIAC GUARANTEED ACCOUNT .................................... 48
APPENDIX B-- FIXED ACCOUNT .............................................. 51
APPENDIX C-- DESCRIPTION OF UNDERLYING FUNDS ............................ 52
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. THE COMPANY DOES NOT AUTHORIZE ANY
PERSON TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THE OFFERING CONTAINED IN THIS PROSPECTUS EXCEPT AS OTHERWISE CONTAINED HEREIN.
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4
<PAGE>
DEFINITIONS
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The following terms are defined as they are used in this Prospectus:
Account: A record that identifies contract values accumulated on each
Certificate Holder's behalf.
Account Effective Date: The date on which an Account is established on a
Certificate Holder's behalf.
Account Value: The total dollar value of amounts held in an Account as of each
Valuation Date during the Accumulation Period.
Account Year: A period of twelve months measured from the Account Effective
Date or an anniversary of such Account Effective Date.
Accumulation Period: The period during which Purchase Payment(s) credited to an
Account are invested to fund future Annuity Payments.
Accumulation Unit: A measure of the value of each Subaccount before Annuity
Payments begin.
Adjusted Account Value: The Account Value, plus or minus the aggregate market
value adjustment, if applicable, for amounts allocated to the Guaranteed
Account.
Annuitant: The person on whose death, during the Accumulation Period, a death
benefit becomes payable, and whose life or life expectancy Annuity Payments are
based.
Annuity Payment: A series of payments for life, a definite period or a
combination of the two.
Annuity Date: The date on which Annuity Payments begin.
Annuity Payout Option: The option selected by the Certificate Holder which
governs how Annuity Payments will be made.
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.
Application: The form or collection of information required by the Company to
purchase an interest in a group contract or an individual contract.
Beneficiary: The person(s) or entity who is entitled to receive any death
benefit proceeds. Beneficiary refers to the Beneficiary named under the
Contract.
Certificate: The document issued to a Certificate Holder for an Account
established under a group contract.
Certificate Holder (You): A person or entity who purchases an individual
Contract or acquires an interest under a group Contract.
Claim Date: The date when proof of death and the Beneficiary's entitlement to
the death benefit are received in good order at the Company's Home Office.
Company (We, Us): Aetna Life Insurance and Annuity Company.
Contract: The group and individual deferred, variable annuity contracts offered
by this Prospectus.
Distributor(s): The registered broker-dealer(s), or banks that may be acting as
broker-dealers without separate registration under the Securities Exchange Act
of 1934, which have entered into selling agreements with the Company to offer
and sell the Contracts. The Company may also serve as a Distributor.
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5
<PAGE>
Fixed Account: The fixed interest option described in Appendix B to this
Prospectus. The Fixed Account is only available in those states in which the
Guaranteed Account is not available. Amounts allocated to the Fixed Account are
included in the Account Value.
Fund(s): An open-end registered management investment company whose shares are
purchased by the Separate Account to fund the benefits provided by the
Contract.
Group Contract Holder: The entity to which a group Contract is issued.
Guaranteed Account: The ALIAC Guaranteed Account credited interest option which
is described in Appendix A and under which we guarantee stipulated fixed rates
of interest, if held for the guaranteed term. The Guaranteed Account is
available in most states. Amounts allocated to the Guaranteed Account are
included in the Account Value.
Home Office: The Company's principal executive offices located at 151
Farmington Avenue, Hartford, Connecticut 06156.
Individual Retirement Annuity: An individual or group variable deferred annuity
intended to qualify under Code Section 408(b) or 408A.
Nonqualified Contract: A contract established to supplement an individual's
retirement income, or to provide an alternative investment option under an
Individual Retirement Account qualified under Code Section 408(a).
Option Package: The version of the Contract selected which defines, among other
things, the amount of the mortality and expense risk charge, the calculation of
the death benefit, and the availability of certain withdrawals without
imposition of a deferred sales charge.
Purchase Payment(s): The gross payment(s) made to the Company under an Account.
Qualified Contracts: Contracts available for use with plans entitled to special
federal income tax treatment under Code Sections 403(b), 408(b), or 408A.
Roth IRA: An IRA intended to qualify under Code Section 408A.
Registered Representative: The individual who is registered with a
broker-dealer acting as Distributor to offer and sell securities, or who is an
employee of a bank acting as Distributor that is exempt from broker-dealer
registration under the Securities Exchange Act of 1934. Registered
Representatives must also be licensed as insurance agents to sell variable
annuity contracts.
Schedule Effective Date: The date an Option Package is effective, as indicated
on the schedule issued to the Certificate Holder. The initial Schedule
Effective Date is the same as the Account Effective Date. There will be a new
Schedule Effective Date upon any transfer to another Option Package.
Separate Account: Variable Annuity Account B, a separate account established
for the purpose of funding variable annuity contracts issued by the Company.
Subaccount(s): The portion of the assets of the Separate Account that is
allocated to a particular Fund. Each Subaccount invests in the shares of only
one corresponding Fund.
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.
Withdrawal Value: The amount payable upon the withdrawal of all or any portion
of an Account Value.
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6
<PAGE>
PROSPECTUS SUMMARY
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CONTRACT OFFERED
The Contracts offered in connection with this Prospectus are group and
individual deferred variable annuity contracts issued by the Company. The
purpose of the Contract is to accumulate values and to provide benefits upon
retirement. The Contracts are currently available for (1) individual
nonqualified purchases, including purchases by a custodian for an Individual
Retirement Account; (2) IRAs including Roth IRAs, other than "SIMPLE IRAs" as
defined in the Code, and (3) purchases made in conjunction with employer
sponsored retirement plans. (See "Purchase--Contract Availability.")
In most states, group Contracts are offered, generally to certain
broker-dealers or banks which have agreed to act as Distributors of the
Contracts. Individuals who have established accounts with those broker-dealers
or banks are eligible to participate in the Contract. Individual Contracts are
offered only in those states where the group Contracts are not authorized for
sale. Joint Certificate Holders are allowed only on Nonqualified Contracts.
References to "Certificate Holders" in this Prospectus mean both of the
Certificate Holders on joint Accounts.
CONTRACT PURCHASE
You may purchase an interest in the Contract by completing an Application and
submitting it to the Company. Purchase Payments can be applied to the Contract
either through a lump-sum payment or through ongoing contributions. (See
"Purchase.")
OPTION PACKAGES
There are currently three Option Packages available under the Contract. You
select an Option Package in the Application.
Each Option Package differs in the amount of the mortality and expense risk
charge, the calculation of the death benefit, and the availability of certain
withdrawals without imposition of a deferred sales charge. There may also be
differences in the required minimum initial Purchase Payment or Account Value
necessary to select an Option Package. These differences are summarized as
follows:
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7
<PAGE>
<TABLE>
<CAPTION>
Option Package I Option Package II Option Package III
- -------------- ----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortality and
Expense Risk 0.80% 1.10% 1.25%
Charge(1):
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Death Benefit(2) The greater of: The greatest of: The greatest of:
on Death of the (1) The sum of all Purchase (1) The sum of all Purchase (1) The sum of all Purchase
Annuitant(3): Payments made, adjusted Payments made, adjusted Payments made, adjusted
for amount(s) withdrawn for amount(s) withdrawn for amount(s) withdrawn
or applied to an Annuity or applied to an Annuity or applied to an Annuity
Payout Option as of the Payout Option as of the Payout Option as of the
Claim Date; or Claim Date; or Claim Date; or
(2) The Account Value on the (2) The Account Value on the (2) The Account Value on the
Claim Date. Claim Date; or Claim Date; or
(3) The "Step-up Value" on (3) The "Step-up Value" on
the Claim Date. the Claim Date; or
(4) The "Roll-up Value" on
the Claim Date. The Roll-up
Value may not exceed
200% of the Account Value
on the Schedule Effective
Date, adjusted for Purchase
Payments made and
amount(s) withdrawn or
applied to an Annuity
Payout Option since that
date.
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Minimum Initial Non-Qualified: Qualified: Non-Qualified: Qualified: Non-Qualified: Qualified:
Purchase $15,000 $1,500 $5,000 $1,500 $5,000 $1,500
Payment/
Account Value(4):
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Free 10% of Account Value each 10% of Account Value each 10% of Account Value each
Withdrawals(5): Account Year, non-cumulative. Account Year, non-cumulative. Account Year, cumulative to a
maximum of 30%.
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Nursing Care--
Waiver of
Deferred Sales Not Available Available Available
Charge(6):
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</TABLE>
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(1) See the "Fee Table" and "Charges and Deductions--Mortality and Expense
Risk Charge" for complete details.
(2) See "Death Benefit During the Accumulation Period--Death Benefit Amount"
for complete details.
(3) When a Certificate Holder is not the Annuitant, the amount of the death
benefit is not the same as shown above under each Option Package. See
"Death Benefit During the Accumulation Period--Death of a Certificate
Holder who is not the Annuitant" for complete details. A Certificate
Holder who is not the Annuitant should seriously consider whether Option
Packages II or III are suitable for their circumstances.
(4) See "Purchase--Purchase Payments" for complete details.
(5) See "Charges and Deductions--Free Withdrawals" for complete details.
(6) See "Charges and Deductions--Deferred Sales Charge" for complete details.
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8
<PAGE>
Subject to certain restrictions, you may transfer from one Option Package to
another on any anniversary of the Account Effective Date. You may make the
election to transfer during the sixty day period prior to and including any
anniversary of the Account Effective Date. The election must be made in writing
and received in good order at our Home Office during the sixty day election
period. Only one Option Package may be in effect at a time. See "Transfers
Between Option Packages" for complete details.
FREE LOOK PERIOD
You may cancel the Contract or Certificate within 10 days after you receive it
(or longer if required by state law) by returning it to the Company along with
a written notice of cancellation. Unless state law requires otherwise, the
amount you will receive upon cancellation will reflect the investment
performance of the Subaccounts into which your Purchase Payments were
deposited. In some cases this may be more or less than the amount of your
Purchase Payments. Under a Contract issued as an IRA, you will receive a refund
of your Purchase Payments. (See "Purchase--
Right to Cancel.") If the Purchase Payment to a Roth IRA is a rollover from a
contract issued by the Company or an affiliate where the deferred sales charge
was eliminated or reduced to facilitate the rollover to this Contract and you
exercise your free look right under this provision, the Purchase Payment will
be restored to the contract from which it came.
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. The Contract allows investment in the
Subaccounts, as well as in the Guaranteed Account (or Fixed Account, in certain
states) described below, subject to the limitations described in "Investment
Options." For a complete list of the Funds available under the Contracts, and a
description of the investment objectives of each of the Funds and their
investment advisers, see "Investment Options--The Funds" and Appendix C to this
Prospectus, as well as the prospectus for each of the Funds.
The Guaranteed Account is the credited interest option available under the
Contract which allows you to earn a fixed rate of interest, if held for the
guaranteed term. For a complete description of the Guaranteed Account option,
see Appendix A to this Prospectus and the prospectus for the Guaranteed
Account.
The Fixed Account is an option available under the Contract in states where the
Guaranteed Account is unavailable and which allows you to earn a fixed rate of
interest. For a complete description of the Fixed Account option, see Appendix
B to this Prospectus.
CHARGES AND DEDUCTIONS
The charges associated with these Contracts may vary depending on the Option
Package selected. These charges include daily deductions from the Separate
Account (the mortality and expense risk charge and an administrative charge),
as well as any applicable maintenance fee, transfer 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.")
SUBACCOUNT TRANSFERS
During the Accumulation Period, and subject to certain limitations, you can
transfer Account Values among the Subaccounts, and the Guaranteed Account (or
Fixed Account in certain states). During the Annuity Period and subject to
state approval, if you have elected variable Annuity Payments, you can make
transfers among the available Subaccounts. Currently, during the Accumulation
Period, twelve free transfers are allowed each Account Year. During the Annuity
Period, four free transfers are allowed each Account Year. The Company reserves
the right to charge up to $10 for each additional transfer in excess of the
available free transfers. Any transfer charge will be applied so that the
amount being transferred will be reduced. The Company currently does not impose
this charge. Transfers can be requested in writing or by telephone in
accordance with the Company's transfer procedures. (Transfers from the
Guaranteed Account may be restricted and subject to a market value adjustment.
See Appendix A.)
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9
<PAGE>
The Company also offers a Dollar Cost Averaging Program and an Account
Rebalancing Program. The Dollar Cost Averaging Program permits the automatic
transfer of amounts from any of the Subaccounts and an available Guaranteed
Account term to any of the other Subaccounts on a monthly or quarterly basis.
In a Contract with a Fixed Account, the Fixed Account is only available for
dollar cost averaging from the Fixed Account to the other investment options
over a period not to exceed 12 months. The Account Rebalancing Program allows
you to request that each year, or at other more frequent intervals as we allow,
we automatically reallocate your Account Value to specified percentages among
the Subaccounts in which you invest. (See "Subaccount Transfers.")
WITHDRAWALS
All or a part of the Account Value may be withdrawn prior to the Annuity Date
by properly completing a disbursement form and sending it to the Company.
Certain charges may be assessed upon withdrawal. Amounts withdrawn from the
Guaranteed Account may be subject to a market value adjustment. (See Appendix
A.) The taxable portion of the withdrawal may also be subject to income tax and
a 10% federal tax penalty. (See "Withdrawals.")
The Contract also offers certain Systematic Distribution Options during the
Accumulation Period subject to certain criteria. Some Systematic Distribution
Options are not available in all states and may not be suitable in every
situation. (See "Systematic Distribution Options.")
DEATH BENEFIT
Each Option Package contains a different method of calculating the death
benefit. Upon the death of the Annuitant, the Account Value may be increased
under certain circumstances. (See "Death Benefit During Accumulation Period.")
After Annuity Payments have commenced, a death benefit may be payable to the
Beneficiary depending upon the terms of the Contract and the Annuity Payout
Option selected. (See "Death Benefit Payable During the Annuity Period.")
THE ANNUITY PERIOD
On the Annuity Date, you may elect to begin receiving Annuity Payments. Annuity
Payments can be made on either a fixed, variable or combination fixed and
variable basis. If a variable payout is selected, the payments will continue to
vary with the investment performance of the Subaccounts selected. The Company
reserves the right to limit the number of Subaccounts that may be available
during the Annuity Period. (See "Annuity Period.")
TAXES
Earnings are not generally taxed until you or your Beneficiary actually receive
a distribution from the Contract. A 10% federal tax penalty may be imposed on
certain withdrawals. Special rules apply to distributions from a Roth IRA. (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 06156-5996
Attention: Customer Service
[bullet] Call Customer Service: 1-800-531-4547 (for automated transfers or
changes in the allocation of Account
Values, call: 1-800-262-3862.)
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<PAGE>
FEE TABLE
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This Fee Table describes the various charges and expenses associated with the
Contract. No sales charge is paid upon purchase of the Contract. All costs that
are borne directly or indirectly under the Subaccounts and Funds are shown
below. Some expenses may vary as explained under "Charges and Deductions." The
charges and expenses shown below do not include premium taxes that may be
applicable. For more information regarding expenses paid out of assets of a
particular Fund, see the Fund's prospectus.
CERTIFICATE HOLDER TRANSACTION EXPENSES
Deferred Sales Charge for withdrawals under each Contract (as a percentage
of each Purchase Payment withdrawn). If the Purchase Payment to a Roth IRA
Contract is a rollover from another contract issued by the Company or an
affiliate where the deferred sales charge has been waived, the deferred
sales charge is based on the number of completed years since the date of
the initial payment to the predecessor contract. The Company reserves the
right to not accept any rollover contribution to an existing Contract.
CONTRACTS OTHER THAN ROTH IRA CONTRACTS:
<TABLE>
<CAPTION>
- -----------------------------------------------
Years from Receipt of Deferred Sales
Purchase Payment Charge Deduction
- ----------------------------- -----------------
<S> <C>
Less than 2 7%
2 or more but less than 4 6%
4 or more but less than 5 5%
5 or more but less than 6 4%
6 or more but less than 7 3%
7 or more 0%
- -----------------------------------------------
</TABLE>
ROTH IRA CONTRACTS:
<TABLE>
<CAPTION>
- -----------------------------------------------
Deferred Sales
Completed Account Years Charge Deduction
- ----------------------------- -----------------
<S> <C>
Less than 1 5%
1 or more but less than 2 4%
2 or more but less than 3 3%
3 or more but less than 4 2%
4 or more but less than 5 1%
5 or more 0%
- -----------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Annual Maintenance Fee (1) ............. $30.00
Subaccount Transfer Charge (2) ......... $ 0.00
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES
(Daily deductions, equal to the percentage shown on an annual basis, made from
amounts allocated to the Subaccounts under each Contract.)
DURING THE ACCUMULATION PERIOD:
<TABLE>
<S> <C>
[bullet] Option Package I --
Mortality and Expense Risk Charge ......... 0.80%(3)
Administrative Charge ..................... 0.15%
-------
Total Subaccount Annual Expenses .......... 0.95%
=======
[bullet] Option Package II --
Mortality and Expense Risk Charge ......... 1.10%(3)
Administrative Charge ..................... 0.15%
-------
Total Subaccount Annual Expenses .......... 1.25%
=======
[bullet] Option Package III --
Mortality and Expense Risk Charge ......... 1.25%(3)
Administrative Charge ..................... 0.15%
-------
Total Subaccount Annual Expenses .......... 1.40%
=======
</TABLE>
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<PAGE>
DURING THE ANNUITY PERIOD:
<TABLE>
<S> <C>
[bullet] All Option Packages --
Mortality and Expense Risk Charge ......... 1.25%
Administrative Charge ..................... 0.00%(4)
-------
Total Subaccount Annual Expenses .......... 1.25%
=======
</TABLE>
(1) The maintenance fee, if applicable, will generally be deducted from each
Account annually and if the full Account Value is withdrawn. The
maintenance fee is waived when the Account Value is $50,000 or more on
the date the maintenance fee is due. The amount shown is the maximum
maintenance fee that can be deducted under the Contract.
(2) During the Accumulation Period we currently allow an unlimited number of
transfers between Subaccounts without charge. We reserve the right,
however, to impose a fee of $10 for each transfer in excess of 12 per
year.
(3) Under certain Contracts the mortality and expense risk charge during the
Accumulation Period may be reduced. See "Charges and Deductions."
(4) We currently do not impose an Administrative Charge during the Annuity
Period. However, we reserve the right to deduct a daily charge of not
more than 0.25% per year from the Subaccounts.
- -------------------------------------------------------------------------------
12
<PAGE>
ANNUAL EXPENSES OF THE FUNDS (APPLIES TO ALL CONTRACTS)
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 are based on figures for the year ended December 31,
1997. A Fund's "Other Expenses" include operating costs of the Fund. These
expenses are reflected in the Fund's net asset value and are not deducted from
the Account Value.
<TABLE>
<CAPTION>
Investment
Advisory Fees(1) Other Expenses
(after expense (after expense Total Fund
reimbursement) reimbursement) Annual Expenses
------------------ ---------------- ----------------
<S> <C> <C> <C>
Aetna Balanced VP, Inc.(3) 0.50% 0.10% 0.60%
Aetna Bond VP(3) 0.40% 0.10% 0.50%
Aetna Growth VP(2)(3) 0.16% 0.64% 0.80%
Aetna Growth and Income VP(3) 0.50% 0.09% 0.59%
Aetna Index Plus Large Cap VP(2)(3) 0.32% 0.23% 0.55%
Aetna International VP(2)(3) 0.77% 0.38% 1.15%
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%
AIM V.I. Capital Appreciation Fund(4) 0.63% 0.05% 0.68%
AIM V.I. Growth Fund(4) 0.65% 0.08% 0.73%
AIM V.I. Growth and Income Fund(4) 0.63% 0.06% 0.69%
AIM V.I. Value Fund(4) 0.62% 0.08% 0.70%
Fidelity VIP Equity-Income Portfolio(5) 0.50% 0.08% 0.58%
Fidelity VIP High Income Portfolio(5) 0.59% 0.12% 0.71%
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 Growth Portfolio(6) 0.65% 0.05% 0.70%
Janus Aspen Worldwide Growth Portfolio(6) 0.66% 0.08% 0.74%
MFS Total Return Series(7) 0.75% 0.25% 1.00%
Oppenheimer Aggressive Growth Fund 0.71% 0.02% 0.73%
Oppenheimer Growth & Income Fund 0.75% 0.08% 0.83%
Oppenheimer Strategic Bond Fund 0.75% 0.08% 0.83%
Portfolio Partners MFS Emerging Equities Portfolio(8)(9) 0.68% 0.13% 0.81%
Portfolio Partners MFS Research Growth Portfolio(8)(9) 0.70% 0.15% 0.85%
Portfolio Partners MFS Value Equity Portfolio(8) 0.65% 0.25% 0.90%
Portfolio Partners Scudder International Growth Portfolio(8) 0.80% 0.20% 1.00%
</TABLE>
------------------
(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 1.24% for Growth VP; 0.35% and 0.58% for Index Plus
Large Cap VP; 0.85% and 1.23% for International VP; 0.75% and 1.08% for
Real Estate Securities VP; and 0.75% and 1.35% for Small Company VP,
respectively.
(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
- -------------------------------------------------------------------------------
13
<PAGE>
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. 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) AIM Advisors, Inc. (AIM) may from time to time voluntarily waive or reduce
its respective fees. Effective May 1, 1998, the Funds reimburse AIM in an
amount up to 0.25% of the average net asset value of each Fund, for
expenses incurred in providing, or assuring that participating insurance
companies provide, certain administrative services. Currently, the fee only
applies to the average net asset value of each Fund in excess of the net
asset value of each Fund as calculated on April 30, 1998.
(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; 0.71% for High Income 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) The adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, such that each Series' "Other Expenses" shall
not exceed 0.25% of the average daily net assets of the Series during the
current fiscal year. Otherwise, "Other Expenses" for the MFS Total Return
Series would be 0.27%, respectively, and "Total Fund Annual Expenses" would
be 1.02%, respectively, for these Series. Each Series has an expense offset
arrangement which reduces the Series' custodian fee based upon the amount
of cash maintained by the Series with its custodian and dividend disbursing
agent, and may enter into other such arrangements and directed brokerage
arrangements (which also have the effect of reducing the Series' expenses).
Any such fee reductions are not reflected under "Other Expenses."
(8) 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.
(9) The advisory fee is 0.70% of the first $500 million in assets and 0.65% on
the excess.
- -------------------------------------------------------------------------------
14
<PAGE>
HYPOTHETICAL EXAMPLE: OPTION PACKAGE I--FOR CONTRACTS OTHER THAN ROTH IRAS
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. For the
purposes of these Examples, the maximum maintenance fee of $30.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.019%.
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
--------------------------------------- --------------------------------------
If you withdraw the entire Account If you do not withdraw the Account
Value at the end of the periods Value, or if you annuitize at the end
shown, you would pay the following of the periods shown, you would pay
expenses, including any applicable the following expenses (no deferred
deferred sales charge: sales charge is reflected):*
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. $79 $103 $121 $187 $16 $50 $ 85 $187
Aetna Bond VP $78 $100 $115 $176 $15 $46 $ 80 $176
Aetna Growth VP $81 $109 $131 $208 $18 $56 $ 96 $208
Aetna Growth and Income VP $79 $103 $120 $186 $16 $49 $ 85 $186
Aetna Index Plus Large Cap VP $78 $101 $118 $181 $15 $48 $ 83 $181
Aetna International VP $84 $120 $149 $245 $22 $66 $114 $245
Aetna Money Market VP $76 $ 95 $107 $159 $13 $42 $ 72 $159
Aetna Real Estate Securities VP $82 $114 $139 $224 $19 $60 $104 $224
Aetna Small Company VP $82 $114 $139 $224 $19 $60 $104 $224
AIM V.I. Capital Appreciation Fund $80 $105 $125 $195 $17 $52 $ 90 $195
AIM V.I. Growth Fund $80 $107 $128 $201 $17 $54 $ 92 $201
AIM V.I. Growth and Income Fund $80 $106 $125 $196 $17 $52 $ 90 $196
AIM V.I. Value Fund $80 $106 $126 $198 $17 $53 $ 91 $198
Fidelity VIP Equity-Income Portfolio $79 $102 $120 $184 $16 $49 $ 84 $184
Fidelity VIP High Income Portfolio $80 $106 $127 $199 $17 $53 $ 91 $199
Fidelity VIP II Contrafund Portfolio $80 $106 $127 $199 $17 $53 $ 91 $199
Janus Aspen Aggressive Growth Portfolio $80 $108 $129 $204 $18 $54 $ 94 $204
Janus Aspen Balanced Portfolio $81 $110 $133 $211 $18 $57 $ 97 $211
Janus Aspen Growth Portfolio $80 $106 $126 $198 $17 $53 $ 91 $198
Janus Aspen Worldwide Growth Portfolio $80 $107 $128 $202 $17 $54 $ 93 $202
MFS Total Return Series $83 $115 $142 $229 $20 $62 $106 $229
Oppenheimer Aggressive Growth Fund $80 $107 $128 $201 $17 $54 $ 92 $201
Oppenheimer Growth & Income Fund $81 $110 $133 $211 $18 $57 $ 97 $211
Oppenheimer Strategic Bond Fund $81 $110 $133 $211 $18 $57 $ 97 $211
Portfolio Partners MFS Emerging Equities
Portfolio $81 $109 $132 $209 $18 $56 $ 96 $209
Portfolio Partners MFS Research Growth Portfolio $81 $111 $134 $214 $18 $57 $ 98 $214
Portfolio Partners MFS Value Equity Portfolio $82 $112 $136 $219 $19 $59 $101 $219
Portfolio Partners Scudder International Growth
Portfolio $83 $115 $142 $229 $20 $62 $106 $229
</TABLE>
* This Example would not apply if a non-lifetime variable Annuity Payout Option
is selected, and a lump sum payment 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.)
- -------------------------------------------------------------------------------
15
<PAGE>
HYPOTHETICAL EXAMPLE: OPTION PACKAGE I--CONTRACTS ISSUED AS ROTH IRAS
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. For the
purposes of these Examples, the maximum maintenance fee of $30.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.019%.
<TABLE>
<CAPTION>
EXAMPLE C EXAMPLE D
--------------------------------------- --------------------------------------
If you withdraw the entire Account If you do not withdraw the Account
Value at the end of the periods Value, or if you annuitize at the end
shown, you would pay the following of the periods shown, you would pay
expenses, including any applicable the following expenses (no deferred
deferred sales charge: sales charge is reflected):*
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. $52 $67 $ 85 $187 $16 $50 $ 85 $187
Aetna Bond VP $51 $64 $ 80 $176 $15 $46 $ 80 $176
Aetna Growth VP $54 $73 $ 96 $208 $18 $56 $ 96 $208
Aetna Growth and Income VP $52 $67 $ 85 $186 $16 $49 $ 85 $186
Aetna Index Plus Large Cap VP $51 $66 $ 83 $181 $15 $48 $ 83 $181
Aetna International VP $57 $84 $114 $245 $22 $66 $114 $245
Aetna Money Market VP $49 $60 $ 72 $159 $13 $42 $ 72 $159
Aetna Real Estate Securities VP $55 $78 $104 $224 $19 $60 $104 $224
Aetna Small Company VP $55 $78 $104 $224 $19 $60 $104 $224
AIM V.I. Capital Appreciation Fund $53 $70 $ 90 $195 $17 $52 $ 90 $195
AIM V.I. Growth Fund $53 $71 $ 92 $201 $17 $54 $ 92 $201
AIM V.I. Growth and Income Fund $53 $70 $ 90 $196 $17 $52 $ 90 $196
AIM V.I. Value Fund $53 $70 $ 91 $198 $17 $53 $ 91 $198
Fidelity VIP Equity-Income Portfolio $52 $67 $ 84 $184 $16 $49 $ 84 $184
Fidelity VIP High Income Portfolio $53 $71 $ 91 $199 $17 $53 $ 91 $199
Fidelity VIP II Contrafund Portfolio $53 $71 $ 91 $199 $17 $53 $ 91 $199
Janus Aspen Aggressive Growth Portfolio $53 $72 $ 94 $204 $18 $54 $ 94 $204
Janus Aspen Balanced Portfolio $54 $74 $ 97 $211 $18 $57 $ 97 $211
Janus Aspen Growth Portfolio $53 $70 $ 91 $198 $17 $53 $ 91 $198
Janus Aspen Worldwide Growth Portfolio $53 $72 $ 93 $202 $17 $54 $ 93 $202
MFS Total Return Series $56 $80 $106 $229 $20 $62 $106 $229
Oppenheimer Aggressive Growth Fund $53 $71 $ 92 $201 $17 $54 $ 92 $201
Oppenheimer Growth & Income Fund $54 $74 $ 97 $211 $18 $57 $ 97 $211
Oppenheimer Strategic Bond Fund $54 $74 $ 97 $211 $18 $57 $ 97 $211
Portfolio Partners MFS Emerging Equities
Portfolio $54 $74 $ 96 $209 $18 $56 $ 96 $209
Portfolio Partners MFS Research Growth Portfolio $54 $75 $ 98 $214 $18 $57 $ 98 $214
Portfolio Partners MFS Value Equity Portfolio $55 $77 $101 $219 $19 $59 $101 $219
Portfolio Partners Scudder International Growth
Portfolio $56 $80 $106 $229 $20 $62 $106 $229
</TABLE>
* This Example would not apply if a non-lifetime variable Annuity Payout Option
is selected, and a lump sum payment is requested within three years after
Annuity Payments start, since the lump sum payment will be treated as a
withdrawal during the Accumulation Period and will be subject to any
deferred sales charge that would then apply. (Refer to Example C.)
- -------------------------------------------------------------------------------
16
<PAGE>
HYPOTHETICAL EXAMPLE: OPTION PACKAGE II--FOR CONTRACTS OTHER THAN ROTH IRAS
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. For the
purposes of these Examples, the maximum maintenance fee of $30.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.019%.
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
--------------------------------------- --------------------------------------
If you withdraw the entire Account If you do not withdraw the Account
Value at the end of the periods Value, or if you annuitize at the end
shown, you would pay the following of the periods shown, you would pay
expenses, including any applicable the following expenses (no deferred
deferred sales charge: sales charge is reflected):*
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. $82 $112 $136 $219 $19 $59 $101 $219
Aetna Bond VP $81 $109 $131 $208 $18 $56 $ 96 $208
Aetna Growth VP $84 $118 $147 $240 $21 $65 $111 $240
Aetna Growth and Income VP $82 $112 $136 $218 $19 $58 $101 $218
Aetna Index Plus Large Cap VP $81 $111 $134 $214 $18 $57 $ 98 $214
Aetna International VP $87 $129 $164 $276 $25 $75 $129 $276
Aetna Money Market VP $79 $104 $123 $192 $16 $51 $ 88 $192
Aetna Real Estate Securities VP $85 $123 $154 $255 $23 $69 $119 $255
Aetna Small Company VP $85 $123 $154 $255 $23 $69 $119 $255
AIM V.I. Capital Appreciation Fund $83 $115 $141 $227 $20 $61 $105 $227
AIM V.I. Growth Fund $83 $116 $143 $233 $20 $63 $108 $233
AIM V.I. Growth and Income Fund $83 $115 $141 $228 $20 $62 $106 $228
AIM V.I. Value Fund $83 $115 $142 $229 $20 $62 $106 $229
Fidelity VIP Equity-Income Portfolio $82 $112 $135 $217 $19 $58 $100 $217
Fidelity VIP High Income Portfolio $83 $116 $142 $231 $20 $62 $107 $231
Fidelity VIP II Contrafund Portfolio $83 $116 $142 $231 $20 $62 $107 $231
Janus Aspen Aggressive Growth Portfolio $83 $117 $145 $236 $21 $64 $109 $236
Janus Aspen Balanced Portfolio $84 $119 $148 $243 $21 $66 $113 $243
Janus Aspen Growth Portfolio $83 $115 $142 $229 $20 $62 $106 $229
Janus Aspen Worldwide Growth Portfolio $83 $116 $144 $234 $20 $63 $108 $234
MFS Total Return Series $86 $124 $157 $260 $23 $71 $121 $260
Oppenheimer Aggressive Growth Fund $83 $116 $143 $233 $20 $63 $108 $233
Oppenheimer Growth & Income Fund $84 $119 $148 $243 $21 $66 $113 $243
Oppenheimer Strategic Bond Fund $84 $119 $148 $243 $21 $66 $113 $243
Portfolio Partners MFS Emerging Equities
Portfolio $84 $119 $147 $241 $21 $65 $112 $241
Portfolio Partners MFS Research Growth Portfolio $84 $120 $149 $245 $22 $66 $114 $245
Portfolio Partners MFS Value Equity Portfolio $85 $121 $152 $250 $22 $68 $116 $250
Portfolio Partners Scudder International Growth
Portfolio $86 $124 $157 $260 $23 $71 $121 $260
</TABLE>
* This Example would not apply if a non-lifetime variable Annuity Payout Option
is selected, and a lump sum payment 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.)
- -------------------------------------------------------------------------------
17
<PAGE>
HYPOTHETICAL EXAMPLE: OPTION PACKAGE II--CONTRACTS ISSUED AS ROTH IRAS
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. For the
purposes of these Examples, the maximum maintenance fee of $30.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.019%.
<TABLE>
<CAPTION>
EXAMPLE C EXAMPLE D
--------------------------------------- --------------------------------------
If you withdraw the entire Account If you do not withdraw the Account
Value at the end of the periods Value, or if you annuitize at the end
shown, you would pay the following of the periods shown, you would pay
expenses, including any applicable the following expenses (no deferred
deferred sales charge: sales charge is reflected):*
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. $55 $77 $101 $219 $19 $59 $101 $219
Aetna Bond VP $54 $73 $ 96 $208 $18 $56 $ 96 $208
Aetna Growth VP $57 $83 $111 $240 $21 $65 $111 $240
Aetna Growth and Income VP $55 $76 $101 $218 $19 $58 $101 $218
Aetna Index Plus Large Cap VP $54 $75 $ 98 $214 $18 $57 $ 98 $214
Aetna International VP $60 $93 $129 $276 $25 $75 $129 $276
Aetna Money Market VP $52 $59 $ 88 $192 $16 $51 $ 88 $192
Aetna Real Estate Securities VP $58 $87 $119 $255 $23 $69 $119 $255
Aetna Small Company VP $58 $87 $119 $255 $23 $69 $119 $255
AIM V.I. Capital Appreciation Fund $56 $79 $105 $227 $20 $61 $105 $227
AIM V.I. Growth Fund $56 $81 $108 $233 $20 $63 $108 $233
AIM V.I. Growth and Income Fund $56 $79 $106 $228 $20 $62 $106 $228
AIM V.I. Value Fund $56 $80 $106 $229 $20 $62 $106 $229
Fidelity VIP Equity-Income Portfolio $55 $76 $100 $217 $19 $58 $100 $217
Fidelity VIP High Income Portfolio $56 $80 $107 $231 $20 $62 $107 $231
Fidelity VIP II Contrafund Portfolio $56 $80 $107 $231 $20 $62 $107 $231
Janus Aspen Aggressive Growth Portfolio $56 $81 $109 $236 $21 $64 $109 $236
Janus Aspen Balanced Portfolio $57 $84 $113 $243 $21 $66 $113 $243
Janus Aspen Growth Portfolio $56 $80 $106 $229 $20 $62 $106 $229
Janus Aspen Worldwide Growth Portfolio $56 $81 $108 $234 $20 $63 $108 $234
MFS Total Return Series $59 $89 $121 $260 $23 $71 $121 $260
Oppenheimer Aggressive Growth Fund $56 $81 $108 $233 $20 $63 $108 $233
Oppenheimer Growth & Income Fund $57 $84 $113 $243 $21 $66 $113 $243
Oppenheimer Strategic Bond Fund $57 $84 $113 $243 $21 $66 $113 $243
Portfolio Partners MFS Emerging Equities
Portfolio $57 $83 $112 $241 $21 $65 $112 $241
Portfolio Partners MFS Research Growth Portfolio $57 $84 $114 $245 $22 $66 $114 $245
Portfolio Partners MFS Value Equity Portfolio $58 $86 $116 $250 $22 $68 $116 $250
Portfolio Partners Scudder International Growth
Portfolio $59 $89 $121 $260 $23 $71 $121 $260
</TABLE>
* This Example would not apply if a non-lifetime variable Annuity Payout Option
is selected, and a lump sum payment is requested within three years after
Annuity Payments start, since the lump sum payment will be treated as a
withdrawal during the Accumulation Period and will be subject to any
deferred sales charge that would then apply. (Refer to Example C.)
- -------------------------------------------------------------------------------
18
<PAGE>
HYPOTHETICAL EXAMPLE: OPTION PACKAGE III--FOR CONTRACTS OTHER THAN ROTH IRAS
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. For the
purposes of these Examples, the maximum maintenance fee of $30.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.019%.
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
--------------------------------------- --------------------------------------
If you withdraw the entire Account If you do not withdraw the Account
Value at the end of the periods Value, or if you annuitize at the end
shown, you would pay the following of the periods shown, you would pay
expenses, including any applicable the following expenses (no deferred
deferred sales charge: sales charge is reflected):*
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. $83 $117 $144 $235 $20 $63 $109 $235
Aetna Bond VP $82 $114 $139 $224 $19 $60 $104 $224
Aetna Growth VP $85 $123 $154 $255 $23 $69 $119 $255
Aetna Growth and Income VP $83 $116 $144 $234 $20 $63 $108 $234
Aetna Index Plus Large Cap VP $83 $115 $142 $229 $20 $62 $106 $229
Aetna International VP $89 $133 $172 $290 $26 $80 $136 $290
Aetna Money Market VP $81 $109 $131 $208 $18 $56 $ 96 $208
Aetna Real Estate Securities VP $87 $127 $162 $271 $24 $74 $126 $271
Aetna Small Company VP $87 $127 $162 $271 $24 $74 $126 $271
AIM V.I. Capital Appreciation Fund $84 $119 $148 $243 $21 $66 $113 $243
AIM V.I. Growth Fund $85 $121 $151 $248 $22 $67 $115 $248
AIM V.I. Growth and Income Fund $84 $120 $149 $244 $21 $66 $113 $244
AIM V.I. Value Fund $84 $120 $149 $245 $22 $66 $114 $245
Fidelity VIP Equity-Income Portfolio $83 $116 $143 $233 $20 $63 $108 $233
Fidelity VIP High Income Portfolio $84 $120 $150 $246 $22 $67 $114 $246
Fidelity VIP II Contrafund Portfolio $84 $120 $150 $246 $22 $67 $114 $246
Janus Aspen Aggressive Growth Portfolio $85 $122 $152 $251 $22 $68 $117 $251
Janus Aspen Balanced Portfolio $86 $124 $156 $258 $23 $70 $120 $258
Janus Aspen Growth Portfolio $84 $120 $149 $245 $22 $66 $114 $245
Janus Aspen Worldwide Growth Portfolio $85 $121 $151 $249 $22 $68 $116 $249
MFS Total Return Series $87 $129 $164 $276 $25 $75 $129 $276
Oppenheimer Aggressive Growth Fund $85 $121 $151 $248 $22 $67 $115 $248
Oppenheimer Growth & Income Fund $86 $124 $156 $258 $23 $70 $120 $258
Oppenheimer Strategic Bond Fund $86 $124 $156 $258 $23 $70 $120 $258
Portfolio Partners MFS Emerging Equities
Portfolio $85 $123 $155 $256 $23 $70 $119 $256
Portfolio Partners MFS Research Growth Portfolio $86 $124 $157 $260 $23 $71 $121 $260
Portfolio Partners MFS Value Equity Portfolio $86 $126 $159 $265 $24 $72 $124 $265
Portfolio Partners Scudder International Growth
Portfolio $87 $129 $164 $276 $25 $75 $129 $276
</TABLE>
* This Example would not apply if a non-lifetime variable Annuity Payout Option
is selected, and a lump sum payment 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.)
- -------------------------------------------------------------------------------
19
<PAGE>
HYPOTHETICAL EXAMPLE: OPTION PACKAGE III--CONTRACTS ISSUED AS ROTH IRAS
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. For the
purposes of these Examples, the maximum maintenance fee of $30.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.019%.
<TABLE>
<CAPTION>
EXAMPLE C EXAMPLE D
--------------------------------------- --------------------------------------
If you withdraw the entire Account If you do not withdraw the Account
Value at the end of the periods Value, or if you annuitize at the end
shown, you would pay the following of the periods shown, you would pay
expenses, including any applicable the following expenses (no deferred
deferred sales charge: sales charge is reflected):*
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. $56 $81 $109 $235 $20 $63 $109 $235
Aetna Bond VP $55 $78 $104 $224 $19 $60 $104 $224
Aetna Growth VP $58 $87 $119 $255 $23 $69 $119 $255
Aetna Growth and Income VP $56 $81 $108 $234 $20 $63 $108 $234
Aetna Index Plus Large Cap VP $56 $80 $106 $229 $20 $62 $106 $229
Aetna International VP $62 $98 $136 $290 $26 $80 $136 $290
Aetna Money Market VP $54 $73 $ 96 $208 $18 $56 $ 96 $208
Aetna Real Estate Securities VP $60 $92 $126 $271 $24 $74 $126 $271
Aetna Small Company VP $60 $92 $126 $271 $24 $74 $126 $271
AIM V.I. Capital Appreciation Fund $57 $84 $113 $243 $21 $66 $113 $243
AIM V.I. Growth Fund $58 $85 $115 $248 $22 $67 $115 $248
AIM V.I. Growth and Income Fund $57 $84 $113 $244 $21 $66 $113 $244
AIM V.I. Value Fund $57 $84 $114 $245 $22 $66 $114 $245
Fidelity VIP Equity-Income Portfolio $56 $81 $108 $233 $20 $63 $108 $233
Fidelity VIP High Income Portfolio $57 $84 $114 $246 $22 $67 $114 $246
Fidelity VIP II Contrafund Portfolio $57 $84 $114 $246 $22 $67 $114 $246
Janus Aspen Aggressive Growth Portfolio $58 $86 $117 $251 $22 $68 $117 $251
Janus Aspen Balanced Portfolio $59 $88 $120 $258 $23 $70 $120 $258
Janus Aspen Growth Portfolio $57 $84 $114 $245 $22 $66 $114 $245
Janus Aspen Worldwide Growth Portfolio $58 $85 $116 $249 $22 $68 $116 $249
MFS Total Return Series $60 $93 $129 $276 $25 $75 $129 $276
Oppenheimer Aggressive Growth Fund $58 $85 $115 $248 $22 $67 $115 $248
Oppenheimer Growth & Income Fund $59 $88 $120 $258 $23 $70 $120 $258
Oppenheimer Strategic Bond Fund $59 $88 $120 $258 $23 $70 $120 $258
Portfolio Partners MFS Emerging Equities
Portfolio $58 $88 $119 $256 $23 $70 $119 $256
Portfolio Partners MFS Research Growth Portfolio $59 $89 $121 $260 $23 $71 $121 $260
Portfolio Partners MFS Value Equity Portfolio $59 $90 $124 $265 $24 $72 $124 $265
Portfolio Partners Scudder International Growth
Portfolio $60 $93 $129 $276 $25 $75 $129 $276
</TABLE>
* This Example would not apply if a non-lifetime variable Annuity Payout Option
is selected, and a lump sum payment is requested within three years after
Annuity Payments start, since the lump sum payment will be treated as a
withdrawal during the Accumulation Period and will be subject to any
deferred sales charge that would then apply. (Refer to Example C.)
- -------------------------------------------------------------------------------
20
<PAGE>
CONDENSED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
As of the date of this Prospectus, we had not begun selling the Contracts
and the Subaccounts did not have any assets. Therefore, no condensed financial
information is presented herein.
THE 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 the Separate Account in 1976 as a segregated
asset account for the purpose of funding its variable annuity contracts. The
Separate Account is registered as a unit investment trust under the Investment
Company Act of 1940 (the "1940 Act"), and meets the definition of "separate
account" under federal securities laws. The Separate Account is divided into
"Subaccounts" which do not invest directly in stocks, bonds or other
investments. Instead, each Subaccount buys and sells shares of a corresponding
Fund.
Although the Company holds title to the assets of the Separate Account,
such assets are not chargeable with liabilities of any other business conducted
by the Company. Income, gains or losses of the Separate Account are credited to
or charged against the assets of the Separate Account without regard to other
income, gains or losses of the Company. All obligations arising under the
Contracts are obligations of the Company.
INVESTMENT OPTIONS
- --------------------------------------------------------------------------------
THE FUNDS
Purchase Payments may be allocated to one or more of the Subaccounts as
designated on the Application. In turn, the Subaccounts invest in the
corresponding Funds at net asset value. The Company reserves the right to limit
the number of investment options selected during the Accumulation Period. At
this time there is no limit on the number of investment options selected during
the Accumulation Period, but the number of investment options that may be
selected at any one time by a Certificate Holder is limited to 18. Each
Subaccount and each Guaranteed Term of the same duration, or an investment in
the Fixed Account in certain Contracts where the Guaranteed Account is not
available, count as an investment option.
Orders for the purchase of Fund shares may be subject to acceptance or
rejection by the Fund. The Company reserves the right to reject any allocation
of Purchase Payments to a Subaccount if the Subaccount's investment in the
corresponding Fund is rejected or not accepted by the Fund for any reason.
The availability of Funds may be subject to regulatory authorization. In
addition, the Company may add or withdraw Funds, as permitted by applicable
law. Not all Funds may be available in all jurisdictions or under all
Contracts.
Subject to state regulatory approval, if the shares of any Fund should no
longer be available for investment by the Separate Account or if in the
judgment of the
- --------------------------------------------------------------------------------
21
<PAGE>
Company, further investment in such shares should become inappropriate in view
of the purpose of the Contract, we may cease to make such Fund shares available
for investment under the Contract prospectively. The Company may,
alternatively, substitute shares of another Fund for shares already acquired.
The Company reserves the right to substitute shares of another Fund for shares
already acquired without a proxy vote. Any elimination, substitution or
addition of Funds will be done in accordance with applicable state and federal
securities laws.
The Funds are described in Appendix C of this prospectus. More detailed
information may be found in the current prospectus for each Fund offered. The
prospectus for the Fund should be read in conjunction with this prospectus. A
free Fund prospectus is available upon request from the local Company office or
by writing or calling the number listed in the "Inquiries" section of the
Prospectus Summary.
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. 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.
GUARANTEED ACCOUNT OPTION
Purchase Payments may be allocated to the Guaranteed Account. Through the
Guaranteed Account, we guarantee stipulated rates of interest for stated
periods of time. Amounts must remain in the Guaranteed Account for specified
periods to receive the quoted interest rates, or a market value adjustment
(which may be positive or negative) will be applied. (See Appendix A.)
FIXED ACCOUNT OPTION
In certain states, Purchase Payments may be allocated to the Fixed
Account. Through the Fixed Account we guarantee to pay the minimum interest
rate specified in the Contract. (See Appendix B.)
PURCHASE
- --------------------------------------------------------------------------------
CONTRACT AVAILABILITY
The Contracts are offered only in those states where the Contract has
been approved for sale in that state. The Contracts are offered as (1)
nonqualified deferred annuity contracts, including Contracts offered to a
custodian for an Individual Retirement Account under Section 408(a) of the Code
(we reserve the right to limit ownership of nonqualified Contracts to natural
persons); (2) IRAs, including Roth IRAs, other than "SIMPLE IRAs" as defined in
Section 408(p) of the Code; or (3) Qualified Contracts used in conjunction with
certain employer sponsored retirement plans. IRAs are currently available as
rollovers, and may permit ongoing contributions subject to state regulatory
- --------------------------------------------------------------------------------
22
<PAGE>
approval. Additionally, availability of the Qualified Contracts described under
item (3) is subject to approval by the Company and state regulatory agencies. A
Roth IRA Contract is a special form of IRA which can accept nondeductible
annual contributions. Contributions to a Simplified Employee Pension Plan
("SEP") are not permitted in a Roth IRA Contract. The Roth IRA Contract can
also accept transfers and rollovers, but only from an IRA/Individual Retirement
Account, subject to ordinary income tax, or from another Roth IRA. If the
Purchase Payment to a Roth IRA is a rollover from a contract issued by the
Company or an affiliate where the deferred sales charge was eliminated or
reduced and the Contract is canceled during the free look period, the Purchase
Payment will be restored to the predecessor contract.
Eligible persons seeking to invest and accumulate money for retirement can
purchase individual interests in group Contracts, or, where required by state
law, they may purchase individual Contracts. In most states, group Contracts
are offered, generally to certain broker-dealers or banks which have agreed to
act as Distributors of the Contracts, and individual accounts are established
by the Company for each Certificate Holder. In some states, an individual
Contract will be owned by the Certificate Holder. In both cases, a Certificate
Holder's interest in the Contract is known as his or her "Account."
The maximum issue age for the Annuitant is 90.
Joint Certificate Holders. Nonqualified Contracts may be purchased by
individuals as joint Certificate Holders. References to "Certificate Holders"
in this Prospectus mean both of the Certificate Holders on joint Accounts. Tax
law prohibits the purchase of Qualified Contracts by joint Certificate Holders.
PURCHASING INTERESTS IN THE CONTRACT
Group Contracts. Groups will generally consist of those eligible
individuals who have established an account with a broker-dealer or bank which
has agreed to act as a Distributor for the Contracts. A group Contract is
issued to the Group Contract Holder. Certificate Holders may purchase interests
in a group Contract by submitting an Application. Once the Application is
accepted a Certificate will be issued.
Individual Contracts. Certain states will not allow a group Contract due to
provisions in their insurance laws. In those states, an eligible individual
will submit an Application and will be issued a Contract rather than a
Certificate.
Regardless of whether you have purchased an interest in a group Contract or
an individual Contract, the Company must accept or reject the Application
within two business days of receipt. If the Application is incomplete, the
Company may hold any forms and accompanying Purchase Payments for five days.
Purchase Payments may be held for longer periods only with the consent of the
Certificate Holder, pending acceptance of the Application. If the Application
is rejected, the Application and any Purchase Payments will be returned to the
Certificate Holder. However, if the Purchase Payment to a Roth IRA is a
rollover from a contract issued by the Company or an affiliate where the
deferred sales charge was eliminated or reduced and the Contract is canceled
during the free look period, the Purchase Payment will be restored to the
predecessor contract.
PURCHASE PAYMENTS
You may make Purchase Payments under the Contract in one lump sum,
through periodic payments or as a transfer from a pre-existing plan. A 403(b)
Contract can only accept rollover or transfer contributions.
The minimum initial Purchase Payment amount generally is $5,000 ($15,000
for Option Package I) for Nonqualified Contracts and $1,500 for Qualified
Contracts. In some states, a Contract issued as an IRA can accept only a lump
sum, rollover Purchase Payment. Additional Purchase Payments made to an
existing Contract must be at least $1,000 or at least $50 per month by
electronic funds transfer, and are subject to the terms and conditions
published by us at the time of the subsequent payment. A Purchase Payment of
more than $1,000,000 will be allowed only with the Company's consent. We also
reserve the right to reject any Purchase Payment to a prospective or existing
Account without advance notice (unless not allowed by state law).
In certain circumstances, we may reduce the minimum initial or additional
Purchase Payment amounts we may accept for a Contract. Whether such a reduction
is available will be determined by us based upon consideration of the following
factors:
(1) The size and composition of the prospective group, if any, to which the
reduction would apply;
- --------------------------------------------------------------------------------
23
<PAGE>
(2) The method and frequency of payment of Purchase Payments; and
(3) The amount of compensation to be paid to Distributors and their
Registered Representatives on each Purchase Payment.
Any reduction of the minimum initial or additional Purchase Payment amounts
will not be unfairly discriminatory against any person. We will make any such
reduction according to our own rules in effect at the time the Purchase Payment
is received. We reserve the right to change these rules from time to time.
For Qualified Contracts the Code imposes a maximum limit on annual Purchase
Payments which may be excluded from a participant's gross income. (See "Tax
Status.")
Allocation of Purchase Payments. Purchase Payments will initially be
allocated to the Subaccounts or the Guaranteed Account or Fixed Account as
specified on the Application. Changes in such allocation may be made in writing
or by telephone transfer. Allocations must be in whole percentages, and there
may be limitations on the number of investment options that can be selected.
(See "Investment Options.")
CONTRACT RIGHTS
Under individual Contracts, Certificate Holders have all Contract rights.
Under group Contracts, the Group Contract Holder has title to the Contract and
generally only the right to accept or reject any modifications to the Contract.
You have all other rights to your Account under the Contract. However, under a
Nonqualified Contract, if you and the Annuitant are not the same, and the
Annuitant dies first, your rights are automatically transferred to the
Beneficiary. (See "Death Benefit.")
Joint Certificate Holders have equal rights under the Contract and with
respect to their Account. All rights under the Contract must be exercised by
both joint Certificate Holders with the exception of transfers among investment
options, which can be exercised by one joint Certificate Holder after the
Account has been established. See "Death Benefit" regarding the rights of the
surviving joint Certificate Holder upon the death of a joint Certificate Holder
prior to the Annuity Date.
DESIGNATIONS OF BENEFICIARY AND ANNUITANT
You generally designate the Beneficiary for your Account on the
Application. You may also elect to specify the form of payment to be made to
the Beneficiary. For Qualified Contracts issued in conjunction with a Code
Section 403(b) tax deferred annuity program subject to the Employee Retirement
Income Security Act (ERISA), the spouse of a married participant must be the
Beneficiary of at least 50% of the Account Value. If the married participant is
age 35 or older, the participant may name an alternate Beneficiary provided the
participant furnishes a waiver and spousal consent which meets the requirements
of ERISA Section 205. The participant on whose behalf the Account was
established must be the Annuitant.
For Qualified Contracts issued as an IRA, the Certificate Holder must be
the Annuitant. For Nonqualified Contracts, the Certificate Holder and the
Annuitant, may, but need not, be the same person. (See "Purchase--Contract
Availability.")
RIGHT TO CANCEL
You may cancel the Contract or Certificate without penalty by returning
it to the Company with a written notice of your intent to cancel. In most
states, you have ten days to exercise this "free look" right; some states allow
you longer. Unless state law requires otherwise, the amount you will receive
upon cancellation will reflect the investment performance of the Subaccounts
into which your Purchase Payments were deposited. In some cases this may be
more or less than the amount of your Purchase Payments; therefore, you bear the
entire investment risk for amounts allocated among the Subaccounts during the
free look period. Under Contracts issued as IRAs, you will receive a refund of
your Purchase Payment. Account Values will be determined as of the Valuation
Date on which we receive your request for cancellation at our Home Office. If
the Purchase Payment to a Roth IRA is a rollover from a contract issued by the
Company or an affiliate where the deferred sales charge was eliminated or
reduced and the Contract is canceled during the free look period, the Purchase
Payment will be restored to the predecessor contract.
- --------------------------------------------------------------------------------
24
<PAGE>
CHARGES AND DEDUCTIONS
- --------------------------------------------------------------------------------
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 assessed against the daily net assets of the Subaccounts and varies
for each Option Package. The charge under each Option Package is equal, on an
annual basis, to the following percentages:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Option Package I Option Package II Option Package III
- ------------------------ --------------------- ----------------------
<S> <C> <C>
0.80% 1.10% 1.25%
- ---------------------------------------------------------------------
</TABLE>
The mortality and expense risk charge compensates the Company for the
assumption of the mortality and expense risks under the Contract. The mortality
risks are those assumed for our promise to make lifetime Annuity 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, including
the expenses associated with the differing death benefit available under each
Option Package, will exceed the maximum costs that can be charged under the
Contract.
In certain circumstances, the risk of adverse expense experience associated
with this Contract may be reduced. In such event, the mortality and expense
risk charge applicable to that Contract may likewise be reduced. Whether such a
reduction is available will be determined by the Company based upon
consideration of one of the following factors:
(1) the size and composition of the prospective group such as a group made up
of active employees of the Company or its affiliates;
(2) the type and frequency of administrative and sales services provided; and
(3) the level of maintenance fee and deferred sales charges.
Any reduction of the mortality and expense risk charge will not be unfairly
discriminatory against any person. We will make any reduction in the mortality
and expense risk charge according to our own rules in effect at the time the
Contract is issued. We reserve the right to change these rules from time to
time.
If the amount deducted for mortality and expense risks is not sufficient to
cover the mortality costs and expense shortfalls, the loss is borne by the
Company. If the deduction is more than sufficient, the excess may be used to
recover distribution expenses relating to the Contracts and as a source of
profit to the Company. The Company expects to make a profit from the mortality
and expense risk charge.
Administrative Charge. During the Accumulation Period, the Company makes a
daily deduction from each of the Subaccounts for an administrative charge. The
charge is equal, on an annual basis, to 0.15% of the daily net assets of the
Subaccounts and compensates the Company for administrative expenses that exceed
revenues from the maintenance fee described below. The charge is set at a level
which does not exceed the average expected cost of the administrative services
to be provided while the Contract is in force. The Company does not expect to
make a profit from this charge.
During the Annuity Period, the Company reserves the right to make a
deduction for the administrative charge of an amount equal, on an annual basis,
to a maximum of 0.25% of the daily net assets of the Subaccounts. There is
currently no administrative charge during the Annuity Period. Once an Annuity
Payout Option is elected, the charge will be established and will be effective
during the entire Annuity Period.
MAINTENANCE FEE
During the Accumulation Period, the Company will deduct a maintenance fee
from the Account Value. The maintenance fee is to reimburse the Company for
some of its administrative expenses relating to the establishment and
maintenance of the Accounts.
The maximum maintenance fee deducted under the Contract is $30. The
maintenance fee will be deducted annually on the anniversary of the Account
Effective Date. It is deducted on a pro rata basis from each investment option
in which you have an interest. If your entire Account Value is withdrawn, the
full maintenance fee, if applicable, will be deducted at the time of
withdrawal. The maintenance fee will not be deducted (either annually or upon
withdrawal) if your Account Value is $50,000 or more on the day the maintenance
fee is due.
- --------------------------------------------------------------------------------
25
<PAGE>
REDUCTION OR ELIMINATION OF ADMINISTRATIVE CHARGE AND MAINTENANCE FEE
The administrative charge and maintenance fee may be reduced or
eliminated when sales of the Contracts are made to individuals or to a group of
individuals in such a manner that results in savings of administrative
expenses. The entitlement to such a reduction will be based on:
(1) the size and type of the group of individuals to whom the Contract is
offered; and
(2) the amount of expected Purchase Payments.
Any reduction or elimination of the administrative charge or maintenance
fee will not be unfairly discriminatory against any person. We will make any
reduction in the administrative charge or maintenance fee according to our own
rules in effect at the time the Contract is issued. 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 Purchase
Payments withdrawn from the Subaccounts and the Guaranteed Account or Fixed
Account and, except for Roth IRAs, is based on the number of years which have
elapsed since the Purchase Payment was received. The deferred sales charge on
withdrawals from a Roth IRA is based on the number of completed Account Years
which have elapsed from the Account Effective Date. The deferred sales charge
for each Purchase Payment is determined by multiplying the Purchase Payment
withdrawn by the appropriate percentage, in accordance with the schedule set
forth in the tables below. If the Purchase Payment is a rollover from another
contract issued by the Company or an affiliate where the deferred sales charge
has been waived, the deferred sales charge is based on the number of completed
Account Years since the date of the initial payment to the predecessor
contract. The Company reserves the right to not accept any rollover
contribution to an existing contract.
Withdrawals are taken first against Purchase Payments, then against any
increase in value. However, the deferred sales charge only applies to the
Purchase Payment (not to any associated changes in value). To satisfy a partial
withdrawal other than from a Roth IRA, the deferred sales charge is calculated
as if the Purchase Payments are withdrawn from the Subaccounts in the same
order they were applied to the Account. Partial withdrawals from the Guaranteed
Account or the Fixed Account will be treated as described in the Appendices
attached to this Prospectus and the prospectus for the Guaranteed Account. The
total charge will be the sum of the charges applicable for all of the Purchase
Payments withdrawn.
CONTRACTS OTHER THAN ROTH IRA
CONTRACTS:
<TABLE>
<CAPTION>
--------------------------------------------------
Years From Receipt of Purchase Deferred Sales
Payment Charge Deduction
-------------------------------- -----------------
<S> <C>
Less than 2 7%
2 or more but less than 4 6%
4 or more but less than 5 5%
5 or more but less than 6 4%
6 or more but less than 7 3%
7 or more 0%
--------------------------------------------------
</TABLE>
ROTH IRA CONTRACTS:
<TABLE>
<CAPTION>
-----------------------------------------------
Deferred Sales
Completed Account Years Charge Deduction
----------------------------- -----------------
<S> <C>
Less than 1 5%
1 or more but less than 2 4%
2 or more but less than 3 3%
3 or more but less than 4 2%
4 or more but less than 5 1%
5 or more 0%
-----------------------------------------------
</TABLE>
A deferred sales charge will not be deducted from any portion of a Purchase
Payment withdrawn if the withdrawal is:
[bullet] applied to provide Annuity Payments;
[bullet] paid to a Beneficiary due to the Annuitant's death before Annuity
Payments start, up to a maximum of the aggregate Purchase Payments
made, minus the total of all partial withdrawals, amounts applied to an
Annuity Payout Option and deductions made prior to the Annuitant's date
of death;
[bullet] made due to the election of a Systematic Distribution Option (see
"Systematic Distribution Options");
[bullet] if approved by your state, under a Qualified Contract when the amount
withdrawn is equal to the minimum distribution required by the Code for
this Contract
- --------------------------------------------------------------------------------
26
<PAGE>
calculated using a method permitted under the Code and agreed to by the
Company;
[bullet] paid upon a full withdrawal where the Account Value is $2,500 or less
and no amount has been withdrawn during the prior 12 months;
[bullet] paid if we close out your Account when the value is less than $2,500
(or other amount required by state law); or
[bullet] if the withdrawal is applied as a rollover to certain Roth IRAs issued
by the Company or an affiliate.
The Company does not anticipate that the deferred sales charge will cover
all sales and administrative expenses which it incurs in connection with the
Contract. The difference will be covered by the general assets of the Company
which are attributable, in part, to mortality and expense risk charges under
the Contract described above.
Nursing Home Waiver. Under Option Packages II and III, you may withdraw all
or a portion of your Purchase Payments without a deferred sales charge,
provided that:
(1) More than one Account Year has elapsed since the Schedule Effective Date;
(2) The withdrawal is requested within three years of the Annuitant's admission
to a licensed Nursing Home Waiver (including non-licensed facilities in New
Hampshire); and
(3) the Annuitant has spent at least 45 consecutive days in such facility.
This waiver of deferred sales charge does not apply if the Annuitant is in
a licensed Nursing Home Facility for at least one day during the two week
period immediately preceding or following the Schedule Effective Date. It will
also not apply if otherwise prohibited by state law.
Free Withdrawals. Subject to the restrictions described below, you may
withdraw up to the greater of 10% of your Account Value or the minimum
distribution amount required by law during each Account Year without imposition
of a deferred sales charge. Under Option Package III, any unused percentage of
the 10% free withdrawal amount shall carry forward into successive Account
Years, up to a maximum of 30% of your Account Value. The free withdrawal amount
will be based on the Account Value calculated on the Valuation Date next
following our receipt of your request for withdrawal and will be adjusted for
amounts requested for withdrawal under a Systematic Distribution Option or
taken as a minimum distribution amount required by law, during the Account
Year. If your withdrawal exceeds the applicable free withdrawal allowance, we
will deduct a deferred sales charge on the excess amount. (See Appendix A for a
discussion of withdrawals from the Guaranteed Account.)
REDUCTION OR ELIMINATION OF THE DEFERRED SALES CHARGE
We may reduce or eliminate the deferred sales charge when sales of the
Contracts are made to individuals or a group of individuals in such a manner
that results in savings of sales expenses. The entitlement to such a reduction
in the deferred sales charge will be based on the following:
(1) the size and type of the group of individuals to whom the Contract is
offered;
(2) the amount of expected Purchase Payments; and
(3) whether there is a prior or existing relationship with the Company such as
being an employee of the Company or an affiliate, receiving distributions
or making internal transfers from other contracts issued by the Company, or
making transfers of amounts held under qualified plans sponsored by the
Company or an affiliate.
Any reduction or elimination of the deferred sales charge may be subject to
state approval and will not be unfairly discriminatory against any person.
FUND EXPENSES
Each Fund incurs certain expenses which are paid out of its net assets.
These expenses include, among other things, the investment advisory or
"management" fee. The expenses of the Funds are set forth in the Fee Table in
this Prospectus and described more fully in the Fund prospectuses.
PREMIUM AND OTHER TAXES
Several states and municipalities currently impose a premium tax on
Annuities. These taxes currently range from 0% to 4%. Ordinarily, any
applicable state premium tax will be deducted from the Account Value when it is
applied to an Annuity Payout Option. However, we reserve the right to deduct
state premium tax from the Purchase Payments or from the Account
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27
<PAGE>
Values at any time, but no earlier than when we have a tax liability under
state law.
Any municipal premium tax assessed at a rate in excess of 1% will be
deducted from the Purchase Payments or from the amount applied to an Annuity
Payout Option based on our determination of when such tax is due. We will
absorb any municipal premium tax which is assessed at 1% or less. We reserve
the right, however, to reflect this added expense in our Annuity Payment
purchase rates for residents of such municipalities.
CONTRACT VALUATION
- --------------------------------------------------------------------------------
ACCOUNT VALUE
Until the Annuity Date, the Account Value is the total dollar value of
amounts held in the Account as of any Valuation Date. The Account Value at any
given time is based on the value of the units held in each Subaccount, plus the
value of amounts held in the Guaranteed Account or Fixed Account.
ACCUMULATION UNITS
The value of your interests in a Subaccount is expressed as the number of
"Accumulation Units" that you hold multiplied by an "Accumulation Unit Value"
(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 AUV will be affected by the investment performance,
expenses and charges of the applicable Fund and is reduced each day by a
percentage that accounts for the daily assessment of mortality and expense risk
charges and the administrative charge.
Initial Purchase Payments will be credited to your Account at the AUV next
computed following our acceptance of the Application as described under
"Purchasing Interests in the Contract." 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 on the preceding Valuation Date;
(e) minus a daily charge at the annual effective rate equal to the mortality
and expense risk charge under the Option Package then in effect (0.80%
under Option Package I, 1.10% under Option Package II, and 1.25% under
Option Package III) and an administrative charge of 0.15% (unless reduced
or eliminated) during the Accumulation Period and up to 0.25% during the
Annuity Period (currently 0% during the Annuity Period).
The net investment rate may be either positive or negative.
SUBACCOUNT TRANSFERS
- --------------------------------------------------------------------------------
At any time prior to the Annuity Date, you can transfer amounts held
under your Account among the investment options available subject to certain
limitations. (See "Investment Options.") Transfers from the Guaranteed Account
may be subject to certain restrictions and to a market value adjustment. (See
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28
<PAGE>
Appendix A.) Transfers may be made from the Fixed Account to any of the
investment options available subject to certain restrictions. Amounts may not
be transferred into the Fixed Account from any of the investment options. If
approved by your state, during the Annuity Period, if you have elected variable
Annuity Payments, you can make transfers only among the Subaccounts available
during the Annuity Period. (See "Annuity Payout Options.") A request for
transfer can be made either in writing or by telephone. (See "Telephone
Transfers" below.) The telephone transfer privilege is available automatically;
no special election is necessary. All transfers must be in accordance with the
terms of the Contract. Any transfer will be based on the AUV next determined
after the Company receives a valid transfer request at its Home Office.
During the Accumulation Period, twelve free transfers are allowed each
Account Year. During the Annuity Period, four free transfers are allowed each
Account Year. The Company reserves the right to charge up to $10 for each
additional transfer in excess of the available free transfers. This charge will
be deducted from the gross amount of the transfer. The Company currently does
not impose this charge.
Orders for the purchase of Fund shares may be subject to acceptance or
rejection by the Fund. The Company reserves the right to reject any transfer
request to a Subaccount if the Subaccount's investment in the corresponding
Fund is rejected or not accepted by the Fund for any reason.
TELEPHONE TRANSFERS
You automatically 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 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.
DOLLAR COST AVERAGING PROGRAM
You may establish automated transfers of Account Values on a monthly or
quarterly basis through the Company's Dollar Cost Averaging Program. Dollar
cost averaging is a system for investing a fixed amount of money at regular
intervals over a period of time. The Dollar Cost Averaging Program permits the
transfer of amounts from any of the variable investment options and an
available Guaranteed Term or Fixed Account subject to the Company's terms and
conditions to any of the Subaccounts. A market value adjustment will not be
applied to dollar cost averaging transfers from any such Guaranteed Term during
participation in the Dollar Cost Averaging Program. If dollar cost averaging
from a Guaranteed Term is discontinued, the Company will automatically transfer
the balance remaining in the Guaranteed Term from which dollar cost averaging
is withdrawn to a Guaranteed Term of the same duration unless the Certificate
Holder initiates a transfer to another investment option. In either case, a
market value adjustment will apply. If Dollar Cost Averaging is stopped with
regard to amounts in the Fixed Account, the remaining balance in the Fixed
Account will be transferred to the money market subaccount. There is no
additional charge for the Dollar Cost Averaging Program. (See Appendix A for a
discussion of the restrictions and features attributable to the Guaranteed
Account.)
Dollar cost averaging does not ensure a profit nor guarantee against loss
in a declining market. You should consider your financial ability to continue
purchases through periods of low price levels. For additional information,
please refer to the "Inquiries" section of the Prospectus Summary, which
describes how you can obtain further information.
The Dollar Cost Averaging Program is not available to individuals who have
elected the Account Rebalancing Program.
ACCOUNT REBALANCING PROGRAM
The Account Rebalancing Program allows you to have portions of your
Account Value automatically reallocated annually to a specified percentage or
at other more frequent intervals as allowed by us under the program. Only
Account Values accumulating in the Subaccounts can be rebalanced. You may
participate in this program by completing the Account Rebalancing section of
the Application, or by sending a written request to the Company at its Home
Office. The
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29
<PAGE>
Account Rebalancing Program does not ensure a profit nor guarantee against loss
in a declining market.
The Account Rebalancing Program is not available to Certificate Holders who
have elected the Dollar Cost Averaging Program.
WITHDRAWALS
- --------------------------------------------------------------------------------
All or a portion of your Account Value may be withdrawn at any time
during the Accumulation Period. Withdrawal restrictions applicable to Section
403(b) Contracts are described below. To request a withdrawal, you must
properly complete a disbursement form and send it to our Home Office. Payments
for withdrawal requests will be made in accordance with Securities and Exchange
Commission requirements, but normally not later than seven calendar days
following our receipt of a disbursement form. Withdrawals may be subject to a
deferred sales charge (see "Charges and Deduction") and to taxes and to tax
penalties (see "Tax Status"). Roth IRAs provide for a tax-free withdrawal of
all assets in the Contract, both contributions and earnings, provided the
withdrawal is not made within the 5-taxable year period beginning with the
first tax year for which a contribution was made, and the distribution is made
after attainment of age 59-1/2, or on account of death or disability, or for a
qualified first-time home purchase.
Withdrawals may be requested in one of the following forms:
[bullet] Full Withdrawal of an Account: The amount paid for a full withdrawal
will be the Adjusted Account Value minus any applicable deferred sales
charge and maintenance fee due.
[bullet] Partial Withdrawals: (Percentage): The amount paid will be the
percentage of the Adjusted Account Value requested minus any applicable
deferred sales charge.
[bullet] Partial Withdrawals: (Specified Dollar Amount): The amount paid will be
the dollar amount requested. However, the amount withdrawn from your
Account will equal the amount you request plus any applicable deferred
sales charge and plus or minus any applicable market value adjustment.
For any partial withdrawal, the value of the Accumulation Units
canceled will be withdrawn proportionately from the Guaranteed Account,
Fixed Account and each Subaccount in which your Account is invested,
unless you request otherwise in writing. All amounts paid will be based
on your Account Value as of the next Valuation Date after we receive a
request for withdrawal at our Home Office, or on such later date as the
disbursement form may specify.
The tax treatment of withdrawals from each Nonqualified Contract may be
affected if you own other annuity contracts issued by us (or our affiliates)
that were purchased after October 21, 1988. (See "Tax Status.")
Withdrawal Restrictions from 403(b) Plans. Under Section 403(b) Contracts,
the withdrawal of salary reduction contributions and earnings on such
contributions is generally prohibited prior to the participant's death,
disability, attainment of age 59-1/2, separation from service or financial
hardship. (See "Tax Status.")
Reinstatement Privilege Following Withdrawal. You may elect to reinstate
all or a portion of the proceeds received from the full withdrawal of your
Account within 30 days after the withdrawal. Reinvested amounts must be
received by the Company within 60 days of the withdrawal. Accumulation Units
will be credited to your Account for the amount reinstated, as well as for any
maintenance fee charged and any portion of any deferred sales charge imposed at
the time of withdrawal. However, any aggregate negative market value adjustment
made to the Guaranteed Account will not be credited. Reinstated amounts will be
reallocated to applicable investment options in the same proportion as they
were allocated at the time of withdrawal.
The number of Accumulation Units credited will be based upon the AUV(s)
next computed following receipt at our Home Office of the reinstatement request
along with the amount to be reinstated. Any maintenance fee which falls due
after the withdrawal and before the reinstatement will be deducted from the
amount reinstated. The reinstatement privilege may be used only once and does
not apply to a Certificate Holder's Account that we close out as described in
the Section entitled, "Involuntary Terminations." If you are contemplating
reinstatement, you should seek competent advice regarding the tax consequences
associated with this type of transaction.
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30
<PAGE>
SYSTEMATIC DISTRIBUTION OPTIONS
- --------------------------------------------------------------------------------
The Company offers certain withdrawal options under the Contract that are
not considered Annuity Payout Options ("Systematic Distribution Options"). To
exercise these options, your Account Value must meet the minimum dollar amount
and age criteria applicable to that option.
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 your Account based on a payment method you select. It
is designed for those who want a periodic income while retaining
investment flexibility for amounts accumulated under a Contract.
[bullet] ECO--Estate Conservation Option. ECO offers the same investment
flexibility as SWO but is designed for those who want to receive only
the minimum distribution that the Code requires each year. ECO is
available only under Qualified Contracts. Under ECO, the Company
calculates the minimum distribution amount required by law, and pays
you that amount once a year. (See "Tax Status.") ECO is not available
under the Roth IRA Contract.
[bullet] LEO--Life Expectancy Option. LEO offers an annual payment over a number
of years equal to your life expectancy or the life expectancy of you
and a designated beneficiary.
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, you will retain
all of the rights and flexibility permitted under the Contract during the
Accumulation Period. Your Account Value will continue to be subject to the
charges and deductions described in this Prospectus. 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 you elect a Systematic Distribution Option, you may revoke it any time
by submitting a written request to our Home Office. Once an option is revoked,
no other Systematic Distribution Option may be elected unless permitted by the
Code. The Company reserves the right to discontinue the availability of one or
all of these Systematic Distribution Options for new elections at any time,
and/or to change the terms of future elections.
DEATH BENEFIT DURING ACCUMULATION PERIOD
- --------------------------------------------------------------------------------
A death benefit will be payable to the Beneficiary if the Certificate
Holder or the Annuitant dies before Annuity Payments have commenced. If the
Account is owned jointly, the death benefit applies at the death of the first
joint Certificate Holder. Upon the death of a joint Certificate Holder prior to
the Annuity Date, the surviving Certificate Holder, if any, will become the
designated Beneficiary. Any other Beneficiary designation on record with the
Company at the time of death will be treated as the primary or contingent
Beneficiary, as originally designated, unless or until the newly designated
Beneficiary changes the Beneficiary designation.
DEATH BENEFIT AMOUNT
The amount of the death benefit will depend on the Option Package in
effect on the date the Certificate Holder or Annuitant dies.
OPTION PACKAGE I
Upon the death of the Annuitant the death benefit will be the greater of:
(1) The sum of all Purchase Payments made, adjusted for amounts withdrawn or
applied to an Annuity Payout Option ("Return of Purchase Payment") as of
the Claim Date; or
(2) The Account Value on the Claim Date.
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31
<PAGE>
OPTION PACKAGE II
Upon the death of the Annuitant the death benefit will be the greatest
of:
(1) The sum of all Purchase Payments made, adjusted for amounts withdrawn or
applied to an Annuity Payout Option ("Return of Purchase Payment") as of
the Claim Date; or
(2) The Account Value on the Claim Date; or
(3) The "Step-up Value" (as described below) on the Claim Date.
OPTION PACKAGE III
Upon the death of the Annuitant, the death benefit will be the greatest
of:
(1) The sum of all Purchase Payments made, adjusted for amounts withdrawn or
applied to an Annuity Payout Option ("Return of Purchase Payment") as of
the Claim Date; or
(2) The Account Value on the Claim Date; or
(3) The "Step-up Value" (as described below) on the Claim Date; or
(4) The "Roll-up Value" (as described below) on the Claim Date.
Step-up Value: On the Schedule Effective Date, the Step-up Value is equal
to the greater of : (1) the Account Value; or (2) the Step-up Value, if any,
calculated on the anniversary of the Account Effective Date prior to the
Schedule Effective Date, adjusted for Purchase Payments made and amounts
withdrawn or applied to an Annuity Payout Option during the prior Account Year.
Thereafter, once each year on the anniversary of the Schedule Effective Date
until the anniversary immediately preceding the Annuitant's 85th birthday or
death, whichever is earlier, the Step-up Value is equal to the greater of:
(a) The Step-up Value most recently calculated, adjusted for Purchase Payments
made and amounts withdrawn or applied to an Annuity Payout Option during
the prior Account Year; or
(b) The Account Value on that anniversary of the Schedule Effective Date.
On each anniversary of the Schedule Effective Date after the Annuitant's
85th birthday, the Step-up Value shall be equal to the Step-up Value on the
anniversary immediately preceding the Annuitant's 85th birthday, adjusted for
Purchase Payments made and amounts withdrawn or applied to an Annuity Payout
Option since that anniversary. On the Claim Date, the Step-up Value shall equal
the Step-up Value on the anniversary of the Schedule Effective Date immediately
preceding the Annuitant's death, adjusted for Purchase Payments made and
amounts withdrawn or applied to an Annuity Payout Option since that
anniversary.
Roll-up Value: On the Schedule Effective Date, the Roll-up Value is equal
to the Account Value. Thereafter, once each year on the anniversary of the
Schedule Effective Date until the anniversary immediately preceding the
Annuitant's 76th birthday or death, whichever is earlier, the Roll-up Value is
equal to the Roll-up Value most recently calculated multiplied by a factor of
1.05, adjusted for Purchase Payments made and amounts withdrawn or applied to
an Annuity Payout Option during the prior Account Year. The Roll-up Value may
not exceed 200% of the Account Value on the Schedule Effective Date, adjusted
for Purchase Payments made and amounts withdrawn or applied to an Annuity
Payout Option since that date.
On each anniversary of the Schedule Effective Date after the Annuitant's
76th birthday, the Roll-up Value shall be equal to the Roll-up Value on the
anniversary immediately preceding the Annuitant's 76th birthday, adjusted for
Purchase Payments made and amounts withdrawn or applied to an Annuity Payout
Option since that anniversary. On the Claim Date, the Roll-up Value shall equal
the Roll-up Value on the anniversary of the Schedule Effective Date immediately
preceding the Annuitant's death, adjusted for Purchase Payments made and
amounts withdrawn or applied to an Annuity Payout Option since that
anniversary.
For purposes of determining the death benefit, the adjustment for Purchase
Payments made and amounts withdrawn or applied to an Annuity Payout Option will
increase or reduce the Return of Purchase Payment, Step-up Value and/or Roll-up
Value in the same proportion that the Account Value was increased or reduced on
the date of the Purchase Payment, withdrawal or application to an Annuity
Payout Option.
Notwithstanding which Option Package is selected, on the Claim Date, if the
amount of the death benefit is greater than the Account Value, the amount by
which the death benefit exceeds the Account Value will be deposited and
allocated to the money market Subaccount available under the Contract.
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32
<PAGE>
Death of a Spousal Beneficiary who Continues the Account. If the spousal
Beneficiary continues the Account at the death of the Certificate Holder who
was also the Annuitant, the spousal Beneficiary becomes the Annuitant. The
Option Package in effect at the death of the Certificate Holder will also apply
to the spousal Beneficiary, unless later changed by the spousal Beneficiary.
The amount of the death benefit payable at the death of a spousal
beneficiary who continues the Account shall be determined under the Option
Package then in effect and as described above, except that:
(1) In calculating the Return of Purchase Payment amount, the Account Value
on the Claim Date for the prior Certificate Holder's death shall be
treated as the initial Purchase Payment; and
(2) In calculating the Step-up Value, the Step-up Value on the Claim Date for
the prior Certificate Holder's death shall be the initial Step-up Value;
and
(3) In calculating the Roll-up Value, the Roll-up Value on the Claim Date for
the prior Certificate Holder's death shall be the initial Roll-up Value.
Death of a Certificate Holder who is not the Annuitant. Under Nonqualified
Contracts only, if the Certificate Holder is not the Annuitant and dies, the
death benefit described above under Option Packages I, II and III will not
apply. Rather, the amount paid on account of the death of the Certificate
Holder will be equal to the Adjusted Account Value on the date the payment
request is processed. A deferred sales charge may apply to any full or partial
payment of this death benefit.
Likewise, if the spousal Beneficiary continues the Account at the death of
the Certificate Holder who was not the Annuitant, the Annuitant will not change
and the death benefit described above under Option Packages I, II and III will
not apply on the death of the spousal Beneficiary. Rather, the amount of death
benefit proceeds payable upon the spousal Beneficiary's death will be equal to
the Adjusted Account Value on the date the payment request is processed. A
deferred sales charge may apply to any full or partial payment of this death
benefit.
Because the death benefit equals the Adjusted Account Value in this
situation, a Certificate Holder who is not also the Annuitant should seriously
consider whether Option Packages II or III are suitable for their
circumstances.
DEATH BENEFIT PAYMENT OPTIONS
Death benefit proceeds may be paid to the Beneficiary as described below.
The Beneficiary may elect any available death benefit payment option as
permitted, unless the Certificate Holder has specified the form of payment to
the Beneficiary. If you die and no Beneficiary exists, the death benefit will
be paid in a lump sum to your estate.
Prior to the date any election by the Beneficiary for payment of the death
benefit is processed, the Account Value will remain in the Account and the
Account Value will continue to be affected by the investment performance of the
investment option(s) selected. As a result, the amount received by the
Beneficiary may be greater or less than the amount of the death benefit on the
Claim Date. The Beneficiary has the right to allocate or transfer any amount to
any available investment option (subject to a market value adjustment, as
applicable). The Code requires that distributions begin within a certain time
period, as described below. If no elections are made, no distributions will be
made. Failure to commence distributions within those time periods can result in
tax penalties.
Nonqualified Contracts. Under a Nonqualified Contract, if you die and the
Beneficiary is your surviving spouse, or if you are a nonnatural person and the
Annuitant dies and the Beneficiary is the Annuitant's surviving spouse, he or
she automatically becomes the successor Certificate Holder. The successor
Certificate Holder may exercise all rights under the Account and (1) continue
in the Accumulation Period; (2) elect to apply some or all of the Adjusted
Account Value to any of the Annuity Payout Options; or (3) receive at any time
a lump sum payment equal to all or a portion of the Adjusted Account Value. If
you die and you are not the Annuitant, any applicable deferred sales charge
will be applied if a lump sum payment is elected. Under the Code, distributions
are not required until the successor Certificate Holder's death.
If you die and the Beneficiary is not your surviving spouse, he or she may
elect option (2) or (3) above. According to the Code, any portion of the
Adjusted Account Value not distributed in installments over the life or life
expectancy beginning within one year of your
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33
<PAGE>
death, must be paid within five years of your death. (See "Tax Status of the
Contract.")
If you are a natural person but not the Annuitant and the Annuitant dies, the
Beneficiary may elect to apply the Adjusted Account Value to an Annuity Payout
Option within 60 days or to receive a lump sum payment equal to the Adjusted
Account Value, subject to state regulatory approval. If the Beneficiary does
not elect an Annuity Payout Option within 60 days of the date of death, the
gain, if any, will be includible in the Beneficiary's income in the year the
Annuitant dies.
If SWO is in effect, payments will cease at the Certificate Holder's or
Annuitant's death. A Beneficiary, however, may elect to continue SWO.
Qualified Contracts. Under a Qualified Contract, the death benefit is paid at
the death of the participant, who is the Annuitant under the Contract. The
Beneficiary has the following options: (1) apply some or all of the Adjusted
Account Value to any of the Annuity Payout Options, subject to the distribution
rules in Code Section 401(a)(9), or (2) receive at any time a lump sum payment
equal to all or a portion of the Adjusted Account Value.
If ECO, SWO or LEO is in effect and the participant dies before the required
beginning date for minimum distributions, payments will cease. A Beneficiary,
or the Certificate Holder on behalf of a plan Beneficiary, may elect ECO, SWO
or LEO provided the election would satisfy the Code minimum distribution rules.
If ECO, SWO or LEO is in effect and the participant dies after the required
beginning date for minimum distributions, payments will continue as permitted
under the Code minimum distribution rules, unless the option is revoked.
Death benefit payments must satisfy the distribution rules in Code Section
401(a)(9). (See "Tax Status of the Contract.")
TRANSFERS BETWEEN OPTION PACKAGES
- --------------------------------------------------------------------------------
Provided your Account Value meets the minimum requirements described
below, you may transfer from one Option Package to another on any anniversary
of the Account Effective Date by providing us with written notice of your
intent to transfer. For such notice to be effective, it must be received by us
during the sixty day period prior to and including the anniversary on which the
transfer is to be made.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Transfers to Option Package I Transfers to Option Packages II or III
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum Account Non-Qualified: Qualified: Non-Qualified: Qualified:
Value: $15,000 $1,500 $5,000 $1,500
- ------------------------------------------------------------------------------------------
</TABLE>
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34
<PAGE>
The mortality and expense risk charge relating to the Option Package
transferred to will be effective as of the new Schedule Effective Date. With
respect to the guaranteed death benefit and withdrawals free of the deferred
sales charge, the following rules will apply:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Transfers to Option Package I Transfers to Option Package II Transfers to Option Package III
- --------------------------------------- -------------------------------------- -----------------------------------
<S> <C> <C>
[bullet] Death Benefit(1): [bullet] Death Benefit(1): [bullet] Death Benefit(1):
[bullet] Return of Purchase Payment [bullet] Return of Purchase Payment [bullet] Return of Purchase Payment
amount will continue to be amount will continue to be amount will continue to be
calculated as of the Account calculated as of the Account calculated as of the Account
Effective Date. Effective Date. Effective Date.
[bullet] The Step up Value under Option [bullet] If transferring from Option [bullet] If transferring from Option
Packages II and III will Package I, the Step-up Value Package I, the Step-up Value
terminate on the new Schedule will be calculated beginning on will be calculated beginning on
Effective Date. the new Schedule Effective the new Schedule Effective
Date. Date.
[bullet] If transferring from Option [bullet] If transferring from Option
Package III, the Step-up Value Package II, the Step-up Value
will continue to be calculated will continue to be calculated
from the date calculated under from the date calculated under
Option Package III. Option Package II.
[bullet] The Roll-up Value under Option [bullet] The Roll-up Value under Option [bullet] The Roll-up Value will be
Package III will terminate on Package III will terminate on calculated beginning on the new
the new Schedule Effective the new Schedule Effective Schedule Effective Date.
Date. Date.
[bullet] Nursing Home Waiver(2): [bullet] Nursing Home Waiver(2): [bullet] Nursing Home Waiver(2):
[bullet] The availability of waiver of [bullet] If transferring from Option [bullet] If transferring from Option
the deferred sales charge under Package I, the waiting period Package I, the waiting period
the Nursing Home Waiver will under the Nursing Home Waiver under the Nursing Home Waiver
terminate on the new Schedule will begin to be measured from will begin to be measured from
Effective Date. the new Schedule Effective the new Schedule Effective
Date. Date.
[bullet] If transferring from Option [bullet] If transferring from Option
Package III, the waiting period Package II, the waiting period
under the Nursing Home Waiver under the Nursing Home Waiver
will have been satisfied on the will have been satisfied on the
new Schedule Effective Date. new Schedule Effective Date.
[bullet] Free Withdrawal Amount(3): [bullet] Free Withdrawal Amount(3): [bullet] Free Withdrawal Amount(3):
[bullet] If transferring From Option [bullet] If transferring From Option [bullet] The cumulative to 30% available
Package III, any available free Package III, any available free free withdrawal amount will
withdrawal amount in excess of withdrawal amount in excess of begin to be calculated as of
10% will be lost as of the new 10% will be lost as of the new the new Schedule Effective
Schedule Effective Date. Schedule Effective Date. Date.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Death Benefit During the Accumulation Period--Death Benefit Amount".
(2) See "Charges And Deductions--Nursing Home Waiver".
(3) See "Charges And Deductions--Free Withdrawals".
Only one Option Package may be in effect at any time.
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35
<PAGE>
ANNUITY PERIOD
- --------------------------------------------------------------------------------
ANNUITY PERIOD ELECTIONS
You must notify us in writing of the date you want Annuity Payments to
start (the "Annuity Date") and the Annuity Payout Option elected. Payments may
not begin during the first Account Year, or, unless we consent, later than the
later of (a) the first day of the month following the Annuitant's 85th
birthday, or (b) the tenth anniversary of the last Purchase Payment.
Annuity Payments will not begin until you have selected an Annuity Date and
an Annuity Payout Option. Until a date and option are elected, the Account will
continue in the Accumulation Period.
As of January 1, 1997, the Code generally requires that for Qualified
Contracts, other than IRAs and for five-percent owners in other Qualified
Contracts, minimum annual distributions of the Account Value begin by April 1st
of the Account Year following the Account Year in which a participant attains
age 70-1/2 or retires, whichever occurs later. For IRA depositors and for
five-percent owners, minimum distributions must begin by April 1 of the Account
Year following the Account Year in which the participant attains age 70-1/2. In
addition, distributions must be in a form and amount sufficient to satisfy the
Code requirements. These requirements may be satisfied by the election of
certain Annuity Payout Options or Systematic Distribution Options. (See "Tax
Status.") For Nonqualified Contracts, failure to select an Annuity Payout
Option and an Annuity Date, or postponement of the Annuity Date past the
Annuitant's 85th birthday or tenth anniversary of your last Purchase Payment
may have adverse tax consequences. You should consult with a qualified tax
advisor if you are considering such a course of action.
For Roth IRAs, the minimum distribution rules do not apply prior to your
death. You are not required to begin taking minimum annual distributions by
April 1 of the Account Year following the Account Year in which you attain age
70-1/2. The general rule that Annuity Payments may not extend beyond your
life/life expectancy or beyond the joint lives/joint life expectancies of you
and your beneficiaries does not apply to a Roth IRA. The minimum distribution
rules which apply to the beneficiary at your death and which are described in
this Prospectus continue to apply. The rules differ depending on whether you
die after distributions have begun.
At least 30 days prior to the Annuity Date, you must notify us in writing
of the following:
[bullet] the date on which you would like Annuity Payments to begin;
[bullet] the Annuity Payout Option under which you want 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., fixed
Annuity Payments using the general account or variable Annuity Payments
using any of the Subaccounts available on the Annuity Date, or a
combination of the two).
Once Annuity Payments begin, the Annuity Payout Option may not be changed.
PARTIAL ANNUITIZATION
You may elect an Annuity Payout Option with respect to a portion of your
Account Value, while leaving the remaining portion of your Account Value
invested in the Accumulation Period. The Code and the regulations do not
specifically address the tax treatment applicable to payments provided in this
way. Whether such payments are taxable as Annuity Payments or as withdrawals is
currently unclear; therefore, you should consult with a qualified tax advisor
if you are considering a partial annuitization of your Account.
ANNUITY PAYOUT OPTIONS
The Certificate Holder may choose one of the following Annuity Payout
Options:
NONLIFETIME ANNUITY PAYOUT OPTION:
Nonlifetime Annuity--An option with Annuity Payments made for generally
5-30 years, as selected by the Certificate Holder. If this option is elected as
variable Annuity Payments, the Certificate Holder may request that the present
value of all or any portion of the remaining variable payments be paid in one
sum. However, any lump-sum elected before three years of payments have been
completed will be treated as a withdrawal during the Accumulation Period and
any applicable deferred sales charge will be assessed. (See "Charges and
Deductions--Deferred Sales Charge.") If the nonlifetime option is elected on a
fixed basis, you cannot elect to receive a lump-sum payment.
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LIFETIME ANNUITY PAYOUT OPTIONS:
[bullet] Option 1--Life Annuity--An option with Annuity Payments ending on the
Annuitant's death.
[bullet] Option 2--Life Annuity with Guaranteed Payments-- An option with
Annuity Payments guaranteed for 5-30 years.
[bullet] Option 3--Life Annuity with Cash Refund Feature-- An option with a cash
refund feature. Payments are guaranteed for the amount applied to the
Annuity Payout Option. If the Annuitant dies before the amount applied
to the Annuity Payout Option (less any applicable premium tax) has been
paid, any remaining balance will be paid in one sum to the Beneficiary.
This option is available only for fixed Annuity Payments.
[bullet] Option 4--Life Annuity Based Upon the Lives of Two Annuitants--An
option with Annuity Payments made during the lives of the primary
Annuitant and a secondary Annuitant. The Certificate Holder selects
Annuity Payments with 100%, 66% or 50% of the payment to continue after
the first death, or Annuity Payments with 100% of the payment to
continue at the death of the secondary Annuitant and 50% of the payment
to continue at the death of the primary Annuitant.
[bullet] Option 5--Life Annuity Based Upon the Lives of Two Annuitants with
Guaranteed Payments--An option with Annuity Payments made for a minimum
of 5-30 years, with 100% of the payment to continue after the first
death.
[bullet] Option 6--Life Annuity Based Upon the Lives of Two Annuitants with a
Cash Refund Feature--An option with 100% of the payment to continue
after the first death with a cash refund feature. Payments are
guaranteed for the amount applied to the Annuity Payout Option. If both
Annuitants die prior to the total payment of the amount applied to the
Annuity Payout Option (less any premium tax), any remaining balance
will be paid in one sum to the Beneficiary. This option is available
only for fixed Annuity Payments and may not be available in all states.
If Option 1 or 4 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 4, should die prior to the due date of the second Annuity Payment. Once
lifetime Annuity Payments begin, the Certificate Holder cannot elect to receive
a lump-sum payment.
We may also offer additional Annuity Payout Options under your Contract
from time to time. You can call the number listed in the "Inquiries" section of
the Prospectus Summary to determine which options are available and the terms
of such options. Additional or enhanced options may not be available to those
already receiving Annuity Payments.
ANNUITY PAYMENTS
Date Payments Start. When payments start, the age of the Annuitant plus
the number of years for which payments are guaranteed must not exceed 95. For
Qualified Contracts only, Annuity Payments may not extend beyond (a) the life
of the Annuitant, (b) the joint lives of the Annuitant and Beneficiary, (c) a
period certain greater than the Annuitant's life expectancy, or (d) a period
certain greater than the joint life expectancies of the Annuitant and
Beneficiary.
Amount of Each Annuity Payment. The amount of each payment depends on how
you allocate your Account Value between fixed and variable payouts (some
options require that all payments be made on a fixed basis). No election may be
made that would result in the first Annuity Payment of less than $50, or total
yearly Annuity Payments of less than $250 (less if required by state law). If
the Account Value on the Annuity Date is insufficient to elect an option for
the minimum amount specified, a lump-sum payment must be elected. We reserve
the right to increase the minimum first Annuity Payment amount and the minimum
annual Annuity Payment amount based on increases reflected in the Consumer
Price Index-Urban (CPI-U), since July 1, 1993.
If Annuity Payments are to be made on a variable basis, the first and
subsequent payments will vary depending on the assumed interest rate ("AIR")
selected (3-1/2% or 5% per annum). Selection of a 5% AIR causes a higher first
payment, but Annuity Payments will increase thereafter only to the extent that
the rate exceeds 5% on an annualized basis. Annuity Payments would decline if
the rate were below 5%. Use of the 3-1/2% AIR causes a lower first payment, but
subsequent payments would increase more rapidly or decline more slowly as
changes occur in the AIR. (See the Statement of Additional Information for
further discussion on the impact of selecting an AIR.)
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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 investment options. This charge, established when a
variable Annuity Payout Option is elected, will not exceed 0.25% per year of
amounts held on a variable basis. Once established, the charge will be
effective during the entire Annuity Period. (See "Charges and Deductions.")
DEATH BENEFIT PAYABLE DURING THE ANNUITY PERIOD
The death benefit, if any, due when the Annuitant dies after Annuity
Payments have begun, will depend on the terms of the Contract and the Annuity
Payout Option selected. If Option 1 or Option 4 was elected, Annuity Payments
will cease on the death of the Annuitant under Option 1 or the death of the
surviving Annuitant under Option 4.
If lifetime Option 2 or Option 5 was elected and the death of the Annuitant
under Option 2, or the surviving Annuitant under Option 5, occurs prior to the
end of the guaranteed minimum payment period, we will continue payments to the
Beneficiary unless the Beneficiary elects a lump sum, provided the Certificate
Holder has not prohibited such an election in the Beneficiary designation.
If the nonlifetime option was elected, and the Annuitant dies before all
payments are made, remaining payments will be paid to the Beneficiary unless
the Beneficiary elects a lump sum, provided the Certificate Holder has not
prohibited such an election in the Beneficiary designation.
When the Annuitant dies after Annuity Payments have begun and if there is a
death benefit payable under the Annuity Payout Option elected, the remaining
value must be distributed to the Beneficiary at least as rapidly as under the
original method of distribution.
Any lump-sum payment paid under the applicable lifetime or nonlifetime
Annuity Payout Options will be made within seven calendar days after acceptable
proof of death, 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 5, such value will be reduced by any payments made after
the date of death.
TAX STATUS
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INTRODUCTION
The following provides a general discussion 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).
In addition, this discussion does not cover the potential application of
federal estate and gift tax laws, or state, local or any other tax law. The
Company makes no guarantee regarding the tax treatment of any contract or
transaction involving a Contract.
The Contract may be purchased on a non-tax qualified basis ("Nonqualified
Contract") or purchased and used in connection with certain retirement
arrangements entitled to special income tax treatment under Sections 403(b),
408(b) or 408A of the Code, ("Qualified Contracts"). The ultimate effect of
federal income taxes on the amounts held under a Contract, on Annuity Payments,
and on the economic benefit to the Group Contract Holder, Certificate Holder or
Beneficiary may depend upon the tax status of the individual concerned. Any
person concerned about these tax implications should consult a competent tax
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 investment income and realized net
capital gains will not be taxed to the extent that such income and gains are
applied to increase the reserves under the Contracts.
Accordingly, the Company does not anticipate that it will incur any federal
income tax liability attributable to the Separate Account and, therefore, the
Company
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does not intend to make provisions for any such taxes. However, if changes in
the federal tax laws or interpretation thereof result in the Company being
taxed on income or gains attributable to the Separate Account, then the Company
may impose a charge against the Separate Account (with respect to some or all
Contracts) in order to set aside provisions to pay such taxes.
TAX STATUS OF THE CONTRACT
Diversification. Section 817(h) of the Code requires that with respect to
Nonqualified Contracts, the investments of the Funds be "adequately
diversified" in accordance with Treasury Regulations in order for the Contracts
to qualify as annuity contracts under federal tax law. The Separate Account,
through the Funds, intends to comply with the diversification requirements
prescribed by the Treasury in Reg. Sec. 1.817-5, which affects how the Funds'
assets may be invested.
In addition, in certain circumstances, owners of variable annuity contracts
may be considered the owners, for federal income tax purposes, of the assets of
the separate accounts used to support their contracts. In these circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the owner possesses incidents of investment control over the assets.
The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that owners were not owners of separate account assets. For example,
a Certificate Holder has additional flexibility in allocating premium payments
and account values. In addition, the number of funds provided under the
Contract is significantly greater than the number of funds offered in contracts
on which rulings have been issued. These differences could result in a
Certificate Holder being treated as the owner of a pro rata portion of the
assets of the Separate Account. The Company reserves the right to modify the
Contract as necessary to attempt to prevent a Certificate Holder from being
considered the owner of a pro rata share of the assets of the Separate Account.
Required Distributions--Nonqualified Contracts: In order to be treated as
an annuity contract for federal income tax purposes, Section 72(s) of the Code
requires Nonqualified Contracts to provide that (a) if any Certificate Holder
dies on or after the Annuity Date but prior to the time the entire interest in
the Contract has been distributed, the remaining portion of such interest will
be distributed at least as rapidly as under the method of distribution in
effect at the time of the Certificate Holder's death, and (b) if any
Certificate Holder dies prior to the Annuity Date, the entire interest in the
Contract will be distributed within five years after the date of such
Certificate Holder's death. These requirements will be considered satisfied as
to any portion of a Certificate Holder's interest which is payable to or for
the benefit of a "designated beneficiary" and which is distributed over the
life of such "designated beneficiary" or over a period not extending beyond the
life expectancy of that beneficiary, provided that such distributions begin
within one year of the Certificate Holder's death. The "designated beneficiary"
refers to a natural person designated by the Certificate Holder as a
Beneficiary and to whom ownership of the contract passes by reason of death.
However, if the "designated beneficiary" is the surviving spouse of the
deceased Certificate Holder, the Account may be continued with the surviving
spouse as the new Certificate Holder. If the Certificate Holder is a
non-natural person, the surviving spouse who is the "designated beneficiary" of
the deceased Annuitant may continue the Account.
If the Certificate Holder is a natural person but not the Annuitant and the
Annuitant dies, if the Beneficiary does not elect an Annuity Payout Option
within 60 days of the date of death, the gain, if any, will be includible in
the Beneficiary's income in the year the Annuitant dies.
The Nonqualified Contracts contain provisions which are intended to comply
with the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Company intends to
review such provisions and modify them if necessary to assure that they comply
with the requirements of Code Section 72(s) when clarified by regulation or
otherwise.
The discussion under "Taxation of Annuities" below is based on the
assumption that the Contract qualifies as an annuity contract for federal
income tax purposes.
Required Distributions--Qualified Contracts: The Code has required
distribution rules for Section 403(b) Plans and IRAs. Other than for IRAs and
for five-percent owners in other Qualified Contracts,
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distributions must generally begin by April 1 of the Account Year following the
Account Year in which the participant attains age 70-1/2 or retires, whichever
occurs later. For traditional IRA participants and for five-percent owners,
minimum distributions must begin by April 1 of the Account Year following the
Account Year in which the participant attains age 70-1/2. There is no required
distribution date for participants in a Roth IRA. Under 403(b) plans, if the
Company maintains separate records, distribution of amounts held as of December
31, 1986 must generally begin by the end of the Account Year in which the
participant attains age 75 (or retires, whichever occurs later). However,
special rules require that some or all of the balance be distributed earlier if
any distributions are taken in excess of the minimum required amount.
To comply with these provisions, distributions must be in a form and amount
sufficient to satisfy the minimum distribution and minimum distribution
incidental death benefit rules specified in Section 401(a) (9) of the Code. In
general, Annuity Payments from a traditional IRA must be distributed over the
participant's life or the joint lives of the participant and beneficiary, or
over a period not greater than the participant's life expectancy or the joint
life expectancies of the participant and beneficiary.
If the participant dies on or after the required beginning date for minimum
distributions, distributions to the beneficiary must be made at least as
rapidly as the method of distribution in effect at the time of the
participant's death. However, if the required minimum distribution is
calculated each year based on the participant's single life expectancy or the
joint life expectancies of the participant and beneficiary, the regulations for
Code Section 401(a)(9) provide specific rules for calculating the required
minimum distributions at the participant's death. For example, if ECO was
elected with the calculation based on the participant's single life expectancy,
and the life expectancy is recalculated each year, the recalculated life
expectancy becomes zero in the Account Year following the participant's death
and the entire remaining interest must be distributed to the beneficiary by
December 31 of the year following the participant's death. However, a spousal
beneficiary has certain rollover rights which can only be exercised in the year
of the participant's death. The rules are complex and the participant should
consult a tax advisor before electing the method of calculation to satisfy the
minimum distribution requirements.
If the participant dies before the required beginning date for minimum
distributions, the entire interest must be distributed by December 31 of the
Account Year containing the fifth anniversary of the date of the participant's
death. Alternatively, payments may be made over the life of the beneficiary or
over a period not extending beyond the life expectancy of the beneficiary,
provided the distribution begins to a non-spouse beneficiary by December 31 of
the Account Year following the Account Year of the participant's death. If
payments are made to a spousal beneficiary, distributions must begin by the
later of December 31 of the Account Year following the Account Year of the
death or December 31 of the Account Year in which the participant would have
attained age 70-1/2.
An exception applies for a spousal beneficiary under an IRA. In lieu of
taking a distribution under these rules, a spousal beneficiary may elect to
treat the Account as his or her own IRA and defer taking a distribution until
his or her age 70-1/2. The surviving spouse is deemed to have made such an
election if the surviving spouse makes a rollover to or from the Account or
fails to take a distribution within the required time period.
The minimum distribution rules also apply to beneficiaries under a Roth IRA
and are based on whether the participant dies before or after distribution
begins.
If the participant or beneficiary fails to take the required minimum
distribution for any tax year, a 50% excise tax is imposed on the required
amount that was not distributed.
TAXATION OF ANNUITY CONTRACTS
In General: Section 72 of the Code governs taxation of annuities in
general. The Company believes that a Certificate Holder under a Nonqualified
Contract who is a natural person generally is not taxed on increases in the
Account Value until distribution occurs by withdrawing all or part of such
Account Value (e.g., withdrawals or Annuity Payments under the Annuity Payout
Option elected). The taxable portion of a distribution (in the form of a single
sum payment or an Annuity Payment) is taxable as ordinary income.
Non-Natural Holders of a Nonqualified Contract: If the Certificate Holder
is not a natural person, a
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Nonqualified Contract is not treated as an annuity for income tax purposes and
the "income on the contract" for the taxable year is currently taxable as
ordinary income. "Income on the contract" is any increase over the year in the
Withdrawal Value, adjusted for Purchase Payments made during the year, amounts
previously distributed and amounts previously included in income. There are
some exceptions to the rule and a non-natural person should consult with its
tax advisor prior to purchasing this Contract. A non-natural person exempt from
federal income taxes should consult with its tax advisor regarding treatment of
"income on the contract" for purposes of the unrelated business income tax.
When the Certificate Holder is not a natural person, the Annuitant is
considered the Certificate Holder for the purpose of meeting the required
distribution-at-death rules. In addition, when the Certificate Holder is not a
natural person, a change in Annuitant is treated as the death of the
Certificate Holder.
The following discussion generally applies to Qualified Contracts or
Nonqualified Contracts owned by a natural person.
Withdrawals: In the case of a withdrawal under a Qualified Contract,
including withdrawals under SWO, ECO or LEO, the amount taxable is generally
based on the ratio of the "investment in the contract" to Account Value. The
"investment in the contract" generally equals the amount of any nondeductible
Purchase Payments paid by or on behalf of any individual less any amount
received previously which was excludable from gross income. For a Qualified
Contract, the "investment in the contract" can be zero. Special tax rules may
be available for certain distributions from a Qualified Contract.
With respect to Nonqualified Contracts, partial withdrawals, including
withdrawals under SWO or LEO, are generally treated as taxable income to the
extent that the Account Value immediately before the withdrawal exceeds the
"investment in the contract" at that time. The Account Value immediately before
a withdrawal may have to be increased by any positive market value adjustment
(MVA) that results from such a withdrawal. There is, however, no definitive
guidance on the proper tax treatment of MVAs in these circumstances, and a
Certificate Holder should contact a competent tax advisor with respect to the
potential tax consequences of any MVA that arises as a result of a partial
withdrawal.
Full withdrawals of a Nonqualified Contract are treated as taxable income
to the extent that the amount received exceeds the "investment in the
contract."
Any "qualified" distribution from a Roth IRA is not includible in gross
income. A "qualified" distribution is any distribution made after the
participant attains age 59-1/2 , or on account of the participant's death or
disability, or for a qualified first-time home purchase. A distribution will
not be treated as "qualified" if it is made within the 5-taxable year period
beginning with the first taxable year for which a contribution was made. If a
distribution is not "qualified", the accumulated earnings are includible in
income. The 10% premature distribution penalty will apply to the taxable
portion of the distribution unless one of the exceptions under the Code
applies. (See "Penalty Tax" below.) A partial distribution will first be
treated as a return of cost basis (i.e. aggregate amount of contributions.)
For Roth IRAs the minimum distribution rules do not apply prior to the
participant's death. (See "Annuity Period" above.)
Annuity Payments: Although the tax consequences may vary depending on the
Annuity Payment elected under the Contract, in general, only the portion of the
Annuity Payment that represents the amount by which the Account Value exceeds
the "investment in the contract" will be taxed; after the "investment in the
contract" is recovered, the full amount of any additional Annuity Payments is
taxable. For variable Annuity Payments, the taxable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
However, the entire distribution will be taxable once the recipient has
recovered the dollar amount of his or her "investment in the contract." For
fixed Annuity Payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the expected number of payments as defined in Code Section 72 (d);
however, the remainder of each Annuity Payment is taxable. Once the "investment
in the contract" has been fully recovered, the full amount of any additional
Annuity Payments is taxable. If Annuity Payments cease as a result of an
Annuitant's death before full recovery
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of the "investment in the contract," consult a competent tax advisor regarding
deductibility of the unrecovered amount.
Penalty Tax: In the case of a distribution pursuant to a Nonqualified
Contract, there may be imposed a federal income tax penalty equal to 10% of the
amount treated as taxable income.
In general, there is no penalty tax on distributions from a Nonqualified
Contract: (1) made on or after the date on which the taxpayer attains age
59-1/2; (2) made as a result of the death of the Certificate Holder; (3)
attributable to the taxpayer's total and permanent disability; (4) received in
substantially equal periodic payments (at least annually) over the life or life
expectancy of the taxpayer or the joint lives or joint life expectancies of the
taxpayer and a "designated beneficiary;" or (5) allocable to "investment in the
contract" before August 14, 1982.
If a distribution is made from a Qualified Contract sold in conjunction
with Section 403(b) Plan, the penalty tax will not apply on distribution made
when the participant (a) attains age 59-1/2 , (b) becomes permanently and
totally disabled, (c) dies, (d) separates from service with the plan sponsor at
or after age 55, (e) rolls over the distribution amount to another plan of the
same type in accordance with the terms of the Code, or (f) takes the
distributions in substantially equal periodic payments (at least annually) over
his or her life or life expectancy or the joint lives or joint life
expectancies of the participant and beneficiary, provided the participant has
separated from service with the plan sponsor. In addition, the penalty tax does
not apply for the amount of a distribution equal to unreimbursed medical
expenses incurred by the participant that qualify for deduction as specified in
the Code. The Code may impose other penalty taxes in other circumstances.
In general, except for (d), the same exceptions described in the preceding
paragraph will apply to distributions made from an IRA, including a
distribution from a Roth IRA that is not a "qualified distribution" or a
rollover to a Roth IRA that is not a "qualified rollover" contribution.
Beginning January 1, 1997, the penalty tax is also waived on distributions made
from an IRA to pay for health insurance premiums for certain unemployed
individuals. Beginning January 1, 1998, the penalty tax is waived if the
amounts withdrawn are used for a qualified first-time home purchase or for
higher education expenses.
Taxation of Death Benefit Proceeds: Amounts may be distributed from the
Contract because of the death of a Certificate Holder or the Annuitant.
Generally, such amounts are includible in the income of the recipient as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full surrender as described above, or (2) if distributed under an Annuity
Payout Option, they are taxed in the same manner as Annuity Payments, as
described above.
Special rules may apply on Nonqualified Contracts. See "Required
Distributions--Nonqualified Contracts."
Transfers, Assignments or Exchanges of the Contract: A transfer of
ownership of a Contract, the designation of an Annuitant, payee or other
Beneficiary who is not also a Certificate Holder, the selection of certain
Annuity Dates, or the exchange of a Contract may result in certain tax
consequences. The assignment, pledge, or agreement to assign or pledge any
portion of the Account Value generally will be treated as a distribution. The
assignment or transfer of ownership of a Qualified Contract generally is not
allowed. Anyone contemplating any such designation, transfer, assignment,
selection, or exchange should contact a competent tax advisor with respect to
the potential tax effects of such a transaction.
Multiple Contracts: All deferred nonqualified annuity contracts that are
issued by the Company (or its affiliates) to the same owner during any Account
Year are treated as one annuity contract for purposes of determining the amount
includible in gross income under Section 72(e) of the Code. In addition, the
Treasury Department has specific authority to issue regulations that prevent
the avoidance of Section 72(e) through the serial purchase of annuity contracts
or otherwise.
CONTRACTS USED WITH CERTAIN RETIREMENT PLANS
Qualified Contracts in General: The Qualified Contract is designed for
use as a Code Section 408(b) IRA or as a Contract used in connection with
certain employer sponsored retirement plans. The tax rules applicable to
participants and beneficiaries in Qualified Contracts are complex. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from contributions in excess
of specified limits; distributions
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prior to age 59-1/2 (subject to certain exceptions); distributions that do not
conform to specified commencement and minimum distribution rules; and in other
specified circumstances.
The Company makes no attempt to provide more than general information about
use of the Contracts with the various types of retirement plans. Participants
and beneficiaries under Qualified Contracts may be subject to the terms and
conditions of the retirement plans themselves, in addition to the terms and
conditions of the Contract issued in connection with such plans. Some
retirement plans are subject to distribution and other requirements that are
not incorporated in the provisions of the Contracts. Purchasers are responsible
for determining that contributions, distributions and other transactions with
respect to the Contracts satisfy applicable laws, and should consult their
legal counsel and tax advisor regarding the suitability of the Contract.
Section 403(b) Plans. Section 403(b)(11) restricts the distribution under
Section 403(b) contracts of: (1) salary reduction contributions made after
December 31, 1988; (2) earnings on those contributions; and (3) earnings during
such period on amounts held as of December 31, 1988. Distribution of those
amounts may only occur upon death of the participant, attainment of age 59-1/2,
separation from service, total and permanent disability, or financial hardship.
In addition, income attributable to salary reduction contributions may not be
distributed in the case of hardship.
INDIVIDUAL RETIREMENT ANNUITIES AND SIMPLIFIED EMPLOYEE PENSION PLANS
Section 408(b) of the Code permits eligible individuals to contribute to
an individual retirement program known as a traditional IRA, hereinafter
referred to as an "IRA." Also, distributions from certain other types of
qualified plans may be "rolled over" on a tax-deferred basis into an IRA.
Employers may establish Simplified Employee Pension (SEP) Plans and contribute
to an IRA owned by the employee. Purchasers of a Qualified Contract for use
with IRAs will be provided with supplemental information required by the IRS.
Purchasers should seek competent advice as to the suitability of the Contract
for use with IRAs.
Section 408A of the Code permits eligible individuals to contribute to a
Roth IRA on an after-tax (non-deductible) basis.
Distributions from other types of qualified plans are not permitted to be
transferred or rolled over to a Roth IRA. A Roth IRA can accept
transfers/rollovers only from an IRA, subject to ordinary income tax, or from
another Roth IRA.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding
for the recipient's federal income tax liability at rates that vary according
to the type of distribution and the recipient's tax status. Recipients may be
provided the opportunity to elect not to have tax withheld from distributions;
however, certain distributions from Section 403(b) tax-deferred annuities are
subject to mandatory 20% federal income tax withholding. If the recipient is a
non-resident alien, any withholding will be governed by Code Section 1441 based
on the individual's citizenship, the country of domicile and treaty status. We
will report to the IRS the taxable portion of all distributions.
MISCELLANEOUS
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DISTRIBUTION
The Company will serve as the principal underwriter for the securities
sold by this Prospectus. The Company is registered as a broker-dealer with the
Securities and Exchange Commission ("SEC") and is a member of the National
Association of Securities Dealers, Inc. ("NASD"). As principal underwriter, the
Company will contract with one or more registered broker-dealers, or with banks
that may be acting as broker-dealers without separate registration under the
Securities Exchange Act of 1934 pursuant to legal and regulatory exceptions
("Distributors") to offer and sell the Contracts. The Company and one or more
of its affiliates may also sell the Contracts directly. All individuals
offering and selling the Contracts must either be registered representatives of
a broker-dealer, or employees of a bank exempt from registration under the
Securities Exchange Act of 1934, and must also be licensed as insurance agents
to sell variable annuity contracts.
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From time to time, the Company may offer customers of certain
broker-dealers special guaranteed rates in connection with the Guaranteed
Account offered through the Contracts, and may negotiate different commissions
for these broker-dealers.
The Company may also contract with independent third party broker-dealers
who will act as wholesalers by assisting the Company in finding broker-dealers
or banks interested in acting as Distributors for the Company. These
wholesalers may also provide training, marketing and other sales related
functions for the Company and the Distributors and may provide certain
administrative services to the Company in connection with the Contracts. The
Company may pay such wholesalers compensation based on Purchase Payments for
the Contracts purchased through Distributors selected by the wholesaler.
The Company may also designate third parties to provide services in
connection with the Contracts such as reviewing applications for completeness
and compliance with insurance requirements and providing the Distributors with
approved marketing material, prospectuses or other supplies. These parties will
also receive payments based on Purchase Payments for their services, to the
extent such payments are allowed by applicable securities laws. All costs and
expenses related to these services will be paid by the Company.
Payment of Commissions. We pay Distributors and their Registered
Representatives who sell the Contracts commissions and service fees.
Distributors will be paid commissions up to an amount currently equal to 7.0%
of Purchase Payments or as a combination of a certain percentage amount of
purchase payments at time of sale and a trail commission as a percentage of
assets. Under the latter arrangement, commission payments may exceed 7.0% of
purchase payments over the life of the Contract. In limited circumstances, we
also pay certain of these professionals compensation, overrides or
reimbursement for expenses associated with the distribution of the Contract. At
times the Company may offer certain distributors an enhanced commission for a
limited period of time. In addition, some sales personnel may receive various
types of non-cash compensation such 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.
We pay these commissions, fees and related distribution expenses out of any
deferred sales charges assessed or out of our general assets, including
investment income and any profit from investment advisory fees and mortality
and expense risk charges. No additional deductions or charges are imposed for
commissions and related expenses.
DELAY OR SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of payment
for any benefit or values (a) on any Valuation Date on which the New York Stock
Exchange ("Exchange") is closed (other than customary weekend and holiday
closings) or when trading on the Exchange is restricted; (b) when an emergency
exists, as determined by the SEC, so that disposal of securities held in the
Subaccounts is not reasonably practicable or it is not reasonably practicable
for the Company fairly to determine the value of the Subaccount's assets; or
(c) during such other periods as the SEC may by order permit for the protection
of investors. The conditions under which restricted trading or an emergency
exists shall be determined by the rules and regulations of the SEC.
PERFORMANCE REPORTING
From time to time, the Company may advertise different types of
historical performance for the Subaccounts of the Separate Account. The Company
may advertise the "standardized average annual total returns" of the
Subaccounts, calculated in a manner prescribed by the SEC, as well as the
"non-standardized returns." "Standardized average annual total returns" are
computed according to a formula in which a hypothetical investment of $1,000 is
applied to the Subaccount and then related to the ending redeemable values over
the most recent one, five and ten-year periods (or since contributions were
first received in the Fund under the Separate Account, 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 charges, annual
maintenance fees, administrative charge and any applicable deferred sales
charge). "Non-standardized returns" will be calculated in a similar manner,
except that non-standardized figures will not reflect the deduction of any
applicable deferred sales charge (which would decrease the level of performance
shown if reflected in
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these calculations). The non-standardized figures may also include monthly,
quarterly, year-to-date and three-year periods, and may include performance
from the Fund's inception date.
The Company may also advertise certain ratings, rankings or other
information related to the Company, the Subaccounts or the Funds. Further
details regarding performance reporting and advertising are described in the
Statement of Additional Information.
VOTING RIGHTS
Each individual Certificate Holder or Group Contract Holder may direct us
in the voting of shares at shareholders' meetings of the appropriate Funds(s).
The number of votes to which each individual Certificate Holder or Group
Contract Holder may give direction will be determined as of the record date.
The number of votes each individual Certificate Holder or Group Contract Holder
is entitled to direct with respect to a particular Fund during the Accumulation
Period equals the portion of the Account Value(s) of the Contract attributable
to that Fund, divided by the net asset value of one share of that Fund. During
the Annuity Period, the number of votes is equal to the valuation reserve for
the portion of the Contract attributable to that Fund, divided by the net asset
value of one share of that Fund. In determining the number of votes, fractional
votes will be recognized. Where the value of the Contract or valuation reserve
relates to more than one Fund, the calculation of votes will be performed
separately for each Fund.
If you are a Certificate Holder under a group Contract, you have a fully
vested (100%) interest in the benefits provided to you under your Account.
Therefore, you may instruct the Group Contract Holder how to direct the Company
to cast the votes for the portion or the value of valuation reserve
attributable to your Account. Votes attributable to those Certificate Holders
who do not instruct the Group Contract Holder will be cast by the Company in
the same proportion as votes for which instructions have been received by the
Group Contract Holder. Votes attributable to individual Certificate Holders or
Group Contract Holders who do not direct us will be cast by us in the same
proportion as votes for which directions we have received.
You will receive a notice of each meeting of shareholders, together with
any proxy solicitation materials, and a statement of the number of votes
attributable to your Account.
MODIFICATION OF THE CONTRACT
The Company may change the Contract as required by federal or state law.
In addition, the Company may, upon 30 days written notice to the Group Contract
Holder, make other changes to group Contracts that would apply only to
individuals who become Certificate Holders under that Contract after the
effective date of such changes. If the Group Contract Holder does not agree to
a change, the Company reserves the right to refuse to establish new Accounts
under the Contract. Certain changes will require the approval of appropriate
state or federal regulatory authorities.
TRANSFERS OF OWNERSHIP; ASSIGNMENT
Assignments or transfers of ownership of a Qualified Contract generally
are not allowed except as permitted under the Code, incident to a divorce. We
will accept assignments or transfers of ownership of a Nonqualified Contract or
a Qualified Contract where assignments or transfers of ownership are not
prohibited, with proper notification. The date of any such transfer will be the
date we receive the notification at our Home Office. (Refer to "Tax Status" for
general tax information.) If you are contemplating a transfer of ownership or
assignment you should consult a tax advisor due to the potential for tax
liability.
No assignment of a Contract will be binding on us unless made in writing
and sent to us at our Home Office. The Company will use reasonable procedures
to confirm that the assignment is authentic, including verification of
signature. If the Company fails to follow its procedures, it would be liable
for any losses to you directly resulting from the failure. Otherwise, we are
not responsible for the validity of any assignment. The rights of the
Certificate Holder and the interest of the Annuitant and any Beneficiary will
be subject to the rights of any assignee of record.
INVOLUNTARY TERMINATIONS
We reserve the right to terminate any Account with a value of $2,500 or
less immediately following a partial withdrawal (unless otherwise required by
state law). However, an IRA may only be closed out when Purchase Payments have
not been received for a 24-month period and the paid-up annuity benefit at
maturity would be less than $20 per month. If such right is exercised, you will
be given 90 days advance written notice. No deferred sales charge will be
deducted for involuntary terminations. The Company does not intend to exercise
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this right in cases where the Account Value is reduced to $2,500 or less solely
due to investment performance.
LEGAL MATTERS AND PROCEEDINGS
The Company knows of no material legal proceedings pending to which the
Separate Account or the Company is a party or which would materially affect the
Separate Account. The validity of the securities offered by this Prospectus has
been passed upon by 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 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
Sales Material and Advertising
Independent Auditors
Financial Statements of the Separate Account
Financial Statements of the Company
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APPENDIX A
ALIAC GUARANTEED ACCOUNT
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The ALIAC Guaranteed Account (the "Guaranteed Account") is a credited
interest option available during the Accumulation Period under the Contracts.
This Appendix is a summary of the Guaranteed Account and is not intended to
replace the Guaranteed Account prospectus. You should read the accompanying
Guaranteed Account prospectus carefully before investing.
The Guaranteed Account is a credited interest option in which we guarantee
stipulated rates of interest for stated periods of time on amounts directed to
the Guaranteed Account. For guaranteed terms of one year or less, a guaranteed
rate is credited for the full term. For guaranteed rates of greater than one
year, the initial guaranteed rate is credited from the date of deposit to the
end of a specified period within the guaranteed term. The interest rate
stipulated is an annual effective yield; that is, it reflects a full year's
interest. Interest is credited daily at a rate that will provide the guaranteed
annual effective yield for one year. Guaranteed interest rates will never be
less than an annual effective rate of 3%.
During a deposit period, amounts may be applied to any of the available
guaranteed terms. A Guaranteed Term is the period of time specified by the
Company for which a specific Guaranteed Rate or Rates are offered on amounts
invested during a specific Deposit Period. Guaranteed Terms are made available
by the Company subject to the Company's terms and conditions. See the
prospectus for the Guaranteed Account for further details regarding Guaranteed
Term. The Company may offer more than one Guaranteed Term of the same duration
and credit one with a higher rate contingent upon use only with the Dollar Cost
Averaging Program. If amounts are applied to a Guaranteed Term which is
credited with a higher rate using dollar cost averaging and the dollar cost
averaging is discontinued, the amounts will be transferred to another
Guaranteed Term of the same duration and a market value adjustment ("MVA") will
apply. The Company also reserves the right to limit the number of Guaranteed
Terms or the availability of certain Guaranteed Terms. Purchase Payments
received after the initial payment will be allocated in the same proportions as
the last allocation, if no new allocation instructions are received with the
Purchase Payment. If the same guaranteed term(s) are not available, the next
shortest term will be used. If no shorter guaranteed term is available, the
next longer guaranteed term will be used.
Except for transfers from an available Guaranteed Term subject to the
Company's terms and conditions in connection with the Dollar Cost Averaging
Program, withdrawals taken in connection with an Estate Conservation or
Systematic Withdrawal distribution option, and, if approved by your state,
withdrawals for minimum distributions required by the Code for which the
deferred sales charge is waived, withdrawals or transfers from a guaranteed
term before the guaranteed term matures may be subject to an MVA. An MVA
reflects the change in the value of the investment due to changes in interest
rates since the date of deposit. When interest rates increase after the date of
deposit, the value of the investment decreases, and the MVA is negative.
Conversely, when interest rates decrease after the date of deposit, the value
of the investment increases, and the MVA is positive. It is possible that a
negative MVA could result in the Certificate Holder receiving an amount which
is less than the amount paid into the Guaranteed Account.
For partial withdrawals during the Accumulation Period, amounts to be
withdrawn from the Guaranteed Account will be withdrawn on a pro rata basis
from each group of deposits having the same length of time until the Maturity
Date ("Guaranteed Term Group"). Within a Guaranteed Term Group, the amount will
be withdrawn first from the oldest Deposit Period, then from the next oldest,
and so on until the amount requested is satisfied.
As a Guaranteed Term matures, assets accumulating under the Guaranteed
Account may be (a) transferred to a new Guaranteed Term, (b) transferred to
other available investment options, or (c) withdrawn. Amounts withdrawn may be
subject to a deferred sales charge. If no direction is received by the Company
at its Home Office by the maturity date of a guaranteed term, the amount from
the maturing guaranteed term will be transferred to the current deposit period
for a similar length guaranteed term. If the same guaranteed term is no longer
available the
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next shortest guaranteed term available in the current deposit period will be
used. If no shorter guaranteed term is available, the next longer guaranteed
term will be used.
If you do not provide instructions concerning the maturity value of a
maturing guaranteed term, the maturity value transfer provision applies. This
provision allows you to transfer without an MVA to available guaranteed terms
of the current deposit period or to other available investment options, or
surrender without an MVA (if applicable, a deferred sales charge is assessed on
the surrendered amount). The provision is available only during the calendar
month immediately following a guaranteed term maturity date and only applies to
the first transaction regardless of the amount involved in the transaction.
MORTALITY AND EXPENSE RISK CHARGES
We make no deductions from the credited interest rate for mortality and
expense risks; these risks are considered in determining the credited rate.
TRANSFERS
Amounts applied to a guaranteed term during a deposit period may not be
transferred to any other funding option or to another guaranteed term during
that deposit period or for 90 days after the close of that deposit period. This
does not apply to (1) amounts transferred on the Maturity Date or under the
maturity value transfer provision; (2) amounts transferred from the Guaranteed
Account before the Maturity Date due to the election of an Annuity Payout
Option; (3) amounts distributed under the Estate Conservation or Systematic
Withdrawal Options; and (4) amounts transferred from an available Guaranteed
Term in connection with the Dollar Cost Averaging Program. However, if the
Certificate Holder discontinues the Dollar Cost Averaging Program and the
amounts in it are transferred in accordance with the Company's terms and
conditions governing Guaranteed Terms, an MVA will apply. Transfers after the
90-day period are permitted from guaranteed term(s) to other guaranteed term(s)
available during a deposit period or to other available investment options.
Except for transactions described in items (1), (3) and (4) above, amounts
withdrawn or transferred from the Guaranteed Account prior to the maturity date
will be subject to an MVA. However, only a positive aggregate MVA will be
applied to transfers made due to annuitization under one of the lifetime
Annuity Payout Options described in item (2) above.
The Company reserves the right to limit the number of investment options
selected during the Accumulation Period. At this time there is no limit on the
number of options selected during the Accumulation Period, but the number of
investment options that may be selected at any one time by a Certificate Holder
presently is limited to 18. Under the Guaranteed Account, each guaranteed term
is counted as one funding option. If a guaranteed term matures, and is renewed
for the same term, it will not count as an additional investment option.
Transfers of the Guaranteed Account values on or within one calendar month of a
term's maturity date are not counted as one of the 12 free transfers of
accumulated values in the Account.
By notifying us at least 30 days prior to the Annuity Date, you may elect a
variable Annuity Payout Option and have amounts that have been accumulating
under the Guaranteed Account transferred to one or more of the Subaccounts
available during the Annuity Period. The Guaranteed Account cannot be used as
an investment option during the Annuity Period. Transfers made due to the
election of a lifetime Annuity Payout Option will be subject to only a positive
aggregate MVA.
DEATH BENEFIT
Full and partial withdrawals and transfers made from the Guaranteed
Account within six months after the date of the Annuitant's death will be the
greater of:
(1) the aggregate MVA amount (i.e., the sum of all market value adjusted
amounts calculated due to a withdrawal of amounts) which may be greater or
less than the Account Value of those amounts; or
(2) the applicable portion of the Account Value attributable to the Guaranteed
Account.
After the six-month period, the surrender or transfer amount will be adjusted
for the aggregate MVA amount, which may be greater or less than the Account
Value of those amounts.
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DISTRIBUTION
The Company is the principal underwriter of the Contract. The Company is
registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 as a broker-dealer, and is a member of the National
Association of Securities Dealers, Inc.
From time to time, the Company may offer customers of certain broker-dealers
special guaranteed rates in connection with the Guaranteed Account offered
through the Contracts, and may negotiate different commissions for these
broker-dealers.
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APPENDIX B
FIXED ACCOUNT
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The Fixed Account is an investment option available during the
Accumulation Period under the Contracts. The following summarizes material
information concerning the Fixed Account that is offered as an option under the
Contract. Additional information may be found in your Contract. Amounts
allocated to the Fixed Account are held in the Company's general account that
supports 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 this prospectus regarding the Fixed
Account, however, may 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 Account has not
been reviewed by the SEC.
FIXED ACCOUNT
Amounts allocated to this option will earn the minimum guaranteed interest
rate specified in the Contract. The Company may credit a higher interest rate
from time to time. The Company's determination of interest rates reflects the
investment income earned on invested assets and the amortization of any capital
gains and/or losses realized on the sale of invested assets. Under this option,
the Company assumes the risk of investment gain or loss by guaranteeing Net
Purchase Payment values and promising a minimum interest rate and Annuity
Payment.
Amounts applied to the Fixed Account will earn the interest rate in effect
when actually applied to the Fixed Account. The Fixed Account is only available
in certain states. If a withdrawal is made from the Fixed Account, a deferred
sales charge may apply. Amounts allocated to the Fixed Account will count as an
option for purposes of the 18 investment option limit. (See "Investment
Options.")
DOLLAR COST AVERAGING
Amounts invested in the Fixed Account must be transferred into the other
investment options available under the Contract over a period not to exceed 12
months under the Dollar Cost Averaging Program. In the event a Certificate
Holder discontinues dollar cost averaging, the remaining balance amounts in the
Fixed Account will be transferred into the money market Subaccount unless
directed otherwise.
MORTALITY AND EXPENSE RISK CHARGES
The Fixed Account will reflect a compound interest rate credited by the
Company. The interest rate quoted is an annual effective yield. The Company
makes no deductions from the credited interest rate for mortality and expense
risks; these risks are considered in determining the credited rate.
TRANSFERS AMONG INVESTMENT OPTIONS
Transfers from the Fixed Account to any other available investment option
under the Contract are allowed in each Account Year during the Accumulation
Period. The amount which may be transferred may vary at the Company's
discretion; however, it will never be less than 10% of the amount held under
the Fixed Account.
By giving notice to the Company at its Home Office at least 30 days before
Annuity Payments begin, the Certificate Holder may elect to have amounts which
have been accumulated under the Fixed Account transferred to one or more of the
investment options available during the Annuity Period to provide variable
Annuity Payments.
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 allow provided
by federal law.
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APPENDIX C
DESCRIPTION OF UNDERLYING FUNDS
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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.
Aetna Balanced VP, Inc.
Investment Objective
Seeks to maximize investment return, consistent with reasonable safety of
principal 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.
Policies
Assets are allocated among common and preferred stocks, bonds, U.S.
Government securities and derivatives, and money market instruments. The Fund
may also invest in when-issued or delayed-delivery securities. The Fund
generally will maintain at least 25 percent of its total assets in fixed income
securities.
Risks
There can be no assurance that the investment adviser will always allocate
assets to the best performing sectors. The Fund's performance would suffer if a
major proportion of its assets were allocated to stocks in a declining market
or, similarly, if a major portion of its assets were allocated to bonds in a
time of adverse interest rate movement. High-yield bonds involve additional
investment risk. Foreign securities may involve certain additional risks. Such
risks include: currency fluctuations and related currency conversion costs;
less liquidity; price or income volatility; less government supervision and
regulation of foreign stock exchanges, brokers and listed companies; adverse
foreign political and economic developments; different accounting procedures
and auditing standards; and less publicly available information about foreign
issuers.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Income Shares d/b/a Aetna Bond VP
Investment Objective
Seeks to maximize total return, consistent with reasonable risk, through
investments in a diversified portfolio consisting primarily of debt securities.
Policies
The Fund will invest at least 65 percent of its total assets in debt
securities. It is anticipated that the portfolio's effective average maturity
will normally be between three and ten years. The Fund will normally invest at
least 70 percent of its assets in one or more of the following: a) debt
securities or obligations that are rated at the time of purchase within the
four highest categories assigned by Moody's Investors Service, Inc., Standard &
Poor's Corporation, or other rating agencies, or, if not rated, that are
considered by the investment adviser to be of comparable quality; b) securities
of, or guaranteed by, the U.S. Government, its agencies or instrumentalities;
c) marketable securities or obligations of, or guaranteed by, foreign
governments; d) commercial paper and other short-term investments having a
maturity of less than one year that are considered by the investment adviser to
be investment grade; and, e) cash or cash equivalents. May invest up to 30
percent of its total assets in high-yield bonds. May invest up to 25 percent of
its total assets in foreign debt and/or equity securities.
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Risks
The value of debt securities may be affected by changes in general
interest rates. High-yield bonds tend to offer higher yields than
investment-grade bonds, but additional risks are associated with them. Foreign
securities may involve certain additional risks. Such risks include: currency
fluctuations and related currency conversion costs; less liquidity; price or
income volatility; less government supervision and regulation of foreign stock
exchanges, brokers and listed companies; adverse foreign political and economic
developments; different accounting procedures and auditing standards; and less
publicly available information about foreign issuers.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Fund d/b/a Aetna Growth and Income VP
Investment Objective
Seeks to maximize total return through investments in a diversified
portfolio of common stocks and securities convertible into common stock. It is
anticipated that capital appreciation and investment income will both be major
factors in achieving total return.
Policies
The Fund will invest principally in common stocks and securities
convertible into common stock that the investment adviser believes have
significant potential for capital appreciation and/or investment income. May
invest up to 25 percent of its total assets in foreign equity securities. The
Fund may invest in nonconvertible preferred stocks, debt securities, rights and
warrants; the Fund may maintain a reserve of cash and high-grade, short-term
debt securities and the Fund may purchase securities on a when-issued or
delayed-delivery basis.
Risks
Share prices will fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. Foreign
securities may involve certain additional risks. Such risks include: currency
fluctuations and related currency conversion costs; less liquidity; price or
income volatility; less government supervision and regulation of foreign stock
exchanges, brokers and listed companies; adverse foreign political and economic
developments; different accounting procedures and auditing standards; and less
publicly available information about foreign issuers.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Encore Fund d/b/a Aetna Money Market VP
Investment Objective
Seeks to provide high current return, consistent with preservation of
capital and liquidity, through investment in high-quality money market
instruments.
Policies
The Fund will Invest primarily in: a) money market instruments that have a
maturity at the time of purchase, of 397 days or less (762 days or less for
U.S. government securities), and b) debt securities with a longer maturity, if
the Fund has the absolute right to sell such securities back to the issuer for
at least the face amount of the debt obligation within 397 days after the date
of purchase. At least 95 percent of total Fund assets are invested in high-
quality securities (those receiving the highest credit rating by any two rating
agencies or one if only one agency has rated the security). May invest up to 25
percent of its total assets in foreign securities.
Risks
Yield will fluctuate with interest rates. The Fund is neither insured nor
guaranteed by the U.S. government. Foreign securities may involve certain
additional risks. Such risks include: currency fluctuations and related
currency conversion costs; less liquidity; price or income volatility; less
government supervision and regulation of foreign stock
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exchanges, brokers and listed companies; adverse foreign political and economic
developments; different accounting procedures and auditing standards; and less
publicly available information about foreign issuers.
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Growth VP
Investment Objective
Seeks growth of capital through investment in a diversified portfolio of
common stocks and securities convertible into common stocks believed to offer
growth potential.
Policies
Normally invests at least 65 percent of its total assets in common stocks
that have significant potential for capital growth. May also invest in
convertible and nonconvertible preferred stocks. May buy and sell put and call
options, and stock index futures and options. May enter into repurchase
agreements and invest up to 25 percent of its total assets in foreign
securities. Will not invest more than 15 percent of the total value of its
assets in high-yield bonds.
Risks
Equity securities are subject to a decline in the stock market or in the
value of the company and preferred stocks have price risk and some interest
rate and credit risk. Foreign investing involves certain additional risks not
present in U.S. securities. Such risks may include: currency fluctuations and
related currency conversion costs: less liquidity; price or income volatility;
less government supervision and regulation of foreign stock exchanges, brokers
and listed companies; adverse foreign political and economic developments;
different accounting procedures and auditing standards; and less publicly
available information about foreign issuers. High-yield bonds may provide a
higher return, but have added risk. Derivatives may experience greater price
swings and may be less liquid than other securities.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP
Investment Objective
Seeks to outperform the total return performance of publicly traded common
stocks represented in the Standard & Poor's 500 Composite Stock Price Index
(S&P 500).
Policies
The Portfolio attempts to be fully invested in common stocks and normally
invests at least 90 percent of its assets in certain common stocks represented
in the S&P 500. Portfolio managers will attempt to outperform the S&P 500 by
creating a portfolio that has similar market risk characteristics to the S&P
500, but will use a disciplined quantitative analysis to identify those stocks
having the greatest likelihood of either outperforming or underperforming the
market.
Risks
Because the Portfolio invests in common stocks, it is subject to the
possibility that common stock prices will decline over short or even extended
periods. The U.S. stock market tends to be cyclical, with periods when stock
prices generally rise and periods when prices generally decline. There is no
assurance that the Portfolio's objectives will be met.
Investment Adviser: Aeltus Investment Management, Inc.
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Aetna Variable Portfolios, Inc.--Aetna International VP
Investment objective
Seeks long-term capital growth primarily though investment in a
diversified portfolio of common stocks principally traded in countries outside
of the United States. The Portfolio will not target any given level of current
income.
Policies
Invests at least 65 percent of its total assets among securities
principally traded in three or more countries outside of North America. The
Portfolio will invest primarily in equity securities, including securities
convertible into stocks. The Portfolio will invest in a broad spectrum of
companies and industries. Further, from time to time, the Portfolio may hold up
to 10 percent of its total assets in long-term debt securities with an S&P or
Moody's rating of AA/Aa or above, or, if unrated, are considered by the
investment adviser to be of comparable quality. Additionally, the Portfolio may
invest in options, futures, enter into repurchase agreements and engage in
currency hedging.
Risks
Equity securities are subject to a decline in the stock market or in the
value of the company. Investments in foreign securities involve certain
additional risks. Such risks may include: currency fluctuations and related
currency conversion costs; less liquidity; price or income volatility; less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies; adverse foreign economic and political developments;
different accounting procedures and auditing standards; and less publicly
available information about foreign issuers. Derivatives may experience greater
price swings and may be less liquid than other securities.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Real Estate Securities VP
Investment Objective
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).
Policies
Normally invests at least 65 percent of total assets in income-producing
equity securities of publicly-traded companies "principally engaged" in the
real estate industry, including those companies that, at the time of purchase,
derive a significant proportion (at least 50 percent) of their revenues or
profits from real estate operations or related services. The Portfolio may
invest in convertible securities and preferred stock. Additionally, the
Portfolio may invest in options and futures, enter into repurchase agreements,
and invest up to 25 percent of its total assets in foreign securities. The
Portfolio will not invest more than 15 percent of the total value of its assets
in high-yield bonds.
Risks
There are a number of risk factors to be considered when investing in Real
Estate Securities VP. Derivatives may experience greater price swings than
other securities and may be less liquid than other securities. Risks involved
in futures contracts include, but are not limited to: transactions to close out
futures contracts may not be able to be effected at favorable prices; possible
reduction in a fund's total return and yield; possible reduction the value of
the futures instrument, and potential losses in excess of the amount invested
in the futures contracts themselves. Writing call options involves the risk of
not being able to effect closing transactions at favorable prices or to
participate in the appreciation of the underlying securities. Purchasing put
options involves the risk of losing the entire purchase price of the option.
High-yield bonds have additional risks associated with them, including but not
limited to: lack of liquidity; an unpredictable secondary market and a higher
risk of default. Special consideration to an investment in real estate include
those risks associated with the direct ownership of real estate: declines in
the value of real estate, risks related to general and local economic
conditions, over-building and increased competition, increases in property
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taxes and operating expenses, changes in zoning laws and other risks particular
to this market. The value of securities of companies which service the real
estate industry may also be affected by such risks.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Small Company VP
Investment Objective
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.
Policies
Normally invests at least 65 percent of its total assets in the common
stock of companies with equity market capitalizations at the time of purchase
of $1 billion or less. May also invest in convertible and nonconvertible
preferred stock. The securities of small capitalization companies may be in an
early developmental stage or older companies entering a new stage of growth due
to management changes, new technology, products, or markets. Such companies may
also be undervalued due to poor economic conditions, market decline, or actual
or unanticipated unfavorable developments affecting the companies. May invest
in lower-risk derivatives for hedging and other investment purposes.
Risks
Equity securities are subject to a decline in the stock market or in the
value of the company. Although securities of small capitalization companies
tend to offer greater potential for growth than securities of larger, more
established issuers, there are additional risks associated with them. These
include: limited marketability, more abrupt or erratic market movements than
securities of larger capitalization companies, and less publicly available
information about the issuer. These companies may also be dependent on
relatively few products or services, have limited financial resources and lack
of management depth, and may have less of a track record or historical pattern
of performance. Derivatives may experience greater price swings and may be less
liquid than other securities.
Investment Adviser: Aeltus Investment Management, Inc.
AIM V.I. Capital Appreciation Fund ("Capital Appreciation Fund")
Investment Objective
Seeks capital appreciation through investments in common stocks, with
emphasis on medium-sized and smaller emerging growth companies.
Policies
AIM will be particularly interested in companies that are likely to
benefit from new and innovative products, services or processes that should
enhance such companies' prospects for future growth in earnings. Any income
received from securities held by the Fund will be incidental. The Fund's
portfolio is primarily comprised of securities of two bias categories of
companies: (1) "core" companies, which AIM considers to have experienced
above-average and consistent long-term growth in earnings and to have excellent
prospects for outstanding future growth, and (2) "earnings acceleration"
companies which AIM believes are currently enjoying a dramatic increase in
profits.
Risks
There is no guarantee that the Fund's objective will be met. The market
prices of many of the securities purchased and held by the Fund may fluctuate
widely. Investing in equity securities of small-and-medium-sized companies may
involve greater risk than associated with investing in more established
companies. Equity securities are subject to a decline in the stock market or in
the value of the issuer, and preferred stocks have price risk and some credit
risk. The Fund may invest in convertible securities, which may be subject to
redemption at the option of the issuer at a price established in the
convertible security's governing instrument. The Fund may invest in foreign
securities. Investments in securities of foreign issuers or foreign securities
involve risks not present in domestic
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markets, including: currency fluctuations and related currency conversion
costs, political instability, expropriation or confiscatory taxation and
limited government regulations, accounting and auditing processes; and market
due to a lesser trade volume than is generally expected of domestic markets.
Investment Adviser: AIM Advisors, Inc.
AIM V.I. Growth Fund ("Growth Fund")
Investment Objective
Seeks growth of capital principally through investment in common stocks of
seasoned and better capitalized companies considered by AIM to have strong
earnings momentum. Current income will not be an important criterion of
investment selection, and any such income should be considered incidental.
Policies
The Fund's portfolio is primarily comprised of securities of two basic
categories: (1)"core" companies, which AIM considers to have experienced
above-average and consistent long-term growth in earnings and to have excellent
prospects for outstanding future growth, and (2) "earnings acceleration"
companies which Fund management believes are currently enjoying a dramatic
increase in profits.
Risks
There is no guarantee that the Fund will achieve its objective. Because
the Fund invests in common stocks, it is subject to the possibility that common
stock prices will decline over short or even extended periods. The U.S. stock
market tends to be cyclical, with periods when prices generally rise, and
periods when prices generally decline. The Fund may invest in convertible
securities, which may be subject to redemption at the option of the issuer at a
price established in the convertible security's governing instrument. The Fund
may invest in foreign securities. Investments in foreign securities involve
risks not present in domestic markets, including: currency fluctuations and
related currency conversion costs, political and economical risk due to less
stringent government regulations, accounting and auditing processes; and market
risk due to a lesser trade volume than is generally expected of domestic
markets.
Investment Adviser: AIM Advisors, Inc.
AIM V.I. Growth and Income Fund ("Growth and Income Fund")
Investment Objective
Seeks growth of capital, with current income as a secondary objective.
Although the amount of the Fund's current income will vary from time to time,
it is anticipated that the current income realized by the Fund will generally
be greater than that realized by the mutual funds whose sole objective is
growth of capital.
Policies
The Fund seeks to achieve its objective by generally investing at the
least 65% if its net assets in stocks of companies believed by management to
have the potential for the above-average growth in revenues and earnings. The
Fund generally will also invest at least 80% of its assets in securities which
pay income to the Fund.
Risks
There is no guarantee that the Fund will achieve its objective. Equity
securities are subject to a decline in the stock market or in the value of the
issuer. The U.S. stock market tends to be cyclical, with periods when stock
prices generally rise and periods when prices generally decline. The value of
debt securities may be affected by changes in general interest rates and in the
creditworthiness of the issuer. The Fund may invest in convertible securities,
which may be subject to redemption at the option of the issuer at a price
established in the convertible security's governing instrument. The Fund may
invest in foreign securities. Investments in securities of foreign issuers or
in foreign securities involve risks not present in domestic markets, including:
currency fluctuation and related currency conversion costs, political and
economic risk due to social or political instability, expropriation or
confiscatory
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taxation and limited liquidity: regulatory risk due to less stringent
government regulations, accounting and auditing processes; and market risk due
to a lesser trade volume is generally expected to domestic markets.
Investment Adviser: AIM Advisors, Inc.
AIM V.I. Value Fund ("Value Fund")
Investment Objective
To achieve long-term growth of capital by investing primarily in equity
securities judged by AIM to be undervalued relative to the current or projected
earnings of the companies issuing the securities, or relative to the current
market values of assets owned by the companies issuing the securities, or
relative to the equity market, generally.
Policies
Income as the secondary objective would be satisfied principally from the
income generated by the common stocks, convertible bonds and convertible
preferred stocks that make up the Fund's portfolio. The Fund may also acquire
preferred stocks and debt instruments having prospects for growth of capital.
The primary thrust of AIM's search for undervalued equity securities is in four
categories: (1) out of favor cyclical growth companies; (2) established growth
companies that are undervalued compared to historical relative valuation
parameters; (3) companies where there is early but tangible evidence of
improving prospects which are not yet reflected in the price of the company's
equity securities; and (4) companies whose equity securities are selling at
prices that do not reflect the current market value of its assets and where
there is no reason to expect realization of this potential in the form of
increased equity values. The Fund may invest up to 15% of its net assets in
securities which are illiquid, and may invest up to 25% if its assets in
foreign securities.
Risks
Investment in equity securities involves certain risks. Equity securities
offer no guaranteed return, and prices will fluctuate. During certain market
conditions, purchases and sales of futures contracts may not completely offset
a decline or rise in the value of the Fund's portfolio. In the futures market,
it may not always be possible to execute a buy or sell order at the desired
price, or to close out an open position due to market conditions, limits on
open positions and/or daily price fluctuations. Unanticipated price movements
in a futures contract may result in a loss substantially greater than the
Fund's initial investment in the contract. Limitations on the resale of
illiquid securities may have an adverse affect on their marketability, which
may prevent the Fund from disposing of them promptly at reasonable prices.
Investment in the foreign securities carries the following primary risks:
Currency risks due to changing currency exchange rates; political and social
due to political/social instability and other factors; regulatory risk due to
less stringent regulation and government supervision of foreign issuers; and
market risks whereby foreign securities may be less liquid and more volatile
due to lower trading volume and higher transactions costs.
Investment Adviser: AIM Advisors, Inc.
Fidelity Investments Variable Insurance Products Fund--Equity-Income Portfolio
Investment Objective
Seeks reasonable income by investing primarily in income-producing equity
securities. Also considers the potential for capital appreciation.
Policies
Seeks to achieve a yield that will beat that of the Standard & Poor's
(S&P) 500 Index. The Portfolio normally invests at least 65 percent of its
total assets in income-producing equity securities. The Portfolio has the
flexibility, however, to invest the balance in all types of domestic and
foreign securities, including bonds. Portfolio managers do not expect to invest
in debt securities of companies that do not have proven earnings or credit.
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Risks
Share prices will fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. The value of
bonds fluctuates based on changes in interest rates and in the credit quality
of the issuer. Foreign securities, foreign currencies and securities issued by
U.S. entities with substantial foreign operations may involve additional risks.
These include political or economic risks, fluctuations in foreign currencies
withholding or other taxes, operational risks, increased regulatory burdens,
and less stringent investor protection and disclosure standards of foreign
markets.
Investment Adviser: Fidelity Management & Research Company
Fidelity Investments Variable Insurance Products Fund-- High Income Portfolio
Investment Objective
Seeks to obtain a high level of current income by investing primarily in
high-yielding, lower-rated, fixed income securities, while also considering
growth of capital.
Policies
Invests primarily in all types of income-producing debt securities,
preferred stocks, and convertible securities. The Portfolio normally invests at
least 65 percent of its assets in these securities. If consistent with its
investment objectives, the Portfolio may also invest in common stocks, other
equity securities, and debt securities that are not currently paying interest
but that are expected to do so in the future. The Portfolio manager focuses on
assembling a portfolio of income-producing securities that it believes will
provide the best tradeoff between risk and return within the range of
securities that are eligible investments for the Portfolio. The Portfolio may
invest up to 50 percent of its total assets in foreign securities.
Risks
Yield and share price change daily and are based on changes in interest
rates, market conditions, other economic and political news, and on the quality
and maturity of the Portfolio's investments. Lower quality debt securities
(also known as "junk bonds") are considered to have speculative characteristics
and involve greater risk of default or price changes. Foreign securities,
foreign currencies and securities issued by U.S. entities with substantial
foreign operations may involve additional risks. These include political or
economic risks, fluctuations in foreign currencies, withholding or other taxes,
operational risks, increased regulatory burdens, and less stringent investor
protection and disclosure standards of foreign markets.
Investment Adviser: Fidelity Management & Research Company
Fidelity Investments Variable Insurance Products Fund II--Contrafund Portfolio
Investment Objective
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.
Policies
Usually invests in common stock and securities convertible into common
stock, but may invest in any type of security that may produce capital
appreciation. Seeks companies that are: 1) unpopular, but that may improve due
to developments such as a change in management, a new product line, or an
improved balance sheet; or 2) recently popular, but temporarily out of favor
due to short-term or one-time factors; or, undervalued compared to other
companies in the same industry. May not invest more than 25 percent of its
total assets in any one industry.
Risks
Stock values may fluctuate in response to the activities of an individual
company or general market and economic conditions. The Portfolio's strategy can
lead to investments in small- and medium-sized companies, which
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carry more risk than larger ones. Generally, such companies rely on limited
product lines and markets, financial resources or other factors. This may make
them more susceptible to downturns. Foreign securities, foreign currencies, and
securities issued by U.S. entities with substantial foreign operations may
involve additional risks. These include political or economic risks,
fluctuations in foreign currencies, withholding or other taxes, operational
risks, increased regulatory burdens, and less stringent investor protection and
disclosure standards of foreign markets. Seeks to manage risk by diversifying
its holdings among many companies and industries.
Investment Adviser: Fidelity Management & Research Company
Janus Aspen Series--Aggressive Growth Portfolio
Investment Objective
Seeks long-term growth of capital.
Policies
A nondiversified portfolio that invests primarily in common stocks of
foreign and domestic companies selected for their growth potential. Normally
invests at least 50 percent of its equity assets in securities issued by
medium-sized companies--those whose market capitalizations fall within the
range of companies in the Standard and Poor's (S&P) Mid Cap 400 Index. May
invest, to a lesser degree, in other types of securities including preferred
stocks, warrants, convertible securities, and debt securities. May invest up to
35 percent of its net assets in high-yield/high-risk debt securities ("junk
bonds"). May at times hold substantial positions in cash equivalents or
interest-bearing securities.
Risks
Stock values may fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. Historically,
common stocks have provided greater long-term returns and have entailed greater
short-term risks than other investment choices. Smaller or newer issuers are
more likely to realize more substantial growth as well as suffer more
significant losses than larger or more established issuers. Investments in such
companies can be both more volatile and more speculative. Investments in
foreign securities, including those of foreign governments, involve greater
risks than investing in comparable domestic securities. These risks include
currency, political, economic, regulatory, and market risk factors.
High-yield/high-risk securities are generally more dependent on the ability of
the issuer to meet interest and principal payments (i.e., credit risk). Issuers
of high-yield securities may not be as strong financially as those issuing
bonds with higher credit ratings. They are more vulnerable to real or perceived
economic changes, political changes or other adverse developments.
Investment Adviser: Janus Capital Corporation
Janus Aspen Series--Balanced Portfolio
Investment Objective
Seeks long-term capital growth, consistent with preservation of capital
and balanced by current income.
Policies
Normally invests 40-60 percent of its assets in securities selected
primarily for their growth potential and 40-60 percent of its assets in
securities selected primarily for their income potential. Invests in common
stocks of domestic and foreign companies. May invest to a lesser degree in
other types of securities including preferred stocks, warrants, convertible
securities, and debt securities when the portfolio manager perceives an
opportunity for capital growth. Assets may shift between the growth and income
components of the Portfolio based on the portfolio manager's analysis of
relevant market financial and economic conditions. The portfolio manager
generally takes a "bottom up" approach to building the Portfolio, seeking to
identify individual companies with earnings growth potential that may not be
recognized by the market at large.
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Risks
Share prices will fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. Investments
in foreign securities, including those of foreign governments, involve greater
risks than investing in comparable domestic securities. These risks include
currency, political, economic, regulatory and market risk factors. Risk is
reduced through diversification.
Investment Adviser: Janus Capital Corporation
Janus Aspen Series--Growth Portfolio
Investment Objective
Seeks long-term growth of capital in a manner consistent with the
preservation of capital.
Policies
Invests in common stocks of companies of any size, although it generally
invests in larger, more established issuers. Invests primarily in stocks of
domestic and foreign companies selected for their growth potential. May at
times hold substantial positions in cash equivalents or interest bearing
securities. May invest to a lesser degree in other types of securities
including preferred stocks, warrants, convertible securities, and debt
securities when its portfolio manager perceives an opportunity for capital
growth. Using a "bottom up" approach to building the Portfolio, the portfolio
manager seeks to identify individual companies with earnings growth potential
that may not be recognized by the market at large. Securities are generally
selected without regard to any defined industry sector. Securities are selected
solely for their capital growth potential; investment income is not a
consideration.
Risks
Share prices will fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. Historically,
common stocks have provided greater long-term returns and have entailed greater
short-term risks than other investment choices. Smaller or newer issuers are
more likely to realize more substantial growth as well as suffer more
significant losses than larger or more established issuers. Investments in such
companies can be both more volatile and more speculative. Investments in
foreign securities, including those of foreign governments, involve greater
risks than investing in comparable domestic securities. These risks include
currency, political, economic, regulatory and market risk factors. Risk is
reduced through diversification.
Investment Adviser: Janus Capital Corporation
Janus Aspen Series--Worldwide Growth Portfolio
Investment Objective
Seeks long-term growth of capital in a manner consistent with the
preservation of capital.
Policies
A diversified portfolio that invests primarily in common stocks of foreign
and domestic issuers. Invests worldwide in companies and organizations of any
size, regardless of country of organization or place of principal business
activity. Normally invests in issuers from at least five different countries,
including the United States. May at times invest in fewer than five countries
or even in a single country. May hold substantial positions in cash equivalents
or interest-bearing securities. May invest to a lesser degree in other types of
securities, including preferred stocks, warrants, convertible securities, and
debt securities, when the portfolio manager perceives an opportunity for
growth. May invest up to 35 percent of net assets in high-yield/high-risk
securities (also called "junk bonds"). May invest without limit in foreign
equity and debt securities.
Risks
Stock values may fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. Historically,
common stocks have provided greater long-term returns and have
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entailed greater short-term risks than other investment choices. Investment in
foreign securities, including those of foreign governments, involve greater
risks than investing in comparable domestic securities. These include currency,
political, economic, regulatory and market risk factors. High-yield/high-risk
securities are generally more dependent on the ability of the issuer to meet
interest and principal payments (i.e., credit risk). Issuers of high-yield
securities may not be as strong financially as those issuing bonds with higher
credit ratings. They are more vulnerable to real or perceived economic changes,
political changes or other adverse developments.
Investment Adviser: Janus Capital Corporation
MFS Total Return Series
Investment Objective
Seeks to provide above average income (compared to a portfolio invested
entirely in equity securities) consistent with the prudent employment of
capital. Its secondary objective is to provide a reasonable opportunity for
growth of capital and income.
Policies
Under normal market conditions, at least 25 percent of the Series' assets
will be invested in fixed income securities, and at least 40 percent (but no
more than 75 percent) of the Series' assets will be invested in equity
securities. The Series invests in a broad list of securities, including
short-term obligations. The list may be diversified not only by companies and
industries, but also by type of security. May vary the percentage of assets
invested in any one type of security depending on the Adviser's interpretation
of economic and money market conditions, fiscal and monetary policy, and
underlying security values. The Series debt investment may consist of both
investment grade securities and securities that are lower rated or unrated
categories (commonly known as "junk bonds"). May hold up to 20 percent of its
assets in foreign securities (including emerging market securities and Brady
Bonds) which are not traded on a U.S. exchange.
Risks
Investing in the securities of foreign issuers generally involves risks
not ordinarily associated with investing in securities of domestic issuers.
These include changes in currency rates, exchange control regulations,
governmental administration or economic or monetary policy (in the U.S. or
abroad), or circumstances in dealing between nations. Other considerations
include limited information about foreign issuers, higher brokerage costs,
different accounting standards, and thinner trading markets.
Investment Adviser: Massachusetts Financial Services Company ("MFS")
Oppenheimer Aggressive Growth Fund
Investment Objective
Seeks to achieve capital appreciation by investing in "growth-type"
companies.
Policies
"Growth-type" companies are believed to have relatively favorable
long-term prospects for increasing demand for their goods or services, or to be
developing new products, services, or markets and normally retain a relatively
larger portion of their earnings for research, development, and investment in
capital assets. The Fund will invest no more than 25 percent of its total
assets in foreign securities or in government securities of any foreign country
or in obligations of foreign banks.
Risks
Stock prices will fluctuate. Additional risk is present in growth-type
investments since the price of the security may decline if the anticipated
development fails to occur. Investing in small, unseasoned companies (those
that have been in operation for less than three years, counting the operations
of any predecessors) may have limited liquidity, and the prices of these
securities may be volatile. Foreign securities markets may be less liquid and
more volatile than
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markets in the U.S. Risks of foreign securities may include foreign withholding
taxation, changes in currency, less publicly available information, and
differences between domestic and foreign legal, auditing, brokerage and
economic standards.
Investment Adviser: OppenheimerFunds, Inc.
Oppenheimer Growth & Income Fund
Investment Objective
Seeks a high total return (which includes growth in the value of its
shares as well as current income) from equity and debt securities.
Policies
Invests primarily in equity and debt securities and focuses on all market
capitalization including small to medium capitalization companies. Equity
investments include common stocks, preferred stocks, convertible securities,
and warrants. Debt securities include bonds, participation interests,
asset-backed securities, private label mortgage backed securities and
collateralized mortgage obligations (CMOs), zero coupon securities, and U.S.
Government obligations. The proportion of equity and fixed income investments
will vary based upon the manager's evaluation of economic and market trends and
perceived relative total anticipated return from such types of investments.
There is no minimum or maximum percentage of assets that may, at any given
time, be invested in either type of investment. The Fund may invest in foreign
securities without limit.
Risks
Changes in overall market movements or interest rates, or factors
affecting a particular industry or issuer can affect the value of the Fund's
investments and their price per share. Equity investments are generally subject
to a number of risks, including the risk that values will fluctuate as a result
of changing expectations for the economy and individual issuers; stocks with
small- to medium-size capitalization may fluctuate more than large
capitalization stocks. Foreign investments are subject to the risk of adverse
currency fluctuation and additional risks and expenses in comparison to U.S.
investments.
Investment Adviser: OppenheimerFunds, Inc.
Oppenheimer Strategic Bond Fund
Investment Objective
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.
Policies
Invests principally in lower-rated, high-yield domestic debt securities
(commonly known as "junk bonds"), U.S. Government securities, and foreign
government and corporate debt securities. Under normal circumstances, the
Fund's assets will be invested in each of these three sectors. However,
Strategic Bond Fund may occasionally invest up to 100 percent of its total
assets in any one sector, if, in the manager's judgment, the Fund has the
opportunity to seek a high level of current income without undue risk to
principal. Accordingly, the Fund's investments should be considered
speculative. Distributable income will fluctuate as the Fund's assets are
shifted among the three sectors.
Risks
The higher yields and income sought by Strategic Bond Fund are generally
associated with securities in the lower-rating categories of the established
rating services. Such securities are considered speculative and involve greater
risk than lower-yielding, higher-rated fixed income securities, while providing
higher yields than such securities. Lower-rated securities may be less liquid,
and significant losses could be experienced if a substantial
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number of other holders of such securities decide to sell at the same time.
Issuers of lower-rated or unrated securities are generally not as financially
secure or creditworthy as issuers of higher-rated securities.
Investment Adviser: OppenheimerFunds, Inc.
Portfolio Partners MFS Emerging Equities Portfolio
Investment Objective
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.
Policies
Normally invests at least 80 percent of its assets in common stocks of
companies the subadviser believes are in an early phase of their life cycle,
but that have the potential to become major enterprises. Such companies would
be expected to show earnings growth over time well above the growth rate of the
overall economy and inflation and have the products, technologies, management
and market and other opportunities usually necessary to become more widely
recognized as growth companies. Emerging growth companies can be of any size.
The Portfolio may invest in larger or more established companies whose rates of
earnings growth are expected to accelerate because of special factors or basic
changes in the economic environment. Up to 25 percent of the Portfolio's net
assets may be invested in foreign issuers.
Risks
Share prices will fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. Investing in
emerging growth companies involves greater risk than is customarily associated
with investments in more established companies. Such companies may have limited
product lines, markets or financial resources and they may be dependent on one
person's management. In addition, there may be less research available on many
promising small- and medium-sized emerging growth companies, making it more
difficult to find and analyze these companies. The securities of these
companies may have limited marketability and may be subject to more abrupt or
erratic market movements than securities of larger, more established growth
companies or the market averages in general. Foreign investing involves risks
that are different in some respects from investments in the securities of U.S.
issuers. Risks include less availability of information about issuers or
foreign markets, economic and political volatility, and price, interest rate
and currency risk.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Massachusetts Financial Services Company
Portfolio Partners MFS Research Growth Portfolio
Investment Objective
Seeks long-term growth of capital and future income.
Policies
Invests at least 65 percent of its total assets in common stocks, or
securities convertible into common stocks, of companies believed to possess
better than average prospects for long-term growth. A smaller proportion of the
assets may be invested in bonds, short-term obligations, preferred stocks or
common stocks whose principal characteristic is income production rather than
growth. In the case of both growth stocks and income issues, emphasis is placed
on the selection of progressive, well-managed companies. The Portfolio may
invest up to 20 percent of its net assets in foreign securities, including
emerging market securities.
Risks
Share prices will fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. Investing in
securities of foreign issuers generally involves risks not ordinarily
associated
- -------------------------------------------------------------------------------
64
<PAGE>
with investing in securities of domestic issuers. These include less
availability of information about issuers or foreign markets, economic and
political volatility, and price, interest rate and currency risk.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Massachusetts Financial Services Company
Portfolio Partners MFS Value Equity Portfolio
Investment Objectives
Seeks capital appreciation. Dividend income, if any, is a consideration
incidental to the Portfolio's objective of capital appreciation.
Policies
While the Portfolio's policy is to invest at least 65 percent of its total
assets in common stocks, it may seek appreciation other types of securities
(such as fixed-income, convertible bonds, convertible preferred stocks and
warrants) when relative values make such purchases appear attractive, either as
individual issues or as types of securities in certain economic environments.
The Portfolio may invest in high-yield fixed-income (below investment grade),
but will invest no more than 25 percent of its net assets in these securities.
The Portfolio may also invest up to 50 percent (but generally expects to invest
not more than 25 percent) of its net assets in foreign securities.
Risks
Share prices will fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. Historically,
common stocks have provided greater long-term returns and have entailed greater
short-term risks than other investment choices. Lower-rated bonds have
speculated characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher-grade securities. Investing in
securities of foreign issuers generally involves risks not ordinarily
associated with investing in securities of domestic issuers. These include less
availability of information about issuers or foreign markets, economic and
political volatility, and price, interest rate and currency risk.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Massachusetts Financial Services Company
Portfolio Partners Scudder International Growth Portfolio
Investment Objective
Seeks long-term growth of capital primarily through a diversified
portfolio of marketable foreign equity investments.
Policies
Invests in companies, wherever organized, that do business primarily
outside the United States. The Portfolio intends to diversify investments among
several countries and to have represented in its holdings business activities
in not less than three different countries. Does not intend to concentrate
investments in any particular industry. Invests primarily in equity securities
of established companies, listed on foreign exchanges, that the subadviser
believes have favorable characteristics. Although the Portfolio will consist
primarily of equity securities, it may also invest in fixed-income securities
of foreign governments and companies.
Risks
Share prices will fluctuate in response to the activities of an individual
company or in response to general market and economic conditions. Historically,
common stocks have provided greater long-term returns and have entailed greater
short-term risks than other investment choices. Investing in foreign securities
may involve a greater degree of risk than investing in domestic securities.
Additional risk factors include the possibility of exchange rate fluctuations,
less publicly available information, more volatile markets, less securities
regulation and less favorable tax provisions.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Scudder Kemper Investments, Inc.
- -------------------------------------------------------------------------------
65
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated August 19, 1998
Aetna Variable Annuity
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current Prospectus for Variable Annuity Account B (the
"Separate Account") dated August 19, 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
1-800-531-4547
Read the Prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information and History...................................... 2
Variable Annuity Account B........................................... 2
Offering and Purchase of Contracts................................... 3
Performance Data..................................................... 3
General........................................................ 3
Average Annual Total Return Quotations......................... 4
Annuity Payments..................................................... 7
Sales Material and Advertising....................................... 8
Independent Auditors................................................. 8
Financial Statements of the Separate Account......................... S-1
Financial Statements of the Company.................................. F-1
</TABLE>
- 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 affiliate 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. The Company's Home Office is located at 151 Farmington Avenue,
Hartford, Connecticut 06156.
In addition to serving as the principal underwriter and the depositor for the
Separate Account, the Company is also a registered investment adviser under the
Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934. The Company provides investment advice to
several of the registered management investment companies offered as variable
investment options under the Contracts funded by the Separate Account (see
"Variable Annuity Account B" below).
Other than the mortality and expense risk charges and administrative charge
described in the Prospectus, all expenses incurred in the operations of the
Separate Account are borne by the Company. See "Charges and Deductions" in the
Prospectus. The 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 of the Contract. The availability of the Funds
is subject to applicable regulatory authorization. Not all Funds are available
in all jurisdictions or under all Contracts.
- 2 -
<PAGE>
The Funds currently available under the Contracts are as follows:
<TABLE>
<S> <C>
[bullet] Aetna Balanced VP, Inc. [bullet] Janus Aspen Aggressive Growth Portfolio
[bullet] Aetna Income Shares d/b/a Aetna Bond VP [bullet] Janus Aspen Balanced Portfolio
[bullet] Aetna Growth VP [bullet] Janus Aspen Growth Portfolio
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP [bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Aetna Index Plus Large Cap VP [bullet] MFS Total Return Series
[bullet] Aetna International VP [bullet] Oppenheimer Aggressive Growth Fund
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market
VP [bullet] Oppenheimer Growth & Income Fund
[bullet] Aetna Real Estate Securities VP [bullet] Oppenheimer Strategic Bond Fund
[bullet] Aetna Small Company VP [bullet] Portfolio Partners MFS Emerging Equities
[bullet] AIM V.I. Capital Appreciation Fund Portfolio
[bullet] AIM V.I. Growth Fund
[bullet] AIM V.I. Growth & Income Fund [bullet] Portfolio Partners MFS Research Growth Portfolio
[bullet] AIM V.I. Value Fund [bullet] Portfolio Partners MFS Value Equity Portfolio
[bullet] Fidelity VIP Equity-Income Portfolio [bullet] Portfolio Partners Scudder International Growth
[bullet] Fidelity VIP High Income Portfolio Portfolio
[bullet] Fidelity VIP II Contrafund Portfolio
</TABLE>
Complete descriptions of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, are contained in the
prospectuses and statements of additional information for each of the Funds.
OFFERING AND PURCHASE OF CONTRACTS
The Company is both the depositor and the principal underwriter for the
securities sold by the Prospectus. The Company offers the Contracts through life
insurance agents licensed to sell variable annuities who are Registered
Representatives as defined in the Prospectus. The offering of the Contracts is
continuous. A description of the manner in which Contracts are purchased may be
found in the Prospectus under the sections titled "Purchase" and "Contract
Valuation."
PERFORMANCE DATA
GENERAL
From time to time, the Company may advertise different types of historical
performance for the Subaccounts of the Separate Account available under the
Contracts. The Company may advertise the "standardized average annual total
returns," calculated in a manner prescribed by the Securities and Exchange
Commission (the "standardized return"), as well as "non-standardized returns,"
both of which are described below.
The standardized and non-standardized total return figures are computed
according to a formula in which a hypothetical initial Purchase Payment of
$1,000 is applied to the various Subaccounts under the Contract, and then
related to the ending redeemable values over one, five and ten year periods (or
fractional periods thereof). The 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 the maximum recurring charges
under the Contracts during each period (i.e., Option Package III: 1.25%
mortality and expense risk charge, $30.00 maintenance fee, 0.15% administrative
charge, and deferred sales charge of 7% of Purchase Payments grading down to 0%
after 7 years). These charges will be deducted on a pro rata basis in the case
of fractional periods. The maintenance
- 3 -
<PAGE>
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 will be lower than the standardized figures for Option Packages I and II
because of the lower mortality and expense risk charge under those Option
Packages (0.80% and 1.10% respectively). The Company may also advertise
standardized returns and non-standardized returns using the fees and charges
applicable to Option Package I and II.
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 reflected the investment 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
Fund's 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
The tables below reflect the average annual standardized and non-standardized
total return quotation figures for the periods ended December 31, 1997 for the
variable investment options under the Contracts issued by the Company. These
returns reflect the maximum charges under the Contract (i.e. Option Package III)
as described under "General" above; the Company may also advertise returns based
on lower charges that may apply to particular Contracts under Option Packages I
and II.
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 non-standardized
performance, the "Since Inception" column shows average annual total return
since the Fund's inception date.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
Date Contributions
First Received
Under the Separate
STANDARDIZED Account
- -------------------------------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 5 Year 10 Year Inception*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. 14.60% 12.42% 11.05% 06/30/89
- -------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 0.51% 4.85% 7.68%
- -------------------------------------------------------------------------------------------------------------
Aetna Growth VP 10.54% 05/30/97
- -------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 21.95% 15.69% 14.99%
- -------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 25.92% 26.87% 10/31/96
- -------------------------------------------------------------------------------------------------------------
Aetna International VP 05/05/98
- -------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) (2.29%) 2.71% 4.45%
- -------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP 05/06/98
- -------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 12.09% 05/30/97
- -------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 20.18% 22.66% 12/30/94
- -------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio 9.81% 12.49% 06/30/95
- -------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 16.24% 19.87% 06/30/95
- -------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth 4.85% 11.50% 10/31/94
Portfolio
- -------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 14.22% 17.96% 01/31/95
- -------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 14.86% 18.30% 07/29/94
- -------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth 14.27% 25.63% 04/28/95
Portfolio
- -------------------------------------------------------------------------------------------------------------
MFS Total Return Series 13.42% 14.43% 05/31/96
- -------------------------------------------------------------------------------------------------------------
Oppenheimer Aggressive Growth Fund 2.03% 05/30/97
- -------------------------------------------------------------------------------------------------------------
Oppenheimer Growth & Income Fund 10.25% 05/30/97
- -------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund (2.07%) 05/30/97
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging (8.19%) 11/28/97
Equities Portfolio
- -------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio 1.43% 9.49% 09/30/93
Partners MFS Emerging Equities(3)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research (8.83%) 11/28/97
Growth Portfolio
- -------------------------------------------------------------------------------------------------------------
American Century VP Capital
Appreciation/Portfolio Partners (10.67%) 3.73% 5.37% 08/31/92
MFS Research Growth(3)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity (5.69%) 11/28/97
Portfolio
- -------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT 18.43% 10.97% 11.16% 11/30/92
Growth/Portfolio Partners MFS
Value Equity(3)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder (5.87%) 11/28/97
International Growth Portfolio
- -------------------------------------------------------------------------------------------------------------
Scudder International Portfolio
Class A/Portfolio Partners 1.20% 11.67% 9.75% 08/31/92
Scudder International Growth(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 4.061%. 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 7% 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 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>
Fund Inception
NON-STANDARDIZED Date
- -----------------------------------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. 20.75% 19.81% 12.82% 10.93% 04/03/89
- -----------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 6.77% 8.32% 5.42% 7.68%
- -----------------------------------------------------------------------------------------------------------------
Aetna Growth VP 31.13% 31.13% 12/13/96
- -----------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 28.05% 27.01% 16.04% 14.99%
- -----------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 32.00% 32.76% 09/16/96
- -----------------------------------------------------------------------------------------------------------------
Aetna International VP 2.65% 12/22/97
- -----------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) 3.98% 4.13% 3.34% 4.45%
- -----------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP 3.54% 12/15/97
- -----------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 32.59% 33.01% 12/27/96
- -----------------------------------------------------------------------------------------------------------------
AIM V.I. Capital Appreciation Fund 11.91% 20.19% 16.99% 05/05/93
- -----------------------------------------------------------------------------------------------------------------
AIM V.I. Growth Fund 25.10% 24.63% 16.55% 05/05/93
- -----------------------------------------------------------------------------------------------------------------
AIM V.I. Growth and Income Fund 23.97% 24.62% 19.42% 05/02/94
- -----------------------------------------------------------------------------------------------------------------
AIM V.I. Value Fund 21.97% 22.95% 18.08% 05/05/93
- -----------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income 26.30% 23.75% 18.47% 15.08%
Portfolio(1)
- -----------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio(1) 16.00% 15.78% 12.30% 11.22%
- -----------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 22.39% 26.39% 01/03/95
- -----------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth 11.07% 14.10% 17.54% 09/13/93
Portfolio
- -----------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 20.37% 19.26% 14.66% 09/13/93
- -----------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 21.01% 21.95% 16.01% 09/13/93
- -----------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth 20.43% 24.37% 21.19% 09/13/93
Portfolio
- -----------------------------------------------------------------------------------------------------------------
MFS Total Return Series 19.58% 19.24% 01/03/95
- -----------------------------------------------------------------------------------------------------------------
Oppenheimer Aggressive Growth Fund(1) 10.09% 19.46% 14.28% 14.45%
- -----------------------------------------------------------------------------------------------------------------
Oppenheimer Growth & Income Fund 30.61% 35.28% 07/06/95
- -----------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund 7.17% 10.41% 6.11% 05/03/93
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging (1.27%) 11/28/97
Equities Portfolio
- -----------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio 7.68% 16.31% 10.62% 17.31% 09/21/88
Partners MFS Emerging Equities(3)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research (1.96%) 11/28/97
Growth Portfolio
- -----------------------------------------------------------------------------------------------------------------
American Century VP Capital
Appreciation/Portfolio Partners (4.34%) 5.26% 4.32% 7.19%
MFS Research Growth(3)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity 1.41% 11/28/97
Portfolio
- -----------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT 24.56% 20.28% 11.41% 13.03%
Growth/Portfolio Partners MFS
Value Equity(3)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder 1.22% 11/28/97
International Growth Portfolio
- -----------------------------------------------------------------------------------------------------------------
Scudder International Portfolio
Class A/Portfolio Partners Scudder 7.44% 10.02% 12.09% 10.21%
International Growth(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 4.061%. 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 7% 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>
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 ("AIR") selected (3.5% or 5% per annum). Selection of a 5% AIR
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% AIR causes a lower first payment, but subsequent payments
would increase more rapidly or decline more slowly as changes occur in the AIR.
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 AIR 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 AIR of
3.5% per annum built into the number of Annuity Units determined above) produces
a result of 1.0014057. This is then multiplied by the Annuity Unit value for the
prior Valuation Date (assume such value to be $13.504376) to produce an Annuity
Unit value of $13.523359 for the Valuation Date on which the second payment is
due.
- 7 -
<PAGE>
The second monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359,
which produces a payment of $276.07.
*If an AIR 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
Service, 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 Certificate Holders. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments, including comparison between the Contracts and the
characteristics of and market for such financial instruments.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103, are the
independent auditors for the Separate Account and for the Company. The services
provided to the Separate Account include primarily the examination of the
Separate Account's financial statements and review of filings made with the SEC.
- 8 -
<PAGE>
FINANCIAL STATEMENTS
VARIABLE ANNUITY ACCOUNT B
Index
Statement of Assets and Liabilities........................................ S-2
Statements of Operations and Changes in Net Assets......................... S-6
Notes to Financial Statements.............................................. S-7
Independent Auditors' Report............................................... S-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:
Aetna Variable Fund
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Aetna GET Fund, Series B
Aetna GET Fund, Series C
Aetna Ascent Variable Portfolio
Aetna Crossroads Variable Portfolio
Aetna Legacy Variable Portfolio
Aetna Variable Portfolio, Inc.:
[bullet] Capital Appreciation Portfolio
[bullet] Growth Portfolio
[bullet] Index Plus Portfolio
[bullet] Small Company Portfolio
Alger American Funds:
[bullet] Balanced Portfolio
[bullet] Income and Growth Portfolio
[bullet] Leveraged AllCap Portfolio
American Century Investments:
[bullet] Balanced Fund
[bullet] International Fund
Calvert Social Balanced Portfolio
Fidelity Investments Variable Insurance Products Fund:
[bullet] Equity-Income Portfolio
[bullet] Growth Portfolio
[bullet] High Income Portfolio
[bullet] Overseas Portfolio
Fidelity Investments Variable Insurance Products Fund II:
[bullet] Asset Manager Portfolio
[bullet] Contrafund Portfolio
[bullet] Index 500 Portfolio
[bullet] Investment Grade Bond Portfolio
Insurance Management Series:
[bullet] American Leaders Fund II
[bullet] Equity Income Fund II
[bullet] Growth Strategies Fund II
[bullet] High Income Bond Fund II
[bullet] International Equity Fund II
[bullet]o Prime Money Fund II
[bullet] U.S. Government Securities Fund II
[bullet] Utility Fund II
Janus Aspen Series:
[bullet] Aggressive Growth Portfolio
[bullet] Balanced Portfolio
[bullet] Flexible Income Portfolio
[bullet] Growth Portfolio
[bullet] Worldwide Growth Portfolio
Lexington Emerging Markets Fund
Lexington Natural Resources Trust Fund
MFS Funds:
[bullet] Total Return Series
[bullet] Worldwide Government Series
Oppenheimer Funds:
[bullet] Capital Appreciation Fund
[bullet] Global Securities Fund
[bullet] Growth & Income Fund
[bullet] Strategic Bond Fund
Portfolio Partners, Inc.:
[bullet] PPI MFS Emerging Equities Portfolio
[bullet] PPI MFS Research Growth Portfolio
[bullet] PPI MFS Value Equity Portfolio
[bullet] PPI Scudder International Growth Portfolio
[bullet] PPI T. Rowe Price Growth Equity Portfolio
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 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>
- ----------------------------------------------------------------------------------------------------------
$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.
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
<TABLE>
<CAPTION>
Page
---
<S> <C>
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
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and 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.
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)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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,
-------------------------------
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, pretax, respectively) 32.4 (72.0) 321.5
-------- -------- --------
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.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -------------
(millions)
<S> <C> <C>
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
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ -----------
(millions)
<S> <C> <C> <C> <C>
1997
- ----
Equity Securities $ 210.0 $ 21.3 $ 0.1 $ 231.2
======= ====== ===== =======
1996
- ----
Equity Securities $ 184.9 $ 16.3 $ 0.8 $ 200.4
======= ====== ===== =======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
(millions)
<S> <C> <C> <C> <C>
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
</TABLE>
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument, nor do
they consider the tax impact of the realization of unrealized gains or losses.
In many cases, the fair value estimates cannot be substantiated by comparison
to independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument. In evaluating the Company's management of
interest rate, price and liquidity risks, the fair values of all assets and
liabilities should be taken into consideration, not only those presented above.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND 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:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -------------
(millions)
<S> <C> <C>
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
</TABLE>
(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(millions)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(millions)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
(millions)
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------ -----------
(millions)
<S> <C> <C> <C>
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
===== ======= ======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(millions)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
(millions)
<S> <C> <C> <C>
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
======= ======= ========
</TABLE>
(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:
<TABLE>
<CAPTION>
(Millions) Reserve Positions
- ----------------------------------- --------- ----------
<S> <C> <C>
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
======= ====
</TABLE>
(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:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(millions)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
Income taxes were different from the amount computed by applying the federal
income tax rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(millions)
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(millions)
<S> <C> <C>
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
======== ========
</TABLE>
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
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)
this limit, up to a maximum of $8.0 million on any new individual life
business, on a yearly renewable term basis. Premium amounts related to this
agreement were $5.9 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>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
(millions)
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
(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.56297-98 ALIAC Ed. August 1998
