A FIXED AND VARIABLE SINGLE PREMIUM IMMEDIATE ANNUITY
ISSUED BY AETNA LIFE INSURANCE AND ANNUITY COMPANY
PROSPECTUS
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The Contract offered in connection with this Prospectus is a combination fixed
and/or variable single premium immediate annuity contract (the "Contract")
issued by Aetna Life Insurance and Annuity Company (the "Company"). The
Contract is designed to provide regular income payments for a certain period or
for life (with or without a guaranteed period) commencing immediately after
purchase under the payment method that you select.
The Contract provides that your Purchase Payment may be allocated to a fixed
dollar option and/or one or more of the Subaccounts of Variable Annuity Account
B, a separate account of the Company. The Subaccounts invest directly in shares
of the following Funds:
[bullet] Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund, Inc.)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP
[bullet] Aetna Crossroads VP (formerly Aetna Crossroads Variable Portfolio)
[bullet] Aetna Growth VP (formerly Aetna Variable Growth Portfolio)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP
[bullet] Aetna Index Plus Large Cap VP (formerly Aetna Variable Index Plus
Portfolio)
[bullet] Aetna International VP
[bullet] Aetna Legacy VP (formerly Aetna Legacy Variable Portfolio)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP
[bullet] Aetna Real Estate Securities VP
[bullet] Aetna Small Company VP (formerly Aetna Variable Small Company
Portfolio)
[bullet] Fidelity VIP High Income Portfolio
[bullet] Janus Aspen Growth Portfolio
[bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Oppenheimer Strategic Bond Fund
[bullet] Portfolio Partners MFS Emerging Equities Portfolio
[bullet] Portfolio Partners MFS Value Equity Portfolio
[bullet] Portfolio Partners Scudder International Growth Portfolio
[bullet] Portfolio Partners T. Rowe Price Growth Equity Portfolio
The availability of the Funds is subject to applicable regulatory
authorization. Not all Funds may be available in all jurisdictions or under all
Contracts.
This Prospectus provides information that you should know before purchasing the
Contract. Additional information about the Contract and the Separate Account is
contained in a Statement of Additional Information ("SAI") dated May 1, 1998.
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 13 of this Prospectus. For a free copy of the SAI, call us at (800)
238-6273 or write us at: 151 Farmington Avenue, Hartford, Connecticut 06156,
Attention: ARS Settlements. You may also obtain an SAI for any of the Funds by
calling that phone number.
PLEASE KEEP THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS IS VALID ONLY
WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF THE FUNDS.
THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION AND OTHER INFORMATION
ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION (SEC) CAN BE FOUND IN THE SEC'S WEB SITE AT
http://www.sec.gov.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS IS DATED MAY 1, 1998.
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TABLE OF CONTENTS
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DEFINITIONS ..................................... DEFINITIONS--1
PROSPECTUS SUMMARY .............................. SUMMARY--1
FEE TABLE ....................................... FEE TABLE--1
CONDENSED FINANCIAL INFORMATION ............................. 1
THE VARIABLE ANNUITY CONTRACT ............................... 1
ANNUITY PAYMENTS ............................................ 1
Annuity Elections ........................................ 1
Annuity Options .......................................... 1
Annuity Payments ......................................... 2
Valuation of Annuity Unit Values ......................... 2
PURCHASE .................................................... 3
Purchase Payments ........................................ 3
How to Purchase .......................................... 3
Allocation of Purchase Payment ........................... 3
Free Look Period ......................................... 3
INVESTMENT OPTIONS .......................................... 4
Fund Availability and Substitution ....................... 5
Transfers Among Subaccounts .............................. 6
CHARGES AND DEDUCTIONS ...................................... 6
Mortality and Expense Risk Charge ........................ 6
Administrative Charge .................................... 6
Withdrawal Charge ........................................ 6
Fund Expenses ............................................ 7
Premium and Other Taxes .................................. 7
TAXES ....................................................... 7
Introduction ............................................. 7
Taxation of Annuity Payments ............................. 7
Taxation of Withdrawals .................................. 8
Distributions--Tax-Deferred Annuities ... ................ 8
Tax Penalty .............................................. 8
Nonnatural Owners ........................................ 9
WITHDRAWALS--ACCESS TO YOUR MONEY ........................... 9
Commutation .............................................. 9
Commuted Value ........................................... 9
PERFORMANCE ................................................. 9
DEATH BENEFIT ............................................... 10
Death Benefit Commutation ................................ 10
OTHER INFORMATION ........................................... 10
The Company .............................................. 10
The Separate Account ..................................... 10
Distribution ............................................. 11
Ownership ................................................ 11
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Beneficiary .............................................. 11
Delay or Suspension of Payments .......................... 11
Voting Rights ............................................ 11
Modification of the Contract ............................. 12
Legal Matters and Proceedings ............................ 12
Financial Statements ..................................... 12
Year 2000 ................................................ 12
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ......... 13
APPENDIX A--THE FIXED DOLLAR OPTION ......................... 14
APPENDIX B--CONDENSED FINANCIAL INFORMATION ................. 17
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DEFINITIONS
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The following terms are defined as they are used in this Prospectus:
Annuitant/Joint Annuitant: An individual named in the contract (1) whose life
determines the amount or continuation of life-contingent payments, and/or (2)
whose death results in the payment of death benefits.
Annuity Payment(s): A series of payments for life, a certain period or a
combination of the two.
Beneficiary(ies): The person or persons who are designated by the Contract
Holder to receive any death benefit proceeds payable under the Contract.
Commutation: The right to receive in a lump sum the present value of all or a
portion of future Guaranteed Payments under a Period Certain Annuity. This
right may be subject to a withdrawal charge.
Commuted Value: The present value of any future Guaranteed Payments which have
not yet been paid under the Contract.
Company (We, Us): Aetna Life Insurance and Annuity Company.
Contract: The individual single premium immediate annuity contract offered in
connection with this Prospectus.
Contract Effective Date: The date that the money is applied to the Contract and
all paperwork is received in good order at the Company's Home Office.
Contract Holder (You): The person to whom the Contract is issued. The Company
reserves the right to limit ownership to natural persons.
Fund(s): An open-end registered management investment company whose shares are
purchased by the Separate Account to fund the benefits provided by the
Contract.
Guaranteed Payment: A payment that is due whether or not the Annuitant, or
Joint Annuitant (if applicable), is alive on the Payment Due Date.
Home Office: The Company's principal executive offices located at 151
Farmington Avenue, Hartford, Connecticut 06156.
Life Annuity: An annuity with payments that are based solely on whether or not
the Annuitant, or Joint Annuitant (if applicable), is alive on the Payment Due
Date.
Payee: A person who receives Annuity Payments. The Contract Holder shall be the
Payee unless the Contract Holder designates otherwise in writing.
Payment Due Date: The date on which each Annuity Payment is scheduled to be
paid. Such date can be either monthly, quarterly, semi-annually or annually, at
the election of the Contract Holder.
Period Certain Annuity: An annuity with a specified number of Guaranteed
Payments that are payable whether or not the Annuitant, or Joint Annuitant (if
applicable), is alive on the Payment Due Date.
Separate Account: Variable Annuity Account B, a separate account established by
the Company for the purpose of funding variable annuity contracts issued by the
Company.
Subaccount(s): The portion of the assets of the Separate Account that is
allocated to a particular Fund. Each Subaccount invests in the shares of only
one corresponding Fund.
Valuation Date: The date and time at which the Annuity Unit Value of a
Subaccount is calculated. Currently, this calculation occurs after the close of
business of the New York Stock Exchange on any normal business day, Monday
through Friday, that the New York Stock Exchange is open.
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DEFINITIONS - 1
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PROSPECTUS SUMMARY
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THE VARIABLE ANNUITY CONTRACT
The fixed and variable single premium immediate annuity contract offered
by the Company represents a contract between you and Aetna Life Insurance and
Annuity Company. The purpose of the Contract is to provide regular income
payments for a certain period or for life (with or without a guaranteed period)
commencing immediately after purchase under the payment method that you select.
PURCHASE
You may purchase the Contract with a single Purchase Payment of $5,000 or
more. Your registered representative can help you fill out the proper forms.
The Contract is available to persons who wish to receive annuity income
payments. Contracts may be issued on a nonqualified basis. Contracts may also
be issued in connection with employer sponsored Section 401(a), Section 403(b)
and Section 457 plans, or as an Individual Retirement Annuity (IRA). (Contracts
sold in New York are not available for Section 457 plans.)
The maximum issue age is 85 to 90 depending on the option selected. The
Company reserves the right to modify the maximum issue age. (See "Purchase".)
FREE LOOK PERIOD
If you cancel the Contract within 10 days after receiving it (or whatever
period is required in your state), we will return your money without assessing
a withdrawal charge. You will receive whatever your Contract is worth on the
day we receive your request, less any Annuity Payments already made. This
amount may be more or less than your original Purchase Payment. (See
"Purchase--Free Look Period.")
ANNUITY PAYMENTS
Annuity Payments may be made on either a fixed, variable or combination
fixed and variable basis. If a variable payout is selected, the payments will
vary with the investment performance of the Subaccount(s) selected. You have
the right to select the payment plan, or "Annuity Option," under which Annuity
Payments are to be made. These Options can provide payments for life or for the
joint lives of two Annuitants, with or without a Guaranteed Period, or for a
certain period or number of payments. (See "Annuity Payments.")
INVESTMENT OPTIONS
You can put all or some of your money in up to four Subaccounts. These
Subaccounts invest directly in shares of the Funds as listed on the first page
of the Prospectus.
Each of the Funds is fully described in a separate Fund prospectus. Since
the value of a Subaccount's units is affected by the performance of the
underlying Fund, depending on market conditions, you can make or lose money by
investing in any of the Subaccounts.
You can also put all or some of your money into a fixed dollar option
which guarantees a fixed payment, as specified in the Contract. The fixed
dollar option is described in Appendix A to the Prospectus. Transfers are
currently not permitted into or out of the fixed dollar option. (See
"Investment Options" in this Prospectus, as well as the prospectuses for each
of the Funds.)
TRANSFERS
You may make transfers among the Subaccounts at any time. The Company
reserves the right to limit such transfers to four (4) in any calendar year.
Aetna may establish a minimum transfer amount. See "Investment
Options--Transfers.")
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SUMMARY - 1
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CHARGES AND DEDUCTIONS
The Contract has insurance features and investment features, and there are
costs related to each. These charges include daily deductions from the Separate
Account (the mortality and expense risk charge and an administrative charge),
as well as fees and expenses which are deducted directly from the Funds. (See
the Fee Table and "Charges and Deductions.")
WITHDRAWALS
Under a variable Period Certain Annuity, you may elect to receive the
Commuted Value of all or a portion of future Guaranteed Payments, less any
applicable withdrawal charge. The Commuted Value will be determined as of the
Valuation Date next following the Company's receipt of your written request for
Commutation. Withdrawals during the free look period will not incur a
withdrawal charge. Withdrawals may also be subject to income tax and a federal
tax penalty. (See "Withdrawals--Access to Your Money.")
DEATH BENEFIT
A death benefit may be payable if your Contract is issued under certain
Annuity Options. The death benefit is the right to receive any remaining
Guaranteed Payments. The death benefit is payable upon the death of the
Annuitant, or the survivor if there is a Joint Annuitant. Under Lifetime
Annuity Options with Guaranteed Payments, the Beneficiary may elect, within six
months of such death, to receive the Commuted Value of any remaining Guaranteed
Payments. However, under a Period Certain Annuity, the Beneficiary may make
such election at any time. No withdrawal charge will apply to the Commuted
Value of the death benefit. (See "Death Benefit.")
TAXES
All or a portion of each Annuity Payment will generally be includable in
gross income and subject to federal income tax. A 10% federal tax penalty may
be imposed on certain Annuity Payments or withdrawals. (See "Taxes.")
INQUIRIES
Questions or requests for additional information may be directed to your
agent or local representative, or you may contact the Company as follows:
[bullet] Write to: Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
Attention: ARS Settlements
[bullet] Telephone: 1-800-238-6273
________________________________________________________________________________
SUMMARY - 2
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FEE TABLE
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This information is intended to help you understand the various costs and
expenses incurred under your Contract. The table reflects expenses of the
Subaccounts as well as of the Funds. Some expenses may vary as explained under
"Charges and Deductions." Charges shown do not include premium taxes that may
be applicable. For more information regarding fees and expenses paid out of the
assets of a particular Fund, see the Fund's prospectus.
CONTRACT HOLDER TRANSACTION EXPENSES
WITHDRAWAL CHARGE
Under a variable Period Certain Annuity, Commutations are subject to the
following charges:
- --------------------------------------------------------------------------------
Number of years from Withdrawal Charge
Contract Effective Date % of Commuted Value(1)
- ----------------------------------------- -----------------------
Fewer than 1 5%
1 or more but fewer than 2 5%
2 or more but fewer than 3 4%
3 or more but fewer than 4 4%
4 or more, but fewer than 5 3%
5 or more, but fewer than 6 2%
6 or more, but fewer than 7 1%
7 or more 0%
- --------------------------------------------------------------------------------
(1) The Company will monitor the applicable deductions for the Withdrawal
Charge to ensure it will never exceed 8.5% of the Purchase Payment.
SEPARATE ACCOUNT ANNUAL EXPENSES
Each Subaccount pays these expenses out of its assets. The charges are reflected
in the Subaccount's daily Unit Value and are not charged directly to you. The
Separate Account charges include:
Mortality and Expense Risk Charge ............................ 1.25%
Administrative Charge(2) ..................................... 0.00%
----
Total Separate Account Annual Expenses ................... 1.25%
====
(2) We currently do not impose an administrative charge. However, we
reserve the right to deduct a daily charge from the Subaccounts,
equivalent on an annual basis to not more than 0.25%.
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FEE TABLE - 1
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ANNUAL EXPENSES OF THE FUNDS
The following table illustrates the advisory fees and other expenses applicable
to the Funds. These figures are a percentage of each Fund's average net assets
and, except as noted, are based on figures for the year ended December 31, 1997,
unless otherwise indiciated. A Fund's "Other Expenses" include operating costs
of the Fund. Investment Advisory fees and other expenses are deducted from each
Fund's net asset value and are not deducted from the value of your Contract.
<TABLE>
<CAPTION>
Investment
Advisory Fees(1) Other Expenses
(after expense (after expense Total Annual
reimbursement) reimbursement) Fund Expenses
------------------ ---------------- --------------
<S> <C> <C> <C>
Aetna Balanced VP, Inc.(2) 0.50% 0.10% 0.60%
Aetna Bond VP(2) 0.40% 0.10% 0.50%
Aetna Crossroads VP(2)(3) 0.55% 0.25% 0.80%
Aetna Growth VP(2)(3) 0.16% 0.64% 0.80%
Aetna Growth and Income VP(2) 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 Legacy VP(2)(3) 0.49% 0.31% 0.80%
Aetna Money Market VP(2) 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%
Fidelity VIP High Income Portfolio(4) 0.59% 0.12% 0.71%
Janus Aspen Growth Portfolio(5) 0.65% 0.05% 0.70%
Janus Aspen Worldwide Growth Portfolio(5) 0.66% 0.08% 0.74%
Oppenheimer Strategic Bond Fund 0.75% 0.08% 0.83%
Portfolio Partners
MFS Emerging Equities Portfolio(6)(7) 0.68% 0.13% 0.81%
Portfolio Partners
MFS Value Equity Portfolio(6) 0.65% 0.25% 0.90%
Portfolio Partners
Scudder International Growth Portfolio(6) 0.80% 0.20% 1.00%
Portfolio Partners
T. Rowe Price Growth Equity Portfolio(6) 0.60% 0.15% 0.75%
</TABLE>
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(1) Certain of the Fund advisers reimburse the Company for administrative costs
incurred in connection with administering the Funds as variable funding
options under the Contract. These reimbursements are paid out of the
investment advisory fees and are not charged to investors.
(2) Prior to May 1, 1998, the investment adviser provided administrative
services to the Fund and assumed the Fund's ordinary recurring direct costs
under an Administrative Services Agreement. Effective May 1, 1998, the
investment adviser will continue to provide administrative services to the
Fund but will no longer assume all of the Fund's ordinary recurring direct
costs under the Administrative Services Agreement. The Administrative Fee
is 0.075% on the first $5 billion in assets and 0.050% on all assets over
$5 billion. The "Other Expenses" shown are not based on actual figures for
the year ended December 31, 1997, but reflect the fee payable under the new
Administrative Services Agreement and estimates of the Fund's ordinary
recurring direct costs.
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.
(3) Effective May 1, 1998, the Portfolios' adviser has agreed to waive a
portion of its fee or to reimburse certain expenses so that aggregate
expenses do not exceed the total expenses shown above. These fee
waiver/expense reimbursement arrangements will increase total return and
may be modified or terminated at any time.
Without these fee waiver/expense reimbursement arrangements, Management
Fees and Total Expenses for the Portfolio would be higher. Management Fees
and Total Expenses would be as follows: 0.60% and 0.85% for Crossroads VP;
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; 0.60% and 0.91% for Legacy VP; 0.75%
and 1.08% for Real Estate Securities VP; 0.75% and 1.35% for Small Company
VP, respectively.
(4) 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 expense would have been 0.71% for
High Income Portfolio.
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FEE TABLE - 2
<PAGE>
(5) Management fees for 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 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 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.
(6) 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.
(7) The advisory fee is 0.70% of the first $500 million in assets and 0.65% on
the excess.
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FEE TABLE - 3
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HYPOTHETICAL ILLUSTRATION
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Single Premium Immediate Annuity Contract
and 5% return on assets. For the purposes of these Examples, the calculations
assume that Annuity Payments are made based on a 15 year Period Certain Annuity
with a 3.5% Assumed Annual Net Return Rate.
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
----------------------------------- ---------------------------------
If you withdraw your entire
Commuted Value at the end of the If you do not withdraw your
periods shown, you would pay the Commuted Value you would pay the
following expenses, including any following expenses (no withdrawal
applicable withdrawal charge: charge is reflected):
3 5 3 5
1 year years years 10 years 1 year years years 10 years
-------- ------- ------- ---------- -------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. $65 $84 $ 94 $130 $18 $51 $ 79 $130
Aetna Bond VP $64 $81 $ 90 $124 $17 $48 $ 75 $124
Aetna Crossroads VP $67 $89 $102 $143 $20 $56 $ 88 $143
Aetna Growth VP $67 $89 $102 $143 $20 $56 $ 88 $143
Growth and Income VP $65 $84 $ 93 $129 $18 $51 $ 79 $129
Aetna Index Plus Large Cap VP $65 $83 $ 92 $127 $18 $50 $ 77 $127
Aetna International VP $70 $98 $116 $165 $23 $65 $102 $165
Aetna Legacy VP $67 $89 $102 $143 $20 $56 $ 88 $143
Aetna Money Market VP $63 $78 $ 83 $114 $16 $44 $ 69 $114
Aetna Real Estate Securities VP $68 $93 $108 $152 $21 $60 $ 94 $152
Aetna Small Company VP $68 $93 $108 $152 $21 $60 $ 94 $152
Fidelity VIP High Income Portfolio $66 $87 $ 98 $137 $19 $54 $ 84 $137
Janus Aspen Growth Portfolio $66 $87 $ 98 $137 $19 $54 $ 83 $137
Janus Aspen Worldwide Growth Portfolio $67 $88 $ 99 $139 $19 $55 $ 85 $139
Oppenheimer Strategic Bond Fund $67 $90 $103 $145 $20 $57 $ 89 $145
Portfolio Partners MFS Emerging Equities
Portfolio $67 $89 $102 $144 $20 $56 $ 88 $144
Portfolio Partners MFS Value Equity Portfolio $68 $92 $106 $149 $21 $59 $ 92 $149
Portfolio Partners Scudder International
Growth Portfolio $69 $94 $110 $156 $22 $62 $ 96 $156
Portfolio Partners T. Rowe Price Growth Equity
Portfolio $67 $88 $100 $140 $19 $55 $ 86 $140
</TABLE>
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FEE TABLE - 4
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CONDENSED FINANCIAL INFORMATION
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Condensed Financial Information for the Separate Account is shown in
Appendix B.
THE VARIABLE ANNUITY CONTRACT
================================================================================
The fixed and variable single premium immediate annuity contract offered
by the Company represents a contract between you and Aetna Life Insurance and
Annuity Company, an insurance company. The purpose of the Contract is to
provide regular income payments for a certain period or for life (with or
without a guaranteed period) commencing immediately after purchase under the
payment method that you select.
You must select one of the annuity income options described under
"Annuity Payments" below. Additionally, you may allocate your Purchase Payment
to up to four of the nineteen different Subaccounts listed under "Investment
Options," or to the fixed dollar option described in Appendix A to the
Prospectus.
Specific information on how to purchase a Contract and to whom the
Contract is available is discussed under "Purchase."
ANNUITY PAYMENTS
================================================================================
ANNUITY ELECTIONS
Under the Contract, the Company will make regular income payments to you
or to a Payee you designate in writing. You can choose to have payments made on
a monthly, quarterly, semi-annual or annual basis. The first payment will
generally be due on the last day of the payment period you select. If an annual
frequency is elected, the payment will be due one day before one year after the
Contract Effective Date. An alternate first payment date may be elected subject
to the Company's approval and compliance with IRS regulations.
If you choose to have any portion of your Annuity Payments come from the
Subaccounts, the dollar amount of your payment will depend upon three things:
(1) the value of that portion of your Contract that is allocated to the
Subaccounts on the Annuity Date; (2) the Assumed Annual Net Return Rate that
you select; and (3) the performance of the Subaccounts that you select. If the
net return rate of the Subaccounts exceeds the Assumed Annual Net Return Rate
stated in your Contract, your Annuity Payments will increase. Conversely, if
the net return rate of the Subaccounts is less than the Assumed Annual Net
Return Rate, your Annuity Payments will decrease.
ANNUITY OPTIONS
You must choose one of the following Annuity Options. The option may not
be changed after the Contract is issued.
The options are listed in two groups: Lifetime and Nonlifetime. A
Lifetime Annuity Option means that Annuity Payments are based on the life of
one or two Annuitants and will continue for as long as such Annuitant(s) is
alive. Certain Lifetime Annuity Options may also contain a guarantee of
payments for a certain period. A Nonlifetime Annuity Option means that Annuity
Payments are guaranteed to continue for a certain period; the continuation of
payments under such option is not based on the continued life of the
Annuitant(s).
Lifetime Annuity Options:
[bullet] Option 1--Single Life Annuity--A stream of Annuity Payments that is
payable for the life of the Annuitant. Payments cease upon the death
of the Annuitant.
[bullet] Option 2--Single Life Annuity with Guaranteed Payments--A stream of
Annuity Payments that is payable for the life of the Annuitant. If the
Annuitant dies prior to the payment of all of the Guaranteed Payments,
any remaining payments will be made to the Beneficiary.
[bullet] Option 3--Joint and Survivor Annuity--A stream of Annuity Payments
that is payable for the lives of the
________________________________________________________________________________
1
<PAGE>
Annuitant and Joint Annuitant. Upon the death of either Annuitant, payments
continue for the life of the survivor at the full or reduced amount
depending upon the option elected. Payments cease upon the death of the
survivor.
[bullet] Option 4--Joint and Full Survivor Annuity with Guaranteed Payments--A
stream of Annuity Payments that is payable for the lives of the
Annuitant and the Joint Annuitant. Upon the death of either Annuitant,
the full payment continues for the life of the survivor. If the
survivor dies prior to the payment of all of the Guaranteed Payments,
any remaining Guaranteed Payments will be paid to the Beneficiary.
[bullet] Option 5--Joint and Contingent Annuity--A stream of Annuity Payments
that is payable for the lives of the Annuitant and the Joint
Annuitant. If the Annuitant is the first to die, payments continue for
the life of the Joint Annuitant at a reduced amount. If the Joint
Annuitant is the first to die, the full payment continues for the life
of the Annuitant. Payments cease upon the death of the survivor.
If you elect Lifetime Option 1, 3 or 5, it is possible that no Annuity Payments
would be made if the Annuitant under Option 1 dies, or both the Annuitant and
the Joint Annuitant under Option 3 or 5, die prior to the first Annuity Payment
Date. Lifetime Annuity Options do not provide for any withdrawal rights.
Nonlifetime Annuity Options:
[bullet] Option 6--Period Certain--A stream of Annuity Payments that continues
for a certain period of time, as provided under your Contract.
Payments are guaranteed for the number of Guaranteed Payments
selected, and cease after the selected number of Guaranteed Payments
have been made.
If Option 6 is elected on a variable basis, you may request to receive
the Commuted Value at any time. Any such withdrawal may be subject to a
withdrawal charge. (See "Charges and Deductions--Withdrawal Charge.")
ANNUITY PAYMENTS
Duration of Payments. Guaranteed Payments under a qualified annuity
contract may not extend beyond (a) the life expectancy of the Annuitant, or (b)
the joint life expectancies of the Annuitant and Beneficiary. In any event,
qualified contract Annuity Payments must comply with the minimum distribution
requirements of Code Section 401(a)(9).
Amount of Each Annuity Payment. The amount of each payment depends on (1)
the amount of your Purchase Payment, (2) how you allocate the Purchase Payment
between the fixed dollar option and the Subaccounts, and (3) the Annuity Option
and any features chosen. The initial Annuity Payment must be at least $50 per
month, or aggregate to $250 per year for payments of any other frequency.
For any portion of your Annuity Payments that is made on a variable
basis, the first and subsequent payments will vary depending on the Assumed
Annual Net Return Rate (3-1/2% or 5% per annum). Selection of a 5% rate causes a
higher first payment, but Annuity Payments will increase thereafter only to the
extent that the net return rate on the Subaccounts in which you have invested
exceeds 5% on an annualized basis. Annuity Payments would decline if the net
return rate was below 5%. Use of the 3-1/2% Assumed Annual Net Return Rate
causes a lower first payment, but subsequent payments would increase more
rapidly or decline more slowly as changes occur in the net return rate. (See
the Statement of Additional Information for further discussion on the impact of
selecting an Assumed Annual Net Return Rate.)
VALUATION OF ANNUITY UNIT VALUES
The amount of any Annuity Payment from a Subaccount is determined by
multiplying the number of "Annuity Units" that you hold, by an Annuity Unit
Value ("AUV") for each unit. The AUV on any Valuation Date is determined by
multiplying the value on the immediately preceding Valuation Date by the net
return factor of that Subaccount for the period between the immediately
preceding Valuation Date and the current Valuation Date (see "Net Return
Factor" below), and by a factor to reflect the Assumed Annual Net Return Rate.
The AUV will be affected by the investment performance, expenses and charges of
the applicable Fund and is reduced each day by a percentage that accounts for
the daily assessment of mortality and expense risk charges and the
administrative charge (if any).
Net Return Factor. The net return factor is used to measure the
investment performance of a Subaccount from one Valuation Date to the next. The
net return factor for a Subaccount for any valuation period is equal to the sum
of 1.000000 plus the net return rate. The net return rate equals:
________________________________________________________________________________
2
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(a) the value of the shares of the Fund held by the Subaccount on the
current Valuation Date, minus
(b) the value of the shares of the Fund held by the Subaccount on the
preceding Valuation Date, plus or minus
(c) taxes (or reserves for taxes) attributable to the operation of the
Subaccount (if any);
(d) divided by the total value of the Subaccount's Annuity Units on the
preceding Valuation Date;
(e) minus a daily charge at the annual effective rate of 1.25% for
mortality and expense risks and up to 0.25% for administrative
expenses (currently 0%).
A net return rate may be more or less than 0%.
PURCHASE
================================================================================
PURCHASE PAYMENTS
A "Purchase Payment" is the money that you give us to buy the Contract.
The minimum amount that we will accept is $5,000. The Contract is designed to
be a single premium contract, which means that no additional payments may be
made under the Contract. The Company reserves the right to establish a maximum
Purchase Payment amount and to reject any Purchase Payment exceeding the
maximum.
The Contract is available to persons who wish to receive annuity income
payments. Contracts may be issued on a nonqualified basis. Contracts may also
be issued in connection with employer sponsored Section 401(a), Section 403(b)
and Section 457 plans, or as an Individual Retirement Annuity (IRA). (Contracts
sold in New York are not available for Section 457 plans.)
The maximum issue age is 85 to 90 depending on the option selected. The
Company reserves the right to modify the maximum issue age.
HOW TO PURCHASE
You may purchase a Contract by submitting an application to the Company.
The Company must accept or reject the application within two business days of
receipt. If the application is incomplete, the Company may hold any forms and
accompanying Purchase Payment for five days. A Purchase Payment may be held for
longer periods only with your consent, pending acceptance of the forms. Any
Purchase Payment accompanying the application, or received prior to the
acceptance of the application, will be invested as of the date of acceptance.
If the application is rejected, the application and any Purchase Payment will
be returned.
ALLOCATION OF PURCHASE PAYMENT
Your Purchase Payment less applicable premium taxes ("Net Purchase
Payment") will be allocated among the investment options that you designate on
your application. You may select up to four Subaccounts from the available
choices. You may also select a fixed dollar option and allocate all or a
portion of your Purchase Payment to the Company's general account. Allocations
must be in whole percentages. You may change your choices after the Contract is
issued by calling or writing to the Company at its Home Office. The Company
reserves the right to restrict fund transfers to no more than four in any
calendar year and to establish a minimum transfer amount.
FREE LOOK PERIOD
If you change your mind about owning this Contract, you have the right to
cancel it within 10 days of receiving it (or such longer period of time as may
be required by your state). To exercise your right to cancel, both the Contract
and a written notice of cancellation should be sent to the Company at its Home
Office. (For Contracts issued in the state of New York, your exercise of this
right is deemed to occur on the earlier of the date we receive the Contract or
the notice of cancellation.) If you cancel the Contract during the time period
described above, you will not be assessed with a withdrawal charge. Following
cancellation, you will receive back whatever your Contract is worth on the day
we receive your request for cancellation, less any Annuity Payments already
made. In certain states (or if you have purchased the Contract as an IRA), we
may be required to return your entire Purchase Payment.
________________________________________________________________________________
3
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INVESTMENT OPTIONS
================================================================================
The Contract offers a number of different variable investment options
through the Separate Account. The Separate Account is divided into
"Subaccounts" which do not invest directly in stocks, bonds or other
investments. Instead, each Subaccount buys and sells shares of a corresponding
Fund. Your Purchase Payment may be allocated to up to four of the Subaccounts
as designated on the application. You may also allocate all or a portion of
your Purchase Payment to the fixed dollar option.
The investment results of the Funds described below are likely to differ
significantly and there is no assurance that any of the Funds will achieve
their respective investment objectives. Except where otherwise noted, all of
the Funds are diversified, as defined in the 1940 Act.
[bullet] Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund,
Inc.) 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.(1)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP seeks to maximize total
return, consistent with reasonable risk, through investments in a
diversified portfolio consisting primarily of debt securities.(1)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP seeks to maximize
total return through investments in a diversified portfolio of common
stocks and securities convertible into common stock.(1)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP seeks to
provide high current return, consistent with preservation of capital
and liquidity, through investment in high-quality money market
instruments. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Crossroads VP (formerly Aetna
Crossroads Variable Portfolio) seeks to provide total return (i.e.,
income and capital appreciation, both realized and unrealized). The
Portfolio is designed for investors who have an investment horizon
exceeding 10 years and who have a moderate level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Legacy VP (formerly Aetna
Legacy Variable Portfolio) seeks to provide total return consistent
with preservation of capital. The Portfolio is designed for investors
who have an investment horizon exceeding five years and who have a low
level of risk tolerance.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Growth VP (formerly Aetna
Variable Growth Portfolio) seeks growth of capital through investment
in a diversified portfolio of common stocks and securities convertible
into common stocks believed to offer growth potential.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP
(formerly Aetna Variable Index Plus Portfolio) seeks to outperform the
total return performance of publicly traded common stocks represented
by the S&P 500 Composite Stock Price Index.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna International VP seeks
long-term capital growth primarily through investment in a diversified
portfolio of common stocks principally traded in countries outside of
the United States. Aetna International VP will not target any given
level of current income.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Real Estate Securities VP seeks
maximum total return primarily through investment in a diversified
portfolio of equity securities issued by real estate companies, the
majority of which are real estate investment trusts (REITs).(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Small Company VP (formerly
Aetna Variable Small Company Portfolio) seeks growth of capital
primarily through investment in a diversified portfolio of common
stocks and securities convertible into common stocks of companies with
smaller market capitalizations. (1)
[bullet] Fidelity Investments Variable Insurance Products Fund--High Income
Portfolio 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. Lower-rated corporate debt
obligations are commonly known as "junk bonds" or "high yield, high
risk bonds" and involve significant degree of risk (see the Fund's
prospectus for a discussion of the risk factors involved in investing
in lower-rated corporate debt obligations).(2)
________________________________________________________________________________
4
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[bullet] Janus Aspen Series--Growth Portfolio seeks long-term growth of capital
in a manner consistent with the preservation of capital. The Portfolio
pursues its investment objective by investing primarily in common
stocks of issuers of any size. This portfolio generally invests in
larger, more established issuers.(3)
[bullet] Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth
of capital in a manner consistent with preservation of capital. The
Portfolio pursues its investment objective primarily through
investments in common stocks of foreign and domestic issuers.(3)
[bullet] Oppenheimer Strategic Bond Fund seeks a high level of current income
principally derived from interest on debt securities and seeks to
enhance such income by writing covered call options on debt
securities. The Fund intends to invest principally in: (i) foreign
government and corporate debt securities, (ii) securities of the U.S.
Government and its agencies and instrumentalities ("U.S. Government
securities"), and (iii) lower-rated high yield domestic debt
securities, commonly known as "junk bonds", which are subject to a
greater risk of loss of principal and nonpayment of interest than
higher-rated securities. These securities may be considered to be
speculative.(4)
[bullet] Portfolio Partners, Inc.--MFS Emerging Equities Portfolio seeks to
provide long-term growth of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the Portfolio's
investment objective.(5)(a)
[bullet] Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation. Dividend income, if any, is a consideration incidental to
the Portfolio's objective of capital appreciation.(5)(a)
[bullet] Portfolio Partners, Inc.--Scudder International Growth Portfolio seeks
long-term growth of capital primarily through a diversified portfolio
of marketable foreign equity securities.(5)(b)
[bullet] Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term growth of capital and, secondarily, to increase dividend
income by investing primarily in common stocks of well established
growth companies.(5)(c)
Investment Advisers for each of the Funds:
(1) Aeltus Investment Management, Inc.
(2) Fidelity Management & Research Company
(3) Janus Capital Corporation
(4) OppenheimerFunds, Inc.
(5) Aetna Life Insurance and Annuity Company (adviser);
(a) Massachusetts Financial Services Company (subadviser)
(b) Scudder Kemper Investments, Inc. (subadviser)
(c) T. Rowe Price Associates, Inc. (subadviser)
More comprehensive information, including a discussion of potential
risks, is found in the current prospectus for each Fund which is distributed
with and accompanies this Prospectus. You should read the Fund prospectuses and
consider carefully, and on a continuing basis, which Fund or combination of
Funds is best suited to your long-term investment objectives. Additional
prospectuses and Statements of Additional Information for this Prospectus and
for each of the Funds can be obtained from the Company's Home Office at the
address and telephone number listed on the cover of this Prospectus.
FUND AVAILABILITY AND SUBSTITUTION
The availability of Funds may be subject to regulatory authorization. In
addition, the Company may add or withdraw Funds, as permitted by applicable
law. Not all Funds may be available in all jurisdictions or under all
Contracts.
If the shares of any Fund should no longer be available for investment by
the Separate Account, or if, in the judgment of the Company, further
investments in such shares should become inappropriate under this type of
Contract, we may cease to make such Fund shares available for investment under
the Contract on a prospective basis. In addition, the Company may substitute
shares of another Fund for shares already acquired. The Company reserves the
right to substitute shares of another Fund for shares already acquired without
a proxy vote. Any elimination, substitution or addition of Funds will be done
in accordance with applicable state or federal securities laws.
________________________________________________________________________________
5
<PAGE>
TRANSFERS AMONG SUBACCOUNTS
Generally, you may make transfers among the Subaccounts at any time. The
Company reserves the right to limit such transfers to four in any calendar
year. Transfers are currently not permitted into or out of the fixed dollar
option.
CHARGES AND DEDUCTIONS
================================================================================
There are charges and other expenses associated with the Contract that
reduce the amount of your Annuity Payments. These charges and expenses are as
follows:
MORTALITY AND EXPENSE RISK CHARGE
The Company makes a daily deduction from each of the Subaccounts for the
mortality and expense risk charge. The charge is equal, on an annual basis, to
1.25% of the daily net assets of the Subaccounts and compensates the Company
for the assumption of mortality and/or expense risks under the Contract. The
mortality risks are those assumed for any promise to make lifetime payments.
The expense risk is the risk that the actual expenses for costs incurred under
the Contract will exceed the maximum costs that can be charged under the
Contract.
If the amount deducted for mortality and expense risks is not sufficient
to cover the mortality costs and expense shortfalls, the loss is borne by the
Company. If the deduction is more than sufficient, the excess may be used to
recover distribution expenses relating to the Contracts, and may also be used
as a source of profit to the Company. The Company expects to make a profit from
the mortality and expense risk charge.
ADMINISTRATIVE CHARGE
The Company reserves the right to make a deduction from each of the
Subaccounts for an administrative charge. Under the Contract, the
administrative charge may be an amount equal, on an annual basis, to not more
than 0.25% of the daily net assets of the Subaccounts. There is currently no
administrative charge assessed under the Contract. Once an administrative
charge is established for your Contract, it may not be increased.
If an administrative charge is assessed, it will be set at a level which
does not exceed the average expected cost of the administrative services to be
provided while the Contract is in force. The Company does not expect to make a
profit from this charge.
WITHDRAWAL CHARGE
The withdrawal charge is, in effect, a deferred sales charge. It is
imposed upon the surrender (Commutation) or withdrawal (partial Commutation) of
the remaining Guaranteed Payments under a Period Certain Annuity at any time
before the last Guaranteed Payment is made and while the Annuitant is living.
The amount paid is equal to the Commuted Value minus the applicable withdrawal
charge. The withdrawal charge is imposed to reimburse the Company for
unrecovered acquisition and distribution costs. The Company will monitor the
applied deductions for the withdrawal charge to ensure it will never exceed
8.5% of the Purchase Payment.
The schedule for the calculation of the withdrawal charge is:
- --------------------------------------------------------------------------------
Withdrawal Charge
Number of Years from Percentage of
Contract Effective Date Commuted Value
------------------------------- ------------------
Fewer than 1 5%
1 or more, but fewer than 2 5%
2 or more, but fewer than 3 4%
3 or more, but fewer than 4 4%
4 or more, but fewer than 5 3%
5 or more, but fewer than 6 2%
6 or more, but fewer than 7 1%
7 or more 0%
- --------------------------------------------------------------------------------
Reduction or Elimination of the Withdrawal Charge. We may reduce or eliminate
the withdrawal charge when sales of the Contract are made to individuals or a
group of individuals in such a manner that results in savings of sales
expenses. The entitlement to such a reduction in the withdrawal charge will be
based on the following criteria:
(a) the size and type of group of individuals to whom the Contract is offered;
or
(b) whether there is a prior or existing relationship with the Company such as
being an employee of the Company or one of its affiliates, receiving
distributions or making internal transfers from other Contracts issued by
the Company or one of its affiliates, or making transfers of amounts held
under
________________________________________________________________________________
6
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qualified plans sponsored by the Company or an affiliate.
Any reduction or elimination of the withdrawal charge will not be unfairly
discriminatory against any person.
FUND EXPENSES
Each Fund incurs certain expenses which are paid out of its net assets.
These expenses include, among other things, the investment advisory or
"management" fee. The expenses of the Funds are set forth in the Fee Table in
this Prospectus and described more fully in the accompanying Fund prospectuses.
PREMIUM AND OTHER TAXES
Several states and municipalities impose a premium tax based on the
amount of your Purchase Payment. These taxes currently range from 0% to 4%. The
Company will deduct premium taxes from your Purchase Payment at the Contract
Effective Date. Under certain circumstances, the Company reserves the right not
to deduct premium taxes where the Purchase Payment is provided through an
internal transfer from an annuity or other contract issued by the Company (or
one of its affiliates) under which the Company previously deducted premium tax.
TAXES
================================================================================
INTRODUCTION
The Company has prepared the following as a general discussion on federal
taxes. This discussion is not intended as tax advice to any individual. Any
person concerned about tax implications should consult a tax advisor before
investing and before electing any Commutation feature permitted under the
Contract.
TAXATION OF ANNUITY PAYMENTS
Nonqualified Contracts. Section 72 of the Internal Revenue Code ("Code")
governs taxation of annuities. In general, under a nonqualified contract, only
the portion of the Annuity Payment that represents the amount by which the
expected return exceeds the "investment in the contract" will be taxed. After
the "investment in the contract" is recovered, the full amount of any
additional Annuity Payments is taxable.
For variable Annuity Payments, the non-taxable portion of each payment is
generally determined by dividing the "investment in the contract" (generally,
your Purchase Payment) by the total number of expected Annuity Payments. For
fixed Annuity Payments, the non-taxable portion is determined by a ratio your
"investment in the contract" bears to the total dollar amount of expected
Annuity Payments. Under either a variable or a fixed annuity, once the
"investment in the contract" has been fully recovered, the full amount of each
additional Annuity Payment is taxable. If Annuity Payments cease as a result of
an Annuitant's death before full recovery of the "investment in the contract,"
you should consult a competent tax advisor regarding deductibility of the
unrecovered amount.
Qualified Contracts. The taxation of Annuity Payments under a
nonqualified contract described above does not apply to "qualified" contracts.
Qualified contracts are contracts issued in conjunction with Code Section
408(b) Individual Retirement Annuity (IRA), a Code Section 403(b) Tax Deferred
Annuity, a Code Section 457 deferred compensation plan or a Code Section 401(a)
or 401(k) pension or profit sharing plan. Generally, the entire Annuity Payment
received is taxable. Any portion of the Annuity Payment attributable to
after-tax employee contributions to the plan is not taxable. The amount taxable
is generally based on the ratio of the "investment or the Contract" to the
expected number of Contract Payments as defined in Code Section 72(d). The
"investment in the Contract" generally equals the amount of any non deductible
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. Any portion of an
Annuity Payment that is an "eligible rollover distribution" and that is
properly rolled over to another plan of the same type or to a traditional IRA
also is not taxable. An Annuity Payment made in connection with a Section
403(b) Tax Deferred Annuity or a Section 401(a) or 401(k) pension or
profit-sharing plan can be an "eligible rollover distribution" only if made
under a Period Certain Annuity having a period of less than ten years and only
to the extent that the Annuity Payment (1) is not attributable to after-tax
contributions or (2) is not a required minimum distribution under Code Section
401(a)(9). If any portion of an eligible roll-over distribution is paid to the
employee, the Company is required to withhold 20% of that amount as federal
income tax withholding.
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7
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TAXATION OF WITHDRAWALS
If the Commuted Value of all or any portion of the Guaranteed Payments is
withdrawn or distributed as a death benefit, the amount received will be taxed
as "an amount not received as an annuity."
Nonqualified Contracts. If received under a nonqualified contract, the
Commuted Value is generally includable in gross income to the extent that there
is income on the contract. Income on the contract means the excess of the
Commuted Value of the contract (determined without regard to any withdrawal
charge) immediately before the amount is received over the investment in the
contract at such time.
Qualified Contracts. Generally, any distribution under a qualified
contract is fully taxable upon receipt. If the distribution is made in
connection with a Section 403(b) Tax Deferred Annuity or a Section 401(a)
pension or profit sharing plan, it may not be taxable if attributable to
after-tax contributions or if the distribution is an "eligible rollover
distribution" (as defined above) that is properly rolled over to another
contract or plan of the same type or to a traditional IRA.
DISTRIBUTIONS--TAX-DEFERRED ANNUITIES
The Code limits the distribution of amounts contributed on or after
January 1, 1989 under a salary reduction agreement to a Section 403(b) Tax
Deferred Annuity. In general, such distributions can only be made if the
participant has attained age 59-1/2, separates from service, dies or becomes
disabled (as defined in the Code).
TAX PENALTY
The Code provides that any amount received under a qualified or
nonqualified annuity contract may be subject to a premature distribution
penalty tax equal to 10% of the amount that is includable in income.
Because some of the exceptions to the 10% penalty discussed below require
that the payment or distribution be part of a series of "substantially equal
periodic payments," your selection of an increasing annuity or receipt of the
Commuted Value may be subject to the 10% penalty unless one of the other
exceptions applies. You should consult with a tax advisor to determine how this
will affect your tax liability.
Nonqualified Contracts. There is an exception to the tax penalty for
nonqualified contracts if the payment is made under an immediate annuity
contract. An immediate annuity is defined as a contract that (1) is purchased
with a single premium, (2) has an annuity starting date no later than one year
from the date of purchase, and (3) provides for a series of substantially equal
periodic payments to be made no less frequently than annually over the annuity
period. However, the IRS has ruled that where an immediate annuity contract is
received in exchange for a deferred annuity contract pursuant to a Section 1035
exchange, the immediate annuity contract does not qualify for this exception to
the 10% penalty.
In addition to the immediate annuity exception, the 10% penalty tax also
does not apply to(1) payments made on or after the date the taxpayer becomes
age 59-1/2, (2) any payment attributable to the taxpayer becoming disabled (as
defined by the Code), (3) any payment made on or after the death of the
Contract Holder, or (4) any payment which is part of a series of substantially
equal periodic payments made at least annually for the life or life expectancy
of the taxpayer or the joint lives or joint life expectancies of the taxpayer
and his designated Beneficiary. (Modification of the series of payments prior
to the later of age 59-1/2 or 5 years may result in an additional tax in the
year of modification equal to the penalty which would have been imposed, plus
interest, if the exception had not applied.)
Qualified Contracts. The 10% penalty tax may apply to amounts received
under a qualified contract, other than a contract issued in conjunction with a
Section 457 deferred compensation plan. The 10% penalty tax does not apply to
distributions that are (1) made on or after the date the employee attains age
59-1/2, (2) made to a Beneficiary on or after the death of the employee, (3)
attributable to the employee's disability (as defined by the Code), (4) made to
an employee after separation from service after age 55 (not applicable to an
IRA), or (5) part of a series of substantially equal periodic payments made at
least annually for the life or life expectancy of the employee or the joint
lives or joint life expectancies of the employee and a designated Beneficiary.
(Modification of the series of payments prior to the later of age 59-1/2 or 5
years may result in an additional tax in the year of modification equal to the
penalty which would have been imposed, plus interest, if the exception had not
applied.) In addition, the penalty tax does not apply for the amount of
distribution equal to unreimbursed medical expenses incurred by the employee
that qualify
________________________________________________________________________________
8
<PAGE>
for a deduction as specified in the Code. Beginning January 1, 1997, the
penalty tax is also waived on distributions made from an IRA to pay health
insurance premiums for certain unemployed individuals. Beginning January 1,
1998, the penalty tax is waived if the amounts withdrawn from an IRA are used
for a qualified first-time home purchase or for higher education expenses.
NONNATURAL OWNERS
If a nonqualified contract is owned by a person who is not a natural
person, the contract is not treated as an annuity contract for income tax
purposes and the "income on the contract" for the taxable year is currently
taxable as ordinary income. This rule does not apply to an immediate annuity,
which is defined in the same way as for 10% penalty tax purposes. (See "Tax
Penalty" above.) Therefore, if you elect an increasing annuity or elect to
receive the Commuted Value, you should consult with a tax advisor to determine
how this will affect your tax liability.
This rule also does not apply to a trust or other entity which holds the
contract solely as an agent for a natural person (other than an employer which
holds for the benefit of employees). The rule also does not apply to qualified
contracts (other than a contract held in connection with a Section 457 deferred
compensation plan).
A tax-exempt organization should consult with its tax advisor regarding
treatment of "income on the contract" for purposes of the unrelated business
income tax.
WITHDRAWALS--ACCESS TO YOUR MONEY
================================================================================
COMMUTATION
If you elect a Period Certain Annuity, you may elect to receive the
Commuted Value of all or a portion of the Guaranteed Payments, less any
applicable withdrawal charge. Commuted Value means the present value of any
remaining Guaranteed Payments which have not yet been paid under the Contract.
If a portion of the Guaranteed Payments under a variable Period Certain Annuity
is commuted, the remaining Annuity Payments will be reduced pro rata from all
of the Subaccounts unless you designate otherwise. Commutations may be subject
to a withdrawal charge as described in "Charges and Deductions."
COMMUTED VALUE
Under the Period Certain Annuity, the Commuted Value is equal to the
present value of the remaining Guaranteed Payments calculated using the Assumed
Annual Net Return Rate stated in the Contract. All Commuted Values will be
determined as of the Valuation Date next following the date on which a written
request for Commutation is received in good order by the Company at its Home
Office.
PERFORMANCE
================================================================================
The Company may illustrate the hypothetical values of Annuity Payments made
from each of the Subaccounts over certain time periods based on the historical
net asset values of the Funds. These numbers reflect the mortality and expense
risk charge, the administrative expense charge (if any), as well as the
advisory fees and other expenses of the Funds. The Company may also advertise
the "standardized average annual total returns" of the Subaccounts, calculated
in a manner prescribed by the SEC, as well as the "non-standardized returns."
"Standardized average annual total returns" are computed according to a formula
in which a hypothetical investment of $1,000 is applied to the Subaccount and
then related to the ending redeemable values over the most recent one, five and
ten-year periods (or since the date contributions were first received in 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, administrative expense charge (if any) and
any applicable withdrawal charge). "Non-standardized returns" will be
calculated in a similar manner, except that non-standardized figures will not
reflect the deduction of any applicable withdrawal charge (which would decrease
the level of performance shown if reflected in these calculations). The
non-standardized figures may also include monthly,
________________________________________________________________________________
9
<PAGE>
quarterly, year-to-date or three-year periods and may be computed from the
inception date of the fund.
The Company may advertise certain ratings, rankings or other information
related to the Company, the Subaccounts or the Funds. Further details regarding
performance reporting are described in the Separate Account's Statement of
Additional Information.
DEATH BENEFIT
================================================================================
The following describes the death benefit provision applicable to variable
Annuity Payments under the Contract. For information on the death benefit
provision applicable to the fixed dollar option under the Contract, please
refer to Appendix A.
A death benefit may be payable if your Contract is issued under (i) a
Single Life Annuity with Guaranteed Payments (Option 2), (ii) a Joint and Full
Survivor Annuity with Guaranteed Payments (Option 4), or (iii) a Period Certain
Annuity (Option 6). The death benefit is payable upon the death of the
Annuitant, or the death of the survivor if there is a Joint Annuitant.
If the Annuitant dies, or if the survivor under a Joint Annuity Option
dies, any remaining Guaranteed Payments will be paid to the Beneficiary in the
form specified in the Contract. Such payments will be paid at least as rapidly
as under the method of distribution then in effect. Under Options 2 and 4, the
Beneficiary may elect, within six months of such death, to receive the Commuted
Value of any remaining Guaranteed Payments. Under Option 6, the Beneficiary may
make such election at any time. No withdrawal charge will apply to the Commuted
Value of the death benefit.
If the Contract Holder who is not the Annuitant dies, Annuity Payments
will continue to be paid to the Payee in the form specified in the Contract. If
no Payee survives the death of the Contract Holder, Annuity Payments will be
made to the Annuitant. Such payments will be paid at least as rapidly as under
the method of distribution then in effect.
DEATH BENEFIT COMMUTATION
The Commuted Value under this death benefit provision will be determined
on the next Valuation Date after the Company receives acceptable proof of death
and a request for payment in good order at its Home Office. The Commuted Value
is equal to the present value of any remaining Guaranteed Payments calculated
using the Assumed Annual Net Return Rate stated in the Contract.
OTHER INFORMATION
================================================================================
THE COMPANY
Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company organized in 1976 under the insurance laws of the State of
Connecticut. Through a merger, it succeeded to the business of Aetna Variable
Annuity Life Insurance Company (formerly Participating Annuity Life Insurance
Company, an Arkansas life insurance company organized in 1954). The Company is
a wholly owned subsidiary of Aetna Retirement Holdings, Inc., which is in turn
a wholly owned subsidiary of Aetna Retirement Services, Inc., and an indirect
wholly owned subsidiary of Aetna Inc.
The Company is engaged in the business of issuing life insurance policies
and variable annuity contracts in all states of the United States. The
Company's principal executive offices are located at 151 Farmington Avenue,
Hartford, Connecticut 06156.
THE SEPARATE ACCOUNT
The Company has established a separate account, Variable Annuity Account
B, for the purpose of funding its variable annuity contracts. The Board of
Directors of the Company adopted a resolution in 1976 to establish the Separate
Account under Connecticut insurance law. The Separate Account is registered as
a unit investment trust under the Investment Company Act of 1940, and meets the
definition of "separate account" under the federal securities laws.
Although the Company holds title to the assets of the Separate Account,
such assets are not chargeable with liabilities of any other business conducted
by the Company. Income, gains or losses of the Separate Account are credited to
or charged against the assets of the Separate Account without regard to other
income, gains or losses of the Company. All obligations arising under the
Contracts are obligations of the Company.
________________________________________________________________________________
10
<PAGE>
DISTRIBUTION
The Company acts as the Principal Underwriter for the securities sold by
this Prospectus, and as the distributor of the Contracts.
Compensation will be paid to broker-dealers who sell the Contracts.
Broker-dealers will be paid commissions of up to 3.5% of the Purchase Payment.
Under certain circumstances, such broker-dealers may also be paid additional
compensation of up to 0.5%. In addition, some sales personnel may receive
various types of non-cash compensation as special sales incentives, including
trips and educational and/or business seminars. Supervisory and other
management personnel of the Company may receive compensation that will vary
based on the relative profitability to the Company of the funding options you
select. Funding options that invest in Funds advised by the Company or its
affiliates are generally more profitable to the Company.
The names of the broker-dealer and the registered representative
responsible for your Contract are set forth on your application. Commissions
and sales related expenses are paid by the Company and are not deducted from
your Purchase Payment. To the extent that the withdrawal charge is insufficient
to cover the actual costs of distribution, the Company may use any of its
corporate assets, including any profit from the mortality and expense risk
charge, to make up any difference.
OWNERSHIP
The Contract is owned by the Contract Holder (You). You have all title to
the Contract, as well as all rights to amounts held in the Contract during the
lifetime of the Annuitant, and the Joint Annuitant (if applicable). Any choices
selected under the Contract must be made by you in writing, unless otherwise
allowed by the Company. Until we receive amendments to any such choices, we
will rely on any previous choices made.
Ownership of the Contract may be changed to the extent permitted by law.
You should immediately notify the Company, in writing, of any change in
ownership. No such ownership change will be binding until such notification is
received and recorded by the Company at its Home Office.
BENEFICIARY
If the Contract provides for any Guaranteed Payments following the death
of the Annuitant and the Joint Annuitant (if applicable), you have the right to
name a Beneficiary. The Beneficiary is the person entitled to receive any death
benefit proceeds. The Company will pay any death benefit proceeds based on the
last written Beneficiary designation on file at its Home Office as of the date
of death.
Changes in Beneficiary Designations. The designated Beneficiary may be
changed at any time during the lifetime of the Annuitant and the Joint
Annuitant (if applicable). Such change must be submitted to the Company in
writing, and except for Contracts issued in New York, will become effective as
of the date written notice of the change is received and recorded by the
Company. For Contracts issued in New York, the change will become effective as
of the date the notice is signed. However, the Company's obligation to pay
death benefits shall be fully discharged upon payment to the Beneficiary named
in the written notice of Beneficiary designation last received by the Company
as of the date of such payment. Some restrictions may apply to Beneficiary
changes under qualified contracts.
DELAY OR SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of payment
for any benefit or values (a) on any Valuation Date on which the New York Stock
Exchange ("Exchange") is closed (other than customary weekend and holiday
closings) or when trading on the Exchange is restricted; (b) when an emergency
exists, as determined by the SEC, so that disposal of securities held in the
Subaccounts is not reasonably practicable or it is not reasonably practicable
for the Company fairly to determine the value of the Subaccount's assets; or
(c) during such other periods as the SEC may by order permit for the protection
of investors. The conditions under which restricted trading or an emergency
exists shall be determined by the rules and regulations of the SEC.
VOTING RIGHTS
The Company is the legal owner of the shares of the Funds. However, we
believe that when a Fund solicits proxies in conjunction with a vote of
shareholders, we are required to obtain from you and other owners instructions
as to how to vote those shares. When we receive those instructions, we will
vote all of the shares we own in proportion to those instructions. This will
also include any
________________________________________________________________________________
11
<PAGE>
shares that the Company owns on its own behalf. Should we determine that we are
no longer required to comply with the above, we will vote the shares in our own
right.
MODIFICATION OF THE CONTRACT
The Company reserves the right to modify the Contract to meet the
requirements of state or federal laws or regulations. The Company will notify
you in writing of any changes.
LEGAL MATTERS AND PROCEEDINGS
The Company knows of no material legal proceedings pending to which the
Separate Account or the Company is a party or which would materially affect the
Separate Account. The validity of the securities offered by this Prospectus has
been passed upon by Counsel to the Company.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and the financial
statements of the Separate Account have been included in the Statement of
Additional Information.
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.
________________________________________________________________________________
12
<PAGE>
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
================================================================================
The following items are the contents of the Statement of Additional
Information:
General Information and History
Variable Annuity Account B
Offering and Purchase of Contract
Performance Data
Annuity Payments
Sales Material and Advertising
Independent Auditors
Financial Statements of the Separate Account
Financial Statements of the Company
- --------------------------------------------------------------------------------
13
<PAGE>
APPENDIX A
THE FIXED DOLLAR OPTION
================================================================================
The following summarizes material information concerning the fixed dollar
option. Amounts allocated to the fixed dollar option are held in the Company's
general account that supports general insurance and annuity obligations.
Interests in the fixed dollar option have not been registered with the SEC in
reliance upon exemptions under the Securities Act of 1933, as amended.
Disclosure in the Prospectus regarding the fixed dollar option may, however, be
subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of such statements. Disclosure
in this Appendix regarding the fixed dollar option has not been reviewed by the
SEC.
THE FIXED DOLLAR OPTION
In addition to allocating your Purchase Payment to the Subaccounts
described in the Prospectus, you may choose to allocate all or a portion of
your Purchase Payment to the fixed dollar option. If you choose the fixed
dollar option, your Annuity Payments will remain fixed as specified in your
Contract over the term of the Contract unless you elect an Increasing Annuity.
There is no right of Commutation for Annuity Payments supported by the
fixed dollar option under any Lifetime Annuity Option. You may purchase a right
of Commutation for Annuity Payments supported by the fixed dollar option under
a Period Certain Annuity. The right of Commutation is described under
"Withdrawals--Access to Your Money."
ANNUITY OPTIONS
All of the Annuity Options described under "Investment Options" in the
Prospectus are available for the fixed dollar option. If you allocate all or a
portion of your Purchase Payment to a fixed dollar option, you may also elect
one of the following features in connection with the portion of your Annuity
Payments that are derived from the fixed dollar option:
(a) a Cash Refund feature that offers a death benefit in connection with
certain Lifetime Annuity Options. If the Annuitant dies, or the survivor
dies if there is a Joint Annuitant, the Beneficiary will receive a lump sum
payment equal to the Net Purchase Payment allocated to the fixed dollar
option less the total amount of fixed annuity payments paid prior to such
death. The Cash Refund feature may be elected only with a Single Life
Annuity (Option 1) or a Joint and Full Survivor Annuity (Option 3) that has
no reduction in payment to the survivor.
(b) an Increasing Annuity under which the Annuity Payments supported by the
fixed dollar option will increase by a stated percentage compounded
annually. You must elect 1, 2 or 3% as the stated percentage. The feature
is not available under Contracts purchased in conjunction with Section 457
deferred compensation plans.
Annuity Payments. The amount of each Annuity Payment depends on (1) the
Net Purchase Payment you allocate to the fixed dollar option, and (2) the
Annuity Option and features chosen.
CHARGES AND DEDUCTIONS
If you have elected a Period Certain Annuity and have purchased a right of
Commutation, a withdrawal charge may apply to any Commuted Value you receive.
This charge is, in effect, a deferred sales charge. It is imposed upon any
Commutation of a Period Certain Annuity before the last Guaranteed Payment is
made, and while the Annuitant is living. The amount paid upon Commutation is
equal to the Commuted Value minus the applicable withdrawal charge. This charge
is imposed to reimburse the Company for unrecovered acquisition and
distribution costs.
________________________________________________________________________________
14
<PAGE>
The following sets forth the schedule for the calculation of the
withdrawal charge.
- --------------------------------------------------------------------------------
Withdrawal Charge
Number of Years from Percentage of
Contract Effective Date Commuted Value
----------------------------------------- ------------------
1 or more, but fewer than 2 5%
2 or more, but fewer than 3 4%
3 or more, but fewer than 4 4%
4 or more, but fewer than 5 3%
5 or more, but fewer than 6 2%
6 or more, but fewer than 7 1%
7 or more 0%
- --------------------------------------------------------------------------------
Reduction or Elimination of the Withdrawal Charge. We may reduce or
eliminate the withdrawal charge when sales of the Contract are made to
individuals or a group of individuals in such a manner that results in savings
of sales expenses. The entitlement to such a reduction in the withdrawal charge
will be based on the following criteria:
(a) the size and type of group of individuals to whom the Contract is offered;
or
(b) whether there is a prior or existing relationship with the Company such as
being an employee of the Company or one of its affiliates, receiving
distributions or making internal transfers from other Contracts issued by
the Company or one of its affiliates, or making transfers of amounts held
under qualified plans sponsored by the Company or an affiliate.
Any reduction or elimination of the withdrawal charge will not be unfairly
discriminatory against any person.
WITHDRAWALS--ACCESS TO YOUR MONEY
Commutation. If you elect a fixed Period Certain Annuity with a right of
Commutation, you may elect to receive the Commuted Value of all or a portion of
the remaining Guaranteed Payments, less any applicable withdrawal charge. Such
Commutations may be elected once each calendar year. No Commutations are
allowed from a fixed dollar option in the first Contract year. In subsequent
contract years, full or partial Commutations are allowed, provided that under a
partial Commutation the remaining Annuity Payments would equal $50 or more. If
a portion of the Guaranteed Payments is commuted, the remaining Annuity
Payments will be reduced proportionately. Commutations are subject to a
withdrawal charge.
Commuted Value. Under a fixed Period Certain Annuity, the Commuted Value
is equal to the present value of the remaining Guaranteed Payments calculated
using the adjusted contract rate.
The adjusted contract rate equals:
(Rate of Return)+ CY - IY
where:
[bullet] Rate of Return is the Fixed Annuity Present Value Interest Rate shown
in the Contract;
[bullet] CY is the Commutation Yield; and
[bullet] IY is the Issue Yield.
CY is determined as follows:
(1) CY is the average of the yields, as published in the Wall Street Journal on
the Friday before the date of Commutation, of the three (or more if the
Company deems necessary) noncallable, noninflation adjusted Treasury Notes
or Bonds maturing on or closest to the Commutation Duration Date.
(2) The Commutation Duration Date is the date (month and year) obtained when
the Commutation Duration is added to the date of Commutation.
________________________________________________________________________________
15
<PAGE>
(3) Commutation Duration equals 1 plus the number of whole years from the date
of Commutation until the final Guaranteed Payment is due, divided by 2. Any
resulting fraction will be rounded up to the next whole number.
IY is determined as follows:
(1) IY is the average of the yields, as published in the Wall Street Journal on
the Friday before the Contract Effective Date, of the three (or more if the
Company deems necessary) noncallable, noninflation adjusted Treasury Notes
or Bonds maturing on or closest to the Issue Duration Date.
(2) The Issue Duration Date (month and year) is obtained when the Issue
Duration is added to the Contract Effective Date.
(3) Issue Duration equals 1 plus the number of whole years from issue until the
final payment is due, divided by 2. Any resulting fraction will be rounded
up to the next whole number.
DEATH BENEFIT
The death benefit is payable upon the death of the Annuitant, or the death
of the survivor if there is a Joint Annuitant, and if there are remaining
Guaranteed Payments. Any remaining Guaranteed Payments will be paid to the
Beneficiary in the form specified in the Contract. Such payments will be paid
at least as rapidly as under the method of distribution then in effect. Within
six months of such death, the Beneficiary may elect to receive the Commuted
Value of any remaining Guaranteed Payments. However, under a Period Certain
Annuity where you have purchased a right of Commutation, the Beneficiary may
make such election at any time. No withdrawal charge will apply to the Commuted
Value of the death benefit.
If a Cash Refund feature is elected, the death benefit is payable in one
sum to the Beneficiary.
If the Contract Holder who is not the Annuitant dies, Annuity Payments
will continue to be paid to the Payee in the form specified in the Contract. If
no Payee survives the death of the Contract Holder, Annuity Payments will be
made to the Annuitant. Such payments will be paid at least as rapidly as under
the method of distribution then in effect.
Death Benefit Commutation. The Commuted Value of the death benefit will be
determined as of the next Valuation Date following the Company's receipt at its
Home Office of proof of death acceptable to the Company and a request for
payment in good order. If the Contract is issued as a Period Certain Annuity
with a right of Commutation, the Commuted Value will be determined as described
under "Withdrawal--Access to Your Money" in this Appendix. If the Contract is
issued as a Life Annuity with Guaranteed Payments or a Period Certain where you
have not purchased a right of Commutation, the rate used to determined the
Commuted Value of the remaining Guaranteed Payments will be the Fixed Annuity
Present Value Interest Rate shown in the Contract.
________________________________________________________________________________
16
<PAGE>
APPENDIX B
CONDENSED FINANCIAL INFORMATION
(Selected data for Annuity and Accumulation Units outstanding during each
period at a 3.50% Assumed Annual Net Return Rate)
================================================================================
The condensed financial information presented below for the year ended December
31, 1997 is derived from information included in the financial statements of the
Separate Account, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The financial statements and the independent auditors' report thereon
for the year ended December 31, 1997 are included in the Statement of Additional
Information. The Annuity Unit Values shown below are derived from accumulation
unit values and reflect the application of a factor corresponding to the Assumed
Annual Net Return Rate of 3.50%. See Valuation of Annuity Unit Values for more
information. Only those Subaccounts with Annuity Units outstanding at the end of
the period are listed below.
1997
-------------------
AETNA BALANCED VP, INC.
Value at beginning of period $13.448
Value at end of period $15.488
Increase (decrease) in value of
annuity unit(1) 15.17%(2)
AETNA BOND VP
Value at beginning of period $11.087
Value at end of period $11.529
Increase (decrease) in value of
annuity unit(1) 3.99%(2)
AETNA CROSSROADS VP
Value at beginning of period $10.108
Value at end of period $10.242
Increase (decrease) in value of
annuity unit(1) 1.32%(4)
AETNA GROWTH AND
INCOME VP
Value at beginning of period $15.431
Value at end of period $18.426
Increase (decrease) in value of
annuity unit(1) 19.41%(5)
AETNA INDEX PLUS LARGE
CAP VP
Value at beginning of period $11.263
Value at end of period $12.402
Increase (decrease) in value of
annuity unit(1) 10.11%(6)
AETNA LEGACY VP
Value at beginning of period $10.372
Value at end of period $11.201
Increase (decrease) in value of
annuity unit(1) 8.00%(7)
AETNA SMALL COMPANY VP
Value at beginning of period $12,930
Value at end of period $13,444
Increase (decrease) in value of
annuity unit(1) 3.97%(2)
________________________________________________________________________________
17
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
================================================================================
1997
-----------------------
JANUS ASPEN GROWTH
PORTFOLIO
Value at beginning of period $10.481
Value at end of period $11.789
Increase (decrease) in value of
annuity unit(1) 12.49%(8)
JANUS ASPEN WORLDWIDE
GROWTH PORTFOLIO
Value at beginning of period $10.576
Value at end of period $12.007
Increase (decrease) in value of
annuity unit(1) 13.53%(5)
PORTFOLIO PARTNERS MFS EMERGING
EQUITIES PORTFOLIO
Value at beginning of period $10.050
Value at end of period $ 9.894
Increase (decrease) in value of
annuity unit(1) (1.55%)(8)
PORTFOLIO PARTNERS MFS VALUE
EQUITY PORTFOLIO
Value at beginning of period $12.335
Value at end of period $12.474
Increase (decrease) in value of
annuity unit(1) 1.13%(8)
(1) The above figures are calculated by subtracting the beginning Annuity Unit
value from the ending Annuity Unit value, and dividing the result by the
beginning Annuity Unit value. These figures do not reflect the deferred
sales charge or the fixed dollar annual maintenance fee, if any. Inclusion
of these charges would reduce the investment results shown.
(2) Reflects less than a full year of performance activity. Funds were received
in this option during March 1997.
(3) Reflects less than a full year of performance activity. Funds were received
in this option during December 1997.
(4) Reflects less than a full year of performance activity. Funds were received
in this option during January 1997.
(5) Reflects less than a full year of performance activity. Funds were received
in this option during October 1997.
(6) Reflects less than a full year of performance activity. Funds were received
in this option during February 1997.
(7) Reflects less than a full year of performance activity. Funds were received
in this option during August 1997.
(8) Reflects less than a full year of performance activity. Funds were received
in this option during November 1997.
________________________________________________________________________________
18
<PAGE>
CONDENSED FINANCIAL INFORMATION
(Selected data for Annuity and Accumulation Units outstanding during each
period at a 5.00% Assumed Annual Net Return Rate)
================================================================================
The condensed financial information presented below for the year ending December
31, 1997 is derived from information included in the financial statements of the
Separate Account, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The financial statements and the independent auditors' report thereon
for the year ended December 31, 1997 are included in the Statement of Additional
Information. The Annuity Unit Values shown below are derived from accumulation
unit values and reflect the application of a factor corresponding to the Assumed
Annual Net Return Rate of 5.00%. See Valuation of Annuity Unit Values for more
information. Only those Subaccounts with Annuity Units outstanding at the end of
the period are listed below.
1997
---------------------
AETNA BALANCED VP, INC.
Value at beginning of period $13.209
Value at end of period $14.800
Increase (decrease) in value of
annuity unit(1) 12.04%(2)
AETNA BOND VP
Value at beginning of period $10.990
Value at end of period $11.017
Increase (decrease) in value of
annuity unit(1) 0.25%(3)
AETNA CROSSROADS VP
Value at beginning of period $10.032
Value at end of period $10.223
Increase (decrease) in value of
annuity unit(1) 1.90%(4)
AETNA GROWTH VP
Value at beginning of period $13.538
Value at end of period $13.015
Increase (decrease) in value of
annuity unit(1) (3.86%)(4)
AETNA GROWTH AND INCOME VP
Value at beginning of period $15.123
Value at end of period $17.607
Increase (decrease) in value of
annuity unit(1) 16.43%(2)
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $10.848
Value at end of period $12.277
Increase (decrease) in value of
annuity unit(1) 13.17%(5)
AETNA LEGACY VP
Value at beginning of period $10.264
Value at end of period $11.017
Increase (decrease) in value of
annuity unit(1) 7.34%(2)
________________________________________________________________________________
19
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
================================================================================
1997
-----------------------
AETNA SMALL COMPANY VP
Value at beginning of period $13.322
Value at end of period $13.308
Increase (decrease) in value of
annuity unit(1) (0.10%)(4)
FIDELITY VIP HIGH
INCOME PORTFOLIO
Value at beginning of period $10.058
Value at end of period $10.060
Increase (decrease) in value of
annuity unit(1) 0.02%(4)
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $10.433
Value at end of period $11.580
Increase (decrease) in value of
annuity unit(1) 11.00%(6)
JANUS ASPEN WORLDWIDE
GROWTH PORTFOLIO
Value at beginning of period $10.638
Value at end of period $11.794
Increase (decrease) in value of
annuity unit(1) 10.87%(2)
PPI MFS EMERGING EQUITIES PORTFOLIO
Value at beginning of period $ 9.885
Value at end of period $ 9.719
Increase (decrease) in value of
annuity unit(1) (1.68%)(7)
PPI MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $12.132
Value at end of period $12.253
Increase (decrease) in value of
annuity unit(1) 1.00%(7)
(1) The above figures are calculated by subtracting the beginning Annuity Unit
value from the ending Annuity Unit value during a calendar year, and
dividing the result by the beginning Annuity Unit value. These figures do
not reflect the deferred sales charge or the fixed dollar annual
maintenance fee, if any. Inclusion of these charges would reduce the
investment results shown.
(2) Reflects less than a full year of performance activity. Funds were received
in this option during January 1997.
(3) Reflects less than a full year of performance activity. Funds were received
in this option during October 1997.
(4) Reflects less than a full year of performance activity. Funds were received
in this option during December 1997.
(5) Reflects less than a full year of performance activity. Funds were received
in this option during May 1997.
(6) Reflects less than a full year of performance activity. Funds were received
in this option during March 1997.
(7) Reflects less than a full year of performance activity. Funds were received
in this option during November 1997.
________________________________________________________________________________
20
<PAGE>
For Master Applications Only
I hereby acknowledge receipt of an Account B Fixed and Variable Single Premium
Immediate Annuity prospectus dated May 1, 1998, as well as all current
prospectuses pertaining to the variable investment options available under the
Contracts.
___ Please send an Account B Statement of Additional Information (Form No.
SAI.09515-98) dated May 1, 1998.
________________________________________________________________________________
CONTRACT HOLDER'S SIGNATURE
________________________________________________________________________________
DATE
PROS.09515-98
________________________________________________________________________________
21
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated May 1, 1998
A Fixed and Variable Single Premium Immediate Annuity Contract
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Variable Annuity Account B (the
"Separate Account") dated May 1, 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
Attn: ARS Settlements
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-238-6273
Read the prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the prospectus.
TABLE OF CONTENTS
Page
General Information and History........................................ 2
Variable Annuity Account B............................................. 2
Offering and Purchase of Contracts..................................... 3
Performance Data....................................................... 3
General.......................................................... 3
Average Annual Total Return Quotations........................... 4
Annuity Payments....................................................... 7
Sales Material and Advertising......................................... 8
Independent Auditors................................................... 8
Financial Statements of the Separate Account........................... S-1
Financial Statements of Aetna Life Insurance and Annuity Company....... F-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company which was organized under the insurance laws of the State of
Connecticut in 1976. Through a merger, it succeeded to the business of Aetna
Variable Annuity Life Insurance Company (formerly Participating Annuity Life
Insurance Company organized in 1954). As of December 31, 1997, the Company
(ALIAC) 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 charge and administrative charge
described in the prospectus, all expenses incurred in the operations of the
Separate Account are borne by the Company. (See "Charges and Deductions" in the
prospectus.) The Company receives reimbursement for certain administrative costs
from some 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 Contract are as follows:
[bullet] Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund, Inc.)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP
[bullet]Aetna Crossroads VP (formerly Aetna Crossroads Variable Portfolio)
[bullet] Aetna Growth VP (formerly Aetna Variable Growth Portfolio)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP
[bullet] Aetna Index Plus Large Cap VP (formerly Aetna Variable Index Plus
Portfolio)
[bullet] Aetna International VP
[bullet] Aetna Legacy VP (formerly Aetna Legacy Variable Portfolio)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP
[bullet] Aetna Real Estate Securities VP
[bullet] Aetna Small Company VP (formerly Aetna Variable Small Company
Portfolio)
[bullet] Fidelity VIP High Income Portfolio
[bullet] Janus Aspen Growth Portfolio
[bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Oppenheimer Strategic Bond Fund
[bullet] Portfolio Partners MFS Emerging Equities Portfolio
[bullet] Portfolio Partners MFS Value Equity Portfolio
[bullet] Portfolio Partners Scudder International Growth Portfolio
[bullet] Portfolio Partners T. Rowe Price Growth Equity Portfolio
Complete descriptions of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, are contained in the
prospectuses and statements of additional information for each of the Funds.
OFFERING AND PURCHASE OF CONTRACTS
The Company is both the depositor and the principal underwriter for the
securities sold by the prospectus. The Company offers the Contracts through life
insurance agents licensed to sell variable annuities who are registered
representatives of the Company or of other registered broker-dealers who have
sales agreements with the Company. The offering of the Contracts is continuous.
A description of the manner in which Contracts are purchased is in the
prospectus.
PERFORMANCE DATA
GENERAL
From time to time, the Company may advertise different types of historical
performance for the Subaccounts of the Separate Account available under the
Contracts. The Company may advertise the "standardized average annual total
returns," calculated in a manner prescribed by the Securities and Exchange
Commission (the "standardized return"), as well as "non-standardized returns,"
both of which are described below.
The standardized and non-standardized total return figures are computed
according to a formula in which a hypothetical initial Purchase Payment of
$1,000 is applied under a deferred annuity contract to the various Subaccounts
available under the Contract, and then related to the ending redeemable values
over one, five and ten year periods (or fractional periods thereof). The
redeemable value is then divided by the initial investment and this quotient is
taken to the Nth root (N represents the number of years in the period) and 1 is
subtracted from the result which is then expressed as a percentage, carried to
at least the nearest hundredth of a percent. The standardized figures use the
actual returns of the Fund since the date contributions were first received in
the Fund under the Separate Account and then adjust them to reflect the
deduction of all recurring charges during each period that apply to the
Contracts described in this prospectus (e.g., mortality and expense risk
charges, administrative expense charges (if any), and the withdrawal charge
schedule applicable to commutations under a
3
<PAGE>
variable Period Certain Annuity). These charges will be deducted on a pro rata
basis in the case of fractional periods.
The non-standardized figures will be calculated in a similar manner, except that
they will not reflect the deduction of any applicable withdrawal charge (which
would decrease the level of performance shown if reflected in these
calculations). The non-standardized figures may also include monthly, quarterly,
year-to-date and three-year periods, 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 amount available upon redemption may be
more or less than your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
The table shown below reflects the average annual standardized and
non-standardized total return quotation figures for the periods ended December
31, 1997 for the Subaccounts. 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 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.
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.
4
<PAGE>
<TABLE>
<CAPTION>
Date
Contributions
STANDARDIZED First
------------ Received
Under the
Separate
SUBACCOUNT 1 Year 5 Years 10 Years Inception* Account
---------- ------ ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. 14.91% 12.55% 11.24% 06/30/89
Aetna Bond VP(1) 1.60% 5.17% 7.86%
Aetna Crossroads VP 10.30% 14.47% 08/31/95
Aetna Growth VP 13.04% 05/30/97
Aetna Growth and Income VP(1) 21.85% 15.76% 15.18%
Aetna Index Plus Large Cap VP 25.60% 26.37% 10/31/96
Aetna Legacy VP 7.42% 11.20% 08/31/95
Aetna Money Market VP(1)(2) (1.05%) 3.09% 4.63%
Aetna Small Company VP 14.63% 05/30/97
Fidelity VIP High Income Portfolio 10.39% 12.53% 06/30/95
Janus Aspen Growth Portfolio 15.15% 18.02% 07/29/94
Janus Aspen Worldwide Growth Portfolio 14.60% 25.14% 04/28/95
Oppenheimer Strategic Bond Fund 0.14% 05/30/97
Portfolio Partners
MFS Emerging Equities Portfolio (6.18%) 11/28/97
Alger American Small Cap/
Portfolio Partners
MFS Emerging Equities(3) 2.47% 9.62% 09/30/93
Portfolio Partners
MFS Value Equity Portfolio (3.63%) 11/28/97
Neuberger & Berman AMT Growth/
Portfolio Partners
MFS Value Equity(3) 18.53% 11.14% 11.32% 11/30/92
Portfolio Partners
Scudder International
Growth Portfolio (3.81%) 11/28/97
Scudder International
Portfolio Class A/
Portfolio Partners
Scudder International Growth(3) 2.25% 11.82% 9.94% 08/31/92
Portfolio Partners T. Rowe Price
Growth Equity Portfolio (3.06%) 11/28/97
Alger American Growth/
Portfolio Partners
T. Rowe Price Growth Equity(3) 20.31% 22.03% 02/28/95
</TABLE>
Please refer to the discussion preceding the table 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 4.23%. The current yield reflects the
deduction of all charges under the Contract that are deducted from the
total return quotations shown above except the maximum 5% withdrawal
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>
NON-STANDARDIZED Fund
---------------- Inception
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception** Date
---------- ------ ------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. 20.95% 20.01% 13.01% 11.12% 04/03/89
Aetna Bond VP(1) 6.95% 8.50% 5.60% 7.86%
Aetna Crossroads VP 16.10% 17.02% 07/05/95
Aetna Growth VP 31.34% 31.31% 12/13/96
Aetna Growth and Income VP(1) 28.27% 27.21% 16.23% 15.18%
Aetna Index Plus Large Cap VP 32.22% 32.91% 09/16/96
Aetna Legacy VP 13.07% 13.52% 07/05/95
Aetna Money Market VP(1)(2) 4.16% 4.31% 3.51% 4.63%
Aetna Small Company VP 32.81% 33.75% 12/27/96
Fidelity VIP High Income
Portfolio(1) 16.20% 15.97% 12.49% 11.40%
Janus Aspen Growth Portfolio 21.21% 22.15% 16.20% 09/13/93
Janus Aspen Worldwide Growth Portfolio 20.63% 24.57% 21.38% 09/13/93
Oppenheimer Strategic Bond Fund 7.35% 10.60% 6.29% 05/03/93
Portfolio Partners
MFS Emerging Equities Portfolio (1.25%) 11/28/97
Alger American Small Cap/
Portfolio Partners
MFS Emerging Equities(3) 7.86% 16.50% 10.81% 17.50% 09/21/88
Portfolio Partners
MFS Value Equity Portfolio 1.30% 11/28/97
Neuberger & Berman AMT Growth/
Portfolio Partners
MFS Value Equity(3) 24.77% 20.48% 11.59% 13.22%
Portfolio Partners
Scudder International
Growth Portfolio 1.46% 11/28/97
Scudder International Portfolio
Class A/Portfolio Partners
Scudder International 7.63% 10.21% 12.28% 10.40%
Growth(3)
Portfolio Partners T. Rowe Price
Growth Equity Portfolio 1.91% 11/28/97
Alger American Growth/
Portfolio Partners T. Rowe Price
Growth Equity(3) 26.65% 24.05% 18.26% 18.21% 01/09/89
</TABLE>
Please refer to the discussion preceding the tables A 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 4.23%. The current yield reflects the
deduction of all charges under the Contract that are deducted from the
total return quotations shown above. As in the table above, the maximum 5%
withdrawal 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
Your variable Annuity Payment will fluctuate as the Annuity Unit value(s)
fluctuates with the investment experience of the selected Subaccount(s). The
first payment and subsequent payments also vary depending on the assumed net
investment rate selected (3.5% or 5% per annum). Selection of a 5% rate causes a
higher first payment, but Annuity Payments will increase thereafter only to the
extent that the net investment rate increases by more than 5% on an annual
basis. Annuity Payments would decline if the rate failed to increase by 5%. Use
of the 3.5% assumed rate causes a lower first payment, but subsequent payments
would increase more rapidly or decline more slowly as changes occur in the net
investment rate.
A fixed number of Annuity Units is determined in each of the designated
Subaccounts on the Contract Effective Date. The number of Annuity Units, which
does not change thereafter, is calculated by dividing (a) by (b), where (a) is
the amount of the Annuity Payment as if the Annuity Payment was calculated as of
the Contract Effective Date, and (b) is the Annuity Unit value for that
investment option on the Contract Effective Date. The first payment will be
calculated ten Valuation Dates prior to the payment due date which depends upon
the payment frequency you have selected. As noted above, Annuity Unit values
fluctuate from one Valuation Date to the next; such fluctuations reflect changes
in the net investment factor for the applicable Subaccount(s) (with a ten
Valuation Date lag which gives the Company time to process Annuity Payments) and
a mathematical adjustment which offsets the assumed net investment rate of 3.5%
or 5% per annum.
The operation of all these factors can be illustrated by the following
hypothetical example. These procedures will be performed separately for each
Subaccount selected.
EXAMPLE:
Assume that you purchase a Single Premium Immediate Annuity Contract with a
$50,000 premium. The payment option that you select has a payment factor of
$6.68 per $1,000 of value applied. Also assume that no premium tax is payable.
If a payment was determined as of the Contract Effective Date, that payment
would be calculated by multiplying $6.68 per $1,000 by 50.000. This would
produce an initial payment of $334.00.
Assume that the value of the Annuity Unit on the Contract Effective Date is
13.400000. The payment calculated as of the Contract Effective Date is divided
by the Annuity Unit value to determine the number of Annuity Units (that is,
$334.00/13.400000 = 24.925 Annuity Units). The number of Annuity Units will
remain constant over the term of your contract as determined by your annuity
option. The value of each payment will be determined on the tenth Valuation Date
prior to the payment due date by multiplying the number of Annuity Units by that
date's Annuity Unit value.
Payments will subsequently fluctuate depending upon the net investment
performance that occurs between payment Valuation Dates less a factor that
represents the Assumed Annual Net Return Rate. This offsets the Assumed Annual
Net Return Rate built into the number of Annuity Units determined above.
Annuity Unit values are calculated on a daily basis by multiplying the Annuity
Unit Value by the daily net investment factor and by the daily Assumed Annual
Net Return Rate. The factor for a 3.5% Assumed Annual Net Return Rate is
0.9999058 and for 5.0%, 0.9998663. The new payment is calculated by multiplying
the number of Annuity Units by the new Annuity Unit value.
7
<PAGE>
SALES MATERIAL AND ADVERTISING
The Company may illustrate the hypothetical values of Annuity Payments made from
each of the Subaccounts over certain time periods based on the historical net
asset values of the Funds.
The Company may also include hypothetical illustrations in its sales literature
that explain the mathematical principles of compounded interest, tax deferred
accumulation, and the mechanics of variable annuity contracts. The Company may
also discuss the difference between variable annuity contracts and savings or
investment products, including, but not limited to, personal savings accounts
and certificates of deposit.
We may publish in advertisements and reports, the ratings and other information
assigned to us by one or more independent rating organizations such as A.M. Best
Company, Duff & Phelps, Standard & Poor's Corporation and Moody's Investors
Services, Inc. The purpose of the ratings is to reflect our financial strength
and/or claims-paying ability. We may also quote ranking services such as
Morningstar's Variable Annuity/Life Performance Report and Lipper's Variable
Insurance Products Performance Analysis Service (VIPPAS), which rank variable
annuity or life Subaccounts or their underlying funds by performance and/or
investment objective. We may illustrate in advertisements the performance of the
underlying funds, if accompanied by performance which also shows the performance
of such funds reduced by applicable charges under the Separate Account. We may
categorize funds in terms of the asset classes they represent and use such
categories in marketing material for the Contracts. We may also show in
advertisements the portfolio holdings of the underlying funds, updated at
various intervals. From time to time, we will quote articles from newspapers and
magazines or other publications or reports, including, but not limited to The
Wall Street Journal, Money magazine, USA Today and The VARDS Report.
The Company may provide in advertising, sales literature, periodic publications
or other materials information on various topics of interest to current and
prospective Contract Holders. These topics may include the relationship between
sectors of the economy and the economy as a whole and its effect on various
securities markets, investment strategies and techniques (such as value
investing, market timing, asset allocation, constant ratio transfer and account
rebalancing), the advantages and disadvantages of investing in tax-deferred and
taxable investments, customer profiles and hypothetical purchase and investment
scenarios, financial management and tax and retirement planning, and investment
alternatives to certificates of deposit and other financial instruments,
including comparison between the Contracts and the characteristics of and market
for such financial instruments.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103, are the
independent auditors for the Separate Account and for the Company. The services
provided to the Separate Account include primarily the examination of the
Separate Account's financial statements and the review of filings made with the
SEC.
8
<PAGE>
FINANCIAL STATEMENTS
VARIABLE ANNUITY ACCOUNT B
Index
Variable Annuity Account B:
Statement of Assets and Liabilities...................................... S-2
Statements of Operations and Changes in Net Assets....................... S-6
Notes to Financial Statements............................................ S-7
Independent Auditors' Report............................................. S-25
S-1
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 30,411,094 shares (cost $955,207,313) ...................... $1,022,883,150
Aetna Income Shares; 5,674,428 shares (cost $72,136,754) ........................ 72,918,472
Aetna Variable Encore Fund; 9,348,762 shares (cost $123,509,269) ................ 124,939,137
Aetna Investment Advisers Fund, Inc.; 10,156,919 shares (cost $141,710,363) ..... 162,842,121
Aetna GET Fund, Series B; 1,326,295 shares (cost $14,665,182) ................... 20,859,924
Aetna GET Fund, Series C; 866,713 shares (cost $8,784,556) ...................... 10,929,107
Aetna Ascent Variable Portfolio; 1,448,001 shares (cost $19,409,307) ............ 20,443,736
Aetna Crossroads Variable Portfolio; 1,552,948 shares (cost $19,616,465) ........ 20,320,625
Aetna Legacy Variable Portfolio; 1,652,443 shares (cost $19,438,586) ............ 19,994,608
Aetna Variable Portfolio, Inc.:
Capital Appreciation Portfolio; 328,354 shares (cost $4,457,675) ............... 3,912,594
Growth Portfolio; 326,907 shares (cost $4,163,981) ............................. 3,218,910
Index Plus Portfolio; 2,014,660 shares (cost $26,897,404) ...................... 28,239,788
Small Company Portfolio; 478,249 shares (cost $6,406,805) ...................... 6,107,129
Alger American Funds:
Balanced Portfolio; 525,665 shares (cost $4,964,549) ........................... 5,656,151
Income and Growth Portfolio; 1,287,394 shares (cost $11,439,405) ............... 14,148,460
Leveraged AllCap Portfolio; 616,315 shares (cost $12,739,767) .................. 14,280,009
American Century Investments:
Balanced Fund; 563,499 shares (cost $4,180,851) ................................ 4,643,230
International Fund; 855,695 shares (cost $5,491,134) ........................... 5,852,955
Calvert Social Balanced Portfolio; 490,079 shares (cost $912,050) ............... 971,337
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 5,712,922 shares (cost $118,902,067) .................. 138,709,740
Growth Portfolio; 2,167,158 shares (cost $65,817,036) .......................... 80,401,549
High Income Portfolio; 2,598,408 shares (cost $32,563,692) ..................... 35,286,379
Overseas Portfolio; 677,325 shares (cost $12,543,713) .......................... 13,004,643
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 652,031 shares (cost $10,605,372) ..................... 11,743,075
Contrafund Portfolio; 5,407,595 shares (cost $89,625,610) ...................... 107,827,442
Index 500 Portfolio; 673,020 shares (cost $66,103,932) ......................... 76,986,772
Investment Grade Bond Portfolio; 523,741 shares (cost $6,191,022) .............. 6,578,182
Insurance Management Series:
American Leaders Fund II; 5,952,606 shares (cost $86,738,072) .................. 116,849,662
Equity Income Fund II; 1,619,705 shares (cost $19,027,165) ..................... 19,938,571
Growth Strategies Fund II; 1,406,137 shares (cost $19,150,654) ................. 22,709,106
High Income Bond Fund II; 4,859,621 shares (cost $49,449,772) .................. 53,212,853
International Equity Fund II; 1,136,596 shares (cost $13,007,527) .............. 13,946,028
Prime Money Fund II; 7,530,487 shares (cost $7,530,487) ........................ 7,530,487
U.S. Government Securities Fund II; 1,252,067 shares (cost 12,683,585) ......... 13,196,784
Utility Fund II; 1,840,648 shares (cost $20,501,843) ........................... 26,302,858
Janus Aspen Series:
Aggressive Growth Portfolio; 1,867,831 shares (cost $33,789,408) ............... 38,383,925
Balanced Portfolio; 1,782,815 shares (cost $27,682,920) ........................ 31,145,778
Flexible Income Portfolio; 894,277 shares (cost $10,167,023) ................... 10,534,588
Growth Portfolio; 2,203,400 shares (cost $34,954,619) .......................... 40,718,827
Worldwide Growth Portfolio; 6,953,978 shares (cost $144,443,276) ............... 162,653,541
Lexington Emerging Markets Fund; 318,004 shares (cost $3,542,964) ............... 2,833,416
Lexington Natural Resources Trust Fund; 464,813 shares (cost $6,752,492) ........ 6,930,364
</TABLE>
S-2
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1997 (continued):
<TABLE>
<S> <C>
MFS Funds:
Total Return Series; 1,140,943 shares (cost $16,998,729) ............................ $ 18,973,878
Worldwide Government Series; 129,706 shares (cost $1,330,232) ....................... 1,324,295
Oppenheimer Funds:
Capital Appreciation Fund; 90,044 shares (cost $3,554,414) .......................... 3,688,200
Global Securities Fund; 125,453 shares (cost $2,681,784) ............................ 2,680,937
Growth & Income Fund; 616,565 shares (cost $12,222,979) ............................. 12,688,907
Strategic Bond Fund; 604,043 shares (cost $3,113,874) ............................... 3,092,701
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio; 2,221,275 shares (cost $96,046,526) ............ 95,292,694
PPI MFS Research Growth Portfolio; 6,783,433 shares (cost $67,030,057) .............. 65,867,130
PPI MFS Value Equity Portfolio; 515,803 shares (cost $15,207,018) ................... 15,427,681
PPI Scudder International Growth Portfolio; 897,175 shares (cost $12,454,736) ....... 12,650,163
PPI T. Rowe Price Growth Equity Portfolio; 2,067,651 shares (cost $88,372,335) ...... 90,170,258
--------------
NET ASSETS (cost $2,666,918,351) ..................................................... $2,922,442,857
==============
Net assets represented by:
Reserves for annuity contracts in accumulation and payment period: (Notes 1 and 5)
</TABLE>
<TABLE>
<S> <C>
Aetna Variable Fund:
Annuity contracts in accumulation ........... $892,006,381
Annuity contracts in payment period ......... 130,876,769
Aetna Income Shares:
Annuity contracts in accumulation ........... 69,236,488
Annuity contracts in payment period ......... 3,681,984
Aetna Variable Encore Fund:
Annuity contracts in accumulation ........... 124,939,137
Aetna Investment Advisers Fund, Inc.:
Annuity contracts in accumulation ........... 150,761,384
Annuity contracts in payment period ......... 12,080,737
Aetna GET Fund, Series B:
Annuity contracts in accumulation ........... 20,859,924
Aetna GET Fund, Series C:
Annuity contracts in accumulation ........... 10,929,107
Aetna Ascent Variable Portfolio:
Annuity contracts in accumulation ........... 20,443,736
Aetna Crossroads Variable Portfolio:
Annuity contracts in accumulation ........... 20,250,904
Annuity contracts in payment period ......... 69,721
Aetna Legacy Variable Portfolio:
Annuity contracts in accumulation ........... 18,710,015
Annuity contracts in payment period ......... 1,284,593
Aetna Variable Portfolio, Inc.:
Capital Appreciation Portfolio:
Annuity contracts in accumulation ........... 3,912,594
Growth Portfolio:
Annuity contracts in accumulation ........... 3,210,344
Annuity contracts in payment period ......... 8,566
Index Plus Portfolio:
Annuity contracts in accumulation ........... 28,074,705
Annuity contracts in payment period ......... 165,083
</TABLE>
S-3
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1997 (continued):
<TABLE>
<S> <C>
Small Company Portfolio:
Annuity contracts in accumulation .................... $ 6,059,783
Annuity contracts in payment period .................. 47,346
Alger American Funds:
Balanced Portfolio:
Annuity contracts in accumulation .................... 5,656,151
Income and Growth Portfolio:
Annuity contracts in accumulation .................... 14,148,460
Leveraged AllCap Portfolio:
Annuity contracts in accumulation .................... 14,280,009
American Century Investments:
Balanced Fund:
Annuity contracts in accumulation .................... 4,643,230
International Fund:
Annuity contracts in accumulation .................... 5,852,955
Calvert Social Balanced Portfolio:
Annuity contracts in accumulation .................... 971,337
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Annuity contracts in accumulation .................... 138,709,740
Growth Portfolio:
Annuity contracts in accumulation .................... 80,401,549
High Income Portfolio:
Annuity contracts in accumulation .................... 35,217,837
Annuity contracts in payment period .................. 68,542
Overseas Portfolio:
Annuity contracts in accumulation .................... 13,004,643
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Annuity contracts in accumulation .................... 11,743,075
Contrafund Portfolio:
Annuity contracts in accumulation .................... 107,827,442
Index 500 Portfolio:
Annuity contracts in accumulation .................... 76,986,772
Investment Grade Bond Portfolio:
Annuity contracts in accumulation .................... 6,578,182
Insurance Management Series:
American Leaders Fund II:
Annuity contracts in accumulation .................... 116,800,911
Annuity contracts in payment period .................. 48,751
Equity Income Fund II:
Annuity contracts in accumulation .................... 19,938,571
Growth Strategies Fund II:
Annuity contracts in accumulation .................... 22,709,106
High Income Bond Fund II:
Annuity contracts in accumulation .................... 53,212,853
International Equity Fund II:
Annuity contracts in accumulation .................... 13,946,028
Prime Money Fund II:
Annuity contracts in accumulation .................... 7,530,487
</TABLE>
S-4
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1997 (continued):
<TABLE>
<S> <C>
U.S. Government Securities Fund II:
Annuity contracts in accumulation ........... $ 13,196,784
Utility Fund II:
Annuity contracts in accumulation ........... 26,302,858
Janus Aspen Series:
Aggressive Growth Portfolio:
Annuity contracts in accumulation ........... 38,383,925
Balanced Portfolio:
Annuity contracts in accumulation ........... 31,145,778
Flexible Income Portfolio:
Annuity contracts in accumulation ........... 10,534,588
Growth Portfolio:
Annuity contracts in accumulation ........... 40,072,928
Annuity contracts in payment period ......... 645,899
Worldwide Growth Portfolio:
Annuity contracts in accumulation ........... 160,658,096
Annuity contracts in payment period ......... 1,995,445
Lexington Emerging Markets Fund:
Annuity contracts in accumulation ........... 2,833,416
Lexington Natural Resources Trust Fund:
Annuity contracts in accumulation ........... 6,930,364
MFS Funds:
Total Return Series:
Annuity contracts in accumulation ........... 18,973,878
Worldwide Government Series:
Annuity contracts in accumulation ........... 1,324,295
Oppenheimer Funds:
Capital Appreciation Fund:
Annuity contracts in accumulation ........... 3,688,200
Global Securities Fund:
Annuity contracts in accumulation ........... 2,680,937
Growth & Income Fund:
Annuity contracts in accumulation ........... 12,688,907
Strategic Bond Fund:
Annuity contracts in accumulation ........... 3,092,701
Portfolio Partners, Inc:
PPI MFS Emerging Equities Portfolio:
Annuity contracts in accumulation ........... 94,796,247
Annuity contracts in payment period ......... 496,447
PPI MFS Research Growth Portfolio:
Annuity contracts in accumulation ........... 65,867,130
PPI MFS Value Equity Portfolio:
Annuity contracts in accumulation ........... 15,049,606
Annuity contracts in payment period ......... 378,075
PPI Scudder International Growth Portfolio:
Annuity contracts in accumulation ........... 12,650,163
PPI T. Rowe Price Growth Equity Portfolio:
Annuity contracts in accumulation ........... 90,170,258
--------------
$2,922,442,857
==============
</TABLE>
See Notes to Financial Statements
S-5
<PAGE>
Variable Annuity Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
----- ----
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ............................................................. $ 278,833,116 $ 120,367,178
Expenses: (Notes 2 and 5)
Valuation period deductions ........................................... (29,243,851) (17,483,870)
-------------- --------------
Net investment income .................................................. 249,589,265 102,883,308
-------------- --------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ................................................... 1,004,789,371 365,025,974
Cost of investments sold .............................................. 933,728,508 347,598,566
-------------- --------------
Net realized gain .................................................... 71,060,863 17,427,408
-------------- --------------
Net unrealized gain on investments: (Note 5)
Beginning of Year ..................................................... 122,191,053 28,746,944
End of Year ........................................................... 255,524,506 122,191,053
-------------- --------------
Net change in unrealized gain ........................................ 133,333,453 93,444,109
-------------- --------------
Net realized and unrealized gain on investments ........................ 204,394,316 110,871,517
-------------- --------------
Net increase in net assets resulting from operations ................... 453,983,581 213,754,825
-------------- --------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments ............................ 571,517,770 538,586,667
Sales and administrative charges deducted by the Company ............... (16,265) (17,370)
-------------- --------------
Net variable annuity contract purchase payments ...................... 571,501,505 538,569,297
Transfers from the Company for mortality guarantee adjustments ......... 371,835 690,779
Transfers from the Company's fixed account options ..................... 144,526,667 50,549,121
Redemptions by contract holders ........................................ (82,942,177) (73,738,526)
Annuity Payments ....................................................... (16,137,431) (12,108,943)
Other .................................................................. 2,327,153 159,467
-------------- --------------
Net increase in net assets from unit transactions (Note 5) ........... 619,647,552 504,121,195
-------------- --------------
Change in net assets ................................................... 1,073,631,133 717,876,020
NET ASSETS:
Beginning of Year ...................................................... 1,848,811,724 1,130,935,704
-------------- --------------
End of Year ............................................................ $2,922,442,857 $1,848,811,724
============== ==============
</TABLE>
See Notes to Financial Statements
S-6
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997
1. Summary of Significant Accounting Policies
Variable Annuity Account B (the "Account") is a separate account established
by Aetna Life Insurance and Annuity Company (the "Company") registered under
the Investment Company Act of 1940 as a unit investment trust. The Account is
sold exclusively for use with variable annuity contracts that may be entitled
to tax-deferred treatment under specific sections of the Internal Revenue
Code of 1986, as amended.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported therein. Although actual results could differ
from these estimates, any such differences are expected to be immaterial to
the net assets of the Account.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset value
per share as determined by each Fund on December 31, 1997:
<TABLE>
<S> <C>
Aetna Variable Fund Insurance Management Series:
Aetna Income Shares [bullet] American Leaders Fund II [bullet]
Aetna Variable Encore Fund [bullet] Equity Income Fund II
Aetna Investment Advisers Fund, Inc. [bullet] Growth Strategies Fund II
Aetna GET Fund, Series B [bullet] High Income Bond Fund II
Aetna GET Fund, Series C [bullet] International Equity Fund II
Aetna Ascent Variable Portfolio [bullet] Prime Money Fund II
Aetna Crossroads Variable Portfolio [bullet] U.S. Government Securities Fund II
Aetna Legacy Variable Portfolio [bullet] Utility Fund II
Aetna Variable Portfolio, Inc.: Janus Aspen Series:
[bullet] Capital Appreciation Portfolio [bullet] Aggressive Growth Portfolio
[bullet] Growth Portfolio [bullet] Balanced Portfolio
[bullet] Index Plus Portfolio [bullet] Flexible Income Portfolio
[bullet] Small Company Portfolio [bullet] Growth Portfolio
Alger American Funds: [bullet] Worldwide Growth Portfolio
[bullet] Balanced Portfolio Lexington Emerging Markets Fund
[bullet] Income and Growth Portfolio Lexington Natural Resources Trust Fund
[bullet] Leveraged AllCap Portfolio MFS Funds:
American Century Investments: [bullet] Total Return Series
[bullet] Balanced Fund [bullet] Worldwide Government Series
[bullet] International Fund Oppenheimer Funds:
Calvert Social Balanced Portfolio [bullet] Capital Appreciation Fund
Fidelity Investments Variable Insurance Products Fund: [bullet] Global Securities Fund
[bullet] Equity-Income Portfolio [bullet] Growth & Income Fund
[bullet] Growth Portfolio [bullet] Strategic Bond Fund
[bullet] High Income Portfolio Portfolio Partners, Inc.:
[bullet] Overseas Portfolio [bullet] PPI MFS Emerging Equities Portfolio
Fidelity Investments Variable Insurance Products Fund II: [bullet] PPI MFS Research Growth Portfolio
[bullet] Asset Manager Portfolio [bullet] PPI MFS Value Equity Portfolio
[bullet] Contrafund Portfolio [bullet] PPI Scudder International Growth Portfolio
[bullet] Index 500 Portfolio [bullet] PPI T. Rowe Price Growth Equity Portfolio
[bullet] Investment Grade Bond Portfolio
</TABLE>
b. Other
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by specific identification.
S-7
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of the Company which is taxed as a life insurance company under
the Internal Revenue Code of 1986, as amended.
d. Annuity Reserves
Annuity reserves held in the Separate Accounts are computed for currently
payable contracts according to the Progressive Annuity, a49, 1971 Individual
Annuity Mortality, 1971 Group Annuity Mortality, 83a, and 1983 Group Annuity
Mortality tables using various assumed interest rates not to exceed seven
percent. Mortality experience is monitored by the Company. Charges to annuity
reserves for mortality experience are reimbursed to the Company if the
reserves required are less than originally estimated. If additional reserves
are required, the Company reimburses the Account.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made in
accordance with the terms of the contracts and are paid to the Company.
3. Dividend Income
On an annual basis, the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions to the
Account are automatically reinvested in shares of the Funds. The Account's
proportionate share of each Fund's undistributed net investment income
(distributions in excess of net investment income) and accumulated net
realized gain (loss) on investments is included in net unrealized gain (loss)
in the Statements of Operations and Changes in Net Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the years ended December 31, 1997 and 1996
aggregated $1,874,026,188 and $1,004,789,371; $972,030,476 and $365,025,974,
respectively.
S-8
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund: $206,171,606 ($9,508,053) $64,103,032 $51,274,099 $12,828,933
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna Income Shares: 4,333,850 (737,718) 12,717,950 11,951,670 766,280
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 4,149,350 (1,373,114) 187,177,845 187,281,193 (103,348)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 20,983,218 (1,660,805) 12,262,658 9,696,803 2,565,855
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 3,422,687 (286,592) 1,109,194 713,521 395,673
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 169,021 (119,214) 963,591 833,090 130,501
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 1,293,085 (171,542) 2,422,808 2,093,544 329,264
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 1,366,067 (170,121) 1,119,794 921,119 198,675
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 1,122,530 (176,596) 1,280,095 1,125,823 154,272
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Aetna Variable Portfolio, Inc.:
Capital Appreciation Portfolio: 621,617 (11,486) 125,792 110,176 15,616
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 848,691 (9,678) 592,546 560,620 31,926
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Index Plus Portfolio: 1,110,445 (154,416) 2,229,246 1,790,247 438,999
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Small Company Portfolio: 366,132 (19,387) 261,692 230,152 31,540
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 142,299 (73,798) 1,098,365 1,473,706 (375,341)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Net
Net Unrealized
Gain (Loss) Net Increase (Decrease) Net Assets
- -------------------------------------- Change in In Net Assets -------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$59,979,314 $67,675,837 $7,696,523 $71,233,894
$644,728,031 $892,006,381
89,732,216 130,876,769
- ---------------------------------------------------------------------------------------------------------------
379,633 781,718 402,085 (1,964,060)
66,534,546 69,236,488
3,583,489 3,681,984
- ---------------------------------------------------------------------------------------------------------------
(540,607) 1,429,868 1,970,475 13,513,776
106,781,998 124,939,137
- ---------------------------------------------------------------------------------------------------------------
15,114,435 21,131,758 6,017,323 7,591,834
119,402,212 150,761,384
7,942,484 12,080,737
- ---------------------------------------------------------------------------------------------------------------
4,487,610 6,194,743 1,707,133 (712,316)
16,333,339 20,859,924
- ---------------------------------------------------------------------------------------------------------------
144,834 2,144,550 1,999,716 (532,193)
9,281,276 10,929,107
- ---------------------------------------------------------------------------------------------------------------
276,453 1,034,430 757,977 12,596,284
5,638,668 20,443,736
- ---------------------------------------------------------------------------------------------------------------
151,493 704,161 552,668 13,077,636
5,295,700 20,250,904
0 69,721
- ---------------------------------------------------------------------------------------------------------------
46,576 556,022 509,446 12,197,969
6,186,987 18,710,015
0 1,284,593
- ---------------------------------------------------------------------------------------------------------------
0 (545,082) (545,082) 3,831,929
0 3,912,594
- ---------------------------------------------------------------------------------------------------------------
0 (945,071) (945,071) 3,293,042
0 3,210,344
0 8,566
- ---------------------------------------------------------------------------------------------------------------
(4,046) 1,342,384 1,346,430 23,512,958
1,985,372 28,074,705
0 165,083
- ---------------------------------------------------------------------------------------------------------------
0 (299,676) (299,676) 6,028,520
0 6,059,783
0 47,346
- ---------------------------------------------------------------------------------------------------------------
(461,380) 691,602 1,152,982 1,032,718
3,777,291 5,656,151
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
S-10
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5.
Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation
Period
Dividends Deductions
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Alger American Funds (continued):
Growth Portfolio: (1) $506,477 ($685,927)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Income and Growth Portfolio: 401,543 (156,768)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 0 (196,601)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
MidCap Growth Portfolio: (1) 350,028 (308,858)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Small Capitalization Portfolio: (2) 2,260,717 (722,118)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
American Century Investments:
Balanced Fund: 199,265 (58,943)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Capital Appreciation Fund: (3) 725,963 (365,809)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
International Fund: 176,899 (85,324)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 67,562 (7,128)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 7,870,976 (1,400,361)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Growth Portfolio: 2,159,319 (938,752)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
High Income Portfolio: 1,270,071 (337,944)
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------
Overseas Portfolio: 863,493 (164,196)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 761,827 (120,783)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Contrafund Portfolio: 1,931,363 (1,125,088)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Index 500 Portfolio: 1,159,193 (771,581)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 277,920 (79,205)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alger American Funds (continued):
Growth Portfolio: (1) $78,591,434 $64,519,617 $14,071,817
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Income and Growth Portfolio: 2,602,037 3,401,714 (799,677)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 7,570,244 6,461,486 1,108,758
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
MidCap Growth Portfolio: (1) 49,795,194 45,404,313 4,390,881
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: (2) 118,175,863 114,437,088 3,738,775
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
American Century Investments:
Balanced Fund: 704,536 619,119 85,417
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Capital Appreciation Fund: (3) 47,909,593 51,060,683 (3,151,090)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
International Fund: 4,226,767 3,417,937 808,830
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 212,241 199,799 12,442
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 17,887,517 15,251,625 2,635,892
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Growth Portfolio: 10,659,015 9,711,716 947,299
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
High Income Portfolio: 4,857,948 4,277,783 580,165
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------
Overseas Portfolio: 5,725,552 5,116,905 608,647
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 1,009,159 904,890 104,269
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 13,933,668 10,543,199 3,390,469
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 17,678,295 13,392,232 4,286,063
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 1,100,211 1,085,995 14,216
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------
</TABLE>
S-11
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2,349,936 $0 ($2,349,936) ($55,087,434)
$43,545,003 $0
- ----------------------------------------------------------------------------------------------------------
(828,912) 2,709,055 3,537,967 4,693,808
6,471,587 14,148,460
- ----------------------------------------------------------------------------------------------------------
220,810 1,540,243 1,319,433 628,691
11,419,728 14,280,009
- ----------------------------------------------------------------------------------------------------------
682,424 0 (682,424) (23,592,354)
19,842,727 0
- ----------------------------------------------------------------------------------------------------------
(495,260) 0 495,260 (64,524,063)
58,751,429 0
- ----------------------------------------------------------------------------------------------------------
145,325 462,379 317,054 1,109,081
2,991,356 4,643,230
- ----------------------------------------------------------------------------------------------------------
(1,588,390) 0 1,588,390 (43,166,616)
44,369,162 0
- ----------------------------------------------------------------------------------------------------------
375,835 361,821 (14,014) 259,970
4,706,594 5,852,955
- ----------------------------------------------------------------------------------------------------------
(881) 59,286 60,167 241,657
596,637 971,337
- ----------------------------------------------------------------------------------------------------------
5,773,475 19,807,673 14,034,198 43,088,538
72,480,497 138,709,740
- ----------------------------------------------------------------------------------------------------------
3,258,300 14,584,513 11,326,213 8,978,986
57,928,484 80,401,549
- ----------------------------------------------------------------------------------------------------------
814,429 2,722,687 1,908,258 17,156,365
14,709,464 35,217,837
0 68,542
- ----------------------------------------------------------------------------------------------------------
743,689 460,930 (282,759) 2,276,187
9,703,271 13,004,643
- ----------------------------------------------------------------------------------------------------------
484,182 1,137,702 653,520 4,412,778
5,931,464 11,743,075
- ----------------------------------------------------------------------------------------------------------
6,210,754 18,201,832 11,991,078 35,101,002
56,538,618 107,827,442
- ----------------------------------------------------------------------------------------------------------
2,241,040 10,882,841 8,641,801 36,290,926
27,380,370 76,986,772
- ----------------------------------------------------------------------------------------------------------
175,829 387,160 211,331 1,392,243
4,761,677 6,578,182
- ----------------------------------------------------------------------------------------------------------
</TABLE>
S-12
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5.
Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Insurance Management Series:
American Leaders Fund II: $2,033,587 ($1,272,645) $2,239,581 $1,354,167 $885,414
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund II: 52,763 (108,244) 188,614 167,057 21,557
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 63,162 (214,573) 650,403 461,919 188,484
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 2,232,254 (576,880) 5,856,816 5,388,542 468,274
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
International Equity Fund II: 8,680 (138,835) 787,960 678,156 109,804
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II: 365,689 (107,783) 7,931,948 7,931,971 (23)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 366,225 (147,271) 3,825,499 3,747,648 77,851
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Utility Fund II: 838,523 (291,277) 1,512,321 1,157,193 355,128
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (419,040) 19,586,639 19,136,007 450,632
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 786,909 (294,871) 2,053,281 1,687,149 366,132
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 528,359 (93,943) 1,111,581 1,079,357 32,224
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 967,832 (429,682) 2,254,366 1,752,378 501,988
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (4) 62,602 (36,643) 13,023,397 12,927,175 96,222
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 2,077,847 (1,645,928) 21,615,276 15,329,845 6,285,431
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 2,717 (53,043) 4,235,697 4,177,632 58,065
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 209,099 (85,086) 3,246,699 2,653,024 593,675
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-13
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8,810,467 $30,111,589 $21,301,122 $32,775,129
$61,127,055 $116,800,911
0 48,751
- --------------------------------------------------------------------------------------------------------
0 911,406 911,406 19,061,089
0 19,938,571
- --------------------------------------------------------------------------------------------------------
733,393 3,558,451 2,825,058 12,664,797
7,182,178 22,709,106
- --------------------------------------------------------------------------------------------------------
1,022,582 3,763,082 2,740,500 21,197,568
27,151,137 53,212,853
- --------------------------------------------------------------------------------------------------------
307,602 938,501 630,899 7,399,890
5,935,590 13,946,028
- --------------------------------------------------------------------------------------------------------
0 0 0 (471,714)
7,744,318 7,530,487
- --------------------------------------------------------------------------------------------------------
73,398 513,199 439,801 4,803,969
7,656,209 13,196,784
- --------------------------------------------------------------------------------------------------------
1,730,892 5,801,015 4,070,123 4,555,867
16,774,494 26,302,858
- --------------------------------------------------------------------------------------------------------
534,823 4,594,517 4,059,694 2,750,579
31,542,060 38,383,925
- --------------------------------------------------------------------------------------------------------
373,883 3,462,858 3,088,975 15,424,389
11,774,244 31,145,778
- --------------------------------------------------------------------------------------------------------
73,395 367,565 294,170 4,626,561
5,147,217 10,534,588
- --------------------------------------------------------------------------------------------------------
1,093,423 5,764,208 4,670,785 14,123,750
20,884,154 40,072,928
0 645,899
- --------------------------------------------------------------------------------------------------------
(27,376) 0 27,376 (2,070,168)
1,920,611 0
- --------------------------------------------------------------------------------------------------------
5,151,123 18,210,266 13,059,143 76,404,357
66,472,691 160,658,096
0 1,995,445
- --------------------------------------------------------------------------------------------------------
(66,591) (709,548) (642,957) 952,674
2,515,960 2,833,416
- --------------------------------------------------------------------------------------------------------
538,139 177,872 (360,267) 1,821,159
4,751,784 6,930,364
- --------------------------------------------------------------------------------------------------------
</TABLE>
S-14
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MFS Funds:
Emerging Growth Series: (2) $0 ($232,144) $37,594,997 $34,076,137 $3,518,860
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Research Series: (3) 0 (273,185) 37,686,630 34,109,865 3,576,765
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Total Return Series: 0 (154,993) 689,861 564,440 125,421
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Value Series: (5) 0 (19,996) 4,332,717 3,942,044 390,673
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Worldwide Government Series: 15,502 (12,983) 124,845 123,607 1,238
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Advisers Management Trust:
Growth Portfolio: (5) 741,183 (92,357) 17,383,777 16,347,694 1,036,083
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Capital Appreciation Fund: 0 (13,374) 8,964,190 9,092,515 (128,325)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Global Securities Fund: 0 (12,451) 850,938 802,777 48,161
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Growth & Income Fund: 37,178 (35,759) 188,084 164,087 23,997
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Strategic Bond Fund: 84,234 (10,842) 122,739 121,006 1,733
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio: 0 (120,211) 43,880,815 44,111,392 (230,577)
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 0 (82,490) 37,923,531 37,983,794 (60,263)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 0 (16,913) 4,632,658 4,633,034 (376)
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 0 (12,760) 259,410 255,379 4,031
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Portfolio: 0 (115,952) 33,484,569 33,491,822 (7,253)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund:
International Portfolio: (6) 275,557 (123,791) 16,445,650 14,417,831 2,027,819
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($85,796) $0 $85,796 ($12,370,520)
$8,998,008 $0
- -------------------------------------------------------------------------------------------------------
204,764 0 (204,764) (9,875,328)
6,776,512 0
- -------------------------------------------------------------------------------------------------------
72,010 1,975,149 1,903,139 12,883,941
4,216,370 18,973,878
- -------------------------------------------------------------------------------------------------------
935 0 (935) (578,583)
208,841 0
- -------------------------------------------------------------------------------------------------------
9,304 (5,937) (15,241) 927,866
407,913 1,324,295
- -------------------------------------------------------------------------------------------------------
(6,666) 0 6,666 (9,934,149)
8,242,574 0
- -------------------------------------------------------------------------------------------------------
0 133,786 133,786 3,696,113
0 3,688,200
- -------------------------------------------------------------------------------------------------------
0 (846) (846) 2,646,073
0 2,680,937
- -------------------------------------------------------------------------------------------------------
0 465,927 465,927 12,197,564
0 12,688,907
- -------------------------------------------------------------------------------------------------------
0 (21,173) (21,173) 3,038,749
0 3,092,701
- -------------------------------------------------------------------------------------------------------
0 (753,832) (753,832) 96,397,314
0 94,796,247
0 496,447
- -------------------------------------------------------------------------------------------------------
0 (1,162,926) (1,162,926) 67,172,809
0 65,867,130
- -------------------------------------------------------------------------------------------------------
0 220,662 220,662 15,224,308
0 15,049,606
0 378,075
- -------------------------------------------------------------------------------------------------------
0 195,427 195,427 12,463,465
0 12,650,163
- -------------------------------------------------------------------------------------------------------
0 1,797,922 1,797,922 88,495,541
0 90,170,258
- -------------------------------------------------------------------------------------------------------
1,510,449 0 (1,510,449) (12,719,263)
12,050,127 0
-------------------------------------------------------------------------------------------------------
</TABLE>
S-16
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Variable Annuity Account B $278,833,116 ($29,243,851) $1,004,789,371 $933,728,508 $71,060,863
=======================================================================================================================
</TABLE>
(1) - Effective November 28, 1997, this funds assets were transferred to the PPI
T. Rowe Price Growth Equity Portfolio.
(2) - Effective November 28, 1997, this funds assets were transferred to the PPI
MFS Emerging Equities Portfolio.
(3) - Effective November 28, 1997, this funds assets were transferred to PPI MFS
Research Growth Fund.
(4) - Effective November 28, 1997, this funds assets were transferred to the
Aetna Variable Encore Fund.
(5) - Effective November 28, 1997, this funds assets were transferred to the PPI
MFS Value Equity Portfolio.
(6) - Effective November 28, 1997, this funds assets were transferred to the PPI
Scudder International Growth Portfolio.
S-17
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$122,191,053 $255,524,506 $133,333,453 $619,647,552 $1,848,811,724 $2,922,442,857
=======================================================================================================================
</TABLE>
S-18
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation
Period
Dividends Deductions
- ------------------------------------------------------------------------------------
<S> <C> <C>
Aetna Variable Fund: $77,000,986 ($7,148,689)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------
Aetna Income Shares: 4,527,825 (813,024)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 5,358,925 (1,043,955)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 11,247,847 (1,372,478)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 1,055,590 (226,340)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 46,499 (14,753)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 235,037 (27,609)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 257,055 (29,943)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 363,749 (38,623)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 10,290 (2,403)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 775,351 (33,904)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Growth Portfolio: 758,872 (394,360)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Income and Growth Portfolio: 2,009,995 (55,929)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 61,186 (116,503)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
MidCap Portfolio: 190,158 (166,087)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Small Capitalization Portfolio: 184,900 (588,663)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Portfolio: 44,676 (3,984)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Variable Fund: $96,146,932 $97,318,697 ($1,171,765)
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna Income Shares: 19,585,006 18,826,116 758,890
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 78,888,315 76,637,102 2,251,213
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 16,403,009 13,386,571 3,016,438
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 915,330 681,610 233,720
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 361,353 354,510 6,843
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 317,740 277,917 39,823
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 362,140 312,870 49,270
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 406,948 384,407 22,541
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 139,030 133,438 5,592
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 244,368 332,405 (88,037)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Growth Portfolio: 6,990,444 6,528,212 462,232
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Income and Growth Portfolio: 390,051 732,537 (342,486)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 4,991,495 4,605,949 385,546
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
MidCap Portfolio: 3,198,308 3,039,709 158,599
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: 31,506,275 29,929,826 1,576,449
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Portfolio: 141,022 137,780 3,242
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
</TABLE>
S-19
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($8,051,873) $59,979,314 $68,031,187 $4,966,306
$530,231,821 $644,728,031
62,550,401 89,732,216
- ---------------------------------------------------------------------------------------------------------------
3,224,044 379,633 (2,844,411) (9,600,618)
74,693,652 66,534,546
3,395,721 3,583,489
- ---------------------------------------------------------------------------------------------------------------
2,487,618 (540,607) (3,028,225) 22,111,260
81,132,780 106,781,998
- ---------------------------------------------------------------------------------------------------------------
12,419,220 15,114,435 2,695,215 602,270
104,415,595 119,402,212
6,739,809 7,942,484
- ---------------------------------------------------------------------------------------------------------------
2,566,580 4,487,610 1,921,030 (650,835)
14,000,174 16,333,339
- ---------------------------------------------------------------------------------------------------------------
0 144,834 144,834 9,097,853
0 9,281,276
- ---------------------------------------------------------------------------------------------------------------
5,570 276,453 270,883 4,773,151
347,383 5,638,668
- ---------------------------------------------------------------------------------------------------------------
8,209 151,493 143,284 4,409,627
466,407 5,295,700
- ---------------------------------------------------------------------------------------------------------------
1,609 46,576 44,967 5,470,774
323,579 6,186,987
- ---------------------------------------------------------------------------------------------------------------
0 (4,046) (4,046) 1,975,940
(1) 1,985,372
- ---------------------------------------------------------------------------------------------------------------
1,644 (461,380) (463,024) 2,897,855
689,050 3,777,291
- ---------------------------------------------------------------------------------------------------------------
(63,817) 2,349,936 2,413,753 29,514,421
10,790,085 43,545,003
- ---------------------------------------------------------------------------------------------------------------
(6,769) (828,912) (822,143) 4,660,630
1,021,520 6,471,587
- ---------------------------------------------------------------------------------------------------------------
32,561 220,810 188,249 8,946,454
1,954,796 11,419,728
- ---------------------------------------------------------------------------------------------------------------
7,193 682,424 675,231 15,727,261
3,257,565 19,842,727
- ---------------------------------------------------------------------------------------------------------------
46,283 (495,260) (541,543) 32,655,969
25,464,317 58,751,429
- ---------------------------------------------------------------------------------------------------------------
(13,512) (881) 12,631 193,226
346,846 596,637
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
S-20
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation
Period
Dividends Deductions
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: $940,850 ($608,164)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Growth Portfolio: 1,412,110 (540,670)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
High Income Portfolio: 178,909 (112,363)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Overseas Portfolio: 75,181 (91,010)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 119,231 (54,259)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Contrafund Portfolio: 146,164 (428,708)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Index 500 Portfolio: 143,406 (203,362)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 45,797 (42,799)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 857,970 (631,122)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Growth Strategies Fund II: 405 (44,481)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
High Income Bond Fund II: 1,647,290 (260,987)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
International Equity Fund II: 10,567 (51,003)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Prime Money Fund II: 289,134 (87,958)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 367,608 (86,361)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Utility Fund II: 547,259 (186,219)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 243,931 (266,292)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Balanced Portfolio: 181,099 (68,277)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: $4,030,269 $3,343,817 $686,452
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Growth Portfolio: 2,600,136 2,280,711 319,425
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
High Income Portfolio: 1,318,057 1,318,142 (85)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Overseas Portfolio: 880,668 813,434 67,234
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 540,553 465,407 75,146
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 5,044,449 4,308,117 736,332
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 6,086,685 5,356,843 729,842
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 882,619 925,636 (43,017)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 6,368,961 4,596,688 1,772,273
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 119,084 103,727 15,357
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 5,863,283 5,644,702 218,581
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
International Equity Fund II: 250,169 236,027 14,142
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Prime Money Fund II: 12,400,851 12,398,826 2,025
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 5,011,311 5,085,345 (74,034)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Utility Fund II: 1,034,753 867,262 167,491
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 6,134,481 4,875,603 1,258,878
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
Balanced Portfolio: 2,812,822 2,536,688 276,134
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------
</TABLE>
S-21
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$966,600 $5,773,475 $4,806,875 $51,230,275
$15,424,209 $72,480,497
- ----------------------------------------------------------------------------------------------------
(34,190) 3,258,300 3,292,490 38,219,867
15,225,262 57,928,484
- ----------------------------------------------------------------------------------------------------
15,029 814,429 799,400 12,636,277
1,207,326 14,709,464
- ----------------------------------------------------------------------------------------------------
51,434 743,689 692,255 6,948,020
2,011,591 9,703,271
- ----------------------------------------------------------------------------------------------------
98,360 484,182 385,822 4,043,035
1,362,489 5,931,464
- ----------------------------------------------------------------------------------------------------
122,841 6,210,754 6,087,913 38,043,675
11,953,242 56,538,618
- ----------------------------------------------------------------------------------------------------
70,864 2,241,040 2,170,176 22,367,490
2,172,818 27,380,370
- ----------------------------------------------------------------------------------------------------
11,466 175,829 164,363 3,931,632
705,701 4,761,677
- ----------------------------------------------------------------------------------------------------
2,916,888 8,810,467 5,893,579 26,548,788
26,685,567 61,127,055
- ----------------------------------------------------------------------------------------------------
3,614 733,393 729,779 6,301,239
179,879 7,182,178
- ----------------------------------------------------------------------------------------------------
229,008 1,022,582 793,574 12,876,189
11,876,490 27,151,137
- ----------------------------------------------------------------------------------------------------
43,172 307,602 264,430 4,073,916
1,623,538 5,935,590
- ----------------------------------------------------------------------------------------------------
(1,182) 0 1,182 1,765,443
5,774,492 7,744,318
- ----------------------------------------------------------------------------------------------------
75,600 73,398 (2,202) 2,942,870
4,508,328 7,656,209
- ----------------------------------------------------------------------------------------------------
799,746 1,730,892 931,146 6,514,735
8,800,082 16,774,494
- ----------------------------------------------------------------------------------------------------
1,164,909 534,823 (630,086) 19,085,222
11,850,407 31,542,060
- ----------------------------------------------------------------------------------------------------
26,040 373,883 347,843 10,311,561
725,884 11,774,244
- ----------------------------------------------------------------------------------------------------
</TABLE>
S-22
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation
Period
Dividends Deductions
<S> <C> <C>
Flexible Income Portfolio: $ 304,512 ($43,754)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Growth Portfolio: 324,844 (141,840)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Short-Term Bond Portfolio: 79,326 (23,159)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Worldwide Growth Portfolio: 642,050 (384,732)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 0 (27,131)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 15,653 (38,378)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
MFS Funds:
Emerging Growth Series: 73,635 (33,243)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Research Series: 94,710 (22,219)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Total Return Series: 87,973 (13,218)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Value Series: 4,089 (372)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
World Government Series: 0 (1,705)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Neuberger & Berman Advisers Management Trust:
Growth Portfolio: 770,877 (98,063)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Scudder Variable Life Investment Fund:
International Portfolio: 276,128 (136,107)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
TCI Portfolios, Inc.:
Balanced Fund: 67,198 (24,832)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
Growth Fund: 6,228,055 (611,968)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------
International Fund: 62,276 (41,867)
Annuity contracts in accumulation
Total Variable Annuity Account B $120,367,178 ($17,483,870)
==================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Flexible Income Portfolio: $1,127,628 $1,090,808 $36,820
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Growth Portfolio: 1,249,735 1,041,911 207,824
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: 2,910,009 2,872,811 37,198
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 4,899,145 3,899,490 999,655
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 1,463,410 1,431,864 31,546
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 2,192,808 1,809,743 383,065
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
MFS Funds:
Emerging Growth Series: 190,630 186,959 3,671
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Research Series: 253,406 258,774 (5,368)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Total Return Series: 140,628 132,113 8,515
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Value Series: 496 486 10
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
World Government Series: 19,663 19,513 150
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Neuberger & Berman Advisers Management Trust:
Growth Portfolio: 3,864,131 3,857,033 7,098
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund:
International Portfolio: 4,557,311 4,016,790 540,521
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
TCI Portfolios, Inc.:
Balanced Fund: 247,893 231,495 16,398
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
Growth Fund: 19,145,021 17,607,144 1,537,877
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------
International Fund: 397,143 365,001 32,142
Annuity contracts in accumulation
Total Variable Annuity Account B $365,025,974 $347,598,566 $17,427,408
===============================================================================================
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$29,809 $73,395 $43,586 $3,237,811
$1,568,242 $5,147,217
----------------------------------------------------------------------------------------------------------------
84,852 1,093,423 1,008,571 16,916,813
2,567,942 20,884,154
----------------------------------------------------------------------------------------------------------------
1,330 (27,376) (28,706) 1,106,654
749,298 1,920,611
----------------------------------------------------------------------------------------------------------------
253,639 5,151,123 4,897,484 54,723,321
5,594,913 66,472,691
----------------------------------------------------------------------------------------------------------------
(4,024) (66,591) (62,567) 2,232,953
341,159 2,515,960
----------------------------------------------------------------------------------------------------------------
188,717 538,139 349,422 2,162,813
1,879,209 4,751,784
----------------------------------------------------------------------------------------------------------------
0 (85,796) (85,796) 9,039,741
0 8,998,008
----------------------------------------------------------------------------------------------------------------
0 204,764 204,764 6,504,625
0 6,776,512
----------------------------------------------------------------------------------------------------------------
0 72,010 72,010 4,061,090
0 4,216,370
----------------------------------------------------------------------------------------------------------------
0 935 935 204,179
0 208,841
----------------------------------------------------------------------------------------------------------------
0 9,304 9,304 400,164
0 407,913
----------------------------------------------------------------------------------------------------------------
77,158 (6,666) (83,824) (710,088)
8,356,574 8,242,574
----------------------------------------------------------------------------------------------------------------
652,411 1,510,449 858,038 (54,117)
10,565,664 12,050,127
----------------------------------------------------------------------------------------------------------------
16,540 145,325 128,785 2,313,929
489,878 2,991,356
----------------------------------------------------------------------------------------------------------------
8,206,103 (1,588,390) (9,794,493) (7,301,710)
54,311,401 44,369,162
----------------------------------------------------------------------------------------------------------------
15,650 375,835 360,185 3,691,239
602,619 4,706,594
----------------------------------------------------------------------------------------------------------------
$28,746,944 $122,191,053 $93,444,109 $504,121,195 $1,130,935,704 $1,848,811,724
=========== ============ =========== ============ ============== ==============
</TABLE>
S-24
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and
Contract Owners of Variable Annuity Account B:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Annuity Account B (the "Account") as
of December 31, 1997, and the related statements of operations and changes in
net assets for each of the years in the two-year period then ended and condensed
financial information for the year ended December 31, 1997. These financial
statements and condensed financial information are the responsibility of the
Account's management. Our responsibility is to express an opinion on these
financial statements and condensed financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and condensed
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and condensed financial information. Our procedures
included confirmation of securities owned as of December 31, 1997, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company Variable Annuity Account B
as of December 31, 1997, the results of its operations and changes in its net
assets for each of the years in the two-year period then ended and condensed
financial information for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Hartford, Connecticut
February 27, 1998
S-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements
------------------------------------------
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Balance Sheets as of December 31, 1997
and 1996 F-4
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aetna Life Insurance
and Annuity Company and Subsidiary at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1998
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
--------------------------------
1997 1996 1995
------- ------- -------
Revenue:
Premiums $267.1 $133.6 $212.7
Charges assessed against policyholders 475.0 396.5 318.9
Net investment income 1,080.5 1,045.6 1,004.3
Net realized capital gains 36.0 19.7 41.3
Other income 39.7 45.4 42.0
------- ------- -------
Total revenue 1,898.3 1,640.8 1,619.2
------- ------- -------
Benefits and expenses:
Current and future benefits 1,127.8 968.6 997.2
Operating expenses 347.4 342.2 310.8
Amortization of deferred policy
acquisition costs 128.4 69.8 48.0
Severance and facilities charges -- 61.3 --
------- ------- -------
Total benefits and expenses 1,603.6 1,441.9 1,356.0
------- ------- -------
Income before income taxes 294.7 198.9 263.2
Income taxes 89.4 57.8 87.3
------- ------- -------
Net income $205.3 $141.1 $175.9
======= ======= =======
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
Assets 1997 1996
- ------ ---- ----
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(amortized cost: $12,912.2 and $12,539.1) $13,463.8 $12,905.5
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $131.7 and $107.6) 147.6 119.0
Investment in affiliated mutual funds (cost: $78.1 and $77.3) 83.0 81.1
Common stock (cost: $0.2 and $0.0) .6 .3
Short-term investments 95.6 34.8
Mortgage loans 12.8 13.0
Policy loans 469.6 399.3
--------- --------
Total investments 14,273.0 13,553.0
Cash and cash equivalents 565.4 459.1
Accrued investment income 163.0 159.0
Premiums due and other receivables 63.7 26.6
Deferred policy acquisition costs 1,654.6 1,515.3
Reinsurance loan to affiliate 397.2 628.3
Other assets 46.8 33.7
Separate accounts assets 22,982.7 15,318.3
--------- --------
Total assets $40,146.4 $31,693.3
========= ========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $3,763.7 $3,617.0
Unpaid claims and claim expenses 38.0 28.9
Policyholders' funds left with the Company 11,143.5 10,663.7
--------- --------
Total insurance reserve liabilities 14,945.2 14,309.6
Other liabilities 312.8 354.7
Income taxes:
Current 12.4 20.7
Deferred 72.0 80.5
Separate accounts liabilities 22,970.0 15,318.3
--------- --------
Total liabilities 38,312.4 30,083.8
--------- --------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Accumulated other comprehensive income 92.9 60.5
Retained earnings 1,320.3 1,128.2
--------- --------
Total shareholder's equity 1,834.0 1,609.5
--------- --------
Total liabilities and shareholder's equity $40,146.4 $31,693.3
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,609.5 $1,583.0 $1,088.5
Comprehensive income
Net income 205.3 141.1 175.9
Other comprehensive income, net of tax
Unrealized gains (losses) on securities ($50.1
million, $(110.8) million and $494.6 million, 32.4 (72.0) 321.5
pretax, respectively)
-------- -------- --------
Total comprehensive income 237.7 69.1 497.4
-------- -------- --------
Capital contributions -- 10.4 0.0
Other changes 4.1 (49.5) 0.0
Common stock dividends (17.3) (3.5) (2.9)
-------- -------- --------
Shareholder's equity, end of year $1,834.0 $1,609.5 $1,583.0
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $205.3 $141.1 $175.9
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
(Increase) decrease in accrued investment income (4.0) 16.5 (33.3)
(Increase) decrease in premiums due and other receivables (33.3) 1.6 25.4
Increase in policy loans (70.3) (60.7) (89.9)
Increase in deferred policy acquisition costs (139.3) (174.0) (177.0)
Decrease in reinsurance loan to affiliate 231.1 27.2 34.8
Net increase in universal life account balances 286.4 243.2 393.4
(Decrease) increase in other insurance reserve liabilities (249.6) (211.5) 79.0
Net (decrease) increase in other liabilities and other assets (41.7) 3.1 13.0
Decrease in income taxes (31.4) (26.7) (4.5)
Net accretion of discount on investments (66.4) (68.0) (66.4)
Net realized capital gains (36.0) (19.7) (41.3)
Other, net -- 1.1 --
-------- -------- --------
Net cash provided by (used for) operating activities 50.8 (126.8) 309.1
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,311.3 5,182.2 4,207.2
Equity securities 103.1 190.5 180.8
Mortgage loans 0.2 8.7 10.7
Limited partnership -- -- 26.6
Investment maturities and collections of:
Debt securities available for sale 1,212.7 885.2 583.9
Short-term investments 89.3 35.0 106.1
Cost of investment purchases in:
Debt securities available for sale (6,732.8) (6,534.3) (6,034.0)
Equity securities (113.3) (118.1) (170.9)
Short-term investments (149.9) (54.7) (24.7)
Mortgage loans -- -- (21.3)
Other, net -- (17.6) --
-------- -------- --------
Net cash used for investing activities (279.4) (423.1) (1,135.6)
-------- -------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,621.2 1,579.5 1,884.5
Withdrawals of investment contracts (1,256.3) (1,146.2) (1,109.6)
Capital contribution to Separate Account (25.0) -- --
Return of capital from Separate Account 12.3 -- --
Capital contribution from HOLDCO -- 10.4 --
Dividends paid to shareholder (17.3) (3.5) (2.9)
-------- -------- --------
Net cash provided by financing activities 334.9 440.2 772.0
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 106.3 (109.7) (54.5)
Cash and cash equivalents, beginning of year 459.1 568.8 623.3
-------- -------- --------
Cash and cash equivalents, end of year $565.4 $459.1 $568.8
======== ======== ========
Supplemental cash flow information:
Income taxes paid, net $119.6 $85.5 $92.8
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiary
(collectively, the "Company") are providers of financial services and life
insurance products in the United States. The Company has two business
segments: financial services and individual life insurance.
Financial services products include annuity contracts that offer a variety
of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403,
408 and 457, and non-qualified annuity contracts. These contracts may be
deferred or immediate ("payout annuities"). Financial services also include
investment advisory services and pension plan administrative services.
Individual life insurance products include universal life, variable
universal life, traditional whole life and term insurance.
Basis of Presentation
---------------------
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiary, Aetna Insurance Company of
America. Aetna Life Insurance and Annuity Company is a wholly owned
subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a
wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate
parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have
been made to 1996 and 1995 financial information to conform to the 1997
presentation.
New Accounting Standard
-----------------------
As of December 31, 1997 the Company adopted Financial Accounting Standard
("FAS") No. 130, Reporting Comprehensive Income. This statement establishes
standards for the reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
encompasses all changes in shareholder's equity (except those arising from
transactions with shareholders) and includes net income and net unrealized
capital gains or losses on available-for-sale securities. As this new
standard only requires additional information in a financial statement, it
does not affect the Company's financial position or results of operations.
Future Application of Accounting Standards
------------------------------------------
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in June 1996 and provides
accounting and reporting standards for transfers of financial assets and
extinguishments of liabilities.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Future Application of Accounting Standards (Continued)
FAS No. 125 is effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending are not effective until January 1, 1998. Provisions effective in
1997 did not have a material effect on the Company's financial position or
results of operations. The Company does not expect adoption of this
statement for provisions effective in 1998 to have a material effect on its
financial position or results of operations.
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments, which provides guidance for
determining when an insurance or other enterprise should recognize a
liability for guaranty-fund and other insurance related assessments and
guidance for measuring the liability. This statement is effective for 1999
financial statements with early adoption permitted. The Company does not
expect adoption of this statement to have a material effect on its
financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from reported results
using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased.
Investments
Debt and equity securities are classified as available for sale and carried
at fair value. These securities are written down (as realized capital
losses) for other than temporary declines in value. Unrealized capital
gains and losses related to available for sale investments, other than
amounts allocable to experience rated contractholders, are reflected in
shareholder's equity, net of related taxes.
Fair values for debt and equity securities are based on quoted market
prices or dealer quotations. Where quoted market prices or dealer
quotations are not available, fair values are measured utilizing quoted
market prices for similar securities or by using discounted cash flow
methods. Cost for mortgage-backed securities is adjusted for unamortized
premiums and discounts, which are amortized using the interest method over
the estimated remaining term of the securities, adjusted for anticipated
prepayments.
F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
The company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of a loaned domestic security and 105% of the market value of
a loaned foreign security. The collateral is deposited by the borrower with
a lending agent, and retained and invested by the lending agent according
to the Company's guidelines to generate additional income. The market value
of the loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market value of the loaned
securities fluctuates. At December 31, 1997 and 1996, the Company loaned
securities (which are reflected as invested assets) with a market value of
approximately $385.1 million and $444.7 million, respectively.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds represents an investment in Aetna
managed mutual funds which have been seeded by the Company, and is carried
at fair value.
Mortgage loans and policy loans are carried at unpaid principal balances,
net of impairment reserves. Sales of mortgage loans are recorded on the
closing date.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which
approximates amortized cost.
The Company utilizes futures contracts, swap agreements and warrants for
other than trading purposes in order to manage investment returns and price
risk and to align maturities, interest rates, and funds availability with
its obligations. (Refer to Note 3.)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that qualify as
hedges are deferred and recognized as an adjustment to the hedged asset or
liability. Deferred gains or losses on such futures contracts are amortized
over the life of the acquired asset or liability as a yield adjustment or
through net realized capital gains or losses upon disposal of an asset.
Changes in the fair value of futures contracts that do not qualify as
hedges are recorded in net realized capital gains or losses. Hedge
designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying
the hedge, and that high correlation be maintained throughout the hedge
period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and
excess gains and losses on the hedging instrument are reflected in net
realized capital gains or losses.
Interest rate swap agreements which are designated as interest rate risk
management instruments at inception are accounted for using the accrual
method. Accordingly, the difference between amounts
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
paid and received on such agreements is reported in net investment income.
There is no recognition in the Consolidated Balance Sheets for changes in
the fair value of the agreement.
Warrants represent the right to purchase specific securities and are
accounted for as hedges. Upon exercise, the cost of the warrants are added
to the basis of the securities purchased.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs,
all of which vary with and are primarily related to the production of new
and renewal business, consist principally of commissions, certain expenses
of underwriting and issuing contracts, and certain agency expenses. For
fixed ordinary life contracts, such costs are amortized over expected
premium-paying periods (up to 20 years). For universal life and certain
annuity contracts, such costs are amortized in proportion to estimated
gross profits and adjusted to reflect actual gross profits over the life of
the contracts (up to 20 years). Deferred policy acquisition costs are
written off to the extent that it is determined that future policy premiums
and investment income or gross profits are not adequate to cover related
losses and expenses.
Insurance Reserve Liabilities
Future policy benefits include reserves for universal life, immediate
annuities with life contingent payouts and traditional life insurance
contracts. Reserves for universal life contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon.
Reserves for immediate annuities with life contingent payouts and
traditional life insurance contracts are computed on the basis of assumed
investment yield, mortality, and expenses, including a margin for adverse
deviations. Such assumptions generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 12.00% for all
years presented. Investment yield is based on the Company's experience.
Mortality and withdrawal rate assumptions are based on relevant Aetna
experience and are periodically reviewed against both industry standards
and experience.
Policyholders' funds left with the Company include reserves for deferred
annuity investment contracts and immediate annuities without life
contingent payouts. Reserves on such contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon (rates
range from 3.50% to 9.50% for all years presented) net of adjustments for
investment experience that the Company is entitled to reflect in future
credited interest. Reserves on contracts subject to experience rating
reflect the rights of contractholders, plan participants and the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges,
actuarial margin and other fees are recorded as revenue in charges assessed
against policyholders. Other amounts received for these contracts are
reflected as deposits and are not recorded as revenue. Life insurance
premiums, other than premiums for universal life and certain annuity
contracts, are recorded as premium revenue when due. Related policy
benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the
contracts. When annuity payments with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity and reflected as an offsetting amount in both premiums and current
and future benefits in the Consolidated Statements of Income.
Separate Accounts
Assets held under variable universal life and variable annuity contracts
are segregated in Separate Accounts and are invested, as designated by the
contractholder or participant under a contract, in shares of mutual funds
which are managed by the Company, or other selected mutual funds not
managed by the Company.
Separate Accounts assets and liabilities are carried at fair value except
for those relating to a guaranteed interest option. Since the Company bears
the investment risk where the contract is held to maturity, the assets of
the Separate Account supporting the guaranteed interest option are carried
at an amortized cost of $658.6 million for 1997 (fair value $668.7 million)
and $515.6 million for 1996 (fair value $523.0 million). Reserves relating
to the guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 4.10% to 8.00% in both 1997 and in
1996.
Separate Accounts assets and liabilities are shown as separate captions in
the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains and losses of the Separate Accounts
are not reflected in the Consolidated Statements of Income (with the
exception of realized capital gains and losses on the sale of assets
supporting the guaranteed interest option). The Consolidated Statements of
Cash Flows do not reflect investment activity of the Separate Accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. The Company is taxed at regular corporate rates after adjusting
income reported for financial statement purposes for certain items.
Deferred income tax expenses/benefits result from changes during the year
in cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $1,219.7 $74.0 $0.1 $1,293.6
States, municipalities and political
subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Financial 2,370.7 84.6 1.3 2,454.0
Food & fiber 195.4 9.3 -- 204.7
Healthcare & consumer products 728.5 27.0 2.6 752.9
Media & broadcast 252.9 14.7 0.1 267.5
Natural resources 143.5 5.5 - 149.0
Transportation & capital goods 528.2 33.2 0.1 561.3
Utilities 521.3 23.5 0.9 543.9
Other corporate securities 96.9 3.2 - 100.1
---------- -------- -------- -----------
Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4
Foreign Securities:
Government 612.5 36.7 23.6 625.6
Utilities 177.5 28.7 -- 206.2
Other 857.9 27.7 42.8 842.8
---------- -------- -------- -----------
Total foreign securities 1,647.9 93.1 66.4 1,674.6
Residential mortgage-backed securities:
Pass-throughs 784.4 71.3 2.0 853.7
Collateralized mortgage obligations 2,280.5 137.4 2.0 2,415.9
---------- -------- -------- -----------
Total residential mortgage-
backed securities 3,064.9 208.7 4.0 3,269.6
Commercial/Multifamily mortgage-
backed securities 1,127.8 34.0 0.4 1,161.4
Other asset-backed securities 1,014.2 17.1 0.4 1,030.9
---------- -------- -------- -----------
Total Debt Securities $12,912.2 $627.9 $76.3 $13,463.8
========== ======== ======== ===========
</TABLE>
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Debt securities available for sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $1,072.4 $20.5 $4.5 $1,088.4
States, municipalities and political
subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other corporate securities 141.5 3.0 -- 144.5
--------- --------- -------- ---------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
--------- -------- --------- ---------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
--------- --------- -------- ---------
Total residential mortgage-
backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-
backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
--------- -------- --------- --------
Total Debt Securities $12,539.1 $432.6 $66.2 $12,905.5
========= ======== ========= ========
</TABLE>
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
At December 31, 1997 and 1996, net unrealized appreciation of $551.6
million and $366.4 million, respectively, on available-for-sale debt
securities included $429.3 million and $288.5 million, respectively,
related to experience rated contracts, which were not reflected in
shareholder's equity but in future policy benefits and policyholders' funds
left with the Company.
The carrying and fair value of debt securities for the year ended December
31, 1997 are shown below by contractual maturity. Actual maturities may
differ from contractual maturities because securities may be restructured,
called, or prepaid.
Amortized Fair
Cost Value
--------- ------
(millions)
Due to mature:
One year or less $367.3 $367.6
After one year through five years 2,165.1 2,195.4
After five years through ten years 2,367.3 2,407.0
After ten years 2,805.6 3,031.9
Mortgage-backed securities 4,192.7 4,431.0
Other asset-backed securities 1,014.2 1,030.9
--------- ---------
Total $12,912.2 $13,463.8
========= =========
At December 31, 1997 and 1996, debt securities carried at $8.2 million and
$7.6 million, respectively, were on deposit as required by regulatory
authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 1997.
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1997 1996
--------------------- ------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
-------- -------- -------- --------
(millions)
<S> <C> <C> <C> <C>
Total residential CMOs(1) $2,415.9 $2,280.5 $2,309.0 $2,227.8
======== ======== ======== ========
Percentage of total:
Supporting experience rated products 81.6% 84.2%
Supporting remaining products 18.4% 15.8%
----- -----
100.0% 100.0%
===== =====
</TABLE>
(1) At December 31, 1997 and 1996, approximately 73% and 71%,
respectively, of the Company's residential CMO holdings were
backed by government agencies such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees
of risk from changes in interest rates and, for nonagency-backed CMOs,
defaults. The principal risks inherent in holding CMOs are prepayment and
extension risks related to dramatic decreases and increases in interest
rates resulting in the repayment of principal from the underlying mortgages
either earlier or later than originally anticipated. At December 31, 1997
and 1996, approximately 4% and 3%, respectively, of the Company's CMO
holdings were invested in types of CMOs which are subject to more
prepayment and extension risk than traditional CMOs (such as interest- or
principal-only strips).
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in equity securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(millions)
1997
Equity Securities $210.0 $21.3 $0.1 $231.2
====== ===== ==== ======
1996
Equity Securities $184.9 $16.3 $0.8 $200.4
====== ===== ==== ======
3. Financial Instruments
Estimated Fair Value
--------------------
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1997 and 1996 were as follows:
1997 1996
-------------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- ------ -------- -----
(millions)
Assets:
Mortgage loans $ 12.8 $ 12.4 $ 13.0 $ 13.2
Liabilities:
Investment contract
liabilities:
With a fixed maturity $ 1,030.3 $1,005.4 $1,014.1 $1,028.8
Without a fixed
maturity 10,113.2 9,587.5 9,649.6 9,427.6
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial instrument,
such as estimates of timing and amount of future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot
be substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the instrument. In
evaluating the Company's management of interest rate, price and liquidity
risks, the fair values of all assets and liabilities should be taken into
consideration, not only those presented above.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Estimated Fair Value (Continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar
loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans.
Investment contract liabilities (included in policyholders' funds left with
the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under
such contracts to delay payment of withdrawals which may ultimately result
in paying an amount different than that determined to be payable on demand.
Off-Balance-Sheet and Other Financial Instruments (including Derivative
Instruments)
The Company uses off-balance-sheet and other financial instruments
primarily to manage portfolio risks, including interest rate,
prepayment/call, credit, price, and liquidity risks. In 1997 and 1996,
Treasury futures contracts were used to manage interest rate risk in the
Company's bond portfolio; and, in 1996, stock index futures contracts were
used to manage price risk in the Company's equity portfolio. In 1996 and
1995, interest rate swaps and forward commitments to enter into interest
rate swaps, respectively, were also used to manage interest rate risk in
the Company's bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell
securities at a specified future date and at a specified price or yield.
Futures contracts trade on organized exchanges and, therefore, have minimal
credit risk. Cash settlements are made daily based on changes in the prices
of the underlying assets. There were no futures contracts open as of
December 31, 1997 and 1996.
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to
exchange interest amounts calculated by reference to an agreed notional
principal amount. Generally, no cash is exchanged at the outset of the
contract and no principal payments are made. A single net payment is
usually made by one counterparty at each due date or upon termination of
the contract. The Company would be
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments (Including Derivative
Instruments) (Continued)
exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, however, the Company controls its
exposure to credit risk through credit approvals, credit limits and regular
monitoring procedures. The credit exposure of interest rate swaps is
represented by the fair value (market value) of contracts with a positive
fair value (market value) at the reporting date. There were no interest
rate swap agreements open as of December 31, 1997 and 1996.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1997
and 1996.
Warrants:
Warrants are instruments giving the Company the right, but not the
obligation to buy a security at a given price during a specified period. As
of December 31, 1997 and 1996, the Company had open warrants to purchase
equity securities with a fair value of $0.6 million and $0.3 million,
respectively.
Debt Instruments with Derivative Characteristics:
The Company also had investments in certain debt instruments with
derivative characteristics, including those whose market value is at least
partially determined by, among other things, levels of or changes in
domestic and/or foreign interest rates (short or long term), exchange
rates, prepayment rates, equity markets or credit ratings/spreads. The
amortized cost and fair value of these securities, included in the debt
securities portfolio, as of December 31, 1997 was as follows:
Amortized Fair
Cost Value
--------- ----
(millions)
Residential collateralized mortgage
obligations $2,280.5 $2,415.9
Principal-only strips (included above) 59.0 67.0
Interest-only strips (included above) 12.8 24.3
Other structured securities with derivative
characteristics (1) 107.4 105.2
(1) Represents non-leveraged instruments whose fair values and credit
risk are based on underlying securities, including fixed income
securities and interest rate swap agreements.
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $962.8 $945.3 $891.5
Nonredeemable preferred stock 13.7 5.9 4.2
Investment in affiliated
mutual funds 4.9 14.3 14.9
Mortgage loans 1.3 2.2 1.4
Policy loans 19.9 18.4 13.7
Reinsurance loan to affiliate 37.5 44.1 46.5
Cash equivalents 44.2 29.4 38.9
Other 10.0 2.1 8.4
-------- -------- --------
Gross investment income 1,094.3 1,061.7 1,019.5
Less investment expenses (13.8) (16.1) (15.2)
-------- -------- --------
Net investment income $1,080.5 $1,045.6 $1,004.3
======== ======== ========
Net investment income includes amounts allocable to experience rated
contractholders of $823.1 million, $787.6 million and $744.2 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Interest
credited to contractholders is included in current and future benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively.
The amount of dividends that may be paid to the shareholder in 1998 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$77.6 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus those
amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which differ in certain respects
from generally accepted accounting principles. Statutory net income was
$80.5 million, $57.8 million and $70.0 million for the years ended December
31, 1997, 1996 and 1995, respectively. Statutory capital and surplus was
$778.7 million and $713.6 million as of December 31, 1997 and 1996,
respectively.
As of December 31, 1997 the Company does not utilize any statutory
accounting practices which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains on investments were as follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $22.5 $11.1 $32.8
Equity securities 9.9 8.6 8.3
Other 3.6 -- 0.2
------ -------- ------
Pretax realized capital gains $36.0 $19.7 $41.3
====== ======== ======
After tax realized capital gains $23.2 $13.0 $25.8
====== ======== ======
Net realized capital gains of $96.1 million, $53.1 million and $61.1
million for 1997, 1996 and 1995, respectively, allocable to experience
rated contracts, were deducted from net realized capital gains and an
offsetting amount was reflected in policyholders' funds left with the
Company. Net unamortized gains were $138.1 million and $53.3 million at
December 31, 1997 and 1996, respectively.
Proceeds from the sale of available-for-sale debt securities and the
related gross gains and losses were as follows:
1997 1996 1995
----- ----- ----
(millions)
Proceeds on Sales $5,311.3 $5,182.2 $4,207.2
Gross Gains 25.8 24.3 44.6
Gross Losses 3.3 13.2 11.8
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities)
(excluding those related to experience rated contractholders) were as
follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $44.3 $(100.1) $255.9
Equity securities 5.6 (10.5) 27.3
Limited partnership -- -- 1.8
----- ------- ------
49.9 (110.6) 285.0
Increase (decrease) in deferred
income taxes (See Note 8) 17.5 (38.6) (36.5)
----- ------- ------
Net changes in accumulated other
comprehensive income $32.4 $(72.0) $321.5
===== ======= ======
Net unrealized capital gains allocable to experience rated contracts of
$356.7 million and $72.6 million at December 31, 1997 and $245.2 million
and $43.3 million at December 31, 1996 are reflected on the Consolidated
Balance Sheets in policyholders' funds left with the Company and future
policy benefits, respectively, and are not included in shareholder's
equity.
Shareholder's equity included the following accumulated other comprehensive
income, which are net of amounts allocable to experience rated
contractholders, at December 31:
1997 1996 1995
---- ---- ----
(millions)
Debt securities
Gross unrealized capital gains $140.6 $101.7 $179.3
Gross unrealized capital losses (18.4) (23.8) (1.3)
----- ----- -----
122.2 77.9 178.0
Equity securities
Gross unrealized capital gains 21.2 16.3 27.2
Gross unrealized capital losses (0.1) (0.8) (1.2)
---- ---- -----
21.1 15.5 26.0
Deferred income taxes (See Note 8) 50.4 32.9 71.5
---- ---- -----
Net accumulated other
comprehensive income $92.9 $60.5 $132.5
==== ==== =====
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to
experience rated contractholders) were as follows:
1997 1996 1995
---- ---- ----
(millions)
Unrealized holding gains (losses)
arising during the period (1) $98.8 $(14.8) $390.5
Less: reclassification adjustment
for gains and other items included
in net income (2) 66.4 57.2 69.0
----- ------ ------
Net unrealized gains (losses)
on securities $32.4 $(72.0) $321.5
===== ====== ======
(1) Pretax unrealized holding gains (losses) arising during the
period were $152.0 million, ($22.8) million and $600.8 million
for 1997, 1996 and 1995, respectively.
(2) Pretax reclassification adjustments for gains and other items
included in net income were $102.4 million, $87.7 million and
$107.5 million for 1997, 1996 and 1995, respectively.
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, included
the following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased Corporate
(Millions) Severance Write-off Property Other Allocation Total
-------------------------- --------- --------- --------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Financial Services $29.1 $1.0 $1.3 $1.7 $ -- $33.1
Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2
Corporate Allocation -- -- -- -- 14.0 14.0
--------- --------- --------- ----- ---------- ---------
Total Company $41.6 $1.4 $1.8 $2.5 $14.0 $61.3
-------------------------- --------- --------- --------- ----- ---------- ---------
</TABLE>
In the third quarter of 1996, the Company recorded a $30.7 million after
tax ($47.3 million pretax) charge principally related to actions taken or
expected to be taken to improve its cost structure relative to its
competitors. The severance portion of the charge is based on a plan to
eliminate 702 positions (primarily customer service, sales and information
technology support staff). The facilities portion of the charge is based on
a plan to consolidate sales/service field offices.
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges (Continued)
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions
taken or expected to be taken to reduce the level of corporate expenses and
other costs previously absorbed by Aetna's property-casualty operations,
which were sold in April 1996. The cost allocated to the Company associated
with this charge was $9.1 million after tax ($14.0 million pretax).
Activity for 1997 and 1996 within the severance and facilities reserve
(pretax, in millions) and the number of positions eliminated related to
such actions were as follows:
(Millions) Reserve Positions
----------------------------------- ---------- ---------
Balance at December 31, 1995 $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
---------- ---------
Balance at December 31, 1996 47.9 524
Actions taken (1) (27.1) (163)
---------- ---------
Balance at December 31, 1997 $20.8 361
========== =========
(1) Includes $15.9 million and $8.0 million in 1997 and 1996,
respectively, of severance-related actions and $7.9 million and $4.1
million in 1997 and 1996, respectively, of corporate
allocation-related actions.
The Company's severance actions are expected to be substantially completed
by September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return, the
Illinois Unitary return and the Connecticut and the New York combined state
income tax returns of Aetna. Aetna allocates to each member an amount
approximating the tax it would have incurred were it not a member of the
consolidated group, and credits the member for the use of its tax saving
attributes used in the consolidated federal income tax return.
Income taxes for the years ended December 31, consist of:
1997 1996 1995
---- ---- ----
(millions)
Current taxes:
Income Taxes:
Federal income tax $64.5 $50.9 $82.9
State income tax 3.7 3.7 3.2
Net realized capital gains 45.6 25.3 28.5
----- ---- ----
113.8 79.9 114.6
----- ---- -----
Deferred taxes (benefits):
Income taxes:
Federal 8.4 (3.5) (14.4)
Net realized capital gains (losses) (32.8) (18.6) (12.9)
----- ----- -----
(24.4) (22.1) (27.3)
----- ----- -----
Total $89.4 $57.8 $87.3
===== ===== =====
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes for the following
reasons:
1997 1996 1995
---- ---- ----
(millions)
Income before income taxes $294.7 $198.9 $263.2
Tax rate 35% 35% 35%
------- ------- -------
Application of the tax rate 103.1 69.6 92.1
------- ------- -------
Tax effect of:
State income tax, net of
federal benefit 2.4 2.4 2.1
Excludable dividends (15.9) (8.7) (9.3)
Other, net (0.2) (5.5) 2.4
------- ------- --------
Income taxes $89.4 $57.8 $87.3
======= ======= ========
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1997 1996
---- ----
(millions)
Deferred tax assets:
Insurance reserves $415.8 $344.6
Unrealized gains allocable to
experience rated contracts 150.1 100.8
Investment losses 6.6 7.5
Postretirement benefits other
than pensions 26.3 27.0
Deferred compensation 31.2 25.0
Pension (3.6) 7.6
Restructuring charge 9.5 17.6
Depreciation 3.9 2.6
Other 8.8 9.1
--------- --------
Total gross assets 648.6 541.8
Deferred tax liabilities:
Deferred policy acquisition costs 515.6 482.1
Market discount 5.1 6.8
Net unrealized capital gains 200.5 133.7
Other (0.6) (0.3)
--------- ---------
Total gross liabilities 720.6 622.3
--------- ---------
Net deferred tax liability $72.0 $80.5
========= =========
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. As of December 31, 1997 and 1996, no
valuation allowances were required for unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax
return purposes under the Deficit Reduction Act of 1984. The balance in
such account was approximately $17.2 million at December 31, 1997. This
amount would be taxed only under certain conditions. No income taxes have
been provided on this amount since management believes the conditions under
which such taxes would become payable are remote.
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1990. Discussions
are being held with the Service with respect to proposed adjustments.
Management believes there are adequate defenses against, or sufficient
reserves to provide for, any such adjustments. The Service has commenced
its examinations for the years 1991 through 1994.
9. Benefit Plans
Employee Pension Plans - The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to amounts that are tax-deductible. As of
December 31, 1997, Aetna's accrued pension cost has been allocated to its
subsidiaries, including the Company, under an allocation based on eligible
salaries. Data on a separate company basis regarding the proportionate
share of the projected benefit obligation and plan assets is not available.
The accumulated benefit obligation and plan assets are recorded by Aetna.
As of the measurement date (i.e., September 30), the accumulated plan
assets exceeded accumulated plan benefits. Allocated pretax charges to
operations for the pension plan (based on the Company's total salary cost
as a percentage of Aetna's total salary cost) were $2.7 million, $4.3
million and $6.1 million for the years ended December 31, 1997, 1996 and
1995, respectively.
Employee Postretirement Benefits - In addition to providing pension
benefits, Aetna currently provides certain health care and life insurance
benefits for retired employees. A comprehensive medical and dental plan is
offered to all full-time employees retiring at age 50 with 15 years of
service or at age 65 with 10 years of service. There is a cap on the
portion of the cost paid by the Company relating to medical and dental
benefits. Retirees are generally required to contribute to the plans based
on their years of service with Aetna. The costs to the Company associated
with the Aetna postretirement plans for 1997, 1996 and 1995 were $2.7
million, $1.8 million and $1.4 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$77.7 million of accrued liabilities, primarily related to the pension and
postretirement benefit plans described above, that had been previously
recorded by Aetna. The after tax amount of this transfer (approximately
$50.5 million) is reported as a reduction in retained earnings. In 1997,
other changes in shareholder's equity includes an additional $0.8 million
reduction reflecting revisions to the allocation of these accrued
liabilities.
Agent Pension Plans - The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides
pension benefits based on annual commission earnings. As of the measurement
date (i.e., September 30), the accumulated plan assets exceeded accumulated
plan benefits.
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
Agent Postretirement Benefits - The Company, in conjunction with Aetna,
also provides certain postretirement health care and life insurance
benefits for certain agents. The costs to the Company associated with the
agents' postretirement plans for 1997, 1996 and 1995 were $0.6 million,
$0.7 million and $0.8 million, respectively.
Incentive Savings Plan - Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which
may be invested in common stock of Aetna or certain other investments, are
matched, up to 5% of compensation, by Aetna. Pretax charges to operations
for the incentive savings plan were $4.4 million, $5.4 million and $4.9
million in 1997, 1996 and 1995, respectively.
Stock Plans - Aetna has a stock incentive plan that provides for stock
options, deferred contingent common stock or equivalent cash awards or
restricted stock to certain key employees. Executive and middle management
employees may be granted options to purchase common stock of Aetna at or
above the market price on the date of grant. Options generally become 100%
vested three years after the grant is made, with one-third of the options
vesting each year. Aetna does not recognize compensation expense for stock
options granted at or above the market price on the date of grant under its
stock incentive plans. In addition, executives may be granted incentive
units which are rights to receive common stock or an equivalent value in
cash. The incentive units may vest within a range from 0% to 175% at the
end of a four year period based on the attainment of performance goals. The
costs to the Company associated with the Aetna stock plans for 1997, 1996
and 1995, were $2.9 million, $8.1 million and $6.3 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$1.1 million of deferred tax benefits related to stock options. This amount
is reported as an increase in retained earnings. In 1997, other changes in
shareholder's equity include an additional increase of $2.3 million
reflecting revisions to the allocation of the deferred tax benefit.
10. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality
and expense risks pertaining to variable life and annuity contracts. Under
the insurance contracts, the Separate Accounts pay the Company a daily fee
which, on an annual basis, ranges, depending on the product, from 0.10% to
1.90% of their average daily net assets. The Company also receives fees
from Aetna managed mutual funds for serving as investment adviser. Under
the advisory agreements, these funds pay the Company a daily fee which, on
an annual basis, ranges, depending on the fund, from 0.25% to 0.85% of
their average daily net assets. The Company also receives fees (expressed
as a percentage of the average daily net assets) from some of its funds for
providing administration services, and from The Aetna Series Fund for
providing shareholder services and promoting sales. The amount of
compensation and fees received from the Separate Accounts and mutual funds,
included in charges assessed against policyholders, amounted to $271.2
million, $186.8 million and $128.1 million in 1997, 1996 and 1995,
respectively. The Company may waive advisory fees at its discretion.
F-27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting
as Subadvisor for affiliated mutual funds and adviser for most of the
General Account assets. Fees paid by the Company to Aeltus, included in
both charges assessed against policyholders and net investment income, on
an annual basis, range from 0.06% to 0.55% of the average daily net assets
under management. For the years ended December 31, 1997 and 1996, the
Company paid $45.5 million and $16.0 million in such fees.
The Company may, from time to time, make reimbursements to an Aetna managed
mutual fund for some or all of its operating expenses. Reimbursement
arrangements may be terminated at any time without notice.
Since 1981, all domestic individual non-participating life insurance of
Aetna and its subsidiaries has been issued by the Company. Effective
December 31, 1988, the Company entered into a reinsurance agreement with
Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the non-participating individual life and annuity business written by Aetna
Life prior to 1981 was assumed by the Company. A $6.1 million and a $108.0
million commission, paid by the Company to Aetna Life in 1996 and 1988,
respectively, was capitalized as deferred policy acquisition costs. In
consideration for the assumption of this business, a loan was established
relating to the assets held by Aetna Life which support the insurance
reserves. Effective January 1, 1997, this agreement has been amended to
transition (based on underlying investment rollover in Aetna Life) from a
modified coinsurance to a coinsurance arrangement. As a result of this
change, reserves will be ceded to the Company from Aetna Life as investment
rollover occurs and the loan previously established will be reduced. The
Company maintained insurance reserves of $574.5 million ($397.2 million
relating to the modified coinsurance agreement and $177.3 million relating
to the coinsurance agreement) and $628.3 million as of December 31, 1997
and 1996, respectively, relating to the business assumed. The fair value of
the loan relating to assets held by Aetna Life was $412.3 million and
$625.3 million as of December 31, 1997 and 1996, respectively, and is based
upon the fair value of the underlying assets. Premiums of $176.7 million,
$25.3 million and $28.0 million and current and future benefits of $183.9
million, $39.5 million and $43.0 million were assumed in 1997, 1996 and
1995, respectively.
Investment income of $37.5 million, $44.1 million and $46.5 million was
generated from the reinsurance loan to affiliate in 1997, 1996 and 1995,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life for the purchase and administration of a life contingent
single premium variable payout annuity contract. In addition, the Company
also is responsible for administering fixed annuity payments that are made
to annuitants receiving variable payments. Reserves of $32.5 million and
$28.9 million were maintained for this contract as of December 31, 1997 and
1996, respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement
with Aetna Life to reinsure amounts in excess of this
F-28
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
limit, up to a maximum of $8.0 million on any new individual life business,
on a yearly renewable term basis. Premium amounts related to this agreement
were $5.9 million, $5.2 million and $3.2 million for 1997, 1996 and 1995,
respectively.
Effective October 1, 1997, the Company entered into a reinsurance agreement
with Aetna Life to assume amounts in excess of $0.2 million for certain of
its participating life insurance, on a yearly renewable term basis. Premium
amounts related to this agreement were $0.7 million in 1997.
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1997 or
1995.
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively. In 1995, the Company dividended $2.9
million in the form of two of its subsidiaries, Systematized Benefits
Administrators, Inc. and Aetna Investment Services, Inc., to Aetna
Retirement Services, Inc. (the Company's former parent).
Premiums due and other receivables include $37.0 million and $2.8 million
due from affiliates in 1997 and 1996, respectively. Other liabilities
include $1.2 million and $10.7 million due to affiliates for 1997 and 1996,
respectively.
As of December 31, 1997, Aetna transferred to the Company $2.5 million
based on its decision not to settle state tax liabilities for the years
1996 and 1997. This amount has been reported as an other increase in
retained earnings.
Substantially all of the administrative and support functions of the
Company are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures
appropriate for the type and nature of service provided.
11. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverables deemed
probable of recovery are reflected as assets on the Company's Consolidated
Balance Sheets.
F-29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 10 above.
<TABLE>
<CAPTION>
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
(millions)
------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
1997
----
Premiums:
Life Insurance $ 35.7 $15.1 $177.4 $198.0
Accident and Health Insurance 5.6 5.6 -- --
Annuities 67.9 -- 1.2 69.1
------- ------------- ----------- ---------
Total earned premiums $109.2 $20.7 $178.6 $267.1
======= ============= =========== =========
1996
----
Premiums:
Life Insurance $ 34.6 $11.2 $25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
------- ------------- ----------- ---------
Total earned premiums $125.2 $17.5 $25.9 $133.6
======= ============= =========== =========
1995
----
Premiums:
Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
------- ------------- ----------- ---------
Total earned premiums $200.3 $16.1 $28.5 $212.7
======= ============= =========== =========
</TABLE>
12. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments. At December 31, 1997, the
Company had commitments to purchase investments of $38.7 million. The fair
value of the investments at December 31, 1997 approximated $39.0 million.
F-30
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities (Continued)
Litigation
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in liability for amounts
material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance. Summarized financial
information for the Company's principal operations was as follows:
1997 1996 1995
--------- --------- ---------
(millions)
Revenue:
Financial Services $1,277.9 $1,195.1 $1,211.3
Individual Life Insurance 620.4 445.7 407.9
--------- --------- ---------
Total revenue $1,898.3 $1,640.8 $1,619.2
========= ========= =========
Income before income taxes: (2)
Financial Services $188.2 $129.9 $160.1
Individual Life Insurance 106.5 83.0 103.1
--------- --------- ---------
Total income before
income taxes $294.7 $212.9 $263.2
========= ========= =========
Net income: (2)
Financial Services $137.5 $94.3 $113.8
Individual Life Insurance 67.8 55.9 62.1
--------- --------- ---------
Net income $205.3 $150.2 $175.9
========= ========= =========
Assets under management: (3)
Financial Services (4) $37,609.3 $27,268.1 $22,534.4
Individual Life Insurance 3,096.1 2,830.5 2,590.9
--------- --------- ---------
Total assets under management 40,705.4 $30,098.6 $25,125.3
========= ========= =========
(1) The 1996 results include severance and facilities charges of
$30.7 million, after tax. Of this charge $21.5 million related to
the Financial Services segment and $9.2 million related to the
Individual Life Insurance segment.
(2) Excludes any effect of the corporate facilities and severance
charge recorded in 1996 which is not directly allocable to the
Financial Services and Individual Life Insurance segments. (Refer
to Note 7).
(3) Excludes net unrealized capital gains (losses) of $551.5 million,
$366.4 million and $797.1 million at December 31, 1997, 1996 and
1995, respectively.
(4) The December 31, 1997 balance includes the transfer of $4,078.5
million of assets under management that were previously reported
by an affiliate.
F-31
<PAGE>
Form No. SAI.09515-98 ALIAC Ed. May 1998
