Prospectus - May 3, 1999
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The Funds
Aetna Ascent VP
Aetna Balanced VP, Inc.
Aetna Income Shares d/b/a Aetna Bond VP
Aetna Crossroads VP
Aetna Growth VP
Aetna Variable Fund d/b/a Aetna Growth and Income VP
Aetna High Yield VP
Aetna Index Plus Large Cap VP
Aetna Index Plus Mid Cap VP
Aetna Index Plus Small Cap VP
Aetna International VP
Aetna Legacy VP
Aetna Variable Encore Fund d/b/a Aetna Money Market VP
Aetna Real Estate Securities VP
Aetna Small Company VP
Aetna Value Opportunity VP o
AIM V. I. Capital Appreciation Fund
AIM V. I. Growth Fund
AIM V. I. Growth and Income Fund
AIM V. I. Value Fund
Calvert Social Balanced Portfolio
Fidelity Variable Insurance Products Fund (VIP) Equity-Income Portfolio
Fidelity Variable Insurance Products Fund (VIP) Growth Portfolio
Fidelity Variable Insurance Products Fund (VIP) Overseas Portfolio
Fidelity Variable Insurance Products Fund II (VIP II) Contrafund Portfolio
Janus Aspen Aggressive Growth Portfolio
Janus Aspen Balanced Portfolio
Janus Aspen Flexible Income Portfolio
Janus Aspen Growth Portfolio
Janus Aspen Worldwide Growth Portfolio
Lexington Natural Resources Trust*
Oppenheimer Global Securities Fund/VA
Oppenheimer Strategic Bond Fund/VA
Portfolio Partners MFS Emerging Equities Portfolio
Portfolio Partners MFS Research Growth Portfolio
Portfolio Partners MFS Value Equity Portfolio
Portfolio Partners Scudder International Growth Portfolio
Portfolio Partners T. Rowe Price Growth Equity Portfolio
The Contracts. The contracts described in this prospectus are group deferred
variable annuity contracts issued by Aetna Life Insurance and Annuity Company
(the Company). They are intended to be used as funding vehicles for certain
types of retirement plans, including those that qualify for beneficial tax
treatment, and/or to provide current income reduction under certain sections of
the Internal Revenue Code of 1986, as amended (Tax Code). The contracts were
formerly sold as both group contracts and employer-owned individual contracts.
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Why Reading this Prospectus is Important. Before you participate in the
contract through a retirement plan, you should read this prospectus. It
provides facts about the contract and its investment options. Plan sponsors
(generally your employer) should read this prospectus to help determine if the
contract is appropriate for their plan. Keep this document for future
reference.
Table of Contents . . . page 3
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Contract Design. The contracts are designed to:
> Help you save for retirement while receiving beneficial tax treatment
> Offer a variety of investment options to help meet long-term financial goals
> Provide a benefit to a beneficiary in the event of death
> Provide future income payments over a lifetime or for a specified period
Investment Options. The contracts offer variable investment options and fixed
interest options. When we establish your account(s), the contract holder, or
you if permitted by the plan, instructs us to direct account dollars to any of
the available options. Some investment options may be unavailable through
certain contracts and plans, or in some states.
Variable Investment Options. These options are called subaccounts. Each
subaccount invests in one of the mutual funds (funds) listed on this page.
Earnings on amounts invested in a subaccount will vary depending on the
performance of its underlying fund. The subaccounts are within Variable Annuity
Account B (the separate account), a separate account of the Company. You do not
invest directly in or hold shares of the funds.
The funds in which the subaccounts invest have various risks. For information
about risks of investing in the funds see "Investment Options" in this
prospectus and each fund prospectus. Retain the fund prospectuses for future
reference.
Fixed Interest Options.
> Guaranteed Accumulation Account
> Fixed Plus Account
> Fixed Account
Except as specifically mentioned, this prospectus describes only the variable
investment options. However, we describe the fixed interest options in the
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* Transfers or deposits are not allowed into the subaccount investing in this
fund, except from accounts established under the contract before May 1,
1998. As soon as all those who have current allocations to the subaccount
under the contract have redirected their allocations to other investment
options, we will close the subaccount to all investments.
<PAGE>
Prospectus - May 3, 1999 (continued)
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appendices to this prospectus. There is also a separate prospectus for the
Guaranteed Accumulation Account.
Getting Additional Information. You may obtain the May 3, 1999, Statement of
Additional Information (SAI) by indicating your request on your enrollment
materials or calling the Company at 1-800-525-4225. You may also obtain an SAI
for any of the funds by calling that number. This prospectus, the SAI and other
information about the separate account are posted on the Securities and
Exchange Commission (SEC) web site, http://www.sec.gov and may also be
obtained, free of charge, by contacting the SEC Public Reference Room at
202-942-8090. The SAI table of contents is listed on page 37 of this
prospectus. The SAI is incorporated into this prospectus by reference.
Additional Disclosure Information. Neither the SEC, nor any state securities
commission, has approved or disapproved the securities offered through this
prospectus or passed on the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense. This prospectus is valid
only when accompanied by current prospectuses of the funds and the Guaranteed
Accumulation Account. We do not intend for this prospectus to be an offer to
sell or a solicitation of an offer to buy these securities in any state that
does not permit their sale. We have not authorized anyone to provide you with
information that is different than that contained in this prospectus.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<S> <C>
Contract Overview ............................... 4
Who's Who
The Contract and Your Retirement Plan
Contract Rights
Contract Facts
Contract Phases: Accumulation Phase, Income Phase
Questions: Contacting the Company (sidebar)
Sending Requests in Good Order (sidebar)
</TABLE>
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<TABLE>
<S> <C>
Fee Table ................................................... 6
Condensed Financial Information ............................. 10
Investment Options .......................................... 10
Transfers ................................................... 11
Contract Purchase and Participation ......................... 12
Contract Ownership and Rights ............................... 14
Right to Cancel ............................................. 14
Fees ........................................................ 15
Your Account Value .......................................... 19
Withdrawals ................................................. 21
Systematic Distribution Options ............................. 22
Death Benefit ............................................... 23
The Income Phase ............................................ 24
Taxation .................................................... 28
Other Topics ................................................ 32
The Company -- Variable Annuity Account B -- Performance Reporting -- Voting
Rights -- Contract Distribution -- Contract Modification -- Legal Matters and
Proceedings -- Payment Delay or Suspension -- Transfer of Ownership; Assignment
- -- Year 2000 Readiness
Contents of the Statement of Additional Information ......... 37
Appendix I -- Guaranteed Accumulation Account ............... 38
Appendix II -- Fixed Account ................................ 40
Appendix III -- Fixed Plus Account .......................... 41
Appendix IV -- Fund Descriptions ............................ 43
Appendix V -- Condensed Financial Information ............... 46
</TABLE>
3
<PAGE>
Questions: Contacting the Company. To
answer your questions, contact your
local representative or write or call
our Home Office:
Aetna Retirement Services
Annuity Services
151 Farmington Avenue
Hartford, CT 06156-1277
1-800-525-4225
Sending Forms and Written Requests in
Good Order.
If you are writing to change your
beneficiary, request a withdrawal, or
for any other purpose, contact your
local representative or the Company to
learn what information is required in
order for the request to be in "good
order." We can only act upon written
requests that are received in good
order.
Contract Overview
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The following is a summary. Please read each section of this prospectus for
additional information.
Who's Who
You (the participant): The individual participating in a retirement plan, where
the plan uses the contract as a funding option.
Plan Sponsor: The sponsor of your retirement plan. Generally, your employer.
Contract Holder: The person or entity to whom we issue the contract. Generally,
the plan sponsor.
We (the Company): Aetna Life Insurance and Annuity Company. We issue the
contract.
The Contract and Your Retirement Plan
Retirement plan (plan): A plan sponsor has established a retirement plan for
you. This contract is offered as a funding option for that plan. We are not a
party to the plan, so the terms and the conditions of the contract and the plan
may differ.
Plan Type. We refer to plans in this prospectus as 457 plans or non-457 plans.
For a description of each see "Taxation--Your Retirement Plan."
Contract Rights
The contract holder holds all rights under the contract, but may permit you to
exercise those rights through the plan.
For example: The contract may permit the contact holder to select investment
options for your account dollars. The plan may permit you to exercise that
right. For greater detail see "Contract Ownership and Rights."
Contract Facts
Free look/Right to Cancel: Contract holders may cancel the contract no later
than 10 days after they receive the contract. See "Right To Cancel."
Death Benefit: A beneficiary may receive a benefit in the event of your death
prior to the income phase. Death benefits during the income phase depend on the
payment option selected. See "Death Benefit" and "The Income Phase."
Withdrawals: During the accumulation phase, the contract holder may, on your
behalf and subject to the limits in the contract, withdraw all or a part of
your account value. Certain fees and taxes may apply. See "Withdrawals" and
"Taxation."
Systematic Distribution Options: The contract holder may elect on your behalf
for you to receive regular payments from your account, while retaining the
account in the accumulation phase. See "Systematic Distribution Options."
Fees: Certain fees are deducted from your account value. See "Fee Table" and
"Fees."
Taxation: The Tax Code has certain rules that apply to amounts accumulated and
distributed under the contract. Tax penalties may apply if rules are not
followed. See "Taxation."
4
<PAGE>
Contract Phases
I. The Accumulation Phase (accumulating retirement benefits)
<TABLE>
<S> <C>
+--------------+
| Payments to |
STEP 1: You or the contract | Your Account |
holder provide Aetna Life +--------------+
Insurance and Annuity Step 1 [arrow down]
Company with your completed +------------------------------------------+
enrollment materials. The | Aetna Life Insurance and Annuity Company |
contract holder directs us to +------------------------------------------+
set up an account for you. a) [arrow down] Step 2 b) [arrow down]
+--------+ +----------------------------+
STEP 2: The contract holder, | Fixed | | Variable Annuity |
or you if permitted by your |Interest| | Account B |
plan, directs us to invest your |Options | | |
account dollars in any of the: | | | Variable Investment Options|
+--------+ +----------------------------+
(a) Fixed Interest Options The Subaccounts
+--------+---------+---------+
| A | B | Etc. |
(b) Variable Investment +--------+---------+---------+
Options. (The variable investment Step 2b)[arrow down]
options are the subaccounts of +--------+---------+
Variable Annuity Account B. Each | Mutual | Mutual |
one invests in a specific mutual | Fund A | Fund B |
fund.) +--------+---------+
</TABLE>
STEP 2(b), continued: The subaccount(s)
selected purchases shares of its
corresponding fund.
II. The Income Phase The contract offers several payment options (see "The
Income Phase.") In general, you may:
> Receive payments over a lifetime or for a specified period
> Receive payments monthly, quarterly, semi-annually or annually
> Select an option that provides a death benefit to beneficiaries
> Select fixed payments or payments that vary based on the performance of the
variable investment options you select.
5
<PAGE>
In This Section:
> Maximum Transaction Fees
> Maximum Fees Deducted from the Subaccounts
> Fund Fees
> Examples of Fee Deductions
Also see the "Fees" section for:
> Early Withdrawal Charge Schedules
> How, When and Why Fees are Deducted
> Reduction, Waiver and/or Elimination of Certain Fees
> Premium and Other Taxes
See "The Income Phase" for:
> Fees During the Income Phase
Fee Table
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The tables and examples in this section show the fees your account may incur
while accumulating dollars under the contract (the Accumulation Phase). See "The
Income Phase" for fees that may apply after you begin receiving payments under
the contract. The fees shown below do not include premium taxes that may be
applicable.
Maximum Transaction Fees
Early Withdrawal Charge. (As a percentage of the amount withdrawn)
Early Withdrawal Charge Schedules
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<TABLE>
<CAPTION>
Installment Purchase Payment Accounts Single Purchase Payment Accounts
- ------------------------------------------ -----------------------------------
Purchase Payment Early Withdrawal Account Years Early Withdrawal
Periods Completed Charge Completed Charge
<S> <C> <C> <C>
Fewer than 5 5% Fewer than 5 5%
5 or more but 5 or more but
fewer than 7 4% fewer than 6 4%
7 or more but 6 or more but
fewer than 9 3% fewer than 7 3%
9 or more but 7 or more but
fewer than 10 2% fewer than 8 2%
8 or more but
10 or more 0% fewer than 9 1%
9 or more 0%
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</TABLE>
Annual Maintenance Fee
<TABLE>
<S> <C>
Installment Purchase Payment Accounts.................................$20.00(1)
Single Purchase Payment Accounts.......................................$0.00
Maximum Fees Deducted From the Subaccounts
(Daily deductions equal to the given percentage on an annual basis)
Mortality and Expense Risk Charge......................................1.25%(1)
Administrative Expense Charge..........................................0.25%(2)
--------
Total Separate Account Expenses........................................1.50%
=====
</TABLE>
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(1) These charges may be reduced for certain plans.
(2) We only impose this charge under some contracts. See "Fees."
6
<PAGE>
Fees Deducted by the Funds
Using this Information. The following table shows the investment advisory fees
and other expenses charged annually by each fund. Fund fees are one factor that
impacts the value of a fund share. To learn about additional factors, refer to
the fund prospectus.
How Fees are Deducted. Fund fees are not deducted from account values. Instead,
fees are deducted from the value of fund shares on a daily basis, which in turn
will affect the value of each subaccount on a daily basis. Except as noted
below, the following figures are a percentage of the average net assets of each
fund, and are based on figures for the year ended December 31, 1998.
Fund Expense Table
<TABLE>
<CAPTION>
Total Fund Net Fund
Annual Annual
Expenses Expenses
Investment Without Total After
Advisory Other Waivers or Waivers and Waivers or
Fund Name Fees(1) Expenses Reductions Reductions Reductions
--------- ------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP(2)(3) 0.60% 0.15% 0.75% 0.00% 0.75
Aetna Balanced VP, Inc.(3) 0.50% 0.09% 0.59% -- 0.59%
Aetna Bond VP(3) 0.40% 0.10% 0.50% -- 0.50%
Aetna Crossroads VP(2)(3) 0.60% 0.15% 0.75% 0.00% 0.75%
Aetna Growth VP(2)(3) 0.60% 0.15% 0.75% 0.00% 0.75%
Aetna Growth and Income VP(3) 0.50% 0.08% 0.58% -- 0.58%
Aetna High Yield VP(2)(3) 0.65% 0.40% 1.05% 0.25% 0.80%
Aetna Index Plus Large Cap VP(2)(3) 0.35% 0.10% 0.45% 0.00% 0.45%
Aetna Index Plus Mid Cap VP(2)(3) 0.40% 0.51% 0.91% 0.31% 0.60%
Aetna Index Plus Small Cap VP(2)(3) 0.40% 0.61% 1.01% 0.41% 0.60%
Aetna International VP(2)(3) 0.85% 1.22% 2.07% 0.92% 1.15%
Aetna Legacy VP(2)(3) 0.60% 0.16% 0.76% 0.00% 0.76%
Aetna Money Market VP(3) 0.25% 0.09% 0.34% -- 0.34%
Aetna Real Estate Securities VP(2)(3) 0.75% 0.73% 1.48% 0.53% 0.95%
Aetna Small Company VP(2)(3) 0.75% 0.14% 0.89% 0.00% 0.89%
Aetna Value Opportunity VP(2)(3) 0.60% 0.14% 0.74% 0.00% 0.74%
AIM V.I. Capital Appreciation Fund(4) 0.62% 0.05% 0.67% -- 0.67%
AIM V.I. Growth Fund(4) 0.64% 0.08% 0.72% -- 0.72%
AIM V.I. Growth and Income Fund(4) 0.61% 0.04% 0.65% -- 0.65%
AIM V.I. Value Fund(4) 0.61% 0.05% 0.66% -- 0.66%
Calvert Social Balanced Portfolio(5) 0.70% 0.18% 0.88% 0.02% 0.86%
Fidelity VIP Equity-Income Portfolio(6) 0.49% 0.09% 0.58% 0.01% 0.57%
Fidelity VIP Growth Portfolio(6) 0.59% 0.09% 0.68% 0.02% 0.66%
Fidelity VIP Overseas Portfolio(6) 0.74% 0.17% 0.91% 0.02% 0.89%
Fidelity VIP II Contrafund Portfolio(6) 0.59% 0.11% 0.70% 0.04% 0.66%
Janus Aspen Aggressive Growth Portfolio(7) 0.72% 0.03% 0.75% 0.00% 0.75%
Janus Aspen Balanced Portfolio(7) 0.72% 0.02% 0.74% 0.00% 0.74%
Janus Aspen Flexible Income Portfolio(7) 0.65% 0.08% 0.73% 0.00% 0.73%
Janus Aspen Growth Portfolio(7) 0.72% 0.03% 0.75% 0.07% 0.68%
Janus Aspen Worldwide Growth Portfolio(7) 0.67% 0.07% 0.74% 0.02% 0.72%
Lexington Natural Resources Trust(8) 1.00% 0.29% 1.29% 0.00% 2.50%
Oppenheimer Global Securities Fund/VA(4) 0.68% 0.06% 0.74% -- 0.74%
Oppenheimer Strategic Bond Fund/VA(4) 0.74% 0.06% 0.80% -- 0.80%
Portfolio Partners MFS Emerging Equities Portfolio(9) 0.68% 0.13% 0.81% 0.00% 0.83%
Portfolio Partners MFS Research Growth Portfolio(9) 0.70% 0.15% 0.85% -- 0.85%
Portfolio Partners MFS Value Equity Portfolio(9) 0.65% 0.25% 0.90% -- 0.90%
Portfolio Partners Scudder International Growth
Portfolio(9) 0.80% 0.20% 1.00% -- 1.00%
Portfolio Partners T. Rowe Price Growth Equity
Portfolio(9) 0.60% 0.15% 0.75% -- 0.75%
</TABLE>
7
<PAGE>
Footnotes to the "Fund Expense Table"
(1) Certain of the fund advisers reimburse the company for administrative
costs incurred in connection with administering the funds as variable
funding options under the contract. These reimbursements are generally
paid out of the management fees and are not charged to investors. For the
AIM Funds, the reimbursements may be paid out of fund assets in an amount
up to 0.25% annually. Any such reimbursements may be paid from the AIM
Funds' assets are included in the "Other Expenses" column.
(2) The investment adviser is contractually obligated through December 31,
1999 to waive all or a portion of its investment advisory fee and/or its
administrative services fee and/or to reimburse a portion of other
expenses in order to ensure that the portfolio's Total Fund Annual
Expenses do not exceed the percentage reflected under Net Fund Annual
Expenses After Waivers or Reductions.
(3) Prior to May 1, 1998, the portfolio's investment adviser provided
administrative services to the portfolio and assumed the portfolio's
ordinary recurring direct costs under an administrative services
agreement. After that date, the portfolio's investment adviser provided
administrative services but no longer assumed all of the portfolio's
ordinary recurring direct costs under an 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,
1998, but reflect the fee payable under the new administrative services
agreement and estimates the portfolio's ordinary recurring direct costs.
(4) Fee waiver/expense reimbursement obligations do not apply to these
portfolios.
(5) The figures above are based on expenses for fiscal year 1998, and have
been restated to reflect the elimination of a performance adjustment. The
restatement includes the addition of 0.01% to the portfolio management
fee. Other Expenses reflect an indirect fee of 0.02% relating to an
expense offset arrangement with the portfolio's custodian. Amounts shown
under Total Waivers and Reductions reflect a voluntary reduction of fees
paid indirectly.
(6) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds, or the investment
adviser on behalf of 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. These credits are
included under Total Waivers and Reductions.
(7) All expenses are stated both with and without contractual waivers and fee
reductions by Janus Capital. Fee reductions for the Aggressive Growth,
Balanced, Growth and Worldwide Growth Portfolios reduce the Management
fee to the level of the corresponding Janus retail fund. Other waivers,
if applicable, are first applied against the Management Fee and then
against Other Expenses. Janus Capital has agreed to continue the other
waivers and fee reduction until at least the next annual renewal of the
advisory agreement.
(8) For 1998, the fund's investment adviser voluntarily agreed to limit the
total expenses of the fund (excluding interest, taxes, brokerage
commissions, and extraordinary expense, but including management fees and
operating expenses) to an annual rate of 2.50% of the fund's average
daily net assets. This voluntary agreement will remain in effect through
December 31, 1999.
(9) The investment adviser has agreed to reimburse the portfolios for
expenses and/or waive its fees, so that, through at least April 30, 2000,
the aggregate of each portfolio's expenses will not exceed the combined
investment advisory fees and other expenses shown under the Net Fund
Annual Expenses After Waivers or Reductions column above. For the
Portfolio Partners MFS Emerging Equities Portfolio, the Total Fund Annual
Expenses Without Waivers or Reductions for 1998 were less than the
percentage reflected under the Net Fund Annual Expenses After Waivers or
Reductions column. Nevertheless, the investment adviser will waive fees
and/or reimburse expenses if that portfolio's Total Fund Annual Expenses
Without Waivers or Reductions for 1999 exceed the percentage reflected
under the Net Fund Annual Expenses After Waivers or Reductions column.
8
<PAGE>
Hypothetical Examples
Account Fees Incurred Over Time. The following hypothetical examples show the
fees paid over time if $1000 is invested in a subaccount, assuming a 5% annual
return on the investment. For the purpose of these examples, we deducted the
maximum mortality and expense risk charge of 1.25% annually, an administrative
expense charge of 0.25% annually and the maximum maintenance fee of $20
(converted to a percentage of assets equal to 0.007%.) The total annual Fund
expenses used are those shown in the column "Total Annual Expenses without
Waivers or Reductions" in the Fund Expense Table.
- -------------------------------------------
> These examples are purely hypothetical
> They should not be considered a
representation of past or future fees or
expected returns
> Actual fees and/or returns may be more or
less than those shown in these examples
- -------------------------------------------
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
-------------------------------------- -------------------------------------
If you withdraw your entire account If you leave your entire account
value at the end of the periods shown, value invested or if you select an
you would pay the following fees, income phase payment option at the
including any applicable Early end of the periods shown, you would
Withdrawal Charge assessed:* pay the following fees (no Early
Withdrawal Charge is reflected):**
1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
-------- --------- --------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP $74 $125 $178 $259 $23 $ 71 $121 $259
Aetna Balanced VP, Inc. $73 $120 $170 $243 $21 $ 66 $113 $243
Aetna Bond VP $72 $118 $166 $233 $20 $ 63 $108 $233
Aetna Crossroads VP $74 $125 $178 $259 $23 $ 71 $121 $259
Aetna Growth VP $74 $125 $178 $259 $23 $ 71 $121 $259
Aetna Growth and Income VP $73 $120 $170 $242 $21 $ 65 $112 $242
Aetna High Yield VP $77 $133 $192 $289 $26 $ 80 $136 $289
Aetna Index Plus Large Cap VP $71 $116 $164 $228 $20 $ 61 $106 $228
Aetna Index Plus Mid Cap VP $76 $129 $186 $275 $24 $ 75 $129 $275
Aetna Index Plus Small Cap VP $77 $132 $190 $285 $25 $ 78 $134 $285
Aetna International VP $87 $162 $239 $384 $36 $110 $185 $384
Aetna Legacy VP $74 $125 $179 $260 $23 $ 71 $121 $260
Aetna Money Market VP $70 $113 $158 $217 $19 $ 58 $100 $217
Aetna Real Estate Securities VP $81 $145 $212 $331 $30 $ 92 $157 $331
Aetna Small Company VP $76 $129 $185 $273 $24 $ 75 $128 $273
Aetna Value Opportunity VP $74 $124 $178 $258 $23 $ 70 $120 $258
AIM V.I. Capital Appreciation Fund $73 $122 $174 $251 $22 $ 68 $117 $251
AIM V.I. Growth Fund $74 $124 $177 $256 $23 $ 70 $119 $256
AIM V.I. Growth and Income Fund $73 $122 $173 $249 $22 $ 68 $116 $249
AIM V.I. Value Fund $73 $122 $174 $250 $22 $ 68 $116 $250
Calvert Social Balanced Portfolio $75 $128 $184 $272 $24 $ 74 $127 $272
Fidelity VIP Equity-Income Portfolio $73 $120 $170 $242 $21 $ 65 $112 $242
Fidelity VIP Growth Portfolio $74 $123 $175 $252 $22 $ 68 $117 $252
Fidelity VIP Overseas Portfolio $76 $129 $186 $275 $24 $ 75 $129 $275
Fidelity VIP II Contrafund Portfolio $74 $123 $176 $254 $22 $ 69 $118 $254
Janus Aspen Aggressive Growth Portfolio $74 $125 $178 $259 $23 $ 71 $121 $259
Janus Aspen Balanced Portfolio $74 $124 $178 $258 $23 $ 70 $120 $258
Janus Aspen Flexible Income Portfolio $74 $124 $177 $257 $23 $ 70 $120 $257
Janus Aspen Growth Portfolio $74 $125 $178 $259 $23 $ 71 $121 $259
Janus Aspen Worldwide Growth Portfolio $74 $124 $178 $258 $23 $ 70 $120 $258
Lexington Natural Resources Trust $79 $140 $204 $313 $28 $ 87 $148 $313
Oppenheimer Global Securities Fund/VA $74 $124 $178 $258 $23 $ 70 $120 $258
Oppenheimer Strategic Bond Fund/VA $75 $126 $180 $264 $23 $ 72 $123 $264
Portfolio Partners MFS Emerging Equities Portfolio $75 $126 $181 $265 $23 $ 72 $124 $265
Portfolio Partners MFS Research Growth Portfolio $75 $128 $183 $269 $24 $ 74 $126 $269
Portfolio Partners MFS Value Equity Portfolio $76 $129 $185 $274 $24 $ 75 $128 $274
Portfolio Partners T. Rowe Price Growth Equity
Portfolio $74 $125 $178 $259 $23 $ 71 $121 $259
Portfolio Partners Scudder International Growth
Portfolio $77 $132 $190 $284 $25 $ 78 $133 $284
</TABLE>
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*This example reflects deduction of an early withdrawal charge calculated
using the schedule applicable to Installment Purchase Payment Accounts.
Under that schedule, if only one $1,000 payment was made as described above,
fewer than 5 purchase payment periods would have been completed at the end
of years 1, 3 and 5, and the 5% charge would apply. At the end of the tenth
account year, the early withdrawal charge is waived regardless of the number
of purchase payment periods completed, and no early withdrawal charge would
apply.
**This example does not apply if during the income phase, a nonlifetime
payment option with variable payments is selected and a lump sum withdrawal
is requested within 3 years after payments start. In this case, the lump sum
payment is treated as a withdrawal during the accumulation phase and may be
subject to an early withdrawal charge as shown in Example A.
9
<PAGE>
Condensed Financial Information
- --------------------------------------------------------------------------------
Understanding Condensed Financial Information. In Appendix V, we provide
condensed financial information about the Variable Annuity Account B (the
separate account) subaccounts available under the contracts. The tables show
the value of the subaccounts over the past 10 years. For subaccounts that were
not available 10 years ago, we give a history from the date of first
availability.
Investment Options
- --------------------------------------------------------------------------------
The contract offers variable investment options and fixed interest options.
When we establish your account(s), the contract holder, or you if permitted by
the plan, instructs us to direct account dollars to any of the available
options.
Variable Investment Options. These options are called subaccounts. The
subaccounts are within Variable Annuity Account B (the separate account), a
separate account of the Company. Earnings on amounts invested in a subaccount
will vary depending on the performance and fees of its underlying fund. You do
not invest directly in or hold shares of the funds.
> Fund Descriptions. We provide brief descriptions of the funds in Appendix IV.
Please refer to the fund prospectuses for additional information. Fund
prospectuses may be obtained, free of charge, from our Home Office at the
address and phone number listed in "Contract Overview", or by contacting the
SEC at its website, or by contacting the SEC Public Reference Room.
Fixed Interest Options. For descriptions of the fixed interest options, see
Appendices I, II and III and the Guaranteed Accumulation Account prospectus.
- --------------------------------------------------------------------------------
Selecting Investment Options
o Choose options appropriate for you. Your Aetna representative can help you
evaluate which funds or fixed interest options may be appropriate for your
financial goals.
o Understand the risks associated with the options you choose. Some subaccounts
invest in funds that are considered riskier than others. Funds with
additional risks are expected to have a value that rises and falls more
rapidly and to a greater degree than other funds. For example, funds
investing in foreign or international securities are subject to additional
risks not associated with domestic investments, and their performance may
vary accordingly. Also, funds using derivatives in their investment strategy
may be subject to additional risks.
o Be informed. Read this prospectus, the fund prospectus, fixed interest option
appendices and the Guaranteed Accumulation Account prospectus.
- --------------------------------------------------------------------------------
Limits on Option Availability. Some funds and fixed interest options may not be
available through certain contracts and plans or in some states. We may add,
withdraw or substitute funds, subject to the conditions in the contract and
regulatory requirements.
Limits on Number of Options Selected. No more than 18 investment options may be
selected for your account at any one time. Each subaccount, the Fixed
10
<PAGE>
Account, the Fixed Plus Account and each classification of the Guaranteed
Accumulation Account selected counts as one option.
Limits Imposed by the Underlying Fund. Orders for the purchase of fund shares
may be subject to acceptance by the fund. We reserve the right to reject,
without prior notice, any allocation of payments to a subaccount if the
subaccount's investment in the corresponding fund is not accepted by the fund
for any reason.
Additional Risks of Investing in the Funds. (Mixed and Shared Funding)
"Shared funding" occurs when shares of a fund, which the subaccounts buy for
variable annuity contracts, are also bought by other insurance companies for
their variable annuity contracts.
"Mixed funding" occurs when shares of a fund, which the subaccounts buy for
variable annuity contracts, is bought for variable life insurance contracts
issued by us or other insurance companies.
> Shared--bought by more than one company
> Mixed--bought for annuities and life insurance
It is possible that a conflict of interest may arise due to mixed and/or shared
funding, that could adversely impact the value of a fund. For example, if a
conflict of interest occurred and one of the subaccounts withdrew its
investment in a fund, the fund may be forced to sell its securities at
disadvantageous prices, causing its share value to decrease. Each fund's board
of directors or trustees will monitor events to identify any conflicts which
might arise and to determine what action, if any, should be taken to address
such conflicts.
Transfers
- --------------------------------------------------------------------------------
Transfers Among Investment Options. During the accumulation phase, the contract
holder, or you if permitted by the plan, may transfer amounts of $500 or more
among investment options. Subject to the contract holder's approval, you may
make a request in writing, by telephone or, where applicable, electronically.
Transfers must be made in accordance with the terms of the contract and your
plan. Transfers from fixed interest options are restricted as outlined in
Appendices I, II and III. You may not make transfers once you enter the income
phase.
Value of Transferred Dollars. The value of amounts transferred in or out of the
funds will be based on the subaccount unit values next determined after we
receive your request in good order at our Home Office.
Telephone Transfers: Security Measures. To prevent fraudulent use of telephone
transactions, we have established security procedures. These include recording
calls on our toll-free telephone lines and requiring use of a personal
identification number (PIN) to execute transactions. You are responsible for
keeping your PIN and account information confidential. If we fail to follow
reasonable security procedures, we may be liable for losses due to unauthorized
or fraudulent telephone transactions. We are not liable for losses resulting
from
11
<PAGE>
following telephone instructions we believe to be genuine. If a loss occurs
when we rely on such instructions, you will bear the loss.
Limits on Frequent Transfers. The contracts are not designed to serve as
vehicles for frequent trading in response to short-term fluctuations in the
market. Such frequent trading can disrupt management of a fund and raise its
expenses. This in turn can have an adverse effect on fund performance.
Accordingly, organizations or individuals that use market-timing investment
strategies and make frequent transfers should not purchase the contracts.
We reserve the right to restrict, in our sole discretion and without prior
notice, transfers initiated by a market-timing organization or individual or
other party authorized to give transfer instructions on behalf of multiple
contract holders or participants. Such restrictions could include: (1) not
accepting transfer instructions from an agent acting on behalf of more than one
contract holder or participant; and (2) not accepting preauthorized transfer
forms from market timers or other entities acting on behalf of more than one
contract holder or participant at a time.
We further reserve the right to impose, without prior notice, restrictions on
any transfers that we determine, in our sole discretion, will disadvantage or
potentially hurt the rights or interests of other contract holders or
participants.
The Dollar Cost Averaging Program. If available under your plan, you may
participate in our dollar cost averaging program. There is no additional charge
for this service. Dollar cost averaging is a system for investing that buys
fixed dollar amounts of an investment at regular intervals, regardless of
price. Our program transfers, at regular intervals, a fixed dollar amount to
one or more subaccounts that you select. Dollar cost averaging is not permitted
into the Lexington Natural Resources Trust subaccount. Dollar cost averaging
neither ensures a profit nor guarantees against loss in a declining market. You
should consider your financial ability to continue purchases through periods of
low price levels. For additional information about this program, contact your
local representative or call the Company at the number listed in "Contract
Overview--Questions."
Contract Purchase and Participation
- --------------------------------------------------------------------------------
Contracts Available for Purchase. The contracts are designed for deferred
compensation plans sponsored by an employer for its employees and/or
independent contractors. The plans may be sponsored by:
(1) Non-governmental tax-exempt organizations for deferrals that are subject to
Code Section 457 (457 Plans)
(2) Tax-exempt organizations for deferrals not subject to Code Section 457
(3) Taxable organizations
The types of plans described in (2) and (3) above are referred to as non-457
plans.
Purchasing the Contract. The contract holder submits the required forms and
application to the Company. We approve the forms and issue a contract to the
contract holder.
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<PAGE>
Participating in the Contract. To participate in the contract, complete an
enrollment form and submit it to us. If your enrollment is accepted, we
establish an account for you under the contract.
Acceptance or Rejection of Applications or Enrollment Forms. We must accept or
reject an application or your enrollment materials within two business days of
receipt. If the forms are incomplete, we may hold any forms and accompanying
payments for five days, unless you consent to our holding them longer. Under
limited circumstances, we may also agree, for a particular plan, to hold
payments for longer periods with the permission of the contract holder. If we
agree to do this, we will deposit the payments in the Aetna Money Market VP
subaccount until the forms are completed (or for a maximum of 105 days). If we
reject the application or enrollment, we will return the forms and any
payments.
Methods of Payment. The following payment methods are available:
> Continuous payments over time into an installment purchase payment account
Payments to an installment purchase payment account must be at least $100 per
month ($1,200 annually). No payment may be less than $25.
> Lump sum transfer from a previous plan into a single purchase payment account,
in accordance with our procedures in effect at the time of purchase.
If you participate in a 457 plan, the Tax Code places limits on how much of
your compensation may be deferred annually. See "Taxation" for further
information.
Allocation of Payments. The contract holder or you, if the contract holder
permits, directs us to allocate initial contributions to the investment options
available under the plan. Generally you will specify this information on your
enrollment materials. After your enrollment, changes to allocations for future
payments or transfer of existing balances among investment options may be
requested in writing and, where available, by telephone or electronically.
Allocations must be in whole percentages and there may be limitations on the
number of investment options that can be selected at any one time. (See
"Investment Options" and "Transfers.")
Transfer Credits. The Company may provide a transfer credit on transferred
assets, subject to certain conditions and state approvals. Transferred assets
are the value of contributions made on your behalf under the plan or a prior
plan before such amounts are applied to the contract. The transfer credit
equals a percentage of the transferred assets remaining in the contract after a
specified period of time. Once a transfer credit is applied to the contract, it
will not be recaptured by the Company; however, all applicable provisions and
limitations of the contract will apply to those amounts. This benefit is
provided on a nondiscriminatory basis. If a transfer credit is due under the
contract, you will be provided with additional information specific to the
contract.
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<PAGE>
Contract Ownership and Rights
- --------------------------------------------------------------------------------
Who owns the Contract? The contract holder. This is the person or entity to
whom we issue the contract.
Who Owns Money Accumulated under the Contract? All dollars accumulated under
the contracts, including contributions attributable to deferred compensation,
are part of your employer's general assets and subject to the claims of its
general creditors. The plan exclusively governs what benefits are available to
you and those benefits are provided from your employer's general assets.
What Rights Do I Have under The Contract? The contract holder, usually your
employer, holds all rights under the contract. The contract holder's plan,
which you participate in, may permit you to exercise some of those rights.
Right to Cancel
- --------------------------------------------------------------------------------
When and How to Cancel. The contract holder may cancel the contract within ten
days after receiving it (or as otherwise allowed by state law) by returning it
to the Company along with a written notice of cancellation.
Refunds to Contract Holders. We will produce a refund to the contract holder
not later than seven days after we receive the contract and the written notice
of cancellation at our Home Office. The refund will equal the dollars
contributed to the contract plus any earnings or less any losses attributable
to those contributions allocated to the variable investment options, unless
otherwise required by law.
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<PAGE>
Types of Fees
There are three types of fees your account may incur:
> Transaction Fees
o Early Withdrawal Charge
o Annual Maintenance Fee
> Fees Deducted from the Subaccounts
o Mortality and Expense Risk Charge
o Administrative Expense Charge
> Fees Deducted by the Funds
o Investment Advisory Fees
o Other Expenses
Terms to Understand
in Schedules
> Account Year--a 12-month
period measured from the
date we establish your
account, or measured from
any anniversary of that
date.
> Purchase Payment Period
(for installment
payments)-- the period
of time it takes to
complete the number of
installment payments
expected to be made to
your account over a
year. For example, if
your payment frequency
is monthly, a payment
period is completed
after 12 payments are
made. If only 11
payments are made, the
payment period is not
completed until the
twelfth payment is made.
At any given time, the
number of payment
periods completed cannot
exceed the number of
account years completed,
regardless of the number
of payments made.
Fees
- --------------------------------------------------------------------------------
The following repeats and adds to information provided in the "Fee Table"
section. Please review both this section and the Fee Table for information on
fees.
Transaction Fees
Early Withdrawal Charge
Withdrawals of all or a portion of your account value may be subject to a
charge.
Amount. The charge is a percentage of the amount withdrawn. The percentage is
determined by the early withdrawal charge schedule that applies to your
account. It will never be more than 8.5% of your total payments to your
account.
Purpose. This is a deferred sales charge. It reimburses us for some of the
sales and administrative expenses associated with the contract. Our remaining
sales and administrative expenses will be covered by our general assets which
are attributable in part to the mortality and expense risk charge described in
this section.
Early Withdrawal Charge Schedules
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Installment Purchase Payment Accounts Single Purchase Payment Accounts
- -------------------------------------------------------------------------------
Purchase Payment Early Withdrawal Account Years Early Withdrawal
Periods Completed Charge Completed Charge
- --------------------- ------------------ --------------- -----------------
<S> <C> <C> <C>
Fewer than 5 5% Fewer than 5 5%
5 or more but 5 or more but
fewer than 7 4% fewer than 6 4%
7 or more but 6 or more but
fewer than 9 3% fewer than 7 3%
9 or more but 7 or more but
fewer than 10 2% fewer than 8 2%
8 or more but
10 or more 0% fewer than 9 1%
9 or more 0%
- --------------------------------------------------------------------------------
</TABLE>
Waiver. The early withdrawal charge is waived for portions of a withdrawal where
one or more of the following apply:
> Used to provide payments to you during the income phase
> Paid because of your death before income phase payments begin
> Paid where your account value is $3,500 or less and no part of the account has
been taken as a withdrawal or used to provide income phase payments within the
prior 12 months (If the contract holder makes a full withdrawal from more than
one of the accounts on your behalf, the value of those accounts will be added
together to be eligible for the $3,500 exemption. This option is not available
for contracts where we do not maintain participant accounts or for withdrawals
of all accounts under one contract)
> Taken because of the election of a systematic distribution option (See
"Systematic Distribution Options")
> Taken when you are 59-1/2 or older, have an installment purchase payment
account and have completed at least nine purchase payment periods
> Taken on or after the tenth anniversary of the effective date of the account
or plan account
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<PAGE>
> For 457 plans only, due to a hardship from an unforeseeable emergency, as
defined in the Tax Code
> For contracts issued in connection with retirement programs for select
management and highly compensated healthcare employees in plans formerly
carried under certain hospital association endorsements, withdrawn due to your
separation from service with your current employer
Reduction, Waiver or Elimination. In addition to the specific waivers described
above, we may reduce, waive or eliminate the early withdrawal charge for a
particular plan. Any such reduction will reflect the differences we expect in
distribution costs or services meant to be defrayed by this charge. Factors we
consider for a reduction include, but are not limited to, the following:
> The number of participants under the plan
> The expected level of assets or cash flow under the plan
> Our agent's involvement in sales activities
> Our sales-related expenses
> Distribution provisions under the plan
> The plan's purchase of one or more other variable annuity contracts from us
and the features of those contracts
> The level of employer involvement in determining eligibility for distributions
under the contract
> Our assessment of financial risk to the Company relating to withdrawals
We will not reduce the early withdrawal charge in a manner that is unfairly
discriminatory against any person.
We may also apply different early withdrawal charge provisions in contracts
issued to certain employer groups or associations which have negotiated the
contract terms on behalf of their employees. We will offer any resulting early
withdrawal charge uniformly to all employees in the group.
Maintenance Fee
Maximum Amount. $20.00 (This fee only applies to installment purchase payment
accounts.)
When/How. For those plans that have a maintenance fee, each year during the
accumulation phase we deduct this fee from your account value. We deduct it on
your account anniversary and, in some cases, at the time of full withdrawal. It
is deducted on a pro rata basis from your account value invested in the
subaccounts and the fixed interest options.
Purpose. This fee reimburses us for our administrative expenses relating to the
establishment and maintenance of your account.
Reduction, Waiver or Elimination. When the plan meets certain criteria, we may
reduce, waive or eliminate the maintenance fee. Factors we consider reflect
differences in our level of administrative costs and services, such as:
> The size, type and nature of the group for which a contract is issued
> The anticipated level of administrative expenses such as billing for payments,
producing periodic reports, providing for the direct payment of account
charges rather than having them deducted from account values, and any other
factors pertaining to the level and expense of administrative services we will
provide
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<PAGE>
> The number of eligible participants and the program's participation rate
We will not unfairly discriminate against any person if we reduce or eliminate
the maintenance fee. We will make any reduction or elimination of this fee
according to our own rules in effect at the time an application for a contract
is approved. We reserve the right to change these rules from time to time.
Fees Deducted from the Subaccounts
Mortality and Expense Risk Charge
Maximum Amount. 1.25% annually of your account value invested in the
subaccounts.
When/How. This fee is deducted daily from the subaccounts. We do not deduct
this from any fixed interest option.
Purpose. The fee compensates us for the mortality and expense risks we assume
under the contracts.
> The mortality risks are those risks associated with our promise to make
lifetime payments based on annuity rates specified in the contracts and our
funding of the death benefit and other payments we make to owners or
beneficiaries of the accounts
> The expense risk is the risk that the actual expenses we incur under the
contracts will exceed the maximum costs that we can charge.
If the amount we deduct for this fee is not enough to cover our mortality costs
and expenses under the contracts, we will bear the loss. We may use any excess
to recover distribution costs relating to the contract and as a source of
profit. We expect to make a profit from this fee.
Reduction. We may reduce the mortality and expense risk charge from the maximum
when the plan meets certain criteria and we agree to the reduction with the
contract holder in writing. Some contracts have a reduced mortality and expense
risk charge only during the accumulation phase of the account which then
increases during the income phase. Any reduction will reflect differences in
expenses for administration based on such factors as:
> The plan design. For example, the plan may favor stability of invested assets
and limit the conditions for withdrawals and available investment options,
which in turn lowers administrative expenses.
> The size of the prospective group, projected annual number of eligible
participants and the program's participation rate, or the number of
participants estimated to choose the contract.
> The frequency, consistency and method of submitting payments.
> The method and extent of onsite services we provide and the contract holder's
involvement in services such as enrollment and ongoing participant services.
> The contract holder's support and involvement in the communication,
enrollment, participant education and other administrative services.
> The projected frequency of distributions.
> The type and level of other factors that affect the overall administrative
expense.
We will determine any reduction of mortality and expense risk on a basis that
is not unfairly discriminatory according to our rules in effect at the time a
contract application is approved. We reserve the right to change these rules
from time to time.
17
<PAGE>
Administrative Expense Charge
Maximum Amount. 0.25% annually of your account value invested in the
subaccounts.
When/How: For all participants who became covered under a contract on or before
November 5, 1984, we reserve the right to charge an administrative expense fee
of up to 0.25% annually. This fee may be assessed during the accumulation phase
and/or the income phase. If we are imposing this fee under the contract issued
in connection with your plan when you enter the income phase, the fee will
apply to you during the entire income phase.
> We do not currently impose this charge under any contracts issued in
connection with retirement programs for select management and highly
compensated healthcare employees in plans formerly carried under certain
hospital association endorsements.
> For contracts not in the above category, beginning on April 4, 1997 we began
to deduct this charge during the accumulation phase only for contracts
effective before October 31, 1996 where the number of participants was less
than 30 as of November 30, 1996 and the contract holder had chosen not to
elect one of the Company's electronic standards for cash collection and
application of participant contribution data. However, we do not impose the
administrative expense charge for participants under those contracts who
enrolled in a group contract or became covered under an individual contract
before November 5, 1984.
> We do not currently deduct an administrative expense charge during the
accumulation phase for any contracts other than those described above.
> We do not currently deduct an administrative expense charge during the income
phase for any contracts.
Purpose. This fee helps defray our administrative expenses that cannot be
covered by the mortality and expense risk charge described above. The fee is
not intended to exceed the average expected cost of administering the
contracts. We do not expect to make a profit from this fee.
Fund Expenses
Maximum Amount. Each fund determines its own advisory fees and expenses. For a
list of fund fees see "Fee Table." The fees are described in more detail in
each fund prospectus.
When/How. Fund fees are not deducted from your account. Fund advisory fees and
expenses are reflected in the daily value of the fund shares, which will in
turn affect the daily value of each subaccount.
Purpose. These amounts help to pay the funds' investment advisor and operating
expenses.
Premium and Other Taxes
Maximum Amount. Some states and municipalities charge a premium tax on
annuities. These taxes currently range from 0% to 4%, depending on the
jurisdiction.
When/How. We reserve the right to deduct premium taxes from your account value
or from payments to your account at any time, but not before there is a tax
liability under state law. Our current practice is to deduct premium taxes at
18
<PAGE>
the time of a full withdrawal or the commencement of income phase payments. We
will not deduct any municipal premium tax of 1% or less, but we reserve the
right to reflect such an expense in our annuity purchase rates.
In addition, the Company reserves the right to assess a charge for any federal
taxes due against the separate account. (See "Taxation.")
Your Account Value
- --------------------------------------------------------------------------------
During the accumulation phase, your account value at any given time equals:
> Account dollars directed to the fixed interest options, including interest
earnings to date
> Less any deductions from the fixed interest options (e.g. withdrawals, fees)
> Plus the current dollar value of amounts invested in the subaccounts.
Subaccount Accumulation Units. When a fund is selected as an investment option,
your account dollars invest in "accumulation units" of the Variable Annuity
Account B subaccount corresponding to that fund. The subaccount invests
directly in the fund shares. The value of your interests in a subaccount is
expressed as the number of accumulation units you hold multiplied by an
"Accumulation Unit Value," as described below, for each unit.
Accumulation Unit Value (AUV). The value of each accumulation unit in a
subaccount is called the accumulation unit value or AUV. The value of
accumulation units vary daily in relation to the underlying fund's investment
performance. The value also reflects deductions for fund fees and expenses, the
mortality and expense risk charge, and the administrative charge (if any). We
discuss these deductions in more detail in "Fee Table" and "Fees."
Valuation. We determine the AUV every business day after the close of the New
York Stock Exchange. At that time, we calculate the current AUV by multiplying
the AUV last calculated by the "net investment factor" of the subaccount. The
net investment factor measures the investment performance of the subaccount
from one valuation to the next.
Current AUV = Prior AUV x Net Investment Factor
Net Investment Factor. The net investment factor for a subaccount between two
consecutive valuations, equals the sum of 1.0000 plus the net investment rate.
Net Investment Rate. The net investment rate is computed according to a formula
that is equivalent to the following:
> The net assets of the fund held by the subaccount as of the current valuation,
minus;
> The net assets of the fund held by the subaccount at the preceding valuation,
plus or minus;
> Taxes or provisions for taxes, if any, due to subaccount operations (with any
federal income tax liability offset by foreign tax credits to the extent
allowed);
> Divided by the total value of the subaccount units at the preceding valuation;
> Less a daily deduction for the mortality and expense risk charge and the
administrative expense charge (if any). See "Fees."
The net investment rate may be either positive or negative.
19
<PAGE>
Hypothetical Illustration. As a hypothetical illustration, assume that an
investor contributes $5,000 to his account and directs us to invest $3,000 in
Fund A and $2,000 in Fund B. After receiving the contribution and following the
next close of business of the New York Stock Exchange, the applicable AUV's are
$10 for Subaccount A, and $25 for Subaccount B. The investor's account is
credited with 300 accumulation units of Subaccount A and 80 accumulation units
of Subaccount B.
<TABLE>
<S> <C>
+-------------------+
|$5,000 contribution|
+-------------------+
Step 1 [arrow down] Step 1: An Investor
+----------------------------------------+ contributes $5000
|Aetna Life Insurance and Annuity Company|
+----------------------------------------+
Step 2 [arrow down] Step 2:
+----------------------------------------+
| Variable Annuity Account B | A. He directs us to invest
+---------------+-----------------+------+ $3,000 in Fund A. His
| Subaccount a | Subaccount B | Etc. | dollars purchase 300
| 300 | 80 | | accumulation units of
| accumulation | accumulation | | Subaccount A ($3,000
| units | units | | divided by the current
| | | | $10 AUV).
| | | |
| | | | B. He directs us to invest
| | | | $2,000 in Fund B. His
| | | | dollars purchase 80
| | | | accumulation units of
| | | | Subaccount B ($2,000
| | | | divided by the current
| | | | $25 AUV).
+---------------+-----------------+------+
[arrow down] Step 3 [arrow down] Step 3: The separate account
+------+ +------+ then purchases shares of the
|Fund A| |Fund B| applicable funds at the
+------+ +------+ current market value (NAV).
</TABLE>
The fund's subsequent investment performance, expenses and charges, and the
daily charges deducted from the subaccount, will cause the AUV to move up or
down on a daily basis.
Payments to Your Account. If all or a portion of initial payments are directed
to the subaccounts, they will purchase subaccount accumulation units at the AUV
next computed after our acceptance of the applicable application or enrollment
forms. Subsequent payments or transfers directed to the subaccounts that we
receive by the close of business of the New York Stock Exchange (Exchange) will
purchase subaccount accumulation units at the AUV computed after the close of
the Exchange on that day. The value of subaccounts may vary day to day.
20
<PAGE>
Taxes, Fees and Deductions
Amounts withdrawn may be subject to one or more of the following:
> Early Withdrawal Charge (see "Fees--Early Withdrawal Charge")
> Maintenance Fee (see "Fees--Maintenance Fee")
> Market Value Adjustment (see Appendix I)
> Tax Penalty (see "Taxation")
> Tax Withholding (see "Taxation")
To determine which may apply, refer to the appropriate sections of this
prospectus, contact your Aetna representative or call the Company at the number
listed in "Contract Overview--Questions."
Withdrawals
- --------------------------------------------------------------------------------
Making a Withdrawal. Subject to limitations on withdrawals from the Fixed Plus
Account, the contract holder may withdraw all or a portion of your account
value (on your behalf) at any time during the accumulation phase.
Steps for Making A Withdrawal. The contract holder, or you if permitted by the
plan must:
> Select the Withdrawal Amount
1) Full Withdrawal: You will receive, reduced by any required withholding tax,
your account value allocated to the subaccounts, the Guaranteed
Accumulation Account (plus or minus any applicable market value adjustment)
and to the Fixed Account, minus any applicable early withdrawal charge,
plus the amount available for withdrawal from the Fixed Plus Account.
2) Partial Withdrawal (Percentage or Specified Dollar Amount): You will
receive, reduced by any required withholding tax, the amount you specify,
subject to the value available in your account. However, the amount
actually withdrawn from your account will be adjusted by any applicable
early withdrawal charge for amounts withdrawn from the subaccounts, the
Guaranteed Accumulation Account or the Fixed Account, and any positive or
negative market value adjustment for amounts withdrawn from the Guaranteed
Accumulation Account. The amount available from the Fixed Plus Account may
be limited.
For a description of limitations on withdrawals from the Fixed Plus
Account, see Appendix III.
> Select Investment Options. If this is not specified, we will withdraw dollars
proportionally from each investment option in which you have an account
value.
> Properly complete a disbursement form and submit it to our Home Office.
Calculation of Your Withdrawal. We determine your account value every normal
business day after the close of the New York Stock Exchange. We pay withdrawal
amounts based on your account value either: (1) As of the next valuation after
we receive a request for withdrawal in good order at our Home Office, or (2) On
such later date as specified on the disbursement form.
Delivery of Payment. Payments for withdrawal requests will be made in
accordance with SEC requirements. Normally, the payment will be sent not later
than seven calendar days following our receipt of the disbursement form in good
order.
21
<PAGE>
Features of a Systematic Distribution
Option (SDO)
An SDO allows the contract holder to
elect for you to receive regular
payments from your account, without
moving into the income phase. By
maintaining your account in the
accumulation phase, certain rights and
flexibility are retained and any
accumulation phase fees may apply.
Systematic Distribution Options
- --------------------------------------------------------------------------------
Availability of Systematic Distribution Options (SDOs). To exercise one of
these options the account value must meet any minimum dollar amount and age
criteria applicable to that option. To determine what SDO's are available,
check with the contract holder or the Company.
The SDOs currently available under the contract include the following:
> SWO--Systematic Withdrawal Option. SWO is a series of automatic partial
withdrawals from your account based on the payment method selected. It is
designed for those who want a periodic income while retaining investment
flexibility for amounts accumulated under the contract.
> ECO--Estate Conservation Option. ECO offers the same investment flexibility as
SWO, but is designed for those who want to receive only the minimum
distribution that the Tax Code requires each year.
Under ECO, we calculate the minimum distribution amount required by law at
age 70-1/2, and pay you that amount once a year. ECO is available under 457
plans only.
> Other Systematic Distribution Options. We may add additional SDOs from time to
time. You may obtain additional information relating to any of the SDOs from
your local representative or from our Home Office.
Availability of Systematic Distribution Options The Company may discontinue the
availability of one or all of the SDOs at any time, and/or change the terms of
future elections.
Terminating a Systematic Distribution Option Once an SDO is elected, the
contract holder may revoke it at any time by submitting a written request to
our Home Office. Any revocation will apply only to the amount not yet paid.
Once an option is revoked for an account, it may not be elected again, nor may
any other SDO be elected.
Charges and Taxation When the contract holder elects an SDO for your account,
your account value remains in the accumulation phase and subject to the charges
and deductions described in the "Fees" section. Taking a withdrawal through an
SDO may have tax consequences. If you are concerned about tax implications
consult a tax advisor before one of these options is elected.
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During the Income Phase
This section provides information about the accumulation phase. For death
benefit information applicable to the income phase (see "The Income Phase").
Death Benefit
- --------------------------------------------------------------------------------
The contract provides a death benefit in the event of your death, which is
payable to the contract holder (usually your employer). The contract holder may
direct that we make any payments to the beneficiary you name under the plan
(plan beneficiary).
During the Accumulation Phase
Payment Process
1. Following your death, the contract holder (on behalf of your plan
beneficiary) must provide the Company with proof of death acceptable to us
and a payment request in good order.
2. The payment request should include selection of a benefit payment option.
3. Within seven days after we receive proof of death acceptable to us and
payment request in good order at our Home Office, we will mail payment,
unless otherwise requested.
Until a payment option is selected, account dollars will remain invested as at
the time of your death, and no distribution will be made.
If you die during the accumulation phase of your account, the following payment
options are available to your plan beneficiary, if allowed by your contract
holder and the Tax Code:
> Lump sum payment
> Payment in accordance with any of the available income phase payment options
(see "The Income Phase--Payment Options")
> If the plan beneficiary is your spouse, payment in accordance with an
available SDO (See "Systematic Distribution Options")
The following options are also available; however, the Tax Code limits how long
the death benefit proceeds may be left in these options:
> Leaving your account value invested in the contract; or
> Under some contracts, leaving your account value on deposit in the Company's
general account, and receiving monthly, quarterly, semi-annual or annual
interest payments at the interest rate then being credited on such deposits.
The beneficiary may withdraw the balance on deposit at any time or request to
receive payment in accordance with any of the available income phase payment
options (See "The Income Phase--Payment Options.")
The Value of the Death Benefit. The death benefit will be based on your account
value as calculated on the next valuation following the date on which we
receive proof of death in good order. Interest, if any, will be paid from the
date of death at a rate no less than required by law. For amounts held in the
Guaranteed Accumulation Account (GAA), any positive aggregate market value
adjustment (the sum of all market value adjustments calculated due to a
withdrawal) will be included in your account value. If a negative market value
adjustment applies, it would be deducted only if the death benefit is withdrawn
more than six months after your death. We describe the market value adjustment
in Appendix I and in the GAA prospectus.
Tax Code Requirements. The Tax Code requires distribution of death benefit
proceeds within a certain period of time. Failure to begin receiving death
benefit payments within those time periods can result in tax penalties.
Regardless of the method of payment, death benefit proceeds will generally be
taxed to the beneficiary in the same manner as if you had received those
payments. See "Taxation" for additional information.
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<PAGE>
We may have used the following terms in prior prospectuses:
Annuity Phase--Income Phase
Annuity Option--Payment Option
Annuity Payment--Income Phase Payment
Annuitization--Initiating Income Phase Payments
The Income Phase
- --------------------------------------------------------------------------------
During the income phase you receive payments from your accumulated account
value.
Initiating Payments. At least 30 days prior to the date you want to start
receiving payments, the contract holder or you, if permitted by the plan, must
notify us in writing of the following:
> Start date
> Payment option (see the payment options table in this section)
> Payment frequency (i.e., monthly, quarterly, semi-annually or annually)
> Choice of fixed or variable payments
> Selection of an assumed net investment rate (only if variable payments are
elected)
> Under some plans, certification from your employer and/or submission of the
appropriate forms is also required
The account will continue in the accumulation phase until the contract holder
or you, as applicable, properly initiate payments. Once a payment option is
selected, it may not be changed; however, certain options allow you to withdraw
a lump sum.
What Affects Payment Amounts? Some of the factors that may affect payment
amounts include: your age, your account value, the payment option selected,
number of guaranteed payments (if any) selected, and whether variable or fixed
payments are selected.
Fixed Payments. Amounts funding fixed payments will be held in the Company's
general account. Fixed payment amounts do not vary over time.
Variable Payments. Amounts funding your income phase payments will be held in
the subaccount(s) selected or a combination of subaccounts and the general
account. The contracts may restrict the subaccounts available during the income
phase, and you may not make transfers once you enter the income phase. For
variable payments, an assumed net investment rate must be selected.
Payments from the Fixed Plus Account. If a nonlifetime payment option is
selected, payments from the Fixed Plus Account may only be made on a fixed
basis.
Assumed Net Investment Rate. For variable payments, an assumed net investment
rate must be selected. If you select a 5% rate, your first payment will be
higher, but subsequent payments will increase only if the investment
performance of the subaccounts selected is greater than 5% annually, after
deduction of fees. Payment amounts will decline if the investment performance
is less than 5%, after deduction of fees.
If a 3-1/2% rate is selected, your first payment will be lower and subsequent
payments will increase more rapidly or decline more slowly depending on the
investment performance of the subaccounts selected. For more information about
selecting an assumed net investment rate, request a copy of the Statement of
Additional Information by calling the Company. (See "Contract
Overview--Questions.")
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<PAGE>
Minimum Payment Amounts. The payment option selected must result in:
> A first payment of at least $20
> Total yearly payments of at least $100.
If your account value is too low to meet these minimum payment amounts, the
contract holder, on your behalf, must elect a lump sum payment.
Charges Deducted. We make a daily deduction for mortality and expense risks
from amounts held in the subaccounts. Therefore, if you choose variable
payments and a nonlifetime payment option, we still make this deduction from
the subaccounts selected, even though we no longer assume any mortality risk
for you. We may also deduct a daily administrative charge from amounts held in
the subaccounts. (See "Fees.")
Death Benefit During the Income Phase. The death benefits that may be available
to a beneficiary are outlined in the payment option table below. If a lump sum
payment is due as a death benefit, we will make payment within seven calendar
days after we receive proof of death acceptable to us and the payment request
in good order at our Home Office.
Taxation. To avoid certain tax penalties, you and any beneficiary must meet the
distribution rules imposed by the Tax Code. (See "Taxation.")
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<PAGE>
Payment Options
The following tables list the payment options and accompanying death benefits
which may be available under the contracts. Some contracts restrict the options
and the terms available. Check with your contract holder for details. We may
offer additional payment options under the contract from time to time.
Terms Used in the Tables:
Annuitant: The person(s) on whose life expectancy the income phase payments are
calculated.
Beneficiary: The person designated to receive the death benefit payable under
the contract.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Lifetime Payment Options
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Length of Payments: For as long as the annuitant lives. It is possible that only one payment will be
Life Income made should the annuitant die prior to the second payment's due date.
Death Benefit--None: All payments end upon the annuitant's death.
- -------------------------------------------------------------------------------------------------------------------------
Length of Payments: For as long as the annuitant lives, with payments guaranteed for a choice of
Life Income-- 5-20 years or as otherwise specified in the contract.
Guaranteed
Payments Death Benefit--Payment to the Beneficiary: If the annuitant dies before we have made all the
guaranteed payments, we will pay the beneficiary a lump sum (unless otherwise requested) equal
to the present value of the remaining guaranteed payments.
- -------------------------------------------------------------------------------------------------------------------------
Length of Payments: For as long as either annuitant lives. It is possible that only one payment will
be made should both annuitants die before the second payment's due date.
Continuing Payments:
Life Income-- (a) This option allows a choice of 100%, 66-2/3% or 50% of the payment to continue to the
Two Lives surviving annuitant after the first death; or
(b) 100% of the payment to continue to the annuitant on the second annuitant's death, and 50%
of the payment to continue to the second annuitant on the annuitant's death.
Death Benefit--None: Payments end after the deaths of both annuitants.
- -------------------------------------------------------------------------------------------------------------------------
Length of Payments: For as long as either annuitant lives, with payments guaranteed for a
minimum of 120 months, or as otherwise specified in the contract.
Life Income-- Continuing Payments: 100% of the payment to continue to the surviving annuitant after the first
Two Lives-- death.
Guaranteed
Payments Death Benefit--Payment to the Beneficiary: If both annuitants die before the guaranteed
payments have all been paid, we will pay the beneficiary a lump sum (unless otherwise requested)
equal to the present value of the remaining guaranteed payments.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Table continued [arrow right (to next page)]
26
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Nonlifetime Payment Options
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Length of Payments: Payments generally may be fixed or variable and may be made for 3-30 years.
However, for amounts held in the Fixed Plus Account during the accumulation phase, the
payment must be on a fixed basis and must be for at least 5 years. In certain cases a lump sum
Nonlifetime-- payment may be requested at any time (see below).
Guaranteed
Payments Death Benefit--Payment to the Beneficiary: If the annuitant dies before we make all the
guaranteed payments, we will pay the beneficiary a lump sum (unless otherwise requested) equal
to the present value of the remaining guaranteed payments, and we will not impose any early
withdrawal charge.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Lump Sum Payment: If the Nonlifetime--Guaranteed Payments option is elected
with variable payments, you may request at any time that all or a portion of the
present value of the remaining payments be paid in one sum. A lump sum elected
before three years of payments have been completed will be treated as a
withdrawal during the accumulation phase and we will charge any applicable early
withdrawal charge. If the early withdrawal charge is based on completed purchase
payment periods, each year that passes after income payments begin will be
treated as a completed purchase payment period, even if no additional payments
are made. (See "Fees--Early Withdrawal Charge.") Lump sum payments will be sent
within seven calendar days after we receive the request for payment in good
order at our Home Office.
Calculation of Lump Sum Payments: If a lump sum payment is available to a
beneficiary or to you in the options above, the rate we use to calculate the
present value of the remaining guaranteed payments is the same rate we use to
calculate the income payments (i.e., the actual fixed rate used for the fixed
payments, or the 3-1/2% or 5% assumed net investment rate for variable
payments).
- -------------------------------------------------------------------------------
27
<PAGE>
In This Section
> Introduction
> Your Retirement Plan
> Withdrawals and other Distributions
> Taxation of Distributions
> Withholding
> Minimum Distribution Requirements
> Contribution and Distribution Limits
> 415(m) Arrangements
> Bona Fide Severance Pay Plans
> Taxation of the Company
When consulting a tax advisor, be
certain that he or she has expertise
in the Tax Code sections applicable to
your tax concerns.
Taxation
- --------------------------------------------------------------------------------
Introduction
This section discusses our understanding of current federal income tax laws
affecting the contract. You should keep the following in mind when reading it:
> Your tax position (or the tax position of the beneficiary, as applicable)
determines federal taxation of amounts held or paid out under the contract.
> Tax laws change. It is possible that a change in the future could affect
contracts issued in the past.
> This section addresses federal income tax rules and does not discuss federal
estate and gift tax implications, state and local taxes or any other tax
provisions.
> We do not make any guarantee about the tax treatment of the contract or
transactions involving the contract.
- --------------------------------------------------------------------------------
We do not intend this information to be tax advice. For advice about the
effect of federal income taxes or any other taxes on amounts held or paid out
under the contract, consult a tax adviser. For more comprehensive information
contact the Internal Revenue Service.
- --------------------------------------------------------------------------------
Your Retirement Plan
The tax rules applicable to retirement plans vary according to plan type, and
terms and conditions of the plan. To understand what tax rules apply, you need
to know the code section under which your plan qualifies. Contact your plan
sponsor, local representative or the Company to learn which code section
applies to your plan.
Plan Types. The contract is designed for use with deferred compensation plans
that qualify under code section 457 or non-section 457 deferred compensation
plans. Code section 457 provides for certain deferred compensation plans. These
plans may be offered by state governments, local governments, political
subdivisions, agencies, instrumentalities and certain affiliates of such
entities, and non-governmental tax exempt organizations. A code section 457
plan may be either a 457(b) (eligible) plan or a 457 (f) (ineligible) plan.
Either type of plan may permit participants to specify the form of investment
for their deferred compensation account. A non-section 457 deferred
compensation plan may be either a deferred compensation plan of a tax-exempt
employer that is "grandfathered" and not subject to 457 rules, or a deferred
compensation plan of a for-profit employer. The contract may also be used with
code section 415(m) arrangements.
The Contract and Retirement Plans. We make this contract available to plans
subject to code section 457 only if a non-governmental employer sponsors the
plan. Under such plans, as well as non-section 457 deferred compensation plans,
all amounts of deferred compensation, all property and rights purchased with
such amounts and all income attributable to such amounts, property and rights
remains solely the property and rights of the employer and is subject to the
claims of the employer's general creditors. Contract holders and contract
participants are responsible for determining that contributions, distributions
and other transactions satisfy applicable laws. Legal counsel and a tax adviser
should be consulted regarding the suitability of the contract.
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<PAGE>
Because the plan is not part of the contract, we are not bound by any plan's
terms or conditions.
Withdrawals and Other Distributions
Certain tax rules apply to distributions from the contract. A distribution is
any amount taken from the contract including withdrawals, income payments,
transfers and death benefit proceeds.
We report the taxable portion of all distributions to the IRS.
Taxation of Distributions
457(b) Plans. All amounts received under a 457(b) plan are includible in gross
income when paid or otherwise made available to you or your beneficiary.
457(f) Plans. Compensation deferred under a 457(f) plan is includible in gross
income in the first year when it is no longer subject to a "substantial risk of
forfeiture" as defined by the Tax Code.
Non-Section 457 Deferred Compensation Plans. Compensation deferred under a
non-Section 457 deferred compensation plan is includible in gross income in the
first year when paid or otherwise made available to you or your beneficiary.
Taxation of Death Benefit Proceeds. In general, payments received by your
beneficiaries after your death are taxed in the same manner as if you had
received those payments.
Withholding for Federal Income Tax Liability
Any distributions under the contracts are generally subject to withholding.
Federal income tax liability rates vary according to the type of distribution
and the recipient's tax status.
All distributions, except death benefit proceeds, are subject to mandatory
federal income tax withholding as wages. No withholding is required on payments
to beneficiaries.
Non-resident Aliens. If you or a beneficiary is a non-resident alien, then any
withholding is governed by code section 1441 based on the individual's
citizenship, the country of domicile and treaty status.
Minimum Distribution Requirements
To avoid certain tax penalties, you and any beneficiary must meet the minimum
distribution requirements imposed by the Tax Code. These requirements only
apply to 457(b) plans. These rules may dictate one or more of the following:
> Start date for distributions
> The time period in which all amounts in your account(s) must be distributed
> Distribution amounts
Start Date. Generally, you must begin receiving distributions by April 1 of the
calendar year following the calendar year in which you attain age 70-1/2 or
retire, whichever occurs later, unless you are a 5% owner, in which case such
29
<PAGE>
distributions must begin by April 1 of the calendar year following the calendar
year in which you attain age 70-1/2.
Time Period. We must pay out distributions from the contract over one of the
following time periods:
> Over your life or the joint lives of you and your beneficiary, or
> Over a period not greater than your life expectancy or the joint life
expectancies of you and your beneficiary
Amount. Any distribution from a 457(b) plan, payable over a period of more than
one year, must be made in substantially non-increasing amounts.
50% Excise Tax. If you fail to receive the minimum required distribution for
any tax year, a 50% excise tax is imposed on the required amount that was not
distributed.
Minimum Distribution of Death Benefit Proceeds. The following only applies to
457(b) plans. Different distribution requirements apply if your death occurs:
> After you begin receiving minimum distributions under the contract, or
> Before you begin receiving such distributions.
If your death occurs after you begin receiving minimum distributions under the
contract, distributions must be made at least as rapidly as under the method in
effect at the time of your death. Code section 401(a)(9) provides specific
rules for calculating the minimum required distributions at your death. The
rules differ, dependent upon the following:
> Whether your minimum required distribution was calculated each year based on
your single life expectancy or the joint life expectancies of you and your
beneficiary
> Whether life expectancy was recalculated
The rules are complex and any beneficiary should consult with a tax adviser
before electing the method of calculation to satisfy the minimum distribution
requirements.
Should you die before you begin receiving minimum distributions under the
contract, your entire balance must be distributed by December 31 of the
calendar year containing the fifth anniversary of the date of your death. For
example, if you die on September 1, 1999, your entire balance must be
distributed to the beneficiary by December 31, 2004. However, if the
distribution begins by December 31 of the calendar year following the calendar
year of your death, then payments may be made in one of the following
time-frames:
> Over the life of the beneficiary
> Over a period not extending beyond the life expectancy of the beneficiary
For 457(b) plans, if the beneficiary is not your spouse, the time-frame may not
exceed fifteen years.
Start Dates for Spousal Beneficiaries. If the beneficiary is your spouse, the
distribution must begin on or before the later of the following:
> December 31 of the calendar year following the calendar year of your death
> December 31 of the calendar year in which you would have attained age 70-1/2
30
<PAGE>
Contribution and Distribution Limits
457(b) Plan. If your employer's plan is a 457(b) plan, the Tax Code imposes a
maximum limit on annual contributions to your account(s) that may be excluded
from your gross income. For Section 457(b) plan participants, such limit is
generally the lesser of $8,000, as adjusted to reflect changes in the cost of
living, or 33% of your includible compensation (25% of gross compensation).
Under a 457(b) plan, amounts may not be made available to you earlier than (1)
the calendar year you attain age 70-1/2, (2) when you separate from service with
the employer or (3) when you are faced with an unforeseeable emergency. A
457(b) plan may permit a one-time in-service distribution if the total amount
payable to the participant does not exceed $5,000 and no amounts have been
deferred by the participant during the 2-year period ending on the date of
distribution.
457(f) Plan. A 457(f) plan is not subject to restrictions on contributions or
distributions, but must contain a "substantial risk of forfeiture" as defined
by the Tax Code. Generally, substantial risk of forfeiture means that your
right to receive deferred compensation is dependent upon your performance of
future services to an employer or other entity.
Non-Section 457 Deferred Compensation Plans. Non-Section 457 Deferred
Compensation Plans also are not subject to restrictions on contributions or
distributions.
Code Section 415(m) Arrangements
If you participate in the contract through a qualified governmental excess
benefit arrangement, defined in code section 415(m), the amounts provided under
the contract may be subject to the same requirements as those applied to code
section 457(b) plans described above, except that the limits described in
"Contributions Excluded from Taxable Income" do not apply. If the code section
415(m) arrangement is not designed to meet the requirements of code section
457(b), then the amounts provided under the contract are taxed in accordance
with code section 451 and are generally taxable when paid or made available to
you.
Bona Fide Severance Pay Plans
If you participate in the contract through certain bona fide severance pay
plans, described in code section 457(e)(11), amounts provided under the
contract are generally not taxable until paid or made available to you.
However, because these plans are not clearly defined in the Code, it may be
determined that your plan does not qualify as a bona fide severance pay plan.
If the plan does not qualify, then amounts provided under the contract are
taxable in the year in which they are deferred. Because of this lack of
clarity, it is imperative that you consult your tax adviser for guidance
regarding taxation.
Taxation of the Company
We are taxed as a life insurance company under the Tax Code. Variable Annuity
Account B is not a separate entity from us. Therefore, it is not taxed
separately as a "regulated investment company," but is taxed as part of the
Company.
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<PAGE>
We automatically apply investment income and capital gains attributable to the
separate account to increase reserves under the contracts. Because of this,
under existing federal tax law we believe that any such income and gains will
not be taxed to the extent that such income and gains are applied to increase
reserves under the contracts. In addition, any foreign tax credits attributable
to the separate account will be first used to reduce any income taxes imposed
on the separate account before being used by the Company.
In summary, we do not expect that we will incur any federal income tax
liability attributable to the separate account and we do not intend to make any
provision for such taxes. However, changes in federal tax laws and/or their
interpretation may result in our being taxed on income or gains attributable to
the separate account. In this case, we may impose a charge against the separate
account (with respect to some or all of the contracts) to set aside provisions
to pay such taxes. We may deduct this amount from the separate account,
including from your account value invested in the subaccounts.
Other Topics
- --------------------------------------------------------------------------------
The Company
Aetna Life Insurance and Annuity Company (the Company, we) issues the contracts
described in this prospectus and is responsible for providing each contract's
insurance and annuity benefits.
We are a stock life insurance company organized under the insurance laws of the
State of Connecticut in 1976 and an indirect wholly-owned subsidiary of Aetna
Inc. Through a merger, our operations include the business of Aetna Variable
Annuity Life Insurance Company (formerly known as Participating Annuity Life
Insurance Company, an Arkansas life insurance company organized in 1954).
We are engaged in the business of issuing life insurance and annuities. Our
principal executive offices are located at:
151 Farmington Avenue
Hartford Connecticut 06156
Variable Annuity Account B
We established Variable Annuity Account B (the separate account) in 1976 as a
segregated asset account to fund our variable annuity contracts. The separate
account is registered as a unit investment trust under the Investment Company
Act of 1940 (the "40 Act"). It also meets the definition of "separate account"
under the federal securities laws.
The separate account is divided into "subaccounts." These subaccounts invest
directly in shares of a pre-assigned fund.
Although we hold title to the assets of the separate account, such assets are
not chargeable with the liabilities of any other business that we conduct.
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.
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<PAGE>
Performance Reporting
We may advertise different types of historical performance for the subaccounts
including:
> standardized average annual total returns
> non-standardized average annual total returns
We may also advertise certain ratings, rankings or other information related to
the Company, the subaccounts or the funds. For further details regarding
performance reporting and advertising request a Statement of Additional
Information at the number listed in "Contract Overview--Questions."
Standardized Average Annual Total Returns. We calculate standardized average
annual total returns according to a formula prescribed by the SEC. This shows
the percentage return applicable to $1,000 invested in the subaccount over the
most recent one, five and 10-year periods. If the investment option was not
available for the full period, we give a history from the date money was first
received in that option under the separate account. We include all recurring
charges during each period (e.g., mortality and expense risk charges, annual
maintenance fees, administrative expense charges (if any) and any applicable
early withdrawal charges).
Non-Standardized Average Annual Total Returns. We calculate non-standardized
average annual total returns in a similar manner as that stated above, except
we do not include the deduction of any applicable early withdrawal charge. Some
non-standardized returns may also exclude the effect of a maintenance fee. If
we reflected these charges in the calculation, they would decrease the level of
performance reflected by the calculation. Non-standardized returns may also
include performance from the Fund's inception date, if that date is earlier
than the one we use for standardized returns.
Voting Rights
Each of the subaccounts holds shares in a fund and each is entitled to vote at
regular and special meetings of that fund. Under our current view of applicable
law, we will vote the shares for each subaccount as instructed by persons
having a voting interest in the separate account. Under the contracts described
in this prospectus, the contract holder, not the plan participants, has all
voting rights. We will vote shares for which instructions have not been
received in the same proportion as those for which we received instructions.
Each person who has a voting interest in the separate account will receive
periodic reports relating to the funds in which he or she has an interest, as
well as any proxy materials and a form on which to give voting instructions.
Voting instructions will be solicited by a written communication at least 14
days before the meeting.
The number of votes (including fractional votes) the contract holder is
entitled to direct will be determined as of the record date set by any fund the
contract holder invests in through the subaccounts.
> During the accumulation phase, the number of votes is equal to the portion of
the account value invested in the fund, divided by the net asset value of one
share of that fund.
> During the income phase, the number of votes is equal to the portion of
reserves set aside for the contract's share of the fund, divided by the net
asset value of one share of that fund.
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<PAGE>
Contract Distribution
The Company will serve as the principal underwriter for the securities sold by
this prospectus. The Company is registered as a broker-dealer with the SEC and
is a member of the National Association of Securities Dealers, Inc.
As principal underwriter, the Company will enter into arrangements with one or
more registered broker-dealers, including at least one affiliate of the
Company, to offer and sell the contracts described in this prospectus. We call
these entities "distributors."
We and one or more of our affiliates may also sell the contracts directly. All
individuals offering and selling the contracts must be registered
representatives of a broker-dealer and must be licensed as insurance agents to
sell variable annuity contracts.
Commission Payments. We may pay commissions to persons who offer and sell the
contracts. The maximum percentage amount we ever pay with respect to a given
purchase payment is the first-year percentage which ranges from 1% to 6% of the
first year of payments to an account. We may also pay renewal commissions on
payments made after the first year and, under group contracts, asset-based
service fees. The average of all commissions and asset-based service fees paid
is estimated to equal approximately 3% of the total payments made over the life
of an average contract. Some sales personnel may receive various types of
non-cash compensation as special sales incentives, including trips and
educational and/or business seminars. However, any such compensation will be
paid in accordance with NASD rules. In addition, we may provide additional
compensation to the Company's supervisory and other management personnel if the
overall amount of investments in funds advised by the Company or its affiliates
increases over time.
We may reimburse the distributor for certain expenses. The name of the
distributor and the registered representative responsible for your account are
stated in your enrollment materials. Commissions and sales related expenses are
paid by us and are not deducted from payments to your account.
Third Party Compensation Arrangements. Occasionally, we may:
> Pay commissions and fees to distributors affiliated or associated with the
contract holder, you and/or other contract participants.
> Enter into agreements with entities associated with the contract holder, you
and/or other participants. Through such agreements, we may pay the entities
for certain services in connection with administering the contract.
In both these circumstances there may be an understanding that the distributor
or entities would endorse us as a provider of the contract. You will be
notified if you are purchasing a contract that is subject to these
arrangements.
Contract Modification
We may change the contract as required by federal or state law. In addition, we
may, upon 30 days' written notice to the contract holder, make other changes to
group contracts that would apply only to individuals who become participants
under that Contract after the effective date of such changes. If the group
contract holder does not agree to a change, we reserve the right to refuse to
establish new accounts under the contract. Certain changes will require the
approval of appropriate state or federal regulatory authorities.
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Legal Matters and Proceedings
We are aware of no material legal proceedings pending which involve the
separate account or the Company as 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.
Payment Delay or Suspension
We reserve the right to suspend or postpone the date of any payment of benefits
or values under the following circumstances: (a) on any valuation date when the
New York Stock Exchange is closed (except customary weekend and holiday
closings) when trading on the Exchange is restricted; b) when an emergency
exists as determined by the SEC so that disposal of the securities held in the
subaccounts is not reasonably practicable or it is not reasonably practicable
fairly to determine the value of the subaccount's assets; (c) during any other
periods 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.
Transfer of Ownership; Assignment
An assignment of a contract will only be binding on us if it is made in writing
and sent to us at our Home Office. We will use reasonable procedures to confirm
that the assignment is authentic, including verification of signature. If we
fail to follow our own procedures, we will be liable for any losses to you
directly resulting from the failure. Otherwise, we are not responsible for the
validity of any assignment. The rights of the contract holder and the interest
of the annuitant and any beneficiary will be subject to the rights of any
assignee we have on our records.
Year 2000 Readiness
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
mission-critical information technology (IT) systems and embedded systems Year
2000 ready. The plan for IT systems covers five stages including (i)
assessment, (ii) remediation, (iii) testing, (iv) implementation and (v) Year
2000 approval. At year end 1997, Aetna, including the Company, had
substantially completed the assessment stage. The remediation of mission-
critical IT systems was completed year end 1998. Testing of all
mission-critical IT systems is underway with Year 2000 approval 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, has initiated 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.
Aetna and the Company have assessed and are prioritizing responses in an
attempt to mitigate 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
35
<PAGE>
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.
36
<PAGE>
Contents of the Statement of Additional
Information
- --------------------------------------------------------------------------------
The Statement of Additional Information contains more specific information on
the separate account and the contract, as well as the financial statements of
the separate account and the Company. A list of the contents of the SAI is set
forth below:
General Information and History
Variable Annuity Account B
Offering and Purchase of Contracts
Performance Data
General
Average Annual Total Return Quotations
Income Phase Payments
Sales Material and Advertising
Independent Auditors
Financial Statements of the Separate Account
Financial Statements of Aetna Life Insurance and Annuity Company
You may request an SAI by calling the Company at the number listed in "Contract
Overview--Questions."
37
<PAGE>
Appendix I
Guaranteed Accumulation Account
- --------------------------------------------------------------------------------
The Guaranteed Accumulation Account (GAA) is a fixed interest option that may
be available during the accumulation phase under the contracts. This appendix
is only a summary of certain facts about GAA. Please read the GAA prospectus
before investing in this option.
In General. Amounts that you invest in GAA will earn a guaranteed interest rate
if amounts are left in GAA for the specified period of time. If you withdraw or
transfer those amounts before the specified period of time has elapsed, we may
apply a "market value adjustment," which may be positive or negative.
When you decide to invest money in GAA, you will want to contact your
representative or the Company to learn:
> The interest rate we will apply to the amounts that you invest in GAA.
We change this rate periodically, so be certain you know what rate we
guarantee on the day your account dollars are invested into GAA.
> The period of time your account dollars need to remain in GAA in order to earn
that rate.
You are required to leave your account dollars in GAA for a specified period
of time (guaranteed term), in order to earn the guaranteed interest rate.
Deposit Periods. A deposit period is the time during which we offer a specific
interest rate if you deposit dollars for a certain guaranteed term. For a
particular interest rate and guaranteed term to apply to your account dollars,
you must invest them during the deposit period during which that rate and term
are offered.
Interest Rates. We guarantee different interest rates, depending on when
account dollars are invested in GAA. The interest rate we guarantee is an
annual effective yield; that means that the rate reflects a full year's
interest. We credit interest daily at a rate that will provide the guaranteed
annual effective yield over one year. The guaranteed interest rate will never
be less than the rate stated in the contract.
Fees and Other Deductions. If all or a portion of your account value in GAA is
withdrawn, you may incur the following:
> Market Value Adjustment (MVA)--as described in this appendix and in the GAA
prospectus
> Tax Penalties and/or Tax withholding--see "Taxation"
> Early Withdrawal Charge--see "Fees"
> Maintenance Fee--see "Fees"
We do not make deductions from amounts in the GAA to cover mortality and
expense risks. Rather, we consider these risks when determining the credited
rate.
Market Value Adjustment (MVA). If you withdraw or transfer your account value
from GAA before the guaranteed term is completed, an MVA may apply. The MVA
reflects the change in the value of the investment due to changes in interest
rates since the date of deposit. The MVA may be positive or negative.
> If interest rates at the time of withdrawal have increased since the date of
deposit, the value of the investment decreases and the MVA will be negative.
This could result in your receiving less than the amount you paid into GAA.
> If interest rates at the time of withdrawal have decreased since the date of
deposit, the value of the investment increases and the MVA will be positive.
Guaranteed Terms. The guaranteed term is the period of time account dollars
must be left in GAA in order to earn the guaranteed interest rate specified
for that guaranteed term. We offer different guaranteed terms at different
times. Check with your representative or the Company to learn the details about
the guaranteed term(s) currently being offered.
38
<PAGE>
In general we offer the following guaranteed terms:
> Short-term--three years or fewer
> Long-term--ten years or less, but greater than three years
At the end of a guaranteed term, your contract holder or you if permitted may:
> Transfer dollars to a new guaranteed term
> Transfer dollars to other available investment options
> Withdraw dollars
Deductions may apply to withdrawals. See "Fees and Other Deductions" in this
section.
Transfer of Account Dollars. Generally, account dollars invested in GAA may be
transferred among guaranteed terms offered through GAA, and/or to other
investment options offered through the contract. However, transfers may not be
made during the deposit period in which your account dollars are invested in
GAA or for 90 days after the close of that deposit period. We will apply an MVA
to transfers made before the end of a guaranteed term.
Income Phase. GAA can not be used as an investment option during the income
phase. However, the contract holder (or you, if permitted) may notify us at
least 30 days in advance to elect a variable payment option and to transfer
your GAA account dollars to any of the subaccounts available during the income
phase.
39
<PAGE>
Appendix II
Fixed Account
- --------------------------------------------------------------------------------
The Fixed Account is an investment option available during the accumulation
phase under the contracts. Amounts allocated to the Fixed Account are held in
the Company's general account which supports insurance and annuity obligations.
- --------------------------------------------------------------------------------
Additional information about this option may be found in the contract.
- --------------------------------------------------------------------------------
General Disclosure. Interests in the Fixed Account have not been registered
with the SEC in reliance on exemptions under the Securities Act of 1933, as
amended. Disclosure in this prospectus about the Fixed Account may be subject
to certain generally applicable provisions of the federal securities laws
relating to the accuracy and completeness of the statements. Disclosure in this
Appendix regarding the Fixed Account has not been reviewed by the SEC.
Interest Rates. The Fixed Account guarantees that amounts allocated to this
option will earn the minimum interest rate specified in the contract. We may
credit a higher interest rate from time to time, but the rate we credit will
never fall below the guaranteed minimum specified in the contract. Amounts
applied to the Fixed Account will earn the interest rate in effect at the time
money is applied. Amounts in the Fixed Account will reflect a compound interest
rate as credited by us. The rate we quote is an annual effective yield.
Our determination of interest rates reflects the investment income earned on
invested assets and the amortization of any capital gains and/or losses
realized on the sale of invested assets. Under this option, we assume the risk
of investment gain or loss by guaranteeing the amounts you allocate to this
option and promising a minimum interest rate and income phase payment.
Withdrawals. Under certain emergency conditions, we may defer payment of any
withdrawal for a period of up to 6 months or as provided by federal law.
Additionally, if allowed by state law, we may pay withdrawals in equal payments
with interest, over a period not to exceed 60 months when:
(a) the Fixed Account withdrawal value for the contract or for the total of the
accounts under the contract exceeds $250,000 on the day before withdrawal;
and
(b) the sum of the current Fixed Account withdrawal and total of all Fixed
Account withdrawals from the contract or any account under the contract
within the past 12 calendar months exceeds 20% of the amount in the Fixed
Account on the day before current withdrawal.
The contract describes how we will determine the interest rate credited to
amounts held in the Fixed Account during the payment period, including the
minimum interest rate.
Charges. We do not make deductions from amounts in the Fixed Account to cover
mortality and expense risks. We consider these risks when determining the
credited rate. If you make a withdrawal from amounts in the Fixed Account, an
early withdrawal charge may apply. (See "Fees--Early Withdrawal Charge.")
Transfers. During the accumulation phase, you may transfer account dollars from
the Fixed Account to any other available investment option. We may vary the
dollar amount that you are allowed to transfer, but it will never be less than
10% of your account value held in the Fixed Account. This 10% limit does not
apply to amounts being transferred into the Fixed Plus Account (if available
under the contract).
By notifying our Home Office at least 30 days before income phase payments
begin, you may elect to have amounts transferred to one or more of the
subaccounts available during the income phase to provide variable payments.
40
<PAGE>
Appendix III
Fixed Plus Account
- --------------------------------------------------------------------------------
The Fixed Plus Account is an investment option available under some contracts.
Amounts allocated to the Fixed Plus Account are held in the Company's general
account which supports insurance and annuity obligations. We reserve the right
to limit investment in or transfers to the Fixed Plus Account.
- -------------------------------------------------------------------------------
Additional information about this option may be found in the contract.
- -------------------------------------------------------------------------------
General Disclosure. Interests in the Fixed Plus Account have not been
registered with the SEC in reliance on exemptions under the Securities Act of
1933, as amended. Disclosure in this prospectus about the Fixed Plus Account
may be subject to certain generally applicable provisions of the federal
securities laws relating to the accuracy and completeness of the statements.
Disclosure in this Appendix regarding the Fixed Plus Account has not been
reviewed by the SEC.
Interest Rates. The Fixed Plus Account guarantees that amounts allocated to
this option will earn the minimum interest rate specified in the contract. We
may credit a higher interest rate from time to time, but the rate we credit
will never fall below the guaranteed minimum specified in the contract. We
credit amounts held in the Fixed Plus Account with a rate 0.25% higher than the
then-declared rate beginning in the tenth year after your account was
established. Amounts applied to the Fixed Plus Account will earn the interest
rate in effect at the time money is applied. Amounts in the Fixed Plus Account
will reflect a compound interest rate as credited by us. The rate we quote is
an annual effective yield. We do not make deductions from amounts in the Fixed
Plus Account to cover mortality and expense risks. We consider these risks in
determining the credited rate.
Our determination of interest rates reflects the investment income earned on
invested assets and the amortization of any capital gains and/or losses
realized on the sale of invested assets. Under this option, we assume the risk
of investment gain or loss by guaranteeing the amounts you allocate to this
option and promising a minimum interest rate and income phase payment.
Partial Withdrawal. Partial withdrawals are limited to 20% of the amount held
in the Fixed Plus Account on the day we receive a request in good order at our
Home Office. The 20% is reduced by any Fixed Plus withdrawals, transfers or
income phase payments made in last 12 months. In calculating 20% limit, we
reserve the right to include payments made through a Systematic Distribution
Option.
The 20% limit is waived if a partial withdrawal is taken proportionally from
each investment option in which the account invests and is due to one or more
of the following:
> Election of any income phase payment option with fixed payments or a lifetime
payment option with variable payments
> Due to your death (the withdrawal must occur within six months after death and
can only be exercised once).
Full Withdrawal. Full withdrawals are paid, with interest, in five annual
payments equal to:
> One-fifth of the Fixed Plus Account value on the day we receive the request,
reduced by any Fixed Plus Account withdrawals, loans, transfers or income
phase payments made during the past 12 months
> One-fourth of the remaining Fixed Plus Account value 12 months later
> One-third of the remaining Fixed Plus Account value 12 months later
> One-half of the remaining Fixed Plus Account value 12 months later, and
> The balance of the Fixed Plus Account value 12 months later
A full withdrawal may be canceled at any time before the end of the
five-payment period.
Once we receive a request for full withdrawal, no further withdrawals or
transfers will be permitted from Fixed Plus Account.
41
<PAGE>
We will waive the above full withdrawal five-payment period if full withdrawal
is made due to any of the following:
> Your death before income phase payments have begun (request must be received
within 6 months after date of death)
> Election of any income phase payment option with fixed payments or a lifetime
payment option with variable payments
> Your account value in the Fixed Plus Account value is $3,500 or less and no
withdrawals, transfers or income phase payments have been made from your
account within the past 12 months
Transfers. Transfers are limited to 20% of the amount held in the Fixed Plus
Account on the day a request in good order is received at our Home Office. The
20% is reduced by any Fixed Plus Account withdrawals, transfers or income phase
payments made in past 12 months. We reserve the right to include payments made
through a Systematic Distribution Option in calculating the 20% limit. The 20%
limit will be waived if your account value in Fixed Plus Account is $1,000 or
less.
Income Phase. Amounts accumulating under the Fixed Plus Account can be
transferred to the subaccounts to fund variable lifetime income options during
the income phase. However, Fixed Plus Account values may not be used to fund
nonlifetime income options with variable payments.
Systematic Withdrawal Option (SWO). SWO described in "Systematic Distribution
Options," may not be elected if you have requested a Fixed Plus Account
transfer or withdrawal within the past 12 months.
42
<PAGE>
Appendix IV
Fund Descriptions
- --------------------------------------------------------------------------------
The investment results of the mutual funds (funds) are likely to differ
significantly and there is no assurance that any of the funds will achieve their
respective investment objectives. Shares of the funds will rise and fall in
value and you could lose money by investing in the funds. Shares of the funds
are not bank deposits and are not guaranteed, endorsed or insured by any
financial institution, the Federal Deposit Insurance Corporation or any other
government agency. Except as noted, all funds are diversified, as defined under
the Investment Company Act of 1940.
> Aetna Balanced VP, 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)
> 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. It is anticipated that
capital appreciation and investment income will both be major factors in
achieving total return.(1)
> 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. It is anticipated that capital
appreciation and investment income will both be major factors in achieving
total return.(1)
> 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)
> Aetna Generation Portfolios, Inc.--Aetna Ascent VP seeks to provide capital
appreciation. The Portfolio is designed for investors who generally have an
investment horizon exceeding 15 years and who have a high level of risk
tolerance.(1)
> Aetna Generation Portfolios, Inc.--Aetna Crossroads VP seeks to provide total
return (i.e., income and capital appreciation, both realized and unrealized).
The Portfolio is designed for investors who generally have an investment
horizon exceeding 10 years and who have a moderate level of risk tolerance.(1)
> Aetna Generation Portfolios, Inc.--Aetna Legacy VP seeks to provide total
return consistent with preservation of capital. The Portfolio is designed for
investors who generally have an investment horizon exceeding five years and
who have a low level of risk tolerance.(1)
> Aetna Variable Portfolios, Inc.--Aetna Growth VP 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)
> Aetna Variable Portfolios, Inc.--Aetna High Yield VP seeks high current income
and growth of capital primarily through investment in a diversified portfolio
of fixed-income securities rated lower than BBB- by Standard and Poor's
Corporation or lower than Baa3 by Moody's Investors Service, Inc.(1)
> Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP seeks to
outperform the total return performance of the Standard & Poor's 500 Composite
Index (S&P 500), while maintaining a market level of risk.(1)
> Aetna Variable Portfolios, Inc.--Aetna Index Plus Mid Cap VP seeks to
outperform the total return performance of the Standard & Poor's MidCap 400
Index (S&P 400), while maintaining a market level of risk.(1)
> Aetna Variable Portfolios, Inc.--Aetna Index Plus Small Cap VP seeks to
outperform the total return performance of the Standard & Poor's SmallCap 600
Index (S&P 600), while maintaining a market level of risk.(1)
> 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 U.S. Aetna
International VP will not target any given level of current income.(1)
> 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)
43
<PAGE>
> Aetna Variable Portfolios, Inc.--Aetna Small Company VP 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)
> Aetna Variable Portfolios, Inc.--Aetna Value Opportunity VP seeks growth of
capital primarily through investment in a diversified portfolio of common
stocks and securities convertible into common stocks.(1)(a)
> AIM V.I. Capital Appreciation Fund seeks growth of capital through investment
in common stocks, with emphasis on medium- and small-sized growth
companies.(2)
> AIM V.I. Growth Fund seeks growth of capital primarily by investing in
seasoned and better capitalized companies considered to have strong earnings
momentum.(2)
> AIM V.I. Growth and Income Fund seeks growth of capital with a secondary
objective of current income. (2)
> AIM V.I. Value Fund seeks to achieve long-term growth of capital by investing
primarily in equity securities judged by the fund's investment advisor to be
undervalued relative to the investment advisor's appraisal of the current or
projected earnings of the companies issuing the securities, or relative to
current market values of assets owned by the companies issuing the securities
or relative to the equity market generally. Income is a secondary
objective.(2)
> Calvert Social Balanced Portfolio is a nondiversified portfolio that seeks to
achieve a competitive total return through an actively managed, nondiversified
portfolio of stocks, bonds, and money market instruments which offer income
and capital growth opportunity and which satisfy the investment and social
criteria established for the Portfolio.(3)
> Fidelity Variable Insurance Products Fund--Equity-Income Portfolio seeks
reasonable income. The fund will also consider the potential for capital
appreciation. The fund seeks a yield which exceeds the composite yield on the
securities comprising the S&P 500.(4)
> Fidelity Variable Insurance Products Fund--Growth Portfolio seeks capital
appreciation by investing primarily in common stocks of companies the
investment adviser believes have above-average growth potential.(4)
> Fidelity Variable Insurance Products Fund--Overseas Portfolio seeks long-term
growth of capital by investing in foreign securities, primarily in common
stocks.(4)
> Fidelity Variable Insurance Products Fund II--Contrafund Portfolio seeks long
term capital appreciation by investing primarily in common stocks of companies
whose value the investment adviser believes is not fully recognized by the
public.(4)
> Janus Aspen Series--Aggressive Growth Portfolio is a nondiversified portfolio
that seeks long-term growth of capital. The Portfolio pursues its investment
objective by investing primarily in common stocks selected for their growth
potential, and normally invests at least 50% of its equity assets in
medium-sized companies. Medium-sized companies are those whose market
capitalizations at the time of investment fall within the range of companies
in the S&P MidCap 400 Index. Market capitalization is a commonly used measure
of the size and value of a company. The market capitalizations within the
Index will vary, but as of December 31, 1998, they ranged from approximately
$142 million to $73 billion.(5)
> Janus Aspen Series--Balanced Portfolio seeks long-term capital growth,
consistent with preservation of capital and balanced by current income. The
Portfolio pursues its investment objective by normally investing 40%-60% of
its assets in securities selected primarily for their growth potential and
40%-60% of its assets in securities selected primarily for their income
potential. This Portfolio normally invests at least 25% of its assets in
fixed-income securities.(5)
> Janus Aspen Series--Flexible Income Portfolio seeks to obtain maximum total
return, consistent with preservation of capital. The Portfolio pursues its
investment objective by primarily investing in a wide variety of
income-producing securities such as corporate bonds and notes, government
securities and preferred stock. As a fundamental policy, the Portfolio will
invest at least 80% of its assets in income-producing securities. The
Portfolio may own an unlimited amount of high-yield/high-risk securities, and
these may be a big part of the portfolio. This Portfolio generates total
return from a combination of current income and capital appreciation, but
income is usually the dominant portion.(5)
> 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 selected
for their growth potential.
44
<PAGE>
Although the Portfolio can invest in companies of any size, it generally
invests in larger, more established issuers.(5)
> Janus Aspen Series--Worldwide 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
companies of any size throughout the world. The Portfolio normally invests in
issuers from at least five different countries, including the United States.
The Portfolio may at times invest in fewer than five countries or even a
single country.(5)
> Lexington Natural Resources Trust is a nondiversified portfolio that seeks
long-term growth of capital through investment primarily in common stocks of
companies which own or develop natural resources and other basic commodities
or supply goods and services to such companies.
Transfer or deposits are not allowed into the subaccount investing in this
fund, except from accounts established under the contract before May 1,
1998. As soon as all those who have current allocations to other
investment options, we will close the subaccount to all investments.(6)
> Oppenheimer Global Securities Fund/VA seeks long-term capital appreciation by
investing a substantial portion of its assets in securities of foreign
issuers, "growth-type" companies, cyclical industries and special situations
which are considered to have appreciation possibilities.(7)
> Oppenheimer Strategic Bond Fund/VA 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.(7)
> Portfolio Partners, Inc.--MFS Emerging Equities Portfolio seeks long-term
growth of capital.(8)(a)
> Portfolio Partners, Inc.--MFS Research Growth Portfolio seeks long-term growth
of capital and future income.(8)(a)
> Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation.(8)(a)
> Portfolio Partners, Inc.--Scudder International Growth Portfolio seeks
long-term growth of capital.(8)(b)
> Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term capital growth, and, secondarily, increasing dividend income.(8)(c)
Investment Advisers for each of the funds:
(1) Aeltus Investment Management, Inc. (adviser)
(2) AIM Advisors, Inc.
(3) Calvert Asset Management Company, Inc.
(4) Fidelity Management & Research Company (adviser)
(5) Janus Capital Corporation
(6) Lexington Management Corporation (adviser);
Market Systems Research Advisors, Inc. (subadviser)
(7) OppenheimerFunds, Inc.
(8) 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)
45
<PAGE>
Appendix V
Condensed Financial Information
- --------------------------------------------------------------------------------
TABLE I
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 0.75%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
The condensed financial information presented below for each of the years in the
ten-year period ended December 31, 1998 (as applicable), is derived from the
financial statements of the separate account, which have been audited by KPMG
LLP, independent auditors. The financial statements and the independent
auditors' report thereon for the year ended December 31, 1998 are included in
the Statement of Additional Information. The accumulation unit values reflect a
mortality and expense risk charge of 1.25% until February 23, 1996, when the
mortality and expense risk charge was reduced to 0.75% during the accumulation
phase. It will increase to 1.25% during the income phase.
<TABLE>
<CAPTION>
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
AETNA ASCENT VP
Value at beginning of period $ 15.535 $ 13.055 $ 10.652 $ 10.000(1)
Value at end of period $ 16.082 $ 15.535 $ 13.055 $ 10.652
Number of accumulation units
outstanding at end of period 104,608 90,134 35,959 16,791
AETNA BALANCED VP, INC
Value at beginning of period $ 19.166 $ 15.765 $ 13.803 $ 10.971
Value at end of period $ 22.244 $ 19.166 $ 15.765 $ 13.803
Number of accumulation units
outstanding at end of period 1,798,425 1,970,116 2,141,189 6,430,772
AETNA BOND VP
Value at beginning of period $ 13.486 $ 12.546 $ 12.212 $ 10.457
Value at end of period $ 14.475 $ 13.486 $ 12.546 $ 12.212
Number of accumulation units
outstanding at end of period 2,012,308 1,921,538 2,206,334 4,853,662
AETNA CROSSROADS VP
Value at beginning of period $ 14.566 $ 12.483 $ 10.594 $ 10.000(1)
Value at end of period $ 15.312 $ 14.566 $ 12.483 $ 10.594
Number of accumulation units
outstanding at end of period 119,246 100,256 26,260 16,953
AETNA GROWTH VP
Value at beginning of period $ 13.239(5)
Value at end of period $ 18.067
Number of accumulation units
outstanding at end of period 428,697
AETNA GROWTH AND
INCOME VP
Value at beginning of period $ 22.233 $ 17.246 $ 13.972 $ 10.698
Value at end of period $ 25.265 $ 22.233 $ 17.246 $ 13.972
Number of accumulation units
outstanding at end of period 12,975,484 14,879,862 14,930,380 30,554,957
AETNA HIGH YIELD VP
Value at beginning of period $ 9.941(7)
Value at end of period $ 9.244
Number of accumulation units
outstanding at end of period 24,320
AETNA INDEX PLUS LARGE
CAP VP
Value at beginning of period $ 14.538 $ 10.940 $ 10.000(8)
Value at end of period $ 18.989 $ 14.538 $ 10.940
Number of accumulation units
outstanding at end of period 1,060,363 485,417 72,973
AETNA INDEX PLUS MID
CAP VP
Value at beginning of period $ 9.950(9)
Value at end of period $ 10.928
Number of accumulation units
outstanding at end of period 16,207
AETNA INDEX PLUS SMALL
CAP VP
Value at beginning of period $ 9.407(7)
Value at end of period $ 8.846
Number of accumulation units
outstanding at end of period 53,460
<CAPTION>
1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
AETNA ASCENT VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA BALANCED VP, INC
Value at beginning of period $ 11.164 $10.286 $ 12.717(2) $ 10.882 $10.423 $ 10.000(3)
Value at end of period $ 10.971 $11.164 $ 10.286 $ 12.717 $10.882 $ 10.423
Number of accumulation units
outstanding at end of period 3,541,703 318,711 6,537 1,324,822 984,798 639,219
AETNA BOND VP
Value at beginning of period $ 11.006 $10.160 $ 37.815(4) $ 32.066 $29.752 $ 26.291
Value at end of period $ 10.457 $11.006 $ 10.160 $ 37.815 $32.066 $ 29.752
Number of accumulation units
outstanding at end of period 1,988,960 166,913 4,196 427,893 358,454 366,176
AETNA CROSSROADS VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA GROWTH VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA GROWTH AND
INCOME VP
Value at beginning of period $ 10.940 $10.378 $ 84.249(6) $ 67.496 $66.174 $ 51.900
Value at end of period $ 10.698 $10.940 $ 10.378 $ 84.249 $67.496 $ 66.174
Number of accumulation units
outstanding at end of period 11,117,383 879,670 3,107 908,777 810,126 831,547
AETNA HIGH YIELD VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA INDEX PLUS LARGE
CAP VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA INDEX PLUS MID
CAP VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA INDEX PLUS SMALL
CAP VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
</TABLE>
46
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
AETNA INTERNATIONAL VP
Value at beginning of period $ 10.288(7)
Value at end of period $ 9.798
Number of accumulation units
outstanding at end of period 29,000
AETNA LEGACY VP
Value at beginning of period $ 13.441 $ 11.826 $ 10.443 $ 10.000(10)
Value at end of period $ 14.266 $ 13.441 $ 11.826 $ 10.443
Number of accumulation units
outstanding at end of period 120,312 54,849 7,510 2,222
AETNA MONEY MARKET VP
Value at beginning of period $ 12.041 $ 11.502 $ 11.007 $ 10.509
Value at end of period $ 12.604 $ 12.041 $ 11.502 $ 11.007
Number of accumulation units
outstanding at end of period 2,102,275 2,066,545 2,421,519 4,354,272
AETNA REAL ESTATE
SECURITIES VP
Value at beginning of period $ 9.678(7)
Value at end of period $ 8.903
Number of accumulation units
outstanding at end of period 23,760
AETNA SMALL
COMPANY VP
Value at beginning of period $ 13.704 $ 13.211(12)
Value at end of period $ 13.751 $ 13.704
Number of accumulation units
outstanding at end of period 90,092 2,408
AETNA VALUE
OPPORTUNITY VP
Value at beginning of period $ 12.632(5)
Value at end of period $ 16.169
Number of accumulation units
outstanding at end of period 91,722
CALVERT SOCIAL
BALANCED PORTFOLIO
Value at beginning of period $ 17.944 $ 15.056 $ 13.480 $ 10.518
Value at end of period $ 20.708 $ 17.944 $ 15.056 $ 13.480
Number of accumulation units
outstanding at end of period 35,544 31,512 33,352 25,730
FIDELITY VIP
EQUITY INCOME
PORTFOLIO
Value at beginning of period $ 15.930 $ 12.529 $ 11.054 $ 10.000(1)
Value at end of period $ 17.650 $ 15.930 $ 12.529 $ 11.054
Number of accumulation units
outstanding at end of period 630,682 744,774 544,657 294,244
FIDELITY VIP GROWTH
PORTFOLIO
Value at beginning of period $ 14.034 $ 11.451 $ 10.066 $ 10.000(1)
Value at end of period $ 19.430 $ 14.034 $ 11.451 $ 10.066
Number of accumulation units
outstanding at end of period 595,859 444,057 379,385 288,576
FIDELITY VIP OVERSEAS
PORTFOLIO
Value at beginning of period $ 12.496 $ 11.286 $ 10.052 $ 10.000(1)
Value at end of period $ 13.984 $ 12.496 $ 11.286 $ 10.052
Number of accumulation units
outstanding at end of period 141,714 102,509 70,271 33,813
FIDELITY VIP II
CONTRAFUND PORTFOLIO
Value at beginning of period $ 15.517 $ 12.593 $ 10.468 $ 10.000(1)
Value at end of period $ 20.018 $ 15.517 $ 12.593 $ 10.468
Number of accumulation units
outstanding at end of period 779,942 710,711 569,561 379,862
JANUS ASPEN AGGRESSIVE
GROWTH PORTFOLIO
Value at beginning of period $ 15.554 $ 13.909 $ 12.992 $ 10.319
Value at end of period $ 20.726 $ 15.554 $ 13.909 $ 12.992
Number of accumulation units
outstanding at end of period 459,710 427,692 433,363 723,839
JANUS ASPEN BALANCED
PORTFOLIO
Value at beginning of period $ 15.130 $ 12.484 $ 10.835 $ 10.000(1)
Value at end of period $ 20.165 $ 15.130 $ 12.484 $ 10.835
Number of accumulation units
outstanding at end of period 241,070 152,646 111,525 7,772
<CAPTION>
1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
AETNA INTERNATIONAL VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA LEGACY VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA MONEY MARKET VP
Value at beginning of period $ 10.223 $10.031 $ 34.122(11) $32.431 $30.285 $28.029
Value at end of period $ 10.509 $10.223 $ 10.031 $34.122 $32.431 $30.285
Number of accumulation units
outstanding at end of period 1,822,449 90,782 2,808 548,425 722,438 653,619
AETNA REAL ESTATE
SECURITIES VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA SMALL
COMPANY VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA VALUE
OPPORTUNITY VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
CALVERT SOCIAL
BALANCED PORTFOLIO
Value at beginning of period $ 11.010 $10.296 $ 10.000(13)
Value at end of period $ 10.518 $11.010 $ 10.296
Number of accumulation units
outstanding at end of period 752 1,383 82
FIDELITY VIP
EQUITY INCOME
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
FIDELITY VIP GROWTH
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
FIDELITY VIP OVERSEAS
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
FIDELITY VIP II
CONTRAFUND PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
JANUS ASPEN AGGRESSIVE
GROWTH PORTFOLIO
Value at beginning of period $ 10.000(14)
Value at end of period $ 10.319
Number of accumulation units
outstanding at end of period 131,702
JANUS ASPEN BALANCED
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
</TABLE>
47
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
JANUS ASPEN FLEXIBLE
INCOME PORTFOLIO
Value at beginning of period $ 14.527 $ 13.096 $ 12.094 $ 9.886
Value at end of period $ 15.731 $ 14.527 $ 13.096 $ 12.094
Number of accumulation units
outstanding at end of period 199,467 97,715 73,340 84,048
JANUS ASPEN GROWTH
PORTFOLIO
Value at beginning of period $ 15.558 $ 12.770 $ 10.870 $ 10.000(1)
Value at end of period $ 20.948 $ 15.558 $ 12.770 $ 10.870
Number of accumulation units
outstanding at end of period 244,107 197,548 144,443 26,022
JANUS ASPEN WORLDWIDE
GROWTH PORTFOLIO
Value at beginning of period $ 16.901 $ 13.940 $ 10.893 $ 10.000(1)
Value at end of period $ 21.626 $ 16.901 $ 13.940 $ 10.893
Number of accumulation units
outstanding at end of period 1,346,457 1,273,110 803,488 227,582
LEXINGTON NATURAL
RESOURCES TRUST
Value at beginning of period $ 14.025 $ 13.188 $ 10.479 $ 9.079
Value at end of period $ 11.189 $ 14.025 $ 13.188 $ 10.479
Number of accumulation units
outstanding at end of period 92,175 106,926 73,699 162,462
OPPENHEIMER GLOBAL
SECURITIES FUND/VA
Value at beginning of period $ 10.004(9)
Value at end of period $ 10.053
Number of accumulation units
outstanding at end of period 9,360
OPPENHEIMER STRATEGIC
BOND FUND/VA
Value at beginning of period $ 10.098(9)
Value at end of period $ 9.929
Number of accumulation units
outstanding at end of period 625
PORTFOLIO PARTNERS
MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $ 15.361 $ 15.547(12)
Value at end of period $ 19.769 $ 15.361
Number of accumulation units
outstanding at end of period 562,097 598,078
PORTFOLIO PARTNERS
MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $ 12.863 $ 13.110(12)
Value at end of period $ 15.703 $ 12.863
Number of accumulation units
outstanding at end of period 428,785 462,383
PORTFOLIO PARTNERS
MFS VALUE EQUITY
PORTFOLIO
Value at beginning of period $ 21.541 $ 21.225(12)
Value at end of period $ 27.097 $ 21.541
Number of accumulation units
outstanding at end of period 167,065 164,474
PORTFOLIO PARTNERS
SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $ 18.070 $ 17.838(12)
Value at end of period $ 21.359 $ 18.070
Number of accumulation units
outstanding at end of period 257,953 280,633
PORTFOLIO PARTNERS T.
ROWE PRICE GROWTH
EQUITY PORTFOLIO
Value at beginning of period $ 14.534 $ 14.237(12)
Value at end of period $ 18.407 $ 14.534
Number of accumulation units
outstanding at end of period 335,510 360,615
<CAPTION>
1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
JANUS ASPEN FLEXIBLE
INCOME PORTFOLIO
Value at beginning of period $ 10.000(14)
Value at end of period $ 9.886
Number of accumulation units
outstanding at end of period 15,893
JANUS ASPEN GROWTH
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
JANUS ASPEN WORLDWIDE
GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
LEXINGTON NATURAL
RESOURCES TRUST
Value at beginning of period $ 9.716 $ 10.000(15)
Value at end of period $ 9.079 $ 9.716
Number of accumulation units
outstanding at end of period 141,076 27,908
OPPENHEIMER GLOBAL
SECURITIES FUND/VA
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
OPPENHEIMER STRATEGIC
BOND FUND/VA
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS
MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS
MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS
MFS VALUE EQUITY
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS
SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS T.
ROWE PRICE GROWTH
EQUITY PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
</TABLE>
- -----------------
(1) The initial accumulation unit value was established at $10.000 during
August 1995, when the fund became available under the contract.
(2) The accumulation unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the accumulation unit value of the fund was $12.991. On the
date of conversion, additional units were issued so that account values
were not changed as a result of the conversion.
48
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
(3) The initial accumulation unit value was established at $10.000 on June 23,
1989, the date on which the fund commenced operations.
(4) The accumulation unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the accumulation unit value of the fund was $39.496. On the
date of conversion, additional units were issued so that account values
were not changed as a result of the conversion.
(5) Funds were first received in this option during January 1998.
(6) The accumulation unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the accumulation unit value of the fund was $85.546. On the
date of conversion, additional units were issued so that account values
were not changed as a result of the conversion.
(7) Funds were first received in this option during June 1998.
(8) The initial accumulation unit value was established at $10.000 during
September 1996 when the portfolio became available under the contract.
(9) Funds were first received in this option during July 1998.
(10) The initial accumulation unit value was established at $10.000 during
September 1995, when the fund became available under the contract.
(11) The accumulation unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the accumulation unit value of the fund was $34.828. On the
date of conversion, additional units were issued so that account values
were not changed as a result of the conversion.
(12) Funds were first received in this option during November 1997.
(13) The initial accumulation unit value was established at $10.000 on November
2, 1992, the date on which the fund/portfolio became available under the
contract.
(14) The initial accumulation unit value was established at $10.000 during
October 1994, when the funds were first received in this option.
(15) The initial accumulation unit value was established at $10.000 on May 26,
1993, the date on which the fund became available under the contract.
49
<PAGE>
Condensed Financial Information
- --------------------------------------------------------------------------------
TABLE II
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.25%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
The condensed financial information presented below for each of the periods in
the ten-year period ended December 31, 1998 (as applicable), is derived from
the financial statements of the separate account, which have been audited by
KPMG LLP, independent auditors. The financial statements and the independent
auditors' report thereon for the year ended December 31, 1998 are included in
the Statement of Additional Information.
<TABLE>
<CAPTION>
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
AETNA ASCENT VP
Value at beginning of period $ 15.392 $ 12.999 $ 10.652 $ 10.000(1)
Value at end of period $ 15.855 $ 15.392 $ 12.999 $ 10.652
Number of accumulation units
outstanding at end of period 274,115 317,579 99,589 16,791
AETNA BALANCED VP, INC
Value at beginning of period $ 18.989 $ 15.698 $ 13.803 $ 10.971
Value at end of period $ 21.929 $ 18.989 $ 15.698 $ 13.803
Number of accumulation units
outstanding at end of period 2,929,720 3,174,738 3,885,730 6,430,772
AETNA BOND VP
Value at beginning of period $ 13.361 $ 12.493 $ 12.212 $ 10.457
Value at end of period $ 14.270 $ 13.361 $ 12.493 $ 12.212
Number of accumulation units
outstanding at end of period 1,129,589 1,168,988 1,947,629 4,853,662
AETNA CROSSROADS VP
Value at beginning of period $ 14.432 $ 12.430 $ 10.594 $ 10.000(1)
Value at end of period $ 15.095 $ 14.432 $ 12.430 $ 10.594
Number of accumulation units
outstanding at end of period 218,649 175,559 74,128 16,953
AETNA GROWTH VP
Value at beginning of period $ 13.173 $ 14.437(5)
Value at end of period $ 17.912 $ 13.173
Number of accumulation units
outstanding at end of period 140,522 2,695
AETNA GROWTH AND
INCOME VP
Value at beginning of period $ 22.028 $ 17.173 $ 13.972 $ 10.698
Value at end of period $ 24.907 $ 22.028 $ 17.173 $ 13.972
Number of accumulation units
outstanding at end of period 9,491,619 10,689,845 15,372,944 30,554,957
AETNA HIGH YIELD VP
Value at beginning of period $ 9.954(7)
Value at end of period $ 9.212
Number of accumulation units
outstanding at end of period 605
AETNA INDEX PLUS LARGE
CAP VP
Value at beginning of period $ 14.444 $ 10.924 $ 10.000(8)
Value at end of period $ 18.772 $ 14.444 $ 10.924
Number of accumulation units
outstanding at end of period 527,155 266,429 89,498
AETNA INDEX PLUS MID
CAP VP
Value at beginning of period $ 10.107(7)
Value at end of period $ 10.891
Number of accumulation units
outstanding at end of period 17,011
AETNA INDEX PLUS SMALL
CAP VP
Value at beginning of period $ 9.996(7)
Value at end of period $ 8.815
Number of accumulation units
outstanding at end of period 55,564
AETNA INTERNATIONAL VP
Value at beginning of period $ 10.149(7)
Value at end of period $ 9.765
Number of accumulation units
outstanding at end of period 35,872
AETNA LEGACY VP
Value at beginning of period $ 13.317 $ 11.776 $ 10.443 $ 10.000(1)
Value at end of period $ 14.064 $ 13.317 $ 11.776 $ 10.443
Number of accumulation units
outstanding at end of period 197,742 133,741 25,977 2,222
<CAPTION>
1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
AETNA ASCENT VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA BALANCED VP, INC
Value at beginning of period $ 11.164 $10.286 $ 12.717(2) $ 10.882 $10.423 $ 10.000(3)
Value at end of period $ 10.971 $11.164 $ 10.286 $ 12.717 $10.882 $ 10.423
Number of accumulation units
outstanding at end of period 3,541,703 318,711 6,537 1,324,822 984,798 639,219
AETNA BOND VP
Value at beginning of period $ 11.006 $10.160 $ 37.815(4) $ 32.066 $29.752 $ 26.291
Value at end of period $ 10.457 $11.006 $ 10.160 $ 37.815 $32.066 $ 29.752
Number of accumulation units
outstanding at end of period 1,988,960 166,913 4,196 427,893 358,454 366,176
AETNA CROSSROADS VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA GROWTH VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA GROWTH AND
INCOME VP
Value at beginning of period $ 10.940 $10.378 $ 84.249(6) $ 67.496 $66.174 $ 51.900
Value at end of period $ 10.698 $10.940 $ 10.378 $ 84.249 $67.496 $ 66.174
Number of accumulation units
outstanding at end of period 11,117,383 879,670 3,107 908,777 810,126 831,547
AETNA HIGH YIELD VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA INDEX PLUS LARGE
CAP VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA INDEX PLUS MID
CAP VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA INDEX PLUS SMALL
CAP VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA INTERNATIONAL VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA LEGACY VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
</TABLE>
50
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
AETNA MONEY MARKET VP
Value at beginning of period $ 11.930 $ 11.453 $ 11.007 $ 10.509
Value at end of period $ 12.425 $ 11.930 $ 11.453 $ 11.007
Number of accumulation units
outstanding at end of period 1,146,661 974,714 1,984,269 4,354,272
AETNA REAL ESTATE
SECURITIES VP
Value at beginning of period $ 10.095(7)
Value at end of period $ 8.873
Number of accumulation units
outstanding at end of period 17,926
AETNA SMALL
COMPANY VP
Value at beginning of period $ 13.654 $ 13.503(5)
Value at end of period $ 13.633 $ 13.654
Number of accumulation units
outstanding at end of period 91,992 17,392
AETNA VALUE
OPPORTUNITY VP
Value at beginning of period $ 13.261 $ 12.904(5)
Value at end of period $ 16.030 $ 13.261
Number of accumulation units
outstanding at end of period 60,870 6,194
CALVERT SOCIAL
BALANCED PORTFOLIO
Value at beginning of period $ 17.779 $ 14.992 $ 13.480 $ 10.518
Value at end of period $ 20.415 $ 17.779 $ 14.992 $ 13.480
Number of accumulation units
outstanding at end of period 8,742 20,122 6,303 25,730
FIDELITY VIP EQUITY-
INCOME PORTFOLIO
Value at beginning of period $ 15.784 $ 12.475 $ 11.054 $ 10.000(1)
Value at end of period $ 17.400 $ 15.784 $ 12.475 $ 11.054
Number of accumulation units
outstanding at end of period 298,921 328,562 208,072 294,244
FIDELITY VIP GROWTH
PORTFOLIO
Value at beginning of period $ 13.904 $ 11.402 $ 10.066 $ 10.000(1)
Value at end of period $ 19.155 $ 13.904 $ 11.402 $ 10.066
Number of accumulation units
outstanding at end of period 324,558 229,060 199,720 288,576
FIDELITY VIP OVERSEAS
PORTFOLIO
Value at beginning of period $ 12.381 $ 11.238 $ 10.052 $ 10.000(1)
Value at end of period $ 13.786 $ 12.381 $ 11.238 $ 10.052
Number of accumulation units
outstanding at end of period 54,226 51,781 38,994 33,813
FIDELITY VIP II
CONTRAFUND PORTFOLIO
Value at beginning of period $ 15.374 $ 12.540 $ 10.468 $ 10.000(1)
Value at end of period $ 19.735 $ 15.374 $ 12.540 $ 10.468
Number of accumulation units
outstanding at end of period 488,102 465,699 273,189 379,862
JANUS ASPEN AGGRESSIVE
GROWTH PORTFOLIO
Value at beginning of period $ 15.410 $ 13.850 $ 12.992 $ 10.319
Value at end of period $ 20.433 $ 15.410 $ 13.850 $ 12.992
Number of accumulation units
outstanding at end of period 512,154 469,230 590,904 723,839
JANUS ASPEN BALANCED
PORTFOLIO
Value at beginning of period $ 14.990 $ 12.431 $ 10.835 $ 10.000(1)
Value at end of period $ 19.880 $ 14.990 $ 12.431 $ 10.835
Number of accumulation units
outstanding at end of period 334,508 193,429 74,184 7,772
JANUS ASPEN FLEXIBLE
INCOME PORTFOLIO
Value at beginning of period $ 14.393 $ 13.040 $ 12.094 $ 9.886
Value at end of period $ 15.509 $ 14.393 $ 13.040 $ 12.094
Number of accumulation units
outstanding at end of period 85,517 109,812 96,128 84,048
JANUS ASPEN GROWTH
PORTFOLIO
Value at beginning of period $ 15.414 $ 12.716 $ 10.870 $ 10.000(1)
Value at end of period $ 20.651 $ 15.414 $ 12.716 $ 10.870
Number of accumulation units
outstanding at end of period 217,310 179,226 132,465 26,022
<CAPTION>
1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
AETNA MONEY MARKET VP
Value at beginning of period $ 10.223 $10.031 $ 34.122(9) $32.431 $30.285 $28.029
Value at end of period $ 10.509 $10.223 $ 10.031 $34.122 $32.431 $30.285
Number of accumulation units
outstanding at end of period 1,822,449 90,782 2,808 548,425 722,438 653,619
AETNA REAL ESTATE
SECURITIES VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA SMALL
COMPANY VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
AETNA VALUE
OPPORTUNITY VP
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
CALVERT SOCIAL
BALANCED PORTFOLIO
Value at beginning of period $ 11.010 $10.296 $ 10.000(10)
Value at end of period $ 10.518 $11.010 $ 10.296
Number of accumulation units
outstanding at end of period 752 1,383 82
FIDELITY VIP EQUITY-
INCOME PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
FIDELITY VIP GROWTH
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
FIDELITY VIP OVERSEAS
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
FIDELITY VIP II
CONTRAFUND PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
JANUS ASPEN AGGRESSIVE
GROWTH PORTFOLIO
Value at beginning of period $ 10.000(11)
Value at end of period $ 10.319
Number of accumulation units
outstanding at end of period 131,702
JANUS ASPEN BALANCED
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
JANUS ASPEN FLEXIBLE
INCOME PORTFOLIO
Value at beginning of period $ 10.000(11)
Value at end of period $ 9.886
Number of accumulation units
outstanding at end of period 15,893
JANUS ASPEN GROWTH
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
</TABLE>
51
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------
<S> <C> <C> <C>
JANUS ASPEN WORLDWIDE
GROWTH PORTFOLIO
Value at beginning of period $ 16.745 $ 13.880 $10.893
Value at end of period $ 21.320 $ 16.745 $13.880
Number of accumulation units
outstanding at end of period 1,069,704 953,522 520,275
LEXINGTON NATURAL
RESOURCES TRUST
Value at beginning of period $ 13.896 $ 13.132 $10.479
Value at end of period $ 11.030 $ 13.896 $13.132
Number of accumulation units
outstanding at end of period 89,735 149,149 115,869
OPPENHEIMER GLOBAL
SECURITIES FUND/VA
Value at beginning of period $ 10.027(7)
Value at end of period $ 10.018
Number of accumulation units
outstanding at end of period 3,998
OPPENHEIMER STRATEGIC
BOND FUND/VA
Value at beginning of period $ 9.952(7)
Value at end of period $ 9.895
Number of accumulation units
outstanding at end of period 3,006
PORTFOLIO PARTNERS
MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $ 15.219 $ 15.411(5)
Value at end of period $ 19.489 $ 15.219
Number of accumulation units
outstanding at end of period 695,813 742,913
PORTFOLIO PARTNERS
MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $ 12.744 $ 12.995(5)
Value at end of period $ 15.481 $ 12.744
Number of accumulation units
outstanding at end of period 605,271 664,979
PORTFOLIO PARTNERS
MFS VALUE EQUITY
PORTFOLIO
Value at beginning of period $ 21.343 $ 21.038(5)
Value at end of period $ 26.713 $ 21.343
Number of accumulation units
outstanding at end of period 303,746 296,540
PORTFOLIO PARTNERS
SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $ 17.903 $ 17.682(5)
Value at end of period $ 21.057 $ 17.903
Number of accumulation units
outstanding at end of period 360,392 411,600
PORTFOLIO PARTNERS T.
ROWE PRICE GROWTH
EQUITY PORTFOLIO
Value at beginning of period $ 14.400 $ 14.112(5)
Value at end of period $ 18.146 $ 14.400
Number of accumulation units
outstanding at end of period 287,914 231,297
<CAPTION>
1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
JANUS ASPEN WORLDWIDE
GROWTH PORTFOLIO
Value at beginning of period $ 10.000(1)
Value at end of period $ 10.893
Number of accumulation units
outstanding at end of period 227,582
LEXINGTON NATURAL
RESOURCES TRUST
Value at beginning of period $ 9.079 $ 9.716 $ 10.000(12)
Value at end of period $ 10.479 $ 9.079 $ 9.716
Number of accumulation units
outstanding at end of period 162,462 141,076 27,908
OPPENHEIMER GLOBAL
SECURITIES FUND/VA
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
OPPENHEIMER STRATEGIC
BOND FUND/VA
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS
MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS
MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS
MFS VALUE EQUITY
PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS
SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
PORTFOLIO PARTNERS T.
ROWE PRICE GROWTH
EQUITY PORTFOLIO
Value at beginning of period
Value at end of period
Number of accumulation units
outstanding at end of period
</TABLE>
- -----------------
(1) The initial accumulation unit value was established at $10.000 during
August 1995, when the fund became available under the contract.
(2) The accumulation unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the accumulation unit value of the fund was $12.991. On the
date of conversion, additional units were issued so that account values
were not changed as a result of the conversion.
(3) The initial accumulation unit value was established at $10.000 on June 23,
1989, the date on which the fund commenced operations.
(4) The accumulation unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the accumulation unit value of the fund was $39.496. On the
date of conversion, additional units were issued so that account values
were not changed as a result of the conversion.
52
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
(5) Funds were first received in this option during November 1997.
(6) The accumulation unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the accumulation unit value of the fund was $85.546. On the
date of conversion, additional units were issued so that account values
were not changed as a result of the conversion.
(7) Funds were first received in this option during May 1998.
(8) The initial accumulation unit value was established at $10.000 during
September 1996, when the portfolio became available under the contract.
(9) The accumulation unit value was converted to $10.000 on November 2, 1992
upon the commencement of a new administrative system. Immediately prior to
that date, the accumulation unit value of the fund was $34.828. On the
date of conversion, additional units were issued so that account values
were not changed as a result of the conversion.
(10) The initial accumulation unit value was established at $10.000 on November
2, 1992, the date on which the fund/portfolio became available under the
contract.
(11) The initial accumulation unit value was established at $10.000 during
October 1994, when the funds were first received in this option.
(12) The initial accumulation unit value was established at $10.000 on May 26,
1993, the date on which the fund became available under the contract.
53
<PAGE>
Condensed Financial Information
- --------------------------------------------------------------------------------
TABLE III
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.50%
INCLUDING A 0.25% ADMINISTRATIVE EXPENSE CHARGE BEGINNING APRIL 7, 1997
(Selected data for accumulation units outstanding throughout each period)
================================================================================
The condensed financial information presented below for each of the periods in
the two-year period ended December 31, 1998 (as applicable), is derived from
the financial statements of the separate account, which have been audited by
KMPG LLP, independent auditors. The financial statements and the independent
auditors' report thereon for the year ended December 31, 1998 are included in
the Statement of Additional Information.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
AETNA ASCENT VP
Value at beginning of period $ 15.364 $ 12.994(1)
Value at end of period $ 15.786 $ 15.364
Number of accumulation units outstanding at end of period 1,718 911
AETNA BALANCED VP, INC
Value at beginning of period $ 18.954 $ 15.823(1)
Value at end of period $ 21.834 $ 18.954
Number of accumulation units outstanding at end of period 30,064 25,112
AETNA BOND VP
Value at beginning of period $ 13.337 $ 12.417(1)
Value at end of period $ 14.208 $ 13.337
Number of accumulation units outstanding at end of period 18,429 36,018
AETNA CROSSROADS VP
Value at beginning of period $ 14.406 $ 12.428(1)
Value at end of period $ 15.030 $ 14.406
Number of accumulation units outstanding at end of period 458 7,855
AETNA GROWTH VP
Value at beginning of period $ 15.727(2)
Value at end of period $ 17.834
Number of accumulation units outstanding at end of period 2,089
AETNA GROWTH AND INCOME VP
Value at beginning of period $ 21.988 $ 17.728(1)
Value at end of period $ 24.800 $ 21.988
Number of accumulation units outstanding at end of period 148,051 188,162
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $ 14.418 $ 11.345(1)
Value at end of period $ 18.691 $ 14.418
Number of accumulation units outstanding at end of period 23,367 11,672
AETNA INDEX PLUS MID CAP VP
Value at beginning of period $ 8.579(3)
Value at end of period $ 10.872
Number of accumulation units outstanding at end of period 1,230
AETNA INDEX PLUS SMALL CAP VP
Value at beginning of period $ 7.685(4)
Value at end of period $ 8.800
Number of accumulation units outstanding at end of period 807
AETNA LEGACY VP
Value at beginning of period $ 13.292 $ 12.076(5)
Value at end of period $ 14.003 $ 13.292
Number of accumulation units outstanding at end of period 1,188 397
AETNA MONEY MARKET VP
Value at beginning of period $ 11.908 $ 11.572(1)
Value at end of period $ 12.372 $ 11.908
Number of accumulation units outstanding at end of period 32,767 23,882
AETNA SMALL COMPANY VP
Value at beginning of period $ 13.320(6)
Value at end of period $ 13.574
Number of accumulation units outstanding at end of period 797
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $ 14.467(7)
Value at end of period $ 15.960
Number of accumulation units outstanding at end of period 54
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $ 15.755 $ 12.668(1)
Value at end of period $ 17.325 $ 15.755
Number of accumulation units outstanding at end of period 6,720 9,385
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $ 13.879 $ 11.373(1)
Value at end of period $ 19.072 $ 13.879
Number of accumulation units outstanding at end of period 17,622 8,432
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $ 12.358 $ 11.356(1)
Value at end of period $ 13.727 $ 12.358
Number of accumulation units outstanding at end of period 1,827 2,264
</TABLE>
54
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $15.346 $12.473(1)
Value at end of period $19.649 $15.346
Number of accumulation units outstanding at end of period 20,097 19,168
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $15.382 $12.282(1)
Value at end of period $20.345 $15.382
Number of accumulation units outstanding at end of period 12,305 10,357
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $14.963 $12.742(1)
Value at end of period $19.794 $14.963
Number of accumulation units outstanding at end of period 7,705 7,255
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $14.367 $13.043(1)
Value at end of period $15.442 $14.367
Number of accumulation units outstanding at end of period 3,383 2,833
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $15.386 $12.975(1)
Value at end of period $20.562 $15.386
Number of accumulation units outstanding at end of period 4,445 3,305
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $16.714 $14.460(1)
Value at end of period $21.228 $16.714
Number of accumulation units outstanding at end of period 28,230 23,481
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $13.870 $12.300(1)
Value at end of period $10.982 $13.870
Number of accumulation units outstanding at end of period 753 4,339
OPPENHEIMER GLOBAL SECURITIES FUND/VA
Value at beginning of period $ 9.378(8)
Value at end of period $10.001
Number of accumulation units outstanding at end of period 24
OPPENHEIMER STRATEGIC BOND FUND/VA
Value at beginning of period $ 9.889(8)
Value at end of period $ 9.878
Number of accumulation units outstanding at end of period 67
PORTFOLIO PARTNERS MFS EMERGING EQUITIES PORTFOLIO
Value at beginning of period $15.192 $15.386(9)
Value at end of period $19.405 $15.192
Number of accumulation units outstanding at end of period 13,060 11,491
PORTFOLIO PARTNERS MFS RESEARCH GROWTH PORTFOLIO
Value at beginning of period $12.721 $12.975(9)
Value at end of period $15.414 $12.721
Number of accumulation units outstanding at end of period 21,363 17,743
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $21.304 $21.005(9)
Value at end of period $26.598 $21.304
Number of accumulation units outstanding at end of period 1,926 2,468
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL GROWTH PORTFOLIO
Value at beginning of period $17.870 $17.653(9)
Value at end of period $20.966 $17.870
Number of accumulation units outstanding at end of period 5,411 4,502
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH EQUITY PORTFOLIO
Value at beginning of period $14.374 $14.090(9)
Value at end of period $18.068 $14.374
Number of accumulation units outstanding at end of period 16,259 14,429
</TABLE>
- -----------------
(1) Funds were first received in this option during April 1997.
(2) Funds were first received in this option during May 1998.
(3) Funds were first received in this option during October 1998.
(4) Funds were first received in this option during September 1998.
(5) Funds were first received in this option during May 1997.
(6) Funds were first received in this option during January 1998.
(7) Funds were first received in this option during March 1998.
(8) Funds were first received in this option during December 1998.
(9) Funds were first received in this option during November 1997.
55
<PAGE>
Condensed Financial Information
- --------------------------------------------------------------------------------
TABLE IV
FOR CONTRACTS CONTAINING LIMITS ON FEES
(Selected data for accumulation units outstanding throughout each period)
================================================================================
The condensed financial information presented below for each of the periods in
the two-year period ended December 31, 1998 (as applicable), is derived from
the financial statements of the separate account, which have been audited by
KMPG LLP, independent auditors. The financial statements and the independent
auditors' report thereon for the year ended December 31, 1998 are included in
the Statement of Additional Information.
<TABLE>
<CAPTION>
1998 1997
---------------- -----------------
<S> <C> <C>
AETNA ASCENT VP
Value at beginning of period $ 15.422 $ 13.943(1)
Value at end of period $ 15.942 $ 15.422
Number of accumulation units outstanding at end of period 24,014 23,868
AETNA BALANCED VP, INC
Value at beginning of period $ 19.016 $ 16.898(1)
Value at end of period $ 22.015 $ 19.016
Number of accumulation units outstanding at end of period 452,764 477,504
AETNA BOND VP
Value at beginning of period $ 13.373 $ 12.747(1)
Value at end of period $ 14.304 $ 13.373
Number of accumulation units outstanding at end of period 452,992 489,431
AETNA CROSSROADS VP
Value at beginning of period $ 14.461 $ 13.178(1)
Value at end of period $ 15.179 $ 14.461
Number of accumulation units outstanding at end of period 10,769 10,798
AETNA GROWTH AND INCOME VP
Value at beginning of period $ 22.060 $ 19.527(1)
Value at end of period $ 25.005 $ 22.060
Number of accumulation units outstanding at end of period 3,821,349 4,106,796
AETNA LEGACY VP
Value at beginning of period $ 13.343 $ 12.335(1)
Value at end of period $ 14.141 $ 13.343
Number of accumulation units outstanding at end of period 1,958 2,254
AETNA MONEY MARKET VP
Value at beginning of period $ 11.930 $ 11.654(1)
Value at end of period $ 12.425 $ 11.930
Number of accumulation units outstanding at end of period 505,775 580,412
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $ 15.784 $ 14.017(1)
Value at end of period $ 17.400 $ 15.784
Number of accumulation units outstanding at end of period 13,539 35,342
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $ 13.904 $ 12.498(1)
Value at end of period $ 19.155 $ 13.904
Number of accumulation units outstanding at end of period 24,195 3,029
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $ 15.374 $ 13.535(1)
Value at end of period $ 19.735 $ 15.374
Number of accumulation units outstanding at end of period 14,618 13,675
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $ 15.410 $ 13.806(1)
Value at end of period $ 20.433 $ 15.410
Number of accumulation units outstanding at end of period 24,373 19,818
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $ 14.990 $ 13.554(1)
Value at end of period $ 19.880 $ 14.990
Number of accumulation units outstanding at end of period 6,712 2,819
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $ 14.630(2)
Value at end of period $ 15.509
Number of accumulation units outstanding at end of period 5,158
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $ 15.414 $ 13.985(1)
Value at end of period $ 20.651 $ 15.414
Number of accumulation units outstanding at end of period 1,028 750
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $ 16.745 $ 15.851(1)
Value at end of period $ 21.320 $ 16.745
Number of accumulation units outstanding at end of period 45,971 44,433
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $ 13.896 $ 13.610(1)
Value at end of period $ 11.030 $ 13.896
Number of accumulation units outstanding at end of period 1,753 1,753
</TABLE>
56
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
PORTFOLIO PARTNERS MFS EMERGING EQUITIES PORTFOLIO
Value at beginning of period $15.219 $15.411(3)
Value at end of period $19.489 $15.219
Number of accumulation units outstanding at end of period 11,330 11,848
PORTFOLIO PARTNERS MFS RESEARCH GROWTH PORTFOLIO
Value at beginning of period $12.744 $12.995(3)
Value at end of period $15.481 $12.744
Number of accumulation units outstanding at end of period 148,963 141,582
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $21.343 $21.038(3)
Value at end of period $26.713 $21.343
Number of accumulation units outstanding at end of period 9,947 8,563
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL GROWTH PORTFOLIO
Value at beginning of period $17.903 $17.682(3)
Value at end of period $21.057 $17.903
Number of accumulation units outstanding at end of period 5,245 3,986
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH EQUITY PORTFOLIO
Value at beginning of period $14.400 $14.112(3)
Value at end of period $18.146 $14.400
Number of accumulation units outstanding at end of period 4,730 3,310
</TABLE>
- -----------------
(1) Funds were first received in this option during June 1997.
(2) Funds were first received in this option during February 1998.
(3) Funds were first received in this option during November 1997.
57
<PAGE>
For Master Applications Only
- --------------------------------------------------------------------------------
I hereby acknowledge receipt of an Account B Group Deferred Variable Prospectus
dated May 3, 1999 for Employer-Sponsored Deferred Compensation Plans, as well
as all current prospectuses pertaining to the variable investment options
available under the Contracts.
____ Please send an Account B Statement of Additional Information (Form No.
SAI.75996-99) dated May 3, 1999.
________________________________________________________________________________
CONTRACT HOLDER'S SIGNATURE
________________________________________________________________________________
DATE
PROS.75996-99
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated May 3, 1999
Group Variable Annuity Contracts for Employer-Sponsored
Deferred Compensation Plans
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 3, 1999.
A free prospectus is available upon request from the local Aetna Life Insurance
and Annuity Company office or by writing to or calling:
Aetna Life Insurance and Annuity Company
Customer Service
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-525-4225
Read the prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information and History........................................... 2
Variable Annuity Account B................................................ 2
Offering and Purchase of Contracts........................................ 3
Performance Data.......................................................... 3
General............................................................. 3
Average Annual Total Return Quotations.............................. 4
Income Phase 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
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Life Insurance and Annuity Company (the "Company," we, us, our) 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, 1998, the Company
(ALIAC) and its subsidiary life company had $43 billion invested through their
products, including $29 billion in their separate accounts (of which the Company
or an affiliate oversees the management of $21 billion). The Company is ranked
based on assets among the top 2% of all life insurance companies rated by A.M.
Best Company as of December 31, 1997. The Company is an indirect wholly owned
subsidiary of Aetna Inc. The Company is engaged in the business of issuing life
insurance policies and annuity contracts. Our 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 a registered investment adviser under the
Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934. We provide 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 expense
charge described in the prospectus, all expenses incurred in the operations of
the separate account are borne by the Company. See "Fees" in the prospectus. We
receive reimbursement for certain administrative costs from some advisers of the
funds used as funding options under the contract. These fees generally range up
to 0.425%.
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.
From this point forward, the term "contract(s)" refers only to those offered
through the prospectus.
VARIABLE ANNUITY ACCOUNT B
Variable Annuity Account B 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.
Payments to accounts 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. We 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,
under all contracts, or under all plans.
2
<PAGE>
The funds currently available under the contract are as follows:
o Aetna Ascent VP
o Aetna Balanced VP, Inc.
o Aetna Income Shares d/b/a Aetna Bond VP
o Aetna Crossroads VP
o Aetna Growth VP
o Aetna Variable Fund d/b/a Aetna Growth and Income VP
o Aetna High Yield VP
o Aetna Index Plus Large Cap VP
o Aetna Index Plus Mid Cap VP
o Aetna Index Plus Small Cap VP
o Aetna International VP
o Aetna Legacy VP
o Aetna Variable Encore Fund d/b/a Aetna Money Market VP
o Aetna Real Estate Securities VP
o Aetna Small Company VP
o Aetna Value Opportunity VP
o AIM V.I. Capital Appreciation Fund
o AIM V.I. Growth Fund
o AIM V.I. Growth and Income Fund
o AIM V.I. Value Fund
o Calvert Social Balanced Portfolio
o Fidelity Variable Insurance Products Fund (VIP) Equity-Income Portfolio
o Fidelity Variable Insurance Products Fund (VIP) Growth Portfolio
o Fidelity Variable Insurance Products Fund (VIP) Overseas Portfolio
o Fidelity Variable Insurance Products Fund (VIP II) Contrafund Portfolio
o Janus Aspen Aggressive Growth Portfolio
o Janus Aspen Balanced Portfolio
o Janus Aspen Flexible Income Portfolio
o Janus Aspen Growth Portfolio
o Janus Aspen Worldwide Growth Portfolio
o Lexington Natural Resources Trust*
o Oppenheimer Global Securities Fund / VA
o Oppenheimer Strategic Bond Fund / VA
o Portfolio Partners MFS Emerging Equities Portfolio
o Portfolio Partners MFS Research Growth Portfolio
o Portfolio Partners MFS Value Equity Portfolio
o Portfolio Partners Scudder International Growth Portfolio
o Portfolio Partners T. Rowe Price Growth Equity Portfolio
* Transfer or deposits are not allowed into the subaccount investing in this
fund, except from accounts established under the contract before May 1, 1998. As
soon as all those who have current allocations to the subaccount under the
contract have redirected their allocations to other investment options, we will
close the subaccount to all investments.
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. We offer the contracts through life insurance
agents licensed to sell variable annuities who are registered representatives of
the Company or of other registered broker-dealers who have sales agreements with
the Company. The offering of the contracts is continuous. A description of the
manner in which contracts are purchased may be found in the prospectus under the
sections titled "Contract Ownership and Rights" and "Your Account Value."
PERFORMANCE DATA
GENERAL
From time to time, we may advertise different types of historical performance
for the subaccounts of the separate account available under the contracts. We
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 payment of $1,000 is
applied to the various subaccounts under the contract, and then related to the
ending redeemable values over one, five and ten year periods (or fractional
periods thereof). The redeemable value is then divided by the initial investment
and this quotient is taken to the Nth root (N represents the number of years in
the period) and 1 is subtracted from the result which is then expressed as a
percentage, carried to at least the nearest hundredth of a percent. The
standardized figures use the actual returns of the fund since the date
contributions were first received in the fund under the separate account and
then adjust
3
<PAGE>
them to reflect the deduction of all recurring charges under the contracts
during each period (e.g., mortality and expense risk charges, maintenance fees,
administrative expense charges, if any, and early withdrawal charges). These
charges will be deducted on a pro rata basis in the case of fractional periods.
The maintenance fee is converted to a percentage of assets based on the average
account size under the contracts described in the prospectus. The total return
figures shown below may be different from the actual historical total return
under your contract because for periods prior to 1994, the subaccount's
investment performance was based on the performance of the underlying fund plus
any cash held by the subaccount.
The non-standardized figures will be calculated in a similar manner, except that
they will not reflect the deduction of any applicable early withdrawal charge,
and in some advertisements will also exclude the effect of the maintenance fee.
The deduction of the early withdrawal charge and the maintenance fee 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. The non-standardized returns shown in the tables below reflect
the deduction of all charges under the contract except the early withdrawal
charge. The maintenance fee has been deducted for the purposes of calculating
the returns.
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 contract value and/or account value upon
redemption may be more or less than your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
The tables below show the average annual standardized and non-standardized total
return quotation figures for the periods ended December 31, 1998 for the
subaccounts under installment payment accounts with a $20 annual maintenance
fee. Both sets of returns below reflect a mortality and expense risk charge of
1.25% annually and the 0.25% administrative expense charge applicable under some
contracts. The non-standardized returns do not reflect the deduction of the
early withdrawal charge. We may also advertise returns based on other fee
schedules that apply to a particular contract holder. These fee schedules may
result in higher returns than those shown.
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
contracts and; (b) after November 26, 1997, based on the performance of the
Portfolio Partners portfolio.
For those subaccounts where results are not available for the full calendar
period indicated, performance for such partial periods is shown in the column
labeled "Since Inception." For standardized performance, the "Since Inception"
column shows the average annual return since the date contributions were first
received in the fund under the separate account. For non-standardized
performance, the "Since Inception" column shows average annual total return
since the fund's inception date.
4
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Date
Installment Payment Account Contributions
($20 Maintenance Fee) STANDARDIZED First Received
Under the
Separate
Account
- -----------------------------------------------------------------------------------------------------------------------------------
Since
SUBACCOUNT 1 Year 5 Year 10 Year Inception*
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP (2.39%) 12.40% 08/31/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 9.43% 13.00% 10.82% 06/30/1989
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 1.20% 3.98% 7.64%
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP (0.89%) 10.79% 08/31/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 28.84% 30.73% 05/30/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 7.14% 16.39% 14.72%
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna High Yield VP (12.22%) 05/21/1998
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 23.15% 27.69% 10/31/1996
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Mid Cap VP 2.19% 05/04/1998
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Small Cap VP (16.37%) 05/04/1998
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna International VP (8.76%) 05/05/1998
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 0.07% 8.88% 08/31/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) (1.31%) 2.65% 4.17%
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP (16.65%) 05/06/1998
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP (5.39%) 8.59% 05/30/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 14.54% 22.56% 05/30/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio 8.81% 11.71% 10.97% 11/30/1992
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 4.46% 18.53% 12/30/1994
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio 30.54% 24.35% 12/30/1994
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio 5.51% 10.14% 01/31/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 21.64% 21.38% 06/30/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 25.64% 15.66% 10/31/1994
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 25.67% 20.75% 01/31/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 2.10% 9.47% 10/31/1994
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 26.95% 20.86% 07/29/1994
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 20.65% 25.06% 04/28/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust (24.79%) 1.26% 0.69% 05/28/1993
- -----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund/VA 6.78% 9.46% 05/30/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund/VA (3.71%) 0.85% 05/30/1997
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio 21.34% 18.03% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners MFS Emerging Equities(3) 21.34% 12.40% 12.19% 09/30/1993
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio 15.10% 11.73% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/Portfolio Partners MFS
Research Growth(3) 15.10% 5.45% 7.22% 08/31/1992
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio 18.60% 18.46% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Neuberger Berman AMT Growth/Portfolio Partners MFS Value Equity(3) 18.60% 14.02% 12.63% 11/30/1992
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth Portfolio 11.45% 11.69% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/Portfolio Partners Scudder
International Growth(3) 11.45% 7.66% 10.30% 08/31/1992
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth Equity Portfolio 19.41% 19.84% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners T. Rowe Price Growth
Equity(3) 19.41% 22.42% 02/28/1995
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
* Reflects performance from the date contributions were first received in the
fund under the separate account.
(1) These funds have been available through the separate account for more than
ten years.
(2) The current yield for the subaccount for the 7-day period ended December
31, 1998 (on an annualized basis) was 3.52%. Current yield more closely
reflects current earnings than does total return. 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% early
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 the Separate
Account" refers to the applicable date for the replaced fund.
5
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Fund
Installment Payment Account NON-STANDARDIZED Inception
($20 Maintenance Fee) Date
- ------------------------------------------------------------------------------------------------------------------------------------
Since
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP 2.74% 13.88% 14.81% 07/05/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 15.19% 16.39% 14.17% 11.29% 04/03/1989
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 6.53% 5.06% 5.05% 7.64%
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 4.33% 12.24% 13.05% 07/05/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 35.62% 33.28% 12/13/1996
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 12.78% 20.94% 17.59% 14.72%
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna High Yield VP (1.76%) (0.36%) 12/10/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 29.64% 31.33% 09/16/1996
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Mid Cap VP 22.44% 25.45% 12/16/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Small Cap VP (2.83%) 1.26% 12/19/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna International VP 17.14% 19.73% 12/22/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 5.34% 10.15% 10.93% 07/05/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) 3.88% 3.85% 3.71% 4.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP (14.15%) (10.66%) 12/15/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP (0.41%) 15.41% 12/27/1996
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 20.57% 29.16% 12/13/1996
- ------------------------------------------------------------------------------------------------------------------------------------
AIM V.I. Capital Appreciation Fund 17.53% 15.04% 15.50% 17.01% 05/05/1993
- ------------------------------------------------------------------------------------------------------------------------------------
AIM V.I. Growth Fund 32.14% 24.33% 19.64% 19.09% 05/05/1993
- ------------------------------------------------------------------------------------------------------------------------------------
AIM V.I. Growth and Income Fund 25.80% 22.57% 20.69% 05/02/1994
- ------------------------------------------------------------------------------------------------------------------------------------
AIM V.I. Value Fund 30.45% 21.67% 19.91% 20.10% 05/05/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio(1) 14.53% 14.54% 12.86% 11.19%
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio(1) 9.96% 16.03% 17.00% 13.90%
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio(1) 37.41% 23.60% 19.92% 17.63%
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio(1) 11.07% 10.80% 8.06% 8.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 28.04% 23.19% 26.73% 01/03/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 32.25% 15.99% 17.57% 20.11% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 32.28% 22.11% 17.33% 17.72% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 7.48% 8.36% 8.67% 8.22% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 33.63% 23.53% 19.60% 19.07% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 27.00% 24.77% 19.51% 22.18% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust (20.83%) 1.46% 2.31% 3.37% 10/14/1991
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund/VA 12.40% 16.29% 8.02% 10.81% 11/12/1990
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund/VA 1.36% 6.21% 5.23% 5.19% 05/03/1993
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio 27.73% 23.65% 11/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners MFS Emerging
Equities(3) 27.73% 12.14% 13.56% 19.20%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio 21.16% 17.06% 11/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/Portfolio Partners MFS
Research Growth(3) 21.16% 2.96% 6.53% 9.60%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio 24.84% 24.10% 11/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Neuberger Berman AMT Growth/Portfolio Partners MFS Value Equity(3) 24.84% 18.65% 15.20% 13.00%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth Portfolio 17.32% 17.03% 11/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/Portfolio Partners
Scudder International Growth(3) 17.32% 12.50% 8.77% 10.34%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth Equity Portfolio 25.70% 25.54% 11/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners T. Rowe Price Growth
Equity(3) 25.70% 21.03% 18.94% 18.68% 01/09/1989
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
** Reflects performance from the fund's inception date.
(1) These funds have been in operation for more than ten years.
(2) The current yield for the subaccount for the 7-day period ended December
31, 1998 (on an annualized basis) was 3.52%. Current yield more closely
reflects current earnings than does total return. 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% early 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>
INCOME PHASE PAYMENTS
When you begin receiving payments under the contract during the income phase
(see "The Income Phase" in the prospectus), the value of your account is
determined using accumulation unit values as of the tenth valuation before the
first payment is due. Such value (less any applicable premium tax) is applied to
provide payments to you in accordance with the payment option and investment
options elected.
The Annuity option tables found in the contract show, for each option, the
amount of the first payment for each $1,000 of value applied. Thereafter,
variable payments fluctuate as the Annuity Unit value(s) fluctuates with the
investment experience of the selected investment option(s). The first payment
and subsequent payments also vary depending on the assumed net investment rate
selected (3.5% or 5% per annum). Selection of a 5% rate causes a higher first
payment, but payments will increase thereafter only to the extent that the net
investment rate increases by more than 5% on an annual basis. Payments would
decline if the rate failed to increase by 5%. Use of the 3.5% assumed rate
causes a lower first payment, but subsequent payments would increase more
rapidly or decline more slowly as changes occur in the net investment rate.
When the income phase begins, the annuitant is credited with a fixed number of
Annuity Units (which does not change thereafter) in each of the designated
investment options. This number is calculated by dividing (a) by (b), where (a)
is the amount of the first payment based on a particular investment option, and
(b) is the then current Annuity Unit value for that investment option. As noted,
Annuity Unit values fluctuate from one valuation to the next (see "Your Account
Value" in the prospectus); such fluctuations reflect changes in the net
investment factor for the appropriate subaccount(s) (with a ten valuation lag
which gives the Company time to process payments) and a mathematical adjustment
which offsets the assumed net investment rate of 3.5% or 5% per annum.
The operation of all these factors can be illustrated by the following
hypothetical example. These procedures will be performed separately for the
investment options selected during the income phase.
EXAMPLE:
- --------
Assume that, at the date payments are to begin, there are 3,000 accumulation
units credited under a particular contract or account and that the value of an
accumulation unit for the tenth valuation prior to retirement was $13.650000.
This produces a total value of $40,950.
Assume also that no premium tax is payable and that the Annuity table in the
contract provides, for the payment option elected, a first monthly variable
payment of $6.68 per $1000 of value applied; the annuitant's first monthly
payment would thus be 40.950 multiplied by $6.68, or $273.55.
Assume then that the value of an Annuity Unit upon the valuation on which the
first payment was due was $13.400000. When this value is divided into the first
monthly payment, the number of Annuity Units is determined to be 20.414. The
value of this number of Annuity Units will be paid in each subsequent month.
If the net investment factor with respect to the appropriate subaccount is
1.0015000 as of the tenth valuation preceding the due date of the second monthly
payment, multiplying this factor by .9999058* (to neutralize the assumed net
investment rate of 3.5% per annum built into the number of Annuity Units
determined above) produces a result of 1.0014057. This is then multiplied by the
Annuity Unit value for the prior valuation (assume such value to be $13.504376)
to produce an Annuity Unit value of $13.523359 for the valuation occurring when
the second payment is due.
7
<PAGE>
The second monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359,
which produces a payment of $276.07.
*If an assumed net investment rate of 5% is elected, the appropriate factor to
neutralize such assumed rate would be .9998663.
SALES MATERIAL AND ADVERTISING
We may include hypothetical illustrations in our sales literature that explain
the mathematical principles of dollar cost averaging, compounded interest, tax
deferred accumulation, and the mechanics of variable annuity contracts. We may
also discuss the difference between variable annuity contracts and other types
of savings or investment products such as personal savings accounts and
certificates of deposit.
We may distribute sales literature that compares the percentage change in
accumulation unit values for any of the subaccounts to established market
indices such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average or to the percentage change in values of other management
investment companies that have investment objectives similar to the subaccount
being compared.
We may publish in advertisements and reports, the ratings and other information
assigned to us by one or more independent rating organizations such as A.M. Best
Company, Duff & Phelps, Standard & Poor's Corporation and Moody's Investors
Service, Inc. The purpose of the ratings is to reflect our financial strength
and/or claims-paying ability. We may also quote ranking services such as
Morningstar's Variable Annuity/Life Performance Report and Lipper's Variable
Insurance Products Performance Analysis Service (VIPPAS), which rank variable
annuity or life subaccounts or their underlying funds by performance and/or
investment objective. We may categorize the underlying funds in terms of the
asset classes they represent and use such categories in marketing materials for
the contracts. We may illustrate in advertisements the performance of the
underlying funds, if accompanied by performance which also shows the performance
of such funds reduced by applicable charges under the separate account. We may
also show in advertisements the portfolio holdings of the underlying funds,
updated at various intervals. From time to time, we will quote articles from
newspapers and magazines or other publications or reports such as The Wall
Street Journal, Money magazine, USA Today and The VARDS Report.
We may provide in advertising, sales literature, periodic publications or other
materials information on various topics of interest to current and prospective
contract holders or participants. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer and account rebalancing), the advantages and disadvantages of
investing in tax-deferred and taxable investments, customer profiles and
hypothetical purchase and investment scenarios, financial management and tax and
retirement planning, and investment alternatives to certificates of deposit and
other financial instruments, including comparison between the contracts and the
characteristics of and market for such financial instruments.
INDEPENDENT AUDITORS
KPMG 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
Statement of Assets and Liabilities................................. S-2
Statements of Operations and Changes in Net Assets.................. S-7
Condensed Financial Information .................................... S-8
Notes to Financial Statements....................................... S-16
Independent Auditors' Report........................................ S-36
S-1
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1998
ASSETS:
Investments, at net asset value: (Note 1)
<TABLE>
<CAPTION>
Net
Shares Cost Assets
------ ---- ------
<S> <C> <C> <C>
Aetna Ascent VP: 1,775,905 $ 25,102,742 $ 24,898,190
Aetna Balanced VP: 12,391,167 181,255,533 194,913,051
Aetna Bond VP: 6,915,310 90,585,384 90,313,945
Aetna Crossroads VP: 2,222,763 29,151,210 29,607,202
Aetna Get Fund, Series B: 1,328,751 16,114,148 19,399,768
Aetna Get Fund, Series C: 641,495 6,843,405 9,276,019
Aetna Get Fund, Series D: 8,945,182 89,971,949 89,907,126
Aetna Growth and Income VP: 34,864,532 1,125,170,574 1,110,783,981
Aetna Growth VP: 2,192,686 25,612,305 29,667,044
Aetna High Yield VP: 25,485 269,013 230,386
Aetna Index Plus Large Cap VP: 4,950,434 77,533,729 87,078,142
Aetna Index Plus Mid Cap VP: 30,799 350,678 375,745
Aetna Index Plus Small Cap VP: 98,357 961,535 969,800
Aetna International VP: 132,091 1,535,380 1,530,933
Aetna Legacy VP: 2,841,936 34,924,355 35,154,748
Aetna Money Market VP: 11,204,743 148,567,676 150,002,380
Aetna Real Estate Securities VP: 115,069 1,060,043 981,537
Aetna Small Company VP: 1,445,875 17,304,318 18,492,740
Aetna Value Opportunity VP: 1,296,961 16,956,181 18,689,212
AIM V.I. Funds:
Capital Appreciation Fund: 11,857 279,072 298,792
Growth and Income Fund: 9,329 203,793 221,558
Growth Fund: 11,970 284,519 296,860
Value Fund: 26,818 681,416 703,970
Alger American Funds:
Balanced Portfolio: 476,550 4,602,622 6,185,618
Income & Growth Portfolio: 1,178,638 11,247,924 15,463,737
Leveraged AllCap Portfolio: 486,301 10,438,458 16,971,895
American Century Investments:
Balanced Fund: 567,422 4,244,446 4,732,298
International Fund: 760,004 5,048,080 5,791,227
Calvert Social Balanced Portfolio: 916,276 1,943,153 1,958,082
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 6,927,959 153,249,176 176,108,721
Growth Portfolio: 3,087,069 104,576,368 138,516,768
High Income Portfolio: 4,321,896 54,257,145 49,831,459
Overseas Portfolio: 892,112 17,216,864 17,886,843
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 1,124,160 18,781,312 20,414,738
Contrafund Portfolio: 6,668,348 127,772,939 162,974,413
Index 500 Portfolio: 1,003,440 116,197,819 141,735,838
Investment Grade Bond Portfolio: 439,478 5,217,593 5,695,641
Insurance Management Series:
American Leaders Fund II: 6,201,568 97,218,342 134,450,002
Equity Income Fund II: 2,025,727 24,690,902 28,664,036
Growth Strategies Fund II: 1,532,692 22,205,952 27,450,515
High Income Bond Fund II: 4,568,474 47,172,964 49,887,731
International Equity Fund II: 1,138,497 13,701,931 17,521,464
Prime Money Fund II: 8,067,320 8,065,097 8,067,320
</TABLE>
S-2
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1998 (continued):
<TABLE>
<CAPTION>
Net
Shares Cost Assets
------ ---- ------
<S> <C> <C> <C>
U.S. Government Securities II: 1,439,895 $ 15,041,447 $ 16,054,824
Utility Fund II: 1,986,746 23,284,347 30,337,604
Janus Aspen Series:
Aggressive Growth Portfolio: 2,079,332 49,261,924 57,368,774
Balanced Portfolio: 3,210,155 56,987,418 72,228,489
Flexible Income Portfolio: 1,710,899 20,378,246 20,633,439
Growth Portfolio: 2,958,516 57,362,313 69,643,462
Worldwide Growth Portfolio: 8,512,439 210,385,419 247,626,862
Lexington Emerging Markets Fund: 266,212 2,706,082 1,509,423
Lexington Natural Resources Trust Fund: 358,558 5,221,161 3,954,893
MFS Funds:
Total Return Series: 2,104,731 34,302,993 38,137,728
Worldwide Government Series: 185,123 1,911,846 2,014,138
Oppenheimer Funds:
Aggressive Growth Fund: 265,843 10,674,495 11,917,723
Global Securities Fund: 346,765 6,867,095 7,653,101
Growth & Income Fund: 1,718,418 35,629,032 35,193,209
Strategic Bond Fund: 2,558,320 13,050,936 13,098,600
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 2,382,266 112,648,846 132,072,829
PPI MFS Research Growth Portfolio: 7,421,331 77,594,206 88,610,687
PPI MFS Value Equity Portfolio: 738,878 24,196,477 27,966,529
PPI Scudder International Growth Portfolio: 1,049,896 16,732,753 17,596,256
PPI T. Rowe Price Growth Equity Portfolio: 2,148,768 93,956,758 118,848,377
-------------- --------------
NET ASSETS $3,606,761,839 $3,956,568,422
============== ==============
</TABLE>
Net assets represented by:
Reserves for annuity contracts in accumulation and payment period: (Notes 1 and
5)
<TABLE>
<CAPTION>
<S> <C>
Aetna Ascent VP:
Annuity contracts in accumulation ........... $ 24,898,190
Aetna Balanced VP:
Annuity contracts in accumulation ........... 176,154,146
Annuity contracts in payment period ......... 18,758,905
Aetna Bond VP:
Annuity contracts in accumulation ........... 85,100,187
Annuity contracts in payment period ......... 5,213,758
Aetna Crossroads VP:
Annuity contracts in accumulation ........... 28,289,880
Annuity contracts in payment period ......... 1,317,322
Aetna Get Fund, Series B:
Annuity contracts in accumulation ........... 19,399,768
Aetna Get Fund, Series C:
Annuity contracts in accumulation ........... 9,276,019
Aetna Get Fund, Series D:
Annuity contracts in accumulation ........... 89,907,126
Aetna Growth and Income VP:
Annuity contracts in accumulation ........... 955,586,320
Annuity contracts in payment period ......... 155,197,661
Aetna Growth VP:
Annuity contracts in accumulation ........... 28,467,187
Annuity contracts in payment period ......... 1,199,857
</TABLE>
S-3
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1998 (continued):
<TABLE>
<CAPTION>
<S> <C>
Aetna High Yield VP:
Annuity contracts in accumulation ........... $ 230,386
Aetna Index Plus Large Cap VP:
Annuity contracts in accumulation ........... 85,248,495
Annuity contracts in payment period ......... 1,829,647
Aetna Index Plus Mid Cap VP:
Annuity contracts in accumulation ........... 375,745
Aetna Index Plus Small Cap VP:
Annuity contracts in accumulation ........... 969,800
Aetna International VP:
Annuity contracts in accumulation ........... 1,528,847
Annuity contracts in payment period ......... 2,086
Aetna Legacy VP:
Annuity contracts in accumulation ........... 32,331,905
Annuity contracts in payment period ......... 2,822,843
Aetna Money Market VP:
Annuity contracts in accumulation ........... 149,772,871
Annuity contracts in payment period ......... 229,509
Aetna Real Estate Securities VP:
Annuity contracts in accumulation ........... 965,259
Annuity contracts in payment period ......... 16,278
Aetna Small Company VP:
Annuity contracts in accumulation ........... 18,295,242
Annuity contracts in payment period ......... 197,498
Aetna Value Opportunity VP:
Annuity contracts in accumulation ........... 18,689,212
AIM V.I. Funds:
Capital Appreciation Fund:
Annuity contracts in accumulation ........... 298,792
Growth and Income Fund:
Annuity contracts in accumulation ........... 221,558
Growth Fund:
Annuity contracts in accumulation ........... 296,860
Value Fund:
Annuity contracts in accumulation ........... 703,970
Alger American Funds:
Balanced Portfolio:
Annuity contracts in accumulation ........... 6,185,618
Income & Growth Portfolio:
Annuity contracts in accumulation ........... 15,463,737
Leveraged AllCap Portfolio:
Annuity contracts in accumulation ........... 16,971,895
American Century Investments:
Balanced Fund:
Annuity contracts in accumulation ........... 4,732,298
International Fund:
Annuity contracts in accumulation ........... 5,791,227
Calvert Social Balanced Portfolio:
Annuity contracts in accumulation ........... 1,958,082
</TABLE>
S-4
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1998 (continued):
<TABLE>
<CAPTION>
<S> <C>
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Annuity contracts in accumulation .................... $ 176,108,721
Growth Portfolio:
Annuity contracts in accumulation .................... 138,516,768
High Income Portfolio:
Annuity contracts in accumulation .................... 49,328,098
Annuity contracts in payment period .................. 503,361
Overseas Portfolio:
Annuity contracts in accumulation .................... 17,886,843
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Annuity contracts in accumulation .................... 20,414,738
Contrafund Portfolio:
Annuity contracts in accumulation .................... 162,974,413
Index 500 Portfolio:
Annuity contracts in accumulation .................... 141,735,838
Investment Grade Bond Portfolio:
Annuity contracts in accumulation .................... 5,695,641
Insurance Management Series:
American Leaders Fund II:
Annuity contracts in accumulation .................... 134,398,144
Annuity contracts in payment period .................. 51,858
Equity Income Fund II:
Annuity contracts in accumulation .................... 28,656,460
Annuity contracts in payment period .................. 7,576
Growth Strategies Fund II:
Annuity contracts in accumulation .................... 27,450,515
High Income Bond Fund II:
Annuity contracts in accumulation .................... 49,887,731
International Equity Fund II:
Annuity contracts in accumulation .................... 17,521,464
Prime Money Fund II:
Annuity contracts in accumulation .................... 8,067,320
U.S. Government Securities II:
Annuity contracts in accumulation .................... 16,054,824
Utility Fund II:
Annuity contracts in accumulation .................... 30,329,937
Annuity contracts in payment period .................. 7,667
Janus Aspen Series:
Aggressive Growth Portfolio:
Annuity contracts in accumulation .................... 57,368,774
Balanced Portfolio:
Annuity contracts in accumulation .................... 72,228,489
Flexible Income Portfolio:
Annuity contracts in accumulation .................... 20,633,439
Growth Portfolio:
Annuity contracts in accumulation .................... 68,058,273
Annuity contracts in payment period .................. 1,585,189
Worldwide Growth Portfolio:
Annuity contracts in accumulation .................... 243,902,115
Annuity contracts in payment period .................. 3,724,747
</TABLE>
S-5
<PAGE>
Variable Annuity Account B
Statement of Assets and Liabilities - December 31, 1998 (continued):
<TABLE>
<CAPTION>
<S> <C>
Lexington Emerging Markets Fund:
Annuity contracts in accumulation ........... $ 1,509,423
Lexington Natural Resources Trust Fund:
Annuity contracts in accumulation ........... 3,954,893
MFS Funds:
Total Return Series:
Annuity contracts in accumulation ........... 38,137,728
Worldwide Government Series:
Annuity contracts in accumulation ........... 2,014,138
Oppenheimer Funds:
Aggressive Growth Fund:
Annuity contracts in accumulation ........... 11,917,723
Global Securities Fund:
Annuity contracts in accumulation ........... 7,653,101
Growth & Income Fund:
Annuity contracts in accumulation ........... 35,193,209
Strategic Bond Fund:
Annuity contracts in accumulation ........... 12,897,019
Annuity contracts in payment period ......... 201,581
Portfolio Partners, Inc (PPI):
PPI MFS Emerging Equities Portfolio:
Annuity contracts in accumulation ........... 131,150,274
Annuity contracts in payment period ......... 922,555
PPI MFS Research Growth Portfolio:
Annuity contracts in accumulation ........... 88,610,687
PPI MFS Value Equity Portfolio:
Annuity contracts in accumulation ........... 27,062,849
Annuity contracts in payment period ......... 903,680
PPI Scudder International Growth Portfolio:
Annuity contracts in accumulation ........... 17,577,310
Annuity contracts in payment period ......... 18,946
PPI T. Rowe Price Growth Equity Portfolio:
Annuity contracts in accumulation ........... 118,791,854
Annuity contracts in payment period ......... 56,523
--------------
$3,956,568,422
==============
</TABLE>
See Notes to Financial Statements
S-6
<PAGE>
Variable Annuity Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
---- ----
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ............................................................. $ 325,794,651 $ 278,833,116
Expenses: (Notes 2 and 5)
Valuation period deductions ........................................... (42,285,760) (29,243,851)
-------------- --------------
Net investment income .................................................. 283,508,891 249,589,265
-------------- --------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ................................................... 1,555,519,398 1,004,789,371
Cost of investments sold .............................................. 1,412,108,865 933,728,508
-------------- --------------
Net realized gain .................................................... 143,410,533 71,060,863
-------------- --------------
Net unrealized gain on investments: (Note 5)
Beginning of year ..................................................... 255,524,506 122,191,053
End of year ........................................................... 349,806,583 255,524,506
-------------- --------------
Net change in unrealized gain ........................................ 94,282,077 133,333,453
-------------- --------------
Net realized and unrealized gain on investments ........................ 237,692,610 204,394,316
-------------- --------------
Net increase in net assets resulting from operations ................... 521,201,501 453,983,581
-------------- --------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments ............................ 489,286,251 571,501,505
Transfers from the Company for mortality guarantee adjustments ......... (906,373) 371,835
Transfers from the Company's fixed account options ..................... 212,914,994 144,526,667
Redemptions by contract holders ........................................ (167,845,102) (82,942,177)
Annuity payments ....................................................... (22,421,712) (16,137,431)
Other .................................................................. 1,896,006 2,327,153
-------------- --------------
Net increase in net assets from unit transactions (Note 5) ........... 512,924,064 619,647,552
-------------- --------------
Change in net assets ................................................... 1,034,125,565 1,073,631,133
NET ASSETS:
Beginning of year ...................................................... 2,922,442,857 1,848,811,724
-------------- --------------
End of year ............................................................ $3,956,568,422 $2,922,442,857
============== ==============
</TABLE>
See Notes to Financial Statements
S-7
<PAGE>
Variable Annuity Account B
Condensed Financial Information - Year Ended December 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP:
Non-Qualified V $ 15.392 $ 15.855 3.01% 274,115.2 $ 4,346,011
Non-Qualified V (0.75) 15.535 16.082 3.52% 104,608.3 1,682,346
Non-Qualified VII 15.333 15.769 2.84% 1,027,839.2 16,207,554
Non-Qualified VIII 14.947 14.012 (6.26%) (4) 160,746.0 2,252,334
Non-Qualified IX 15.364 15.786 2.75% 1,717.5 27,113
Non-Qualified X 15.422 15.942 3.37% 24,014.0 382,832
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP:
Non-Qualified V 18.989 21.929 15.48% 2,929,719.6 64,245,891
Non-Qualified V (0.75) 19.166 22.244 16.06% 1,798,424.8 40,003,913
Non-Qualified VI 15.962 18.445 15.56% 43,363.3 799,818
Non-Qualified VII 18.653 21.507 15.30% 2,533,501.2 54,487,004
Non-Qualified VIII 14.392 15.212 5.70% (4) 363,744.6 5,533,430
Non-Qualified IX 18.954 21.834 15.19% 30,063.5 656,418
Non-Qualified X 19.016 22.015 15.77% 452,763.7 9,967,686
Non-Qualified XI 15.985 18.517 15.84% 6,799.7 125,910
Non-Qualified XIII 9.555 10.337 8.18% (10) 5,234.6 54,109
Non-Qualified XIV 9.276 10.323 11.29% (8) 17,680.9 182,516
Non-Qualified XV 9.581 10.316 7.67% (10) 9,446.8 97,451
Annuity contracts in payment period 18,758,905
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP:
Non-Qualified V 13.361 14.270 6.80% 1,129,588.7 16,119,085
Non-Qualified V (0.75) 13.486 14.475 7.33% 2,012,308.2 29,127,850
Non-Qualified VI 12.204 13.041 6.86% 51,406.2 670,396
Non-Qualified VII 13.128 13.998 6.63% 1,948,372.8 27,273,239
Non-Qualified VIII 11.367 11.910 4.78% (4) 387,994.7 4,620,903
Non-Qualified IX 13.337 14.208 6.53% 18,429.1 261,845
Non-Qualified X 13.373 14.304 6.96% 452,992.2 6,479,375
Non-Qualified XI 12.214 13.072 7.02% 1,301.4 17,012
Non-Qualified XIII 10.157 10.319 1.59% (9) 16,581.5 171,096
Non-Qualified XIV 10.119 10.305 1.84% (9) 30,948.7 318,914
Non-Qualified XV 10.188 10.298 1.08% (10) 3,930.2 40,472
Annuity contracts in payment period 5,213,758
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP:
Non-Qualified V 14.432 15.095 4.59% 218,648.6 3,300,593
Non-Qualified V (0.75) 14.566 15.312 5.12% 119,245.6 1,825,908
Non-Qualified VII 14.377 15.013 4.42% 1,316,579.2 19,766,357
Non-Qualified VIII 14.044 13.588 (3.25%) (4) 237,468.1 3,226,692
Non-Qualified IX 14.406 15.030 4.33% 457.5 6,876
Non-Qualified X 14.461 15.179 4.97% 10,768.7 163,454
Annuity contracts in payment period 1,317,322
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Get Fund, Series B:
Non-Qualified V 20.717 24.373 17.65% 737,172.7 17,966,894
Non-Qualified X 20.717 24.373 17.65% 58,790.1 1,432,874
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Get Fund, Series C:
Non-Qualified V 12.636 15.904 25.86% 92,330.0 1,468,418
Non-Qualified V (0.75) 12.718 16.087 26.49% 468,819.8 7,541,894
Non-Qualified IX 12.613 15.835 25.55% 9,144.7 144,810
Non-Qualified X 12.636 15.904 25.86% 7,601.7 120,897
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Get Fund, Series D:
Non-Qualified V 9.997 10.062 0.65% (9) 1,577,071.0 15,867,744
Non-Qualified V (0.75) 9.997 10.073 0.76% (9) 614,759.8 6,192,546
Non-Qualified VII 9.997 10.058 0.61% (9) 3,322,479.7 33,416,640
Non-Qualified VIII 9.998 10.067 0.69% (9) 1,277,188.8 12,857,641
Non-Qualified X 10.023 10.062 0.39% (10) 65,946.9 663,527
Non-Qualified XIII 10.004 10.072 0.68% (9) 931,827.7 9,385,656
Non-Qualified XIV 10.000 10.066 0.66% (9) 884,851.1 8,907,146
Non-Qualified XV 10.009 10.063 0.54% (9) 259,978.3 2,616,226
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-8
<PAGE>
Variable Annuity Account B
Condensed Financial Information - Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Growth and Income VP:
Non-Qualified 1964 $ 236.446 $ 267.347 13.07% 958.7 $ 256,298
Non-Qualified V 22.028 24.907 13.07% 9,491,618.9 236,409,291
Non-Qualified V (0.75) 22.233 25.265 13.64% 12,975,484.3 327,821,341
Non-Qualified VI 20.614 23.322 13.14% 1,842,162.9 42,963,821
Non-Qualified VII 22.004 24.839 12.88% 8,999,335.5 223,538,139
Non-Qualified VIII 16.554 16.604 0.30% (4) 1,327,156.5 22,036,585
Non-Qualified IX 21.988 24.800 12.79% 148,050.5 3,671,604
Non-Qualified X 22.060 25.005 13.35% 3,821,349.4 95,552,990
Non-Qualified XI 20.644 23.414 13.42% 46,205.4 1,081,861
Non-Qualified XIII 7.862 9.886 25.74% (9) 125,488.2 1,240,545
Non-Qualified XIV 7.672 9.872 28.68% (9) 55,706.9 549,962
Non-Qualified XV 8.961 9.866 10.10% (10) 47,019.7 463,883
Annuity contracts in payment period 155,197,661
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP:
Non-Qualified V 13.173 17.912 35.98% 140,521.9 2,516,985
Non-Qualified V (0.75) 13.239 18.067 36.47% (1) 428,697.2 7,745,376
Non-Qualified VII 13.158 17.862 35.75% 738,448.8 13,190,361
Non-Qualified VIII 15.809 17.909 13.28% (4) 266,761.0 4,777,514
Non-Qualified IX 15.727 17.834 13.40% (4) 2,088.8 37,253
Non-Qualified XIII 8.387 10.489 25.06% (9) 8,459.9 88,734
Non-Qualified XIV 8.359 10.475 25.31% (9) 8,297.4 86,912
Non-Qualified XV 8.899 10.468 17.63% (10) 2,297.8 24,052
Annuity contracts in payment period 1,199,857
- --------------------------------------------------------------------------------------------------------------------------------
Aetna High Yield VP:
Non-Qualified V 9.954 9.212 (7.45%) (4) 604.9 5,573
Non-Qualified V (0.75) 9.941 9.244 (7.01%) (5) 24,320.0 224,813
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP:
Non-Qualified V 14.444 18.772 29.96% 527,155.0 9,895,905
Non-Qualified V (0.75) 14.538 18.989 30.62% 1,060,363.0 20,135,153
Non-Qualified VII 14.414 18.704 29.76% 2,252,763.4 42,134,590
Non-Qualified VIII 16.421 18.449 12.35% (4) 609,863.4 11,251,627
Non-Qualified IX 14.418 18.691 29.64% 23,366.8 436,755
Non-Qualified XIII 8.469 10.716 26.53% (9) 31,054.3 332,779
Non-Qualified XIV 8.964 10.702 19.39% (8) 94,255.0 1,008,675
Non-Qualified XV 9.134 10.694 17.08% (9) 4,956.9 53,011
Annuity contracts in payment period 1,829,647
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Mid Cap VP:
Non-Qualified V 10.107 10.891 7.76% (4) 17,010.7 185,258
Non-Qualified V (0.75) 9.950 10.928 9.83% (6) 16,206.7 177,112
Non-Qualified IX 8.579 10.872 26.73% (9) 1,230.2 13,375
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Small Cap VP:
Non-Qualified V 9.996 8.815 (11.81%) (4) 55,563.7 489,810
Non-Qualified V (0.75) 9.407 8.846 (5.96%) (5) 53,459.5 472,892
Non-Qualified IX 7.685 8.800 14.51% (8) 806.6 7,098
- --------------------------------------------------------------------------------------------------------------------------------
Aetna International VP:
Non-Qualified V 10.149 9.765 (3.78%) (4) 35,872.2 350,278
Non-Qualified V (0.75) 10.288 9.798 (4.76%) (5) 28,999.8 284,152
Non-Qualified VII 10.169 9.754 (4.08%) (5) 45,143.4 440,322
Non-Qualified VIII 10.100 9.764 (3.33%) (4) 41,046.6 400,784
Non-Qualified XIII 8.583 9.149 6.59% (10) 587.0 5,371
Non-Qualified XIV 8.497 9.137 7.53% (10) 4,529.2 41,383
Non-Qualified XV 8.663 9.131 5.40% (11) 718.1 6,557
Annuity contracts in payment period 2,086
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP:
Non-Qualified V 13.317 14.064 5.61% 197,741.5 2,781,008
Non-Qualified V (0.75) 13.441 14.266 6.14% 120,311.5 1,716,341
Non-Qualified VII 13.267 13.989 5.44% 1,551,324.4 21,701,727
Non-Qualified VIII 13.073 13.037 (0.28%) (4) 467,027.3 6,088,503
</TABLE>
S-9
<PAGE>
Variable Annuity Account B
Condensed Financial Information - Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Legacy VP (continued):
Non-Qualified IX $13.292 $14.003 5.35% 1,187.8 $ 16,633
Non-Qualified X 13.343 14.141 5.98% 1,958.3 27,693
Annuity contracts in payment period 2,822,843
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP:
Non-Qualified V 11.930 12.425 4.15% 1,146,661.0 14,247,696
Non-Qualified V (0.75) 12.041 12.604 4.68% 2,102,275.4 26,496,757
Non-Qualified VI 11.642 12.132 4.21% 67,991.9 824,888
Non-Qualified VII 11.850 12.322 3.98% 6,973,165.3 85,923,420
Non-Qualified VIII 10.847 11.141 2.71% (4) 1,221,158.5 13,605,259
Non-Qualified IX 11.908 12.372 3.90% 32,766.7 405,379
Non-Qualified X 11.930 12.425 4.15% 505,775.1 6,284,447
Non-Qualified XI 11.642 12.132 4.21% 49.6 602
Non-Qualified XIII 10.122 10.199 0.76% (9) 103,625.5 1,056,910
Non-Qualified XIV 10.086 10.186 0.99% (8) 44,014.2 448,309
Non-Qualified XV 10.120 10.179 0.58% (10) 47,079.4 479,204
Annuity contracts in payment period 229,509
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP:
Non-Qualified V 10.095 8.873 (12.11%) (4) 17,925.8 159,052
Non-Qualified V (0.75) 9.678 8.903 (8.01%) (5) 23,760.3 211,549
Non-Qualified VII 10.043 8.863 (11.75%) (4) 40,811.5 361,711
Non-Qualified VIII 10.033 8.872 (11.57%) (4) 13,789.3 122,343
Non-Qualified XIII 8.690 8.903 2.45% (10) 10,325.4 91,925
Non-Qualified XIV 8.833 8.891 0.66% (10) 2,081.8 18,509
Non-Qualified XV 8.648 8.885 2.74% (10) 19.2 170
Annuity contracts in payment period 16,278
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP:
Non-Qualified V 13.654 13.633 (0.15%) 91,991.6 1,254,115
Non-Qualified V (0.75) 13.704 13.751 0.34% 90,091.7 1,238,889
Non-Qualified VII 13.638 13.595 (0.32%) 873,315.8 11,872,953
Non-Qualified VIII 15.596 13.631 (12.60%) (4) 272,561.7 3,715,319
Non-Qualified IX 13.320 13.574 1.91% (1) 797.4 10,824
Non-Qualified XIII 8.799 9.357 6.34% (10) 13,537.9 126,679
Non-Qualified XIV 7.219 9.345 29.45% (9) 7,786.6 72,764
Non-Qualified XV 8.739 9.338 6.85% (11) 396.1 3,699
Annuity contracts in payment period 197,498
- --------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP:
Non-Qualified V 13.261 16.030 20.88% 60,870.3 975,730
Non-Qualified V (0.75) 12.632 16.169 28.00% (1) 91,721.6 1,483,031
Non-Qualified VII 13.246 15.985 20.68% 841,077.5 13,444,950
Non-Qualified VIII 15.274 16.028 4.94% (4) 173,741.4 2,784,641
Non-Qualified IX 14.467 15.960 10.32% (3) 53.9 860
- --------------------------------------------------------------------------------------------------------------------------------
AIM V.I. Funds:
Capital Appreciation Fund:
Non-Qualified XIII 7.522 10.245 36.20% (9) 10,912.8 111,802
Non-Qualified XIV 7.914 10.231 29.28% (9) 17,420.4 178,233
Non-Qualified XV 9.078 10.224 12.62% (10) 856.5 8,757
- --------------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund:
Non-Qualified XIII 7.948 10.663 34.16% (9) 3,665.9 39,090
Non-Qualified XIV 8.179 10.649 30.20% (9) 9,967.9 106,146
Non-Qualified XV 8.830 10.641 20.51% (9) 7,172.1 76,322
- --------------------------------------------------------------------------------------------------------------------------------
Growth Fund:
Non-Qualified XIII 7.856 10.779 37.21% (9) 11,162.9 120,321
Non-Qualified XIV 8.120 10.764 32.56% (9) 14,904.3 160,430
Non-Qualified XV 9.702 10.757 10.87% (11) 1,497.6 16,109
- --------------------------------------------------------------------------------------------------------------------------------
Value Fund:
Non-Qualified XIII 7.820 10.616 35.75% (9) 27,667.7 293,713
Non-Qualified XIV 8.093 10.601 30.99% (9) 29,485.9 312,592
Non-Qualified XV 9.664 10.594 9.62% (11) 9,218.7 97,665
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-10
<PAGE>
Variable Annuity Account B
Condensed Financial Information - Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alger American Funds:
Balanced Portfolio:
Non-Qualified VII $16.153 $20.946 29.67% 295,306.5 $ 6,185,618
- --------------------------------------------------------------------------------------------------------------------------------
Income & Growth Portfolio:
Non-Qualified VII 16.902 22.064 30.54% 700,861.1 15,463,737
- --------------------------------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio:
Non-Qualified VII 15.988 24.881 55.62% 682,007.2 16,968,827
Non-Qualified VIII 13.551 18.206 34.35% (4) 168.5 3,068
- --------------------------------------------------------------------------------------------------------------------------------
American Century Investments:
Balanced Fund:
Non-Qualified VII 15.312 17.479 14.15% 270,740.7 4,732,298
- --------------------------------------------------------------------------------------------------------------------------------
International Fund:
Non-Qualified VII 13.782 16.139 17.10% 358,674.4 5,788,553
Non-Qualified VIII 15.241 14.599 (4.21%) (4) 183.2 2,674
- --------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio:
Non-Qualified V 17.779 20.415 14.83% 8,742.2 178,470
Non-Qualified V (0.75) 17.944 20.708 15.40% 35,543.7 736,032
Non-Qualified VII 9.976 11.437 14.65% 34,437.7 393,873
Non-Qualified VIII 10.882 11.456 5.27% (4) 56,713.4 649,707
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Non-Qualified V 15.784 17.400 10.24% 298,921.1 5,201,225
Non-Qualified V (0.75) 15.930 17.650 10.80% 630,681.6 11,131,403
Non-Qualified VII 18.963 20.872 10.07% 6,923,691.7 144,511,703
Non-Qualified VIII 15.151 14.942 (1.38%) (4) 919,970.0 13,746,143
Non-Qualified IX 15.755 17.325 9.97% 6,719.9 116,422
Non-Qualified X 15.784 17.400 10.24% 13,539.3 235,583
Non-Qualified XIII 8.459 9.911 17.17% (9) 48,259.6 478,287
Non-Qualified XIV 8.314 9.897 19.04% (9) 59,608.6 589,966
Non-Qualified XV 9.412 9.891 5.09% (11) 9,907.3 97,989
- --------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio:
Non-Qualified V 13.904 19.155 37.77% 324,557.7 6,216,774
Non-Qualified V (0.75) 14.034 19.430 38.45% 595,859.4 11,577,298
Non-Qualified VII 19.157 26.348 37.54% 4,154,249.8 109,456,984
Non-Qualified VIII 14.533 17.420 19.87% (4) 600,814.2 10,466,173
Non-Qualified IX 13.879 19.072 37.42% 17,622.0 336,085
Non-Qualified X 13.904 19.155 37.77% 24,195.4 463,454
- --------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio:
Non-Qualified VII 13.959 13.168 (5.67%) 3,196,920.6 42,096,053
Non-Qualified VIII 13.167 11.798 (10.40%) (4) 530,361.7 6,257,364
Non-Qualified XIII 8.626 8.949 3.74% (10) 40,909.1 366,076
Non-Qualified XIV 8.411 8.936 6.24% (10) 19,660.9 175,698
Non-Qualified XV 8.987 8.930 (0.63%) (11) 48,475.9 432,907
Annuity contracts in payment period 503,361
- --------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio:
Non-Qualified V 12.381 13.786 11.35% 54,225.5 747,571
Non-Qualified V (0.75) 12.496 13.984 11.91% 141,714.4 1,981,774
Non-Qualified VII 13.682 15.210 11.17% 929,309.5 14,135,208
Non-Qualified VIII 13.796 12.879 (6.65%) (4) 77,430.9 997,217
Non-Qualified IX 12.358 13.727 11.08% 1,826.6 25,073
- --------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Non-Qualified VII 15.679 17.786 13.44% 1,019,122.4 18,126,177
Non-Qualified VIII 13.995 14.783 5.63% (4) 154,808.5 2,288,561
- --------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio:
Non-Qualified V 15.374 19.735 28.37% 488,102.2 9,632,520
Non-Qualified V (0.75) 15.517 20.018 29.01% 779,941.7 15,612,818
Non-Qualified VII 17.066 21.872 28.16% 5,718,965.7 125,086,950
</TABLE>
S-11
<PAGE>
Variable Annuity Account B
Condensed Financial Information - Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Contrafund Portfolio (continued):
Non-Qualified VIII $15.503 $17.492 12.83% (4) 637,258.2 $ 11,146,870
Non-Qualified IX 15.346 19.649 28.04% 20,906.9 410,809
Non-Qualified X 15.374 19.735 28.37% 14,618.4 288,488
Non-Qualified XIII 8.083 10.535 30.34% (9) 42,196.2 444,543
Non-Qualified XIV 8.746 10.521 20.29% (8) 29,543.1 310,821
Non-Qualified XV 8.946 10.514 17.53% (10) 3,861.0 40,594
- --------------------------------------------------------------------------------------------------------------------------------
Index 500 Portfolio:
Non-Qualified VII 17.961 22.727 26.54% 5,533,320.3 125,753,551
Non-Qualified VIII 17.227 18.925 9.86% (4) 844,489.5 15,982,287
- --------------------------------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio:
Non-Qualified VII 11.597 12.446 7.32% 457,640.6 5,695,641
- --------------------------------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II:
Non-Qualified VII 20.287 23.528 15.98% 5,705,447.4 134,238,634
Non-Qualified VIII 16.597 16.869 1.64% (5) 9,455.9 159,510
Annuity contracts in payment period 51,858
- --------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund II:
Non-Qualified VII 12.305 14.013 13.88% 2,043,618.6 28,656,460
Annuity contracts in payment period 7,576
- --------------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II:
Non-Qualified VII 15.777 18.269 15.80% 1,502,535.0 27,450,515
- --------------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II:
Non-Qualified VII 14.724 14.910 1.26% 3,345,668.5 49,883,928
Non-Qualified VIII 12.832 12.629 (1.58%) (4) 301.1 3,803
- --------------------------------------------------------------------------------------------------------------------------------
International Equity Fund II:
Non-Qualified VII 11.888 14.719 23.81% 1,190,289.9 17,519,674
Non-Qualified VIII 13.748 13.523 (1.64%) (7) 132.3 1,790
- --------------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II:
Non-Qualified VII 11.119 11.503 3.45% 701,312.8 8,067,320
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II:
Non-Qualified VII 11.883 12.614 6.15% 1,272,804.3 16,054,824
- --------------------------------------------------------------------------------------------------------------------------------
Utility Fund II:
Non-Qualified VII 16.611 18.663 12.35% 1,625,061.9 30,328,887
Non-Qualified VIII 13.786 15.472 12.23% (7) 67.9 1,050
Annuity contracts in payment period 7,667
- --------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio:
Non-Qualified V 15.410 20.433 32.60% 512,154.4 10,464,741
Non-Qualified V (0.75) 15.554 20.726 33.25% 459,709.5 9,528,051
Non-Qualified VII 15.418 20.410 32.38% 1,622,088.6 33,106,814
Non-Qualified VIII 12.108 14.162 16.96% (4) 216,957.5 3,072,646
Non-Qualified IX 15.382 20.345 32.26% 12,305.4 250,348
Non-Qualified X 15.410 20.433 32.60% 24,372.9 498,007
Non-Qualified XIII 7.183 11.042 53.72% (9) 18,317.8 202,268
Non-Qualified XIV 6.858 11.027 60.79% (9) 21,356.2 235,501
Non-Qualified XV 9.497 11.020 16.04% (11) 943.6 10,398
- --------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio:
Non-Qualified V 14.990 19.880 32.62% 334,507.8 6,649,987
Non-Qualified V (0.75) 15.130 20.165 33.28% 241,070.0 4,861,245
Non-Qualified VII 16.692 22.101 32.40% 2,277,803.6 50,341,553
Non-Qualified VIII 15.156 17.569 15.92% (4) 480,187.2 8,436,522
Non-Qualified IX 14.963 19.794 32.29% 7,705.0 152,514
Non-Qualified X 14.990 19.880 32.62% 6,712.2 133,439
Non-Qualified XIII 9.175 10.945 19.29% (9) 114,602.5 1,254,291
Non-Qualified XIV 8.301 10.930 31.67% (9) 27,397.4 299,452
Non-Qualified XV 9.275 10.923 17.77% (8 9,108.3 99,486
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-12
<PAGE>
Variable Annuity Account B
Condensed Financial Information - Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Flexible Income Portfolio:
Non-Qualified V $14.393 $15.509 7.75% 85,516.5 $ 1,326,243
Non-Qualified V (0.75) 14.527 15.731 8.29% 199,466.7 3,137,882
Non-Qualified VII 14.320 15.405 7.58% 855,509.7 13,179,344
Non-Qualified VIII 12.363 12.873 4.13% (4) 221,988.1 2,857,737
Non-Qualified IX 14.367 15.442 7.48% 3,382.6 52,233
Non-Qualified X 14.630 15.509 6.01% (2) 5,158.4 80,000
- --------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio:
Non-Qualified V 15.414 20.651 33.98% 217,309.5 4,487,701
Non-Qualified V (0.75) 15.558 20.948 34.64% 244,106.5 5,113,454
Non-Qualified VII 18.340 24.532 33.76% 2,097,548.1 51,456,280
Non-Qualified VIII 15.094 17.461 15.68% (4) 281,233.5 4,910,658
Non-Qualified IX 15.386 20.562 33.64% 4,444.5 91,388
Non-Qualified X 15.414 20.651 33.98% 1,027.9 21,226
Non-Qualified XIII 7.907 10.938 38.33% (9) 138,459.2 1,514,405
Non-Qualified XIV 7.596 10.923 43.80% (9) 35,759.3 390,592
Non-Qualified XV 9.157 10.915 19.20% (10) 6,648.3 72,569
Annuity contracts in payment period 1,585,189
- --------------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio:
Non-Qualified V 16.745 21.320 27.32% 1,069,704.4 22,805,969
Non-Qualified V (0.75) 16.901 21.626 27.96% 1,346,456.7 29,118,282
Non-Qualified VII 18.910 24.039 27.12% 7,196,142.1 172,985,648
Non-Qualified VIII 16.509 17.358 5.14% (4) 941,812.3 16,347,812
Non-Qualified IX 16.714 21.228 27.01% 28,229.7 599,257
Non-Qualified X 16.745 21.320 27.32% 45,970.7 980,091
Non-Qualified XIII 7.245 9.576 32.17% (9) 63,712.4 610,124
Non-Qualified XIV 8.027 9.563 19.14% (8) 39,601.7 378,723
Non-Qualified XV 8.519 9.557 12.18% (10) 7,974.3 76,209
Annuity contracts in payment period 3,724,747
- --------------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund:
Non-Qualified VII 8.572 6.068 (29.21%) 247,857.1 1,509,423
- --------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund:
Non-Qualified V 13.896 11.030 (20.62%) 89,735.0 989,787
Non-Qualified V (0.75) 14.025 11.189 (20.22%) 92,175.0 1,031,313
Non-Qualified VII 13.794 10.932 (20.75%) 174,370.9 1,906,192
Non-Qualified IX 13.870 10.982 (20.82%) 752.5 8,264
Non-Qualified X 13.896 11.030 (20.62%) 1,753.1 19,337
- --------------------------------------------------------------------------------------------------------------------------------
MFS Funds:
Total Return Series:
Non-Qualified VII 13.030 14.432 10.76% 2,203,926.5 31,807,542
Non-Qualified VIII 14.096 14.491 2.80% (4) 400,395.8 5,802,076
Non-Qualified XIII 9.712 10.171 4.73% (10) 11,625.0 118,235
Non-Qualified XIV 9.772 10.157 3.94% (10) 12,838.2 130,398
Non-Qualified XV 9.737 10.150 4.24% (10) 27,534.1 279,477
- --------------------------------------------------------------------------------------------------------------------------------
Worldwide Government Series:
Non-Qualified VII 10.207 10.860 6.40% 156,298.4 1,697,332
Non-Qualified VIII 10.312 10.904 5.74% (4) 29,054.9 316,806
- --------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Aggressive Growth Fund:
Non-Qualified VII 12.204 13.520 10.78% 659,693.3 8,919,034
Non-Qualified VIII 14.076 13.556 (3.69%) (4) 211,732.4 2,870,164
Non-Qualified XIII 7.289 9.362 28.44% (9) 730.2 6,837
Non-Qualified XIV 6.300 9.350 48.41% (9) 12,608.6 117,886
Non-Qualified XV 8.309 9.343 12.44% (11) 406.9 3,802
- --------------------------------------------------------------------------------------------------------------------------------
Global Securities Fund:
Non-Qualified V 10.027 10.018 (0.09%) (4) 3,998.3 40,057
Non-Qualified V (0.75) 10.004 10.053 0.49% (6) 9,360.1 94,099
Non-Qualified VII 11.539 12.982 12.51% 465,279.3 6,040,369
Non-Qualified VIII 13.007 13.016 0.07% (4) 113,574.5 1,478,339
Non-Qualified IX 9.378 10.001 6.64% (11) 23.7 237
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-13
<PAGE>
Variable Annuity Account B
Condensed Financial Information - Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth & Income Fund:
Non-Qualified VII $ 12.785 $ 13.199 3.24% 2,014,343.2 $26,587,287
Non-Qualified VIII 14.890 13.234 (11.12%) (4) 602,061.1 7,967,561
Non-Qualified XIII 6.913 9.080 31.35% (9) 27,241.3 247,342
Non-Qualified XIV 6.647 9.067 36.41% (9) 41,656.3 377,715
Non-Qualified XV 8.449 9.061 7.24% (10) 1,468.2 13,304
- --------------------------------------------------------------------------------------------------------------------------------
Strategic Bond Fund:
Non-Qualified V 9.952 9.895 (0.57%) (4) 3,006.1 29,745
Non-Qualified V (0.75) 10.098 9.929 (1.67%) (6) 625.2 6,208
Non-Qualified VII 10.764 10.921 1.46% 890,900.1 9,729,448
Non-Qualified VIII 11.084 10.950 (1.21%) (4) 254,861.2 2,790,663
Non-Qualified IX 9.889 9.878 (0.11%) (11) 67.2 664
Non-Qualified XIII 9.550 9.823 2.86% (10) 21,480.1 211,003
Non-Qualified XIV 9.566 9.810 2.55% (9) 13,169.1 129,188
Non-Qualified XV 9.768 9.803 0.36% (11) 10.2 100
Annuity contracts in payment period 201,581
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio:
Non-Qualified V 15.219 19.489 28.06% 695,812.6 13,560,945
Non-Qualified V (0.75) 15.361 19.769 28.70% 562,096.7 11,112,279
Non-Qualified VII 14.707 18.803 27.85% 5,270,772.3 99,108,417
Non-Qualified VIII 12.011 12.761 6.24% (4) 509,943.9 6,507,181
Non-Qualified IX 15.192 19.405 27.73% 13,060.2 253,436
Non-Qualified X 15.219 19.489 28.06% 11,330.3 220,821
Non-Qualified XIII 7.999 10.371 29.65% (9) 11,390.8 118,131
Non-Qualified XIV 6.702 10.357 54.54% (9) 13,509.1 139,910
Non-Qualified XV 8.599 10.350 20.36% (10) 12,479.0 129,154
Annuity contracts in payment period 922,555
- --------------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio:
Non-Qualified V 12.744 15.481 21.48% 605,270.9 9,370,125
Non-Qualified V (0.75) 12.863 15.703 22.08% 428,785.0 6,733,360
Non-Qualified VI 10.761 13.080 21.55% 8,187.8 107,093
Non-Qualified VII 12.641 15.331 21.28% 4,136,850.6 63,421,168
Non-Qualified VIII 10.102 10.532 4.26% (4) 554,094.8 5,835,838
Non-Qualified IX 12.721 15.414 21.17% 21,363.0 329,290
Non-Qualified X 12.744 15.481 21.48% 148,963.1 2,306,080
Non-Qualified XI 11.698 13.080 11.81% (10) 2,353.6 30,784
Non-Qualified XIII 8.805 10.113 14.86% (10) 4,603.7 46,556
Non-Qualified XIV 9.089 10.099 11.11% (10) 36,362.5 367,223
Non-Qualified XV 8.886 10.092 13.57% (10) 6,259.4 63,170
- --------------------------------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio:
Non-Qualified V 21.343 26.713 25.16% 303,746.3 8,114,121
Non-Qualified V (0.75) 21.541 27.097 25.79% 167,064.5 4,526,964
Non-Qualified VII 10.152 12.686 24.96% 881,252.1 11,179,905
Non-Qualified VIII 12.147 12.708 4.62% (4) 214,289.8 2,723,123
Non-Qualified IX 21.304 26.598 24.85% 1,925.9 51,224
Non-Qualified X 21.343 26.713 25.16% 9,947.4 265,731
Non-Qualified XIII 9.507 10.193 7.22% (10) 10,086.1 102,811
Non-Qualified XIV 9.302 10.180 9.44% (10) 9,561.3 97,330
Non-Qualified XV 9.421 10.173 7.98% (11) 161.2 1,640
Annuity contracts in payment period 903,680
- --------------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio:
Non-Qualified V 17.903 21.057 17.62% 360,392.4 7,588,700
Non-Qualified V (0.75) 18.070 21.359 18.20% 257,953.3 5,509,651
Non-Qualified VII 9.912 11.640 17.43% 199,291.3 2,319,696
Non-Qualified VIII 11.775 11.659 (0.99%) (4) 107,008.6 1,247,585
Non-Qualified IX 17.870 20.966 17.33% 5,411.2 113,451
Non-Qualified X 17.903 21.057 17.62% 5,244.9 110,442
Non-Qualified XIII 8.553 9.248 8.13% (10) 46,182.0 427,101
Non-Qualified XIV 8.395 9.236 10.02% (9) 25,859.7 238,833
</TABLE>
S-14
<PAGE>
Variable Annuity Account B
Condensed Financial Information - Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PPI Scudder International Growth Portfolio (continued):
Non-Qualified XV $ 8.841 $ 9.229 4.39% (10) 2,367.5 $ 21,851
Annuity contracts in payment period 18,946
- ---------------------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio:
Non-Qualified V 14.400 18.146 26.01% 287,914.4 5,224,616
Non-Qualified V (0.75) 14.534 18.407 26.65% 335,509.9 6,175,728
Non-Qualified VII 18.343 23.078 25.81% 4,440,082.5 102,469,170
Non-Qualified VIII 15.327 16.682 8.84% (4) 272,321.4 4,542,742
Non-Qualified IX 14.374 18.068 25.70% 16,259.0 293,769
Non-Qualified X 14.400 18.146 26.01% 4,729.8 85,829
Annuity contracts in payment period 56,523
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Non-Qualified 1964 Individual contracts issued from December 1, 1964 to March 14, 1967.
Non-Qualified V Group Aetna Plus contracts issued in connection with Deferred
Compensation Plans issued since August 28, 1992.
Non-Qualified VI Certain existing contracts that were converted to ACES, an administrative
system (previously valued under Non-Qualified I).
Non-Qualified VII Certain individual and group contracts issued as non-qualified deferred
annuity contracts or Individual Retirement Annuity contracts issued since
May 4, 1994.
Non-Qualified VIII Certain individual Retirement Annuity contracts issued since May 1, 1998.
Non-Qualified IX Group Aetna Plus contracts issued in connection with Deferred
Compensation Plans having contract modifications effective April 7, 1997.
Non-Qualified X Group Aetna Plus contracts issued in connection with Deferred
Compensation Plans having contract modifications effective May 29, 1997.
Non-Qualified XI Certain contracts previously valued under Non-Qualified VI having
contract modifications effective May 29, 1997.
Non-Qualified XIII Certain individual Retirement Annuity contracts issued since October 1, 1998.
Non-Qualified XIV Certain individual Retirement Annuity contracts issued since September 1, 1998.
Non-Qualified XV Certain individual Retirement Annuity contracts issued since September 1, 1998.
</TABLE>
Notes to Condensed Financial Information:
(1) - Reflects less than a full year of performance activity. Funds were first
received in this option during January 1998.
(2) - Reflects less than a full year of performance activity. Funds were first
received in this option during February 1998.
(3) - Reflects less than a full year of performance activity. Funds were first
received in this option during March 1998.
(4) - Reflects less than a full year of performance activity. Funds were first
received in this option during May 1998.
(5) - Reflects less than a full year of performance activity. Funds were first
received in this option during June 1998.
(6) - Reflects less than a full year of performance activity. Funds were first
received in this option during July 1998.
(7) - Reflects less than a full year of performance activity. Funds were first
received in this option during August 1998.
(8) - Reflects less than a full year of performance activity. Funds were first
received in this option during September 1998.
(9) - Reflects less than a full year of performance activity. Funds were first
received in this option during October 1998.
(10) - Reflects less than a full year of performance activity. Funds were first
received in this option during November 1998.
(11) - Reflects less than a full year of performance activity. Funds were first
received in this option during December 1998.
See Notes to Financial Statements
S-15
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998
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, 1998:
<TABLE>
<CAPTION>
<S> <C>
Aetna Ascent VP Fidelity Investments Variable Insurance
Aetna Balanced VP Products Fund II:
Aetna Bond VP o Asset Manager Portfolio
Aetna Crossroads VP o Contrafund Portfolio
Aetna GET Fund, Series B o Index 500 Portfolio
Aetna GET Fund, Series C o Investment Grade Bond Portfolio
Aetna GET Fund, Series D Insurance Management Series:
Aetna Growth and Income VP o American Leaders Fund II
Aetna Growth VP o Equity Income Fund II
Aetna High Yield VP o Growth Strategies Fund II
Aetna Index Plus Large Cap VP o High Income Bond Fund II
Aetna Index Plus Mid Cap VP o International Equity Fund II
Aetna Index Plus Small Cap VP o Prime Money Fund II
Aetna International VP o U.S. Government Securities Fund II
Aetna Legacy VP o Utility Fund II
Aetna Money Market VP Janus Aspen Series:
Aetna Real Estate Securities VP o Aggressive Growth Portfolio
Aetna Small Company VP o Balanced Portfolio
Aetna Value Opportunity VP o Flexible Income Portfolio
AIM V.I. Funds: o Growth Portfolio
o Capital Appreciation Fund o Worldwide Growth Portfolio
o Growth and Income Fund Lexington Emerging Markets Fund
o Growth Fund Lexington Natural Resources Trust Fund
o Value Fund MFS Funds:
Alger American Funds: o Total Return Series
o Balanced Portfolio o Worldwide Government Series
o Income & Growth Portfolio Oppenheimer Funds:
o Leveraged AllCap Portfolio o Aggressive Growth Fund
American Century Investments: o Global Securities Fund
o Balanced Fund o Growth & Income Fund
o International Fund o Strategic Bond Fund
Calvert Social Balanced Portfolio Portfolio Partners, Inc. (PPI):
Fidelity Investments Variable Insurance o PPI MFS Emerging Equities Portfolio
Products Fund: o PPI MFS Research Growth Portfolio
o Equity-Income Portfolio o PPI MFS Value Equity Portfolio
o Growth Portfolio o PPI Scudder International Growth Portfolio
o High Income Portfolio o PPI T. Rowe Price Growth Equity Portfolio
o Overseas Portfolio
</TABLE>
S-16
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (continued):
b. Other
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of 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, 1998 and December 31,
1997 aggregated $2,351,952,353 and $1,555,519,398; $1,874,026,188 and
$1,004,789,371, respectively.
S-17
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP: (1) $1,192,999 ($314,522) $6,202,187 $5,330,213 $871,974
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP: (2) 31,081,246 (2,098,681) 22,863,897 18,450,097 4,413,800
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP: (3) 5,276,463 (891,202) 45,551,245 43,538,269 2,012,976
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP: (4) 1,150,096 (357,408) 3,956,923 3,518,415 438,508
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Get Fund, Series B: 5,018,284 (317,102) 5,046,075 3,579,372 1,466,703
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Get Fund, Series C: 1,099,683 (125,657) 4,593,631 3,264,351 1,329,280
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Get Fund, Series D: 375,948 (91,506) 9,290 9,230 60
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP: (5) 194,648,930 (11,627,716) 149,305,243 120,221,169 29,084,074
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP: (6) 57,222 (185,058) 12,683,460 13,031,327 (347,867)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna High Yield VP: (7) 22,406 (865) 33,710 33,668 42
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP: (8) 3,829,668 (635,743) 17,517,599 14,396,635 3,120,964
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Mid Cap VP: (9) 18,437 (1,287) 73,979 81,147 (7,168)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Small Cap VP: (10) 38,562 (2,372) 124,787 157,822 (33,035)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna International VP: (11) 78,439 (5,821) 5,370,639 5,420,699 (50,060)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP: (12) 1,516,017 (403,303) 5,625,929 5,116,001 509,928
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP: (13) 6,326,910 (1,717,493) 386,526,442 385,568,048 958,394
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP: (14) 49,524 (4,403) 197,598 223,098 (25,500)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP: (15) 162,321 (180,527) 17,373,472 19,128,504 (1,755,032)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP: (16) 205,253 (172,485) 6,514,348 6,609,710 (95,362)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-18
<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>
$1,034,430 ($204,552) ($1,238,982) $3,942,985
$ 20,443,736 $ 24,898,190
- ------------------------------------------------------------------------------------------------------------------------------------
21,131,758 13,657,518 (7,474,240) 6,148,805
150,761,384 176,154,146
12,080,737 18,758,905
- ------------------------------------------------------------------------------------------------------------------------------------
781,718 (271,440) (1,053,158) 12,050,394
69,236,488 85,100,187
3,681,984 5,213,758
- ------------------------------------------------------------------------------------------------------------------------------------
704,161 455,992 (248,169) 8,303,550
20,250,904 28,289,880
69,721 1,317,322
- ------------------------------------------------------------------------------------------------------------------------------------
6,194,743 3,285,620 (2,909,123) (4,718,918)
20,859,924 19,399,768
- ------------------------------------------------------------------------------------------------------------------------------------
2,144,550 2,432,614 288,064 (4,244,458)
10,929,107 9,276,019
- ------------------------------------------------------------------------------------------------------------------------------------
0 (64,824) (64,824) 89,687,448
0 89,907,126
- ------------------------------------------------------------------------------------------------------------------------------------
67,675,837 (14,386,593) (82,062,430) (42,142,027)
892,006,381 955,586,320
130,876,769 155,197,661
- ------------------------------------------------------------------------------------------------------------------------------------
(945,071) 4,054,739 4,999,810 21,924,027
3,210,344 28,467,187
8,566 1,199,857
- ------------------------------------------------------------------------------------------------------------------------------------
0 (38,627) (38,627) 247,430
0 230,386
- ------------------------------------------------------------------------------------------------------------------------------------
1,342,384 9,544,413 8,202,029 44,321,436
28,074,705 85,248,495
165,083 1,829,647
- ------------------------------------------------------------------------------------------------------------------------------------
0 25,068 25,068 340,695
0 375,745
- ------------------------------------------------------------------------------------------------------------------------------------
0 8,264 8,264 958,381
0 969,800
- ------------------------------------------------------------------------------------------------------------------------------------
0 (4,447) (4,447) 1,512,822
0 1,528,847
0 2,086
- ------------------------------------------------------------------------------------------------------------------------------------
556,022 230,393 (325,629) 13,863,127
18,710,015 32,331,905
1,284,593 2,822,843
- ------------------------------------------------------------------------------------------------------------------------------------
1,429,868 1,434,703 4,835 19,490,597
124,939,137 149,772,871
0 229,509
- ------------------------------------------------------------------------------------------------------------------------------------
0 (78,505) (78,505) 1,040,421
0 965,259
0 16,278
- ------------------------------------------------------------------------------------------------------------------------------------
(299,676) 1,188,423 1,488,099 12,670,750
6,059,783 18,295,242
47,346 197,498
- ------------------------------------------------------------------------------------------------------------------------------------
(545,082) 1,733,031 2,278,113 12,561,099
3,912,594 18,689,212
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-19
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information of Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AIM V.I. Funds:
Capital Appreciation Fund: $4,806 ($202) $14,985 $12,643 $2,342
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund: 2,713 (267) 23,669 19,935 3,734
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Fund: 9,742 (211) 23,394 19,680 3,714
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Value Fund: 25,024 (535) 56,171 51,027 5,144
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 486,973 (82,216) 1,110,574 897,864 212,710
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Income & Growth Portfolio: 1,467,662 (206,029) 3,272,978 2,151,013 1,121,965
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 631,832 (203,365) 4,222,156 3,043,959 1,178,197
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
American Century Investments:
Balanced Fund: 593,854 (65,789) 611,313 550,274 61,039
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
International Fund: 390,912 (86,065) 1,137,750 894,619 243,131
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 142,097 (14,682) 869,863 750,607 119,256
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 8,906,937 (2,144,267) 25,370,915 20,727,569 4,643,346
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 11,278,163 (1,400,091) 22,592,809 17,208,859 5,383,950
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio: 4,692,207 (673,883) 14,109,054 14,587,749 (478,695)
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 1,031,834 (210,954) 48,431,460 47,643,577 787,883
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 1,595,388 (233,627) 3,024,858 2,760,267 264,591
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 6,614,609 (1,728,721) 42,738,053 30,874,729 11,863,324
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 3,204,277 (1,496,826) 30,685,587 22,118,189 8,567,398
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 342,576 (87,927) 1,725,694 1,635,019 90,675
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-20
<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>
$0 $19,720 $19,720 $272,126
$0 $298,792
- ------------------------------------------------------------------------------------------------------------------------------------
0 17,765 17,765 197,613
0 221,558
- ------------------------------------------------------------------------------------------------------------------------------------
0 12,342 12,342 271,273
0 296,860
- ------------------------------------------------------------------------------------------------------------------------------------
0 22,553 22,553 651,784
0 703,970
- ------------------------------------------------------------------------------------------------------------------------------------
691,602 1,582,996 891,394 (979,394)
5,656,151 6,185,618
- ------------------------------------------------------------------------------------------------------------------------------------
2,709,055 4,215,812 1,506,757 (2,575,078)
14,148,460 15,463,737
- ------------------------------------------------------------------------------------------------------------------------------------
1,540,243 6,533,437 4,993,194 (3,907,972)
14,280,009 16,971,895
- ------------------------------------------------------------------------------------------------------------------------------------
462,379 487,853 25,474 (525,510)
4,643,230 4,732,298
- ------------------------------------------------------------------------------------------------------------------------------------
361,821 743,148 381,327 (991,033)
5,852,955 5,791,227
- ------------------------------------------------------------------------------------------------------------------------------------
59,286 14,930 (44,356) 784,430
971,337 1,958,082
- ------------------------------------------------------------------------------------------------------------------------------------
19,807,673 22,859,546 3,051,873 22,941,092
138,709,740 176,108,721
- ------------------------------------------------------------------------------------------------------------------------------------
14,584,513 33,940,400 19,355,887 23,497,310
80,401,549 138,516,768
- ------------------------------------------------------------------------------------------------------------------------------------
2,722,687 (4,425,686) (7,148,373) 18,153,824
35,217,837 49,328,098
68,542 503,361
- ------------------------------------------------------------------------------------------------------------------------------------
460,930 669,980 209,050 3,064,387
13,004,643 17,886,843
- ------------------------------------------------------------------------------------------------------------------------------------
1,137,702 1,633,427 495,725 6,549,586
11,743,075 20,414,738
- ------------------------------------------------------------------------------------------------------------------------------------
18,201,832 35,201,475 16,999,643 21,398,116
107,827,442 162,974,413
- ------------------------------------------------------------------------------------------------------------------------------------
10,882,841 25,538,020 14,655,179 39,819,038
76,986,772 141,735,838
- ------------------------------------------------------------------------------------------------------------------------------------
387,160 478,048 90,888 (1,318,753)
6,578,182 5,695,641
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-21
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
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: $7,998,351 ($1,792,801) $11,978,535 $7,178,957 $4,799,578
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund II: 129,452 (351,981) 2,362,630 1,928,603 434,027
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 1,440,579 (346,704) 2,791,762 2,071,376 720,386
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 1,568,969 (734,892) 9,316,278 8,463,432 852,846
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
International Equity Fund II: 19,289 (235,997) 1,956,908 1,482,907 474,001
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II: 373,803 (110,555) 7,641,997 7,641,997 0
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 228,386 (196,668) 3,851,945 3,576,274 275,671
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Utility Fund II: 1,743,305 (392,083) 2,677,845 1,942,231 735,614
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (548,576) 107,425,514 96,362,874 11,062,640
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 2,261,301 (641,284) 6,017,873 4,527,218 1,490,655
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 1,033,461 (191,305) 3,727,543 3,410,925 316,618
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 3,293,173 (683,049) 26,018,237 18,985,226 7,033,011
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 8,111,689 (2,748,458) 78,479,604 56,933,615 21,545,989
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 161,811 (28,458) 724,351 1,074,950 (350,599)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 340,539 (62,444) 2,112,416 2,109,389 3,027
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
MFS Funds:
Total Return Series: 778,001 (405,501) 3,009,737 2,396,400 613,337
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Government Series: 17,379 (22,917) 739,420 740,555 (1,135)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Aggressive Growth Fund: 152,035 (112,671) 86,439,393 86,664,887 (225,494)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Global Securities Fund: 387,530 (69,872) 10,919,054 11,293,037 (373,983)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund: 1,054,695 (356,726) 4,266,733 4,140,441 126,292
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-22
<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>
$30,111,589 $37,231,660 $7,120,071 ($524,859)
$16,800,911 $134,398,144
48,751 51,858
- ------------------------------------------------------------------------------------------------------------------------------------
911,406 3,973,133 3,061,727 5,452,240
19,938,571 28,656,460
0 7,576
- ------------------------------------------------------------------------------------------------------------------------------------
3,558,451 5,244,563 1,686,112 1,241,036
22,709,106 27,450,515
- ------------------------------------------------------------------------------------------------------------------------------------
3,763,082 2,714,767 (1,048,315) (3,963,730)
53,212,853 49,887,731
- ------------------------------------------------------------------------------------------------------------------------------------
938,501 3,819,534 2,881,033 437,110
13,946,028 17,521,464
- ------------------------------------------------------------------------------------------------------------------------------------
0 2,223 2,223 271,362
7,530,487 8,067,320
- ------------------------------------------------------------------------------------------------------------------------------------
513,199 1,013,377 500,178 2,050,473
13,196,784 16,054,824
- ------------------------------------------------------------------------------------------------------------------------------------
5,801,015 7,053,257 1,252,242 695,668
26,302,858 30,329,937
0 7,667
- ------------------------------------------------------------------------------------------------------------------------------------
4,594,517 8,106,849 3,512,332 4,958,453
38,383,925 57,368,774
- ------------------------------------------------------------------------------------------------------------------------------------
3,462,858 15,241,071 11,778,213 26,193,826
31,145,778 72,228,489
- ------------------------------------------------------------------------------------------------------------------------------------
367,565 255,193 (112,372) 9,052,449
10,534,588 20,633,439
- ------------------------------------------------------------------------------------------------------------------------------------
5,764,208 12,281,148 6,516,940 12,764,560
40,072,928 68,058,273
645,899 1,585,189
- ------------------------------------------------------------------------------------------------------------------------------------
18,210,266 37,241,442 19,031,176 39,032,925
160,658,096 243,902,115
1,995,445 3,724,747
- ------------------------------------------------------------------------------------------------------------------------------------
(709,548) (1,196,659) (487,111) (619,636)
2,833,416 1,509,423
-----------------------------------------------------------------------------------------------------------------------------------
177,872 (1,266,269) (1,444,141) (1,812,452)
6,930,364 3,954,893
- ------------------------------------------------------------------------------------------------------------------------------------
1,975,149 3,834,735 1,859,586 16,318,427
18,973,878 38,137,728
- ------------------------------------------------------------------------------------------------------------------------------------
(5,937) 102,292 108,229 588,288
1,324,295 2,014,138
- ------------------------------------------------------------------------------------------------------------------------------------
133,786 1,243,228 1,109,442 7,306,211
3,688,200 11,917,723
- ------------------------------------------------------------------------------------------------------------------------------------
(846) 786,005 786,851 4,241,638
2,680,937 7,653,101
- ------------------------------------------------------------------------------------------------------------------------------------
465,927 (435,824) (901,751) 22,581,792
12,688,907 35,193,209
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-23
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Strategic Bond Fund: $150,955 ($113,793) $1,981,154 $2,006,416 ($25,262)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 321,152 (1,493,640) 87,290,554 78,385,480 8,905,074
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 18,247 (1,021,049) 37,548,653 34,203,994 3,344,659
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 34,159 (276,002) 13,051,497 11,621,475 1,430,022
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 29,626 (167,735) 136,940,032 134,230,073 2,709,959
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio: 576,750 (1,411,791) 16,657,996 15,110,779 1,547,217
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------------
Total Variable Annuity Account B $325,794,651 ($42,285,760) $1,555,519,398 $1,412,108,865 $143,410,533
====================================================================================================================================
</TABLE>
(1) - Effective May 1, 1998, Aetna Ascent Variable Portfolio's name changed to
Aetna Ascent VP.
(2) - Effective May 1, 1998, Aetna Investment Advisors Fund's name changed to
Aetna Balanced VP.
(3) - Effective May 1, 1998, Aetna Income Shares' name changed to Aetna Bond VP.
(4) - Effective May 1, 1998, Aetna Crossroads Variable Portfolio's name changed
to Aetna Crossroads VP.
(5) - Effective May 1, 1998, Aetna Variable Fund's name changed to Aetna Growth
and Income VP.
(6) - Effective May 1, 1998, Aetna Variable Growth Portfolio's name changed to
Aetna Growth VP.
(7) - Effective May 1, 1998, Aetna High Yield Portfolio's name changed to Aetna
High Yield VP.
(8) - Effective May 1, 1998, Aetna Variable Index Plus Portfolio's name changed
to Aetna Index Plus Large Cap VP.
(9) - Effective May 1, 1998, Aetna Index Plus Mid Cap Portfolio's name changed
to Aetna Index Plus Mid Cap VP.
(10) -Effective May 1, 1998, Aetna Index Plus Small Cap Portfolio's name
changed to Aetna Index Plus Small Cap VP.
(11) -Effective May 1, 1998, Aetna International Portfolio's name changed to
Aetna International VP.
(12) -Effective May 1, 1998, Aetna Legacy Variable Portfolio's name changed to
Aetna Legacy VP.
(13) -Effective May 1, 1998, Aetna Variable Encore Fund's name changed to Aetna
Money Market VP.
(14) -Effective May 1, 1998, Aetna Real Estate Securities Portfolio's name
changed to Aetna Real Estate Securities VP.
(15) -Effective May 1, 1998, Aetna Variable Small Company Portfolio's name
changed to Aetna Small Company VP.
(16) -Effective May 1, 1998, Aetna Variable Capital Appreciation Portfolio's
name changed to Aetna Value Opportunity VP.
S-24
<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>
($21,173) $47,663 $68,836 $9,925,163
$3,092,701 $12,897,019
0 201,581
- ------------------------------------------------------------------------------------------------------------------------------------
(753,832) 19,423,983 20,177,815 8,869,734
94,796,247 131,150,274
496,447 922,555
- ------------------------------------------------------------------------------------------------------------------------------------
(1,162,926) 11,016,482 12,179,408 8,222,292
65,867,130 88,610,687
- ------------------------------------------------------------------------------------------------------------------------------------
220,662 3,770,053 3,549,391 7,801,278
15,049,606 27,062,849
378,075 903,680
- ------------------------------------------------------------------------------------------------------------------------------------
195,427 863,502 668,075 1,706,168
12,650,163 17,577,310
0 18,946
- ------------------------------------------------------------------------------------------------------------------------------------
1,797,922 24,891,619 23,093,697 4,872,245
90,170,258 118,791,854
0 56,523
- ------------------------------------------------------------------------------------------------------------------------------------
$255,524,506 $349,806,583 $94,282,077 $512,924,064 $2,922,442,857 $3,956,568,422
====================================================================================================================================
</TABLE>
S-25
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (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>
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-26
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets -----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$59,979,314 $67,675,837 $7,696,523 $71,233,894
$644,728,031 $892,006,381
89,732,216 130,876,769
- ------------------------------------------------------------------------------------------------------------------------------------
379,633 781,718 402,085 (1,964,060)
66,534,546 69,236,488
3,583,489 3,681,984
- ------------------------------------------------------------------------------------------------------------------------------------
(540,607) 1,429,868 1,970,475 13,513,776
106,781,998 124,939,137
- ------------------------------------------------------------------------------------------------------------------------------------
15,114,435 21,131,758 6,017,323 7,591,834
119,402,212 150,761,384
7,942,484 12,080,737
- ------------------------------------------------------------------------------------------------------------------------------------
4,487,610 6,194,743 1,707,133 (712,316)
16,333,339 20,859,924
- ------------------------------------------------------------------------------------------------------------------------------------
144,834 2,144,550 1,999,716 (532,193)
9,281,276 10,929,107
- ------------------------------------------------------------------------------------------------------------------------------------
276,453 1,034,430 757,977 12,596,284
5,638,668 20,443,736
- ------------------------------------------------------------------------------------------------------------------------------------
151,493 704,161 552,668 13,077,636
5,295,700 20,250,904
0 69,721
- ------------------------------------------------------------------------------------------------------------------------------------
46,576 556,022 509,446 12,197,969
6,186,987 18,710,015
0 1,284,593
- ------------------------------------------------------------------------------------------------------------------------------------
0 (545,082) (545,082) 3,831,929
0 3,912,594
- ------------------------------------------------------------------------------------------------------------------------------------
0 (945,071) (945,071) 3,293,042
0 3,210,344
0 8,566
- ------------------------------------------------------------------------------------------------------------------------------------
(4,046) 1,342,384 1,346,430 23,512,958
1,985,372 28,074,705
0 165,083
- ------------------------------------------------------------------------------------------------------------------------------------
0 (299,676) (299,676) 6,028,520
0 6,059,783
0 47,346
- ------------------------------------------------------------------------------------------------------------------------------------
(461,380) 691,602 1,152,982 1,032,718
3,777,291 5,656,151
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-27
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (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>
Alger American Funds (continued):
Growth Portfolio: (1) $506,477 ($685,927) $ 78,591,434 $ 64,519,617 $ 14,071,817
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Income and Growth Portfolio: 401,543 (156,768) 2,602,037 3,401,714 (799,677)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 0 (196,601) 7,570,244 6,461,486 1,108,758
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
MidCap Growth Portfolio: (1) 350,028 (308,858) 49,795,194 45,404,313 4,390,881
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: (2) 2,260,717 (722,118) 118,175,863 114,437,088 3,738,775
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
American Century Investments:
Balanced Fund: 199,265 (58,943) 704,536 619,119 85,417
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund: (3) 725,963 (365,809) 47,909,593 51,060,683 (3,151,090)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
International Fund: 176,899 (85,324) 4,226,767 3,417,937 808,830
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 67,562 (7,128) 212,241 199,799 12,442
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 7,870,976 (1,400,361) 17,887,517 15,251,625 2,635,892
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 2,159,319 (938,752) 10,659,015 9,711,716 947,299
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio: 1,270,071 (337,944) 4,857,948 4,277,783 580,165
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 863,493 (164,196) 5,725,552 5,116,905 608,647
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 761,827 (120,783) 1,009,159 904,890 104,269
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 1,931,363 (1,125,088) 13,933,668 10,543,199 3,390,469
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 1,159,193 (771,581) 17,678,295 13,392,232 4,286,063
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 277,920 (79,205) 1,100,211 1,085,995 14,216
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-28
<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-29
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (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-30
<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-31
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (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:
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-32
<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-33
<PAGE>
Variable Annuity Account B
Notes to Financial Statements - December 31, 1998 (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-34
<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-35
<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, 1998, 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, 1998. 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, 1998, 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, 1998, 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, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
February 26, 1999
S-36
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996 F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4
Consolidated Statements of Changes in Shareholder's Equity For the Years
Ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiary as of December 31, 1998 and 1997,
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, 1998. 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 aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Aetna Life
Insurance and Annuity Company and Subsidiary at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
February 3, 1999
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Premiums $ 79.4 $ 69.1 $ 84.9
Charges assessed against policyholders 324.3 262.0 197.0
Net investment income 877.6 878.8 852.6
Net realized capital gains 10.4 29.7 17.0
Other income 29.6 38.3 43.6
---------- ---------- ----------
Total revenue 1,321.3 1,277.9 1,195.1
---------- ---------- ----------
Benefits and expenses:
Current and future benefits 714.4 720.4 728.3
Operating expenses 313.2 286.5 275.8
Amortization of deferred policy acquisition costs 106.7 82.8 28.0
Severance and facilities charges -- -- 47.1
---------- ---------- ----------
Total benefits and expenses 1,134.3 1,089.7 1,079.2
---------- ---------- ----------
Income from continuing operations before
income taxes 187.0 188.2 115.9
Income taxes 47.4 50.7 30.7
---------- ---------- ----------
Income from continuing operations 139.6 137.5 85.2
Discontinued Operations, net of tax
Income from operations 61.8 67.8 55.9
Gain on sale 59.0 -- --
---------- ---------- ----------
Net income $ 260.4 $ 205.3 $ 141.1
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Investments:
Debt securities available for sale, at fair value,
(amortized cost: $11,570.3 and $12,912.2) $12,067.2 $13,463.8
Equity securities, at fair value,
Nonredeemable preferred stock (cost: $202.6 and $131.7) 203.3 147.6
Investment in affiliated mutual funds (cost: $96.8 and$78.1) 100.1 83.0
Common stock (cost: $1.0 and $0.2) 2.0 .6
Short-term investments 47.9 95.6
Mortgage loans 12.7 12.8
Policy loans 292.2 469.6
------------ ------------
Total investments 12,725.4 14,273.0
Cash and cash equivalents 608.4 565.4
Short-term investments under securities loan agreement 277.3 --
Accrued investment income 151.6 163.0
Premiums due and other receivables 46.7 51.9
Reinsurance recoverable 2,959.8 11.8
Deferred policy acquisition costs 864.0 1,654.6
Reinsurance loan to affiliate -- 397.2
Deferred tax asset 120.6 --
Other assets 66.6 46.8
Separate accounts assets 29,458.4 22,982.7
------------ ------------
Total assets $47,278.8 $40,146.4
============ ============
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $ 3,815.9 $ 3,763.7
Unpaid claims and claim expenses 18.8 38.0
Policyholders' funds left with the Company 11,305.6 11,143.5
------------ ------------
Total insurance reserve liabilities 15,140.3 14,945.2
Payables under securities loan agreement 277.3 --
Other liabilities 793.2 312.8
Income taxes:
Current 279.8 12.4
Deferred -- 72.0
Separate accounts liabilities 29,430.2 22,970.0
------------ ------------
Total liabilities 45,920.8 38,312.4
------------ ------------
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 427.3 418.0
Accumulated other comprehensive income 104.8 92.9
Retained earnings 823.1 1,320.3
------------ ------------
Total shareholder's equity 1,358.0 1,834.0
------------ ------------
Total liabilities and shareholder's equity $47,278.8 $40,146.4
============ ============
</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,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,834.0 $1,609.5 $1,583.0
Comprehensive income
Net income 260.4 205.3 141.1
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
($18.2 million, $49.9 million and
$(110.6) million, pretax, respectively) 11.9 32.4 (72.0)
---------- ---------- ----------
Total comprehensive income 272.3 237.7 69.1
---------- ---------- ----------
Capital contributions 9.3 -- 10.4
Other changes 1.4 4.1 (49.5)
Common stock dividends (759.0) (17.3) (3.5)
---------- ---------- ----------
Shareholder's equity, end of year $1,358.0 $1,834.0 $1,609.5
========== ========== ==========
</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,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 260.4 $ 205.3 $ 141.1
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Net accretion of discount on investments (29.5) (66.4) (68.0)
Gain on sale of discontinued operations (88.3) -- --
--------- --------- ---------
Cash flows provided by operating activities and net realized capital
gains before changes in assets and liabilities 142.6 138.9 73.1
Net realized capital gains (11.1) (36.0) (19.7)
--------- --------- ---------
Cash flows provided by operating activities before changes in assets
and liabilities 131.5 102.9 53.4
Changes in assets and liabilities:
Decrease (increase) in accrued investment income 11.4 (4.0) 16.5
(Increase) decrease in premiums due and other receivables (16.3) (33.3) 1.6
Decrease (increase) in policy loans 177.4 (70.3) (60.7)
Increase in deferred policy acquisition costs (117.3) (139.3) (174.0)
Decrease in reinsurance loan to affiliate 397.2 231.1 27.2
Net increase in universal life account balances 122.9 157.1 146.6
Decrease in other insurance reserve liabilities (41.8) (120.3) (114.9)
Net (decrease) increase in other liabilities and other assets (50.8) (41.7) 3.1
Increase (decrease) in income taxes 100.4 (31.4) (26.7)
Other, net -- -- 1.1
--------- --------- ---------
Net cash provided by (used for) operating activities 714.6 50.8 (126.8)
--------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 6,790.2 5,311.3 5,182.2
Equity securities 150.1 103.1 190.5
Mortgage loans 0.3 0.2 8.7
Life business 966.5 -- --
Investment maturities and collections of:
Debt securities available for sale 1,290.3 1,212.7 885.2
Short-term investments 129.9 89.3 35.0
Cost of investment purchases in:
Debt securities available for sale (6,701.4) (6,732.8) (6,534.3)
Equity securities (125.7) (113.3) (118.1)
Other investments (2,725.9) -- --
Short-term investments (81.9) (149.9) (54.7)
Other, net -- -- (17.6)
--------- --------- ---------
Net cash used for investing activities (307.6) (279.4) (423.1)
--------- --------- ---------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,571.1 1,621.2 1,579.5
Withdrawals of investment contracts (1,393.1) (1,256.3) (1,146.2)
Capital contribution to Separate Account -- (25.0) --
Return of capital from Separate Account 1.7 12.3 --
Capital contribution from HOLDCO 9.3 -- 10.4
Dividends paid to shareholder (553.0) (17.3) (3.5)
--------- --------- ---------
Net cash (used for) provided by financing activities (364.0) 334.9 440.2
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 43.0 106.3 (109.7)
Cash and cash equivalents, beginning of year 565.4 459.1 568.8
--------- --------- ---------
Cash and cash equivalents, end of year $ 608.4 $ 565.4 $ 459.1
========= ========= =========
Supplemental cash flow information:
Income taxes paid, net $ 48.4 $ 119.6 $ 85.5
========= ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
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 in the
United States. Prior to the sale of the domestic individual life insurance
business on October 1, 1998, the Company had two business segments: financial
services and individual life insurance. On October 1, 1998, the Company sold
its domestic individual life insurance operations to Lincoln National
Corporation ("Lincoln") and accordingly they are now classified as
Discontinued Operations. (Refer to note 2)
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.
Discontinued Operations 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. ("ARS"), 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 1997 and 1996 financial information to conform to the 1998
presentation.
New Accounting Standards
------------------------
Disclosures about Segments of an Enterprise and Related Information
As of December 31, 1998, the Company adopted Financial Accounting Standard
("FAS") No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for the reporting of
information relating to operating segments. This statement supersedes FAS No.
14, Financial Reporting for Segments of a Business Enterprise, which requires
reporting segment information by industry and geographic area (industry
approach). Under FAS No. 131, operating segments are defined as components of
a company for which separate financial information is available and is used
by management to allocate resources and assess performance (management
approach). The adoption of this statement did not change the composition or
the results of operations of any of the operating segments of the Company,
which are consistent with the management approach.
F-7
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Accounting for the Costs of Computer Software Developed and Obtained for
Internal Use
On January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, issued by the American Institute of Certified Public
Accountants ("AICPA"). This statement requires that certain costs incurred in
developing internal use computer software (in process at, and subsequent to
the adoption date) be capitalized, and provides guidance for determining
whether computer software is considered to be for internal use. The Company
amortizes these costs over a period of 3 to 5 years. Previously, the Company
expensed the cost of internal-use computer software as incurred. The adoption
of this statement resulted in a net after-tax increase to the results of
operations of $6.5 million for the year ended December 31, 1998.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB") issued FAS
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, that provides accounting and reporting
standards for transfers of financial assets and extinguishments of
liabilities. FAS No. 125 was effective for 1997 financial statements;
however, certain provisions relating to accounting for repurchase agreements
and securities lending were not effective until January 1, 1998. The adoption
of those provisions effective in 1998 did not have a material effect on the
Company's financial position or results of operations.
Future Application of Accounting Standards
------------------------------------------
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That
Do Not Transfer Insurance Risk
In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk,
which provides guidance on how to account for all insurance and reinsurance
contracts that do not transfer insurance risk, except for long-duration life
and health insurance contracts. This statement is effective for the Company's
financial statements beginning January 1, 2000, with early adoption
permitted. The Company is currently evaluating the impact of the adoption of
this statement and the potential effect on its financial position and results
of operations.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard requires companies to
record all derivatives on the balance sheet as either assets or liabilities
and measure those instruments at fair value. The manner in which companies
are to record gains or losses resulting from changes in the values of those
derivatives depends on the use of the derivative and whether it qualifies for
hedge accounting. This standard is effective for the Company's financial
statements beginning January 1, 2000, with early adoption permitted. The
Company is currently evaluating the impact of adoption of this statement and
the potential effect on its financial position and results of operations.
F-8
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments
In December 1997, the AICPA issued SOP 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. The
Company does not accrue interest on problem debt securities when management
believes the collection of interest is unlikely.
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.
F-9
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
At December 31, 1998 and 1997, the Company loaned securities (which are
reflected as invested assets) with a fair value of approximately $277.3
million and $385.1 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 an original 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 for other than trading purposes in
order to hedge interest rate risk (i.e. market risk, refer to Note 4.)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts allocable to
experience rated contracts are deducted from capital gains and losses with an
offsetting amount reported in future policy benefits. Changes in the fair
value of futures contracts allocable to non-experienced-rated 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
or losses on the hedging instrument are reflected in net realized capital
gains or losses.
Included in common stock are warrants which represent the right to purchase
specific securities. Upon exercise, the cost of the warrants is 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 (prior to the sale of the domestic individual life
insurance business to Lincoln on October 1, 1998, refer to Note 2), such
costs are amortized over expected premium-paying periods (up to 20 years).
For universal life (prior to the sale of the domestic individual life
insurance business to Lincoln on October 1, 1998, refer to Note 2), and
certain annuity contracts,
F-10
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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 50 years for universal life and up to 20 years for certain annuity
contracts). Deferred policy acquisition costs are written off to the extent
that it is determined that future policy premiums and investment income or
gross profits 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. Prior to the sale of the domestic individual life insurance
business on October 1, 1998, (refer to note 2), reserves for universal life
products were equal to cumulative deposits less withdrawals and charges plus
credited interest thereon, plus (less) net realized capital gains (losses)
(which were reflected through credited interest rates). These reserves also
included unrealized capital gains (losses) related to FAS No. 115. As a
result of the sale and transfer of assets supporting the business, reserves
for universal life products will no longer include net realized capital gains
(losses) and unrealized gains (losses) related to FAS No. 115 for the years
ended December 31, 1998 and beyond.
Reserves for immediate annuities with life contingent payouts and traditional
life insurance contracts are 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 1.50% to
11.25% 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.
Because the sale of the domestic individual life insurance business was
substantially in the form of an indemnity reinsurance agreement, the Company
reported an addition to its reinsurance recoverable approximating the
Company's total individual life reserves at the sale date.
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
3.00% to 8.10% for all years presented) net of adjustments for investment
experience that the Company is entitled to reflect in future credited
interest. These reserves also include unrealized gains/losses related to FAS
No. 115. 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-11
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
-----------------------------------------------------------------------
For universal life (prior to the sale of the domestic individual life
insurance business to Lincoln on October 1, 1998, refer to Note 2) 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
(prior to the sale of the domestic individual life insurance business to
Lincoln on October 1, 1998, refer to Note 2) 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 (who bears the investment risk
subject, in some cases, to minimum guaranteed rates) in shares of mutual
funds which are managed by an affiliate of the Company, or other selected
mutual funds not managed by the Company.
As of December 31, 1998, Separate Accounts assets are carried at fair value.
At December 31, 1998, unrealized gains of $10.0 million, after taxes, on
assets supporting a guaranteed interest option are reflected in shareholder's
equity. At December 31, 1997, Separate Account assets supporting the
guaranteed interest option were carried at an amortized cost of $658.6
million (fair value $668.7 million). Separate Accounts liabilities are
carried at fair value, except for those relating to the guaranteed interest
option. Reserves relating to the guaranteed interest option are maintained at
fund value and reflect interest credited at rates ranging from 3.00% to 8.10%
in 1998 and 4.10% to 8.10% in 1997.
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 Financial Statements (with the exception of
realized and unrealized capital gains and losses on the assets supporting the
guaranteed interest option). The Consolidated Statements of Cash Flows do not
reflect investment activity of the Separate Accounts.
F-12
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Reinsurance
-----------
The Company utilizes indemnity reinsurance agreements to reduce its exposure
to large losses in all aspects of its insurance business. Such reinsurance
permits recovery of a portion of losses from reinsurers, although it does not
discharge the primary liability of the Company as direct insurer of the risks
reinsured. The Company evaluates the financial strength of potential
reinsurers and continually monitors the financial condition of reinsurers.
Only those reinsurance recoverables deemed probable of recovery are reflected
as assets on the Company's Consolidated Balance Sheets. The majority of the
reinsurance recoverable on the Consolidated Balance Sheets at December 31,
1998 is related to the reinsurance recoverable from Lincoln arising from the
sale of the domestic life insurance business. (Refer to Note 2)
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.
2. Discontinued Operations-Individual Life Insurance
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The transaction was generally in
the form of an indemnity reinsurance arrangement, under which Lincoln
contractually assumed from the Company certain policyholder liabilities and
obligations, although the Company remains directly obligated to
policyholders. Insurance reserves ceded as of December 31, 1998 were $2.9
billion. Deferred policy acquisition costs related to the life policies of
$907.9 million were written off against the gain on the sale. Certain
invested assets related to and supporting the life policies were sold to
consummate the life sale, and the Company recorded a reinsurance recoverable
from Lincoln. The transaction resulted in an after-tax gain on the sale of
approximately $117 million, of which $58 million will be deferred and
amortized over approximately 15 years (as profits in the book of business
sold emerge). The remaining portion of the gain was recognized immediately in
net income and was largely attributed to the sale of the domestic life
insurance business for access to the agency sales force and brokerage
distribution channel. The unamortized portion of the gain is presented in
other liabilities on the Consolidated Balance Sheets.
The operating results of the domestic individual life insurance business are
presented as Discontinued Operations. All prior year income statement data
has been restated to reflect the presentation as Discontinued Operations.
Revenues for the individual life segment were $652.2 million, $620.4 million
and $445.7 million for 1998, 1997 and 1996, respectively. Premiums ceded and
reinsurance recoveries made in 1998 totaled $153.4 million and $57.7 million,
respectively.
F-13
<PAGE>
Notes to Consolidated Financial Statements (continued)
3. Investments
Debt securities available for sale as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 (Millions) Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and government agencies
and authorities $ 718.9 $ 60.4 $ 0.2 $ 779.1
States, municipalities and political subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Utilities 615.2 29.8 4.1 640.9
Financial 2,259.2 94.6 5.6 2,348.2
Transportation/capital goods 580.8 33.0 1.1 612.7
Health care/consumer products 1,328.2 69.8 4.8 1,393.2
Natural resources 254.5 6.9 2.3 259.1
Other corporate securities 261.7 5.8 7.4 260.1
--------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 5,299.6 239.9 25.3 5,514.2
--------------------------------------------------------------------------------------------------------------
Foreign securities:
Government, including political subdivisions 507.6 30.4 32.9 505.1
Utilities 147.0 32.4 -- 179.4
Other 511.2 14.9 1.8 524.3
--------------------------------------------------------------------------------------------------------------
Total foreign securities 1,165.8 77.7 34.7 1,208.8
--------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 671.9 38.4 2.9 707.4
Collateralized mortgage obligations 1,879.6 119.7 10.4 1,988.9
--------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 2,551.5 158.1 13.3 2,696.3
--------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed
securities 1,114.9 30.9 9.8 1,136.0
Other asset-backed securities 719.3 13.8 0.6 732.5
--------------------------------------------------------------------------------------------------------------
Total debt securities $11,570.3 $580.8 $83.9 $12,067.2
==============================================================================================================
</TABLE>
F-14
<PAGE>
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Debt securities available for sale as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 (Millions) Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------
<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:
Utilities 521.3 23.5 0.9 543.9
Financial 2,370.7 84.6 1.3 2,454.0
Transportation & capital goods 528.2 33.2 0.1 561.3
Healthcare & consumer products 728.5 27.0 2.6 752.9
Natural resources 143.5 5.5 -- 149.0
Other corporate securities 545.2 27.2 0.1 572.3
--------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4
--------------------------------------------------------------------------------------------------------------
Foreign securities:
Government, including political subdivisions 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-15
<PAGE>
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
At December 31, 1998 and 1997, net unrealized appreciation of $496.9 million
and $551.6 million, respectively, on available-for-sale debt securities
included $355.8 million and $429.3 million, respectively, related to
experience-rated contracts, which were not reflected in shareholder's equity
but in insurance reserves.
The amortized cost and fair value of debt securities for the year ended
December 31, 1998 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be
restructured, called, or prepaid.
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
---------------------------------------------------------------
<S> <C> <C>
Due to mature:
One year or less $ 553.5 $ 554.6
After one year through five years 2,619.7 2,692.4
After five years through ten years 1,754.0 1,801.7
After ten years 2,257.4 2,453.7
Mortgage-backed securities 3,666.4 3,832.3
Other asset-backed securities 719.3 732.5
---------------------------------------------------------------
Total $11,570.3 $12,067.2
===============================================================
</TABLE>
At December 31, 1998 and 1997, debt securities carried at $8.8 million and
$8.2 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, 1998.
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Fair Amortized Fair Amortized
(Millions) Value Cost Value Cost
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total residential CMOs (1) $ 1,988.9 $1,879.6 $ 2,415.9 $2,280.5
=======================================================================================================
Percentage of total:
Supporting experience rated products 81.7% 81.6%
Supporting remaining products 18.3% 18.4%
- -------------------------------------------------------------------------------------------------------
100.0% 100.0%
=======================================================================================================
</TABLE>
(1) At December 31, 1998 and 1997, approximately 66% and 73%, respectively, of
the Company's residential CMO holdings were backed by government agencies
such as GNMA, FNMA, FHLMC.
F-16
<PAGE>
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
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, 1998 and 1997,
approximately 2% and 4%, 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).
Investments in equity securities available for sale as of December 31 were as
follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997
-------------------------------------------------------
<S> <C> <C>
Amortized Cost $300.4 $210.0
Gross unrealized gains 13.1 21.3
Gross unrealized losses 8.1 .1
-------------------------------------------------------
Fair Value $305.4 $231.2
=======================================================
</TABLE>
4. Financial Instruments
Estimated Fair Value
--------------------
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- -----------------------
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 12.7 $ 12.3 $ 12.8 $ 12.4
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 1,063.9 $ 984.3 $ 1,030.3 $1,005.4
Without a fixed maturity 10,241.7 9,686.2 10,113.2 9,587.5
- -----------------------------------------------------------------------------------------
</TABLE>
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument,
nor do they consider the tax impact of the realization of unrealized gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument. In evaluating the Company's
management of interest rate, price and liquidity risks, the fair values of
all assets and liabilities should be taken into consideration, not only those
presented above.
F-17
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Financial Instruments (continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar
loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans.
Investment contract liabilities (included in Policyholders' funds left with
the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in
paying an amount different than that determined to be payable on demand.
Off-Balance-Sheet and Other Financial Instruments
-------------------------------------------------
Futures Contracts:
Futures contracts are used to manage interest rate risk in the Company's bond
portfolio. 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. The notional amounts, carrying values and estimated
fair values of the Company's open treasury futures as of December 31, 1998
were $250.9 million, $.1 million, and $.1 million, respectively.
Warrants:
Included in common stocks are warrants which are instruments giving the
Company the right, but not the obligation to buy a security at a given price
during a specified period. The carrying values and estimated fair values of
the Company's warrants to purchase equity securities as of December 31, 1998
were $1.5 million, respectively. The carrying values and estimated fair
values as of December 31, 1997 were $.6 million, respectively.
F-18
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Financial Instruments (continued)
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, 1998 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
-----------------------------------------------------------------------------
<S> <C> <C>
Residential collateralized mortgage obligations $1,879.6 $1,988.9
Principal-only strips (included above) 20.2 24.0
Interest-only strips (included above) 17.3 18.0
Other structured securities with derivative
characteristics (1) 87.3 80.6
-----------------------------------------------------------------------------
</TABLE>
(1) Represents non-leveraged instruments whose fair values and credit risk
are based on underlying securities, including fixed income securities
and interest rate swap agreements.
5. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 798.8 $ 814.6 $ 805.3
Nonredeemable preferred stock 18.4 12.9 5.8
Investment in affiliated mutual funds 6.6 3.8 10.8
Mortgage loans 0.6 0.3 0.6
Policy loans 7.2 5.7 6.4
Reinsurance loan to affiliate 2.3 5.5 9.3
Cash equivalents 44.6 38.8 27.1
Other 16.7 9.5 1.8
-----------------------------------------------------------------------------
Gross investment income 895.2 891.1 867.1
Less: investment expenses (17.6) (12.3) (14.5)
-----------------------------------------------------------------------------
Net investment income $ 877.6 $ 878.8 $ 852.6
=============================================================================
</TABLE>
Net investment income includes amounts allocable to experience rated
contractholders of $655.6 million, $673.8 million and $649.5 million for the
years ended December 31, 1998, 1997 and 1996, respectively. Interest credited
to contractholders is included in current and future benefits.
F-19
<PAGE>
Notes to Consolidated Financial Statements (continued)
6. Dividend Restrictions and Shareholder's Equity
The Company paid $553.0 million and $17.3 million in cash dividends to HOLDCO
in 1998 and 1997, respectively. Additionally, at December 31, 1998, the
Company accrued $206.0 million in dividends. Of the $759.0 million dividends
paid and accrued in 1998, $756.0 million (all of which was approved by the
Insurance Commissioner of the State of Connecticut) was attributable to
proceeds from the sale of the domestic individual life insurance business.
In January 1999, the accrued dividends of $206.0 million were paid by the
Company to HOLDCO. Further dividends to be paid by the Company to HOLDCO
during 1999 will need to be approved by the Insurance Department of the State
of Connecticut (the "Department") prior to payment.
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
$148.1 million, $80.5 million and $57.8 million for the years ended December
31, 1998, 1997 and 1996, respectively. Statutory capital and surplus was
$773.0 million and $778.7 million as of December 31, 1998 and 1997,
respectively.
As of December 31, 1998, 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.
7. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains on investments were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 7.4 $21.1 $ 9.5
Equity securities 3.0 8.6 7.5
----------------------------------------------------------------------------
Pretax realized capital gains $10.4 $29.7 $17.0
============================================================================
After-tax realized capital gains $ 7.3 $19.2 $11.1
============================================================================
</TABLE>
Net realized capital gains of $15.0 million, $83.7 million and $52.5 million
for 1998, 1997 and 1996, 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 $118.6 million and $120.1 million at December 31, 1998
and 1997, respectively.
F-20
<PAGE>
Notes to Consolidated Financial Statements (continued)
7. Capital Gains and Losses on Investment Operations (continued)
Proceeds from the sale of available-for-sale debt securities and the related
gross gains and losses were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds on sales $6,790.2 $5,311.3 $5,182.2
Gross gains 98.8 23.8 22.1
Gross losses 91.4 2.7 12.6
----------------------------------------------------------------------------
</TABLE>
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities,
excluding those related to experience-rated contractholders) were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 18.9 $44.3 $(100.1)
Equity securities (16.1) 5.6 (10.5)
Other 15.4 -- --
-----------------------------------------------------------------------------------
Subtotal 18.2 49.9 (110.6)
Increase (decrease) in deferred income taxes
(Refer to note 8) 6.3 17.5 (38.6)
-----------------------------------------------------------------------------------
Net changes in accumulated other
comprehensive income $ 11.9 $32.4 $ (72.0)
===================================================================================
</TABLE>
Net unrealized capital gains allocable to experience-rated contracts of
$355.8 million at December 31, 1998 are reflected on the Consolidated Balance
Sheets in Policyholders' funds left with the Company and are not included in
shareholder's equity. At December 31, 1997, net unrealized capital gains of
$356.7 million and $72.6 million at December 31, 1997 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.
F-21
<PAGE>
Notes to Consolidated Financial Statements (continued)
7. Capital Gains and Losses on Investment Operations (continued)
Shareholder's equity included the following accumulated other comprehensive
income, which are net of amounts allocable to experience-rated
contractholders, at December 31:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Gross unrealized capital gains $157.3 $140.6 $101.7
Gross unrealized capital losses (16.2) (18.4) (23.8)
----------------------------------------------------------------------------------
141.1 122.2 77.9
----------------------------------------------------------------------------------
Equity securities:
Gross unrealized capital gains 13.1 21.2 16.3
Gross unrealized capital losses (8.1) (0.1) (0.8)
----------------------------------------------------------------------------------
5.0 21.1 15.5
----------------------------------------------------------------------------------
Other:
Gross unrealized capital gains 17.1 -- --
Gross unrealized capital losses (1.7) -- --
----------------------------------------------------------------------------------
15.4 -- --
----------------------------------------------------------------------------------
Deferred income taxes (Refer to note 8) 56.7 50.4 32.9
----------------------------------------------------------------------------------
Net accumulated other comprehensive income $104.8 $ 92.9 $ 60.5
==================================================================================
</TABLE>
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders) were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during the year (1) $38.3 $98.8 $(14.8)
Less: reclassification adjustment for gains and
other items included in net income (2) 26.4 66.4 57.2
-----------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $11.9 $32.4 $(72.0)
===================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the year were
$58.8 million, $152.3 million and ($22.9) million for 1998, 1997 and
1996, respectively.
(2) Pretax reclassification adjustments for gains and other items included
in net income were $40.6 million, $102.4 million and $87.7 million for
1998, 1997 and 1996, respectively.
F-22
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return, the
combined returns of Connecticut and New York, and the Illinois unitary 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 in the consolidated federal income tax return.
Income taxes from continuing operations consist of the following:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes (benefits):
Federal $ 246.4 $ 28.7 $ 30.0
State 1.3 2.0 2.3
Net realized capital gains 16.8 39.1 24.4
------------------------------------------------------------------------------
264.5 69.8 56.7
------------------------------------------------------------------------------
Deferred taxes (benefits):
Federal (203.2) 9.4 (7.6)
Net realized capital (losses) (13.9) (28.5) (18.4)
------------------------------------------------------------------------------
(217.1) (19.1) (26.0)
------------------------------------------------------------------------------
Total $ 47.4 $ 50.7 $ 30.7
==============================================================================
</TABLE>
Income taxes were different from the amount computed by applying the federal
income tax rate to income from continuing operations before income taxes for
the following reasons:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations before
income taxes $187.0 $188.2 $115.9
Tax rate 35% 35% 35%
------------------------------------------------------------------------------
Application of the tax rate 65.5 65.9 40.6
Tax effect of:
State income tax, net of federal benefit 0.9 1.3 1.5
Excludable dividends (17.1) (15.6) (10.8)
Other, net (1.9) (0.9) (0.6)
------------------------------------------------------------------------------
Income taxes $ 47.4 $ 50.7 $ 30.7
==============================================================================
</TABLE>
F-23
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
(Millions) 1998 1997
------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 324.1 $415.8
Unrealized gains allocable to experience
rated contracts 124.5 150.1
Investment (gains) losses (0.3) 6.6
Postretirement benefits other than pensions 26.0 26.3
Deferred compensation 38.6 31.2
Restructuring charge 2.9 9.5
Depreciation 1.7 3.9
Sale of individual life 48.9 -
Other 16.0 8.8
------------------------------------------------------------------------
Total gross assets 582.4 652.2
------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 272.7 515.6
Market discount 4.5 5.1
Net unrealized capital gains 181.2 200.5
Pension 3.9 3.6
Other (0.5) (0.6)
------------------------------------------------------------------------
Total gross liabilities 461.8 724.2
------------------------------------------------------------------------
Net deferred tax (asset) liability $(120.6) $ 72.0
========================================================================
</TABLE>
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. As of December 31, 1998 and 1997, no valuation
allowances were required for unrealized capital gains and losses.
Management believes that it is more likely than not that the Company will
realize the benefit of the net deferred tax asset. The Company expects
sufficient taxable income in the future to realize the net deferred tax asset
because of the Company's long-term history of having taxable income, which is
projected to continue.
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, 1998. This amount would be
taxed only under certain conditions.
F-24
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (Continued)
No income taxes have been provided on this amount since management believes
under current tax law the conditions under which such taxes would become
payable are remote.
The Internal Revenue Service (the "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
Aetna has noncontributory defined benefit pension plans covering
substantially all employees. 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 $0.8 million,
$2.7 million and $4.3 million for the years ended December 31, 1998, 1997 and
1996, respectively.
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 1998, 1997
and 1996 were $0.9 million, $2.7 million and $1.8 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.
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.
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 1998, 1997 and
1996 were $1.4 million, $0.6 million and $0.7 million, respectively.
Effective January 1, 1999, the Company, in conjunction with Aetna, changed
the formula for providing pension benefits from the existing final average
pay formula to a cash balance formula,
F-25
<PAGE>
Notes to Consolidated Financial Statements (continued)
9. Benefit Plans (continued)
which will credit employees annually with an amount equal to a percentage of
eligible pay based on age and years of service as well as an interest credit
based on individual account balances. The formula also provides for a
transition period until December 1, 2006, which allows certain employees to
receive vested benefits at the higher of the final average pay or cash
balance formula. The changing of this formula will not have a material
effect on the Company's results of operations, liquidity or financial
condition.
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 $4.7 million, $4.4 million and $5.4
million in 1998, 1997 and 1996, 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 1998, 1997
and 1996, were $4.1 million, $2.9 million and $8.1 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 1998, other changes in
shareholder's equity include an additional increase of $0.7 million
reflecting revisions to the allocation of the deferred tax benefit.
10. Related Party Transactions
Investment Advisory and Other Fees
----------------------------------
In February 1998 and May 1998, Aeltus Investment Management Inc. ("Aeltus"),
an affiliate of the Company, assumed investment advisory services for Aetna
managed mutual funds and variable funds (collectively, the Funds),
respectively. In connection with that assumption of duties, Aeltus entered
into participation agreements with the Company. Participation fees paid to
the Company, from Aeltus, included in charges assessed against policyholders
amounted to $26.9 million for 1998. Prior to assuming investment advisory
services, Aeltus served as subadvisor to the Funds. Since August 1996,
Aeltus has served as advisor for most of the Company's 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, 1998, 1997 and 1996, the
Company paid $21.7 million, $45.5 million and $16.0 million, respectively,
in such fees.
Prior to February 1998 and May 1998, the Company served as investment
advisor to the Funds. Under the advisory agreements, the funds paid the
Company a daily fee which, on an annual basis, ranged,
F-26
<PAGE>
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions (continued)
depending on the fund, from 0.25% to 0.85% of their average daily net
assets. The Company is also compensated by the Separate Accounts (variable
funds) for bearing mortality and expense risks pertaining to variable life
and annuity contracts. Under the insurance and annuity contracts, the
Separate Accounts pay the Company a daily fee which, on an annual basis is,
depending on the product, up to 2.15% of their average daily net assets. The
amount of compensation and fees received from the Funds and Separate
Accounts, included in charges assessed against policyholders, amounted to
$287.0 million, $271.2 million and $186.6 million in 1998, 1997 and 1996,
respectively.
Reinsurance Transactions
------------------------
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 was 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 were ceded to the Company from Aetna Life as investment
rollover occurred and the loan previously established was 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) as of December 31, 1997 relating to the
business assumed. The fair value of the loan relating to assets held by
Aetna Life was $412.3 million as of December 31, 1997 and was based upon the
fair value of the underlying assets.
Effective October 1, 1998, this agreement was fully transitioned to a
coinsurance arrangement and this business along with the Company's direct
domestic individual non-participating life insurance business was sold to
Lincoln. (Refer to note 2).
The operating results of the domestic individual life business are presented
as Discontinued Operations. Premiums of $336.3 million, $176.7 million and
$25.3 million and current and future benefits of $341.1 million, $183.9
million and $39.5 million, were assumed in 1998, 1997 and 1996,
respectively. Investment income of $17.0 million, $37.5 million and $44.1
million was generated from the reinsurance loan to affiliate for the years
ended December 31, 1998, 1997 and 1996, respectively.
Prior to the sale of the domestic individual life insurance business to
Lincoln on October 1, 1998, the Company's retention limit per individual
life was $2.0 million and amounts in excess of this limit, up to a maximum
of $8.0 million on any new individual life business was reinsured with Aetna
Life on a yearly renewable term basis. Premium amounts related to this
agreement were $2.0 million, $5.9 million and $5.2 million for 1998, 1997
and 1996, respectively. This agreement was terminated effective October 1,
1998.
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
F-27
<PAGE>
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions (continued)
renewable term basis. Premium amounts related to this agreement were $4.4
million and $0.7 million in 1998 and 1997, respectively. The business
assumed under this agreement was retroceded to Lincoln effective October 1,
1998.
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 is
also responsible for administering fixed annuity payments that are made to
annuitants receiving variable payments. Reserves of $87.8 million and $32.5
million were maintained for this contract as of December 31, 1998 and 1997,
respectively.
Capital Transactions
--------------------
The Company received a capital contribution of $9.3 million and $10.4
million in cash from HOLDCO in 1998 and 1996, respectively. The Company
received no capital contributions in 1997.
The Company paid $553.0 million, $17.3 million and 3.5 million in cash
dividends to HOLDCO in 1998, 1997 and 1996, respectively. Additionally, in
1998, the Company accrued $206.0 million in dividends. (Refer to Note 6)
Other
-----
Premiums due and other receivables include $1.6 million and $37.0 million
due from affiliates in 1998 and 1997, respectively. Other liabilities
include $2.2 million and $1.2 million due to affiliates for 1998 and 1997,
respectively.
As of December 31, 1998, Aetna transferred to the Company $0.7 million based
on its decision not to settle state tax liabilities for the years 1998 and
1997. The amount transferred as of December 31, 1997 was $2.5 million. This
amount has been reported as an other change 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
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The transaction is generally in
the form of an indemnity reinsurance arrangement, under which Lincoln
contractually assumed from the Company certain policyholder liabilities and
obligations, although the Company remains directly obligated to
policyholders. (Refer to note 2)
Effective January 1, 1998, 90% of the mortality risk on substantially all
individual universal life product business written from June 1, 1991 through
October 31, 1997 was reinsured externally. Beginning November 1, 1997, 90%
of new business written on these products was reinsured externally.
Effective October 1, 1998 this agreement was assigned from the third party
reinsurer to Lincoln.
F-28
<PAGE>
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
(Millions) Amount Companies Companies Amount
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
----
Premiums:
Discontinued Operations $166.8 $165.4 $340.6 $342.0
Accident and Health Insurance 16.3 16.3 -- --
Annuities 80.8 2.9 1.5 79.4
------------------------------------------------------------------------------------
Total earned premiums $263.9 $184.6 $342.1 $421.4
====================================================================================
1997
----
Premiums:
Discontinued Operations $ 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:
Discontinued Operations $ 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
====================================================================================
</TABLE>
F-29
<PAGE>
Notes to Consolidated Financial Statements (continued)
12. Segment Information
Prior to October 1, 1998, the Company's operations were reported through two
major business segments: Financial Services and Individual Life Insurance
(now Discontinued Operations). Summarized financial information for the
Company's principal operations was as follows:
<TABLE>
<CAPTION>
(4) (4)
Financial Discontinued
1998 (Millions) Services Operations Other Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 433.3 -- -- $ 433.3
Net investment income 877.6 -- -- 877.6
----------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains $ 1,310.9 -- -- $ 1,310.9
====================================================================================================
Amortization of deferred policy
acquisition costs $ 106.7 -- -- $ 106.7
----------------------------------------------------------------------------------------------------
Income taxes $ 57.7 $ (10.3) $ 47.4
----------------------------------------------------------------------------------------------------
Operating earnings (1) $ 151.5 -- -- $ 151.5
Unusual items (2) -- -- $ (19.2) (19.2)
Realized capital gains, net of tax 7.3 -- -- 7.3
----------------------------------------------------------------------------------------------------
Income from continuing operations $ 158.8 -- $ (19.2) $ 139.6
Discontinued operations, net of tax:
Income from operations -- $ 61.8 -- 61.8
Gain on sale -- 59.0 -- 59.0
----------------------------------------------------------------------------------------------------
Net income $ 158.8 $ 120.8 $ (19.2) $ 260.4
====================================================================================================
Segment assets $43,458.6 $3,820.2 -- $47,278.8
----------------------------------------------------------------------------------------------------
Expenditures for long-lived assets (3) -- -- $ 5.3 $ 5.3
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating earnings are comprised of net income excluding net realized
capital gains and any unusual items.
(2) Unusual items excluded from operating earnings include an after-tax
severance benefit of $1.6 million and after-tax Year 2000 costs of
$20.8 million.
(3) Expenditures of long-lived assets represents additions to property and
equipment not allocable to business segments.
(4) Financial Services products include annuity contracts and Discontinued
Operations include life insurance products. (Refer to Note 1)
F-30
<PAGE>
Notes to Consolidated Financial Statements (continued)
12. Segment Information (Continued)
<TABLE>
<CAPTION>
(3) (3)
Financial Discontinued
1997 (Millions) Services Operations Other Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 369.4 -- -- $ 369.4
Net investment income 878.8 -- -- 878.8
----------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains $ 1,248.2 -- -- $ 1,248.2
==============================================================================================
Amortization of deferred policy
acquisition costs $ 82.8 -- -- $ 82.8
----------------------------------------------------------------------------------------------
Income taxes $ 50.7 -- -- $ 50.7
----------------------------------------------------------------------------------------------
Operating earnings (1) $ 118.3 -- -- $ 118.3
Realized capital gains, net of tax 19.2 -- -- 19.2
----------------------------------------------------------------------------------------------
Income from continuing operations $ 137.5 -- -- $ 137.5
Discontinued Operations, net of tax:
Income from operations -- $ 67.8 -- 67.8
----------------------------------------------------------------------------------------------
Net Income $ 137.5 $ 67.8 -- $ 205.3
==============================================================================================
Segment assets $36,638.8 $3,507.6 -- $40,146.4
----------------------------------------------------------------------------------------------
Expenditures for long-lived assets (2) -- -- $9.6 $ 9.6
----------------------------------------------------------------------------------------------
</TABLE>
(1) Operating earnings are comprised of net income excluding net realized
capital gains and any unusual items.
(2) Expenditures for long-lived assets represents additions to property and
equipment not allocable to business segments.
(3) Financial Services products include annuity contracts and Discontinued
Operations include life insurance products. (Refer to Note 1)
F-31
<PAGE>
Notes to Consolidated Financial Statements (continued)
12. Segment Information (Continued)
<TABLE>
<CAPTION>
(3) (3)
Financial Discontinued
1996 (Millions) Services Operations Other Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 325.5 -- -- $ 325.5
Net investment income 852.6 -- -- 852.6
-----------------------------------------------------------------------------------------------------
Total revenue excluding realized capital
gains $1,178.1 -- -- $1,178.1
=====================================================================================================
Amortization of deferred policy acquisition
costs $ 28.0 -- -- $ 28.0
-----------------------------------------------------------------------------------------------------
Income taxes $ 35.6 -- $ (4.9) $ 30.7
-----------------------------------------------------------------------------------------------------
Operating earnings (losses) (1) $ 83.2 -- -- $ 83.2
Unusual items (2) -- -- (9.1) (9.1)
Realized capital gains, net of tax: 11.1 -- -- 11.1
-----------------------------------------------------------------------------------------------------
Income from continuing operations $ 94.3 $ (9.1) $ 85.2
Discontinued operations, net of tax
Income from operations -- $55.9 -- 55.9
-----------------------------------------------------------------------------------------------------
Net income (loss) $ 94.3 $55.9 $ (9.1) $ 141.1
=====================================================================================================
</TABLE>
(1) Operating earnings are comprised of net income excluding net realized
capital gains and any unusual items.
(2) Unusual items excluded from operating earnings represent $9.1 million
after-tax corporate facilities and severance charges not directly
allocable to the business segments.
(3) Financial Services products include annuity contracts and Discontinued
Operations include life insurance products. (Refer to Note 1)
13. 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, 1998 and 1997,
the Company had commitments to purchase investments of $68.7 million and
$38.7 million, respectively. The fair value of the investments at December
31, 1998 and 1997 approximated $68.9 million and $39.0 million,
respectively.
Litigation
----------
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in liability for amounts
material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
F-32
<PAGE>
Form No. SAI.75996-99 ALIAC Ed. MAY 1999
