As filed with the Securities and Exchange Registration No. 33-34370*
Commission on April 9, 1999 Registration No. 811-2512
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
- --------------------------------------------------------------------------------
POST-EFFECTIVE AMENDMENT NO. 37 TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
and Amendment to
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
- --------------------------------------------------------------------------------
Variable Annuity Account B of Aetna Life Insurance and Annuity Company
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06156
Depositor's Telephone Number, including Area Code: (860) 273-4686
Julie E. Rockmore, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06156
(Name and Address of Agent for Service)
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
--------
X on May 3, 1999 pursuant to paragraph (b) of Rule 485
--------
*Pursuant to Rule 429(a) under the Securities Act of 1933, Registrant has
included a combined prospectus under this Registration Statement which includes
all the information which would currently be required in a prospectus relating
to the following earlier Registration Statement: 33-87932.
<PAGE>
VARIABLE ANNUITY ACCOUNT B
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-4
ITEM NO. PART A (PROSPECTUS) LOCATION - PROSPECTUS
<S> <C> <C>
1 Cover Page........................................... Cover Page
2 Definitions.......................................... Not Applicable
3 Synopsis............................................. Contract Overview; Fee Table
4 Condensed Financial Information...................... Condensed Financial Information; Appendix IV -
Condensed Financial Information
5 General Description of Registrant, Depositor, and
Portfolio Companies.................................. Other Topics - The Company; Variable Annuity
Account B; Appendix III - Description of
Underlying Funds
6 Deductions and Expenses.............................. Fees
7 General Description of Variable Annuity Contracts.... Contract Overview; Other Topics
8 Annuity Period....................................... The Income Phase
9 Death Benefit........................................ Death Benefit
10 Purchases and Contract Value......................... Purchase and Rights; Your Account Value
11 Redemptions.......................................... Right to Cancel
12 Taxes................................................ Taxation
13 Legal Proceedings.................................... Other Topics - Legal Matters and Proceedings
14 Table of Contents of the Statement of Additional
Information.......................................... Contents of the Statement of Additional
Information
<PAGE>
<CAPTION>
FORM N-4 PART B (STATEMENT OF LOCATION - STATEMENT OF ADDITIONAL INFORMATION
ITEM NO. ADDITIONAL INFORMATION)
<S> <C> <C>
15 Cover Page........................................... Cover page
16 Table of Contents.................................... Table of Contents
17 General Information and History...................... General Information and History
18 Services............................................. General Information and History; Independent
Auditors
19 Purchase of Securities Being Offered................. Offering and Purchase of Contracts
20 Underwriters......................................... Offering and Purchase of Contracts
21 Calculation of Performance Data...................... Performance Data; Average Annual Total Return
Quotations
22 Annuity Payments..................................... Income Payments
23 Financial Statements................................. Financial Statements
</TABLE>
Part C (Other Information)
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.
<PAGE>
VARIABLE ANNUITY ACCOUNT B
Aetna Life Insurance and Annuity Company
Supplement Dated May __, 1999
to May 3, 1999 Prospectus
GENERAL DESCRIPTION OF GET E
Series E of the Aetna GET Fund (GET E) is an investment option that may be
available during the accumulation phase of the contract. Aetna Life Insurance
and Annuity Company (the Company, we, our) makes a guarantee, as described
below, when you direct money into GET E. Aeltus Investment Management, Inc. is
the investment adviser to GET E.
We will offer GET E shares only during its offering period, which is scheduled
to run from June 15, 1999 through the close of business on September 14, 1999.
GET E may not be available under your contract, your plan or in your state.
Please read the GET E prospectus for a more complete description of GET E,
including its charges and expenses.
INVESTMENT OBJECTIVE OF GET E
GET E seeks to achieve maximum total return, without compromising a targeted
minimum rate of return, by participating in favorable equity market performance
during its guarantee period.
GET E's guarantee period runs from September 15, 1999 through September 14,
2004. During the offering period, all GET E assets will be invested in money
market instruments, and during the guarantee period will be invested in a
combination of fixed income and equity securities.
THE GET FUND GUARANTEE
The guarantee period for GET E will end on September 14, 2004, which is GET E's
maturity date. We guarantee that the value of an accumulation unit of the GET E
subaccount under the contract on the maturity date (as valued after the close
of business on September 14, 2004), will not be less than its value as
determined after the close of business on the last day of the offering period.
If the value on the maturity date is lower than it was on the last day of the
offering period, we will transfer funds from our general account to the GET E
subaccount to make up the difference.
If you withdraw or transfer funds from GET E before the maturity date, we will
process the transactions at the actual unit value next determined after we
receive your order. The guarantee will not apply to these amounts or to amounts
deducted as a maintenance fee, if applicable.
MATURITY DATE
Before the maturity date, we will send a notice to each contract holder who has
amounts in GET E. This notice will remind you that the maturity date is
approaching and that you must choose other investment options for your GET E
amounts. If you do not make a choice, on the maturity date we will transfer
your GET E amounts to another available series of the GET Fund that is
accepting deposits. If no GET Fund series is available, we will transfer the
account value to the fund or funds designated by Aetna. We will make these
transfers as of the unit value next determined after the transfer.
INCOME PHASE
GET E is not available during the income phase. You should not select this
option if you wish to begin income payments or to make other withdrawals or
transfers before the maturity date. You must transfer your GET E account value
to another available investment option before you may elect an income phase
payment option. As stated above, the Company's guarantee will not apply to
amounts you withdraw or transfer before the maturity date.
SUBJECT TO COMPLETION OR AMENDMENT
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus supplement shall not constitute an offer to sell or
the solicitation of any offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
<PAGE>
REINVESTMENT
Some contracts allow you to reinvest all or a portion of the proceeds after a
full withdrawal. If you withdraw amounts from GET E and then elect to reinvest
them, we will reinvest them in a GET Fund series that is then accepting
deposits, if one is available. If one is not available, we will reallocate your
GET E amounts among the other investment options in which you were invested, on
a pro rata basis.
The following information supplements the Fee Table contained in the
prospectus:
FEES DEDUCTED FROM YOUR INVESTMENTS IN THE SUBACCOUNTS
In addition to the amounts currently listed under the heading "Fee Table" in
the prospectus, we will make a daily deduction of a GET Guarantee Charge, equal
on an annual basis to the percentage shown below, from the amounts allocated to
the GET E investment option:
<TABLE>
<S> <C>
GET E Guarantee Charge (deducted daily during the Guarantee Period) ... 0.50%
Maximum Total Separate Account Expenses .................................. 1.90%(1)
</TABLE>
(1) The total separate account expenses that apply to your contract may be
lower. Please refer to the "Fee Table" section of your prospectus.
The following information supplements the Fund Expense Table contained in the
prospectus
Aetna GET Fund Series E Annual Expenses
(As a percentage of the average net assets)
<TABLE>
<CAPTION>
Investment Total Fund Annual Expenses
Advisory Fees(1) Other Expenses(2) (after expense reimbursement)(3)
---------------- ----------------- -------------------------------
<S> <C> <C> <C>
Aetna GET Fund Series E 0.60% 0.15% 0.75%
</TABLE>
For more information regarding expenses paid out of assets of the fund, see the
GET E prospectus.
The following information supplements the Hypothetical Examples contained in
the prospectus.
- -----------------------
(1) The Investment Advisory Fee will be 0.25% during the offering period. An
annual management fee of 0.60% will apply during the guarantee period.
(2) "Other Expenses" include an annual fund administrative fee of 0.075% of the
average daily net assets of GET E and any additional direct fund expenses.
(3) The investment adviser is contractually obligated through GET E's maturity
date to waive all or a portion of its investment advisory fee and/or its
administrative fee and/or to reimburse a portion of the fund's other
expenses in order to ensure that the Total Fund Annual Expenses do not
exceed 0.75% of the fund's average daily net assets. It is not expected that
the fund's actual expenses without this waiver or reimbursement will exceed
this amount.
<PAGE>
Hypothetical Examples--Aetna GET Fund Series E
The following hypothetical example shows the fees and expenses paid over time
if you invest $1,000 in the GET E investment option under the contract (until
GET E's maturity date) and a 5% annual return on the investment.(4)
<TABLE>
<CAPTION>
Example A Example B
--------- ---------
<S> <C> <C>
o This example is purely If you withdrew your If at the end of the
hypothetical. entire account value at periods shown you (1)
the end of the periods leave your entire account
o It should not be shown, you would pay the value invested or (2)
considered a following expenses, select an income phase
representation of past including any applicable payment option, you would
or future expenses or early withdrawal charge: pay the following
expected returns. expenses (no early
withdrawal charge is
o Actual expenses and/or reflected):*
returns may be more or
less than those shown
in this example.
</TABLE>
<TABLE>
<CAPTION>
1 year 3 years 5 years 1 year 3 years 5 years
-------- --------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Aetna GET Fund Series E $90 $137 $177 $27 $83 $142
</TABLE>
- -----------------------
(4) The examples shown above reflect an annual mortality and expense risk charge
of 1.25%, an annual contract administrative expense charge of 0.15%, an
annual GET E guarantee charge of 0.50%, a $30 annual maintenance fee that
has been converted to a percentage of assets equal to .0.022%, and all
charges and expenses of the GET E Fund. Example A reflects an early
withdrawal charge of 7% of the purchase payments at the end of year 1, 6% at
the end of year 3, and 4% at the end of year 5. (The expenses that you would
pay under your contract may be lower. Please refer to the "Fee Table"
section of your prospectus.)
* This example does not apply if during the income phase, you select a
nonlifetime payment option with variable payments and a lump-sum withdrawal
within three 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 (refer to Example A).
RH.GETERETAIL-99 May, 1999
<PAGE>
Contract Prospectus - May 3, 1999
- --------------------------------------------------------------------------------
The Funds
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 Index Plus Large 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 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) High Income Portfolio
o Fidelity Variable Insurance Products Fund (VIP) Overseas Portfolio
o Fidelity Variable Insurance Products Fund (VIP) II Asset Manager Portfolio
o Fidelity Variable Insurance Products Fund (VIP) II Contrafund Portfolio
o Fidelity Variable Insurance Products Fund (VIP) II Index 500 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 MFS Total Return Series
o MFS Global Governments Series
o Oppenheimer Aggressive Growth Fund/VA
o Oppenheimer Global Securities Fund/VA
o Oppenheimer Main Street Growth and Income 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
The Contract. The contracts described in this prospectus are group or
individual "Aetna Marathon Plus" deferred variable annuity contracts issued by
Aetna Life Insurance and Annuity Company (the Company, we, us). They are issued
as either a nonqualified deferred annuity; a qualified individual retirement
annuity (IRA) under section 408(b) of the Internal Revenue Code of 1986, as
amended (Tax Code); a qualified Roth IRA under section 408A of the Tax Code; or
as a qualified contract for use with certain employer sponsored retirement
plans.
Prior to May 1, 1998, the contracts were available as tax deferred annuities as
described under section 401(a) of the Tax Code.
The contracts are not available as SIMPLE IRAs under Tax Code section 408(p).
Why Reading this Prospectus Is Important This prospectus contains facts about
the contracts and the available investment options you should know before
purchasing. Read this prospectus carefully. If you purchase the contract, retain
this prospectus for future reference.
Table of Contents . . . page 3
Contract Design. The contracts described in this prospectus are designed to:
(triangle) Help you save for retirement security while receiving beneficial tax
treatment
(triangle) Offer a variety of investment options to help meet long-term
financial goals
(triangle) Provide a death benefit to the beneficiary you designate
(triangle) Provide payments for life or for a specified period
Getting Additional Information. You may obtain the May 3, 1999, Statement of
Additional Information (SAI) about the separate account by indicating your
request on your application or calling us at 1-800-531-4547. 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
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 52 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. 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.
Investment Options. The contracts offer variable investment options and fixed
interest options. When we establish your account you instruct 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. Each subaccount invests in one of the mutual
funds listed on this page. Earnings on amounts invested in a
<PAGE>
Prospectus - May 3, 1999 (continued)
- --------------------------------------------------------------------------------
subaccount will vary depending upon the performance of its underlying fund. You
do not invest directly in or hold shares of the funds.
Risks Associated with Investing in the Funds. The funds in which the
subaccounts invest have various risks. Information about the risks of investing
in the funds is located in the "Investment Option" section in this prospectus
and in each fund prospectus. Read this prospectus in conjunction with the fund
prospectuses, and retain the prospectuses for future reference.
Fixed Interest Options.
(triangle) ALIAC Guaranteed Account (the Guaranteed Account)
(triangle) Fixed Account
Except as specifically mentioned, this prospectus describes only the investment
options offered through the separate account. However, we describe the fixed
interest options in appendices to this prospectus. There is also a separate
Guaranteed Account prospectus.
Availability of Options. Some funds or fixed interest options may be
unavailable through your contract or in your state.
These contracts are not deposits with, obligations of or guaranteed by any
bank, nor are they insured by the FDIC. The contracts are subject to investment
risk, including the possible loss of the principal amount of your investment.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Contract Overview ....................................... 4
Contract Design
Contract Facts
Questions: Contacting the Company
Sending Forms and Written Requests in Good Order
Contract Phases: The Accumulation Phase, The Income Phase
</TABLE>
<TABLE>
<S> <C>
Fee Table ............................... 6
Condensed Financial Information ......... 13
Investment Options ...................... 13
Transfers ............................... 15
Purchase and Rights ..................... 16
Right to Cancel ......................... 18
Fees .................................... 19
Your Account Value ...................... 24
Withdrawals ............................. 26
Systematic Distribution Options ......... 28
Death Benefit ........................... 29
The Income Phase ........................ 33
Taxation ................................ 37
Other Topics ............................ 47
</TABLE>
The Company -- Variable Annuity Account B -- Contract Distribution -- Payment of
Commissions -- Payment Delay or Suspension -- Performance Reporting -- Voting
Rights -- Contract Modifications -- Transfer of Ownership: Assignment --
Involuntary Terminations -- Legal Matters and Proceedings -- Year 2000 Readiness
<TABLE>
<S> <C>
Contents of the Statement of Additional Information ......... 52
Appendix I -- ALIAC Guaranteed Account ...................... 53
Appendix II -- Fixed Account ................................ 56
Appendix III -- Description of Underlying Funds ............. 57
Appendix IV -- Condensed Financial Information .............. 77
</TABLE>
3
<PAGE>
Questions: Contacting the Company. To answer your questions, contact your local
representative or write or call our Home Office at:
Aetna Retirement Services
Annuity Services
151 Farmington Avenue
Hartford, CT 06156-1277 1-800-531-4547
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 for
the request to be in "good order." We can only act upon requests that are
received in good order.
Contract Overview
- --------------------------------------------------------------------------------
The following is intended as a summary. Please read each section of this
prospectus for additional detail.
Contract Design
The contract described in this prospectus is a group or individual deferred
variable annuity contract. It is intended to be a retirement savings vehicle
that receives beneficial tax treatment and offers a variety of investment
options to help meet long-term financial goals.
Contract Facts
Free Look/Right to Cancel: You may cancel your contract within 10 days (or
longer if required by state law) of receipt. See "Right To Cancel."
Death Benefit: Your beneficiary may receive a financial benefit in the event of
your death prior to the income phase. Benefits during the income phase depend
upon the payment option selected. See "Death Benefit" and "Income Phase."
Withdrawals: During the accumulation phase, you may withdraw all or part of
your account value. Certain fees, taxes and early withdrawal penalties may
apply. In addition, the Tax Code restricts full and partial withdrawals in some
circumstances. See "Withdrawals." Amounts withdrawn from the Guaranteed Account
may be subject to a market value adjustment. See Appendix I.
Systematic Distribution Options: These are made available for you to receive
periodic withdrawals from your account, while retaining the account in the
accumulation phase. See "Systematic Distribution Options."
Fees and Expenses: Certain fees and expenses are deducted from the value of
your contract. See "Fee Table" and "Fees."
Taxation: The contract is designed to help defer taxes while saving for
retirement. Taxes will generally be due when you receive a distribution from
amounts accumulated. Tax penalties may apply in some circumstances. See
"Taxation."
4
<PAGE>
- --------------------------------------------------------------------------------
Contract Phases
I. The Accumulation Phase (accumulating dollars)
STEP 1: You provide us with your completed application and initial payment. We
establish an account for you.
STEP 2: You direct us to invest your payments in one or more of the following:
(a) Fixed Interest Options
(b) Variable Investment Options (The variable investment options are the
subaccounts of Variable Annuity Account B. Each one invests in a specific
mutual fund.)
STEP 3: Each subaccount you select purchases shares of its assigned fund.
II. The Income Phase When you want to begin receiving payments from your
contract, you may select from the options available.
The contract offers several payment options (see "Income Phase"). In
general, you may:
(triangle) Receive payments for a specified period of time or for life
(triangle) Receive payments monthly, quarterly, semi-annually or annually
(triangle) Select an option that provides for payments to beneficiaries
(triangle) Select fixed payments or payments that vary based upon the
performance of the variable investment options you select
[graphic]
Payments to
Your Account
Step 1 (down arrow)
Aetna Life Insurance and Annuity Company
(a) Step 2 (b)
Variable Annuity
Fixed Separate Account B
Interest
Options Variable Investment Options
The Subaccounts
A B Etc.
(down arrow) Step 3 (down arrow)
Mutual Mutual
Fund A Fund B
[end graphic]
5
<PAGE>
In this Section:
(triangle) Maximum Transaction Fees
(triangle) Maximum Fees Deducted from Investments in the Separate Account
(triangle) Fees Deducted by the Funds
(triangle) Examples of Fee Deductions
Also see the "Fees" section for:
(triangle) How, When and Why Fees are Deducted
(triangle) Reduction, Waiver and/or Elimination of Certain Fees
Fee Table
- --------------------------------------------------------------------------------
The tables and examples in this section show the fees that may affect your
account value while you are accumulating dollars under the contract (the
accumulation phase). See "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 purchase payments withdrawn.)
CONTRACTS ISSUED OUTSIDE OF NEW YORK
<TABLE>
<CAPTION>
Contracts Other Than Roth IRA Contracts Roth IRA Contracts(1)
- ------------------------------------------- -----------------------------------------
Years From Early Early
Receipt of Withdrawal Completed Withdrawal
Payment Charge Account Years Charge
- ---------------------------- ------------ --------------------------- -----------
<S> <C> <C> <C>
Less than 2 7% Less than 1 5%
2 or more but less than 4 6% 1 or more but less than 2 4%
4 or more but less than 5 5% 2 or more but less than 3 3%
5 or more but less than 6 4% 3 or more but less than 4 2%
6 or more but less than 7 3% 4 or more but less than 5 1%
7 or more 0% 5 or more 0%
</TABLE>
CONTRACTS ISSUED IN NEW YORK
<TABLE>
<CAPTION>
Years from Receipt Early Withdrawal
of Payment Charge
- ----------------------------- -----------------
<S> <C>
Less than 1 7%
1 or more but less than 2 6%
2 or more but less than 3 5%
3 or more but less than 4 4%
4 or more but less than 5 3%
5 of more but less than 6 2%
6 or more but less than 7 1%
7 or more 0%
</TABLE>
Annual Maintenance Fee................................................$30.00(2)
Transfer Charge........................................................$0.00(3)
Maximum Fees Deducted from Investments in the Separate Account
(Daily deductions equal to the given percentage on an annual basis.)
o Contracts other than Roth IRA Contracts Issued before May 1, 1998
Mortality and Expense Risk Charge.....................................1.25%
Administrative Expense Charge.........................................0.15%(4)
-----
Total Separate Account Annual Expenses................................1.40%
=====
o Contracts Issued on or after May 1, 1998, and all Roth IRA Contracts
Mortality and Expense Risk Charge.....................................1.10%(5)
Administrative Expense Charge..........................................0.15%(4)
-----
Total Separate Account Annual Expenses.................................1.25%
=====
6
<PAGE>
(1)If the purchase payment is a rollover from another contract issued by us or
one of our affiliates and the early withdrawal charge was waived, the early
withdrawal charge will be based on the number of completed account years
since the date of the initial payment to the former contract.
(2)The annual maintenance fee will be waived if your account value is $50,000 or
greater on the date this fee is due. See "Fees -- Annual Maintenance Fee."
(3)During the accumulation phase, we currently allow you 12 free transfers each
calendar year. We reserve the right to charge $10 for each additional
transfer. We currently do not impose this charge. See "Transfers."
(4)We currently do not deduct an administrative expense charge during the income
phase; however, we reserve the right to deduct a daily charge of not more
than 0.25% per year. See "Income Phase -- Charges Deducted."
(5)Under certain contracts the mortality and expense risk charge during the
accumulation period may be reduced. See "Fees -- Mortality and Expense Risk
Charge."
7
<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 more about additional factors
impacting the share value, refer to the fund prospectus.
How fees are deducted. The fund fees are not deducted from account values.
Instead, they are deducted from the value of the fund shares on a daily basis,
which in turn affects the value of each subaccount that purchases fund shares.
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 Index Plus Large Cap VP (2) (3) 0.35% 0.10% 0.45% 0.00% 0.45%
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%
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 High Income Portfolio (6) 0.58% 0.12% 0.70% 0.00% 0.70%
Fidelity VIP Overseas Portfolio (6) 0.74% 0.17% 0.91% 0.02% 0.89%
Fidelity VIP II Asset Manager Portfolio (6) 0.54% 0.10% 0.64% 0.01% 0.63%
Fidelity VIP II Contrafund Portfolio (6) 0.59% 0.11% 0.70% 0.04% 0.66%
Fidelity VIP II Index 500 Portfolio (6) 0.24% 0.11% 0.35% 0.07% 0.28%
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%
MFS Total Return Series (8) 0.75% 0.16% 0.91% 0.00% 0.91%
MFS Global Governments Series (8)(9) 0.75% 0.36% 1.11% 0.10% 1.01%
Oppenheimer Aggressive Growth Fund/VA (4) 0.69% 0.02% 0.71% -- 0.71%
Oppenheimer Global Securities Fund/VA (4) 0.68% 0.06% 0.74% -- 0.74%
Oppenheimer Main Street Growth and Income Fund/VA (4) 0.74% 0.05% 0.79% -- 0.79%
Oppenheimer Strategic Bond Fund/VA (4) 0.74% 0.06% 0.80% -- 0.80%
Portfolio Partners MFS Emerging Equities Portfolio (10) 0.68% 0.13% 0.81% 0.00% 0.83%
Portfolio Partners MFS Research Growth Portfolio (10) 0.70% 0.15% 0.85% -- 0.85%
Portfolio Partners MFS Value Equity Portfolio (10) 0.65% 0.25% 0.90% -- 0.90%
Portfolio Partners Scudder International Growth Portfolio (10) 0.80% 0.20% 1.00% -- 1.00%
Portfolio Partners T. Rowe Price Growth Equity Portfolio (10) 0.60% 0.15% 0.75% -- 0.75%
</TABLE>
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.
8
<PAGE>
(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) Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each series may enter into
other such arrangements and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. Expenses do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series.
(9) MFS has agreed to bear expenses for this series, subject to reimbursement by
the series, such that the series' "other Expenses" shall not exceed 0.25% of
the average daily net assets of the series during the current fiscal year.
The payments made by MFS on behalf of the series under this arrangement are
subject to reimbursement by the series to MFS, which will be accomplished by
the payment of an expense reimbursement fee by the series to MFS computed
and paid monthly at a percentage of the series' average daily net assets for
its then current fiscal year, with a limitation that immediately after such
payment the series' "Other Expenses" will not exceed the percentage set
forth above. The obligation of MFS to bear a series' "Other Expenses"
pursuant to this arrangement, and the series' obligation to pay the
reimbursement fee to MFS, terminates on the earlier of the date on which
payments made by the series' equal the prior payment of such reimbursable
expenses by MFS, or December 31, 2004. MFS may, in its discretion, terminate
this arrangement at an earlier date, provided that the arrangement will
continue until at least May 1, 2000, unless terminated with the consent of
the board of trustees which oversees the series.
(10)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.
9
<PAGE>
Hypothetical Example: For Contracts Other Than Roth IRA Contracts Issued
Outside of New York
Account Fees You May Incur Over Time. The following hypothetical examples show
the fees and expenses paid over time if you invest $1,000 in the contract and
assume a 5% annual return on the investment. For the purpose of these examples,
we deducted total annual fund expenses, the maximum mortality and expense risk
charge of 1.25% annually, an administrative expense charge of 0.15% annually,
and the maximum annual maintenance fee of $30 (converted to a percentage of
assets equal to 0.022%). The total annual fund expenses used are those shown in
the "Total Annual Expenses Without Waivers or Reductions" column in the Fund
Expense Table.
(triangle) These examples are purely hypothetical.
(triangle) They should not be considered a
representation of past or future expenses or
expected returns.
(triangle) Actual expenses and/or returns may be
more or less than those shown in these
examples.
<TABLE>
<CAPTION>
EXAMPLE A
If you withdraw your entire account
value at the end of the periods shown,
you would pay the following expenses,
including any applicable early
withdrawal charge:
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Aetna Ascent VP $85 $121 $152 $250
Aetna Balanced VP, Inc. $83 $116 $144 $234
Aetna Bond VP $82 $114 $139 $224
Aetna Crossroads VP $85 $121 $152 $250
Aetna Growth VP $85 $121 $152 $250
Aetna Growth and Income VP $83 $116 $143 $233
Aetna Index Plus Large Cap VP $82 $112 $136 $219
Aetna International VP $98 $161 $217 $376
Aetna Legacy VP $85 $122 $152 $251
Aetna Money Market VP $81 $109 $131 $207
Aetna Real Estate Securities VP $92 $143 $188 $322
Aetna Small Company VP $86 $126 $159 $264
Aetna Value Opportunity VP $85 $121 $151 $249
Calvert Social Balanced Portfolio $86 $125 $158 $263
Fidelity VIP Equity-Income Portfolio $83 $116 $143 $233
Fidelity VIP Growth Portfolio $84 $119 $148 $243
Fidelity VIP High Income Portfolio $84 $120 $149 $245
Fidelity VIP Overseas Portfolio $86 $126 $160 $266
Fidelity VIP II Asset Manager Portfolio $84 $118 $146 $239
Fidelity VIP II Contrafund Portfolio $84 $120 $149 $245
Fidelity VIP II Index 500 Portfolio $81 $109 $131 $208
Janus Aspen Aggressive Growth Portfolio $85 $121 $152 $250
Janus Aspen Balanced Portfolio $85 $121 $151 $249
Janus Aspen Flexible Income Portfolio $85 $121 $151 $248
Janus Aspen Growth Portfolio $85 $121 $152 $250
Janus Aspen Worldwide Growth Portfolio $85 $121 $151 $249
MFS Total Return Series $86 $126 $160 $266
MFS Global Governments Series $88 $132 $170 $286
Oppenheimer Aggressive Growth Fund/VA $84 $120 $150 $246
Oppenheimer Global Securities Fund/VA $85 $121 $151 $249
Oppenheimer Main Street Growth & Income
Fund/VA $85 $123 $154 $254
Oppenheimer Strategic Bond Fund/VA $85 $123 $154 $255
Portfolio Partners MFS Emerging Equities Portfolio $85 $123 $155 $256
Portfolio Partners MFS Research Growth Portfolio $86 $124 $157 $260
Portfolio Partners MFS Value Equity Portfolio $86 $126 $159 $265
Portfolio Partners Scudder International Growth
Portfolio $87 $129 $164 $275
Portfolios Partners T. Rowe Price Growth Equity
Portfolio $85 $121 $152 $250
<CAPTION>
EXAMPLE B
If at the end of the periods shown you
(1) leave your entire account value
invested or (2) select an income phase
payment option, you would pay the
following expenses (no early withdrawal
charge is reflected):*
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Aetna Ascent VP $22 $ 68 $116 $250
Aetna Balanced VP, Inc. $20 $ 63 $108 $234
Aetna Bond VP $19 $ 60 $104 $224
Aetna Crossroads VP $22 $ 68 $116 $250
Aetna Growth VP $22 $ 68 $116 $250
Aetna Growth and Income VP $20 $ 63 $108 $233
Aetna Index Plus Large Cap VP $19 $ 59 $101 $219
Aetna International VP $35 $107 $181 $376
Aetna Legacy VP $22 $ 68 $117 $251
Aetna Money Market VP $18 $ 55 $ 95 $207
Aetna Real Estate Securities VP $29 $ 90 $153 $322
Aetna Small Company VP $23 $ 72 $123 $264
Aetna Value Opportunity VP $22 $ 68 $116 $249
Calvert Social Balanced Portfolio $23 $ 72 $123 $263
Fidelity VIP Equity-Income Portfolio $20 $ 63 $108 $233
Fidelity VIP Growth Portfolio $21 $ 66 $113 $243
Fidelity VIP High Income Portfolio $21 $ 66 $114 $245
Fidelity VIP Overseas Portfolio $24 $ 73 $124 $266
Fidelity VIP II Asset Manager Portfolio $21 $ 65 $111 $239
Fidelity VIP II Contrafund Portfolio $21 $ 66 $114 $245
Fidelity VIP II Index 500 Portfolio $18 $ 56 $ 96 $208
Janus Aspen Aggressive Growth Portfolio $22 $ 68 $116 $250
Janus Aspen Balanced Portfolio $22 $ 68 $116 $249
Janus Aspen Flexible Income Portfolio $22 $ 67 $115 $248
Janus Aspen Growth Portfolio $22 $ 68 $116 $250
Janus Aspen Worldwide Growth Portfolio $22 $ 68 $116 $249
MFS Total Return Series $24 $ 73 $124 $266
MFS Global Governments Series $26 $ 79 $134 $286
Oppenheimer Aggressive Growth Fund/VA $22 $ 67 $114 $246
Oppenheimer Global Securities Fund/VA $22 $ 68 $116 $249
Oppenheimer Main Street Growth & Income
Fund/VA $22 $ 69 $118 $254
Oppenheimer Strategic Bond Fund/VA $22 $ 69 $119 $255
Portfolio Partners MFS Emerging Equities Portfolio $23 $ 70 $119 $256
Portfolio Partners MFS Research Growth Portfolio $23 $ 71 $121 $260
Portfolio Partners MFS Value Equity Portfolio $23 $ 72 $124 $265
Portfolio Partners Scudder International Growth
Portfolio $24 $ 75 $129 $275
Portfolios Partners T. Rowe Price Growth Equity
Portfolio $22 $ 68 $116 $250
</TABLE>
- -----------------
* This example does not apply during the income phase if you select a
nonlifetime payment option with variable payments and take a lump-sum
withdrawal within three 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 (refer to Example A).
10
<PAGE>
Hypothetical Example: For Roth IRA Contracts Issued Outside of New York
Account Fees You May Incur Over Time. The following hypothetical examples show
the fees and expenses paid over time if you invest $1,000 in the contract and
assume a 5% annual return on the investment. For the purpose of these examples,
we deducted total annual fund expenses, the maximum mortality and expense risk
charge of 1.10% annually, an administrative expense charge of 0.15% annually,
and the maximum annual maintenance fee of $30 (converted to a percentage of
assets equal to 0.022%). The total annual fund expenses used are those shown in
the "Total Annual Expenses Without Waivers or Reductions" column in the Fund
Expense Table.
(triangle) These examples are purely hypothetical.
(triangle) They should not be considered a
representation of past or future expenses or
expected returns.
(triangle) Actual expenses and/or returns may be
more or less than those shown in these
examples.
<TABLE>
<CAPTION>
EXAMPLE A
If you withdraw your entire account
value at the end of the periods shown,
you would pay the following expenses,
including any applicable early
withdrawal charge:
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Aetna Ascent VP $58 $ 86 $117 $251
Aetna Balanced VP, Inc. $56 $ 81 $108 $234
Aetna Bond VP $55 $ 78 $104 $225
Aetna Crossroads VP $58 $ 86 $117 $251
Aetna Growth VP $58 $ 86 $117 $251
Aetna Growth and Income VP $56 $ 81 $108 $233
Aetna Index Plus Large Cap VP $55 $ 77 $101 $219
Aetna International VP $71 $125 $181 $377
Aetna Legacy VP $58 $ 86 $117 $252
Aetna Money Market VP $54 $ 73 $ 96 $208
Aetna Real Estate Securities VP $65 $108 $153 $323
Aetna Small Company VP $59 $ 90 $124 $265
Aetna Value Opportunity VP $58 $ 85 $116 $250
Calvert Social Balanced Portfolio $59 $ 90 $123 $264
Fidelity VIP Equity-Income Portfolio $56 $ 81 $108 $233
Fidelity VIP Growth Portfolio $57 $ 84 $113 $243
Fidelity VIP High Income Portfolio $57 $ 84 $114 $245
Fidelity VIP Overseas Portfolio $60 $ 91 $125 $267
Fidelity VIP II Asset Manager Portfolio $57 $ 82 $111 $239
Fidelity VIP II Contrafund Portfolio $57 $ 84 $114 $245
Fidelity VIP II Index 500 Portfolio $54 $ 74 $ 96 $209
Janus Aspen Aggressive Growth Portfolio $58 $ 86 $117 $251
Janus Aspen Balanced Portfolio $58 $ 85 $116 $250
Janus Aspen Flexible Income Portfolio $58 $ 85 $116 $248
Janus Aspen Growth Portfolio $58 $ 86 $117 $251
Janus Aspen Worldwide Growth Portfolio $58 $ 85 $116 $250
MFS Total Return Series $60 $ 91 $125 $267
MFS Global Governments Series $62 $ 97 $135 $287
Oppenheimer Aggressive Growth Fund/VA $58 $ 85 $115 $246
Oppenheimer Global Securities Fund/VA $58 $ 85 $116 $250
Oppenheimer Main Street Growth & Income
Fund/VA $58 $ 87 $119 $255
Oppenheimer Strategic Bond Fund/VA $58 $ 87 $119 $256
Portfolio Partners MFS Emerging Equities Portfolio $59 $ 88 $120 $257
Portfolio Partners MFS Research Growth Portfolio $59 $ 89 $122 $261
Portfolio Partners MFS Value Equity Portfolio $59 $ 90 $124 $266
Portfolio Partners Scudder International
Growth Portfolio $60 $ 93 $129 $276
Portfolio Partners T. Rowe Price Growth
Equity Portfolio $58 $ 86 $117 $251
<CAPTION>
EXAMPLE B
If at the end of the periods shown you
(1) leave your entire account value
invested or (2) select an income phase
payment option, you would pay the
following expenses (no early withdrawal
charge is reflected):*
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Aetna Ascent VP $22 $ 68 $117 $251
Aetna Balanced VP, Inc. $20 $ 63 $108 $234
Aetna Bond VP $20 $ 60 $104 $225
Aetna Crossroads VP $22 $ 68 $117 $251
Aetna Growth VP $22 $ 68 $117 $251
Aetna Growth and Income VP $20 $ 63 $108 $233
Aetna Index Plus Large Cap VP $19 $ 59 $101 $219
Aetna International VP $35 $107 $181 $377
Aetna Legacy VP $22 $ 68 $117 $252
Aetna Money Market VP $18 $ 55 $ 96 $208
Aetna Real Estate Securities VP $29 $ 90 $153 $323
Aetna Small Company VP $23 $ 72 $124 $265
Aetna Value Opportunity VP $22 $ 68 $116 $250
Calvert Social Balanced Portfolio $23 $ 72 $123 $264
Fidelity VIP Equity-Income Portfolio $20 $ 63 $108 $233
Fidelity VIP Growth Portfolio $21 $ 66 $113 $243
Fidelity VIP High Income Portfolio $22 $ 66 $114 $245
Fidelity VIP Overseas Portfolio $24 $ 73 $125 $267
Fidelity VIP II Asset Manager Portfolio $21 $ 65 $111 $239
Fidelity VIP II Contrafund Portfolio $22 $ 66 $114 $245
Fidelity VIP II Index 500 Portfolio $18 $ 56 $ 96 $209
Janus Aspen Aggressive Growth Portfolio $22 $ 68 $117 $251
Janus Aspen Balanced Portfolio $22 $ 68 $116 $250
Janus Aspen Flexible Income Portfolio $22 $ 67 $116 $248
Janus Aspen Growth Portfolio $22 $ 68 $117 $251
Janus Aspen Worldwide Growth Portfolio $22 $ 68 $116 $250
MFS Total Return Series $24 $ 73 $125 $267
MFS Global Governments Series $26 $ 79 $135 $287
Oppenheimer Aggressive Growth Fund/VA $22 $ 67 $115 $246
Oppenheimer Global Securities Fund/VA $22 $ 68 $116 $250
Oppenheimer Main Street Growth & Income
Fund/VA $22 $ 69 $119 $255
Oppenheimer Strategic Bond Fund/VA $23 $ 69 $119 $256
Portfolio Partners MFS Emerging Equities Portfolio $23 $ 70 $120 $257
Portfolio Partners MFS Research Growth Portfolio $23 $ 71 $122 $261
Portfolio Partners MFS Value Equity Portfolio $24 $ 73 $124 $266
Portfolio Partners Scudder International
Growth Portfolio $25 $ 76 $129 $276
Portfolio Partners T. Rowe Price Growth
Equity Portfolio $22 $ 68 $117 $251
</TABLE>
- -----------------
* This example does not apply during the income phase if you select a
nonlifetime payment option with variable payments and take a lump-sum
withdrawal within three 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 (refer to Example A).
11
<PAGE>
Hypothetical Example: For Contracts Issued in New York
Account Fees You May Incur Over Time. The following hypothetical examples show
the fees and expenses paid over time if you invest $1,000 in the contract and
assume a 5% annual return on the investment. For the purpose of these examples,
we deducted total annual fund expenses, the maximum mortality and expense risk
charge of 1.25% annually, an administrative expense charge of 0.15% annually,
and the maximum annual maintenance fee of $30 (converted to a percentage of
assets equal to 0.022%). The total annual fund expenses used are those shown in
the "Total Annual Expenses Without Waivers or Reductions" column in the Fund
Expense Table.
(triangle) These examples are purely hypothetical.
(triangle) They should not be considered a
representation of past or future expenses or
expected returns.
(triangle) Actual expenses and/or returns may be
more or less than those shown in these
examples.
<TABLE>
<CAPTION>
EXAMPLE A
If you withdraw your entire account
value at the end of the periods shown,
you would pay the following expenses,
including any applicable early
withdrawal charge:
1 year 3 years 5 years 10 years
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Aetna Ascent VP $73 $101 $133 $251
Aetna Balanced VP, Inc. $71 $ 97 $125 $234
Aetna Bond VP $70 $ 94 $120 $225
Aetna Crossroads VP $73 $101 $133 $251
Aetna Growth VP $73 $101 $133 $251
Aetna Growth and Income VP $71 $ 96 $124 $233
Aetna Index Plus Large Cap VP $70 $ 92 $118 $219
Aetna International VP $86 $141 $198 $377
Aetna Legacy VP $73 $102 $134 $252
Aetna Money Market VP $69 $ 89 $112 $208
Aetna Real Estate Securities VP $80 $123 $170 $323
Aetna Small Company VP $74 $106 $140 $265
Aetna Value Opportunity VP $73 $101 $133 $250
Calvert Social Balanced Portfolio $74 $105 $140 $264
Fidelity VIP Equity-Income Portfolio $71 $ 96 $124 $233
Fidelity VIP Growth Portfolio $72 $ 99 $130 $243
Fidelity VIP High Income Portfolio $72 $100 $131 $245
Fidelity VIP Overseas Portfolio $74 $106 $141 $267
Fidelity VIP II Asset Manager Portfolio $72 $ 98 $127 $239
Fidelity VIP II Contrafund Portfolio $72 $100 $131 $245
Fidelity VIP II Index 500 Portfolio $69 $ 89 $113 $209
Janus Aspen Aggressive Growth Portfolio $73 $101 $133 $251
Janus Aspen Balanced Portfolio $73 $101 $133 $250
Janus Aspen Flexible Income Portfolio $73 $101 $132 $248
Janus Aspen Growth Portfolio $73 $101 $133 $251
Janus Aspen Worldwide Growth Portfolio $73 $101 $133 $250
MFS Total Return Series $74 $106 $141 $267
MFS Global Governments Series $76 $112 $151 $287
Oppenheimer Aggressive Growth Fund/VA $72 $100 $131 $246
Oppenheimer Global Securities Fund/VA $73 $101 $133 $250
Oppenheimer Main Street Growth & Income Fund/VA $73 $103 $135 $255
Oppenheimer Strategic Bond Fund/VA $73 $103 $136 $256
Portfolio Partners MFS Emerging Equities Portfolio $73 $103 $136 $257
Portfolio Partners MFS Research Growth Portfolio $74 $104 $138 $261
Portfolio Partners MFS Value Equity Portfolio $74 $106 $141 $266
Portfolio Partners Scudder International
Growth Portfolio $75 $109 $146 $276
Portfolio Partners T. Rowe Price Growth
Equity Portfolio $73 $101 $133 $251
<CAPTION>
EXAMPLE B
If at the end of the periods shown you
(1) leave your entire account value
invested or (2) select an income phase
payment option, you would pay the
following expenses (no early withdrawal
charge is reflected):*
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Aetna Ascent VP $22 $ 68 $117 $251
Aetna Balanced VP, Inc. $20 $ 63 $108 $234
Aetna Bond VP $20 $ 60 $104 $225
Aetna Crossroads VP $22 $ 68 $117 $251
Aetna Growth VP $22 $ 68 $117 $251
Aetna Growth and Income VP $20 $ 63 $108 $233
Aetna Index Plus Large Cap VP $19 $ 59 $101 $219
Aetna International VP $35 $107 $181 $377
Aetna Legacy VP $22 $ 68 $117 $252
Aetna Money Market VP $18 $ 55 $ 96 $208
Aetna Real Estate Securities VP $29 $ 90 $153 $323
Aetna Small Company VP $23 $ 72 $124 $265
Aetna Value Opportunity VP $22 $ 68 $116 $250
Calvert Social Balanced Portfolio $23 $ 72 $123 $264
Fidelity VIP Equity-Income Portfolio $20 $ 63 $108 $233
Fidelity VIP Growth Portfolio $21 $ 66 $113 $243
Fidelity VIP High Income Portfolio $22 $ 66 $114 $245
Fidelity VIP Overseas Portfolio $24 $ 73 $125 $267
Fidelity VIP II Asset Manager Portfolio $21 $ 65 $111 $239
Fidelity VIP II Contrafund Portfolio $22 $ 66 $114 $245
Fidelity VIP II Index 500 Portfolio $18 $ 56 $ 96 $209
Janus Aspen Aggressive Growth Portfolio $22 $ 68 $117 $251
Janus Aspen Balanced Portfolio $22 $ 68 $116 $250
Janus Aspen Flexible Income Portfolio $22 $ 67 $116 $248
Janus Aspen Growth Portfolio $22 $ 68 $117 $251
Janus Aspen Worldwide Growth Portfolio $22 $ 68 $116 $250
MFS Total Return Series $24 $ 73 $125 $267
MFS Global Governments Series $26 $ 79 $135 $287
Oppenheimer Aggressive Growth Fund/VA $22 $ 67 $115 $246
Oppenheimer Global Securities Fund/VA $22 $ 68 $116 $250
Oppenheimer Main Street Growth & Income Fund/VA $22 $ 69 $119 $255
Oppenheimer Strategic Bond Fund/VA $23 $ 69 $119 $256
Portfolio Partners MFS Emerging Equities Portfolio $23 $ 70 $120 $257
Portfolio Partners MFS Research Growth Portfolio $23 $ 71 $122 $261
Portfolio Partners MFS Value Equity Portfolio $24 $ 73 $124 $266
Portfolio Partners Scudder International
Growth Portfolio $25 $ 76 $129 $276
Portfolio Partners T. Rowe Price Growth
Equity Portfolio $22 $ 68 $117 $251
</TABLE>
- -----------------
* This example does not apply during the income phase if you select a
nonlifetime payment option with variable payments and take a lump-sum
withdrawal within three 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 (refer to Example A).
12
<PAGE>
Condensed Financial Information
- --------------------------------------------------------------------------------
Understanding Condensed Financial Information. In Appendix IV of this
prospectus, we provide condensed financial information about the Variable
Annuity Account B (the separate account) subaccounts you may invest in through
the contract. The numbers show the year-end unit values of each subaccount from
the time payments were first received in the subaccounts under the contract.
Investment Options
- --------------------------------------------------------------------------------
The contract offers variable investment options and fixed interest 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. Each subaccount invests in one of the funds
described in Appendix III. You do not invest directly in or hold shares of the
funds.
(triangle) Mutual Fund (fund) Descriptions: We provide brief descriptions of the
funds in Appendix III. Investment results of the 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. Unless otherwise noted, all funds are diversified as defined
under the Investment Company Act of 1940. 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-- Questions: Contacting the
Company" or by contacting the SEC Public Reference Room.
Fixed Interest Options. The ALIAC Guaranteed Account (the Guaranteed Account)
and the Fixed Account are the fixed interest options that may be available
under your contract. The Guaranteed Account offers certain guaranteed minimum
interest rates for a stated period of time. Amounts must remain in the
Guaranteed Account for specific periods to receive the quoted interest rates,
or a market value adjustment will be applied. The market value adjustment may
be positive or negative. The Fixed Account guarantees payment of the minimum
interest rate specified in the contract. The fixed account is only available in
certain states. For a description of these options see Appendices I and II and
the Guaranteed Account prospectus.
13
<PAGE>
Selecting Investment Options
o Choose options appropriate for you. Your Company representative can help you
evaluate which investment 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 values that rise and fall 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 prospectuses, the Guaranteed
Account and Fixed Account appendices and the Guaranteed Account prospectus.
Limits on Availability of Options. Some funds or fixed interest options may be
unavailable through your contract or in your state. We may add, withdraw or
substitute funds, subject to the conditions in the contract and compliance with
regulatory requirements.
Limits on How Many Investment Options You May Select. Although we reserve the
right to limit the number of investment options you may select during the
accumulation phase, there is currently no limit. The number of investment
options you may select at any one time, however, is limited to 18. Each
subaccount and each guaranteed term of the Guaranteed Account, or an investment
in the Fixed Account in certain contracts where the Guaranteed Account is not
available, is considered an 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, are bought for variable life insurance contracts
issued by the Company or other insurance companies.
(triangle) Shared--bought by more than one company
(triangle) Mixed--bought for annuities and life insurance
It is possible that a conflict of interest may arise due to mixed and/or shared
funding, which 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
may arise and to determine what action, if any, should be taken to address such
conflicts.
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<PAGE>
Transfers
- --------------------------------------------------------------------------------
During the accumulation phase, you may transfer amounts among the available
subaccounts. Transfers from the Guaranteed Account are subject to certain
restrictions and may be subject to a market value adjustment. Transfers from
the Fixed Account are subject to certain restrictions, and transfers into the
Fixed Account from any of the other investment options is not allowed. During
the income phase, if approved in your state, transfers are limited to four per
year and allowed only if you select variable payments. Transfers must be made
in accordance with the terms of your contract.
Transfer Requests. Requests may be made in writing, by telephone or, where
applicable, electronically.
Limits on Frequent Transfers. The contract is not designed to serve as a
vehicle 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 contract.
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. Such restrictions could include: (1) Not accepting transfer
instructions from an agent acting on behalf of more than one contract holder;
and (2) not accepting preauthorized transfer forms from market timers or other
entities acting on behalf of more than one contract holder at a time.
We further reserve the right to impose, without prior notice, restrictions on
transfers that we determine, in our sole discretion, will disadvantage or
potentially hurt the rights or interests of other contract holders.
Additionally, 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 transfer request to a subaccount if the subaccount's investment in the
corresponding fund is not accepted for any reason.
Charges for Transfers. During the accumulation phase, we allow you 12 free
transfers each calendar year. We reserve the right to charge $10 for each
additional transfer. We currently do not impose this charge.
Value of Your Transferred Dollars. The value of amounts transferred into or out
of subaccounts will be based upon the subaccount unit values next determined
after we receive your transfer request 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 telephone instructions we believe to be genuine. If a loss occurs when we
rely on such instructions, you will bear the loss.
The Dollar Cost Averaging Program. Dollar cost averaging is an investment
15
<PAGE>
strategy whereby you purchase fixed dollar amounts of an investment at regular
intervals, regardless of price. Under this program a fixed dollar amount is
automatically transferred from certain subaccounts and/or the Guaranteed
Account or Fixed Account to any of the other subaccounts. A market value
adjustment will not be applied to dollar cost averaging transfers from a
guaranteed term of the Guaranteed Account during participation in the dollar
cost averaging program. If such participation is discontinued, we will
automatically transfer the remaining balance in that guaranteed term to another
guaranteed term of the same duration, unless you initiate a transfer into
another investment option. In either case, a market value adjustment will
apply. See Appendix I for more information about dollar cost averaging from the
Guaranteed Account. If dollar cost averaging is stopped with respect to amounts
invested in the Fixed Account, the remaining balance will be transferred to the
money market 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. There is no additional charge
for this program and transfers made under this program do not count as
transfers when determining the number of free transfers that may be made each
calendar year. For additional information about this program, contact your
local representative or call us at the number listed in "Contract
Overview--Questions: Contacting the Company."
In certain states, premiums allocated to the Fixed Account may require
participation in the dollar cost averaging program.
Dollar cost averaging is not available if a Systematic Distribution Option is
in effect or if you participate in the account rebalancing program.
The Account Rebalancing Program. Account rebalancing allows you to reallocate
your account value to match the investment allocations you originally selected.
Only account values invested in the subaccounts may be rebalanced. We
automatically reallocate your account value annually (or more frequently as we
allow). Account rebalancing neither ensures a profit nor guarantees against
loss in a declining market. There is no additional charge for this program and
transfers made under this program do not count as transfers when determining
the number of free transfers that may be made each calendar year. You may
participate in this program by completing the account rebalancing section of
your application, or by contacting us at the address and/or number listed in
"Contract Overview--Questions: Contacting the Company."
Account rebalancing is not available if you elect to participate in the dollar
cost averaging program.
Purchase and Rights
- --------------------------------------------------------------------------------
How to Purchase
(triangle) Individual Contracts. In some states, where group contracts are not
available, you may purchase the contract directly from us by
completing an application and delivering it and your initial payment
to us. Upon our approval we will issue you a contract and set up an
account for you under the contract.
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<PAGE>
(triangle) Group Contracts. In most states we have distributors, usually
broker/dealers or banks, who hold the contract as a group contract.
(See "Distribution") You may purchase an interest (or, in other
words, participate) in the group contract by contacting a distributor
and completing an application and delivering it with payment to that
distributor. Upon our approval, we will set up an account for you
under the group contract and issue you a certificate showing your
rights under the contract.
(triangle) Joint Contracts (generally spouses). For a nonqualified contract, you
may participate in a group contract as a joint contract holder.
References to "contract holder" in this prospectus means both
contract holders under joint contracts. The Tax law prohibits the
purchase of qualified contracts by joint contract holders.
The maximum issue age for the annuitant on the date we issue the contract is 90
(age 85 for those contracts or certificates issued in New York and
Pennsylvania).
Your Rights Under the Contract
(triangle) Individual Contracts. You have all contract rights.
(triangle) Group Contracts. The holder of the group contract has title to the
contract and, generally, only the right to accept or reject any
modifications to the Contract. You have all other rights to your
account under the contract.
(triangle) Joint Contracts. Joint contract holders have equal rights under the
contract with respect to their account. All rights under the contract
must be exercised by both joint contract holders with the exception
of transfers among investment options. See the "Death Benefit"
section for the rights of the surviving joint contract holder upon
the death of a joint contract holder prior to the income phase start
date.
Payment Methods. The following payment methods are allowed:
(triangle) One lump sum
(triangle) Periodic payments
(triangle) Transfer or rollover from a pre-existing retirement plan or account*
We reserve the right to reject any payments to a prospective or existing
account without advance notice.
* In some states, an IRA contract can only accept a lump sum, rollover payment.
Payment Amounts.
(triangle) For nonqualified contracts the minimum initial payment amount is
$5,000
(triangle) For qualified contracts the minimum initial payment amount is $1,500.
The Tax Code imposes a maximum limit on annual payments which may be
excluded from your gross income.
Any additional payments must be at least $1,000 or at least $50 per month as
paid by electronic funds transfer. (We may change these amounts from time to
time.) A payment of more than $1,000,000 will be allowed only with our consent.
Acceptance or Rejection of Your Application. We must accept or reject your
application within two business days of receipt. If the application is
incomplete, we may hold any forms and accompanying payment(s) for five business
days.
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<PAGE>
Payments may be held for longer periods only with your consent, pending
acceptance of the application. If the application is rejected, the application
and any payments will be returned to you.
Allocating Payments to the Investment Options. We will allocate your payments
among the investment options you select. Allocations must be in whole
percentages and there may be limits on the number of investment options you may
select. When selecting investment options, you may find it helpful to review
the "Investment Options" section.
Right to Cancel
- --------------------------------------------------------------------------------
When and How to Cancel. You may cancel your contract or certificate within ten
days of receipt (some states allow longer) by returning it to our Home Office
along with a written notice of cancellation.
Refunds. We will issue you a refund within seven days of our receipt of your
contract or certificate and written notice of cancellation. Unless your state
requires otherwise or unless you purchased an IRA, your refund will equal the
payments made plus any earnings or minus any losses attributable to those
payments allocated among the subaccounts. In other words, you will bear the
entire investment risk for amounts allocated among the subaccounts during this
period and the amount refunded could be less than the amount paid. If your
state requires or if you purchased an IRA, we will refund all payments made.
If the payments for your canceled contract came from a rollover from another
contract issued by us or one of our affiliates where an early withdrawal charge
was reduced or eliminated, the payments will be restored to your prior
contract.
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<PAGE>
Types of Fees
There are four types of fees or deductions that may affect your account.
TRANSACTION FEES
(triangle) Early Withdrawal Charge
(triangle) Annual Maintenance Fee
(triangle) Transfer Charge
FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT
(triangle) Mortality and Expense Risk Charge
(triangle) Administrative Expense Charge
FEES DEDUCTED BY THE FUNDS
(triangle) Investment Advisory Fees
(triangle) Other Expenses
PREMIUM AND OTHER TAXES
Fees
- --------------------------------------------------------------------------------
The following repeats and adds to information provided in the "Fee Table"
section. Please review both sections 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. A percentage of the payments that you withdraw. The percentage will be
determined by the early withdrawal charge schedule that applies to your
account.
Early Withdrawal Charge Schedules
CONTRACTS ISSUED OUTSIDE OF NEW YORK
<TABLE>
<CAPTION>
Contracts Other Than Roth IRA Contracts Roth IRA Contracts*
- ------------------------------------------- -----------------------------------------
Years From Early Early
Receipt of Withdrawal Completed Withdrawal
Payment Charge Account Years Charge
- ---------------------------- ------------ --------------------------- -----------
<S> <C> <C> <C>
Less than 2 7% Less than 1 5%
2 or more but less than 4 6% 1 or more but less than 2 4%
4 or more but less than 5 5% 2 or more but less than 3 3%
5 or more but less than 6 4% 3 or more but less than 4 2%
6 or more but less than 7 3% 4 or more but less than 5 1%
7 or more 0% 5 or more 0%
</TABLE>
CONTRACTS ISSUED IN NEW YORK
<TABLE>
<CAPTION>
Years from Receipt Early Withdrawal
of Payment Charge
- ----------------------------- -----------------
<S> <C>
Less than 1 7%
1 or more but less than 2 6%
2 or more but less than 3 5%
3 or more but less than 4 4%
4 or more but less than 5 3%
5 of more but less than 6 2%
6 or more but less than 7 1%
7 or more 0%
</TABLE>
* If the purchase payment is a rollover from another contract issued by us or
one of our affiliates and the early withdrawal charge has been waived, the
early withdrawal charge will be based upon the number of completed account
years since the date of the initial payment to the former contract.
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.
First In, First Out. The early withdrawal charge is calculated separately for
each payment withdrawn. For purposes of calculating your early withdrawal
charge, we consider that your first payment to the account (first in) is the
first you withdraw (first out).
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<PAGE>
For example: For contracts other than Roth IRAs issued outside of New York, we
calculate the early withdrawal charge based upon the number of years since the
payment was received. If your initial payment was made three years ago, we will
deduct an early withdrawal charge equal to 6% of the portion of that payment
withdrawn. The next time you make a withdrawal we will assess the charge
against the portion of the first payment that you did not withdraw and/or your
subsequent payments to your account in the order they were received.
For Roth IRAs, we calculate the early withdrawal charge based upon the number
of completed account years. If three years have elapsed since your initial
payment was made, we will deduct an early withdrawal charge equal to 2% of the
portion of that payment withdrawn. The next time you make a withdrawal we will
assess the charge against the portion of the first payment that you did not
withdraw and/or your subsequent payments to your account in the order they were
received.
Earnings may be withdrawn after all payments have been withdrawn. There is no
early withdrawal charge for withdrawal of earnings.
Free Withdrawals. There is no early withdrawal charge if, during each calendar
year, the amount withdrawn is 10% or less (15% or less for contracts issued in
New York) than:
(triangle) Your account value as of the last valuation day of the preceding
calendar year or the date of your first payment, whichever is later
(if approved in your state), or
(triangle) Your account value on the next valuation day after we receive your
withdrawal request.
The free withdrawal amount will be adjusted for amounts withdrawn under a
systematic distribution option or taken as a required minimum distribution
during the calendar year.
Waiver. The early withdrawal charge is waived for payments withdrawn if the
withdrawal is based upon any of the following:
(triangle) Used to provide payments to you during the income phase
(triangle) Paid due to the annuitant's death during the accumulation phase (in
an amount up to the sum of payments in the account on the date of the
annuitant's death)
(triangle) Paid upon a full withdrawal where your account value is $2,500 or
less and no part of the account has been withdrawn during the prior
12 months
(triangle) Taken because of the election of a systematic distribution option
(See "Systematic Distribution Options")
(triangle) Applied as a rollover to certain Roth IRAs issued by us or an
affiliate
(triangle) If approved in your state, taken under a qualified contract, when the
amount withdrawn is equal to the minimum distribution required by the
Tax Code for your account calculated using a method permitted under
the Tax Code and agreed to by the Company
(triangle) Paid upon termination of your account by us (see "Other Topics --
Involuntary Terminations")
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<PAGE>
Reduction or Elimination. We may reduce or eliminate the early withdrawal
charge if we anticipate savings on our administrative expenses due to any one
of the following:
(triangle) The size and type of group to whom the contract is offered
(triangle) The amount of expected payments
(triangle) A prior or existing relationship with the Company such as being an
employee of the Company or any affiliate, receiving distributions or
making transfers from other contracts issued by us, or transferring
amounts held under qualified retirement plans sponsored by us or one
of our affiliates
We will not unfairly discriminate against any person if we reduce or eliminate
the early withdrawal charge. Any reduction or elimination of this fee will be
subject to state approval.
Nursing Home Waiver. You may withdraw all or a portion of your account value
without an early withdrawal charge if:
(triangle) More than one year has elapsed since the account effective date
(triangle) The withdrawal is requested within three years of the annuitant's
admission to a licensed nursing care facility (in New Hampshire
non-licensed facilities are included), and
(triangle) The annuitant has spent at least 45 consecutive days in such nursing
care facility
We will not waive the early withdrawal charge if the annuitant was in a nursing
care facility on the date we established your account. It will also not apply
if otherwise prohibited by state law.
Annual Maintenance Fee
Maximum Amount. $30.00
When/How. Each year during the accumulation phase we deduct this fee from your
account value. We deduct it on your account anniversary and at the time of full
withdrawal. It is deducted proportionally from each investment option.
Purpose. This fee reimburses our administrative expenses relating to the
establishment and maintenance of your account.
Elimination. We will not deduct the annual maintenance fee if your account
value is $50,000 or more on the date the annual maintenance fee is deducted.
Reduction or Elimination. We may reduce or eliminate the annual maintenance
fee. Factors we consider reflect differences in our level of administrative
costs and services, such as:
(triangle) The size and type of the group to whom the contract is offered
(triangle) The amount of expected payments
We will not unfairly discriminate against any person if we reduce or eliminate
the annual maintenance fee. Any reduction or elimination of this fee will be
done according to our own rules in effect at the time a contract is issued. We
reserve the right to change these rules from time to time.
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<PAGE>
Transfer Charge
Amount. During the accumulation phase, we currently allow you 12 free transfers
each calendar year. We reserve the right to charge $10 for each additional
transfer. We currently do not impose this charge.
Purpose. This fee reimburses the Company for administrative expenses associated
with transferring your dollars among investment options.
FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT
Mortality and Expense Risk Charge
Maximum Amount. This charge, on an annual basis, is equal to the following
percentages of your account value invested in the subaccounts:
o Contracts other than Roth IRAs Issued before May 1, 1998 1.25%
o Contracts Issued on or after May 1, 1998, and all Roth IRA Contracts 1.10%
When/How. We deduct this fee daily from the subaccounts corresponding to the
funds you select. We do not deduct this fee from any fixed interest option.
Purpose. This fee compensates us for the mortality and expense risks we assume
under the contract.
(triangle) The mortality risk is the risk associated with our promise to make
lifetime payments based upon annuity rates specified in the contract.
(triangle) 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 contract, we will bear the loss. You 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 will reduce this fee based upon consideration of one or more of
the following:
(triangle) The size and type of the group to whom the contract is offered
(triangle) The type and frequency of administrative and sales services provided
(triangle) The level of annual maintenance fee and early withdrawal charges
We will not unfairly discriminate against any person if we reduce the mortality
and expense risk charge. Any reduction or elimination of his fee will be done
according to our own rules in effect at the time the contract is issued. We
reserve the right to change these rules from time to time.
Administrative Expense Charge
Maximum Amount. 0.15% of your account value invested in the subaccounts during
the accumulation phase:
There is currently no administrative expense charge during the income phase;
however, we reserve the right to charge an administrative expense fee of up to
0.25% during the income phase.
When/How. If imposed, we deduct this fee daily from the subaccounts
corresponding to the funds you select. We do not deduct this fee from the
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<PAGE>
fixed interest options. This charge may be assessed during the accumulation
phase or the income phase. If we are currently imposing this fee when you enter
the income phase, the fee will apply to you during the entire income phase.
Purpose. This fee helps defray our administrative expenses that cannot be
covered by the mortality and expense risk charges described above. The charge
is not intended to exceed the average expected cost of administering the
contracts. We do not expect to make a profit from this fee.
Reduction or Elimination. We may reduce or eliminate the administrative expense
charge. Factors we consider reflect differences in our level of administrative
costs and services, such as:
(triangle) The size and type of the group to whom the contract is offered
(triangle) The amount of expected payments
We will not unfairly discriminate against any person if we reduce or eliminate
the administrative expense charge. Any reduction or elimination of this fee
will be done according to our rules in effect at the time a contract is issued.
We reserve the right to change these rules from time to time.
FEES DEDUCTED BY THE FUNDS
Maximum Amount. Each fund's advisory fee and expenses are different. They are
set forth in "Fee Table--Fees Deducted by the Funds" and described in more
detail in each fund prospectus.
When/How. The fund fees are not deducted from your account value. Instead, fund
expenses are reflected in the daily value of fund shares, which in turn will
affect the daily value of the subaccounts.
Purpose. These expenses help to pay the fund 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 upon
jurisdiction.
When/How. We reserve the right to deduct premium taxes from your account value
or from payments to the account at any time, but not before there is a tax
liability under state law. Our current practice is to deduct premium taxes at
the time of a complete withdrawal or the commencement of income 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."
23
<PAGE>
Your Account Value
- --------------------------------------------------------------------------------
During the accumulation phase, your account value at any given time equals:
(triangle) The current dollar value of amounts invested in the subaccounts; plus
(triangle) The current dollar values of amounts invested in the fixed interest
options, including interest earnings to date
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 dedicated 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 AUV varies 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:
(triangle) The net assets of the fund held by the subaccount as of the current
valuation; minus
(triangle) The net assets of the fund held by the subaccount at the preceding
valuation; plus or minus
(triangle) 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
(triangle) The total value of the subaccount's units at the preceding valuation;
minus
(triangle) 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.
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<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.
Step 1: An investor contributes $5000
Step 2:
A. He directs us to invest $3,000 in Fund A. His dollars purchase 300
accumulation units of Subaccount A ($3,000 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).
Step 3: The separate account then purchases shares of the applicable funds
at the current market value (NAV).
[graphic]
$5,000 contribution
Step 1 (down arrow)
Aetna Life Insurance and Annuity Company
Step 2 (down arrow)
Variable Annuity Account B
Subaccount A Subaccount B Etc.
300 80
accumulation accumulation
units units
(down arrow) Step 3 (down arrow)
Fund A Fund B
[end graphic]
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 as described
in "Purchase and Rights." Subsequent payments or transfers directed to the
subaccounts will purchase subaccount accumulation units at the AUV next
computed following our receipt of the payment or transfer request. The value of
subaccounts may vary day to day.
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<PAGE>
Taxes, Fees and Deductions
Amounts withdrawn may be subject to one or more of the following:
(triangle) Early Withdrawal Charge (see "Fees--Early Withdrawal Charge")
(triangle) Maintenance Fee (see "Fees--Maintenance Fee")
(triangle) Market Value Adjustment for amounts held in the Guaranteed Account
(see Appendix I and the Guaranteed Account prospectus)
(triangle) Tax Penalty (see "Taxation")
(triangle) Tax Withholding (see "Taxation")
To determine which may apply, refer to the appropriate sections of this
prospectus, contact your local representative or call us at the number listed
in "Contract Overview--Questions: Contacting the Company."
Withdrawals
- --------------------------------------------------------------------------------
You may withdraw all or a portion of your account value at any time during the
accumulation phase. If you participate in the contract through a 403(b) plan,
certain restrictions apply. See "Restrictions on Withdrawals From 403(b) Plan
Accounts."
Steps for Making A Withdrawal
(triangle) 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 Account
(plus or minus any applicable market value adjustment) and the Fixed
Account, minus any applicable early withdrawal charge and annual
maintenance fee.
(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 Account or the Fixed Account, and any positive or negative
market value adjustment for amounts withdrawn from the Guaranteed Account.
See Appendices I and II and the Guaranteed Account prospectus for more
information.
(triangle) Select investment options. If you do not specify this, we will
withdraw dollars proportionally from each of your investment options
(triangle) Properly complete a disbursement form and deliver it to our Home
Office
Restrictions on Withdrawals From 403(b) Plan Accounts
Under Section 403(b) contracts, the withdrawal of salary reduction
contributions and earnings on such contributions is generally prohibited prior
to the participant's death, disability, attainment of age 59-1/2, separation
from service or financial hardship. See "Taxation."
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 upon your account value as of the next valuation after we receive
a request for withdrawal in good order at our Home Office.
Delivery of Payment. Payments for withdrawal requests will be made in
accordance with SEC requirements. Normally, your withdrawal amount will be sent
no later than seven calendar days following our receipt of your properly-
completed disbursement form.
Reinvesting a Full Withdrawal. Within 30 days after a full withdrawal, if
allowed by law and the contract, you may elect to reinvest all or a portion of
your withdrawal. We must receive reinvested amounts within 60 days of the
withdrawal. We reserve the right, however, to accept a reinvestment election
received more than 30 days after the withdrawal and accept proceeds received
more than 60 days after the withdrawal. We will credit the account for the
amount reinvested based upon the subaccount values next computed following our
receipt of your request and the amount to be reinvested. We will credit the
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<PAGE>
amount reinvested proportionally for maintenance fees and early withdrawal
charges imposed at the time of withdrawal. We will deduct from the amounts
reinvested any maintenance fee which fell due after the withdrawal and before
the reinvestment. We will reinvest in the same investment options and
proportions in place at the time of withdrawal. The reinvestment privilege may
be used only once. Special rules apply to reinvestments of amounts withdrawn
from the Guaranteed Account (see Appendix I and the Guaranteed Account
prospectus). We will not credit your account for market value adjustments that
we deducted at the time of your withdrawal. Seek competent advice regarding the
tax consequences associated with reinvestment.
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Features of a Systematic Distribution Option (SDO)
An SDO allows you to receive regular payments from your contract, without
moving into the income phase. By remaining in the accumulation phase, you
retain certain rights and investment flexibility not available during the
income phase.
Systematic Distribution Options
- --------------------------------------------------------------------------------
The following SDOs may be available:
(triangle) SWO--Systematic Withdrawal Option. SWO is a series of automatic
partial withdrawals from your account based upon a payment method you
select. Consider this option if you would like a periodic income
while retaining investment flexibility for amounts accumulated under
the account.
(triangle) 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, generally at age 70-1/2, and pay you that amount once a year.
ECO is not available under nonqualified contracts. An early
withdrawal charge will not be deducted from and a market value
adjustment will not be applied to any part of your account value paid
under an ECO.
(triangle) LEO--Life Expectancy Option. LEO provides for annual payments for a
number of years equal to your life expectancy or the life expectancy
of you and a designated beneficiary. It is designed to meet the
substantially equal periodic payment exception to the 10% premature
distribution penalty under Tax Code section 72. See "Taxation."
Other SDOs. 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 by calling us at the number listed in "Contract Overview--
Contract Questions: Contacting the Company."
Eligibility for an SDO. To determine if you meet the age and account value
criteria and to assess terms and conditions that may apply, contact your local
representative or the Company at the number listed in "Contract Overview--
Questions: Contacting the Company."
SDO Availability. If allowed by applicable law, we reserve the right to
discontinue the availability of one or all of the SDOs for new elections at any
time, and/or to change the terms of future elections.
Terminating an SDO. You may revoke an SDO at any time by submitting a written
request to our Home Office. ECO, once revoked, may not, unless allowed under
the Tax Code, be elected again.
Charges and Taxation. When you elect an SDO, your account value remains in the
accumulation phase and subject to the charges and deductions described in the
"Fees" and "Fee Table" sections. Taking a withdrawal under an SDO may have tax
consequences. If you are concerned about tax implications, consult a qualified
tax advisor before electing an option.
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This section provides information about the death benefit during the
accumulation phase. For death benefit information applicable to the income
phase see "Income Phase."
Terms to understand:
Account Year/Account Anniversary: A period of 12 months measured from the date
we established your account and each anniversary of this date. Account
anniversaries are measured from this date.
Annuitant: The person(s) on whose life or life expectancy(ies) the income phase
payments are based.
Beneficiary(ies): The person(s) or entity(ies) entitled to receive death
benefit proceeds under the contract.
Claim Date: The date due proof of death and the beneficiary's right to receive
the death benefit are received in good order at our Home Office.
Contract Holder (You/Your): The contract holder of an individually owned
contract or the certificate holder of a group contract. The contract holder and
annuitant may be the same person.
Market Value Adjustment: An adjustment that may be made to amounts withdrawn
from the Guaranteed Account. The adjustment may be positive or negative.
Death Benefit
- --------------------------------------------------------------------------------
During the Accumulation Phase
Who Receives Death Benefit Proceeds? If you would like certain individuals or
entities to receive the death benefit when it becomes payable, you may name
them as your beneficiaries. However, if you are a joint contract holder and you
die, the beneficiary will automatically be the surviving joint contract holder.
In this circumstance, any other beneficiary you have named will be treated as
the primary or contingent beneficiary, as originally named, of the surviving
joint contract holder. The surviving joint contract holder may change that
beneficiary designation. If you die and no beneficiary exists, the death
benefit will be paid in a lump sum to your estate.
Designating Your Beneficiary. You may designate a beneficiary on your
application or by contacting your local representative or calling us at the
number listed in the "Contract Overview -- Questions: Contacting the Company."
When is a Death Benefit Payable? During the accumulation phase a death benefit
is payable when the contract holder or the annuitant dies. If there are joint
contract holders, the death benefit is payable when either one dies.
Prior to the election of a death benefit payment by the beneficiary, the
account value will remain in the account and continue to be affected by the
investment performance of the investment option(s) selected. The beneficiary
has the right to allocate or transfer any amount to any available investment
option (subject to a market value adjustment, as applicable).
Death Benefit Amount
Minimum Guaranteed Death Benefit. If approved in your state, upon the death of
the annuitant the death benefit will be the greater of:
(1) The account value on the claim date; or
(2) The minimum guaranteed death benefit as of the date of death, adjusted for
payments made and any amounts deducted from your account (including
withdrawals, payments made under an income phase payment plan, and fees
and expenses) since the date the minimum guaranteed death benefit was
determined
Determining the Minimum Guaranteed Death Benefit. On the day we establish your
account, the minimum guaranteed death benefit equals the amount of your initial
payment. Thereafter the minimum guaranteed death benefit is determined once a
year on the account anniversary (until the account anniversary immediately
before the annuitant's 85th birthday) and equals the greater of:
(a) The minimum guaranteed death benefit as last determined, adjusted for any
payments made and any amounts deducted from your account (including
withdrawals, payments made under an income phase payment plan, and fees
and expenses) since the date the minimum guaranteed death benefit was
determined; or
(b) Your account value on that account anniversary
After the annuitant's 85th birthday, the minimum guaranteed death benefit
equals the minimum guaranteed death benefit on the account anniversary
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immediately before the annuitant's 85th birthday, adjusted for payments made
and any amounts deducted from your account (including withdrawals, payments
made under an income phase payment plan, and fees and expenses) since that
account anniversary.
Death Benefit Greater than the Account Value. If the minimum guaranteed death
benefit is greater than your account value on the claim date, we will allocate
an amount equal to the excess to the money market subaccount. The account value
on the claim date plus any excess deposited into the money market subaccount
becomes the new account value under the contract, and the death benefit paid
will equal the account value when the request for payment is made. No early
withdrawal charge will apply upon payment of the death benefit.
Death Benefit in Certain Cases
If the Contract Holder is not the Annuitant. Under nonqualified contracts only,
if the contract holder who is not the annuitant dies, the minimum guaranteed
death benefit described above will not apply. Rather, in this circumstance the
death benefit proceeds will be equal to the account value on the claim date,
plus or minus any market value adjustment. An early withdrawal charge may apply
to any full or partial payment of this death benefit.
Likewise, if a spousal beneficiary continues the account at the death of the
contract holder who was not also the annuitant, the annuitant will not change
and the minimum guaranteed death benefit will not apply on the death of the
spousal beneficiary. Rather, in this circumstance the death benefit proceeds
will equal the account value on the claim date, plus or minus any market value
adjustment, and minus any applicable early withdrawal charge.
If a Spousal Beneficiary Continues the Account. If a spousal beneficiary
continues the account at the death of the contract holder who was also the
annuitant, the spousal beneficiary becomes the annuitant. In this circumstance,
the minimum guaranteed death benefit payable at the death of a spousal
beneficiary shall be determined as described above, except that the initial
minimum guaranteed death benefit will equal the minimum guaranteed death
benefit payable at the death of the original contract holder/annuitant.
Alternative Death Benefit. If the minimum guaranteed death benefit is not
approved in your state, the following death benefit will apply:
Upon the death of the annuitant, the death benefit will be the greatest of:
(1) The total payments made to your account, adjusted for any amounts deducted
from your account (including withdrawals, payments made under an income
phase payment plan, and fees and expenses);
(2) The highest account value on any account anniversary until the account
anniversary immediately before the annuitant's 75th birthday (85th
birthday for contracts issued in New York) or date of death, whichever is
earlier, adjusted for payments made and any amounts deducted from your
account (including withdrawals, payments made under an income phase
payment plan, and fees and expenses) since that account anniversary; or
(3) The account value as of the date of death
Death Benefit Greater than the Account Value. If the alternative death benefit
is greater than the account value as of the date of death, we will allocate an
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amount equal to the excess to the money market subaccount. The account value on
the claim date plus any excess deposited into the money market subaccount
becomes the new account value under the contract, and the death benefit paid
will equal the account value when the request for payment is received. No early
withdrawal charge will apply upon payment of the death benefit.
Death Benefit in Certain Cases
If the Certificate Holder is not the Annuitant. Under nonqualified contracts
only, if the contract holder who is not the annuitant dies, the alternative
death benefit described above will not apply. Rather, in this circumstance the
death benefit proceeds will be equal to the account value on the date the
request for payment is received, plus or minus any market value adjustment. An
early withdrawal charge may apply to any full or partial payment of this death
benefit.
Likewise, if the spousal beneficiary continues the account at the death of the
contract holder who was not the annuitant, the annuitant will not change and
the alternative death benefit described above will not apply on the death of
the spousal beneficiary. Rather, in this circumstance the death benefit
proceeds will equal the account value on the date the request for payment is
received, plus or minus any market value adjustment, and minus any early
withdrawal charge, if approved in your state. If your state has not approved
deduction of an early withdrawal charge in this situation, then an early
withdrawal charge will apply only to payments made since the death of the
original contract holder/annuitant.
If a Spousal Beneficiary Continues the Account. If the spousal beneficiary
continues the account at the death of the contract holder who was also the
annuitant, the spousal beneficiary will become the annuitant. In this
circumstance, the death benefit payable at the death of a spousal beneficiary
shall equal the account value on the date the request for payment is received,
plus or minus any market value adjustment, and minus any applicable early
withdrawal charge applicable to payments made since the death of the original
contract holder/annuitant.
Death Benefit--Methods of Payment
For Qualified Contracts. Under a qualified contract, if the annuitant dies the
beneficiary has the following options:
(1) Apply some or all of the account value, plus or minus any market value
adjustment, to any of the income phase payment options (subject to the Tax
Code distribution rules)
(2) Receive, at any time, a lump sum payment equal to all or a portion of the
account value, plus or minus any market value adjustment, or
(3) Elect SWO or ECO or LEO (described in "Systematic Distribution Options"),
provided the election would satisfy the Tax Code minimum distribution
rules
Payments from a Systematic Distribution Option. If the annuitant was receiving
payments under SWO or ECO or LEO and died before the Tax Code's required
beginning date for minimum distributions, payments under SWO or ECO or LEO will
stop. The beneficiary, or contract holder on behalf
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of the beneficiary, may elect SWO or ECO or LEO provided the election is
permitted under the Tax Code minimum distribution rules. If the annuitant dies
after the required beginning date for minimum distributions, payments will
continue as permitted under the Tax Code minimum distribution rules, unless the
option is revoked.
Distribution Requirements Subject to Tax Code limitations, a beneficiary may be
able to defer distribution of the death benefit. Death benefit payments must
satisfy the distribution rules in Tax Code Section 401(a)(9). See "Taxation."
For Nonqualified Contracts.
(1) If you die and the beneficiary is your surviving spouse, or if you are a
nonnatural person and the annuitant dies and the beneficiary is the
annuitant's surviving spouse, then the beneficiary becomes the successor
contract holder.
As the successor contract holder, the beneficiary may exercise all rights under
the account and has the following options:
(a) Continue the contract in the accumulation phase
(b) Elect to apply some or all of the account value, plus or minus any market
value adjustment, to any of the income phase payment plans
(c) Receive at any time a lump-sum payment equal to all or a portion of the
account value, plus or any market value adjustment. If you die and are
not the annuitant, an early withdrawal charge will apply if a lump sum
is elected
In this circumstance, the Tax Code does not require distributions under the
contract until the successor contract holder's death.
(2) If you die and the beneficiary is not your surviving spouse, he or she may
elect option 1(b) or option 1(c) above.
In this circumstance, the Tax Code requires any portion of the account
value, plus or minus any market value adjustment, not distributed in
installments over the beneficiary's life or life expectancy, beginning
within one year of your death, must be paid within five years of your
death. See "Taxation."
(3) If you are a natural person but not the annuitant and the annuitant dies,
the beneficiary may elect option 1(b) or 1(c) above. If the beneficiary
does not elect option 1(b) within 60 days from the date of death, the
gain, if any, will be included in the beneficiary's income in the year the
annuitant dies
Payments from a Systematic Distribution Option. If the contract holder or
annuitant dies and payments were made under SWO, payments will stop. A
beneficiary, however, may elect to continue SWO.
Taxation. Your beneficiary(ies) may be subject to tax penalties if they do not
begin receiving death benefit payments within a time frame required by the Tax
Code. See "Taxation."
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We may have used the following terms in prior prospectuses:
Annuity Phase--Income Phase
Annuity Option--Payment Option
Annuity Payment--Income Phase Payment
The Income Phase
- --------------------------------------------------------------------------------
During the income phase you stop contributing dollars to your account and
start receiving payments from your accumulated account value.
Initiating Payments. At least 30 days prior to the date you want to start
receiving payments, you must notify us in writing of all of the following:
(triangle) Start date
(triangle) Payment option (see the payment options table in this section)
(triangle) Payment frequency (i.e., monthly, quarterly, semi-annually or
annually)
(triangle) Choice of fixed or variable payments
(triangle) Selection of an assumed net investment rate (only if variable
payments are elected)
Your account will continue in the accumulation phase until you properly
initiate payments. Once a payment option is selected, it may not be changed.
What Affects Payment Amounts? Some of the factors that may affect payment
amounts include your age, your gender, your account value, the payment option
selected, number of guaranteed payments (if any) selected, and whether you
select variable or fixed payments.
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 variable income payments will be held
in the subaccount(s) you select. Payment amounts will vary depending upon the
performance of the subaccounts you select. For variable payments, an assumed
net investment rate must be selected.
You may also select a combination of both fixed and variable payments.
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 you 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 you select a 3-1/2% rate, your first payment will be lower and subsequent
payments will increase more rapidly or decline more slowly depending upon
changes to the net investment rate of the subaccounts you selected. For more
information about selecting an assumed net investment rate, call us for a copy
of the SAI. See "Contract Overview--Questions: Contacting the Company."
Minimum Payment Amounts. The payment option you select must result in:
(triangle) A first payment of at least $50, or
(triangle) Total yearly payments of at least $250
If your account value is too low to meet these minimum payment amounts, you
will receive one lump sum payment. Unless prohibited by law, we reserve the
right to increase the minimum payment amount based upon increases reflected in
the Consumer Price Index-Urban (CPI-U), since July 1, 1993.
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Restrictions on Start Dates and the Duration of Payments. Payments may not
begin during the first account year, or, unless we consent later than the later
of:
(a) The first day of the month following the annuitant's 85th birthday, or
(b) The tenth anniversary of the last payment made to your account (fifth
anniversary for contracts issued in Pennsylvania)
When payments start, the age of the annuitant plus the number of years for
which payments are guaranteed may not exceed 95. For contracts issued in New
York, payments may not begin later than the first day of the month following
the annuitant's 90th birthday.
For qualified contracts only, payments may not extend beyond:
(a) The life of the annuitant
(b) The joint lives of the annuitant and beneficiary
(c) A guaranteed period greater than the annuitant's life expectancy
(d) A guaranteed period greater than the joint life expectancies of the
annuitant and beneficiary
For qualified contracts other than IRAs and for five-percent owners of other
qualified contracts, minimum distributions from the contract generally must
begin by April 1 of the calendar year following the calendar year in which you
attain age 70-1/2 or retire, whichever occurs later. For Roth IRAs these minimum
distribution rules do not apply. See "Taxation" for further discussion of rules
relating to income phase payments.
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 you select, even though we no longer assume any mortality
risks. 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 request for the
payment in good order at our Home Office. If the continuing payments are
elected, the beneficiary may not elect to receive a lump sum at a future date
unless the option specifically allows a withdrawal right. We will calculate the
value of any death benefit at the next valuation after we receive proof of
death and a request for payment. Such value will be reduced by any payments
made after the date of death.
Beneficiary Rights. A beneficiary's right to elect an income phase payment
option or receive a lump sum payment may have been restricted by the contract
holder. If so, such rights or options will not be available to the beneficiary.
Partial Entry into the Income Phase. You may elect a payment option for a
portion of your account dollars, while leaving the remaining portion invested
in the accumulation phase. Whether the Tax Code considers such payments taxable
as income phase payments or as withdrawals is currently unclear;
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therefore, you should consult with a qualified tax adviser before electing this
option. The same or different payment option may be selected for the portion
left invested in the accumulation phase.
Taxation. To avoid certain tax penalties, you or your beneficiary must meet the
distribution rules imposed by the Tax Code. Additionally, when selecting a
payment option, the Tax Code requires that your expected payments will not
exceed certain amounts. See "Taxation" for additional information.
Payment Options.
The following table lists the payment options and accompanying death benefits
available during the income phase. We may offer additional payment options
under the contract from time to time.
Once income phase payments begin, you may not change the payment option
selected.
Terms to understand:
Annuitant: The person(s) on whose life expectancy(ies) the income phase
payments are based.
Beneficiary: The person(s) or entity(ies) entitled to receive a death benefit.
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<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 your choice
Life Income-- of 5-30 years or as otherwise specified in the contract.
Guaranteed Death Benefit--Payment to the Beneficiary: If the annuitant dies before we have made all the
Payments 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) When you select this option you choose for 100%, 662/3% or 50% of the payment to continue
Two Lives to the 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 will continue to the second annuitant on the annuitant's death.
Death Benefit -- None: All payments end upon the death of both annuitants.
- ------------------------------------------------------------------------------------------------------------------------------------
Length of Payments: For as long as either annuitant lives, with payments guaranteed from 5-30
Life Income -- years or as otherwise specified in the contract.
Two Lives -- Continuing Payments: 100% of the payment to continue after the first death.
Guaranteed Death Benefit -- Payment to the Beneficiary: If both annuitants die before the guaranteed
Payments 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Life Income --
Cash Refund Length of Payments: For as long as the annuitant lives.
Option (limited Death Benefit -- Payment to the Beneficiary: Following the annuitant's death, we will pay a lump
availability -- sum payment equal to the amount originally applied to the payment option (less any premium
fixed payment tax) and less the total amount of fixed payment paid.
only)
- ------------------------------------------------------------------------------------------------------------------------------------
Life Income --
Two Lives--Cash Length of Payments: For as long as either annuitant lives.
Refund Option Continuing Payments: 100% of the payment to continue after the first death.
(limited Death Benefit -- Payment to the Beneficiary: When both annuitants die, we will pay a lump sum
availability -- payment equal to the amount applied to the payment option (less any premium tax) and less the
fixed payment total amount of fixed payment paid.
only)
- ------------------------------------------------------------------------------------------------------------------------------------
Nonlifetime Payment Plan
- ------------------------------------------------------------------------------------------------------------------------------------
Length of Payments: You may select payments for 5 to 30 years. In certain cases a lump-sum
payment may be requested at any time (see below).
Nonlifetime-- Death Benefit--Payment to the Beneficiary: If the annuitant dies before we make all the
Guaranteed guaranteed payments, we will pay the beneficiary a lump-sum (unless otherwise requested) equal
Payments to the present value of the remaining guaranteed payments, and we will not impose any early
withdrawal charge.
- ------------------------------------------------------------------------------------------------------------------------------------
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 lump 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. 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 the Home Office.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Calculation of Lump Sum Payments. If a lump sum payment is available under the
payment options above, the rate used to calculate the present value of the
remaining guaranteed payments will be the same rate we used to calculate the
income phase payments (i.e., the actual fixed rate used for fixed payments or
the 3-1/2% or 5% assumed net investment rate used for variable payments.
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In this Section
INTRODUCTION
CONTRACT TYPE
WITHDRAWALS AND OTHER DISTRIBUTIONS
(triangle) Taxation of Distributions
(triangle) 10% Penalty Tax
(triangle) Withholding for Federal Income Tax Liability
MINIMUM DISTRIBUTION REQUIREMENTS
(triangle) Minimum Distribution of Death Benefit Proceeds (Except Nonqualified
Contracts)
(triangle) Minimum Distribution of Death Benefit Proceeds (Nonqualified
Contracts)
RULES SPECIFIC TO CERTAIN PLANS
(triangle) 401(a) Plans
(triangle) 403(b) Plans
(triangle) 408(b) and 408A IRAs
(triangle) 457(b) Plans
TAXATION OF NONQUALIFIED CONTRACTS
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:
(triangle) Your tax position (or the tax position of the beneficiary, as
applicable) determines federal taxation of amounts held or paid out
under the contract
(triangle) Tax laws change. It is possible that a change in the future could
affect contracts issued in the past
(triangle) 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
(triangle) We do not make any guarantee about the tax treatment of the contract
or transaction involving the contract
(triangle) Contract holder means the contract holder of an individually owned
contract or the certificate holder of a group contract
(triangle) The term "payment" in this section refers to income phase payments.
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.
Taxation of Gains Prior to Distribution. Generally no amounts accumulated under
a variable contract will be taxable prior to the time of actual distribution.
However, the IRS has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the contract owner
possesses incidents of investment control over the assets. In these
circumstances, income and gains from the separate account assets would be
currently includible in the variable contract owner's gross income. The
Treasury announced that it will issue guidance regarding the extent to which
owners could direct their investments among subaccounts without being treated
as owners of the underlying assets of the separate account. It is possible that
the Treasury's position, when announced, may adversely affect the tax treatment
of existing contracts. The Company therefore reserves the right to modify the
contract as necessary to attempt to prevent the contract holder from being
considered the federal tax owner of a pro rata share of the assets of the
separate account.
CONTRACT TYPE
The Contract is designed for use on a non-tax qualified basis as a nonqualified
contract, or with certain retirement arrangements that qualify under Tax Code
sections 403(b), 408(b) or 408A. Prior to May 1, 1998, the contract was
available with certain retirement arrangements that qualify under Tax Code
sections 401(a) or 457(b).
Tax Rules. The tax rules vary according to whether the contract is a
nonqualified contract or used with a retirement arrangement. If used with a
retirement arrangement, you need to know the Tax Code section under which your
arrangement qualifies. Contact your plan sponsor, local representative or the
Company to learn which Tax Code section applies to your arrangement.
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<PAGE>
The Contract. Contract holders 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. If the contract is purchased in conjunction with a retirement
plan, the plan is not a part of the contract and we are not bound by the 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,
rollovers, exchanges and death benefit proceeds.
We report the taxable portion of all distributions to the IRS.
Taxation of Distributions
Nonqualified Contracts. A full withdrawal of a nonqualified contract is taxable
to the extent that the amount received exceeds the investment in the contract.
A partial withdrawal is taxable to the extent that the account value
immediately before the withdrawal exceeds the investment in the contract. In
other words, a partial withdrawal is treated first as a withdrawal of taxable
earnings.
For payments, a portion of each payment which represents the investment in the
contract is not taxable. An exclusion ratio is calculated to determine the
nontaxable portion.
For fixed payments, in general, there is no tax on the portion of each payment
which represents the same ratio that the investment in the contract bears to
the total dollar amount of the expected payments as defined in Tax Code section
72(d). The entire payment will be taxable once the recipient has recovered the
investment in the contract.
For variable payments, an equation is used to establish a specific dollar
amount of each payment that is not taxed. The dollar amount is determined by
dividing the investment in the contract by the total number of expected
periodic payments. The entire payment will be taxable once the recipient has
recovered the investment in the contract.
All deferred nonqualified annuity contracts that are issued by the Company (or
its affiliates) to the same contract holder during any calendar year are
treated as one annuity contract for purposes of determining the amount
includible in gross income under Tax Code section 72(e). In addition, the
Treasury Department has specific authority to issue regulations that prevent
the avoidance of Tax Code section 72(e) through the serial purchase of annuity
contracts or otherwise.
401(a) or 403(b) Plans. All distributions from these plans are taxed as
received unless:
(triangle) The distribution is rolled over to another plan of the same type or
to a traditional individual retirement annuity/account (IRA) in
accordance with the Tax Code; or
(triangle) You made after-tax contributions to the plan. In this case, depending
upon the type of distribution, the amount will be taxed according to
the rules detailed in the Tax Code
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408(b) Individual Retirement Annuity (IRA). All distributions from a
traditional IRA are taxed as received unless:
(triangle) The distribution is rolled over to another traditional IRA or, if the
IRA contains only amounts previously rolled over from a 401(a),
401(k), or 403(b) plan, to another plan of the same type; or
(triangle) You made after-tax contributions to the plan. In this case, the
distribution will be taxed according to rules detailed in the Tax
Code
408A Roth IRA. A qualified distribution from a Roth IRA is not taxed when it is
received. A qualified distribution is a distribution:
(triangle) Made after the 5-taxable year period beginning with the first taxable
year for which a contribution was made, and
(triangle) Made after you attain age 59-1/2, die, become permanently and totally
disabled, or for a qualified first-time home purchase.
If a distribution is not qualified, the accumulated earnings are taxable. A
partial distribution will first be treated as a return of contributions which
is not taxable.
457(b) Plans. All amounts received under a 457(b) plan are includible in
taxable income 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.
10% Penalty Tax
Under certain circumstances, the Tax Code may impose a 10% penalty tax on the
taxable portion of any distribution from a nonqualified contract or from a
contract used with a 401(a), 403(b), 408(b) or 408A arrangement. The 10%
penalty tax does not apply to a distribution from a 457 plan.
Nonqualified Contract. The 10% penalty tax applies to the taxable portion of a
distribution from a nonqualified annuity unless one or more of the following
have occurred:
(a) The taxpayer has attained age 59-1/2
(b) The taxpayer has become totally and permanently disabled
(c) The contract holder has died
(d) The distribution is made in substantially equal periodic payments (at least
annually) over the life or life expectancy of the taxpayer or the joint
lives or joint life expectancies of the taxpayer and beneficiary
(e) The distribution is allocable to investment in the contract before August
14, 1982
401(a) or 403(b) Plan. The 10% penalty tax applies to the taxable portion of a
distribution from a 401(a) or 403(b) plan, unless one or more of the following
have occurred:
(a) You have attained age 59-1/2
(b) You have become totally and permanently disabled
(c) You have died
(d) You have separated from service with the plan sponsor at or after age 55
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(e) The distribution is rolled over into another plan of the same type or to an
IRA in accordance with the Tax Code
(f) The distribution is made in substantially equal periodic payments (at least
annually) over your life or life expectancy or the joint lives or joint
life expectancies of your and your beneficiary. Also, you must have
separated from service with the plan sponsor
(g) The distribution is equal to unreimbursed medical expenses that qualify for
deduction as specified in the Tax Code
408(b) IRA. In general, the exceptions for 401(a) and 403(b) plans also apply
to distributions from an IRA except for the separation from service exception
in (d) above. This includes a distribution from a Roth IRA that is not a
qualified distribution or a rollover to a Roth IRA that is not a qualified
rollover contribution. The penalty tax is also waived on a distribution made
from an IRA to pay for health insurance premiums for certain unemployed
individuals or used for qualified first-time home purchase or for higher
education expenses.
Withholding for Federal Income Tax Liability
Any distributions under the contract are generally subject to withholding.
Federal income tax liability rates vary according to the type of distribution
and the recipient's tax status.
Nonqualified Contract. Generally, you or a beneficiary may elect not to have
tax withheld from distributions.
401(a) or 403(b) Plans. Generally, distributions from these plans are subject
to a mandatory 20% federal income tax withholding. However, you or a
beneficiary may elect not to have tax withheld from certain distributions.
408(b) and 408A IRAs. Generally, you or a beneficiary may elect not to have tax
withheld from distributions.
457 Plans. All distributions from a 457 plan, 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 your beneficiary is a non-resident alien, then
any withholding is governed by Tax Code section 1441 based on the individual's
citizenship, the country of domicile and treaty status.
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MINIMUM DISTRIBUTION REQUIREMENTS
To avoid certain tax penalties, you and any beneficiary must meet the minimum
distribution requirements imposed by the Tax Code. The requirements do not
apply to either nonqualified contracts or Roth IRA contracts, except with
regard to death benefits. These rules may dictate one or more of the following:
(triangle) Start date for distributions
(triangle) The time period in which all amounts in your account(s) must be
distributed
(triangle) 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:
(triangle) You are a 5% owner or the contract is an IRA, in which case such
distributions must begin by April 1st of the calendar year following
the calendar year in which you attain age 70-1/2, or
(triangle) Under 403(b) plans, if the Company maintains separate records of
amounts held as of December 31, 1986. In this case, distribution of
these amounts generally must begin by the end of the calendar year in
which you attain age 75 or retire, if later. However, if you take any
distributions in excess of the minimum required amount, then special
rules require that some or all of the December 31, 1986 balance be
distributed earlier.
Time Period. We must pay out distributions from the contract over one of the
following time periods:
(triangle) Over your life or the joint lives of you and your beneficiary, or
(triangle) Over a period not greater than your life expectancy or the joint life
expectancies of you and your beneficiary.
Amount (457(b) Plans Only). 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.
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Minimum Distribution of Death Benefit Proceeds (Except Nonqualified Contracts)
The following applies to 408(b) and 408A IRAs and 401(a), 403(b) and 457 plans.
Different distribution requirements apply if your death occurs:
(triangle) After you begin receiving minimum distributions under the contract;
or
(triangle) 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. Tax Code section 401(a)(9) provides specific
rules for calculating the minimum required distributions at your death. The
rules differ, dependent upon the following:
(triangle) 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
(triangle) 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.
If your death occurs 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 either of the following
timeframes:
(triangle) Over the life of the beneficiary
(triangle) 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:
(triangle) December 31 of the calendar year following the calendar year of your
death
(triangle) December 31 of the calendar year in which you would have attained age
70-1/2
Special Rule for IRA Spousal Beneficiaries. In lieu of taking a distribution
under these rules, a spousal beneficiary may elect to treat the account as his
or her own IRA and defer taking a distribution until his or her age 70-1/2. The
surviving spouse is deemed to have made such an election if the surviving
spouse makes a rollover to or from the account or fails to take a distribution
within the required time period.
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Minimum Distribution of Death Benefit Proceeds (Nonqualified Contracts)
Death of the Contract Holder. The following requirements apply to nonqualified
contracts at the death of the contract holder. Different distribution
requirements apply if you are the contract holder and your death occurs:
(a) After you begin receiving annuity payments under the contract; or
(b) Before you begin receiving such distributions
If your death occurs after you begin receiving payments, distribution must be
made at least as rapidly as under the method in effect at the time of your
death.
If your death occurs before you begin receiving payments, your entire balance
must be distributed within five years after the date of your death. For
example, if you die on September 1, 1999, your entire balance must be
distributed by August 31, 2004. However, if the distribution begins within one
year of your death, then payments may be made in one of the following
time-frames:
(triangle) Over the life of the beneficiary
(triangle) Over a period not extending beyond the life expectancy of the
beneficiary
Spousal Beneficiaries. If the beneficiary is your spouse, the account may be
continued with the surviving spouse as the new contract holder.
Death of Annuitant. If the contract holder is a nonnatural person and the
annuitant dies, the same rules apply as outlined above for death of a contract
holder. If the contract holder is a natural person but not the annuitant and
the annuitant dies, the beneficiary must elect a payment option within 60 days
of the date of death, or any gain under the contract will be includible in the
beneficiary's income in the year the annuitant dies.
RULES SPECIFIC TO CERTAIN PLANS
401(a) Plans.
Tax Code section 401(a) permits certain employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish various types of retirement plans for themselves and for their
employees. These retirement plans may permit the purchase of the contracts to
accumulate retirement savings under the plans.
Assignment or Transfer of Contracts. Adverse tax consequences to the 401(a)
plan and/or to you may result if your beneficial interest in the contract is
assigned or transferred to persons other than: a plan participant as a means to
provide benefit payments; an alternate payee under a qualified domestic
relations order in accordance with Tax Code section 414(p); or to the Company
as collateral for a loan.
Exclusion From Gross Income. The Tax Code imposes a maximum limit on annual
payments to your 401(a) account(s) that may be excluded from gross income. The
employer must calculate this limit under the plan in accordance with Tax Code
section 415. This limit is generally the lesser of 25% of your compensation or
$30,000. Compensation means your compensation from the employer sponsoring the
plan and, for years beginning after December 31,
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1997, includes any elective deferrals under Tax Code section 402(g) and any
amounts not includible in gross income under Tax Code sections 125 or 457. The
limit applies to your contributions as well as any contributions made by your
employer on your behalf. In addition, payments to your account(s) will be
excluded from your gross income only if the plan meets certain
nondiscrimination requirements.
403(b) Plans.
Under Tax Code section 403(b), contributions made by public school systems or
nonprofit healthcare organizations and other Tax Code section 501(c)(3) tax
exempt organizations to purchase annuity contracts for their employees are
generally excludable from the gross income of the employee.
Assignment or Transfer of Contracts. Adverse tax consequences to the plan
and/or to you may result if your beneficial interest in the contract is
assigned or transferred to any person except to an alternate payee under a
qualified domestic relations order in accordance with Tax Code section 414(p)
or to the Company as collateral for a loan.
Exclusions from Gross Income. In order to be excludable from gross income,
total annual contributions made by you and your employer to a 403(b) plan
cannot exceed the lesser of the following limits set by the Tax Code:
(triangle) The first limit, under Tax Code section 415, is generally the lesser
of 25% of your compensation or $30,000. Compensation means your
compensation from the employer sponsoring the plan and, for years
beginning after December 31, 1997, includes any elective deferrals
under Tax Code section 402(g) and any amounts not includible in gross
income under Tax Code sections 125 or 457
(triangle) The second limit, which is the exclusion allowance under Tax Code
section 403(b), is usually calculated according to a formula that
takes into account your length of employment, any pretax
contributions you and your employer have already made under the plan,
and any pretax contributions to certain other retirement plans
These two limits apply to your contributions as well as to any contributions
made by your employer on your behalf.
(triangle) An additional limit specifically limits your salary reduction
contributions to generally no more than $10,000 annually (subject to
indexing). Your own limit may be higher or lower, depending upon
certain conditions
Payments to your account(s) will be excluded from your gross income only if the
plan meets certain nondiscrimination requirements.
Restrictions on Distributions. Tax Code section 403(b)(11) restricts the
distribution under Tax Code section 403(b) contracts of:
(1) salary reduction contributions made after December 31, 1988
(2) earnings on those contributions
(3) earnings during such period on amounts held as of December 31, 1988
Distribution of those amounts may only occur upon your death, attainment of age
59-1/2, separation from service, disability, or financial hardship. Income
attributable to salary reduction contributions and credited on or after January
1, 1989 may not be distributed in the case of hardship.
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408(b) and 408A IRAs.
Tax Code section 408(b) permits eligible individuals to contribute to a
traditional Individual Retirement Annuity (IRA) on a pre-tax (deductible)
basis. Employers may establish Simplified Employee Pension (SEP) plans and
contribute to a traditional IRA owned by the employee. Tax Code section 408A
permits eligible individuals to contribute to a Roth IRA on an after-tax
(nondeductible) basis.
Assignment or Transfer of Contracts. Adverse tax consequences may result if you
assign or transfer your interest in the contract to persons other than your
spouse incident to a divorce.
Eligibility. Eligibility to contribute to a traditional IRA on a pre-tax basis
or to establish a Roth IRA or to roll over or transfer from a traditional IRA
to a Roth IRA depends upon your adjusted gross income.
Rollovers and Transfers. Rollovers and direct transfers are permitted from a
401, 403(a) or a 403(b) arrangement to a traditional IRA. Distributions from
these arrangements are not permitted to be transferred or rolled over to a Roth
IRA. A Roth IRA can accept transfers/rollovers only from a traditional IRA,
subject to ordinary income tax, or from another Roth IRA.
457(b) Plans.
Tax Code section 457(b) 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-government tax exempt entities. The plan may permit
participants to specify the form of investment in their deferred compensation
account.
Trust Requirement. 457(b) plans maintained by state or local governments, their
political subdivisions, agencies, instrumentalities and certain affiliates are
required to hold all assets and income of the plan in trust for the exclusive
benefit of plan participants and their beneficiaries. For purposes of meeting
this requirement, custodial accounts and annuity contracts are treated as
trusts.
Contributions Excluded from Gross Income. 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).
Restrictions on Distributions. 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.
TAXATION OF NONQUALIFIED CONTRACTS
In General. Tax Code section 72 governs taxation of annuities in general. A
contract holder under a nonqualified contract who is a natural person generally
is not taxed on increases in the account value until distribution
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occurs by withdrawing all or part of such account value. The taxable portion of
a distribution is taxable as ordinary income.
Non-Natural Contract Holders of a Nonqualified Contract. If the contract holder
is not a natural person, a nonqualified contract generally is not treated as an
annuity for income tax purposes and the income on the contract for the taxable
year is currently taxable as ordinary income. Income on the contract is any
increase over the year in the surrender value, adjusted for purchase payments
made during the year, amounts previously distributed and amounts previously
included in income. There are some exceptions to the rule and a non-natural
person should consult with its tax adviser prior to purchasing this contract. A
non-natural person exempt from federal income taxes should consult with its tax
adviser regarding treatment of income on the contract for purposes of the
unrelated business income tax. When the contract holder is not a natural
person, a change in annuitant is treated as the death of the contract holder.
Diversification. Tax Code section 817(h) requires that in a nonqualified
contract the investments of the funds be "adequately diversified" in accordance
with Treasury Regulations in order for the contracts to qualify as annuity
contracts under federal tax law. The separate account, through the funds,
intends to comply with the diversification requirements prescribed by the
Treasury in Reg. Sec. 1.817-5, which affects how the funds' assets may be
invested.
Transfers, Assignments or Exchanges of a Nonqualified Contract. A transfer of
ownership of a nonqualified contract, the designation of an annuitant, payee or
other beneficiary who is not also the contract holder, the selection of certain
annuity dates, or the exchange of a contract may result in certain tax
consequences. The assignment, pledge, or agreement to assign or pledge any
portion of the account value generally will be treated as a distribution.
Anyone contemplating any such designation, transfer, assignment, selection, or
exchange should contact a tax adviser regarding the potential tax effects of
such a transaction.
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.
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
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pay such taxes. We may deduct this amount from the separate account, including
from your account value invested in the subaccounts.
Other Topics
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The Company
Aetna Life Insurance and Annuity Company (the Company, we, us) 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 selling 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 contract are
obligations of the Company.
Contract Distribution
We will serve as the principal underwriter for the securities sold by this
prospectus. We are registered as a broker-dealer with the SEC and a member of
the National Association of Securities Dealers, Inc. (NASD).
As principal underwriter, we 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 may also enter
into these arrangements with banks that may be acting as broker dealers without
separate registration under the Securities Exchange Act of 1934 pursuant to
legal and regulatory exceptions. In this prospectus, we refer to the registered
broker-dealers and the banks described above as "distributors." We and one or
more of our affiliates may also sell the contracts directly. All individuals
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offering and selling the contracts must be registered representatives of a
broker-dealer, or employees of a bank exempt from registration under the
Securities Exchange Act of 1934, and must be licensed as insurance agents to
sell variable annuity contracts.
Occasionally, we may enter into arrangements with independent entities to help
find broker-dealers or banks interested in distributing the contract or to
provide training, marketing and other sales-related functions, or
administrative services. We will reimburse such entities for expenses related
to and may pay fees to such entities in return for these services.
We may offer customers of certain broker-dealers special guaranteed rates in
connection with the Guaranteed Account offered through the contracts, and may
negotiate different commissions for these broker-dealers.
We may also contract with independent third party broker-dealers who will act
as wholesalers by assisting us in selecting broker-dealers or banks interested
in acting as distributors. These wholesalers may also provide training,
marketing and other sales related functions and the distributors and may
provide certain administrative services in connection with the contracts. We
may pay such wholesalers compensation based on payments to contracts purchased
through distributors that they select.
We may also designate third parties to provide services in connection with the
contracts such as reviewing applications for completeness and compliance with
insurance requirements and providing the distributors with approved marketing
material, prospectuses or other supplies. These parties will also receive
payments based on payments for their services, to the extent such payments are
allowed by applicable securities laws. We will pay all costs and expenses
related to these services.
Payment of Commissions
We pay distributors and their registered representatives who sell the contracts
commissions and service fees. Distributors will be paid commissions up to an
amount currently equal to 6% of payments or as a combination of a certain
percentage of payments at time of sale and a trail commission as a percentage
of assets. Under the latter arrangement, commission payments may exceed 6% of
payments over the life of the 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 pay these commissions, fees and related distribution expenses out of any
early withdrawal charges assessed or out of our general assets, including
investment income and any profit from investment advisory fees and mortality
and expense risk charges. No additional deductions or charges are imposed for
commissions and related expenses.
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Payment Delay or Suspension
We reserve the right to suspend or postpone the date of any payment of benefits
or values under any one of the following circumstances:
(triangle) On any valuation date when the New York Stock Exchange is closed
(except customary weekend and holiday closings) or when trading on
the New York Stock Exchange is restricted
(triangle) 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 to fairly determine the value of
the subaccount's assets
(triangle) 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.
Performance Reporting
We may advertise different types of historical performance for the subaccounts
including:
(triangle) Standardized average annual total returns
(triangle) 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 you may request a SAI by calling us at
the number listed in "Contract Overview--Questions: Contacting the Company."
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 subaccounts 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 (i.e., 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. If you are a contract holder
under a group contract, you have a fully vested interest in the contract
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and may instruct the group contract holder how to direct the Company to cast a
certain number of votes. 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) you are entitled to direct
will be determined as of the record date set by any fund you invest in through
the subaccounts.
(triangle) During the accumulation phase the number of votes is equal to the
portion of your account value invested in the fund, divided by the
net asset value of one share of that fund.
(triangle) 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.
Contract Modifications
We may change the contract as required by federal or state law. In addition, we
may, upon 30 days' written notice to the group contract holder, make other
changes to a group contract that would apply only to individuals who become
participants under that contract after the effective date of such changes. If a
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.
Transfer of Ownership: Assignment
We will accept assignments or transfers of ownership of a nonqualified contract
or a qualified contract where such assignments or transfers are not prohibited,
with proper notification. The date of any assignment or transfer of ownership
will be the date we receive the notification at our Home Office. An assignment
or transfer of ownership may have tax consequences and you should consult with
a tax advisor before assigning or transferring ownership of the contract.
An assignment of a contract will only be binding on the Company if it is made
in writing and sent to the Company 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 such 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.
Involuntary Terminations
We reserve the right to terminate any account with a value of $2,500 or less
immediately following a partial withdrawal. However, an IRA may only be closed
out when payments to the contract have not been received for a 24-month period
and the paid-up annuity benefit at maturity would be less than $20 per month.
If such right is exercised, you will be given 90 days' advance written notice.
No early withdrawal charge will be deducted for involuntary terminations. We do
not intend to exercise this right in cases where the
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account value is reduced to $2,500 or less solely due to investment
performance.
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.
Year 2000 Readiness
As a healthcare and financial services enterprise, Aetna Inc. (referred to
collectively with its affiliates and subsidiaries as "Aetna"), is dependent
upon 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 by 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 preparations in a timely manner, and any resulting systems
interruptions or other consequences, would not have an adverse effect, directly
or indirectly, on the separate account, including, without limitation, its
operation or the valuation of its assets and units.
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Contents of the Statement of Additional Information
- --------------------------------------------------------------------------------
The Statement of Additional Information (SAI) contains more specific
information on the separate account and the contract, as well as the financial
statements of the separate account and the Company. The following is a list of
the contents of the SAI.
<TABLE>
<S> <C>
General Information and History .......................................... 2
Variable Annuity Account B ............................................... 2
Offering and Purchase of Contract ........................................ 3
Performance Data ......................................................... 3
General ................................................................. 3
Average Annual Total Return Quotations .................................. 3
Income Phase Payments .................................................... 6
Sales Material and Advertising ........................................... 7
Independent Auditors ..................................................... 7
Financial Statements of the Separate Account ............................. S-1
Financial Statements of Aetna Life Insurance and Annuity Company ......... F-1
</TABLE>
You may request an SAI by calling the Company at the number listed in "Contract
Overview -- Questions: Contacting the Company".
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Appendix I
ALIAC Guaranteed Account
- --------------------------------------------------------------------------------
The ALIAC Guaranteed Account (the Guaranteed Account) is a fixed interest
option available during the accumulation phase under the contract. This
appendix is only a summary of certain facts about the Guaranteed Account.
Please read the Guaranteed Account prospectus carefully before investing in
this option.
In General. Amounts invested in the Guaranteed Account earn specified interest
rates if left in the Guaranteed Account for specified periods of time. If you
withdraw or transfer those amounts before the specified periods elapse, we may
apply a market value adjustment (described below) which may be positive or
negative.
When deciding to invest in the Guaranteed Account, contact your representative
or the Company to learn:
(triangle) The interest rate(s) we will apply to amounts invested in the
Guaranteed Account
We change the rate(s) periodically. Be certain you know the rate we
guarantee on the day your account dollars are invested in the
Guaranteed Account. Guaranteed interest rates will never be less than
an annual effective rate of 3%.
(triangle) The period of time your account dollars need to remain in the
Guaranteed Account in order to earn the rate(s)
You are required to leave your account dollars in the Guaranteed
Account for a specified period of time in order to earn the
guaranteed interest rate(s).
Deposit Period. During a deposit period, we offer a specific interest rate for
dollars invested for a certain guaranteed term. For a specific interest rate
and guaranteed term to apply, account dollars must be invested in the
Guaranteed Account during the deposit period for which that rate and term are
offered.
Interest Rates. We guarantee different interest rates, depending upon when
account dollars are invested in the Guaranteed Account. For guaranteed terms
one year or longer, we may apply more than one specified interest rate. The
interest rate we guarantee is an annual effective yield. That means 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. Guaranteed
interest rates will never be less than an annual effective rate of 3%.
Guaranteed Terms. The guaranteed term is the period of time account dollars
must be left in the Guaranteed Account in order to earn the guaranteed interest
rate. For guaranteed terms one year or longer, we may offer different rates for
specified time periods within a guaranteed term. We offer different guaranteed
terms at different times. We also may offer more than one guaranteed term of
the same duration with different interest rates. Check with your representative
or the Company to learn what terms are being offered. The Company also reserves
the right to limit the number of guaranteed terms or the availability of
certain guaranteed terms.
Fees and Other Deductions. If all or a portion of your account value in the
Guaranteed Account is withdrawn or transferred, you may incur one or more of
the following:
(triangle) Market Value Adjustment (MVA)--as described in this appendix and in
the Guaranteed Account prospectus
(triangle) Tax penalties and/or tax withholding--see "Taxation"
(triangle) Early withdrawal charge--see "Fees"
(triangle) Maintenance fee--see "Fees"
We do not make deductions from amounts in the Guaranteed Account to cover
mortality and expense risks. Rather, we consider these risks when determining
the interest rate to be credited.
Market Value Adjustment (MVA). If your account value is withdrawn or
transferred from the Guaranteed Account before the guaranteed term is
completed, an MVA may apply. The MVA reflects investment value changes caused
by changes in interest rates occurring since the date of deposit. The MVA may
be positive or negative.
If interest rates at the time of withdrawal or transfer 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
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paid into the Guaranteed Account. If interest rates at the time of withdrawal
or transfer have decreased since the date of deposit, the value of the
investment increases and the MVA will be positive.
MVA Waiver. For withdrawals or transfers from a guaranteed term before the
guaranteed term matures, the MVA may be waived for:
(triangle) Transfers due to participation in the dollar cost averaging program
(triangle) Withdrawals taken due to your election of SWO or ECO (described in
"Systematic Distribution Options"), if available
(triangle) Withdrawals for minimum distributions required by the Tax Code and
for which the early withdrawal charge is waived
Death Benefit. When a death benefit is paid under the contract within six
months of the date of death, only a positive aggregate MVA amount, if any, is
applied to the account value attributable to amounts withdrawn from the
Guaranteed Account. This provision does not apply upon the death of a spousal
beneficiary or joint contract holder who continued the account after the first
death. If a death benefit is paid more than six months from the date of death,
a positive or negative aggregate MVA amount, as applicable, will be applied.
Partial Withdrawals. For partial withdrawals during the accumulation phase,
amounts to be withdrawn from the Guaranteed Account will be withdrawn
proportionally from each group of deposits having the same length of time until
the maturity date ("Guaranteed Term Group"). Within a Guaranteed Term Group,
the amount will be withdrawn first from the oldest deposit period, then from
the next oldest, and so on until the amount requested is satisfied.
Guaranteed Terms Maturity. As a guaranteed term matures, assets accumulating
under the Guaranteed Account may be (a) transferred to a new guaranteed term,
(b) transferred to other available investment options, or (c) withdrawn.
Amounts withdrawn may be subject to an early withdrawal charge, taxation and,
if you are under age 59-1/2, tax penalties may apply.
If no direction is received from you at our Home Office by the maturity date of
a guaranteed term, the amount from the maturing guaranteed term will be
transferred to a new guaranteed term of a similar length. If the same
guaranteed term is no longer available, the next shortest guaranteed term
available in the current deposit period will be used. If no shorter guaranteed
term is available, the next longer guaranteed term will be used.
If you do not provide instructions concerning the maturity value of a maturing
guaranteed term, the maturity value transfer provision applies. This provision
allows transfers or withdrawals without an MVA if the transfer or withdrawal
occurs during the calendar month immediately following a guaranteed term
maturity date. This waiver of the MVA only applies to the first transaction
regardless of the amount involved in the transaction.
Under the Guaranteed Account, each guaranteed term is counted as one funding
option. If a guaranteed term matures, and is renewed for the same term, it will
not count as an additional investment option for purposes of any limitation on
the number of investment options.
Subsequent Payments. Payments received after your initial payment to the
Guaranteed Account will be allocated in the same proportions as the last
allocation, unless you properly instruct us to do otherwise. If the same
guaranteed term(s) are not available, the next shortest term will be used. If
no shorter guaranteed term is available, the next longer guaranteed term will
be used.
Dollar Cost Averaging. The Company may offer more than one guaranteed term of
the same duration and credit one with a higher rate contingent upon use only
with the dollar cost averaging program. If amounts are applied to a guaranteed
term which is credited with a higher rate using dollar cost averaging and the
dollar cost averaging is discontinued, the amounts will be transferred to
another guaranteed term of the same duration and an MVA will apply.
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Transfer of Account Dollars. Generally, account dollars invested in the
Guaranteed Account may be transferred among guaranteed terms offered through
the Guaranteed Account, 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 the Guaranteed Account 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. The 90 day wait does not apply to (1)
amounts transferred on the maturity date or under the maturity value transfer
provision; (2) amounts transferred from the Guaranteed Account before the
maturity date due to the election of an income phase payment option; (3)
amounts distributed under the ECO or SWO (See "Systematic Distribution
Options") and (4) amounts transferred from an available guaranteed term in
connection with the dollar cost averaging program.
Transfers after the 90-day period are permitted from guaranteed term(s) to
other guaranteed term(s) available during a deposit period or to other
available investment options. Transfers of the Guaranteed Account values on or
within one calendar month of a term's maturity date are not counted as one of
the 12 free transfers of accumulated values in the account.
Reinvesting Amounts Withdrawn from the Guaranteed Account. If amounts are
withdrawn and then reinvested in the Guaranteed Account, we apply the
reinvested amount to the current deposit period. This means the guaranteed
annual interest rate and guaranteed terms available on the date of reinvestment
will apply. We reinvest amounts proportionately in the same way as they were
allocated before withdrawal. Your account value will not be credited for any
negative MVA that was deducted at the time of withdrawal.
Income Phase. The Guaranteed Account cannot be used as an investment option
during the income phase. However, you may notify us at least 30 days in advance
to elect a fixed or variable payment option and to transfer your Guaranteed
Account dollars to the general account or any of the subaccounts available
during the income phase. Transfers made due to the election of a lifetime
payment option will be subject to only a positive aggregate MVA.
Distribution. The Company is the principal underwriter of the contract. The
Company is registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 as a broker-dealer, and is a member of the
National Association of Securities Dealers, Inc. From time to time, the Company
may offer customers of certain broker-dealers special guaranteed rates in
connection with the Guaranteed Account offered through the contracts, and may
negotiate different commissions for these broker-dealers.
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<PAGE>
Appendix II
Fixed Account
- --------------------------------------------------------------------------------
General Disclosure.
(triangle) The Fixed Account is an investment option available during the
accumulation phase under the contracts
(triangle) Amounts allocated to the Fixed Account are held in the Company's
general account which supports insurance and annuity obligations
(triangle) Interests in the Fixed Account have not been registered with the SEC
in reliance on exemptions under the Securities Act of 1933, as
amended
(triangle) Disclosure in this prospectus regarding 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
(triangle) Disclosure in this appendix regarding the Fixed Account has not been
reviewed by the SEC
(triangle) Additional information about this option may be found in the contract
Interest Rates.
(triangle) 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
(triangle) 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
Dollar Cost Averaging. Amounts you invest in the Fixed Account must be
transferred into the other investment options available under the contract over
a period not to exceed 12 months. If you discontinue dollar cost averaging, the
remaining balance amounts in the Fixed Account will be transferred into the
money market subaccount available under the contract, unless you direct us to
transfer the balance into other available options.
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.
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."
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.
By notifying the Home Office at least 30 days before income 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.
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Appendix III
Description of Underlying Funds
- --------------------------------------------------------------------------------
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.
Investment Objective
Seeks to maximize investment return, consistent with reasonable safety of
principal by investing in a diversified portfolio of one or more of the
following asset classes: stocks, bonds, and cash equivalents, based on the
investment adviser's judgment of which of those sectors or mix thereof offers
the best investment prospects.
Policies
Under normal market conditions, allocates assets among the following asset
classes: 1) equities such as common and preferred stocks; and 2) debt such as
bonds, mortgage-related and other asset-backed securities, and U.S. Government
securities. Typically maintains approximately 60% of total assets in equities
and 40% of total assets in debt (including money market instruments), although
those percentages may vary from time to time.
Risks
Principal risks are those generally attributable to stock and bond investing.
The success of the fund's strategy depends on the investment adviser's skill in
allocating fund assets between equities and debt and in choosing investments
within those categories. Risks attributable to stock investing include sudden
and unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Stocks of smaller companies tend to be less
liquid and more volatile than stocks of larger companies and can be
particularly sensitive to expected changes in interest rates, borrowing costs
and earnings. Fixed-income investments are subject to the risk that interest
rates will rise, which generally causes bond prices to fall. Also, economic and
market conditions may cause issuers to default or go bankrupt. Values of
high-yield bonds are even more sensitive to economic and market conditions than
other bonds. Prices of mortgage-related securities, in addition to being
sensitive to changes in interest rates, also are sensitive to changes in the
prepayment patterns on the underlying instruments.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Income Shares d/b/a Aetna Bond VP
Investment Objective
Seeks to maximize total return, consistent with reasonable risk, through
investments in a diversified portfolio consisting primarily of debt securities.
It is anticipated that capital appreciation and investment income will both be
major factors in achieving total return.
Policies
Under normal market conditions, invests at least 65% of total assets in
high-grade corporate bonds, mortgage-related and other asset-backed securities,
and securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities. High-grade securities are rated at least A by Standard &
Poor's Corporation (S&P) or Moody's Investors Service, Inc. (Moody's), or if
unrated, considered by the investment adviser to be of comparable quality. May
also invest up to 15% of total assets in high-yield bonds, and up to 25% of
total assets in foreign debt securities.
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Risks
Principal risks are those generally attributable to debt investing, including
increases in interest rates and loss of principal. Generally, when interest
rates rise, bond prices fall. Bonds with longer maturities tend to be more
sensitive to changes in interest rates. For all bonds there is a risk that the
issuer will default. High-yield bonds generally are more susceptible to the
risk of default than higher rated bonds. Prices of mortgage-related securities,
in addition to being sensitive to changes in interest rates, also are sensitive
to changes in the prepayment patterns on the underlying instruments. Foreign
securities have additional risks. Some foreign securities tend to be less
liquid and more volatile than their U.S. counterparts. In addition, accounting
standards and market regulations tend to be less standardized. These risks are
usually higher for securities of companies in emerging markets. Securities of
foreign companies may be denominated in foreign currency. Exchange rate
fluctuations may reduce or eliminate gains or create losses.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Fund d/b/a Aetna Growth and Income VP
Investment Objective
Seeks to maximize total return through investments in a diversified portfolio
of common stocks and securities convertible into common stock. It is
anticipated that capital appreciation and investment income will both be major
factors in achieving total return.
Policies
Under normal market conditions, invests at least 65% of total assets in common
stocks that the investment adviser believes have significant potential for
capital or income growth. Tends to emphasize stocks of larger companies. Also
invests assets across other asset classes (including stocks of small and
medium-sized companies, international stock, real estate securities and fixed
income securities).
Risks
Principal risks are those generally attributable to stock investing. These
risks include sudden and unpredictable drops in the value of the market as a
whole and periods of lackluster or negative performance. The success of the
fund's strategy also depends significantly on the investment adviser's skill in
allocating assets and in choosing investments within each asset class.
Growth-oriented stocks typically sell at relatively high valuations as compared
to other types of stocks. If a growth stock does not exhibit the level of
growth expected, its price may drop sharply. Historically, growth-oriented
stocks have been more volatile than value-oriented stocks. Although the
investment adviser emphasizes large cap stocks, the fund is more diversified
across asset classes than most other funds with a similar investment objective.
Therefore, it may not perform as well as those funds when large cap stocks are
in favor.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Encore Fund d/b/a Aetna Money Market VP
Investment Objective
Seeks to provide high current return, consistent with preservation of capital
and liquidity, through investment in high-quality money market instruments.
Policies
Invests only in a diversified portfolio of high-quality fixed income securities
denominated in U.S. dollars, with short remaining maturities. These securities
include U.S. Government securities, such as U.S. Treasury bills and securities
issued or sponsored by U.S. government agencies. They also may include
corporate debt securities, finance company commercial paper, asset-backed
securities and certain obligations of U.S. and foreign banks, each of which
must be highly rated by independent rating agencies or, if unrated, considered
by the investment adviser to be of comparable quality. Maintains a
dollar-weighted average portfolio maturity of 90 days or less.
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Risks
It is possible to lose money by investing in the fund. There is no guaranty the
fund will achieve its investment objective. Shares of the fund are not bank
deposits and are not guaranteed, endorsed or insured by any financial
institution, the FDIC or any other government agency.
A weak economy, strong equity markets and changes by the Federal Reserve in its
monetary policies all could affect short-term interest rates and therefore the
value and yield of the fund's shares.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Generation Portfolios, Inc.--Aetna Ascent VP
Investment Objective
Seeks to provide capital appreciation.
Policies
Designed for investors seeking capital appreciation who generally have an
investment horizon exceeding 15 years and who have a high level of risk
tolerance. Under normal market conditions, allocates assets among several
classes of equities, fixed-income securities, and money market instruments. The
investment adviser has instituted both a benchmark percentage allocation and a
fund level range allocation for each asset class. Asset allocation may vary
from the benchmark allocation (within the permissible range) based on the
investment adviser's ongoing evaluation of the expected returns and risks of
each asset class relative to other classes. May invest up to 15% of total
assets in high-yield bonds.
The benchmark portfolio is 80% equities and 20% fixed income under neutral
market conditions.
Risks
The success of the fund's strategy depends significantly on the investment
adviser's skill in choosing investments and in allocating assets among the
different investment classes. Principal risks are those generally attributable
to stock and bond investing. For stock investments, risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Stocks of smaller companies tend to be less
liquid and more volatile. Risks associated with real estate securities include
periodic declines in the value of real estate, generally, or in the rents and
other income generated by real estate. For bonds, generally, when interest
rates rise, bond prices fall. Economic and market conditions may cause issuers
to default or go bankrupt. Values of high-yield bonds are even more sensitive
to economic and market conditions than other bonds. Prices of mortgage-related
securities, in addition to being sensitive to changes in interest rates, also
are sensitive to changes in the prepayment patterns on the underlying
instruments. Foreign securities have additional risks. Some foreign securities
tend to be less liquid and more volatile than their U.S. counterparts. In
addition, accounting standards and market regulations tend to be less
standardized. These risks are usually higher for securities of companies in
emerging markets. Securities of foreign companies may be denominated in foreign
currency. Exchange rate fluctuations may reduce or eliminate gains or create
losses.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Generation Portfolios, Inc.--Aetna Crossroads VP
Investment Objective
Seeks to provide total return (i.e., income and capital appreciation, both
realized and unrealized).
Policies
Designed for investors seeking a balance between income and capital
appreciation who generally have an investment horizon exceeding ten years and
who have a moderate level of risk tolerance. Under normal market conditions,
allocates assets among several classes of equities, fixed-income securities,
and money market instruments. The investment adviser has instituted both a
benchmark percentage allocation and a fund level range allocation for each
asset class. Asset allocation may vary from the benchmark allocation (within
the permissible range) based on the investment adviser's ongoing evaluation of
the expected returns and risks of each asset class relative to other classes.
May invest up to 15% of total assets in high-yield bonds.
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The benchmark portfolio is 60% equities and 40% fixed income under neutral
market conditions.
Risks
The success of the fund's strategy depends significantly on the investment
adviser's skill in choosing investments and in allocating assets among the
different investment classes. Principal risks are those generally attributable
to stock and bond investing. For stock investments, risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Stocks of smaller companies tend to be less
liquid and more volatile. Risks associated with real estate securities include
periodic declines in the value of real estate, generally, or in the rents and
other income generated by real estate. For bonds, generally, when interest
rates rise, bond prices fall. Economic and market conditions may cause issuers
to default or go bankrupt. Values of high-yield bonds are even more sensitive
to economic and market conditions than other bonds. Prices of mortgage-related
securities, in addition to being sensitive to changes in interest rates, also
are sensitive to changes in the prepayment patterns on the underlying
instruments. Foreign securities have additional risks. Some foreign securities
tend to be less liquid and more volatile than their U.S. counterparts. In
addition, accounting standards and market regulations tend to be less
standardized. These risks are usually higher for securities of companies in
emerging markets. Securities of foreign companies may be denominated in foreign
currency. Exchange rate fluctuations may reduce or eliminate gains or create
losses.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Generation Portfolios, Inc.--Aetna Legacy VP
Investment Objective
Seeks to provide total return consistent with preservation of capital.
Policies
Designed for investors primarily seeking total return consistent with capital
preservation who generally have an investment horizon exceeding five years and
who have a low level of risk tolerance. Under normal market conditions,
allocates assets among several classes of equities, fixed-income securities,
and money market instruments. The investment adviser has instituted both a
benchmark percentage allocation and a fund level range allocation for each
asset class. Asset allocation may vary from the benchmark allocation (within
the permissible range) based on the investment adviser's ongoing evaluation of
the expected returns and risks of each asset class relative to other classes.
May invest up to 15% of total assets in high-yield bonds.
The benchmark portfolio is 40% equities and 60% fixed income under neutral
market conditions.
Risks
The success of the fund's strategy depends significantly on the investment
adviser's skill in choosing investments and in allocating assets among the
different investment classes. Principal risks are those generally attributable
to stock and bond investing. For stock investments, risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Stocks of smaller companies tend to be less
liquid and more volatile. Risks associated with real estate securities include
periodic declines in the value of real estate, generally, or in the rents and
other income generated by real estate. For bonds, generally, when interest
rates rise, bond prices fall. Economic and market conditions may cause issuers
to default or go bankrupt. Values of high-yield bonds are even more sensitive
to economic and market conditions than other bonds. Prices of mortgage-related
securities, in addition to being sensitive to changes in interest rates, also
are sensitive to changes in the prepayment patterns on the underlying
instruments. Foreign securities have additional risks. Some foreign securities
tend to be less liquid and more volatile than their U.S. counterparts. In
addition, accounting standards and market regulations tend to be less
standardized. These risks are usually higher for securities of companies in
emerging markets. Securities of foreign companies may be denominated in foreign
currency. Exchange rate fluctuations may reduce or eliminate gains or create
losses.
Investment Adviser: Aeltus Investment Management, Inc.
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Aetna Variable Portfolios, Inc.--Aetna Growth VP
Investment Objective
Seeks growth of capital through investment in a diversified portfolio of common
stocks and securities convertible into common stocks believed to offer growth
potential.
Policies
Under normal market conditions, invests at least 65% of total assets in common
stocks. Tends to emphasize stocks of larger companies, although may invest in
companies of any size. Focuses on companies that the investment adviser
believes have strong, sustainable and improving earnings growth, and
established market positions in a particular industry.
Risks
Principal risks are those generally attributable to stock investing. They
include sudden and unpredictable drops in the value of the market as a whole
and periods of lackluster or negative performance. Growth-oriented stocks
typically sell at relatively high valuations as compared to other types of
stocks. If a growth stock does not exhibit the consistent level of growth
expected, its price may drop sharply. Historically, growth-oriented stocks have
been more volatile than value-oriented stocks.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP
Investment Objective
Seeks to outperform the total return performance of the Standard & Poor's 500
Composite Index (S&P 500), while maintaining a market level of risk.
Policies
Invests at least 80% of net assets in stocks included in the S&P 500 (other
than Aetna Inc. common stock). The investment adviser attempts to achieve the
objective by overweighting those stocks in the S&P 500 that the investment
adviser believes will outperform the index, and underweighting (or avoiding
altogether) those stocks that the investment adviser believes will underperform
the index. In determining stock weightings, the portfolio manager uses
quantitative computer models to evaluate various criteria, such as the
financial strength of each company and its potential for strong, sustained
earnings growth. Although the fund will not hold all the stocks in the S&P 500,
the investment adviser expects that there will be a close correlation between
the performance of the fund and that of the S&P 500 in both rising and falling
markets.
Risks
Principal risks are those generally attributable to stock investing. These
risks include sudden and unpredictable drops in the value of the market as a
whole and periods of lackluster or negative performance. The success of the
fund's strategy depends significantly on the investment adviser's skill in
determining which securities to overweight, underweight or avoid altogether.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna International VP
Investment Objective
Seeks long-term capital growth primarily though investment in a diversified
portfolio of common stocks principally traded in countries outside of the
United States. The fund will not target any given level of current income.
Policies
Under normal market conditions, invests at least 65% of total assets in
securities principally traded in three or more countries outside of North
America. These securities may include common stocks as well as securities
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convertible into common stocks. Invests primarily in established foreign
securities markets, although may invest in emerging markets as well. Employs
currency hedging strategies to protect from adverse effects on the U.S. dollar.
Risks
Principal risks are those generally attributable to stock investing. These
risks include sudden and unpredictable drops in the value of the market as a
whole and periods of lackluster or negative performance. Stocks of foreign
companies present additional risks for U.S. investors, including the following:
stocks of foreign companies tend to be less liquid and more volatile than their
U.S. counterparts; accounting standards and market regulations tend to be less
standardized in certain foreign countries; and economic and political climates
tend to be less stable. Stocks of foreign companies may be denominated in
foreign currency. Exchange rate fluctuations may reduce or eliminate gains or
create losses. A hedging strategy adds to the fund's expenses and may not
perform as expected.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Real Estate Securities VP
Investment Objective
Seeks maximum total return primarily through investment in a diversified
portfolio of equity securities issued by real estate companies, the majority of
which are real estate investment trusts (REITs).
Policies
Under normal market conditions, invests at least 65% of total assets in stocks,
convertible securities and preferred stocks of companies principally engaged in
the real estate industry. These companies may invest in, among other things,
shopping malls, healthcare facilities, office parks and apartment communities,
or may provide real estate management and development services.
Risks
Concentrating in stocks of real estate-related companies presents certain risks
that are more closely associated with investing in real estate directly than
with investing in the stock market generally. Those risks include: periodic
declines in the value of real estate, generally, or in the rents and other
income generated by real estate; periodic over-building, which creates gluts in
the market, as well as changes in laws (such as zoning laws) that impair the
property rights of real estate owners; adverse developments in the real estate
industry, which may have a greater impact on this fund than a fund that is more
broadly diversified. Performance also may be adversely affected by sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative stock market performance. Although the fund is subject
to the risks generally attributable to stock investing, because the fund has
concentrated its assets in one industry it may be subject to more abrupt swings
in value than would a fund that does not concentrate its assets in one
industry.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Small Company VP
Investment Objective
Seeks growth of capital primarily through investment in a diversified portfolio
of common stocks and securities convertible into common stocks of companies
with smaller market capitalizations.
Policies
Under normal market conditions, invests at least 65% of total assets in common
stocks of small-capitalization companies, defined as: the 2,000 smallest of the
3,000 largest U.S. companies (as measured by market capitalization); all
companies not included above that are included in the Standard & Poor's
SmallCap 600 Index or the Russell 2000 Index; and companies with market
capitalizations lower than any companies included in the first two categories.
For purposes of the 65% policy, the largest company in this group in which the
fund intends to invest currently has a market capitalization of approximately
$1.5 billion.
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Risks
Principal risks are those generally attributable to stock investing. These
risks include sudden and unpredictable drops in the value of the market as a
whole and periods of lackluster or negative performance. Stocks of smaller
companies carry higher risks than stocks of larger companies. This is because
smaller companies may lack the management experience, financial resources,
product diversification, and competitive strengths of larger companies. In many
instances, the frequency and volume of trading in these stocks is substantially
less than is typical of stocks of larger companies. As a result, the stocks of
smaller companies may be subject to wider price fluctuations or may be less
liquid. When selling a large quantity of a particular stock, the fund may have
to sell at a discount from quoted prices or may have to make a series of small
sales over an extended period of time due to the more limited trading volume of
smaller company stocks. Stocks of smaller companies can be particularly
sensitive to expected changes in interest rates, borrowing costs and earnings.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Value Opportunity VP
Investment Objective
Seeks growth of capital primarily through investment in a diversified portfolio
of common stocks and securities convertible into common stocks.
Policies
Under normal market conditions, invests at least 65% of total assets in common
stocks. The subadviser tends to invest in larger companies it believes are
trading below their real value, although it may invest in companies of any
size. The subadviser believes that the investment objective can best be
achieved by investing in companies whose stock price has been excessively
discounted due to perceived problems. The subadviser evaluates financial and
other characteristics of companies, attempting to find those companies that
appear to possess a catalyst for positive change, such as strong management,
solid assets, or market position, rather than those companies whose stocks are
simply inexpensive. The subadviser looks to sell a security when company
business fundamentals deviate from expectations or when stop-loss levels are
triggered.
Risks
Principal risks are those generally attributable to stock investing. They
include sudden and unpredictable drops in the value of the market as a whole
and periods of lackluster or negative performance. Stocks that appear to be
undervalued may never appreciate to the extent expected. Further, because the
prices of value-oriented stocks tend to correlate more closely with economic
cycles than growth-oriented stocks, they are more sensitive to changing
economic conditions, such as changes in interest rates, corporate earnings and
industrial production.
Investment Adviser: Aeltus Investment Management, Inc.
Subadviser: Bradley, Foster & Sargent, Inc.
Calvert Social Balanced Portfolio
Investment Objective
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 for the Portfolio.
Policies
The Portfolio may purchase both common and preferred stocks. Although there is
no predetermined percentage of assets allocated to stocks, bonds, or money
market instruments, the Portfolio will invest at least 25% of its assets in
senior fixed income securities. The Portfolio normally invests in
investment-grade bonds rated in one of the four highest rating categories by
Standard & Poor's Corporation or by Moody's Investors Service, Inc. or, if not
rated, that are determined by the Portfolio's investment adviser to be of
comparable quality. The Portfolio may invest up to 10% of its assets in foreign
securities.
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Risks
Since the Portfolio is nondiversified, the value of the shares may be more
susceptible to any single economic, political, or regulatory event than the
shares of a diversified portfolio. Fixed income investments are subject to
interest rate risk. There are also risks involved in investing in foreign
securities. These include currency risks, less publicly available information
about foreign companies, different audit and financial reporting standards, and
less government supervision and regulation.
Investment Adviser: Calvert Asset Management Company, Inc.
Fidelity Variable Insurance Products Fund--Equity Income Portfolio
Investment Objective
Seeks reasonable income. Also considers the potential for capital appreciation.
Seeks a yield which exceeds the composite yield on the securities comprising
the S&P 500.
Policies
Normally invests at least 65% of total assets in income-producing equity
securities. May also invest in other types of equity securities and debt
securities, including lower-quality debt securities. May invest in securities
of both foreign and domestic issuers. Emphasis on above-average
income-producing equity securities tends to lead to investments in large cap
"value" stocks. In making investment decisions, the investment adviser relies
on fundamental analysis of each issuer and its potential for success in light
of its current financial condition, its industry position, and economic and
market conditions. May use various techniques, such as buying and selling
futures contracts, to increase or decrease exposure to changing security
prices, or other factors that affect security values.
Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can
fluctuate dramatically in response to these developments. Debt securities have
varying levels of sensitivity to changes in interest rates. In general, the
price of a debt security can fall when interest rates rise. Securities with
longer maturities and mortgage securities can be more sensitive to interest
rate changes. Foreign investments, especially those in emerging markets, can be
more volatile and potentially less liquid than U.S. investments due to
increased risks of adverse issuer, political, regulatory, market or economic
developments. Lower-quality debt securities (those of less than
investment-grade quality) can be more volatile due to increased sensitivity to
adverse issuer, political, regulatory, market or economic developments.
Lower-quality debt securities involve greater risk of default or price changes
due to changes in the credit quality of the issuer. "Value" stocks can react
differently to issuer, political, market and economic developments than the
market as a whole and other types of stocks. "Value" stocks may not ever
realize their full value.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund--Growth Portfolio
Investment Objective
Seeks capital appreciation.
Policies
Normally invests primarily in common stocks of companies the investment adviser
believes have above-average growth potential. Companies with high growth
potential tend to be companies with higher than average price/
earning (P/E) ratios and are often called "growth" stocks. May invest in
securities of both foreign and domestic issuers. In making investment
decisions, the investment adviser relies on fundamental analysis of each issuer
and its potential for success in light of its current financial condition, its
industry position, and economic and market conditions. May use various
techniques, such as buying and selling futures contracts, to increase or
decrease exposure to changing security prices, or other factors that affect
security values.
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Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can
fluctuate dramatically in response to these developments. Foreign investments,
especially those in emerging markets, can be more volatile and potentially less
liquid than U.S. investments due to increased risks of adverse issuer,
political, regulatory, market or economic developments. "Growth" stocks tend to
be sensitive to changes in their earnings and more volatile than other types of
stocks.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund--High Income Portfolio
Investment Objective
Seeks a high level of current income while also considering growth of capital.
Policies
Normally invests at least 65% of total assets in income-producing debt
securities, preferred stocks and convertible securities, with an emphasis on
lower-quality debt securities. May also invest in non-income producing
securities, including defaulted securities and common stocks. Currently intends
to limit common stocks to 10% of total assets. May invest in securities of both
foreign and domestic issuers. In making investment decisions, the investment
adviser relies on fundamental analysis of each issuer and its potential for
success in light of its current financial condition, its industry position, and
economic and market conditions. May use various techniques, such as buying and
selling futures contracts, to increase or decrease exposure to changing
security prices, interest rates or other factors that affect security values.
Risks
Debt securities have varying levels of sensitivity to changes in interest
rates. In general, the price of a debt security can fall when interest rates
rise. Securities with longer maturities and mortgage securities can be more
sensitive to interest rate changes. The value of equity securities fluctuates
in response to issuer, political, market and economic developments. In the
short term, equity prices can fluctuate dramatically in response to these
developments. Foreign investments, especially those in emerging markets, can be
more volatile and potentially less liquid than U.S. investments due to
increased risks of adverse issuer, political, regulatory, market or economic
developments. Lower-quality debt securities (those of less than
investment-grade quality) can be more volatile due to increased sensitivity to
adverse issuer, political, regulatory, market or economic developments.
Lower-quality debt securities involve greater risk of default or price changes
due to changes in the credit quality of the issuer.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund II--Overseas Portfolio
Investment Objective
Seeks long-term growth of capital.
Policies
Normally invests at least 65% of total assets in foreign securities, primarily
in common stocks. Investments are allocated across countries and regions, with
consideration given to the size of the market in each country and region
relative to the size of the international market as a whole. In making
investment decisions, the investment adviser relies on fundamental analysis of
each issuer and its potential for success in light of its current financial
condition, its industry position, and economic and market conditions. May use
various techniques, such as buying and selling futures contracts, to increase
or decrease exposure to changing security prices or other factors that affect
security values.
Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can
fluctuate dramatically in response to these developments. Debt securities have
varying levels of sensitivity to changes in interest rates. In general, the
price of a debt security can fall when interest rates rise.
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Securities with longer maturities and mortgage securities can be more sensitive
to interest rate changes. Foreign investments, especially those in emerging
markets, can be more volatile and potentially less liquid than U.S. investments
due to increased risks of adverse issuer, political, regulatory, market or
economic developments.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund II--Asset Manager Portfolio
Investment Objective
Seeks high total return with reduced risk over the long term by allocating its
assets among stocks, bonds and short-term instruments.
Policies
Assets are allocated among the following classes, or types, of investments. The
stock class (can range from 30%--
70%) includes equity securities of all types. The bond class (can range from
20%--60%) includes all varieties of fixed-income securities, including
lower-quality debt securities, maturing in more than one year. The short-term/
money market class (can range from 0%--50%) includes all types of short-term
and money market instruments. Fixed-income securities may be classified in the
bond or short-term/money market class according to interest rate sensitivity as
well as maturity. May also invest in other instruments that do not fall within
these classes. May invest in securities of both foreign and domestic issuers.
In making investment decisions, the investment adviser generally analyzes the
issuer of a security using fundamental factors (e.g., growth potential,
earnings estimates and management) and/or quantitative factors (e.g.,
historical earnings, dividend yield and earnings per share) and evaluates each
security's current price relative to its estimated long-term value. May use
various techniques, such as buying and selling futures contracts, to increase
or decrease exposure to changing security prices, interest rates or other
factors that affect security values.
Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can
fluctuate dramatically in response to these developments. Debt securities have
varying levels of sensitivity to changes in interest rates. In general, the
price of a debt security can fall when interest rates rise. Securities with
longer maturities and mortgage securities can be more sensitive to interest
rate changes. Foreign investments, especially those in emerging markets, can be
more volatile and potentially less liquid than U.S. investments due to
increased risks of adverse issuer, political, regulatory, market or economic
developments. Many types of debt securities, including mortgage securities, are
subject to prepayment risk. Securities subject to prepayment are subject to
greater price volatility if interest rates change. Lower-quality debt
securities (those of less than investment-grade quality) can be more volatile
due to increased sensitivity to adverse issuer, political, regulatory, market
or economic developments. Lower-quality debt securities involve greater risk of
default or price changes due to changes in the credit quality of the issuer.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund II--Contrafund Portfolio
Investment Objective
Seeks long-term capital appreciation.
Policies
Normally invests primarily in common stocks of companies whose value the
investment adviser believes is not fully recognized by the public. May invest
in securities of both foreign and domestic issuers. May tend to buy "growth"
stocks or "value" stocks, or a combination of both types. In making investment
decisions, the investment adviser relies on fundamental analysis of each issuer
and its potential for success in light of its current financial condition, its
industry position, and economic and market conditions. May use various
techniques, such as buying and selling futures contracts, to increase or
decrease exposure to changing security prices, interest rates or other factors
that affect security values.
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Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can
fluctuate dramatically in response to these developments. Debt securities have
varying levels of sensitivity to changes in interest rates. In general, the
price of a debt security can fall when interest rates rise. Securities with
longer maturities and mortgage securities can be more sensitive to interest
rate changes. Foreign investments, especially those in emerging markets, can be
more volatile and potentially less liquid than U.S. investments due to
increased risks of adverse issuer, political, regulatory, market or economic
developments. "Growth" stocks tend to be sensitive to changes in their earnings
and more volatile than other types of stocks. "Value" stocks can react
differently to issuer, political, market and economic developments than the
market as a whole and other types of stocks. "Value" stocks may not ever
realize their full value.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund II--Index 500 Portfolio
Investment Objective
Seeks investment results that correspond to the total return of common stocks
publicly traded in the United States, as represented by the S&P 500.
Policies
Normally invests at least 80%of assets in common stocks included in the S&P
500. The S&P 500 is a widely recognized, unmanaged index of common stock
prices. Seeks to achieve a 98% or better correlation between its total return
and the total return of the index. May use various techniques, such as buying
and selling futures contracts, to increase or decrease exposure to changing
security prices or other factors that affect security values.
Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can
fluctuate dramatically in response to these developments. Debt securities have
varying levels of sensitivity to changes in interest rates. In general, the
price of a debt security can fall when interest rates rise. Securities with
longer maturities and mortgage securities can be more sensitive to interest
rate changes.
An investment in the fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Investment Adviser: Fidelity Management & Research Company; Subadviser: Bankers
Trust Company
Janus Aspen Series--Aggressive Growth Portfolio
Investment Objective
Seeks long-term growth of capital.
Policies
A nondiversified portfolio that invests primarily in common stocks selected for
their growth potential and normally invests at least 50 percent 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 Standard and Poor's (S&P) MidCap 400 Index. The market capitalizations
within the Index will vary, but as of December 31, 1998, they ranged from
approximately $142 million to $73 billion. May at times hold substantial
positions in cash or similar investments.
Risks
Because the Portfolio may invest substantially all of its assets in common
stocks, the main risk is that the value of the stocks it holds might decrease
in response to the activities of an individual company or in response to
general market and/or economic conditions. In addition, a nondiversified
portfolio has the ability to take larger positions in a smaller number of
issuers. Because the appreciation or depreciation of a single stock may have a
greater
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impact on the net asset value of a nondiversified portfolio, its share price
can be expected to fluctuate more than a diversified portfolio. Performance may
also be affected by risks specific to certain types of investments, such as
foreign securities, derivative investments, non-investment grade debt
securities (high-yield/high-risk securities or "junk" bonds) or companies with
relatively small market capitalizations. Smaller or newer companies may suffer
more significant losses as well as realize more substantial growth than larger
or more established issuers. Investments in such companies tend to be more
volatile and somewhat more speculative. Issues associated with investing in
foreign securities include currency risk, political and economic risk,
regulatory risk, market risk and transaction costs. High-yield/high-risk
securities are generally more dependent on the ability of the issuer to meet
interest and principal payments (i.e., credit risk). They are more vulnerable
to real or perceived economic changes, political changes or other adverse
developments specific to the issuer.
Investment Adviser: Janus Capital Corporation
Janus Aspen Series--Balanced Portfolio
Investment Objective
Seeks long-term capital growth, consistent with preservation of capital and
balanced by current income.
Policies
Normally invests 40-60 percent of its assets in securities selected primarily
for their growth potential and 40-60 percent of its assets in securities
selected primarily for their income potential. Will normally invest at least 25
percent of its assets in fixed-income securities. Assets may shift between the
growth and income components of the Portfolio based on the portfolio manager's
analysis of relevant market, financial and economic conditions. May at times
hold substantial positions in cash or similar investments.
Risks
Because the Portfolio may invest a significant portion of its assets in common
stocks, the main risk is that the value of the stocks it holds might decrease
in response to the activities of an individual company or in response to
general market and/or economic conditions. The income component of the
Portfolio's holdings includes fixed-income securities which generally will
decrease in value when interest rates rise. Another risk associated with
fixed-income securities is the risk that an issuer of a bond will be unable to
make principal and interest payments when due (i.e. credit risk). Performance
may also be affected by risks specific to certain types of investments, such as
foreign securities, derivative investments, non-investment grade debt
securities (high-yield/high-risk securities or "junk" bonds) or companies with
relatively small market capitalizations. Smaller or newer companies may suffer
more significant losses as well as realize more substantial growth than larger
or more established issuers. Investments in such companies tend to be more
volatile and somewhat more speculative. Issues associated with investing in
foreign securities include currency risk, political and economic risk,
regulatory risk, market risk and transaction costs. High-yield/high-risk
securities are generally more susceptible to credit risk. They are more
vulnerable to real or perceived economic changes, political changes or other
adverse developments specific to the issuer.
Investment Adviser: Janus Capital Corporation
Janus Aspen Series--Flexible Income Portfolio
Investment Objective
Seeks to obtain maximum total return, consistent with the preservation of
capital.
Policies
Invests primarily in a wide variety of income-producing securities such as
corporate bonds and notes, government securities and preferred stock. Will
invest at least 80 percent of its assets in income-producing securities. May
own an unlimited amount of high-yield/high-risk securities ("junk bonds") which
may be a big part of the portfolio. May at times hold substantial positions in
cash or similar investments.
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Risks
Because the Portfolio invests substantially all of its assets in fixed-income
securities, it is subject to risks such as credit or default risks or decreased
value due to interest rate increases. Generally, a fixed-income security will
increase in value when interest rates fall and decrease in value when interest
rates rise. Performance may also be affected by risks specific to certain types
of investments, such as foreign securities, derivative investments, non-
investment grade debt securities (high-yield/high-risk securities or "junk"
bonds) or companies with relatively small market capitalizations. Smaller or
newer companies may suffer more significant losses as well as realize more
substantial growth than larger or more established issuers. Investments in such
companies tend to be more volatile and somewhat more speculative. Issues
associated with investing in foreign securities include currency risk,
political and economic risk, regulatory risk, market risk and transaction
costs. High-yield/high-risk securities are generally more dependent on the
ability of the issuer to meet interest and principal payments (i.e., credit
risk). They are more vulnerable to real or perceived economic changes,
political changes or other adverse developments specific to the issuer.
Investment Adviser: Janus Capital Corporation
Janus Aspen Series--Growth Portfolio
Investment Objective
Seeks long-term growth of capital in a manner consistent with the preservation
of capital.
Policies
Generally invests primarily in common stocks of larger, more established
companies selected for their growth potential, although it can invest in
companies of any size. May at times hold substantial positions in cash or
similar investments.
Risks
Because the Portfolio may invest substantially all of its assets in common
stocks, the main risk is that the value of the stocks it holds might decrease
in response to the activities of an individual company or in response to
general market and/or economic conditions. Performance may also be affected by
risks specific to certain types of investments, such as foreign securities,
derivative investments, non-investment grade debt securities (high-yield/
high-risk securities or "junk" bonds) or companies with relatively small market
capitalizations. Smaller or newer companies may suffer more significant losses
as well as realize more substantial growth than larger or more established
issuers. Investments in such companies tend to be more volatile and somewhat
more speculative. Issues associated with investing in foreign securities
include currency risk, political and economic risk, regulatory risk, market
risk and transaction costs. High-yield/high-risk securities are generally more
dependent on the ability of the issuer to meet interest and principal payments
(i.e., credit risk). They are more vulnerable to real or perceived economic
changes, political changes or other adverse developments specific to the
issuer.
Investment Adviser: Janus Capital Corporation
Janus Aspen Series--Worldwide Growth Portfolio
Investment Objective
Seeks long-term growth of capital in a manner consistent with the preservation
of capital.
Policies
Invests primarily in common stocks of companies of any size throughout the
world. Normally invests in issuers from at least five different countries,
including the United States. May at times invest in fewer than five countries
or even in a single country. May hold substantial positions in cash or similar
investments.
Risks
Because the Portfolio may invest substantially all of its assets in common
stocks, the main risk is that the value of the stocks it holds might decrease
in response to the activities of an individual company or in response to
general
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market and/or economic conditions. Performance may also be affected by risks
specific to certain types of investments, such as foreign securities,
derivative investments, non-investment grade debt securities (high-yield/
high-risk securities or "junk" bonds) or companies with relatively small market
capitalizations. Smaller or newer companies may suffer more significant losses
as well as realize more substantial growth than larger or more established
issuers. Investments in such companies tend to be more volatile and somewhat
more speculative. Issues associated with investing in foreign securities
include currency risk, political and economic risk, regulatory risk, market
risk and transaction costs. High-yield/high-risk securities are generally more
dependent on the ability of the issuer to meet interest and principal payments
(i.e., credit risk). They are more vulnerable to real or perceived economic
changes, political changes or other adverse developments specific to the
issuer.
Investment Adviser: Janus Capital Corporation
MFS Total Return Series
Investment Objective
Seeks primarily to provide above-average income (compared to a portfolio
invested entirely in equity securities) consistent with the prudent employment
of capital. Its secondary objective is to provide a reasonable opportunity for
growth of capital and income.
Policies
Under normal market conditions, invests at least 40%, but no more than 75%, of
net assets in common stocks and related securities (referred to as equity
securities); bonds, warrants or rights convertible into stock; and depositary
receipts for those securities. Invests at least 25% of net assets in
non-convertible fixed income securities. May vary the percentage of assets
invested in any one type of security (within the limits described above).
Generally, seeks to purchase equity securities that the investment adviser
believes are undervalued in the market relative to their long-term potential
focusing on companies with relatively large market capitalization (i.e., market
capitalizations of $5 billion or more). Fixed income securities include U.S.
government securities, mortgage-backed and asset-backed securities, and
corporate bonds.
Risks
In allocating investments, the series could miss attractive investment
opportunities by underweighting markets where there are significant returns,
and could lose value by overweighting markets where there are significant
declines. The value of securities held by the series may decline due to
changing economic, political or market conditions, or disappointing earnings
results. If anticipated events do not occur or are delayed, or if investor
perceptions about undervalued securities do not improve, the market price of
these securities may not rise or may fall. Fixed income securities are subject
to interest rate risk (the risk that when interest rates rise, the prices of
fixed income securities will generally fall) and credit risk (the risk that the
issuer of a fixed income security will not be able to pay principal and
interest when due). Securities with longer maturities are affected more by
interest rate risk. Fixed income securities traded in the over-the-counter
market may be harder to purchase or sell at a fair price. The inability to
purchase or sell these fixed income securities at a fair price could have a
negative impact on the series' performance.
Investment Adviser: Massachusetts Financial Services Company
MFS Global Governments Series
Investment Objective
Seeks to provide income and capital appreciation.
Policies
Under normal market conditions, invests at least 65% of total assets in U.S.
government securities and foreign government securities, including emerging
market governments. May also invest in corporate bonds, including lower rated
bonds, commonly known as junk bonds, which are bonds assigned low credit
ratings by credit rating agencies or which are unrated and considered by the
investment adviser to be comparable to lower rated bonds, and mortgage--
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backed and asset-backed securities. May invest in derivative securities. The
series is a non-diversified mutual series. This means that the series may
invest a relatively high percentage of its assets in a small number of issuers.
Risks
Investments in foreign securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries. In allocating
investments, the series could miss attractive investment opportunities by
underweighting markets where there are significant returns, and could lose
value by overweighting markets where there are significant declines. The value
of securities held by the series may decline due to changing economic,
political or market conditions, or disappointing earnings results. Fixed income
securities are subject to interest rate risk (the risk that when interest rates
rise, the prices of fixed income securities will generally fall) and credit
risk (the risk that the issuer of a fixed income security will not be able to
pay principal and interest when due). Securities with longer maturities are
affected more by interest rate risk. Junk bonds are subject to a substantially
higher degree of credit risk than higher rated bonds. Derivatives may be used
to hedge against an opposite position that the fund also holds. While hedging
can reduce or eliminate losses, it can also reduce or eliminate gains. Gains or
losses from derivative investments may be substantially greater than the
derivative's original cost. Because the series is non-diversified, investing
its assets in a small number of issuers, the series is more susceptible to any
single economic, political or regulatory event affecting those issuers than is
a diversified fund.
Investment Adviser: Massachusetts Financial Services Company
Oppenheimer Aggressive Growth Fund/VA
Investment Objective
Seeks to achieve long-term capital appreciation by investing in "growth-type"
companies.
Policies
Invests mainly in equity securities, such as common stocks, preferred stocks
and convertible securities, of issuers in the U.S. and foreign countries. The
fund can invest in any country, including countries with developed or emerging
markets, but currently emphasizes investments in developed markets. As a
fundamental policy, the fund will normally invest in at least four countries
(including the United States). The fund emphasizes investments in securities of
"growth-type" companies. The fund may also invest in cyclical industries and in
"special situations" that the fund's investment manager believes present
opportunities for capital growth. "Special situations" are anticipated
acquisitions, mergers or other unusual developments which, in the opinion of
the manager, will increase the value of an issuer's securities, regardless of
general business conditions or market movements.
Risks
The fund's investments in stocks are subject to changes in their value from a
number of factors. They include changes in general stock market movements, or
the change in value of particular stocks because of an event affecting the
issuer. The fund expects to have substantial amounts of its investments in
foreign securities. Therefore, it will be subject to the risks that economic,
political or other events can have on the values of securities of issuers in
particular foreign countries. Changes in interest rates can also affect stock
prices. Investing in securities with high growth potential, which are often
newer companies having a market capitalization of $200 million or less,
involves substantially greater risks of loss and price fluctuations than larger
cap issuers. Small-cap stock investments also pose certain risks because their
stocks may be less liquid than those of larger issuers.
Investment Adviser: Oppenheimer Funds, Inc.
Oppenheimer Global Securities Fund/VA
Investment Objective
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.
71
<PAGE>
Policies
Invests mainly in equity securities, such as common stocks, preferred stocks
and convertible securities, of issuers in the U.S. and foreign countries. The
fund can invest in any country, including countries with developed or emerging
markets, but currently emphasizes investments in developed markets. As a
fundamental policy, the fund will normally invest in at least four countries
(including the United States). In selecting securities for the fund, the fund's
portfolio manager looks primarily for foreign companies with high growth
potential using fundamental analysis of a company's financial statements and
management structure, and analysis of the company's operations and product
development, as well as the industry of which the issuer is part. The fund's
diversification strategies, both with respect to different issuers, different
themes and different countries, is intended to help reduce volatility of the
fund's share price while seeking growth.
Risks
Stock prices will fluctuate. Foreign securities markets may be less liquid and
more volatile than the markets in the U.S. Risks of foreign securities may
include foreign withholding taxation, changes in currency, less publicly
available information, and differences between domestic and foreign legal,
auditing brokerage and economic standards. The fund can use derivatives to seek
increased returns or to try to hedge investment risks. If the issuer of the
derivative does not pay the amount due, the fund can lose money on the
investment. Using derivatives can cause the fund to lose money on its
investment and/or increase the volatility of its share prices.
Investment Adviser: Oppenheimer Funds, Inc.
Oppenheimer Main Street Growth & Income Fund/VA
Investment Objective
Seeks a high total return (which includes growth in the value of its shares as
well as current income) from equity and debt securities.
Policies
Invests in equity securities, such as common stocks, preferred stocks and
convertible securities and in debt securities, of issuers in the U.S. and
foreign countries. Although the fund can invest in securities of issues of all
market capitalization ranges, it may focus from time to time on small to medium
capitalization issuers (having a market capitalization of less than $5
billion). The fund can also use hedging instruments and certain derivative
investments to try to manage investment risks.
Risks
The fund's investments in stocks and bonds are subject to changes in their
value from a number of factors. They include changes in general stock and bond
market movements, or the change in value of particular stocks or bonds because
of an event affecting the issuer. High-yield, lower-grade bonds are subject to
greater credit risks than investment-grade securities. The fund can have
significant amounts of its assets invested in foreign securities. Therefore, it
will be subject to the risks of economic, political or other events that can
affect the values of securities of issuers in particular foreign countries.
Changes in interest rates can also affect stock and bond prices.
Investment Adviser: Oppenheimer Funds, Inc.
Oppenheimer Strategic Bond Fund/VA
Investment Objective
Seeks a high level of current income principally derived from interest on debt
securities and seeks to enhance such income by writing covered call options on
debt securities.
Policies
Invests mainly in debt securities of issuers in three market sectors: foreign
governments and companies, U.S. government securities and lower-rated
high-yield securities of U.S. companies. Under normal market conditions, the
fund invests in each of those three market sectors. However, the fund is not
obligated to do so, and the
72
<PAGE>
amount of its assets in each of the three sectors will vary over time. The fund
can invest up to 100% of its assets in any one sector at any time, if the
manager believes that in doing so the fund can achieve its objective without
undue risk. The fund's foreign investments can include debt securities of
issuers in developed markets as well as emerging markets, which have special
risks. The fund can also use hedging instruments and certain derivative
investments to try to enhance income or try to manage investment risks.
Risks
The fund's investments in debt securities are subject to changes in their value
from a number of factors. They include changes in general bond market movements
in the U.S. and abroad, or the change in value of particular bonds because of
an event affecting the issuer. The fund can focus significant amounts of its
investments in foreign debt securities. Therefore, it will be subject to the
risks that economic, political or other events can have on the values of
securities of issuers in particular foreign countries. These risks are
heightened in the case of emerging market debt securities. Changes in interest
rates can also affect securities prices.
Investment Adviser: Oppenheimer Funds, Inc.
Portfolio Partners MFS Emerging Equities Portfolio
Investment Objective
Seeks long-term growth of capital.
Policies
Invests, under normal market conditions, at least 80% of total assets in common
stocks and related securities, such as preferred stock, convertible securities
and depositary receipts, of emerging growth companies. Emerging growth
companies are companies believed to be either early in their life cycle but
which have the potential to become major enterprises, or major enterprises
whose rates of earnings growth are expected to accelerate. Investments may
include securities traded in the over-the-counter markets.
May also invest in foreign securities and may have exposure to foreign
currencies through its investment in these securities, its direct holdings of
foreign currencies or through its use of foreign currency exchange contracts
for the purchase or sale of a fixed quantity of foreign currency at a future
date.
Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security.
o Emerging Growth Risk: The portfolio's performance is particularly sensitive to
changes in the value of emerging growth companies. Investments in emerging
growth companies may be subject to more abrupt or erratic market movements and
may involve greater risks than investments in other companies.
o Over the Counter Risk: Equity securities that are traded over the counter may
be more volatile than exchange listed securities, and the portfolio may
experience difficulty in purchasing or selling these securities at a fair
price.
o Foreign Markets Risk: Investment in foreign securities involves risks related
to political, social and economic developments abroad. These risks result from
differences between the regulations to which U.S. and foreign issuers and
Markets are subject.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline if the U.S. dollar strengthens against these
currencies or if foreign governments intervene in the currency markets.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Massachusetts Financial Services Company
73
<PAGE>
Portfolio Partners MFS Research Growth Portfolio
Investment Objective
Seeks long-term growth of capital and future income.
Policies
Invests primarily (at least 65% of total assets) in common stocks and related
securities, such as preferred stock, convertible securities and depositary
receipts. Focuses on companies believed to have favorable prospects for
long-term growth, attractive valuations based on current and expected earnings
or cash flow, dominant or growing market share and superior management. May
invest in companies of any size. Investments may also include securities traded
on securities exchanges or in the over-the-counter markets.
May invest in foreign securities and may have exposure to foreign currencies
through its investment in these securities, its direct holdings of foreign
currencies or through its use of foreign currency exchange contracts for the
purchase or sale of a fixed quantity of foreign currency at a future date.
Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security. In
addition, securities of growth companies may be more volatile because such
companies usually invest a high portion of their earnings in their businesses
and may lack the dividends of value companies, which can cushion the security
prices in a declining market.
o Over-the-Counter Risk: Equity securities that are traded over-the-counter may
be more volatile than exchange-listed stocks, and the portfolio may experience
difficulty in purchasing or selling these securities at a fair price.
o Foreign Markets Risk: Investment in foreign securities involves additional
risks relating to political, social and economic developments abroad. Other
risks from these investments result from the differences between the
regulations to which U.S. and foreign issuers and markets are subject.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline if the U.S. dollar strengthens against these
currencies or if foreign governments intervene in the currency markets.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Massachusetts Financial Services Company
Portfolio Partners MFS Value Equity Portfolio
Investment Objectives
Seeks capital appreciation.
Policies
Invests primarily (at least 65% of total assets) in common stocks and related
securities, such as preferred stock, convertible securities and depositary
receipts. Focuses on companies believed to have favorable growth prospects and
attractive valuations based on current and expected earnings or cash flow.
Investments may include securities traded in the over-the-counter markets.
May invest in foreign securities (including emerging market securities) and may
have exposure to foreign currencies through its investment in these securities,
its direct holdings of foreign currencies or through its use of foreign
currency exchange contracts for the purchase or sale of a fixed quantity of a
foreign currency at a future date.
Also may invest in debt securities issued by both U.S. and foreign companies,
including non-investment grade debt securities.
74
<PAGE>
Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security. In
addition, securities of growth companies may be more volatile because such
companies usually invest a high portion of their earnings in their businesses
and may lack the dividends of value companies, which can cushion the security
prices in a declining market.
o Over the Counter Risk: Equity securities that are traded over the counter may
be more volatile than exchange listed securities, and the portfolio may
experience difficulty in purchasing or selling these securities at a fair
price.
o Foreign Markets Risk: The portfolio's investment in foreign securities
involves additional risks relating to political, social and economic
developments abroad. Other risks from these investments result from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject.
o Emerging Markets Risk: Emerging markets are generally defined as countries in
the initial stages of their industrialization cycles with low per capita
income. Investments in emerging markets securities involve all of the risks of
investment in foreign securities, and also have additional risks.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline in the event that the U.S. dollar
strengthens against these currencies, or in the event that foreign governments
intervene in the currency markets.
o Interest Rate Risk: The portfolio's investment in debt securities involves
risks relating to interest rate movement. If interest rates go up, the value
of debt securities held by the portfolio will decline.
o Credit Risk: The portfolio's investment in non-investment grade debt
securities involves credit risk because issuers of non-investment grade
securities are more likely to have difficulty making timely payments of
interest or principal.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Massachusetts Financial Services Company
Portfolio Partners Scudder International Growth Portfolio
Investment Objective
Seeks long-term growth of capital.
Policies
Invests primarily (at least 65% of total assets) in the equity securities of
foreign companies believed to have high growth potential. Normally invests in
securities of at least three different countries other than the U.S. Focuses on
issuers located primarily in Europe, Latin America, and the emerging markets of
the Pacific Basis and Japan, but also may invest in select issues from
elsewhere outside the U.S. Will invest in securities in both developed and
developing markets. Seeks to invest in those companies believed to be best able
to capitalize on the growth and changes taking place within and between various
regions of the world. Typically, these are companies with leading or rapidly
developing business franchises, strong financial positions, and high quality
management capable of defining and implementing strategies to take advantage of
local, regional or global markets.
Also may invest in debt securities issued by both U.S. and foreign companies,
including non-investment grade debt securities.
Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security. In
addition, securities of growth companies may be more volatile because such
companies usually invest a high portion of their earnings in their businesses
and may lack the dividends of value companies, which can cushion the security
prices in a declining market.
75
<PAGE>
o Foreign Markets Risk: The portfolio's investment in foreign securities
involves additional risks relating to political, social and economic
developments abroad. Other risks from these investments result from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline in the event that the U.S. dollar
strengthens against these currencies, or in the event that foreign governments
intervene in the currency markets.
o Emerging Growth Risk: The portfolio's performance is particularly sensitive to
changes in the value of emerging growth companies. Investments in emerging
growth companies may be subject to more abrupt or erratic market movements and
may involve greater risks than investments in other companies.
o Interest Rate Risk: The portfolio's investment in debt securities involves
risks relating to interest rate movement. If interest rates go up, the value
of debt securities held by the portfolio will decline.
o Credit Risk: The portfolio's investment in non-investment grade debt
securities involves credit risk because issuers of non-investment grade
securities are more likely to have difficulty making timely payments of
interest or principal.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Scudder Kemper Investments, Inc.
Portfolio Partners T. Rowe Price Growth Equity Portfolio
Investment Objective
Seeks long-term capital growth, and, secondarily, increasing dividend income.
Policies
Invests primarily (at least 65% of total assets) in the common stocks of a
diversified group of growth companies. The subadviser seeks companies with a
lucrative niche in the economy that it believes will give them the ability to
sustain earnings momentum even during times of slow economic growth. The
subadviser believes that when a company's earnings grow faster than both
inflation and the overall economy, the market will eventually reward it with a
higher stock price.
May invest in foreign securities and may have exposure to foreign currencies
through its investment in these securities, its direct holdings of foreign
currencies or through its use of foreign currency exchange contracts for the
purchase or sale of a fixed quantity of foreign currency at a future date.
Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security. In
addition, securities of growth companies may be more volatile because such
companies usually invest a high portion of their earnings in their businesses
and may lack the dividends of value companies, which can cushion the security
prices in a declining market.
o Foreign Markets Risk: The portfolio's investment in foreign securities
involves additional risks relating to political, social and economic
developments abroad. Other risks from these investments result from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline in the event that the U.S. dollar
strengthens against these currencies, or in the event that foreign governments
intervene in the currency markets.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser: T.
Rowe Price Associates, Inc.
76
<PAGE>
Appendix IV
Condensed Financial Information
- --------------------------------------------------------------------------------
(Selected data for accumulation units outstanding
throughout each period)
- --------------------------------------------------------------------------------
The condensed financial information presented below for each of the periods in
the five-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 I--For Contracts with Total Separate Account Charges of 1.40%
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
AETNA ASCENT VP
Value at beginning of period $15.333 $12.970
Value at end of period $15.769 $15.333
Number of accumulation units outstanding at end of period 1,027,839 898,302
AETNA BALANCED VP, INC.
Value at beginning of period $18.653 $15.445
Value at end of period $21.507 $18.653
Number of accumulation units outstanding at end of period 2,533,501 2,265,203
AETNA BOND VP
Value at beginning of period $13.128 $12.294
Value at end of period $13.998 $13.128
Number of accumulation units outstanding at end of period 1,948,373 1,528,968
AETNA CROSSROADS VP
Value at beginning of period $14.377 $12.402
Value at end of period $15.013 $14.377
Number of accumulation units outstanding at end of period 1,316,579 1,112,043
AETNA GROWTH VP
Value at beginning of period $13.158 $11.084(4)
Value at end of period $17.862 $13.158
Number of accumulation units outstanding at end of period 738,449 241,289
AETNA GROWTH AND INCOME VP
Value at beginning of period $22.004 $17.181
Value at end of period $24.839 $22.004
Number of accumulation units outstanding at end of period 8,999,336 8,522,639
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $14.414 $10.919
Value at end of period $18.704 $14.414
Number of accumulation units outstanding at end of period 2,252,763 1,179,485
AETNA INTERNATIONAL VP
Value at beginning of period $10.169(7)
Value at end of period $9.754
Number of accumulation units outstanding at end of period 45,143
AETNA LEGACY VP
Value at beginning of period $13.267 $11.751
Value at end of period $13.989 $13.267
Number of accumulation units outstanding at end of period 1,551,324 1,217,781
AETNA MONEY MARKET VP
Value at beginning of period $11.850 $11.394
Value at end of period $12.322 $11.850
Number of accumulation units outstanding at end of period 6,973,165 6,770,680
AETNA REAL ESTATE SECURITIES VP
Value at beginning of period $10.043(9)
Value at end of period $8.863
Number of accumulation units outstanding at end of period 40,812
AETNA SMALL COMPANY VP
Value at beginning of period $13.638 $10.603(4)
Value at end of period $13.595 $13.638
Number of accumulation units outstanding at end of period 873,316 424,486
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $13.246 $10.856(4)
Value at end of period $15.985 $13.246
Number of accumulation units outstanding at end of period 841,078 289,182
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $9.976 $9.805(10)
Value at end of period $11.437 $9.976
Number of accumulation units outstanding at end of period 34,438 4,827
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $18.963 $15.013
Value at end of period $20.872 $18.963
Number of accumulation units outstanding at end of period 6,923,692 6,378,264
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $19.157 $15.734
Value at end of period $26.348 $19.157
Number of accumulation units outstanding at end of period 4,154,250 3,697,132
<CAPTION>
1996 1995 1994
---------------- ----------------- -----------------
<S> <C> <C> <C>
AETNA ASCENT VP
Value at beginning of period $10.645 $10.000(1)
Value at end of period $12.970 $10.645
Number of accumulation units outstanding at end of period 298,740 15,832
AETNA BALANCED VP, INC.
Value at beginning of period $13.602 $10.828 $10.000(2)
Value at end of period $15.445 $13.602 $10.828
Number of accumulation units outstanding at end of period 1,544,723 919,744 911,281
AETNA BOND VP
Value at beginning of period $12.037 $10.324 $10.000(3)
Value at end of period $12.294 $12.037 $10.324
Number of accumulation units outstanding at end of period 1,129,814 988,199 983,357
AETNA CROSSROADS VP
Value at beginning of period $10.587 $10.000(1)
Value at end of period $12.402 $10.587
Number of accumulation units outstanding at end of period 326,292 27,089
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 $14.001 $10.737 $10.000(5)
Value at end of period $17.181 $14.001 $10.737
Number of accumulation units outstanding at end of period 4,919,945 3,068,782 3,178,712
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $10.000(6)
Value at end of period $10.919
Number of accumulation units outstanding at end of period 19,177
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 $10.438 $10.000(8)
Value at end of period $11.751 $10.438
Number of accumulation units outstanding at end of period 492,915 28,778
AETNA MONEY MARKET VP
Value at beginning of period $10.968 $10.489 $10.000(5)
Value at end of period $11.394 $10.968 $10.489
Number of accumulation units outstanding at end of period 4,871,015 2,694,034 3,407,448
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
Value at end of period
Number of accumulation units outstanding at end of period
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $13.324 $10.002 $10.000(11)
Value at end of period $15.013 $13.324 $10.002
Number of accumulation units outstanding at end of period 4,200,501 913,517 17,013
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $13.913 $10.423 $10.000(11)
Value at end of period $15.734 $13.913 $10.423
Number of accumulation units outstanding at end of period 3,260,855 885,545 17,013
</TABLE>
77
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- ----------------------
<S> <C> <C>
FIDELITY VIP HIGH INCOME PORTFOLIO
Value at beginning of period $13.959 $12.031
Value at end of period $13.168 $13.959
Number of accumulation units outstanding at end of period 3,196,921 2,522,965
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $13.682 $12.439
Value at end of period $15.210 $13.682
Number of accumulation units outstanding at end of period 929,310 807,976
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Value at beginning of period $15.679 $13.180
Value at end of period $17.786 $15.679
Number of accumulation units outstanding at end of period 1,019,122 748,981
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $17.066 $13.943
Value at end of period $21.872 $17.066
Number of accumulation units outstanding at end of period 5,718,966 5,222,894
FIDELITY VIP II INDEX 500 PORTFOLIO
Value at beginning of period $17.961 $13.728
Value at end of period $22.727 $17.961
Number of accumulation units outstanding at end of period 5,533,320 4,286,245
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $15.418 $13.879
Value at end of period $20.410 $15.418
Number of accumulation units outstanding at end of period 1,622,089 1,558,985
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $16.692 $13.865
Value at end of period $22.101 $16.692
Number of accumulation units outstanding at end of period 2,277,804 1,544,831
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $14.320 $12.995
Value at end of period $15.405 $14.320
Number of accumulation units outstanding at end of period 855,510 523,315
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $18.340 $15.153
Value at end of period $24,532 $18.340
Number of accumulation units outstanding at end of period 2,097,548 1,863,396
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $18.910 $15.701
Value at end of period $24.039 $18.910
Number of accumulation units outstanding at end of period 7,196,142 6,453,536
MFS TOTAL RETURN SERIES
Value at beginning of period $13.030 $10.894
Value at end of period $14.432 $13.030
Number of accumulation units outstanding at end of period 2,203,927 1,456,174
MFS GLOBAL GOVERNMENTS SERIES
Value at beginning of period $10.207 $10.471
Value at end of period $10.860 $10.207
Number of accumulation units outstanding at end of period 156,298 129,739
OPPENHEIMER AGGRESSIVE GROWTH FUND/VA
Value at beginning of period $12.204 $10.725(4)
Value at end of period $13.520 $12.204
Number of accumulation units outstanding at end of period 659,693 302,223
OPPENHEIMER GLOBAL SECURITIES FUND/VA
Value at beginning of period $11.539 $10.457(4)
Value at end of period $12.982 $11.539
Number of accumulation units outstanding at end of period 465,279 232,338
OPPENHEIMER MAIN STREET GROWTH AND INCOME
FUND/VA
Value at beginning of period $12.785 $10.497(4)
Value at end of period $13.199 $12.785
Number of accumulation units outstanding at end of period 2,014,343 992,461
OPPENHEIMER STRATEGIC BOND FUND/VA
Value at beginning of period $10.764 $10.167(4)
Value at end of period $10.921 $10.764
Number of accumulation units outstanding at end of period 890,900 287,313
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $14.707 $14.894(18)
Value at end of period $18.803 $14.707
Number of accumulation units outstanding at end of period 5,270,772 5.027,952
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $12.641 $12.892(18)
Value at end of period $15.331 $12.641
Number of accumulation units outstanding at end of period 4,136,851 3,899,626
<CAPTION>
1996 1995 1994
------------------ ------------------ ------------------
<S> <C> <C> <C>
FIDELITY VIP HIGH INCOME PORTFOLIO
Value at beginning of period $10.701 $10.000(12)
Value at end of period $12.031 $10.701
Number of accumulation units outstanding at end of period 1,222,580 112,819
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $11.143 $10.000(13)
Value at end of period $12.439 $11.143
Number of accumulation units outstanding at end of period 681,094 150,017
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Value at beginning of period $11.664 $10.000(13)
Value at end of period $13.180 $11.664
Number of accumulation units outstanding at end of period 450,051 116,810
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $11.658 $10.000(12)
Value at end of period $13.943 $11.658
Number of accumulation units outstanding at end of period 3,294,964 684,272
FIDELITY VIP II INDEX 500 PORTFOLIO
Value at beginning of period $11.336 $10.000(12)
Value at end of period $13.728 $11.336
Number of accumulation units outstanding at end of period 1,994,556 191,671
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $13.040 $10.374 $10.000(14)
Value at end of period $13.879 $13.040 $10.374
Number of accumulation units outstanding at end of period 1,248,669 187,584 0
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $12.104 $10.000(13)
Value at end of period $13.865 $12.104
Number of accumulation units outstanding at end of period 682,296 53,016
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $12.071 $9.884 $10.000(15)
Value at end of period $12.995 $12.071 $9.884
Number of accumulation units outstanding at end of period 225,717 45,714 0
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $12.975 $10.109 $10.000(2)
Value at end of period $15.153 $12.975 $10.109
Number of accumulation units outstanding at end of period 1,145,305 176,111 9,588
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $12.341 $10.000(16)
Value at end of period $15.701 $12.341
Number of accumulation units outstanding at end of period 3,060,432 252,485
MFS TOTAL RETURN SERIES
Value at beginning of period $10.000(17)
Value at end of period $10.894
Number of accumulation units outstanding at end of period 387,019
MFS GLOBAL GOVERNMENTS SERIES
Value at beginning of period $10.000(17)
Value at end of period $10.471
Number of accumulation units outstanding at end of period 38,958
OPPENHEIMER AGGRESSIVE GROWTH FUND/VA
Value at beginning of period
Value at end of period
Number of accumulation units outstanding at end of period
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 MAIN STREET GROWTH AND INCOME
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
</TABLE>
78
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $10.152 $10.009(18)
Value at end of period $12.686 $10.152
Number of accumulation units outstanding at end of period 881,252 486,822
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL GROWTH
PORTFOLIO
Value at beginning of period $9.912 $9.791(18)
Value at end of period $11.640 $9.912
Number of accumulation units outstanding at end of period 199,291 5,904
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH EQUITY
PORTFOLIO
Value at beginning of period $18.343 $17.979(18)
Value at end of period $23.078 $18.343
Number of accumulation units outstanding at end of period 4,440,083 4,434,574
</TABLE>
- -----------------
(1) The initial accumulation unit value was established at $10.000 during
August 1995, when the fund became available under the contract.
(2) Funds were first received in this option during July 1994.
(3) Funds were first received in this option during August 1994.
(4) Funds were first received in this option during May 1997.
(5) Funds were first received in this option during October 1994.
(6) The initial accumulation unit value was established at $10.000 during
September 1996, when the fund became available under the contract.
(7) Funds were first received in this option during June 1998.
(8) The initial accumulation unit value was established at $10.000 during
September 1995, when the portfolio became available under the contract.
(9) Funds were first received in this option during May 1998.
(10) Funds were first received in this option during December 1997.
(11) Funds were first received in this option during December 1994.
(12) The initial accumulation unit value was established at $10.000 during June
1995, when the fund became available under the contract.
(13) Funds were first received in this option during January 1995.
(14) The initial accumulation unit value was established at $10.000 during May
1994, when the fund became available under the contract.
(15) Funds were first received in this option during November 1994.
(16) Funds were first received in this option during April 1995.
(17) The initial accumulation unit value was established at $10.000 during May
1996, when the series became available under the contract.
(18) Funds were first received in this option during November 1997.
79
<PAGE>
Condensed Financial Information
- --------------------------------------------------------------------------------
(Selected data for accumulation units outstanding throughout each period)
- --------------------------------------------------------------------------------
The condensed financial information presented below for the period ended
December 31, 1998, 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 II--For Contracts with Total Separate Account Charges of 1.25%
<TABLE>
<CAPTION>
1998
-----------------
<S> <C>
AETNA ASCENT VP
Value at beginning of period $14.947(1)
Value at end of period $14.012
Number of accumulation units outstanding at end of period 160,746
AETNA BALANCED VP, INC.
Value at beginning of period $14.392(1)
Value at end of period $15.212
Number of accumulation units outstanding at end of period 363,745
AETNA BOND VP
Value at beginning of period $11.367(1)
Value at end of period $11.910
Number of accumulation units outstanding at end of period 387,995
AETNA CROSSROADS VP
Value at beginning of period $14.044(1)
Value at end of period $13.588
Number of accumulation units outstanding at end of period 237,468
AETNA GROWTH VP
Value at beginning of period $15.809(1)
Value at end of period $17.909
Number of accumulation units outstanding at end of period 266,761
AETNA GROWTH AND INCOME VP
Value at beginning of period $16.554(1)
Value at end of period $16.604
Number of accumulation units outstanding at end of period 1,327,157
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $16.421(1)
Value at end of period $18.449
Number of accumulation units outstanding at end of period 609,863
AETNA INTERNATIONAL VP
Value at beginning of period $10.100(1)
Value at end of period $9.764
Number of accumulation units outstanding at end of period 41,047
AETNA LEGACY VP
Value at beginning of period $13.073(1)
Value at end of period $13.037
Number of accumulation units outstanding at end of period 467,027
AETNA MONEY MARKET VP
Value at beginning of period $10.847(1)
Value at end of period $11.141
Number of accumulation units outstanding at end of period 1,221,159
AETNA REAL ESTATE SECURITIES VP
Value at beginning of period $10.033(1)
Value at end of period $8.872
Number of accumulation units outstanding at end of period 13,789
AETNA SMALL COMPANY VP
Value at beginning of period $15.596(1)
Value at end of period $13.631
Number of accumulation units outstanding at end of period 272,562
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $15.274(1)
Value at end of period $16.028
Number of accumulation units outstanding at end of period 173,741
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $10.882(1)
Value at end of period $11.456
Number of accumulation units outstanding at end of period 56,713
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $15.151(1)
Value at end of period $14.942
Number of accumulation units outstanding at end of period 919,970
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $14.533(1)
Value at end of period $17.420
Number of accumulation units outstanding at end of period 600,814
</TABLE>
80
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
----------------
<S> <C>
FIDELITY VIP HIGH INCOME PORTFOLIO
Value at beginning of period $13.167(1)
Value at end of period $11.798
Number of accumulation units outstanding at end of period 530,362
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $13.796(1)
Value at end of period $12.879
Number of accumulation units outstanding at end of period 77,431
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Value at beginning of period $13.995(1)
Value at end of period $14.783
Number of accumulation units outstanding at end of period 154,809
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $15.503(1)
Value at end of period $17.492
Number of accumulation units outstanding at end of period 637,258
FIDELITY VIP II INDEX 500 PORTFOLIO
Value at beginning of period $17.227(1)
Value at end of period $18.925
Number of accumulation units outstanding at end of period 844,490
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $12.108(1)
Value at end of period $14.162
Number of accumulation units outstanding at end of period 216,958
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $15.156(1)
Value at end of period $17.569
Number of accumulation units outstanding at end of period 480,187
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $12.363(1)
Value at end of period $12.873
Number of accumulation units outstanding at end of period 221,988
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $15.094(1)
Value at end of period $17.461
Number of accumulation units outstanding at end of period 281,234
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $16.509(1)
Value at end of period $17.358
Number of accumulation units outstanding at end of period 941,812
MFS TOTAL RETURN SERIES
Value at beginning of period $14.096(1)
Value at end of period $14.491
Number of accumulation units outstanding at end of period 400,396
MFS GLOBAL GOVERNMENTS SERIES
Value at beginning of period $10.312(1)
Value at end of period $10.904
Number of accumulation units outstanding at end of period 29,055
OPPENHEIMER AGGRESSIVE GROWTH FUND/VA
Value at beginning of period $14.076(1)
Value at end of period $13.556
Number of accumulation units outstanding at end of period 211,732
OPPENHEIMER GLOBAL SECURITIES FUND/VA
Value at beginning of period $13.007(1)
Value at end of period $13.016
Number of accumulation units outstanding at end of period 113,575
OPPENHEIMER MAIN STREET GROWTH AND INCOME FUND/
VA
Value at beginning of period $14.890(1)
Value at end of period $13.234
Number of accumulation units outstanding at end of period 602,061
OPPENHEIMER STRATEGIC BOND FUND/VA
Value at beginning of period $11.084(1)
Value at end of period $10.950
Number of accumulation units outstanding at end of period 254,861
PORTFOLIO PARTNERS MFS EMERGING EQUUITIES
PORTFOLIO
Value at beginning of period $12.011(1)
Value at end of period $12.761
Number of accumulation units outstanding at end of period 503,944
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $10.102(1)
Value at end of period $10.532
Number of accumulation units outstanding at end of period 554,095
</TABLE>
81
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
----------------
<S> <C>
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $12.147(1)
Value at end of period $12.708
Number of accumulation units outstanding at end of period 214,290
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL GROWTH
PORTFOLIO
Value at beginning of period $11.775(1)
Value at end of period $11.659
Number of accumulation units outstanding at end of period 107,009
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH EQUITY
PORTFOLIO
Value at beginning of period $15.327(1)
Value at end of period $16.682
Number of accumulation units outstanding at end of period 272,321
</TABLE>
- -----------------
(1) Funds were first received in this option during May 1998.
82
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated May 3, 1999
AETNA MARATHON PLUS
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 Retirement Services
Annuity Services
151 Farmington Avenue
Hartford, Connecticut 06156-1277
1-800-531-4547
Read the prospectus before you invest. Unless otherwise indicated, 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 Contract............................................... 3
Performance Data................................................................ 3
General.................................................................... 3
Average Annual Total Return Quotations..................................... 3
Income Phase Payments........................................................... 6
Sales Material and Advertising.................................................. 7
Independent Auditors............................................................ 7
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) issues the
contracts described in the prospectus and is responsible for providing each
contract's insurance and annuity benefits. We are a stock life insurance company
which was 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 Participating Annuity Life Insurance Company organized in 1954). Our
Home Office is located at 151 Farmington Avenue, Hartford, Connecticut 06156.
As of December 31, 1998, the Company had $43 billion invested through its
products, including $29 billion in its separate accounts (of which the Company
or an affiliate oversees the management of $21 billion). The Company is ranked
among the top 2% of all U.S. life insurance companies based on assets as of
December 31, 1997.
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 or
under all contracts. The funds currently available under the contract are as
follows:
<TABLE>
<S> <C>
Aetna Ascent VP Fidelity Variable Insurance Products (VIP) II Contrafund Portfolio
Aetna Balanced VP, Inc. Fidelity Variable Insurance Products (VIP) II Index 500 Portfolio
Aetna Income Shares d/b/a Aetna Bond VP Janus Aspen Aggressive Growth Portfolio
Aetna Crossroads VP Janus Aspen Balanced Portfolio
Aetna Growth VP Janus Aspen Flexible Income Portfolio
Aetna Variable Fund d/b/a Aetna Growth and Income VP Janus Aspen Growth Portfolio
Aetna Index Plus Large Cap VP Janus Aspen Worldwide Growth Portfolio
Aetna International VP MFS Total Return Series
Aetna Legacy VP MFS Global Governments Series
Aetna Variable Encore Fund d/b/a Aetna Money Market VP Oppenheimer Aggressive Growth Fund/VA
Aetna Real Estate Securities VP Oppenheimer Global Securities Fund/VA
Aetna Small Company VP Oppenheimer Main Street Growth and Income Fund/VA
Aetna Value Opportunity VP Oppenheimer Strategic Bond Fund/VA
Calvert Social Balanced Portfolio Portfolio Partners MFS Emerging Equities Portfolio
Fidelity Variable Insurance Products (VIP) Equity-Income Portfolio Partners MFS Research Growth Portfolio
Portfolio
Fidelity Variable Insurance Products (VIP) Growth Portfolio Portfolio Partners MFS Value Equity Portfolio
Fidelity Variable Insurance Products (VIP) High Income Portfolio Portfolio Partners Scudder International Growth Portfolio
Fidelity Variable Insurance Products (VIP) Overseas Portfolio Portfolio Partners T. Rowe Price Growth Equity Portfolio
Fidelity Variable Insurance Products (VIP) II Asset Manager
Portfolio
</TABLE>
2
<PAGE>
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 CONTRACT
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 the contracts are purchased can be found in the prospectus under
the sections titled "Purchase 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
adjusted to reflect the deduction of the maximum recurring charges under the
contracts during each period (e.g., 1.25% mortality and expense risk charge, $30
annual maintenance fee, 0.15% administrative charge, and early withdrawal charge
of 7% of purchase payments grading down to 0% after seven years). These charges
will be deducted on a pro rata basis in the case of fractional periods. The
annual 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
returns 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 annual
maintenance fee. The deduction of the early withdrawal charge and the annual
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 the maximum recurring
charges under the contract except the early withdrawal charge. The annual
maintenance fee has been deducted for the purposes of calculating the returns.
Investment results of the funds will fluctuate over time, and any presentation
of the subaccounts' total return quotations for any prior period should not be
considered as a representation of how the subaccounts will perform in any future
period. Additionally, the account value upon redemption may be more or less than
your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
The tables below reflect the average annual standardized and non-standardized
total return quotation figures for the periods ended December 31, 1998 for the
subaccounts under the contracts. The standardized returns assume the maximum
charges under the contract as described under "General" above. The
non-standardized returns assume the same charges but do not include the early
withdrawal charges.
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.
3
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
Date
Contributions
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 (3.46%) 13.11% 08/31/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 9.08% 13.85% 11.49% 06/30/1989
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 0.35% 4.54% 7.72%
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP (1.86%) 11.42% 08/31/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 29.68% 32.01% 05/30/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 6.66% 17.35% 14.97%
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 23.65% 29.18% 10/31/1996
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna International VP (10.64%) 05/05/1998
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP (0.84%) 9.41% 08/31/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) (2.31%) 3.17% 4.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP (18.37%) 05/06/1998
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP (6.64%) 8.58% 05/30/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 14.51% 23.38% 05/30/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio 8.43% 12.54% 11.77% 11/30/1992
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 3.81% 19.58% 12/30/1994
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio 31.48% 25.59% 12/30/1994
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio (12.03%) 6.88% 06/30/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio 4.93% 10.72% 01/31/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 7.21% 14.89% 01/31/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 22.04% 22.46% 06/30/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio 20.39% 25.68% 06/30/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 26.29% 16.59% 10/31/1994
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 26.31% 21.77% 01/31/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 1.31% 10.17% 10/31/1994
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 27.68% 21.94% 07/29/1994
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 20.99% 26.26% 04/28/1995
- ------------------------------------------------------------------------------------------------------------------------------------
MFS Total Return Series 4.52% 13.50% 05/31/1996
- ------------------------------------------------------------------------------------------------------------------------------------
MFS Global Governments Series 0.11% 1.15% 05/31/1996
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Aggressive Growth Fund/VA 4.54% 9.42% 05/30/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund/VA 6.27% 9.51% 05/30/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Main Street Growth & Income Fund/VA (3.06%) 9.93% 05/30/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund/VA (4.86%) 0.36% 05/30/1997
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio 21.72% 18.30% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners MFS Emerging Equities(3) 21.72% 13.26% 13.01% 09/30/1993
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio 15.11% 11.61% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/Portfolio Partners MFS
Research Growth(3) 15.11% 6.08% 7.91% 08/31/1992
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio 18.82% 18.76% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Neuberger Berman AMT Growth/Portfolio Partners MFS Value Equity(3) 18.82% 14.92% 13.47% 11/30/1992
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth Portfolio 11.23% 11.58% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/Portfolio Partners Scudder
International Growth(3) 11.23% 8.36% 11.06% 08/31/1992
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth Equity Portfolio 19.67% 20.22% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners T. Rowe Price Growth
Equity(3) 19.67% 23.50% 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.
4
<PAGE>
(1) These funds have been available through the separate account for more than
ten years.
(2) The current yield for the subaccount for the seven-day period ended
December 31, 1998 (on an annualized basis) was 3.62%. 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 7% 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.
<TABLE>
<CAPTION>
Fund
NON-STANDARDIZED Inception
Date
- ------------------------------------------------------------------------------------------------------------------------------------
Since
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP 2.82% 13.97% 14.90% 07/05/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 15.28% 16.48% 14.23% 11.37% 04/03/1989
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 6.61% 5.14% 5.12% 7.72%
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 4.41% 12.33% 13.14% 07/05/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 35.73% 33.36% 12/13/1996
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 12.87% 21.03% 17.68% 14.97%
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 29.74% 31.43% 09/16/1996
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna International VP 17.24% 19.82% 12/22/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 5.42% 10.23% 11.02% 07/05/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) 3.96% 3.93% 3.78% 4.25%
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP (14.09%) (10.59%) 12/15/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP (0.34%) 15.22% 12/27/1996
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 20.66% 29.26% 12/13/1996
- ------------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio(1) 14.62% 14.63% 12.95% 11.28%
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio(1) 10.04% 16.12% 17.10% 13.99%
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio(1) 37.52% 23.70% 20.02% 17.73%
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio(1) (5.69%) 7.14% 7.25% 9.51%
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio(1) 11.15% 10.88% 8.15% 8.53%
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 13.42% 15.08% 10.22% 11.39% 09/06/1989
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 28.14% 23.29% 26.83% 01/03/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio 26.51% 26.07% 21.98% 19.46% 08/27/1992
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 32.36% 16.08% 17.66% 20.20% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 32.38% 22.20% 17.42% 17.81% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 7.56% 8.45% 8.76% 8.30% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 33.74% 23.63% 19.70% 19.17% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 27.10% 24.87% 19.60% 22.28% 09/13/1993
- ------------------------------------------------------------------------------------------------------------------------------------
MFS Total Return Series 10.74% 14.29% 17.05% 01/03/1995
- ------------------------------------------------------------------------------------------------------------------------------------
MFS Global Governments Series 6.37% 2.06% 4.07% 06/14/1994
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Aggressive Growth Fund/VA(1) 10.77% 13.06% 11.45% 14.34%
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund/VA 12.49% 16.38% 8.11% 10.89% 11/12/1990
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Main Street Growth & Income Fund/VA 3.21% 20.75% 25.19% 07/06/1995
- ------------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund/VA 1.43% 6.29% 5.31% 5.27% 05/03/1993
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio 27.83% 23.81% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners MFS Emerging 27.83% 12.23% 13.65% 19.29%
Equities(3)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio 21.26% 17.20% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/Portfolio Partners MFS
Research Growth(3) 21.26% 3.04% 6.62% 9.68%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio 24.94% 24.26% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Neuberger Berman AMT Growth/Portfolio Partners MFS Value Equity(3) 24.94% 18.74% 15.28% 13.09%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth Portfolio 17.41% 17.17% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/Portfolio Partners
Scudder International Growth(3) 17.41% 12.59% 8.85% 10.43%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Fund
NON-STANDARDIZED Inception
Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio Partners T. Rowe Price Growth Equity Portfolio 25.79% 25.71% 1-1/28/1997
- ------------------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners T. Rowe Price Growth
Equity(3) 25.79% 21.12% 19.03% 18.77% 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 seven-day period ended
December 31, 1998 (on an annualized basis) was 3.62%. 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 7% 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.
INCOME PHASE PAYMENTS
When you begin receiving payments under the contract during the income phase
(see "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
investment performance of the subaccounts you selected is greater than 5%
annually, after deduction of fees. Payments would decline if the performance was
less than 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 performance of the subaccounts selected.
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 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
6
<PAGE>
an annuity unit value of $13.523359 for the valuation occurring when the second
payment is due. 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. 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.
7
<PAGE>
FINANCIAL STATEMENTS OF THE SEPARATE ACCOUNT
VARIABLE ANNUITY ACCOUNT B
Index
<TABLE>
<S> <C>
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 Auditor's Report............................................... S-36
</TABLE>
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. 34370 ALLIAC Ed. May, 1999
<PAGE>
VARIABLE ANNUITY ACCOUNT B
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A:
Condensed Financial Information
(2) Included in Part B:
Financial Statements of Variable Annuity Account B:
- Statement of Assets and Liabilities as of December 31,
1998
- Statements of Operations and Changes in Net Assets for the
years ended December 31, 1998 and 1997
- Condensed Financial Information for the year ended
December 31, 1998
- Notes to Financial Statements
- Independent Auditors' Report
Financial Statements of the Depositor:
- Independent Auditors' Report
- Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996
- Consolidated Balance Sheets as of December 31, 1998 and
1997
- Consolidated Statements of Changes in Shareholder's Equity
for the years ended December 31, 1998, 1997 and 1996
- Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
- Notes to Consolidated Financial Statements
(b) Exhibits
(1) Resolution of the Board of Directors of Aetna Life Insurance
and Annuity Company establishing Variable Annuity Account B(1)
(2) Not applicable
(3.1) Selling Agreement(2)
(3.2) Alternative Form of Wholesaling Agreement and Related Selling
Agreement(3)
(3.3) Federated Broker Dealer Agreement (9/2/94)(4)
(4.1) Variable Annuity Contract (G-CDA-97(NY))(5)
(4.2) Variable Annuity Contract Certificate (GMCC-97(NY)) to
Contract G-CDA-97(NY)(5)
(4.3) Variable Annuity Contract (G-MP1(5/97))(6)
(4.4) Variable Annuity Contract Certificate (MP1CERT(5/97))(6)
(4.5) Variable Annuity Contract (I-MP1(5/97))(6)
(4.6) Variable Annuity Contract (G-MP1(5/96))(7)
(4.7) Variable Annuity Contract Certificate (MP1CERT(5/96))(7)
(4.8) Variable Annuity Contract (I-MP1(5/96))(7)
(4.9) Variable Annuity Contract (G-CDA-96(NY))(7)
<PAGE>
(4.10) Variable Annuity Contract Certificate (GMCC-96(NY))(7)
(4.11) Variable Annuity Contracts (G-CDA-IC(NQ))(8)
(4.12) Variable Annuity Certificate (GMCC-IC(NQ))(8)
(4.13) Variable Annuity Contract (G-CDA-IC(IR))(8)
(4.14) Variable Annuity Contract (I-CDA-IC(NQ/MP))(8)
(4.15) Variable Annuity Contract Certificate (GMCC-IC(IR))
(4.16) Variable Annuity Contract (I-CDA-IC(IR/MP))(8)
(4.17) Variable Annuity Contracts and Certificates (G-CDA-IC(IR/NY)),
(GMCC-IC(IR/NY)), (G-CDA-IC(NQ/NY)), and (GMCC-IC(NQ/NY))(9)
(4.18) Endorsements (MP1IRA(5/97)) and (I-MP1IRA(5/97)) to Contract
G-MP1(5/96) and Certificate MP1CERT(5/96)(7)
(4.19) Endorsements (MP1QP(5/97)) and (I-MP1QP(5/97)) to Contract
G-MP1(5/96) and Certificate MP1CERT(5/96)(7)
(4.20) Endorsements (MP1TDA(5/97)) and (I-MP1TDA(5/97)) to Contract
G-MP1(5/96) and Certificate MP1CERT(5/96)(7)
(4.21) Endorsements (MP1DC(5/97)) and (I-MP1DC(5/97)) to Contract
G-MP1(5/96) and Certificate MP1CERT(5/96)(7)
(4.22) Endorsement (G-MP1IRA(11/96)) to Contract G-CDA-96(NY) and
Certificate GMCC-96(NY)(7)
(4.23) Endorsement (I-MP1END(9/97)) to Contract I-MP1(5/96)(6)
(4.24) Endorsement (E1-MPROTH-97) to Contract G-MP1(5/97)(5)
(4.25) Endorsement (EI1MPROTH-97) to Contract I-MP1(5/97)(5)
(4.26) Endorsement (MP1IRA(11/97)) to Contract G-MP1(5/97)(5)
(4.27) Endorsement (I-MP1IRA(11/97)) to Contract I-MP1(5/97)(5)
(4.28) Endorsement (MP1END(9/97)) to Contract G-MP1(5/97) and
Certificate MP1CERT(5/97)(10)
(4.29) Endorsement (I-MP1END(9/97)) to Contract I-MP1(5/97)(10)
(4.30) Endorsement (MPNQEND(4/95)) to Contract G-CDA-IC(NQ)(11)
(4.31) Endorsement (MPIREND(4/95)) to Contract G-CDA-IC(IR)(11)
(4.32) Endorsement (IMPNQEND(4/95)) to Contract I-CDA-IC(NQ/MP)(11)
(4.33) Endorsement (IMPIREND(4/95)) to Contract I-CDA-IC(IR/MP)(11)
(4.34) Endorsement (EMPGET98) to Contract G-MP1(5/97) and Certificate
MP1CERT(5/97)(12)
(4.35) Endorsement (MPNQCERTEND(4/95)) to Certificate GMCC-IC(NQ)(11)
(4.36) Endorsement (MPIRCERTEND(4/95)) to Certificate GMCC-IC(IR)(11)
(4.37) Endorsement (EGET-99) to Contracts G-MP1(5/97), G-CDA-97(NY)
and I-MP1(5/97) and Certificates MP1(CERT(5/97)) and
GMCC-97(NY)(13)
(4.38) Contract Schedule I Accumulation Period (G-MP1(11/97)-5) to
Group Contract G-MP1(5/97)(5)
<PAGE>
(4.39) Contract Schedule I Accumulation Period (I-MP1(11/97)-5) to
Individual Contract I-MP1(5/97)(5)
(5.1) Variable Annuity Contract Application (MPAPPNY(1/96))(5)
(5.2) Variable Annuity Contract Application (300-MAR-IB)(14)
(5.3) Variable Annuity Contract Application (710.6.13)(14)
(6.1) Certificate of Incorporation of Aetna Life Insurance and
Annuity Company(15)
(6.2) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company(16)
(6.3) By-Laws as amended September 17, 1997 of Aetna Life Insurance
and Annuity Company(17)
(7) Not applicable
(8.1) Fund Participation Agreement by and among Aetna Life Insurance
and Annuity Company and Aetna Variable Fund, Aetna Variable
Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc.,
Aetna GET Fund on behalf of each of its series, Aetna
Generation Portfolios, Inc. on behalf of each of its series,
Aetna Variable Portfolios, Inc. on behalf of each of its
series, and Aeltus Investment Management, Inc. dated as of May
1, 1998(18)
(8.2) Amendment dated November 9, 1998 to Fund Participation
Agreement by and among Aetna Life Insurance and Annuity
Company and Aetna Variable Fund, Aetna Variable Encore Fund,
Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund
on behalf of each of its series, Aetna Generation Portfolios,
Inc. on behalf of each of its series, Aetna Variable
Portfolios, Inc. on behalf of each of its series, and Aeltus
Investment Management, Inc. dated as of May 1, 1998(19)
(8.3) Service Agreement between Aeltus Investment Management, Inc.
and Aetna Life Insurance and Annuity Company in connection
with the sale of shares of Aetna Variable Fund, Aetna Variable
Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc.,
Aetna GET Fund on behalf of each of its series, Aetna
Generation Portfolios, Inc. on behalf of each of its series,
and Aetna Variable Portfolios, Inc. on behalf of each of its
series dated as of May 1, 1998(18)
(8.4) Amendment dated November 4, 1998 to Service Agreement between
Aeltus Investment Management, Inc. and Aetna Life Insurance
and Annuity Company in connection with the sale of shares of
Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income
Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of
each of its series, Aetna Generation Portfolios, Inc. on
behalf of each of its series and Aetna Variable Portfolios,
Inc. on behalf of each of its series dated as of May 1,
1998(19)
(8.5) Fund Participation Agreement (Amended and Restated) between
Aetna Life Insurance and Annuity Company, Alger American Fund
and Fred Alger Management, Inc. dated as of March 31, 1995(3)
<PAGE>
(8.6) Fund Participation Agreement among Calvert Responsibly
Invested Balanced Portfolio, Calvert Asset Management Company,
Inc. and Aetna Life Insurance and Annuity Company dated
December 1, 1997(20)
(8.7) Service Agreement between Calvert Asset Management Company,
Inc. and Aetna Life Insurance and Annuity Company dated
December 1, 1997(20)
(8.8) Fund Participation Agreement by and among Aetna Life Insurance
and Annuity Company, Insurance Management Series and Federated
Advisors dated July 1, 1994(21)
(8.9) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund and Fidelity
Distributors Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995, January 1,
1996 and March 1, 1996(16)
(8.10) Fifth Amendment, dated as of May 1, 1997, to the Fund
Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund and Fidelity
Distributors Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995, January 1,
1996 and March 1, 1996(6)
(8.11) Sixth Amendment dated November 6, 1997 to the Fund
Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund and Fidelity
Distributors Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995, January 1,
1996, March 1, 1996 and May 1, 1997(22)
(8.12) Seventh Amendment dated as of May 1, 1998 to the Fund
Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund and Fidelity
Distributors Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995, January 1,
1996, March 1, 1996, May 1, 1997 and November 6, 1997(18)
(8.13) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund II and
Fidelity Distributors Corporation dated February 1, 1994 and
amended on December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996 and March 1, 1996(16)
(8.14) Fifth Amendment, dated as of May 1, 1997, to the Fund
Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund II and
Fidelity Distributors Corporation dated February 1, 1994 and
amended on December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996 and March 1, 1996(6)
(8.15) Sixth Amendment dated as of January 20, 1998 to the Fund
Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund II and
Fidelity Distributors Corporation dated February 1, 1994 and
amended on December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996, March 1, 1996 and May 1, 1997(23)
<PAGE>
(8.16) Seventh Amendment dated as of May 1, 1998 to the Fund
Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund II and
Fidelity Distributors Corporation dated February 1, 1994 and
amended on December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996, March 1, 1996, May 1, 1997 and January 20,
1998(18)
(8.17) Service Agreement between Aetna Life Insurance and Annuity
Company and Fidelity Investments Institutional Operations
Company dated as of November 1, 1995(24)
(8.18) Amendment dated January 1, 1997 to Service Agreement between
Aetna Life Insurance and Annuity Company and Fidelity
Investments Institutional Operations Company dated as of
November 1, 1995(6)
(8.19) Service Contract between Fidelity Distributors Corporation and
Aetna Life Insurance and Annuity Company dated May 2, 1997(19)
(8.20) Fund Participation Agreement among Janus Aspen Series and
Aetna Life Insurance and Annuity Company and Janus Capital
Corporation dated December 8, 1997(25)
(8.21) Amendment dated October 12, 1998 to Fund Participation
Agreement among Janus Aspen Series and Aetna Life Insurance
and Annuity Company and Janus Capital Corporation dated
December 8, 1997(19)
(8.22) Service Agreement between Janus Capital Corporation and Aetna
Life Insurance and Annuity Company dated December 8, 1997(25)
(8.23) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company and Lexington Management Corporation regarding
Natural Resources Trust dated December 1, 1988 and amended
February 11, 1991(3)
(8.24) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company, Lexington Emerging Markets Fund, Inc. and
Lexington Management Corporation (its investment advisor)
dated April 28, 1994(2)
(8.25) Fund Participation Agreement among MFS Variable Insurance
Trust, Aetna Life Insurance and Annuity Company and
Massachusetts Financial Services Company dated April 30, 1996,
and amended on September 3, 1996, March 14, 1997 and November
28, 1997(18)
(8.26) Fourth Amendment dated May 1, 1998 to the Fund Participation
Agreement by and among MSF Variable Insurance Trust, Aetna
Life Insurance and Annuity Company and Massachusetts Financial
Services Company dated April 30, 1996, and amended on
September 3, 1996, March 14, 1997 and November 28, 1997(26)
(8.27) Fifth Amendment to Fund Participation Agreement by and among
MSF Variable Insurance Trust, Aetna Life Insurance and Annuity
Company and Massachusetts Financial Services Company dated
April 30, 1996, and amended on September 3, 1996, March 14,
1997 and November 28, 1997(27)
<PAGE>
(8.28) Fund Participation Agreement dated March 11, 1997 between
Aetna Life Insurance and Annuity Company and Oppenheimer
Variable Annuity Account Funds and Oppenheimer Funds, Inc.(21)
(8.29) Service Agreement effective as of March 11, 1997 between
Oppenheimer Funds, Inc. and Aetna Life Insurance and Annuity
Company(21)
(8.30) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company, Investors Research Corporation and TCI
Portfolios, Inc. dated July 29, 1992 and amended December 22,
1992 and June 1, 1994(3)
(8.31) Administrative Service Agreement between Aetna Life Insurance
and Annuity Company and Agency, Inc.(2)
(9) Opinion and Consent of Counsel
(10) Consent of Independent Auditors
(11) Not applicable
(12) Not applicable
(13) Schedule for Computation of Performance Data(8)
(14) Not applicable
(15.1) Powers of Attorney(28)
(15.2) Authorization for Signatures(3)
1. Incorporated by reference to Post-Effective Amendment No. 6 to Registration
Statement on Form N-4 (File No. 33-75986), as filed on April 22, 1996.
2. Incorporated by reference to Post-Effective Amendment No. 22 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on April
22, 1996.
3. Incorporated by reference to Post-Effective Amendment No. 5 to Registration
Statement on Form N-4 (File No. 33-75986), as filed on April 12, 1996.
4. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-4 (File No. 33-79122), as filed on August 16, 1995.
5. Incorporated by reference to Post-Effective Amendment No. 32 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
December 16, 1997.
6. Incorporated by reference to Post-Effective Amendment No. 30 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
September 29, 1997.
7. Incorporated by reference to Post-Effective Amendment No. 26 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
February 21, 1997.
8. Incorporated by reference to Post-Effective Amendment No. 35 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on April
17, 1998.
9. Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form N-4 (File No. 33-87932), as filed on September 19, 1995.
10. Incorporated by reference to Post-Effective Amendment No. 33 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
February 12, 1998.
11. Incorporated by reference to Post-Effective Amendment No. 34 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
February 27, 1998.
<PAGE>
12. Incorporated by reference to Post-Effective Amendment No. 37 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
September 14, 1998.
13. Incorporated by reference to Post-Effective Amendment No. 13 to
Registration Statement on Form N-4 (File No. 333-01107), as filed on April
__, 1999.
14. Incorporated by reference to Post-Effective Amendment No. 29 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on August
18, 1997.
15. Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-60477), as filed on April 15, 1996.
16. Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-75964), as filed on
February 11, 1997.
17. Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-91846), as filed on October
30, 1997.
18. Incorporated by reference to Registration Statement on Form N-4 (File No.
333-56297) as filed on June 8, 1998.
19. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form N-4 (File No. 333-56297), as filed on December 14, 1998.
20. Incorporated by reference to Post-Effective Amendment No. 8 to Registration
Statement on Form N-4 (File No. 333-01107), as filed on February 19, 1998.
21. Incorporated by reference to Post-Effective Amendment No. 27 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on April
16, 1997.
22. Incorporated by reference to Post-Effective Amendment No. 16 to
Registration Statement on Form N-4 (File No. 33-75964), as filed on
February 9, 1998.
23. Incorporated by reference to Post-Effective Amendment No. 7 to Registration
Statement on Form S-6 (File No. 33-75248), as filed on February 24, 1998.
24. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-4 (File No. 33-88720), as filed on June 28, 1996.
25. Incorporated by reference to Post-Effective Amendment No. 10 to
Registration Statement on Form N-4 (File No. 33-75992), as filed on
December 31, 1997.
26. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement on Form N-4 (File No. 333-56297), as filed on August 4, 1998.
27. Incorporated by reference to Post-Effective Amendment No. 4 to Registration
Statement on Form N-4 (File No. 333-56297), as filed on February 16, 1999.
28. Incorporated by reference to Post-Effective Amendment No. 5 to Registration
Statement on Form N-4 (File No. 333-56297), as filed on February 25, 1999.
<PAGE>
Item 25. Directors and Officers of the Depositor
<TABLE>
<CAPTION>
Name and Principal
Business Address* Positions and Offices with Depositor
- ----------------- ------------------------------------
<S> <C>
Thomas J. McInerney Director and President
Shaun P. Mathews Director and Senior Vice President
Catherine H. Smith Director, Chief Financial Officer and Senior Vice
President
Deborah Koltenuk Vice President, Treasurer and Corporate Controller
Therese M. Squillacote Vice President and Chief Compliance Officer
Kirk P. Wickman Senior Vice President, General Counsel and Corporate
Secretary
</TABLE>
* The principal business address of all directors and officers listed is 151
Farmington Avenue, Hartford, Connecticut 06156.
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant
Incorporated herein by reference to Item 24 of Post-Effective Amendment No.
14 to Registration Statement on Form N-1A (File No. 33-12723), as filed on March
10, 1999.
Item 27. Number of Contract Owners
As of February 28, 1999, there were 77,799 individuals holding interests in
variable annuity contracts funded through Variable Annuity Account B.
Item 28. Indemnification
Section 21 of Public Act No. 97-246 of the Connecticut General Assembly (the
"Act") provides that a corporation may provide indemnification of or advance
expenses to a director, officer, employee or agent only as permitted by Sections
33-770 to 33-778, inclusive, of the Connecticut General Statutes, as amended by
Sections 12 to 20, inclusive, of this Act. Reference is hereby made to Section
33-771(e) of the Connecticut General Statutes ("CGS") regarding indemnification
of directors and Section 33-776(d) of CGS regarding indemnification of officers,
employees and agents of Connecticut corporations. These statutes provide in
general that Connecticut corporations incorporated prior to January 1, 1997
shall, except to the extent that their certificate of incorporation expressly
provides otherwise, indemnify their directors, officers, employees and agents
against "liability" (defined as the obligation to pay a judgment, settlement,
<PAGE>
penalty, fine, including an excise tax assessed with respect to an employee
benefit plan, or reasonable expenses incurred with respect to a proceeding) when
(1) a determination is made pursuant to Section 33-775 that the party seeking
indemnification has met the standard of conduct set forth in Section 33-771 or
(2) a court has determined that indemnification is appropriate pursuant to
Section 33-774. Under Section 33-775, the determination of and the authorization
for indemnification are made (a) by the disinterested directors, as defined in
Section 33-770(3); (b) by special counsel; (c) by the shareholders; or (d) in
the case of indemnification of an officer, agent or employee of the corporation,
by the general counsel of the corporation or such other officer(s) as the board
of directors may specify. Also, Section 33-772 provides that a corporation shall
indemnify an individual who was wholly successful on the merits or otherwise
against reasonable expenses incurred by him in connection with a proceeding to
which he was a party because he was a director of the corporation. In the case
of a proceeding by or in the right of the corporation or with respect to conduct
for which the director, officer, agent or employee was adjudged liable on the
basis that he received a financial benefit to which he was not entitled,
indemnification is limited to reasonable expenses incurred in connection with
the proceeding against the corporation to which the individual was named a
party.
The statute does specifically authorize a corporation to procure indemnification
insurance on behalf of an individual who was a director, officer, employer or
agent of the corporation. Consistent with the statute, Aetna Inc. has procured
insurance from Lloyd's of London and several major United States excess insurers
for its directors and officers and the directors and officers of its
subsidiaries, including the Depositor.
Item 29. Principal Underwriter
(a) In addition to serving as the principal underwriter and depositor for
the Registrant, Aetna Life Insurance and Annuity Company (Aetna) also
acts as the principal underwriter, only, for Aetna Variable Encore
Fund, Aetna Variable Fund, Aetna Generation Portfolios, Inc., Aetna
Income Shares, Aetna Balanced VP, Inc. (formerly Aetna Investment
Advisers Fund, Inc.), Aetna GET Fund, and Aetna Variable Portfolios,
Inc. and as the principal underwriter and investment adviser for
Portfolio Partners, Inc. (all management investment companies
registered under the Investment Company Act of 1940 (1940 Act)).
Additionally, Aetna acts as the principal underwriter and depositor for
Variable Life Account B of Aetna, Variable Annuity Account C of Aetna
and Variable Annuity Account G of Aetna (separate accounts of Aetna
registered as unit investment trusts under the 1940 Act). Aetna is also
the principal underwriter for Variable Annuity Account I of Aetna
Insurance Company of America (AICA) (a separate account of AICA
registered as a unit investment trust under the 1940 Act).
(b) See Item 25 regarding the Depositor.
<PAGE>
(c) Compensation as of December 31, 1998:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Net Underwriting Compensation on
Principal Discounts and Redemption or Brokerage
Underwriter Commissions Annuitization Commissions Compensation*
- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Aetna Life Insurance $684,000 $42,930,000
and Annuity Company
</TABLE>
* Compensation shown in column 5 includes deductions for mortality and
expense risk guarantees and contract charges assessed to cover costs
incurred in the sales and administration of the contracts issued under
Variable Annuity Account B.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules under it relating to the securities
described in and issued under this Registration Statement are located at the
home office of the Depositor as follows:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
Item 31. Management Services
Not applicable
Item 32. Undertakings
Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement on
Form N-4 as frequently as is necessary to ensure that the audited
financial statements in the registration statement are never more than
sixteen months old for as long as payments under the variable annuity
contracts may be accepted;
(b) to include as part of any application to purchase a contract offered by
a prospectus which is part of this registration statement on Form N-4,
a space that an applicant can check to request a Statement of
Additional Information; and
<PAGE>
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form N-4 promptly
upon written or oral request.
(d) The Company hereby represents that it is relying upon and will comply
with the provisions of Paragraphs (1) through (4) of the SEC Staff's
No-Action Letter dated November 28, 1988 with respect to language
concerning withdrawal restrictions applicable to plans established
pursuant to Section 403(b) of the Internal Revenue Code. See American
Counsel of Life Insurance; SEC No-Action Letter, [1988 WL 235221, *13
(S.E.C.)].
(e) Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
(f) Aetna Life Insurance and Annuity Company represents that the fees and
charges deducted under the contracts covered by this registration
statement, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed
by the insurance company.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, Variable Annuity Account B of Aetna Life Insurance and
Annuity Company, certifies that it meets the requirements of Securities Act Rule
485(b) for effectiveness of this Post-Effective Amendment to its Registration
Statement on Form N-4 (File No. 33-34370) and has duly caused this
Post-Effective Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Hartford, State of Connecticut, on the
9th day of April, 1999.
VARIABLE ANNUITY ACCOUNT B OF AETNA
LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
By: AETNA LIFE INSURANCE AND ANNUITY COMPANY
(Depositor)
By: Thomas J. McInerney*
---------------------------------------
Thomas J. McInerney
President
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 37 to the Registration Statement on Form N-4 (File No. 33-34370) has been
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Thomas J. McInerney* Director and President )
- ------------------------------------- (principal executive officer) )
Thomas J. McInerney )
)
Shaun P. Mathews* Director ) April
- ------------------------------------- )
Shaun P. Mathews ) 9, 1999
)
Catherine H. Smith* Director and Chief Financial Officer )
- ------------------------------------- )
Catherine H. Smith )
)
Deborah Koltenuk* Vice President, Treasurer and Corporate Controller )
- ------------------------------------- )
Deborah Koltenuk )
</TABLE>
By: /s/ J. Neil McMurdie
------------------------------------------------------------
J. Neil McMurdie
*Attorney-in-Fact
<PAGE>
VARIABLE ANNUITY ACCOUNT B
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C> <C>
99-B.4.15 Variable Annuity Contract Certificate GMCC-IC(IR)
-------------
99-B.9 Opinion and Consent of Counsel
-------------
99-B.10 Consent of Independent Auditors
-------------
</TABLE>
----------------------------------------------------
Ex 99-B. 4.15
Variable Annuity Contract
----------------------------------------------------
Aetna Life Insurance and Annuity Company
Home Office: 151 Farmington Avenue
Hartford, Connecticut 06156
(800) 525-4225
Aetna Life Insurance and Annuity Company,
herein called Aetna, agrees to pay the benefits
stated in the Contract.
- -------------------------------------------------------------------------------
Certificate of Group To the Certificate Holder:
Annuity Coverage
Aetna certifies that coverage is in force for
you under the stated Group Annuity Contract and
Certificate numbers. All data shown here is
taken from Aetna records and is based upon
information furnished by you.
This Certificate is a summary of the Group
Annuity Contract provisions. It replaces any
and all prior certificates, riders, or
amendments issued to you under the stated
Contract and Certificate numbers. This
Certificate is for information only and is not
a part of the Contract.
THE VARIABLE FEATURES OF THE GROUP CONTRACT ARE
DESCRIBED IN PARTS III AND IV.
- -------------------------------------------------------------------------------
Right to Cancel You may cancel the Account evidenced by this
Certificate within 10 days of receiving it, by
sending a written notice to Aetna at the above
address or to the agent from whom it was purchased.
Aetna will return all payments made for this
Certificate within 7 days after it receives the
notice of cancellation and this Certificate at its
Home Office.
/s/ Gary G. Benanav /s/ George N. Gingold
Gary G. Benanav George N. Gingold
President Secretary
- -------------------------------------------------------------------------------
Contract Holder Group Annuity Contract No.
E. G. Anybroker Specimen
Your Name Certificate No.
John Doe Specimen
Annuitant Name Type of Plan
John Doe Jr. IRA Rollover
- -------------------------------------------------------------------------------
ALL PAYMENTS AND VALUES PROVIDED BY THE GROUP CONTRACT, WHEN BASED ON INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO
FIXED DOLLAR AMOUNT. THIS CERTIFICATE CONTAINS A MARKET VALUE ADJUSTMENT
FORMULA. APPLICATION OF A MARKET VALUE
CMCC-IC(IR)
<PAGE>
ADJUSTMENT MAY RESULT IN EITHER AN INCREASE OR DECREASE IN THE CURRENT VALUE.
THE MARKET VALUE ADJUSTMENT FORMULA DOES NOT APPLY TO A GUARANTEED TERM AT THE
TIME OF ITS MATURITY.
CMCC-IC(IR)
2
<PAGE>
Specifications
- -------------------------------------------------------------------------------
Guaranteed There are guaranteed interest rates for amounts held in
Interest Rate the MG Account (See Certificate Schedule I).
- -------------------------------------------------------------------------------
Deductions from the There will be deductions for mortality and expense
Separate Account risks and administrative fees. (See Certificate
Schedule I and II).
- -------------------------------------------------------------------------------
Deduction from Purchase The Purchase Payment is subject to a deduction for
Payment premium taxes, if any. (See 3.01.)
- -------------------------------------------------------------------------------
Surrender Fee There will be a charge deducted upon surrender.
(See Certificate Schedule I).
3
<PAGE>
Contract Schedule I
Accumulation Period
Separate Account
- -------------------------------------------------------------------------------
Separate Account: Variable Annuity Account B
Charges to Separate
Account: A daily charge is deducted from any portion of the
Current Value allocated to the Separate Account.
The deduction is the daily equivalent of the
annual effective percentage shown in the following
chart:
Administrative Charge 0.15%
Mortality Risk Charge 0.35%
Expense Risk Charge 0.90%
----
Total Separate Account
Charges 1.40%
Marathon Guaranteed Account (MG Account)
- -------------------------------------------------------------------------------
Minimum Guaranteed Interest Rate (effective annual
rate of return): 3.0%.
Separate Account and MG Account
- --------------------------------------------------------------------------------
Transfers: An unlimited number of Transfers may be made
during the Accumulation Period. Aetna allows 12 free
Transfers in any calendar year. Thereafter, Aetna
reserves the right to charge $10 for each subsequent
Transfer.
Maintenance Fee: The Annual Maintenance Fee is $30. If the Account's
Current Value is $50,000 or more on the date the
Maintenance Fee is to be deducted, the Maintenance
Fee is $0.
Surrender Fee: For each surrender, the Surrender Fee will be
determined as follows:
Surrender Fee
Length of Time from Deposit of (as percentage of
Net Purchase Payment (Years) Net Purchase Payment)
Less than 2 years 7%
2 or more but less than 4 years 6%
4 or more but less than 5 years 5%
5 or more but less than 6 years 4%
6 or more but less than 7 years 3%
7 years or more 0%
Systematic Withdrawal The specified payment or specified percentage may not
Option (SWO): be greater than 10% of the Account's Current Value at
time of election.
See 1. GENERAL DEFINITIONS for explanations.
4
<PAGE>
Contract Schedule II
Annuity Period
Separate Account
- -------------------------------------------------------------------------------
Charges to Separate Account: A daily charge at an annual effective rate of
1.25% for Annuity mortality and expense risks.
The administrative charge is established upon
election of an Annuity option. This charge will
not exceed 0.25%.
Variable Annuity Assumed If a Variable Annuity is chosen, an assumed
Annual Net Return Rate: annual net return rate of 5.0% may be elected.
If 5.0% is not elected, Aetna will use an
assumed annual net return rate of 3.5%.
The assumed annual net return rate factor for
3.5% per year is 0.9999058.
The assumed annual net return rate factor for
5.0% per year is 0.9998663.
If the portion of a Variable Annuity payment for
any Fund is not to decrease, the Annuity return
factor under the Separate Account for that Fund
must be:
(a) 4.75% on an annual basis plus an annual
return of up to 0.25% to offset the
administrative charge set at the time
Annuity payments commence if an assumed
annual net return rate of 3.5% is
chosen; or
(b) 6.25% on an annual basis plus and annual
return of up to 0.25% to offset the
administrative charge set at the time
Annuity payments commence, if an assumed
annual net return rate of 5% is chosen.
Fixed Annuity
- -------------------------------------------------------------------------------
Minimum Guaranteed Interest Rate (effective
annual rate of return): 3.0%
See 1. GENERAL DEFINITIONS for explanations.
5
<PAGE>
TABLE OF CONTENTS
I. GENERAL DEFINITIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
1.01 Account.............................................................9
1.02 Accumulation Period.................................................9
1.03 Adjusted Current Value..............................................9
1.04 Annuitant...........................................................9
1.05 Annuity.............................................................9
1.06 Beneficiary.........................................................9
1.07 Certificate Holder..................................................9
1.08 Code................................................................9
1.09 Contract............................................................9
1.10 Contract Holder.....................................................9
1.11 Current Value......................................................10
1.12 Deposit Period.....................................................10
1.13 Fixed Annuity......................................................10
1.14 Fund(s)............................................................10
1.15 General Account....................................................10
1.16 Guaranteed Rates - MG Account......................................10
1.17 Guaranteed Term....................................................10
1.18 Guaranteed Term(s) Groups..........................................11
1.19 Maintenance Fee....................................................11
1.20 Marathon Guaranteed Account (MG Account)...........................11
1.21 Market Value Adjustment (MVA)......................................11
1.22 Matured Term Value.................................................11
1.23 Matured Term Value Transfer........................................11
1.24 Maturity Date......................................................11
1.25 Net Purchase Payment...............................................11
1.26 Nonunitized Separate Account.......................................12
1.27 Purchase Payment...................................................12
1.28 Reinvestment.......................................................12
1.29 Separate Account...................................................12
1.30 Surrender Value....................................................12
1.31 Transfers..........................................................13
1.32 Valuation Period (Period):.........................................13
1.33 Variable Annuity...................................................13
</TABLE>
6
<PAGE>
II. GENERAL PROVISIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
2.01 Change of Contract................................................13
2.02 Change of Fund(s).................................................14
2.03 Nonparticipating Contract.........................................14
2.04 Payments and Elections............................................14
2.05 State Laws........................................................15
2.06 Control of Contract...............................................15
2.07 Designation of Beneficiary........................................15
2.08 Misstatements and Adjustments.....................................15
2.09 Incontestability..................................................15
2.10 Grace Period......................................................15
III. PURCHASE PAYMENT, CURRENT VALUE, AND SURRENDER PROVISIONS
- -------------------------------------------------------------------------------
3.01 Net Purchase Payment..............................................16
3.02 Certificate Holder's Account......................................16
3.03 Fund(s) Record Units -- Separate Account..........................16
3.04 Net Return Factor(s) -- Separate Account..........................16
3.05 Fund Record Unit Value -- Separate Account........................17
3.06 Market Value Adjustment...........................................17
3.07 Transfer of Current Value from the Funds or MG Account............18
3.08 Reports...........................................................19
3.09 Notice to the Certificate Holder..................................19
3.10 Loans.............................................................19
3.11 Distribution Options..............................................19
3.12 Death Benefit Amount..............................................23
3.13 Death Benefit Options Available to Beneficiary....................24
3.14 Required Distribution to Certificate Holder Beneficiary...........25
3.15 Liquidation of Surrender Value....................................26
3.16 Surrender Fee.....................................................26
3.17 Payment of Surrender Value........................................27
3.18 Reinstatement.....................................................27
3.19 Payment of Adjusted Current Value.................................28
IV. ANNUITY PROVISIONS
- -------------------------------------------------------------------------------
4.01 Choices to be Made................................................28
4.02 Annuity Payments to Certificate Holder............................28
4.03 Annuity Payments to Beneficiary...................................29
4.04 Terms of Annuity Options..........................................29
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
4.05 Death of Annuitant Beneficiary...................................30
4.06 Fund(s) Annuity Units -- Separate Account........................31
4.07 Fund(s) Annuity Unit Value -- Separate Account...................31
4.08 Annuity Net Return Factor(s) -- Separate Account.................31
4.09 Annuity Options..................................................32
</TABLE>
8
<PAGE>
I. GENERAL DEFINITIONS
- --------------------------------------------------------------------------------
1.01 Account: A record established for each Certificate
Holder to maintain the value of the Net
Purchase Payment held on his her behalf during
the Accumulation Period.
1.02 Accumulation Period: The period during which the Net Purchase
Payment is applied to an Account to provide
future Annuity payment(s).
1.03 Adjusted Current Value: The Current Value of an Account plus or minus
any aggregate MG Account MVA, if applicable.
(See 1.21)
1.04 Annuitant: The person whose life is measured for purposes
of the guaranteed death benefit and the
duration of Annuity payments under an Account.
The Certificate Holder and Annuitant must be
the same person under an Account.
1.05 Annuity: Payment of an income:
(a) For the life of one or two persons;
(b) For a stated period; or
(c) For some combination of (a) and (b).
1.06 Beneficiary: The individual or estate entitled to receive
any payment from an Account upon the death of
the Annuitant.
1.07 Certificate Holder: A person who purchases an interest in the
Contract as evidenced by a certificate.
1.08 Code: The Internal Revenue Code of 1986, as it may
be amended from time to time.
1.09 Contract: The agreement between Aetna and the Contract
Holder to provide annuities which qualify as
Individual Retirement Annuities under Code
Section 408(b) for the exclusive benefit of the
Certificate Holder(s) or their Beneficiaries.
1.10 Contract Holder: The entity to which the Contract is issued.
The Contract is offered to:
(a) National Association of Securities
Dealers, Inc. ("NASD") member
broker-dealers selected by Aetna, who
have a minimum net capital of $250,000
or more, including broker-dealer
subsidiaries of banks and savings and
loan associations, to provide Individual
Retirement Annuities under Code Section
408 to their customers; and
(b) Employers who sponsor Individual
Retirement Annuity plans under Code
Section 408 for their employees.
9
<PAGE>
1.11 Current Value: As of the most recent Valuation Period, the
Net Purchase Payment and any additional amount
deposited pursuant to a 3.12 plus any interest
added to the portion allocated to the MG
Account; and plus or minus the investment
experience of the portion allocated to the
Funds since deposit; less all Maintenance Fees
deducted, any amounts surrendered and any
amounts applied to an Annuity.
1.12 Deposit Period: A calendar week, a calendar month, a calendar
quarter, or any other period of time specified
by Aetna during which the Net Purchase Payment.
Transfers and Reinvestments are accepted into
the MG Account for one or more Guaranteed
Terms. Aetna reserves the right to extend the
Deposit Period.
1.13 Fixed Annuity: An Annuity with payments that do not
vary in amount.
1.14 Fund(s): The open-end management investment companies
(mutual funds) in which the Separate Account
invests.
1.15 General Account: The account holding the assets of Aetna,
other than those assets held in Aetna's
separate accounts.
1.16 Guaranteed Rates -- MG Aetna will declare the interest rate(s)
Account: applicable to a specific Guaranteed Term at
thestart of the Deposit Period for that
Guaranteed Term. The rate(s) are guaranteed by
Aetna for that Deposit Period and the ensuring
Guaranteed Term. The Guaranteed Rates are
annual effective yields. That is, interest is
credited daily at a rate that will produce the
Guaranteed Rate over the period of a year. No
Guaranteed Rate will ever be less than the
Minimum Guaranteed Rate shown on Contract
Schedule I.
For Guaranteed Terms of one year or less, one
Guaranteed Rate is credited for the full
Guaranteed Term. For longer Guaranteed Terms,
an initial Guaranteed Rate is credited from the
date of deposit to the end of a specified
period within the Guaranteed Term. There may be
a different Guaranteed Rate(s) declared for
subsequent specified time intervals throughout
the Guaranteed Term.
1.17 Guaranteed Term: The period of time for which MG Account
Guaranteed Rates are guaranteed on Net Purchase
Payments, Transfers and Reinvestments made into
a current Deposit Period for the MG Account.
Such period begins on the day following the
close of the Deposit Period and ends on the
designated Maturity Date. Guaranteed Terms are
offered at Aetna's discretion for various
lengths of time ranging up to and including ten
years.
During a Deposit Period, Aetna may make
available any number of Guaranteed Terms. The
Certificate Holder may allocate the Net
Purchase Payment and Transfers into any or all
of the available Guaranteed Terms.
10
<PAGE>
1.18 Guaranteed Term(s) All MG Account Guaranteed Term(s) with the same
Groups: length of time from the close of the Deposit
Period until the designated Maturity Date.
1.19 Maintenance Fee: The Maintenance Fee (see Contract Schedule I)
will be deducted during the Accumulation Period
from the Current Value on each anniversary of
the date the Account is established and upon
surrender of the entire Account.
1.20 Marathon Guaranteed An accumulation option where Aetna guarantees
Account (MG Account): stipulated rate(s) of interest for specified
periods of time. All assets of Aetna, including
amounts in the Nonunitized Separate Account,
are available to meet the guarantees under the
MG Account.
1.21 Market Value An adjustment to the amount withdrawn or
Adjustment (MVA): transferred from an MG Account Guaranteed Term
prior to the end of that Guaranteed Term. The
adjustment reflects the change in the value of
the investment due to changes in interest rates
since the date of deposit and is computed using
the formula given in 3.06. The adjustment is
expressed as a percentage of each dollar being
withdrawn.
1.22 Matured Term Value: The amount payable on an MG Account Guaranteed
Term's Maturity Date.
1.23 Matured Term During the calendar month following an MG
Value Transfer: Account Maturity Date, the Certificate Holder
may notify Aetna's Home Office in writing to
Transfer or surrender all or part of the
Matured Term Value, plus interest at the new
Guaranteed Rate accrued thereon, from the MG
Account without an MVA. This provision only
applies to the first such written request
received from the Certificate Holder during
this period for any Matured Term Value.
1.24 Maturity Date: The last day of an MG Account Guaranteed Term.
1.25 Net Purchase Payment: The Purchase Payment less premium taxes,
as applicable.
1.26 Nonunitized Separate A separate account set up by Aetna under
Account: Title 38, Section 38a-433, of the Connecticut
General Statutes, that holds assets for MG
Account Terms. There are no discrete units for
this Account. The Certificate Holder does not
participate in the investment gain or loss from
the assets held in the Nonunitized Separate
Account. Such gain or loss is borne entirely by
Aetna. These assets may be chargeable with
liabilities arising out of any other business
of Aetna.
11
<PAGE>
1.27 Purchase Payment: The cash payment accepted by Aetna at its Home
Office which is a rollover amount under Code
Section 402(c), 403(a)(4), 403(b)(8), or
408(d)(3). Aetna may require verification that
a rollover amount qualifies as such under the
Code. Payments to Simplified Employee Pension
plans and annual deductible and nondeductible
contributions to Individual Retirement
Annuities are not accepted under the Contract.
Aetna reserves the right to refuse to accept
any Purchase Payment at any time for any
reason. No advance notice will be given to the
Contract Holder or Certificate Holder.
1.28 Reinvestment: Aetna will mail a notice to the Certificate
Holder at least 18 calendar days before a
Guaranteed Term's Maturity Date. This notice
will contain the Terms available during current
Deposit Periods with their Guaranteed Rate(s)
and projected Matured Term Value. If no
specific direction is given by the Certificate
Holder prior to the Maturity Date, each Matured
Term Value will be reinvested in the current
Deposit Period for a Guaranteed Term of the
same duration. If a Guaranteed Term of the same
duration is unavailable, each Matured Term
Value will automatically be reinvested in the
current Deposit Period for the next shortest
Guaranteed Term available. If no shorter
Guaranteed Term is available, the next longer
Guaranteed Term will be used. Aetna will mail a
confirmation statement to the Certificate
Holder the next business day after the Maturity
Date. This notice will state the Guaranteed
Term and Guaranteed Rate(s) which will apply to
the reinvested Matured Term Value.
1.29 Separate Account: A separate account that buys and holds shares
of the Fund(s). Income, gains or losses,
realized or unrealized, are credited or charged
to the Separate Account without regard to other
income, gains or losses of Aetna. Aetna owns
the assets held in the Separate Account and is
not a trustee as to such amounts. This Separate
Account generally is not guaranteed and is held
at market value. The assets of the Separate
Account, to the extent of reserves and other
contract liabilities of the Account, shall not
be charged with other Aetna liabilities.
1.30 Surrender Value: The amount payable by Aetna upon the surrender
of any portion of an Account.
1.31 Transfers: The movement of invested amounts among the
available Fund(s) and the MG Account under this
Contract during the Accumulation Period.
1.32 Valuation Period The period of time for which a Fund determines
(Period): its net asset value, usually from 4:15 p.m.
Eastern time each day the New York Stock
Exchange is open until 4:15 p.m. the next such
day, or such other day that one or more of the
Funds determines its net asset value.
12
<PAGE>
1.33 Variable Annuity: An Annuity with payments that vary with the
net investment results of one or more Funds
under the Separate Account.
II. GENERAL PROVISIONS
- --------------------------------------------------------------------------------
2.01 Change of Contract: Only an authorized officer of Aetna may change
the terms of the Contract. Aetna will notify
the Contract Holder in writing at least 30 days
before the effective date of any change. Any
change will not affect the amount or terms of
any Annuity which begins before the change.
Aetna reserves the right to refuse to accept
any Purchase Payment at any time for any
reason. No advance notice will be given to the
Contract Holder or Certificate Holder.
Aetna may make any change that affects the MG
Account Market Value Adjustment (3.06) with at
least 30 days advance written notice to the
Contract Holder and the Certificate Holder. Any
such change shall become effective for any new
Term and will apply to all present and future
Accounts.
Aetna reserves the right to change the terms of
the distribution options (3.11) for future
elections and discontinue the availability of
these options after proper notification.
Any change that affects any of the following
under the Contract will not apply to Accounts
in existence before the effective date of the
change:
(a) Net Purchase Payment (1.25)
(b) MG Account Guaranteed Rate (1.16)
(c) Net Return Factor(s) -- Separate
Account (3.04)
(d) Current Value (1.11)
(e) Surrender Value (1.30)
(f) Fund(s) Annuity Unit Value -- Separate
Account (4.05)
(g) Annuity options (4.09)
(h) Fixed Annuity Interest Rates (4.01)
(i) Transfers (1.31).
Any change that affects the Annuity options and
the tables for the options may be made:
(a) No earlier than 12 months after the
effective date of the Contract; and
(b) No earlier than 12 months after the
effective date of any prior change.
13
<PAGE>
2.01 Change of Contract Any Account established on or after the
(Cont'd): effective date of any change will be subject to
the change. If the Contract Holder does not
agree to any change under this provision, no
new Accounts may be established under the
Contract. The Contract may also be changed as
deemed necessary by Aetna to comply with
federal or state law.
2.02 Change of Fund(s): Aetna, or the Separate Account, may:
(a) Change the Fund(s) which may be invested in
by the Separate Account; and
(b) Replace the shares of any Fund(s) held in
the Separate Account with shares of any
other Fund(s).
Changes must be:
(a) Approved by a majority vote in the
Separate Account with respect to the
Fund(s) whose shares are to be replaced;
or
(b) Deemed necessary by Aetna under the
Investment Company Act of 1940; or
(c) Deemed necessary by Aetna to accomplish
the purpose of the Separate Account.
Aetna will notify the Contract Holder and the
Certificate Holder of any change.
2.03 Nonparticipating The Contract Holder, Certificate Holders, or
Contract: Beneficiaries will not have a right to share
in the earnings of Aetna.
2.04 Payments and While the Certificate Holder is living, Aetna
Elections: will pay the Certificate Holder any Annuity
payments as and when due. After the Certificate
Holder's death, any Annuity payments required
to be made will be paid in accordance with
4.05. Aetna will determine other payments and
or elections as of the end of the Valuation
Period in which the request is received at its
Home Office. Such payments will be made within
7 calendar days of receipt at its Home Office
of a written claim for payment which is in good
order, except as provided in 3.17.
2.05 State Laws: The Contract and the certificates comply with
the laws of the state in which they are
delivered. Any surrender, death, or Annuity
payments are equal to or greater than the
minimum required by such laws. Annuity tables
for legal reserve valuation shall be as
required by state law. Such tables may be
different from Annuity tables used to determine
Annuity payments.
2.06 Control of Contract: The Contract is between the Contract Holder and
Aetna. The Contract Holder has title to the
Contract. Contract Holder rights are limited to
accepting or rejecting Contract modifications.
14
<PAGE>
2.06 Control of Contract Each Certificate Holder has a nonforfeitable
(Cont'd): right to all amounts held in his or her
Account. Each Certificate Holder may make any
choices allowed by this Certificate for his or
her Account. Choices made under this
Certificate must be in writing. Until receipt
of such choices at Aetna's Home Office, Aetna
may rely on any previous choices made.
The Contract is not subject to the claims of
any creditors of the Contract Holder or the
Certificate Holder except to the extent
permitted by law.
The Account may not be attached, alienated, or
subject to the claims of any creditors of the
Certificate Holder except to the extent
permitted by law. The Account is
nontransferable by the Certificate Holder. The
Certificate Holder may not assign, transfer,
pledge or use as collateral his or her rights
under the Contract.
2.07 Designation of Each Certificate Holder shall name his or her
Beneficiary: Beneficiary. The Beneficiary may be changed at
any time. Changes to a Beneficiary must be
submitted to Aetna's Home Office in writing and
will not be effective until accepted by Aetna.
2.08 Misstatements and If Aetna finds the age of any Annuitant to be
Adjustments: misstated, the correct facts will be used to
adjust payments.
2.09 Incontestability: Aetna cannot cancel the Contract because of any
error of fact on the application. Aetna cannot
cancel an Account because of any error of fact
on the enrollment form.
2.10 Grace Period: The Contract and the Account evidenced by this
certificate will remain in effect except as
provided in the Payment of Adjusted Current
Value provision (see 3.19).
III. PURCHASE PAYMENT, CURRENT VALUE, AND SURRENDER PROVISIONS
- --------------------------------------------------------------------------------
3.01 Net Purchase This amount is the actual Purchase Payment less
Payment: any premium tax. Aetna will generally deduct
the premium tax when Annuity benefits are
elected (see Part IV). If Aetna determines that
under applicable state law, it must pay a
premium tax when the Purchase Payment is
received or at any other time, it will deduct
the tax at that time.
The Net Purchase Payment will be credited
among:
(a) The current Deposit Period(s) for
Guaranteed Terms under the MG Account; and
(b) The Fund(s) in which the Separate Account
invests.
15
<PAGE>
3.01 Net Purchase The Certificate Holder shall tell Aetna the
Payment (Cont'd): allocation percentage to be applied to the
current Deposit Period for each of the
available Guaranteed Terms in the MG Account
and or each Fund.
3.02 Certificate Holder's Aetna will maintain an Account for each
Account: Certificate Holder.
Aetna will declare from time to time the
acceptability and the minimum amount for a
Purchase Payment.
3.03 Fund(s) Record The portion of the Net Purchase Payment applied
Units -- Separate to each Fund under the Separate Account will
Account: determine the number of Fund record units for
that Fund. This number is equal to the portion
of the Net Purchase Payment applied to each
Fund divided by the Fund record unit value (see
3.05) for the Valuation Period in which the
Purchase Payment is received in good order at
Aetna's Home Office.
3.04 Net Return Factor(s) The net return factor(s) are used to compute
-- Separate Account: all Separate Account record units for any Fund.
The net return factor(s) for each Fund is equal
to 1.0000000 plus the net return rate.
The net return rate is equal to:
(a) The value of the shares of the Fund held by
the Separate Account at the end of the
Valuation Period; minus
(b) The value of the shares of the Fund held by
the Separate Account at the start of the
Valuation Period; plus or minus
(c) Taxes (or reserves for taxes) on the
Separate Account (if any); divided by
(d) The total value of the Fund(s) record units
and Fund(s) Annuity units of the Separate
Account at the start of the Valuation
Period; minus
(e) A daily Separate Account charge at an
annual rate as shown on Contract Schedule I
for mortality and expense risks, which may
include profit; and a daily administrative
charge.
A net return rate may be more or less than 0%.
The value of a share of the Fund is equal to
the net assets of the Fund divided by the
number of shares outstanding.
3.05 Fund Record Unit A Fund record unit value is computed by
Value -- Separate multiplying the Net Return Factors for the
Account: current Valuation Period by the Fund record
unit value for the previous Period. The dollar
value of a Fund record units, Separate Account
assets, and Variable Annuity payments may go up
or down due to investment gain or loss.
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<PAGE>
3.06 Market Value There will be an MVA for a withdrawal from the
Adjustment: MG Account before the end of a Guaranteed Term
when the withdrawal is due to:
(a) A Transfer; except as specified in MG
Account Matured Term Value Transfer;
(b) A full or partial surrender, including a
10% free withdrawal under 3.16; or
(c) An election of Annuity option 2 (see 4.09).
Full and partial surrenders and Transfers made
within six months after the date of the
Annuitant's death will be the greater of:
(a) The aggregate MVA amount which is the sum
of all market value adjusted amounts
calculated due to a withdrawal of amounts.
This total may be greater or less than the
Current Value of those amounts; or
(b) The applicable portion of the Current Value
in the MG Account.
After the six-month period, the surrender or
Transfer will be the aggregate MVA amount,
which may be greater or less than the Current
Value of those amounts.
The greater of the aggregate MVA amount or the
applicable portion of the Current Value applies
to amounts withdrawn from the MG Account on
account of an election of Annuity Options 3 or
4 (see 4.09).
Market value adjusted amounts will be equal to
the amount withdrawn multiplied by the
following ratio:
x
---
365
(1 + i)
-------------
x
---
365
(1 + j)
Where:
i is the Deposit Period Yield
j is the Current Yield
x is the number of days remaining (computed
from Wednesday of the week of withdrawal) in
the Guaranteed Term.
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<PAGE>
3.06 Market Value The Deposit Period Yield will be determined as
Adjustment follows:
(Cont'd):
(a) At the close of the last business day of
each week of the Deposit Period, a yield
will be computed as the average of the
yields on that day of U.S. Treasury Notes
which mature in the last three months of
the Guaranteed Term.
(b) The Deposit Period Yield is the average of
those yields for the Deposit Period. If
withdrawal is made before the close of the
Deposit Period, it is the average of those
yields on each week preceding withdrawal.
The Current Yield is the average of the yields
on the last business day of the week preceding
withdrawals on the same U.S. Treasury Notes
included in the Deposit Period Yield.
In the event that no U.S. Treasury Notes which
mature in the last three months of the
Guaranteed Term exist, Aetna reserves the right
to use the U.S. Treasury Notes that mature in
the following quarter.
3.07 Transfer of Current Before an Annuity option is elected, all or any
Value from the portion of the Adjusted Current Value of the
Funds or MG Certificate Holder's Account may be transferred
Account: from any Fund or Guaranteed Term of the MG
Account:
(a) To any other Fund; or
(b) To any Guaranteed Term of the MG Account
available in the current Deposit Period.
Transfer requests can be submitted as a
percentage or as a dollar amount. Aetna may
establish a minimum transfer amount. Within a
Guaranteed Term Group, the amount to be
surrendered or transferred will be withdrawn
first from the oldest Deposit Period, then from
the next oldest, and so on until the amount
requested is satisfied.
The Certificate Holder may make an unlimited
number of Transfers during the Accumulation
Period. The number of free Transfers allowed by
Aetna is shown on Contract Schedule I.
Additional Transfers may be subject to a
Transfer fee as shown on Contract Schedule I.
Transfers from the MG Account of a Matured Term
Value on or within one calendar month of a
Term's Maturity Date do not count against the
annual Transfer limit.
Amounts applied to Guaranteed Terms of the MG
Account may not be transferred to the Funds or
to another Guaranteed Term during the Deposit
Period or for 90 days after the close of the
Deposit Period except for Matured Term Value(s)
during the calendar month following the Term's
Maturity Date.
18
<PAGE>
3.07 Transfer of Current Transfers from Guaranteed Terms of the MG
Value from the Account are subject to the MVA provisions of
Funds or MG 3.06.
Account (Cont'd):
3.08 Reports: Aetna, as issuer of the Contract, will make any
reports required of it by federal law. Aetna
will furnish annual calendar year reports
concerning the status of the annuity.
3.09 Notice to the The Certificate Holder will receive quarterly
Certificate Holder: statements from Aetna of:
(a) The value of any amounts held in:
(1) The MG Account; and
(2) The Fund(s) under the Separate Account.
(b) The number of any Fund(s) record units; and
(c) The Fund(s) record unit value.
Such number or values will be as of a specific
date no more than 60 days before the date of
the notice.
3.10 Loans: Loans are not available under the Contract.
3.11 Distribution The following distribution options may be
Options: elected by the Certificate Holder during the
Accumulation Period.
(a) Estate Conservation Option (ECO) - A
distribution option under which a portion
of the Account's Current Value will
automatically be surrendered and
distributed each year. ECO payments will be
calculated based on the Account's full
Current Value. The distributed amount will
be withdrawn pro rata from each investment
option used under the Account. A Surrender
Fee will not be deducted from any portion
of the Adjusted Current Value which is paid
as a distribution under ECO. Certificate
Holders should consult their tax adviser
prior to requesting this distribution
option. Aetna will not be responsible for
any adverse tax consequences due to
receiving ECO payments.
(1) Amount of Distribution: Each year that
ECO is in effect, Aetna will calculate
and distribute an amount equal to the
minimum required distribution under the
Code. The annual distribution will be
determined by dividing the Current
Value as of December 31 of the year
prior to the payment year, by a life
expectancy factor.
19
<PAGE>
3.11 Distribution Options The Certificate Holder, or spouse
(Cont'd.): Beneficiary if ECO is elected after the
Certificate Holder's death, shall elect
either single life expectancy or joint
life expectancy. Life expectancy is
computed by use of the expected return
multiples in Tables V and VI of section
1.72-9 of the Income Tax Regulations.
Joint life expectancy can only be
elected based on the joint life
expectancy of the Certificate Holder
and his or her Beneficiary. If the
Certificate Holder makes any changes in
the Beneficiary designation under the
Certificate, ECO distributions after
the change will be recalculated as
required by IRS regulations.
Life expectancies shall be recalculated
annually. If the joint life expectancy
is elected with a non-spouse
Beneficiary, the life expectancy of the
non-spouse Beneficiary may not be
recalculated. Instead, the life
expectancy will be calculated using the
attained age of the Beneficiary during
the calendar year in which the
Certificate Holder attains age 70-1/2,
and payments for subsequent years shall
be recalculated based on such life
expectancy reduced by one for each
calendar year which has elapsed since
the calendar year life expectancy was
first calculated.
If joint life expectancy is elected
with a spouse Beneficiary, at the death
of either, the payments can continue
and will be calculated based solely on
the survivor's life expectancy. If
joint life expectancy is elected with a
non-spouse Beneficiary and the
non-spouse Beneficiary dies first,
payments will continue based on the
joint life expectancy.
If a single life expectancy is elected
and the Certificate Holder dies, or if
a joint life expectancy is elected and
the survivor dies, the death benefits
determined under Section 3.12 will be
paid to the Beneficiary in a lump sum
not later than December 31 following
the year of death.
(2) Minimum Initial Current Value: At its
discretion, Aetna may require a minimum
initial Account Current Value for
election of this option. If after
election of this option, the Current
Value is insufficient to make a
scheduled ECO payment, Aetna will
distribute the entire Account balance.
20
<PAGE>
3.11 Distribution Options (3) Date of Distribution: Distribution will
(Cont'd.): be made annually on the 15th of any
month or such other date Aetna may
designate or allow. The Certificate
Holder shall specify an initial
distribution month, not earlier than
the calendar year in which the
Certificate Holder attains age 70-1/2,
or such later time when distributions
must commence as specified under the
Code, whichever is appropriate. For a
spouse Beneficiary, the earliest date
is the date of the Certificate Holder's
death.
(4) Election and Revocation: ECO may be
elected by the Certificate Holder, or
spouse Beneficiary if elected after the
Certificate Holder's death, by
submitting a written request to Aetna
at its Home Office.
Once elected, this option may be
revoked by the Certificate Holder by
submitting a written request to Aetna
at its Home Office. Any revocation will
apply only to amounts not yet paid. The
Certificate Holder assumes
responsibility for compliance with
minimum distribution rules under the
Code. ECO may be elected only once by
the Certificate Holder or by a spouse
Beneficiary.
(b) Systematic Withdrawal Option (SWO): A
distribution option under which a portion
of the Account's Current Value will
automatically be surrendered and
distributed each year. SWO payments will be
calculated based on the Account's full
Current Value. The distributed amount will
be withdrawn pro rata from each investment
option used under the Contract. A Surrender
Fee will not be deducted from any portion
of the Adjusted Current Value which is paid
as a distribution under SWO. Certificate
Holders should consult their tax adviser
prior to requesting this distribution
option. Aetna will not be responsible for
any adverse tax consequences due to
receiving SWO payments.
(1) Amount of Distribution: The Certificate
Holder may elect one of the three
payment methods described below.
(i) Specified Payment: Payments of a
designated dollar amount. The
annual amount may not be greater
than the percentage of the
Current Value at time of election
as shown on Contract Schedule I.
This annual dollar amount shall
remain constant. At its
discretion, Aetna may require a
minimum initial payment amount;
21
<PAGE>
3.11 Distribution Options (ii) Specified Period: Payments made
Cont'd.): over a period of time of at least
10 years. The maximum specified
period shall be determined under
the Code minimum distribution
rules. The annual amount paid
each year is calculated by
dividing the Account Current
Value as of December 31 of the
prior year by the number of
payment years remaining; or
(iii) Specified Percentage: Payment of
a designated percentage which
cannot be greater than the
percentage of the Current Value
at the time of election as shown
on Contract Schedule I. The
percentage may be changed by
written request. Aetna reserves
the right to limit the number of
times the percentage may be
changed. The annual amount is
calculated by multiplying the
Current Value as of December 31
of the year prior to the payment
year by the designated
percentage.
Payments will be made until the
year the Certificate Holder
attains age 70-1/2 or, if elected
by the Beneficiary, the year the
Certificate Holder would have
attained age 70-1/2.
Under both the Specified Payment and
Specified Period payment methods, a
higher amount shall be paid in any year
if required under the Code minimum
distribution rules. For purposes of
this determination, life expectancy for
the initial distribution year shall be
calculated based on single life
expectancy Table V of section 1.72-9 of
the Income Tax Regulations. With each
subsequent year, the life expectancy
will be the life expectancy for the
previous year reduced by one.
Payments upon the Certificate Holder's
death will be made to the Beneficiary
in the manner described in 3.13.
(2) Minimum Initial Current Value: At its
discretion, Aetna may require a minimum
initial Current Value for election of
this option. If after election of this
option the Current Value is
insufficient to make a scheduled SWO
payment, Aetna will distribute the
entire Account balance.
22
<PAGE>
3.11 Distribution Options (3) Date of Distribution: The Certificate
(Cont'd.): Holder shall specify the initial
distribution date. The earliest date
for distribution is the first date on
which the Certificate Holder attains
age 59-1/2. As elected by the
Certificate Holder, SWO payments will
be made on a monthly, quarterly,
semi-annual or annual basis. If SWO
payments are made more frequently than
annually, the designated annual amount
is divided by the number of payments
due each year. Subsequent distributions
will be made on the 15th of any month
or such other date Aetna may designate
or allow.
(4) Election and Revocation: SWO may be
elected by the Certificate Holder, or
spouse Beneficiary if elected after the
Certificate Holder's death, by
submitting a completed and signed
election form to Aetna's Home Office.
Once elected, this option may be
revoked by the Certificate Holder or
spouse Beneficiary if elected after the
Certificate Holder's death, by
submitting a written request to Aetna
at its Home Office. Any revocation will
apply only to amounts not yet paid. SWO
may be elected only once by the
Certificate Holder or by the spouse
Beneficiary.
3.12 Death Benefit If the Certificate Holder/Annuitant dies before
Amount: Annuity payments start, the Beneficiary is
entitled to a death benefit under the Account.
The claim date is the date when proof of death
and the beneficiary's claim are received in
good order at Aetna's Home Office. The amount
of the death benefit is determined as follows:
(a) Death of Certificate Holder/Annuitant less
than 75 years of age: The guaranteed death
benefit is the greatest of:
(1) The Net Purchase Payment made to the
Account minus the sum of all amounts
surrendered, applied to an Annuity, or
deducted from the Account;
(2) The step up value as of the date of
death minus the total of all partial
surrenders, amounts applied to an
Annuity and deductions made from the
Account since determination of the step
up value. The step up value is the
Current Value on the most recent
seventh year anniversary of the date
the Net Purchase Payment is applied to
the Account:
(3) The Account's Current Value as of the
date of death.
23
<PAGE>
3.12 Death Benefit The excess, if any, of the guaranteed death
Amount (Cont'd): benefit value over the Account's Current
Value is determined as of the date of
death. Any excess amount will be deposited
to the Account and allocated to Aetna
Variable Encore Fund as of the claim date.
The Current Value on the claim date plus
any excess amount deposited becomes the
Account's Current Value.
(b) Death 75 or the A date. of Certificate
Holder/Annuitant age greater: The death
benefit amount is ccount Current Value on
the claim
3.13 Death Benefit Prior to any election, or until amounts must be
Options available to otherwise distributed under this section, the
Beneficiary: Current Value of the Account will be retained
in the Account. The Beneficiary has the right
under the Account to allocate or reallocate any
amount to any of the available investment
options (subject to an MVA, as applicable). The
following options are available to the
beneficiary:
(a) If the Beneficiary is the Certificate
Holder's surviving spouse, the surviving
spouse may exercise all rights under the
Contract and continue in the Accumulation
Period, or may elect (1), (2), or (3)
below. Under the Code, distributions from
the Account are not required until December
31st of the year in which the original
Certificate Holder would have attained age
70-1/2. The Beneficiary may elect to:
(1) Apply some or all of the Adjusted
Current Value of the Account to Annuity
option 2, 3 or 4 (see 4.09); or
(2) Apply some or all of the Adjusted
Current Value of the Account to Annuity
option 1 (see 4.09); or
(3) Receive, at any time, a lump sum
payment equal to the Adjusted Current
Value of the Account.
If ECO is in effect on the Certificate
Holder's date of death, the surviving
spouse can elect to continue receiving ECO
payments if a joint life expectancy was
chosen. Otherwise, the surviving spouse
must receive a lump sum payment equal to
the Adjusted Current Value.
If SWO is in effect and the Certificate
Holder dies before the required beginning
date for minimum distributions (see 3.14).
SWO payments will cease and the surviving
spouse may claim the death benefit in
accordance with the terms of this section.
24
<PAGE>
3.13 Death Benefit If SWO is in effect and the Certificate
Options available to Holder dies after the required beginning
Beneficiary date for minimum distributions, the
(Cont'd.): surviving spouse can elect to continue to
receive the SWO payments. Otherwise, the
surviving spouse must elect to receive a
lump sum payment equal to the Adjusted
Current Value.
(b) If the Beneficiary is other than the
Certificate Holder's surviving spouse, then
options (1), (2), or (3) under (a) above
apply. Any portion of the Adjusted Current
Value of the Account that is not applied to
Annuity option 2, 3 or 4 by December 31st
of the year following the year of the
Certificate Holder's death must be
distributed by December 31st of the year
containing the fifth anniversary of the
Certificate Holder's date of death.
If ECO or SWO is in effect on the
Certificate Holder's date of death, the
Beneficiary must receive an automatic and
immediate lump sum payment equal to the
Adjusted Current Value.
(c) If no Beneficiary exists, a lump sum
payment equal to the Adjusted Current Value
will be made to the Certificate Holder's
estate.
3.14 Required (a) Certificate Holder: The entire interest of
Distribution to the Certificate Holder will be distributed
Certificate Holder/ or begin to be distributed no later than
Beneficiary: April 1 following the calendar year in
which the Certificate Holder attains age
70-1/2 (required beginning date), over (a)
the life of the Certificate Holder, or the
lives of the Certificate Holder and his or
her designated Beneficiary, or (b) a period
certain not extending beyond the life
expectancy of the Certificate Holder, or
the joint and last survivor expectancy of
the Certificate Holder and his or her
designated Beneficiary. Payments must be
made in periodic payments at intervals no
longer than one year. In addition, payments
must be either nonincreasing or they may
increase only as provided in Q&A F-3 of
section 1.401(a)(9)-1 of the Proposed
Income Tax Regulations.
All distributions made hereunder shall be
made in accordance with the requirements of
section 401(a)(9) of the Code, and the
regulations thereunder, including the
minimum distribution incidental benefit
requirement of section 1.401(a)(9)-2 of the
Proposed Income Tax Regulations.
Distribution may be an Annuity as set forth
in Sections 4.01 through 4.04. payments
under ECO or SWO as defined in Section
3.11. or a lump sum payment.
(b) Beneficiary: If the Certificate Holder dies
after distribution of his or her interest
has begun, the remaining portion of such
interest will continue to be distributed at
least as rapidly as under the method of
distribution being used prior to the
Certificate Holder's death.
25
<PAGE>
3.14 Required Distributions are considered to have begun
Distribution to if distributions are made on account of the
Certificate Holder/ Certificate Holder's reaching his or her
Beneficiary (Cont'd): required beginning date or if prior to the
required beginning date distributions
irrevocably commence to the Certificate
Holder over a period permitted and in an
Annuity from acceptable under section
1.401(a)(9) of the Income Tax Regulations.
3.15 Liquidation of All or any portion of the Account's Adjusted
Surrender Value: Current Value may be surrendered at any time.
Surrender requests can be submitted as a
percentage of the Account value or as a
specific dollar amount. The Net Purchase
Payment amount is withdrawn first, and then the
excess value, if any. Amounts are withdrawn on
a pro rata basis from the Fund(s) and or the
Guaranteed Term(s) Groups of the MG Account in
which the Current Value is invested. Within a
Guaranteed Term Group, the amount to be
surrendered or transferred will be withdrawn
first from the oldest Deposit Period, then from
the next oldest, and so on until the amount
requested is satisfied.
After deduction of the Maintenance Fee, if
applicable, the surrendered amounts shall be
reduced by a Surrender Fee, if applicable.
3.16 Surrender Fee: The Surrender Fee only applies to the Net
Purchase Payment portion surrendered and varies
according to the elapsed time since deposit
(see Contract Schedule I).
No Surrender Fee is deducted from any portion
of the Current Value which is paid:
(a) To a Beneficiary due to the Annuitant's
death before Annuity payments start;
(b) As a premium for an Annuity option 2, 3 or
4 under this certificate (see 4.09);
(c) As a distribution under the ECO or SWO
provision (see 3.11);
(d) At least 12 months after the date of the
Purchase Payment to the Account in an
amount equal to or less than 10% of the
Current Value. This applies to the first
surrender request, partial or full, in a
calendar year. The Current Value is
calculated as of the date the surrender
request is received in good order at
Aetna's Home Office. This waiver is not
available to the Certificate Holder while
SWO is in effect;
(e) For a full surrender of the Account where
the Current Value of the Account is $2,500
or less and no surrenders have been taken
from the Account within the prior 12
months;
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<PAGE>
3.16 Surrender Fee (f) By Aetna under 3.19; or
(Cont'd):
(g) If the Certificate Holder has spent at
least 45 consecutive days in a licensed
nursing care facility and each of the
following conditions are met:
(1) more than one calendar year has elapsed
since the date this certificate was
issued; and
(2) the surrender is requested within 3
years of admission to a licensed
nursing care facility.
This waiver does not apply if the
Certificate Holder was in a nursing care
facility at the time this certificate was
issued.
3.17 Payment of Under certain emergency conditions, Aetna may
Surrender Value: defer payment:
(a) For a period of up to 6 months (unless not
allowed by state law); or
(b) As provided by federal law.
3.18 Reinstatement: All or a portion of the proceeds of a full
surrender of an Account may be reinvested
within 30 days after the surrender. Any
Maintenance Fee and Surrender Fee charged at
the time of surrender on the amount reinvested
will be included in the reinstatement. Any
Market Value Adjustment(s) deducted from
surrenders will not be included in the
reinstatement.
Amounts will be reinstated among the MG Account
and the Funds in the Separate Account in the
same proportion as they were at the time of
surrender. Any amounts reinstated to the MG
Account will be credited to the available
Guaranteed Terms of the current Deposit Period
in the same proportion as they were at the time
of surrender. In the event that a Guaranteed
Term of the same duration is unavailable,
amounts will be reinvested in the next shortest
Guaranteed Term available in the current
Deposit Period. If no shorter Guaranteed Term
is available, the next longer Guaranteed Term
will be used. The number of Fund(s) record
units reinstated will be based on the record
unit value(s) next computed after receipt at
Aetna's Home Office of the reinstatement
request and the amount to be reinstated.
Any Maintenance Fee which falls due after the
surrender and before the reinvestment will be
deducted from the amount reinstated.
Any Account(s) surrendered because the Current
Value was less than $2,500 immediately
following any partial surrender may not be
reinstated (see 3.19).
Reinstatement of an Account is permitted only
once.
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<PAGE>
3.19 Payment of Adjusted Upon 90 days' written notice to the
Current Value: Certificate Holder, Aetna will terminate any
Value: Account if the Current Value becomes
less than $2,500 immediately following any
partial surrender. Aetna does not intend to
exercise this right in cases where an Account
Current Value is reduced to $2,500 or less
solely due to investment performance. A
Surrender Fee will not be deducted from the
Adjusted Current Value. This terminated
Adjusted Current Value of an Account may not be
reinstated.
IV. ANNUITY PROVISIONS
- --------------------------------------------------------------------------------
4.01 Choices to be Made: The Certificate Holder may tell Aetna to apply
any portion of the Adjusted Current Value
(minus any premium tax) for an Annuity under
option 2, 3, or 4 (see 4.09). The first Annuity
payment may not be earlier than one calendar
year after the Purchase Payment nor later than
the later of:
(a) The first day of the month following the
Annuitant's 85th birthday or
(b) The tenth anniversary of the last Purchase
Payment. In lieu of the election of an
Annuity, the Certificate Holder may tell
Aetna to make a lump sum payment.
When an Annuity option is chosen, Aetna must
also be told if payments are to be made other
than monthly and whether to pay:
(a) A Fixed Annuity using the General Account;
(b) A Variable Annuity using any of the Fund(s)
available under this Contract for Annuity
purposes; or
(c) A combination of (a) and (b).
If a Fixed Annuity is chosen, the Annuity
purchase rate for the option chosen reflects
the Minimum Guaranteed Interest Rate (see
Contract Schedule II), but may reflect higher
interest rates. If a Variable Annuity is
chosen, the initial Annuity payment for the
option chosen reflects the assumed annual
return rate elected. (see Contract Schedule
II).
4.02 Annuity Payments to In no event may any payments under an Annuity
Certificate Holder: option extend beyond:
(a) The life of the Certificate Holder;
(b) The lives of the Certificate Holder and
Beneficiary;
(c) Any certain period greater than the
Certificate Holder's life expectancy
according to regulations under Code Section
401(a)(9), determined as of the date
payments are to begin; or
(d) A period greater than the joint and last
survivor life expectancies of the
Certificate Holder and the Certificate
Holder's Beneficiary according to
regulations under Code Section 401(a)(9),
determined as of the date payments are to
begin.
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<PAGE>
4.03 Annuity Payments to In no event may payments to the Beneficiary
Beneficiary: under an Annuity option extend beyond:
(a) The life of the Beneficiary; or
(b) Any certain period greater than the
Beneficiary's life expectancy as determined
by regulations under Code Section
401(a)(9).
4.04 Terms of Annuity (a) When payments start, the age of the
Options: Annuitant plus the number of years for
which payments are guaranteed must not
exceed 95.
(b) An Annuity option may not be elected if the
first payment would be less than $50 or if
the total payments in a year would be less
than $250 (less if required by state law).
Aetna reserves the right to increase the
minimum first Annuity payment amount and
the annual minimum Annuity payment amount
based upon increases reflected in the
Consumer Price Index-Urban. (CPI-U) since
July 1, 1993.
(c) If a Fixed Annuity under option 2, 3 or 4
is chosen and a larger payment would result
from applying the Surrender Value to a
current Aetna single premium immediate
Annuity, Aetna will make the larger
payment.
(d) For purposes of calculating the guaranteed
first payment of a Variable Annuity or the
payments for a Fixed Annuity, the
Annuitant's and second Annuitant's adjusted
age will be used. The Annuitant's and
second Annuitant's adjusted age is his or
her age as of the birthday closest to the
Annuity commencement date reduced by one
year for Annuity commencement dates
occurring during the period of time from
July 1, 1993 through December 31, 1999. The
Annuitant's and second Annuitant's age will
be reduced by two years for Annuity
commencement dates occurring during the
period of time from January 1, 2000 through
December 31, 2009. The Annuitant's and
second Annuitant's age will be reduced by
one additional year for Annuity
commencement dates occurring in each
succeeding decade.
The Annuity rates for Options 3 and 4 are
based on mortality from 1983 Table a.
(e) Assumed Annual Net Return Rate is the
interest rate to determine the amount of
the first Annuity payment under a Variable
Annuity as shown on Contract Schedule II.
The Separate Account must earn this rate
plus enough to cover the mortality expense
risks charges (which may include profit)
and administrative charges if future
Variable Annuity Payments are to remain
level, (see Annuity return factor under
Variable Annuity Assumed Annual Net Return
Rate on Contract Schedule II).
29
<PAGE>
4.04 Terms of Annuity (f) Once elected, Annuity payments cannot be
Options (Cont'd): commuted to a lump sum except for Variable
Annuity payments under Option 2 (see 4.09)
The life expectancy of the Certificate
Holder or Certificate Holder and second
Annuitant shall be irrevocable upon the
election of an Annuity option.
4.05 Death of Annuitant/ (a) When the Annuitant dies under option 2 or
Beneficiary: 3, or both the Annuitant and second
Annuitant die under option 4(d), the
present value of any remaining guaranteed
payments will be paid in one sum to the
Beneficiary, or upon election by the
Beneficiary, any remaining payments will
continue to the Beneficiary. If option 4
has been elected and the Annuitant dies,
the remaining payments will continue to the
second Annuitant as successor payee.
(b) If there is no Beneficiary under option 2,
3 or 4, the present value of any remaining
payments will be paid in one sum to the
Certificate Holder's estate.
(c) If the Beneficiary designated under option
1 dies, the amount held plus accrued
interest will be paid in one sum to a
successor Beneficiary, if any, named by the
designated Beneficiary. If there is no
successor Beneficiary, the lump sum will be
paid to the designated Beneficiary's
estate.
(d) If the Beneficiary dies while receiving
Annuity payments, the present value of any
remaining guaranteed payments will be paid
in one sum to the successor Beneficiary, or
upon election by the successor Beneficiary,
any remaining payments will continue to the
successor Beneficiary. If no successor
Beneficiary has been designated, the
present value of any remaining guaranteed
payments will be paid in one sum to the
Beneficiary's estate.
(e) The present value will be determined as of
the Valuation Period in which proof of
death acceptable to Aetna and a request for
payment is received at Aetna's Home Office.
The interest rate used to determine the
first payment will be used to calculate the
present value.
4.06 Fund(s) Annuity The number of each Fund's Annuity units is
Units -- Separate based on the amount of the first Variable
Account: Annuity payment which is equal to:
(a) The portion of the Current Value applied to
pay a Variable Annuity (minus any premium
tax); divided by
(b) 1,000; multiplied by
(c) The payment rate for the option chosen.
30
<PAGE>
4.06 Fund(s) Annuity Such amount, or portion of the Variable payment
Units -- Separate will be divided by the appropriate Fund Annuity
Account (Cont'd): unit value (see 4.07) of the tenth Valuation
Period before the due date of the first payment
to determine the number of each Fund Annuity
units. The number of each Fund Annuity units
remains fixed. Each future payment is equal to
the sum of the products of each Fund Annuity
unit value multiplied by the appropriate number
of units. The Fund Annuity unit value on the
tenth Valuation Period prior to the due date of
the payment is used.
4.07 Fund(s) Annuity For any Valuation Period, a Fund Annuity unit
Unit Value -- value is equal to:
Separate Account:
(a) The Value for the previous Period;
multiplied by
(b) The Annuity net return factor(s) (see 4.08
below) for the Period; multiplied by
(c) A factor to reflect the assumed annual net
return rate (see Contract Schedule II).
The dollar value of a Fund(s) Annuity unit
values and Annuity payments may go up or down
due to investment gain or loss.
4.08 Annuity Net Return The Annuity net return factor(s) are used to
Factor(s) -- Separate compute all Separate Account Annuity Payments
Account: for any Fund.
The Annuity net return factor(s) for each Fund
is equal to 1.0000000 plus the net return rate.
The net return rate is equal to:
(a) The value of the shares of the Fund held by
the Separate Account at the end of a
Valuation Period; minus
(b) The value of the shares of the Fund held by
the Separate Account at the start of the
Valuation Period; plus or minus
(c) Taxes (or reserves for taxes) on the
Separate Account (if any); divided by
(d) The total value of the Fund(s) record units
and Fund(s) Annuity units of the Separate
Account at the start of the Valuation
Period; minus
(e) A daily charge for Annuity mortality and
expense risks, which may include profit,
and a daily administrative charge (at the
annual rate as shown on Contract
Schedule II).
A net return rate may be more of less than 0%.
The value of a share of the Fund is equal to
the net assets of the Fund divided by the
number of shares outstanding.
Payments shall not be changed due to changes in
the mortality or expense results or
administrative charges.
31
<PAGE>
4.09 Annuity Options: Option 1 -- Payment of Interest on Sum Left
with Aetna -- This option may be used only by
the Beneficiary when the Certificate Holder
dies before Aetna has started paying an
Annuity. A portion or all of the sum paid upon
death may be held under this option and will be
held in the General Account of Aetna at
interest (see 4.01). The Beneficiary may later
tell Aetna to:
(a) Pay a portion or all of the sum held by
Aetna;
(b) Apply a portion or all of the sum held by
Aetna to any Annuity option below.
If a nonspouse Beneficiary elects that some or
all of the Account is to be held under this
option, the Beneficiary must tell Aetna to pay
the full sum held under this option by December
31st of the year containing the fifth
anniversary of the Certificate Holder's date of
death.
Option 2 -- Payments for a Stated Period of
Time -- An Annuity will be paid for the number
of years chosen. The number of years must be at
least 5 and not more than 30.
If payments for this option are made under a
Variable Annuity, the present value of any
remaining payments may be withdrawn at any
time. If a withdrawal is requested within 3
years after the start of payments, it will be
treated as a surrender and any applicable
Surrender Fee will be applied (see 3.16).
Option 3 -- Life Income -- An Annuity will be
paid for the life of the Annuitant. If also
chosen, Aetna will guarantee payments for 60,
120, 180, or 240 months.
Option 4 -- Life Income Based upon the Lives of
Two Annuitants -- An Annuity will be paid
during the lives of the Annuitant and a second
Annuitant. Payments will continue until both
Annuitants have died. When this option is
chosen, a choice must be made of:
(a) 100% of the payment to continue after the
first death;
(b) 66-2/3% of the payment to continue after
the first death;
(c) 50% of the payment to continue after the
first death;
(d) Payments for a minimum of 120 months with
100% of the payment to continue after the
first death; or
(e) 100% of the payment to continue at the
death of the second Annuitant to the
survivor if the survivor is the Annuitant
and 50% of the payment to continue at the
death of the Annuitant.
Other Options -- Aetna may make other options
available as allowed by the laws of the state
in which the Contract and this certificate is
delivered.
32
<PAGE>
OPTION 2
Payments for a Stated Period of Time
Amount of First Monthly Payment for Each $1,000
After Deduction of any Charge for Premium Taxes
Rates for a Fixed Annuity with Guaranteed Interest Rate of 3.0%
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Guaranteed Monthly Quarterly Semi-Annual Annual
Years Rate Payment Payment Payment Payment
<S> <C> <C> <C> <C> <C>
3 3.00% $ 28.99 $ 86.76 $ 172.88 $ 343.23
4 3.00% 22.06 66.02 131.56 261.19
5 3.00% 17.91 53.59 106.78 211.99
6 3.00% 15.14 45.30 90.27 179.22
7 3.00% 13.16 39.39 78.49 155.83
8 3.00% 11.68 34.96 69.66 138.31
9 3.00% 10.53 31.52 62.81 124.69
10 3.00% 9.61 28.77 57.33 113.82
11 3.00% 8.86 26.52 52.85 104.93
12 3.00% 8.24 24.65 49.13 97.54
13 3.00% 7.71 23.08 45.98 91.29
14 3.00% 7.26 21.73 43.29 85.95
15 3.00% 6.87 20.56 40.96 81.33
16 3.00% 6.53 19.54 38.93 77.29
17 3.00% 6.23 18.64 37.14 73.74
18 3.00% 5.96 17.84 35.56 70.59
19 3.00% 5.73 17.13 34.14 67.78
20 3.00% 5.51 16.50 32.87 65.26
21 3.00% 5.32 15.92 31.72 62.98
22 3.00% 5.15 15.40 30.68 60.92
23 3.00% 4.99 14.92 29.74 59.04
24 3.00% 4.84 14.49 28.88 57.33
25 3.00% 4.71 14.09 28.08 55.76
26 3.00% 4.59 13.73 27.36 54.31
27 3.00% 4.47 13.39 26.68 52.97
28 3.00% 4.37 13.08 26.06 51.74
29 3.00% 4.27 12.79 25.49 50.60
30 3.00% 4.18 12.52 24.95 49.53
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
OPTION 3
Life Income
Amount of First Monthly Payment for Each $1,000
After Deduction of any Charge for Premium Taxes
Rates for a Fixed Annuity with Guaranteed Interest Rate of 3.0%
Payments Guaranteed for a Stated Period of Months
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Adjusted
Age of
Annuitant None 60 120 180 240
- --------------------- ------------------ ------------------ ------------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
50 $4.05 $4.05 $ 4.03 $3.99 $ 3.93
51 4.12 4.11 4.09 4.05 3.99
52 4.19 4.19 4.16 4.11 4.04
53 4.27 4.26 4.23 4.18 4.10
54 4.35 4.34 4.31 4.25 4.16
55 4.44 4.42 4.39 4.32 4.22
56 4.53 4.51 4.47 4.40 4.29
57 4.62 4.61 4.56 4.48 4.35
58 4.72 4.71 4.65 4.56 4.42
59 4.83 4.81 4.75 4.64 4.49
60 4.95 4.93 4.86 4.73 4.55
61 5.07 5.05 4.97 4.83 4.62
62 5.20 5.17 5.08 4.92 4.69
63 5.34 5.31 5.20 5.02 4.76
64 5.49 5.45 5.33 5.12 4.83
65 5.65 5.61 5.47 5.22 4.89
66 5.82 5.77 5.61 5.33 4.96
67 6.01 5.94 5.75 5.44 5.02
68 6.20 6.13 5.91 5.54 5.08
69 6.41 6.33 6.07 5.65 5.14
70 6.64 6.54 6.23 5.76 5.19
71 6.88 6.76 6.41 5.86 5.24
72 7.14 7.00 6.59 5.97 5.28
73 7.43 7.26 6.77 6.06 5.32
74 7.73 7.53 6.96 6.16 5.35
75 8.06 7.82 7.14 6.25 5.38
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Rates are based on mortality from 1983 Table a. The rates doe not differ by sex.
Rates for ages not shown will be provided on request and will be computed
on a basis consistent with the rates in the above tables.
34
<PAGE>
OPTION 4
Life Income for Two Payees
Amount of First Monthly Payment for Each $1,000
After Deduction of any Charge for Premium Taxes
Rates for a Fixed Annuity with Guaranteed Interest Rate of 3.0%
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Adjusted Ages
- -------------------------------------
Second
Annuitant Annuitant Option 4a Option 4b Option 4c Option 4d Option 4e
- ------------------- ----------------- ---------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
55 50 $ 3.69 $ 4.05 $ 4.27 $ 3.69 $ 4.03
55 55 3.88 4.25 4.47 3.87 4.14
55 60 3.99 4.44 4.71 3.98 4.42
60 55 3.99 4.44 4.71 3.98 4.42
60 60 4.24 4.71 4.99 4.23 4.57
60 65 4.38 4.97 5.32 4.38 4.93
65 60 4.38 4.97 5.32 4.38 4.93
65 65 4.72 5.33 5.70 4.71 5.14
65 70 4.93 5.68 6.15 4.91 5.66
70 65 4.93 5.68 6.15 4.91 5.66
70 70 5.40 6.21 6.70 5.36 5.96
70 75 5.69 6.68 7.32 5.62 6.67
75 70 5.69 6.68 7.32 5.62 6.67
75 75 6.37 7.45 8.15 6.23 7.12
75 80 6.78 8.11 8.99 6.54 8.13
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rates are based on mortality from 1983 Table a. The rates do not differ by sex.
Rates for ages not shown will be provided on request and will be computed
on a basis consistent with the rates in the above tables.
35
<PAGE>
OPTION 2
Payments for a Stated Period of Time
Amount of First Monthly Payment for Each $1,000
After Deduction of any Charge for Premium Taxes
Rates for a Variable Annuity with Assumed Net Return Rate of 3.5%
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Guaranteed Monthly Quarterly Semi-Annual Annual
Years Rate Payment Payment Payment Payment
<S> <C> <C> <C> <C> <C>
3 3.50% $ 29.19 $ 87.33 $ 173.91 $ 344.86
4 3.50% 22.27 66.61 132.65 263.04
5 3.50% 18.12 54.19 107.92 213.99
6 3.50% 15.35 45.92 91.44 181.32
7 3.50% 13.38 40.01 79.69 158.01
8 3.50% 11.90 35.59 70.88 140.56
9 3.50% 10.75 32.16 64.05 127.00
10 3.50% 9.83 29.42 58.59 116.18
11 3.50% 9.09 27.18 54.13 107.34
12 3.50% 8.46 25.32 50.42 99.98
13 3.50% 7.94 23.75 47.29 93.78
14 3.50% 7.49 22.40 44.62 88.47
15 3.50% 7.10 21.24 42.31 83.89
16 3.50% 6.76 20.23 40.29 79.89
17 3.50% 6.47 19.34 38.51 76.37
18 3.50% 6.20 18.55 36.94 73.25
19 3.50% 5.97 17.85 35.54 70.47
20 3.50% 5.75 17.22 34.28 67.98
21 3.50% 5.56 16.65 33.15 65.74
22 3.50% 5.39 16.13 32.13 63.70
23 3.50% 5.24 15.66 31.19 61.85
24 3.50% 5.09 15.24 30.34 60.17
25 3.50% 4.96 14.85 29.56 58.62
26 3.50% 4.84 14.49 28.85 57.20
27 3.50% 4.73 14.15 28.19 55.90
28 3.50% 4.63 13.85 27.58 54.69
29 3.50% 4.53 13.57 27.02 53.57
30 3.50% 4.45 13.30 26.49 52.53
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
OPTION 2
Payments for a Stated Period of Time
Amount of First Monthly Payment for Each $1,000
After Deduction of any Charge for Premium Taxes
Rates for a Variable Annuity with Assumed Net Return Rate of 5.0%
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Guaranteed Monthly Quarterly Semi-Annual Annual
Years Rate Payment Payment Payment Payment
<S> <C> <C> <C> <C> <C>
3 5.00% $ 29.80 $ 89.04 $ 176.99 $ 349.72
4 5.00% 22.89 68.38 135.93 268.58
5 5.00% 18.74 56.00 111.33 219.98
6 5.00% 15.99 47.77 94.96 187.64
7 5.00% 14.02 41.90 83.30 164.59
8 5.00% 12.56 37.52 74.58 147.35
9 5.00% 11.42 34.11 67.81 133.99
10 5.00% 10.51 31.40 62.42 123.34
11 5.00% 9.77 29.19 58.03 114.66
12 5.00% 9.16 27.36 54.38 107.45
13 5.00% 8.64 25.81 51.31 101.39
14 5.00% 8.20 24.50 48.69 96.21
15 5.00% 7.82 23.36 46.44 91.75
16 5.00% 7.49 22.37 44.47 87.88
17 5.00% 7.20 21.51 42.75 84.48
18 5.00% 6.94 20.74 41.23 81.47
19 5.00% 6.71 20.06 39.88 78.80
20 5.00% 6.51 19.46 38.68 76.42
21 5.00% 6.33 18.91 37.59 74.28
22 5.00% 6.17 18.42 36.62 72.35
23 5.00% 6.02 17.98 35.73 70.61
24 5.00% 5.88 17.57 34.93 69.02
25 5.00% 5.76 17.20 34.20 67.57
26 5.00% 5.65 16.87 33.53 66.25
27 5.00% 5.54 16.56 32.92 65.04
28 5.00% 5.45 16.28 32.35 63.93
29 5.00% 5.36 16.01 31.83 62.90
30 5.00% 5.28 15.77 31.35 61.95
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
OPTION 3
Life Income
Amount of First Monthly Payment for Each $1,000
After Deduction of any Charge for Premium Taxes
Rates for a Variable Annuity with Assumed Net Return Rate of 3.5%
Payments Guaranteed for a Stated Period of Months
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Adjusted Age of
Annuitant None 60 120 180 240
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
50 $ 4.34 $ 4.34 $ 4.31 $ 4.27 $ 4.22
51 4.41 4.40 4.38 4.33 4.27
52 4.48 4.47 4.45 4.40 4.32
53 4.56 4.55 4.52 4.46 4.38
54 4.64 4.63 4.59 4.53 4.44
55 4.72 4.71 4.67 4.60 4.50
56 4.81 4.80 4.75 4.67 4.56
57 4.91 4.89 4.84 4.75 4.62
58 5.01 4.99 4.93 4.83 4.69
59 5.12 5.10 5.03 4.92 4.75
60 5.23 5.21 5.13 5.00 4.82
61 5.36 5.33 5.24 5.09 4.88
62 5.49 5.45 5.35 5.19 4.95
63 5.63 5.59 5.47 5.28 5.02
64 5.78 5.73 5.60 5.38 5.08
65 5.94 5.89 5.73 5.48 5.15
66 6.11 6.05 5.87 5.58 5.21
67 6.29 6.22 6.02 5.69 5.27
68 6.49 6.41 6.17 5.79 5.33
69 6.70 6.60 6.33 5.90 5.38
70 6.92 6.81 6.49 6.00 5.43
71 7.17 7.04 6.66 6.10 5.48
72 7.43 7.27 6.84 6.20 5.52
73 7.71 7.53 7.02 6.30 5.55
74 8.02 7.80 7.20 6.39 5.59
75 8.35 8.08 7.38 6.48 5.62
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Rates are based on mortality from 1983 Table a. The rates do not differ by sex.
Rates for ages not shown will be provided on request and will be computed
on a basis consistent with the rates in the above tables.
38
<PAGE>
OPTION 3
Life Income
Amount of First Monthly Payment for Each $1,000
After Deduction of any Charge for Premium Taxes
Rates for a Variable Annuity with Assumed Net Return Rate of 5.0%
Payments Guaranteed for a Stated Period of Months
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Adjusted Age of
Annuitant None 60 120 180 240
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
50 $ 5.26 $ 5.25 $ 5.22 $ 5.17 $ 5.11
51 5.33 5.32 5.28 5.23 5.15
52 5.40 5.38 5.34 5.29 5.20
53 5.47 5.45 5.41 5.35 5.26
54 5.54 5.53 5.48 5.41 5.31
55 5.63 5.61 5.56 5.47 5.36
56 5.71 5.69 5.63 5.54 5.42
57 5.80 5.78 5.72 5.61 5.47
58 5.90 5.88 5.81 5.69 5.53
59 6.01 5.98 5.90 5.77 5.59
60 6.12 6.09 6.00 5.85 5.65
61 6.24 6.21 6.10 6.93 5.71
62 6.37 6.33 6.21 6.02 5.77
63 6.51 6.46 6.33 6.11 5.83
64 6.66 6.60 6.45 6.20 5.89
65 6.82 6.75 6.57 6.30 5.95
66 6.99 6.91 6.71 6.39 6.01
67 7.17 7.08 6.85 6.49 6.06
68 7.36 7.27 6.99 6.59 6.12
69 7.57 7.46 7.15 6.69 6.17
70 7.80 7.67 7.30 6.78 6.21
71 8.05 7.89 7.47 6.88 6.25
72 8.31 8.13 7.64 6.97 6.29
73 8.59 8.38 7.81 7.06 6.33
74 8.90 8.64 7.99 7.15 6.36
75 9.23 8.93 8.16 7.23 6.38
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Rates are based on mortality from 1983 Table a. The rates do not differ by sex.
Rates for ages not shown will be provided on request and will be computed
on a basis consistent with the rates in the above tables.
39
<PAGE>
OPTION 4
Life Income for Two Payees
Amount of First Monthly Payment for Each $1,000
After Deduction of any Charge for Premium Taxes
Rates for a Variable Annuity with Assumed Net Return Rate of 3.5%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Adjusted Ages
- -------------------------------------
Second
Annuitant Annuitant Option 4a Option 4b Option 4c Option 4d Option 4e
<S> <C> <C> <C> <C> <C> <C>
55 50 $ 3.97 $ 4.35 $ 4.56 $ 3.97 $ 4.31
55 55 4.16 4.54 4.76 4.15 4.42
55 60 4.27 4.73 5.00 4.26 4.48
60 55 4.27 4.73 5.00 4.26 4.70
60 60 4.51 4.99 5.27 4.50 4.84
60 65 4.66 5.25 5.61 4.65 4.93
65 60 4.66 5.25 5.61 4.65 5.22
65 65 4.99 5.61 5.99 4.98 5.42
65 70 5.19 5.97 6.44 5.17 5.54
70 65 5.19 5.97 6.44 5.17 5.93
70 70 5.67 6.49 6.99 5.62 6.23
70 75 5.95 6.96 7.61 5.87 6.40
75 70 5.95 6.96 7.61 5.87 6.95
75 75 6.64 7.73 8.43 6.48 7.40
75 80 7.04 8.39 9.29 6.79 7.64
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rates are based on mortality from 1983 Table a. The rates do not differ by sex.
Rates for ages not shown will be provided on request and will be computed
on a basis consistent with the rates in the above tables.
40
<PAGE>
OPTION 4
Life Income for Two Payees
Amount of First Monthly Payment for Each $1,000
After Deduction of any Charge for Premium Taxes
Rates for a Variable Annuity with Assumed Net Return Rate of 5.0%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Adjusted Ages
- -------------------------------------
Second
Annuitant Annuitant Option 4a Option 4b Option 4c Option 4d Option 4e
<S> <C> <C> <C> <C> <C> <C>
55 50 $ 4.88 $ 5.26 $5.48 $4.88 $5.23
55 55 5.04 5.44 5.66 5.04 5.32
55 60 5.15 5.63 5.91 5.14 5.38
60 55 5.15 5.63 5.91 5.14 5.59
60 60 5.37 5.87 6.16 5.37 5.72
60 65 5.52 6.14 6.51 5.51 5.80
65 60 5.52 6.14 6.51 5.51 6.10
65 65 5.83 6.49 6.87 5.82 6.29
65 70 6.04 6.84 7.34 6.00 6.41
70 65 6.04 6.84 7.34 6.00 6.81
70 70 6.49 7.35 7.87 6.44 7.08
70 75 6.77 7.84 8.51 6.68 7.25
75 70 6.77 7.84 8.51 6.58 7.81
75 75 7.45 8.60 9.33 7.27 8.25
75 80 7.86 9.28 10.20 7.57 8.49
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rates are based on mortality from 1983 Table a. The rates do not differ by sex.
Rates for ages not shown will be provided on request and will be computed
on a basis consistent with the rates in the above tables.
41
<PAGE>
----------------------------------------
Aetna Life Insurance and Annuity Company
Home Office: 151 Farmington Avenue
Hartford, Connecticut 06156
(800) 525-4225
Certificate of Group Annuity Coverage
----------------------------------------
ALL PAYMENTS AND VALUES PROVIDED BY THE GROUP CONTRACT, WHEN BASED ON INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO
FIXED DOLLAR AMOUNT. THIS CERTIFICATE CONTAINS A MARKET VALUE ADJUSTMENT
FORMULA. APPLICATION OF A MARKET VALUE ADJUSTMENT MAY RESULT IN EITHER AN
INCREASE OR DECREASE IN THE CURRENT VALUE. THE MARKET VALUE ADJUSTMENT FORMULA
DOES NOT APPLY TO A GUARANTEED TERM AT THE TIME OF ITS MATURITY.
GMCC-IC(IR)
[Aetna letterhead]
[Aetna logo]
151 Farmington Avenue
Hartford, CT 06156
Julie E. Rockmore
Counsel
Law Division, RE4A
April 9, 1999 Investments & Financial Services
(860) 273-4686
Fax: (860) 273-8340
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Aetna Life Insurance and Annuity Company and its Variable Annuity Account B
Post-Effective Amendment No. 37 to Registration Statement on Form N-4
Prospectus Title: Aetna Marathon Plus - Group and Individual Deferred
Variable Annuity Contracts
File Nos. 33-34370* and 811-2512
Dear Sir or Madam:
The undersigned serves as counsel to Aetna Life Insurance and Annuity Company, a
Connecticut life insurance company (the "Company"). It is my understanding that
the Company, as depositor, has registered an indefinite amount of securities
(the "Securities") under the Securities Act of 1933 (the "Securities Act") as
provided in Rule 24f-2 under the Investment Company Act of 1940 (the "Investment
Company Act").
In connection with this opinion, I or those for whom I have supervisory
responsibility, have reviewed the N-4 Registration Statement, as amended to the
date hereof, and this Post-Effective Amendment No. 37. I have also examined
originals or copies, certified or otherwise identified to my satisfaction, of
such documents, trust records and other instruments I have deemed necessary or
appropriate for the purpose of rendering this opinion. For purposes of such
examination, I have assumed the genuineness of all signatures on original
documents and the conformity to the original of all copies.
I am admitted to practice law in Connecticut, and do not purport to be an expert
on the laws of any other state. My opinion herein as to any other law is based
upon a limited inquiry thereof which I have deemed appropriate under the
circumstances.
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* Pursuant to Rule 429(a) under the Securities Act of 1933, Registrant has
included a combined prospectus under this Registration Statement which
includes all the information which would currently be required in a
prospectus relating to the following earlier Registration Statement:
33-87932.
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Based upon the foregoing, and, assuming the Securities are sold in accordance
with the provisions of the prospectus, I am of the opinion that the Securities
being registered will be legally issued and will represent binding obligations
of the Company.
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Julie E. Rockmore
Julie E. Rockmore
Consent of Independent Auditors
The Board of Directors of Aetna Life Insurance and Annuity Company and
Contractholders of Aetna Variable Annuity Account B:
We consent to the use of our reports dated February 3, 1999 and February 26,
1999 included in this Post-Effective Amendment No. 37 to Registration Statement
(File No. 33-34370) on Form N-4 and to the references to our firm under the
headings "Condensed Financial Information" in the prospectus and "Independent
Auditors" in the statement of additional information.
/s/ KPMG LLP
Hartford, Connecticut
April 9, 1999
