As filed with the Securities and Exchange Registration No. 333-72079
Commission on April 13, 1999 Registration No. 811-2512
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
- --------------------------------------------------------------------------------
Pre-Effective Amendment No. 1 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)
- --------------------------------------------------------------------------------
Approximate date of Proposed Public Offering: As soon as practicable after the
effectiveness of this Registration Statement.
It is proposed that this filing will become effective on May 3, 1999.
<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 Tables
4 Condensed Financial Information...................... Condensed Financial Information; Appendix II -
Condensed Financial Information
5 General Description of Registrant, Depositor, and
Portfolio Companies.................................. Other Topics - The Company, Variable Annuity
Account B; Investment Options - Fund Descriptions
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; The Income Phase
10 Purchases and Contract Value......................... Purchase and Rights; Your Account Value
11 Redemptions.......................................... Right to Cancel; Systematic Distribution Options
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM N-4 PART B (STATEMENT OF LOCATION - STATEMENT OF
ITEM NO. ADDITIONAL INFORMATION) 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 Contract
20 Underwriters......................................... Offering and Purchase of Contract
21 Calculation of Performance Data...................... Performance Data; Average Annual Total Return
Quotations
22 Annuity Payments..................................... Income Phase 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>
Contract Prospectus - May 3, 1999
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[Begin sidebar]
The Funds
o Federated American Leaders Fund II
o Federated Equity Income Fund II
o Federated Fund for U.S. Government Securities II
o Federated Growth Strategies Fund II
o Federated High Income Bond Fund II
o Federated International Equity Fund II
o Federated Prime Money Fund II
o Federated Utility Fund II
[End sidebar]
The Contract. The contract described in this prospectus is the group or
individual New York "Growth Plus" deferred variable annuity contract issued by
Aetna Life Insurance and Annuity Company (the Company, we, us). It is issued as
either a nonqualified deferred annuity or a qualified individual retirement
annuity (IRA) under Section 408(b) of the Internal Revenue Code of 1986 as
amended (Tax Code).
- --------------------------------------------------------------------------------
Why Reading this Prospectus Is Important. This prospectus contains facts about
the contract and its 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 contract described in this prospectus is designed to:
> Help you save for retirement while receiving beneficial tax treatment
> Offer a variety of investment options to help meet long-term financial goals
> Provide a death benefit to a beneficiary
> Provide payments for life or for a specified period
Investment Options. The contract offers variable investment options and a fixed
interest option. 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 subaccount will
vary depending upon the performance of its underlying mutual fund. You do not
invest directly in or hold shares of the funds.
The funds in which the subaccounts invest have various risks. For information
about risks of investing in the funds see "Investment Options" in this
prospectus and each fund prospectus. Read this prospectus in conjunction with
the fund prospectuses, and retain the prospectuses for future reference.
Fixed Interest Option. The ALIAC Guaranteed Account (Guaranteed Account) offers
certain guaranteed interest rates. Except as specifically mentioned, this
prospectus describes only the variable investment options. However, we describe
the Guaranteed Account in Appendix I of this prospectus. There is also a
separate Guaranteed Account prospectus.
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 41 of this prospectus. The SAI is
incorporated into this prospectus by reference.
Additional Disclosure Information. Neither the SEC, nor any state securities
commission, has approved or disapproved the securities offered through this
prospectus or passed on the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense. This prospectus is valid
only when accompanied by current prospectuses of the funds and the Guaranteed
Account. We do not intend for this prospectus to be an offer to sell or a
solicitation of an offer to buy these securities in any state that does not
permit their sale. We have not authorized anyone to provide you with information
that is different than that contained in this prospectus.
<PAGE>
Prospectus - May 3, 1999 (continued)
- --------------------------------------------------------------------------------
The contract is not a deposit with, obligation of or guaranteed or endorsed by
any bank, nor is it insured by the FDIC. The contract is 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 ......... 9
Investment Options ...................... 9
Transfers ............................... 12
Purchase and Rights ..................... 14
Right to Cancel ......................... 15
Fees .................................... 16
Your Account Value ...................... 20
Withdrawals ............................. 22
Systematic Distribution Options ......... 23
Death Benefit ........................... 24
The Income Phase ........................ 27
Taxation ................................ 30
Other Topics ............................ 36
</TABLE>
The Company -- Variable Annuity Account B -- Contract Distribution -- 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 ......... 41
Appendix I -- ALIAC Guaranteed Account ...................... 42
Appendix II -- Condensed Financial Information .............. 45
</TABLE>
3
<PAGE>
[Begin sidebar]
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.
[End sidebar]
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 or certificate within 10
days 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 affect 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 payments in one or more of the following:
(a) Fixed Interest Option
(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:
> Receive payments for a specified period of time or for life
> Receive payments monthly, quarterly, semi-annually or annually
> Select an option that provides for payments to beneficiaries
> Select fixed payments or payments that vary based on 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>
[Begin sidebar]
In This Section:
> Maximum Transaction Fees
> Maximum Fees Deducted from Investments in the Separate Account
> Fees Deducted by the Funds
> Examples of Fee Deductions
Also see the "Fees" section for:
> How, When and Why Fees are Deducted
> Reduction, Waiver and/or Elimination of Certain Fees
[End sidebar]
Fee Table
- --------------------------------------------------------------------------------
The tables and examples in this section show the fees that may affect your
account value during 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 payments withdrawn.)
Early Withdrawal Charge Schedule
<TABLE>
<S> <C>
Years from Receipt of Payment Early Withdrawal Charge
----------------------------- -----------------------
Fewer than 1 7%
1 or more but fewer than 2 6%
2 or more but fewer than 3 5%
3 or more but fewer than 4 4%
4 or more but fewer than 5 3%
5 of more but fewer than 6 2%
6 or more but fewer than 7 1%
7 or more 0%
</TABLE>
Annual Maintenance Fee................................................$30.00(1)
Transfer Charge........................................................$0.00(2)
Maximum Fees Deducted from Investments in the Separate Account
(Daily deductions equal to the given percentage on an annual basis.)
Mortality and Expense Risk Charge......................................1.25%
Administrative Expense Charge..........................................0.15%(3)
-----
Total Separate Account Expenses........................................1.40%
-----
-----
(1)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."
(2)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."
(3)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."
6
<PAGE>
Fees Deducted by the Funds
Using this information. The following table shows the investment advisory fees
and other expenses charged annually by each fund. Fund fees are one factor that
impacts the value of a fund share. To learn about additional factors impacting
the share value, refer to the fund prospectus.
How fees are deducted. 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>
Federated American Leaders Fund II(2) 0.75% 0.14% 0.89% 0.01% 0.88%
Federated Equity Income Fund II(2) 0.75% 0.61% 1.36% 0.43% 0.93%
Federated Fund for U.S. Government
Securities II(2) 0.60% 0.33% 0.93% 0.08% 0.85%
Federated Growth Strategies Fund II(2) 0.75% 0.42% 1.17% 0.31% 0.86%
Federated High Income Bond Fund II(2) 0.60% 0.18% 0.78% -- 0.78%
Federated International Equity Fund II(2) 1.00% 0.72% 1.72% 0.47% 1.25%
Federated Prime Money Fund II(2) 0.50% 0.31% 0.81% 0.01% 0.80%
Federated Utility Fund II(2) 0.75% 0.25% 1.00% 0.07% 0.93%
</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.
(2) Amounts shown under Total Waivers and Reductions reflect a voluntary waiver
of the management fee. The adviser can terminate this voluntary waiver at
any time at its sole discretion.
The fund did not pay or accrue a shareholder services fee during the fiscal
year ended December 31, 1998. The fund has no present intention of paying
or accruing the shareholder services fee during the fiscal year ended
December 31, 1999. The maximum shareholder services fee is 0.25%.
7
<PAGE>
Hypothetical Examples
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
column "Total Annual Expenses Without Waivers or Reductions" in the Fund Expense
Table.
- ---------------------------------------------
> These examples are purely hypothetical.
> They should not be considered a
representation of past or future expenses
or expected returns.
> 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>
Federated American Leaders Fund II $85 $106 $140 $265
Federated Equity Income Fund II 89 120 164 311
Federated Fund for U.S. Government Securities II 85 107 142 269
Federated Growth Strategies Fund II 88 114 154 293
Federated High Income Bond Fund II 84 102 135 254
Federated International Equity Fund II 93 131 181 345
Federated Prime Money Fund II 84 103 136 257
Federated Utility Fund II 86 109 146 276
<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>
Federated American Leaders Fund II $23 $72 $124 $265
Federated Equity Income Fund II 28 86 147 311
Federated Fund for U.S. Government Securities II 24 73 126 269
Federated Growth Strategies Fund II 26 81 138 293
Federated High Income Bond Fund II 22 69 118 254
Federated International Equity Fund II 32 97 165 345
Federated Prime Money Fund II 23 70 120 257
Federated Utility Fund II 25 76 129 276
</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 3 years after payments start. In this case, the lump sum
payment is treated as a withdrawal during the accumulation phase and may be
subject to an early withdrawal charge (refer to Example A).
8
<PAGE>
Condensed Financial Information
- --------------------------------------------------------------------------------
Understanding Condensed Financial Information. In Appendix II 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 over
the past five years since the contract became available.
Investment Options
- --------------------------------------------------------------------------------
The contract offers variable investment options and a fixed interest option.
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 below. You do not invest directly in or hold shares of the funds.
> Mutual fund (fund) descriptions. We provide brief descriptions of the funds in
this section. The 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 Option. The ALIAC Guaranteed Account (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. For a description of this option see
Appendix I and the Guaranteed Account prospectus.
9
<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 appendix and the Guaranteed Account prospectus.
- --------------------------------------------------------------------------------
> Federated Insurance Series -- Federated American Leaders Fund II seeks to
achieve long-term growth of capital and to provide income. The Fund pursues
its investment objective by investing, under normal circumstances, at least
65% of its total assets in common stock of "blue-chip" companies. "Blue-chip"
companies generally are top-quality, established growth companies which, in
the opinion of the Fund's adviser meet certain criteria.
Investment Adviser: Federated Advisers.
> Federated Insurance Series -- Federated Equity Income Fund II seeks to provide
above average income and capital appreciation. The Fund attempts to achieve
its objectives by investing at least 65% of its assets in income-producing
equity securities. Equity securities include common stocks, preferred stocks,
and securities (including debt securities) that are convertible into common
stocks. The portion of the Fund's total assets invested in common stocks,
preferred stocks, and convertible securities will vary according to the Fund's
assessment of market and economic conditions and outlook.
Investment Adviser: Federated Advisers.
> Federated Insurance Series -- Federated Fund for U.S. Government Securities II
seeks to provide current income. The Fund pursues its investment objective by
investing at least 65% of the value of its total assets in securities issued
or guaranteed as to payment of principal and interest by the U.S. government,
its agencies or instrumentalities.
Investment Adviser: Federated Advisers.
> Federated Insurance Series -- Federated Growth Strategies Fund II seeks
capital appreciation. The Fund pursues its objective by investing at least 65%
of its assets in equity securities of companies with prospects for above-
average growth in earnings and dividends or companies where significant
fundamental changes are taking place. Equity securities include common stocks,
preferred stocks, and securities (including debt securities) that are
convertible into common stocks.
Investment Adviser: Federated Advisers.
> Federated Insurance Series -- Federated High Income Bond Fund II seeks high
current income by investing primarily in a professionally managed and
diversified portfolio of fixed income securities. The fixed-income securities
in which the Fund intends to invest are lower-rated corporate debt
10
<PAGE>
obligations (commonly known as "junk bonds" or "high yield, high risk bonds"
which involve significant degree of risk). (See the Fund's prospectus for a
discussion of the risk factors involved in investing in lower-rated corporate
debt obligations).
Investment Adviser: Federated Advisers.
> Federated Insurance Series -- Federated International Equity Fund II seeks
total return on its assets by investing at least 65% of its assets (and under
normal market conditions, substantially all of its assets) in equity
securities of issuers located in at least three different countries outside of
the United States. Investing in non-U.S. securities carries substantial risks
in addition to those associated with domestic investments.
Investment Adviser: Federated Advisers.
> Federated Insurance Series -- Federated Prime Money Fund II seeks to provide
current income consistent with stability of principal and liquidity. The Fund
pursues its investment objective by investing exclusively in a portfolio of
money market instruments maturing in 397 days or less. The average maturity of
the money market instruments in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less. An investment in this Fund is
neither insured nor guaranteed by the U.S. government.
Investment Adviser: Federated Advisers.
> Federated Insurance Series--Federated Utility Fund II seeks to achieve high
current income and moderate capital appreciation by investing primarily in a
professionally managed and diversified portfolio of equity and debt securities
of utility companies. Under normal market conditions, the Fund will invest at
least 65% of its total assets in securities of utility companies.
Investment Adviser: Federated Advisers.
Limits on Availability of Options. 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 classification of the Guaranteed Account that you select 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.
11
<PAGE>
> Shared--bought by more than one company
> Mixed--bought for annuities and life insurance
It is possible that a conflict of interest may arise due to mixed and/or shared
funding, 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.
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. During the income
phase, 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.
12
<PAGE>
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
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
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.
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."
Dollar cost averaging is not available if you elect to 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.
13
<PAGE>
Purchase and Rights
- --------------------------------------------------------------------------------
How to Purchase
> Individual Contracts. 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.
> Group Contracts. 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.
> Joint Contracts (generally spouses). For a nonqualified contract, you may
participate in a group contract as a joint contract holder. Joint contract
holders do not need to be spouses. Tax law prohibits the purchase of an IRA by
joint contract holders. References to "contract holder" in this prospectus
mean both contract holders under joint contracts.
The maximum age of the annuitant on the date we issue the contract is 85.
Your Rights Under the Contract
> Individual Contracts. You have all contract rights.
> 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.
> 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:
> One lump sum
> Periodic payments
> 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.
> For nonqualified contracts the minimum initial payment amount is $5,000.
> 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
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<PAGE>
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. 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 10
days of receipt 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. Your refund will
equal 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>
[Begin sidebar]
Types of Fees
There are four types of fees or deductions that may affect your account.
TRANSACTION FEES
o Early Withdrawal Charge
o Annual Maintenance Fee
o Transfer Charge
FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT
o Mortality and Expense Risk Charge
o Administrative Expense Charge
FEES DEDUCTED BY THE FUNDS
o Investment Advisory Fees
o Other Expenses
PREMIUM AND OTHER TAXES
[End sidebar]
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 according to the following schedule.
Early Withdrawal Charge Schedule
<TABLE>
<S> <C>
Years from Receipt of Payment Early Withdrawal Charge
----------------------------- -----------------------
Fewer than 1 7%
1 or more but fewer than 2 6%
2 or more but fewer than 3 5%
3 or more but fewer than 4 4%
4 or more but fewer than 5 3%
5 of more but fewer than 6 2%
6 or more but fewer than 7 1%
7 or more 0%
</TABLE>
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).
For example: If you made the initial payment three years ago, we will deduct an
early withdrawal charge equal to 4% 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. After the first year of your contract there is no early
withdrawal charge on the first withdrawal each calendar year if the amount
withdrawn is 15% or less than your current account value on the date the
withdrawal request is received at our Home Office.
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.
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<PAGE>
Waiver. The early withdrawal charge is waived for payments withdrawn if the
withdrawal is based on any one of the following:
> Used to provide payments to you during the income phase
> Paid due to the annuitant's death during the accumulation phase (for an amount
up to the sum of payments in the account on the annuitant's date of death)
> Paid upon a full withdrawal where your account value is $2,500 or less and no
part of the account value has been withdrawn during the prior 12 months
> Taken because of the election of a systematic distribution option (see
"Systematic Distribution Options")
> 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
> Paid upon termination of your account by us (see "Other Topics-- Involuntary
Terminations")
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:
> The size and type of group to whom the contract is offered
> The amount of expected payments, and
> 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 charge will be
subject to state approval.
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 due.
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:
> The size and type of the group to whom the contract is offered, and
> 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
17
<PAGE>
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.
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. 1.25% annually of your account value invested in the
subaccounts.
When/How. We deduct this fee daily from the subaccounts corresponding to the
funds you select. We do not deduct this fee from the Guaranteed Account.
Purpose. This fee compensates us for the mortality and expense risks we assume
under the contract.
> The mortality risk is the risk associated with our promise to make lifetime
payments based on annuity rates specified in the contract
> The expense risk is the risk that the actual expenses we incur under the
contracts will exceed the maximum costs that we can charge
If the amount we deduct for this fee is not enough to cover our mortality costs
and expenses under the contracts, we will bear the loss. We may use any excess
to recover distribution costs relating to the contract and as a source of
profit. We expect to make a profit from this fee.
Reduction. We may reduce this fee based upon consideration of one or more of the
following:
> The size and type of the group to whom the contract is offered
> The type and frequency of administrative and sales services provided, and
> 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 of this 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% annually 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 charge of up
to 0.25% during the income phase.
When/How. If imposed, we deduct this charge daily from the subaccounts
corresponding to the funds you select. We do not deduct this charge from the
18
<PAGE>
Guaranteed Account. This charge may be assessed during the accumulation phase or
the income phase. If we are currently imposing this charge when you enter the
income phase, the charge will apply to you during the entire income phase.
Purpose. This charge helps defray our administrative expenses that cannot be
covered by the mortality and expense risk charge described above. The charge is
not intended to exceed the average expected cost of administering the contract.
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:
> The size and type of the group to whom the contract is offered, and
> 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."
19
<PAGE>
Your Account Value
- --------------------------------------------------------------------------------
During the accumulation phase, your account value at any given time equals:
> The current dollar value of amounts invested in the subaccounts, plus
> The current dollar values of amounts invested in the Guaranteed Account,
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:
> The net assets of the fund held by the subaccount as of the current valuation;
minus
> The net assets of the fund held by the subaccount at the preceding valuation;
plus or minus
> Taxes or provisions for taxes, if any, due to subaccount operations (with any
federal income tax liability offset by foreign tax credits to the extent
allowed); divided by
> The total value of the subaccount's units at the preceding valuation; minus
> 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.
20
<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.
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.
[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]
21
<PAGE>
[Begin sidebar]
Taxes, Fees and Deductions
Amounts withdrawn may be subject to one or more of the following:
> Early Withdrawal Charge (see "Fees--Early Withdrawal Charge")
> Maintenance Fee (see "Fees--Maintenance Fee")
> Market Value Adjustment for amounts held in the Guaranteed Account (see
Appendix I and the Guaranteed Account prospectus)
> Tax Penalty (see "Taxation")
> 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."
[End sidebar]
Withdrawals
- --------------------------------------------------------------------------------
You may withdraw all or a portion of your account value at any time during the
accumulation phase.
Steps for Making A Withdrawal
> 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), 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, and any positive or negative market value
adjustment for amounts withdrawn from the Guaranteed Account.
See Appendix I and the Guaranteed Account prospectus for more information.
> Select investment options. If you do not specify this, we will withdraw
dollars proportionally from each of your investment options
> Properly complete a disbursement form and deliver it to our Home Office
Calculation of Your Withdrawal. We determine your account value every normal
business day after the close of the New York Stock Exchange. We pay withdrawal
amounts based 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 in good order.
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 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 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.
22
<PAGE>
[Begin sidebar]
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.
[End sidebar]
Systematic Distribution Options
- --------------------------------------------------------------------------------
The following Systematic Distribution Options (SDOs) may be available:
> SWO--Systematic Withdrawal Option. SWO is a series of automatic partial
withdrawals from your account based on 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.
> 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.
> 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--
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.
23
<PAGE>
[Begin sidebar]
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 a death
benefit under the contract.
Claim Date: The date 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.
[End sidebar]
Death Benefit
- --------------------------------------------------------------------------------
During the Accumulation Phase
Who Receives the Death Benefit? 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 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 the 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 "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
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, income phase payments, and fees)
(2) The highest account value on any account anniversary up to the annuitant's
85th birthday (or date of death, if earlier), adjusted for payments made
and any amounts deducted from your account (including withdrawals, income
phase payments, and fees) since that account anniversary, and
(3) The account value as of the date of death
If the death benefit is greater than the account value as of the date of death,
on the claim date we will allocate 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 Amounts in Certain Cases
If the Holder is not the Annuitant. Under nonqualified contracts only, if the
contract holder who is not the annuitant dies, the death benefit 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.
24
<PAGE>
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 becomes the annuitant. In this circumstance,
the death benefit payable at the death of a spousal beneficiary equals the
account value on the claim date, plus or minus any market value adjustment, and
minus any early withdrawal charge applicable to any payments made to the account
since the death of the original contract holder/annuitant.
If the spousal beneficiary continues the account at the death of the certificate
holder who was not the annuitant, the annuitant will not change. At the death of
the spousal beneficiary, the death benefit described above will not apply and
the death benefit will equal the account value on the current claim date, plus
or minus any market value adjustment, and minus any applicable early withdrawal
charge.
Guaranteed Account
For amounts held in the Guaranteed Account, see the Guaranteed Account
prospectus for a discussion of the death benefit calculation.
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
(3) Elect SWO or ECO (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 and died before the Tax Code's required beginning date
for minimum distributions, payments under SWO or ECO will stop. The beneficiary
or contract holder on behalf of the beneficiary may elect SWO or ECO 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."
25
<PAGE>
For Nonqualified Contracts.
(1) If you die and the beneficiary is your surviving spouse, or if you are a
non-natural 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 account 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 options
(c) 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
If you die and you are not the annuitant, an early withdrawal charge will
apply if a lump-sum payment 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 option 1(c) above. If the
beneficiary does not elect option 1(b) within 60 days from the annuitant's
date of death, the gain, if any, is includible 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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<PAGE>
[Begin sidebar]
We may have used the following terms in prior prospectuses:
Annuity Phase--Income Phase
Annuity Option--Payment Option
Annuity Payment--Income Phase Payment
[End sidebar]
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:
> Start date
> Payment option (see the payment options table in this section)
> Payment frequency (i.e., monthly, quarterly, semi-annually or annually)
> Choice of fixed or variable payments
> Selection of an assumed net investment rate (only if variable payments are
elected)
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:
> A first payment of at least $50, or
> 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. We reserve the right to increase the minimum
payment amount based upon the Consumer Price Index-Urban (CPI-U), since July 1,
1993.
27
<PAGE>
Restrictions on Start Dates and the Duration of Payments. For nonqualified
contracts, payments may not begin later than the first day of the month
following the annuitant's 90th birthday. For qualified IRAs, generally payments
must begin by April 1 of the calendar year following the calendar year in which
you attain age 70-1/2. When payments start, the age of the annuitant plus the
number of years for which payments are guaranteed must not exceed 95.
For qualified contracts only, 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
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; 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.
28
<PAGE>
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
under the contract.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Lifetime Payment Options
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Length of Payments: For as long as the annuitant lives. It is possible that only one payment will be
Life Income made should the annuitant die prior to the second payment's due date.
Death Benefit--None: All payments end upon the annuitant's death.
- --------------------------------------------------------------------------------------------------------------------------
Length of Payments: For as long as the annuitant lives, with payments guaranteed for 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%, 66-2/3% 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.
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Nonlifetime Payment Plan
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
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.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Lump-sum Payment: If the "Nonlifetime--Guaranteed Payments" option is elected
with variable payments, you may request at any time that all or a portion of the
present value of the remaining payments be paid in one 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.
- --------------------------------------------------------------------------------
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).
29
<PAGE>
[Begin sidebar]
In this Section
INTRODUCTION
CONTRACT TYPE
WITHDRAWALS AND OTHER DISTRIBUTIONS
o Taxation of Distributions
o 10% Penalty Tax
o Withholding for Federal Income Tax Liability
MINIMUM DISTRIBUTION REQUIREMENTS
o 50% Excise Tax
o Minimum Distribution of Death Benefits-IRAs
o Minimum Distribution of Death Benefits--
Nonqualified Contracts
RULES SPECIFIC TO IRAS
RULES SPECIFIC TO NONQUALIFIED CONTRACTS
TAXATION OF THE COMPANY
When consulting a tax adviser, be certain that he or she has expertise in the
Tax Code sections applicable to your tax concerns.
[End sidebar]
Taxation
- --------------------------------------------------------------------------------
INTRODUCTION.
This section discusses our understanding of current federal income tax laws
affecting the contract. You should keep the following in mind when reading it:
> Your tax position (or the tax position of the beneficiary, as applicable)
determines federal taxation of amounts held or paid out under the contract
> Tax laws change. It is possible that a change in the future could affect
contracts issued in the past
> This section addresses federal income tax rules and does not discuss federal
estate and gift tax implications, state and local taxes or any other tax
provisions
> We do not make any guarantee about the tax treatment of the contract or a
transaction involving the contract
> Contract holder means the holder of an individually owned contract or the
certificate holder of a group contract
> 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 are 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 owner possesses
incidents of investment control over the assets. In these circumstances, income
and gains from the separate account assets would be 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 reserves the right to modify the contract as necessary to attempt to
prevent a contract holder from being considered the owner of a pro rata share of
the assets of the separate account for Federal tax purposes.
CONTRACT TYPE
The contract is designed for use on a non-tax qualified basis as a nonqualified
contract or as a qualified traditional IRA under Tax Code section 408(b).
Tax Rules. The tax rules vary according to whether the contract is a
nonqualified contract or an IRA under Tax Code Section 408(b).
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.
30
<PAGE>
WITHDRAWALS AND OTHER DISTRIBUTIONS
Certain tax rules apply to distributions from the contract. A distribution is
any amount taken from the contract including withdrawals, payments, rollovers,
exchanges and death benefits.
We report the taxable portion of all distributions to the Internal Revenue
Service (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.
408(b) Individual Retirement Annuity (IRA). All distributions from a traditional
IRA are taxed as received unless either of the following is true:
> 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
> You made after-tax contributions to the plan. In this case, the distribution
will be taxed according to rules detailed in the Tax Code
Taxation of Death Benefits. In general, payments received by your beneficiaries
after your death are taxed in the same manner as if you had received those
payments.
31
<PAGE>
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 408(b) IRA.
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, or
(e) The distribution is allocable to investment in the contract before August
14, 1982
408(b) IRA. The 10% penalty tax applies to the taxable portion of a distribution
from a 408(b) IRA, 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) The distribution is rolled over into another plan of the same type or to an
IRA in accordance with the Tax Code
(e) 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, or
(f) The distribution is equal to unreimbursed medical expenses that qualify for
deduction as specified in the Tax Code
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.
408(b) IRA. Generally, you or a beneficiary may elect not to have tax withheld
from distributions.
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.
32
<PAGE>
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 nonqualified contracts, except with regard to death benefits. These rules may
dictate one or more of the following:
> Start date for distributions
> The time period in which all amounts in your account(s) must be distributed
> Distribution amounts
Start Date. Generally, you must begin receiving distributions from an IRA by
April 1 of the calendar year following the calendar year in which you attain age
70-1/2 or retire, whichever occurs later, unless you are a 5% owner or the
contract is an IRA, in which case such distributions must begin by April 1 of
the calendar year in which you attain 70-1/2.
Time Period. We must pay out distributions from the contract over one of the
following time periods:
> Over your life or the joint lives of you and your beneficiary
> Over a period not greater than your life expectancy or the joint life
expectancies of you and your beneficiary
50% Excise Tax
If you fail to receive the minimum required distribution for any tax year, a 50%
excise tax is imposed on the required amount that was not distributed.
Minimum Distribution of Death Benefits--IRAs
The following applies to 408(b) IRAs. Different distribution requirements apply
depending upon whether your death occurs:
> After you begin receiving minimum distributions under the contract, or
> Before you begin receiving such distributions
If your death occurs after you begin receiving minimum distributions under the
contract, distributions must be made at least as rapidly as under the method in
effect at the time of your death. Tax Code section 401(a)(9) provides specific
rules for calculating the minimum required distributions at your death. The
rules differ, depending upon:
> 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, and
> 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.
33
<PAGE>
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 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:
> Over the life of the beneficiary
> Over a period not extending beyond the life expectancy of the beneficiary
Start Dates for Spousal Beneficiaries. If the beneficiary is your spouse, the
distribution must begin on or before the later of the following:
> December 31 of the calendar year following the calendar year of your death
> December 31 of the calendar year in which you would have attained age 70-1/2
In lieu of taking a distribution under these rules, an IRA 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.
Minimum Distribution of Death Benefits--Nonqualified Contracts
Death of the Contract Holder. The following requirements apply to nonqualified
contracts at the death of the contract holder. If you are the contract holder,
different distribution requirements apply depending upon whether your death
occurs:
> After you begin receiving payments under the contract, or
> 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:
> Over the life of the beneficiary
> 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.
34
<PAGE>
RULES SPECIFIC TO IRAS
Tax Code Section 408(b) IRAs. Tax Code section 408(b) permits eligible
individuals to contribute to a traditional 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.
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
depends on 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.
RULES SPECIFIC TO 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 occurs by
withdrawing all or part of such account value. The taxable portion of a
distribution is taxable as ordinary income.
Non-Natural 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.
35
<PAGE>
TAXATION OF THE COMPANY
We are taxed as a life insurance company under the Tax Code. Variable Annuity
Separate 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 pay such
taxes. We may deduct this amount from the separate account, including from your
account value invested in the subaccounts.
Other Topics
- --------------------------------------------------------------------------------
The Company
Aetna Life Insurance and Annuity Company (the Company, we, 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 issuing life insurance and annuities. Our
principal executive offices are located at:
151 Farmington Avenue
Hartford Connecticut 06156
Variable Annuity Account B
We established Variable Annuity Account B (the separate account) in 1976 as a
segregated asset account to fund our variable annuity contracts. The separate
account is registered as a unit investment trust under the Investment Company
Act of 1940 (the "40 Act"). It also meets the definition of "separate account"
under the federal securities laws.
The separate account is divided into subaccounts. These subaccounts invest
directly in shares of a pre-assigned fund.
36
<PAGE>
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.
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 contract 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 contract directly. All individuals
offering and selling the contract 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.
Federated Securities Corp., an affiliate of the investment advisor, may enter
into agreements with some of the distributors to provide services to customers
in connection with the funds acquired through the contract. These services
include:
> Providing customers with information concerning the funds, and their
investment objectives, policies and limitations, portfolio securities and
performance
> Responding to customer inquiries
> Providing other services as the parties may agree
Fees for these services may be based on the fund's total assets attributable to
the distributor's customers.
We may offer customers of certain broker-dealers special guaranteed rates in
connection with the Guaranteed Account offered through the contract, and may
negotiate different commissions for these broker-dealers.
Payment of Commissions. We pay commissions to distributors who sell the
contract. Distributors will be paid commissions up to an amount currently equal
to 6.5% of payments for promotional or distribution expenses associated with the
marketing of the contract. We pay these commissions out of any early withdrawal
charge we collect or out of our general assets. Commissions are not deducted
from payments to your account.
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<PAGE>
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:
> 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
> 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
> 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:
> Standardized average annual total returns
> Non-standardized average annual total returns
We may also advertise certain ratings, rankings or other information related to
the Company, the subaccounts or the funds. For further details regarding
performance reporting and advertising you may request an 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.
38
<PAGE>
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 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.
> 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.
> 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.
39
<PAGE>
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 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.
40
<PAGE>
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 .................................................... 4
Sales Material and Advertising ........................................... 5
Independent Auditors ..................................................... 6
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."
41
<PAGE>
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:
> 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%.
> 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:
> Market Value Adjustment (MVA)--as described in this appendix and in the
Guaranteed Account prospectus
> Tax penalties and/or tax withholding--see "Taxation"
> Early withdrawal charge--see "Fees"
> Maintenance fee--see "Fees"
We do not make deductions from amounts in the 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
42
<PAGE>
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:
> Transfers due to participation in the dollar cost averaging program
> Withdrawals taken due to your election of SWO or ECO (described in "Systematic
Distribution Options"), if available
> 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.
43
<PAGE>
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.
44
<PAGE>
Appendix II
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>
FEDERATED AMERICAN LEADERS FUND II
Value at beginning of period $20.287 $15.548
Value at end of period $23.528 $20.287
Number of accumulation units outstanding at end of period 5,705,447 5,757,361
FEDERATED EQUITY INCOME FUND II
Value at beginning of period $12.305 $10.534(2)
Value at end of period $14.013 $12.305
Number of accumulation units outstanding at end of period 2,043,619 1,620,310
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
Value at beginning of period $11.883 $11.099
Value at end of period $12.614 $11.883
Number of accumulation units outstanding at end of period 1,272,804 1,110,579
FEDERATED GROWTH STRATEGIES FUND II
Value at beginning of period $15.777 $12.596
Value at end of period $18.269 $15.777
Number of accumulation units outstanding at end of period 1,502,535 1,439,357
FEDERATED HIGH INCOME BOND FUND II
Value at beginning of period $14.724 $13.119
Value at end of period $14.910 $14.724
Number of accumulation units outstanding at end of period 3,345,669 3,613,943
FEDERATED INTERNATIONAL EQUITY FUND II
Value at beginning of period $11.888 $10.952
Value at end of period $14.719 $11.888
Number of accumulation units outstanding at end of period 1,190,290 1,173,166
FEDERATED PRIME MONEY FUND II
Value at beginning of period $11.119 $10.748
Value at end of period $11.503 $11.119
Number of accumulation units outstanding at end of period 701,313 677,262
FEDERATED UTILITY FUND II
Value at beginning of period $16.611 $13.303
Value at end of period $18.663 $16.611
Number of accumulation units outstanding at end of period 1,625,062 1,583,456
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
FEDERATED AMERICAN LEADERS FUND II
Value at beginning of period $12.971 $9.838 $10.00(1)
Value at end of period $15.548 $12.971 $9.838
Number of accumulation units outstanding at end of period 3,931,613 2,057,364 188,708
FEDERATED EQUITY INCOME FUND II
Value at beginning of period
Value at end of period
Number of accumulation units outstanding at end of period
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
Value at beginning of period $10.804 $10.073 $10.000(1)
Value at end of period $11.099 $10.804 $10.073
Number of accumulation units outstanding at end of period 689,789 417,293 12,714
FEDERATED GROWTH STRATEGIES FUND II
Value at beginning of period $10.277 $10.000(3)
Value at end of period $12.596 $10.277
Number of accumulation units outstanding at end of period 570,182 17,503
FEDERATED HIGH INCOME BOND FUND II
Value at beginning of period $11.640 $9.814 $10.000(1)
Value at end of period $13.119 $11.640 $9.814
Number of accumulation units outstanding at end of period 2,069,633 1,020,321 31,309
FEDERATED INTERNATIONAL EQUITY FUND II
Value at beginning of period $10.255 $10.000(4)
Value at end of period $10.952 $10.255
Number of accumulation units outstanding at end of period 541,970 158,319
FEDERATED PRIME MONEY FUND II
Value at beginning of period $10.406 $10.033 $10.000(5)
Value at end of period $10.748 $10.406 $10.033
Number of accumulation units outstanding at end of period 720,521 554,934 51,949
FEDERATED UTILITY FUND II
Value at beginning of period $12.095 $9.881 $10.000(1)
Value at end of period $13.303 $12.095 $9.881
Number of accumulation units outstanding at end of period 1,260,915 727,601 41,191
</TABLE>
- -----------------
(1) Funds were first received in this option during September 1994.
(2) Funds were first received in this option during February 1997.
(3) The initial accumulation unit value was established at $10.000 during
November 1995, when the portfolio became available under the contract.
(4) The initial accumulation unit value was established at $10.000 during May
1995, when the portfolio became available under the contract.
(5) Funds were first received in this option during November 1994.
45
<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>
FEDERATED AMERICAN LEADERS FUND II
Value at beginning of period $16.597(1)
Value at end of period $16.869
Number of accumulation units outstanding at end of period 9,456
FEDERATED HIGH INCOME BOND FUND II
Value at beginning of period $12.832(2)
Value at end of period $12.629
Number of accumulation units outstanding at end of period 301
FEDERATED INTERNATIONAL EQUITY FUND II
Value at beginning of period $13.748(3)
Value at end of period $13.523
Number of accumulation units outstanding at end of period 132
FEDERATED UTILITY FUND II
Value at beginning of period $ 13.786(3)
Value at end of period $15.472
Number of accumulation units outstanding at end of period 68
</TABLE>
- -----------------
(1) Funds were first received in this option during June 1998.
(2) Funds were first received in this option during May 1998.
(3) Funds were first received in this option during August 1998.
46
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated May 3, 1999
NEW YORK GROWTH 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................................................. 4
Sales Material and Advertising........................................ 5
Independent Auditors.................................................. 6
Financial Statements of the Separate Account.......................... S-1
Financial Statements of Aetna Life Insurance and Annuity Company...... F-1
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Life Insurance and Annuity Company (the Company, we, us, our) 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).
As of December 31, 1998, the Company and its subsidiary life 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 rated by A.M. Best Company as of December 31, 1997. Our Home Office is
located at 151 Farmington Avenue, Hartford, Connecticut 06156.
In addition to serving as the principal underwriter and the depositor for the
separate account, the Company is a registered investment adviser under the
Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934. We provide investment advice to several of the
registered management investment companies offered as variable investment
options under the contracts funded by the separate account (see "Variable
Annuity Account B" below).
Other than the mortality and expense risk charge and administrative expense
charge described in the prospectus, all expenses incurred in the operations of
the separate account are borne by the Company. See "Fees" in the prospectus. We
receive reimbursement for certain administrative costs from some advisers of the
funds used as funding options under the contract. These fees generally range up
to 0.425%
The assets of the separate account are held by the Company. The separate account
has no custodian. However, the funds in whose shares the assets of the separate
account are invested each have custodians, as discussed in their respective
prospectuses.
From this point forward, the term "contract" refers only to the contract 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. The funds currently available under the contract are
as follows:
[square bullet] Federated American Leaders Fund II
[square bullet] Federated Equity Income Fund II
[square bullet] Federated Fund for U.S. Government Securities II
[square bullet] Federated Growth Strategies Fund II
[square bullet] Federated High Income Bond Fund II
[square bullet] Federated International Equity Fund II
[square bullet] Federated Prime Money Fund II
[square bullet] Federated Utility Fund II
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.
2
<PAGE>
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 contract 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 contract is not continuous. A description of
the manner in which the contract may be 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 contract. 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
contract during each period (e.g., 1.25% mortality and expense risk charge, $30
annual maintenance fee, 0.15% administrative expense charge, and early
withdrawal charges 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 maintenance fee is converted to a percentage of assets
based on the average account size under the contract described in the
prospectus.
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
the calculations. The non-standardized figures may also include monthly,
quarterly, year-to-date and three-year periods, and may include returns
calculated from the fund's inception date and/or the date contributions were
first received in the fund under the separate account. The non-standardized
returns shown in the tables below reflect the deduction of all charges under the
contract except the early withdrawal charge. The 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 period ended December 31, 1998 for the
subaccounts under the contract. 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 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
First Received
Under the Separate
STANDARDIZED Account
- ---------------------------------------------------------------------------------------------------------------------------------
Since
SUBACCOUNT 1 Year 5 Year 10 Year Inception*
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federated American Leaders Fund II 9.00% 22.03% 09-30-94
- ---------------------------------------------------------------------------------------------------------------------------------
Federated Equity Income Fund II 7.09% 14.33% 02-28-97
- ---------------------------------------------------------------------------------------------------------------------------------
Federated Fund for U.S. Government Securities II (0.24%) 5.12% 09-30-94
- ---------------------------------------------------------------------------------------------------------------------------------
Federated Growth Strategies Fund II 8.83% 19.74% 10-02-95
- ---------------------------------------------------------------------------------------------------------------------------------
Federated High Income Bond Fund II (4.84%) 9.46% 09-30-94
- ---------------------------------------------------------------------------------------------------------------------------------
Federated International Equity Fund II 16.37% 10.70% 05-31-95
- ---------------------------------------------------------------------------------------------------------------------------------
Federated Prime Money Fund II(1) (2.77%) 2.90% 11-30-94
- ---------------------------------------------------------------------------------------------------------------------------------
Federated Utility Fund II 5.59% 15.53% 09-30-94
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Reflects performance from the date contributions were first received in the
fund under the separate account.
(1) The current yield for the subaccount for the seven-day period ended
December 31, 1998 (on an annualized basis) was 2.60%. 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Fund
($30 Maintenance Fee) NON-STANDARDIZED Inception
Date
- ------------------------------------------------------------------------------------------------------------------------------
Since
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federated American Leaders Fund II 15.95% 21.94% 19.04% 02-10-94
- ------------------------------------------------------------------------------------------------------------------------------
Federated Equity Income Fund II 13.93% 18.45% 01-02-97
- ------------------------------------------------------------------------------------------------------------------------------
Federated Fund for U.S. Government Securities II 6.13% 5.28% 5.15% 03-28-94
- ------------------------------------------------------------------------------------------------------------------------------
Federated Growth Strategies Fund II 15.77% 21.12% 20.33% 10-02-95
- ------------------------------------------------------------------------------------------------------------------------------
Federated High Income Bond Fund II 1.24% 8.58% 7.94% 03-01-94
- ------------------------------------------------------------------------------------------------------------------------------
Federated International Equity Fund II 23.80% 12.78% 11.16% 05-07-95
- ------------------------------------------------------------------------------------------------------------------------------
Federated Prime Money Fund II(2) 3.43% 3.38% 3.44% 11-17-94
- ------------------------------------------------------------------------------------------------------------------------------
Federated Utility Fund II 12.33% 15.54% 12.81% 02-10-94
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
**Reflects performance from the fund's inception date.
(2) The current yield for the subaccount for the seven-day period ended
December 31, 1998 (on an annualized basis) was 2.60%. 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.
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in calculating the standardized and
non-standardized figures. These figures represent historical performance and
should not be considered a projection of future performance.
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
4
<PAGE>
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 daily 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 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
5
<PAGE>
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.
6
<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 Auditors' 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>
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-CDA-96(NY))(6)
(4.4) Variable Annuity Contract Certificate (GMCC-96(NY))(6)
(4.5) Variable Annuity Contracts and Certificates (G-CDA-IC(IR/NY)),
(GMCC-IC(IR/NY)), (G-CDA-IC(NQ/NY)), and (GMCC-IC(NQ/NY))(7)
(4.6) Endorsement (G-MP1IRA(11/96)) to Contract G-CDA-96(NY) and
Certificate GMCC-96(NY)(6)
(5) Variable Annuity Contract Application (MPAPPNY(1/96))(5)
(6.1) Certificate of Incorporation of Aetna Life Insurance and
Annuity Company(8)
<PAGE>
(6.2) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company(9)
(6.3) By-Laws as amended September 17, 1997 of Aetna Life Insurance
and Annuity Company(10)
(7) Not applicable
(8) Fund Participation Agreement by and among Aetna Life Insurance
and Annuity Company, Insurance Management Series and Federated
Advisors dated July 1, 1994(11)
(9) Opinion and Consent of Counsel
(10) Consent of Independent Auditors
(11) Not applicable
(12) Not applicable
(13) Schedule for Computation of Performance Data(12)
(14) Not applicable
(15.1) Powers of Attorney(13)
(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. 26 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
February 21, 1997.
7. 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.
8. 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
9. 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.
10. 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.
11. 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.
12. 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.
<PAGE>
13. 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>
<S> <C>
Name and Principal
Business Address* Positions and Offices with Depositor
- ----------------- ------------------------------------
Thomas J. McInerney Director and President
Catherine H. Smith Director, Chief Financial Officer and Senior Vice
President
Shaun P. Mathews Director 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 individual holders of 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
Principal Discounts and on Redemption Brokerage
Underwriter Commissions or Annuitization Commissions Compensation*
- ----------- ----------- ---------------- ----------- -------------
<S> <C> <C>
Aetna Life $684,000 $42,930,000
Insurance 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) 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.
(e) 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, has duly caused this Pre-Effective Amendment to its
Registration Statement on Form N-4 (File No. 333-72079) to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Hartford,
State of Connecticut, on the 13th 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 Pre-Effective Amendment
No. 1 to the Registration Statement 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 )
- --------------------------------
Thomas J. McInerney (principal executive officer) )
) April
Catherine H. Smith* Director and Chief Financial Officer ) 13, 1999
- --------------------------------
Catherine H. Smith )
)
Shaun P. Mathews* Director )
- --------------------------------
Shaun P. Mathews )
)
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.9 Opinion and Consent of Counsel
-------------
99-B.10 Consent of Independent Auditor
-------------
</TABLE>
[Aetna Letterhead] Julie E. Rockmore
[Aetna Logo] Counsel
Law Division, RE4A
April 13, 1999 Investments & Financial Services
(860) 273-4686
Fax: (860) 273-8340
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Filing Desk
Re: Aetna Life Insurance and Annuity Company Variable Annuity Account B
Pre-Effective Amendment No. 1 to Registration Statement on Form N-4
Prospectus Title: New York Growth Plus
File Nos.: 333-72079 and 811-4536
Gentlemen:
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 Pre-Effective Amendment No. 1. 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.
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.
<PAGE>
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Julie E. Rockmore
Julie E. Rockmore
Counsel
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 reports dated February 3, 1999 and February 26, 1999,
included herein this Pre-Effective Amendment No. 1 to Registration Statement
(File No. 333-72079) 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 13, 1999
