<PAGE>
PROSPECTUS
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The Contracts offered in connection with this Prospectus are individual deferred
variable annuity contracts ("Contracts") issued by Aetna Life Insurance and
Annuity Company (the "Company"). The Contracts are intended to qualify as
Individual Retirement Annuities ("IRA") established under Section 408 of the
Internal Revenue Code of 1986, as amended (the "Code"). (See "Purchase.")
Currently, the Contracts are not available as a "SIMPLE IRA" as defined in
Section 408(p) of the Code.
The Contracts provide that contributions may be allocated to one or more of the
Credited Interest Options or to one or more of the Subaccounts of Variable
Annuity Account C, a separate account of the Company. The Subaccounts invest
directly in shares of the following Funds:
<TABLE>
<S> <C>
[bullet] Aetna Variable Fund [bullet] American Century VP Capital Appreciation
[bullet] Aetna Income Shares (formerly TCI Growth)
[bullet] Aetna Variable Encore Fund [bullet] Fidelity VIP II Contrafund Portfolio
[bullet] Aetna Investment Advisers Fund, Inc. [bullet] Fidelity VIP Equity-Income Portfolio
[bullet] Aetna Ascent Variable Portfolio [bullet] Fidelity VIP Growth Portfolio
[bullet] Aetna Crossroads Variable Portfolio [bullet] Fidelity VIP Overseas Portfolio
[bullet] Aetna Legacy Variable Portfolio [bullet] Janus Aspen Aggressive Growth Portfolio
[bullet] Aetna Variable Capital Appreciation Portfolio [bullet] Janus Aspen Balanced Portfolio
[bullet] Aetna Variable Growth Portfolio [bullet] Janus Aspen Growth Portfolio
[bullet] Aetna Variable Index Plus Portfolio [bullet] Janus Aspen Short-Term Bond Portfolio
[bullet] Aetna Variable Small Company Portfolio [bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Alger American Growth Portfolio [bullet] Scudder International Portfolio Class A Shares
[bullet] Alger American Small Cap Portfolio
</TABLE>
The Credited Interest Options currently available under the Contract are the
Guaranteed Interest Account, the Fixed Account and the Guaranteed Accumulation
Account (available in New York only). Except as specifically mentioned, this
Prospectus describes only investments through the Separate Account. A brief
description of each of the Credited Interest Options is contained in Appendices
to this Prospectus and additional information concerning the Guaranteed
Accumulation Account is contained in a separate prospectus. The availability of
the Funds and the Credited Interest Options is subject to applicable regulatory
authorization. Not all Funds or Credited Interest Options may be available in
all jurisdictions or under all Contracts. (See "Investment Options.")
This Prospectus provides investors with the information that they should know
about the Separate Account before investing in the Contract. Additional
information about the Separate Account is contained in a Statement of Additional
Information ("SAI") which is available at no charge. The SAI has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.
The Table of Contents for the SAI is printed on page 15 of this Prospectus. An
SAI may be obtained by indicating the request on the Application, or by calling
the number listed under the "Inquiries" section of the Prospectus Summary. You
may also obtain an SAI for any of the Funds by calling that phone number.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS AND THE GUARANTEED ACCUMULATION ACCOUNT. ALL PROSPECTUSES SHOULD BE
READ AND RETAINED FOR FUTURE REFERENCE.
THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION AND OTHER INFORMATION
ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (SEC) CAN BE FOUND IN THE SEC'S WEB SITE AT http://www.sec.gov.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL
INFORMATION ARE DATED MAY 1, 1997.
<PAGE>
TABLE OF CONTENTS
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DEFINITIONS .................................................... DEFINITIONS - 1
PROSPECTUS SUMMARY ........................................... SUMMARY - 1
FEE TABLE .................................................... FEE TABLE - 1
CONDENSED FINANCIAL INFORMATION ............................... AUV HISTORY - 1
THE COMPANY ............................................................ 1
VARIABLE ANNUITY ACCOUNT C ............................................. 1
INVESTMENT OPTIONS ...................................................... 1
The Funds ............................................................ 1
Credited Interest Options ............................................. 4
PURCHASE ............................................................... 4
Contract Availability ................................................ 4
Contract Purchase ...................................................... 4
Purchase Payments ...................................................... 4
Right to Cancel ...................................................... 4
CHARGES AND DEDUCTIONS ................................................... 5
Daily Deductions from the Separate Account ........................... 5
Maintenance Fee ...................................................... 5
Reduction or Elimination of Maintenance Fee ............................. 5
Deferred Sales Charge ................................................ 5
Fund Expenses ......................................................... 6
Premium and Other Taxes ................................................ 7
CONTRACT VALUATION ...................................................... 7
Contract Value ......................................................... 7
Accumulation Units ................................................... 7
Net Investment Factor ................................................ 7
TRANSFERS ............................................................... 8
Dollar Cost Averaging Program .......................................... 8
WITHDRAWALS ............................................................ 8
Reinvestment Privilege ................................................ 8
ADDITIONAL WITHDRAWAL OPTIONS .......................................... 9
DEATH BENEFIT DURING ACCUMULATION PERIOD ................................. 9
ANNUITY PERIOD ......................................................... 10
Annuity Period Elections ............................................. 10
Annuity Options ...................................................... 10
Annuity Payments ...................................................... 11
Charges Deducted During the Annuity Period ........................... 11
Death Benefit Payable During the Annuity Period ........................ 11
TAX STATUS ............................................................... 12
Introduction ......................................................... 12
Taxation of the Company ................................................ 12
Contracts Used with Certain Retirement Plans ........................... 12
Individual Retirement Annuities and Simplified Employee Pension Plans 12
<PAGE>
MISCELLANEOUS ............................................. 13
Distribution .......................................... 13
Delay or Suspension of Payments ........................ 13
Performance Reporting ................................. 13
Voting Rights .......................................... 14
Modification of the Contract ........................... 14
Involuntary Terminations .............................. 14
Legal Matters and Proceedings ........................... 14
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ...... 15
APPENDIX I--GUARANTEED INTEREST ACCOUNT .................. 16
APPENDIX II--FIXED ACCOUNT .............................. 17
APPENDIX III--GUARANTEED ACCUMULATION ACCOUNT ............ 18
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. THE COMPANY DOES NOT AUTHORIZE ANY
PERSON TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
OFFERING CONTAINED IN THIS PROSPECTUS EXCEPT AS OTHERWISE CONTAINED HEREIN.
<PAGE>
DEFINITIONS
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The following terms are defined as they are used in this Prospectus:
Accumulation Period: The period during which Purchase Payment(s) credited to the
Contract are invested to fund future annuity payments.
Accumulation Unit: A measure of the value of each Subaccount before annuity
payments begin.
Annuitant: The person on whose life or life expectancy the annuity payments are
based.
Annuity: A series of payments for life, a definite period or a combination of
the two.
Annuity Date: The date on which annuity payments begin.
Annuity Period: The period during which annuity payments are made.
Annuity Unit: A measure of the value of each Subaccount selected during the
Annuity Period.
Beneficiary(ies): The person or persons identified on the application who are to
receive any death benefit proceeds payable under the Contract.
Code: Internal Revenue Code of 1986, as amended.
Company (We, Us): Aetna Life Insurance and Annuity Company.
Contract: The individual deferred, variable annuity contracts offered by this
Prospectus.
Contract Holder (You): The person to whom the Contract is issued.
Contract Value: The dollar value of amounts held under the Contract as of any
Valuation Date during the Accumulation Period.
Contract Year: The period of 12 months measured from the date the first Purchase
Payment is applied to the Contract or from any anniversary of such date.
Credited Interest Options: The fixed interest options available under the
Contract. The Credited Interest Options currently consist of the Guaranteed
Interest Account, the Fixed Account and the Guaranteed Accumulation Account,
each of which is described in an Appendix to this Prospectus. Amounts allocated
to the Credited Interest Options are included in the Contract Value.
Fund(s): An open-end registered management investment company whose shares are
purchased by the Separate Account to fund the benefits provided by the Contract.
Home Office: The Company's principal executive offices located at 151 Farmington
Avenue, Hartford, Connecticut 06156.
Purchase Payment(s): The gross payment(s) made to the Company under a Contract.
Separate Account: Variable Annuity Account C, a separate account established by
the Company for the purpose of funding variable annuity contracts issued by the
Company.
Subaccount(s): The portion of the assets of the Separate Account that is
allocated to a particular Fund. Each Subaccount invests in the shares of only
one corresponding Fund.
Valuation Date: The date and time at which the Accumulation Unit Value and
Annuity Unit Value of a Subaccount is calculated. Currently, this calculation
occurs after the close of business of the New York Stock Exchange on any normal
business day, Monday through Friday, that the New York Stock Exchange is open.
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DEFINITIONS - 1
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PROSPECTUS SUMMARY
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CONTRACTS OFFERED
The Contracts offered in connection with this Prospectus are individual
deferred variable annuity contracts issued by Aetna Life Insurance and Annuity
Company (the "Company"). There are two types of Contracts currently offered
through this Prospectus for new sales: (1) 1994 Contracts that are not connected
with an internal transfer (if you are a new customer), and (2) 1994 Internal
Rollover Contracts (if you have certain existing contracts or retirement
accounts established with the Company or one of our affiliates) (collectively
referred to as "1994 Contracts"). In New York, subject to regulatory approval,
this Contract is available only to individuals who have retirement accounts
established with the Company under the Company's Multiple Asset Portfolio
contracts, as a 1994 Internal Rollover Contract. Additionally, this Prospectus
also describes 1992 Contracts (Internal Rollover and those that are not
connected with an internal transfer) that were discontinued for new sales during
1994 ("1992 Contracts"). The Contracts are intended to qualify as Individual
Retirement Annuities under Section 408(b) of the Code. Currently, the Contracts
are not available as a "SIMPLE IRA" as defined in Section 408(p) of the Code.
The Contracts will accept annual contributions to an Individual Retirement
Annuity or a Simplified Employee Pension Plan (SEP). The Contracts can also
accept transfers or rollovers from another Individual Retirement Annuity, an
Individual Retirement Account under Section 408(a) of the Code, a tax-deferred
annuity under Section 403(b) of the Code or a qualified pension or profit
sharing plan under 401(a) of the Code.
These Contracts may be purchased by completing the proper application form
and submitting it to the Distributor. (See "Contract Purchase.")
FREE LOOK PERIOD
You may cancel the Contract no later than 10 days after you receive it (or
as otherwise allowed by state law) by returning it to the Company with a written
notice of cancellation. We will produce a refund not later than seven days after
we receive the Contract and the written notice at our Home Office. Cancellations
requested after a customer receives the Contract will consist of a refund of the
Purchase Payment. (See "Purchase Right to Cancel.")
INVESTMENT OPTIONS
The Company has established Variable Annuity Account C, a registered unit
investment trust, for the purpose of funding the variable portion of the
Contracts. The Separate Account is divided into Subaccounts which invest
directly in shares of the Funds described herein, as you designate. The Contract
allows investment in any or all of the Subaccounts, as well as in the Credited
Interest Options described below. The total number of investment options that
you may select during the Accumulation Period is limited. For a complete list of
the Funds available under the Contracts, a description of the investment
objectives of each of the Funds and their investment advisers, and a description
of the limitations on the number of funding options, see "Investment
Options--The Funds" in this Prospectus, as well as the prospectuses for each of
the Funds.
The Contract also provides for investment in Credited Interest Options
which allow you to earn fixed rates of interest that may vary periodically in
the Company's discretion. The fixed options available under the Contract are the
Guaranteed Interest Account, the Fixed Account and the Guaranteed Accumulation
Account. (See the Appendices to this Prospectus.)
CHARGES AND DEDUCTIONS
Certain charges are associated with these Contracts. These charges include
daily deductions from the Separate Account (the mortality and expense risk
charges and an administrative expense charge), as well as any annual maintenance
fee, transfer fees, and premium and other taxes. The Funds also incur certain
fees and expenses which are deducted directly from the Funds. A deferred sales
charge may apply upon a full or partial withdrawal of the Contract Value. (See
the Fee Table and "Charges and Deductions.")
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SUMMARY - 1
<PAGE>
TRANSFERS
Prior to the Annuity Date, and subject to certain limitations, Contract
Values may be transferred among the Subaccounts and the Credited Interest
Options without charge. Transfers can be requested in writing or by telephone in
accordance with the Company's transfer procedures. (See Appendices I, II and III
for a full description of the restrictions applicable to transfers from the
Credited Interest Options.) (See "Transfers.")
WITHDRAWALS
All or a part of the Contract Value may be withdrawn prior to the Annuity
Date by properly completing a disbursement form and sending it to the Company.
Certain charges may be assessed upon withdrawal. The withdrawal may also be
subject to income tax and a federal tax penalty. (See "Withdrawals.")
The Contract also offers certain Additional Withdrawal Options during the
Accumulation Period to persons meeting certain criteria. Additional Withdrawal
Options are not available in all states and may not be suitable in every
situation. (See "Additional Withdrawal Options.")
DEATH BENEFIT
A death benefit is payable if you die before the Annuity Date. Death
benefit proceeds will be paid to the Beneficiary in an amount equal to the
Contract Value. Until the election of a method of payment, the Contract Value
will remain invested under the Contract. The Beneficiary may elect to receive
the proceeds in a lump sum or under any of the payment options available under
the Contract. However, the Code requires that distributions begin within a
certain time period. (See "Death Benefit During Accumulation Period.")
After Annuity Payments have commenced, a death benefit may be payable to
the Beneficiary depending upon the terms of the Contract and the Annuity Option
selected. (See "Death Benefit Payable During the Annuity Period.")
THE ANNUITY PERIOD
On the Annuity Date, you may elect to begin receiving Annuity Payments.
Annuity Payments can be made on either a fixed, variable or combination fixed
and variable basis. If a variable payout is selected, the payments will vary
with the investment performance of the Subaccount(s) selected. The Company
reserves the right to limit the number of Subaccounts that may be available
during the Annuity Period. (See "Annuity Period.")
TAXES
Contributions and earnings are not generally taxed until you or your
beneficiary(ies) actually receive a distribution from the Contract. A 10%
federal tax penalty may be imposed on certain withdrawals. (See "Tax Status.")
INQUIRIES
Questions, inquiries or requests for additional information can be directed
to your agent or local representative, or you may contact the Company as
follows:
[bullet] Write to: Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156-1258
Attention: Customer Service
[bullet] Call Customer Service: 1-800-531-4547 (for Contract Values,
automated transfers or changes in
allocation call: 1-800-262-3862)
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SUMMARY - 2
<PAGE>
FEE TABLE
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This Fee Table describes the various charges and expenses associated with the
Contract during the Accumulation Period. For amounts deducted during the Annuity
Period, see "Annuity Period--Charges Deducted During the Annuity Period." No
sales charge is paid upon purchase of the Contract. Some expenses may vary as
explained under "Charges and Deductions." The charges and expenses shown below
do not include premium taxes that may be applicable. For more information
regarding expenses paid out of the assets of a particular Fund, see the Fund's
prospectus.
CONTRACT HOLDER TRANSACTION EXPENSES
Deferred Sales Charge (as a percentage of the amount withdrawn)(1)
[bullet] Schedule A illustrates deferred sales charges for 1994 and 1992
Internal Rollover Contracts for internal transfers from contracts
issued by the Company under certain pension or profit sharing
retirement plans. (For 1992 Contracts, this schedule applies only
if you have not been subject to a deferred sales charge under the
prior contract.) It also applies to internal transfers from
certain contracts issued by Aetna Life Insurance Company. The
deferred sales charge is based on the number of completed Contract
Years since the date of initial payment to the new Contract. This
Schedule also applies to all sales of the Contract in New York.
[bullet] Schedule B illustrates deferred sales charges for 1992 Internal
Rollover Contracts for internal transfers from contracts issued by
the Company where you were, at the time of the rollover, subject
to a deferred sales charge under the prior Contract. The deferred
sales charge is based on the number of completed Contract Years
since the initial payment to the predecessor Contract.
[bullet] Schedule C illustrates deferred sales charges for 1994 Internal
Rollover Contracts for certain internal transfers from IRA or SEP
Contracts issued by the Company where you have been, or still are,
subject to a deferred sales charge. The Contract Holder enters the
deferred sales charge schedule at the percentage point
corresponding to the deferred sales charge applicable under the
predecessor Contract at the time of the exchange, and continues
from that point in the schedule. Schedule C also applies to all
new purchases that are not connected with an internal transfer
(i.e., external rollovers or Contracts established with at least a
$1,000 annual Purchase Payment).
Your Contract Schedule page shows the Deferred Sales Charge Schedule that
applies to you.
SCHEDULE A
Completed Contract Deferred Sales
Years Charge Deduction
------------------ ----------------
Less than 1 1%
1 or more 0%
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FEE TABLE - 1
<PAGE>
SCHEDULE B
Completed Contract Deferred Sales
Years Charge Deduction
------------------ ----------------
Less than 5 5%
5 or more but less than 6 4%
6 or more but less than 7 3%
7 or more but less than 8 2%
8 or more but less than 9 1%
9 or more 0%
SCHEDULE C
Completed Contract Deferred Sales
Years Charge Deduction
------------------ ----------------
Less than 2 6%
2 or more but less than 3 5%
3 or more but less than 4 4%
4 or more but less than 5 3%
5 or more but less than 6 2%
6 or more but less than 7 1%
7 or more 0%
Annual Contract Maintenance Fee ............................... $25.00(2)
Allocation and Transfer Fees ................................ $ 0.00(3)
SEPARATE ACCOUNT ANNUAL EXPENSES
(Daily deductions, equal to the percentage shown on an annual basis, made from
amounts allocated to the variable options under each Contract.)
Mortality and Expense Risk Charge ...... 1.25%(4)
Administrative Expense Charge. ......... 0.00%(5)
--------
Total Separate Account Expenses ......... 1.25%
========
(1) The total amount deducted for the deferred sales charge will not exceed 8.5%
of the total Purchase Payments applied to the Contract.
(2) The maintenance fee will generally be deducted annually from each Contract.
For 1994 Contracts, if the Contract Value is $10,000 or greater, and for
1992 Contracts, if the initial Purchase Payment is $10,000 or greater, the
maintenance fee will be $0.
(3) The Company currently allows an unlimited number of transfers or allocation
changes without charge. However, we reserve the right to assess a fee of
$10.00 for each transfer in excess of 12 made during each Contract Year.
(See "Transfers and Allocation Changes.")
(4) This illustrates the maximum mortality and expense risk charge that can be
deducted under the Contract. For the 1994 Contracts, the charge may be
reduced to 1.15% under certain circumstances. (See "Charges and
Deductions.")
(5) We currently do not impose an administrative expense charge. However, we
reserve the right to deduct a daily charge from the Subaccounts, equivalent
on an annual basis to not more than 0.25%.
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FEE TABLE - 2
<PAGE>
ANNUAL EXPENSES OF THE FUNDS
The following table illustrates the advisory fees and other expenses applicable
to the Funds. A Fund's "Other Expenses" include operating costs of the Fund.
These expenses are reflected in the Fund's net asset value and are not deducted
from your Contract Value. (Except as noted, the following figures are a
percentage of average net assets and, except where otherwise indicated, are
based on figures for the year ended December 31, 1996.)
<TABLE>
<CAPTION>
Investment
Advisory Fees(1) Other Expenses
(after expense (after expense Total Fund
reimbursement) reimbursement) Annual Expenses
------------------- ----------------- -----------------
<S> <C> <C> <C>
Aetna Variable Fund(2) 0.50% 0.06% 0.56%
Aetna Income Shares(2) 0.40% 0.08% 0.48%
Aetna Variable Encore Fund(2) 0.25% 0.10% 0.35%
Aetna Investment Advisers Fund, Inc.(2) 0.50% 0.08% 0.58%
Aetna Ascent Variable Portfolio(2) 0.60% 0.15% 0.75%
Aetna Crossroads Variable Portfolio(2) 0.60% 0.15% 0.75%
Aetna Legacy Variable Portfolio(2) 0.60% 0.15% 0.75%
Aetna Variable Capital Appreciation Portfolio(2) 0.60% 0.15% 0.75%
Aetna Variable Growth Portfolio(2) 0.60% 0.15% 0.75%
Aetna Variable Index Plus Portfolio(2) 0.35% 0.15% 0.50%
Aetna Variable Small Company Portfolio(2) 0.75% 0.15% 0.90%
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Alger American Small Cap Portfolio 0.85% 0.03% 0.88%
American Century VP Capital Appreciation(3) 1.00% 0.00% 1.00%
Fidelity VIP II Contrafund Portfolio(4) 0.61% 0.13% 0.74%
Fidelity VIP Equity-Income Portfolio(4) 0.51% 0.07% 0.58%
Fidelity VIP Growth Portfolio(4) 0.61% 0.08% 0.69%
Fidelity VIP Overseas Portfolio(4) 0.76% 0.17% 0.93%
Janus Aspen Aggressive Growth Portfolio(5) 0.72% 0.04% 0.76%
Janus Aspen Balanced Portfolio(5) 0.79% 0.15% 0.94%
Janus Aspen Growth Portfolio(5) 0.65% 0.04% 0.69%
Janus Aspen Short-Term Bond Portfolio(5) 0.47% 0.19% 0.66%
Janus Aspen Worldwide Growth Portfolio(5) 0.66% 0.14% 0.80%
Scudder International Portfolio Class A Shares 0.86% 0.19% 1.05%
</TABLE>
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(1) Certain of the unaffiliated Fund advisers reimburse the Company for
administrative costs incurred in connection with administering the Funds as
variable funding options under the Contract. These reimbursements are paid
out of the investment advisory fees and are not charged to investors.
(2) The Company provides administrative services to the Fund and assumes the
Fund's ordinary recurring direct costs under an Administrative Services
Agreement. The new Administrative Services Agreement became effective on May
1, 1996 for Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore
Fund, Aetna Investment Advisers Fund, Inc., Aetna Ascent Variable Portfolio,
Aetna Crossroads Variable Portfolio, and Aetna Legacy Variable Portfolio.
Therefore, for these Funds the "Other Expenses" shown are not based on
actual figures for the year ended December 31, 1996, but reflect the fee
payable under that Agreement. The Administrative Services Agreement was in
effect for Aetna Variable Capital Appreciation Portfolio, Aetna Variable
Growth Portfolio, Aetna Variable Index Plus Portfolio and Aetna Variable
Small Company Portfolio since their inception.
Effective August 1, 1996, Investment Advisory Fees were increased for Aetna
Variable Fund, Aetna Income Shares, Aetna Investment Advisers Fund, Inc.,
Aetna Ascent Variable Portfolio, Aetna Crossroads Variable Portfolio, and
Aetna Legacy Variable Portfolio. The Advisory Fees shown above are not based
on actual figures for the year ended December 31, 1996, but reflect the
increased Investment Advisory Fees.
(3) The Portfolio's investment adviser pays all expenses of the Portfolio except
brokerage commissions, taxes, interest, fees and expenses of the
non-interested person directors (including counsel fees) and extraordinary
expenses. These expenses have historically represented a very small
percentage (less than 0.01%) of total net assets in a fiscal year.
(4) A portion of the brokerage commissions that certain funds pay was used to
reduce expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses would
have been 0.71% for Contrafund Portfolio, 0.56% for Equity Income Portfolio,
0.67% for Growth Portfolio and 0.92% for Overseas Portfolio.
(5) The fees and expenses shown above are based on gross expenses of the Shares
before expense offset arrangements for the fiscal year ended December 31,
1996. The information for each Portfolio other than the Flexible Income
Portfolio is net of fee waivers
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FEE TABLE - 3
<PAGE>
or reductions from Janus Capital. Fee reductions for the Aggressive Growth,
Balanced, Growth, and Worldwide Growth Portfolios reduce the management fee
to the level of the corresponding Janus retail fund. Other waivers, if
applicable, are first applied against the management fee and then against
other expenses. Without such waivers or reductions, the Management Fee,
Other Expenses and Total Fund Annual Expenses would have been 0.79%, 0.04%
and 0.83% for Aggressive Growth Portfolio; 0.92%, 0.15% and 1.07% for
Balanced Portfolio; 0.79%, 0.04% and 0.83% for Growth Portfolio; 0.65%,
0.19% and 0.84% for Short-Term Bond Portfolio; and 0.77%, 0.14% and 0.91%
for Worldwide Growth Portfolio, respectively. Janus Capital may modify or
terminate the waivers or reductions at any time upon at least 90 days'
notice to the Portfolio's Board of Trustees.
HYPOTHETICAL ILLUSTRATION (EXAMPLE)
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.
The following Examples illustrate the expenses that would have been paid
assuming a $1,000 investment in the Contract and a 5% return on assets. For the
purposes of these Examples, the maximum maintenance fee of $25.00 that can be
deducted under the Contract has been converted to a percentage of assets equal
to 0.106%.
<TABLE>
<CAPTION>
EXAMPLE A
--------------------------------------------
If you withdraw your entire Contract
Value at the end of the periods shown,
you would pay the following expenses,
including any applicable deferred sales
charge assessed under Schedule A:
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Aetna Variable Fund $19 $60 $103 $224
Aetna Income Shares $19 $58 $ 99 $215
Aetna Variable Encore Fund $17 $54 $ 93 $201
Aetna Investment Advisers Fund, Inc. $20 $61 $105 $226
Aetna Ascent Variable Portfolio $21 $66 $113 $244
Aetna Crossroads Variable Portfolio $21 $66 $113 $244
Aetna Legacy Variable Portfolio $21 $66 $113 $244
Aetna Variable Capital Appreciation Portfolio $21 $66 $113 $244
Aetna Variable Growth Portfolio $21 $66 $113 $244
Aetna Variable Index Plus Portfolio $19 $58 $100 $218
Aetna Variable Small Company Portfolio $23 $71 $121 $259
Alger American Growth Portfolio $22 $67 $115 $248
Alger American Small Cap Portfolio $23 $70 $120 $257
American Century VP Capital Appreciation $24 $74 $126 $269
Fidelity VIP II Contrafund Portfolio $21 $66 $113 $243
Fidelity VIP Equity-Income Portfolio $20 $61 $105 $226
Fidelity VIP Growth Portfolio $21 $64 $110 $238
Fidelity VIP Overseas Portfolio $23 $71 $122 $262
Janus Aspen Aggressive Growth Portfolio $21 $66 $114 $245
Janus Aspen Balanced Portfolio $23 $72 $123 $263
Janus Aspen Growth Portfolio $21 $64 $110 $238
Janus Aspen Short-Term Bond Portfolio $20 $63 $109 $234
Janus Aspen Worldwide Growth Portfolio $22 $67 $116 $249
Scudder International Portfolio Class A Shares $24 $75 $128 $274
<CAPTION>
EXAMPLE B
-------------------------------------------
If you withdraw your entire Contract
Value at the end of the periods shown,
you would pay the following expenses,
including any applicable deferred sales
charge assessed under Schedule B:
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Aetna Variable Fund $71 $115 $150 $224
Aetna Income Shares $70 $113 $146 $215
Aetna Variable Encore Fund $69 $109 $140 $201
Aetna Investment Advisers Fund, Inc. $71 $116 $151 $226
Aetna Ascent Variable Portfolio $73 $120 $159 $244
Aetna Crossroads Variable Portfolio $73 $120 $159 $244
Aetna Legacy Variable Portfolio $73 $120 $159 $244
Aetna Variable Capital Appreciation Portfolio $73 $120 $159 $244
Aetna Variable Growth Portfolio $73 $120 $159 $244
Aetna Variable Index Plus Portfolio $70 $113 $147 $218
Aetna Variable Small Company Portfolio $74 $125 $167 $259
Alger American Growth Portfolio $73 $122 $161 $248
Alger American Small Cap Portfolio $74 $124 $166 $257
American Century VP Capital Appreciation $75 $128 $171 $269
Fidelity VIP II Contrafund Portfolio $73 $120 $159 $243
Fidelity VIP Equity-Income Portfolio $71 $116 $151 $226
Fidelity VIP Growth Portfolio $72 $119 $156 $238
Fidelity VIP Overseas Portfolio $75 $126 $168 $262
Janus Aspen Aggressive Growth Portfolio $73 $121 $160 $245
Janus Aspen Balanced Portfolio $75 $126 $169 $263
Janus Aspen Growth Portfolio $72 $119 $156 $238
Janus Aspen Short-Term Bond Portfolio $72 $118 $155 $234
Janus Aspen Worldwide Growth Portfolio $73 $122 $162 $249
Scudder International Portfolio Class A Shares $76 $129 $174 $274
</TABLE>
- --------------------------------------------------------------------
FEE TABLE - 4
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE C
--------------------------------------------
If you withdraw your entire Contract
Value at the end of the periods shown, you
would pay the following expenses,
including any applicable deferred sales
charge assessed under Schedule C:
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Aetna Variable Fund $81 $104 $127 $224
Aetna Income Shares $81 $102 $123 $215
Aetna Variable Encore Fund $79 $ 98 $116 $201
Aetna Investment Advisers Fund, Inc. $81 $105 $128 $226
Aetna Ascent Variable Portfolio $83 $110 $136 $244
Aetna Crossroads Variable Portfolio $83 $110 $136 $244
Aetna Legacy Variable Portfolio $83 $110 $136 $244
Aetna Variable Capital Appreciation Portfolio $83 $110 $136 $244
Aetna Variable Growth Portfolio $83 $110 $136 $244
Aetna Variable Index Plus Portfolio $81 $102 $124 $218
Aetna Variable Small Company Portfolio $85 $114 $144 $259
Alger American Growth Portfolio $83 $111 $138 $248
Alger American Small Cap Portfolio $84 $113 $143 $257
American Century VP Capital Appreciation $85 $117 $149 $269
Fidelity VIP II Contrafund Portfolio $83 $109 $136 $243
Fidelity VIP Equity-Income Portfolio $81 $105 $128 $226
Fidelity VIP Growth Portfolio $83 $108 $133 $238
Fidelity VIP Overseas Portfolio $85 $115 $145 $262
Janus Aspen Aggressive Growth Portfolio $83 $110 $137 $245
Janus Aspen Balanced Portfolio $85 $115 $146 $263
Janus Aspen Growth Portfolio $83 $108 $133 $238
Janus Aspen Short-Term Bond Portfolio $82 $107 $132 $234
Janus Aspen Worldwide Growth Portfolio $84 $111 $139 $249
Scudder International Portfolio Class A Shares $86 $118 $151 $274
<CAPTION>
EXAMPLE D
-------------------------------------------
If you do not withdraw your Contract
Value, or if you annuitize during the
periods shown, you would pay the
following expenses (no deferred sales
charge is reflected):*
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Aetna Variable Fund $19 $60 $103 $224
Aetna Income Shares $19 $58 $ 99 $215
Aetna Variable Encore Fund $17 $54 $ 93 $201
Aetna Investment Advisers Fund, Inc. $20 $61 $105 $226
Aetna Ascent Variable Portfolio $21 $66 $113 $244
Aetna Crossroads Variable Portfolio $21 $66 $113 $244
Aetna Legacy Variable Portfolio $21 $66 $113 $244
Aetna Variable Capital Appreciation Portfolio $21 $66 $113 $244
Aetna Variable Growth Portfolio $21 $66 $113 $244
Aetna Variable Index Plus Portfolio $19 $58 $100 $218
Aetna Variable Small Company Portfolio $23 $71 $121 $259
Alger American Growth Portfolio $22 $67 $115 $248
Alger American Small Cap Portfolio $23 $70 $120 $257
American Century VP Capital Appreciation $24 $74 $126 $269
Fidelity VIP II Contrafund Portfolio $21 $66 $113 $243
Fidelity VIP Equity-Income Portfolio $20 $61 $105 $226
Fidelity VIP Growth Portfolio $21 $64 $110 $238
Fidelity VIP Overseas Portfolio $23 $71 $122 $262
Janus Aspen Aggressive Growth Portfolio $21 $66 $114 $245
Janus Aspen Balanced Portfolio $23 $72 $123 $263
Janus Aspen Growth Portfolio $21 $64 $110 $238
Janus Aspen Short-Term Bond Portfolio $20 $63 $109 $234
Janus Aspen Worldwide Growth Portfolio $22 $67 $116 $249
Scudder International Portfolio Class A Shares $24 $75 $128 $274
</TABLE>
- ------------------
* This Example would not apply if a nonlifetime variable annuity option is
selected and a lump sum settlement is requested within three years (for 1992
Contracts) or 5 years (for 1994 Contracts) after annuity payments start since
the lump sum payment will be treated as a withdrawal during the Accumulation
Period and will be subject to any deferred sales charge that would then apply.
(See Example A, B or C, as applicable.)
- --------------------------------------------------------------------
FEE TABLE - 5
<PAGE>
CONDENSED FINANCIAL INFORMATION
(FOR CONTRACTS ISSUED AFTER MARCH 1994 WITH TOTAL SEPARATE ACCOUNT
ANNUAL EXPENSES OF 1.25%)*
(Selected data for accumulation units outstanding throughout each period)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
The condensed financial information presented below for the three years ended
December 31, 1996 (as applicable), is derived from the financial statements of
the Separate Account, which financial statements have been audited by KPMG Peat
Marwick LLP, Independent Auditors. The financial statements and the Independent
Auditors' report thereon, are included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ------------
<S> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $ 14.077 $ 10.778 $ 11.020
Value at end of period $ 17.302 $ 14.077 $ 10.778
Increase (decrease) in value of accumulation unit(1) 22.91% 30.61% (2.20)%(2)
Number of accumulation units outstanding at end of period 29,130,769 2,370,234 602,838
AETNA INCOME SHARES
Value at beginning of period $ 12.098 $ 10.360 $ 10.905
Value at end of period $ 12.377 $ 12.098 $ 10.360
Increase (decrease) in value of accumulation unit(1) 2.30% 16.78% (5.00)%(2)
Number of accumulation units outstanding at end of period 3,717,900 354,993 148,193
AETNA VARIABLE ENCORE FUND
Value at beginning of period $ 11.026 $ 10.528 $ 10.241
Value at end of period $ 11.473 $ 11.026 $ 10.528
Increase (decrease) in value of accumulation unit(1) 4.05% 4.73% 2.80%(2)
Number of accumulation units outstanding at end of period 3,510,588 544,383 334,746
AETNA INVESTMENT ADVISERS FUND, INC.
Value at beginning of period $ 13.673 $ 10.868 $ 11.057
Value at end of period $ 15.551 $ 13.673 $ 10.868
Increase (decrease) in value of accumulation unit(1) 13.73% 25.81% (1.71)%(2)
Number of accumulation units outstanding at end of period 7,803,572 940,933 261,895
AETNA ASCENT VARIABLE PORTFOLIO
Value at beginning of period $ 10.976 $10.000(3)
Value at end of period $ 13.395 $ 10.976
Increase (decrease) in value of accumulation unit(1) 22.04% 9.76%
Number of accumulation units outstanding at end of period 201,475 49,748
AETNA CROSSROADS VARIABLE PORTFOLIO
Value at beginning of period $ 10.862 $10.000(3)
Value at end of period $ 12.744 $ 10.862
Increase (decrease) in value of accumulation unit(1) 17.32% 8.62%
Number of accumulation units outstanding at end of period 165,860 47,204
AETNA LEGACY VARIABLE PORTFOLIO
Value at beginning of period $ 10.626 $10.000(9)
Value at end of period $ 11.982 $ 10.626
Increase (decrease) in value of accumulation unit(1) 12.76% 6.26%
Number of accumulation units outstanding at end of period 188,303 20,531
AETNA VARIABLE INDEX PLUS PORTFOLIO
Value at beginning of period $ 10.000(5)
Value at end of period $ 10.924
Increase (decrease) in value of accumulation unit(1) 9.24%(5)
Number of accumulation units outstanding at end of period 13,142
ALGER AMERICAN GROWTH PORTFOLIO
Value at beginning of period $ 11.379 $10.000(3)
Value at end of period $ 12.736 $ 11.379
Increase (decrease) in value of accumulation unit(1) 11.93% 13.79%
Number of accumulation units outstanding at end of period 699,452 284,978
ALGER AMERICAN SMALL CAP PORTFOLIO
Value at beginning of period $ 13.450 $ 9.437 $ 9.959
Value at end of period $ 13.838 $ 13.450 $ 9.437
Increase (decrease) in value of accumulation unit(1) 2.88% 42.52% (5.24)%(2)
Number of accumulation units outstanding at end of period 1,597,970 1,081,375 208,784
AMERICAN CENTURY VP CAPITAL APPRECIATION**
Value at beginning of period $ 15.253 $ 11.781 $ 12.069
Value at end of period $ 14.395 $ 15.253 $ 11.781
Increase (decrease) in value of accumulation unit(1) (5.63)% 29.47% (2.39)%(2)
Number of accumulation units outstanding at end of period 2,179,700 474,744 139,235
</TABLE>
- --------------------------------------------------------------------
AUV HISTORY - 1
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $ 11.681 $ 10.000(6)
Value at end of period $ 13.994 $ 11.681
Increase (decrease) in value of accumulation unit(1) 19.79% 16.81%
Number of accumulation units outstanding at end of period 500,034 174,259
FIDELITY EQUITY-INCOME PORTFOLIO
Value at beginning of period $ 13.880 $ 10.403 $ 10.000
Value at end of period $ 15.664 $ 13.880 $ 10.403
Increase (decrease) in value of accumulation unit(1) 12.86% 33.42% 4.03%(7)
Number of accumulation units outstanding at end of period 1,166,495 766,360 100,574
FIDELITY GROWTH PORTFOLIO
Value at beginning of period $ 14.000 $ 10.472 $ 10.000
Value at end of period $ 15.858 $ 14.000 $ 10.472
Increase (decrease) in value of accumulation unit(1) 13.27% 33.69% 4.72%(7)
Number of accumulation units outstanding at end of period 994,616 612,992 121,070
FIDELITY OVERSEAS PORTFOLIO
Value at beginning of period $ 10.262 $ 9.474 $ 10.000
Value at end of period $ 11.473 $ 10.262 $ 9.474
Increase (decrease) in value of accumulation unit(1) 11.80% 8.32% (5.26)%(7)
Number of accumulation units outstanding at end of period 182,533 166,303 54,387
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $ 12.861 $ 10.000(6)
Value at end of period $ 13.710 $ 12.861
Increase (decrease) in value of accumulation unit(1) 6.60% 28.61%
Number of accumulation units outstanding at end of period 495,557 167,920
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $ 11.259 $ 10.000(3)
Value at end of period $ 12.917 $ 11.259
Increase (decrease) in value of accumulation unit(1) 14.73% 12.59%
Number of accumulation units outstanding at end of period 127,631 34,072
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $ 11.626 $ 10.000(3)
Value at end of period $ 13.599 $ 11.626
Increase (decrease) in value of accumulation unit(1) 16.98% 16.26%
Number of accumulation units outstanding at end of period 250,918 78,126
JANUS ASPEN SHORT-TERM BOND PORTFOLIO
Value at beginning of period $ 10.285 $ 10.000(4)
Value at end of period $ 10.561 $ 10.285
Increase (decrease) in value of accumulation unit(1) 2.68% 2.85%
Number of accumulation units outstanding at end of period 11,034 1,405
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $ 12.216 $ 10.000(6)
Value at end of period $ 15.566 $ 12.216
Increase (decrease) in value of accumulation unit(1) 27.43% 22.16%
Number of accumulation units outstanding at end of period 526,646 65,384
SCUDDER INTERNATIONAL PORTFOLIO CLASS A SHARES
Value at beginning of period $ 13.923 $ 12.687 $ 12.957
Value at end of period $ 15.781 $ 13.923 $ 12.687
Increase (decrease) in value of accumulation unit(1) 13.35% 9.74% (2.08)%(2)
Number of accumulation units outstanding at end of period 510,035 432,183 187,169
</TABLE>
- ------------------
* This Table applies to all 1994 and 1992 Internal Rollover Contracts issued on
or after March 23, 1994 and all Contracts not connected with an internal
transfer (i.e., external rollovers or Contracts established with at least a
$1,000 annual Purchase Payment) issued on or after March 29, 1994.
**Formerly TCI Portfolios, Inc. -- TCI Growth
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value during a calendar year,
and dividing the result by the beginning Accumulation Unit value. These
figures do not reflect the deferred sales charge or the fixed dollar annual
maintenance fee, if any. Inclusion of these charges would reduce the
investment results shown.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during April 1994.
(3) Reflects less than a full year of performance activity. Funds were first
available in this option during June 1995.
(4) Reflects less than a full year of performance activity. Funds were first
available in this option during July 1995.
(5) Reflects less than a full year of performance activity. The initial
Accumulation Unit value was established during August 1996, when the
Portfolio became available under the Contract, when funds were first
received in this option or when the applicable daily asset charge was first
utilized.
(6) Reflects less than a full year of performance activity. Funds were first
available in this option during May 1995.
(7) Reflects less than a full year of performance activity. Funds were first
received in this option during May 1994.
- --------------------------------------------------------------------
AUV HISTORY - 2
<PAGE>
CONDENSED FINANCIAL INFORMATION
(FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT ANNUAL EXPENSES OF 1.15%)
(Selected data for accumulation units outstanding throughout each period)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
The condensed financial information presented below for the three years ended
December 31, 1996 is derived from the financial statements of the Separate
Account, which financial statements have been audited by KPMG Peat Marwick LLP,
Independent Auditors. The financial statements and the Independent Auditors'
report thereon, are included in the Statement of Additional Information.
<TABLE>
<CAPTION>
1996 1995 1994
------- --------- -----------
<S> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $14.108 $ 10.791 $ 10.875
Value at end of period $17.357 $ 14.108 $ 10.791
Increase (decrease) in value of accumulation unit(1) 23.03% 30.74% (0.77)%(3)
Number of accumulation units outstanding at end of period 405,331 273,578 110,420
AETNA INCOME SHARES
Value at beginning of period $12.125 $ 10.373 $ 10.367
Value at end of period $12.416 $ 12.125 $ 10.373
Increase (decrease) in value of accumulation unit(1) 2.40% 16.89% 0.06%(3)
Number of accumulation units outstanding at end of period 92,017 50,261 16,110
AETNA VARIABLE ENCORE FUND
Value at beginning of period $11.051 $ 10.541 $ 10.484
Value at end of period $11.510 $ 11.051 $ 10.541
Increase (decrease) in value of accumulation unit(1) 4.16% 4.84% 0.54%(4)
Number of accumulation units outstanding at end of period 173,308 145,629 9,736
AETNA INVESTMENT ADVISERS FUND, INC.
Value at beginning of period $13.703 $ 10.880 $ 10.951
Value at end of period $15.600 $ 13.703 $ 10.880
Increase (decrease) in value of accumulation unit(1) 13.85% 25.95% (0.65)%(4)
Number of accumulation units outstanding at end of period 172,588 138,271 49,333
AETNA ASCENT VARIABLE PORTFOLIO
Value at beginning of period $10.982 $10.000(6)
Value at end of period $13.415 $ 10.982
Increase (decrease) in value of accumulation unit(1) 22.16% 9.82%
Number of accumulation units outstanding at end of period 28,982 15,055
AETNA CROSSROADS VARIABLE PORTFOLIO
Value at beginning of period $10.868 $10.000(6)
Value at end of period $12.763 $ 10.868
Increase (decrease) in value of accumulation unit(1) 17.44% 8.68%
Number of accumulation units outstanding at end of period 15,074 2,394
AETNA LEGACY VARIABLE PORTFOLIO
Value at beginning of period $10.631 $10.000(7)
Value at end of period $12.000 $ 10.631
Increase (decrease) in value of accumulation unit(1) 12.88% 6.31%
Number of accumulation units outstanding at end of period 19,864 17,106
ALGER AMERICAN GROWTH PORTFOLIO
Value at beginning of period $11.385 $10.000(6)
Value at end of period $12.756 $ 11.385
Increase (decrease) in value of accumulation unit(1) 12.05% 13.85%
Number of accumulation units outstanding at end of period 53,888 12,859
ALGER AMERICAN SMALL CAP PORTFOLIO
Value at beginning of period $13.481 $ 9.450 $ 9.202
Value at end of period $13.883 $ 13.481 $ 9.450
Increase (decrease) in value of accumulation unit(1) 2.98% 42.66% 2.70%(2)
Number of accumulation units outstanding at end of period 116,124 54,684 22,052
AMERICAN CENTURY VP CAPITAL APPRECIATION*
Value at beginning of period $15.285 $ 11.794 $ 11.910
Value at end of period $14.440 $ 15.285 $ 11.794
Increase (decrease) in value of accumulation unit(1) (5.53)% 29.60% (0.97)%(3)
Number of accumulation units outstanding at end of period 4,846 13,307 4,486
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $11.689 $10.000(5)
Value at end of period $14.016 $ 11.689
Increase (decrease) in value of accumulation unit(1) 19.91% 16.89%
Number of accumulation units outstanding at end of period 13,300 5,453
</TABLE>
- --------------------------------------------------------------------
AUV HISTORY - 3
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------- --------- ----------
<S> <C> <C> <C>
FIDELITY EQUITY-INCOME PORTFOLIO
Value at beginning of period $13.902 $ 10.409 $ 10.000
Value at end of period $15.705 $ 13.902 $ 10.409
Increase (decrease) in value of accumulation unit(1) 12.97% 33.55% 4.09%(2)
Number of accumulation units outstanding at end of period 194,798 118,679 43,852
FIDELITY GROWTH PORTFOLIO
Value at beginning of period $14.023 $ 10.479 $ 10.000
Value at end of period $15.900 $ 14.023 $ 10.479
Increase (decrease) in value of accumulation unit(1) 13.39% 33.82% 4.79%(4)
Number of accumulation units outstanding at end of period 87,971 45,765 32,592
FIDELITY OVERSEAS PORTFOLIO
Value at beginning of period $10.278 $ 9.480 $ 10.000
Value at end of period $11.503 $ 10.278 $ 9.480
Increase (decrease) in value of accumulation unit(1) 11.92% 8.43% (5.20)%(4)
Number of accumulation units outstanding at end of period 35,293 4,284 5,098
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $12.869 $10.000(5)
Value at end of period $13.733 $ 12.869
Increase (decrease) in value of accumulation unit(1) 6.71% 28.69%
Number of accumulation units outstanding at end of period 24,366 22,050
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $11.265 $10.000(6)
Value at end of period $12.938 $ 11.265
Increase (decrease) in value of accumulation unit(1) 14.85% 12.65%
Number of accumulation units outstanding at end of period 15,488 9,383
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $11.633 $10.000(6)
Value at end of period $13.621 $ 11.633
Increase (decrease) in value of accumulation unit(1) 17.09% 16.33%
Number of accumulation units outstanding at end of period 6,308 3,238
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $12.223 $10.000(5)
Value at end of period $15.592 $ 12.223
Increase (decrease) in value of accumulation unit(1) 27.56% 22.23%
Number of accumulation units outstanding at end of period 33,350 2,617
SCUDDER INTERNATIONAL PORTFOLIO CLASS A SHARES
Value at beginning of period $13.952 $ 12.701 $ 13.433
Value at end of period $15.830 $ 13.952 $ 12.701
Increase (decrease) in value of accumulation unit(1) 13.46% 9.85% (5.45)%(2)
Number of accumulation units outstanding at end of period 38,898 41,921 23,840
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value during a calendar year,
and dividing the result by the beginning Accumulation Unit value. These
figures do not reflect the deferred sales charge or the fixed dollar annual
maintenance fee, if any. Inclusion of these charges would reduce the
investment results shown.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during September 1994.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during October 1994.
(4) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1994.
(5) Reflects less than a full year of performance activity. Funds were first
available in this option during May 1995.
(6) Reflects less than a full year of performance activity. Funds were first
available in this option during June 1995.
(7) Reflects less than a full year of performance activity. Funds were first
available in this option during July 1995.
*Formerly TCI Portfolios, Inc. -- TCI Growth
- --------------------------------------------------------------------
AUV HISTORY - 4
<PAGE>
CONDENSED FINANCIAL INFORMATION
(1992 CONTRACTS ISSUED PRIOR TO MARCH 1994)*
(Selected data for accumulation units outstanding throughout each period)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
The condensed financial information presented below for each of the years in the
ten-year period ended December 31, 1996 (as applicable), is derived from the
financial statements of the Separate Account, which financial statements have
been audited by KPMG Peat Marwick LLP, Independent Auditors. The financial
statements and the Independent Auditors' report thereon, are included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $ 137.869 $ 105.558 $ 107.925 $ 102.383 $ 97.165
Value at end of period $ 169.448 $ 137.869 $ 105.558 $ 107.925 $ 102.383
Increase (decrease) in value of
accumulation unit(1) 22.91% 30.61% (2.19)% 5.41% 5.37%
Number of accumulation units
outstanding at end of period 2,071,139 6,364,000 13,966,072 21,148,863 24,201,565
AETNA INCOME SHARES
Value at beginning of period $ 46.913 $ 40.173 $ 42.283 $ 39.038 $ 36.789
Value at end of period $ 47.992 $ 46.913 $ 40.173 $ 42.283 $ 39.038
Increase (decrease) in value of
accumulation unit(1) 2.30% 16.78% (4.99)% 8.31% 6.11%
Number of accumulation units
outstanding at end of period 835,724 2,377,622 5,108,720 8,210,666 8,507,292
AETNA VARIABLE ENCORE FUND
Value at beginning of period $ 37.988 $ 36.271 $ 35.282 $ 34.619 $ 33.812
Value at end of period $ 39.528 $ 37.988 $ 36.271 $ 35.282 $ 34.619
Increase (decrease) in value of
accumulation unit(1) 4.05% 4.73% 2.80% 1.92% 2.39%
Number of accumulation units
outstanding at end of period 597,656 1,836,260 3,679,802 5,086,515 7,534,662
AETNA INVESTMENT
ADVISERS FUND, INC.
Value at beginning of period $ 17.954 $ 14.270 $ 14.519 $ 13.379 $ 12.736
Value at end of period $ 20.419 $ 17.954 $ 14.270 $ 14.519 $ 13.379
Increase (decrease) in value of
accumulation unit(1) 13.73% 25.82% (1.71)% 8.52% 5.05%
Number of accumulation units
outstanding at end of period 2,716,641 9,193,181 21,990,186 30,784,750 34,802,433
AMERICAN CENTURY VP
CAPITAL APPRECIATION**
Value at beginning of period $ 13.224 $ 10.213 $ 10.463 $ 10.000(3)
Value at end of period $ 12.480 $ 13.224 $ 10.213 $ 10.463
Increase (decrease) in value of
accumulation unit(1) (5.63)% 29.47% (2.39)% 4.63%
Number of accumulation units
outstanding at end of period 741,392 4,184,701 12,096,731 12,272,152
<CAPTION>
1991 1990 1989 1988 1987
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $ 77.845 $ 76,311 $ 59.871 $ 52.885 $ 50.760
Value at end of period $ 97.165 $ 77.845 $ 76.311 $ 59.871 $ 52.885
Increase (decrease) in value of
accumulation unit(1) 24.82% 2.01% 27.46% 13.21% 4.19%
Number of accumulation units
outstanding at end of period 20,948,226 18,362,906 17,142,820 16,455,396 16,497,406
AETNA INCOME SHARES
Value at beginning of period $ 31.192 $ 28.943 $ 25.574 $ 24.061 $ 23.308
Value at end of period $ 36.789 $ 31.192 $ 28.943 $ 25.574 $ 24.061
Increase (decrease) in value of
accumulation unit(1) 17.94% 7.77% 13.17% 6.29% 3.23%
Number of accumulation units
outstanding at end of period 7,844,412 6,984,793 6,202,834 5,955,293 5,372,271
AETNA VARIABLE ENCORE FUND
Value at beginning of period $ 32.138 $ 30.012 $ 27.783 $ 26.171 $ 24.812
Value at end of period $ 33.812 $ 32.138 $ 30.012 $ 27.783 $ 26.171
Increase (decrease) in value of
accumulation unit(1) 5.21% 7.08% 8.02% 6.16% 5.48%
Number of accumulation units
outstanding at end of period 8,430,082 10,220,110 8,286,033 8,154,644 7,326,151
AETNA INVESTMENT
ADVISERS FUND, INC.
Value at beginning of period $ 10.896 $ 10.437 $ 10.000(2)
Value at end of period $ 12.736 $ 10.896 $ 10.437
Increase (decrease) in value of
accumulation unit(1) 16.89% 4.40% 4.37%
Number of accumulation units
outstanding at end of period 22,898,099 17,078,985 9,535,986
AMERICAN CENTURY VP
CAPITAL APPRECIATION
Value at beginning of period Value at end of period Increase (decrease) in value
of accumulation unit(1) Number of accumulation units outstanding at end of
period
</TABLE>
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*This Table applies to 1992 Internal Rollover Contracts issued prior to March
23, 1994 and 1992 Contracts not connected with an internal transfer (i.e.,
external rollovers or Contracts established with at least a $1,000 annual
Purchase Payment) issued prior to March 29, 1994.
**Formerly TCI Portfolios, Inc. -- TCI Growth
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value during a calendar year,
and dividing the result by the beginning Accumulation Unit value. These
figures do not reflect the deferred sales charge or the fixed dollar annual
maintenance fee, if any. Inclusion of these charges would reduce the
investment results shown.
(2) The initial Accumulation Unit value was established at $10.000 on June 23,
1989, the date on which the Fund commenced operations.
(3) The initial Accumulation Unit value was established at $10.000 on February
1, 1993, the date on which the Portfolio became available under the
Contract.
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AUV HISTORY - 5
<PAGE>
THE COMPANY
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Aetna Life Insurance and Annuity Company (the "Company") is the issuer of
the Contract, and as such, it is responsible for providing the insurance and
annuity benefits under the Contract. The Company is a stock life insurance
company organized under the insurance laws of the State of Connecticut in 1976.
Through a merger, it succeeded to the business of Aetna Variable Annuity Life
Insurance Company (formerly Participating Annuity Life Insurance Company, an
Arkansas life insurance company organized in 1954). The Company is engaged in
the business of issuing life insurance policies and variable annuity contracts
in all states of the United States. The Company's principal executive offices
are located at 151 Farmington Avenue, Hartford, Connecticut 06156.
The Company is a wholly owned subsidiary of Aetna Retirement Holdings,
Inc., which is in turn a wholly owned subsidiary of Aetna Retirement Services,
Inc. and an indirect wholly owned subsidiary of Aetna Inc.
VARIABLE ANNUITY ACCOUNT C
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The Company established Variable Annuity Account C (the "Separate
Account") in 1976 as a segregated asset account for the purpose of funding its
variable annuity contracts. The Separate Account is registered as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act"), and
meets the definition of "separate account" under the federal securities laws.
The Separate Account is divided into "subaccounts" which do not invest directly
in stocks, bonds or other investments. Instead, each Subaccount buys and sells
shares of a corresponding Fund.
Although the Company holds title to the assets of the Separate Account,
such assets are not chargeable with liabilities of any other business conducted
by the Company. Income, gains or losses of the Separate Account are credited to
or charged against the assets of the Separate Account without regard to other
income, gains or losses of the Company. All obligations arising under the
Contracts are general corporate obligations of the Company.
INVESTMENT OPTIONS
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THE FUNDS
Purchase Payments may be allocated to one or more of the Subaccounts as
designated on the application. In turn, the Subaccounts invest in the
corresponding Funds at net asset value.
The availability of Funds may be subject to applicable regulatory
authorization. In addition, the Company may add, withdraw or substitute Funds,
subject to the conditions in the Contract and to compliance with regulatory
requirements. Not all Funds may be available in all jurisdictions or under all
Contracts. The total number of investment options that you may select during the
Accumulation Period is limited to 18. Each Subaccount, the Fixed Account, and
each classification of GIA/GAA count as one option once you have made an
allocation to it, even if you no longer have amounts allocated to that option.
Additionally, 1994 Contracts provide that no more than ten investment choices
may be selected at any given time.
The investment results of the Funds described below are likely to differ
significantly and there is no assurance that any of the Funds will achieve their
respective investment objectives. Except where otherwise noted, all of the Funds
are diversified, as defined in the 1940 Act.
[bullet] Aetna Variable Fund seeks to maximize total return through investments
in a diversified portfolio of common stocks and securities convertible
into common stock.(1)
[bullet] Aetna Income Shares seeks to maximize total return, consistent with
reasonable risk, through investments in a diversified portfolio
consisting primarily of debt securities.(1)
[bullet] Aetna Variable Encore Fund seeks to provide high current return,
consistent with preservation of capital and liquidity, through
investment in high-quality money market instruments. An investment in
the Fund is neither insured nor guaranteed by the U.S. Government.(1)
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1
<PAGE>
[bullet] Aetna Investment Advisers Fund, Inc. is a managed fund which seeks to
maximize investment return consistent with reasonable safety of
principal by investing in one or more of the following asset classes:
stocks, bonds and cash equivalents based on the Company's judgment of
which of those sectors or mix thereof offers the best investment
prospects.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Ascent Variable Portfolio
seeks to provide capital appreciation by allocating its investments
among equities and fixed income securities. The Portfolio is managed
for investors who generally have an investment horizon exceeding 15
years, and who have a high level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Crossroads Variable Portfolio
seeks to provide total return (i.e., income and capital appreciation,
both realized and unrealized) by allocating its investments among
equities and fixed income securities. The Portfolio is managed for
investors who generally have an investment horizon exceeding 10 years
and who have a moderate level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Legacy Variable Portfolio
seeks to provide total return consistent with preservation of capital
by allocating its investments among equities and fixed income
securities. The Portfolio is managed for investors who generally have
an investment horizon exceeding five years and who have a low level of
risk tolerance.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Capital Appreciation
Portfolio seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into
common stock. The Portfolio will use a value-oriented approach in an
attempt to outperform the total return performance of publicly traded
common stocks represented by the S & P 500 Composite Stock Price Index
("S & P 500"), a broad based stock market index composed of 500 common
stocks selected by the Standard & Poor's Corporation. The Portfolio
uses the S & P 500 as a comparative benchmark because it represents
approximately two-thirds of the total market value of all U.S. common
stocks, and is well known to investors.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Growth Portfolio seeks
growth of capital through investment in a diversified portfolio of
common stocks and securities convertible into common stocks believed to
offer growth potential.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Index Plus Portfolio
seeks to outperform the total return performance of publicly traded
common stocks represented by the S & P 500.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Small Company Portfolio
seeks growth of capital primarily through investment in a diversified
portfolio of common stocks and securities convertible into common
stocks of companies with smaller market capitalizations. Companies with
smaller market capitalizations generally will have market
capitalization at the time of purchase of $1 billion or less.(1)
[bullet] Alger American Fund--Alger American Growth Portfolio seeks long-term
capital appreciation by investing in a diversified, actively managed
portfolio of equity securities. The Portfolio primarily invests in
equity securities of companies which have a market capitalization of $1
billion or greater.(2)
[bullet] Alger American Fund--Alger American Small Capitalization Portfolio
seeks long-term capital appreciation. Except during temporary defensive
periods, the Portfolio invests at least 65% of its total assets in
equity securities of companies that, at the time of purchase of the
securities, have total market capitalization within the range of
companies included in the Russell 2000 Growth Index ("Russell Index")
and the S&P SmallCap 600 Index ("S&P Index"), updated quarterly. As of
March 31, 1997, the range of market capitalization of the companies in
the Russell Index was $10 million to $1.94 billion; the range of market
capitalization of the companies in the S&P Index at that date was $32
million to $2.58 billion. The combined range was $10 million to $2.58
billion.(2)
[bullet] American Century VP Capital Appreciation (formerly TCI Growth) seeks
capital growth. The Fund seeks to achieve its objective by investing in
common stocks (including securities convertible into common stocks) and
other securities that meet certain fundamental and technical standards
of selection and, in the opinion of the Fund's investment manager, have
better than average potential for appreciation.(3)
[bullet] Fidelity Investments' Variable Insurance Products Fund II--Contrafund
Portfolio seeks maximum total return over the long term by investing
mainly in equity securities of companies that are undervalued or
out-of-favor.(4)
[bullet] Fidelity Investments' Variable Insurance Products Fund--Equity-Income
Portfolio seeks reasonable income
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2
<PAGE>
by investing primarily in income-producing equity securities. In
selecting investments, the Fund also considers the potential for
capital appreciation.(4)
[bullet] Fidelity Investments' Variable Insurance Products Fund--Growth
Portfolio seeks capital appreciation by investing mainly in common
stocks, although its investments are not restricted to any one type of
security.(4)
[bullet] Fidelity Investments' Variable Insurance Products Fund--Overseas
Portfolio seeks long-term growth by investing mainly in foreign
securities (at least 65% of the Fund's total assets in securities of
issuers from at least three countries outside of North America).
Foreign investments involve greater risks than U.S. investments,
including political and economic risks and the risk of currency
fluctuation.(4)
[bullet] Janus Aspen Series--Aggressive Growth Portfolio is a nondiversified
portfolio that seeks long-term growth of capital. The Portfolio pursues
its investment objective by normally investing at least 50% of its
equity assets in securities issued by medium-sized companies. Medium-
sizes companies are those whose market capitalizations fall within the
range of companies in the S & P MidCap 400 Index, which as of December
30, 1996 included companies with capitalizations between approximately
$192 million and $6.5 billion, but which is expected to change on a
regular basis.(5)
[bullet] Janus Aspen Series--Balanced Portfolio seeks long-term capital growth,
consistent with preservation of capital and balanced by current income.
The Portfolio pursues its investment objective by, under normal
circumstances, investing 40%-60% of its assets in securities selected
primarily for their growth potential and 40%-60% of its assets in
securities selected primarily for their income potential.(5)
[bullet] Janus Aspen Series--Growth Portfolio seeks long-term growth of capital
in a manner consistent with the preservation of capital. The Portfolio
pursues its investment objective by investing in common stocks of
companies of any size.(5)
[bullet] Janus Aspen Series--Short-Term Bond Portfolio seeks as high a level of
current income as is consistent with preservation of capital. The
Portfolio pursues its investment objective by investing primarily in
short- and intermediate-term fixed income securities.(5)
[bullet] Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth
of capital in a manner consistent with preservation of capital. The
Portfolio pursues its investment objective primarily through
investments in common stocks of foreign and domestic issuers.(5)
[bullet] Scudder Variable Life Investment Fund--International Portfolio Class A
Shares seeks long-term growth of capital primarily through diversified
holdings of marketable foreign equity investments.(6)
Investment Advisers for each of the Funds:
(1) Aetna Life Insurance and Annuity Company (adviser); Aeltus Investment
Management, Inc. (sub-adviser)
(2) Fred Alger Management, Inc.
(3) American Century Investment Management, Inc.
(4) Fidelity Management & Research Company
(5) Janus Capital Corporation
(6) Scudder, Stevens & Clark, Inc.
Risks Associated with Investment in the Funds. Some of the Funds may use
instruments known as derivatives as part of their investment strategies. The use
of certain derivatives may involve high risk of volatility to a Fund, and the
use of leverage in connection with such derivatives can also increase risk of
losses. Some of the Funds may also invest in foreign or international securities
which involve greater risks than U.S. investments.
More comprehensive information, including a discussion of potential risks,
is found in the current prospectus for each Fund which is distributed with and
accompanies this Prospectus. You should read the Fund prospectuses and consider
carefully, and on a continuing basis, which Fund or combination of Funds is best
suited to your long-term investment objectives. Additional prospectuses and
Statements of Additional Information for this Prospectus and for each of the
Funds can be obtained from the Company's Home Office at the address and
telephone number listed under the "Inquiries" section of the Prospectus Summary.
Conflicts of Interest (Mixed and Shared Funding). Shares of the Funds are
sold to each of the Subaccounts for funding the variable annuity contracts
issued by the Company. Shares of the Funds may also be sold to other insurance
companies for the same purpose. This is referred to as "shared funding." Shares
of the Funds may also be used for funding variable life insurance contracts
issued by the Company or by third parties. This is referred to as "mixed
funding."
Because the Funds available under the Contract are sold to fund variable
annuity contracts and variable life
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3
<PAGE>
insurance policies issued by us or by other companies, certain conflicts of
interest could arise. If a conflict of interest were to occur, one of the
separate accounts might withdraw its investment in a Fund, which might force
that Fund to sell portfolio securities at disadvantageous prices, causing its
per share value to decrease. Each Fund's Board of Directors or Trustees has
agreed to monitor events in order to identify any material irreconcilable
conflicts which might arise and to determine what action, if any, should be
taken to address such conflict.
CREDITED INTEREST OPTIONS
Purchase Payments may be allocated to one or more of the Credited Interest
Options available under the Contract as described below.
[bullet] The Guaranteed Interest Account (GIA) is a part of the Company's
general account and guarantees a minimum interest rate, as specified in
the Contract. The Company may credit higher interest rates at its
discretion. (See Appendix I.)
[bullet] The Fixed Account is also a part of the Company's general account. The
Fixed Account guarantees a minimum interest rate, as specified in the
Contract. The Company may credit higher interest rates from time to
time. Transfers from the Fixed Account are limited. (See Appendix II.)
[bullet] The Guaranteed Accumulation Account (GAA) is a Credited Interest Option
through which we guarantee stipulated rates of interest for stated
periods of time. Amounts must remain in GAA for the full guaranteed
term to received the quoted interest rates, or a market value
adjustment (which may be positive or negative) will be applied. (See
Appendix III.)
PURCHASE
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CONTRACT AVAILABILITY
The Contracts described in this Prospectus are intended to be used as
Individual Retirement Annuities. The Contracts will accept annual contributions
to an IRA including contributions pursuant to the provisions of a Simplified
Employee Pension Plan ("SEP"). The Contracts can also accept transfers and
rollovers from other Individual Retirement Annuities/Individual Retirement
Accounts, as well as tax deferred annuities and qualified pension/profit sharing
plans under Section 401(a) of the Code. Currently, the Contracts are not
available as a "SIMPLE IRA" as defined in Section 408(p) of the Code.
CONTRACT PURCHASE
These Contracts may be purchased by completing the proper application form
and submitting it to the Company. The Company must accept or reject the
application within two business days of receipt. If the application is
incomplete, the Company may hold any forms and accompanying Purchase Payments
for five days. Purchase Payments may be held for longer periods only with the
consent of the Contract Holder, pending acceptance of the application. If the
application is rejected, the application and any Purchase Payments will be
returned to the Contract Holder.
PURCHASE PAYMENTS
The minimum initial rollover amount required to establish a Contract is
$1,500. The Contract may accept additional rollovers and/or Purchase Payments as
long as they meet the minimum amount established from time to time by us.
Installment Purchase Payments must be at least $85 per month or $1,000 annually.
(Monthly installments must be made via Automatic Bank Check Plan.)
Allocation of Purchase Payments. Purchase Payments will initially be
allocated to the Subaccounts or Credited Interest Options as specified by the
Contract Holder on the application. Changes in such allocation may be made in
writing or by telephone transfer. Allocations must be in whole percentages, and
there may be limitations on the number of investment options that can be
selected during the Accumulation Period. (See "Investment Options--The Funds.")
RIGHT TO CANCEL
You may cancel the Contract no later than 10 days after you receive it (or
as otherwise allowed by state law) by returning it to the Company with a written
notice of cancellation. We will produce a refund not later than seven days after
we receive the Contract and the written notice at our Home Office. Cancellations
requested after a customer receives the Contract will consist of a refund of the
Purchase Payment.
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4
<PAGE>
CHARGES AND DEDUCTIONS
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DAILY DEDUCTIONS FROM THE SEPARATE ACCOUNT
Mortality and Expense Risk Charge. The Company makes a daily deduction
from each of the Subaccounts for the mortality and expense risk charge. The
Charge is equal, on an annual basis, to 1.25% of the daily net assets of the
Subaccounts and compensates the Company for the assumption of the mortality and
expense risks under the Contract. Under the 1994 Contracts, the Company will
reduce the charge to 1.15% provided one of the following conditions are met: (1)
the Contract has remained in the Accumulation Period for 10 years following the
initial Purchase Payment; or (2) if $250,000 or more is applied as the initial
Purchase Payment; or (3) if the Contract's Value at the Contract Year
anniversary is at least $250,000. The mortality risks are those assumed for our
promise to make lifetime payments according to annuity rates specified in the
Contract. The expense risk is the risk that the actual expenses for costs
incurred under the Contract will exceed the maximum costs that can be charged
under the Contract.
If the amount deducted for mortality and expense risks is not sufficient
to cover the mortality costs and expense shortfalls, the loss is borne by the
Company. If the deduction is more than sufficient, the excess may be used to
recover distribution expenses relating to the Contracts and as a source of
profit to the Company. The Company expects to make a profit from the mortality
and expense risk charge.
Administrative Expense Charge. The Company reserves the right to make a
deduction from each of the Subaccounts for an administrative expense charge. The
administrative expense charge compensates the Company for administrative
expenses that exceed revenues from the maintenance fee described below. The
charge is set at a level which does not exceed the average expected cost of the
administrative services to be provided while the Contract is in force. The
Company does not expect to make a profit from this charge.
Under the Contract, the amount of the administrative expense charge may be
an amount up to, on an annual basis, 0.25% of the daily net assets of the
Subaccounts. There is currently no administrative expense charge during the
Accumulation Period or Annuity Period. The charge in effect at time of election
of an Annuity Option will be applicable during the entire Annuity Period.
MAINTENANCE FEE
During the Accumulation Period, the Company will deduct an annual
maintenance fee from the Contract Value. The maintenance fee is to reimburse the
Company for some of its administrative expenses relating to the establishment
and maintenance of the Contracts.
The maintenance fee under the Contract is $25. The maintenance fee is
determined annually based on the Contract Value on the last day of the Contract
Year. For 1994 Contracts, if the Contract Value is $10,000 or greater, and for
1992 Contracts, if the initial Purchase Payment is $10,000 or greater, the
annual maintenance fee is zero. The maintenance fee will be deducted on a pro
rata basis from each Subaccount or Credited Interest Option in which you have an
interest.
REDUCTION OR ELIMINATION OF MAINTENANCE FEE
The maintenance fee may be reduced or eliminated when sales of the
Contracts are made to individuals or to a group of individuals in such a manner
that results in savings of administrative expenses. The entitlement to such a
reduction will be based on:
(1) the size and type of group of individuals to whom the Contract is offered;
and
(2) the amount of expected Purchase Payments.
Any reduction or elimination of the maintenance fees will not be unfairly
discriminatory against any person. We will make any reduction in the annual
maintenance fees according to our own rules in effect at the time an application
for a Contract is approved. We reserve the right to change these rules from time
to time.
DEFERRED SALES CHARGE
Withdrawals of all or a portion of the Contract Value may be subject to a
deferred sales charge. The deferred sales charge is a percentage of the amount
withdrawn from the Subaccounts and the Credited Interest Options in which you
have an interest. As set forth in the tables below, the length of the deferred
sales charge schedule will vary depending on the type of Contract.
SCHEDULE A applies to 1994 Internal Rollover Contracts established with
amounts that were transferred or rolled over from an existing Contract issued by
the
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5
<PAGE>
Company where you have participated under certain pension or profit sharing
retirement plans and to 1992 Internal Rollover Contracts established with
amounts transferred from such contracts only where you have not been subject to
a deferred sales charge under the prior contract. It also applies to Contracts
established with amounts that were transferred from certain existing contracts
issued by Aetna Life Insurance Company (one of our affiliates), and all sales of
the Contract in New York. The deferred sales charge is based on the number of
completed Contract Years since the date of initial payment to the new Contract.
SCHEDULE A
Completed Contract Deferred Sales
Years Charge Deduction
------------------ ----------------
Less than 1 1%
1 or more 0%
SCHEDULE B applies to 1992 Internal Rollover Contracts established with
amounts that were transferred from certain existing Contracts, issued by the
Company where the Contract Holder has been, or still is, subject to a deferred
sales charge. The beginning deferred sales charge is based on the number of
completed Contract Years since the initial payment to the predecessor Contract.
SCHEDULE B
Completed Contract Deferred Sales
Years Charge Deduction
------------------ ----------------
Less than 5 5%
5 or more but less than 6 4%
6 or more but less than 7 3%
7 or more but less than 8 2%
8 or more but less than 9 1%
9 or more 0%
SCHEDULE C applies to 1994 Internal Rollover Contracts established with
amounts that were transferred from certain IRA or SEP Contracts issued by us
where you have been, or still are, subject to a deferred sales charge. The
Contract Holder enters the deferred sales charge schedule at the percentage
point corresponding to the deferred sales charge applicable under the
predecessor contract at the time of the exchange, and continues from that point
in the Schedule. Schedule C also applies to all new purchases that are not
connected with an internal transfer (i.e., external rollovers or Contracts
established with at least a $1,000 annual Purchase Payment).
SCHEDULE C
Completed Contract Deferred Sales
Years Charge Deduction
------------------ ----------------
Less than 2 6%
2 or more but less than 3 5%
3 or more but less than 4 4%
4 or more but less than 5 3%
5 or more but less than 6 2%
6 or more but less than 7 1%
7 or more 0%
A deferred sales charge will not be deducted from any portion of the
Contract Value if the withdrawal is:
[bullet] applied to provide Annuity benefits;
[bullet] paid due to your death;
[bullet] withdrawn due to the election of an Additional Withdrawal Option (see
"Additional Withdrawal Options");
[bullet] paid where the Contract Value is $2,500 or less and no amount has been
withdrawn from that Contract, within the prior 12 months;
[bullet] paid in an amount of 10% or less of the current Contract Value. This
applies only to the first partial withdrawal in each calendar year and
does not apply to full withdrawals, except for Contracts issued in the
states of Washington, Florida and New Jersey. The 10% amount will be
calculated using the Contract Value on the date the request is received
in good order at our Home Office. When an Additional Withdrawal Option
is elected, this provision includes any amounts paid under that
election. This provision is available only if you are at least age
59-1/2.
The deduction for the deferred sales charge will not exceed 8.5% of the
total Purchase Payments actually made to the Contract. The Company does not
anticipate that the deferred sales charge will cover all sales and
administrative expenses which it incurs in connection with the Contract. The
difference will be covered by the general assets of the Company, which are
attributable, in part, to mortality and expense risk charges under the Contract
described above.
FUND EXPENSES
Each Fund incurs certain expenses which are paid out of its net assets.
These expenses include, among other things, the investment advisory or
"management" fee. The expenses of the Funds are set forth in the Fee Table in
this Prospectus and described more fully in the accompanying Fund prospectuses.
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6
<PAGE>
PREMIUM AND OTHER TAXES
Several states and municipalities impose a premium tax on annuities. These
taxes currently range from 0% to 4%. The Company reserves the right to deduct
premium tax against Purchase Payments or Contract Values at any time, but no
earlier than when we have a tax liability under state law. The Company's current
practice is to deduct for premium taxes at the time of complete withdrawal or
annuitization. In addition to the premium tax, the Company reserves the right to
assess a charge for any state or federal taxes due against the Contract or the
Separate Account assets. (See "Tax Status.")
Any municipal premium tax assessed at a rate in excess of 1% will be
deducted from the Purchase Payment(s) or from the amount applied to an Annuity
Option based upon our determination of when such tax is due. We will absorb any
municipal premium tax that is assessed at 1% or less. We reserve the right,
however, to reflect this added expense in our annuity purchase rates for
residents of such municipalities.
CONTRACT VALUATION
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CONTRACT VALUE
Until the Annuity Date, the Contract Value is the total dollar value of
amounts held in your Account as of any Valuation Date. The Contract Value at any
given time is based on the value of the units held in each Subaccount, plus the
value of amounts held in any of the Credited Interest Options.
ACCUMULATION UNITS
The value of your interest in a Subaccount is expressed as the number of
"Accumulation Units" that you hold multiplied by an "Accumulation Unit Value"
(or "AUV") for each unit. The AUV on any Valuation Date is determined by
multiplying the value on the immediately preceding Valuation Date by the net
investment factor of that Subaccount for the period between the immediately
preceding Valuation Date and the current Valuation Date. (See "Net Investment
Factor" below.) The Accumulation Unit Value will be affected by the investment
performance, expenses and charges of the applicable Fund and is reduced each day
by a percentage that accounts for the daily assessment of mortality and expense
risk charges and the administrative charge (if any).
Initial Purchase Payments will be credited to your Contract at the AUV
computed on the next Valuation Date following our acceptance of the application
or enrollment form, as described under "Purchase--Contract Purchase." Each
subsequent Purchase Payment (or amount transferred) received by the Company by
the close of business of the New York Stock Exchange will be credited to your
Contract at the AUV computed on the next Valuation Date following our receipt of
your payment or transfer request. The value of an Accumulation Unit may increase
or decrease.
NET INVESTMENT FACTOR
The net investment factor is used to measure the investment performance of
a Subaccount from one Valuation Date to the next. The net investment factor for
a Subaccount for any valuation period is equal to the sum of 1.0000 plus the net
investment rate. The net investment rate equals:
(a) the net assets of the Fund held by the Subaccount on the current
Valuation Date, minus
(b) the net assets of the Fund held by the Subaccount on the preceding
Valuation Date, plus or minus
(c) taxes or provisions for taxes, if any, attributable to the operation
of the Subaccount;
(d) divided by the total value of the Subaccount's Accumulation and
Annuity Units on the preceding Valuation Date;
(e) minus a daily charge at the annual effective rate of 1.25% (or 1.15%,
as applicable) for mortality and expense risks and up to 0.25%
(currently 0%) as an administrative expense charge.
The net investment rate may be either positive or negative.
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7
<PAGE>
TRANSFERS
- --------------------------------------------------------------------
- --------------------------------------------------------------------
At any time prior to the Annuity Date, you can transfer amounts held under
your Contract from one Subaccount to another. Transfers between the Credited
Interest Options and the Subaccounts are subject to certain restrictions. (See
Appendices I, II and III.) A request for transfer can be made either in writing
or by telephone. The telephone transfer privilege is available automatically; no
special election is necessary. All transfers must be in accordance with the
terms of the Contract.
The Company currently allows unlimited transfers of accumulated amounts to
available investment options without charge. However, the Company reserves the
right to impose an additional fee if more than 12 such changes are made in any
calendar year. The total number of investment options that you may select during
the Accumulation Period is limited. (See "Investment Options--The Funds.")
Additionally, 1994 Contracts provide that no more than ten investment choices
may be selected at any given time. Any transfer will be based on the
Accumulation Unit Value next determined after the Company receives a valid
transfer request at its Home Office. Transfers are not available during the
Annuity Period.
DOLLAR COST AVERAGING PROGRAM
For 1994 Contracts, you may establish automated transfers of Funds from
one Subaccount to another Subaccount on a monthly basis through the Company's
Dollar Cost Averaging Program. There is no additional charge for the Program.
Dollar Cost Averaging is a system for investing a fixed amount of money at
regular intervals over a period of time. Dollar Cost Averaging does not ensure a
profit nor guarantee against loss in a declining market. You should consider
your financial ability to continue purchases through periods of low price
levels. Please refer to the "Inquiries" section of the prospectus summary which
describes how you can obtain further information.
WITHDRAWALS
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All or a portion of the Contract Value may be withdrawn at any time during
the Accumulation Period. To request a withdrawal, you must properly complete a
disbursement form and send it to our Home Office. Payments for withdrawal
requests will be made in accordance with SEC requirements, but normally not
later than seven calendar days following our receipt of a disbursement form.
Withdrawals may be requested in one of the following forms:
[bullet] Full Withdrawal of the Contract: The amount paid for a full withdrawal
will be the Contract Value allocated to the Subaccounts, the Guaranteed
Interest Account, the Guaranteed Accumulation Account (plus or minus a
market value adjustment) (see Appendix III), and the Fixed Account,
minus any applicable deferred sales charge.
[bullet] Partial Withdrawals (Percentage): The amount paid will be the
percentage of the Contract Value requested minus any applicable
deferred sales charge.
[bullet] Partial Withdrawal (Specified Dollar Amount): The amount paid will be
the dollar amount requested. However, the amount withdrawn from the
Contract will equal the amount requested plus any applicable deferred
sales charge.
For any partial withdrawal, amounts will be withdrawn proportionately from
each Subaccount or Credited Interest Option in which the Account is invested,
unless you request otherwise in writing. All amounts paid will be based on the
Contract Value as of the next Valuation Date after we receive a request for
withdrawal at our Home Office, or on such later date as the disbursement form
may specify.
REINVESTMENT PRIVILEGE
You may elect to reinvest all or a portion of the proceeds received from a
full withdrawal of your Contract within 30 days after such withdrawal has been
made. Accumulation Units will be credited to the Contract for the amount
reinvested, as well as any applicable maintenance fee and any deferred sales
charge imposed at the time of withdrawal. Any maintenance fee which falls due
after the withdrawal and before the reinvestment will be deducted from the
amounts reinvested. Reinvested amounts will be reallocated to the applicable
investment options in the same proportion as they were allocated at the time of
withdrawal. Accumulation Units will be credited to your Contract based on the
Accumulation Unit Value next
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computed following our receipt of your request along with the amount to be
reinvested. The reinvestment privilege may be used only once. For a discussion
of amounts withdrawn from GIA and GAA and then reinvested see Appendices I and
III, respectively. If you are contemplating reinvestment, you should seek
competent advice regarding the tax consequences associated with such a
transaction.
ADDITIONAL WITHDRAWAL OPTIONS
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The Company offers certain withdrawal options under the Contract that are
not considered Annuity Options ("Additional Withdrawal Options"). To exercise
these options, your Contract Value must meet the minimum dollar amounts and age
criteria applicable to that option.
The Additional Withdrawal Options currently available under the Contract
include the following:
[bullet] SWO--Systematic Withdrawal Option. SWO is a series of partial
withdrawals from your Contract based on a payment method you select. It
is designed for those who want a periodic income while retaining
investment flexibility for amounts accumulated under a Contract.
[bullet] ECO--Estate Conservation Option. ECO offers the same investment
flexibility as SWO but is designed for those who want to receive only
the minimum distribution that the Code requires each year. Under ECO,
the Company calculates the minimum distribution amount required by law
at age 70-1/2, and pays you that amount once a year. (See "Tax
Status.")
Other Additional Withdrawal Options may be added from time to time.
Additional information relating to any of the Additional Withdrawal Options may
be obtained from your local representative or from the Company at its Home
Office.
If you select one of the Additional Withdrawal Options, you will retain
all of the rights and flexibility permitted under the Contract during the
Accumulation Period. Your Contract Value will continue to be subject to the
charges and deductions described in this Prospectus. Taking a withdrawal under
one of these Additional Withdrawal Options may have tax consequences. Any person
concerned about tax implications should consult a competent tax advisor prior to
electing an option.
Once you elect an Additional Withdrawal Option, you may revoke it any time
by submitting a written request to our Home Office. Once an option is revoked,
it may not be elected again, nor may any other Additional Withdrawal Option be
elected unless permitted by the Code. The Company reserves the right to
discontinue the availability of one or all of these Additional Withdrawal
Options at any time, and/or to change the terms of future elections.
DEATH BENEFIT DURING ACCUMULATION PERIOD
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The Contract provides that a death benefit is payable to the
Beneficiary(ies) upon your death before the Annuity Date. The amount of the
death benefit will be equal to the Contract Value. Death benefit proceeds may be
paid to the Beneficiary:
[bullet] in a lump sum;
[bullet] in accordance with any of the Annuity Options available under the
Contract; or
[bullet] under any Additional Withdrawal Options available under the Contract
(if the Beneficiary is your spouse).
The Beneficiary may instead elect one of the following two options;
however, the Code limits how long the death benefit proceeds may be left in
these options (see below):
[bullet] to leave the Contract Value invested in the Contract; or
[bullet] to leave the Contract Value on deposit in the Company's general
account, and to receive monthly, quarterly, semi- annual or annual
interest payments at the interest rate then being credited on such
deposits. The balance on deposit can be withdrawn at any time or
applied to an Annuity Option.
When paying the Beneficiary, we will determine the Contract Value on the
Valuation Date following the date on which we receive proof of death acceptable
to the Company. Interest, if any, will be paid from the date of death at a rate
no less than required by law. We will mail payment to the Beneficiary within
seven days after we receive proof of death.
The Code requires that distribution of death proceeds begin within a
certain period of time. Generally, either payments must begin by December 31 of
the year following
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the year of your death, or the entire value of your benefits must be distributed
by December 31 of the fifth year following the year of your death. If your
Beneficiary is your spouse, he or she is not required to begin distributions
until the year you would have attained age 70-1/2. In no event may payments
extend beyond the life expectancy of the Beneficiary or any period greater than
the Beneficiary's life expectancy. If no elections are made, no distributions
will be made. Failure to commence distributions within the above time periods
can result in tax penalties. Regardless of the method of payment, death benefit
proceeds will generally be taxed to the Beneficiary in the same manner as if you
had received those payments. (See "Tax Status.")
ANNUITY PERIOD
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ANNUITY PERIOD ELECTIONS
For the types of Contracts described in this prospectus, the Code requires
that minimum annual distributions of the Contract Value must begin by April 1st
of the calendar year following the calendar year in which you attain age 70-1/2.
In addition, distributions must be in a form and amount su
fficient to satisfy
the Code requirements. These requirements may be satisfied by the election of
certain Annuity Options or Additional Withdrawal Options. (See "Tax Status.")
At least 30 days prior to the Annuity Date, you must notify us in writing
of the following:
[bullet] the date on which you would like to start receiving Annuity payments;
[bullet] the Annuity Option under which you want your payments to be calculated
and paid;
[bullet] whether the payments are to be made monthly, quarterly, semi-annually
or annually; and
[bullet] the investment option(s) used to provide Annuity payments (i.e., a
fixed annuity using the general account or any of the Subaccounts
available at the time of annuitization). As of the date of this
Prospectus, Aetna Variable Fund, Aetna Income Shares and Aetna
Investment Advisers Fund, Inc. are the only Subaccounts available.
Annuity Payments will not begin until you have selected an Annuity Option.
Until a date and option are elected, the Contract will continue in the
Accumulation Period. Once Annuity Payments begin, the Annuity Option may not be
changed, nor may transfers be made among the investment option(s) selected.
ANNUITY OPTIONS
You may choose one of the following Annuity Options:
Lifetime Annuity Options:
[bullet] Option 1--Life Annuity.--An Annuity with payments ending on the
Annuitant's death.
[bullet] Option 2--Life Annuity with Guaranteed Payments--An Annuity with
payments guaranteed for 5, 10, 15 or 20 years, or such other periods as
the Company may offer at the time of annuitization.
[bullet] Option 3--Life Income based Upon the Lives of Two Payees--An Annuity
will be paid during the lives of the Annuitant and a second Annuitant,
with 100%, 66-2/3% or 50% of the payment to continue after the first
death, or 100% of the payment to continue at the death of the second
Annuitant and 50% of the payment to continue at the death of the
Annuitant.
[bullet] Option 4--Life Income based Upon the Lives of Two Payees--An annuity
with payments for a minimum of 120 months, with 100% of the payment to
continue after the first death.
If Option 1 or 3 is elected, it is possible that only one Annuity payment
will be made if the Annuitant under Option 1, or the surviving Annuitant under
Option 3, should die prior to the due date of the second Annuity payment. Once
lifetime Annuity payments begin, the Annuitant cannot elect to receive a
lump-sum settlement.
Nonlifetime Annuity Options:
[bullet] Option 1--Payments for a Specified Period--payments will continue for a
specified period of time, as provided for under your Contract.
An Annuity may be selected on a fixed or variable basis and payments may
be made for the number of years specified in your Contract: 3-30 years for 1992
Contracts; 5-30 years for 1994 Contracts. If this option is elected on a
variable basis, the Annuitant may request at any time during the payment period
that the present value of all or any portion of the remaining variable payments
be paid in one sum. However, any lump-sum elected before five years of payments
for 1994 Contracts, or 3 years of payments for 1992 Contracts, have been
completed will be treated as a withdrawal during the Accumulation Period and any
applicable deferred sales charge will be assessed. (See
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"Charges and Deductions--Deferred Sales Charge.") The nonlifetime option is not
available on a variable basis under a Contract which provides for immediate
Annuity benefits.
We may also offer additional Annuity Options under your Contract from time
to time.
ANNUITY PAYMENTS
Date Payouts Start. When payments start, the age of the Annuitant plus the
number of years for which payments are guaranteed must not exceed 95. Annuity
payments may not extend beyond (a) the life of the Annuitant, (b) the joint
lives of the Annuitant and Beneficiary, (c) a period certain greater than the
Annuitant's life expectancy, or (d) a period greater than the joint life
expectancies of the Annuitant and Beneficiary.
Amount of Each Annuity Payment. The amount of each payment depends on how
you allocate your Contract Value between fixed and variable payouts. No election
may be made that would result in a first Annuity payment of less than $50 or
total yearly Annuity payments of less than $250 for 1994 Contracts, and a first
Annuity payment of less than $20 or total yearly Annuity payments of less than
$100 for 1992 Contracts. If your Contract Value on the Annuity Date is
insufficient to elect an option for the minimum amount specified, a lump-sum
payment must be elected.
If Annuity payments are to be made on a variable basis, the first and
subsequent payments will vary depending on the assumed net investment rate
selected (3-1/2% or 5% per annum). Selection of a 5% rate causes a higher first
payment, but Annuity payments will increase thereafter only to the extent that
the net investment rate exceeds 5% on an annualized basis. Annuity payments
would decline if the rate were below 5%. Use of the 3-1/2% assumed rate causes a
lower first payment, but subsequent payments would increase more rapidly or
decline more slowly as changes occur in the net investment rate. (See the
Statement of Additional Information for further discussion on the impact of
selecting an assumed net investment rate.)
CHARGES DEDUCTED DURING THE ANNUITY PERIOD
We make a daily deduction for mortality and expense risks from any amounts
held on a variable basis. Therefore, electing the nonlifetime option on a
variable basis will result in a deduction being made even though we assume no
mortality risk. We may also deduct a daily administrative charge from amounts
held under the variable options. (See "Charges and Deductions.")
DEATH BENEFIT PAYABLE DURING THE ANNUITY PERIOD
If an Annuitant dies after Annuity payments have begun, any death benefit
payable will depend on the terms of the Contract and the Annuity Option
selected. If Option 1 or Option 3 was elected, Annuity payments will cease on
the death of the Annuitant under Option 1 or the death of the surviving
Annuitant under Option 3.
If Lifetime Option 2 or Option 4 was elected and the death of the
Annuitant under Option 2, or the surviving Annuitant under Option 4, occurs
prior to the end of the guaranteed minimum payment period, we will pay to the
Beneficiary in a lump sum, unless otherwise requested, the present value of the
guaranteed annuity payments remaining.
If the nonlifetime option was elected, and the Annuitant dies before all
payments are made, the value of any remaining payments will be paid in a
lump-sum to the Beneficiary (unless otherwise requested), and no deferred sales
charge will be imposed.
If the Annuitant dies after Annuity payments have begun and if there is a
death benefit payable under the Annuity Option elected, the remaining value must
be distributed to the Beneficiary at least as rapidly as under the original
method of distribution.
Any lump-sum payment paid under the applicable lifetime or nonlifetime
Annuity Options will be made within seven calendar days after proof of death
acceptable to us, and a request for payment are received at our Home Office. The
value of any death benefit proceeds will be determined as of the next Valuation
Date after we receive acceptable proof of death and a request for payment. Under
Options 2 and 4, such value will be reduced by any payments made after the date
of death.
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TAX STATUS
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INTRODUCTION
The following provides a general discussion and is not intended as tax
advice. This discussion reflects the Company's understanding of current federal
income tax law. Such laws may change in the future, and it is possible that any
change could be retroactive (i.e., effective prior to the date of the change).
The Company makes no guarantee regarding the tax treatment of any Contract or
transaction involving a Contract. The ultimate effect of federal income taxes on
the amounts held under a Contract, on Annuity payments, and on the economic
benefit to the Contract Holder, Annuitant or Beneficiary may depend upon the tax
status of the individual concerned. Any person concerned about these tax
implications should consult a competent tax adviser before initiating any
transaction.
TAXATION OF THE COMPANY
The Company is taxed as a life insurance company under the Code. Since the
Separate Account is not an entity separate from the Company, it will not be
taxed separately as a "regulated investment company" under the Code. Investment
income and realized capital gains are automatically applied to increase reserves
under the Contracts. Under existing federal income tax law, the Company believes
that the Separate Account's investment income and realized net capital gains
will not be taxed to the extent that such income and gains are applied to
increase the reserves under the Contracts.
The Company does not anticipate that it will incur any federal income tax
liability attributable to the Separate Account and, therefore, the Company does
not intend to make provisions for any such taxes. However, if changes in the
federal tax laws or interpretation thereof result in the Company being taxed on
income or gains attributable to the Separate Account, then the Company may
impose a charge against the Separate Account (with respect to some or all
Contracts) in order to set aside provisions to pay such taxes.
CONTRACTS USED WITH CERTAIN RETIREMENT PLANS
In General. The Contract is designed for use with retirement plans
qualified under Sections 408(b) or 408(k) of the Code. The tax rules applicable
to participants and beneficiaries in retirement plans vary according to the type
of plan and the terms and conditions of the plan.
The Company makes no attempt to provide more than general information
about use of the Contracts with the various types of retirement plans. Some
retirement plans are subject to limitations on distribution and other
requirements that are not incorporated in the Contracts. Purchasers are
responsible for determining that contributions, distributions and other
transactions with respect to the Contracts satisfy applicable laws, and should
consult their legal counsel and tax advisor regarding the suitability of the
Contract.
INDIVIDUAL RETIREMENT ANNUITIES AND SIMPLIFIED EMPLOYEE PENSION PLANS
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity" or
"Individual Retirement Account" (each hereinafter referred to as an "IRA").
Also, distributions from certain other types of qualified plans may be "rolled
over" on a tax-deferred basis into an IRA. Employers may establish Simplified
Employee Pension (SEP) Plans and make contributions to an IRA on behalf of their
employees. The sale of a Contract for use with an IRA requires special
disclosure mandated by the Internal Revenue Code, and purchasers of an IRA
Contract will be provided with supplemental information as required by the Code.
Such purchasers will have the right to revoke their purchase within seven days
of the earlier of the establishment of the IRA or their purchase. A Contract
issued as an IRA will be amended as necessary to conform to the requirements of
the Code. Purchasers should seek competent advice as to the suitability of the
Contract as an IRA.
Taxation of Distributions. All distributions will be taxed as ordinary
income unless nondeductible contributions were made to the IRA or the
distribution is "rolled over" to another retirement plan in accordance with the
terms of the Code. If amounts are withdrawn before age 59-1/2, the payment is
subject to a 10% penalty unless the payment is due to disability, is rolled over
to another IRA or is part of a series of payments over your (or your
Beneficiary's) life or life expectancy. Distributions are generally subject to
withholding for the recipient's federal income tax liability at rates that vary
according to the type of distribution and the recipient's tax status. Recipients
generally are provided the opportunity to elect not have tax withheld from
distributions.
In general, payments received by your Beneficiaries after your death are
taxed in the same manner as if you have received those payments, except that a
limited death benefit exclusion
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may apply for payments due to deaths occurring on or before August 20, 1996.
This exclusion no longer applies to payments due to deaths occurring after
August 20, 1996.
The Code imposes a 10% penalty tax on the taxable portion of any
distribution from an IRA unless made when (a) you have attained age 59-1/2, (b)
you have become disabled as defined by the Code, (c) the distribution amount is
rolled over in accordance with the terms of the Code, (d) it is paid in a series
of substantially equal periodic payments over you and your beneficiary's life or
life expectancy, or (e) you have been unemployed and receiving unemployment
benefits as further described in the Code. In addition, the penalty tax does not
apply for the amount of a distribution equal to unreimbursed medical expenses
incurred by you that qualify for deduction as specified in the Code. The Code
may impose other penalty taxes in other circumstances.
This Contract has been approved by the IRS as a prototype IRA. The IRS
approval, however, only pertains to whether the Contract meets the Code
requirements for IRAs and is not a determination of the merits of the Contract.
MISCELLANEOUS
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DISTRIBUTION
The Company will serve as the principal underwriter for the securities
sold by this Prospectus. The Company is registered as a broker-dealer with the
Securities and Exchange Commission and is a member of the National Association
of Securities Dealers, Inc. (NASD). As underwriter, the Company will contract
with one or more registered broker-dealers ("Distributors"), including at least
one affiliate of the Company, to offer and sell the Contracts. All persons
offering and selling the Contracts must be registered representatives of the
Distributors and must also be licensed as insurance agents to sell variable
annuity contracts. These registered representatives may also provide services to
Contract Holders in connection with their Contract.
Payment of Commissions. Persons offering and selling the Contracts may
receive commissions in connection with the sale of the Contracts. The maximum
percentage amount that the Company will ever pay as commission with respect to
any given Purchase Payment is with respect to those made during the first year
of Purchase Payments under a Contract. The percentage amount will range from 2%
to 4% of those Purchase Payments. The Company may also pay renewal commissions
on Purchase Payments made after the first year and service fees. The average of
all payments made by the Company is estimated to equal approximately 3% of the
total Purchase Payments made over the life of an average Contract. In addition,
some sales personnel may receive various types of non-cash compensation as
special sales incentives, including trips and educational and/or business
seminars. Supervisory and other management personnel of the Company may receive
compensation that will vary based on the relative profitability to the Company
of the funding options you select. Funding options that invest in Funds advised
by the Company or its affiliates are generally more profitable to the Company.
The Company may also reimburse the Distributor for certain expenses. The name of
the Distributor and the registered representative responsible for your Contract
are set forth in your application. Commissions and sales related expenses are
paid by the Company and are not deducted from Purchase Payments. (See "Charges
and Deductions--Deferred Sales Charge.")
DELAY OR SUSPENSION OF PAYMENTS
The Company reserves the right to suspend or postpone the date of payment
for any benefit or values (a) on any Valuation Date on which the New York Stock
Exchange ("Exchange") is closed (other than customary weekend and holiday
closings) or when trading on the Exchange is restricted; (b) when an emergency
exists, as determined by the SEC, so that disposal of securities held in the
Subaccounts is not reasonably practicable or it is not reasonably practicable
for the Company fairly to determine the value of the Subaccount's assets; or (c)
during such other periods as the SEC may by order permit for the protection of
investors. The conditions under which restricted trading or an emergency exists
shall be determined by the rules and regulations of the SEC.
PERFORMANCE REPORTING
From time to time, the Company may advertise different types of historical
performance for the Subaccounts of the Separate Account. The Company may
advertise the "standardized average annual total returns" of the Subaccounts,
calculated in a manner prescribed by the SEC, as well as the "non-standardized
returns." "Standardized average annual total returns" are computed according to
a formula in which a hypothetical investment of $1,000 is applied to the
Subaccount and then related to the ending redeemable values over the most recent
one,
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five and ten-year periods (or since inception, if less than ten years).
Standardized returns will reflect the reduction of all recurring charges during
each period (e.g., mortality and expense risk charges, annual maintenance fees,
administrative expense charge (if any) and any applicable deferred sales
charge.) "Non-standardized returns" will be calculated in a similar manner,
except that nonstandardized figures will not reflect the deduction of any
applicable deferred sales charge (which would decrease the level of performance
shown if reflected in these calculations). The non-standardized figures may also
include monthly, quarterly, year-to-date and three-year periods.
The Company may also advertise certain ratings, rankings or other
information related to the Company, the Subaccounts or the Funds. Further
details regarding performance reporting and advertising are described in the
Statement of Additional Information.
VOTING RIGHTS
In accordance with the Company's view of present applicable law, it will
vote the shares of each of the Funds held by the Separate Account at regular and
special meetings of Fund shareholders in accordance with instructions received
from persons having a voting interest in the Separate Account. The Company will
vote shares for which it has not received instructions in the same proportion as
it votes shares for which it has received instructions.
Each person having a voting interest in the Separate Account will receive
periodic reports relating to the Fund(s) 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 written communication at least 14 days
before such meeting. The number of votes for which each person may give
direction will be determined as of the record date set by the Fund.
The number of votes that you may cast during the Accumulation Period is
equal to the portion of the Contract Value allocated to that Fund, divided by
the net asset value of one share of that Fund. During the Annuity Period, the
number of votes is equal to the valuation reserve applicable to the portion of
the Contract attributable to that Fund, divided by the net asset value of one
share of that Fund. In determining the number of votes, fractional votes will be
recognized.
MODIFICATION OF THE CONTRACT
The Company may modify the Contract when it deems an amendment
appropriate, by providing you written notice 30 days before the effective date
of the change. The most likely reason for a change to the Contract would be to
ensure compliance with applicable law. Certain changes will require the approval
of appropriate state or federal regulatory authorities.
INVOLUNTARY TERMINATIONS
Subject to state regulatory approval, following the completion of two
Contract Years in which no Purchase Payments have been made, the Company
reserves the right to pay the full Contract Value to the Contract Holder if the
Contract Value is less than $1,500, provided the Company gives the Contract
Holder 90 days written notice. Such Contract Value paid may not utilize the
Reinvestment Privilege. The full Contract Value payable to the Contract Holder
will not be reduced by any deferred sales charge, and amounts withdrawn from
GIA, if applicable, will not receive a reduced rate of interest. Amounts
withdrawn from GIA will receive a guaranteed effective annual yield to the date
of Contract termination as if the amounts had remained in GIA until the end of a
Guaranteed Term. (See Appendix I)
Amounts surrendered from GAA will receive the greater of:
(a) The aggregate MVA amount from all Guaranteed Terms prior to the end of
those terms; or
(b) The applicable portion of the Contract Value in GAA.
This provision does not apply for any Contract that has elected an Annuity
Option.
LEGAL MATTERS AND PROCEEDINGS
The Company knows of no material legal proceedings pending to which the
Separate Account or the Company is a party or which would materially affect the
Separate Account. The validity of the securities offered by this Prospectus has
been passed upon by Counsel to the Company.
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CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
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The Statement of Additional Information contains more specific information
on the Separate Account and the Contract, as well as the financial statements of
the Separate Account and the Company. A list of the contents of the SAI is set
forth below.
General Information and History
Variable Annuity Account C
Offering and Purchase of Contracts
Performance Data
General
Average Annual Total Return Quotations
Annuity Payments
Sales Material and Advertising
Independent Auditors
Financial Statements of the Separate Account
Financial Statements of Aetna Life Insurance and Annuity Company
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APPENDIX I
GUARANTEED INTEREST ACCOUNT
(Available in all states except Washington, New York and New Jersey)
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The Guaranteed Interest Account ("GIA") is an investment option available
during the Accumulation Period. Amounts allocated to Short-Term Classifications
of GIA are held in the Company's general account that supports insurance and
annuity obligations. Amounts allocated to Long-Term Classifications of GIA are
held in a noninsulated, nonunitized separate account. Interests in GIA have not
been registered with the SEC in reliance on exemptions under the Securities Act
of 1933, as amended. Disclosure in this Prospectus regarding GIA, may, however,
be subject to certain generally applicable provisions of the federal securities
laws relating to the accuracy and completeness of such statements. Disclosure in
this Appendix regarding the Guaranteed Interest Account has not been reviewed by
the SEC.
GIA is a Credited Interest Option under which we guarantee stipulated rates
of interest for stated periods of time. Interest is credited daily at a rate
that will provide the guaranteed effective yield by the end of the stated period
of time.
During a stated period of time, amounts may be applied to any or all
available Guaranteed Terms within the Short-Term and Long-Term Classifications.
The Short-Term Classification consists of all Guaranteed Terms of 3 years or
less and the Long-Term Classification consists of all Guaranteed Terms of 10
years or less, but greater than 3 years.
As long as amounts are not withdrawn before the end of a stated term, we
will pay the guaranteed rate of interest. If amounts are withdrawn or
transferred before the end of a stated period of time (except if pursuant to the
Company's termination of the Contract--see "Miscellaneous--Involuntary
Terminations"), we will pay a reduced rate of interest, but never less than the
minimum stated in the Contract.
As a Guaranteed Term matures, assets accumulating under GIA may be (a)
transferred to a new Guaranteed Term, (b) transferred to the other available
investment options, or (c) withdrawn. Amounts withdrawn may be subject to a
deferred sales charge and/or tax liabilities.
MORTALITY AND EXPENSE RISK CHARGES
We make no deductions from the credited interest rate for mortality and
expense risks; these risks are considered in determining the credited interest
rate.
TRANSFERS AMONG INVESTMENT OPTIONS
Transfers are permitted from Guaranteed Terms of one Classification to
available Guaranteed Terms of another Classification. We will apply a reduced
rate of interest to amounts transferred prior to the end of a Guaranteed Term.
Transfers of GIA values due to a maturity are not subject to a reduced rate of
interest.
By notifying us at our Home Office at least 30 days before Annuity payments
begin, you may elect to have amounts that have been accumulating under GIA
transferred to one or more of the Subaccounts currently available during the
Annuity Period to provide variable Annuity payments. GIA cannot be used as an
investment option during the Annuity Period.
REINVESTMENT PRIVILEGE
Any amounts reinvested in GIA will be applied to the current deposit
period. Amounts are proportionately reinvested to the classifications in the
same manner as they were allocated before the withdrawal.
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APPENDIX II
FIXED ACCOUNT
(Available in all states except New York)
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The following summarizes material information concerning the Fixed Account.
Amounts allocated to the Fixed Account are held in the Company's general account
that supports general insurance and annuity obligations. Interests in the Fixed
Account have not been registered with the SEC in reliance on exemptions under
the Securities Act of 1933, as amended. Disclosure in the Prospectus regarding
the Fixed Account, may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of such statements. Disclosure in this Appendix regarding the Fixed
Account has not been reviewed by the SEC.
The Fixed Account guarantees the minimum interest rate specified in the
Contract. These minimum interest rates cannot be changed by the Company;
however, the Company may credit a higher interest rate from time to time.
Amounts applied to the Fixed Account will earn the interest rate in effect when
actually applied to the Fixed Account.
Under the Fixed Account, the Company assumes the risk of investment gain or
loss by guaranteeing Contract Values and promising a minimum interest rate and
Annuity Payment. The Company's determination of interest rates reflects the
investment income earned on invested assets and the amortization of any capital
gains and/or losses realized on the sale of invested assets. The Fixed Account
will reflect a compound interest rate credited by us. The interest rate quoted
is an annual effective yield.
Under certain emergency conditions, we may defer payment of a Fixed Account
withdrawal value for a period of up to six months, or as provided by federal
law. The Fixed Account withdrawal value may be paid in equal payments, with
interest, over a period not to exceed 60 months when:
(a) the amount held in the Fixed Account under this Contract exceeds $100,000
($250,000 on 1992 Contracts) on the day prior to the current withdrawal; and
(b) the sum of the current Fixed Account withdrawal and the total of all Fixed
Account withdrawals from the Contract within the past 12 calendar months
exceeds 20% of the amount in the Fixed Account on the day prior to the
current withdrawal.
Interest rates, as used above, will not be more than two percentage points
below any rate determined prospectively by the Board of Directors for this class
of Contract. In no event will the interest rate be less than the minimum stated
in the Contract.
MORTALITY AND EXPENSE RISK CHARGES
We make no deductions from the credited interest rate for mortality and
expense risks; these risks are considered in determining the credited rate.
TRANSFERS AMONG INVESTMENT OPTIONS
Transfers from the Fixed Account to any other available investment
option(s) are allowed in each calendar year during the Accumulation Period. The
amount which may be transferred may vary at our discretion; however, it will
never be less than 10% of the amount held under the Fixed Account. Additionally,
any remaining balance in the Fixed Account under the Contract may be transferred
by you in its entirety to any other investment option(s) if:
(a) the Current Value in the Fixed Account is $2,000 or less; or
(b) the maximum percentage allowed was transferred from the Fixed Account in
each of the four consecutive calendar years and no additional Net Purchase
Payment(s) have been allocated to the Fixed Account during that same time
period.
By notifying us at our Home Office at least 30 days before Annuity Payments
begin, you may elect to have amounts which have been accumulating under the
Fixed Account transferred to one or more of the Subaccounts available during the
Annuity Period to provide variable Annuity Payments.
- --------------------------------------------------------------------
17
<PAGE>
APPENDIX III
GUARANTEED ACCUMULATION ACCOUNT
(Offered in New York only)
- --------------------------------------------------------------------
- --------------------------------------------------------------------
The Guaranteed Accumulation Account ("GAA") is a credited interest option
available during the Accumulation Period. Amounts allocated to Long-Term
Classifications of GAA are held in a noninsulated, nonunitized separate account.
Amounts allocated to Short-Term Classifications of GAA are held in the Company's
general account. This Appendix is a summary of GAA and is not intended to
replace the GAA prospectus. You should read the accompanying GAA prospectus
carefully before investing.
GAA is a Credited Interest Option in which we guarantee stipulated rates of
interest for stated periods of time on amounts directed to GAA. This option
guarantees the minimum interest rate specified in the Contract. The interest
rate stipulated is an annual effective yield; that is, it reflects a full year's
interest. Interest is credited daily at a rate that will provide the guaranteed
annual effective yield for one year.
During a specified period of time (the "deposit period"), amounts may be
applied to any or all available Guaranteed Terms within the Short-Term and
Long-Term classifications. Short-Term GAA has Guaranteed Terms from one to three
years, and Long-Term GAA has Guaranteed Terms greater than three years but no
more than ten years.
Withdrawals or transfers from a Guaranteed Term before the end of that
Guaranteed Term may be subject to a market value adjustment ("MVA"). An MVA
reflects the change in the value of the investments due to changes in interest
rates since the date of deposit. When interest rates increase after the date of
deposit, the value of the investment decreases and the MVA is negative.
Conversely, when interest rates decrease after the date of deposit, the value of
the investment increases, and the MVA is positive. It is possible that a
negative MVA could result in you receiving an amount which is less than the
amount paid into GAA.
As a Guaranteed Term matures, assets accumulating under GAA may be (a)
transferred to a new Guaranteed Term, (b) transferred to other available
investment options, or (c) withdrawn. Amounts withdrawn may be subject to a
deferred sales charge and/or federal tax penalties.
MORTALITY AND EXPENSE RISK CHARGES
We make no deductions from the credited interest rate for mortality and
expense risks; these risks are considered in determining the credited interest
rate.
TRANSFERS AMONG INVESTMENT OPTIONS
Transfers are permitted among Guaranteed Terms. However, amounts applied to
GAA may not be transferred to another Guaranteed Term of GAA, or to any other
Subaccount or Credited Interest Option available under the Contract, during the
deposit period or the 90 days after the close of the deposit period. We will
apply an MVA to transfers made before the end of a Guaranteed Term, unless such
transfer is due to the maturity of the Guaranteed Term.
By notifying us at least 30 days prior to the Annuity Date, you may elect a
Variable Annuity and have amounts that have been accumulating under GAA
transferred to one or more of the Subaccounts available during the Annuity
Period. GAA cannot be used as an investment option during the Annuity Period.
REINVESTMENT PRIVILEGE
If amounts are withdrawn from GAA and reinvested, they will be applied to
the current deposit period. Amounts are proportionately reinvested in the same
manner as they were allocated before the withdrawal. Any negative MVA amount
applied to a withdrawal is not included in the reinvestment.
- --------------------------------------------------------------------
18
<PAGE>
Please attach to your Application
I hereby acknowledge receipt of an Account C Individual Variable Annuity
Contract Prospectus dated May 1, 1997 for Individual Retirement Annuities and
Simplified Employee Pension Plans, as well as all current prospectuses
pertaining to the variable investment options available under the Contracts.
_____ Please send an Account C Statement of Additional Information (Form No.
75988(S)-3) dated May 1, 1997.
_______________________________________________________________________________
CONTRACT HOLDER'S SIGNATURE
_______________________________________________________________________________
DATE
75988-3 (5/97)
- --------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT C
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- -------------------------------------------------------------------------------
Statement of Additional Information dated May 1, 1997
Individual Variable Annuity Contracts for Individual Retirement Annuities under
Section 408(b) and Simplified Employee Pension Plans under Section 408(k)
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Variable Annuity Account C (the
"Separate Account") dated May 1, 1997.
A free prospectus is available upon request from the local Aetna Life Insurance
and Annuity Company office or by writing to or calling:
Aetna Life Insurance and Annuity Company
Customer Service
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-531-4547
Read the prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the prospectus.
TABLE OF CONTENTS
Page
General Information and History........................................... 2
Variable Annuity Account C................................................ 2
Offering and Purchase of Contracts........................................ 3
Performance Data.......................................................... 3
General.............................................................. 3
Average Annual Total Return Quotations............................... 4
Annuity Payments.......................................................... 8
Sales Material and Advertising............................................ 9
Independent Auditors...................................................... 9
Financial Statements of the Separate Account.............................. S-1
Financial Statements of Aetna Life Insurance and Annuity Company.......... F-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company which was organized under the insurance laws of the State of
Connecticut in 1976. Through a merger, it succeeded to the business of Aetna
Variable Annuity Life Insurance Company (formerly Participating Annuity Life
Insurance Company organized in 1954). As of December 31, 1996, the Company had
$30.1 billion invested through its products, including $15.0 billion in its
separate accounts (of which the Company oversees the management of $10.5
billion) and $1.1 billion in its mutual funds offered outside of its separate
accounts. As of December 31, 1995, it ranked among the top 2% of all U.S. life
insurance companies based on assets. The Company is a wholly owned subsidiary of
Aetna Retirement Holdings, Inc., which is in turn a wholly owned subsidiary of
Aetna Retirement Services, Inc., and an indirect wholly owned subsidiary of
Aetna Inc. The Company is engaged in the business of issuing life insurance
policies and annuity contracts in all states of the United States. The Company's
Home Office is located at 151 Farmington Avenue, Hartford, Connecticut 06156.
In addition to serving as the principal underwriter and the depositor for the
Separate Account, the Company is also a registered investment adviser under the
Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934. The Company provides investment advice to
several of the registered management investment companies offered as variable
investment options under the Contracts funded by the Separate Account (see
"Variable Annuity Account C" below).
Other than the mortality and expense risk charges and administrative expense
charge described in the prospectus, all expenses incurred in the operations of
the Separate Account are borne by the Company. See "Charges and Deductions" in
the prospectus. The Company receives reimbursement for certain administrative
costs from some unaffiliated sponsors of the Funds used as funding options under
the Contract. These fees generally range up to 0.25%.
The assets of the Separate Account are held by the Company. The Separate Account
has no custodian. However, the Funds in whose shares the assets of the Separate
Account are invested each have custodians, as discussed in their respective
prospectuses.
VARIABLE ANNUITY ACCOUNT C
Variable Annuity Account C (the "Separate Account") is a separate account
established by the Company for the purpose of funding variable annuity contracts
issued by the Company. The Separate Account is registered with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940, as amended. Purchase Payments made under the Contract may be
allocated to one or more of the Subaccounts. Each Subaccount invests in the
shares of only one of the Funds listed below. The Company may make additions to,
deletions from or substitutions of available investment options as permitted by
law and subject to the conditions of the Contract. The availability of the Funds
is subject to applicable regulatory authorization. Not all Funds are available
in all jurisdictions or under all Contracts.
-2-
<PAGE>
The Funds currently available under the Contract are as follows:
<TABLE>
<S> <C>
Aetna Variable Fund American Century VP Capital Appreciation
Aetna Income Shares (formerly TCI Growth)
Aetna Variable Encore Fund Fidelity VIP II Contrafund Portfolio
Aetna Investment Advisers Fund, Inc. Fidelity VIP Equity-Income Portfolio
Aetna Ascent Variable Portfolio Fidelity VIP Growth Portfolio
Aetna Crossroads Variable Portfolio Fidelity VIP Overseas Portfolio
Aetna Legacy Variable Portfolio Janus Aspen Aggressive Growth Portfolio
Aetna Variable Capital Appreciation Portfolio Janus Aspen Balanced Portfolio
Aetna Variable Growth Portfolio Janus Aspen Growth Portfolio
Aetna Variable Index Plus Portfolio Janus Aspen Short-Term Bond Portfolio
Aetna Variable Small Company Portfolio Janus Aspen Worldwide Growth Portfolio
Alger American Growth Portfolio Scudder International Portfolio Class A
Alger American Small Cap Portfolio
</TABLE>
Complete descriptions of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, are contained in the
prospectuses and statements of additional information for each of the Funds.
OFFERING AND PURCHASE OF CONTRACTS
The Company is both the depositor and the principal underwriter for the
securities sold by the prospectus. The Company offers the Contracts through life
insurance agents licensed to sell variable annuities who are registered
representatives of the Company or of other registered broker-dealers who have
sales agreements with the Company. The offering of the Contracts is continuous.
A description of the manner in which Contracts are purchased may be found in the
prospectus under the section titled "Purchase" and "Contract Valuation."
PERFORMANCE DATA
GENERAL
From time to time, the Company may advertise different types of historical
performance for the Subaccounts of the Separate Account available under the
Contracts. The Company may advertise the "standardized average annual total
returns," calculated in a manner prescribed by the Securities and Exchange
Commission (the "standardized return"), as well as "non-standardized returns,"
both of which are described below.
The standardized and non-standardized total return figures are computed
according to a formula in which a hypothetical initial Purchase Payment of
$1,000 is applied to the various Subaccounts under the Contract, and then
related to the ending redeemable values over one, five and ten year periods (or
fractional periods thereof). The redeemable value is then divided by the initial
investment and this quotient is taken to the Nth root (N represents the number
of years in the period) and 1 is subtracted from the result which is then
expressed as a percentage, carried to at least the nearest hundredth of a
percent. The standardized figures use the actual returns of the Fund since
inception and then adjust them to reflect the deduction of all recurring charges
under the Contracts during each period (e.g., mortality and expense risk
charges, maintenance fees, administrative expense charges, and deferred sales
charges). Table One reflects the deferred sales charge schedules shown in
Schedule A of the prospectus, Table Two reflects the schedule shown in Schedule
B of the prospectus and Table Three reflects the schedule shown in Schedule C of
the prospectus. These charges
-3-
<PAGE>
will be deducted on a pro rata basis in the case of fractional periods. The
maintenance fee is converted to a percentage of assets based on the average
account size under the Contracts described in the prospectus. The total return
figures shown below may be different from the actual historical total return
under your Contract because for periods prior to 1994, the Subaccount's
investment performance was based on the performance of the underlying Fund plus
any cash held by the Subaccount.
The non-standardized figures will be calculated in a similar manner, except that
they will not reflect the deduction of any applicable deferred sales charge
(which would decrease the level of performance shown if reflected in these
calculations). The non-standardized figures may also include monthly, quarterly,
year-to-date and three-year periods.
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 Contract Value upon redemption may be more or less
than your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
The tables below reflect the average annual standardized and non-standardized
total return quotation figures for the periods ended December 31, 1996 for the
Subaccounts under the Contract. For those Subaccounts where results are not
available for the full calendar period indicated, the percentage shown is an
average annual return since inception (denoted with an *).
-4-
<PAGE>
TABLE ONE
CORRESPONDING WITH DEFERRED SALES CHARGE
SCHEDULE A
<TABLE>
<CAPTION>
---------------------------------- -------------------------------------------- -----------
Fund
STANDARDIZED NON-STANDARDIZED Inception
Date
--------------------------------------- ---------------------------------- -------------------------------------------- -----------
SUBACCOUNT 1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
---------- ------ ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund 22.80% 11.66% 12.70% 22.80% 16.11% 11.66% 12.70% 05/01/75
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Income Shares 2.19% 5.34% 7.38% 2.19% 4.17% 5.34% 7.38% 05/15/73
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Variable Encore Fund 3.95% 3.06% 4.66% 3.95% 3.73% 3.06% 4.66% 08/01/75
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Investment Advisers Fund, Inc. 13.63% 9.78% 9.81%* 13.63% 11.89% 9.78% 9.81%* 04/03/89
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Ascent Variable Portfolio 21.93% 21.53%* n/a 21.93% 21.53%* n/a n/a 07/05/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Crossroads Variable Portfolio 17.22% 17.54%* n/a 17.22% 17.54%* n/a n/a 07/05/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Legacy Variable Portfolio 12.66% 13.73%* n/a 12.66% 13.73%* n/a n/a 07/05/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Variable Index Plus Portfolio 8.04%* n/a n/a 9.13%* n/a n/a n/a 09/16/96
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Alger American Growth Portfolio 11.83% 15.09% 17.10%* 11.83% 14.64% 15.09% 17.10%* 01/09/89
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Alger American Small Cap Portfolio 2.78% 9.54% 18.63%* 2.78% 11.36% 9.54% 18.63%* 09/21/88
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
American Century VP Capital
Appreciation (5.62%) 4.75% 9.34%* (5.62%) 5.98% 4.75% 9.34%* 11/20/87
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP ll Contrafund Portfolio 19.60% 28.57%* n/a 19.60% 28.57%* n/a n/a 01/03/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP Equity-Income Portfolio 12.75% 16.42% 12.23% 12.75% 16.67% 16.42% 12.23% 10/09/86
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP Growth Portfolio 13.17% 13.63% 13.62% 13.17% 14.25% 13.63% 13.62% 10/09/86
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP Overseas Portfolio 11.63% 7.70% 6.49%* 11.63% 6.65% 7.70% 6.49%* 02/13/87
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Aggressive Growth
Portfolio 6.50% 19.68%* n/a 6.50% 15.43% 19.68%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Balanced Portfolio 14.63% 13.07%* n/a 14.63% 11.99% 13.07%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Growth Portfolio 16.87% 14.64%* n/a 16.87% 15.03% 14.64%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Short-Term Bond Portfolio 2.58% 3.01%* n/a 2.58% 3.35% 3.01%** n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Worldwide Growth
Portfolio 27.32% 21.52%* n/a 27.32% 17.04% 21.52%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Scudder International Portfolio
Class A Shares 13.24% 9.57% 8.47%* 13.24% 6.69% 9.57% 8.47%* 05/01/87
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
</TABLE>
Please refer to the discussion preceding the Tables for an explanation of the
charges included in the Standardized and Non-Standardized figures. These figures
represent historical performance and should not be considered a projection of
future performance.
-5-
<PAGE>
TABLE TWO
CORRESPONDING WITH DEFERRED SALES CHARGE
SCHEDULE B
<TABLE>
<CAPTION>
---------------------------------- -------------------------------------------- -----------
Fund
STANDARDIZED NON-STANDARDIZED Inception
Date
--------------------------------------- ---------------------------------- -------------------------------------------- -----------
SUBACCOUNT 1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
---------- ------ ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund 16.65% 10.75% 12.70% 22.80% 16.11% 11.66% 12.70% 05/01/75
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Income Shares (2.92%) 4.48% 7.38% 2.19% 4.17% 5.34% 7.38% 05/15/73
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Variable Encore Fund (1.26%) 2.22% 4.66% 3.95% 3.73% 3.06% 4.66% 08/01/75
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Investment Advisers Fund, Inc. 7.94% 8.89% 9.52%* 13.63% 11.89% 9.78% 9.81%* 04/03/89
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Ascent Variable Portfolio 15.83% 17.43%* n/a 21.93% 21.53%* n/a n/a 07/05/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Crossroads Variable Portfolio 11.35% 13.57%* n/a 17.22% 17.54%* n/a n/a 07/05/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Legacy Variable Portfolio 7.02% 9.89%* n/a 12.66% 13.73%* n/a n/a 07/05/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Variable Index Plus Portfolio 3.67%* n/a n/a 9.13%* n/a n/a n/a 09/16/96
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Alger American Growth Portfolio 6.23% 14.15% 16.80%* 11.83% 14.64% 15.09% 17.10%* 01/09/89
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Alger American Small Cap Portfolio (2.37%) 8.64% 18.49%* 2.78% 11.36% 9.54% 18.63%* 09/21/88
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
American Century VP Capital
Appreciation (10.35%) 3.90% 9.34%* (5.62%) 5.98% 4.75% 9.34%* 11/20/87
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP ll Contrafund Portfolio 13.62% 25.30%* n/a 19.60% 28.57%* n/a n/a 01/03/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP Equity-Income Portfolio 7.11% 15.47% 12.23% 12.75% 16.67% 16.42% 12.23% 10/09/86
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP Growth Portfolio 7.50% 12.71% 13.62% 13.17% 14.25% 13.63% 13.62% 10/09/86
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP Overseas Portfolio 6.05% 6.82% 6.49%* 11.63% 6.65% 7.70% 6.49%* 02/13/87
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Aggressive Growth
Portfolio 1.17% 17.83%* n/a 6.50% 15.43% 19.68%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Balanced Portfolio 8.89% 11.32%* n/a 14.63% 11.99% 13.07%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Growth Portfolio 11.02% 12.87%* n/a 16.87% 15.03% 14.64%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Short-Term Bond Portfolio (2.56%) 1.42%* n/a 2.58% 3.35% 3.01%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Worldwide Growth
Portfolio 20.95% 19.65%* n/a 27.32% 17.04% 21.52%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Scudder International Portfolio
Class A Shares 7.58% 8.68% 8.47%* 13.24% 6.69% 9.57% 8.47%* 05/01/87
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
</TABLE>
Please refer to the discussion preceding the Tables for an explanation of the
charges included in the Standardized and Non-Standardized figures. These figures
represent historical performance and should not be considered a projection of
future performance.
-6-
<PAGE>
TABLE THREE
CORRESPONDING WITH DEFERRED SALES CHARGE
SCHEDULE C
<TABLE>
<CAPTION>
---------------------------------- -------------------------------------------- -----------
Fund
STANDARDIZED NON-STANDARDIZED Inception
Date
--------------------------------------- ---------------------------------- -------------------------------------------- -----------
SUBACCOUNT 1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years
---------- ------ ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund 15.43% 11.21% 12.70% 22.80% 16.11% 11.66% 12.70% 05/01/75
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Income Shares (3.94%) 4.91% 7.38% 2.19% 4.17% 5.34% 7.38% 05/15/73
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Variable Encore Fund (2.30%) 2.64% 4.66% 3.95% 3.73% 3.06% 4.66% 08/01/75
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Investment Advisers Fund, Inc. 6.80% 9.34% 9.81%* 13.63% 11.89% 9.78% 9.81%* 04/03/89
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Ascent Variable Portfolio 14.61% 16.60%* n/a 21.93% 21.53%* n/a n/a 07/05/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Crossroads Variable Portfolio 10.18% 12.76%* n/a 17.22% 17.54%* n/a n/a 07/05/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Legacy Variable Portfolio 5.89% 9.11%* n/a 12.66% 13.73%* n/a n/a 07/05/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Aetna Variable Index Plus Portfolio 2.58%* n/a n/a 9.13%* n/a n/a n/a 09/16/96
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Alger American Growth Portfolio 5.11% 14.62% 17.10%* 11.83% 14.64% 15.09% 17.10%* 01/09/89
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Alger American Small Cap Portfolio (3.40%) 9.09% 18.63%* 2.78% 11.36% 9.54% 18.63%* 09/21/88
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
American Century VP Capital
Appreciation (11.29%) 4.33% 9.34%* (5.62%) 5.98% 4.75% 9.34%* 11/20/87
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP ll Contrafund Portfolio 12.42% 24.64%* n/a 19.60% 28.57%* n/a n/a 01/03/95
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP Equity-Income Portfolio 5.98% 15.95% 12.23% 12.75% 16.67% 16.42% 12.23% 10/09/86
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP Growth Portfolio 6.37% 13.18% 13.62% 13.17% 14.25% 13.63% 13.62% 10/09/86
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Fidelity VIP Overseas Portfolio 4.93% 7.26% 6.49%* 11.63% 6.65% 7.70% 6.49%* 02/13/87
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Aggressive Growth
Portfolio 0.10% 18.21%* n/a 6.50% 15.43% 19.68%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Balanced Portfolio 7.74% 11.68%* n/a 14.63% 11.99% 13.07%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Growth Portfolio 9.85% 13.22%* n/a 16.87% 15.03% 14.64%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Short-Term Bond Portfolio (3.59%) 1.74%* n/a 2.58% 3.35% 3.01%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Janus Aspen Worldwide Growth
Portfolio 19.68% 20.03%* n/a 27.32% 17.04% 21.52%* n/a 09/13/93
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
Scudder International Portfolio
Class A Shares 6.44% 9.13% 8.47%* 13.24% 6.69% 9.57% 8.47%* 05/01/87
--------------------------------------- ---------- ----------- ----------- ----------- --------- ---------- ----------- -----------
</TABLE>
Please refer to the discussion preceding the Tables for an explanation of the
charges included in the Standardized and Non-Standardized figures. These figures
represent historical performance and should not be considered a projection of
future performance.
-7-
<PAGE>
ANNUITY PAYMENTS
When Annuity payments are to begin, the value of the Contract is determined
using Accumulation Unit values as of the tenth Valuation Date before the first
Annuity payment is due. Such value (less any applicable premium tax) is applied
to provide an Annuity in accordance with the Annuity and investment options
elected.
The Annuity option tables found in the Contract show, for each form of Annuity,
the amount of the first Annuity payment for each $1,000 of value applied.
Thereafter, variable Annuity payments fluctuate as the Annuity Unit value(s)
fluctuates with the investment experience of the selected investment option(s).
The first payment and subsequent payments also vary depending on the assumed net
investment rate selected (3.5% or 5% per annum). Selection of a 5% rate causes a
higher first payment, but Annuity payments will increase thereafter only to the
extent that the net investment rate increases by more than 5% on an annual
basis. Annuity payments would decline if the rate failed to increase by 5%. Use
of the 3.5% assumed rate causes a lower first payment, but subsequent payments
would increase more rapidly or decline more slowly as changes occur in the net
investment rate.
When the Annuity Period begins, the Annuitant is credited with a fixed number of
Annuity Units (which does not change thereafter) in each of the designated
investment options. This number is calculated by dividing (a) by (b), where (a)
is the amount of the first Annuity payment based on a particular investment
option, and (b) is the then current Annuity Unit value for that investment
option. As noted, Annuity Unit values fluctuate from one Valuation Date to the
next; such fluctuations reflect changes in the net investment factor for the
appropriate Subaccount(s) (with a ten Valuation Date lag which gives the Company
time to process Annuity payments) and a mathematical adjustment which offsets
the 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 Annuity Period.
EXAMPLE:
Assume that, at the date Annuity payments are to commence, there are 3,000
Accumulation Units credited under a particular Contract and that the value of an
Accumulation Unit for the tenth Valuation Date prior to retirement was
$13.650000. This produces a total value of $40,950.
Assume also that no premium tax is payable and that the Annuity table in the
Contract provides, for the option elected, a first monthly variable Annuity
payment of $6.68 per $1000 of value applied; the Annuitant's first monthly
payment would thus be 40.950 multiplied by $6.68, or $273.55.
Assume then that the value of an Annuity Unit for the Valuation Date on which
the first payment was due was $13.400000. When this value is divided into the
first monthly payment, the number of Annuity Units is determined to be 20.414.
The value of this number of Annuity Units will be paid in each subsequent month.
If the net investment factor with respect to the appropriate Subaccount is
1.0015000 as of the tenth Valuation Date preceding the due date of the second
monthly payment, multiplying this factor by .9999058* (to neutralize the 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 Date (assume such value to be
$13.504376) to produce an Annuity Unit value of $13.523359 for the Valuation
Date on which the second payment is due.
-8-
<PAGE>
The second monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359,
which produces a payment of $276.07.
*If an assumed net investment rate of 5% is elected, the appropriate factor to
neutralize such assumed rate would be .9998663.
SALES MATERIAL AND ADVERTISING
The Company may include hypothetical illustrations in its sales literature that
explain the mathematical principles of dollar cost averaging, compounded
interest, tax deferred accumulation, and the mechanics of variable annuity
contracts. The Company may also discuss the difference between variable annuity
contracts and other types of savings or investment products, including, but not
limited to, personal savings accounts and certificates of deposit.
We may distribute sales literature that compares the percentage change in
Accumulation Unit values for any of the Subaccounts to established market
indices such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average or to the percentage change in values of other management
investment companies that have investment objectives similar to the Subaccount
being compared.
We may publish in advertisements and reports, the ratings and other information
assigned to us by one or more independent rating organizations such as A.M. Best
Company, Duff & Phelps, Standard & Poor's Corporation and Moody's Investors
Services, Inc. The purpose of the ratings is to reflect our financial strength
and/or claims-paying ability. We may also quote ranking services such as
Morningstar's Variable Annuity/Life Performance Report and Lipper's Variable
Insurance Products Performance Analysis Service (VIPPAS), which rank variable
annuity or life Subaccounts or their underlying funds by performance and/or
investment objective. We may illustrate in advertisements the performance of the
underlying funds, if accompanied by performance which also shows the performance
of such funds reduced by applicable charges under the Separate Account. We may
also show in advertisements the portfolio holdings of the underlying funds,
updated at various intervals. From time to time, we will quote articles from
newspapers and magazines or other publications or reports, including, but not
limited to The Wall Street Journal, Money magazine, USA Today and The VARDS
Report.
The Company may provide in advertising, sales literature, periodic publications
or other materials information on various topics of interest to current and
prospective Contract Holders. 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. These topics may include the relationship between sectors of
the economy and the economy as a whole and its effect on various securities
markets, investment strategies and techniques (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer and
account rebalancing), the advantages and disadvantages of investing in
tax-deferred and taxable investments, customer profiles and hypothetical
purchase and investment scenarios, financial management and tax and retirement
planning, and investment alternatives to certificates of deposit and other
financial instruments, including comparison between the Contracts and the
characteristics of and market for such financial instruments.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103, are the
independent auditors for the Separate Account and for the Company. The services
provided to the Separate Account
-9-
<PAGE>
include primarily the examination of the Separate Account's financial statements
and the review of filings made with the SEC.
-10-
<PAGE>
FINANCIAL STATEMENTS
VARIABLE ANNUITY ACCOUNT C
Index
Statement of Assets and Liabilities........................................ S-2
Statements of Operations and Changes in Net Assets......................... S-5
Notes to Financial Statements.............................................. S-6
Independent Auditors' Report............................................... S-12
S-1
<PAGE>
Variable Annuity Account C
Statement of Assets and Liabilities - December 31, 1996:
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 151,485,109 shares (cost $4,579,080,272) ............................. $4,906,825,216
Aetna Income Shares; 28,507,123 shares (cost $369,163,545)................................ 359,849,312
Aetna Variable Encore Fund; 18,592,739 shares (cost $246,054,502) ......................... 245,304,466
Aetna Investment Advisers Fund, Inc.; 53,928,968 shares (cost $718,075,860) ............... 815,295,428
Aetna GET Fund, Series B; 4,575,463 shares (cost $47,775,458) ............................. 65,062,153
Aetna GET Fund, Series C; 19,458,746 shares (cost $196,074,278) ........................... 199,058,163
Aetna Ascent Variable Portfolio; 1,716,448 shares (cost $19,943,767) ...................... 21,660,591
Aetna Crossroads Variable Portfolio; 1,232,084 shares (cost $13,920,592) .................. 14,758,921
Aetna Legacy Variable Portfolio; 805,622 shares (cost $8,954,520) ......................... 9,067,002
Aetna Variable Index Plus Portfolio; 976,838 shares (cost $10,573,112) .................... 10,653,437
Alger American Funds:
Growth Portfolio; 3,054,826 shares (cost $98,141,364) ................................... 104,872,172
Small Capitalization Portfolio; 7,916,675 shares (cost $284,506,629) .................... 323,871,170
Calvert Responsibly Invested Balanced Fund; 22,541,903 shares (cost $37,025,408) .......... 39,989,335
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 5,062,740 shares (cost $95,793,557) ............................ 106,469,428
Growth Portfolio; 2,583,239 shares (cost $75,185,783) ................................... 80,442,047
Overseas Portfolio; 448,481 shares (cost $7,799,758) .................................... 8,449,388
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 1,010,226 shares (cost $14,600,538) ............................ 17,103,129
Contrafund Portfolio; 7,179,138 shares (cost $103,725,028) .............................. 118,886,521
Index 500 Portfolio; 238,202 shares (cost $18,926,038) .................................. 21,230,903
Franklin Government Securities Trust; 1,774,843 shares (cost $22,950,984) .................. 23,356,943
Janus Aspen Series:
Aggressive Growth Portfolio; 9,477,882 shares (cost $155,207,650) ....................... 172,876,567
Balanced Portfolio; 1,034,616 shares (cost $14,529,701) ................................. 15,281,267
Flexible Income Portfolio; 748,885 shares (cost $8,276,798) ............................. 8,417,464
Growth Portfolio; 2,630,613 shares (cost $38,608,238) ................................... 40,800,809
Short-Term Bond Portfolio; 169,569 shares (cost $1,697,074) ............................. 1,690,606
Worldwide Growth Portfolio; 8,868,224 shares (cost $155,687,884) ........................ 172,398,274
Lexington Emerging Markets Fund; 480,702 shares (cost $4,742,490) ......................... 4,845,481
Lexington Natural Resources Trust Fund; 1,668,604 shares (cost $19,847,176) ............... 23,844,347
Neuberger and Berman Advisers Management Trust -
Growth Portfolio; 3,688,195 shares (cost $85,622,163) ................................... 95,081,684
Scudder Variable Life Investment Fund -
International Portfolio; 14,454,018 shares (cost $162,216,238) .......................... 191,515,746
TCI Portfolios Inc. - Growth Fund; 33,812,929 shares (cost $338,104,873) .................... 346,244,393
--------------
NET ASSETS (cost $7,952,811,278)............................................................ $8,565,202,363
==============
Net assets represented by:
Reserves for annuity contracts in accumulation and payment period: (Notes 1 and
5)
Aetna Variable Fund:
Annuity contracts in accumulation.......................................................... $4,694,078,344
Annuity contracts in payment period........................................................ 212,746,872
Aetna Income Shares:
Annuity contracts in accumulation.......................................................... 354,233,289
Annuity contracts in payment period........................................................ 5,616,023
Aetna Variable Encore Fund:
Annuity contracts in accumulation.......................................................... 245,304,466
Aetna Investment Advisers Fund, Inc.:
Annuity contracts in accumulation.......................................................... 800,532,626
Annuity contracts in payment period........................................................ 14,762,802
</TABLE>
S-2
<PAGE>
Variable Annuity Account C
Statement of Assets and Liabilities - December 31, 1996 (continued):
<TABLE>
<S> <C>
Aetna GET Fund, Series B:
Annuity contracts in accumulation......................................................... $65,062,153
Aetna GET Fund, Series C:
Annuity contracts in accumulation......................................................... 199,058,163
Aetna Ascent Variable Portfolio:
Annuity contracts in accumulation......................................................... 21,660,591
Aetna Crossroads Variable Portfolio:
Annuity contracts in accumulation......................................................... 14,758,921
Aetna Legacy Variable Portfolio:
Annuity contracts in accumulation......................................................... 9,067,002
Aetna Variable Index Plus Portfolio:
Annuity contracts in accumulation......................................................... 10,653,437
Alger American Funds:
Growth Portfolio:
Annuity contracts in accumulation......................................................... 104,872,172
Small Capitalization Portfolio:
Annuity contracts in accumulation......................................................... 323,871,170
Calvert Responsibly Invested Balanced Fund:
Annuity contracts in accumulation......................................................... 39,989,335
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Annuity contracts in accumulation......................................................... 106,469,428
Growth Portfolio:
Annuity contracts in accumulation......................................................... 80,442,047
Overseas Portfolio:
Annuity contracts in accumulation......................................................... 8,449,388
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Annuity contracts in accumulation......................................................... 17,103,129
Contrafund Portfolio:
Annuity contracts in accumulation......................................................... 118,886,521
Index 500 Portfolio:
Annuity contracts in accumulation......................................................... 21,230,903
Franklin Government Securities Trust Fund:
Annuity contracts in accumulation......................................................... 23,356,943
Janus Aspen Series:
Aggressive Growth Portfolio:
Annuity contracts in accumulation......................................................... 172,876,567
Balanced Portfolio:
Annuity contracts in accumulation......................................................... 15,281,267
Flexible Income Portfolio:
Annuity contracts in accumulation......................................................... 8,417,464
Growth Portfolio:
Annuity contracts in accumulation......................................................... 40,800,809
Short-Term Bond Portfolio:
Annuity contracts in accumulation......................................................... 1,690,606
Worldwide Growth Portfolio:
Annuity contracts in accumulation......................................................... 172,398,274
Lexington Emerging Markets Fund:
Annuity contracts in accumulation......................................................... 4,845,481
Lexington Natural Resources Trust Fund:
Annuity contracts in accumulation......................................................... 23,844,347
Neuberger and Berman Advisers Management Trust -
Growth Portfolio:
Annuity contracts in accumulation......................................................... 95,081,684
Scudder Variable Life Investment Fund - International Portfolio:
Annuity contracts in accumulation......................................................... 191,515,746
</TABLE>
S-3
<PAGE>
Variable Annuity Account C
Statement of Assets and Liabilities - December 31, 1996 (continued):
<TABLE>
<S> <C>
TCI Portfolios, Inc. - Growth Fund:
Annuity contracts in accumulation......................................................... $346,244,393
--------------
$8,565,202,363
==============
</TABLE>
See Notes to Financial Statements
S-4
<PAGE>
Variable Annuity Account C
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---- ----
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ..................................................... $712,854,599 $730,430,612
Expenses: (Notes 2 and 5)
Valuation Period Deductions ................................... (93,446,331) (71,090,542)
-------------- --------------
Net investment income ............................................ 619,408,268 659,340,070
-------------- --------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ............................................ 2,060,808,031 570,154,582
Cost of investments sold ....................................... 1,547,239,509 409,480,615
-------------- --------------
Net realized gain ............................................ 513,568,522 160,673,967
Net unrealized gain on investments: (Note 5)
Beginning of year .............................................. 594,083,184 73,479,233
End of year .................................................... 612,391,085 594,083,184
-------------- --------------
Net change in unrealized gain ................................ 18,307,901 520,603,951
-------------- --------------
Net realized and unrealized gain on investments .................. 531,876,423 681,277,918
-------------- --------------
Net increase in net assets resulting from operations ............. 1,151,284,691 1,340,617,988
-------------- --------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments ...................... 951,293,520 771,594,245
Sales and administrative charges deducted by the Company ......... (61,783) (98,694)
-------------- --------------
Net variable annuity contract purchase payments............... 951,231,737 771,495,551
Transfer from the Company for mortality guarantee adjustments .... 3,247,064 3,678,430
Transfers (to) from the Company's fixed account options .......... 187,508,331 (44,377,350)
Redemptions by contract holders .................................. (339,383,183) (287,945,984)
Annuity Payments ................................................. (20,948,181) (14,807,537)
Other ............................................................ 144,245 1,144,770
-------------- --------------
Net increase in net assets from unit transactions (Note 5) ... 781,800,013 429,187,880
-------------- --------------
Change in net assets ............................................. 1,933,084,704 1,769,805,868
NET ASSETS:
Beginning of year ................................................ 6,632,117,659 4,862,311,791
-------------- --------------
End of year ...................................................... $8,565,202,363 $6,632,117,659
============== ==============
</TABLE>
See Notes to Financial Statements
S-5
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1996
1. Summary of Significant Accounting Policies
Variable Annuity Account C ("Account") is a separate account established by
Aetna Life Insurance and Annuity Company and is 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 are qualified
under 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, 1996:
Aetna Variable Fund
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Aetna GET Fund, Series B
Aetna GET Fund, Series C
Aetna Ascent Variable Portfolio
Aetna Crossroads Variable Portfolio
Aetna Legacy Variable Portfolio
Aetna Variable Index Plus Portfolio
Alger American Funds:
[bullet] Growth Portfolio
[bullet] Small Capitalization Portfolio
Calvert Responsibly Invested Balanced Portfolio
Fidelity Investments Variable Insurance Products Fund:
[bullet] Equity-Income Portfolio
[bullet] Growth Portfolio
[bullet] Overseas Portfolio
Fidelity Investments Variable Insurance Products Fund II:
[bullet] Asset Manager Portfolio
[bullet] Contrafund Portfolio
[bullet] Index 500 Portfolio
Franklin Government Securities Trust Janus Aspen Series: [bullet]
Aggressive Growth Portfolio [bullet] Balanced Portfolio [bullet] Flexible
Income Portfolio [bullet] Growth Portfolio [bullet] Short-Term Bond
Portfolio [bullet] Worldwide Growth Portfolio Lexington Fund Emerging
Markets Fund Lexington Natural Resources Trust Fund Neuberger & Berman
Advisers Management Trust -
Growth Portfolio
Scudder Variable Life Investment Fund -
International Portfolio
TCI Portfolios, Inc. - Growth Fund
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 Aetna Life Insurance and Annuity Company ("Company") which is
taxed as a life insurance company under the Internal Revenue Code of 1986,
as amended.
S-6
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1996 (continued):
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, 1996 and December
31, 1995 aggregated $3,462,016,312 and $2,060,808,031; $1,658,682,532 and
$570,154,582, respectively.
S-7
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1996 (continued):
5. Supplemental Information to Statements of Operations and Changes in
Net Assets - Year Ended December 31, 1996
<TABLE>
<CAPTION>
Net Unrealized
Valuation Proceeds Cost of Net Gain (Loss)
Period from Investments Realized Beginning
Dividends Deductions Sales Sold Gain (Loss) of Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund: $515,238,366 ($54,321,686) $1,237,963,630 $841,837,896 $396,125,734 $267,567,573
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares: 23,144,319 (4,611,478) 155,474,786 153,469,788 2,004,998 3,230,862
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 14,058,252 (2,878,790) 175,207,017 167,163,639 8,043,378 9,204,418
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 72,699,670 (9,562,496) 223,353,174 160,905,519 62,447,655 122,622,603
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 5,304,368 (1,100,778) 25,117,816 18,596,857 6,520,959 13,423,804
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 969,084 (280,865) 229,569 224,240 5,329 0
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 963,171 (137,931) 514,612 443,710 70,902 105,405
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 797,511 (106,179) 755,620 679,118 76,502 68,967
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 595,666 (63,355) 1,206,903 1,119,490 87,413 36,214
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 57,328 (16,537) 356,603 338,531 18,072 0
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Growth Portfolio: 2,138,198 (966,404) 3,326,813 3,149,890 176,923 (285,937)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: 1,173,212 (3,731,877) 24,333,106 17,577,100 6,756,006 38,038,924
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Fund: 3,000,539 (425,159) 1,793,014 1,429,393 363,621 2,175,908
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 2,269,871 (994,896) 3,851,613 3,166,678 684,935 2,759,687
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 2,304,888 (707,334) 623,639 453,561 170,078 505,388
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 115,737 (82,498) 2,280,928 2,065,136 215,792 163,196
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 955,910 (196,386) 2,016,939 1,797,456 219,483 1,530,985
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 357,388 (910,633) 1,299,964 1,078,898 221,066 285,166
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 219,199 (139,391) 1,105,697 943,071 162,626 223,865
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Franklin Government Securities Trust: 1,223,061 (290,354) 5,788,894 5,646,267 142,627 831,241
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-8
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1996 (continued):
5. Supplemental Information to Statements of Operations and Changes in
Net Assets - Year Ended December 31, 1996
<TABLE>
<CAPTION>
Net
Net Unrealized Net Increase(Decrease)
Gain (Loss) Change in In Net Assets Net Assets
End Unrealized from Unit Beginning End
of Year Gain (Loss) Transactions of Year of Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund: $327,744,944 $60,177,371 $39,664,335
Annuity contracts in accumulation $3,805,891,355 $4,694,078,344
Annuity contracts in payment period 144,049,741 212,746,872
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares: (9,314,233) (12,545,095) (34,151,027)
Annuity contracts in accumulation 380,937,626 354,233,289
Annuity contracts in payment period 5,069,969 5,616,023
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: (750,036) (9,954,454) 5,744,394
Annuity contracts in accumulation 230,291,686 245,304,466
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 97,219,569 (25,403,034) (7,904,062)
Annuity contracts in accumulation 713,304,833 800,532,626
Annuity contracts in payment period 9,712,862 14,762,802
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 17,286,695 3,862,891 (22,661,545)
Annuity contracts in accumulation 73,136,258 65,062,153
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 2,983,885 2,983,885 195,380,730
Annuity contracts in accumulation 0 199,058,163
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 1,716,824 1,611,419 14,244,294
Annuity contracts in accumulation 4,908,736 21,660,591
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 838,329 769,362 9,552,968
Annuity contracts in accumulation 3,668,757 14,758,921
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 112,482 76,268 6,451,330
Annuity contracts in accumulation 1,919,680 9,067,002
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 80,325 80,325 10,514,249
Annuity contracts in accumulation 0 10,653,437
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Growth Portfolio: 6,730,808 7,016,745 58,052,710
Annuity contracts in accumulation 38,454,000 104,872,172
- -----------------------------------------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: 39,364,541 1,325,617 77,101,765
Annuity contracts in accumulation 241,246,447 323,871,170
- -----------------------------------------------------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Fund: 2,963,927 788,019 7,573,554
Annuity contracts in accumulation 28,688,761 39,989,335
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 10,675,870 7,916,183 58,569,396
Annuity contracts in accumulation 38,023,939 106,469,428
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 5,256,264 4,750,876 46,205,811
Annuity contracts in accumulation 27,717,728 80,442,047
- -----------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 649,630 486,434 3,994,936
Annuity contracts in accumulation 3,718,987 8,449,388
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 2,502,591 971,606 782,358
Annuity contracts in accumulation 14,370,158 17,103,129
- -----------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 15,161,493 14,876,327 73,985,256
Annuity contracts in accumulation 30,357,117 118,886,521
- -----------------------------------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 2,304,865 2,081,000 15,496,325
Annuity contracts in accumulation 3,411,144 21,230,903
- -----------------------------------------------------------------------------------------------------------------------------------
Franklin Government Securities Trust: 405,959 (425,282) 664,776
Annuity contracts in accumulation 22,042,115 23,356,943
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-9
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1996 (continued):
5. Supplemental Information to Statements of Operations and Changes in
Net Assets - Year Ended December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Janus Aspen Series:
Aggressive Growth Portfolio: $1,589,459 ($1,739,222) $4,803,682 $3,702,615 $1,101,067
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 238,807 (87,725) 1,671,701 1,511,274 160,427
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 499,929 (72,736) 1,541,843 1,429,353 112,490
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 630,364 (245,877) 1,130,979 963,703 167,276
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: 61,378 (14,453) 726,351 729,002 (2,651)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 1,725,690 (1,035,043) 1,942,344 1,492,553 449,791
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 0 (55,554) 905,228 870,164 35,064
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 80,144 (231,100) 7,649,108 6,026,027 1,623,081
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Neuberger and Berman Advisers Management Trust -
Growth Portfolio: 8,437,018 (1,199,983) 15,336,623 13,853,081 1,483,542
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund -
International Portfolio: 4,063,525 (2,264,627) 26,981,873 22,523,390 4,458,483
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc. - Growth Fund: 47,942,547 (4,974,984) 131,517,962 112,052,109 19,465,853
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Total Variable Annuity Account C $712,854,599 ($93,446,331) $2,060,808,031 $1,547,239,509 $513,568,522
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net Net
Unrealized Net Increase (Decrease)
Gain (Loss) Change in In Net Assets 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> <C>
Janus Aspen Series:
Aggressive Growth Portfolio: $13,091,398 $17,668,916 $4,577,518 $79,952,029
Annuity contracts in accumulation $87,395,716 $172,876,567
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 60,530 751,567 691,037 12,773,551
Annuity contracts in accumulation 1,505,170 15,281,267
- ------------------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 167,581 140,666 (26,915) 4,046,573
Annuity contracts in accumulation 3,858,123 8,417,464
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 145,978 2,192,571 2,046,593 33,135,966
Annuity contracts in accumulation 5,066,487 40,800,809
- ------------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (354) (6,468) (6,114) 1,108,236
Annuity contracts in accumulation 544,210 1,690,606
S-10
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 786,497 16,710,390 15,923,893 139,287,080
Annuity contracts in accumulation 16,046,863 172,398,274
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: (46,118) 102,991 149,109 1,627,816
Annuity contracts in accumulation 3,089,046 4,845,481
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 1,277,740 3,997,171 2,719,431 5,442,307
Annuity contracts in accumulation 14,210,484 23,844,347
- ------------------------------------------------------------------------------------------------------------------------------------
Neuberger and Berman Advisers Management Trust -
Growth Portfolio: 11,656,721 9,459,521 (2,197,200) (937,272)
Annuity contracts in accumulation 89,495,579 95,081,684
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund -
International Portfolio: 12,783,439 29,299,509 16,516,070 4,017,712
Annuity contracts in accumulation 164,724,583 191,515,746
- ------------------------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc. - Growth Fund: 91,671,503 8,139,519 (83,531,984) (57,916,538)
Annuity contracts in accumulation 425,259,499 346,244,393
- ------------------------------------------------------------------------------------------------------------------------------------
Total Variable Annuity Account C $594,083,184 $612,391,085 $18,307,901 $781,800,013 $6,632,117,659 $8,565,202,363
===================================================================================================================================
</TABLE>
S-11
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and Contract
Owners of Variable Annuity Account C:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Annuity Account C (the "Account") as
of December 31, 1996, 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, 1996. 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. Our procedures included confirmation of securities
owned as of December 31, 1996, 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 C
as of December 31, 1996, the results of its operations and the 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, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 14, 1997
S-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 F-3
Consolidated Balance Sheets as of December 31, 1996
and 1995 F-4
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiaries as of December 31, 1996 and 1995,
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, 1996. 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 statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aetna Life Insurance
and Annuity Company and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 4, 1997
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
Revenue:
Premiums $133.6 $212.7 $191.6
Charges assessed against policyholders 396.5 318.9 279.0
Net investment income 1,045.6 1,004.3 917.2
Net realized capital gains 19.7 41.3 1.5
Other income 45.4 42.0 10.3
------- ------- -------
Total revenue 1,640.8 1,619.2 1,399.6
------- ------- -------
Benefits and expenses:
Current and future benefits 968.6 997.2 921.5
Operating expenses 342.2 310.8 225.7
Amortization of deferred policy
acquisition costs 69.8 48.0 31.5
Severance and facilities charges 61.3 -- --
------- ------- -------
Total benefits and expenses 1,441.9 1,356.0 1,178.7
------- ------- -------
Income before income taxes 198.9 263.2 220.9
Income taxes 57.8 87.3 75.6
------- ------- -------
Net income $141.1 $175.9 $145.3
======= ======= =======
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
December 31,
-------------------------
1996 1995
---- ----
Assets
- ------
Investments:
Debt securities, available for sale:
(amortized cost: $12,539.1 and $11,923.7) $12,905.5 $12,720.8
Equity securities, available for sale:
Non-redeemable preferred stock
(cost: $107.6 and $51.3) 119.0 57.6
Investment in affiliated mutual funds
(cost: $77.3 and $173.4) 81.1 191.8
Common stock (cost: $0.0 and $6.9) 0.3 8.2
Short-term investments 34.8 15.1
Mortgage loans 13.0 21.2
Policy loans 399.3 338.6
--------- ---------
Total investments 13,553.0 13,353.3
Cash and cash equivalents 459.1 568.8
Accrued investment income 159.0 175.5
Premiums due and other receivables 26.6 37.3
Deferred policy acquisition costs 1,515.3 1,341.3
Reinsurance loan to affiliate 628.3 655.5
Other assets 33.7 26.2
Separate Account assets 15,318.3 10,987.0
--------- ---------
Total assets $31,693.3 $27,144.9
========= =========
Liabilities and Shareholder's Equity
- -------------------------------------
Liabilities:
Future policy benefits $3,617.0 $3,594.6
Unpaid claims and claim expenses 28.9 27.2
Policyholders' funds left with the Company 10,663.7 10,500.1
--------- ---------
Total insurance reserve liabilities 14,309.6 14,121.9
Other liabilities 354.7 257.2
Income taxes:
Current 20.7 26.2
Deferred 80.5 169.6
Separate Account liabilities 15,318.3 10,987.0
--------- ---------
Total liabilities 30,083.8 25,561.9
--------- ---------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and
outstanding) 2.8 2.8
Paid-in capital 418.0 407.6
Net unrealized capital gains 60.5 132.5
Retained earnings 1,128.2 1,040.1
--------- ---------
Total shareholder's equity 1,609.5 1,583.0
--------- ---------
Total liabilities and shareholder's equity $31,693.3 $27,144.9
========= =========
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
Years Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
Shareholder's equity, beginning of year $1,583.0 $1,088.5 $1,246.7
Capital contributions 10.4 -- --
Net change in unrealized capital gains (losses) (72.0) 321.5 (303.5)
Net income 141.1 175.9 145.3
Other changes (49.5) -- --
Common stock dividends declared (3.5) (2.9) --
-------- -------- --------
Shareholder's equity, end of year $1,609.5 $1,583.0 $1,088.5
======== ======== ========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $141.1 $175.9 $145.3
Adjustments to reconcile net income to net
cash (used for) provided by operating activities:
Decrease (increase) in accrued investment income 16.5 (33.3) (17.5)
Decrease in premiums due and other receivables 1.6 25.4 1.3
Increase in policy loans (60.7) (89.9) (46.0)
Increase in deferred policy acquisition costs (174.0) (177.0) (105.9)
Decrease in reinsurance loan to affiliate 27.2 34.8 27.8
Net increase in universal life account balances 243.2 393.4 164.7
(Decrease) increase in other insurance
reserve liabilities (211.5) 79.0 75.1
Net increase in other liabilities and other assets 3.1 13.0 52.5
Decrease in income taxes (26.7) (4.5) (10.3)
Net accretion of discount on investments (68.0) (66.4) (77.9)
Net realized capital gains (19.7) (41.3) (1.5)
Other, net 1.1 -- (1.0)
-------- -------- --------
Net cash (used for) provided by operating activities (126.8) 309.1 206.6
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,182.2 4,207.2 3,593.8
Equity securities 190.5 180.8 93.1
Mortgage loans 8.7 10.7 --
Limited partnership -- 26.6 --
Investment maturities and collections of:
Debt securities available for sale 885.2 583.9 1,289.2
Short-term investments 35.0 106.1 30.4
Cost of investment purchases in:
Debt securities available for sale (6,534.3) (6,034.0) (5,621.4)
Equity securities (118.1) (170.9) (162.5)
Short-term investments (54.7) (24.7) (106.1)
Mortgage loans -- (21.3) --
Limited partnership -- -- (25.0)
Other, net (17.6) -- --
-------- -------- --------
Net cash used for investing activities (423.1) (1,135.6) (908.5)
-------- -------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,579.5 1,884.5 1,737.8
Withdrawals of investment contracts (1,146.2) (1,109.6) (948.7)
Additional capital contributions 10.4 -- --
Dividends paid to shareholder (3.5) (2.9) --
-------- -------- --------
Net cash provided by financing activities 440.2 772.0 789.1
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (109.7) (54.5) 87.2
Cash and cash equivalents, beginning of year 568.8 623.3 536.1
-------- -------- --------
Cash and cash equivalents, end of year $459.1 $568.8 $623.3
======== ======== ========
Supplemental cash flow information:
Income taxes paid, net $85.5 $92.8 $85.9
======== ======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries
(collectively, the "Company") is a provider of financial services and life
insurance products in the United States. The Company has two business
segments: financial services and individual life insurance.
Financial services products include annuity contracts that offer a variety
of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403,
408 and 457, and non-qualified annuity contracts. These contracts may be
deferred or immediate ("payout annuities"). Financial services also include
investment advisory services, financial planning and pension plan
administrative services.
Individual life insurance products include universal life, variable
universal life, traditional whole life and term insurance.
Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiaries, Aetna Insurance Company
of America and Aetna Private Capital, Inc. Aetna Life Insurance and Annuity
Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc.
("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement
Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have
been made to 1995 and 1994 financial information to conform to the 1996
presentation.
Future Application of Accounting Standards
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was
issued in June 1996. This statement provides accounting and reporting
standards for transfers of financial assets and extinguishments of
liabilities. Transactions covered by this statement would include
securitizations, sales of partial interests in assets, repurchase
agreements and securities lending. This statement requires that after a
transfer of financial assets, an entity would recognize any assets it
controls and liabilities it has incurred. An entity would not recognize
assets when control has been surrendered or liabilities have been
satisfied. Portions of this statement are effective for each of 1997 and
1998 financial statements and early adoption is not permitted. The Company
does not expect adoption of this statement to have a material effect on its
financial position or results of operations.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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
All of the Company's 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 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.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds primarily represents an
investment in the Aetna Series Fund, Inc., a retail mutual fund which has
been seeded by the Company, and is carried at fair value.
Mortgage loans and policy loans are carried at unpaid principal balances,
net of impairment reserves. Sales of mortgage loans are recorded on the
closing date.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which
approximates amortized cost.
F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that qualify as
hedges are deferred and recognized as an adjustment to the hedged asset or
liability. Deferred gains or losses on such futures contracts are amortized
over the life of the acquired asset or liability as a yield adjustment or
through net realized capital gains or losses upon disposal of an asset.
Changes in the fair value of futures contracts that do not qualify as
hedges are recorded in net realized capital gains or losses. Hedge
designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying
the hedge, and that high correlation be maintained throughout the hedge
period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and
excess gains and losses on the hedging instrument are reflected in net
realized capital gains or losses.
Swap agreements which are designated as interest rate risk management
instruments at inception are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such
agreements is reported in net investment income. There is no recognition in
the Consolidated Balance Sheets for changes in the fair value of the
agreement.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs,
all of which vary with and are primarily related to the production of new
and renewal business, consist principally of commissions, certain expenses
of underwriting and issuing contracts, and certain agency expenses. For
fixed ordinary life contracts, such costs are amortized over expected
premium-paying periods (up to 20 years). For universal life and certain
annuity contracts, such costs are amortized in proportion to estimated
gross profits and adjusted to reflect actual gross profits over the life of
the contracts (up to 20 years).
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross
profits are not adequate to cover related losses and expenses.
Insurance Reserve Liabilities
Future Policy Benefits include reserves for universal life, immediate
annuities with life contingent payouts and traditional life insurance
contracts. Reserves for universal life contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon.
Reserves for immediate annuities with life contingent payouts and
traditional life insurance contracts are computed on the basis of assumed
investment yield, mortality, and expenses, including a margin for adverse
deviations. Such assumptions generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 12.00%.
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.
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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 4.00% to 7.00%), net of adjustments for investment experience
that the Company is entitled to reflect in future credited interest.
Reserves on contracts subject to experience rating reflect the rights of
contractholders, plan participants and the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges,
actuarial margin and other fees are recorded as revenue in charges assessed
against policyholders. Other amounts received for these contracts are
reflected as deposits and are not recorded as revenue. Life insurance
premiums, other than premiums for universal life and certain annuity
contracts, are recorded as premium revenue when due. Related policy
benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the
contracts. When annuity payments begin under contracts with life contingent
payouts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity, reflected as an offsetting amount in both premiums and current and
future benefits in the Consolidated Statements of Income.
Separate Accounts
Assets held under variable universal life and variable annuity contracts
are segregated in Separate Accounts and are invested, as designated by the
contractholder or participant under a contract, in shares of Aetna Variable
Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment
Advisers Fund, Inc., Aetna GET Fund, the Aetna Series Fund Inc., or the
Aetna Generation Funds (collectively, "Funds"), which are managed by the
Company, or other selected mutual funds not managed by the Company.
Separate Accounts assets and liabilities are carried at fair value except
for those relating to a guaranteed interest option. Since the Company bears
the investment risk where the contract is held to maturity, the assets of
the Separate Account supporting the guaranteed interest option are carried
at an amortized cost of $515.6 million for 1996 (fair value $523.0 million)
and $322.2 million for 1995 (fair value $343.9 million). Reserves relating
to the guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 4.10% to 8.00% in 1996 and 4.50% to
8.38% in 1995.
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Separate Accounts assets and liabilities are shown as separate captions in
the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains and losses of the Separate Accounts
are not reflected in the Consolidated Statements of Income (with the
exception of realized capital gains and losses on the sale of assets
supporting the guaranteed interest option). The Consolidated Statements of
Cash Flows do not reflect investment activity of the Separate Accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. The Company is taxed at regular corporate rates after adjusting
income reported for financial statement purposes for certain items.
Deferred income tax expenses/benefits result from changes during the year
in cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $ 1,072.4 $ 20.5 $ 4.5 $ 1,088.4
States, municipalities and political
subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other 141.5 3.0 -- 144.5
--------- --------- --------- ---------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
--------- --------- --------- ---------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
--------- --------- --------- ---------
Total residential mortgage-
backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-
backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
--------- --------- --------- ---------
Total Debt Securities $12,539.1 $ 432.6 $ 66.2 $12,905.5
========= ========= ========= =========
</TABLE>
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Debt securities available for sale as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $ 539.5 $ 47.5 $ -- $ 587.0
States, municipalities and political
subdivisions 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial 2,764.4 110.3 2.1 2,872.6
Food & fiber 310.8 20.8 0.6 331.0
Healthcare & consumer products 766.0 59.2 0.2 825.0
Media & broadcast 191.7 10.0 -- 201.7
Natural resources 186.9 12.6 0.2 199.3
Transportation & capital goods 602.4 46.7 0.2 648.9
Utilities 454.4 27.8 1.0 481.2
Other 119.9 10.2 -- 130.1
--------- --------- --------- ---------
Total U.S. corporate securities 5,396.5 297.6 4.3 5,689.8
Foreign securities:
Government 316.4 26.1 2.0 340.5
Utilities 236.3 32.9 269.2
Other 749.9 60.5 3.5 806.9
--------- --------- --------- ---------
Total foreign securities 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Pass-throughs 556.7 99.2 1.8 654.1
Collateralized mortgage obligations 2,383.9 167.6 2.2 2,549.3
--------- --------- --------- ---------
Total residential mortgage-
backed securities 2,940.6 266.8 4.0 3,203.4
Commercial/multifamily mortgage-
backed securities 741.9 32.3 0.2 774.0
Other asset-backed securities 961.2 35.5 0.5 996.2
--------- --------- --------- ---------
Total Debt Securities $11,923.7 $ 811.6 $ 14.5 $12,720.8
========= ========= ========= =========
</TABLE>
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
At December 31, 1996 and 1995, net unrealized appreciation of $366.4
million and $797.1 million, respectively, on available for sale debt
securities included $288.5 million and $619.1 million, respectively,
related to experience rated contracts, which were not reflected in
shareholder's equity but in Future Policy Benefits and Policyholders' Funds
Left With the Company.
The amortized cost and fair value of debt securities for the year ended
December 31, 1996 are shown below by contractual maturity. Actual
maturities may differ from contractual maturities because securities may be
restructured, called, or prepaid.
Amortized Fair
Cost Value
--------- -----
(millions)
Due to mature:
One year or less $ 424.4 $ 425.7
After one year through five years 2,162.4 2,194.2
After five years through ten years 2,467.4 2,509.6
After ten years 2,568.4 2,675.4
Mortgage-backed securities 4,028.7 4,204.3
Other asset-backed securities 887.8 896.3
--------- ---------
Total $12,539.1 $12,905.5
========= =========
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Collateral, primarily cash, which is in excess of the market value of the
loaned securities, is deposited by the borrower with a lending agent, and
retained and invested by the lending agent to generate additional income
for the Company. The market value of the loaned securities is monitored on
a daily basis with additional collateral obtained or refunded as the market
value fluctuates. At December 31, 1996 and 1995, the Company had loaned
securities (which are reflected as invested assets) with a market value of
approximately $444.7 million and $264.5 million, respectively.
At December 31, 1996 and 1995, debt securities carried at $7.6 million and
$7.4 million, respectively, were on deposit as required by regulatory
authorities.
The carrying value of non-income producing investments was $0.9 million and
$0.1 million at December 31, 1996 and 1995, respectively.
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, 1996.
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Included in the Company's total debt securities were residential
collateralized mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
Fair Amortized Fair Amortized
Value Cost Value Cost
----- ---- ----- ----
(millions)
<S> <C> <C> <C> <C>
Total residential CMOs (1) $2,309.0 $2,227.8 $2,549.4 $2,383.9
======== ======== ======== ========
Percentage of total:
Supporting experience rated products 84.2% 85.3%
Supporting remaining products 15.8% 14.7%
-------- --------
100.0% 100.0%
======== ========
</TABLE>
(1) At December 31, 1996 and 1995, approximately 71% and 81%,
respectively, of the Company's residential CMO holdings were backed by
government agencies such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees
of risk from changes in interest rates and, for nonagency-backed CMOs,
defaults. The principal risks inherent in holding CMOs are prepayment and
extension risks related to dramatic decreases and increases in interest
rates resulting in the repayment of principal from the underlying mortgages
either earlier or later than originally anticipated.
At December 31, 1996 and 1995, approximately 68% and 79%, respectively, of
the Company's CMO holdings were in planned amortization class ("PAC") and
sequential structure tranches, which are subject to less prepayment and
extension risk than other types of CMO instruments. At December 31, 1996
and 1995, approximately 3% of the Company's CMO holdings were in the
interest-only ("IOs") and principal-only ("POs") tranches, which are
subject to more prepayment and extension risks than other types of CMO
instruments. Remaining CMO holdings are in other tranches that have
prepayment and extension risks which fall between the degree of risk
associated with PACs and sequentials, and IOs and POs.
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in available for sale equity securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ---------- ---------- -----
(millions)
1996
Equity Securities $ 184.9 $ 16.3 $ 0.8 $ 200.4
======= ======= ======= =======
1995
Equity Securities $ 231.6 $ 27.2 $ 1.2 $ 257.6
======= ======= ======= =======
3. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 13.0 $ 13.2 $ 21.2 $ 21.9
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 1,014.1 $ 1,028.8 $ 989.1 $ 1,001.2
Without a fixed maturity 9,649.6 9,427.6 9,511.0 9,298.4
</TABLE>
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial instrument,
such as estimates of timing and amount of future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot
be substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the instrument. In
evaluating the Company's management of interest rate, price and liquidity
risks, the fair values of all assets and liabilities should be taken into
consideration, not only those presented above.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. 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 (including Derivative
Financial Instruments)
The Company uses off-balance-sheet and other financial instruments
primarily to manage portfolio risks, including interest rate,
prepayment/call, credit, price, and liquidity risks. In 1996, Treasury
futures contracts were used to manage interest rate risk in the Company's
bond portfolio and stock index futures contracts were used to manage price
risk in the Company's equity portfolio. In 1996 and 1995, interest rate
swaps and forward commitments to enter into interest rate swaps,
respectively, were also used to manage interest rate risk in the Company's
bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell
underlying assets at a specified future date. Futures contracts trade on
organized exchanges and, therefore, have minimal credit risk. Cash
settlements are made daily based on changes in the prices of the underlying
assets. There were no futures contracts open as of December 31, 1996 and
1995.
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to
exchange interest amounts calculated by reference to an agreed notional
principal amount. Generally, no cash is exchanged at the outset of the
contract and no principal payments are made. A single net payment is
usually made by one counterparty at each due date or upon termination of
the contract. The Company would be exposed to credit-related losses in the
event of nonperformance by counterparties to financial instruments,
however, the Company controls its exposure to credit risk through credit
approvals, credit limits and regular monitoring procedures. The credit
exposure of interest rate swaps is represented by the fair value (market
value) of contracts with a positive fair value (market value) at the
reporting date. There were no interest rate swap agreements open as of
December 31, 1996. At December 31, 1995, the Company had an open forward
swap agreement with a notional amount of $100.0 million and a fair value of
$0.1 million.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1996.
As of December 31, 1996 and 1995, there were no option contracts
outstanding.
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, 1996 was as follows:
Amortized Fair
Cost Value
---- -----
(millions)
Residential collateralized mortgage obligations $ 2,227.8 $ 2,309.0
Principal-only strips (included above) 44.5 53.3
Interest-only strips (included above) 10.3 22.8
Other structured securities with derivative
characteristics (1) 126.3 129.2
(1) Represents non-leveraged instruments whose fair values and credit risk
are based on underlying securities, including fixed income securities
and interest rate swap agreements.
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
1996 1995 1994
---- ---- ----
(millions)
Debt securities $ 945.3 $ 891.5 $ 823.9
Preferred stock 5.9 4.2 3.9
Investment in affiliated mutual funds 14.3 14.9 5.2
Mortgage loans 2.2 1.4 1.4
Policy loans 18.4 13.7 11.5
Reinsurance loan to affiliate 44.1 46.5 51.5
Cash equivalents 29.4 38.9 29.5
Other 2.1 8.4 6.7
-------- -------- --------
Gross investment income 1,061.7 1,019.5 933.6
Less investment expenses (16.1) (15.2) (16.4)
-------- -------- --------
Net investment income $1,045.6 $1,004.3 $ 917.2
======== ======== ========
Net investment income includes amounts allocable to experience rated
contractholders of $787.6 million, $744.2 million and $677.1 million for
the years ended December 31, 1996, 1995 and 1994, respectively. Interest
credited to contractholders is included in Current and Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995,
the Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services,
Inc., to Aetna Retirement Services, Inc. (the Company's former parent).
The amount of dividends that may be paid to the shareholder in 1997 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$71.1 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus those
amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which differ in certain respects
from generally accepted accounting principles. Statutory net income was
$57.8 million, $70.0 million and $64.9 million for the years ended December
31, 1996, 1995 and 1994, respectively. Statutory capital and surplus was
$713.6 million and $670.7 million as of December 31, 1996 and 1995,
respectively.
As of December 31, 1996 the Company does not utilize any statutory
accounting practices which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains on investments were as follows:
1996 1995 1994
---- ---- ----
(millions)
Debt securities $ 11.1 $ 32.8 $ 1.0
Equity securities 8.6 8.3 0.2
Mortgage loans -- 0.2 0.3
-------- -------- -------
Pretax realized capital gains $ 19.7 $ 41.3 $ 1.5
======== ======= =======
After tax realized capital gains $ 13.0 $ 25.8 $ 1.0
======== ======= =======
Net realized capital gains of $53.1 million and $61.1 million for 1996 and
1995, respectively, and net realized capital losses of $29.1 million for
1994, allocable to experience rated contracts, were deducted from net
realized capital gains (losses) and an offsetting amount was reflected in
policyholder funds' left with the Company. Net unamortized gains were $53.3
million and $7.3 million at December 31, 1996 and 1995, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities for other than temporary declines in value are included in net
realized capital gains (losses) and amounted to $(3.3) million, $3.1
million and $1.1 million, of which $(3.2) million, $2.2 million and $0.8
million were allocable to experience rated contractholders, for the years
ended December 31, 1996, 1995 and 1994, respectively. There was no
valuation reserve for mortgage loans at December 31, 1996 or at December
31, 1995.
Proceeds from the sale of available for sale debt securities and the
related gross gains and losses were as follows:
1996 1995 1994
---- ---- ----
(millions)
Proceeds on Sales $5,182.2 $4,207.2 $3,593.8
Gross gains 24.3 44.6 26.6
Gross losses 13.2 11.8 25.6
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in shareholder's equity related to changes in unrealized capital
gains (losses), (excluding those related to experience rated
contractholders), were as follows:
1996 1995 1994
---- ---- ----
(millions)
Debt securities $ (100.1) $ 255.9 $ (242.1)
Equity securities (10.5) 27.3 (13.3)
Limited partnership -- 1.8 (1.8)
-------- -------- --------
(110.6) 285.0 (257.2)
Deferred income taxes (See Note 8) (38.6) (36.5) 46.3
-------- -------- --------
Net change in unrealized
capital gains (losses) $ (72.0) $ 321.5 $ (303.5)
======== ======== ========
Net unrealized capital gains allocable to experience rated contracts of
$245.2 million and $43.3 million at December 31, 1996 and $515.0 million
and $104.1 million at December 31, 1995 are reflected on the Consolidated
Balance Sheets in Policyholders' Funds Left With the Company and Future
Policy Benefits, respectively, and are not included in shareholder's
equity.
Shareholder's equity included the following unrealized capital gains
(losses), which are net of amounts allocable to experience rated
contractholders, at December 31:
1996 1995 1994
---- ---- ----
(millions)
Debt securities
Gross unrealized capital gains $101.7 $179.3 $ 27.4
Gross unrealized capital losses (23.8) (1.3) (105.2)
------ ------ --------
77.9 178.0 (77.8)
Equity securities
Gross unrealized capital gains 16.3 27.2 6.5
Gross unrealized capital losses (0.8) (1.2) (7.9)
------ ------ --------
15.5 26.0 (1.4)
Limited Partnership -- -- --
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- -- (1.8)
------ ------ --------
-- -- (1.8)
Deferred income taxes (See Note 8) 32.9 71.5 108.0
------ ------ --------
Net unrealized capital gains (losses) $ 60.5 $132.5 $(189.0)
====== ====== ========
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, included
the following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased Corporate
(Millions) Severance Write-Off Property Other Allocation Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial Services $ 29.1 $ 1.0 $ 1.3 $ 1.7 $ -- $ 33.1
Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2
Corporate Allocation -- -- -- -- 14.0 14.0
---------------------------------------------------------------
Total Company $ 41.6 $ 1.4 $ 1.8 $ 2.5 $ 14.0 $ 61.3
- --------------------------------------------------------------------------------------------
</TABLE>
In the third quarter of 1996, the Company recorded a $30.7 million after
tax ($47.3 million pretax) charge principally related to actions taken or
expected to be taken to improve its cost structure relative to its
competitors. The severance portion of the charge is based on a plan to
eliminate 702 positions (primarily customer service, sales and information
technology support staff). The facilities portion of the charge is based on
a plan to consolidate sales/service field offices.
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions
taken or expected to be taken to reduce the level of corporate expenses and
other costs previously absorbed by Aetna's property-casualty operations.
The cost allocated to the Company associated with this charge was $9.1
million after tax ($14.0 million pretax).
The activity during 1996 within the severance and facilities reserve
(pretax, in millions) and the number of positions eliminated related to
such actions were as follows:
Reserve Positions
---------------------------------------------------------------------------
Beginning of year $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
-------------------------------
End of year $ 47.9 524
---------------------------------------------------------------------------
(1) Includes $8.0 million of severance-related actions and $4.1 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed
by March 31, 1998. The corporate allocation actions and the vacating of the
leased office space are expected to be substantially completed in 1997.
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return and
combined Connecticut and New York state income tax returns of Aetna. Aetna
allocates to each member an amount approximating the tax it would have
incurred were it not a member of the consolidated group, and credits the
member for the use of its tax saving attributes used in the consolidated
returns.
Income taxes for the years ended December 31, consist of:
1996 1995 1994
---- ---- ----
(millions)
Current taxes (benefits):
Income Taxes:
Federal $ 50.9 $ 82.9 $ 78.7
State 3.7 3.2 4.4
Net realized capital gains (losses) 25.3 28.5 (33.2)
------ ------ ------
79.9 114.6 49.9
------ ------ ------
Deferred taxes (benefits):
Income Taxes:
Federal (3.5) (14.4) (8.0)
Net realized capital gains (losses) (18.6) (12.9) 33.7
------ ------ ------
(22.1) (27.3) 25.7
------ ------ ------
Total $ 57.8 $ 87.3 $ 75.6
====== ====== ======
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes for the following
reasons:
1996 1995 1994
---- ---- ----
(millions)
Income before income taxes $198.9 $263.2 $220.9
Tax rate 35% 35% 35%
------ ------ ------
Application of the tax rate 69.6 92.1 77.3
------ ------ ------
Tax effect of:
State income tax, net of federal benefit 2.4 2.1 2.9
Excludable dividends (8.7) (9.3) (8.6)
Other, net (5.5) 2.4 4.0
------ ------ ------
Income taxes $ 57.8 $ 87.3 $ 75.6
====== ====== ======
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1996 1995
---- ----
(millions)
Deferred tax assets:
Insurance reserves $ 344.6 $ 290.4
Unrealized gains allocable to
experience rated contracts 100.8 216.7
Investment losses 7.5 7.3
Postretirement benefits other
than pensions 27.0 7.7
Deferred compensation 25.0 18.9
Pension 7.6 5.7
Other 29.3 9.2
------- -------
Total gross assets 541.8 555.9
Deferred tax liabilities:
Deferred policy acquisition costs 482.1 433.0
Market discount 6.8 4.4
Net unrealized capital gains 133.7 288.2
Other (0.3) (0.1)
------- -------
Total gross liabilities 622.3 725.5
------- -------
Net deferred tax liability $ 80.5 $ 169.6
======= =======
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. Valuation allowances are provided when it is
not considered more likely than not that deferred tax assets will be
realized. As of December 31, 1996 and 1995, no valuation allowances were
required for unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax
return purposes under the Deficit Reduction Act of 1984. The balance in
such account was approximately $17.2 million at December 31, 1996. This
amount would be taxed only under certain conditions. No income taxes have
been provided on this amount since management believes the conditions under
which such taxes would become payable are remote.
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1990. Discussions
are being held with the Service with respect to proposed adjustments.
Management believes there are adequate defenses against, or sufficient
reserves to provide for, any such adjustments. The Service has commenced
its examinations for the years 1991 through 1994.
9. Benefit Plans
Employee Pension Plans - The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to the amounts that are tax-deductible. As of
December 31, 1996, 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 $4.3 million, $6.1
million and $5.5 million for the years ended December 31, 1996, 1995 and
1994, respectively.
Employee Postretirement Benefits - In addition to providing pension
benefits, Aetna currently provides health care and life insurance benefits,
subject to certain caps, 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. 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 1996, 1995 and 1994 were $1.8 million, $1.4
million and $1.0 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.
Agent Pension Plans - The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides
pension benefits based on annual commission earnings. As of the measurement
date (i.e., September 30), the accumulated plan assets exceeded accumulated
plan benefits.
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
Agent Postretirement Benefits - The Company, in conjunction with Aetna,
also provides certain postretirement health care and life insurance
benefits for certain agents. The costs to the Company associated with the
agents' postretirement plans for 1996, 1995 and 1994 were $0.7 million,
$0.8 million and $0.7 million, respectively.
Incentive Savings Plan - Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which
may be invested in common stock of Aetna or certain other investments, are
matched, up to 5% of compensation, by Aetna. Pretax charges to operations
for the incentive savings plan were $5.4 million, $4.9 million and $3.3
million in 1996, 1995 and 1994, 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 1996, 1995
and 1994, were $8.1 million, $6.3 million and $1.7 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.
10. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality
and expense risks pertaining to variable life and annuity contracts. Under
the insurance contracts, the Separate Accounts pay the Company a daily fee
which, on an annual basis, ranges, depending on the product, from .10% to
1.90% of their average daily net assets. The Company also receives fees
from the variable life and annuity mutual funds and The Aetna Series Fund
for serving as investment adviser. Under the advisory agreements, the Funds
pay the Company a daily fee which, on an annual basis, ranges, depending on
the fund, from .25% to .85% of their average daily net assets. The Company
also receives fees (expressed as a percentage of the average daily net
assets) from the variable life and annuity mutual funds and The Aetna
Series Fund for providing administration services, and from The Aetna
Series Fund for providing shareholder services and promoting sales. The
amount of compensation and fees received from the Separate Accounts and
Funds, included in Charges Assessed Against Policyholders, amounted to
$185.4 million, $128.1 million and $104.6 million in 1996, 1995 and 1994,
respectively. The Company may waive advisory fees at its discretion.
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting
as Subadvisor of all affiliated mutual funds and of most of the General
Account assets. Fees paid by the Company to Aeltus, included in both
Charges Assessed Against Policyholders and Net Investment Income, on an
annual basis, range from .06% to .55% of the average daily net assets under
management. For the year ended December 31, 1996, the Company paid $16.0
million in such fees.
The Company may, from time to time, make reimbursements to a Fund for some
or all of its operating expenses. Reimbursement arrangements may be
terminated at any time without notice.
Since 1981, all domestic individual non-participating life insurance of
Aetna and its subsidiaries has been issued by the Company. Effective
December 31, 1988, the Company entered into a reinsurance agreement with
Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the non-participating individual life and annuity business written by Aetna
Life prior to 1981 was assumed by the Company. A $108.0 million commission,
paid by the Company to Aetna Life in 1988, was capitalized as deferred
policy acquisition costs. An additional $6.1 million commission, paid by
the Company to Aetna Life in 1996, was capitalized as deferred policy
acquisition costs. The Company maintained insurance reserves of $628.3
million and $655.5 million as of December 31, 1996 and 1995, respectively,
relating to the business assumed. 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. The loan is being reduced in
accordance with the decrease in the reserves. The fair value of this loan
was $625.3 million and $663.5 million as of December 31, 1996 and 1995,
respectively, and is based upon the fair value of the underlying assets.
Premiums of $25.3 million, $28.0 million and $32.8 million and current and
future benefits of $39.5 million, $43.0 million and $43.8 million were
assumed in 1996, 1995 and 1994, respectively.
Investment income of $44.1 million, $46.5 million and $51.5 million was
generated from the reinsurance loan to affiliate in 1996, 1995 and 1994,
respectively. Net income of approximately $8.1 million, $18.4 million and
$25.1 million resulted from this agreement in 1996, 1995 and 1994,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life for the purchase and administration of a life contingent
single premium variable payout annuity contract. In addition, the Company
also is responsible for administering fixed annuity payments that are made
to annuitants receiving variable payments. Reserves of $28.9 million and
$28.0 million were maintained for this contract as of December 31, 1996 and
1995, respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement
with Aetna Life to reinsure amounts in excess of this limit, up to a
maximum of $8.0 million on any new individual life business, on a yearly
renewable term basis. Premium amounts related to this agreement were $5.2
million, $3.2 million and $1.3 million for 1996, 1995 and 1994,
respectively.
F-27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1995 or
1994.
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995,
the Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services,
Inc., to Aetna Retirement Services, Inc. (the Company's former parent).
Premiums due and other receivables include $2.8 million and $5.7 million
due from affiliates in 1996 and 1995, respectively. Other liabilities
include $10.7 million and $12.4 million due to affiliates for 1996 and
1995, respectively.
Substantially all of the administrative and support functions of the
Company are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures
appropriate for the type and nature of service provided.
11. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverables deemed
probable of recovery are reflected as assets on the Company's Consolidated
Balance Sheets.
F-28
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 10 above.
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
------ --------- --------- ------
(millions)
1996
Premiums:
Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
======= ======= ======= =======
Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6
======= ======= ======= =======
1995
Premiums:
Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
======= ======= ======= =======
Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7
======= ======= ======= =======
1994
Premiums:
Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health Insurance 9.3 9.3 -- --
Annuities 137.3 -- 0.2 137.5
======= ======= ======= =======
Total earned premiums $ 173.9 $ 15.3 $ 33.0 $ 191.6
======= ======= ======= =======
12. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments. At December 31, 1996, the
Company had commitments to purchase investments of $17.9 million. The fair
value of the investments at December 31, 1996 approximated $18.3 million.
F-29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities (Continued)
Litigation
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in liability for amounts
material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
F-30
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly
owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance.
Summarized financial information for the Company's principal operations was
as follows:
(Millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Revenue:
Financial Services $ 1,195.1 $ 1,211.3 $ 1,013.5
Individual Life Insurance 445.7 407.9 386.1
---------------------------------
Total revenue $ 1,640.8 $ 1,619.2 $ 1,399.6
- --------------------------------------------------------------------------------
Income before income taxes: (2)
Financial Services $ 129.9 $ 160.1 $ 122.5
Individual Life Insurance 83.0 103.1 98.4
---------------------------------
Total income before income taxes $ 212.9 $ 263.2 $ 220.9
- --------------------------------------------------------------------------------
Net income: (2)
Financial Services $ 94.3 $ 113.8 $ 85.5
Individual Life Insurance 55.9 62.1 59.8
---------------------------------
Net income $ 150.2 $ 175.9 $ 145.3
- --------------------------------------------------------------------------------
Assets under management: (3)
Financial Services $27,268.1 $22,534.4 $18,122.9
Individual Life Insurance 2,830.5 2,590.9 2,220.5
- --------------------------------------------------------------------------------
Total assets under management $30,098.6 $25,125.3 $20,343.4
- --------------------------------------------------------------------------------
(1) The 1996 results include severance and facilities charges of $30.7 million,
after tax. Of this charge $21.5 million related to the Financial Services
segment and $9.2 million related to the Individual Life Insurance segment.
(2) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the Financial Services
and Individual Life Insurance segments. (Refer to Note 7).
(3) Excludes net unrealized capital gains (losses) of $366.4 million, $797.1
million and $(386.4) million at December 31, 1996, 1995 and 1994,
respectively.
F-31
<PAGE>
- --------------------------------------------------------------------------------
Form No. SAI.75988-97 ALIAC Ed. May 1997
- --------------------------------------------------------------------------------
