PROSPECTUS
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The Contracts offered in connection with this Prospectus are the Retirement
Plus and Voluntary Contracts, which are group deferred variable annuity
contracts (the "Contracts") issued by Aetna Life Insurance and Annuity Company
("Company"). See "Purchase." The Contracts are designed to fund plans that
provide for retirement income and are established under the Internal Revenue
Code of 1986, as amended ("Code"). Amounts held under a Contract may be
entitled to tax-deferred treatment under certain sections of the Code.
Each Contract allows values to accumulate under variable investment options or
credited interest options, or a combination of these investment options. They
also provide for the payment of annuity benefits on a variable or fixed basis,
or a combination thereof.
The variable investment options ("Funds") currently available through Variable
Annuity Account C (the "Separate Account") under the Contracts described in
this Prospectus are as follows:
[bullet] Aetna Ascent VP (formerly known as Aetna Ascent Variable Portfolio)
[bullet] Aetna Balanced VP, Inc. (formerly known as Aetna Investment Advisers
Fund, Inc.)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP
[bullet] Aetna Crossroads VP (formerly known as Aetna Crossroads Variable
Portfolio)
[bullet] Aetna Growth VP (formerly known as Aetna Variable Growth Portfolio)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP
[bullet] Aetna High Yield VP
[bullet] Aetna Index Plus Large Cap VP (formerly known as Aetna Variable Index
Plus Portfolio)
[bullet] Aetna Index Plus Mid Cap VP
[bullet] Aetna Index Plus Small Cap VP
[bullet] Aetna International VP
[bullet] Aetna Legacy VP (formerly known as Aetna Legacy Variable Portfolio)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP
[bullet] Aetna Real Estate Securities VP
[bullet] Aetna Small Company VP (formerly known as Aetna Variable Small Company
Portfolio)
[bullet] Aetna Value Opportunity VP (formerly known as Aetna Variable Capital
Appreciation Portfolio)
[bullet] Calvert Social Balanced Portfolio (formerly known as Calvert
Responsibly Invested Portfolio)
[bullet] Fidelity VIP Equity-Income Portfolio
[bullet] Fidelity VIP Growth Portfolio
[bullet] Fidelity VIP Overseas Portfolio
[bullet] Fidelity VIP II Contrafund Portfolio
[bullet] Janus Aspen Aggressive Growth Portfolio
[bullet] Janus Aspen Balanced Portfolio
[bullet] Janus Aspen Flexible Income Portfolio
[bullet] Janus Aspen Growth Portfolio
[bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Lexington Natural Resources Trust*
[bullet] Oppenheimer Global Securities Fund
[bullet] Oppenheimer Strategic Bond Fund
[bullet] Portfolio Partners MFS Emerging Equities Portfolio
[bullet] Portfolio Partners MFS Research Growth Portfolio
[bullet] Portfolio Partners MFS Value Equity Portfolio
[bullet] Portfolio Partners Scudder International Growth Portfolio
[bullet] Portfolio Partners T. Rowe Price Growth Equity Portfolio
*This Fund is only available for investment by Participants who established an
Individual Account under the Contract before May 1, 1998. As soon as all such
Participants have redirected their allocations to other investment options,
the Fund will be closed to all new investment (except reinvested dividends and
capital gains earned on amounts already invested in the Fund through the
Separate Account and loan repayments automatically deposited into the Fund
pursuant to the Company's loan repayment procedures).
The credited interest options available for the accumulation of values are the
Guaranteed Accumulation Account, the Fixed Plus Account and the Fixed Account.
The Guaranteed Accumulation Account and the Fixed Plus Account are offered only
in those jurisdictions in which they are approved. (See Appendices I, II and
III.) The Fixed Account is available for accumulation only in limited
circumstances. (See Appendix IV.) Except as specifically mentioned, this
Prospectus describes only the variable investment options of the Contracts.
Additional information about the Guaranteed Accumulation Account is also
contained in an accompanying prospectus.
The availability of the above Funds and credited interest options is subject to
applicable regulatory authorization. Not all Funds or credited interest options
are available in all jurisdictions, under all Plans or under a particular
Contract. Please check with your employer to determine option availability.
This Prospectus sets forth concisely the information about the Separate Account
that a prospective investor should know before investing. Additional
information about the Separate Account is contained in a Statement of
Additional Information ("SAI") dated May 1, 1998, which has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. The
Table of Contents for the SAI is printed in this Prospectus. An SAI may be
obtained without charge by indicating the request on the enrollment form or on
the enclosed prospectus receipt for this Prospectus or by calling
1-800-525-4225. You may also obtain a SAI for any of the Funds by calling that
phone number.
<PAGE>
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.
NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
THE PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION ARE DATED MAY 1, 1998
<PAGE>
TABLE OF CONTENTS
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DEFINITIONS ................................................. DEFINITIONS - 1
PROSPECTUS SUMMARY .......................................... SUMMARY - 1
FEE TABLE ................................................... FEE TABLE - 1
CONDENSED FINANCIAL INFORMATION .......................................... 1
PERFORMANCE DATA ......................................................... 1
THE COMPANY .............................................................. 1
VARIABLE ANNUITY ACCOUNT C ............................................... 1
THE FUNDS ................................................................ 2
Mixed and Shared Funding .............................................. 5
Fund Changes .......................................................... 5
Fund Limitations ...................................................... 5
PURCHASE ................................................................. 5
The Contracts ......................................................... 5
Eligible Contract Holders ............................................. 5
Purchase By Exchange .................................................. 5
Contract Charges and Fees Options ..................................... 5
Responsibilities of Contract Holders .................................. 6
Enrollment of Participants ............................................ 6
Contributions ......................................................... 6
Contribution Limits for Contracts Used with 403(b) Plans ............ 6
Contribution Limits for Contracts Used with 401(a)/401(k) Plans ..... 6
Distribution .......................................................... 7
DETERMINING INDIVIDUAL ACCOUNT CURRENT VALUE ............................. 7
Fund Record Units ..................................................... 7
Net Return Factor ..................................................... 8
Transfer Credits ...................................................... 8
CONTRACT RIGHTS .......................................................... 8
Right to Cancel ....................................................... 8
Rights Under the Contracts ............................................ 8
Rights Under the Retirement Plus Contract ........................... 8
Rights Under the Voluntary Contract ................................. 9
Rights to your Individual Account ................................... 9
TRANSFERS AND ALLOCATION CHANGES ......................................... 9
WITHDRAWALS .............................................................. 9
Withdrawal Restrictions for Contracts Used with 403(b) and 401(k) Plans 10
Reinvestment Privilege ................................................ 10
CONTRACT LOANS ........................................................... 10
CHARGES AND FEES DURING THE ACCUMULATION PERIOD .......................... 10
Annual Maintenance Fee ................................................ 13
Reduction or Elimination of the Maintenance Fee ..................... 13
Withdrawal Fee ........................................................ 13
Mortality and Expense Risk Charge ..................................... 14
Administrative Expense Charge ......................................... 14
<PAGE>
<TABLE>
<S> <C>
Reduction of Mortality and Expense Risk and/or Administrative Charges........ 14
Fund Expenses ............................................................... 15
Premium and Other Taxes ..................................................... 15
CHARGES AND FEES DURING THE ANNUITY PERIOD ..................................... 15
Mortality and Expense Risk Charge ........................................... 15
Administrative Expense Charge ............................................... 15
Withdrawal Fee .............................................................. 15
SYSTEMATIC DISTRIBUTION OPTIONS ................................................ 15
ANNUITY PERIOD ................................................................. 16
Annuity Period Elections .................................................... 16
Annuity Options ............................................................. 17
DEATH BENEFIT .................................................................. 18
Accumulation Period ......................................................... 18
Annuity Period .............................................................. 19
TAX STATUS ..................................................................... 19
Introduction ................................................................ 19
Taxation of the Company ..................................................... 19
Contracts Used With Certain Retirement Plans ................................ 20
MISCELLANEOUS .................................................................. 22
Voting Rights ............................................................... 22
Modification of the Contracts ............................................... 23
Contract Holder Inquiries ................................................... 23
Telephone Transfers ......................................................... 23
Payments .................................................................... 23
Transfer of Ownership; Assignment ........................................... 23
Legal Proceedings ........................................................... 23
Legal Matters ............................................................... 23
Year 2000 ................................................................... 23
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ............................ 25
APPENDIX I--GUARANTEED ACCUMULATION ACCOUNT .................................... 26
APPENDIX II--FIXED PLUS ACCOUNT ................................................ 27
APPENDIX III--FIXED PLUS ACCOUNT (Applicable only in limited circumstances) .... 29
APPENDIX IV--FIXED ACCOUNT (Applicable only in limited circumstances) .......... 31
APPENDIX V--EMPLOYEE APPOINTMENT OF EMPLOYER AS AGENT UNDER AN ANNUITY CONTRACT 33
APPENDIX VI--CONTRACTS ACQUIRED BY EXCHANGE .................................... 34
APPENDIX VII--CONDENSED FINANCIAL INFORMATION .................................. 36
</TABLE>
<PAGE>
DEFINITIONS
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As used in this Prospectus, the following terms have the meanings shown:
Accumulation Period: The period during which Net Contribution(s) are applied to
an Individual Account.
Adjusted Current Value: The Current Value of an Individual Account plus or
minus any applicable aggregate GA Account Market Value Adjustment, if
applicable.
Aggregate Current Value: Current Value of Individual Accounts under a Contract
and other contracts of the same class as the Contract and covering employees of
the employer maintaining the Plan. Where such other contract becomes effective
after the date a Contract became effective, the aggregation will commence in
accordance with the Company's existing administrative practice, but in no event
later than the first day of the next succeeding anniversary date. Where such
other contract is in existence prior to, or on the date a Contract became
effective, the aggregation will commence on the date the Contract becomes
effective.
Annuitant: A person on whose life an Annuity payment is based under a Contract.
Annuity: Payments of income:
(a) For the life of one or two persons;
(b) For a stated period; or
(c) For some combination of (a) and (b).
Annuity Period: The period during which Annuity payments are made.
Annuity Unit: A measure of the value attributable to each Fund selected during
the Annuity Period.
Beneficiary: Under the Retirement Plus Contract the Contract Holder is the
Beneficiary. Under the Voluntary Contract, the Beneficiary is the person
designated to receive any benefits which remain under a Contract after a
Participant's death. The Participant designates a Beneficiary under a Voluntary
Contract by providing written notice to the Company on the appropriate form.
Code: Internal Revenue Code of 1986, as amended.
Company: Aetna Life Insurance and Annuity Company, sometimes referred to as
"we" or "us."
Contract(s): Either the Retirement Plus Contract or the Voluntary Contract
offered by this Prospectus or both.
Contract Holder: The entity to which a Contract is issued. The Contract Holder
is usually the employer.
Contribution: A payment received at the Company's Home Office and allocated to
a Contract.
Current Value: For an Individual Account during the Accumulation Period, the
Current Value is the total of:
(a) The amount, if any, in the Fixed Plus Account, with interest earned to
date; plus
(b) The amount, if any, in the GA Account with interest earned to date; plus
(c) The amount, if any, in the Fixed Account with interest earned to date;
plus
(d) The value of all Fund Record Units, if any, as of the most recent
Valuation Period; less
(e) Any Maintenance Fee(s) due.
Distributor(s): The registered broker-dealer(s) which have entered into selling
agreements with the Company to offer and sell the Contracts. The Company may
also serve as a Distributor.
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DEFINITIONS - 1
<PAGE>
Employee Account: An Individual Account that will be credited with Participant
Contributions, specifically employee salary reduction Contributions.
Employer Account: An Individual Account that will be credited with the employer
Contributions.
ERISA: Employee Retirement Income Security Act of 1974.
Fixed Account: An accumulation option with a guaranteed minimum interest rate
which is available for accumulation only in limited circumstances. See Appendix
IV.
Fixed Plus Account: An accumulation option with a guaranteed minimum interest
rate. The Company may credit a higher rate which is not guaranteed. See
Appendices II and III.
Fund Record Units: Units representing the portion of the Net Contribution(s)
applied to each Fund under the Separate Account.
Funds: The open-end registered management investment companies or separate
investment portfolio thereof, in which the Separate Account invests.
General Account: The account holding the assets of the Company, other than
those assets held in the Company's separate account(s).
Guaranteed Accumulation Account (GA Account or the GAA): An accumulation option
where the Company guarantees stipulated rate(s) of interest for a specified
period of time. See Appendix I.
Home Office: The Company's principal executive offices located at 151
Farmington Avenue, Hartford, Connecticut 06156.
Individual Account(s): Account(s) established for each Participant under each
Contract in which he or she may be participating to keep a record of Current
Values and transactions.
Maintenance Fee: A maintenance fee will be charged for each Participant under
each Contract and will be deducted during the Accumulation Period from the sum
under each Contract of the Current Value of Participant's Individual Accounts
and upon full surrender of the Participant's Individual Accounts.
Market Value Adjustment: An adjustment to the amount withdrawn or transferred
from the Guaranteed Accumulation Account prior to the end of that Guaranteed
Term. The adjustment reflects the change in the value of the investment due to
changes in interest rates since the date of deposit. See Appendix I and the
prospectus for the Guaranteed Accumulation Account for a discussion of how the
market value adjustment is actually calculated.
Net Contributions: A Contribution less applicable premium taxes.
Participant: An eligible person participating in the Plan maintained by the
Contract Holder, for whom an Individual Account has been established by the
Contract Holder, referred to as "you."
Plan Beneficiary: The person entitled to receive benefits under the Plan in the
event of the Participant's death. Under the Voluntary Contract, the Beneficiary
is the Plan Beneficiary. Where the Plan utilizes the Retirement Plus Contract,
the Participant designates a Plan Beneficiary with the employer, pursuant to
the terms of the Plan.
Plan(s): The Plan named on the cover of a Contract established under Code
Section 403(b) or Sections 401(a)/
401(k).
Retirement Plus Contract: The group deferred variable annuity contract offered
in connection with this Prospectus which allows for employer Contributions and
employee Contributions.
SEC: Securities and Exchange Commission.
Separate Account: Variable Annuity Account C, an account established by the
Company under Section 38a-433 of the Connecticut General Statutes, that buys
and holds shares of the Fund(s) available under a Contract.
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DEFINITIONS - 2
<PAGE>
Systematic Distribution Options: certain withdrawal options offered by the
Company under each Contract that are not considered annuity options.
Underwriter: The registered broker-dealer which contracts with other registered
broker-dealers on behalf of the Separate Account to offer and sell the
Contracts.
Valuation Period: The period of time from when the Company determines the
Accumulation Unit Value and Annuity Unit Value of a variable investment option
until the next time it determines such unit value. Currently, the 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.
Valuation Reserve: A reserve established pursuant to the insurance laws of
Connecticut to measure voting rights during the Annuity Period and the value of
a commutation right available under the "Payments for a Specified Period"
nonlifetime Annuity option when elected on a variable basis under a Contract.
Variable Annuity: An Annuity providing for the accumulation of values and/or
for Annuity payments which vary in dollar amount with investment results.
Voluntary Contract: The group deferred variable annuity contract offered in
connection with this Prospectus which allows only for employee Contributions.
Withdrawal Fee: If all or any portion of an Individual Account's Current Value
is withdrawn during the Accumulation Period, a percentage of the amount
withdrawn may be deducted so that the Company may recover sales and
administrative related expenses.
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DEFINITIONS - 3
<PAGE>
PROSPECTUS SUMMARY
===============================================================================
CONTRACTS OFFERED
The Contracts offered in connection with this Prospectus are group
deferred, variable annuity contracts. Under the Retirement Plus Contract,
Contributions may be made by the Contract Holder (generally, the employer) and
the Participants. Under the Voluntary Contract, Contributions may be made only
by Participants. See "The Contracts," "Contract Rights" and "Miscellaneous."
The Contracts are being offered in certain markets to fund Plans that are
adopted under Sections 401(a) (including 401(k)) or 403(b) of the Code. Amounts
held under the Plans may be entitled to tax-deferred treatment under the Code.
Under the Plans, Contributions made under the Plan are forwarded by the
Contract Holder to the Company.
PURCHASE
Each Contract may be purchased by eligible organizations on behalf of a
group made up of their employees. Eligible employees may participate in a
Contract by completing an enrollment form (and any other required forms) and
submitting it to the Company with an initial Contribution. See "Purchase."
WITHDRAWALS
Each Contract allows withdrawals of all or a portion of your Individual
Account Current Value during the Accumulation Period. Certain charges and fees
may be assessed upon withdrawal from either Contract. See "Charges and Fees
During the Accumulation Period." Limitations apply to withdrawals from the
Fixed Plus Account. See Appendices II and III. The Code restricts full and
partial withdrawals in certain circumstances. See "Tax Status -- Contracts Used
With Certain Retirement Plans". Amounts withdrawn from the GAA may be subject
to a Market Value Adjustment. See Appendix I.
WITHDRAWAL FEE
Amounts withdrawn from either Contract may be subject to a Withdrawal Fee.
The maximum Withdrawal Fee that could be assessed on a full or partial
withdrawal is 8.5% of the total Contributions made to the Individual Account of
a Contract. See "Charges and Fees During the Accumulation Period--Withdrawal
Fee."
TAXES AND WITHHOLDING
A 10% federal tax penalty and a 20% withholding for income tax may be
imposed on certain withdrawals. See "Tax Status."
CONTRACT CHARGES
Certain charges are associated with each Contract; for example, mortality
and expense risk charges, administrative expense charges and Maintenance Fees.
The Funds are also subject to certain fees and expenses. Contributions may also
be subject to premium taxes. See "Charges and Fees During the Accumulation
Period" for a complete explanation of these charges.
FREE LOOK PERIOD
Contract Holders have the right to cancel their Contract and Participants
have the right to cancel their participation in a Contract within 10 days (or
longer if required by state law). Unless state law requires otherwise, the
Company will return the full amount of Contributions increased or decreased by
the investment performance of the variable funding options to which
Contributions were deposited.
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SUMMARY - 1
<PAGE>
FEE TABLE
===============================================================================
The purpose of the Fee Table is to assist Contract Holders in
understanding the various costs and expenses that may be borne, directly or
indirectly, under each Contract. The costs and expenses will be based upon the
charges and fees option the Contract Holder selects. The information listed
reflects the charges due under each Contract, as well as the fees and expenses
deducted from the Funds. Additional information regarding the charges and fees
assessed under each Contract can be found under "Contract Charges and Fees
Options" and "Charges and Fees During the Accumulation Period" in this
Prospectus. Charges and expenses shown do not take into account 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
WITHDRAWAL FEE for withdrawals under each Contract (as a percentage of
amount withdrawn)(1):
Number of Years
Individual Account Has
Been Established Fee
- ------------------------------ ----
Less than 5 5%
5 or more but less than 7 4%
7 or more but less than 9 3%
9 or more but less than 10 2%
10 or more 0%
ANNUAL MAINTENANCE FEE(2)
Per Participant, Per Contract ......... $ 20.00
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(3) ........... 1.25%
Administrative Expense Charge(4) ............... 0.25%
Total Separate Account Annual Expenses ......... 1.50%
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(1) This sets forth the Withdrawal Fee schedule for 10 years, the maximum
duration of the Withdrawal Fee. The total amount deducted for the
Withdrawal Fee will not exceed 8.5% of the Contributions made to an
Individual Account. See "Contract Charges and Fees Options" and "Charges
and Fees During the Accumulation Period--Withdrawal Fee" for instances in
which the Withdrawal Fee will only be charged for 5 years or not at all
and for a description of this charge.
(2) This represents the maximum annual Maintenance Fee that will be deducted
under a Contract. See "Contract Charges and Fees Options" and "Charges and
Fees During the Accumulation Period--Annual Maintenance Fee" for instances
in which this fee may be reduced and for a description of this charge. A
Maintenance Fee, to the extent permitted by state law, is also deducted
upon termination of an Individual Account.
(3) This represents the maximum mortality and expense risk charge that may be
deducted under a Contract. See "Contract Charges and Fees Options" and
"Charges and Fees During the Accumulation Period--Mortality and Expense
Risk Charge" for instances in which this fee may be reduced and for a
description of this charge.
(4) This represents the maximum annual administrative expense charge that will
be deducted under a Contract. See "Contract Charges and Fees Options" and
"Charges and Fees During the Accumulation Period--Administrative Expense
Charge" for instances in which this fee may be reduced and for a
description of this charge.
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FEE TABLE - 1
<PAGE>
FUND ANNUAL EXPENSES
The following table illustrates the advisory fees and other expenses
applicable to the Funds. 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, 1997. A Fund's "Other
Expenses" include operating costs of the Fund. These expenses shown below are
reflected in the Fund's net asset value and are not deducted from the
Individual Account Current Value under the Contract.
<TABLE>
<CAPTION>
Investment
Advisory Fees(1) Other Expenses
(after expense (after expense Total Fund
reimbursement) reimbursement) Annual Expenses
------------------ ---------------- ----------------
<S> <C> <C> <C>
Aetna Ascent VP(2)(3) 0.57% 0.23% 0.80%
Aetna Balanced VP, Inc.(3) 0.50% 0.10% 0.60%
Aetna Bond VP(3) 0.40% 0.10% 0.50%
Aetna Crossroads VP(2)(3) 0.55% 0.25% 0.80%
Aetna Growth VP(2)(3) 0.16% 0.64% 0.80%
Aetna Growth and Income VP(3) 0.50% 0.09% 0.59%
Aetna High Yield VP(2)(3) 0.47% 0.32% 0.80%
Aetna Index Plus Large Cap VP(2)(3) 0.32% 0.23% 0.55%
Aetna Index Plus Mid Cap VP(2)(3) 0.27% 0.33% 0.60%
Aetna Index Plus Small Cap VP(2)(3) 0.27% 0.33% 0.60%
Aetna International VP(2)(3) 0.77% 0.38% 1.15%
Aetna Legacy VP(2)(3) 0.49% 0.31% 0.80%
Aetna Money Market VP(3) 0.25% 0.10% 0.35%
Aetna Real Estate Securities VP(2)(3) 0.62% 0.33% 0.95%
Aetna Small Company VP(2)(3) 0.35% 0.60% 0.95%
Aetna Value Opportunity VP(2)(3) 0.20% 0.60% 0.80%
Calvert Social Balanced Portfolio(4) 0.69% 0.12% 0.81%
Fidelity VIP Equity-Income Portfolio(5) 0.50% 0.08% 0.58%
Fidelity VIP Growth Portfolio(5) 0.60% 0.09% 0.69%
Fidelity VIP Overseas Portfolio(5) 0.75% 0.17% 0.92%
Fidelity VIP II Contrafund Portfolio(5) 0.60% 0.11% 0.71%
Janus Aspen Aggressive Growth Portfolio(6) 0.73% 0.03% 0.76%
Janus Aspen Balanced Portfolio(6) 0.76% 0.07% 0.83%
Janus Aspen Flexible Income Portfolio 0.65% 0.10% 0.75%
Janus Aspen Growth Portfolio(6) 0.65% 0.05% 0.70%
Janus Aspen Worldwide Growth Portfolio(6) 0.66% 0.08% 0.74%
Lexington Natural Resources Trust 1.00% 0.25% 1.25%
Oppenheimer Global Securities Fund 0.70% 0.06% 0.76%
Oppenheimer Strategic Bond Fund 0.75% 0.08% 0.83%
Portfolio Partners MFS Emerging Equities
Portfolio(7)(8) 0.68% 0.13% 0.81%
Portfolio Partners MFS Research Growth
Portfolio(7)(8) 0.70% 0.15% 0.85%
Portfolio Partners MFS Value Equity
Portfolio(7) 0.65% 0.25% 0.90%
Portfolio Partners Scudder International
Growth Portfolio(7) 0.80% 0.20% 1.00%
Portfolio Partners T. Rowe Price Growth
Equity Portfolio(7) 0.60% 0.15% 0.75%
</TABLE>
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(1) Certain of the Fund advisers reimburse the Company for administrative costs
incurred in connection with administering the Funds as variable funding
options under the Contract. These reimbursements are paid out of the
investment advisory fees and are not charged to investors.
(2) Effective May 1, 1998, the Portfolios' adviser has agreed to waive a
portion of its fee or to reimburse certain expenses so that aggregate
expenses do not exceed the total expenses shown above. These fee
waiver/expense reimbursement arrangements will increase total return and
may be modified or terminated at any time.
Without these fee waiver/expense reimbursement arrangements Management Fees
and Total Expenses for the Portfolio would be higher. Management Fees and
Total Expenses would be as follows: 0.60% and 0.83% for Ascent VP; 0.60% and
0.85% for Crossroads VP; 0.60% and 1.24% for Growth VP; 0.65% and 0.98% for
High Yield VP; 0.35% and 0.58% for Index Plus Large Cap VP; 0.40% and 0.73%
for Index Plus Mid Cap VP; 0.40% and 0.73% for Index Plus Small Cap VP;
0.85% and 1.23% for International VP; 0.60% and 0.91% for Legacy VP; 0.75%
and 1.08% for Real Estate Securities VP; 0.75% and 1.35% for Small Company
VP; and 0.60% and 1.20% for Value Opportunity VP, respectively.
- --------------------------------------------------------------------------------
FEE TABLE - 2
<PAGE>
(3) Prior to May 1, 1998, the investment adviser provided administrative
services to the Fund and assumed the Fund's ordinary recurring direct
costs under an Administrative Services Agreement. Effective May 1, 1998,
the investment adviser will continue to provide administrative services to
the Fund but will no longer assume all of the Fund's ordinary recurring
direct costs under the Administrative Services Agreement. The
Administrative Fee is 0.075% on the first $5 billion in assets and 0.050%
on all assets over $5 billion. The "Other Expenses" shown are not based on
actual figures for the year ended December 31, 1997, but reflect the fee
payable under the new Administrative Services Agreement and estimates of
the Fund's ordinary recurring direct costs.
High Yield VP, Index Plus Mid Cap VP, Index Plus Small Cap VP,
International VP and Real Estate Securities VP commenced operations in
December 1997, therefore, estimates are based on expenses incurred for
similar funds. Actual expenses incurred may be more or less than the
amounts shown above.
(4) The figures above are based on expenses for the fiscal year 1997, and have
been restated to reflect an increase in transfer agency expenses of 0.01%
for the Portfolio expected to be incurred in 1998. "Management Fees"
includes a performance adjustment, which depending on performance, could
cause the fee to be as high as 0.85% or as low as 0.55%. "Other Expenses"
reflect an indirect fee of 0.03% (relating to an expense offset
arrangement with the Portfolio's custodian). Net fund operating expenses
after reductions for fees paid indirectly (again, restated) would be
0.78%.
(5) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into
arrangements with their custodian whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses would have been 0.57% for
Equity-Income Portfolio; 0.67% for Growth Portfolio; 0.90% for Overseas
Portfolio: and 0.68% for Contrafund Portfolio.
(6) Management fees for Aggressive Growth, Balanced, Growth and Worldwide
Growth Portfolios reflect a reduced fee schedule effective July 1, 1997.
The management fees shown above are based on the new rate applied to net
assets as of December 31, 1997. Other expenses are based on gross expenses
of the shares before expense offset arrangements for the fiscal year ended
December 31, 1997. The information for each Portfolio is net of fee
waivers or reductions from Janus Capital. Fee reductions for the
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 Operating Expenses for the shares
would have been 0.74%, 0.04%, and 0.78% for Aggressive Growth Portfolio;
0.77%, 0.06%, and 0.83% for Balanced Portfolio; 0.74%, 0.04%, and 0.78%
for Growth Portfolio; and 0.72%, 0.09%, and 0.81% for Worldwide Growth
Portfolio, respectively. Janus Capital may modify or terminate the waivers
or reductions at any time upon at least 90 days' notice to the Trustees.
(7) Each Portfolio's aggregate expenses are contractually limited to the
advisory and administrative fees disclosed above. The investment adviser
will not seek an increase in its advisory or administrative fee at any time
prior to May 1, 1999.
(8) The advisory fee is 0.70% of the first $500 million in assets and 0.65% on
the excess.
- --------------------------------------------------------------------------------
FEE TABLE - 3
<PAGE>
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 $1000 investment in the Contract and a 5% return on assets. The
Examples assume that (i) a withdrawal charge will be applicable for a 10-year
period, (ii) a transfer credit will apply, and (iii) less than $500,000 in
assets will be held by the Company. Accordingly, the Individual Account is
subject to a mortality and expense risk charge of 1.25%, an administrative
expense charge of 0.25%, $15.00 annual Maintenance Fee as an annual charge of
0.088% of the assets held in the Separate Account under the Contracts, and a
Withdrawal Fee for 10 years. See "Charges and Fees During the Accumulation
Period."
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
--------------------------------------- --------------------------------------
If you withdraw your entire Account If you do not withdraw your Account
Value at the end of the periods shown, Value, or if you annuitize at the end of
you would pay the following expenses, the periods shown, you would pay the
including any applicable deferred following expenses (no deferred sales
sales charge: charge is reflected):*
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP $75 $129 $173 $272 $24 $74 $127 $272
Aetna Balanced VP, Inc. $74 $123 $163 $252 $22 $68 $117 $252
Aetna Bond VP $73 $120 $158 $242 $21 $65 $112 $242
Aetna Crossroads VP $75 $129 $173 $272 $24 $74 $127 $272
Aetna Growth VP $75 $129 $173 $272 $24 $74 $127 $272
Aetna Growth and Income VP $73 $123 $163 $251 $22 $68 $117 $251
Aetna High Yield VP $75 $129 $173 $272 $24 $74 $127 $272
Aetna Index Plus Large Cap VP $73 $121 $161 $247 $22 $67 $115 $247
Aetna Index Plus Mid Cap VP $74 $123 $163 $252 $22 $68 $117 $252
Aetna Index Plus Small Cap VP $74 $123 $163 $252 $22 $68 $117 $252
Aetna International VP $79 $138 $190 $307 $28 $85 $145 $307
Aetna Legacy VP $75 $129 $173 $272 $24 $74 $127 $272
Aetna Money Market VP $71 $116 $151 $226 $20 $61 $105 $226
Aetna Real Estate Securities VP $77 $133 $180 $287 $26 $79 $135 $287
Aetna Small Company VP $77 $133 $180 $287 $26 $79 $135 $287
Aetna Value Opportunity VP $75 $129 $173 $272 $24 $74 $127 $272
Calvert Social Balanced Portfolio $76 $129 $173 $273 $24 $75 $128 $273
Fidelity VIP Equity-Income Portfolio $73 $122 $162 $250 $22 $68 $116 $250
Fidelity VIP Growth Portfolio $74 $125 $168 $261 $23 $71 $122 $261
Fidelity VIP Overseas Portfolio $77 $132 $179 $284 $25 $78 $133 $284
Fidelity VIP II Contrafund Portfolio $75 $126 $169 $263 $23 $72 $123 $263
Janus Aspen Aggressive Growth Portfolio $75 $127 $171 $268 $24 $73 $125 $268
Janus Aspen Balanced Portfolio $76 $129 $174 $275 $24 $75 $129 $275
Janus Aspen Flexible Income Portfolio $75 $127 $171 $267 $24 $73 $125 $267
Janus Aspen Growth Portfolio $75 $126 $168 $262 $23 $71 $122 $262
Janus Aspen Worldwide Growth Portfolio $75 $127 $170 $266 $24 $73 $124 $266
Lexington Natural Resources Trust $80 $141 $194 $316 $29 $88 $150 $316
Oppenheimer Global Securities Fund $75 $127 $171 $268 $24 $73 $125 $268
Oppenheimer Strategic Bond Fund $76 $129 $174 $275 $24 $75 $129 $275
Portfolio Partners MFS Emerging Equities
Portfolio $76 $129 $173 $273 $24 $75 $128 $273
Portfolio Partners MFS Research Growth
Portfolio $76 $130 $175 $277 $25 $76 $130 $277
Portfolio Partners MFS Value Equity Portfolio $76 $131 $178 $282 $25 $77 $132 $282
Portfolio Partners Scudder International
Growth Portfolio $77 $134 $182 $292 $26 $80 $137 $292
Portfolio Partners T. Rowe Price Growth Equity
Portfolio $75 $127 $171 $267 $24 $73 $125 $267
</TABLE>
- --------------------------------------------------------------------------------
FEE TABLE - 4
<PAGE>
* This Example would not apply if the Annuity Option of Payments for a Stated
Period of Time is selected, and a lump sum settlement is requested before five
years of payments have been made, 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 apply. (Refer to Example A.)
- --------------------------------------------------------------------------------
FEE TABLE - 5
<PAGE>
CONDENSED FINANCIAL INFORMATION
================================================================================
Condensed Financial Information for the Separate Account is shown in
Appendix VII.
PERFORMANCE DATA
================================================================================
From time to time, the Company may advertise different types of historical
performance for the variable funding options of the Separate Account available
under the Contracts described in this Prospectus. The Company may advertise the
"standardized average annual total returns" of the variable funding options,
calculated in a manner prescribed by the SEC, as well as the "non-standardized
return." Both methods are described below. Further information is contained in
the SAI.
"Standardized average annual total returns" are computed according to a
formula in which a hypothetical investment of $1,000 is applied to the variable
investment options under the Contracts and then related to the ending
redeemable values over the most recent one, five and ten-year periods (or since
contributions were first received in the Fund under the Separate Account, if
less than the full period). Standardized returns will reflect the deduction of
all recurring charges during each period based either on the fee schedule under
the Contract that generates the lowest return, or based on an actual fee
schedule applicable to a particular Contract Holder, if different.
"Non-standardized returns" will be calculated in a similar manner, except
that non-standardized figures will not reflect the deduction of any applicable
Withdrawal Fee (which would decrease the level of performance shown if
reflected in these calculations). The non-standardized figures may also include
monthly, quarterly, year-to-date and three-year periods, and may also be
calculated from the Fund's inception date.
The Company may also advertise certain ratings, rankings or other
information related to the Company, the variable investment options or the
Funds. Further details regarding performance reporting and advertising are
described in the Statement of Additional Information.
THE COMPANY
================================================================================
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
================================================================================
Variable Annuity Account C is a separate account established by the
Company in 1976 pursuant to the insurance laws of the State of Connecticut. The
Separate Account was formed for the purpose of segregating assets attributable
to the variable portions of the Contracts from other assets of the Company. The
Separate Account is registered as a unit investment trust under the Investment
Company Act of 1940, and meets the definition of "separate account" under
federal securities laws.
Although the Company holds title to the assets of the Separate Account,
such assets are not chargeable with liabilities arising out of any other
business the Company may conduct. Income, gains or losses of the Separate
Account are credited to or charged against the assets of the Separate Account
without regard to other income, gains or losses of the Company. All obligations
arising under the Contracts are obligations of the Company.
- --------------------------------------------------------------------------------
1
<PAGE>
THE FUNDS
================================================================================
The Contract Holder will designate some or all of the mutual funds
described below as variable funding options under the Contracts. Except where
noted, all of the Funds are diversified as defined in the Investment Company
Act of 1940.
The Contract Holder may decide to offer only a select number of Funds
under its Plan. The availability of Funds may also be subject to applicable
regulatory authorization. Not all Funds may be available in all jurisdictions,
under all Contracts or in all Plans.
[bullet] Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund,
Inc.) seeks to maximize investment return, consistent with reasonable
safety of principal by investing in a diversified portfolio of one or
more of the following asset classes: stocks, bonds and cash
equivalents, based on the investment adviser's judgment of which of
those sectors or mix thereof offers the best investment prospects.(1)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP seeks to maximize total
return, consistent with reasonable risk, through investments in a
diversified portfolio consisting primarily of debt securities.(1)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP seeks to maximize
total return through investments in a diversified portfolio of common
stocks and securities convertible into common stock.(1)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP seeks to
provide high current return, consistent with preservation of capital
and liquidity, through investment in high-quality money market
instruments. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Ascent VP (formerly Aetna
Ascent Variable Portfolio) seeks to provide capital appreciation. The
Portfolio is designed for investors who have an investment horizon
exceeding 15 years and who have a high level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Crossroads VP (formerly Aetna
Crossroads Variable Portfolio) seeks to provide total return (i.e.,
income and capital appreciation, both realized and unrealized). The
Portfolio is designed for investors who have an investment horizon
exceeding 10 years and who have a moderate level of risk tolerance.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Legacy VP (formerly Aetna
Legacy Variable Portfolio) seeks to provide total return consistent
with preservation of capital. The Portfolio is designed for investors
who have an investment horizon exceeding five years and who have a low
level of risk tolerance.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Growth VP (formerly Aetna
Variable Growth Portfolio) seeks growth of capital through investment
in a diversified portfolio of common stocks and securities convertible
into common stocks believed to offer growth potential.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna High Yield VP seeks high
current income and growth of capital primarily through investment in a
diversified portfolio of fixed income securities rated lower than BBB-
by Standard and Poor's Corporation or lower than Baa3 by Moody's
Investors Service, Inc.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP
(formerly Aetna Variable Index Plus Portfolio) seeks to outperform the
total return performance of publicly traded common stocks represented
in the S&P 500 Composite Stock Price Index.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Index Plus Mid Cap VP seeks to
outperform the total return performance of publicly traded common
stocks represented in the S&P 400.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Index Plus Small Cap VP seeks
to outperform the total return performance of publicly traded common
stocks represented by the S&P SmallCap 600 Index, a stock market index
composed of 600 common stocks selected by Standard and Poor's
Corporation.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna International VP seeks
long-term capital growth primarily through investment in a diversified
portfolio of common stocks principally traded in countries outside of
the United States. Aetna International VP will not target any given
level of current income.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Real Estate Securities VP seeks
maximum total return primarily through investment in a diversified
portfolio of equity securities issued by real estate companies, the
majority of which are real estate investment trusts (REITs).(1)
- --------------------------------------------------------------------------------
2
<PAGE>
[bullet] Aetna Variable Portfolios, Inc.--Aetna Small Company VP (formerly
Aetna Variable Small Company Portfolio) seeks growth of capital
primarily through investment in a diversified portfolio of common
stocks and securities convertible into common stocks of companies with
smaller market capitalizations.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Value Opportunity VP (formerly
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.(1)
[bullet] Calvert Social Balanced Portfolio (formerly Calvert Responsibly
Invested Balanced Portfolio) is a nondiversified portfolio that seeks
to achieve a total return above the rate of inflation through an
actively managed, nondiversified portfolio of common and preferred
stocks, bonds and money market instruments which offer income and
capital growth opportunity and which satisfy the social criteria
established for the Portfolio.(2)
[bullet] Fidelity Investments Variable Insurance Products Fund--Equity-Income
Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In selecting investments, the Fund
also considers the potential for capital appreciation.(3)
[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.(3)
[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
foreign issuers). Foreign investments involve greater risks than U.S.
investments, including political and economic risks and the risk of
currency fluctuation.(3)
[bullet] Fidelity Investments Variable Insurance Products Fund II--Contrafund
Portfolio seeks maximum total return over the long term by investing
mainly in securities of companies whose value the investment adviser
believes is not fully recognized by the public.(3)
[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-sized companies are those whose market capitalizations fall
within the range of companies in the S&P MidCap 400 Index, which as of
December 31, 1997 included companies with capitalizations between
approximately $213 million and $13.7 billion, but which is expected to
change on a regular basis.(4)
[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.(4)
[bullet] Janus Aspen Series--Flexible Income Portfolio seeks to obtain maximum
total return, consistent with preservation of capital. The Portfolio
pursues its investment objective primarily through investments in
income-producing securities. Total return is expected to result from a
combination of current income and capital appreciation. The Portfolio
invests in all types of income-producing securities and may have
substantial holdings of debt securities rated below investment grade
(e.g., junk bonds).(4)
[bullet] Janus Aspen Series--Growth Portfolio seeks long-term growth of capital
in a manner consistent with the preservation of capital. The Portfolio
pursues its investment objective by investing primarily in common
stocks of issuers of any size. This Portfolio generally invests in
larger, more established issuers.(4)
[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.(4)
[bullet] Lexington Natural Resources Trust is a nondiversified portfolio that
seeks long-term growth of capital through investment primarily in
common stocks of companies which own or develop natural resources and
other basic commodities or supply goods and services to such
companies.(5)
* This Fund is only available for investment by Participants who established
an Individual Account under the Contract before May 1, 1998. As soon as all
such Participants have redirected their allocations to other investment
options, the Fund will be closed to all new investment (except reinvested
dividends and capital gains earned on amounts already invested in the Fund
through the Separate Account and loan repayments automatically deposited
into the Fund pursuant to the Company's loan repayment procedures).
[bullet] Oppenheimer Global Securities Fund seeks long-term capital
appreciation by investing a substantial portion of its assets in
securities of foreign issuers, "growth-
- --------------------------------------------------------------------------------
3
<PAGE>
type" companies, cyclical industries and special situations which are
considered to have appreciation possibilities but which may be
considered to be speculative.(6)
[bullet] Oppenheimer Strategic Bond Fund seeks a high level of current income
principally derived from interest on debt securities and seeks to
enhance such income by writing covered call options on debt
securities. The Fund intends to invest principally in (i) foreign
government and corporate debt securities, (ii) securities of the U.S.
Government and its agencies and instrumentalities ("U.S. Government
securities"), and (iii) lower-rated high yield domestic debt
securities, commonly known as "junk bonds," which are subject to a
greater risk of loss of principal and nonpayment of interest than
higher-rated securities. These securities may be considered to be
speculative. Current income is not an objective.(6)
[bullet] Portfolio Partners, Inc.--MFS Emerging Equities Portfolio seeks to
provide long-term growth of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the Portfolio's
investment objective.(7a)
[bullet] Portfolio Partners, Inc.--MFS Research Growth Portfolio seeks
long-term growth of capital and future income.(7a)
[bullet] Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation. Dividend income, if any, is a consideration incidental
to the Portfolio's objective of capital appreciation.(7a)
[bullet] Portfolio Partners, Inc.--Scudder International Growth Portfolio seeks
long-term growth of capital primarily through a diversified portfolio
of marketable foreign equity securities.(7b)
[bullet] Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term growth of capital and, secondarily, to increase dividend
income by investing primarily in common stocks of well established
growth companies.(7c)
Investment Advisers for each of the Funds:
(1) Aeltus Investment Management Company, Inc.
(2) Calvert Asset Management Company, Inc.
(3) Fidelity Management & Research Company
(4) Janus Capital Corporation
(5) Lexington Management Corporation (adviser); Market Systems Research
Advisors, Inc. (subadviser)
(6) OppenheimerFunds, Inc.
(7) Aetna Life Insurance and Annuity Company (adviser);
(a) Massachusetts Financial Services Company (subadviser)
(b) Scudder, Stevens & Clark, Inc. (subadviser)
(c) T. Rowe Price Associates, Inc. (subadviser)
There is no assurance that the Funds will achieve their investment
objectives. Participants bear the full investment risk of investments in the
Funds selected.
Some of the Funds may invest in instruments known as derivatives as part
of their investment strategies, as described in their respective prospectuses.
The use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of
leverage in connection with derivatives can also increase risk of losses. See
the prospectus for the Funds for a discussion of the risks associated with an
investment in those funds.
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. Contract Holders and Participants should
read the accompanying prospectuses carefully before investing. Additional
prospectuses and the Statements of Additional Information for this Prospectus
and each of the Funds can be obtained by calling the Company's Home Office
telephone number listed on the cover of this Prospectus, or by writing to the
Home Office (see page Definitions - 2 "Home Office" for address).
MIXED AND SHARED FUNDING
Shares of the Funds are available to insurance company separate accounts
which fund variable annuity contracts and variable life insurance policies,
including the Contracts described in this Prospectus. Because Fund shares are
offered to separate accounts of both affiliated and unaffiliated insurance
companies, it is conceivable that, in the future, it may not be advantageous
for variable life insurance separate accounts and variable annuity separate
accounts to invest in these Funds simultaneously, since the interests of such
policyowners or contractholders may differ. Although neither the Company nor
the Funds currently
- --------------------------------------------------------------------------------
4
<PAGE>
foresee any such disadvantages either to variable life insurance or to variable
annuity policyowners, each Fund's Board of Trustees/Directors has agreed to
monitor events in order to identify any material irreconcilable conflicts which
may possibly arise and to determine what action, if any, should be taken in
response thereto. If such a conflict were to occur, one of the separate
accounts might withdraw its investment in a Fund. This might force that Fund to
sell portfolio securities at disadvantageous prices.
FUND CHANGES
The Company reserves the right, subject to compliance with appropriate
state and federal laws, to change the Fund(s) in which the Separate Account
invests, and/or replace the shares of any Fund(s) held in the Separate Account
with shares of any other Fund(s).
FUND LIMITATIONS
The Contract Holder may decide to offer only a select number of Funds as
funding options under its Plan, or may decide to change which Funds it offers.
Under some Contracts, no more than 18 different investment options may be
selected at any one time, unless you have an outstanding loan, in which case as
of the date of this Prospectus no more than 18 different choices of investment
options may be made during the Accumulation Period. (For Contracts with a loan,
a higher total may be available in the future.) For the purposes of either
limit, each Fund, the Fixed Account, each version of the Fixed Plus Account
(see Appendices II and III), and each classification of GAA counts as one
option. If you have an outstanding loan and the limit applies over the entire
Accumulation Period, once an investment option is selected, it counts towards
the limit even if amounts are no longer allocated to that option. Please check
with your local representative or contact the Company at the toll-free number
on the cover of this Prospectus to determine if these limitations apply to you
or to determine if you may select more than 18 investment options during the
Accumulation Period if you have a loan.
The Company reserves the right to limit the funding options available
during the Annuity Period.
PURCHASE
================================================================================
THE CONTRACTS
The Contracts are group deferred, variable annuity contracts. Under the
Retirement Plus Contract, Contributions may be made by the Contract Holder
(generally, the employer) and the Participants. The Contract Holder, or any
person designated by the Contract Holder, may exercise the rights under the
Retirement Plus Contract. The Contract Holder may, by written direction, allow
Participants to select the investment options for the Contract Holder
Contributions and Participant Contributions. Under the Voluntary Contract,
Contributions may be made only by Participants. Each Participant may exercise
the rights under the Voluntary Contract with respect to the Participant's
Individual Accounts. See "Contract Rights" and "Miscellaneous."
ELIGIBLE CONTRACT HOLDERS
An organization eligible to establish tax-deferred annuity plans under
Section 403(b) or Sections 401(a)/
401(k) of the Code may acquire either or both of the Contracts for its Plan by
filling out the appropriate master application forms and returning them to the
Company or to a Distributor for delivery to the Company. Once we approve the
application, a group Contract is issued to the organization as Contract Holder.
PURCHASE BY EXCHANGE
Certain organizations which own contracts issued by the Company may
exchange their existing contract(s) for either or both of the Contracts. See
Appendix VI.
CONTRACT CHARGES AND FEES OPTIONS
Your Contract's charges and fees will depend in part upon the Aggregate
Current Value and in part upon choices made by your Contract Holder. Each
Contract offers a Contract Holder the flexibility to choose a charges and fees
structure during the Accumulation Period that will best suit the needs of its
Participants. For a description of the Contracts' charges and fees, see
"Charges and Fees During the Accumulation Period."
RESPONSIBILITIES OF CONTRACT HOLDERS
The Contract Holder is responsible for maintaining all Participant
vesting percentages and records, ensuring that the Plan meets certain
nondiscrimination requirements imposed by the Code, and ensuring employee
Contributions do not exceed the maximum limits imposed by the Code.
- --------------------------------------------------------------------------------
5
<PAGE>
If a Contract is used to fund an ERISA Plan, the Contract Holder must:
(a) provide written certification to the Company of the satisfaction of
applicable requirements for ERISA tax-deferred annuity plans, and
(b) certify that all distributions are made in accordance with the terms
of the Plan, and, if applicable, the requirements of the Code.
ENROLLMENT OF PARTICIPANTS
Eligible organizations may acquire the Contract by submitting an
application to the Company. Once we approve the application, a group Contract
is issued to the employer or association as the group Contract Holder.
Participants may purchase interests in a group Contract by submitting an
enrollment form to the Company.
The Company must accept or reject the application or enrollment form
within two business days of receipt. If the enrollment materials are
incomplete, the Company may hold any forms and accompanying Purchase Payments
for five days. Purchase Payments may be held for a longer period pending
acceptance of the forms only with consent of the Participant or, under certain
circumstances described below, with the consent of the group Contract Holder.
Under limited circumstances the Company may agree, with respect to a particular
Plan, to hold Purchase Payments for longer than the five business days, based
on the consent of the group Contract Holder, in which case these Purchase
Payments will be deposited in the Aetna Money Market VP investment option until
the forms are completed.
After accepting your application, we will establish one or more
Individual Accounts to track Contributions and transactions. If you and your
employer make Contributions under a Retirement Plus Contract, we may establish
an Employee Account and an Employer Account. For any lump sum Contribution
under either Contract, we may establish a separate Individual Account for that
Contribution.
CONTRIBUTIONS
Under a Contract, Contributions may be made on an installment basis or
one or more lump sum Contribution(s) may be made. The Company reserves the
right not to accept any Contribution. Each Contribution is forwarded to the
Company through a Distributor.
Net Contribution(s) may accumulate (a) on a variable basis by allocation
to one or more of the available Funds; (b) on a fixed basis under the GA
Account; (c) on a fixed basis under the Fixed Plus Account; and (d) in a
combination of any of the available investment options. See Appendices I, II
and III. Not all Funds or credited interest options are available in all
jurisdictions or under a particular Contract. The Fixed Account is available
only for Net Contribution(s) previously allocated to a fixed account under a
contract exchanged for a Contract. See Appendix IV. The Net Contribution(s)
must be allocated to the respective options in increments of whole percentage
amounts.
Contribution Limits for Contracts Used with 403(b) Plans
The Code imposes a maximum limit on annual Contributions which may be
excluded from your gross income. That limit must be calculated in accordance
with Sections 403(b), 415 and 402(g) of the Code. See "Tax Status--Contracts
Used With Certain Retirement Plans." It is the Contract Holder's responsibility
to determine compliance with these requirements and other provisions of the
Plan. See "Rights Under the Contracts."
Contribution Limits for Contracts Used with 401(a)/401(k) Plans
The Code imposes a maximum limit on annual Contributions that may be
excluded from a Participant's gross income. Such limit must be calculated under
the Plan by the Contract Holder in accordance with Sections 402(g) and 415 of
the Code. See "Tax Status--Contracts Used With Certain Retirement Plans." It is
the Contract Holder's responsibility to determine compliance with these
requirements and other provisions of the Plan. See "Rights Under the
Contracts."
DISTRIBUTION
The Company will serve as Underwriter for the securities sold by this
Prospectus. The Company is registered as a broker-dealer with the SEC and is a
member of the National Association of Securities Dealers, Inc. ("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 Participants in
connection with establishing their Individual Accounts under a Contract.
- --------------------------------------------------------------------------------
6
<PAGE>
Persons offering and selling the Contracts may receive commissions in
connection with the sale of a Contract. The sales commission will range from 1%
to 4% of the first year Contributions. The Company may also pay renewal
commissions on Contributions made after the first year and asset-based service
fees. The average of all payments made by the Company is estimated to equal
approximately 3% of the total Contributions 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 Individual Account are set forth
on your enrollment form. Commissions and sales related expenses are paid by the
Company and are not deducted from Contributions. See "Charges and Fees During
the Accumulation Period--Withdrawal Fee."
Occasionally, we may pay commissions and fees to Distributors which are
affiliated or associated with the Contract Holder or the Participants. We may
also enter into agreements with some entities associated with the Contract
Holder or Participants in which we would agree to pay the association for
certain services in connection with administering the Contracts. In both these
circumstances there may be an understanding that the Distributor or association
would endorse the Company as a provider of the Contracts. You will be notified
if a Contract is subject to these arrangements.
DETERMINING INDIVIDUAL ACCOUNT CURRENT VALUE
================================================================================
The Current Value of your Individual Account as of the most recent
Valuation Period, is determined by adding the value of any Fund Record Units
attributed to the Fund(s) you have selected to the value, with interest earned
to date, of any amounts invested in the Fixed Plus Account, the GAA and/or the
Fixed Account, less any Maintenance Fee(s) due.
FUND RECORD UNITS
A Contribution that is directed to one or more of the Funds is deposited
in the Separate Account and credited to your Individual Account in the form of
Fund Record Units for each Fund selected. The number of Fund Record Units
credited is determined by dividing the applicable portion of the Contribution
by that Contract's Fund Record Unit value of the appropriate Fund. The value of
Fund Record Units attributable to the Funds will be affected by the investment
performance, expenses and charges of those Funds. Generally, if the net asset
value of the Fund increases, so does the Fund Record Unit value; however,
performance of the Separate Account is reduced by charges and fees under a
Contract.
The Fund Record Unit value used is that next computed following the date
on which a Contribution is received, provided the Contribution is received by
us by the close of business of the New York Stock Exchange, unless the
application has not been accepted. In that event, Contributions will be
credited at the Fund Record Unit Value next determined after acceptance of the
application. Shares of the Funds are purchased by the Separate Account at the
net asset value next determined by the Fund following receipt of Contributions
by the Separate Account.
Fund Record Units are valued separately for each Fund. Therefore, if you
elect to have a Contribution invested in a combination of Funds, you will have
Fund Record Units credited from more than one source.
NET RETURN FACTOR
The value of a Fund Record Unit for any Valuation Period is calculated by
multiplying the Fund Record Unit value for the immediately preceding Valuation
Period by the net return factor of the appropriate investment option for the
Current Valuation Period.
The net return factor is calculated separately for each Fund in which
assets of the Separate Account are invested. It is determined by adding
1.0000000 to the net return rate.
The net return rate is equal to:
(a) The value of the shares of the Fund held by the Separate Account at
the end of a Valuation Period; minus
- --------------------------------------------------------------------------------
7
<PAGE>
(b) The value of the shares of the Fund held by the Separate Account at
the start of the Valuation Period; plus or minus
(c) Taxes (or reserves for taxes) on the Separate Account (if any);
(d) Divided by the total value of the Fund Record Units and Fund Annuity
Units of the Separate Account at the start of the Valuation Period;
(e) Minus a Separate Account charge at an annual effective rate as shown
in a Contract for mortality and expense risks and profit and a daily
administrative expense charge which will not exceed the amount shown
on Contract Schedule I on an annual basis.
The net return rate may be more or less than zero.
TRANSFER CREDITS
If a Contract Holder is transferring to the Company assets held by
another provider of funding for a Plan, a transfer credit is applied to the
Individual Accounts, subject to certain conditions (and state approval). This
benefit is provided on a nondiscriminatory basis if your Contract is eligible.
In certain circumstances, a Contract Holder may elect to forego the transfer
credit and the Contract will be subject to lower charges and fees. See "Charges
and Fees During the Accumulation Period--
Option B." The transfer credit will be credited to the Fixed Plus Account. See
Appendices II and III.
Once transfer credit amounts are applied to the Individual Accounts, all
provisions of the Contract apply. If a transfer credit is due under a Contract,
you will be provided with additional information specific to the Contract.
CONTRACT RIGHTS
================================================================================
RIGHT TO CANCEL
The Contract Holder may cancel a Contract and you may cancel your
interest in a Contract, no later than ten days after receiving it (or as
otherwise allowed by state law) by returning it, along with a written notice of
cancellation, to us. Within seven days after we receive the Contract and the
written notice at our Home Office, we will return your Current Value, unless
the laws of the state in which the Contract was issued require that we return
Contributions (if greater than your Current Value). In states that do not
require a return of Contributions, you bear the entire investment risk for
amounts allocated among the variable funding options during the free look
period.
RIGHTS UNDER THE CONTRACTS
Your rights and the Contract Holder's rights are set forth in each
Contract purchased by the Contract Holder. You should consult with your
employer to determine which Contract your employer has purchased and you should
refer to that Contract to determine your rights. Benefits payable to you
subject to the terms and conditions of the Plan. The Company is not a party to
the Plan.
Rights Under the Retirement Plus Contract. Under the Retirement Plus
Contract, the rights rest with the Contract Holder (generally the employer).
The Contract Holder may, by written direction, allow Participants to select the
investment options for the Employer Account and Employee Account. The exercise
of other rights under the Retirement Plus Contract must be made by the Contract
Holder on your behalf. You have no rights to direct the Company as to payments
under the Contract unless countersigned by the Contract Holder.
For the Retirement Plus Contract, the Contract Holder and each
Participant must agree in writing to the terms and conditions of the Contract,
to have the Contract Holder make choices under the Contract, and to be bound by
the Contract Holder's direction to the Company. See Appendix V.
Rights Under the Voluntary Contract. You may make any choices, subject to
the terms of your Plan, under the Voluntary Contract with respect to your
Individual Accounts.
Rights to your Individual Account. For Contracts used with a 403(b) Plan,
you have a nonforfeitable right to the value of your Contributions pursuant to
Code Section 403(b) and the terms of the Plan as interpreted by the Contract
Holder. For Contracts used with a 401(a)/401(k) Plan, your right to
Contributions derived from your Contributions must be nonforfeitable in order
for the Plan to qualify for favorable tax treatment afforded to 401(a)/
401(k) Plans under the Code. You have a nonforfeitable right to the value of
your Individual Account to which your employer's Contributions are credited
pursuant to the terms of, and to the extent of your vested percentage under,
the Plan as interpreted by the Contract Holder.
- --------------------------------------------------------------------------------
8
<PAGE>
TRANSFERS AND ALLOCATION CHANGES
================================================================================
Before the Annuity Period, the allocation of future Net Contributions
among the allowable investment options under a Contract may be changed. There
is no limit on the number of these changes. Each Contract also allows any
number of transfers of not less than $500 among funding options during the
calendar year, without charge. The total number of funding options that may be
invested in at any one time or during the Accumulation Period may be limited.
(See "The Funds--Fund Limitations.")
Subject to state regulatory approval, transfers during the Annuity Period
are permitted, however, we reserve the right to limit such transfers to four
per year.
Any transfer involving a Fund where the request is received by us by the
close of business of the New York Stock Exchange will be based on the Fund
Record Unit value next determined after we receive a valid request at our Home
Office.
Transfers from the Fixed Plus Account are limited. See Appendices I, II,
III and IV for more information on transfers from the GAA, the Fixed Plus
Account and the Fixed Account.
WITHDRAWALS
================================================================================
Each Contract allows the withdrawal of all or a portion of an Individual
Account Adjusted Current Value during the Accumulation Period. To do so, we
must receive a properly completed disbursement form in our Home Office.
Disbursement forms are available from us and our representatives.
Withdrawals may be requested in one of the following four ways:
[bullet] Full Withdrawal from a Contract: The amount paid will be the sum of
the Individual Accounts allocated to the Funds, the GAA (plus or minus
the Market Value Adjustment), and the Fixed Account, minus any
applicable Withdrawal Fee and Maintenance Fee due plus one-fifth of
the sum of the Individual Accounts allocated to the Fixed Plus
Account*, minus any Fixed Plus Account withdrawals, transfers or
annuitizations made in the prior 12 months.
[bullet] Full Withdrawal from an Individual Account: The amount paid will be
the Individual Account allocated to the Funds, the GAA (plus or minus
the Market Value Adjustment), and the Fixed Account, minus any
applicable Withdrawal Fee and Maintenance Fee due plus one-fifth of
the Individual Account allocated to the Fixed Plus Account*, minus any
Fixed Plus Account withdrawals, transfers, loans or annuitizations
made in the prior 12 months.**
[bullet] Partial Withdrawal (Percentage): The amount paid will be the
percentage of the Individual Account Current Value requested minus any
applicable Withdrawal Fee.** However, amounts withdrawn from the Fixed
Plus Account may not exceed 20% minus any Fixed Plus Account***
withdrawals, transfers or annuitizations in the prior 12 months.
[bullet] Partial Withdrawal (Specific Dollar Amount): The amount paid will be
the dollar amount requested. However, the amount withdrawn from the
Individual Account will equal the dollar amount requested plus any
applicable Withdrawal Fee.** The amount withdrawn from the Fixed Plus
Account may not exceed 20% minus any Fixed Plus Account***
withdrawals, transfers or annuitizations in the prior 12 months.
* The balance of the amount held in the Fixed Plus Account will be paid
in four annual installments. Under certain circumstances, the entire
amount held in the Fixed Plus Account will be paid in one lump sum (or
used to provide Annuity payments) rather than in annual installments.
See Appendices II and III for more information.
** A 20% income tax may be withheld from amounts paid directly to you.
See "Tax Status-- Contracts Used With Certain Retirement Plans."
*** The 20% limit is waived under certain circumstances. See Appendices II
and III for more information.
- --------------------------------------------------------------------------------
9
<PAGE>
All amounts paid will be based on Individual Account Current Values as of
the end of the Valuation Period in which the request is received in good order
in our Home Office. For any partial withdrawal, unless otherwise requested,
partial withdrawals are satisfied by withdrawing amounts on a pro rata basis
from each investment option in which the Individual Account is invested.
WITHDRAWAL RESTRICTIONS FOR CONTRACTS USED WITH 403(B) PLANS AND 401(K) PLANS
Code Sections 403(b) and 401(k) impose restrictions on full or partial
withdrawals. See "Tax Status--Contracts Used With Certain Retirement Plans."
REINVESTMENT PRIVILEGE
Within 30 days after a withdrawal, if allowed by law, a Participant may
elect to reinvest all or a portion of the proceeds received for the full
withdrawal of an Individual Account. Reinvested amounts must be received by the
Company within 60 days of the withdrawal. Any Maintenance Fee and Withdrawal
Fee charged at the time of the withdrawal on the amount being reinvested will
be included in the reinstatement. Any Maintenance Fee which falls due after the
withdrawal and before the reinstatement will be deducted from the amount
reinstated. Any Market Value Adjustment deducted from GA Account withdrawals
will not be included in the reinstatement. Amounts will be reinstated among the
Fixed Plus Account, the GA Account, and/or the Fund(s) for the Separate Account
in the same proportion as they were at the time of withdrawal. Any amounts
reinstated to the GA Account will be credited to terms available during the
then-current Deposit Period. The number of Fund Record Units reinstated will be
based on the Fund Record Unit Value(s) next computed after receipt in good
order at the Company's Home Office of the reinstatement request and the amount
to be reinvested.
CONTRACT LOANS
================================================================================
During the Accumulation Period, loans from the Individual Account are
available from Contracts used with 403(b) plans, and from Contracts used with
401(a) plans to the extent provided in the Contract. Under the Retirement Plus
Contract, a loan may be restricted to your Employee Account unless the Contract
Holder has authorized loans from the value of the Employer Account (check with
the Contract Holder to see if this is available). Loans can only be made from
the Current Value held in the Funds, the Fixed Plus Account and/or the Fixed
Account. See Appendices II, III and IV. A loan may be requested by reviewing
and reading the terms of your loan application, properly completing a loan
request form and submitting it to the Company's Home Office. Some restrictions
may apply under the Code and/or due to Company administrative practices.
CHARGES AND FEES DURING THE ACCUMULATION PERIOD
================================================================================
The amount of the charges and fees that will be assessed under a Contract
will be based upon the charges and fees option selected by the Contract Holder.
See "Contract Charges and Fees Options." You should consult your employer to
determine which charges and fees option applies to your Individual Accounts.
Based upon its prior experience with similar annuity contracts, the
Company has determined that its costs of administering a Contract will
fluctuate with the amount of the Aggregate Current Value, the average
Contributions per Participant transferred under a Contract, and whether a
Withdrawal Fee is charged. The charges and fees for the initial Contract year
will be based on the estimated year-end Aggregate Current Value, as determined
by the Company. If your charges and fees change on your Contract Anniversary
(because of an increase or decrease in the Aggregate Current Value), a new Fund
Record Unit value might apply and the Fund Record Units might have to be
adjusted so that the Current Value of your Individual Account would stay the
same. If you invest in one of the series of the Aetna GET Fund, the GET Fund
guarantee will be recalculated so that the new guarantee would be equivalent to
the original guarantee.
A Contract Holder may elect whether a Withdrawal Fee will be applicable
under a Contract, and if so, whether the Withdrawal Fee will be applicable for
a 5-year period or a 10-year period. When a Withdrawal Fee is not charged, the
Company has determined that more Individual Account transactions occur, and as
a result, in some circumstances the Company imposes a
- --------------------------------------------------------------------------------
10
<PAGE>
greater administrative expense charge and Maintenance Fee charge. The 5-year
period and 10-year period Withdrawal Fees are as follows:
FIVE-YEAR WITHDRAWAL PERIOD:
Number of Years
Individual Account
Has Been Established Fee
- ---------------------------------------
Less than 1 5%
1 or more but less than 2 4%
2 or more but less than 3 3%
3 or more but less than 4 2%
4 or more but less than 5 1%
5 or more 0%
TEN-YEAR WITHDRAWAL PERIOD:
Number of Years
Individual Account
Has Been Established Fee
- ---------------------------------------
Less than 5 5%
5 or more but less than 7 4%
7 or more but less than 9 3%
9 or more but less than 10 2%
10 or more 0%
For Contracts issued in the State of New York only the Ten-Year
Withdrawal Period Fee Schedule will be available. Additionally, for those New
York Contracts under which the GAA is selected as a funding option, the
Withdrawal Fee imposed under the Ten-Year Withdrawal Period (as set forth in
the schedule above), will never be greater than (a) 7% of amounts withdrawn
from investment options other than the GAA, plus (b) 7% of amounts withdrawn
from the GAA, reduced (but not below zero) by one percent for each year the
Contract has been in force.
The following schedule illustrates the withdrawal fee imposed if the
Ten-Year Withdrawal Period is selected for Contracts issued in the States of
Oregon and Texas:
Number of Years
Individual Account
Has Been Established Fee
- -------------------------------------
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%
In selecting a charges and fees option, a Contract Holder should consider
the composition and needs of its Participants to determine which option is most
appropriate.
OPTION A
A Contract Holder may select any of the charges and fees elections under
Option A below. Under Option A, a transfer credit may apply to transfers to the
Company of assets not previously held by the Company. See "Determining
Individual Account Current Value--Transfer Credits" and Appendices II and III.
If a Contract is acquired by exchange, and a transfer credit will apply, then
for existing Participants of the exchanged contract, the Option A charges and
fees schedule set forth below with a Withdrawal Fee for 10 years will apply. See
Appendix VI. New Participants of a Contract acquired by exchange will be subject
to the charges and fees schedule selected by the Contract Holder.
The charges and fees shown below for Contract Holders are the maximum
Contract charges which will apply. There are conditions under which these
charges and fees may be reduced for certain Contract Holders. See "Reduction of
Mortality and Expense Risk and/or Administrative Charges" and "Reduction or
Elimination of the Maintenance Fee."
- --------------------------------------------------------------------------------
11
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Assets Assets Assets Assets Assets
Less $500,000 $1,000,001 $5,000,001 Greater
than to to to than
OPTION "A" CHARGES $500,000 $1,000,000 $5,000,000 $15,000,000 $15,000,000
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WITHDRAWAL FEE FOR 10 YEARS
- -----------------------------------------------------------------------------------------------
Mortality and Expense Charge 1.25% 1.15% 1.05% 1.00% 0.95%
- -----------------------------------------------------------------------------------------------
Administrative Expense Charge 0.25% 0.15% 0.10% 0.05% 0.00%
- -----------------------------------------------------------------------------------------------
Maintenance Fee $15 $15 $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------
WITHDRAWAL FEE FOR 5 YEARS
- -----------------------------------------------------------------------------------------------
Mortality and Expense Charge 1.25% 1.25% 1.15% 1.10% 1.05%
- -----------------------------------------------------------------------------------------------
Administrative Charge 0.25% 0.15% 0.10% 0.05% 0.00%
- -----------------------------------------------------------------------------------------------
Maintenance Fee $15 $15 $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------
NO WITHDRAWAL FEE
- -----------------------------------------------------------------------------------------------
Mortality and Expense Charge 1.25% 1.25% 1.15% 1.10% 1.05%
- -----------------------------------------------------------------------------------------------
Administrative Charge 0.25% 0.20% 0.15% 0.10% 0.05%
- -----------------------------------------------------------------------------------------------
Maintenance Fee $20 $20 $10 $10 $10
- -----------------------------------------------------------------------------------------------
</TABLE>
OPTION B
Charges and fees elections under Option B are available if:
a) the Company will receive all future allocations of assets of the
Contract Holder's Plan(s); and
b) the Contract Holder is transferring assets to the Company in an amount
which satisfies the then current rules of the Company, applied in a
nondiscriminatory manner.
If a Contract is acquired by exchange, then for existing Participants of
the exchanged contract, the Option B charges and fees schedule set forth below
with a Withdrawal Fee for 10 years will apply. See Appendix VI. New
Participants of a Contract acquired by exchange will be subject to the charges
and fees schedule selected by the Contract Holder. If a Contract Holder selects
a charges and fees election under Option B, no transfer credit will apply.
The charges and fees shown below for Contract Holders are the maximum
Contract charges which will apply. There are conditions under which these
charges and fees may be reduced for certain Contract Holders. See "Reduction of
Mortality and Expense Risk and/or Administrative Charges" and "Reduction or
Elimination of the Maintenance Fee."
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Assets Assets Assets Assets Assets
Less $500,000 $1,000,001 $5,000,001 Greater
than to to to than
OPTION "B" CHARGES $500,000 $1,000,000 $5,000,000 $15,000,000 $15,000,000
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WITHDRAWAL FEE FOR 10 YEARS
- -----------------------------------------------------------------------------------------------
Mortality and Expense Charge 1.15% 1.05% 0.95% 0.90% 0.85%
- -----------------------------------------------------------------------------------------------
Administrative Expense Charge 0.25% 0.15% 0.10% 0.05% 0.00%
- -----------------------------------------------------------------------------------------------
Maintenance Fee $15 $15 $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------
WITHDRAWAL FEE FOR 5 YEARS
- -----------------------------------------------------------------------------------------------
Mortality and Expense Charge 1.15% 1.15% 1.05% 1.00% 0.95%
- -----------------------------------------------------------------------------------------------
Administrative Charge 0.25% 0.15% 0.10% 0.05% 0.00%
- -----------------------------------------------------------------------------------------------
Maintenance Fee $15 $15 $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------
NO WITHDRAWAL FEE
- -----------------------------------------------------------------------------------------------
Mortality and Expense Charge 1.15% 1.15% 1.05% 1.00% 0.95%
- -----------------------------------------------------------------------------------------------
Administrative Charge 0.25% 0.20% 0.15% 0.10% 0.05%
- -----------------------------------------------------------------------------------------------
Maintenance Fee $20 $20 $10 $10 $10
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE>
The following describes the charges and fees that we may deduct during
the Accumulation Period from the Individual Accounts under each Contract.
ANNUAL MAINTENANCE FEE
An annual Maintenance Fee is charged for each Participant and is deducted
from the sum of the Current Value of your Individual Accounts under a Contract.
This fee is to reimburse the Company for some of its administrative expenses
relating to the establishment and maintenance of the Individual Account.
Because the annual Maintenance Fee is based, in part, on the amount of the
Aggregate Current Value, the annual Maintenance Fee may change on each Contract
anniversary.
The Maintenance Fee is deducted from your Individual Accounts on the
Contract anniversary date (or, if not a valuation date, on the next valuation
date). Under the Retirement Plus Contract, the Contract Holder may elect that
the entire Maintenance Fee be deducted from only one Individual Account--either
the Employee Account or the Employer Account. Alternatively, the Maintenance
Fee may be billed to the employer at or prior to such deduction under the
Retirement Plus Contract. A Maintenance Fee, to the extent permitted by state
law, is also deducted upon the full withdrawal of a Participant's Individual
Accounts. We deduct this fee from each investment option in the same proportion
that the values held under each option have to the total value under the
Individual Account. No Maintenance Fee is deducted from a separate Individual
Account established for the purpose of a lump sum Contribution.
Reduction Or Elimination Of The Maintenance Fee
The annual Maintenance Fee may be reduced or eliminated for Contract
Holders having an Aggregate Current Value greater than $1 million under various
conditions as agreed to by us and by the Contract Holder in writing. Any
reduction or elimination of the annual Maintenance Fee will reflect differences
in administrative costs and services after taking into consideration factors
such as the following:
[bullet] the characteristics and nature of the group to which a Contract is
issued;
[bullet] the number of eligible Participants and the program's participation
rate;
[bullet] the level of the Company's anticipated expenses in administering the
Contract on an ongoing basis.
We will determine any reduction or elimination of Maintenance Fees on a
basis that is not unfairly discriminatory. We will make any reduction in annual
Maintenance Fees according to the Company's own rules in effect at the time an
application for a Contract is approved and/or at the time of Contract
anniversary. We reserve the right to change these rules from time to time.
WITHDRAWAL FEE
There are no deductions from Contributions for sales commissions or
related expenses. Sales commissions and expenses are advanced by the Company and
recovered out of any Withdrawal Fees or, if Withdrawal Fees are insufficient,
out of its profits from investment activities, including the mortality and
expense risk charge under a Contract. The total amount deducted for the
Withdrawal Fee will not exceed 8.5% of the Contributions made to an Individual
Account. For sales commissions paid in connection with the sale of a Contract,
see "Contract Purchase--Distribution." If applicable, the Withdrawal Fee will
apply to withdrawals from the Funds, the GA Account or the Fixed Account. No
Withdrawal Fee will be deducted from the Fixed Plus Account. There are
additional restrictions and deductions on withdrawals. See "Contract Rights--
Withdrawals."
A Withdrawal Fee is not deducted from any portion of the Individual
Account Current Value under a Contract which is:
(a) withdrawn due to the Participant's separation from service with the
Contract Holder (the Contract Holder must submit documentation
satisfactory to the Company confirming the Participant is no longer
providing services to the employer);
(b) applied to provide Annuity benefits under a Contract;
(c) withdrawn on or after the tenth anniversary of the effective date of
the Individual Account if a ten-year duration for Withdrawal Fees
has been elected, or on or after the fifth anniversary if a
five-year duration has been elected;
(d) paid due to the death of the Participant before Annuity payments
under a Contract begin;
(e) withdrawn due to the election of any Systematic Distribution Option
under a Contract (see "Systematic Distribution Options");
- --------------------------------------------------------------------------------
13
<PAGE>
(f) withdrawn due to financial hardship, as specified in the Code;
(g) paid where the Individual Account Current Value is $3,500 or less and
no amount has been withdrawn, taken as a loan or used to purchase
Annuity benefits during the prior 12 months;
(h) paid in an amount of up to 10% of the Individual Account Current
Value. This applies only to the first partial withdrawal in each
calendar year. The 10% amount will be calculated using the Individual
Account Current Value on the date the request is received, in good
order, in the Home Office. This provision is available to Participants
who are between the ages of 59-1/2 and 70-1/2. Any loans outstanding
on an Individual Account are excluded from the Individual Account
Current Value when calculating the 10% amount. This provision is not
applicable to a full withdrawal of the Individual Account, or to
partial withdrawals due to loan defaults. See "Contract
Rights--Contract Loans." This provision may not be exercised if SWO is
elected. See "Systematic Distribution Options"; or
(i) withdrawal due to a transfer of the Individual Account Current Value
to another retirement product offered by the Company under the
Contract Holder's Plan under various conditions as agreed to by us and
by the Contract Holder in writing.
Although no Withdrawal Fee is deducted in the above instances, the amount
withdrawn may, however, be includible in gross income and subject to the 10%
federal penalty tax. See "Tax Status--Contracts Used With Certain Retirement
Plans."
MORTALITY AND EXPENSE RISK CHARGE
We make a daily deduction from any portion of an Individual Account
Current Value allocated to the Funds under a Contract for mortality and expense
risks. The mortality risk charge is to compensate us for the risk we assume
when we promise to continue making payments for the lives of individual
Annuitants according to Annuity rates specified in the tables at the time
Annuity payments begin. The expense risk charge is to compensate us for the
risk that actual expenses for costs incurred under a Contract will exceed the
maximum costs that can be charged under the Contract. Because it is based, in
part, on the amount of the Aggregate Current Value, the charge for mortality
and expense risks may change on each Contract anniversary.
Based on our actuarial determination, we do not anticipate that the
Withdrawal Fee will cover all sales and administrative expenses which we will
incur in connection with a Contract. Also, we do not intend to profit from
either the annual Maintenance Fee or the administrative expense charge, if
imposed. We do hope to profit from the daily deduction for mortality and
expense risks. Any such profit, as well as any other profit realized by us and
held in the general account (which supports insurance and annuity obligations),
would be available for any proper corporate purpose, including, but not limited
to, payment of sales and distribution expenses.
ADMINISTRATIVE EXPENSE CHARGE
We deduct a daily charge for administrative expenses from any portion of
an Individual Account Current Value allocated to the Funds to reimburse the
Company for some of the expenses we incur for administering a Contract. Because
it is based, in part, on the amount of the Aggregate Current Value, the
administrative expense charge may change on each Contract anniversary.
REDUCTION OF MORTALITY AND EXPENSE RISK AND/OR ADMINISTRATIVE CHARGES
Mortality and expense risk and/or administrative charges may be reduced
from the maximum shown in the table for each Aggregate Current Value for a
Contract Holder under various conditions as agreed to by us and by the Contract
Holder in writing. Any reduction to the mortality and expense risk and/or
administrative charges will reflect differences in expenses for administration
after taking into consideration factors such as the following:
[bullet] The Plan design. For example, the Plan design may favor stability of
invested assets and limit the conditions for withdrawals, loans, and
investment options available, which in turn will lower administrative
expenses.
[bullet] The number of eligible Participants and the program's participation
rate.
[bullet] The frequency, consistency and method of submitting Contributions and
loan repayments.
- --------------------------------------------------------------------------------
14
<PAGE>
[bullet] The projected annual Contributions for all Participants in the
program.
[bullet] The method and extent of onsite services such as enrollment and
ongoing Participant services.
[bullet] The Contract Holder's support and involvement in the communication,
enrollment, Participant education, and other administrative services.
[bullet] The type and level of other factors that affect the overall
administrative expense.
We will determine any reduction of mortality and expense risk and/or
administrative expense charges on a basis that is not unfairly discriminatory.
We will make any reduction in mortality and expense risk and/or administrative
charges according to the Company's rules in effect at the time an application
for a Contract is approved and/or at the time of Contract anniversary. We
reserve the right to change these rules from time to time.
FUND EXPENSES
Each Fund has an investment adviser. An investment advisory fee, based on
the Fund's average net assets, is deducted from the assets of each Fund and
paid to the investment adviser.
Most expenses incurred in the operations of the Funds are borne by that
Fund. Fund advisers may reimburse the Funds they advise for some or all of
these expenses. For further details of each Fund's expenses, you and the
Contract Holder should read the accompanying prospectus for each Fund and refer
to the Fee Table in this Prospectus.
PREMIUM AND OTHER TAXES
Several states and municipalities impose a premium tax on Annuities.
Currently such taxes range from 0% to 4%. The Company reserves the right to
deduct premium tax against Contributions or Current Values at any time, but no
earlier than when due 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 premium tax, the Company reserves the right to assess a charge
for any state or federal taxes due against a Contract or the Separate Account
assets.
CHARGES AND FEES DURING THE ANNUITY PERIOD
================================================================================
This section describes the charges and fees that we may deduct during the
Annuity Period.
MORTALITY AND EXPENSE RISK CHARGE
During the Annuity Period a daily charge for mortality and expense risks
equal to an annual effective rate of 1.25% may be deducted from any portion of
an Individual Account allocated to the Funds.
ADMINISTRATIVE EXPENSE CHARGE
During the Annuity Period, a daily charge for administrative expenses
equal to an annual effective rate of up to 0.25% may be deducted from any
portion of an Individual Account under a Contract allocated to the Funds.
WITHDRAWAL FEE
A Withdrawal Fee will apply during the Annuity Period if a non-lifetime
Annuity Option is elected on a variable basis and the remaining value is
withdrawn prior to the minimum number of years specified in the Contract. See
"Annuity Period--Annuity Options."
SYSTEMATIC DISTRIBUTION OPTIONS
================================================================================
The Company offers certain withdrawal options under each Contract that
are not considered annuity options ("Systematic Distribution Options"). To
exercise these options, the Current Value must meet the minimum dollar amounts
and you must satisfy the age criteria applicable to that option.
The Systematic Distribution Options currently available under the
Contract include the following:
[bullet] SWO--Systematic Withdrawal Option. SWO is a series of partial
withdrawals from your Individual Account 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. (This option may not be elected if you have an outstanding
contract loan.)
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[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 the later of age 70-1/2 or retirement, or for 5% owners at age
70-1/2 and pays you that amount once a year. (See "Tax Status.")
Other Systematic Distribution Options may be added from time to time.
Additional information relating to any of the Systematic Distribution Options
may be obtained from your local representative or from the Company at its Home
Office. For Contracts issued in the state of New York, no Market Value
Adjustment will be imposed on withdrawals from the GA Account for ECO.
If one of the Systematic Distribution Options is selected, your Account
will retain all of the rights and flexibility permitted under the Contract
during the Accumulation Period. Your Current Account Value will continue to be
subject to the charges and deductions described in this Prospectus. Taking a
withdrawal under one of these Systematic Distribution Options may have tax
consequences. Any person concerned about tax implications should consult a
competent tax advisor prior to electing an option.
Once elected, a Systematic Distribution Option may be revoked at 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 Systematic Distribution Option
be elected unless permitted by the Code. The Company reserves the right to
discontinue the availability of one or all of those Systematic Distribution
Options at any time, and/or to change the terms of future elections.
ANNUITY PERIOD
================================================================================
ANNUITY PERIOD ELECTIONS
We must receive in writing the Annuity start date and Annuity option you
have elected. Until a date and option are elected, your Individual Accounts
will continue in the Accumulation Period.
We must receive written notice at least 30 days before Annuity payments
begin electing or changing (a) the date on which Annuity payments are to begin,
(b) the Annuity option, (c) whether the payments are to be made monthly,
quarterly, semiannually or annually, and (d) the investment option(s) used to
provide Annuity payments (i.e., a fixed annuity using the general account, or a
variable annuity using any of the Funds available at the time of
annuitization). Under the Retirement Plus Contract, the Contract Holder, on
your behalf, must provide such written notice to us. Once Annuity Payments
begin, the Annuity Option may not be changed. Subject to state regulatory
approval, transfers during the Annuity Period are allowed; however, we reserve
the right to limit such transfers to four per year.
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
(31/2% per annum, unless a 5% annual rate is elected). Selection of a 5% rate
causes a higher first payment, but Annuity payments will increase thereafter
only to the extent the net investment rate exceeds 5% on an annualized basis.
Annuity payments would decline if the rate were below 5%. Use of the 31/2%
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 details
regarding the selection of a net investment rate.)
No election may be made that would result in a first Annuity payment or
total yearly Annuity payments of less than the minimum amounts specified in the
Contract. If the combined value of the Employer and Employee Accounts is
insufficient to elect an option for the minimum amount specified, a lump sum
payment must be elected.
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) your life, (b) the joint lives
of you and your Plan Beneficiary, (c) a period certain greater than your life
expectancy, or (d) a period certain greater than the joint life expectancies of
you and your Plan Beneficiary.
The Code has required distribution rules for Section 403(b), 401(a) and
401(k) Plans. See "Tax Status -- Contracts Used With Certain Retirement Plans."
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In determining the amount of benefit payments, the minimum distribution
incidental death benefit rule described in IRS regulations* must be satisfied.
This distribution rule does not apply to certain 403(b) Plans if Annuity Option
3 is elected and your spouse is the second Annuitant. See "Annuity
Period--Annuity Options."
You will be subject to a 50% federal penalty tax on the amount of
distribution required each year that is not distributed under the Code's
minimum distribution rules.
* This rule assures that any death benefits payable under the Plan are
incidental to the primary purpose of the Plan which is to provide retirement
benefits to the Participant. The amount to be distributed under this rule is
determined based on the Participant's age and tables contained in the IRS
regulations.
If you elect a Variable Annuity Option, your Individual Account will be
allocated to the Separate Account and the Company will make a daily deduction
for mortality and expense risks. See "Charges and Fees During the Accumulation
Period--Mortality and Expense Risk Charge." Therefore, electing the nonlifetime
option on a variable basis will result in a deduction being made even though
the Company assumes no mortality risk. During the Accumulation Period, the
Company will also deduct daily a charge for administrative expenses. See
"Charges and Fees During the Annuity Period--Administrative Expense Charge."
ANNUITY OPTIONS
You or, under the Retirement Plus Contract, the Contract Holder on your
behalf, may choose one of the following Annuity options:
[bullet] Option 1--Payments for a Stated Period of Time--An Annuity will be
paid for 5 to 30 years.
For amounts held in the Fixed Plus Account the Annuity must be paid on
a fixed basis. If payments for this option are made under a Variable
Annuity, the present value of any remaining payments may be withdrawn
at any time. If a withdrawal is requested before five years of payments
have been made, it will be subject to any Withdrawal Fee, if
applicable. (See "Charges and Fees During the Accumulation Period.")
[bullet] Option 2--Life Income Based on the Life of the Annuitant--Payments
will be made until the death of the Annuitant. When this option is
chosen, a choice from the following must be made:
(a) payments cease at the death of the Annuitant;
(b) payments may be guaranteed for 5-30 years; or
(c) cash refund: if the Annuitant dies, the Plan Beneficiary will receive
a lump sum payment equal to the amount applied to the Annuity option
(less any premium tax) less the total amount of Fixed Annuity payments
paid prior to such death. This cash refund feature is only available
if the total amount applied to the Annuity option is allocated to a
Fixed Annuity.
[bullet] Option 3--Life Income Based Upon the Lives of Two Annuitants--An
Annuity will be paid during the lives of the Annuitant and a joint
Annuitant. Payments will continue until both Annuitants have died.
When this option is chosen, a choice of the following must be made:
(a) 100% of the payment to continue after the first death;
(b) 66 2/3% of the payment to continue after the first death;
(c) 50% of the payment to continue after the first death;
(d) 100% of the payment to continue after the first death with a guarantee
of 5-30 years;
(e) 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; or
(f) 100% of the payment to continue after the first death with a cash
refund feature. If the Annuitant and joint Annuitant die, the Plan
Beneficiary will receive a lump sum payment equal to the amount
applied to the Annuity option (less any premium tax) less the total
amount of Fixed Annuity payments paid prior to such death. This cash
refund feature is only available if the total amount applied to the
Annuity option is allocated to a Fixed Annuity.
[bullet] Option 4--Payments of Interest on Sum Left with the Company (if
available under the Contract)--This Option may be used only by the
Plan Beneficiary when the Participant dies before the Company has
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<PAGE>
started paying an Annuity. A portion or all of the sum paid upon death
may be held under this Option and will be held in the general account
of the Company at interest. The Contract Holder, on behalf of the Plan
Beneficiary, may later tell the Company to:
Pay a portion or all of the sum held by the Company; or
Apply a portion or all of the sum held by the Company to any Annuity
Option above.
If the Plan Beneficiary is the Participant's surviving spouse, the
lump sum payment may be deferred to a date not later than when the
Participant would have attained age 70-1/2.
If the Plan Beneficiary is not a spouse, the Contract Holder must tell
the Company to pay the full sum within 5 years after the death of the
Participant.
If a Fixed Annuity is chosen under option 1, option 2 a) or b) or option
3 a) or d), the Participant may elect an annual increase of one, two or three
percent compounded annually.
We may also offer additional Annuity Options under your Contract from
time to time.
Payments under any lifetime Annuity option will be determined without
regard to the sex of the Annuitant(s). Such Annuity payments will be based
solely on the age of the Annuitant(s).
If a lifetime option is elected without a guaranteed minimum payment
period, it is possible that only one Annuity payment will be made if the
Annuitant under Option 2, or the surviving Annuitant under Option 3, should die
prior to the due date of the second Annuity payment.
Once lifetime Annuity payments begin, neither the Contract Holder nor the
Annuitant can elect to receive another form of settlement.
DEATH BENEFIT
================================================================================
ACCUMULATION PERIOD
A portion or all of any death proceeds may be (a) paid to the Plan
Beneficiary in a lump sum; (b) applied to any of the Annuity Options; (c)
subject to applicable provisions of the Code, left in the variable investment
options; (d) if the Plan Beneficiary is your spouse, paid under a Systematic
Distribution Option; or (e) subject to applicable provisions of the Code, left
on deposit in the Company's general account and the Plan Beneficiary may receive
monthly, quarterly, semiannual or annual interest payments at the interest rate
then currently being credited on such deposits. The balance on deposit can be
withdrawn at any time or applied under any Annuity Option. See "Annuity Period--
Annuity Options." Under the Retirement Plus Contract, any death proceeds will be
paid as directed by the Contract Holder. Any lump sum payment paid during the
Accumulation Period or under the applicable lifetime or nonlifetime Annuity
options will normally be mailed to the Contract Holder, or to the Plan
Beneficiary,(if requested by the Contract Holder), within seven calendar days
after proof of death acceptable to the Company and a request for payment on a
form acceptable to the Company is received at our Home Office in good order.
Until the election of method of payment, amounts will remain invested as
they were before the death, and the Beneficiary will assume all nonforfeitable
rights under a Contract. The Code requires that distributions begin within a
certain time period. If the Plan Beneficiary is your surviving spouse and the
Plan allows, the Plan Beneficiary has until you would have attained age 70-1/2
to begin Annuity payments, to receive a lump sum distribution, or to begin
receiving distributions under a Systematic Distribution Option. If your Plan
Beneficiary is not your surviving spouse, either Annuity payments must begin by
December 31 of the year following the year of your death, or the entire value
must be distributed by December 31 of the fifth year following the year of your
death. In no event may payments to any Plan Beneficiary extend beyond the life
of the Plan Beneficiary or any period certain greater than the Plan
Beneficiary's life expectancy. Failure to commence distribution within the above
time periods can result in tax penalties.
If a lump sum distribution is elected, the Plan Beneficiary will receive
the value of the Individual Account determined as of the Valuation Period in
which proof of death, acceptable to us, and a request for payment on a form
acceptable to the Company is received at our Home Office in good order. The
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<PAGE>
distribution is taxed in the same manner as a full surrender. If an Annuity
Option is elected, the value applied to the Annuity Option is determined in the
same manner, and the proceeds are taxed in the same manner as the Annuity
payments. If amounts are left in the variable investment options, the
Individual Account Current Value will continue to be affected by the investment
performance of the investment option(s) selected. If amounts are left on
deposit in the general account, the principal amount is guaranteed, but
interest payments may vary. In general, regardless of the method of payment,
payments received by your Beneficiaries after your death are taxed in the same
manner as if you had received those payments. See "Tax Status."
ANNUITY PERIOD
If an Annuitant dies after Annuity payments have begun, any death benefit
payable will depend upon the terms of the Contract and the Annuity option
selected.
If Annuity Option 2 or 3 was elected without a guaranteed minimum payment
period under a Contract, Annuity payments will cease upon the death of the
Annuitant under a Life Annuity or the death of the surviving Annuitant under
Option 3.
Under a Contract, if Annuity Option 2 or 3 was elected with a guaranteed
minimum payment period and the death of the Annuitant under Annuity Option 2 or
the surviving Annuitant under Option 3 occurs prior to the end of that period,
we will pay to the person designated by the Contract Holder in a lump sum
(unless otherwise requested) the present value of the guaranteed Annuity
payments remaining. Such value will be determined as of the Valuation Period in
which proof of death, acceptable to us, and a request for payment are received
at our Home Office. The value will be reduced by any payments made after the
date of death.
If Annuity Option 2 was elected with a guaranteed minimum payment period
under a Contract and the Annuitant dies before all guaranteed payments are made,
the value of any remaining payments may be paid in a lump sum to your Plan
Beneficiary and no Withdrawal Fee will be imposed. Such value will be determined
as of the Valuation Period in which proof of death, acceptable to us, and a
request for payment on a form acceptable to the Company are received at our Home
Office in good order.
If the Annuitant dies after Annuity payments have begun and if there is a
death benefit payable under the Annuity option elected, the remaining values
must be distributed to your designated Plan 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 normally be made within seven calendar days after proof of
death, acceptable to us, and a request for payment are received at our Home
Office.
TAX STATUS
================================================================================
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 and does not consider any applicable state or other tax laws.
Current federal income tax 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, Participant or Plan Beneficiary may
depend upon the tax status of the individual concerned. Any person concerned
about these tax implications should consult a competent tax advisor 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.
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<PAGE>
Accordingly, 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 Section 403(b) plans,
Section 401(a) and Section 401(k) plans. The tax rules applicable to 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.
Participants as well as Plan Beneficiaries are cautioned that the rights of any
person to any benefits under the Contracts may be subject to the terms and
conditions of the plans themselves, in addition to the terms and conditions of
the Contracts issued in connection with such 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.
Minimum Distribution Requirements. The Code has required distribution
rules for Section 403(b), 401(a) and 401(k) Plans. Under 403(b) Plans,
distributions of amounts held as of December 31, 1986 must generally begin by
the end of the calendar year in which you attain age 75 or retire, if later.
However, special rules require that some or all of that balance be distributed
earlier if any distributions are taken in excess of the minimum required
amount. For all Participants, other than 5% owners, distributions under 401(a)
and 401(k) Plans, and distributions attributable to Contributions under Section
403(b) Plans on or after January 1, 1987 (including any earnings on the entire
Account Value after that date), must generally begin by April 1 of the calendar
year following the calendar year in which you attain age 70-1/2 or retire,
whichever occurs later. For 5% owners, such distributions must begin by April
1st of the calendar year following the calendar year in which you attain age
70-1/2.
In general, annuity payments must be distributed over your life or the
joint lives of you and your Plan Beneficiary, or over a period not greater than
your life expectancy or the joint life expectancies of you and your Plan
Beneficiary.
If you die after the required minimum distribution has commenced,
distributions to your Plan Beneficiary must be made at least as rapidly as
under the method of distribution in effect at the time of your death. However,
if the minimum required distribution is calculated each year based on your
single life expectancy or the joint life expectancies of you and your Plan
Beneficiary, the regulations for Code Section 401(a)(9) provide specific rules
for calculating the minimum required distributions at your death. For example,
if you have elected ECO with the calculation based on your single life
expectancy, and the life expectancy is recalculated each year, your
recalculated life expectancy becomes zero in the calendar year following your
death and the entire remaining interest must be distributed to your Plan
Beneficiary by December 31 of the year following your death. However, a spousal
Plan Beneficiary has certain rollover rights which can only be exercised in the
year of your death. The rules are complex and you should consult your tax
advisor before electing the method of calculation to satisfy the minimum
distribution requirements.
If you die before the required minimum distribution has commenced, your
entire interest must be distributed by December 31 of the calendar year
containing the fifth anniversary of the date of your death. Alternatively,
payments may be made over the life of the Plan Beneficiary or over a period not
extending beyond the life expectancy of the Plan Beneficiary, provided the
distribution begins by December 31 of the calendar year following the calendar
year of your death, or December 31 of the calendar year in which you would have
attained age 70-1/2.
If you fail to receive the minimum required distribution for any tax
year, a 50% excise tax is imposed on the required amount that was not
distributed.
Taxation of Distributions. All distributions will be taxed as they are
received unless you made a rollover
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<PAGE>
contribution of the distribution to another plan of the same type or to an
individual retirement annuity/account ("IRA") in accordance with the Code, or
unless you have made after-tax Contributions to the Plan, which are not taxed
upon distribution. The Code has specific rules that apply, depending on the type
of distribution received, if after-tax Contributions were made.
In general, payments received by your Plan Beneficiaries after your death
are taxed in the same manner as if you had received those payments, except that
a limited death benefit exclusion may apply to payments made for deaths
occurring on or before August 20, 1996.
Pension and annuity distributions generally are 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 may be provided
the opportunity to elect not to have tax withheld from distributions; however,
certain distributions from annuities are subject to a mandatory 20% federal
income tax withholding. If the Participant or Beneficiary is a non-resident
alien, any withholding will be governed by Code Section 1441 based on the
individual's citizenship, the country of domicile and treaty status. We will
report to the IRS the taxable portion of all distributions.
The Code imposes a 10% penalty tax on the taxable portion of any
distribution unless made when (a) you have attained age 59-1/2, (b) you have
become disabled, (c) you have died, (d) you have separated from service with
the plan sponsor at or after age 55, (e) the distribution amount is rolled over
into another plan of the same type or to an IRA in accordance with the terms of
the Code, or (f) the distribution amount is made in substantially equal
periodic payments (at least annually) over your life or life expectancy or the
joint lives or joint life expectancies of you and your Plan Beneficiary,
provided you have separated from service with the plan sponsor. 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.
Section 403(b) Plans. Under Code Section 403(b), contributions made by
public school systems or nonprofit healthcare organizations and other Section
501(c)(3) tax exempt organizations to purchase annuity contracts for their
employees are generally excludable from the gross income of the employee.
In order to be excludable from taxable income, total annual contributions
made by you and your employer cannot exceed either of two limits set by the
Code. The first limit, under Section 415, is generally the lesser of 25% of your
compensation or $30,000. Compensation means your compensation from the employer
sponsoring the Plan and, for years beginning after December 31, 1997, includes
any elective deferrals under Code Section 402(g) and any amounts not includible
in gross income under Code Section 125 or 457. The second limit, which is the
exclusion allowance under Section 403(b), is usually calculated according to a
formula that takes into account your length of employment, any pretax
contributions you and your employer have already made under the Plan, and any
pretax contributions to certain other retirement plans. These two limits apply
to your contributions as well as to any contributions made by your employer on
your behalf. There is an additional limit that specifically limits your salary
reduction contributions to generally no more than $10,000 annually (subject to
indexing); your own limit may be higher or lower, depending on certain
conditions. In addition, Purchase Payments will be excluded from a Participant's
gross income only if the Plan meets certain nondiscrimination requirements.
Code Section 403(b)(11) restricts the distribution under Section 403(b)
contracts of: (1) salary reduction contributions made after December 31, 1988;
(2) earnings on those contributions; and (3) earnings during such period on
amounts held as of December 31, 1988. Subject to the terms of the Plan,
distribution of those amounts may only occur upon death of the employee,
attainment of age 59-1/2, separation from service, disability, or financial
hardship. In addition, income attributable to salary reduction contributions may
not be distributed in the case of hardship.
If, pursuant to Revenue Ruling 90-24, the Company agrees to accept, under
any of the Contracts covered by this Prospectus, amounts transferred from a
Code Section 403(b)(7) custodial account, such amounts will be subject to the
withdrawal restrictions set forth in Code Section 403(b)(7)(A)(ii).
Generally, no amounts accumulated under the Contract will be taxable
prior to the time of actual distribution. However, the IRS has stated in
published
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rulings that a variable contract owner, including participants under Section
403(b) Plans, will be considered the owner of separate account assets if the
contract owner possesses incidents of investment control over the assets. In
these circumstances, income and gains from the separate account assets would be
currently includable in the variable contract owner's gross income. The Treasury
announced that guidance would be issued in the future regarding the extent to
which owners could direct their investments among subaccounts without being
treated as owners of the underlying assets of the separate account. It is
possible that the Treasury's position, when announced, may adversely affect the
tax treatment of existing contracts. The Company therefore reserves the right to
modify the Contract as necessary to attempt to prevent the owner from being
considered the federal tax owner of the assets of the Separate Account.
Section 401(a) and 401(k) Plans. Section 401(a) and 401(k) permits
certain employers to establish various types of retirement plans for employees,
and permits self-employed individuals to establish various types of retirement
plans for themselves and for their employees. These retirement plans may permit
the purchase of the Contracts to accumulate retirement savings under the plans.
Adverse tax consequences to the Plan, to the Participant or to both may result
if this Contract is assigned or transferred to any individual except to a
Participant as a means to provide benefit payments.
The Code imposes a maximum limit on annual Purchase Payments that may be
excluded from a Participant's gross income. Such limit must be calculated under
the Plan by the employer in accordance with Section 415 of the Code. This limit
is generally the lesser of 25% of your compensation or $30,000. Compensation
means your compensation from the employer sponsoring the Plan and, for years
beginning after December 31, 1997, includes any elective deferrals under Code
Section 402(g) and any amounts not includible in gross income under Code Section
125 or 457. The limit applies to your contributions as well as any contributions
made by your employer on your behalf. There is an additional limit that
specifically limits your salary reduction contributions under a 401(k) Plan to
generally no more than $10,000 annually (subject to indexing). Your own limits
may be higher or lower, depending on certain conditions. In addition, Purchase
Payments will be excluded from a Participant's gross income only if the Plan
meets certain nondiscrimination requirements.
Code Section 401(k) restricts distribution from the 401(k) Employee
Account and possibly all or a portion of the 401(k) Employer Account, if such
amounts are included in determining compliance with certain nondiscrimination
requirements under the Code.
Subject to the terms of the Plan, distribution of these restricted
amounts may only occur upon retirement, death of the employee, attainment of
age 59-1/2, disability, separation from service, financial hardship, termination
of the Plan in certain circumstances or upon disposition of substantially all
of the employer's assets or of a subsidiary. In addition, income attributable
to salary reduction contributions and credited on or after January 1, 1989 may
not be distributed in the case of hardship.
MISCELLANEOUS
================================================================================
VOTING RIGHTS
Each Contract Holder may direct us in the voting of shares at meetings of
shareholders of the appropriate Fund(s). The number of votes to which each
Contract Holder may give direction will be determined as of the record date.
The number of votes each Contract Holder is entitled to direct with
respect to a particular Fund during the Accumulation Period is equal to the
portion of the sum of all Current Values of a Contract attributable 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 a 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. Where the value of a Contract or
Valuation Reserve relates to more than one Fund, the calculation of votes will
be performed separately for each Fund.
Participants and Annuitants have a fully vested (100%) interest in the
value of the Individual Accounts which are credited with Participant
Contributions. Participants and Annuitants also have a nonforfeitable
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<PAGE>
(vested) right to the value of the Employer Account pursuant to the terms of,
and to the extent of their vested percentage under the Plan. Therefore, such
Participants and Annuitants may instruct the Contract Holder how to direct us to
cast the votes for the portion of the Current Value or Valuation Reserve
attributable to their Individual Accounts. Votes attributable to those
Participants and Annuitants who do not instruct the Contract Holder will be cast
by us in the same proportion as votes for which instructions have been received
by the Contract Holder. Votes attributable to Contract Holders who do not direct
us will be cast by us in the same proportion as the votes for which we have
received directions.
Contract Holders, or Participants and Annuitants entitled to instruct the
casting of votes, will receive a notice of each meeting of shareholders,
together with any proxy solicitation materials, and a statement of the number
of votes attributable to their participation under a Contract and stating the
right to instruct the Contract Holder how such votes shall be cast.
MODIFICATION OF THE CONTRACTS
Only an authorized officer of the Company may change the terms of this
Contract. The Company reserves the right to modify this Contract to meet the
requirements of applicable state and federal laws or regulations. The Company
will notify the Contract Holder and Participants in writing of any changes.
The Company may change the tables for determining the amount of Annuity
benefit payments attributable only to Contributions accepted after the
effective date of change, without Contract Holder consent. Such a change will
not become effective earlier than twelve months after (1) the effective date of
the Contract, or (2) the effective date of a previous change. The Company will
notify the Contract Holder in writing at least thirty (30) days before the
effective date of the change. The Company may not make changes which adversely
affect the Annuity benefits attributable to Contributions already made to the
Contract.
CONTRACT HOLDER INQUIRIES
A Contract Holder or a Participant may direct inquiries to a local
representative of the Distributor or may write directly to us. See page
Definitions - 2 "Home Office" for our address.
TELEPHONE TRANSFERS
Subject to the Contract Holder's approval, you automatically have the
right to make transfers among Funds by telephone. We have enacted procedures to
prevent abuses of Account transactions by telephone, including requiring the
use of a personal identification number (PIN) to execute transactions. You are
responsible for safeguarding your PIN, and for keeping Account information
confidential. Although the Company's failure to follow reasonable procedures
may result in the Company's liability for any losses due to unauthorized or
fraudulent telephone transfers, the Company will not be liable for following
instructions communicated by telephone which it reasonably believes to be
genuine. Any losses incurred pursuant to actions taken by the Company in
reliance on telephone instructions reasonably believed to be genuine shall be
borne by you. To ensure authenticity, we record all calls on the 800 line.
Note: All Account information and transactions permitted are subject to the
terms of the Plan(s).
PAYMENTS
Payments for withdrawal requests (subject to the limitations on
withdrawals from the Fixed Plus Account described in Appendices II and III)
will be made in accordance with SEC requirements, but normally not later than
seven calendar days after a properly completed disbursement form is received at
our Home Office or within seven calendar days of the date the withdrawal form
may specify. Payments may be delayed for: (a) any period in which the New York
Stock Exchange ("Exchange") is closed (other than customary weekend and holiday
closings) or in which trading on the Exchange is restricted; (b) any period in
which an emergency exists where disposal of securities held by the Funds is not
reasonably practicable or is not reasonably practicable for the value of the
assets of the Funds to be fairly determined; or (c) such other periods as the
SEC may by order permit for the protection of Contract Holders and
Participants. The conditions under which restricted trading or an emergency
exists shall be determined by the rules and regulations of the SEC.
TRANSFER OF OWNERSHIP; ASSIGNMENT
Unless contrary to applicable law, assignment of a Contract or an
Individual Account is prohibited.
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<PAGE>
LEGAL PROCEEDINGS
We know of no material legal proceedings pending to which the Separate
Account is a party, nor which would materially affect the Separate Account.
LEGAL MATTERS
The validity of the securities offered by this Prospectus has been passed
upon by Counsel to the Company.
YEAR 2000
As a healthcare and financial services enterprise, Aetna Inc. (referred to
collectively with its affiliates and subsidiaries as Aetna), is dependent on
computer systems and applications to conduct its business. Aetna has developed
and is currently executing a comprehensive risk-based plan designed to make its
computer systems, applications and facilities Year 2000 ready. The plan covers
four stages including (i) inventory, (ii) assessment, (iii) remediation and (iv)
testing and certification. At year end 1997, Aetna, including the Company, had
substantially completed the inventory and assessment stages. The remediation
process is currently underway and targeted for completion by December 31, 1998.
Testing and certification of these systems and applications are targeted for
completion by mid-1999. The costs of these efforts will not affect the Separate
Account.
The Company, its affiliates and the mutual funds that serve as investment
options for the Separate Account also have relationships with investment
advisers, broker dealers, transfer agents, custodians or other securities
industry participants or other service providers that are not affiliated with
Aetna. Aetna, including the Company, is initiating communication with its
critical external relationships to determine the extent to which Aetna may be
vulnerable to such parties' failure to resolve their own Year 2000 issues.
Where practicable Aetna and the Company will assess and attempt to mitigate
their risks with respect to the failure of these parties to be Year 2000 ready.
There can be no assurance that failure of third parties to complete adequate
preparations in a timely manner, and any resulting systems interruptions or
other consequences, would not have an adverse effect, directly or indirectly,
on the Separate Account, including, without limitation, its operation or the
valuation of its assets and units.
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<PAGE>
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
================================================================================
The following items are the contents of the Statement of Additional
Information:
General Information and History
Variable Annuity Account C
Offering and Purchase of Contracts
Performance Data
General
Average Annual Total Return Quotations
Annuity Payments
Sales Material
Independent Auditors
Financial Statements of the Separate Account
Financial Statements of Aetna Life Insurance and Annuity Company
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<PAGE>
APPENDIX I
GUARANTEED ACCUMULATION ACCOUNT
================================================================================
This Appendix is a summary of the Guaranteed Accumulation Account ("GAA") and is
not intended to replace the GAA prospectus. You should read the accompanying GAA
prospectus carefully before investing.
The GAA is a credited interest option available during the Accumulation
Period. Amounts allocated to the GAA are held by the Company as described in the
GAA prospectus.
The GAA is a credited interest option in which we guarantee stipulated
rates of interest for stated periods of time on amounts directed to the GAA.
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 over the period of one year. This option
guarantees the minimum interest rate specified in the Contract.
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 from more than three and up
to ten years.
Purchase Payments must remain in the GAA for the full Guaranteed Term to
receive the quoted interest rates. Withdrawals or transfers from a Guaranteed
Term before the end of that Guaranteed Term may be subject to a Market Value
Adjustment ("MVA"). For Contracts issued in New York, no MVA applies upon the
election of the Estate Conservation Option or the Systemic Withdrawal Option.
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 the Participant receiving an amount that is
less than the amount paid into the GAA.
As a Guaranteed Term matures, assets accumulating under the GAA may be (a)
transferred to a new Guaranteed Term, if available under the Contract, (b)
transferred to other available investment options, or (c) withdrawn. Amounts
withdrawn may be subject to a Withdrawal Fee, federal tax penalties or
mandatory income tax withholding and a Maintenance Fee.
By notifying us at least 30 days prior to the Annuity Date, you may elect
a variable annuity and have amounts which have been accumulating under the GAA
transferred to one or more of the Funds available during the Annuity Period.
GAA cannot be used as an investment option during the Annuity Period.
MORTALITY AND EXPENSE RISK CHARGE
The Company makes no deductions from the credited interest rate for
mortality and expense risks; these risks are considered in determining the
credited rate.
TRANSFERS
Transfers are permitted among Guaranteed Terms. However, amounts applied
to the 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 during the end of a Guaranteed Term,
unless such transfer is due to the maturity of the Guaranteed Term.
CONTRACT LOANS
Loans may not be made against amounts held in the GAA, although such value
is included in determining the value of the Individual Account against which a
loan may be made.
REINVESTMENT PRIVILEGE
If amounts are withdrawn from the GAA and reinvested, they 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. Any negative MVA amount applied to a withdrawal is not included in
the reinvestment.
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26
<PAGE>
APPENDIX II
FIXED PLUS ACCOUNT
================================================================================
After receipt of any required regulatory approval in a given state, all
Contracts issued in that state that offer the Fixed Plus Account will provide
for the availability of this Fixed Plus Account investment option.
The following summarizes material information concerning the Fixed Plus Account
that is offered as an option under the Contracts. Additional information may by
found in your certificate or Contract. Amounts allocated to the Fixed Plus
Accounts are held in the Company's general account that supports insurance and
annuity obligations. Interests in the Fixed Plus Account have not been
registered with the SEC in reliance on exemptions under the Securities Act of
1933, as amended. Disclosure in this Prospectus regarding the Fixed Plus
Account, however, may be subject to certain generally applicable provisions of
the federal securities laws relating to the accuracy and completeness of the
statements. Disclosure in this Appendix regarding the Fixed Plus Account has
not been reviewed by the SEC.
The Fixed Plus Account guarantees that amounts allocated to this option
will earn the minimum Fixed Plus interest rate specified in a Contract. We may
credit a higher interest rate from time to time. 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. Under this option, we assume the risk of investment gain or
loss by guaranteeing Net Contribution values and promising a minimum interest
rate and Annuity payment.
The Fixed Plus Account will reflect a compound interest rate credited by
us. The interest rate quoted is an annual effective yield. Amounts applied to
the Fixed Plus Account will earn the Fixed Plus interest rate in effect when
actually applied to the Fixed Plus Account. We make no deductions from the
credited interest rate for mortality and expense risks; these risks are
considered in determining the credited rate.
The Company reserves the right to limit Net Contribution(s) and/or
transfers to the Fixed Plus Account.
FIXED PLUS ACCOUNT WITHDRAWALS
The amount eligible for partial withdrawal is 20% of the amount held in
the Fixed Plus Account on the day our Home Office receives a written request,
reduced by any Fixed Plus Account withdrawals, transfers, loans or
annuitizations made in the prior 12 months. In calculating the 20% limit, we
reserve the right to include payments made due to the election of a Systematic
Distribution Option. The 20% limit is waived if the partial withdrawal is taken
pro rata from each investment option in which the Individual Account invests;
and is due to annuitization under a fixed lifetime or non-lifetime Annuity
option, or a variable lifetime Annuity option, or due to death. The waiver upon
death will only be exercised once and must occur within 6 months after the
Participant's date of death. In addition, subject to state regulatory approval,
the 20% limit is waived if the partial withdrawal is due to hardship from an
unforeseeable emergency, as defined by the Code, and if the following
conditions are met: i) the hardship is certified; ii) the partial withdrawal is
taken pro rata from each investment option in which the Individual Account
invests; iii) the amount is paid directly to you; and iv) the amount paid for
all withdrawals due to hardship during the previous 12-month period does not
exceed 10% of the average value of all Accounts during that same period.
If a full withdrawal is requested, we will pay any amounts held in the
Fixed Plus Account, with interest, in five annual payments equal to:
[bullet] One-fifth of the Fixed Plus Account Value on the day the request is
received, reduced by any Fixed Plus Account withdrawals, loans,
transfers or annuitizations made in the prior 12 months;
[bullet] One-fourth of the then remaining Fixed Plus Account Value 12 months
later;
[bullet] One-third of the then remaining Fixed Plus Account Value 12 months
later;
[bullet] One-half of the then remaining Fixed Plus Account Value 12 months
later; and
[bullet] The balance of the Fixed Plus Account Value 12 months later.
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<PAGE>
We will waive this payout provision for a Fixed Plus Account full surrender
if a full withdrawal is made due to:
(a) the Participant's death, before Annuity payments begin and request for
payment is received within 6 months after the Participant's date of
death;
(b) the election of a fixed lifetime or non-lifetime Annuity option or a
variable lifetime Annuity option;
(c) if the Fixed Plus Account Value is $3,500 or less and no withdrawals,
transfers, loan or annuitizations have been made from the Account within
the prior 12 months; or
(d) Subject to state regulatory approval, due to your separation from service
with the employer, provided that:
(1) the employer certifies that you have separated from service;
(2) the amount is withdrawn within one year from separation from service
or, if withdrawn after one year from separation from service, the
amount withdrawn is paid directly to you; and
(3) the amount paid for all withdrawals due to separation from service
during the previous 12-month period does not exceed 20% of the
average value of all Accounts under the Contract during that same
period.
Once we receive a request for a full withdrawal from an Account, no
further withdrawals or transfers will be permitted from the Fixed Plus Account.
A full withdrawal from the Fixed Plus Account may be canceled at any time
before the end of the five-payment period.
TRANSFERS AMONG INVESTMENT OPTIONS
The amount eligible for transfer from the Fixed Plus Account is 20% of the
amount held in the Fixed Plus Account on the day our Home Office receives a
written request, reduced by any Fixed Plus Account withdrawals, transfers, loans
or annuitizations made in the prior 12 months. In calculating the 20% limit, we
reserve the right to include payments made due to the election of a Systematic
Distribution Option. The 20% limit on transfers will be waived when the value in
the Fixed Plus Account is $1,000 or less.
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 Plus Account transferred to one or more of the Funds available
during the Annuity Period to provide lifetime Variable Annuity payments.
SWO
The Systematic Withdrawal Option may not be elected if you have requested
a Fixed Plus Account transfer or withdrawal within the prior 12-month period.
LOANS
Loans may be made from those Individual Account Current Values held in the
Fixed Plus Account. A 5% default charge may be assessed on amounts loaned from,
but not repaid to the Fixed Plus Account. The default charge will apply to
borrowed amounts that exceed the amount eligible for withdrawal at the time the
loan is made.
TRANSFER CREDITS
The Company provides a transfer credit in certain circumstances. See
"Transfer Credits." The Transfer Credit is a specified percentage of the assets
transferred to the Company under a Contract that remain in the Individual
Accounts for the period of time specified by the Company, plus the interest
that would have been credited had that amount been deposited in the Fixed Plus
Account on the first business day of the calendar month following its
calculation. The transfer credit is applied to the Current Value held in the
Fixed Plus Account.
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<PAGE>
APPENDIX III
FIXED PLUS ACCOUNT
(Applicable only in limited circumstances)
================================================================================
If the Fixed Plus Account is available under the Contract, the Fixed Plus
Account described below will be available as an investment option for all
Contributions under Contracts issued in a given state until the Company obtains
any required state regulatory approval to offer the Fixed Plus Account
investment option described in Appendix II. Subject to state regulatory
approval, certain Contracts under which the Fixed Plus Account described below
is an investment option may be endorsed to (i) provide that no new Contributions
or transfers may be made to the Fixed Plus Account described below; or (2) make
the Fixed Plus Account investment option described in Appendix II applicable to
all new and existing Contributions to the Fixed Plus Account.
The following summarizes material information concerning the Fixed Plus Account
that is offered as an option under the Contracts. Additional information may be
found in your Certificate or Contract. Amounts allocated to the Fixed Plus
Accounts are held in the Company's general account that supports insurance and
annuity obligations. Interests in the Fixed Plus Account have not been
registered with the SEC in reliance on exemptions under the Securities Act of
1933, as amended. Disclosure in this Prospectus regarding the Fixed Plus
Account, however, may be subject to certain generally applicable provisions of
the federal securities laws relating to the accuracy and completeness of the
statements. Disclosure in this Appendix regarding the Fixed Plus Account has
not been reviewed by the SEC.
The Fixed Plus Account guarantees that amounts allocated to this option
will earn the minimum Fixed Plus interest rate specified in a Contract. We may
credit a higher interest rate from time to time. 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. Under this option, we assume the risk of investment gain or
loss by guaranteeing Net Contribution values and promising a minimum interest
rate and Annuity payment.
The Fixed Plus Account will reflect a compound interest rate credited by
us. The interest rate quoted is an annual effective yield. Amounts applied to
the Fixed Plus Account will earn the Fixed Plus interest rate in effect when
actually applied to the Fixed Plus Account. We make no deductions from the
credited interest rate for mortality and expense risks; these risks are
considered in determining the credited rate.
Beginning on the tenth Individual Account Year, we will credit amounts
held in the Fixed Plus Account with an interest rate that is at least 0.25%
higher than the then-declared interest rate for the Fixed Plus Accounts for
Individual Accounts that have not reached their tenth anniversary.
The Company reserves the right to limit Net Contribution(s) and/or
transfers to the Fixed Plus Account.
FIXED PLUS ACCOUNT WITHDRAWALS
The amount eligible for partial withdrawal is 20% of the amount held in the
Fixed Plus Account on the day our Home Office receives a written request,
reduced by any Fixed Plus Account withdrawals, transfers, loans or
annuitizations made in the prior 12 months. In calculating the 20% limit, we
reserve the right to include payments made due to the election of a Systematic
Distribution Option. The 20% limit is waived if the partial withdrawal is taken
pro rata from each investment option the Individual Account invests and is due
to annuitization under a fixed lifetime or non-lifetime Annuity option; or a
variable lifetime Annuity option; or due to death. The waiver upon death will
only be exercised once and must occur within 6 months after the Participant's
date of death.
If a full withdrawal is requested, we will pay any amounts held in the
Fixed Plus Account, with interest, in five annual payments equal to:
[bullet] One-fifth of the Fixed Plus Account Value on the day the request is
received, reduced by any Fixed Plus Account withdrawals, loans,
transfers or annuitizations made in the prior 12 months;
[bullet] One-fourth of the then remaining Fixed Plus Account Value 12 months
later;
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<PAGE>
[bullet] One-third of the then remaining Fixed Plus Account Value 12 months
later;
[bullet] One-half of the then remaining Fixed Plus Account Value 12 months
later; and
[bullet] The balance of the Fixed Plus Account Value 12 months later.
We will waive this payout provision for a Fixed Plus Account full
surrender if a full withdrawal is made due to:
(a) the Participant's death, before Annuity payments begin and request for
payment is received within 6 months after the Participant's date of
death;
(b) the election of a fixed lifetime or non-lifetime Annuity option or a
variable lifetime Annuity option; or
(c) if the Fixed Plus Account Value is $3,500 or less and no withdrawals,
transfers, loans or annuitizations have been made from the Account within
the prior 12 months.
Once we receive a request for a full withdrawal from an Account, no
further withdrawals or transfers will be permitted from the Fixed Plus Account.
A full withdrawal from the Fixed Plus Account may be canceled at any time
before the end of the five-payment period.
TRANSFERS AMONG INVESTMENT OPTIONS
The amount eligible for transfer from the Fixed Plus Account is 20% of the
amount held in the Fixed Plus Account on the day our Home Office receives a
written request, reduced by any Fixed Plus Account withdrawals, transfers, loans
or annuitizations made in the prior 12 months. In calculating the 20% limit, we
reserve the right to include payments made due to the election of a Systematic
Distribution Option. The 20% limit on transfers will be waived when the value
in the Fixed Plus Account is $1,000 or less.
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 Plus Account transferred to one or more of the Funds available
during the Annuity Period to provide lifetime Variable Annuity payments.
SWO
The Systematic Withdrawal Option may not be elected if you have requested
a Fixed Plus Account transfer or withdrawal within the prior 12-month period.
LOANS
Loans may be made from those Individual Account Current Values held in the
Fixed Plus Account. A 5% default charge may be assessed on amounts loaned from,
but not repaid to the Fixed Plus Account. The default charge will apply to
borrowed amounts that exceed the amount eligible for withdrawal at the time the
loan is made.
TRANSFER CREDITS
The Company provides a transfer credit in certain circumstances. See
"Transfer Credits." The transfer credit is a specified percentage of the assets
transferred to the Company under a Contract that remain in the Individual
Accounts for the period of time specified by the Company, plus the interest
that would have been credited had that amount been deposited in the Fixed Plus
Account on the first business day of the calendar month following its
calculation. The transfer credit is applied to the Current Value held in the
Fixed Plus Account.
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<PAGE>
APPENDIX IV
FIXED ACCOUNT
(Applicable only in limited circumstances)
================================================================================
If made available under your Contract, the Fixed Account is an investment option
generally available only for amounts previously allocated to a Fixed Account
under contracts that are exchanged into one or more of the Contracts. See
Appendix VI. Generally, no new Contributions or transfers to the Fixed Account
will be allowed, unless otherwise provided in the Contact.
The following summarizes material information concerning the Fixed Account.
Additional information may be found in your certificate or Contract. Amounts
allocated to the Fixed Account are held in the Company's general account.
Interests in the Fixed Account have not been registered with the SEC in
reliance on exemptions under the Securities Act of 1933, as amended. Disclosure
in this Prospectus regarding the Fixed Account, however, may be subject to
certain generally applicable provisions of the Federal Securities Laws relating
to the accuracy and completeness of the statements. Disclosure in this Appendix
regarding the Fixed Account has not been reviewed by the SEC.
The Fixed Account guarantees that amounts allocated to this option will
earn the minimum interest rate specified in the Contract. (This minimum
interest rate cannot be changed by the Company.) We may credit a higher
interest rate from time to time. 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.
Under this option, we assume the risk of investment gain or loss by
guaranteeing Net Purchase Payment values and promising a minimum interest rate
and Annuity payment.
Under certain emergency conditions, we may defer payment of a Fixed
Account withdrawal value (a) for a period of up to 6 months or (b) as provided
by federal law.
In addition, if allowed by state law, we may pay any Fixed Account
withdrawal value in equal payments, with interest, over a period not to exceed
60 months, when:
(a) the Fixed Account withdrawal value for the Contract or for the total of
the Accounts under the Contract exceeds $250,000 on the day prior to the
withdrawal; and
(b) the sum of the current Fixed Account withdrawal and the total of all
Fixed Account withdrawals from the Contract or any Account under the
Contract within the past 12 calendar months exceeds 20% of the amount in
the Fixed Account on the day prior to the current withdrawal.
Interest, 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.
Amounts applied to the Fixed Account will earn the interest rate in effect
when actually applied to the Fixed Account.
MORTALITY AND EXPENSE RISK CHARGE
The Fixed Account will reflect a compound interest rate credited by us.
The interest rate quoted is an annual effective yield. 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 that may be transferred may vary at our discretion; however, it will
never be less than 10% of the amount held under the Fixed Account. Transfers to
the Fixed Plus Account will be permitted without regard to this limitation.
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<PAGE>
By notifying us at our Home Office at least 30 days before Annuity
payments begin, the Contract Holder, on your behalf, may elect to have amounts
which have been accumulating under the Fixed Account transferred to one or more
of the Funds available during the Annuity Period to provide Variable Annuity
payments.
CONTRACT LOANS
Loans may be made from those Individual Account Current Values held in the
Fixed Account.
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<PAGE>
APPENDIX V
EMPLOYEE APPOINTMENT OF EMPLOYER
AS AGENT UNDER AN ANNUITY CONTRACT
(FOR RETIREMENT PLUS CONTRACTS)
================================================================================
My employer has adopted a plan under Internal Revenue Code Sections 403(b)
or 401(a)/401(k) ("Plan") and has purchased an Aetna Life Insurance and Annuity
Company ("Company") Retirement Plus group variable annuity contract
("Contract") as the funding vehicle. Contributions under this Plan will be made
by me through salary reduction to an Employee Account, and by my employer to an
Employer Account.
By electing to participate in my employer's Plan, I voluntarily appoint my
employer, who is the Contract Holder, as my agent for the purposes of all
transactions under the Contract in accordance with the terms of the Plan. The
Company is not a party to the Plan and does not interpret the Plan provisions.
As a Participant in the Plan, I understand and agree to the following
terms and conditions:
[bullet] I own the value of my Employee Account subject to the restrictions
of Sections 403(b) or 401(k) and the terms of the Plan. Subject to
the terms of the vesting schedule in the Plan and the restrictions
of Sections 403(b) or 401(k), I have ownership in the value of my
Employer Account.
[bullet] I understand that the Company will process transactions only with my
employer's written direction to the Company. I agree to be bound by
my employer's interpretation of the Plan provisions and its written
direction to the Company.
[bullet] My employer may permit me to make investment selections under the
Employee Account and/or the Employer Account directly with the
Company under the terms of the Contract. Without my employer's
written permission, I will be unable to make any investment
selections under the Contract.
[bullet] On my behalf, my employer may request a loan in accordance with the
terms of the Contract and the provisions of the Plan. The Company
will make payment of the loan amount directly to me. I will be
responsible for making repayments directly to the Company in a
timely manner.
[bullet] In the event of my death, my employer is the named Beneficiary under
the terms of the Contract. I have the right to name a personal
Beneficiary as determined under the terms of the Plan and file that
Beneficiary election with my employer. It is my employer's
responsibility to direct the Company to properly pay any death
benefits.
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<PAGE>
APPENDIX VI
CONTRACTS ACQUIRED BY EXCHANGE
================================================================================
Certain holders of contracts issued by the Company may exchange their
contract(s) (the "Exchanged Contracts") for either or both of the Contracts
(the "Acquired Contract(s)"). The contracts eligible for exchange are existing
group tax-deferred annuity contracts issued by the Company of the same class as
the Contracts. The Company will not assess any charges or deductions in
connection with an exchange. See "Deferred Sales Charges" below. Upon an
exchange, the rights of the Exchanged Contract holder and participants under
the Exchanged Contract will be governed by the Acquired Contract(s).
DIFFERENCES BETWEEN EXCHANGED CONTRACTS AND ACQUIRED CONTRACTS
The terms of the Acquired Contracts vary from the Exchanged Contracts and
it may or may not be advantageous to make an exchange. Contract Holders and
Participants should review the Acquired Contract and an Exchanged Contract to
determine all the differences. Some differences relate to the minimum
guaranteed interest rates for the GAA, Fixed Plus Account and the Fixed
Account, the availability of the Fixed Account (see Appendix IV), the operation
of the Fixed Plus Account (see Appendix ll and Appendix III), the annuity
options, and the tables on which Annuity payments are based.
SPECIAL ACQUIRED CONTRACTS PROVISIONS
Except as follows, terms of the Acquired Contracts are identical to the
Contracts described in the Prospectus:
Transfer Credit
If a new Participant under an Acquired Contract transfers to the Company
assets not previously held by the Company, the new Participant may receive a
transfer credit. Participants of an Exchanged Contract in effect for less than
a period of time specified by the Company who transferred assets not previously
held by the Company may also receive a transfer credit. See "Transfer Credit."
Deferred Sales Charge
Under the Acquired Contract, new Participants of the Acquired Contract
will be subject to the Withdrawal Fee elected by the Contract Holder. See
"Charges and Fees During the Annuity Period". The Withdrawal Fee for existing
Participants of an Exchanged Contract, however, will be subject to the deferred
sales charges outlined below and as previously set forth in their Exchanged
Contract unless such charges are reduced or eliminated. See "Reduction or
Elimination of the Deferred Sales Charge" below. In general, deferred sales
charges may be deducted from amounts withdrawn during the first 10 Purchase
Payment Periods completed (if the Exchanged Contract is an Installment Purchase
Payment Contract) or 9 Account Years (if the Exchanged Contract is a Single
Purchase Payment Contract), as set forth in the table below. In some cases, the
deferred sales charge will be based on Account Years for both Installment
Purchase Payment Contracts and for Single Purchase Payment Contracts. Please
refer to the Contract endorsement relating to the exchange to obtain more
specific information. Consult the Exchanged Contract to determine whether it is
an Installment Payment Contract or Single Purchase Payment Contract. For
purposes of determining if a deferred sales charge applies under an Acquired
Contract, amounts received under an Exchanged Contract will be credited for the
period of time during which the amount was held under an Exchanged Contract.
The following tables reflect the deferred sales charge deduction as a
percentage of the amount withdrawn from the Funds, GAA and the Fixed Account:
- --------------------------------------------------------------------------------
34
<PAGE>
INSTALLMENT PURCHASE PAYMENT ACCOUNT:
Purchase Payment Deferred Sales
Periods Completed* Charge Deduction
- ----------------------------------------------
Less than 5 5%
5 or more but less than 7 4%
7 or more but less than 9 3%
9 or 10 2%
More than 10 0%
* For some Contracts, the deferred sales charge for Installment Purchase
Payment Accounts will be based on Account Years. Please refer to the
Contract endorsement relating to the exchange.
SINGLE PURCHASE PAYMENT ACCOUNT:
Account Years Deferred Sales
Completed 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%
The deduction for the deferred sales charge will not exceed 8.5% of the
total Purchase Payments actually made to an Individual Account.
The deferred sales charge will apply to withdrawals during the
Accumulation Period. It will apply during the Annuity Period if a non-lifetime
Annuity option is elected on a variable basis and the remaining value is
withdrawn before five years of Annuity payments have been completed.
Reduction or Elimination of the Deferred Sales Charge
For a particular Plan, we may reduce, waive or eliminate the deferred
sales charge for existing Participants of a Contract acquired by exchange. Any
reduction, waiver or elimination of such charges will reflect differences or
expected differences in the amounts of unrecovered distribution costs or
services of the types that the charges are intended to defray. When considering
whether to reduce or eliminate such charges or to grant such a waiver, we will
take into account factors which may include the following:
[bullet] the level of the Company's sales-related expenses;
[bullet] the specific distribution provisions of the Plan;
[bullet] the level of employer involvement in determining eligibility for
distributions under the Contract; and
[bullet] the Company's assessment of financial risk to the Company relating to
withdrawals.
We will determine any reduction, waiver or elimination of deferred sales
charges on a basis that is not unfairly discriminatory. We will make any
reduction in deferred sales charge according to the Company's rules in effect
at the time an application for an Acquired Contract is approved. We reserve the
right to change these rules from time to time.
FIXED PLUS ACCOUNT
For Acquired Contracts that allow investment in the Fixed Plus Account
described in Appendix III, there is a one-time election for Individual Accounts
established with Net Contributions from exchanged Company Contracts.
1) During a specified period beginning on the Contract effective date,
Participants will have a one-time opportunity to elect, by giving notice
to the Company, to have all amounts held in the Fixed Plus Account be
subject to the Fixed Plus Account rules described in Appendix II.
Participants who make the election described in the preceding sentence
will not be entitled to be credited, beginning on the tenth anniversary of
the effective date of their Individual Account, with an interest rate that
is higher than the then declared rate for Individual Accounts before the
tenth anniversary on any amounts held in the Fixed Plus Account (See
Appendix III). An election made pursuant to this provision may not be
revoked.
2) For Participants who do not make the election allowed under 1) above,
amounts attributable to their balances in the Fixed Plus Account on the
Contract effective date will remain subject to the rules described in
Appendix III until such time as they are transferred to another investment
option or withdrawn.
- --------------------------------------------------------------------------------
35
<PAGE>
APPENDIX VII
CONDENSED FINANCIAL INFORMATION
TABLE I
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 0.95%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
For Contracts with total Separate Account Charges of 0.95% the condensed
financial information presented below for each of the periods in the two-year
period ended December 31, 1997 (as applicable), is derived from the financial
statements of the Separate Account, which have been audited by KPMG Peat Marwick
LLP, independent auditors. The financial statements and the independent
auditors' report thereon for the year ended December 31, 1997 are included in
the Statement of Additional Information.
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
<S> <C> <C>
AETNA ASCENT VP
Value at beginning of period $11.472 $10.000(2)
Value at end of period $13.624 $11.472
Increase (decrease) in value of accumulation unit(1) 18.76% 14.72%(2)
Number of accumulation units outstanding at end of period 119,471 20,237
AETNA BALANCED VP, INC.
Value at beginning of period $10.902 $10.000(2)
Value at end of period $13.226 $10.902
Increase (decrease) in value of accumulation unit(1) 21.32% 9.02%(2)
Number of accumulation units outstanding at end of period 986,711 702,222
AETNA BOND VP
Value at beginning of period $10.503 $10.000(2)
Value at end of period $11.268 $10.503
Increase (decrease) in value of accumulation unit(1) 7.28% 5.03%(2)
Number of accumulation units outstanding at end of period 251,156 161,765
AETNA CROSSROADS VP
Value at beginning of period $11.146 $10.000(2)
Value at end of period $12.980 $11.146
Increase (decrease) in value of accumulation unit(1) 16.46% 11.46%(2)
Number of accumulation units outstanding at end of period 117,725 7,882
AETNA GROWTH VP
Value at beginning of period $12.787
Value at end of period $13.202
Increase (decrease) in value of accumulation unit(1) 3.25%(3)
Number of accumulation units outstanding at end of period 1,880
AETNA GROWTH AND INCOME VP
Value at beginning of period $11.469 $10.000(2)
Value at end of period $14.756 $11.469
Increase (decrease) in value of accumulation unit(1) 28.66% 14.69%(2)
Number of accumulation units outstanding at end of period 3,760,076 2,876,728
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $10.934 $10.000(4)
Value at end of period $14.500 $10.934
Increase (decrease) in value of accumulation unit(1) 32.62% 9.34%(4)
Number of accumulation units outstanding at end of period 62,360 2,697
AETNA LEGACY VP
Value at beginning of period $10.905 $10.000(2)
Value at end of period $12.369 $10.905
Increase (decrease) in value of accumulation unit(1) 13.43% 9.05%(2)
Number of accumulation units outstanding at end of period 47,726 61
AETNA MONEY MARKET VP
Value at beginning of period $10.277 $10.000(2)
Value at end of period $10.738 $10.277
Increase (decrease) in value of accumulation unit(1) 4.48% 2.77%(2)
Number of accumulation units outstanding at end of period 147,123 39,811
AETNA SMALL COMPANY VP
Value at beginning of period $13.119
Value at end of period $13.684
Increase (decrease) in value of accumulation unit(1) 4.31%(5)
Number of accumulation units outstanding at end of period 2,124
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $12.912
Value at end of period $13.290
Increase (decrease) in value of accumulation unit(1) 2.93%(5)
Number of accumulation units outstanding at end of period 587
</TABLE>
- --------------------------------------------------------------------------------
36
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997 1996
------------- -------------------
<S> <C> <C>
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $ 10.924 $10.000(2)
Value at end of period $ 12.994 $10.924
Increase (decrease) in value of accumulation unit(1) 18.95% 9.24%(2)
Number of accumulation units outstanding at end of period 93,905 19,808
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $ 10.819 $10.000(2)
Value at end of period $ 13.729 $10.819
Increase (decrease) in value of accumulation unit(1) 26.90% 8.19%(2)
Number of accumulation units outstanding at end of period 125,669 27,639
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $ 10.362 $10.000(2)
Value at end of period $ 12.674 $10.362
Increase (decrease) in value of accumulation unit(1) 22.31% 3.62%(2)
Number of accumulation units outstanding at end of period 150,612 54,133
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $ 10.664 $10.000(2)
Value at end of period $ 11.783 $10.664
Increase (decrease) in value of accumulation unit(1) 10.50% 6.64%(2)
Number of accumulation units outstanding at end of period 20,273 3,820
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $ 11.243 $10.000(2)
Value at end of period $ 13.825 $11.243
Increase (decrease) in value of accumulation unit(1) 22.97% 12.43%(2)
Number of accumulation units outstanding at end of period 266,396 95,199
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $ 9.510 $10.000(2)
Value at end of period $ 10.613 $ 9.510
Increase (decrease) in value of accumulation unit(1) 11.60% (4.90)%(2)
Number of accumulation units outstanding at end of period 416,100 125,232
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $ 11.105 $10.000(2)
Value at end of period $ 13.431 $11.105
Increase (decrease) in value of accumulation unit(1) 20.95% 11.05%(2)
Number of accumulation units outstanding at end of period 42,699 9,188
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $ 10.902 $10.000(4)
Value at end of period $ 12.069 $10.902
Increase (decrease) in value of accumulation unit(1) 10.70% 9.02%(4)
Number of accumulation units outstanding at end of period 29,665 1,402
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $ 10.891 $10.000(2)
Value at end of period $ 13.242 $10.891
Increase (decrease) in value of accumulation unit(1) 21.59% 8.91%(2)
Number of accumulation units outstanding at end of period 92,666 39,841
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $ 11.370 $10.000(2)
Value at end of period $ 13.757 $11.370
Increase (decrease) in value of accumulation unit(1) 21.00% 13.70%(2)
Number of accumulation units outstanding at end of period 555,448 151,935
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $ 11.383 $10.000(2)
Value at end of period $ 12.082 $11.383
Increase (decrease) in value of accumulation unit(1) 6.14% 13.83%(2)
Number of accumulation units outstanding at end of period 85,577 5,295
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
------------------
<S> <C>
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $10.062
Value at end of period $ 9.940
Increase (decrease) in value of accumulation unit(1) (1.21)%(6)
Number of accumulation units outstanding at end of period 795,375
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $ 8.897
Value at end of period $ 8.727
Increase (decrease) in value of accumulation unit(1) (1.90)%(6)
Number of accumulation units outstanding at end of period 484,407
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $12.296
Value at end of period $12.478
Increase (decrease) in value of accumulation unit(1) 1.47%(6)
Number of accumulation units outstanding at end of period 96,338
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $11.376
Value at end of period $11.522
Increase (decrease) in value of accumulation unit(1) 1.28%(6)
Number of accumulation units outstanding at end of period 351,150
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH
PORTFOLIO
Value at beginning of period $13.062
Value at end of period $13.332
Increase (decrease) in value of accumulation unit(1) 2.07%(6)
Number of accumulation units outstanding at end of period 238,562
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the result
by the beginning Accumulation Unit value.
(2) Reflects less than a full year of performance activity. The initial
Accumulation Unit value was established during May 1996 when the fund
became available under the Contract, when funds were first received in
this option or when the applicable daily asset charge was first utilized.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during August 1997.
(4) Reflects less than a full year of performance activity. The initial
Accumulation Unit value was established during August 1996 when the fund
became available under the Contract, when funds were first received in
this option or when the applicable daily asset charge was first utilized.
(5) Reflects less than a full year of performance activity. Funds were first
received in this option during December 1997.
(6) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
38
<PAGE>
CONDENSED FINANCIAL INFORMATION
TABLE II
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.00%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
For Contracts with total Separate Account Charges of 1.00% the condensed
financial information presented below for each of the periods in the two-year
period ended December 31, 1997 (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 for the year ended December 31, 1997 are
included in the Statement of Additional Information.
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
AETNA ASCENT VP
Value at beginning of period $11.468 $10.000(2)
Value at end of period $13.613 $11.468
Increase (decrease) in value of accumulation unit(1) 18.70% 14.68%(2)
Number of accumulation units outstanding at end of period 14,463 13
AETNA BALANCED VP, INC.
Value at beginning of period $13.054
Value at end of period $13.215
Increase (decrease) in value of accumulation unit(1) 1.23%(3)
Number of accumulation units outstanding at end of period 57,737
AETNA BOND VP
Value at beginning of period $10.500 $10.000(2)
Value at end of period $11.258 $10.500
Increase (decrease) in value of accumulation unit(1) 7.22% 5.00%(2)
Number of accumulation units outstanding at end of period 64,958 679
AETNA CROSSROADS VP
Value at beginning of period $12.945
Value at end of period $12.970
Increase (decrease) in value of accumulation unit(1) 0.19%(4)
Number of accumulation units outstanding at end of period 2,786
AETNA GROWTH AND INCOME VP
Value at beginning of period $11.465 $10.000(2)
Value at end of period $14.744 $11.465
Increase (decrease) in value of accumulation unit(1) 28.60% 14.65%(2)
Number of accumulation units outstanding at end of period 362,675 13,125
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $14.289
Value at end of period $14.491
Increase (decrease) in value of accumulation unit(1) 1.41%(5)
Number of accumulation units outstanding at end of period 29
AETNA LEGACY VP
Value at beginning of period $12.242
Value at end of period $12.358
Increase (decrease) in value of accumulation unit(1) 0.95%(6)
Number of accumulation units outstanding at end of period 64
AETNA MONEY MARKET VP
Value at beginning of period $10.274 $10.000(2)
Value at end of period $10.729 $10.274
Increase (decrease) in value of accumulation unit(1) 4.43% 2.74%(2)
Number of accumulation units outstanding at end of period 65,496 1,551
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $12.982
Value at end of period $12.983
Increase (decrease) in value of accumulation unit(1) 0.01%(7)
Number of accumulation units outstanding at end of period 25,620
</TABLE>
- --------------------------------------------------------------------------------
39
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $13.438
Value at end of period $13.718
Increase (decrease) in value of accumulation unit(1) 2.08%(7)
Number of accumulation units outstanding at end of period 29,808
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $10.358 $10.000(2)
Value at end of period $12.663 $10.358
Increase (decrease) in value of accumulation unit(1) 22.25% 3.58%(2)
Number of accumulation units outstanding at end of period 61,043 21
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $11.818
Value at end of period $11.774
Increase (decrease) in value of accumulation unit(1) (0.37)%(5)
Number of accumulation units outstanding at end of period 1,294
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $11.239 $10.000(2)
Value at end of period $13.814 $11.239
Increase (decrease) in value of accumulation unit(1) 22.91% 12.39%(2)
Number of accumulation units outstanding at end of period 139,417 20,020
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $ 9.507 $10.000(2)
Value at end of period $10.604 $ 9.507
Increase (decrease) in value of accumulation unit(1) 11.54% (4.93)%(2)
Number of accumulation units outstanding at end of period 106,350 17,055
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $13.490
Value at end of period $13.420
Increase (decrease) in value of accumulation unit(1) (0.52)%(7)
Number of accumulation units outstanding at end of period 5,846
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $10.857
Value at end of period $12.059
Increase (decrease) in value of accumulation unit(1) 11.07%(8)
Number of accumulation units outstanding at end of period 12,527
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $10.929
Value at end of period $13.231
Increase (decrease) in value of accumulation unit(1) 21.07%(8)
Number of accumulation units outstanding at end of period 17,098
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $11.366 $10.000(2)
Value at end of period $13.746 $11.366
Increase (decrease) in value of accumulation unit(1) 20.94% 13.66%(2)
Number of accumulation units outstanding at end of period 207,630 36,305
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $13.838
Value at end of period $12.072
Increase (decrease) in value of accumulation unit(1) (12.77)%(7)
Number of accumulation units outstanding at end of period 12,963
</TABLE>
- --------------------------------------------------------------------------------
40
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
------------------
<S> <C>
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $10.054
Value at end of period $ 9.932
Increase (decrease) in value of accumulation unit(1) (1.21)%(5)
Number of accumulation units outstanding at end of period 180,890
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $ 8.890
Value at end of period $ 8.720
Increase (decrease) in value of accumulation unit(1) (1.91)%(5)
Number of accumulation units outstanding at end of period 55,616
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $12.287
Value at end of period $12.467
Increase (decrease) in value of accumulation unit(1) 1.47%(5)
Number of accumulation units outstanding at end of period 68,968
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $11.367
Value at end of period $11.512
Increase (decrease) in value of accumulation unit(1) 1.27%(5)
Number of accumulation units outstanding at end of period 80,978
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH
PORTFOLIO
Value at beginning of period $13.052
Value at end of period $13.321
Increase (decrease) in value of accumulation unit(1) 2.06%(5)
Number of accumulation units outstanding at end of period 65,906
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the result
by the beginning Accumulation Unit value.
(2) Reflects less than a full year of performance activity. The initial
Accumulation Unit value was established during May 1996 when the fund
became available under the Contract, when funds were first received in
this option or when the applicable daily asset charge was first utilized.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during July 1997.
(4) Reflects less than a full year of performance activity. Funds were first
received in this option during September 1997.
(5) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
(6) Reflects less than a full year of performance activity. Funds were first
received in this option during February 1997.
(7) Reflects less than a full year of performance activity. Funds were first
received in this option during October 1997.
(8) Reflects less than a full year of performance activity. Funds were first
received in this option during January 1997.
- --------------------------------------------------------------------------------
41
<PAGE>
CONDENSED FINANCIAL INFORMATION
TABLE III
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.05%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
For Contracts with total Separate Account Charges of 1.05% the condensed
financial information presented below for the period ended December 31, 1997, 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 for the year
ended December 31, 1997 are included in the Statement of Additional Information.
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
AETNA ASCENT VP
Value at beginning of period $11.629
Value at end of period $13.602
Increase (decrease) in value of accumulation unit(1) 16.96%(2)
Number of accumulation units outstanding at end of period 24,508
AETNA BALANCED VP, INC.
Value at beginning of period $12.677
Value at end of period $13.204
Increase (decrease) in value of accumulation unit(1) 4.16%(3)
Number of accumulation units outstanding at end of period 4,205
AETNA BOND VP
Value at beginning of period $10.587
Value at end of period $11.249
Increase (decrease) in value of accumulation unit(1) 6.25%(2)
Number of accumulation units outstanding at end of period 11,619
AETNA CROSSROADS VP
Value at beginning of period $11.292
Value at end of period $12.959
Increase (decrease) in value of accumulation unit(1) 14.76%(2)
Number of accumulation units outstanding at end of period 12,847
AETNA GROWTH VP
Value at beginning of period $13.184
Value at end of period $13.192
Increase (decrease) in value of accumulation unit(1) 0.06%(4)
Number of accumulation units outstanding at end of period 31
AETNA GROWTH AND INCOME VP
Value at beginning of period $12.312
Value at end of period $14.732
Increase (decrease) in value of accumulation unit(1) 19.66%(2)
Number of accumulation units outstanding at end of period 44,425
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $14.043
Value at end of period $14.481
Increase (decrease) in value of accumulation unit(1) 3.12%(3)
Number of accumulation units outstanding at end of period 1,083
AETNA LEGACY VP
Value at beginning of period $11.009
Value at end of period $12.348
Increase (decrease) in value of accumulation unit(1) 12.16%(2)
Number of accumulation units outstanding at end of period 6,221
AETNA MONEY MARKET VP
Value at beginning of period $10.322
Value at end of period $10.720
Increase (decrease) in value of accumulation unit(1) 3.86%(2)
Number of accumulation units outstanding at end of period 1,863
AETNA SMALL COMPANY VP
Value at beginning of period $12.485
Value at end of period $13.674
Increase (decrease) in value of accumulation unit(1) 9.52%(3)
Number of accumulation units outstanding at end of period 125
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $12.796
Value at end of period $13.281
Increase (decrease) in value of accumulation unit(1) 3.79%(4)
Number of accumulation units outstanding at end of period 17
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $12.278
Value at end of period $12.972
Increase (decrease) in value of accumulation unit(1) 5.65%(3)
Number of accumulation units outstanding at end of period 766
</TABLE>
- --------------------------------------------------------------------------------
42
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $11.435
Value at end of period $13.706
Increase (decrease) in value of accumulation unit(1) 19.86%(2)
Number of accumulation units outstanding at end of period 34,010
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $10.988
Value at end of period $12.653
Increase (decrease) in value of accumulation unit(1) 15.16%(2)
Number of accumulation units outstanding at end of period 22,425
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $10.798
Value at end of period $11.764
Increase (decrease) in value of accumulation unit(1) 8.95%(2)
Number of accumulation units outstanding at end of period 3,858
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $12.865
Value at end of period $13.802
Increase (decrease) in value of accumulation unit(1) 7.28%(3)
Number of accumulation units outstanding at end of period 9,650
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $ 8.894
Value at end of period $10.596
Increase (decrease) in value of accumulation unit(1) 19.14%(2)
Number of accumulation units outstanding at end of period 38,785
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $11.587
Value at end of period $13.409
Increase (decrease) in value of accumulation unit(1) 15.73%(2)
Number of accumulation units outstanding at end of period 14,527
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $11.571
Value at end of period $12.049
Increase (decrease) in value of accumulation unit(1) 4.13%(3)
Number of accumulation units outstanding at end of period 700
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $13.078
Value at end of period $13.220
Increase (decrease) in value of accumulation unit(1) 1.08%(3)
Number of accumulation units outstanding at end of period 7,726
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $12.089
Value at end of period $13.735
Increase (decrease) in value of accumulation unit(1) 13.61%(2)
Number of accumulation units outstanding at end of period 59,673
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $12.407
Value at end of period $12.062
Increase (decrease) in value of accumulation unit(1) (2.78)%(3)
Number of accumulation units outstanding at end of period 791
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $10.046
Value at end of period $ 9.923
Increase (decrease) in value of accumulation unit(1) (1.22)%(5)
Number of accumulation units outstanding at end of period 26,577
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $ 8.883
Value at end of period $ 8.713
Increase (decrease) in value of accumulation unit(1) (1.91)%(5)
Number of accumulation units outstanding at end of period 1,465
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $12.277
Value at end of period $12.457
Increase (decrease) in value of accumulation unit(1) 1.47%(5)
Number of accumulation units outstanding at end of period 1,514
</TABLE>
- --------------------------------------------------------------------------------
43
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $11.358
Value at end of period $11.503
Increase (decrease) in value of accumulation unit(1) 1.27%(5)
Number of accumulation units outstanding at end of period 8,780
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH
PORTFOLIO
Value at beginning of period $13.042
Value at end of period $13.310
Increase (decrease) in value of accumulation unit(1) 2.06%(5)
Number of accumulation units outstanding at end of period 18,429
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the result
by the beginning Accumulation Value unit.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during February 1997.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during July 1997.
(4) Reflects less than a full year of performance activity. Funds were first
received in this option during August 1997.
(5) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
44
<PAGE>
CONDENSED FINANCIAL INFORMATION
TABLE IV
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.10%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
For Contracts with total Separate Account Charges of 1.10% the condensed
financial information presented below for the period ended December 31, 1997, 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 for the year
ended December 31, 1997 are included in the Statement of Additional Information.
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
AETNA ASCENT VP
Value at beginning of period $13.275
Value at end of period $13.590
Increase (decrease) in value of accumulation unit(1) 2.37%(2)
Number of accumulation units outstanding at end of period 42
AETNA BALANCED VP, INC.
Value at beginning of period $12.915
Value at end of period $13.194
Increase (decrease) in value of accumulation unit(1) 2.16%(2)
Number of accumulation units outstanding at end of period 294
AETNA BOND VP
Value at beginning of period $11.219
Value at end of period $11.240
Increase (decrease) in value of accumulation unit(1) 0.19%(3)
Number of accumulation units outstanding at end of period 6
AETNA CROSSROADS VP
Value at beginning of period $12.904
Value at end of period $12.949
Increase (decrease) in value of accumulation unit(1) 0.34%(2)
Number of accumulation units outstanding at end of period 14
AETNA GROWTH VP
Value at beginning of period $13.325
Value at end of period $13.188
Increase (decrease) in value of accumulation unit(1) (1.03)%(2)
Number of accumulation units outstanding at end of period 37
AETNA GROWTH AND INCOME VP
Value at beginning of period $14.520
Value at end of period $14.720
Increase (decrease) in value of accumulation unit(1) 1.37%(2)
Number of accumulation units outstanding at end of period 570
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $14.078
Value at end of period $14.472
Increase (decrease) in value of accumulation unit(1) 2.80%(2)
Number of accumulation units outstanding at end of period 215
AETNA LEGACY VP
Value at beginning of period $12.223
Value at end of period $12.338
Increase (decrease) in value of accumulation unit(1) 0.94%(4)
Number of accumulation units outstanding at end of period 851
AETNA MONEY MARKET VP
Value at beginning of period $10.663
Value at end of period $10.711
Increase (decrease) in value of accumulation unit(1) 0.45%(2)
Number of accumulation units outstanding at end of period 145
AETNA SMALL COMPANY VP
Value at beginning of period $13.331
Value at end of period $13.669
Increase (decrease) in value of accumulation unit(1) 2.54%(2)
Number of accumulation units outstanding at end of period 650
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $12.952
Value at end of period $13.276
Increase (decrease) in value of accumulation unit(1) 2.50%(2)
Number of accumulation units outstanding at end of period 46
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $13.343
Value at end of period $13.695
Increase (decrease) in value of accumulation unit(1) 2.64%(2)
Number of accumulation units outstanding at end of period 589
</TABLE>
- --------------------------------------------------------------------------------
45
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
------------------
<S> <C>
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $12.740
Value at end of period $12.643
Increase (decrease) in value of accumulation unit(1) (0.77)%(2)
Number of accumulation units outstanding at end of period 416
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $11.651
Value at end of period $11.754
Increase (decrease) in value of accumulation unit(1) 0.89%(3)
Number of accumulation units outstanding at end of period 5
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $13.502
Value at end of period $13.791
Increase (decrease) in value of accumulation unit(1) 2.14%(2)
Number of accumulation units outstanding at end of period 110
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $10.337
Value at end of period $10.587
Increase (decrease) in value of accumulation unit(1) 2.42%(2)
Number of accumulation units outstanding at end of period 269
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $13.138
Value at end of period $13.398
Increase (decrease) in value of accumulation unit(1) 1.98%(2)
Number of accumulation units outstanding at end of period 256
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $11.872
Value at end of period $12.039
Increase (decrease) in value of accumulation unit(1) 1.41%(2)
Number of accumulation units outstanding at end of period 12
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $12.995
Value at end of period $13.209
Increase (decrease) in value of accumulation unit(1) 1.65%(2)
Number of accumulation units outstanding at end of period 498
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $13.565
Value at end of period $13.724
Increase (decrease) in value of accumulation unit(1) 1.17%(2)
Number of accumulation units outstanding at end of period 971
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $10.039
Value at end of period $ 9.915
Increase (decrease) in value of accumulation unit(1) (1.23)%(2)
Number of accumulation units outstanding at end of period 16
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the result
by the beginning Accumulation Unit value.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during December 1997.
(4) Reflects less than a full year of performance activity. Funds were first
received in this option during January 1997.
- --------------------------------------------------------------------------------
46
<PAGE>
CONDENSED FINANCIAL INFORMATION
TABLE V
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.15%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
For Contracts with total Separate Account Charges of 1.15% the condensed
financial information presented below for each of the periods in the two-year
period ended December 31, 1997 (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 for the year ended December 31, 1997 are
included in the Statement of Additional Information.
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
AETNA ASCENT VP
Value at beginning of period $11.525
Value at end of period $13.579
Increase (decrease) in value of accumulation unit(1) 17.82%(2)
Number of accumulation units outstanding at end of period 6,392
AETNA BALANCED VP, INC.
Value at beginning of period $11.130
Value at end of period $13.183
Increase (decrease) in value of accumulation unit(1) 18.44%(2)
Number of accumulation units outstanding at end of period 250,060
AETNA BOND VP
Value at beginning of period $10.476
Value at end of period $11.231
Increase (decrease) in value of accumulation unit(1) 7.20%(2)
Number of accumulation units outstanding at end of period 89,517
AETNA CROSSROADS VP
Value at beginning of period $11.182
Value at end of period $12.938
Increase (decrease) in value of accumulation unit(1) 15.70%(2)
Number of accumulation units outstanding at end of period 7,129
AETNA GROWTH VP
Value at beginning of period $13.348
Value at end of period $13.183
Increase (decrease) in value of accumulation unit(1) (1.24)%(3)
Number of accumulation units outstanding at end of period 118
AETNA GROWTH AND INCOME VP
Value at beginning of period $11.805
Value at end of period $14.708
Increase (decrease) in value of accumulation unit(1) 24.59%(2)
Number of accumulation units outstanding at end of period 508,938
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $11.663
Value at end of period $14.463
Increase (decrease) in value of accumulation unit(1) 24.01%(2)
Number of accumulation units outstanding at end of period 5,517
AETNA LEGACY VP
Value at beginning of period $10.927
Value at end of period $12.328
Increase (decrease) in value of accumulation unit(1) 12.82%(2)
Number of accumulation units outstanding at end of period 21,027
AETNA MONEY MARKET VP
Value at beginning of period $10.264 $10.000(4)
Value at end of period $10.702 $10.264
Increase (decrease) in value of accumulation unit(1) 4.27% 2.64%(4)
Number of accumulation units outstanding at end of period 44,265 9,856
AETNA SMALL COMPANY VP
Value at beginning of period $13.709
Value at end of period $13.664
Increase (decrease) in value of accumulation unit(1) (0.33)%(3)
Number of accumulation units outstanding at end of period 119
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $13.244
Value at end of period $13.271
Increase (decrease) in value of accumulation unit(1) 0.20%(3)
Number of accumulation units outstanding at end of period 47
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $11.071
Value at end of period $12.951
Increase (decrease) in value of accumulation unit(1) 16.98%(2)
Number of accumulation units outstanding at end of period 37,416
</TABLE>
- --------------------------------------------------------------------------------
47
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $10.805 $10.000(4)
Value at end of period $13.684 $10.805
Increase (decrease) in value of accumulation unit(1) 26.64% 8.05%(4)
Number of accumulation units outstanding at end of period 40,977 4,215
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $10.348 $10.000(4)
Value at end of period $12.632 $10.348
Increase (decrease) in value of accumulation unit(1) 22.07% 3.48%(4)
Number of accumulation units outstanding at end of period 43,953 4,472
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $10.662
Value at end of period $11.745
Increase (decrease) in value of accumulation unit(1) 10.15%(2)
Number of accumulation units outstanding at end of period 6,203
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $11.228 $10.000(4)
Value at end of period $13.780 $11.228
Increase (decrease) in value of accumulation unit(1) 22.72% 12.28%(4)
Number of accumulation units outstanding at end of period 56,042 4,169
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $ 9.498 $10.000(4)
Value at end of period $10.578 $ 9.498
Increase (decrease) in value of accumulation unit(1) 11.38% (5.02)%(4)
Number of accumulation units outstanding at end of period 77,340 4,932
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $11.090 $10.000(4)
Value at end of period $13.387 $11.090
Increase (decrease) in value of accumulation unit(1) 20.71% 10.90%(4)
Number of accumulation units outstanding at end of period 15,461 13
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $10.882
Value at end of period $12.029
Increase (decrease) in value of accumulation unit(1) 10.54%(2)
Number of accumulation units outstanding at end of period 4,140
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $11.138
Value at end of period $13.198
Increase (decrease) in value of accumulation unit(1) 18.49%(2)
Number of accumulation units outstanding at end of period 22,179
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $11.355 $10.000(4)
Value at end of period $13.712 $11.355
Increase (decrease) in value of accumulation unit(1) 20.76% 13.55%(4)
Number of accumulation units outstanding at end of period 77,286 9
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $11.865
Value at end of period $12.042
Increase (decrease) in value of accumulation unit(1) 1.50%(2)
Number of accumulation units outstanding at end of period 12,454
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $10.031
Value at end of period $ 9.907
Increase (decrease) in value of accumulation unit(1) (1.23)%(5)
Number of accumulation units outstanding at end of period 165,668
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $ 8.869
Value at end of period $ 8.698
Increase (decrease) in value of accumulation unit(1) (1.92)%(5)
Number of accumulation units outstanding at end of period 122,863
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $12.258
Value at end of period $12.437
Increase (decrease) in value of accumulation unit(1) 1.46%(5)
Number of accumulation units outstanding at end of period 79,382
</TABLE>
- --------------------------------------------------------------------------------
48
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $11.341
Value at end of period $11.484
Increase (decrease) in value of accumulation unit(1) 1.26%(5)
Number of accumulation units outstanding at end of period 77,528
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH
PORTFOLIO
Value at beginning of period $13.021
Value at end of period $13.288
Increase (decrease) in value of accumulation unit(1) 2.05%(5)
Number of accumulation units outstanding at end of period 42,110
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the result
by the beginning Accumulation Unit value.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during January 1997.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during September 1997.
(4) Reflects less than a full year of performance activity. The initial
Accumulation Units value was established during May 1996 when the fund
became available under the Contract, when funds were first received in this
option or when the applicable daily asset charge was first utilized.
(5) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
49
<PAGE>
CONDENSED FINANCIAL INFORMATION
TABLE VI
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.20%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
For Contracts with total Separate Account Charges of 1.20% the condensed
financial information presented below for the period ended December 31, 1997, 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 for the year
ended December 31, 1997 are included in the Statement of Additional Information.
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
AETNA GROWTH AND INCOME VP
Value at beginning of period $13.746
Value at end of period $14.696
Increase (decrease) in value of accumulation unit(1) 6.91%(2)
Number of accumulation units outstanding at end of period 25
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $13.642
Value at end of period $14.453
Increase (decrease) in value of accumulation unit(1) 5.95%(2)
Number of accumulation units outstanding at end of period 24
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $12.889
Value at end of period $13.768
Increase (decrease) in value of accumulation unit(1) 6.82%(2)
Number of accumulation units outstanding at end of period 27
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $13.856
Value at end of period $13.701
Increase (decrease) in value of accumulation unit(1) (1.12)%(2)
Number of accumulation units outstanding at end of period 27
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the result
by the beginning Accumulation Unit value.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during July 1997.
- --------------------------------------------------------------------------------
50
<PAGE>
CONDENSED FINANCIAL INFORMATION
TABLE VII
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.25%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
For Contracts with total Separate Account Charges of 1.25% the condensed
financial information presented below for the period ended December 31, 1997, 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 for the year
ended December 31, 1997 are included in the Statement of Additional Information.
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
AETNA ASCENT VP
Value at beginning of period $12.564
Value at end of period $13.557
Increase (decrease) in value of accumulation unit(1) 7.91%(2)
Number of accumulation units outstanding at end of period 253
AETNA BALANCED VP, INC.
Value at beginning of period $11.921
Value at end of period $13.161
Increase (decrease) in value of accumulation unit(1) 10.40%(2)
Number of accumulation units outstanding at end of period 133
AETNA CROSSROADS VP
Value at beginning of period $12.024
Value at end of period $12.917
Increase (decrease) in value of accumulation unit(1) 7.42%(2)
Number of accumulation units outstanding at end of period 93
AETNA GROWTH AND INCOME VP
Value at beginning of period $12.851
Value at end of period $14.684
Increase (decrease) in value of accumulation unit(1) 14.26%(3)
Number of accumulation units outstanding at end of period 1,646
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $14.070
Value at end of period $14.444
Increase (decrease) in value of accumulation unit(1) 2.66%(4)
Number of accumulation units outstanding at end of period 10
AETNA LEGACY VP
Value at beginning of period $12.362
Value at end of period $12.308
Increase (decrease) in value of accumulation unit(1) (0.44)%(5)
Number of accumulation units outstanding at end of period 2
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $12.790
Value at end of period $12.930
Increase (decrease) in value of accumulation unit(1) 1.09%(6)
Number of accumulation units outstanding at end of period 6
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $13.299
Value at end of period $13.661
Increase (decrease) in value of accumulation unit(1) 2.73%(6)
Number of accumulation units outstanding at end of period 6
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $11.704
Value at end of period $12.612
Increase (decrease) in value of accumulation unit(1) 7.76%(2)
Number of accumulation units outstanding at end of period 214
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $12.512
Value at end of period $11.726
Increase (decrease) in value of accumulation unit(1) (6.28)%(4)
Number of accumulation units outstanding at end of period 22
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $11.902
Value at end of period $13.757
Increase (decrease) in value of accumulation unit(1) 15.59%(3)
Number of accumulation units outstanding at end of period 390
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $ 9.646
Value at end of period $10.561
Increase (decrease) in value of accumulation unit(1) 9.48%(2)
Number of accumulation units outstanding at end of period 262
</TABLE>
- --------------------------------------------------------------------------------
51
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
------------------
<S> <C>
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $13.270
Value at end of period $13.177
Increase (decrease) in value of accumulation unit(1) (0.70)%(4)
Number of accumulation units outstanding at end of period 32
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $13.125
Value at end of period $13.690
Increase (decrease) in value of accumulation unit(1) 4.30%(2)
Number of accumulation units outstanding at end of period 273
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $11.717
Value at end of period $12.022
Increase (decrease) in value of accumulation unit(1) 2.60%(2)
Number of accumulation units outstanding at end of period 35
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $10.015
Value at end of period $ 9.891
Increase (decrease) in value of accumulation unit(1) (1.24)%(6)
Number of accumulation units outstanding at end of period 99
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $11.323
Value at end of period $11.465
Increase (decrease) in value of accumulation unit(1) 1.25%(6)
Number of accumulation units outstanding at end of period 189
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the result
by the beginning Accumulation Unit value.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during June 1997.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during May 1997.
(4) Reflects less than a full year of performance activity. Funds were first
received in this option during September 1997.
(5) Reflects less than a full year of performance activity. Funds were first
received in this option during October 1997.
(6) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
52
<PAGE>
CONDENSED FINANCIAL INFORMATION
TABLE VIII
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.30%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
For Contracts with total Separate Account Charges of 1.30% the condensed
financial information presented below for the period ended December 31, 1997, 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 for the year
ended December 31, 1997 are included in the Statement of Additional Information.
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
AETNA ASCENT VP
Value at beginning of period $11.759
Value at end of period $13.546
Increase (decrease) in value of accumulation unit(1) 15.20%(2)
Number of accumulation units outstanding at end of period 855
AETNA BALANCED VP, INC.
Value at beginning of period $11.717
Value at end of period $13.150
Increase (decrease) in value of accumulation unit(1) 12.23%(3)
Number of accumulation units outstanding at end of period 459
AETNA BOND VP
Value at beginning of period $10.974
Value at end of period $11.203
Increase (decrease) in value of accumulation unit(1) 2.09%(2)
Number of accumulation units outstanding at end of period 279
AETNA CROSSROADS VP
Value at beginning of period $11.380
Value at end of period $12.906
Increase (decrease) in value of accumulation unit(1) 13.41%(2)
Number of accumulation units outstanding at end of period 641
AETNA GROWTH AND INCOME VP
Value at beginning of period $12.519
Value at end of period $14.672
Increase (decrease) in value of accumulation unit(1) 17.20%(2)
Number of accumulation units outstanding at end of period 3,082
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $11.470
Value at end of period $14.435
Increase (decrease) in value of accumulation unit(1) 25.85%(4)
Number of accumulation units outstanding at end of period 8,665
AETNA LEGACY VP
Value at beginning of period $11.401
Value at end of period $12.298
Increase (decrease) in value of accumulation unit(1) 7.86%(3)
Number of accumulation units outstanding at end of period 74
AETNA MONEY MARKET VP
Value at beginning of period $10.358
Value at end of period $10.676
Increase (decrease) in value of accumulation unit(1) 3.07%(4)
Number of accumulation units outstanding at end of period 8,302
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $11.742
Value at end of period $12.919
Increase (decrease) in value of accumulation unit(1) 10.02%(3)
Number of accumulation units outstanding at end of period 44
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $10.942
Value at end of period $13.650
Increase (decrease) in value of accumulation unit(1) 24.75%(4)
Number of accumulation units outstanding at end of period 7,817
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $10.724
Value at end of period $12.601
Increase (decrease) in value of accumulation unit(1) 17.51%(2)
Number of accumulation units outstanding at end of period 2,031
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $11.785
Value at end of period $11.716
Increase (decrease) in value of accumulation unit(1) (0.58)%(2)
Number of accumulation units outstanding at end of period 348
</TABLE>
- --------------------------------------------------------------------------------
53
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $11.031
Value at end of period $13.746
Increase (decrease) in value of accumulation unit(1) 24.61%(4)
Number of accumulation units outstanding at end of period 7,728
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $ 8.944
Value at end of period $10.552
Increase (decrease) in value of accumulation unit(1) 17.98%(2)
Number of accumulation units outstanding at end of period 2,527
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $12.113
Value at end of period $13.354
Increase (decrease) in value of accumulation unit(1) 10.24%(3)
Number of accumulation units outstanding at end of period 369
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $10.962
Value at end of period $13.166
Increase (decrease) in value of accumulation unit(1) 20.11%(4)
Number of accumulation units outstanding at end of period 637
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $11.961
Value at end of period $13.679
Increase (decrease) in value of accumulation unit(1) 14.36%(4)
Number of accumulation units outstanding at end of period 2,018
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $10.678
Value at end of period $12.012
Increase (decrease) in value of accumulation unit(1) 12.49%(4)
Number of accumulation units outstanding at end of period 5
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $10.007
Value at end of period $ 9.883
Increase (decrease) in value of accumulation unit(1) (1.25)%(5)
Number of accumulation units outstanding at end of period 3,595
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $ 8.848
Value at end of period $ 8.677
Increase (decrease) in value of accumulation unit(1) (1.94)%(5)
Number of accumulation units outstanding at end of period 1,788
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $12.230
Value at end of period $12.406
Increase (decrease) in value of accumulation unit(1) 1.44%(5)
Number of accumulation units outstanding at end of period 237
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $11.314
Value at end of period $11.456
Increase (decrease) in value of accumulation unit(1) 1.25%(5)
Number of accumulation units outstanding at end of period 200
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH
PORTFOLIO
Value at beginning of period $12.991
Value at end of period $13.256
Increase (decrease) in value of accumulation unit(1) 2.04%(5)
Number of accumulation units outstanding at end of period 1,649
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the result
by the beginning Accumulation Unit value.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during May 1997.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during June 1997.
(4) Reflects less than a full year of performance activity. Funds were first
received in this option during April 1997.
(5) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
54
<PAGE>
CONDENSED FINANCIAL INFORMATION
TABLE IX
FOR CONTRACTS WITH TOTAL SEPARATE ACCOUNT CHARGES OF 1.50%
(Selected data for accumulation units outstanding throughout each period)
================================================================================
For Contracts with total Separate Account Charges of 1.50% the condensed
financial information presented below for each of the periods in the two-year
period ended December 31, 1997 (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 for the year ended December 31, 1997 are
included in the Statement of Additional Information.
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
AETNA ASCENT VP
Value at beginning of period $11.422
Value at end of period $13.502
Increase (decrease) in value of accumulation unit(1) 18.20%(2)
Number of accumulation units outstanding at end of period 9,985
AETNA BALANCED VP, INC.
Value at beginning of period $11.009
Value at end of period $13.107
Increase (decrease) in value of accumulation unit(1) 19.05%(2)
Number of accumulation units outstanding at end of period 7,997
AETNA BOND VP
Value at beginning of period $10.442
Value at end of period $11.166
Increase (decrease) in value of accumulation unit(1) 6.94%(2)
Number of accumulation units outstanding at end of period 2,940
AETNA CROSSROADS VP
Value at beginning of period $11.093
Value at end of period $12.864
Increase (decrease) in value of accumulation unit(1) 15.96%(2)
Number of accumulation units outstanding at end of period 30,806
AETNA GROWTH AND INCOME VP
Value at beginning of period $11.429 $10.000(3)
Value at end of period $14.624 $11.429
Increase (decrease) in value of accumulation unit(1) 27.96% 14.29%(3)
Number of accumulation units outstanding at end of period 40,309 5
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $11.374
Value at end of period $14.397
Increase (decrease) in value of accumulation unit(1) 26.58%(2)
Number of accumulation units outstanding at end of period 3,156
AETNA LEGACY VP
Value at beginning of period $10.835
Value at end of period $12.257
Increase (decrease) in value of accumulation unit(1) 13.13%(4)
Number of accumulation units outstanding at end of period 14,983
AETNA MONEY MARKET VP
Value at beginning of period $10.249
Value at end of period $10.641
Increase (decrease) in value of accumulation unit(1) 3.82%(2)
Number of accumulation units outstanding at end of period 13,868
AETNA SMALL COMPANY VP
Value at beginning of period $13.952
Value at end of period $13.629
Increase (decrease) in value of accumulation unit(1) (2.31)%(5)
Number of accumulation units outstanding at end of period 47
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $12.103
Value at end of period $13.237
Increase (decrease) in value of accumulation unit(1) 9.37%(6)
Number of accumulation units outstanding at end of period 795
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $10.955
Value at end of period $12.877
Increase (decrease) in value of accumulation unit(1) 17.54%(2)
Number of accumulation units outstanding at end of period 1,007
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
<S> <C> <C>
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $10.905
Value at end of period $13.606
Increase (decrease) in value of accumulation unit(1) 24.77%(2)
Number of accumulation units outstanding at end of period 9,207
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $10.537
Value at end of period $12.560
Increase (decrease) in value of accumulation unit(1) 19.20%(2)
Number of accumulation units outstanding at end of period 2,793
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $10.566
Value at end of period $11.678
Increase (decrease) in value of accumulation unit(1) 10.52%(2)
Number of accumulation units outstanding at end of period 107
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $11.436
Value at end of period $13.701
Increase (decrease) in value of accumulation unit(1) 19.81%(2)
Number of accumulation units outstanding at end of period 8,704
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $ 9.477 $ 10.000(3)
Value at end of period $10.518 $9.477
Increase (decrease) in value of accumulation unit(1) 10.99% (5.23)%(3)
Number of accumulation units outstanding at end of period 12,648 9
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $11.136
Value at end of period $13.310
Increase (decrease) in value of accumulation unit(1) 19.52%(2)
Number of accumulation units outstanding at end of period 2,801
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $10.955
Value at end of period $11.960
Increase (decrease) in value of accumulation unit(1) 9.18%(4)
Number of accumulation units outstanding at end of period 118
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $11.002
Value at end of period $13.123
Increase (decrease) in value of accumulation unit(1) 19.27%(2)
Number of accumulation units outstanding at end of period 5,724
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $11.483
Value at end of period $13.634
Increase (decrease) in value of accumulation unit(1) 18.73%(2)
Number of accumulation units outstanding at end of period 16,828
LEXINGTON NATURAL RESOURCES TRUST
Value at beginning of period $11.712
Value at end of period $11.973
Increase (decrease) in value of accumulation unit(1) 2.23%(2)
Number of accumulation units outstanding at end of period 627
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $ 9.976
Value at end of period $ 9.850
Increase (decrease) in value of accumulation unit(1) (1.26)%(7)
Number of accumulation units outstanding at end of period 2,413
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $ 8.821
Value at end of period $ 8.649
Increase (decrease) in value of accumulation unit(1) (1.95)%(7)
Number of accumulation units outstanding at end of period 442
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $12.192
Value at end of period $12.365
Increase (decrease) in value of accumulation unit(1) 1.42%(7)
Number of accumulation units outstanding at end of period 80
</TABLE>
- --------------------------------------------------------------------------------
56
<PAGE>
CONDENSED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
1997 1996
------------------- -----
<S> <C> <C>
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $11.279
Value at end of period $11.418
Increase (decrease) in value of accumulation unit(1) 1.23%(7)
Number of accumulation units outstanding at end of period 2,665
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH
PORTFOLIO
Value at beginning of period $12.951
Value at end of period $13.212
Increase (decrease) in value of accumulation unit(1) 2.02%(7)
Number of accumulation units outstanding at end of period 3,802
</TABLE>
- ------------------
(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value, and dividing the result
by the beginning Accumulation Unit value.
(2) Reflects less than a full year of performance activity. Funds were first
received in this option during January 1997.
(3) Reflects less than a full year of performance activity. The initial
Accumulation Unit value was established during May 1996 when the fund became
available under the Contract, when funds were first received in this option
or when the applicable daily asset charge was first utilized.
(4) Reflects less than a full year of performance activity. Funds were first
received in this option during April 1997.
(5) Reflects less than a full year of performance activity. Funds were first
received in this option during September 1997.
(6) Reflects less than a full year of performance activity. Funds were first
received in this option during July 1997.
(7) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
57
<PAGE>
For Master Applications Only
I hereby acknowledge receipt of an Account C prospectus for Retirement Plus and
Voluntary Tax-Deferred Annuity Plans dated May 1, 1998, 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.
SAI.01107-98) dated May 1, 1998.
- --------------------------------------------------------------------------------
CONTRACT HOLDER'S SIGNATURE
- --------------------------------------------------------------------------------
DATE
PROS.01107-98
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT C
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
Statement of Additional Information dated May 1, 1998
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current Prospectus dated May 1, 1998. The Contracts
offered in connection with the Prospectus are the Retirement Plus Contract and
Voluntary Contract funded through Variable Annuity Account C (the "Separate
Account"). A free Prospectus is available upon request from the local Aetna Life
Insurance and Annuity Company office or by writing to or calling:
Aetna Life Insurance and Annuity Company
Customer Service
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-525-4225
Read the Prospectus before you invest. Unless otherwise indicated, 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......................................... 1
Variable Annuity Account C.............................................. 1
Offering and Purchase of Contracts...................................... 2
Performance Data........................................................ 2
General........................................................... 2
Average Annual Total Return Quotations............................ 3
Annuity Payments........................................................ 6
Sales Material and Advertising.......................................... 7
Independent Auditors.................................................... 7
Financial Statements of the Separate Account............................ S-1
Financial Statements of Aetna Life Insurance and Annuity Company........ F-1
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company which was organized under the insurance laws of the State of
Connecticut in 1976. Through a merger, it succeeded to the business of Aetna
Variable Annuity Life Insurance Company (formerly Participating Annuity Life
Insurance Company organized in 1954). As of December 31, 1997, the Company
(ALIAC) had $40.7 billion invested through its products, including $22.3 billion
in its separate accounts (of which the Company, or an affiliate oversees the
management of $17.6 billion) and $1.3 billion in its mutual funds offered
outside of its separate accounts. The Company is ranked among the top 2% of all
U.S. life insurance companies based on assets as of December 31, 1996. The
Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc., which
is in turn a wholly owned subsidiary of Aetna Retirement Services, Inc., and an
indirect wholly owned subsidiary of Aetna Inc. The Company is engaged in the
business of issuing life insurance policies and annuity contracts in all states
of the United States and in the District of Columbia. 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 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, if any, described in the Prospectus, all expenses incurred in the
operations of the Separate Account are borne by the Company. (See "Charges and
Deductions" in the Prospectus.) The Company receives reimbursement for certain
administrative costs from some advisers of the Funds used as funding options
under the Contract. These fees generally range up to 0.25%.
The assets of the Separate Account are held by the Company. Please refer to the
prospectuses of the individual Funds in whose shares the assets of the Separate
Account are invested regarding the custodians for those Funds.
VARIABLE ANNUITY ACCOUNT C
(the "Separate Account")
Variable Annuity Account C 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. The
assets of the Separate Account will be invested exclusively in shares of the
mutual funds described in the Prospectus ("Funds"). Purchase Payments made under
the Contract may be allocated to one or more of the Funds. The Company may make
additions to, deletions from or substitution of available variable 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.
1
<PAGE>
The Funds currently available under the Contract are as follows:
[bullet] Aetna Ascent VP (formerly known as Aetna Ascent Variable Portfolio)
[bullet] Aetna Balanced VP, Inc. (formerly known as Aetna Investment Advisers
Fund, Inc.)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP
[bullet] Aetna Crossroads VP (formerly known as Aetna Crossroads Variable
Portfolio)
[bullet] Aetna Growth VP (formerly known as Aetna Variable Growth Portfolio)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP
[bullet] Aetna High Yield VP
[bullet] Aetna Index Plus Large Cap VP (formerly known as Aetna Variable Index
Plus Portfolio)
[bullet] Aetna Index Plus Mid Cap VP
[bullet] Aetna Index Plus Small Cap VP
[bullet] Aetna International VP
[bullet] Aetna Legacy VP (formerly known as Aetna Legacy Variable Portfolio)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP
[bullet] Aetna Real Estate Securities VP
[bullet] Aetna Small Company VP (formerly known as Aetna Variable)
[bullet] Aetna Value Opportunity VP (formerly known as Aetna Variable Capital
Appreciation Portfolio)
[bullet] Calvert Social Balanced Portfolio (formerly known as Calvert
Responsibly Invested Balanced Portfolio)
[bullet] Fidelity VIP Equity-Income Portfolio
[bullet] Fidelity VIP Growth Portfolio
[bullet] Fidelity VIP Overseas Portfolio
[bullet] Fidelity VIP II Contrafund Portfolio
[bullet] Janus Aspen Aggressive Growth Portfolio
[bullet] Janus Aspen Balanced Portfolio
[bullet] Janus Aspen Flexible Income Portfolio
[bullet] Janus Aspen Growth Portfolio
[bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Lexington Natural Resources Trust*
[bullet] Oppenheimer Global Securities Fund
[bullet] Oppenheimer Strategic Bond Fund
[bullet] Portfolio Partners MFS Emerging Equities Portfolio
[bullet] Portfolio Partners MFS Research Growth Portfolio
[bullet] Portfolio Partners MFS Value Equity Portfolio
[bullet] Portfolio Partners Scudder International Growth Portfolio
[bullet] Portfolio Partners T. Rowe Price Growth Equity Portfolio
* This Fund is only available for investment by Participants who established an
Individual Account under the Contract before May 1, 1998. As soon as all such
Participants have redirected their allocations to other investment options,
the Fund will be closed to all new investment (except reinvested dividends and
capital gains earned on amounts already invested in the Fund through the
Separate Account and loan repayments automatically deposited into the Fund
pursuant to the Company's loan repayment procedures).
A complete description of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, is contained in the
prospectus and statement 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 sections titled "Purchase" and "Determining Individual
Account Current Value."
PERFORMANCE DATA
General
From time to time, the Company may advertise different types of historical
performance for the variable investment options of the Separate Account
available under the Contracts issued by the Company in connection with Plans
described in the Prospectus. The Company may advertise the "standardized average
annual total returns," calculated in a manner and for the periods prescribed by
the Securities and Exchange Commission (the "standardized total return"), as
well as the "non-standardized total return," 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 variable investment options 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
2
<PAGE>
represents the number of years in the period) and 1 is subtracted from the
result which is then expressed as a percentage, carried to at least the nearest
hundredth of a percent. The standardized figures use the actual returns of the
Fund since the date contributions were first received in the Fund under the
Separate Account and then adjust them to reflect the deduction of all recurring
charges under the Contracts during each period (e.g., mortality and expense risk
charges, any applicable administrative expense charge, the maintenance fee and
the withdrawal fee). These charges will be deducted on a pro rata basis in the
case of fractional periods. The maintenance fee is converted to a percentage of
assets based on the average account size under the Contracts described in the
Prospectus.
The non-standardized total return figures will be calculated in a similar
manner, except that they will not reflect any applicable withdrawal fee ( which
would decrease the level of performance shown if reflected in these
calculations.) The non-standardized figures may also include monthly, quarterly,
year-to-date and three year periods, and may include returns calculated from the
Funds inception date and/or the date contributions were first received in the
Fund under the Separate Account.
The total return quotations are based upon historical earnings and are not
necessarily representative of future performance. Investment results of the
Funds will fluctuate over time, and any presentation of the Funds' total return
quotations for any prior period should not be considered as a representation of
how the Funds will perform in any future period. Additionally, your Current
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, 1997 for the
variable investment options under the Contracts issued by the Company. The
standardized returns (Table A) assume a mortality and expense risk charge of
1.25%, a $15 annual maintenance fee and a withdrawal fee for ten years. The
non-standardized returns (Table B) assume the same charges but do not include
the withdrawal fee. The Company may also advertise returns based on other fee
schedules that apply to a particular Contract Holder. These fee schedules may
result in higher returns than those shown.
For the variable investment options funded by the Portfolio Partners portfolios,
two sets of performance returns are shown for each variable investment option:
one showing performance based solely on the performance of the Portfolio
Partners portfolio from November 28, 1997, the date the Portfolio commenced
operations; and one quotation based on (a) performance through November 26, 1997
of the fund it replaced under many Company contracts and; (b) after November 26,
1997, based on the performance of the Portfolio Partners portfolio.
For those variable investment options where results are not available for the
full calendar period indicated, performance for such partial periods is shown in
the column labeled "Since Inception". For standardized performance, the "Since
Inception" column shows the average annual return since the date contributions
were first received in the Fund under the Separate Account. For nonstandardized
performance, the "Since Inception" column shows average annual total return
since the Fund's inception date.
3
<PAGE>
TABLE A
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Date
Contributions
First
Received
Under the
Separate
($15 Maintenance Fee) STANDARDIZED Account
- ----------------------------------------------------------------------------------------------------------------------------------
Since
VARIABLE INVESTMENT OPTIONS 1 Year 5 Year 10 Year Inception*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP 12.12% 16.72% 07/31/95
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 14.54% 11.74% 10.38% 04/03/89
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 1.27% 4.40% 7.51%
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 9.94% 14.27% 07/04/95
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 12.79% 05/30/97
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 21.47% 14.93% 14.82%
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 25.21% 25.97% 10/31/96
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 7.07% 10.49% 07/31/95
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) (1.38%) 2.33% 4.29%
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 14.38% 05/30/97
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 14.51% 05/30/97
- ----------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio 12.29% 10.23% 9.77% 05/31/89
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 19.80% 19.04% 05/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio 15.47% 17.96% 05/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio 4.31% 5.57% 05/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 16.09% 20.94% 05/31/95
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 5.35% 16.71% 06/30/94
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 14.18% 15.85% 06/30/95
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 4.50% 10.03% 10/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 14.79% 18.12% 06/30/95
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 14.23% 24.32% 05/31/95
- ----------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust 0.19% 8.15% 7.13% 10/14/91
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio (6.29%) 11/28/97
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners-
MFS Emerging Equities(3) 2.13% 8.74% 09/30/93
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio (6.94%) 11/28/97
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/Portfolio Partners-
MFS Research Growth(3) (9.27%) 3.31% 4.91% 08/31/92
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio (3.74%) 11/28/97
- ----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Growth/Portfolio Partners-
MFS Value Equity(3) 18.15% 10.33% 9.50% 05/31/89
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth Portfolio (3.92%) 11/28/97
- ----------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/Portfolio Partners-
Scudder International Growth(3) 1.91% 11.01% 7.17% 07/31/89
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth Equity Portfolio (3.17%) 11/28/97
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners-
T. Rowe Price Growth Equity 19.93% 19.66% 10/31/94
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding Table A for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
* Reflects performance from the date contributions were first received in the
Fund under the Separate Account.
(1) These Funds have been available through the Separate Account for more than
ten years.
(2) The current yield for the variable investment option for the 7-day period
ended December 31, 1997 (on an annualized basis) was 3.892%. The current
yield reflects the deduction of all charges under the Contract that are
deducted from the total return quotations shown above except the maximum 5%
withdrawal fee.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced Fund may not have been available under all
Contracts. The "Date Contributions First Received Under the Separate
Account" refers to the applicable date for the replaced Fund.
4
<PAGE>
TABLE B
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Fund
Inception
($15 Maintenance Fee) NON-STANDARDIZED Date
- ---------------------------------------------------------------------------------------------------------------------------------
Since
VARIABLE INVESTMENT OPTIONS 1 Year 3 Years 5 Years 10 Years Inception**
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP 18.02% 19.95% 07/05/95
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 20.57% 19.63% 12.65% 10.76% 04/03/89
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 6.60% 8.15% 5.26% 7.51%
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 15.73% 16.65% 07/05/95
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 30.94% 30.90% 12/13/96
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 27.87% 26.82% 15.87% 14.82%
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 31.81% 32.49% 09/16/96
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 12.71% 13.16% 07/05/95
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) 3.82% 3.97% 3.17% 4.29%
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 32.40% 33.34% 12/27/96
- ---------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 37.20% 37.73% 12/13/96
- ---------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio(1) 18.20% 18.74% 11.13% 10.66%
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio(1) 26.11% 23.57% 18.29% 14.91%
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio(1) 21.56% 22.30% 16.17% 15.36%
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio(1) 9.81% 9.72% 12.34% 7.91%
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 22.21% 26.21% 01/03/95
- ---------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 10.90% 13.93% 17.36% 09/13/93
- ---------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 20.20% 19.08% 14.48% 09/13/93
- ---------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 10.01% 12.97% 8.31% 09/13/93
- ---------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 20.83% 21.77% 15.84% 09/13/93
- ---------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 20.25% 24.19% 21.01% 09/13/93
- ---------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust 5.47% 14.88% 9.04% 7.84% 10/14/91
- ---------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund 20.51% 12.03% 16.96% 10.51% 11/12/90
- ---------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund 7.00% 10.24% 5.95% 05/03/93
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio (1.36%) 11/28/97
- ---------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners-
MFS Emerging Equities(3) 7.51% 16.14% 10.46% 17.13% 09/21/88
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio (2.05%) 11/28/97
- ---------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/
Portfolio Partners-MFS Research Growth(3) (4.49%) 5.10% 4.16% 7.02%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio 1.19% 11/28/97
- ---------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman AMT Growth/Portfolio Partners-
MFS Value Equity(3) 24.38% 20.11% 11.24% 12.86%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth Portfolio 1.35% 11/28/97
- ---------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/
Portfolio Partners-Scudder International Growth(3) 7.28% 9.85% 11.92% 10.04%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth Equity Portfolio 1.80% 11/28/97
- ---------------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners-
T. Rowe Price Growth Equity(3) 26.25% 23.67% 17.89% 17.84% 01/09/89
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding Table A for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
** Reflects performance from the Fund's inception date.
(1) These Funds have been in operation for more than ten years.
(2) The current yield for the variable investment option for the 7-day period
ended December 31, 1997 (on an annualized basis) was 3.892%. The current
yield reflects the deduction of all charges under the Contract that are
deducted from the total return quotations shown above. As in the table above
the maximum 5% withdrawal fee is not reflected.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced Fund may not have been available under all
Contracts. The "Fund Inception Date" refers to the applicable date for the
replaced Fund. If no date is shown, the replaced Fund has been in operation
for more than ten years.
5
<PAGE>
ANNUITY PAYMENTS
When Variable Annuity payments are to begin, the value of the Individual Account
is determined using Fund Annuity Unit values as of the tenth Valuation Period
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 Variable Annuity payment for each $1,000 of value
applied. Thereafter, Variable Annuity payments fluctuate as the Fund 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
Fund 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 Fund Annuity Unit value for that investment
option. As noted, Fund Annuity Unit values fluctuate from one Valuation Period
to the next; such fluctuations reflect changes in the net investment factor for
the appropriate Fund(s) (with a ten Valuation Period 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 begin, there are 3,000 Fund
Annuity Units credited under a particular Contract or Individual Account and
that the value of a Fund Annuity Unit for the tenth Valuation Period 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 a Fund Annuity Unit for the Valuation Period in
which the first payment was due was $13.400000. When this value is divided into
the first monthly payment, the number of Fund Annuity Units is determined to be
20.414. The value of this number of Fund Annuity Units will be paid in each
subsequent month.
If the net investment factor with respect to the appropriate Fund is 1.0015000
as of the tenth Valuation Period 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 Fund Annuity Units
determined above) produces a result of 1.0014057. This is then multiplied by the
Fund Annuity Unit value for the prior Valuation Period (assume such value to be
$13.504376) to produce a Fund Annuity Unit value of $13.523359 for the Valuation
Period in which the second payment is due.
6
<PAGE>
The second monthly payment is then determined by multiplying the number of Fund
Annuity Units by the current Fund 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 variable investment options 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
variable investment option 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 categorize the underlying funds in terms of the
asset classes they represent and use such categories in marketing materials for
the Contracts. We may illustrate in advertisements the performance of the
underlying funds, if accompanied by performance which also shows the performance
of such funds reduced by applicable charges under the Separate Account. We may
also show in advertisements the portfolio holdings of the underlying funds,
updated at various intervals. From time to time, we will quote articles from
newspapers and magazines or other publications or reports, 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 or Participants. These topics may include the
relationship between sectors of the economy and the economy as a whole and its
effect on various securities markets, investment strategies and techniques (such
as value investing, market timing, dollar cost averaging, asset allocation,
constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management and tax and retirement planning, and investment alternatives to
certificates of deposit and other financial instruments, including comparison
between the Contracts and the characteristics of and market for such financial
instruments.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103, are the
independent auditors for the Separate Account and for the Company. The services
provided to the Separate Account include primarily the examination of the
Separate Account's financial statements and review of filings made with the SEC.
7
<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-17
S-1
<PAGE>
Variable Annuity Account C
Statement of Assets and Liabilities - December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 189,402,635 shares (cost $5,932,019,068) ........................ $ 6,370,594,954
Aetna Income Shares; 29,481,519 shares (cost $379,976,337) ........................... 378,848,309
Aetna Variable Encore Fund; 17,984,272 shares (cost $234,633,355) .................... 240,346,197
Aetna Investment Advisers Fund, Inc.; 61,720,862 shares (cost $848,048,432) .......... 989,547,679
Aetna GET Fund, Series B; 5,058,054 shares (cost $56,606,586) ........................ 79,552,932
Aetna GET Fund, Series C; 18,780,804 shares (cost $190,080,319) ...................... 236,822,693
Aetna Ascent Variable Portfolio; 5,107,825 shares (cost $66,607,510) ................. 72,115,304
Aetna Crossroads Variable Portfolio; 3,801,191 shares (cost $47,125,006) ............. 49,739,310
Aetna Legacy Variable Portfolio; 2,710,978 shares (cost $32,214,576) ................. 32,802,912
Aetna Variable Portfolios, Inc.:
Aetna Variable Capital Appreciation Portfolio; 171,171 shares (cost $2,313,642) ..... 2,039,640
Aetna Variable Growth Portfolio; 111,560 shares (cost $1,335,706) ................... 1,098,483
Aetna Variable Index Plus Portfolio; 5,933,809 shares (cost $76,210,503) ............ 83,175,077
Aetna Variable Small Company Portfolio; 388,120 shares (cost $5,122,912) ............ 4,956,212
Calvert Social Balanced Portfolio; 27,469,430 shares (cost $47,247,774) .............. 54,444,411
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 7,855,657 shares (cost $156,737,051) ....................... 190,735,350
Growth Portfolio; 3,457,071 shares (cost $105,862,746) .............................. 128,257,345
Overseas Portfolio; 700,480 shares (cost $13,223,729) ............................... 13,449,206
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 1,288,137 shares (cost $19,277,286) ........................ 23,199,341
Contrafund Portfolio; 12,866,038 shares (cost $206,330,826) ......................... 256,548,805
Index 500 Portfolio; 504,605 shares (cost $46,209,224) .............................. 57,721,771
Janus Aspen Series:
Aggressive Growth Portfolio; 10,248,197 shares (cost $174,115,177) .................. 210,600,444
Balanced Portfolio; 2,143,788 shares (cost $32,647,487) ............................. 37,451,981
Flexible Income Portfolio; 1,252,635 shares (cost $14,374,926) ...................... 14,756,039
Growth Portfolio; 4,330,541 shares (cost $68,345,213) ............................... 80,028,403
Worldwide Growth Portfolio; 18,350,150 shares (cost $366,705,134).................... 429,210,001
Lexington Emerging Markets Fund; 649,673 shares (cost $6,756,872)..................... 5,788,593
Lexington Natural Resources Trust Fund; 2,881,672 shares (cost $41,178,832)........... 42,965,725
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio; 8,228,209 shares (cost $356,891,357)............. 352,990,165
PPI MFS Research Growth Portfolio; 23,381,050 shares (cost $231,196,214).............. 227,029,997
PPI MFS Value Equity Portfolio; 3,887,887 shares (cost $114,649,620).................. 116,286,704
PPI Scudder International Growth Portfolio; 14,375,874 shares (cost $199,666,185)..... 202,699,815
PPI T. Rowe Price Growth Equity Portfolio; 3,885,589 shares (cost $166,078,985) ...... 169,450,553
---------------
NET ASSETS (cost $10,239,788,590) ..................................................... $11,155,254,351
===============
Net assets represented by:
Reserves for annuity contracts in accumulation and payment period: (Notes 1 and 5)
Aetna Variable Fund:
Annuity contracts in accumulation .................................................... $ 6,078,549,136
Annuity contracts in payment period .................................................. 292,045,818
Aetna Income Shares:
Annuity contracts in accumulation .................................................... 372,629,553
Annuity contracts in payment period .................................................. 6,218,756
</TABLE>
S-2
<PAGE>
Variable Annuity Account C
Statement of Assets and Liabilities - December 31, 1997 (continued):
<TABLE>
<S> <C>
Aetna Variable Encore Fund:
Annuity contracts in accumulation ...................... $ 240,346,197
Aetna Investment Advisers Fund, Inc.:
Annuity contracts in accumulation ...................... 968,354,403
Annuity contracts in payment period .................... 21,193,276
Aetna GET Fund, Series B:
Annuity contracts in accumulation ...................... 79,552,932
Aetna GET Fund, Series C:
Annuity contracts in accumulation ...................... 236,822,693
Aetna Ascent Variable Portfolio:
Annuity contracts in accumulation ...................... 72,115,304
Aetna Crossroads Variable Portfolio:
Annuity contracts in accumulation ...................... 49,739,310
Aetna Legacy Variable Portfolio:
Annuity contracts in accumulation ...................... 32,749,254
Annuity contracts in payment period .................... 53,658
Aetna Variable Portfolios, Inc.:
Aetna Variable Capital Appreciation Portfolio:
Annuity contracts in accumulation ...................... 2,039,640
Aetna Variable Growth Portfolio:
Annuity contracts in accumulation ...................... 1,098,483
Aetna Variable Index Plus Portfolio:
Annuity contracts in accumulation ...................... 83,098,319
Annuity contracts in payment period .................... 76,758
Aetna Variable Small Company Portfolio:
Annuity contracts in accumulation ...................... 4,956,212
Calvert Social Balanced Portfolio:
Annuity contracts in accumulation ...................... 54,444,411
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Annuity contracts in accumulation ...................... 190,735,350
Growth Portfolio:
Annuity contracts in accumulation ...................... 128,257,345
Overseas Portfolio:
Annuity contracts in accumulation ...................... 13,449,206
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Annuity contracts in accumulation ...................... 23,199,341
Contrafund Portfolio:
Annuity contracts in accumulation ...................... 256,548,805
Index 500 Portfolio:
Annuity contracts in accumulation ...................... 57,721,771
Janus Aspen Series:
Aggressive Growth Portfolio:
Annuity contracts in accumulation ...................... 210,600,444
Balanced Portfolio:
Annuity contracts in accumulation ...................... 37,451,981
Flexible Income Portfolio:
Annuity contracts in accumulation ...................... 14,756,039
Growth Portfolio:
Annuity contracts in accumulation ...................... 79,992,417
Annuity contracts in payment period .................... 35,986
</TABLE>
S-3
<PAGE>
Variable Annuity Account C
Statement of Assets and Liabilities - December 31, 1997 (continued):
<TABLE>
<S> <C>
Worldwide Growth Portfolio:
Annuity contracts in accumulation ........... $ 429,093,163
Annuity contracts in payment period ......... 116,838
Lexington Emerging Markets Fund:
Annuity contracts in accumulation ........... 5,788,593
Lexington Natural Resources Trust Fund:
Annuity contracts in accumulation ........... 42,965,725
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio:
Annuity contracts in accumulation ........... 352,966,999
Annuity contracts in payment period ......... 23,166
PPI MFS Research Growth Portfolio:
Annuity contracts in accumulation ........... 227,029,997
PPI MFS Value Equity Portfolio:
Annuity contracts in accumulation ........... 116,286,704
PPI Scudder International Growth Portfolio:
Annuity contracts in accumulation ........... 202,699,815
PPI T. Rowe Price Growth Equity Portfolio:
Annuity contracts in accumulation ........... 169,450,553
---------------
$11,155,254,351
===============
</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,
1997 1996
------------------- -----------------
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ............................................................ $ 1,552,106,208 $ 712,854,599
Expenses: (Notes 2 and 5)
Valuation period deductions .......................................... (120,867,375) (93,446,331)
--------------- --------------
Net investment income ................................................. 1,431,238,833 619,408,268
--------------- --------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales .................................................. 2,013,561,413 2,060,808,031
Cost of investments sold ............................................. 1,773,010,971 1,547,239,509
--------------- --------------
Net realized gain ................................................... 240,550,442 513,568,522
Net unrealized gain on investments: (Note 5)
Beginning of year .................................................... 612,391,085 594,083,184
End of year .......................................................... 915,465,761 612,391,085
--------------- --------------
Net change in unrealized gain ....................................... 303,074,676 18,307,901
--------------- --------------
Net realized and unrealized gain on investments ....................... 543,625,118 531,876,423
--------------- --------------
Net increase in net assets resulting from operations .................. 1,974,863,951 1,151,284,691
--------------- --------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments ........................... 1,039,130,530 951,293,520
Sales and administrative charges deducted by the Company .............. (17,373) (61,783)
--------------- --------------
Net variable annuity contract purchase payments ...................... 1,039,113,157 951,231,737
Transfer from the Company for mortality guarantee adjustments ......... 2,085,609 3,247,064
Transfers from the Company's fixed account options .................... 166,510,610 187,508,331
Transfers to the Company's other variable annuity accounts ............ (88,238,000) 0
Redemptions by contract holders ....................................... (474,257,152) (339,383,183)
Annuity Payments ...................................................... (31,253,253) (20,948,181)
Other ................................................................. 1,227,066 144,245
--------------- --------------
Net increase in net assets from unit transactions: (Note 5) .......... 615,188,037 781,800,013
--------------- --------------
Change in net assets .................................................. 2,590,051,988 1,933,084,704
NET ASSETS:
Beginning of year ..................................................... 8,565,202,363 6,632,117,659
--------------- --------------
End of year ........................................................... $11,155,254,351 $8,565,202,363
=============== ==============
</TABLE>
See Notes to Financial Statements
S-5
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1997
1. Summary of Significant Accounting Policies
Variable Annuity Account C (the "Account") is a separate account
established by Aetna Life Insurance and Annuity Company (the "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, 1997:
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 Portfolios, Inc.:
[bullet] Aetna Variable Capital Appreciation Portfolio
[bullet] Aetna Variable Growth Portfolio
[bullet] Aetna Variable Index Plus Portfolio
[bullet] Aetna Variable Small Company Portfolio
Calvert Social 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
Janus Aspen Series:
[bullet] Aggressive Growth Portfolio
[bullet] Balanced Portfolio
[bullet] Flexible Income Portfolio
[bullet] Growth Portfolio
[bullet] Worldwide Growth Portfolio
Lexington Emerging Markets Fund
Lexington Natural Resources Trust Fund
Portfolio Partners, Inc.:
[bullet] PPI MFS Emerging Equities Portfolio
[bullet] PPI MFS Research Growth Portfolio
[bullet] PPI MFS Value Equity Portfolio
[bullet] PPI Scudder International Growth Portfolio
[bullet] PPI T. Rowe Price Growth Equity Portfolio
b. Other
Investment transactions are accounted for on a trade date basis and
dividend income is recorded on the ex-dividend date. The cost of
investments sold is determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of the Company which is taxed as a life insurance company under
the Internal Revenue Code of 1986, as amended.
d. Annuity Reserves
Annuity reserves held in the Account are computed for currently payable
contracts according to the Progressive Annuity, a49, 1971 Individual
Annuity Mortality, 1971 Group Annuity Mortality, 83a, and 1983 Group
Annuity Mortality tables using various assumed interest rates not to exceed
seven percent. Mortality experience is monitored by the Company. Charges to
annuity reserves for mortality experience are reimbursed to the Company if
the reserves required are less than originally estimated. If additional
reserves are required, the Company reimburses the Account.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made
in accordance with the terms of the contracts and are paid to the Company.
3. Dividend Income
On an annual basis, the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions to
the Account are automatically reinvested in shares of the Funds. The
Account's proportionate share of each Fund's undistributed net investment
income (distributions in excess of net investment income) and accumulated
net realized gain (loss) on investments is included in net unrealized gain
(loss) in the Statements of Operations and Changes in Net Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the years ended December 31, 1997 and 1996
aggregated $4,059,988,283 and $2,013,561,413; $3,462,016,312 and
$2,060,808,031, respectively.
S-6
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation
Period
Dividends Deductions
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Aetna Variable Fund: $1,291,034,822 ($ 68,500,273)
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------
Aetna Income Shares: 22,258,737 (4,263,839)
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 9,635,587 (2,938,575)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 128,304,517 (10,844,018)
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 13,341,021 (1,078,816)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 3,678,012 (3,257,441)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 4,541,482 (578,657)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 3,316,159 (392,434)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 1,788,369 (229,584)
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------
Aetna Variable Portfolios Inc:
Aetna Variable Capital Appreciation Portfolio: 312,433 (2,197)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------
Aetna Variable Growth Portfolio: 249,335 (1,093)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 3,327,658 (542,532)
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------
Aetna Variable Small Company Portfolio: 269,004 (5,868)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------
Alger American Funds:
Growth Portfolio: (1) 1,199,482 (1,526,918)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------
Small Capitalization Portfolio: 11,721,861 (3,575,543)
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Variable Fund: $205,088,291 $150,120,010 $ 54,968,281
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna Income Shares: 46,789,033 49,260,722 (2,471,689)
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 206,958,669 210,166,945 (3,208,276)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 37,558,168 27,770,494 9,787,674
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 7,648,728 4,940,723 2,708,005
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 13,972,003 11,896,317 2,075,686
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 498,613 380,091 118,522
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 409,248 325,568 83,680
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 2,265,127 2,019,840 245,287
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna Variable Portfolios Inc:
Aetna Variable Capital Appreciation Portfolio: 123,165 113,851 9,314
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Variable Growth Portfolio: 80,207 72,190 8,017
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 29,980,862 29,823,433 157,429
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
Aetna Variable Small Company Portfolio: 478,457 428,319 50,138
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Alger American Funds:
Growth Portfolio: (1) 169,481,196 134,718,793 34,762,403
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: 403,516,606 343,440,431 60,076,175
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------
</TABLE>
S-7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$327,744,944 $438,575,885 $110,830,941 $ 75,435,966
$4,694,078,344 $6,078,549,136
212,746,872 292,045,818
- -----------------------------------------------------------------------------------------------------------------------
(9,314,233) (1,128,028) 8,186,205 (4,710,418)
354,233,289 372,629,553
5,616,023 6,218,756
- -----------------------------------------------------------------------------------------------------------------------
(750,036) 5,712,842 6,462,878 (14,909,883)
245,304,466 240,346,197
- -----------------------------------------------------------------------------------------------------------------------
97,219,569 141,499,248 44,279,679 2,724,400
800,532,626 968,354,403
14,762,802 21,193,276
- -----------------------------------------------------------------------------------------------------------------------
17,286,695 22,946,346 5,659,651 (6,139,082)
65,062,153 79,552,932
- -----------------------------------------------------------------------------------------------------------------------
2,983,885 46,742,374 43,758,489 (8,490,216)
199,058,163 236,822,693
- -----------------------------------------------------------------------------------------------------------------------
1,716,824 5,507,794 3,790,970 42,582,396
21,660,591 72,115,304
- -----------------------------------------------------------------------------------------------------------------------
838,329 2,614,303 1,775,974 30,197,010
14,758,921 49,739,310
- -----------------------------------------------------------------------------------------------------------------------
112,482 588,337 475,855 21,455,983
9,067,002 32,749,254
0 53,658
- -----------------------------------------------------------------------------------------------------------------------
0 (274,002) (274,002) 1,994,092
0 2,039,640
- -----------------------------------------------------------------------------------------------------------------------
0 (237,223) (237,223) 1,079,447
0 1,098,483
- -----------------------------------------------------------------------------------------------------------------------
80,325 6,964,574 6,884,249 62,694,836
10,653,437 83,098,319
0 76,758
- -----------------------------------------------------------------------------------------------------------------------
0 (166,700) (166,700) 4,809,638
0 4,956,212
- -----------------------------------------------------------------------------------------------------------------------
6,730,808 0 (6,730,808) (132,576,331)
104,872,172 0
- -----------------------------------------------------------------------------------------------------------------------
39,364,541 0 (39,364,541) (352,729,122)
323,871,170 0
0 0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
S-8
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation
Period
Dividends Deductions
- -------------------------------------------------------------------------------------------
<S> <C> <C>
American Century Investments -
Capital Appreciation Fund: (2) $ 5,882,464 ($ 2,974,651)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 3,787,208 (578,804)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 11,536,379 (1,844,101)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Growth Portfolio: 3,033,640 (1,277,878)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Overseas Portfolio: 762,691 (144,474)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 2,134,313 (253,981)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Contrafund Portfolio: 4,376,096 (2,382,593)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Index 500 Portfolio: 890,215 (515,853)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Franklin Government Securities Trust: (3) 1,578,341 (279,189)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (2,188,842)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Balanced Portfolio: 940,676 (329,511)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Flexible Income Portfolio: 757,640 (131,213)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Growth Portfolio: 1,871,919 (768,752)
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (4) 64,108 (25,465)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 5,510,563 (4,109,527)
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
American Century Investments -
Capital Appreciation Fund: (2) $347,378,690 $348,986,817 ($ 1,608,127)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 1,767,421 1,342,657 424,764
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 2,876,456 2,187,102 689,354
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Growth Portfolio: 1,967,157 1,268,813 698,344
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 6,265,740 5,529,606 736,134
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 1,353,806 1,132,813 220,993
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 989,526 754,795 234,731
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 2,042,782 1,517,607 525,175
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Franklin Government Securities Trust: (3) 35,001,358 34,302,739 698,619
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 16,697,333 12,596,723 4,100,610
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 1,236,230 981,509 254,721
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 4,035,296 3,816,553 218,743
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Growth Portfolio: 1,933,431 1,461,183 472,248
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (4) 5,452,797 5,400,161 52,636
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 16,620,763 10,266,465 6,354,298
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------------------------
</TABLE>
S-9
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 8,139,519 $0 ($8,139,519) ($339,404,560)
$346,244,393 $0
- ----------------------------------------------------------------------------------------------------------------
2,963,927 7,196,636 4,232,709 6,589,199
39,989,335 54,444,411
- ----------------------------------------------------------------------------------------------------------------
10,675,870 33,998,298 23,322,428 50,561,862
106,469,428 190,735,350
- ----------------------------------------------------------------------------------------------------------------
5,256,264 22,394,599 17,138,335 28,222,857
80,442,047 128,257,345
- ----------------------------------------------------------------------------------------------------------------
649,630 225,478 (424,152) 4,069,619
8,449,388 13,449,206
- ----------------------------------------------------------------------------------------------------------------
2,502,591 3,922,056 1,419,465 2,575,422
17,103,129 23,199,341
- ----------------------------------------------------------------------------------------------------------------
15,161,493 50,217,979 35,056,486 100,377,564
118,886,521 256,548,805
- ----------------------------------------------------------------------------------------------------------------
2,304,865 11,512,547 9,207,682 26,383,649
21,230,903 57,721,771
- ----------------------------------------------------------------------------------------------------------------
405,959 0 (405,959) (24,948,755)
23,356,943 0
- ----------------------------------------------------------------------------------------------------------------
17,668,916 36,485,267 18,816,351 16,995,758
172,876,567 210,600,444
- ----------------------------------------------------------------------------------------------------------------
751,567 4,804,494 4,052,927 17,251,901
15,281,267 37,451,981
- ----------------------------------------------------------------------------------------------------------------
140,666 381,113 240,447 5,252,958
8,417,464 14,756,039
- ----------------------------------------------------------------------------------------------------------------
2,192,571 11,683,190 9,490,619 28,161,560
40,800,809 79,992,417
0 35,986
- ----------------------------------------------------------------------------------------------------------------
(6,468) 0 6,468 (1,788,353)
1,690,606 0
- ----------------------------------------------------------------------------------------------------------------
16,710,390 62,504,868 45,794,478 203,261,915
172,398,274 429,093,163
0 116,838
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
S-10
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation
Period
Dividends Deductions
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Lexington Emerging Markets Fund: $4,375 ($79,412)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 1,239,038 (531,930)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Neuberger and Berman Advisers Management Trust -
Growth Portfolio: (5) 8,158,940 (1,195,227)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio: 0 (406,682)
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 0 (262,081)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 0 (133,426)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
PPI MFS Scudder International Growth Portfolio: 0 (235,626)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
PPI MFS T. Rowe Price Growth Equity Portfolio: 0 (193,734)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund -
International Portfolio: (6) 4,599,123 (2,286,635)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------
Total Variable Annuity Account C $1,552,106,208 ($ 120,867,375)
========================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lexington Emerging Markets Fund: $1,639,618 $1,424,729 $214,889
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 14,866,827 11,618,994 3,247,833
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Neuberger and Berman Advisers Management Trust -
Growth Portfolio: (5) 128,039,479 103,983,767 24,055,712
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio: 3,797,005 3,880,012 (83,007)
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 1,453,829 1,486,006 (32,177)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 928,145 929,114 (969)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
PPI MFS Scudder International Growth Portfolio: 13,091,485 12,881,912 209,573
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
PPI MFS T. Rowe Price Growth Equity Portfolio: 891,088 887,544 3,544
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund -
International Portfolio: (6) 278,386,778 238,895,623 39,491,155
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Total Variable Annuity Account C $2,013,561,413 $1,773,010,971 $240,550,442
=========================================================================================================
</TABLE>
(1) Effective November 28, 1997, this funds assets were transferred to the PPI
T. Rowe Price Growth Equity Portfolio.
(2) Effective November 28, 1997, this funds assets were transferred to the PPI
MFS Research Growth Portfolio.
(3) Effective November 28, 1997, this funds assets were transferred to Aetna
Income Shares.
(4) Effective November 28, 1997, this funds assets were transferred to the Aetna
Variable Encore Fund.
(5) Effective November 28, 1997, this funds assets were transferred to the PPI
MFS Value Equity Portfolio.
(6) Effective November 28, 1997, this funds assets were transferred to the PPI
Scudder International Growth Portfolio.
S-11
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$102,991 ($968,279) ($1,071,270) $1,874,530
$4,845,481 $5,788,593
- ------------------------------------------------------------------------------------------------------------------------
3,997,171 1,786,893 (2,210,278) 17,376,715
23,844,347 42,965,725
- ------------------------------------------------------------------------------------------------------------------------
9,459,521 0 (9,459,521) (116,641,588)
95,081,684 0
- ------------------------------------------------------------------------------------------------------------------------
0 (3,901,193) (3,901,193) 357,381,047
0 352,966,999
0 23,166
- ------------------------------------------------------------------------------------------------------------------------
0 (4,166,217) (4,166,217) 231,490,472
0 227,029,997
- ------------------------------------------------------------------------------------------------------------------------
0 1,637,084 1,637,084 114,784,015
0 116,286,704
- ------------------------------------------------------------------------------------------------------------------------
0 3,033,630 3,033,630 199,692,238
0 202,699,815
- ------------------------------------------------------------------------------------------------------------------------
0 3,371,568 3,371,568 166,269,175
0 169,450,553
- ------------------------------------------------------------------------------------------------------------------------
29,299,509 0 (29,299,509) (204,019,879)
191,515,746 0
- ------------------------------------------------------------------------------------------------------------------------
$612,391,085 $915,465,761 $303,074,676 $615,188,037 $8,565,202,363 $11,155,254,351
========================================================================================================================
</TABLE>
S-12
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation
Period
Dividends Deductions
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Aetna Variable Fund: $515,238,366 ($54,321,686)
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------
Aetna Income Shares: 23,144,319 (4,611,478)
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 14,058,252 (2,878,790)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 72,699,670 (9,562,496)
Annuity contracts in accumulation
Annuity contracts in payment period
- ----------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 5,304,368 (1,100,778)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 969,084 (280,865)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 963,171 (137,931)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 797,511 (106,179)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 595,666 (63,355)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 57,328 (16,537)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Alger American Funds:
Growth Portfolio: 2,138,198 (966,404)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Small Capitalization Portfolio: 1,173,212 (3,731,877)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Fund: 3,000,539 (425,159)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 2,269,871 (994,896)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Growth Portfolio: 2,304,888 (707,334)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Overseas Portfolio: 115,737 (82,498)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 955,910 (196,386)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Variable Fund: $1,237,963,630 $841,837,896 $396,125,734
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------------------
Aetna Income Shares: 155,474,786 153,469,788 2,004,998
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 175,207,017 167,163,639 8,043,378
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 223,353,174 160,905,519 62,447,655
Annuity contracts in accumulation
Annuity contracts in payment period
- --------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B: 25,117,816 18,596,857 6,520,959
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C: 229,569 224,240 5,329
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 514,612 443,710 70,902
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 755,620 679,118 76,502
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 1,206,903 1,119,490 87,413
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 356,603 338,531 18,072
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Alger American Funds:
Growth Portfolio: 3,326,813 3,149,890 176,923
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: 24,333,106 17,577,100 6,756,006
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Fund: 1,793,014 1,429,393 363,621
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 3,851,613 3,166,678 684,935
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Growth Portfolio: 623,639 453,561 170,078
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 2,280,928 2,065,136 215,792
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 2,016,939 1,797,456 219,483
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------------
</TABLE>
S-13
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$267,567,573 $327,744,944 $60,177,371 $39,664,335
$3,805,891,355 $4,694,078,344
144,049,741 212,746,872
- --------------------------------------------------------------------------------------------------------------------------
3,230,862 (9,314,233) (12,545,095) (34,151,027)
380,937,626 354,233,289
5,069,969 5,616,023
- --------------------------------------------------------------------------------------------------------------------------
9,204,418 (750,036) (9,954,454) 5,744,394
230,291,686 245,304,466
- --------------------------------------------------------------------------------------------------------------------------
122,622,603 97,219,569 (25,403,034) (7,904,062)
713,304,833 800,532,626
9,712,862 14,762,802
- --------------------------------------------------------------------------------------------------------------------------
13,423,804 17,286,695 3,862,891 (22,661,545)
73,136,258 65,062,153
- --------------------------------------------------------------------------------------------------------------------------
0 2,983,885 2,983,885 195,380,730
0 199,058,163
- --------------------------------------------------------------------------------------------------------------------------
105,405 1,716,824 1,611,419 14,244,294
4,908,736 21,660,591
- --------------------------------------------------------------------------------------------------------------------------
68,967 838,329 769,362 9,552,968
3,668,757 14,758,921
- --------------------------------------------------------------------------------------------------------------------------
36,214 112,482 76,268 6,451,330
1,919,680 9,067,002
- --------------------------------------------------------------------------------------------------------------------------
0 80,325 80,325 10,514,249
0 10,653,437
- --------------------------------------------------------------------------------------------------------------------------
(285,937) 6,730,808 7,016,745 58,052,710
38,454,000 104,872,172
- --------------------------------------------------------------------------------------------------------------------------
38,038,924 39,364,541 1,325,617 77,101,765
241,246,447 323,871,170
- --------------------------------------------------------------------------------------------------------------------------
2,175,908 2,963,927 788,019 7,573,554
28,688,761 39,989,335
- --------------------------------------------------------------------------------------------------------------------------
2,759,687 10,675,870 7,916,183 58,569,396
38,023,939 106,469,428
- --------------------------------------------------------------------------------------------------------------------------
505,388 5,256,264 4,750,876 46,205,811
27,717,728 80,442,047
- --------------------------------------------------------------------------------------------------------------------------
163,196 649,630 486,434 3,994,936
3,718,987 8,449,388
- --------------------------------------------------------------------------------------------------------------------------
1,530,985 2,502,591 971,606 782,358
14,370,158 17,103,129
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-14
<PAGE>
Variable Annuity Account C
Notes to Financial Statements - December 31, 1997 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation
Period
Dividends Deductions
- -------------------------------------------------------------------------------------
<S> <C> <C>
Contrafund Portfolio: $357,388 ($910,633)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Index 500 Portfolio: 219,199 (139,391)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Franklin Government Securities Trust: 1,223,061 (290,354)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 1,589,459 (1,739,222)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Balanced Portfolio: 238,807 (87,725)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Flexible Income Portfolio: 499,929 (72,736)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Growth Portfolio: 630,364 (245,877)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Short-Term Bond Portfolio: 61,378 (14,453)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 1,725,690 (1,035,043)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 0 (55,554)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 80,144 (231,100)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Neuberger and Berman Advisers Management Trust -
Growth Portfolio: 8,437,018 (1,199,983)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund -
International Portfolio: 4,063,525 (2,264,627)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
TCI Portfolios, Inc. - Growth Fund: 47,942,547 (4,974,984)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------
Total Variable Annuity Account C $712,854,599 ($ 93,446,331)
=====================================================================================
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Contrafund Portfolio: $1,299,964 $1,078,898 $221,066
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 1,105,697 943,071 162,626
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Franklin Government Securities Trust: 5,788,894 5,646,267 142,627
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 4,803,682 3,702,615 1,101,067
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Balanced Portfolio: 1,671,701 1,511,274 160,427
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 1,541,843 1,429,353 112,490
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Growth Portfolio: 1,130,979 963,703 167,276
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: 726,351 729,002 (2,651)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 1,942,344 1,492,553 449,791
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 905,228 870,164 35,064
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 7,649,108 6,026,027 1,623,081
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Neuberger and Berman Advisers Management Trust -
Growth Portfolio: 15,336,623 13,853,081 1,483,542
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund -
International Portfolio: 26,981,873 22,523,390 4,458,483
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc. - Growth Fund: 131,517,962 112,052,109 19,465,853
Annuity contracts in accumulation
- --------------------------------------------------------------------------------------------------------
Total Variable Annuity Account C $2,060,808,031 $1,547,239,509 $513,568,522
========================================================================================================
</TABLE>
S-15
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$285,166 $15,161,493 $14,876,327 $73,985,256
$30,357,117 $118,886,521
- ----------------------------------------------------------------------------------------------------------------------
223,865 2,304,865 2,081,000 15,496,325
3,411,144 21,230,903
- ----------------------------------------------------------------------------------------------------------------------
831,241 405,959 (425,282) 664,776
22,042,115 23,356,943
- ----------------------------------------------------------------------------------------------------------------------
13,091,398 17,668,916 4,577,518 79,952,029
87,395,716 172,876,567
- ----------------------------------------------------------------------------------------------------------------------
60,530 751,567 691,037 12,773,551
1,505,170 15,281,267
- ----------------------------------------------------------------------------------------------------------------------
167,581 140,666 (26,915) 4,046,573
3,858,123 8,417,464
- ----------------------------------------------------------------------------------------------------------------------
145,978 2,192,571 2,046,593 33,135,966
5,066,487 40,800,809
- ----------------------------------------------------------------------------------------------------------------------
(354) (6,468) (6,114) 1,108,236
544,210 1,690,606
- ----------------------------------------------------------------------------------------------------------------------
786,497 16,710,390 15,923,893 139,287,080
16,046,863 172,398,274
- ----------------------------------------------------------------------------------------------------------------------
(46,118) 102,991 149,109 1,627,816
3,089,046 4,845,481
- ----------------------------------------------------------------------------------------------------------------------
1,277,740 3,997,171 2,719,431 5,442,307
14,210,484 23,844,347
- ----------------------------------------------------------------------------------------------------------------------
11,656,721 9,459,521 (2,197,200) (937,272)
89,495,579 95,081,684
- ----------------------------------------------------------------------------------------------------------------------
12,783,439 29,299,509 16,516,070 4,017,712
164,724,583 191,515,746
- ----------------------------------------------------------------------------------------------------------------------
91,671,503 8,139,519 (83,531,984) (57,916,538)
425,259,499 346,244,393
- ----------------------------------------------------------------------------------------------------------------------
$ 594,083,184 $612,391,085 $ 18,307,901 $ 781,800,013 $6,632,117,659 $8,565,202,363
======================================================================================================================
</TABLE>
S-16
<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, 1997, and the related statements of operations and changes
in net assets for each of the years in the two-year period then ended and
condensed financial information for the year ended December 31, 1997. These
financial statements and condensed financial information are the responsibility
of the Account's management. Our responsibility is to express an opinion on
these financial statements and condensed financial information based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and condensed
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and condensed financial information. Our procedures
included confirmation of securities owned as of December 31, 1997, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company Variable Annuity Account C
as of December 31, 1997, the results of its operations and changes in its net
assets for each of the years in the two-year period then ended and condensed
financial information for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 27, 1998
S-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements
------------------------------------------
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Balance Sheets as of December 31, 1997
and 1996 F-4
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aetna Life Insurance
and Annuity Company and Subsidiary at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1998
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
--------------------------------
1997 1996 1995
------- ------- -------
Revenue:
Premiums $267.1 $133.6 $212.7
Charges assessed against policyholders 475.0 396.5 318.9
Net investment income 1,080.5 1,045.6 1,004.3
Net realized capital gains 36.0 19.7 41.3
Other income 39.7 45.4 42.0
------- ------- -------
Total revenue 1,898.3 1,640.8 1,619.2
------- ------- -------
Benefits and expenses:
Current and future benefits 1,127.8 968.6 997.2
Operating expenses 347.4 342.2 310.8
Amortization of deferred policy
acquisition costs 128.4 69.8 48.0
Severance and facilities charges -- 61.3 --
------- ------- -------
Total benefits and expenses 1,603.6 1,441.9 1,356.0
------- ------- -------
Income before income taxes 294.7 198.9 263.2
Income taxes 89.4 57.8 87.3
------- ------- -------
Net income $205.3 $141.1 $175.9
======= ======= =======
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
Assets 1997 1996
- ------ ---- ----
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(amortized cost: $12,912.2 and $12,539.1) $13,463.8 $12,905.5
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $131.7 and $107.6) 147.6 119.0
Investment in affiliated mutual funds (cost: $78.1 and $77.3) 83.0 81.1
Common stock (cost: $0.2 and $0.0) .6 .3
Short-term investments 95.6 34.8
Mortgage loans 12.8 13.0
Policy loans 469.6 399.3
--------- --------
Total investments 14,273.0 13,553.0
Cash and cash equivalents 565.4 459.1
Accrued investment income 163.0 159.0
Premiums due and other receivables 63.7 26.6
Deferred policy acquisition costs 1,654.6 1,515.3
Reinsurance loan to affiliate 397.2 628.3
Other assets 46.8 33.7
Separate accounts assets 22,982.7 15,318.3
--------- --------
Total assets $40,146.4 $31,693.3
========= ========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $3,763.7 $3,617.0
Unpaid claims and claim expenses 38.0 28.9
Policyholders' funds left with the Company 11,143.5 10,663.7
--------- --------
Total insurance reserve liabilities 14,945.2 14,309.6
Other liabilities 312.8 354.7
Income taxes:
Current 12.4 20.7
Deferred 72.0 80.5
Separate accounts liabilities 22,970.0 15,318.3
--------- --------
Total liabilities 38,312.4 30,083.8
--------- --------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Accumulated other comprehensive income 92.9 60.5
Retained earnings 1,320.3 1,128.2
--------- --------
Total shareholder's equity 1,834.0 1,609.5
--------- --------
Total liabilities and shareholder's equity $40,146.4 $31,693.3
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,609.5 $1,583.0 $1,088.5
Comprehensive income
Net income 205.3 141.1 175.9
Other comprehensive income, net of tax
Unrealized gains (losses) on securities ($50.1
million, $(110.8) million and $494.6 million, 32.4 (72.0) 321.5
pretax, respectively)
-------- -------- --------
Total comprehensive income 237.7 69.1 497.4
-------- -------- --------
Capital contributions -- 10.4 0.0
Other changes 4.1 (49.5) 0.0
Common stock dividends (17.3) (3.5) (2.9)
-------- -------- --------
Shareholder's equity, end of year $1,834.0 $1,609.5 $1,583.0
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $205.3 $141.1 $175.9
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
(Increase) decrease in accrued investment income (4.0) 16.5 (33.3)
(Increase) decrease in premiums due and other receivables (33.3) 1.6 25.4
Increase in policy loans (70.3) (60.7) (89.9)
Increase in deferred policy acquisition costs (139.3) (174.0) (177.0)
Decrease in reinsurance loan to affiliate 231.1 27.2 34.8
Net increase in universal life account balances 286.4 243.2 393.4
(Decrease) increase in other insurance reserve liabilities (249.6) (211.5) 79.0
Net (decrease) increase in other liabilities and other assets (41.7) 3.1 13.0
Decrease in income taxes (31.4) (26.7) (4.5)
Net accretion of discount on investments (66.4) (68.0) (66.4)
Net realized capital gains (36.0) (19.7) (41.3)
Other, net -- 1.1 --
-------- -------- --------
Net cash provided by (used for) operating activities 50.8 (126.8) 309.1
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,311.3 5,182.2 4,207.2
Equity securities 103.1 190.5 180.8
Mortgage loans 0.2 8.7 10.7
Limited partnership -- -- 26.6
Investment maturities and collections of:
Debt securities available for sale 1,212.7 885.2 583.9
Short-term investments 89.3 35.0 106.1
Cost of investment purchases in:
Debt securities available for sale (6,732.8) (6,534.3) (6,034.0)
Equity securities (113.3) (118.1) (170.9)
Short-term investments (149.9) (54.7) (24.7)
Mortgage loans -- -- (21.3)
Other, net -- (17.6) --
-------- -------- --------
Net cash used for investing activities (279.4) (423.1) (1,135.6)
-------- -------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,621.2 1,579.5 1,884.5
Withdrawals of investment contracts (1,256.3) (1,146.2) (1,109.6)
Capital contribution to Separate Account (25.0) -- --
Return of capital from Separate Account 12.3 -- --
Capital contribution from HOLDCO -- 10.4 --
Dividends paid to shareholder (17.3) (3.5) (2.9)
-------- -------- --------
Net cash provided by financing activities 334.9 440.2 772.0
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 106.3 (109.7) (54.5)
Cash and cash equivalents, beginning of year 459.1 568.8 623.3
-------- -------- --------
Cash and cash equivalents, end of year $565.4 $459.1 $568.8
======== ======== ========
Supplemental cash flow information:
Income taxes paid, net $119.6 $85.5 $92.8
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiary
(collectively, the "Company") are providers of financial services and life
insurance products in the United States. The Company has two business
segments: financial services and individual life insurance.
Financial services products include annuity contracts that offer a variety
of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403,
408 and 457, and non-qualified annuity contracts. These contracts may be
deferred or immediate ("payout annuities"). Financial services also include
investment advisory services and pension plan administrative services.
Individual life insurance products include universal life, variable
universal life, traditional whole life and term insurance.
Basis of Presentation
---------------------
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiary, Aetna Insurance Company of
America. Aetna Life Insurance and Annuity Company is a wholly owned
subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a
wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate
parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have
been made to 1996 and 1995 financial information to conform to the 1997
presentation.
New Accounting Standard
-----------------------
As of December 31, 1997 the Company adopted Financial Accounting Standard
("FAS") No. 130, Reporting Comprehensive Income. This statement establishes
standards for the reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
encompasses all changes in shareholder's equity (except those arising from
transactions with shareholders) and includes net income and net unrealized
capital gains or losses on available-for-sale securities. As this new
standard only requires additional information in a financial statement, it
does not affect the Company's financial position or results of operations.
Future Application of Accounting Standards
------------------------------------------
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in June 1996 and provides
accounting and reporting standards for transfers of financial assets and
extinguishments of liabilities.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Future Application of Accounting Standards (Continued)
FAS No. 125 is effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending are not effective until January 1, 1998. Provisions effective in
1997 did not have a material effect on the Company's financial position or
results of operations. The Company does not expect adoption of this
statement for provisions effective in 1998 to have a material effect on its
financial position or results of operations.
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments, which provides guidance for
determining when an insurance or other enterprise should recognize a
liability for guaranty-fund and other insurance related assessments and
guidance for measuring the liability. This statement is effective for 1999
financial statements with early adoption permitted. The Company does not
expect adoption of this statement to have a material effect on its
financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from reported results
using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased.
Investments
Debt and equity securities are classified as available for sale and carried
at fair value. These securities are written down (as realized capital
losses) for other than temporary declines in value. Unrealized capital
gains and losses related to available for sale investments, other than
amounts allocable to experience rated contractholders, are reflected in
shareholder's equity, net of related taxes.
Fair values for debt and equity securities are based on quoted market
prices or dealer quotations. Where quoted market prices or dealer
quotations are not available, fair values are measured utilizing quoted
market prices for similar securities or by using discounted cash flow
methods. Cost for mortgage-backed securities is adjusted for unamortized
premiums and discounts, which are amortized using the interest method over
the estimated remaining term of the securities, adjusted for anticipated
prepayments.
F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
The company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of a loaned domestic security and 105% of the market value of
a loaned foreign security. The collateral is deposited by the borrower with
a lending agent, and retained and invested by the lending agent according
to the Company's guidelines to generate additional income. The market value
of the loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market value of the loaned
securities fluctuates. At December 31, 1997 and 1996, the Company loaned
securities (which are reflected as invested assets) with a market value of
approximately $385.1 million and $444.7 million, respectively.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds represents an investment in Aetna
managed mutual funds which have been seeded by the Company, and is carried
at fair value.
Mortgage loans and policy loans are carried at unpaid principal balances,
net of impairment reserves. Sales of mortgage loans are recorded on the
closing date.
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which
approximates amortized cost.
The Company utilizes futures contracts, swap agreements and warrants for
other than trading purposes in order to manage investment returns and price
risk and to align maturities, interest rates, and funds availability with
its obligations. (Refer to Note 3.)
Futures contracts are carried at fair value and require daily cash
settlement. Changes in the fair value of futures contracts that qualify as
hedges are deferred and recognized as an adjustment to the hedged asset or
liability. Deferred gains or losses on such futures contracts are amortized
over the life of the acquired asset or liability as a yield adjustment or
through net realized capital gains or losses upon disposal of an asset.
Changes in the fair value of futures contracts that do not qualify as
hedges are recorded in net realized capital gains or losses. Hedge
designation requires specific asset or liability identification, a
probability at inception of high correlation with the position underlying
the hedge, and that high correlation be maintained throughout the hedge
period. If a hedging instrument ceases to be highly correlated with the
position underlying the hedge, hedge accounting ceases at that date and
excess gains and losses on the hedging instrument are reflected in net
realized capital gains or losses.
Interest rate swap agreements which are designated as interest rate risk
management instruments at inception are accounted for using the accrual
method. Accordingly, the difference between amounts
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
paid and received on such agreements is reported in net investment income.
There is no recognition in the Consolidated Balance Sheets for changes in
the fair value of the agreement.
Warrants represent the right to purchase specific securities and are
accounted for as hedges. Upon exercise, the cost of the warrants are added
to the basis of the securities purchased.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs,
all of which vary with and are primarily related to the production of new
and renewal business, consist principally of commissions, certain expenses
of underwriting and issuing contracts, and certain agency expenses. For
fixed ordinary life contracts, such costs are amortized over expected
premium-paying periods (up to 20 years). For universal life and certain
annuity contracts, such costs are amortized in proportion to estimated
gross profits and adjusted to reflect actual gross profits over the life of
the contracts (up to 20 years). Deferred policy acquisition costs are
written off to the extent that it is determined that future policy premiums
and investment income or gross profits are not adequate to cover related
losses and expenses.
Insurance Reserve Liabilities
Future policy benefits include reserves for universal life, immediate
annuities with life contingent payouts and traditional life insurance
contracts. Reserves for universal life contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon.
Reserves for immediate annuities with life contingent payouts and
traditional life insurance contracts are computed on the basis of assumed
investment yield, mortality, and expenses, including a margin for adverse
deviations. Such assumptions generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 12.00% for all
years presented. Investment yield is based on the Company's experience.
Mortality and withdrawal rate assumptions are based on relevant Aetna
experience and are periodically reviewed against both industry standards
and experience.
Policyholders' funds left with the Company include reserves for deferred
annuity investment contracts and immediate annuities without life
contingent payouts. Reserves on such contracts are equal to cumulative
deposits less charges and withdrawals plus credited interest thereon (rates
range from 3.50% to 9.50% for all years presented) net of adjustments for
investment experience that the Company is entitled to reflect in future
credited interest. Reserves on contracts subject to experience rating
reflect the rights of contractholders, plan participants and the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges,
actuarial margin and other fees are recorded as revenue in charges assessed
against policyholders. Other amounts received for these contracts are
reflected as deposits and are not recorded as revenue. Life insurance
premiums, other than premiums for universal life and certain annuity
contracts, are recorded as premium revenue when due. Related policy
benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the
contracts. When annuity payments with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity and reflected as an offsetting amount in both premiums and current
and future benefits in the Consolidated Statements of Income.
Separate Accounts
Assets held under variable universal life and variable annuity contracts
are segregated in Separate Accounts and are invested, as designated by the
contractholder or participant under a contract, in shares of mutual funds
which are managed by the Company, or other selected mutual funds not
managed by the Company.
Separate Accounts assets and liabilities are carried at fair value except
for those relating to a guaranteed interest option. Since the Company bears
the investment risk where the contract is held to maturity, the assets of
the Separate Account supporting the guaranteed interest option are carried
at an amortized cost of $658.6 million for 1997 (fair value $668.7 million)
and $515.6 million for 1996 (fair value $523.0 million). Reserves relating
to the guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 4.10% to 8.00% in both 1997 and in
1996.
Separate Accounts assets and liabilities are shown as separate captions in
the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains and losses of the Separate Accounts
are not reflected in the Consolidated Statements of Income (with the
exception of realized capital gains and losses on the sale of assets
supporting the guaranteed interest option). The Consolidated Statements of
Cash Flows do not reflect investment activity of the Separate Accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. The Company is taxed at regular corporate rates after adjusting
income reported for financial statement purposes for certain items.
Deferred income tax expenses/benefits result from changes during the year
in cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $1,219.7 $74.0 $0.1 $1,293.6
States, municipalities and political
subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Financial 2,370.7 84.6 1.3 2,454.0
Food & fiber 195.4 9.3 -- 204.7
Healthcare & consumer products 728.5 27.0 2.6 752.9
Media & broadcast 252.9 14.7 0.1 267.5
Natural resources 143.5 5.5 - 149.0
Transportation & capital goods 528.2 33.2 0.1 561.3
Utilities 521.3 23.5 0.9 543.9
Other corporate securities 96.9 3.2 - 100.1
---------- -------- -------- -----------
Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4
Foreign Securities:
Government 612.5 36.7 23.6 625.6
Utilities 177.5 28.7 -- 206.2
Other 857.9 27.7 42.8 842.8
---------- -------- -------- -----------
Total foreign securities 1,647.9 93.1 66.4 1,674.6
Residential mortgage-backed securities:
Pass-throughs 784.4 71.3 2.0 853.7
Collateralized mortgage obligations 2,280.5 137.4 2.0 2,415.9
---------- -------- -------- -----------
Total residential mortgage-
backed securities 3,064.9 208.7 4.0 3,269.6
Commercial/Multifamily mortgage-
backed securities 1,127.8 34.0 0.4 1,161.4
Other asset-backed securities 1,014.2 17.1 0.4 1,030.9
---------- -------- -------- -----------
Total Debt Securities $12,912.2 $627.9 $76.3 $13,463.8
========== ======== ======== ===========
</TABLE>
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Debt securities available for sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $1,072.4 $20.5 $4.5 $1,088.4
States, municipalities and political
subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other corporate securities 141.5 3.0 -- 144.5
--------- --------- -------- ---------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
--------- -------- --------- ---------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
--------- --------- -------- ---------
Total residential mortgage-
backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-
backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
--------- -------- --------- --------
Total Debt Securities $12,539.1 $432.6 $66.2 $12,905.5
========= ======== ========= ========
</TABLE>
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
At December 31, 1997 and 1996, net unrealized appreciation of $551.6
million and $366.4 million, respectively, on available-for-sale debt
securities included $429.3 million and $288.5 million, respectively,
related to experience rated contracts, which were not reflected in
shareholder's equity but in future policy benefits and policyholders' funds
left with the Company.
The carrying and fair value of debt securities for the year ended December
31, 1997 are shown below by contractual maturity. Actual maturities may
differ from contractual maturities because securities may be restructured,
called, or prepaid.
Amortized Fair
Cost Value
--------- ------
(millions)
Due to mature:
One year or less $367.3 $367.6
After one year through five years 2,165.1 2,195.4
After five years through ten years 2,367.3 2,407.0
After ten years 2,805.6 3,031.9
Mortgage-backed securities 4,192.7 4,431.0
Other asset-backed securities 1,014.2 1,030.9
--------- ---------
Total $12,912.2 $13,463.8
========= =========
At December 31, 1997 and 1996, debt securities carried at $8.2 million and
$7.6 million, respectively, were on deposit as required by regulatory
authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 1997.
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1997 1996
--------------------- ------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
-------- -------- -------- --------
(millions)
<S> <C> <C> <C> <C>
Total residential CMOs(1) $2,415.9 $2,280.5 $2,309.0 $2,227.8
======== ======== ======== ========
Percentage of total:
Supporting experience rated products 81.6% 84.2%
Supporting remaining products 18.4% 15.8%
----- -----
100.0% 100.0%
===== =====
</TABLE>
(1) At December 31, 1997 and 1996, approximately 73% and 71%,
respectively, of the Company's residential CMO holdings were
backed by government agencies such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees
of risk from changes in interest rates and, for nonagency-backed CMOs,
defaults. The principal risks inherent in holding CMOs are prepayment and
extension risks related to dramatic decreases and increases in interest
rates resulting in the repayment of principal from the underlying mortgages
either earlier or later than originally anticipated. At December 31, 1997
and 1996, approximately 4% and 3%, respectively, of the Company's CMO
holdings were invested in types of CMOs which are subject to more
prepayment and extension risk than traditional CMOs (such as interest- or
principal-only strips).
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in equity securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(millions)
1997
Equity Securities $210.0 $21.3 $0.1 $231.2
====== ===== ==== ======
1996
Equity Securities $184.9 $16.3 $0.8 $200.4
====== ===== ==== ======
3. Financial Instruments
Estimated Fair Value
--------------------
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1997 and 1996 were as follows:
1997 1996
-------------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- ------ -------- -----
(millions)
Assets:
Mortgage loans $ 12.8 $ 12.4 $ 13.0 $ 13.2
Liabilities:
Investment contract
liabilities:
With a fixed maturity $ 1,030.3 $1,005.4 $1,014.1 $1,028.8
Without a fixed
maturity 10,113.2 9,587.5 9,649.6 9,427.6
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial instrument,
such as estimates of timing and amount of future cash flows. Such estimates
do not reflect any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates cannot
be substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the instrument. In
evaluating the Company's management of interest rate, price and liquidity
risks, the fair values of all assets and liabilities should be taken into
consideration, not only those presented above.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Estimated Fair Value (Continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar
loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans.
Investment contract liabilities (included in policyholders' funds left with
the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under
such contracts to delay payment of withdrawals which may ultimately result
in paying an amount different than that determined to be payable on demand.
Off-Balance-Sheet and Other Financial Instruments (including Derivative
Instruments)
The Company uses off-balance-sheet and other financial instruments
primarily to manage portfolio risks, including interest rate,
prepayment/call, credit, price, and liquidity risks. In 1997 and 1996,
Treasury futures contracts were used to manage interest rate risk in the
Company's bond portfolio; and, in 1996, stock index futures contracts were
used to manage price risk in the Company's equity portfolio. In 1996 and
1995, interest rate swaps and forward commitments to enter into interest
rate swaps, respectively, were also used to manage interest rate risk in
the Company's bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell
securities at a specified future date and at a specified price or yield.
Futures contracts trade on organized exchanges and, therefore, have minimal
credit risk. Cash settlements are made daily based on changes in the prices
of the underlying assets. There were no futures contracts open as of
December 31, 1997 and 1996.
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to
exchange interest amounts calculated by reference to an agreed notional
principal amount. Generally, no cash is exchanged at the outset of the
contract and no principal payments are made. A single net payment is
usually made by one counterparty at each due date or upon termination of
the contract. The Company would be
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments (Including Derivative
Instruments) (Continued)
exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, however, the Company controls its
exposure to credit risk through credit approvals, credit limits and regular
monitoring procedures. The credit exposure of interest rate swaps is
represented by the fair value (market value) of contracts with a positive
fair value (market value) at the reporting date. There were no interest
rate swap agreements open as of December 31, 1997 and 1996.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1997
and 1996.
Warrants:
Warrants are instruments giving the Company the right, but not the
obligation to buy a security at a given price during a specified period. As
of December 31, 1997 and 1996, the Company had open warrants to purchase
equity securities with a fair value of $0.6 million and $0.3 million,
respectively.
Debt Instruments with Derivative Characteristics:
The Company also had investments in certain debt instruments with
derivative characteristics, including those whose market value is at least
partially determined by, among other things, levels of or changes in
domestic and/or foreign interest rates (short or long term), exchange
rates, prepayment rates, equity markets or credit ratings/spreads. The
amortized cost and fair value of these securities, included in the debt
securities portfolio, as of December 31, 1997 was as follows:
Amortized Fair
Cost Value
--------- ----
(millions)
Residential collateralized mortgage
obligations $2,280.5 $2,415.9
Principal-only strips (included above) 59.0 67.0
Interest-only strips (included above) 12.8 24.3
Other structured securities with derivative
characteristics (1) 107.4 105.2
(1) Represents non-leveraged instruments whose fair values and credit
risk are based on underlying securities, including fixed income
securities and interest rate swap agreements.
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $962.8 $945.3 $891.5
Nonredeemable preferred stock 13.7 5.9 4.2
Investment in affiliated
mutual funds 4.9 14.3 14.9
Mortgage loans 1.3 2.2 1.4
Policy loans 19.9 18.4 13.7
Reinsurance loan to affiliate 37.5 44.1 46.5
Cash equivalents 44.2 29.4 38.9
Other 10.0 2.1 8.4
-------- -------- --------
Gross investment income 1,094.3 1,061.7 1,019.5
Less investment expenses (13.8) (16.1) (15.2)
-------- -------- --------
Net investment income $1,080.5 $1,045.6 $1,004.3
======== ======== ========
Net investment income includes amounts allocable to experience rated
contractholders of $823.1 million, $787.6 million and $744.2 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Interest
credited to contractholders is included in current and future benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively.
The amount of dividends that may be paid to the shareholder in 1998 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$77.6 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus those
amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which differ in certain respects
from generally accepted accounting principles. Statutory net income was
$80.5 million, $57.8 million and $70.0 million for the years ended December
31, 1997, 1996 and 1995, respectively. Statutory capital and surplus was
$778.7 million and $713.6 million as of December 31, 1997 and 1996,
respectively.
As of December 31, 1997 the Company does not utilize any statutory
accounting practices which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains on investments were as follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $22.5 $11.1 $32.8
Equity securities 9.9 8.6 8.3
Other 3.6 -- 0.2
------ -------- ------
Pretax realized capital gains $36.0 $19.7 $41.3
====== ======== ======
After tax realized capital gains $23.2 $13.0 $25.8
====== ======== ======
Net realized capital gains of $96.1 million, $53.1 million and $61.1
million for 1997, 1996 and 1995, respectively, allocable to experience
rated contracts, were deducted from net realized capital gains and an
offsetting amount was reflected in policyholders' funds left with the
Company. Net unamortized gains were $138.1 million and $53.3 million at
December 31, 1997 and 1996, respectively.
Proceeds from the sale of available-for-sale debt securities and the
related gross gains and losses were as follows:
1997 1996 1995
----- ----- ----
(millions)
Proceeds on Sales $5,311.3 $5,182.2 $4,207.2
Gross Gains 25.8 24.3 44.6
Gross Losses 3.3 13.2 11.8
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities)
(excluding those related to experience rated contractholders) were as
follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $44.3 $(100.1) $255.9
Equity securities 5.6 (10.5) 27.3
Limited partnership -- -- 1.8
----- ------- ------
49.9 (110.6) 285.0
Increase (decrease) in deferred
income taxes (See Note 8) 17.5 (38.6) (36.5)
----- ------- ------
Net changes in accumulated other
comprehensive income $32.4 $(72.0) $321.5
===== ======= ======
Net unrealized capital gains allocable to experience rated contracts of
$356.7 million and $72.6 million at December 31, 1997 and $245.2 million
and $43.3 million at December 31, 1996 are reflected on the Consolidated
Balance Sheets in policyholders' funds left with the Company and future
policy benefits, respectively, and are not included in shareholder's
equity.
Shareholder's equity included the following accumulated other comprehensive
income, which are net of amounts allocable to experience rated
contractholders, at December 31:
1997 1996 1995
---- ---- ----
(millions)
Debt securities
Gross unrealized capital gains $140.6 $101.7 $179.3
Gross unrealized capital losses (18.4) (23.8) (1.3)
----- ----- -----
122.2 77.9 178.0
Equity securities
Gross unrealized capital gains 21.2 16.3 27.2
Gross unrealized capital losses (0.1) (0.8) (1.2)
---- ---- -----
21.1 15.5 26.0
Deferred income taxes (See Note 8) 50.4 32.9 71.5
---- ---- -----
Net accumulated other
comprehensive income $92.9 $60.5 $132.5
==== ==== =====
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to
experience rated contractholders) were as follows:
1997 1996 1995
---- ---- ----
(millions)
Unrealized holding gains (losses)
arising during the period (1) $98.8 $(14.8) $390.5
Less: reclassification adjustment
for gains and other items included
in net income (2) 66.4 57.2 69.0
----- ------ ------
Net unrealized gains (losses)
on securities $32.4 $(72.0) $321.5
===== ====== ======
(1) Pretax unrealized holding gains (losses) arising during the
period were $152.0 million, ($22.8) million and $600.8 million
for 1997, 1996 and 1995, respectively.
(2) Pretax reclassification adjustments for gains and other items
included in net income were $102.4 million, $87.7 million and
$107.5 million for 1997, 1996 and 1995, respectively.
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, included
the following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased Corporate
(Millions) Severance Write-off Property Other Allocation Total
-------------------------- --------- --------- --------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Financial Services $29.1 $1.0 $1.3 $1.7 $ -- $33.1
Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2
Corporate Allocation -- -- -- -- 14.0 14.0
--------- --------- --------- ----- ---------- ---------
Total Company $41.6 $1.4 $1.8 $2.5 $14.0 $61.3
-------------------------- --------- --------- --------- ----- ---------- ---------
</TABLE>
In the third quarter of 1996, the Company recorded a $30.7 million after
tax ($47.3 million pretax) charge principally related to actions taken or
expected to be taken to improve its cost structure relative to its
competitors. The severance portion of the charge is based on a plan to
eliminate 702 positions (primarily customer service, sales and information
technology support staff). The facilities portion of the charge is based on
a plan to consolidate sales/service field offices.
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges (Continued)
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions
taken or expected to be taken to reduce the level of corporate expenses and
other costs previously absorbed by Aetna's property-casualty operations,
which were sold in April 1996. The cost allocated to the Company associated
with this charge was $9.1 million after tax ($14.0 million pretax).
Activity for 1997 and 1996 within the severance and facilities reserve
(pretax, in millions) and the number of positions eliminated related to
such actions were as follows:
(Millions) Reserve Positions
----------------------------------- ---------- ---------
Balance at December 31, 1995 $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
---------- ---------
Balance at December 31, 1996 47.9 524
Actions taken (1) (27.1) (163)
---------- ---------
Balance at December 31, 1997 $20.8 361
========== =========
(1) Includes $15.9 million and $8.0 million in 1997 and 1996,
respectively, of severance-related actions and $7.9 million and $4.1
million in 1997 and 1996, respectively, of corporate
allocation-related actions.
The Company's severance actions are expected to be substantially completed
by September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return, the
Illinois Unitary return and the Connecticut and the New York combined state
income tax returns of Aetna. Aetna allocates to each member an amount
approximating the tax it would have incurred were it not a member of the
consolidated group, and credits the member for the use of its tax saving
attributes used in the consolidated federal income tax return.
Income taxes for the years ended December 31, consist of:
1997 1996 1995
---- ---- ----
(millions)
Current taxes:
Income Taxes:
Federal income tax $64.5 $50.9 $82.9
State income tax 3.7 3.7 3.2
Net realized capital gains 45.6 25.3 28.5
----- ---- ----
113.8 79.9 114.6
----- ---- -----
Deferred taxes (benefits):
Income taxes:
Federal 8.4 (3.5) (14.4)
Net realized capital gains (losses) (32.8) (18.6) (12.9)
----- ----- -----
(24.4) (22.1) (27.3)
----- ----- -----
Total $89.4 $57.8 $87.3
===== ===== =====
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes for the following
reasons:
1997 1996 1995
---- ---- ----
(millions)
Income before income taxes $294.7 $198.9 $263.2
Tax rate 35% 35% 35%
------- ------- -------
Application of the tax rate 103.1 69.6 92.1
------- ------- -------
Tax effect of:
State income tax, net of
federal benefit 2.4 2.4 2.1
Excludable dividends (15.9) (8.7) (9.3)
Other, net (0.2) (5.5) 2.4
------- ------- --------
Income taxes $89.4 $57.8 $87.3
======= ======= ========
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1997 1996
---- ----
(millions)
Deferred tax assets:
Insurance reserves $415.8 $344.6
Unrealized gains allocable to
experience rated contracts 150.1 100.8
Investment losses 6.6 7.5
Postretirement benefits other
than pensions 26.3 27.0
Deferred compensation 31.2 25.0
Pension (3.6) 7.6
Restructuring charge 9.5 17.6
Depreciation 3.9 2.6
Other 8.8 9.1
--------- --------
Total gross assets 648.6 541.8
Deferred tax liabilities:
Deferred policy acquisition costs 515.6 482.1
Market discount 5.1 6.8
Net unrealized capital gains 200.5 133.7
Other (0.6) (0.3)
--------- ---------
Total gross liabilities 720.6 622.3
--------- ---------
Net deferred tax liability $72.0 $80.5
========= =========
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. As of December 31, 1997 and 1996, no
valuation allowances were required for unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax
return purposes under the Deficit Reduction Act of 1984. The balance in
such account was approximately $17.2 million at December 31, 1997. This
amount would be taxed only under certain conditions. No income taxes have
been provided on this amount since management believes the conditions under
which such taxes would become payable are remote.
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1990. Discussions
are being held with the Service with respect to proposed adjustments.
Management believes there are adequate defenses against, or sufficient
reserves to provide for, any such adjustments. The Service has commenced
its examinations for the years 1991 through 1994.
9. Benefit Plans
Employee Pension Plans - The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to amounts that are tax-deductible. As of
December 31, 1997, Aetna's accrued pension cost has been allocated to its
subsidiaries, including the Company, under an allocation based on eligible
salaries. Data on a separate company basis regarding the proportionate
share of the projected benefit obligation and plan assets is not available.
The accumulated benefit obligation and plan assets are recorded by Aetna.
As of the measurement date (i.e., September 30), the accumulated plan
assets exceeded accumulated plan benefits. Allocated pretax charges to
operations for the pension plan (based on the Company's total salary cost
as a percentage of Aetna's total salary cost) were $2.7 million, $4.3
million and $6.1 million for the years ended December 31, 1997, 1996 and
1995, respectively.
Employee Postretirement Benefits - In addition to providing pension
benefits, Aetna currently provides certain health care and life insurance
benefits for retired employees. A comprehensive medical and dental plan is
offered to all full-time employees retiring at age 50 with 15 years of
service or at age 65 with 10 years of service. There is a cap on the
portion of the cost paid by the Company relating to medical and dental
benefits. Retirees are generally required to contribute to the plans based
on their years of service with Aetna. The costs to the Company associated
with the Aetna postretirement plans for 1997, 1996 and 1995 were $2.7
million, $1.8 million and $1.4 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$77.7 million of accrued liabilities, primarily related to the pension and
postretirement benefit plans described above, that had been previously
recorded by Aetna. The after tax amount of this transfer (approximately
$50.5 million) is reported as a reduction in retained earnings. In 1997,
other changes in shareholder's equity includes an additional $0.8 million
reduction reflecting revisions to the allocation of these accrued
liabilities.
Agent Pension Plans - The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides
pension benefits based on annual commission earnings. As of the measurement
date (i.e., September 30), the accumulated plan assets exceeded accumulated
plan benefits.
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
Agent Postretirement Benefits - The Company, in conjunction with Aetna,
also provides certain postretirement health care and life insurance
benefits for certain agents. The costs to the Company associated with the
agents' postretirement plans for 1997, 1996 and 1995 were $0.6 million,
$0.7 million and $0.8 million, respectively.
Incentive Savings Plan - Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which
may be invested in common stock of Aetna or certain other investments, are
matched, up to 5% of compensation, by Aetna. Pretax charges to operations
for the incentive savings plan were $4.4 million, $5.4 million and $4.9
million in 1997, 1996 and 1995, respectively.
Stock Plans - Aetna has a stock incentive plan that provides for stock
options, deferred contingent common stock or equivalent cash awards or
restricted stock to certain key employees. Executive and middle management
employees may be granted options to purchase common stock of Aetna at or
above the market price on the date of grant. Options generally become 100%
vested three years after the grant is made, with one-third of the options
vesting each year. Aetna does not recognize compensation expense for stock
options granted at or above the market price on the date of grant under its
stock incentive plans. In addition, executives may be granted incentive
units which are rights to receive common stock or an equivalent value in
cash. The incentive units may vest within a range from 0% to 175% at the
end of a four year period based on the attainment of performance goals. The
costs to the Company associated with the Aetna stock plans for 1997, 1996
and 1995, were $2.9 million, $8.1 million and $6.3 million, respectively.
As of December 31, 1996, Aetna transferred to the Company approximately
$1.1 million of deferred tax benefits related to stock options. This amount
is reported as an increase in retained earnings. In 1997, other changes in
shareholder's equity include an additional increase of $2.3 million
reflecting revisions to the allocation of the deferred tax benefit.
10. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality
and expense risks pertaining to variable life and annuity contracts. Under
the insurance contracts, the Separate Accounts pay the Company a daily fee
which, on an annual basis, ranges, depending on the product, from 0.10% to
1.90% of their average daily net assets. The Company also receives fees
from Aetna managed mutual funds for serving as investment adviser. Under
the advisory agreements, these funds pay the Company a daily fee which, on
an annual basis, ranges, depending on the fund, from 0.25% to 0.85% of
their average daily net assets. The Company also receives fees (expressed
as a percentage of the average daily net assets) from some of its funds for
providing administration services, and from The Aetna Series Fund for
providing shareholder services and promoting sales. The amount of
compensation and fees received from the Separate Accounts and mutual funds,
included in charges assessed against policyholders, amounted to $271.2
million, $186.8 million and $128.1 million in 1997, 1996 and 1995,
respectively. The Company may waive advisory fees at its discretion.
F-27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting
as Subadvisor for affiliated mutual funds and adviser for most of the
General Account assets. Fees paid by the Company to Aeltus, included in
both charges assessed against policyholders and net investment income, on
an annual basis, range from 0.06% to 0.55% of the average daily net assets
under management. For the years ended December 31, 1997 and 1996, the
Company paid $45.5 million and $16.0 million in such fees.
The Company may, from time to time, make reimbursements to an Aetna managed
mutual fund for some or all of its operating expenses. Reimbursement
arrangements may be terminated at any time without notice.
Since 1981, all domestic individual non-participating life insurance of
Aetna and its subsidiaries has been issued by the Company. Effective
December 31, 1988, the Company entered into a reinsurance agreement with
Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the non-participating individual life and annuity business written by Aetna
Life prior to 1981 was assumed by the Company. A $6.1 million and a $108.0
million commission, paid by the Company to Aetna Life in 1996 and 1988,
respectively, was capitalized as deferred policy acquisition costs. In
consideration for the assumption of this business, a loan was established
relating to the assets held by Aetna Life which support the insurance
reserves. Effective January 1, 1997, this agreement has been amended to
transition (based on underlying investment rollover in Aetna Life) from a
modified coinsurance to a coinsurance arrangement. As a result of this
change, reserves will be ceded to the Company from Aetna Life as investment
rollover occurs and the loan previously established will be reduced. The
Company maintained insurance reserves of $574.5 million ($397.2 million
relating to the modified coinsurance agreement and $177.3 million relating
to the coinsurance agreement) and $628.3 million as of December 31, 1997
and 1996, respectively, relating to the business assumed. The fair value of
the loan relating to assets held by Aetna Life was $412.3 million and
$625.3 million as of December 31, 1997 and 1996, respectively, and is based
upon the fair value of the underlying assets. Premiums of $176.7 million,
$25.3 million and $28.0 million and current and future benefits of $183.9
million, $39.5 million and $43.0 million were assumed in 1997, 1996 and
1995, respectively.
Investment income of $37.5 million, $44.1 million and $46.5 million was
generated from the reinsurance loan to affiliate in 1997, 1996 and 1995,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life for the purchase and administration of a life contingent
single premium variable payout annuity contract. In addition, the Company
also is responsible for administering fixed annuity payments that are made
to annuitants receiving variable payments. Reserves of $32.5 million and
$28.9 million were maintained for this contract as of December 31, 1997 and
1996, respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement
with Aetna Life to reinsure amounts in excess of this
F-28
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
limit, up to a maximum of $8.0 million on any new individual life business,
on a yearly renewable term basis. Premium amounts related to this agreement
were $5.9 million, $5.2 million and $3.2 million for 1997, 1996 and 1995,
respectively.
Effective October 1, 1997, the Company entered into a reinsurance agreement
with Aetna Life to assume amounts in excess of $0.2 million for certain of
its participating life insurance, on a yearly renewable term basis. Premium
amounts related to this agreement were $0.7 million in 1997.
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1997 or
1995.
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively. In 1995, the Company dividended $2.9
million in the form of two of its subsidiaries, Systematized Benefits
Administrators, Inc. and Aetna Investment Services, Inc., to Aetna
Retirement Services, Inc. (the Company's former parent).
Premiums due and other receivables include $37.0 million and $2.8 million
due from affiliates in 1997 and 1996, respectively. Other liabilities
include $1.2 million and $10.7 million due to affiliates for 1997 and 1996,
respectively.
As of December 31, 1997, Aetna transferred to the Company $2.5 million
based on its decision not to settle state tax liabilities for the years
1996 and 1997. This amount has been reported as an other increase in
retained earnings.
Substantially all of the administrative and support functions of the
Company are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures
appropriate for the type and nature of service provided.
11. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverables deemed
probable of recovery are reflected as assets on the Company's Consolidated
Balance Sheets.
F-29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 10 above.
<TABLE>
<CAPTION>
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
(millions)
------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
1997
----
Premiums:
Life Insurance $ 35.7 $15.1 $177.4 $198.0
Accident and Health Insurance 5.6 5.6 -- --
Annuities 67.9 -- 1.2 69.1
------- ------------- ----------- ---------
Total earned premiums $109.2 $20.7 $178.6 $267.1
======= ============= =========== =========
1996
----
Premiums:
Life Insurance $ 34.6 $11.2 $25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
------- ------------- ----------- ---------
Total earned premiums $125.2 $17.5 $25.9 $133.6
======= ============= =========== =========
1995
----
Premiums:
Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
------- ------------- ----------- ---------
Total earned premiums $200.3 $16.1 $28.5 $212.7
======= ============= =========== =========
</TABLE>
12. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments. At December 31, 1997, the
Company had commitments to purchase investments of $38.7 million. The fair
value of the investments at December 31, 1997 approximated $39.0 million.
F-30
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities (Continued)
Litigation
The Company is involved in numerous lawsuits arising, for the most part, in
the ordinary course of its business operations. While the ultimate outcome
of litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related
reserves established, it is not expected to result in liability for amounts
material to the financial condition of the Company, although it may
adversely affect results of operations in future periods.
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance. Summarized financial
information for the Company's principal operations was as follows:
1997 1996 1995
--------- --------- ---------
(millions)
Revenue:
Financial Services $1,277.9 $1,195.1 $1,211.3
Individual Life Insurance 620.4 445.7 407.9
--------- --------- ---------
Total revenue $1,898.3 $1,640.8 $1,619.2
========= ========= =========
Income before income taxes: (2)
Financial Services $188.2 $129.9 $160.1
Individual Life Insurance 106.5 83.0 103.1
--------- --------- ---------
Total income before
income taxes $294.7 $212.9 $263.2
========= ========= =========
Net income: (2)
Financial Services $137.5 $94.3 $113.8
Individual Life Insurance 67.8 55.9 62.1
--------- --------- ---------
Net income $205.3 $150.2 $175.9
========= ========= =========
Assets under management: (3)
Financial Services (4) $37,609.3 $27,268.1 $22,534.4
Individual Life Insurance 3,096.1 2,830.5 2,590.9
--------- --------- ---------
Total assets under management 40,705.4 $30,098.6 $25,125.3
========= ========= =========
(1) The 1996 results include severance and facilities charges of
$30.7 million, after tax. Of this charge $21.5 million related to
the Financial Services segment and $9.2 million related to the
Individual Life Insurance segment.
(2) Excludes any effect of the corporate facilities and severance
charge recorded in 1996 which is not directly allocable to the
Financial Services and Individual Life Insurance segments. (Refer
to Note 7).
(3) Excludes net unrealized capital gains (losses) of $551.5 million,
$366.4 million and $797.1 million at December 31, 1997, 1996 and
1995, respectively.
(4) The December 31, 1997 balance includes the transfer of $4,078.5
million of assets under management that were previously reported
by an affiliate.
F-31
<PAGE>
Form No. SAI.01107-98 ALIAC Ed. May 1998
