VARIABLE ANNUITY ACCOUNT C
Prospectus Dated:
May 1, 1998
Group Installment Variable Annuity Contracts For HR 10 Plans And Rewrite Of
Qualified 401 Plans
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The Contracts offered in connection with this prospectus are group installment
Variable Annuity Contracts (the "Contracts") issued by Aetna Life Insurance and
Annuity Company (the "Company"). The Contract is designed to fund Plans
("Plans") that provide for retirement income. The Plans may be entitled to
tax-deferred treatment under the Internal Revenue Code of 1986, as amended (the
"Code").
The Contract allows values to accumulate under credited interest or variable
options, or a combination of these options. It also provides for the payment of
annuity benefits on a fixed or variable basis, or a combination thereof.
The variable funding options currently available through the Separate Account
under the Contract described in this Prospectus are as follows:
<TABLE>
<S> <C>
[bullet] Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund, Inc.)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP
[bullet] Portfolio Partners MFS Research Growth Portfolio
</TABLE>
The credited interest options available for the accumulation of values are the
Guaranteed Accumulation Account and the Fixed Account. The Guaranteed
Accumulation Account and the Fixed Account are offered only in those states in
which they are approved. Except as specifically mentioned, this Prospectus
describes only the variable options of the Contract. Information about the
Guaranteed Accumulation Account and the Fixed Account is found in Appendix I
and Appendix II.
This Prospectus contains the information about Variable Annuity Account C (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 prospectus receipt
contained in this prospectus or by calling 1-800-232-5422. You may also obtain
an SAI for any of the Funds by calling that phone number.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THEFUNDS 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.
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION ARE DATED MAY 1,
1998.
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TABLE OF CONTENTS
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<TABLE>
<S> <C>
DEFINITIONS ................................DEFINITIONS - 1
PROSPECTUS SUMMARY .............................SUMMARY - 1
FEE TABLE ....................................FEE TABLE - 1
CONDENSED FINANCIAL INFORMATION ........................ 1
THE COMPANY ............................................ 1
VARIABLE ANNUITY ACCOUNT C ............................. 1
THE FUNDS .............................................. 1
Mixed and Shared Funding .............................. 2
Fund Additions, Limitations and Substitutions ......... 2
404(c) Protection ..................................... 2
THE CONTRACT ........................................... 3
Contract Purchase ..................................... 3
Net Purchase Payments ................................. 3
Distribution .......................................... 4
DETERMINING CONTRACT VALUE ............................. 4
Accumulation Units .................................... 4
Net Investment Factor ................................. 5
CONTRACT RIGHTS ........................................ 5
Right to Cancel ....................................... 5
Rights Under the Contract ............................. 5
Transfers and Allocation Changes ...................... 5
Withdrawals ........................................... 5
Reinvestment Privilege ................................ 6
CHARGES AND DEDUCTIONS ................................. 6
Maintenance Fee ....................................... 6
Mortality and Expense Risk Charges .................... 7
Administrative Expense Charge ......................... 7
Fund Expenses ......................................... 7
Allocation and Transfer of Fees ....................... 7
Deferred Sales Charge ................................. 7
Premium Tax ........................................... 8
SYSTEMATIC DISTRIBUTION OPTIONS ........................ 9
General ............................................... 9
Estate Conservation Option ............................ 9
Systematic Withdrawal Option .......................... 10
ANNUITY PERIOD ......................................... 10
Annuity Period Elections .............................. 10
Annuity Options ....................................... 11
DEATH BENEFIT .......................................... 12
Accumulation Period ................................... 12
Annuity Period ........................................ 12
TAX STATUS ............................................. 13
</TABLE>
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<TABLE>
<S> <C>
Federal Tax Status of the Company ............................ 13
Use of the Contract .......................................... 13
Tax Status of Amounts Distributed Under The Contract ......... 13
MISCELLANEOUS ................................................. 14
Performance Reporting ........................................ 14
Voting Rights ................................................ 15
Modification of the Contract ................................. 15
Contract Holder Inquiries .................................... 15
Telephone Transfers .......................................... 15
Transfer of Ownership; Assignment ............................ 16
Legal Proceedings ............................................ 16
Legal Matters ................................................ 16
Year 2000 .................................................... 16
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ........... 17
APPENDIX I--GUARANTEED ACCUMULATION ACCOUNT ................... 18
APPENDIX II--FIXED ACCOUNT .................................... 19
APPENDIX III--CONDENSED FINANCIAL INFORMATION ................. 20
</TABLE>
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DEFINITIONS
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As used in this Prospectus, the following terms have the meanings shown:
Account Value: The dollar value of amounts held in an Account as of any
Valuation Period, including the value of the Accumulation Units in the Funds,
the amounts held in GAA, and any amounts invested in the Fixed Account, plus
interest earned on those amounts, less any maintenance fees due, but excluding
amounts used for Annuity Options.
Accumulation Period: The period during which Purchase Payment(s) credited to an
Account are invested to fund future annuity payments.
Accumulation Unit: A measure of the value of the Separate Account assets
attributable to each Fund used as a variable funding option.
Aggregate Purchase Payment(s): The sum of all Purchase Payment(s) made under a
Contract.
Annuitant: A natural person on whose life an Annuity payment is based.
Annuity: A series of payments for life, for a definite period, or a combination
of the two.
Annuity Period: The period during which Annuity payments are made.
Annuity Unit: A unit of measure used to calculate the amount of each variable
annuity payment.
Code: Internal Revenue Code of 1986, as amended.
Company (We, Us): Aetna Life Insurance and Annuity Company.
Contract: The group installment Purchase Payment variable annuity contracts
offered by this Prospectus.
Contract Holder: The entity to which the Contract is issued. The Contract
Holder is usually the trustee of a trusteed Plan.
Contract Year: For HR 10 Contracts issued before June 1, 1992, and for all
Corporate 401 Contracts, the period of 12 months measured from the Contract's
effective date or from any anniversary of such effective date. For HR 10
Contracts issued on and after June 1, 1992, the period of 12 months measured
from the date the first Purchase Payment is applied to the Contract or from any
anniversary of such date, subject to state approval.
Corporate 401 Contracts: Contracts designed for Corporate 401 Plans.
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.
Effective Date: The date on which the Company accepts and approves the Contract
application.
ERISA: The Employee Retirement Income Security Act of 1974, as amended.
Fund(s): An open-end registered management investment company(ies) whose shares
are purchased by the Separate Account to fund the benefits provided by the
Contract.
GAA: Guaranteed Accumulation Account, the credited interest option available in
most jurisdictions for deposits under the Contract.
Home Office: The Company's principal executive offices located at 151
Farmington Avenue, Hartford, Connecticut 06156.
HR 10 Contracts: Contracts designed for HR 10 Plans.
Individual Account: A record established for each Participant to identify
Contract values accumulated on the Participant's behalf during the Accumulation
Period.
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DEFINITIONS - 1
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Market Value Adjustment: An amount deducted or added to amounts withdrawn early
from the Guaranteed Accumulation Account to reflect changes in the market value
of the investment 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 Purchase Payments(s): The Purchase Payment(s) less premium taxes, if
applicable.
Participant ("You"): An eligible person participating in a Plan.
Plan(s): There are two types of plans described in this Prospectus: Qualified
tax-deferred retirement plans established by self-employed individuals ("HR 10
Plans"); and qualified tax-deferred retirement plans established by
corporations that have elected to rewrite their individual pension annuity
contracts ("Corporate 401 Plans"). HR 10 Plans for sole proprietorships or
partnerships are sometimes referred to as Keogh Plans.
Plan Account: The record established for a Contract Holder of the Net Purchase
Payment(s) accumulated under a Contract where Individual Accounts are not
maintained.
Purchase Payment(s): The gross payment(s) made to the Company under a Contract.
SEC: Securities and Exchange Commission.
Separate Account: Variable Annuity Account C, an account whose assets are
segregated from other assets of the Company and which holds shares of the Funds
acquired for the Contracts. The Company holds title to the assets held in the
Separate Account.
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 the Contract.
Variable Annuity Contract: An Annuity Contract providing for the accumulation
of values and for Annuity payments which vary in dollar amount with investment.
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DEFINITIONS - 2
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PROSPECTUS SUMMARY
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CONTRACT PURCHASE
The Contracts are designed for Plans established by self-employed
individuals ("HR 10 Contracts"), or established by employers for their
employees to provide retirement benefits under Corporate 401 Plans ("Corporate
401 Contracts"). The Contracts may be purchased by completing the proper
application form and submitting it to the Distributor with the initial Purchase
Payment. "Contract Purchase" in this Prospectus outlines the complete process
of purchasing a Variable Annuity Contract.
REDEMPTION
The Contract Holder may withdraw all or a portion of the Contract or an
Individual Account value during the Accumulation Period by properly completing
and submitting to the Company a disbursement form provided by the Company.
Certain charges and deductions may be assessed upon withdrawal. (See "Charges
and Deductions.")
DEFERRED SALES CHARGE
The maximum deferred sales charge that could be assessed on a full or
partial withdrawal is 5% of the amount withdrawn. (See "Deferred Sales Charge"
and "Withdrawals.")
TAXES AND WITHHOLDING
Certain distributions are subject to mandatory withholding. A 10% federal
penalty tax may be imposed on a premature distribution paid to the
Participants. (See "Tax Status of Amounts Distributed Under the Contract.")
CONTRACT CHARGES
Certain other charges are associated with this Contract such as the
maintenance fee, mortality and expense risk charges, administrative expense
charge, fund expenses, allocation and transfer fees, and premium tax. (See
"Charges and Deductions" for a compete explanation of these charges.)
FREE LOOK
The Contract Holder may cancel the 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 the Company. Unless state law requires
otherwise, the amount you will receive on cancellation under this provision
will reflect the investment performance of the Purchase Payments deposited in
the Separate Account while invested. In certain cases, this may be less than
the amount of your Purchase Payments. (See "Contract Rights--Right to Cancel.")
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SUMMARY - 1
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FEE TABLE
(Based on year ended December 31, 1997)
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The purpose of the Fee Table is to assist Contract Holders in understanding the
various costs and expenses that will be borne, directly or indirectly, under
the Contract. The information listed reflects the charges due under the
Contract as well as the fees and expenses deducted from the Funds. Additional
information regarding the charges and deductions assessed under the Contract
can be found under "Charges and Deductions" in this Prospectus. Charges and
expenses shown do not take into account premium taxes that may be applicable.
CONTRACT HOLDER TRANSACTION EXPENSES
Deferred Sales Charge (as a percentage of amount withdrawn)(1):
<TABLE>
<CAPTION>
Completed Contract Years Deduction
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<S> <C>
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%
</TABLE>
<TABLE>
<S> <C>
Allocation and Transfer Fees(2) ............ $ 0.00
Annual Contract Maintenance Fee(3) ......... $ 30.00
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES (HR 10 CONTRACTS)
(Daily deductions, equal to the percentage shown on an annual basis, made from
amounts allocated to the variable options)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees .................. 1.25%
Administrative Expense Charge(4) ................. 0.00%
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Total Separate Account Annual Expenses ......... 1.25%
====
</TABLE>
SEPARATE ACCOUNT ANNUAL EXPENSES (CORPORATE 401 CONTRACTS)
(Daily deductions, equal to the percentage shown on an annual basis, made
from amounts allocated to the variable options)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees .................. 1.19%
Administrative Expense Charge(4) ................. 0.00%
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Total Separate Account Annual Expenses ......... 1.19%
====
</TABLE>
(1) The total amount deducted for the deferred sales charge will not exceed
8.5% of the Purchase Payments made to the Individual Account. The
deferred sales charge may be referred to in the Contract as a "surrender
fee." See "Deferred Sales Charge" for instances in which this charge is
not deducted.
(2) The Company currently allows an unlimited number of transfers or
allocation changes without charge. However, we reserve the right to
impose a fee of $10 for each transfer or allocation change in excess of
12 per calendar year. (See "Transfers and Allocation Changes.")
(3) A Maintenance fee, to the extent permitted by state law, is also
deducted upon termination of an Account.
(4) The Company currently does not impose an Administrative Expense Charge.
However, the Company reserves the right to deduct a daily charge of not
more than 0.25% per year from the variable portion of contract values.
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FEE TABLE - 1
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MUTUAL FUND ANNUAL EXPENSES
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
<TABLE>
<CAPTION>
Investment Other
Advisory Fees(1) Expenses
(after expense (after expense Total Fund
reimbursement) reimbursement) Annual Expenses
------------------ ---------------- ----------------
<S> <C> <C> <C>
Aetna Balanced VP, Inc. (2) 0.50% 0.10% 0.60%
Aetna Bond VP(2) 0.40% 0.10% 0.50%
Aetna Growth and Income VP(2) 0.50% 0.09% 0.59%
Aetna Money Market VP(2) 0.25% 0.10% 0.35%
Portfolio Partners MFS Research Growth Portfolio(3)(4) 0.70% 0.15% 0.85%
</TABLE>
(1) Certain of the Fund advisers reimburse the Company for administrative costs
incurred in connection with administering the Funds as variable funding
options under the Contract. These reimbursements are paid out of the
investment advisory fees and are not charged to investors.
(2) 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.
(3) Each Portfolio's aggregate expenses are contractually limited to the
advisory and administrative fees disclosed above through April 30, 1999.
The investment adviser will not seek an increase in its advisory or
administrative expense fee at any time prior to May 1, 1999.
(4) The advisory fee is 0.70% of the first $500 million in assets and 0.65% on
the excess.
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FEE TABLE - 2
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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.
Assuming a 5% annual return on assets, you would have paid the following on a
$1,000 investment:(1)
HR 10 CONTRACTS
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
--------------------------------------- --------------------------------------
If you make a complete withdrawal of If you do not make a complete
your contract at the end of the withdrawal of your contract or if
applicable time period: you annuitize:*
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 Balanced VP, Inc. $71 $114 $149 $221 $19 $59 $102 $221
Aetna Bond VP $70 $111 $144 $210 $18 $56 $ 97 $210
Aetna Growth and Income VP $71 $114 $148 $220 $19 $59 $101 $220
Aetna Money Market VP $68 $107 $136 $194 $17 $52 $ 89 $194
Portfolio Partners MFS Research
Growth Portfolio $73 $121 $161 $247 $22 $67 $115 $247
</TABLE>
CORPORATE 401 CONTRACTS
<TABLE>
<CAPTION>
EXAMPLE A EXAMPLE B
--------------------------------------- --------------------------------------
If you make a complete withdrawal of If you do not make a complete
your contract at the end of the withdrawal of your contract or if
applicable time period: you annuitize:*
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 Balanced VP, Inc. $70 $112 $146 $214 $19 $57 $ 99 $214
Aetna Bond VP $69 $109 $141 $204 $18 $54 $ 94 $204
Aetna Growth and Income VP $70 $112 $145 $213 $18 $57 $ 98 $213
Aetna Money Market VP $68 $105 $133 $188 $16 $50 $ 86 $188
Portfolio Partners MFS Research
Growth Portfolio $73 $120 $158 $241 $21 $65 $112 $241
</TABLE>
(1) The illustration reflects the $30.00 annual maintenance fee as an annual
charge of 0.037% of assets.
* This example would not apply if a nonlifetime variable annuity option is
selected and a lump sum settlement is requested within three years after
annuity payments start since the lump-sum payment will be treated as a
withdrawal during the Accumulation Period and will be subject to any
deferred sales charge that would then apply. (See Example A.)
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FEE TABLE - 3
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CONDENSED FINANCIAL INFORMATION
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Condensed financial information for the Accumulation Units under the
Contracts is shown in Appendix III.
THE COMPANY
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Aetna Life Insurance and Annuity Company (the "Company") is the issuer of
the Contract, and as such, it is responsible for providing the insurance and
annuity benefits under the Contract. The Company is a stock life insurance
company organized under the insurance laws of the State of Connecticut in 1976.
Through a merger, it succeeded to the business of Aetna Variable Annuity Life
Insurance Company (formerly Participating Annuity Life Insurance Company, an
Arkansas life insurance company organized in 1954). The Company is engaged in
the business of issuing life insurance policies and variable annuity contracts
in all states of the United States. The Company's principal executive offices
are located at 151 Farmington Avenue, Hartford, Connecticut 06156.
The Company is a wholly owned subsidiary of Aetna Retirement Holdings,
Inc., which is in turn a wholly owned subsidiary of Aetna Retirement Services,
Inc. and an indirect wholly owned subsidiary of Aetna Inc.
VARIABLE ANNUITY ACCOUNT C
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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 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 the
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 conducted by the Company. Income, gains or losses of the Separate
Account are credited to or charged against the assets of the Separate Account
without regard to other income, gains or losses of the Company. All obligations
arising under the Contracts are obligations of the Company.
THE FUNDS
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The Contract Holder will designate some or all of the Funds described
below as variable funding options under the Contract. The Contract Holder, or
the Participant, if allowed by the Contract Holder may select one or more of
the Funds for investment of the Purchase Payments made on their behalf. Except
where noted, all of the Funds are diversified as defined in the Investment
Company Act of 1940.
[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)
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1
<PAGE>
[bullet] Portfolio Partners, Inc. MFS Research Growth Portfolio seeks long-term
growth of capital and future income.(2)
(1) Aeltus Investment Management, Inc., adviser
(2) Aetna Life Insurance and Annuity Company, adviser
Massachusetts Financial Services Company, sub-adviser
There is no assurance that the Funds will achieve their investment
objectives. Contract Holders bear the full investment risk of investments in
the Funds selected.
Some of the above funds may use 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 Fund's prospectus for a discussion of the risks associated with an
investment in that Fund.
More comprehensive information, including a discussion of potential
risks, is found in the current prospectus for each Fund which is distributed
with and accompanies this Prospectus. You should read the Fund prospectuses and
consider carefully, and on a continuing basis, which Fund or combination of
Funds is best suited to your long-term investment objectives. Additional
prospectuses and Statements of Additional Information for this Prospectus and
for each of the Funds can be obtained from the Company's Home Office at the
telephone number listed on the cover of this Prospectus.
MIXED AND SHARED FUNDING
Shares of the Funds are sold to the Company for funding variable
annuities. The Funds may be sold to other companies for the same purpose. This
is referred to as "shared funding." Shares of the Funds may also be used for
funding variable life insurance policies through variable life separate
accounts sponsored by the Company or by third parties. This is referred to as
"mixed funding."
It is conceivable that, in the future, it may be disadvantageous for
variable annuity separate accounts and variable life separate accounts to
invest in these Funds simultaneously, since the interests of the contract
holders or policy owners may differ. Each Fund's Board of Trustees or Directors
has agreed to monitor events in order to identify any material irreconcilable
conflicts that 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 ADDITIONS, LIMITATIONS AND SUBSTITUTIONS
The Company may, from time to time, add, withdraw or substitute Funds as
eligible variable funding options under the Contracts, subject to the
conditions in the Contract and to compliance with regulatory requirements.
The Company's current policy is to allow only Aetna Balanced VP, Inc.,
Aetna Bond VP and Aetna Growth and Income VP to be used as variable investment
options during the Annuity Period. (See "Annuity Period Elections.")
The Contract Holder may decide to offer only a select number of Funds as
funding options under its Plan.
404(C) PROTECTION
The Employee Retirement Income Security Act of 1974 (ERISA) imposes a
"prudent man" standard of investment selection and monitoring on employers and
other pension plan fiduciaries. Fiduciaries can be held liable for plan
investment losses if they fail to invest plan assets prudently. However,
Section 404(c) of ERISA provides limited relief from liability in participant-
directed individual account plans where the plans' investment options meet
special conditions.
The five mutual fund options offered under the Contract allow plan
trustees to take advantage of the 404(c) protection. These five funds qualify
as "core funds" under the 404(c) rules since they are broadly diversified, have
different risk/return characteristics, are supported by pre-and post-enrollment
disclosure material, are valued and accessible daily, and are look-through
investment vehicles (mandatory for employees with small account balances). The
Fixed and Guaranteed Accumulation Accounts are designed to be additional
investments (not 404(c) core funds) which, in combination with the Funds,
provide employers with both a well-rounded portfolio and 404(c) protection
without the need for outside investment managers.
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2
<PAGE>
Although the Contract can provide employers and trustees with 404(c)
protection, it is important to understand that the Company is not a designated
fiduciary nor investment manager for any pension plan, since the Company has no
discretionary authority over the plan or its investments. Rather, the Company's
responsibility is to carry out the investment instructions received from the
trustee and/or employees in accordance with applicable federal and state
requirements. The employer and plan trustee always have overall fiduciary
responsibility for their plan. It is also important to note that the plan
trustees must take certain affirmative actions in order to avail themselves of
404(c) protection and should carefully review the applicable Department of
Labor regulations (29 C.F.R. [sec]2550.404c-1).
Contract Holders and Participants should read the accompanying
prospectuses of the Funds carefully before investing. Fund prospectuses may be
obtained from the Company at its Home Office.
THE CONTRACT
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CONTRACT PURCHASE
An organization eligible to establish HR 10 Plans may acquire a group HR
10 Contract for its Plan by filling out the appropriate master application form
and returning it 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. The Contract Holder exercises all rights under
the Contracts. (See "Contract Rights.") Purchase Payments to the HR 10 Contract
may not be less than $25 per payment per Participant and annual Aggregate
Purchase Payments must be at least $6,000 ($2,000 average per Participant, if
less than three Individual Accounts).
The Corporate 401 Contract was available, through the Company's rewrite
program, only to Contract Holders of Individual Pension Trust Contracts issued
prior to May 1, 1975, who elected to discontinue Purchase Payments to their
existing Contracts and direct future Purchase Payments to new Contracts. The
Contract is no longer available for new sales.
Participants may fill out an enrollment form or forms and return them to
the Company or to a Distributor for delivery to the Company for review,
acceptance or rejection. The Company must accept or reject an application or
enrollment form within two business days of its receipt. If the application or
enrollment form is incomplete, the Company may hold it and any accompanying
Purchase Payment for five days. Purchase Payments may be held for longer
periods only with the consent of the Contract Holder or Participant, pending
acceptance of the application or enrollment form. If the application or
enrollment form is accepted, a Contract will be issued to the Contract Holder.
Any Purchase Payment accompanying the application or enrollment form or
received prior to acceptance of the application, will be invested as of the
date of acceptance. If the application or enrollment form is rejected, the
application or enrollment form and any Purchase Payments will be returned to
the Contract Holder.
A single master group Contract is issued to cover all present and future
Participants. If a group Contract is not permitted by the state, an individual
Contract will be issued. Group Contracts may be issued in either allocated or
unallocated form. An allocated Contract provides for the establishment of an
Individual Account for each Participant. An unallocated Contract does not
provide for the establishment of Individual Accounts but all Purchase Payments
are applied to a single Plan Account.
The Purchase Payments made on behalf of a Participant in a defined
contribution Plan are determined by the Plan contribution formula. Generally,
Code section 415 imposes an annual limit of the lesser of $30,000 or 25% of
eligible compensation for each Participant. Purchase Payments for a defined
benefit Plan are determined on an actuarial basis to provide Plan benefits for
all Participants. These Purchase Payments are held in a single Plan Account.
Under Code Section 415, a Plan can provide annual benefits of the lesser of
$130,000 (for 1998) or 100% of eligible compensation for each Participant.
Under Code Section 402(g) for 401(k) Plans, the maximum elective deferral is
$10,000 (for 1998).
NET PURCHASE PAYMENTS
Each Purchase Payment is forwarded to the Company through a Distributor.
Each Net Purchase Payment, to the extent it is to be accumulated on a
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variable basis, is placed in the Separate Account and credited to the Contract.
The Contract Holder or, if permitted by a Plan, the Participant may elect
to have the Net Purchase Payment(s) accumulate (a) on a variable basis by
allocation to one or more of the available Funds; (b) on a fixed basis under
one or more of the available credited interest options; or (c) in a combination
of any of the available investment options. The Net Purchase Payment(s) must be
allocated to the respective options in increments of whole percentage amounts.
The Contract Holder or, if permitted by a Plan, the Participant may elect
to change the allocation of future Net Purchase Payments to any accumulation
option described above.
DISTRIBUTION
The Company will serve as Underwriter for the securities sold by this
Prospectus. The Company is registered as a broker-dealer with the Securities
and Exchange Commission and is a member of the National Association of
Securities Dealers, Inc. (NASD). As Underwriter, the Company will contract with
one or more registered broker dealers ("Distributors"), including at least one
affiliate of the Company, to offer and sell the Contracts. All persons offering
and selling the Contracts must be registered representatives of the
Distributors and must also be licensed as insurance agents to sell Variable
Annuity Contracts. These registered representatives may also provide service to
Participants in connection with establishing their Accounts under the Contract.
Persons offering and selling the Contracts may receive commissions in
connection with the sale of the Contracts. The maximum amount that the Company
will ever pay as commission with respect to any given Purchase Payment is in
the first Purchase Payment Period and ranges from 2% of that Purchase Payment.
The Company may also pay renewal commissions and service fees. In limited
circumstances, we also pay certain of these professionals profit sharing and
other compensation, overrides or reimbursement for expenses. The average of all
payments made by the Company is equal to approximately 2% of the total Purchase
Payments made over the estimated life of the 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 name of the Distributor and the registered representative responsible for
your Account are set forth on your enrollment form. Commissions and sales
related expenses are paid by the Company and are not deducted from Purchase
Payments. See "Charges and Deductions--Deferred Sales Charges."
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 Contract. Participants will be
notified if they are purchasing a Contract that is subject to these
arrangements.
DETERMINING CONTRACT VALUE
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ACCUMULATION UNITS
A Purchase Payment that is directed to one or more of the Funds is
deposited in the Separate Account and credited to the Account in the form of
Accumulation Units for each Fund selected. The number of Accumulation Units
credited is determined by dividing the applicable portion of the Purchase
Payment by the Contract's Accumulation Unit value of the appropriate Fund. The
Accumulation Unit value used is that next-computed following the date on which
a Purchase Payment is received, unless the application has not been accepted.
In that event, Purchase Payments will be credited at the Accumulation Unit
value next computed after acceptance of the application. Shares of the Funds
are purchased by the Separate Account at the net asset value next computed by
the Fund following receipt of Purchase Payments by the Separate Account. The
value of Accumulation Units attributable to the Funds will be affected by the
investment performance, expenses and charges of those Funds. Generally, if the
net asset value
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<PAGE>
of the fund increases, so does the Accumulation Unit value; however,
performance of the Separate Account is reduced by charges and deductions under
the Contract.
Each subsequent Purchase Payment (or amount transferred) received by the
Company by the close of business of the New York Stock Exchange will be
credited to the Contract at the Accumulation Unit Value next computed after
receipt by the Company of your payment or transfer request.
NET INVESTMENT FACTOR
The value of an Accumulation Unit for any Valuation Period is calculated
by multiplying the Accumulation Unit value for the immediately preceding
Valuation Period by the net investment factor of the appropriate investment
option for the current period.
The net investment 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 investment rate.
The net investment rate equals (a) the net assets of the Fund held by the
Separate Account at the end of a Valuation Period, minus (b) the net assets of
the Fund held by the Separate Account at the beginning of a Valuation Period,
plus or minus (c) taxes or provision for taxes, if any, attributable to the
operation of the Separate Account, divided by (d) the value of the Fund's
Accumulation and Annuity Units held by the Separate Account at the beginning of
the Valuation Period, minus (e) a daily charge at an annual rate of 1.25% for
HR 10 Contracts, and 1.19% for Corporate 401 Contracts, for the Annuity
mortality and expense risks, and a daily administrative expense charge which
will not exceed 0.25% on an annual basis. The administrative expense charge is
currently 0%. The net investment rate may be more or less than zero.
CONTRACT RIGHTS
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RIGHT TO CANCEL
The Contract Holder may cancel the 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 of the Company. The Company will produce a
refund not later than seven days after it receives the Contract and the written
notice at the Home Office. Unless the applicable state law requires a refund of
Purchase Payments only, the Company will refund the Purchase Payment(s) plus
any increase or minus any decrease in the value attributable to any Purchase
Payments allocated to the variable option(s).
RIGHTS UNDER THE CONTRACT
All rights under the Contract rest with the Contract Holder, which is
usually the employer. In the case of a trusteed Plan, the Plan trustee will be
the Contract Holder. Benefits available to Participants are governed
exclusively by the provisions of the Plan. Some of the options and elections
under the Contract may not be available to Participants under the provisions of
the Plan.
TRANSFERS AND ALLOCATION CHANGES
During each calendar year, the Contract Holder, or if applicable, the
Participant may change the allocation of future Net Purchase Payments among the
allowable investment options. Currently, an unlimited number of allocation
changes may be made in a calendar year free of charge. However, the Company
reserves the right to charge $10 for each allocation change in excess of 12 in
a calendar year.
During the Accumulation Period only, the Company currently permits an
unlimited number of free transfers of accumulated values in the Individual or
Plan Account each calendar year. The Company reserves the right to charge $10
for each transfer in excess of 12 in a calendar year. Transfers may be made
among the available Funds or from any of the Funds to a credited interest
option. Any transfer will be based on the Accumulation Unit value next
determined after a proper request is received at the Home Office. See Appendix
I and II for information on transfers from credited interest options.
During the Annuity Period, no transfers of accumulated value are allowed.
WITHDRAWALS
The Contract Holder may withdraw all or a portion of the Individual or
Plan Account value during the Accumulation Period. To do so, the Contract
Holder must properly complete a disbursement form provided by the Company and
send it to the Company's Home Office. Disbursement forms are available from the
Company and its representatives. Withdrawals may be requested in one of the
following ways:
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[bullet] Full withdrawal of the Contract: The amount paid will be the full
value of the Plan Accounts minus any applicable deferred sales
charge(s) and maintenance fees due.
[bullet] Full withdrawal of an Individual Account: The amount paid will be the
full value of the Individual Account minus any applicable deferred
sales charge and maintenance fee due.*
[bullet] Partial withdrawal (percentage): The amount paid will be the
percentage of the Individual or Plan Account value requested minus any
applicable deferred sales charge.*
[bullet] Partial withdrawal (specific dollar amount): The amount paid will be
the dollar amount requested. However, the amount withdrawn from the
Individual or Plan Account will equal the dollar amount requested minus
any applicable deferred sales charge.*
[bullet] All amounts paid will be based on Individual or Plan Account values as
of the end of the Valuation Period for which the request is received
in the Home Office or such later date as the disbursement form may
specify. For any partial withdrawal, unless requested otherwise by the
Contract Holder, the value of the Accumulation Units canceled will be
withdrawn proportionately from each investment option used under the
Individual or Plan Account.
Payments for withdrawal requests will be made in accordance with SEC
requirements, but normally not later than seven calendar days after a withdrawal
form in good order is received at the Company's Home Office or within seven
calendar days of the date the withdrawal from 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.
REINVESTMENT PRIVILEGE
The Contract Holder may elect to reinvest all or a portion of the
proceeds received from the full withdrawal of a Plan or Individual Account
within 30 days after such withdrawal. Reinvested amounts must be received by
the Company within 60 days of the withdrawal. Accumulation Units will be
credited to the Plan or Individual Account for the amount reinvested, as well
as for any applicable maintenance fee and any appropriate portion of any
deferred sales charge imposed at the time of withdrawal. Any maintenance fee
which falls due after the withdrawal and before the reinvestment will be
deducted from the amount reinvested. Reinvested amounts will be allocated to
the investment options in the same proportions they were in at the time of
withdrawal.
The number of Accumulation Units credited will be based upon the
Accumulation Unit value(s) next computed after the Company's Home Office
receives the reinvestment request along with the amount to be reinvested. The
reinvestment privilege may be used only once. A Contract Holder contemplating
reinvestment should seek competent advice regarding the tax consequences
associated with such a transaction.
- -------------------
*A 20% income tax may be withheld from amounts paid directly to a Participant.
See "Tax Status of Amounts Distributed Under the Contract."
CHARGES AND DEDUCTIONS
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MAINTENANCE FEE
An annual maintenance fee is deducted during the Accumulation Period from
each Individual or Plan Account on its anniversary date (or, if not a valuation
date, on the next valuation date). This fee is to reimburse the Company for
some of its administrative expenses relating to the establishment and
maintenance of the Individual or Plan Account. The Company deducts this fee
from each respective investment option in the same proportion as the values
held under each option bear to the total value of the Individual Account. The
maintenance fee, to the extent permitted by state law, is also deducted upon
termination of an Individual or Plan Account.
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<PAGE>
The annual maintenance fee is $30 for each Individual Account. The annual
maintenance fee for a Plan Account is $30 for each Participant for whom
payments are being made to the Contract to a maximum of $240 for the Plan
Account.
The Contract Holder may elect to pay the annual maintenance fee directly
to the Company for all Participants. In this case, the maintenance fee will not
be deducted from the current value.
For HR 10 Contracts, the Contract Holder may be eligible for a
maintenance fee reduction. At installation, if the Contract has 25 or more
active participants and the Contract Holder meets and adheres to the terms of
an agreement to remit automated payments and enrollments, the maintenance fee
for all participants will be reduced by $10. Subsequent to the installation and
for Contracts effective prior to June 1, 1992, the maintenance fee for all
participants will be reduced by $5 if the Contract has 25 or more active
participants and the Contract Holder meets and adheres to the terms of an
agreement to remit automated payments.
For Corporate 401 Contracts, the maintenance fee will be reduced by $5 if
the Contract has 25 or more active Participants and the Contract Holder meets
and adheres to the terms of an agreement to remit automated payments.
For all Contracts, the maintenance fee is waived if (a) a Participant has
a total of less than $100 in his or her Individual Accounts, (b) a Participant
enrolls within 90 days of the maintenance fee deduction, or (c) upon
termination of an Individual or Plan Account, a maintenance fee has been
deducted within the previous 90 days.
MORTALITY AND EXPENSE RISK CHARGES
The Company makes a daily deduction from the variable portion of Contract
values for mortality and expense risks. This deduction, made as part of the
calculation of Accumulation and Annuity Unit value(s), is equivalent to 1.25%
per year for HR 10 Contracts and 1.19% per year for Corporate 401 Contracts.
The mortality risk charge is to compensate the Company for the risk it
assumes when it promises to continue making payments for the lives of
individual Annuitants according to Annuity rates specified in the Contract at
issue. The expense risk charge is to compensate the Company for the risk that
actual expenses for costs incurred under the Contract will exceed the maximum
costs that can be charged under the Contract. For the year ending December 31,
1997, the Company received $120,867,375 for mortality and expense risks and
other valuation period deductions from contracts funded through the Separate
Account.
ADMINISTRATIVE EXPENSE CHARGE
The Company reserves the right to make a deduction from each of the
Subaccounts for an administrative expense charge. The administrative expense
charge compensates the Company for administrative expenses that exceed revenues
from the maintenance fee described below. The charge is set at a level which
does not exceed the average expected cost of the administrative services to be
provided while the Contract is in force. The Company does not expect to make a
profit from this charge.
Under the Contract, the amount of the administrative expense charge may
be an amount equal, on an annual basis, of up to 0.25% of the daily net assets
of the Subaccounts. There is currently no administrative charge during the
Accumulation Period or the Annuity Period. Once an Annuity option is elected,
the charge will be established and will be effective during the entire Annuity
Period.
FUND EXPENSES
Each Fund incurs certain expenses which are paid out of its net assets.
These expenses include, among other things, the investment advisory or
"management" fee. The expenses of the Funds are set forth in the Fee Table in
this Prospectus and described more fully in the accompanying Fund prospectuses.
ALLOCATION AND TRANSFER OF FEES
Once 12 allocation changes or 12 transfers have been made in a calendar
year, we reserve the right to charge a fee of not more than $10 for each
additional change or transfer. We currently do not impose a fee.
DEFERRED SALES CHARGE
There are no deductions from Purchase Payments for sales commissions or
related expenses. Sales commissions and expenses are advanced by the Company
and recovered out of any deferred sales charges or, if deferred sales charges
are insufficient, out of its profits from investment activities, including the
mortality and expense risk charges under the Contract. For sales commissions
paid in connection with the sale of Contracts, see "Contract
Purchase--Distribution." Deferred sales charges may be deducted from amounts
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withdrawn during the first 10 Contract Years, as set forth in the table below.
The deferred sales charge will apply to withdrawals during the Accumulation
Period. It will apply during the Annuity Period if the nonlifetime Annuity
Option is elected on a variable basis and the remaining value is withdrawn
before three years of Annuity payments have been completed. (See "Annuity
Period--Annuity Options.") There are additional restrictions and deductions on
withdrawals. (See "Contract Rights--Withdrawals.") The following table reflects
the deferred sales charge deduction as a percentage of the amount withdrawn:
<TABLE>
<CAPTION>
Deferred Sales
Completed Contract Years Charge Deduction
- ------------------------------ -----------------
<S> <C>
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%
</TABLE>
The deduction for the deferred sales charge will not exceed 8.5% of the
total Purchase Payments actually made to the Individual or Plan Account.
A deferred sales charge is not deducted from any portion of the
Individual or Plan Account value that is:
(a) applied to provide Annuity benefits;
(b) paid due to the death of the Participant;
(c) withdrawn on or after the completion of 10 Contract Years;
(d) withdrawn due to the election of the Systematic Withdrawal or Estate
Conservation Option;
(e) withdrawn as a rollover to another pension or IRA Contract issued by
the Company; or
(f) paid where the Individual Account value is less than $2,500 and no
withdrawals have been made from that Individual Account within the
prior 12 months. All Individual Account values held on behalf of the
Participant will be added together to determine eligibility for the
$2,500 exemption. This provision is not available under Plan Accounts
(where Individual Accounts are not maintained by the Company) or
applicable to the withdrawal of all Individual Accounts under one
Contract established with the Company.
In the instances cited in the above paragraphs, no deferred sales charge
is deducted. However, the amount withdrawn may be subject to the 10% federal
penalty tax. (See "Tax Status of Amounts Distributed Under the Contract.")
Based on its actuarial determination, the Company does not anticipate
that the deferred sales charge will cover all sales and administrative expenses
which the Company will incur in connection with the Contract. Also, the Company
does not intend to profit from either the annual maintenance fee or the
administrative expense charge, if imposed. The Company does hope to profit from
the daily deduction for mortality and expense risks. Any such profit, as well
as any other profit realized by the Company 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.
PREMIUM TAX
Several states and municipalities impose a premium tax on annuities.
These taxes currently range from 0% to 4%. The Company reserves the right to
deduct premium tax against Purchase Payments or Contract Values at any time but
no earlier than when we have a tax liability under state law. The Company's
current practice is to deduct for premium taxes at the time of complete
withdrawal or annuitization. In addition to the premium tax, the Company
reserves the right to assess a charge for any state or federal taxes due
against the Contract or the Separate Account assets. (See "Tax Status.")
Any municipal premium tax assessed at a rate in excess of 1% will be
deducted from the Purchase Payment(s) or from the amount applied to an Annuity
Option based upon our determination of when such tax is due. The Company will
absorb any municipal premium tax that is assessed at 1% or less. We reserve the
right, however, to reflect this added expense in our Annuity purchase rates for
residents of such municipalities.
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SYSTEMATIC DISTRIBUTION OPTIONS
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GENERAL
The Company currently offers two systematic distribution options that are
not considered Annuity options: the Estate Conservation Option ("ECO") and the
Systematic Withdrawal Option ("SWO"). These options are available to
Participants with contract values of at least $25,000 at the time of election
and are available at certain ages as described below. Under SWO, Participants
receive a series of partial withdrawals from the account based on the payment
method selected. It is designed for those who want a periodic income while
retaining investment flexibility for amounts accumulating under the Contract.
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 and pays you that amount once a year.
Amounts withdrawn for ECO and SWO will be deducted from the Contract in
the same manner as for any other withdrawals during the Accumulation Period
except that no deferred sales charge will be applied. (See "Contract
Rights--Withdrawals" and "Charges and Deductions--Deferred Sales Charge.")
Since ECO and SWO are not Annuity options, the Individual or Plan Account
remains in the Accumulation Period, retains all the rights and flexibility
described in this Prospectus, and is subject to all other Contract charges. The
value of the Accumulation Units canceled will be withdrawn from the respective
investment options in the same proportion as their respective values bear to
the total value of the portion of the Plan Account. The Company reserves the
right to discontinue the availability of these options and to change the terms
for future elections. In addition, other Systematic Distribution Options may be
added from time to time.
Once elected, these options may be revoked by the Contract Holder at any
time, but only by submitting a written request to the Home Office. Any
revocation will apply only to the amounts not yet paid. Once ECO or SWO is
revoked, it may not be elected again.
Participants should determine the availability of ECO and SWO under their
Plan (by checking with the Contract Holder), and the terms and conditions that
may apply.
SWO is different from ECO in the following ways: (1) SWO payments are
made for a fixed dollar amount or fixed time period, whereas ECO payments vary
in dollar amount and can continue indefinitely during the Contract Holder's or
Participant's lifetime and (2) generally, SWO payments will be higher than
expected ECO payments. Participants should carefully assess their future income
needs when considering the election of these distribution options.
Please consult a qualified tax adviser before electing either option.
There may be adverse tax consequences.
In the event of the Participant's death, payments may be continued if
allowed by the Plan.
ESTATE CONSERVATION OPTION
The Company will calculate and distribute an annual amount using the
method contained in the Code's minimum distribution regulations. The annual
distribution is determined by dividing the prior December 31 value of the
Individual or Participant's portion of the Plan Account, as directed by the
Contract Holder, by a life expectancy factor from tables designated by the
Internal Revenue Service ("IRS"). The factor will be based on either the
Participant's life expectancy or the joint life expectancies of the participant
and the Participant's spouse. If ECO is elected based on the Participant's life
expectancy, the full value of the Individual or Participant's portion of the
Plan Account must be distributed in the year following the Participant's death,
as required by current IRS regulations. The factor will be determined each year
for each year's distribution. The value of the Individual or Participant's
portion of the Plan Account to be used in this calculation is the value on the
December 31st prior to the year for which payment is being made. This
calculation will be changed, if necessary, to conform to changes in the Code or
applicable regulations.
At the time of ECO election, the total aggregate value of all Individual
Accounts or portions of Plan Accounts to which ECO is applied must be $25,000
or more. Distributions may not start earlier than the year the Participant
attains age 70-1/2, or such later time when distributions must commence as
specified under the Code, whichever is appropriate.
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SYSTEMATIC WITHDRAWAL OPTION
The Company will distribute a portion of the Individual or Participant's
portion of the Plan Account, as directed by the Contract Holder, annually. The
Company reserves the right to provide payments more frequently.
The annual minimum SWO distribution, or maximum SWO time period, will be
determined, as directed by the Contract Holder, by a life expectancy factor
from tables designated by the IRS. The factor will be based on either the
Participant's life expectancy or the joint life expectancies of the Participant
and Participant's spouse. Factors will be reduced by one for each distribution
year.
At the time of SWO election, the total aggregate value of all Individual
Accounts or portions of Plan Accounts to which SWO is applied must be $25,000
or more. Distributions may not start earlier than the year the Participant
attains age 70-1/2, or such later time when distributions must commence as
specified under the Code, whichever is appropriate.
One of two methods of distribution may be elected:
(a) Specified Payment--payments of a designated dollar amount. The
minimum specified payment is determined by dividing the value of the Individual
or Participant's portion of the Plan Account by the life expectancy factor. The
value of the Individual or Participant's portion of the Plan Account to be used
in this calculation is the value on the December 31st prior to the year for
which the payment is being made. The dollar amount chosen must be at least $250
annually but cannot be greater than 10% of the cash value applied to SWO. This
amount will remain constant unless a higher amount is required under Code
minimum distribution regulations. If a payment is less than the amount
determined under the Code's minimum distribution regulations, the Company will
calculate and pay the minimum distribution amount.
(b) Specified Period--payments for a designated time period. The specified
period must be at least 10 years but no greater than the Participant's life
expectancy factor. The first distribution must be at least $250. Each annual
distribution is determined by dividing the Individual Account or total portions
of the Plan Accounts' value by the number of years remaining in the elected
period. The value to be used in this calculation is the value on the December
31st prior to the year for which the payment is being made.
ANNUITY PERIOD
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ANNUITY PERIOD ELECTIONS
The Contract Holder must notify the Company in writing of the Annuity
start date and Annuity Option elected. Until a date and option are elected, the
Individual or Plan Account will continue in the Accumulation Period.
The Contract Holder may give written notice to the Company at least 30
days before Annuity payments begin by electing or changing (a) the date on
which Annuity payments are to start, (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, Aetna Balanced Fund, Inc., Aetna Bond Fund,
Aetna Growth and Income Fund, or any combination thereof). No other Funds may
currently be used as investment options during the Annuity Period. Once Annuity
Payments begin, the Annuity Option may not be changed, nor may transfers be
made among funding options.
If Annuity payments are to be made on a variable basis (i.e., Aetna
Balanced Fund, Inc., Aetna Bond Fund and/or Aetna Growth and Income Fund are
chosen), the first and subsequent payments will vary depending on the assumed
net investment rate (3-1/2% 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 that the net investment rate exceeds 5%
on an annualized basis. Annuity payments would decline if the rate were below
5%. Use of the 3% 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.
No election may be made that would result in a first Annuity payment of
less than $20 or total yearly Annuity payments of less than $100. If the value
of the
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Contract 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.
The retirement date and the Annuity Options available to Participants are
normally established by the terms of the plan, subject to applicable provisions
of the Code.
Generally, distributions for all Plan Participants other than 5% owners
must begin no later than April 1 of the calendar year following the calendar
year in which the Participant attains age 70-1/2, or retires, if later. For
Participants who are 5% owners, such distributions must begin by April 1 of the
calendar year following the calendar year in which the Participant attains age
70-1/2.
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 if any of the Annuity Options under (b)
below are elected with the spouse as the sole beneficiary. (See "Annuity
Options.")
Annuity payments may not extend beyond (a) the life of the Annuitant, (b)
the joint lives of the Annuitant and beneficiary, (c) a period certain greater
than the Annuitant's life expectancy, or (d) a period certain greater than the
joint life expectancies of the Annuitant and beneficiary.
The Participant will be subject to a 50% federal penalty tax on the
amount of distribution required each year which is not distributed under the
Code's minimum distribution rules.
ANNUITY OPTIONS
Lifetime:
(a) Life Annuity--an Annuity with payments guaranteed to the date of the
Annuitant's death. This option may be elected with payments guaranteed for
5, 10, 15 or 20 years or such other periods as we may offer at the time of
annuitization. Because it provides a specified minimum number of Annuity
payments, the election of a guaranteed payment period results in somewhat
lower payments.
(b) Life Income Based Upon the Lives of Two Payees--An Annuity will be paid
during the lives of the Annuitant and a second Annuitant. Payments will
continue until both Annuitants have died. When this option is chosen, a
choice must be made of:
(i) 100% of the payment to continue after the first death;
(ii) 66-2/3% of the payment to continue after the first death;
(iii) 50% of the payment to continue after the first death;
(iv) payments for a minimum of 120 months, with 100% of the payment to
continue after the first death; or
(v) 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
Because (iv) provides a specified minimum number of Annuity payments, the
election of the guaranteed payment period results in somewhat lower payments.
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 (a), or the surviving Annuitant under (b), 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 benefit.
NONLIFETIME:
Payments for a Specified Period An Annuity with payments to be made for 3
to 30 years, as selected. If this option is elected on a variable basis, the
Contract Holder may request at any time during the payment
- -------------------
*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 or deferred compensation 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.
- --------------------------------------------------------------------------------
11
<PAGE>
period that the present value of all or any portion of the remaining variable
payments be paid in one sum. However, any lump sum elected before 3 years of
payments have been completed will be treated as a withdrawal during the
Accumulation Period, and any applicable deferred sales charge will be assessed.
(See "Deferred Sales Charge.") This option is not available on a variable basis
under a Contract which provides for immediate Annuity benefits.
The Company makes a daily deduction for mortality and expense risks from
any Contract values held on a variable basis. (See "Mortality and Expense Risk
Charges.") Therefore, electing the nonlifetime option on a variable basis will
result in a deduction being made even though the Company assumes no mortality
risk.
The Company may make available to Contact Holders and other payees
optional methods of payment in addition to the Annuity Options described.
DEATH BENEFIT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ACCUMULATION PERIOD
At the direction of the Contract Holder, who in most plans is the
beneficiary, a portion or all of any death proceeds may be (a) paid to the
Participant's beneficiary under the Plan in a lump sum; (b) applied under any
of the Annuity Options; (c) subject to applicable provisions of the Code, left
in the variable investment options; or (d) subject to applicable provisions of
the Code, left on deposit in the Company's general account with the
Participant's beneficiary electing to 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 Options.") Any lump-sum payment paid during the Accumulation
Period or under the applicable lifetime or nonlifetime Annuity options will
normally be made within seven calendar days after proof of death acceptable to
the Company and a request for payment are received at the Company's Home
Office.
Until the election of method of payment, amounts will remain invested as
they were before the death, and the beneficiary will assume all rights under
the Contract. The Code requires that distributions begin within a certain time
period. If the Participant's beneficiary under the Plan is the surviving
spouse, the Code allows a Plan to give the Participant's beneficiary until the
Participant would have attained age 70-1/2 to begin Annuity payments or to
receive a lump-sum distribution. If the Participant's beneficiary under the
Plan is not the surviving spouse, Annuity payments must begin by December 31 of
the year following the year of 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 beneficiary extend beyond the life of the beneficiary or
any period certain greater than the beneficiary's life expectancy. If no
elections are made concerning distribution, no distributions will be made.
Failure to commence distribution within the above time periods can result in
tax penalties.
If a lump-sum distribution is elected, the beneficiary will receive the
value of the Contract determined as of the Valuation Period in which proof of
death acceptable to us and a request for payment are received at the Home
Office. If an Annuity Option is elected, the value applied to the Annuity
Option is determined in the same manner as a lump-sum distribution; the amount
paid will depend on the Annuity Option elected and the investment option(s)
used to provide such payments. (See "Annuity Period.") If amounts are left in
the variable investment options, the Account 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
by 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
Should an Annuitant die after Annuity payments have begun, any death
benefit payable will depend upon the terms of the Contract and the Annuity
Option selected.
If lifetime option (a) or (b) was elected without a guaranteed minimum
payment period under the Contract, Annuity payments will cease upon the death
of
- --------------------------------------------------------------------------------
12
<PAGE>
the Annuitant under a Life Annuity or the death of the second Annuitant under
options (b)(i)(ii), (iii), or (v).
Under the Contract, if lifetime option (a) or (b) was elected with a
guaranteed minimum payment period and the death of the Annuitant under option
(a) or the surviving Annuitant under option (b)(iv) occurs before the end of
that period, the Company will pay to the designated beneficiary in 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 the Company and a request for payment are
received at its Home Office. The value will be reduced by any payments made
after the date of death.
If the nonlifetime option was elected under the Contract and the
Annuitant dies before all payments are made, the value of any remaining
payments may be paid in a lump sum to the beneficiary and no deferred sales
charge will be imposed. Such value will be determined as of the Valuation
Period in which proof of death acceptable to the Company and a request for
payment are received at the Home Office.
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.
Under the Code, if the Annuitant under a Plan 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 the Participant's
beneficiary under the Plan at least as rapidly as under the original method of
distribution.
TAX STATUS
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- --------------------------------------------------------------------------------
FEDERAL TAX STATUS OF THE COMPANY
The Company is taxed as a life insurance company in accordance with the
Code. For federal income tax purposes, the operations of the Separate Account
form a part of the Company's total operations and are not taxed independently,
although operations of the Separate Account are treated separately for
accounting and financial statement purposes. Under the current provisions of
the Code, the investment income and realized capital gains of the Separate
Account (i.e., income and capital gains distributed to the Separate Account by
the Funds) will not be taxable to the Company to the extent such amounts are
credited to the Contracts. Based on this, no charge is being made currently to
the Separate Account for federal income taxes. However, the Company reserves
the right to make a deduction for federal income taxes attributable to the
Contracts should such taxes be imposed in the future.
USE OF THE CONTRACT
There are two Contracts described in this Prospectus. One Contract is
intended to provide retirement benefits to Participants under qualified Plans
established by self-employed individuals (HR 10 Plans). The other Contract is
designed for qualified tax-deferred retirement plans established by
corporations (401 Plans). Some of the options and elections under the Contracts
may not be available to Participants under the provisions of the Plans.
TAX STATUS OF AMOUNTS DISTRIBUTED UNDER THE CONTRACT
The following description of the federal income tax status of amounts
distributed under the Contracts is not exhaustive and is not intended to cover
all situations. Contract Holders and Participants should seek advice from their
tax advisers as to the application of federal (and where applicable, state and
local) tax laws to amounts received by them and by their beneficiaries under
the Contracts.
The Code imposes a 10% penalty tax on the taxable portion of any
distribution unless made when (a) the Participant has attained age 59-1/2, (b)
the Participant has become disabled, (c) the Participant has died, (d) the
Participant has attained age 55 and has separated from service with the Plan
sponsor, (e) the distribution amount is rolled over into an Individual
Retirement Annuity or Account ("IRA") in accordance with terms of the Code, or
(f) the distribution amount is annuitized over the life or life expectancy of
the Participant or the joint lives or life expectancies of the Participant and
beneficiary, provided the Participant has separated from service with the Plan
sponsor. In addition, the penalty tax is abated for the amount of a
distribution equal to medical expenses incurred by the Participant that qualify
for deduction as specified in the Code.
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13
<PAGE>
Whether the Participant elects a lump sum or Annuity payments, if a
Participant has made after-tax contributions to the Plan, the Participant will
have a cost basis (equal to such contributions) which can be recovered tax free
from distributions from the Plan.
The Contract Holder, on behalf of a payee (a Participant, surviving
spouse, and former spouse, if entitled to benefits under certain divorce
orders) entitled to a distribution under this Contract on or after January 1,
1993, may elect a direct rollover of an eligible rollover distribution. A
direct rollover is the payment by the Company to another eligible retirement
plan. An eligible retirement plan is another 401 plan or HR 10 plan or an
individual retirement annuity/acccount. The election of a direct rollover must
be made in accordance with the Company's procedures.
An eligible rollover distribution is a distribution of all or any portion
of an amount payable except for any distribution: (1) that is one of a series
of equal payments (made at least once a year) for the life/life expectancy of
the payee or payee and beneficiary, or for a period of ten years or more; (2)
that is a required minimum distribution under Code Section 401(a)(9); and (3)
any distribution or portion thereof that is not taxable.
If a direct rollover of an eligible rollover distribution is made, the
Company must report the amount of the distribution to the IRS and the
Participant, but is not required to withhold any federal or state income tax.
If an eligible rollover distribution is paid to the payee (as defined above),
the Company must withhold 20% federal income tax and any required state income
tax. For taxable amounts that are not eligible rollover distributions, if
payable to the Participant, he or she has the right to choose not to have
federal income tax withheld.
If a Participant receives a payment prior to reaching age 59-1/2, and does
not roll the payment over, in addition to the tax withholding, a 10% penalty
tax on the taxable portion of the payment may apply (unless the payment is
subject to an exception listed above).
Federal income and state taxes will be withheld from any payments made
directly to a Participant, unless instructed otherwise. The Company will report
to the IRS the taxable portion of all distributions whether or not income taxes
are withheld.
a. Accumulation Period
The Purchase Payments and investment results of the Separate Account
credited to the value of the Contract are not taxable to Participants until
distributed. Lump-sum payments will generally be taxed to Participants as
ordinary income in the year received.
b. Annuity Period
Annuity payments will generally be fully taxable to Participants as
ordinary income when received.
MISCELLANEOUS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PERFORMANCE REPORTING
From time to time, the Company may advertise different types of
historical performance for the variable funding options under the Separate
Account. The Company may advertise the "standardized average annual total
returns," calculated in a manner prescribed by the SEC, as well as the
"non-standardized returns." "Standardized average annual total returns" are
computed according to a formula in which a hypothetical investment of $1,000 is
applied to the variable funding option and then related to the ending
redeemable values over the most recent one, five and ten-year periods (or since
the fund became available through the Separate Account, if less than the full
period). Standardized returns will reflect the reduction of all recurring
charges during each period (e.g., mortality and expense risk charges, annual
maintenance fees, administrative expense charge (if any) and any applicable
deferred sales charge). "Non-standardized returns" will be calculated in a
similar manner, except that non-standardized figures will not reflect the
deduction of any applicable deferred sales charge (which would decrease the
level of performance shown if reflected in these calculations). The
non-standardized figures may also include a 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 Separate Account or the Funds. Further
details regarding performance reporting and advertising are described in the
Statement of Additional Information.
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14
<PAGE>
VOTING RIGHTS
Each Contract Holder may direct the Company 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 current value of the 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 the Contract attributable to that Fund, divided by the net asset value of
one share of the Fund. In determining the number of votes, fractional votes
will be recognized. Where the value of the Contract or Valuation Reserve
relates to more than one Fund, the calculation of votes will be performed
separately for each Fund.
Each Contract Holder will receive a notice of each meeting of the
shareholders, together with any proxy solicitation materials, and a statement
of the number of votes attributable to the Contract. Votes attributable to
Contract Holders who do not direct the Company will be cast by the Company in
the same proportion as the votes for which directions have been received by the
Company.
MODIFICATION OF THE CONTRACT
The Company may modify the Contract when it deems an amendment
appropriate, subject to the limitations described below, by giving written
notice to the Contract Holder 30 days before the effective date of the change.
The following Contract provisions may be considered material by the Company and
cannot be changed without the approval of appropriate state or federal
regulatory authorities:
(a) transfers among investment options;
(b) notification to the Contract Owner;
(c) conditions governing payments of withdrawal values;
(d) terms of Annuity options;
(e) death benefit payments; and
(f) maintenance fee provisions
However, changes to items (a) thorough (g) listed below will apply only
to new Participants enrolled under a Contract after the effective date of the
modification:
(a) the Annuity options,
(b) the contractual promise that no deduction will be made from Purchase
Payments for sales or administrative expenses,
(c) increasing the deferred sales charge,
(d) increasing the mortality and expense risk charges,
(e) increasing the administrative expense charge provision, if applicable,
(f) increasing the annual maintenance fee charge, and
(g) the maximum allocation and transfer fees.
If the Contract Holder has not accepted the proposed change at the time
of the effective date, no new Participants may be enrolled under the Contract.
However, additional Purchase Payments may continue to be made on behalf of
Participants already enrolled under the Contract.
No change may effect any Annuity beginning before the effective date of
such modification unless deemed necessary for the Plan or Contract to comply
with the requirements of the Code or other laws and regulations affecting the
Plan or Contract.
CONTRACT HOLDER INQUIRIES
A Contract Holder may direct inquiries to a local representative of the
Distributor or may write directly to the Company at the address shown on the
cover page of this prospectus.
TELEPHONE TRANSFERS
The Participant automatically has the right to make transfers among Funds
by telephone. The Company has enacted procedures to prevent abuses of
Individual Account transactions by telephone, including requiring the use of a
personal identification number (PIN) to execute transactions. The Participant
is responsible for safeguarding his or her 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
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15
<PAGE>
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, the Company records all calls on the 800 line. Note: all
Individual Account information and transactions permitted are subject to the
terms of the Plan(s).
TRANSFER OF OWNERSHIP; ASSIGNMENT
Unless contrary to applicable law, assignment of the Contract or an
Individual or Plan Account is prohibited.
LEGAL PROCEEDINGS
We know of no material legal proceedings pending to which the Separate
Account is party or 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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16
<PAGE>
CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
General Information and History
Variable Annuity Account C
Offering and Purchase of Contracts
Annuity Payments
Sales Material and Advertising
Independent Auditors
Financial Statements of the Separate Account
Financial Statements of Aetna Life Insurance and Annuity Company
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17
<PAGE>
APPENDIX I
GUARANTEED ACCUMULATION ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Appendix is a summary of GAA and is not intended to replace the GAA
prospectus. You should read the accompanying GAA prospectus carefully before
investing.
The Guaranteed Accumulation Account ("GAA") is a credited interest option
available during the Accumulation Period. Amounts allocated to GAA are held by
the Company as described in the GAA prospectus.
GAA is a credited interest option where the Company guarantees stipulated
rates of interest for stated periods of time on amounts directed to 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, amounts may be applied to any or all of
available Guaranteed Terms within the Short-Term and Long-Term Classifications.
The Short-Term Classification consists of all Guaranteed Terms of 3 years or
less and the Long-Term Classification consists of all Guaranteed Terms of 10
years or less, but greater than 3 years.
Withdrawals or transfers from a Guaranteed Term prior to the end of that
Guaranteed Term may be subject to a Market Value Adjustment ("MVA"). An MVA
reflects the change in the value of the investments due to changes in interest
rates since the date of deposit. When interest rates increase after the date of
deposit, the value of the investment decreases and the MVA is negative.
Conversely, when interest rates decrease after the date of deposit, the value
of the investment increases, and the MVA is positive. It is possible that a
negative MVA could result in the Contract Holder or, if applicable, the
Participant receiving an amount which is less than the amount paid into GAA.
As a Guaranteed Term matures, assets accumulating under GAA may be (a)
transferred to a new Guaranteed Term, (b) transferred to the other available
investment options or (c) withdrawn. Amounts withdrawn may be subject to a
deferred sales charge, tax penalties and/or withholding.
By notifying the Company at its Home Office at least 30 days before
Annuity payments begin, the Contract Holder or, if permitted by the Plan, the
Participant may elect to have amounts which have been accumulating under GAA
transferred to one or more of the Funds available during the Annuity Period, to
provide variable Annuity payments. GAA cannot be used as an investment option
during the Annuity Period.
MORTALITY AND EXPENSE RISK CHARGES
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
Amounts applied to a Guaranteed Term during a deposit period may not be
transferred to any other funding option or to another Guaranteed Term during
that deposit period or for 90 days after the close of that deposit period.
Transfers are permitted from Guaranteed Terms of one Classification to
available Guaranteed Terms of another Classification. The Company will apply an
MVA to GAA transfers made before the end of a Guaranteed Term. Transfers of GAA
values due to a maturity are not subject to an MVA and are not counted as one
of the 12 free transfers of accumulated values in the Individual or Plan
Account.
REINVESTMENT PRIVILEGE
Any amounts reinvested in GAA will be applied to the current deposit
period. Amounts are proportionately reinvested to the Classifications in the
same manner as they were allocated prior to withdrawal. Any negative MVA amount
applied to a withdrawal is not included in the reinvestment.
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18
<PAGE>
APPENDIX II
FIXED ACCOUNT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Fixed Account is an investment option available during the Accumulation
Period under the Contracts. The following summarizes material information
concerning the Fixed Account that is offered as an option under the Contract.
Additional information may be found in the Contract. Amounts allocated to the
Fixed Account are held in the Company's general account that supports insurance
and annuity obligations. Interests in the Fixed Account have not been
registered with the SEC in reliance on exemptions under the Securities Act of
1933, as amended. Disclosure in 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.
CREDITED INTEREST OPTION FIXED ACCOUNT
This option guarantees that amounts allocated to this option will earn the
minimum interest rates specified in the Contract. (This minimum interest rate
cannot be changed by the Company.) The Company 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, the Company assumes the risk of investment gain or loss by guaranteeing
Net Purchase Payment values and promising a minimum interest rate and Annuity
payment.
The Company may pay any Fixed Account withdrawal value in one lump sum to
the Contract Holder if (a) the total of the current Fixed Account withdrawal
and (b) the total of all Fixed Account withdrawals from the Contract within the
past 12 calendar months is less than $250,000 for HR 10 Contracts, or $500,000
for Corporate 401 Contracts. However, if the total is equal to or greater than
$250,000 for HR 10 Contracts, or $500,000 for Corporate 401 Contracts, the
Company will pay the Fixed Account withdrawal value in equal payments, with
interest, over a period not to exceed 60 months. This interest 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. In addition, under certain
emergency conditions, the Company may defer payment (a) for a period of up to 6
months or (b) as provided by federal law.
Amounts applied to the Fixed Account will earn the interest rate in effect
when actually applied to the Fixed Account.
MORTALITY AND EXPENSE RISK CHARGES
The Fixed Account will reflect a compound interest rate credited by the
Company. The interest rate quoted is an annual effective yield. 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 AMONG INVESTMENT OPTIONS
Transfers from the Fixed Account to any other available investment option
are allowed in each calendar year during the Accumulation Period. The amount
which may be transferred may vary at the Company's discretion; however, it will
never be less than 10% of the amount held under the Fixed Account.
By notifying the Company at its Home Office at least 30 days before
Annuity payments begin, the Contract Holder or, if permitted by the Plan, the
Participant 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.
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19
<PAGE>
APPENDIX III
CONDENSED FINANCIAL INFORMATION
Corporate 401 Contracts
(Selected data for accumulation units outstanding throughout each period)
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The condensed financial information presented below for each of the periods in
the ten-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 I
<TABLE>
<CAPTION>
1997 1996 1995 1994
------------------- ------------- ------------- ------------------
<S> <C> <C> <C> <C>
AETNA BALANCED VP, INC.
Value at beginning of period $20.511 $18.024 $14.336 $14.558
Value at end of period $24.826 $20.511 $18.024 $14.336
Increase(decrease) in value
of accumulation unit(1) 21.04% 13.80% 25.73% (1.52)%
Number of accumulation
units outstanding at end of
period 84,065 280,547 393,613 756,261
AETNA BOND VP
Value at beginning of period $48.524 $47.405 $40.570 $42.675
Value at end of period $51.930 $48.524 $47.405 $40.570
Increase(decrease) in value
of accumulation unit(1) 7.02% 2.36% 16.85% (4.93)%
Number of accumulation
units outstanding at end of
period 20,288 43,327 72,902 181,535
AETNA GROWTH AND INCOME VP
Value at beginning of period $222.444 $180.879 $138.406 $141.424
Value at end of period $285.511 $222.444 $180.879 $138.406
Increase(decrease) in value
of accumulation unit(1) 28.35% 22.98% 30.69% (2.13)%
Number of accumulation
units outstanding at end of
period 158,078 340,229 549,056 1,258,166
AETNA MONEY MARKET VP
Value at beginning of period $40.069 $38.485 $36.723 $35.701
Value at end of period $41.763 $40.069 $38.485 $36.723
Increase(decrease) in value
of accumulation unit(1) 4.23% 4.12% 4.80% 2.88%
Number of accumulation
units outstanding at end of
period 34,420 93,727 150,480 241,159
PORTFOLIO PARTNERS MFS RESEARCH GROWTH PORTFOLIO
Value at beginning of period $9.218
Value at end of period $9.041
Increase(decrease) in value
of accumulation unit(1) (1.93)%(3)
Number of accumulation
units outstanding at end of
period 603
<CAPTION>
1993 1992 1991 1990 1989
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
AETNA BALANCED VP, INC.
Value at beginning of period $13.407 $12.755 $10.906 $10.440 $10.000(2)
Value at end of period $14.558 $13.407 $12.755 $10.906 $10.440
Increase(decrease) in value
of accumulation unit(1) 8.59% 5.11% 16.86% 4.46% 4.40%
Number of accumulation
units outstanding at end of
period 1,142,268 1,129,453 725,598 619,748 470,302
AETNA BOND VP
Value at beginning of period $39.376 $37.086 $31.424 $29.142 $25.734
Value at end of period $42.675 $39.376 $37.086 $31.424 $29.142
Increase(decrease) in value
of accumulation unit(1) 8.38% 6.17% 18.02% 7.83% 13.24%
Number of accumulation
units outstanding at end of
period 241,551 263,105 283,119 251,861 248,678
AETNA GROWTH AND INCOME VP
Value at beginning of period $134.081 $127.171 $101.824 $99.758 $78.220
Value at end of period $141.424 $134.080 $127.171 $101.824 $99.758
Increase(decrease) in value
of accumulation unit(1) 5.48% 5.43% 24.89% 2.07% 27.54%
Number of accumulation
units outstanding at end of
period 1,616,018 1,829,160 1,956,479 2,169,721 2,496,795
AETNA MONEY MARKET VP
Value at beginning of period $35.009 $34.172 $32.460 $30.295 $28.028
Value at end of period $35.701 $35.009 $34.172 $32.460 $30.295
Increase(decrease) in value
of accumulation unit(1) 1.98% 2.45% 5.27% 7.15% 8.09%
Number of accumulation
units outstanding at end of
period 312,350 471,585 470,248 624,613 542,581
PORTFOLIO PARTNERS MFS RESEARCH GROWTH PORTFOLIO
Value at beginning of period
Value at end of period
Increase(decrease) in value
of accumulation unit(1)
Number of accumulation
units outstanding at end of
period
<CAPTION>
1988
---------------
<S> <C>
AETNA BALANCED VP, INC.
Value at beginning of period
Value at end of period
Increase(decrease) in value
of accumulation unit(1)
Number of accumulation
units outstanding at end of
period
AETNA BOND VP
Value at beginning of period $24.197
Value at end of period $25.734
Increase(decrease) in value
of accumulation unit(1) 6.35%
Number of accumulation
units outstanding at end of
period 284,650
AETNA GROWTH AND INCOME VP
Value at beginning of period $69.051
Value at end of period $78.220
Increase(decrease) in value
of accumulation unit(1) 13.28%
Number of accumulation
units outstanding at end of
period 3,030,548
AETNA MONEY MARKET VP
Value at beginning of period $26.387
Value at end of period $28.028
Increase(decrease) in value
of accumulation unit(1) 6.22%
Number of accumulation
units outstanding at end of
period 637,833
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period
Value at end of period
Increase(decrease) in value
of accumulation unit(1)
Number of accumulation
units outstanding at end of
period
</TABLE>
(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. These figures do not
reflect the deductions from Purchase Payments for sales load. Inclusion of
these charges would reduce the investment results shown.
(2) The initial Accumulation Unit value was established at $10.000 on June 23,
1989, the date on which the Fund commenced operations.
(3) Reflects less than a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
20
<PAGE>
CONDENSED FINANCIAL INFORMATION
Corporate 401 Contracts
(Selected data for accumulation units outstanding throughout each period)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The condensed financial information presented below for the period ended
December 31, 1997 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 II
(For Contracts containing limits on fees)
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
AETNA BALANCED VP, INC.
Value at beginning of period $22.085
Value at end of period $24.861
Increase(decrease) in value of
accumulation unit(1) 12.57%(2)
Number of accumulation units
outstanding at end of period 157,309
AETNA BOND VP
Value at beginning of period $49.527
Value at end of period $51.975
Increase(decrease) in value of
accumulation unit(1) 4.94%(2)
Number of accumulation units
outstanding at end of period 23,539
AETNA GROWTH AND
INCOME VP
Value at beginning of period $253.00
Value at end of period $285.918
Increase(decrease) in value of
accumulation unit(1) 13.01%(2)
Number of accumulation units
outstanding at end of period 118,511
AETNA MONEY MARKET VP
Value at beginning of period $40.781
Value at end of period $41.763
Increase(decrease) in value of
accumulation unit(1) 2.41%(2)
Number of accumulation units
outstanding at end of period 19,720
PORTFOLIO PARTNERS MFS
RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $9.218
Value at end of period $9.041
Increase(decrease) in value of
accumulation unit(1) (1.93)%(3)
Number of accumulation units
outstanding at end of period 40,144
</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. These figures do not
reflect the deductions from Purchase Payments for sales load. Inclusion of
these charges would reduce the investment results shown.
(2) Reflects less a full year of performance activity. Funds were first
received in this option during June 1997.
(3) Reflects less a full year of performance activity. Funds were first
received in this option during November 1997.
- --------------------------------------------------------------------------------
21
<PAGE>
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION
HR 10 CONTRACTS
(Selected data for accumulation units outstanding throughout each period)
====================================================================================================================================
The condensed financial information presented below for each of the periods in the ten-year period ended December 31, 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 I
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AETNA BALANCED VP, INC.
Value at beginning of
period $20.419 $17.954 $14.270 $14.519 $13.379 $12.736 $10.896 $10.437 $10.000(2)
Value at end of period $24.700 $20.419 $17.954 $14.270 $14.519 $13.379 $12.736 $10.896 $10.437
Increase (decrease)
in value of
accumulation unit(1) 20.96% 13.73% 25.82% (1.71)% 8.52% 5.05% 16.89% 4.40% 4.37%
Number of accumulation
units outstanding
at end of period 2,160,305 2,716,641 9,193,181 21,990,186 30,784,750 34,802,433 22,898,099 17,078,985 9,535,986
AETNA BOND VP
Value at beginning
of period $47.992 $46.913 $40.173 $42.283 $39.038 $36.789 $31.192 $28.943 $25.574 $24.061
Value at end of period $51.330 $47.992 $46.913 $40.173 $42.283 $39.038 $36.789 $31.192 $28.943 $25.574
Increase (decrease) in
value of accumulation
unit(1) 6.96% 2.30% 16.78% (4.99)% 8.31% 6.11% 17.94% 7.77% 13.17% 6.29%
Number of accumulation
units outstanding
at end of period 959,336 835,724 2,377,622 5,108,720 8,210,666 8,507,292 7,844,412 6,984,793 6,202,834 5,955,293
AETNA GROWTH AND INCOME VP
Value at beginning
of period $169.448 $137.869 $105.558 $107.925 $102.383 $97.165 $77.845 $76.311 $59.871 $52.885
Value at end of period $217.359 $169.448 $137.869 $105.558 $107.925 $102.383 $97.165 $77.845 $76.311 $59.871
Increase (decrease)
in value of
accumulation unit(1) 28.27% 22.91% 30.61% (2.19)% 5.41% 5.37% 24.82% 2.01% 27.46% 13.21%
Number of accumulation
units outstanding at
end of period 1,826,355 2,071,139 6,364,000 13,966,072 21,148,863 24,201,565 20,948,226 18,362,906 17,142,820 16,455,396
AETNA MONEY MARKET VP
Value at beginning
of period $39.528 $37.988 $36.271 $35.282 $34.619 $33.812 $32.138 $30.012 $27.783 $26.171
Value at end of period $41.174 $39.528 $37.988 $36.271 $35.282 $34.619 $33.812 $32.138 $30.012 $27.783
Increase (decrease)
in value of of
accumulation unit(1) 4.16% 4.05% 4.73% 2.80% 1.92% 2.39% 5.21% 7.08% 8.02% 6.16%
Number of accumulation
units outstanding
at end of period 455,502 597,656 1,836,260 3,679,802 5,086,515 7,534,662 8,430,082 10,220,110 8,286,033 8,154,644
PORTFOLIO PARTNERS MFS RESEARCH GROWTH PORTFOLIO
Value at beginning
of period $12.195
Value at end
of period $11.960
Increase (decrease)
in value of
accumulation unit(1) (1.93)%(3)
Number of
accumulation units
outstanding at
end of period 232,418
- --------------------------------------
(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. These figures do not reflect the deductions from Purchase
Payments for sales load. Inclusion of these charges would reduce the investment results shown.
(2) The initial Accumulation Unit value was established at $10.000 on June 23, 1989, the date on which the Fund commenced
operations.
(3) Reflects less than a full year of performance activity. Funds were first received in this option during November 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION
HR 10 CONTRACTS
(Selected data for accumulation units outstanding throughout each period)
====================================================================================================================================
The condensed financial information presented below for the period ended December 31, 1997 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 II
(For Contracts containing limits on fees)
1997
------------------
<S> <C>
AETNA BALANCED VP, INC.
Value at beginning of period $21.980
Value at end of period $24.735
Increase(decrease) in value of accumulation unit(1) 12.53%(2)
Number of accumulation units outstanding at end of period 178,943
AETNA BOND VP
Value at beginning of period $48.971
Value at end of period $51.374
Increase(decrease) in value of accumulation unit(1) 4.91%(2)
Number of accumulation units outstanding at end of period 39,709
AETNA GROWTH AND INCOME VP
Value at beginning of period $192.674
Value at end of period $217.668
Increase(decrease) in value of accumulation unit(1) 12.97%(2)
Number of accumulation units outstanding at end of period 225,862
AETNA MONEY MARKET VP
Value at beginning of period $40.220
Value at end of period $41.174
Increase(decrease) in value of accumulation unit(1) 2.37%(2)
Number of accumulation units outstanding at end of period 98,560
PORTFOLIO PARTNERS MFS RESEARCH GROWTH PORTFOLIO
Value at beginning of period $12.195
Value at end of period $11.960
Increase(decrease) in value of accumulation unit(1) (1.93)%(3)
Number of accumulation units outstanding at end of period 31,573
(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. These figures do not reflect the deductions from Purchase
Payments for sales load. Inclusion of these charges would reduce the investment results shown.
(2) Reflects less than a full year of performance activity. Funds were first received in this option during June 1997.
(3) Reflects less than a full year of performance activity. Funds were first received in this option during November 1997.
</TABLE>
<PAGE>
For Master Applications Only
I hereby acknowledge receipt of an Account C Group Installment Variable Annuity
prospectus dated May 1, 1998 for Employer-Sponsored HR 10 Plans, and Rewrite of
Qualified 401 Plans, as well as all current prospectuses pertaining to the
variable investment options available under the Contracts.
- --- Please send an Account C Statement of Additional Information (Form No. SAI
75980-98) dated May 1, 1998.
- --------------------------------------------------------------------------------
CONTRACT HOLDER'S SIGNATURE
- --------------------------------------------------------------------------------
DATE
PROS. 75980-98 (5/98)
- --------------------------------------------------------------------------------
<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 for Variable Annuity Account C (the
"Separate Account") dated May 1, 1998.
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
1-800-232-5422
Read the prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the prospectus.
TABLE OF CONTENTS
Page
General Information and History........................................... 2
Variable Annuity Account C................................................ 2
Offering and Purchase of Contracts........................................ 3
Performance Data.......................................................... 3
General.............................................................. 3
Average Annual Total Return Quotations............................... 4
Annuity Payments.......................................................... 7
Sales Material and Advertising............................................ 8
Independent Auditors...................................................... 8
Financial Statements of the Separate Account.............................. S-1
Financial Statements of Aetna Life Insurance and Annuity Company.......... F-1
<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 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. The Company's Home Office is located at 151 Farmington Avenue,
Hartford, Connecticut 06156.
In addition to serving as the principal underwriter and the depositor for the
Separate Account, the Company is also a registered investment adviser under the
Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934. The Company provides investment advice to
several of the registered management investment companies offered as variable
investment options under the Contracts funded by the Separate Account (see
"Variable Annuity Account C" below).
Other than the mortality and expense risk charges and administrative expense
charge, 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 sponsors of the Funds used as funding options
under the Contract. These fees generally range up to 0.25%.
The assets of Separate Account are held by the Company. The Separate Account has
no custodian. However, the Funds in whose shares the assets of the Separate
Account are invested each have custodians, as discussed in their respective
prospectuses.
VARIABLE ANNUITY ACCOUNT C
Variable Annuity Account C (the "Separate Account") is a separate account
established by the Company for the purpose of funding variable annuity contracts
issued by the Company. The Separate Account is registered with the Securities
and Exchange Commission as a unit investment trust under the Investment Company
Act of 1940, as amended. Purchase Payments made under the Contract may be
allocated to one or more of the Funds. The Company may make additions to,
deletions from or substitutions of available investment options as permitted by
law and subject to the conditions in the Contract. The availability of the Funds
is subject to applicable regulatory authorization. Not all Funds are available
in all jurisdictions or under all Contracts.
2
<PAGE>
The Funds currently available under the Contract are as follows:
Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund, Inc.)
Aetna Income Shares d/b/a Aetna Bond VP
Aetna Variable Fund d/b/a Aetna Growth and Income VP
Aetna Variable Encore Fund d/b/a Aetna Money Market VP
Portfolio Partners MFS Research Growth Portfolio
Complete descriptions of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, is contained in the
prospectuses and statements of additional information for each of the Funds.
OFFERING AND PURCHASE OF CONTRACTS
The Company is both the depositor and the principal underwriter for the
securities sold by the prospectus. The Company offers the Contracts through life
insurance agents licensed to sell variable annuities who are registered
representatives of the Company or of other registered broker-dealers who have
sales agreements with the Company. The offering of the Contracts is continuous.
A description of the manner in which Contracts are purchased may be found in the
prospectus under the section titled "Contract Purchase" and "Determining
Contract Value."
PERFORMANCE DATA
GENERAL
From time to time, the Company may advertise different types of historical
performance for the variable investment options 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 prescribed by the Securities and Exchange Commission (the
"standardized return"), as well as "non-standardized returns," both of which are
described below.
The standardized and non-standardized total return figures are computed
according to a formula in which a hypothetical initial Purchase Payment of
$1,000 is applied to the various 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 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,
maintenance fees, administrative expense charges, and deferred sales charges).
These charges will be deducted on a pro rata basis in the case of fractional
periods. The maintenance fee is converted to a percentage of assets based on the
average account size under the Contracts described in the prospectus. The total
return figures shown below may be different from the actual historical total
return under your Contract because for periods prior to 1994, the investment
performance was based on the performance of the underlying Fund plus any cash
held in the Separate Account.
3
<PAGE>
The non-standardized figures will be calculated in a similar manner, except that
they will not reflect the deduction of any applicable deferred sales charge
(which would decrease the level of performance shown if reflected in these
calculations). The non-standardized figures may also include monthly, quarterly,
year-to-date and three-year periods, and may include returns calculated from the
Fund's inception date and/or the date the Fund was added to the Separate
Account.
Investment results of the investment options will fluctuate over time, and any
presentation of the total return quotations for any prior period should not be
considered as a representation of how the investment options will perform in any
future period. Additionally, the Account Value upon redemption may be more or
less than your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
Table A shown below reflects the average annual standardized and
non-standardized total return quotation figures for the periods ended December
31, 1997 for the variable investment options available under HR 10 Contracts.
The standardized returns for HR 10 Contracts assume a mortality and expense risk
charge of 1.25%, a $30 annual maintenance fee and a deferred sales charge for
ten years. Table B shown below reflects the average annual standardized and
non-standardized total return quotation figures for the periods ended December
31, 1997 for the Subaccounts available under Corporate 401 Contracts. The
standardized returns for Corporate 401 Contracts assume a mortality and expense
risk charge of 1.19%, a $30 annual maintenance fee and a deferred sales charge
for ten years. The non-standardized returns assume the same charges but do not
include the deferred sales charge.
For the Subaccount funded by the Portfolio Partners portfolio, two sets of
performance returns are shown: 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.
In both sets of tables, 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 average annual
return since the date contributions were first received in the Fund under the
Separate Account. For non-standardized performance, the "Since Inception" column
shows average annual total return since the Fund's inception date.
4
<PAGE>
Table A
HR 10 CONTRACTS
- --------------------------------------------------------------------------------
STANDARDIZED Date
$30 Maintenance Fee Contributions
First
Received
Under the
Separate
Account
- --------------------------------------------------------------------------------
SUBACCOUNT 1 Year 5 Year 10 Year Inception*
- --------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 14.88% 12.07% 10.70% 04/03/89
- --------------------------------------------------------------------------------
Aetna Bond VP(1) 1.57% 4.71% 7.83%
- --------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 21.82% 15.26% 15.15%
- --------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) (1.08%) 2.64% 4.60%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Portfolio Partners
MFS Research Growth
Portfolio (6.87%) 11/28/97
- --------------------------------------------------------------------------------
American Century VP
Capital Appreciation/
Portfolio Partners
MFS Research Growth(3) (8.99%) 3.62% 5.23% 08/31/92
- --------------------------------------------------------------------------------
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
* Reflects performance from the date contributions were first received in the
Fund under the Separate Account.
(1) These Funds have been available through the Separate Account for more than
ten years.
(2) The current yield for the Subaccount for the 7-day period ended December
31, 1997 (on an annualized basis) was 4.193%. 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% deferred sales
charge.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced Fund may not have been available under all
Contracts. The "Date Contributions First Received Under Separate Account"
refers to the applicable date for the replaced Fund.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Fund
$30 Maintenance Fee NON-STANDARDIZED Inception
Date
- -----------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. 20.93% 19.98% 12.98% 11.09% 04/03/89
- -----------------------------------------------------------------------------------------
Aetna Bond VP(1) 6.92% 8.48% 5.57% 7.83%
- -----------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 28.24% 27.19% 16.21% 15.15%
Aetna Money Market VP(1)(2) 4.13% 4.28% 3.48% 4.60%
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Portfolio Partners
MFS Research
Growth Portfolio (1.97%) 11/28/97
- -----------------------------------------------------------------------------------------
American Century
VP Capital Appreciation/
Portfolio Partners
MFS Research Growth(3) (4.20%) 5.41% 4.47% 7.34%
- -----------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
** Reflects performance from the Fund's inception date.
(1) These Funds have been in operation for more than ten years.
(2) The current yield for the Subaccount for the 7-day period ended December
31, 1997 (on an annualized basis) was 4.193%. 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%
deferred sales charge is not reflected.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced Fund may not have been available under all
Contracts. The "Fund Inception Date" refers to the applicable date for the
replaced Fund. If no date is shown, the replaced Fund has been in operation
for more than ten years.
5
<PAGE>
Table B
CORPORATE 401 CONTRACTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Date
Contributions
First
$30 Maintenance Fee STANDARDIZED Received
Under the
Separate
Account
- ------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 5 Year 10 Year Inception*
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. 14.95% 12.13% 10.77% 04/03/89
- ------------------------------------------------------------------------------------
Aetna Bond VP(1) 1.63% 4.77% 7.89%
- ------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 21.90% 15.33% 15.22%
- ------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) (1.02%) 2.70% 4.66%
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Portfolio Partners
MFS Research Growth
Portfolio (6.87%) 11/28/97
- ------------------------------------------------------------------------------------
American Century
VP Capital Appreciation/
Portfolio Partners
MFS Research Growth(3) (8.94%) 3.68% 5.29% 08/31/92
- ------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
* Reflects performance from the date contributions were first received in the
Fund under the Separate Account.
(1) These Funds have been available through the Separate Account for more than
ten years.
(2) The current yield for the Subaccount for the 7-day period ended December
31, 1997 (on an annualized basis) was 4.252%. 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% deferred sales
charge.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced Fund may not have been available under all
Contracts. The "Date Contributions First Received Under Separate Account"
refers to the applicable date for the replaced Fund.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Fund
$30 Maintenance Fee NON-STANDARDIZED Inception
Date
- ----------------------------------------------------------------------------------------------
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Balanced VP, Inc. 21.00% 20.05% 13.05% 11.15% 04/03/89
- ----------------------------------------------------------------------------------------------
Aetna Bond VP(1) 6.98% 8.54% 5.63% 7.89%
- ----------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 28.31% 27.27% 16.28% 15.22%
- ----------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) 4.19% 4.34% 3.54% 4.66%
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Portfolio Partners
MFS Research Growth
Portfolio (1.97%) 11/28/97
- ----------------------------------------------------------------------------------------------
American Century
VP Capital Appreciation/
Portfolio Partners
MFS Research Growth(3) (4.15%) 5.47% 4.54% 7.40%
- ----------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
** Reflects performance from the Fund's inception date.
(1) These Funds have been in operation for more than ten years.
(2) The current yield for the Subaccount for the 7-day period ended December
31, 1997 (on an annualized basis) was 4.252%. 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%
deferred sales charge is not reflected.
(3) The Fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced Fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced Fund may not have been available under all
Contracts. The "Fund Inception Date" refers to the applicable date for the
replaced Fund. If no date is shown, the replaced Fund has been in operation
for more than ten years.
6
<PAGE>
ANNUITY PAYMENTS
When Annuity payments are to begin, the value of the Account is determined using
Accumulation 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 Annuity payment for each $1,000 of value applied.
Thereafter, variable Annuity payments fluctuate as the Annuity Unit value(s)
fluctuates with the investment experience of the selected investment option(s).
The first payment and subsequent payments also vary depending on the assumed net
investment rate selected (3.5% or 5% per annum). Selection of a 5% rate causes a
higher first payment, but Annuity payments will increase thereafter only to the
extent that the net investment rate increases by more than 5% on an annual
basis. Annuity payments would decline if the rate failed to increase by 5%. Use
of the 3.5% assumed rate causes a lower first payment, but subsequent payments
would increase more rapidly or decline more slowly as changes occur in the net
investment rate.
When the Annuity Date begins, the Annuitant is credited with a fixed number of
Annuity Units (which does not change thereafter) in each of the designated
investment options. This number is calculated by dividing (a) by (b), where (a)
is the amount of the first Annuity payment based on a particular investment
option, and (b) is the then current Annuity Unit value for that investment
option. As noted, Annuity Unit values fluctuate from one Valuation 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 Date.
EXAMPLE:
Assume that, at the date Annuity payments are to begin, there are 3,000
Accumulation Units credited under a particular Account and that the value of an
Accumulation 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 an 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 Annuity Units is determined to be 20.414.
The value of this number of Annuity Units will be paid in each subsequent month.
If the net investment factor with respect to the appropriate 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 Annuity Units
determined above) produces a result of 1.0014057. This is then multiplied by the
Annuity Unit value for the prior Valuation Period (assume such value to be
$13.504376) to produce an Annuity Unit value of $13.523359 for the Valuation
Period in which the second payment is due.
The second monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359,
which produces a payment of $276.07.
*If an assumed net investment rate of 5% is elected, the appropriate factor to
neutralize such assumed rate would be .9998663.
7
<PAGE>
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.
8
<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 Manger 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.
/s/ 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.75980-98 ALIAC Ed. MAY 1998
