Variable Life
Account B
Corporate
Variable
Universal
Life
Prospectus Dated: May 1, 1996
(Aetna Logo)
Aetna Life Insurance and Annuity Company
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Variable Life Account B
Underwritten By:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
(203) 275-4995
Prospectus Dated May 1, 1996
The Flexible Premium Variable Universal Life Insurance Policy
This prospectus describes Corporate VUL, a flexible premium variable
universal life insurance policy ("Policy") offered by Aetna Life Insurance
and Annuity Company (ALIAC, the Company, we, us or our). This Policy is
intended to provide life insurance benefits. The Policy is designed to allow
flexible premium payments, a choice of underlying funding options, and a
choice from three Death Benefit Options. Your Policy's cash value may vary
with the investment performance of the underlying funding options You choose.
Although Policy values may vary, the Policy can be guaranteed to stay in
force through the Guaranteed Death Benefit provision. Policy cash value may
be used to continue Your Policy in force, may be borrowed within certain
limits, and may be fully or partially surrendered (subject to a surrender
charge).
You may also choose to select one of the annuity settlement options upon
Maturity of the Policy. Prior to Maturity of the Policy, You may apply the
value of Your Policy (minus any applicable surrender charges and the amount
necessary to repay any loans in full) to one of the annuity settlement
options. Upon death of the Insured, the beneficiary will be paid (a) the
value of the Death Benefit Option in one lump sum, or (b) under one of the
annuity settlement options.
The Policy has a Free-Look Period during which You may return it to our Home
Office for a refund. The refund may be more or less than the premiums paid.
(See "Right to Examine the Policy.")
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance policy with a Corporate VUL
Policy.
The Policies are available on a multiple life basis where the insureds share
a common employment or business relationship, and may be owned individually
or by a corporation, trust, association or similar entity. The Policyowner
will have all rights and privileges under the Policy. The Policies may be
used for such purposes as funding non-qualified executive deferred
compensation or salary continuation plans. These Policies may be used by
large corporations as a means of funding death benefit liabilities incurred
under executive retirement plans or as a source for funding cash flow
obligations under such plans. Corporate VUL is not designed to be used in an
employer's pension or profit sharing plan.
This prospectus is intended to describe the variable options used to fund
this Policy through the Separate Account. The variable funding options
currently available through the Separate Account are as follows: Aetna
Variable Fund; Aetna Income Shares; Aetna Variable Encore Fund; Aetna
Investment Advisers Fund, Inc.; Alger American Fund - Alger American Small
Capitalization Portfolio; Fidelity Investments Variable Insurance Products
Fund - Equity-Income Portfolio, Growth Portfolio and
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Overseas Portfolio; Fidelity Investments' Variable Insurance Products Fund II
- - Asset Manager Portfolio and Contrafund Portfolio; Janus Aspen Series -
Aggressive Growth Portfolio, Balanced Portfolio, Growth Portfolio, Short-Term
Bond Portfolio, and Worldwide Growth Portfolio; Scudder Variable Life
Investment Fund - Scudder International Portfolio Class A Shares; and TCI
Portfolios, Inc. - TCI Growth (collectively, the "Funds").
The availability of the above Funds is subject to applicable regulatory
approvals. Not all Funds are available in all jurisdictions or under all
Policies.
Please read this prospectus carefully and retain it for future reference.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Table of Contents
Definitions iv
Policy Summary 1
The Separate Accounts 2
Allocation of Premiums 3
Fixed Account 3
The Funds 3
Mixed and Shared Funding 6
Charges & Fees 7
Surrender Charge 7
Surrender Charges on Full and Partial Surrenders 7
Premium Load 7
Charges and Fees Assessed Against the Total Account Value 8
Charges and Fees Associated with the Variable Funding Options 8
Reduction of Charges 9
Policy Choices 10
Premium Payments 10
Guaranteed Death Benefit 11
Life Insurance Qualification 12
Death Benefit Options 13
Transfers and Allocations to Funding Options 14
Policy Values 15
Total Account Value 15
Accumulation Unit Value 15
Maturity Value 16
Surrender Value 16
Policy Rights 17
Partial Surrenders 17
No Lapse Coverage 18
Reinstatement of a Lapsed Policy 18
Policy Loans: Preferred and Nonpreferred 18
Policy Changes 19
Right to Examine the Policy 21
Death Benefit 22
Policy Settlement 23
Settlement Options 23
Calculation of Settlement Payments 25
Term Insurance Rider 26
The Company 27
Directors & Officers 28
Additional Information 30
Reports to Policyowners 30
Right to Instruct Voting to Fund Shares 30
Disregard of Voting Instructions 31
State Regulation 31
Legal Matters 31
The Registration Statement 31
Distribution of Policies 32
Records and Accounts 32
Independent Auditors 33
Tax Matters 34
Federal Tax Status of the Company 34
Other Tax Considerations 37
Misc. Policy Provisions 38
The Policy 38
Payment of Benefits 38
Age 38
Incontestability 38
Suicide 38
Coverage Beyond Maturity 38
Nonparticipation 39
Illustrations of Death Benefits, Total Account Values and
Surrender Values 40
Financial Statements of the Separate Account S-1
Financial Statements of the Company F-1
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Policy Definitions
Accumulated Premium: The sum of all premiums paid from the Date of Issue
accumulated at the Premium Accumulation Rate. The Accumulated Premium is used
with Death Benefit Option 3.
Accumulation Unit: A unit used to measure the value of a Policyowner's
interest in each applicable funding option used to calculate the value of the
variable portion of the Total Account Value before election of a Settlement
Option.
Additional Premiums: Any premium paid in addition to Planned Premiums.
Amount at Risk: The Death Benefit before subtraction of outstanding loans, if
any, divided by 1.0032737, minus the Total Account Value.
Annuity: A series of payments for life or for a definite period.
Attained Age: The Issue Age of the Insured increased by the number of Policy
Years elapsed.
Cost of Insurance: The portion of the Monthly Deduction attributable to the
basic insurance coverage, not including riders, supplemental benefits or
monthly expense charges.
Date of Issue: The effective date of initial coverage. The Date of Issue and
the effective date for any change in coverage will be the Date of Coverage
Change shown in Supplemental Policy Specifications which will be sent to You.
Coverage is conditional on payment of the first premium, if required, and
issue of the Policy as provided in the application.
Death Benefit: The amount payable in accordance with the Death Benefit Option
chosen to the beneficiary upon the death of the Insured, after deduction of
the Loan Account Value plus any accrued interest and any overdue deductions.
Death Benefit Option: Any of three methods for determining the Death Benefit.
Fixed Account: The fixed interest option offered under the Policy that
guarantees a minimum interest rate of 4.0% per year.
Fixed Account Value: The non-loaned portion of this Policy's Total Account
Value attributable to the non-variable portion of the Policy. The Fixed
Account Value is held in the General Account.
Fund(s): One or more of the underlying funding options available under the
Policy (as described in this Prospectus). Each of the Funds is an open-end
management investment company whose shares are available to fund the benefits
provided by the Policy.
General Account: The Company's general asset account, in which assets
attributable to the non-variable portion of Policies are held, i.e., the Loan
Account Value and the Fixed Account Value.
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Grace Period: The 61-day period beginning on the Monthly Deduction Day on
which the Policy's Surrender Value is insufficient to cover the current
Monthly Deduction. The Policy will terminate without value at the end of the
61-day period unless a sufficient payment described in the notification
letter is received by the Company.
Guaranteed Death Benefit Premium: A specified premium that, if paid, will
keep the Policy in force to attained age 80 or 100, even if the Surrender
Value is insufficient to cover current monthly deductions.
Home Office: The principal executive office of the Company, located at 151
Farmington Avenue, Hartford, Connecticut.
Insured: The person on whose life the Policy is issued.
Issue Age: The Insured's age on his/her birthday on or prior to the Policy's
Date of Issue.
Loan Account Value: An amount equal to the sum of all unpaid loans. The Loan
Account Value does not include interest accrued since the last Policy
anniversary. Such interest is payable in order to discharge any policy
indebtedness.
Maturity Date: The Policy anniversary on which the Insured reaches Attained
Age 100.
Maturity Value: The Total Account Value on the Maturity Date, less Loan
Account Value plus any accrued interest.
Minimum Monthly Premium: The amount of premium which must be paid to assure
that the Policy remains in force for at least five years after issue,
assuming there have been no loans or surrenders.
Monthly Deduction: The Monthly Deduction from the Total Account Value which
includes the Cost of Insurance, charges for supplemental riders or benefits,
and an administrative expense charge. The Monthly Deduction Day is the day
that the deduction is actually taken.
Net Premium: The premium paid, less the premium load.
Nonpreferred Loan: Loans taken in the first ten Policy Years, and beginning
in the eleventh Policy Year, loans taken in excess of the Preferred Loan
Amount.
Planned Premium: The amount of premium the Policyowner chooses to pay the
Company on a scheduled basis. This is the amount for which the Company sends
a bill.
Policy: The life insurance contract described in this prospectus.
Policyowner: The owner of the Policy, referred to as "You."
Policy Year: Each twelve-month period, beginning on the Date of Issue, during
which the Policy is in effect.
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Preferred Loan Amount: A portion of the maximum loan amount available
beginning in the eleventh Policy Year at zero net cost to the Policyowner.
The preferred loan is the amount taken.
Premium Accumulation Rate: The annual rate at which premiums paid will be
accumulated to determine the Death Benefit if Death Benefit Option 3 is
selected. This rate is chosen by You at issue. Any amount requested in excess
of 10% may be subject to additional underwriting.
Separate Account(s): Variable Life Account B (and Variable Annuity Account B
when referring to a Settlement Option).
Separate Account Value: The portion of the Policy's Total Account Value
attributable to the variable portion of the Policy. The Separate Account
Value is held in Variable Life Account B.
Settlement Option(s): The manner in which a beneficiary may receive Annuity
payments due from a Death Benefit if elected upon Maturity, or which the
insured may choose to receive Annuity payments from the Surrender Value of
the Policy.
Settlement Option Units: A measure of the net investment results of the
investment options used to calculate the amount of the Settlement Option
payments.
Specified Amount: The amount, originally chosen by the Policyowner, used in
determining the Death Benefit. It is initially equal to the Death Benefit.
The Specified Amount may be increased or decreased as described in this
prospectus.
Surrender Charge: The amount retained by the Company, upon the full or
partial surrender of the Policy.
Surrender Value: The amount a Policyowner can receive in cash by surrendering
the Policy. This equals the Total Account Value minus the applicable
surrender charge, the Loan Account Value and any accrued interest, plus any
credit for premium loads paid.
Target Amount: If a Term Insurance Rider is attached to the Policy, the
Target Amount is the Term Insurance Rider's Benefit Amount plus the Policy's
Death Benefit which is dependent upon the Death Benefit Option in effect.
Total Account Value: The sum of the Fixed Account Value, Separate Account
Value and the Loan Account Value.
Valuation Period: The period of time for which a Fund determines its net
asset value, usually from 4:15 p.m. Eastern time each day the New York Stock
Exchange is open until 4:15 p.m. the next such day.
Variable Life Account B: A Separate Account of the Company established for
the purpose of segregating assets attributable to the variable portion of
life insurance contracts from other assets of the Company. It is organized as
a unit investment trust.
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Policy Summary
This is a flexible premium variable universal life insurance Policy. Proceeds
as described in the Policy will be paid upon surrender, maturity, or death of
the Insured.
At the time of purchase, You must choose from three Death Benefit Options.
The amount payable under the option chosen will be determined as of the date
of the Insured's death. (See "Death Benefit Options.")
Also at the time of purchase, You must choose which life insurance
qualification method bests suits Your needs - Cash Value Accumulation or
Guideline Premium. Both methods require a Policy to provide minimum ratios of
life insurance coverage to Total Account Value. (See "Life Insurance
Qualification.")
The Policy also offers a Guaranteed Death Benefit provision (may not be
available in all states) which ensures that the Policy will stay in force
even if the Surrender Value is insufficient to cover the current monthly
deductions due to fund performance. Sufficient premiums must be paid in order
to maintain a Guaranteed Death Benefit to Age 80 or 100. (See "Guaranteed
Death Benefit.")
At the time of purchase, You must also choose the amount of premium You
intend to pay. You may vary premium payments to some extent and still keep
Your Policy in force. However, sufficient premiums must be paid to continue
the Policy and premium reminder notices will be sent for planned premiums and
for premiums required to continue this Policy in force. If this Policy lapses
it may be reinstated as discussed in Reinstatement of a Lapsed Policy.
You must also choose how to allocate Net Premiums. Net Premiums allocated to
the Separate Account must be allocated to one or more Funds, and allocations
must be in whole percentages. The variable portion of this Policy is
supported by the Funds You choose. The Fund value in each Fund is not
guaranteed and will vary with the investment performance of that Fund.
If the Fixed Account is selected, the Fixed Account Value will accumulate at
rates of interest we determine. Such rates will not be less than 4.0% a year.
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The Separate Accounts
The Separate Account established for the purpose of providing Variable
Options to fund the Policy is Variable Life Account B. Amounts allocated to
the Separate Account are invested in the Funds. Each of the Funds is an
open-end management investment company whose shares are purchased by the
Separate Account to fund the benefits provided by the Policy. The Funds
currently available under the Separate Account, including their investment
objectives and their investment advisers, are described in this Prospectus.
Complete descriptions of the Funds' investment objectives and restrictions
and other material information relating to an investment in the Funds are
contained in the prospectuses for each of the Funds which accompany this
Prospectus.
Variable Life Account B was established pursuant to a June 18, 1986,
resolution of the Board of Directors of the Company. Under Connecticut
insurance law, the income, gains or losses of the Separate Account are
credited without regard to the other income, gains or losses of the Company.
These assets are held for the Company's variable life insurance policies. Any
and all distributions made by the Funds with respect to shares held by the
Separate Account will be reinvested in additional shares at net asset value.
The assets maintained in the Separate Account will not be charged with any
liabilities arising out of any other business conducted by the Company. The
Company is, however, responsible for meeting the obligations of the Policy to
the Policyowner.
No stock certificates are issued to the Separate Account for shares the Funds
held in the Separate Account. Ownership of Fund shares is documented on the
books and records of the Funds and of the Company for the Separate Account.
The Separate Account is registered with the Securities and Exchange
Commission ("SEC") as a unit investment trust under the Investment Company
Act of 1940 and meets the definition of separate account under the federal
securities laws. Such registration does not involve any approval or
disapproval by the SEC of the Separate Account or the Company's management or
investment practices or policies. The Company does not guarantee the Separate
Account's investment performance.
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Allocation of Premiums
You may allocate all or a part of Your Net Premiums to the Fixed Account
(part of the Company's General Account) or to the Funds currently available
through the Separate Account in connection with the Policy. The investment
results of the Funds, whose objectives are described below, are likely to
differ significantly. You should consider carefully, and on a continuing
basis, which Fund or combination of Funds is best suited to Your long-term
investment objectives. Except where otherwise indicated, all of the Funds are
diversified, as defined in the Investment Company Act of 1940, as amended.
In states which require a full refund of premiums during the Right of Policy
Examination period (see "Right to Examine the Policy"), the first Net Premium
will be allocated in its entirety to Aetna Variable Encore Fund (a money
market fund), regardless of the policy owner's premium allocation percentages
until the day following the expiration of the Right of Policy Examination
period. Any other Net Premium received prior to that day will also be
allocated to Aetna Variable Encore Fund. On the day following the expiration
of the Right of Policy Examination, the policy value and future Net Premiums
will be allocated in accordance with the policy owner's selected premium
allocation percentages.
If the policy is issued, any monies received prior to the policy issue would
be held in Aetna Variable Encore Fund from the date of receipt until the day
the policy is issued or, for states which require the full premium refund,
until the day following the Right of Policy Examination period on the issued
policy.
Fixed Account
(bullet) Amounts held in the Fixed Account will be credited with interest at
rates of not less than 4.0% per year. Additional excess interest of
up to 0.5% may be credited to the Fixed Account Value beginning in
Policy Year 11. Credited interest rates reflect the Company's return
on Fixed Account invested assets and the amortization of any
realized gains and/or losses which the Company may incur on these
assets.
Separate Account
(bullet) Aetna Variable Fund seeks to maximize total return through
investments in a diversified portfolio of common stocks and
securities convertible into common stock. (1)
(bullet) Aetna Income Shares seeks to maximize total return, consistent with
reasonable risk, through investments in a diversified portfolio of
debt securities. (1)
(bullet) Aetna Variable Encore Fund seeks to provide a high level of current
income consistent with the preservation of capital and liquidity,
primarily through investments in high quality money market
instruments. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government. (1)
(bullet) Aetna Investment Advisers Fund, Inc. is a managed mutual fund which
seeks to maximize investment return consistent with reasonable
safety of principal by investing in one or more of the following
asset classes: stocks, bonds and cash equivalents based on the
Company's judgment of which of those sectors or mix thereof offers
the best investment prospects. (1)
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(bullet) Alger American Fund - Alger American Small Capitalization Portfolio
seeks long-term capital appreciation. Except during temporary
defensive periods, the Portfolio invests at least 65% of its total
assets in equity securities of companies that, at the time of
purchase of such securities, have total market capitalization within
the range of companies included in the Russell 2000 Growth Index,
updated quarterly. The Russell 2000 Growth Index is designed to
track the performance of small capitalization companies. At March
31, 1996 the range of market capitalization of these companies was
$20 million to $3.0 billion. (2)
(bullet) Fidelity Investments Variable Insurance Products Fund II - Asset
Manager Portfolio seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and foreign
stocks, bonds and short-term fixed income instruments. (3)
(bullet) Fidelity Investments Variable Insurance Products Fund II -
ContraFund Portfolio seeks maximum total return over the long term
by investing its assets mainly in equity securities of companies
that are undervalued or out-of-favor. (3)
(bullet) Fidelity Investments Variable Insurance Products Fund -
Equity-Income Portfolio seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these
securities, the Fund will also consider the potential for capital
appreciation. (3)
(bullet) Fidelity Investments Variable Insurance Products Fund - Growth
Portfolio seeks to achieve capital appreciation by investing
primarily in common stock, although the Fund is not limited to any
one type of security. (3)
(bullet) Fidelity Investments Variable Insurance Products Fund - Overseas
Portfolio seeks long-term growth of capital primarily through
investments in foreign securities (at least 65% from at least three
countries outside of North America). (3)
(bullet) Janus Aspen Series - Aggressive Growth Portfolio is a nondiversified
portfolio that seeks long-term growth of capital in a manner
consistent with the preservation of capital. The Portfolio pursues
its investment objective by normally investing at least 50% of its
equity assets in securities issued by medium-sized companies.
Medium-sized companies are those whose market capitalizations fall
within the range of companies in the S&P MidCap 400 Index, which as
of December 29, 1995 included companies with capitalizations between
approximately $118 million and $7.5 billion, but which is expected
to change on a regular basis. (4)
(bullet) Janus Aspen Series - Balanced Portfolio seeks long-term capital
growth consistent with preservation of capital and balanced by
current income. The Portfolio pursues its investment objective by
investing 40%-60% of its assets in securities selected primarily for
their growth potential and 40%-60% of its assets in securities
selected primarily for their income potential. (4)
(bullet) Janus Aspen Series - Growth Portfolio seeks long-term growth of
capital by investing primarily in a diversified portfolio of common
stocks of a large number of issuers of any size. The Portfolio
generally emphasizes issuers with large market capitalizations. (4)
(bullet) Janus Aspen Series - Short-Term Bond Portfolio seeks as high a level
of current income as is consistent with preservation of capital. The
Portfolio pursues its investment objective by investing primarily in
short- and intermediate-term fixed income securities. (4)
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(bullet) Janus Aspen Series - Worldwide Growth Portfolio seeks long-term
growth of capital consistent with the preservation of capital. The
Portfolio pursues its investment objective by investing primarily in
common stocks of foreign and domestic issuers of any size. (4)
(bullet) Scudder Variable Life Investment Fund - International Portfolio
Class A Shares seeks long-term growth of capital principally from a
diversified portfolio of foreign equity investments. (5)
(bullet) TCI Portfolios, Inc. - TCI Growth (a Twentieth Century fund) seeks
capital growth by investing in common stocks (including securities
convertible into common stocks) and other securities that meet
certain fundamental and technical standards of selection, and, in
the opinion of TCI Growth's management, have better than average
potential for appreciation. (6)
Investment Advisers:
(1) Aetna Life Insurance and Annuity Company
(2) Fred Alger Management, Inc.
(3) Fidelity Management & Research Company
(4) Janus Capital Corporation
(5) Scudder, Stevens & Clark, Inc.
(6) Investors Research Corporation
The availability of the Funds listed above is subject to applicable
regulatory approvals. Not all Funds are available in all jurisdictions or
under all Policies.
There is no assurance that the Funds will achieve their investment
objectives. Policyowners bear the full investment risk of investments in the
Funds selected.
Some of the above Funds may use instruments knowns as derivatives as part of
their investment strategies, as described in their respective prospectuses.
The use of certain derivatives such as inverse floaters and principal only
debt instruments may involve higher risk of volatility to a Fund. The use of
leverage in connection with derivatives can also increase risk of losses. See
the prospectus for the Funds for a discussion of the risks associated with an
investment in those funds. You should refer to the accompanying prospectuses
of the Funds for more complete information about their investment policies
and restrictions.
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Mixed and Shared Funding
Shares of the Funds are available to insurance company separate accounts
which fund variable annuity contracts and variable life insurance policies,
including the Policy described in this Prospectus. Because Fund shares are
offered to separate accounts of both affiliated and unaffiliated insurance
companies, it is conceivable that, in the future, it may not be advantageous
for variable life insurance separate accounts and variable annuity separate
accounts to invest in these Funds simultaneously, since the interests of such
Policyowners or contractholders may differ. Although neither the Company nor
the Funds currently foresees any such disadvantages either to variable life
insurance or to variable annuity Policyholders, each Fund's Board of
Trustees/Directors has agreed to monitor events in order to identify any
material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken in response thereto. If such a conflict
were to occur, one of the separate accounts might withdraw its investment in
a Fund. This might force that Fund to sell portfolio securities at
disadvantageous prices.
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Charges & Fees
Surrender Charge
If You surrender Your Policy (in whole or in part) a surrender charge may
apply, as described below.
This charge is imposed in part as a deferred sales charge and in part to
enable the Company to recover certain first year administrative costs. The
maximum portion of the Surrender Charge applied to reimburse the Company for
sales and promotional expense is 30% of the first year's Minimum Monthly
Premium. (Any surrenders may result in tax implications; see "Tax Matters.")
The initial Surrender Charge, as specified in Your Policy, is based on the
Specified Amount. It also depends on the Insured's Attained Age and risk
class. Once determined, the Surrender Charge will decrease annually until it
reaches zero after nine years.
If You increase the Specified Amount, a new Surrender Charge will be
applicable, in addition to the then existing Surrender Charge. This charge
will be determined based on the Insured's Attained Age and risk class. The
Surrender Charge applicable to the increase will be equal to the Surrender
Charge on a new Policy whose Specified Amount equals the amount of the
increase, and will cover administrative expenses. The additional surrender
charge will also decrease annually until it reaches zero after nine years.
If You decrease the Specified Amount while the Surrender Charge applies, the
Surrender Charge will remain the same as it was before the decrease.
Based on its actuarial determination, the Company does not anticipate that
the Surrender Charge will cover all sales and administrative expenses which
the Company will incur in connection with the Policy. Any such shortfall,
including but not limited to payment of sales and distribution expenses,
would be charged to and paid by the Company.
Surrender Charges on Full and Partial Surrenders
Full Surrender: All applicable Surrender Charges are imposed.
Partial Surrender: A proportional percentage of all Surrender Charges is
imposed. The proportional percentage is the amount of the net partial
surrender divided by the sum of the Fixed Account Value and the Separate
Account Value less full Surrender Charges. When a partial surrender is made,
any applicable remaining Surrender Charges will be reduced in the same
proportion.
Premium Load
The premium load is deducted from your premium payments. The premium load is
guaranteed to be no higher than 10% of premiums paid up to the first year's
Guaranteed Death Benefit Premium to age 80 (5% in renewal years) and 5% over
the Guaranteed Death Benefit Premium to age 80 in both first and renewal
years. The current premium load for this Policy is 7% of premiums paid up to
the first year's Guaranteed Death Benefit Premium to age 80 (2% in renewal
years) and 2%
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over the Guaranteed Death Benefit Premium to age 80 in both first and renewal
years. This load represents average applicable state premium taxes as well as
administrative expenses. The Company is responsible for payment of premium
taxes and other amounts payable with respect to Your premium payments to the
extent they exceed the premium load. DAC taxes are paid by the Company.
Upon a full surrender of Your Policy within the first 36 months of the
Policy, if Your Policy is not in default you may be entitled to a credit for
some or all of the premium loads which have been deducted from your premium
payments although a Surrender Charge will also apply. For Policies which are
surrendered during the first twelve months after the Date of Issue, the
credit will be the sum of all premium loads deducted. For Policy Months 13
through 36, the credit will be equal to the sum of all premium loads deducted
since the Date of Issue multiplied by twelve and then divided by the number
of Policy Months since the Date of Issue of the Policy. For example, during
Policy Month 24, the credit would be equal to the total of all premium loads
deducted since the Date of Issue multiplied by 12/24, or half of all premium
loads paid. No credits apply if a Policy is in default.
To determine your Surrender Value, upon a full surrender, the credit will be
applied as well as the applicable Surrender Charge (see "Surrender Charge,"
above). To determine the Surrender Value, for a surrender within the first 36
months of the Policy, the Total Account Value will be reduced by the
applicable Surrender Charge and the amount of any Loan Account Value,
including accrued interest. That amount would be increased by the applicable
credit for the premium load.
Charges and Fees Assessed Against the Total Account Value
A Monthly Deduction is made from the Total Account Value. The Monthly
Deduction is made as of the same day each month, beginning with the Date of
Issue. The Monthly Deduction includes the Cost of Insurance and any charges
for supplemental riders or benefits. The Cost of Insurance depends on the
Attained Age, risk class of the Insured and the Specified Amount of the
Policy.
Once a Policy is issued, Monthly Deductions, including Cost of Insurance
charges, will begin as of the Date of Issue, even if the Policy's issuance
was delayed due to underwriting requirements, and will be in amounts based on
the Specified Amount of the Policy issued, even if the temporary insurance
coverage received during the underwriting period was for a lesser amount. If
we decline an application, we will refund the premium payment made.
The Monthly Deduction also includes a monthly administrative expense charge
of $7 during all Policy Years. This charge is for items such as premium
billing and collection, Policy value calculation, confirmations and periodic
reports and will not exceed our costs. The Monthly Deduction is deducted
proportionately from each funding option, if more than one is used. This is
accomplished by liquidating Accumulation Units and withdrawing the value of
the liquidated Accumulation Units from each funding option in the same
proportion as their respective values have to Your Fixed Account and Separate
Account Values.
Charges and Fees Associated with the Variable Funding Options
The Company deducts a daily charge from the assets of Variable Life Account B
for mortality and expense risks assumed by it in connection with the Policy.
During the first ten Policy Years, this charge is currently equal to an
annual rate of 0.70% of
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the average daily net assets of the Separate Account; beginning in Policy
Year eleven, the current charge decreases to an annual rate of 0.20% of the
Separate Account's average daily net assets. The mortality and expense risk
charge is assessed to compensate the Company for assuming certain mortality
and expense risks under the Policies. The Company reserves the right to
increase the mortality and expense risk charge if it believes that
circumstances have changed so that current charges are no longer adequate. In
no event will the charge exceed 0.90% of average daily net assets on an
annual basis.
The Company also deducts a daily administrative charge equivalent on an
annual basis to 0.30% of the average daily net assets of Variable Life
Account B to compensate the Company for expenses associated with the
administration and maintenance of the Policy. These types of expenses are
described above in connection with the monthly administrative charge. The
daily administrative charge and the monthly administrative charge work
together to cover the Company's administrative expenses. In later years of
the Policy, the revenue collected from the daily asset-based charge grows
with the Total Account Value to cover increased expenses from Account-based
transactional expenses. The daily administrative charge is guaranteed not to
exceed 0.50% of the average daily net assets of the Separate Account on an
annual basis.
Reduction of Charges
This Policy is available for purchase by corporations and other groups or
sponsoring organizations for multiple life sales. We reserve the right to
reduce premium loads or any other charges on certain multiple life sales
("cases") where it is expected that the amount or nature of such cases will
result in savings of sales, underwriting, administrative or other costs.
Eligibility for these reductions and the amount of reductions will be
determined by a number of factors, including the number of lives to be
insured, the total premiums expected to be paid, total assets under
management for the Policyowner, the nature of the relationship among the
insured individuals, the purpose for which the policies are being purchased,
expected persistency of the individual policies, and any other circumstances
which We believe to be relevant to the expected reduction of our expenses.
Some of these reductions may be guaranteed and others may be subject to
withdrawal or modification by us on a uniform case basis. Reductions in
charges will not be unfairly discriminatory to any Policyowners.
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Policy Choices
When You buy a Policy, You make several important choices:
(bullet) The amount of premium You intend to pay and whether You want to pay
the amount necessary to guarantee Your Death Benefit to age 80 or
100;
(bullet) Which Life Insurance Qualification method best suits Your needs --
Cash Value Accumulation or Guideline Premium;
(bullet) Which one of the three Death Benefit Options You would like;
(bullet) The Premium Accumulation Rate You would like if You choose Death
Benefit Option 3;
(bullet) The way Your premiums will be allocated to the Funds and/or the
Fixed Account.
Each of these choices is described in detail below:
Premium Payments
During the first five Policy years, payment of the Minimum Monthly Premium
assures that the Policy will remain in force, as long as there are no partial
surrenders or loans taken during that time. The Minimum Monthly Premium is
stated in the Policy. If Minimum Monthly Premiums are not paid, or there are
partial surrenders or loans taken during the first five Policy Years, the
Policy will lapse if the Surrender Value is less than the next Monthly
Deduction.
Minimum Monthly Premiums are current if premiums paid, minus loans and
partial surrenders, are greater than or equal to the Minimum Monthly Premium
multiplied by the number of months the Policy has been in force.
After the first five Policy Years, Your Policy will not lapse as long as the
Policy's Surrender Value is sufficient to cover the next Monthly Deduction.
Planned Premiums are those premiums You choose to pay on a scheduled basis.
We will bill You annually, semiannually, or quarterly, or at any other
agreed-upon frequency. Pre-authorized automatic monthly check payments may
also be arranged.
Additional Premiums are any premiums You pay in addition to Planned Premiums.
Payment of Minimum Monthly Premiums, Planned Premiums, or Additional Premiums
in any amount will not, except as noted above, guarantee that Your Policy
will remain in force. Conversely, failure to pay Planned Premiums or
Additional Premiums will not necessarily cause Your Policy to lapse. Not
paying Your Planned Premiums can, however, cause the Guaranteed Death Benefit
provision to terminate. (See "Guaranteed Death Benefit.")
At any time, You may increase Your Planned Premium by written notice to us,
or pay Additional Premiums, except that:
(bullet) We may require evidence of insurability if the Additional Premium or
the new Planned Premium during the current Policy Year increases the
difference between the Death Benefit and the Total Account Value. If
satisfactory evidence of insurability is requested and not provided,
we will refund the increase in premium
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without interest and without investing such amounts in the
underlying funding options.
(bullet) If You have chosen the Guideline Premium method for Life Insurance
Qualification in no event may the total of all premiums paid exceed
the then-current maximum premium limitations established by federal
income tax law for a Policy to qualify as life insurance. (See "Tax
Considerations for Policyowners.")
(bullet) If, at any time, a premium is paid which would result in total
premiums exceeding such maximum premium limitations, we will only
accept that portion of the premium which will make total premiums
equal to the maximum. Any part of the premium in excess of that
amount will be returned or applied as otherwise agreed and no
further premiums will be accepted until allowed by the then-current
maximum premium limitations prescribed by law.
(bullet) If You make a sufficient premium payment when You apply for a
Policy, and have answered favorably to certain questions relating to
the Insured's health, a "temporary insurance agreement" in the
amount applied for (subject to stated maximums) will be provided.
(bullet) After the first premium payment, all premiums must be sent directly
to our Home Office and will be deemed received when actually
received at the Home Office. Your premium payments received during a
Valuation Period at the Home Office will be allocated as You have
directed at the value determined at the end of the Valuation Period
after each payment is received in the Home Office.
You may reallocate Your future premium payments at any time free of charge.
Any reallocation will apply to premium payments made after You have received
written verification from us.
Under limited circumstances, we may backdate a Policy, upon request, by
assigning a Date of Issue earlier than the date the application is signed,
but no earlier than six months prior to state approval of the Policy.
Backdating may be desirable, for example, so that You can purchase a
particular Policy Specified Amount for lower cost of insurance rates, based
on a younger insurance age. For a backdated Policy, You must pay the minimum
premium payable for the period between the Date of Issue and the date of
initial premium is invested in the Separate Account. Backdating of your
Policy will not affect the date on which your premium payments are credited
to the Separate Account and you are credited with Accumulation Units. You
cannot be credited with Accumulation Units until your Net Premium is actually
deposited in the Separate Account. (See "Policy Values.")
Guaranteed Death Benefit
The Guaranteed Death Benefit assures that as long as the Guaranteed Death
Benefit Premium test, as described below, is met, the Policy will stay in
force even if the Surrender Value is insufficient to cover monthly
deductions.
By paying the required Guaranteed Death Benefit Premium, You can choose which
Guaranteed Death Benefit will be in effect. This benefit may not be available
to all risk classes and is only available in those states where it has been
approved, (eg., not available in New York.) The Guaranteed Death Benefit is
available to age 80 or to age 100.
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We will test annually to determine if the sum of all premiums paid to date
are sufficient to support the Guaranteed Death Benefit then in effect. In
order for the Guaranteed Death Benefit to be in effect, the cumulative
premiums paid less partial surrenders must be greater than or equal to the
required monthly Guaranteed Death Benefit Premium times the number of months
elapsed since the Policy's Date of Issue.
If these premiums are deficient, the Policyowner will be notified and given
61 days to pay the amount deficient. If the Guaranteed Death Benefit to age
100 had been in place, and the amount deficient is not received within the
61-day period, the Guaranteed Death Benefit to age 80 will be substituted. If
the cumulative premium test is satisfied based on the Guaranteed Death
Benefit Premium to age 80, the Guaranteed Death Benefit to age 80 will then
be in effect. Otherwise the Guaranteed Death Benefit will terminate. If the
Guaranteed Death Benefit to age 80 had been in effect and the amount
deficient is not received within the 61-day period, the Guaranteed Death
Benefit will terminate.
If the Guaranteed Death Benefit is terminated it may not be reinstated.
Increases, decreases, partial surrenders, and option changes may affect the
Guaranteed Death Benefit Premium. These events and loans may also affect the
Policy's ability to remain in force even if the cumulative annual Guaranteed
Death Benefit test has been met.
Life Insurance Qualification
A Policy must satisfy either of two testing methods to qualify as a life
insurance contract for tax purposes under Section 7702 of the Internal
Revenue Code of 1986, as amended. At the time of purchase, You may choose a
Policy which uses either the Guideline Premium test or the Cash Value
Accumulation test. Both methods require a life insurance Policy to meet
minimum ratios of life insurance coverage to Total Account Value. We refer to
the ratios as Applicable Percentages. We refer to required life insurance
coverage in excess of the Total Account Value as the Death Benefit corridor.
The Applicable Percentages for the Guideline Premium test are 250% through
Attained Age 40, decreasing over time to 100% at Attained Age 95 and above.
The Guideline Premium test also restricts the maximum premiums that may be
paid into a life insurance policy for a specified Death Benefit. The Cash
Value Accumulation test does not limit premiums which may be paid but has
higher required Applicable Percentages. For example, Applicable Percentages
for Non-Smokers range from 716% at Attained Age 20, 372% at Attained Age 40
to 100% at Attained Age 100.
If Your primary objective were to pay as much premium as possible into the
Policy to target a cash value funding objective, generally a Cash Value
Accumulation method policy would best meet Your needs, since it generally
permits higher premium payments. The choice, however, might result in higher
eventual Cost of Insurance charges because of the higher Death Benefit
corridor. In addition, the payment of higher premiums which would be
associated with choosing the Cash Value Accumulation method, increases the
possibility that the amount paid into the Policy will exceed the amount that
would have been paid had the Policy provided for seven level annual premiums
(the "7-pay test"). If premiums paid exceed such limit during
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any 7-pay testing period, any partial surrender or Policy loan may be subject
to federal income taxation. (See "Tax Considerations for Policyowners.")
If Your primary objective were to maximize the potential for growth in Total
Account Value, or to conserve Total Account Value, generally a Guideline
Premium Policy would best meet Your needs. This is because the Applicable
Percentages are lower, resulting in lower Cost of Insurance charges for the
smaller required Death Benefit corridor coverage.
If Your primary objective were to provide a specified Death Benefit at low
cost, then generally there is no difference between the testing methods
because the planned premium will be less than the maximum premium limit under
the Guideline Premium test and additional Death Benefit insurance coverage
may not be necessary under either testing method to comply with the Death
Benefit corridor requirements.
Death Benefit Options
At the time of purchase, You must choose from three available Death Benefit
Options. The amount payable under the option chosen will be determined as of
the date of the Insured's death. The Death Benefit may be affected by partial
surrenders. The Death Benefit for all three options will be reduced by the
Loan Account Value plus any accrued interest.
Under Option 1, the Death Benefit will be the greater of the Specified Amount
or Target Amount if a Term Insurance Rider is attached to the Policy (see
"Term Insurance Rider"), or the Applicable Percentage of the Total Account
Value. Option 1 generally provides a level Death Benefit.
Under Option 2, the Death Benefit will be the greater of the Specified
Amount, plus the Total Account Value or the Target Amount if a Term Insurance
Rider is attached to the Policy (see "Term Insurance Rider"), or the
Applicable Percentage of the Total Account Value. Option 2 provides a varying
Death Benefit which increases or decreases over time, depending on the amount
of premium paid and the investment performance of the underlying funding
options You choose.
Under Option 3, the Death Benefit will be the greater of the Specified Amount
plus the Accumulated Premium(s) accumulated at the Premium Accumulation Rate
or Target Amount if a Term Insurance Rider is attached to the Policy (see
"Term Insurance Rider"), or the Applicable Percentage of the Total Account
Value but will not exceed the total Death Benefit paid under Option 2. This
option may only be selected at issue.
The choice of Death Benefit Option should be based upon the pattern of Death
Benefits which best matches the intended use of the Policy. For example, an
Option 1 Policy should be chosen for a simple, fixed, level total Death
Benefit need. Option 2 would be chosen to provide a level death benefit in
addition to the Policy Total Account Value, and Option 3 would provide a
level death benefit for the Specified Amount plus a return of Accumulated
Premiums.
Choosing the option which provides the lowest pattern of Death Benefits which
meets the desired need will be the most efficient for accumulating potential
cash value, since the lower Cost of Insurance charges will improve the growth
or preservation of the Total Account Value. Other than providing the
appropriate pattern
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of desired Death Benefits, there is no economic advantage of one option over
another, since the Cost of Insurance charges for all three Options is based
upon the amount at risk, the difference between the Death Benefit and the
Total Account Value each month.
The same is true for the choice of a Premium Accumulation Rate under Option
3. Choice of a higher Premium Accumulation Rate will cause the death benefit
to increase more rapidly, but this will also generate higher Cost of
Insurance charges and lower the potential growth in Total Account Value.
Transfers and Allocations to Funding Options
At purchase, You must decide how to allocate Your Net Premiums among the
Funds and/or the Fixed Account. Net Premiums must be allocated in whole
percentages. You should carefully consider current market conditions and each
Fund's investment policies and related risks before allocating money to or
transferring values among the Funds.
Before the Maturity Date, You may transfer Policy values from one Fund to
another at any time, or to the Fixed Account. Within 45 days after each
Policy anniversary, and before the Maturity Date, You may also transfer a
portion of the Fixed Account Value to one or more Funds. A transfer from the
Fixed Account is allowed only once in the 45-day period after the Policy
anniversary and will be effective as of the next Valuation Period after Your
request is received at the Company's Home Office. The amount of such transfer
cannot exceed the greater of 20% of the greatest amount held in the Fixed
Account Value during the prior 5 years or $1000.
Any transfer among the Funds or to the Fixed Account will result in the
crediting and cancellation of Accumulation Units based on the Accumulation
Unit values next determined after Your request is received by us at our Home
Office. (See "Accumulation Unit Value.")
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Policy Values
Total Account Value
Once Your Policy has been issued, each Net Premium allocated to a funding
option through the Separate Account is credited in the form of Accumulation
Units for the funding option based on that funding option's Accumulation Unit
value (see below). If You choose to pay the initial premium upon delivery of
the Policy, the initial premium will be invested in the Separate Account no
later than five days following the later of the Date of Issue, the date the
premium is received or the date the Policy is actually issued. Each Net
Premium will be credited to Your Policy at the Accumulation Unit value(s)
determined for the Valuation Period in which it is received by us at our Home
Office following the Date of Issue of the Policy. (See "Premium Payments.")
The number of Accumulation Units credited is determined by dividing the Net
Premium by the value of an Accumulation Unit computed at the end of the
Valuation Period during which we receive the premium. Shares in each Fund
elected by You will be purchased by the Separate Account at the net asset
value next determined by the Fund following receipt of the Net Premium by the
Separate Account. This date will be no later than one business day following
the crediting of Accumulation Units. Since each Fund has its own Accumulation
Unit value, a Policyowner who has elected a combination of funding options
will have Accumulation Units credited for each funding option.
The Total Account Value of Your Policy is determined by: (a) multiplying the
total number of Accumulation Units credited to the Policy for each applicable
funding option by its appropriate current Accumulation Unit value; (b) if You
have elected a combination of funding options, totaling the resulting values;
(c) adding any values attributable to the Fixed Account; and (d) any values
attributable to the Loan Account Value.
The number of Accumulation Units credited to a Policy for each funding option
will not be changed by any subsequent change in the value of an Accumulation
Unit. The number is increased by subsequent contributions or transfers into
that funding option, and decreased by charges and withdrawals from that
funding option.
There is no assurance that the Separate Account Value of the Policy will
equal or exceed the premiums paid and allocated to the Separate Account.
You will be advised at least annually as to the number of Accumulation Units
which remain credited to the Policy for each Fund, the current Accumulation
Unit values, the Separate Account Value, the Fixed Account Value, and the
Total Account Value.
Accumulation Unit Value
The value of an Accumulation Unit for any Valuation Period is determined by
multiplying the value of an Accumulation Unit for the immediately preceding
Valuation Period by the net investment factor for the current period for the
appropriate Fund. The net investment factor equals the net investment rate
plus 1.0000000. The net investment rate is determined separately for each
Fund as follows:
The net investment rate equals (a) the net assets of the Fund held in
Variable Life Account B at the end of a Valuation Period, minus (b) the net
assets of the Fund
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held in Variable Life Account B at the beginning of that Valuation Period,
plus or minus (c) taxes or provisions for taxes, if any, attributable to the
operation of Variable Life Account B, divided by (d) the value of the
Accumulation Units held by Variable Life Account B at the beginning of the
Valuation Period, minus (e) a daily charge for mortality and expense risk and
for administrative expenses in connection with these Policies. (See "Charges
and Fees Associated with the Variable Funding Options.")
Maturity Value
The Maturity Value of the Policy is the Total Account Value on the Maturity
Date, less the Loan Account Value and any unpaid accrued interest.
Surrender Value
The Surrender Value of Your Policy is the amount You can receive in cash by
surrendering the Policy. All or part of the Surrender Value may be applied to
one or more of the Settlement Options. (See "Surrender Charge.")
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Policy Rights
Partial Surrenders
A partial surrender may be made at any time after the first Policy Year. If,
at the time of a partial surrender Your Total Account Value is attributable
to more than one funding option, the Surrender Charge, transaction charge and
the amount paid to You upon the surrender will be taken proportionately from
the Accumulation Unit values in each funding option.
The amount of a partial surrender may not exceed the Surrender Value on the
date the request is received and may not be less than $500.
Partial surrenders may only be made prior to election of a Settlement Option.
For an Option 1 Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value, Death Benefit, and
Specified Amount. The Specified Amount and Total Account Value will be
reduced by equal amounts and will reduce any past increases in the reverse
order in which they occurred.
For an Option 2 Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value and the Death
Benefit, but it will not reduce the Specified Amount.
For an Option 3 Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value, Death Benefit, and
Specified Amount. The Specified Amount and Total Account Value will be
reduced by equal amounts and will reduce any past increases in the reverse
order in which they occurred.
Payment of any amount due from the Separate Account Values on a full or
partial surrender will be made within seven calendar days after we receive
Your written request at our Home Office in form satisfactory to us. Payment
may be postponed when the New York Stock Exchange has been closed and for
such other periods as the Commission may require. Payment from the Fixed
Account Values may be deferred up to 6 months, except when used to pay
premiums to the Company.
The Specified Amount remaining in force after a partial surrender may not be
less than $100,000. Any request for partial surrender that would reduce the
Specified Amount below this amount will not be granted. In addition, if,
following the partial surrender and the corresponding decrease in the
Specified Amount, the Policy would not comply with the maximum premium
limitations required by federal tax law, the decrease may be limited to the
extent necessary to meet the federal tax law requirements.
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No Lapse Coverage
This Policy will not terminate during the five-year period after its Date of
Issue or the Date of Issue of any increase if, on each Monthly Deduction Day
within that period, the sum of premiums paid equals or exceeds: 1) the sum of
the Minimum Monthly Premiums for each Policy month from the Date of Issue,
including the current month; plus, 2) any partial surrenders; plus 3) any
increase in Loan Account Value since the Policy's Date of Issue or the
effective date of any increase.
If, on each Monthly Deduction Day within the five-year period, the sum of
premiums paid is less than the sum of items 1, 2, and 3 above, and the
Surrender Value is insufficient to cover the current Monthly Deduction, the
Grace Period provision will apply. (See "Grace Period.")
After the five-year period expires, and depending on the investment
performance of the Funds, the Total Account Value may be insufficient to keep
this Policy in force, and payment of an additional premium may be necessary,
unless the Guaranteed Death Benefit provision is in effect.
Reinstatement of a Lapsed Policy
A lapse occurs if Your Monthly Deduction is greater than the Surrender Value
and no payment to cover the deduction is made within the 61 days of our
notifying You. This may happen after the first five Policy Years, or during
the first five Policy Years if Your Minimum Monthly Premiums are not current.
You can apply for reinstatement within five years after the date of lapse and
before the Maturity Date. To reinstate Your Policy we will require
satisfactory evidence of insurability and an amount sufficient to pay for the
current Monthly Deduction plus two additional Monthly Deductions.
If the Policy is reinstated within five years of the Policy's Date of Issue,
or while the No Lapse Coverage provision (see "No Lapse Coverage") would be
in effect if this Policy had not lapsed, all values, including the Loan
Account Value, will be reinstated to the point they were on the date of
lapse. However, the Guaranteed Death Benefit provision will not be
reinstated.
If the Policy is reinstated after the No Lapse Coverage provision (see "No
Lapse Coverage") has expired, this Policy will be reinstated on the Monthly
Deduction Day following our approval. This Policy's Total Account Value at
reinstatement will be the Net Premium paid less the Monthly Deduction due
that day. Any Loan Account Value will not be reinstated, and the Guaranteed
Death Benefit will not be reinstated.
If the Policy's Surrender Value less any Loan Account Value plus accrued
interest is not sufficient to cover the full Surrender Charge at the time of
lapse, the remaining portion of the Surrender Charge will also be reinstated
at the time of Policy reinstatement.
Policy Loans: Preferred and Nonpreferred
Unless otherwise required by state law, the maximum loan amount is 90% of the
sum of the Fixed Account Value and the Separate Account Value less the
surrender charge applicable at the time of the loan.
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Loans taken during the first ten Policy Years are considered nonpreferred
loans. Beginning in the eleventh Policy Year, up to 10% of the maximum loan
amount available at the beginning of a Policy Year can be taken as a
preferred loan during that Policy Year. Amounts borrowed that are in excess
of the maximum loan amount available for a preferred loan will be considered
a nonpreferred loan. An amount equal to what You receive for a loan, together
with any interest added to the loan for due and unpaid interest, as described
below, will be added to the Loan Account Value.
If a policy loan is requested, the amount to be borrowed will be withdrawn by
Us from the funding options and Fixed Account Value in proportion to the
value of the Policy attributable to each funding option and the Fixed
Account. Repayments on the loan will be allocated among the funding options
in the same proportion the loan was taken from the funding options. The Loan
Account Value will be reduced by the amount of any loan repayment.
Interest on loans will accrue at an annual rate which will be the greater of:
1) The monthly average (i.e., the Composite Yield on Corporate Bonds as
published by Moody's Investors Service, Inc.) for the calendar month which
ends two months before the month in which the Policy Anniversary occurs,
or
2) 5.0%.
Increases to the current interest rate may occur only when the maximum
interest rate is at least .5% higher than the interest rate in effect for the
prior Policy Year.
Decreases to the current interest rate will occur only when the maximum
interest rate is at least .5% lower than the interest rate in effect for the
prior Policy Year.
We will notify You of the current interest rate charged for a loan at the
time the loan is made. If Your Policy has a loan outstanding, we will notify
You of any change in the interest rate before the new rate becomes effective.
Interest is payable once a year on each anniversary of the loan, or earlier
upon surrender, payment of proceeds, or maturity of a Policy. Any interest
not paid when due becomes part of the loan and bears interest.
We will credit interest on the Loan Account Value. The Loan Account Value for
the non-preferred loans will be credited interest, during any Policy Year, at
an annual rate that is the interest rate charged on the loan minus 1%.
However, in no case will the credited interest rate be less than 4.0%
annually.
The Loan Account Value on preferred loans will be credited interest at a rate
equal to the interest rate charged. In no case will the credited interest
rate be less than 5.0% annually.
Policy Changes
You may make changes to Your Policy as described below by submitting a
written request to our Home Office in a form satisfactory to us.
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Increases: You may increase the Specified Amount of Your Policy any time
subject to the following conditions:
(bullet) Satisfactory evidence of insurability may be required.
(bullet) An increase in the Specified Amount will increase the Surrender
Charge.
(bullet) The Minimum Monthly Premium will be increased when the Specified
Amount is increased.
(bullet) An Increase in the Specified Amount will increase the Guaranteed
Death Benefit amount and will increase the Guaranteed Death Benefit
Premium.
(bullet) The 5 year period as described in the No Lapse Coverage provision
will restart on the Date of Issue of an increase.
Decreases: Beginning in the sixth Policy Year decreases will be allowed,
however:
(bullet) No decrease may reduce the Specified Amount to less than the minimum
for this type of Policy. (See "Death Benefit Options.")
(bullet) Any decrease in the Specified Amount will cause a decrease in the
Guaranteed Death Benefit Premium. The Guaranteed Death Benefit
Premium will be based on the new Specified Amount.
Death Benefit Option Change: A Death Benefit Option change will be allowed,
subject to the following conditions:
(bullet) The change will take effect on the Monthly Deduction Day on or next
following the date on which the Company receives Your written
request.
(bullet) There will be no change in the Surrender Charge, and evidence of
insurability may be required.
(bullet) We will not allow a change in the Death Benefit Option if the
Specified Amount will be reduced below the minimum.
(bullet) Changes from Option 1 to Option 2 are allowed beginning in the sixth
Policy Year. The new Specified Amount will equal the Specified
Amount less the Total Account Value at the time of the change.*
(bullet) Changes from Option 2 to Option 1 are allowed at anytime. The new
Specified Amount will equal the Specified Amount plus the Total
Account Value as of the time of the change.*
(bullet) Changes from Option 3 to 1 are allowed at anytime. The Specified
Amount will be increased to equal the Specified Amount prior to the
change plus the lesser of the Accumulated Premiums or the Total
Account Value at the time of the change.*
(bullet) Changes from Option 3 to 2 are allowed after the fifth Policy Year.
The Specified Amount will be reduced to equal the Specified Amount
prior to the change minus the difference between the Total Account
Value and the sum of the Accumulated Premiums at the time of the
change.*
(bullet) Changes from Options 1 or 2 to Option 3 are not allowed.*
* Changes in the Death Benefit Option also affect the Guaranteed Death
Benefit amount and the Guaranteed Death Benefit Premium.
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Right to Examine the Policy
The Policy has a free-look period during which You may examine the Policy. If
for any reason You are dissatisfied, it may be returned to our Home Office
for a refund. It must be returned within ten days after You receive the
Policy and the written notice of withdrawal right, or within 45 days after
You sign the application for the Policy, whichever occurs later. Some states
provide a longer period of time to exercise these rights. Your Policy will
indicate if you have more than 10 days to review the Policy. If You return
(cancel) the Policy, we will pay a refund of (1) the difference between
payments made and amounts allocated to the Separate Account, plus (2) the
value of the amount allocated to the Separate Account as of the date the
returned Policy is received by us, plus (3) any fees imposed on the amounts
allocated to the Separate Account. Some state laws require the refund equal
all premiums paid, without interest. Refunds will usually occur within seven
days of notice of cancellation, although a refund of premiums paid by check
may be delayed until the check clears Your bank.
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Death Benefit
The Death Benefit under the Policy will be paid in a lump sum within seven
days after we receive due proof of the Insured's death (a certified copy of
the death certificate), unless You or the beneficiary have elected that it be
paid under one or more of the Settlement Options or such options as we may
choose to make available in the future. Payment of the Death Benefit may be
delayed if the Policy is being contested. (See "Settlement Options.")
While the Insured is living, You may elect a Settlement Option for the
beneficiary and deem it irrevocable. You may revoke or change a prior
election. The beneficiary may make or change an election within 90 days of
the death of the Insured, unless You have made an irrevocable election. A
beneficiary who has elected Settlement Option 1 may elect another option
within two years after the Insured's death.
If the Policy is assigned as collateral security, we will pay any amount due
the assignee in one lump sum. Any excess Death Benefit due will be paid as
elected.
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Policy Settlement
Settlement Options
Proceeds in the form of Settlement Options are payable by the Company upon
the Insured's death, upon Maturity of the Policy, or upon election of one of
the Settlement Options (after any applicable Surrender Charges have been
deducted).
A written request may be made to elect, change, or revoke a Settlement Option
before payments begin under any Settlement Option. This request must be in
form satisfactory to us, and will take effect upon its filing at our Home
Office. If no Settlement Option has been elected by the Policyowner when the
Death Benefit becomes payable to the beneficiary, that beneficiary may make
the election.
The first variable Settlement Option payment will be as of the tenth
Valuation Period following our receipt of the properly completed election
form.
The following are the currently available Settlement Options (others may
become available):
Option 1 - Payment of interest on the sum left with us;
Option 2 - Payments for a stated number of years, at least three but no more
than thirty;
Option 3 - Payments for the lifetime of the payee. If also chosen, we will
guarantee payments for 60, 120, 180 or 240 months; or
Option 4 - Payments during the joint lifetimes of two payees. At the death of
either, payments will continue to the survivor. When this option is chosen, a
choice must be made of:
a) 100% of the payment to continue to the survivor;
b) 66-2/3% of the payment to continue to the survivor;
c) 50% of the payment to continue to the survivor;
d) Payments for a minimum of 120 months, with 100% of the payment to continue
to the survivor; or
e) 100% of the payment to continue to the survivor if the survivor is the
payee, and 50% of the payment to continue to the survivor if the survivor
is the second payee.
In most states, no election may be made that would result in a first payment
of less than $25 or that would result in total yearly payments of less than
$120. If the value of the Policy is insufficient to elect an option for the
minimum amount specified, a lump-sum payment must be elected.
Proceeds applied under Option 1 will be held by us in the General Account.
Proceeds in the General Account will be used to make payments on a
fixed-dollar basis. We will add interest to such proceeds at an annual rate
of not less than 3.0%. We may add interest daily at any higher rate.
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<PAGE>
Under Option 1, the payee may later tell the Company to (a) pay to him or her
a portion of all of the sum held by the Company; or (b) apply a portion of
all of the sum held by the Company to another Settlement Option.
Proceeds applied under Settlement Options 2, 3 and 4 will be held at the
election of You or Your beneficiary: (a) in a fixed annuity using the General
Account; or (b) in Variable Annuity Account B, invested in one or more of the
available investment options; or (c) a mix of (a) and (b). Proceeds held in
Variable Annuity Account B will be used to make payments on a variable basis.
If payments are to be funded on a variable basis, the first and subsequent
payments will vary depending on the Assumed Net Investment Rate. This rate
will be 3.5% per year, unless a 5% annual rate is chosen. The Assumed Net
Investment Rate is chosen by the payee.
Selection of a 5% rate causes a higher first payment, but subsequent payments
will increase only to the extent the actual net investment rate exceeds 5% on
an annualized basis, and they will decline if the rate is less than 5%. Use
of the 3.5% Assumed Net Investment Rate causes a lower first payment, but
subsequent payments will increase more rapidly or decline more slowly as
changes occur in the actual net investment rate. The investment performance
of the underlying funding option(s) must equal such assumed rate, plus enough
to cover the mortality and expense risk and administrative fee charges, if
future payments on a variable basis are to remain level.
If payments on a variable basis are not to decrease, gross return on the
assets of the underlying funding options must be:
a) 4.75% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge in effect at the time Settlement Option
payments start, if an Assumed Net Investment Rate of 3.5% is chosen; or
b) 6.25% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge in effect at the time Settlement Option
payments start, if an Assumed Net Investment Rate of 5% is chosen.
Settlement Options 2, 3 or 4 may be chosen on a fixed-dollar basis. However,
if the guaranteed payments are less than the payments which would be made
from the purchase of the Company's current single premium immediate annuity,
the larger payment will be made instead.
As to funds held under Option 1, the payee may elect to make a withdrawal or
to change options. Under Option 2, if payments are made on a variable basis,
the current value may be withdrawn at any time. Amounts held in the Fixed
Account may not be withdrawn under Option 2. No withdrawals or changes of
option may be made under Options 3 and 4.
When a payee dies while receiving payments under Options 2, 3 or 4, the
present value of any remaining guaranteed payments will either be paid in one
sum to the payee's beneficiary or upon election by that beneficiary, any
remaining guaranteed payments will continue to that beneficiary. If no
beneficiary exists, the present value of any remaining guaranteed payments
will be paid in one sum to the payee's estate. If the payee dies while
receiving payments under Option 1, the current value of the Option will be
paid in one sum to the beneficiary, or to the payee's estate.
24
<PAGE>
If the payee's beneficiary dies (and there is no contingent beneficiary),
while receiving payments, the current value of the account (Option 1), or the
present value of any remaining guaranteed payments will be paid in one sum to
the estate of that beneficiary. The interest rate used to determine the first
payment will be used to calculate the present value.
Calculation of Settlement Payments
When You have chosen payment on a variable basis, the first payment is
calculated as follows:
a) the portion of the proceeds applied to make payments on the variable
basis; divided by
b) 1,000; times
c) the payment rate per $1000 of proceeds for the option chosen as shown in
the Policy.
Such amount, or portion, of the variable payment will be divided by the
Settlement Option Unit value (described below), as of the tenth Valuation
Period before the due date of the first payment, to determine the number of
Settlement Option Units. Each future payment is equal to the number of
Settlement Option Units, times the Settlement Option Unit value as of the
tenth Valuation Period prior to the due date of the payment.
For any Valuation Period, the Settlement Option Unit value is equal to:
a) The Settlement Option Unit value for the previous Valuation Period; times
b) The Net Return Factor (as defined below) for the Valuation Period; times
c) A factor to reflect the Assumed Net Investment Rate.
The factor for 3.5% per year is .9999058; for 5% per year, it is .9998663.
The Net Return Factor equals:
1) The net assets of the applicable fund held in Variable Annuity Account B
at the end of a Valuation Period; minus
2) The net assets of the applicable fund held in Variable Annuity Account B
at the beginning of that Valuation Period; plus or minus
3) Taxes or provision for taxes, if any, attributable to the operations of
Variable Annuity Account B; divided by
4) The value of Settlement Option Units and other accumulation units held in
Variable Annuity Account B at the beginning of the Valuation Period; minus
5) A daily charge at an annual rate of 1.25% for annuity mortality and
expense risk and the then-current daily administrative expense charge.
The number of Settlement Option Units remains fixed. However, the dollar
value of the Settlement Option Unit values and the payments may increase or
decrease due to investment gain or loss.
Payments will not be affected by changes in the mortality or expense results
or administrative expense charges.
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<PAGE>
Term Insurance Rider
The Policy can be issued with a Term Insurance Rider as a portion of the
total Death Benefit. The Rider provides term life insurance on the life of
the Insured, which is annually renewable to attained age 100 (70 in New
York). The amount of coverage provided under the Rider's Benefit Amount,
varies from month to month.
The Benefit Amount is the greater of (a) or (b), where (a) is the Target
Amount, which is an amount selected by You, or a percentage of the Total
Account Value as described in the Policy if that percentage is greater than
the Target Amount; less (i) the greater of the Policy's Specified Amount and
Total Account Value, if Death Benefit Option 1 is in effect; or (ii) the
Policy's Specified Amount plus the Total Account Value, if Death Benefit
Option 2 is in effect; or (iii) the Policy's Specified Amount plus the
Accumulated Premiums, if Death Benefit Option 3 is in effect; (b) is zero.
The result of Death Benefit Option 3 will never be greater than the result of
Death Benefit Option 2. We may limit the Target Amount selected.
The cost of the Rider is added to the Monthly Deductions, and is based on the
Insured's Attained Age and premium class. We may adjust the monthly rider
rate from time to time, but the rate will never exceed the guaranteed cost of
insurance rates for the Rider for that Policy Year. The cost for this Rider
is added to our calculation of the Minimum Monthly Premium for no lapse
protection and to our calculation of the Guaranteed Death Benefit Premium.
The Rider provides a vehicle for short-term insurance protection for
policyholders who desire lower required premiums under the Policy, in
anticipation of growth in Total Account Value to fund life insurance coverage
in later Policy Years.
If the Policy's Death Benefit increases as a result of an increase in Total
Account Value (see "Life Insurance Qualification"), the Rider's Target Death
Benefit will be reduced by an equivalent amount to maintain the total desired
Death Benefit.
The Rider's Death Benefit is included in the total Death Benefit paid under
the Policy. (See "Death Benefit Options.")
26
<PAGE>
The Company
Aetna Life Insurance and Annuity 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
organized in 1954). The Company is engaged in the business of issuing life
insurance policies and annuity contracts in all states of the United States.
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 Life and Casualty Company.
The Company is registered as an investment adviser under the Investment
Advisers Act of 1940. It is also registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National Association
of Securities Dealers, Inc.
27
<PAGE>
Directors & Officers
<TABLE>
<CAPTION>
Principal Occupation
Name and Address* Position with Company During Past 5 Years
<S> <C> <C>
Daniel P. Kearney Director, President and Chairman, President (since December 1993), Aetna Life
Executive Committee (Principal Insurance and Annuity Company; Executive Vice
Executive Officer) President (since December 1993), and Group
Executive, Financial Division (February
1991--December 1993), Aetna Life and Casualty
Company.
Christopher J. Burns Director (1991); Senior Vice Senior Vice President, Sales & Service (since
President; Member of Executive February 1996), and Senior Vice President, Life
Committee (March 1991--February 1996), Aetna Life
Insurance and Annuity Company.
Laura R. Estes Director and Senior Vice Senior Vice President, Manage/Design Products
President; Member of Executive and Services (since February 1996), and Senior
Committee Vice President, Pensions (March 1991--February
1996), Aetna Life Insurance and Annuity
Company.
Timothy A. Holt Director, Senior Vice President Senior Vice President, Strategy & Finance, and
and Chief Financial Officer Chief Financial Officer (since February 1996),
(1996) Aetna Life Insurance and Annuity Company; Vice
President, Portfolio Management/Investment
Group (August 1992--February 1996), Aetna Life
and Casualty Company; Treasurer (February
1990--July 1991), Aeltus Investment Management,
Inc.
Gail P. Johnson Director and Vice President Vice President, Service and Retain Customers
(since February 1996); Vice President, Defined
Benefit Services (September 1994--February
1996); Vice President, Plan Services, Pensions
and Financial Services (December 1992--
September 1994); Managing Director, Business
Strategy (July 1991--December 1992); Assistant
Vice President, Portfolio Management, Financial
Division (June 1987-- July 1991); -- Aetna Life
Insurance and Annuity Company.
John Y. Kim Director and Senior Vice President (since December 1995), Aeltus
President Investment Management, Inc.; Chief Investment
Officer (since May 1994), Aetna Life and
Casualty Company; Managing Director (September
1993--April 1994), Mitchell Hutchins
Institutional Investors (New York, New York);
Vice President and Senior Portfolio Manager
(October 1991-- August 1993), and Vice
President, Investor Relations (1990--1992),
Aetna Life and Casualty Company.
Shaun P. Mathews Director and Vice President Vice President, Products Group (since February
1996); Senior Vice President, Strategic Markets
and Products (February 1993--February 1996);
and Senior Vice President, Mutual Funds (March
1991-- February 1993) -- Aetna Life Insurance
and Annuity Company.
* The address of all Directors and Officers listed is 151 Farmington Avenue, Hartford, Connecticut.
28
<PAGE>
Principal Occupation
Name and Address* Position with Company During Past 5 Years
Glen Salow Director and Vice President Vice President, Information Technology (since
February 1996), Vice President, Information
Technology, Investments and Financial Services
(February 1995--February 1996); Vice President,
Investment Systems (1992--1995); AIT -- Aetna
Life Insurance and Annuity Company; Senior Vice
President (December 1986--August 1992), Lehman
Brothers.
Creed R. Terry Director and Vice President Vice President, Select and Manage Markets
(since February 1996), Market Strategist
(August 1995--February 1996) -- Aetna Life
Insurance and Annuity Company; President
(1991--1995), Chemical Technology Corporation
(a subsidiary of Chemical Bank).
Zoe Baird Senior Vice President and General Senior Vice President and General Counsel
Counsel (since April 1992), Vice President and General
Counsel (July 1990--April 1992), Aetna Life and
Casualty Company.
Susan E. Schechter Counsel and Corporate Secretary Counsel (since November 1993), Aetna Life and
Casualty Company; Associate Attorney (September
1986--October 1993), Steptoe & Johnson.
Eugene M. Trovato Vice President and Treasurer, Vice President and Treasurer, Corporate
Corporate Controller Controller (since February 1996), Vice
President and Controller (February 1995--
February 1996), Aetna Life Insurance and
Annuity Company; Vice President, Financial
Reporting (December 1991--February 1995),
Assistant Vice President, Financial Reporting
(June 1989--December 1991), Aetna Life and
Casualty Company.
Diane B. Horn Vice President and Chief Vice President and Chief Compliance Officer
Compliance Officer (since February 1996), and Senior Compliance
Officer (August 1993--February 1996), Aetna
Life Insurance and Annuity Company; Director of
Compliance (May 1991--July 1993), Kemper Life
Insurance Company.
* The address of all Directors and Officers listed is 151 Farmington Avenue, Hartford, Connecticut.
</TABLE>
29
<PAGE>
Additional Information
Reports to Policyowners
Within 30 days after each Policy Anniversary and before proceeds are applied
to a Settlement Option, we will send You a report containing the following
information:
1) A statement of changes in the Total Account Value and Surrender Value
since the prior report or since the Date of Issue, if there has been no
prior report. This includes a statement of Monthly Deductions and
investment results and any interest earnings for the report period;
2) Surrender Value, Death Benefit, and any Loan Account Value as of the
Policy Anniversary;
3) A projection of the Total Account Value, Loan Account Value and Surrender
Value as of the succeeding Policy Anniversary.
If You have Policy values funded in a Separate Account You will receive, in
addition, such periodic reports as may be required by the SEC.
Some state laws require additional reports; these requirements vary from
state to state.
Right to Instruct Voting of Fund Shares
In accordance with our view of present applicable law, we will vote the
shares of each of the Funds held in each Separate Account. The votes will be
cast at meetings of the shareholders of the Fund and will be based on
instructions received from Policyowners. However, if the Investment Company
Act of 1940 or any regulations thereunder should be amended or if the present
interpretation thereof should change, and as a result we determine that we
are permitted to vote the shares of the Fund in our own right, we may elect
to do so.
The number of Fund shares which each Policyowner is entitled to direct a vote
is determined by dividing the portion of Total Account Value attributable to
a Fund, if any, by the net asset value of one share in the Fund. During the
Settlement Option period, the number of votes is determined by dividing the
Valuation Reserve (as defined below) attributable in the Fund, if any, by the
net asset value of one share of the Fund. Fractional votes will be counted.
Where the value of the Total Account Value or the Valuation Reserve relates
to more than one Fund, the calculation of votes will be performed separately
for each Fund. The Valuation Reserve is established pursuant to the insurance
laws of Connecticut to measure voting rights during the Settlement Option
period and the value of a communication right, if available, under Settlement
Option 2 when elected on a variable basis.
The number of shares which a person has a right to vote will be determined as
of a date to be chosen by us, but not more than 90 days before the meeting of
the Fund. Voting instructions will be solicited by written communication at
least 14 days before such meeting.
Fund shares for which no timely instructions are received, and Fund shares
which are not otherwise attributable to Policyowners, will be voted by us in
the same
30
<PAGE>
proportion as the voting instructions which are received for all Policies
participating in each Fund through Variable Life Account B.
Policyowners having a voting interest will receive periodic reports relating
to the Fund, proxy material and a form for giving voting instructions.
Disregard of Voting Instructions
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the shares be voted so
as to cause a change in the sub-classification or investment objectives of a
Fund or to approve or disapprove an investment advisory contract for a Fund.
In addition, we may disregard voting instructions in favor of changes
initiated by a Policyowner in the investment policy or the investment adviser
of the Fund if we reasonably disapprove of such changes.
A change would be disapproved only if the proposed change is contrary to
state law or prohibited by state regulatory authorities or we determined that
the change would have an adverse effect on the Separate Accounts in that the
proposed investment policy for a Fund may result in overly speculative or
unsound investments. In the event we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in
the next annual report to Policyowners.
State Regulation
We are subject to regulation and supervision by the Insurance Department of
the state of Connecticut, which periodically examines our affairs. We are
also subject to the insurance laws and regulations of all jurisdictions where
we are authorized to do business. The Policies have been approved by the
Insurance Department of the state of Connecticut and in other jurisdictions
where they are offered.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various
jurisdictions in which we do business, for the purposes of determining
solvency and compliance with local insurance laws and regulations.
Legal Matters
The Company knows of no material legal proceedings pending to which the
Separate Account is a party or which would materially affect the Separate
Account.
The legal validity of the securities described in the Prospectus has been
passed on by Susan E. Bryant, Counsel.
The Registration Statement
A Registration Statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this Prospectus. This
Prospectus does not include all the information set forth in the Registration
Statement, certain portions of which have been omitted pursuant to the rules
and regulations of the SEC. The omitted information may be obtained at the
SEC's principal office in Washington, D.C., upon payment of the SEC's
prescribed fees.
31
<PAGE>
Distribution of the Policies
We offer the Policies through life insurance salespersons and certain Home
Office sales employees. Such persons are registered representatives of Aetna
Investment Services, Inc., a wholly owned subsidiary of the Company, (which
is a registered broker-dealer), or of other registered broker-dealers which
have entered into distribution agreements with the Company. The maximum
commission payable by the Company to salespersons and their supervising
broker-dealers for Policy distribution is 50% of the Guaranteed Death Benefit
Premium to age 80, or, in the event of an increase in the Specified Amount,
50% of the Guaranteed Death Benefit Premium to age 80, attributable to the
increase. In particular circumstances, we may also pay certain of these
professionals for their administrative expenses. The Company may be deemed to
be an underwriter for purposes of the federal securities laws.
The registered representative may be required to return all or part of the
first year commission if the Policy is not continued through the second year.
If a Policy is terminated in the first 2 Policy Years, all or a portion of
the commissions paid will be recalled from life insurance salespersons by the
Company as described below.
If a Policy is terminated in Policy months 1 through 3, 100% of the
commissions paid will be recalled by the Company.
If a Policy is terminated in Policy months 4 through 12, a graded chargeback
will be applied, grading uniformly from 75% in Policy month 4 to 35% in
Policy month 12.
If a Policy is terminated in Policy months 13 through 24, a graded chargeback
will be applied, grading uniformly from 30% in Policy month 13 to 2.5% in
Policy Month 24.
No further commissions will be recalled if a Policy is surrendered in Policy
months 25 and later.
Application forms are completed by the applicant and forwarded to the Company
for acceptance. Upon acceptance, the Policy is prepared, executed by duly
authorized officers of the Company, and forwarded to the Policyowner.
The Policies are offered for sale in all jurisdictions where we are
authorized to do business except Guam, Puerto Rico, and the Virgin Islands.
Records and Accounts
Andesa, TPA, Inc., Suite 102, 1621 N. Cedar Crest Boulevard, Allentown,
Pennsylvania, will act as a Transfer Agent on behalf of Aetna Life Insurance
and Annuity Company as it relates to the policies described in this
Prospectus. In the role of a Transfer Agent, Andesa will perform
administrative functions, such as decreases, increases, surrenders and
partial surrenders, fund allocation changes and transfers on behalf of the
Company.
All records and accounts relating to the Separate Accounts and the Funds will
be maintained by the Company. All financial transactions will be handled by
the Company. All reports required to be made and information required to be
given will be provided by Andesa on behalf of the Company.
32
<PAGE>
Independent Auditors
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut, are the
independent auditors for the Separate Account and for the Company. The
services provided to the Separate Account include primarily the examination
of the Separate Account's financial statements and the review of filings made
with the SEC.
33
<PAGE>
Tax Matters
General
The following is a discussion of the federal income tax considerations
relating to the Policy. This discussion is based on the Company's
understanding of federal income tax laws as they now exist and are currently
interpreted by the Internal Revenue Service ("IRS"). These laws are complex,
and tax results may vary among individuals. A person or persons contemplating
the purchase of or the exercise of elections under the Policy described in
this Prospectus should seek competent tax advice.
Federal Tax Status of the Company
The Company is taxed as a life insurance company in accordance with the
Internal Revenue Code of 1986, as amended ("Code"). For federal income tax
purposes, the operations of each Separate Account form a part of the
Company's total operations and are not taxed separately, although operations
of each Separate Account are treated separately for accounting and financial
statement purposes.
Both investment income and realized capital gains of the Separate Account
(i.e., income, capital gains and dividends distributed to the Separate
Account by the Funds) are reinvested without tax since the Code does not
impose a tax on the Separate Account for these amounts. The Company reserves
the right, however, to make a deduction for such taxes should they be imposed
with respect to such items in the future.
Life Insurance Qualification
Section 7702 of the Code includes a definition of life insurance for tax
purposes. The Secretary of the Treasury has been granted authority to
prescribe regulations to carry out the purposes of this section, and proposed
regulations governing mortality charges were issued in 1991. The Company
believes that the Policy meets the statutory definition of life insurance. As
such, and assuming the diversification standards of Section 817(h) (discussed
below) are satisfied, then except in limited circumstances (a) death benefits
paid under the Policy should generally be excluded from the gross income of
the beneficiary for federal income tax purposes under Section 101(a)(1) of
the Code, and (b) a Policyowner should not generally be taxed on the cash
value under a Policy, including increments thereof, prior to actual receipt.
The principal exceptions to these rules are corporations that are subject to
the alternative minimum tax, and thus may be subject to tax on increments in
the Policy's Total Account Value, and Policyowners who acquire a Policy in a
"transfer for value" and thus can become subject to tax on the portion of the
Death Benefit which exceeds the total of their cost of acquisition and
subsequent premium payments.
The Company intends to comply with any future final regulations issued under
Sections 7702 and 817(h) of the Code, and therefore reserves the right to
make such changes as it deems necessary to ensure such compliance. Any such
changes will apply uniformly to affected Policyowners and will be made only
after advance written notice.
General Rules
Upon the surrender or cancellation of any Policy, whether or not it is a
Modified Endowment Contract, the Policyowner will be taxed on the Surrender
Value only to the extent that it exceeds the gross premiums paid less prior
untaxed withdrawals.
34
<PAGE>
The amount of any unpaid Policy Loans will, upon surrender, be added to the
Surrender Value and will be treated for this purpose as if it had been
received.
Assuming the Policy is not a Modified Endowment Contract, the proceeds of any
Partial Surrenders are generally not taxable unless the total amount received
due to such surrenders exceeds total premiums paid less prior untaxed Partial
Surrender amounts. However, Partial Surrenders made within the first 15
Policy Years may be taxable in certain limited instances where the Surrender
Value plus any unpaid Policy debt exceeds the total premiums paid less the
untaxed portion of any prior Partial Surrenders. This result may occur even
if the total amount of any Partial Surrenders does not exceed total premiums
paid to that date.
Loans received under the Policy will ordinarily be considered indebtedness of
the Policyowner, and assuming the Policy is not considered a Modified
Endowment Contract, Policy Loans will not be treated as current distributions
subject to tax. Generally, amounts of loan interest paid by individuals will
be considered nondeductible "personal interest."
Modified Endowment Contracts
A class of contracts known as "Modified Endowment Contracts" has been created
under Section 7702A of the Code. The tax rules applicable to loan proceeds
and proceeds of a Partial Surrender of any Policy that is considered to be a
Modified Endowment Contract will differ from the general rules noted above.
A contract will be considered a Modified Endowment Contract if it fails the
"7-pay test." A Policy fails the 7-pay test if, at any time in the first
seven Policy Years, the amount paid into the Policy exceeds the amount that
would have been paid had the Policy provided for the payment of seven (7)
level annual premiums. In the event of a distribution under the Policy, the
Company will notify the Policyowner if the Policy is a Modified Endowment
Contract.
Each Policy is subject to retesting under the 7-pay test during the first
seven Policy Years and at any time a material change takes effect. A material
change, for these purposes, includes the exchange of a life insurance policy
for another life insurance policy or the conversion of a term life insurance
policy into a whole life or universal life insurance policy. In addition, an
increase in the future benefits provided constitutes a material change unless
the increase is attributable to (1) the payment of premiums necessary to fund
the lowest Death Benefit payable in the first seven Policy Years or (2) the
crediting of interest or other earnings with respect to such premiums. A
reduction in death benefits during the first seven Policy Years may also
cause a Policy to be considered a Modified Endowment Contract.
If the Policy is considered to be a Modified Endowment Contract, the proceeds
of any Partial Surrenders and any Policy Loans will be currently taxable to
the extent that the Policy's Total Account Value immediately before payment
exceeds gross premiums paid (increased by the amount of loans previously
taxed and reduced by untaxed amounts previously received). These rules may
also apply to Policy Loans or Partial Surrender proceeds received during the
two-year period prior to the time that a Policy becomes a Modified Endowment
Contract. If the Policy becomes a Modified Endowment Contract, it may be
aggregated with other Modified Endowment Contracts purchased by You from the
Company (and its affiliates) during any one
35
<PAGE>
calendar year for purposes of determining the taxable portion of withdrawals
from the Policy.
A penalty tax equal to 10% of the amount includable in income will apply to
the taxable portion of the proceeds of any Policy Surrender or Policy Loan
received by any Policyowner of a Modified Endowment Contract who is not an
individual. The penalty tax will also apply where taxable Policy Loans are
received by an individual who has not reached the age of 59-1/2. Taxable
policy distributions made to an individual who has not reached the age of
59-1/2 will also be subject to the penalty tax unless those distributions are
attributable to the individual becoming disabled, or are part of a series of
equal periodic payments made not less frequently than annually for the life
or life expectancy of such individual (i.e., an annuity).
Diversification Standards
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate
accounts of insurance companies) underlying the Policy must be "adequately
diversified" in accordance with Treasury regulations in order for the Policy
to qualify as life insurance. The Treasury Department has issued regulations
prescribing the diversification requirements in connection with variable
contracts. The Separate Account, through the Funds, intends to comply with
these requirements.
Investor Control
In certain circumstances, owners of variable contracts may be considered the
owners for federal income tax purposes of the assets of the separate account
used to support their contracts. In those circumstances, income and gains
from separate account assets would be includable in the variable
contractowner's gross income. In several rulings published prior to the
enactment of Section 817(h), the IRS stated that a variable contractowner
will be considered the owner of separate account assets if the contractowner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations under Section
817(h) concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., You),
rather than the insurance company, to be treated as the owner of the assets
in the account." This announcement also stated that guidance would be issued
by way of regulations or rulings on the "extent to which policyholders may
direct their investments to particular Funds without being treated as owners
of the underlying assets." As of the date of this Prospectus, no such
guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from those described by the IRS in pre-Section 817(h)
rulings in which it was determined that Policyowners were not owners of
separate account assets. For example, a Policyowner has additional
flexibility in allocating premium payments and account values. While the
Company does not believe that these differences would result in a Policyowner
being treated as the owner of a pro rata portion of the assets of the
Separate Account, there is no regulation or ruling of the IRS that confirms
this conclusion. In addition, the Company does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Company therefore reserves the
right to modify
36
<PAGE>
the Policy as necessary to attempt to prevent a Policyowner from being
considered the owner of a pro rata share of the assets of the Separate
Account.
Other Tax Considerations
Business-owned life insurance may be subject to certain additional rules.
Section 264(a)(1) of the Code generally prohibits employers from deducting
premiums on policies covering officers, employees or other financially
interested parties. Additions to the Policy's Total Account Value may also be
subject to tax under the corporation alternative minimum tax provisions. In
addition, Section 264(a)(4) of the Code limits the Policyowner's deduction
for interest on loans taken against life insurance covering the lives of
officers, employees, or other financially interested in the Policyowner's
trade or business. Under current tax law, interest may generally be deducted
on an aggregate total of $50,000 of loans per covered life with respect to
all life insurance policies covering each officer, employee or others who may
have a financial interest in the Policyowner's trade or business.
Depending on the circumstances, the exchange of a policy, a change in the
Policy's Death Benefit Option, a Policy Loan, a Full or Partial Surrender, a
change in Ownership or an assignment of the Policy may have federal income
tax consequences. In addition, federal, state and local transfer, estate,
inheritance and other tax consequences of policy ownership, premium payments
and receipt of policy proceeds depend on the circumstances of each
Policyowner or beneficiary.
37
<PAGE>
Misc. Policy Provisions
The Policy
The Policy which You receive and the application You make when You purchase
the Policy are the whole contract. A copy of the application is attached to
the Policy when it is issued to You. Any application for changes, once
approved by us, will become part of the Policy.
Payment of Benefits
All benefits are payable at our Home Office. We may require submission of the
Policy before we grant loans, make changes or pay benefits.
Age
If age is misstated on the application, the amount payable on death will be
that which would have been purchased by the most recent monthly deduction at
the current age.
Incontestability
We will not contest coverage under the Policy after the Policy has been in
force during the lifetime of the insured for a period of two years from the
Policy's Date of Issue. Our right to contest coverage is not affected by the
Guaranteed Death Benefit provision.
For coverage which takes effect on a later date (e.g., an increase in
coverage), we will not contest such coverage after it has been in force
during the lifetime of the Insured more than two years from its effective
date.
Suicide
In most states, if the Insured commits suicide within two years from the Date
of Issue, the only benefit paid will be the sum of:
a) premiums paid less amounts allocated to the Separate Account; and
b) the Separate Account Value on the date of suicide, plus the portion of the
Monthly Deduction from the Separate Account Value, minus
c) the amount necessary to repay any loans in full and any interest earned on
the Loan Account Value transferred to the Separate Account Value, and any
surrenders from the Fixed Account.
If the Insured commits suicide within two years from the effective date of
any increase in coverage, we will pay as a benefit only the Monthly Deduction
for the increase, in lieu of the face amount of the increase.
All amounts described in (a) and (c) above will be calculated as of the date
of death.
Coverage Beyond Maturity
You may, by written request in the 30 days before the Maturity Date of this
Policy, elect to continue coverage beyond the Maturity Date. At Age 100, the
Separate Account Value will be transferred to the Fixed Account. If coverage
beyond maturity
38
<PAGE>
is elected, we will continue to credit interest to the Total Account Value of
this Policy. Monthly Deductions will be calculated with a Cost of Insurance
rate equal to zero. (This provision is not available in New York.)
At this time, uncertainties exist regarding the tax treatment of the Policy
should it continue beyond the Maturity Date. You should therefore consult
with Your tax advisor prior to making this election. (See "Tax Matters.")
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company.
No dividends are payable.
39
<PAGE>
Illustrations of Death Benefit, Total Account Values and Surrender Values
The following tables illustrate how the Death Benefit, Total Account Values
and Surrender Values of a Policy change with the investment experience of the
Fund. The tables show how the Death Benefit, Total Account Values, and
Surrender Values of a Policy issued to an insured of a given age and a given
premium would vary over time if the investment return on the assets held in
each Fund were a uniform, gross, after tax annual rate of 0%, 6%, and 12%,
respectively.
Tables I, II, V and VI illustrate Policies issued on a unisex basis, age 45,
in the preferred nonsmoker rate class. Tables III, IV, VII and VIII
illustrate Policies issued on a unisex basis, age 45 in the nonsmoker rate
class. Tables I through IV show values under the Guideline Premium Test for
the definition of life insurance, and Tables V through VIII show values under
the Cash Value Accumulation Test for the definition of life insurance. The
Death Benefit, Total Account Values, and Surrender Values would be different
from those shown if the gross annual investment rates of return averaged 0%,
6%, and 12%, respectively, over a period of years, but fluctuated above and
below those averages for individual Policy Years.
The second column of each table shows the accumulated values of the premiums
paid at an assumed interest rate of 5%. The third through fifth columns
illustrate the Death Benefit of a Policy over the designated period. The
sixth through eighth columns illustrate the Total Account Values, while the
ninth through the eleventh columns illustrate the Surrender Values of each
Policy over the designated period. Tables I, III, V and VII assume that the
maximum Cost of Insurance allowable under the Policy are charged in all
Policy Years. These tables also assume that the maximum allowable mortality
and expense risk charge of 0.90% on an annual basis, the maximum allowable
administrative expense charge of 0.50% on an annual basis, and the maximum
allowable premium load of 10% up to the first year's Guaranteed Death Benefit
Premium to age 80 and 5% over the Guaranteed Death Benefit Premium to age 80,
are assessed in the first Policy Year and 5% on all premium in all Policy
Years thereafter. Tables II, IV, VI and VIII assume that the current scale of
Cost of Insurance Rates applies during all Policy Years. These tables also
assume the current mortality and expense risk charge of 0.70% on an annual
basis for the first 10 Policy Years and 0.20% for Policy Years 11 and
thereafter, the current administrative expense charge of 0.30% on an annual
basis, and the current premium load of 7% up to the first year's Guaranteed
Death Benefit Premium to age 80 and 2% over the Guaranteed Death Benefit
Premium to age 80 are assessed in the first Policy Year and 2% on all premium
in all Policy Years thereafter.
The amounts shown for Death Benefit, Surrender Values, and Total Account
Values reflect the fact that the net investment return is lower than the
gross, after tax return on the assets held in each Fund as a result of
expenses paid by each Fund and Separate Account charges levied.
The values shown take into account the daily investment advisory fee and
other Fund expenses paid by each Fund. See the individual prospectuses for
each Fund for more information.
In addition, a charge for mortality and expense risks of 0.70% for Policy
Years 1-10 and 0.20% beginning in Policy Year 11 and thereafter (0.90%
maximum) and administrative expenses of 0.30% (0.50% maximum) has also been
reflected in the
40
<PAGE>
values shown. After deduction of these amounts, the illustrated net annual
return is -2.09%, 3.91% and 9.91% on the maximum charge basis and -1.69%,
4.31% and 10.31% on a current charge basis for Policy Years 1-10. The
illustrated net annual return is -0.82%, 5.18% and 11.18% on a current charge
basis for Policy Years 11 and thereafter.
A weighted average has been used for the illustrations assuming that the
Policy Owner has invested in the Funds as follows: 8% in Aetna Variable Fund;
8% in Aetna Income Shares; 8% in Aetna Variable Encore Fund; 8% in Aetna
Investment Advisers Fund, Inc.; 10% in Alger American Small Cap Portfolio; 7%
in Fidelity's Variable Insurance Products Fund-Equity-Income Portfolio; 7% in
Fidelity's Variable Insurance Products Fund--Growth Portfolio; 7% in
Fidelity's Variable Insurance Products Fund--Overseas Portfolio; 7% in
Fidelity's Variable Insurance Products Funds II--Asset Manager Portfolio; 7%
in Fidelity's Variable Insurance Products Fund II--Contrafund Portfolio; 3%
in each of the Janus Aspen Aggressive Growth Portfolio, Janus Aspen Balanced
Portfolio, Janus Aspen Growth Portfolio, Janus Aspen Short-Term Bond
Portfolio, and the Janus Aspen Worldwide Growth Portfolio, 4% in the Scudder
International Portfolio and 4% in TCI Growth.
The hypothetical values shown in the tables do not reflect any Separate
Account charges for federal income taxes, since we are not currently making
such charges. However, such charges may be made in the future, and in that
event, the gross annual investment rate of return would have to exceed 0%,
6%, or 12% by an amount sufficient to cover the tax charges in order to
produce the Death Benefit, Total Account Values, and Surrender Values
illustrated.
The tables illustrate the Policy Values that would result based upon the
hypothetical investment rates of return if premiums were paid as indicated,
if all Net Premiums were allocated to Variable Life Account B, and if no
Policy loans have been made. The tables are also based on the assumptions
that the Policyowner has not requested an increase or decrease in the
Specified Amount of the Policy, and no partial surrenders have been made.
Upon request, we will provide an illustration based upon the proposed
Insured's age, and underwriting classification, the Specified Amount or
premium requested, the proposed frequency of premium payments and any
available riders requested.
The hypothetical gross annual investment return assumed in such an
illustration will not exceed 12%.
41
<PAGE>
Table I
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$5,244.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
SIMPLIFIED ISSUE
GUIDELINE PREMIUM TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Return of Annual Investment Return of Annual Investment Return of
End of at ---------------------------------- ---------------------------------- ----------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Per Year Net -2.09% Net 3.91% Net 9.91% Net -2.09% Net 3.91% Net 9.91% Net -2.09% Net 3.91% Net 9.91%
----- ---------- ---------- --------- --------- ---------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5,244 500,000 500,000 500,000 2,885 3,112 3,340 2,636 2,862 3,090
2 10,750 500,000 500,000 500,000 5,851 6,499 7,177 5,547 6,196 6,874
3 16,532 500,000 500,000 500,000 8,624 9,887 11,261 8,355 9,617 10,992
4 22,602 500,000 500,000 500,000 11,197 13,263 15,605 10,655 12,721 15,064
5 28,976 500,000 500,000 500,000 13,568 16,623 20,233 13,104 16,158 19,769
6 35,669 500,000 500,000 500,000 15,714 19,939 25,149 15,327 19,552 24,762
7 42,697 500,000 500,000 500,000 17,617 23,189 30,360 17,307 22,880 30,051
8 50,076 500,000 500,000 500,000 19,249 26,339 35,870 19,017 26,106 35,638
9 57,823 500,000 500,000 500,000 20,582 29,352 41,682 20,427 29,197 41,527
10 65,958 500,000 500,000 500,000 21,594 32,199 47,806 21,594 32,199 47,806
15 113,158 500,000 500,000 500,000 21,031 42,726 83,700 21,031 42,726 83,700
20 173,398 500,000 500,000 500,000 6,893 41,395 129,508 6,893 41,395 129,508
25 250,281 500,000 500,000 500,000 0 13,150 186,506 0 13,150 186,506
30 348,405 500,000 500,000 500,000 0 0 259,584 0 0 259,584
20 173,398 500,000 500,000 500,000 6,893 41,395 129,508 6,893 41,395 129,508
(Age 65)
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If
a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a
smaller premium is paid, the Surrender Value as a percentage of the Total
Account Value will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum mortality and expense risk charges, administrative expense charges,
and premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment
results may be more or less than those shown and will depend on a number of
factors, including the Policyowner's allocations and the Funds' rates of
return. The Total Account Value and Surrender Value for a Policy would be
different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that
these rates of return will definitely be achieved for any one year or
sustained over a period of time.
42
<PAGE>
Table II
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$5,244.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
SIMPLIFIED ISSUE
GUIDELINE PREMIUM TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Return of Annual Investment Return of Annual Investment Return of
End of at ---------------------------------- ---------------------------------- -----------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Per Year Net -1.69% Net 4.31% Net 10.31% Net -1.69% Net 4.31% Net 10.31% Net -1.69% Net 4.31% Net 10.31%
----- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5,244 500,000 500,000 500,000 3,476 3,726 3,976 3,069 3,319 3,569
2 10,750 500,000 500,000 500,000 7,080 7,814 8,579 6,620 7,353 8,118
3 16,532 500,000 500,000 500,000 10,550 12,004 13,581 10,123 11,577 13,155
4 22,602 500,000 500,000 500,000 13,884 16,297 19,024 13,342 15,755 18,482
5 28,976 500,000 500,000 500,000 17,081 20,697 24,950 16,617 20,232 24,486
6 35,669 500,000 500,000 500,000 20,143 25,207 31,413 19,756 24,820 31,026
7 42,697 500,000 500,000 500,000 23,077 29,839 38,478 22,767 29,530 38,168
8 50,076 500,000 500,000 500,000 25,863 34,579 46,188 25,631 34,347 45,956
9 57,823 500,000 500,000 500,000 28,529 39,457 54,641 28,374 39,302 54,486
10 65,958 500,000 500,000 500,000 31,038 44,443 63,880 31,038 44,443 63,880
15 113,158 500,000 500,000 500,000 41,650 72,208 127,485 41,650 72,208 127,485
20 173,398 500,000 500,000 500,000 46,564 102,651 231,472 46,564 102,651 231,472
25 250,281 500,000 500,000 500,000 44,405 135,993 408,331 44,405 135,993 408,331
30 348,405 500,000 500,000 760,447 28,389 168,588 710,698 28,389 168,588 710,698
20 173,398 500,000 500,000 500,000 46,564 102,651 231,472 46,564 102,651 231,472
(Age 65)
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If
a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a
smaller premium is paid, the Surrender Value as a percentage of the Total
Account Value will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current mortality rates assumed.
Current mortality and expense risk charges, administrative expense charges,
and premium load assumed. The current mortality and expense risk charge may
be reduced from .70% to .20% in Policy Years 11 and thereafter. Beginning in
Policy Years 11 and thereafter, the illustrated net annual return is -0.82%,
5.18% and 11.18%.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment
results may be more or less than those shown and will depend on a number of
factors, including the Policyowner's allocations and the Funds' rates of
return. The Total Account Value and Surrender Value for a Policy would be
different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that
these rates of return will definitely be achieved for any one year or
sustained over a period of time.
43
<PAGE>
Table III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$6,444.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
NONSMOKER RISK
FACE AMOUNT $500,000
GUARANTEED ISSUE
GUIDELINE PREMIUM TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Return of Annual Investment Return of Annual Investment Return of
End of at ---------------------------------- ---------------------------------- -----------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Per Year Net -2.09% Net 3.91% Net 9.91% Net -2.09% Net 3.91% Net 9.91% Net -2.09% Net 3.91% Net 9.91%
----- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,444 500,000 500,000 500,000 3,946 4,238 4,531 3,637 3,928 4,221
2 13,210 500,000 500,000 500,000 8,014 8,862 9,749 7,638 8,487 9,373
3 20,315 500,000 500,000 500,000 11,871 13,541 15,357 11,537 13,208 15,023
4 27,774 500,000 500,000 500,000 15,510 18,266 21,384 14,842 17,598 20,716
5 35,607 500,000 500,000 500,000 18,932 23,035 27,873 18,359 22,463 27,300
6 43,832 500,000 500,000 500,000 22,114 27,827 34,846 21,637 27,350 34,369
7 52,467 500,000 500,000 500,000 25,039 32,620 42,336 24,657 32,239 41,954
8 61,534 500,000 500,000 500,000 27,682 37,388 50,372 27,395 37,102 50,085
9 71,055 500,000 500,000 500,000 30,016 42,101 58,985 29,825 41,910 58,795
10 81,052 500,000 500,000 500,000 32,021 46,734 68,222 32,021 46,734 68,222
15 139,052 500,000 500,000 500,000 36,384 67,795 125,921 36,384 67,795 125,921
20 213,077 500,000 500,000 500,000 27,423 80,911 210,650 27,423 80,911 210,650
25 307,553 500,000 500,000 500,000 0 74,421 342,486 0 74,421 342,486
30 428,132 500,000 500,000 610,216 0 22,747 570,295 0 22,747 570,295
20 213,077 500,000 500,000 500,000 27,423 80,911 210,650 27,423 80,911 210,650
(Age 65)
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If
a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a
smaller premium is paid, the Surrender Value as a percentage of the Total
Account Value will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum mortality and expense risk charges, administrative expense charges,
and premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment
results may be more or less than those shown and will depend on a number of
factors, including the Policyowner's allocations and the Funds' rates of
return. The Total Account Value and Surrender Value for a Policy would be
different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that
these rates of return will definitely be achieved for any one year or
sustained over a period of time.
44
<PAGE>
Table IV
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$6,444.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
NONSMOKER RISK
FACE AMOUNT $500,000
GUARANTEED ISSUE
GUIDELINE PREMIUM TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Return of Annual Investment Return of Annual Investment Return of
End of at ---------------------------------- ---------------------------------- -----------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Per Year Net -1.69% Net 4.31% Net 10.31% Net -1.69% Net 4.31% Net 10.31% Net -1.69% Net 4.31% Net 10.31%
----- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,444 500,000 500,000 500,000 4,156 4,460 4,764 3,653 3,957 4,261
2 13,210 500,000 500,000 500,000 8,448 9,335 10,260 7,879 8,766 9,691
3 20,315 500,000 500,000 500,000 12,543 14,294 16,196 12,016 13,767 15,669
4 27,774 500,000 500,000 500,000 16,432 19,331 22,610 15,764 18,663 21,942
5 35,607 500,000 500,000 500,000 20,163 24,497 29,602 19,590 23,924 29,029
6 43,832 500,000 500,000 500,000 23,710 29,768 37,206 23,233 29,291 36,729
7 52,467 500,000 500,000 500,000 27,084 35,161 45,500 26,702 34,780 45,118
8 61,534 500,000 500,000 500,000 30,221 40,617 54,497 29,935 40,331 54,211
9 71,055 500,000 500,000 500,000 33,219 46,235 64,371 33,028 46,044 64,180
10 81,052 500,000 500,000 500,000 35,963 51,908 75,110 35,963 51,908 75,110
15 139,052 500,000 500,000 500,000 46,850 83,009 148,950 46,850 83,009 148,950
20 213,077 500,000 500,000 500,000 49,344 115,531 270,033 49,344 115,531 270,033
25 307,553 500,000 500,000 555,648 39,912 148,007 479,007 39,912 148,007 479,007
30 428,132 500,000 500,000 890,104 7,135 173,566 831,873 7,135 173,566 831,873
20 213,077 500,000 500,000 500,000 49,344 115,531 270,033 49,344 115,531 270,033
(Age 65)
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If
a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a
smaller premium is paid, the Surrender Value as a percentage of the Total
Account Value will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current mortality rates assumed.
Current mortality and expense risk charges, administrative expense charges,
and premium load assumed. The current mortality and expense risk charge may
be reduced from .70% to .20% in Policy Years 11 and thereafter. Beginning in
Policy Years 11 and thereafter, the illustrated net annual return is -0.82%,
5.18% and 11.18%.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment
results may be more or less than those shown and will depend on a number of
factors, including the Policyowner's allocations and the Funds' rates of
return. The Total Account Value and Surrender Value for a Policy would be
different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that
these rates of return will definitely be achieved for any one year or
sustained over a period of time.
45
<PAGE>
Table V
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$5,244.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
SIMPLIFIED ISSUE
CASH VALUE ACCUMULATION TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Return of Annual Investment Return of Annual Investment Return of
End of at ---------------------------------- ---------------------------------- -----------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Per Year Net -2.09% Net 3.91% Net 9.91% Net -2.09% Net 3.91% Net 9.91% Net -2.09% Net 3.91% Net 9.91%
----- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5,244 500,000 500,000 500,000 2,885 3,112 3,340 2,636 2,862 3,090
2 10,7650 500,000 500,000 500,000 5,851 6,499 7,177 5,547 6,196 6,874
3 16,532 500,000 500,000 500,000 8,624 9,887 11,261 8,355 9,617 10,992
4 22,602 500,000 500,000 500,000 11,197 13,263 15,605 10,655 12,721 15,064
5 28,976 500,000 500,000 500,000 13,568 16,623 20,233 13,104 16,158 19,769
6 35,669 500,000 500,000 500,000 15,714 19,939 25,149 15,327 19,552 24,762
7 42,697 500,000 500,000 500,000 17,617 23,189 30,360 17,307 22,880 30,051
8 50,076 500,000 500,000 500,000 19,249 26,339 35,870 19,017 26,106 35,638
9 57,823 500,000 500,000 500,000 20,582 29,352 41,682 20,427 29,197 41,527
10 65,958 500,000 500,000 500,000 21,594 32,199 47,806 21,594 32,199 47,806
15 113,158 500,000 500,000 500,000 21,031 42,726 83,700 21,031 42,726 83,700
20 173,398 500,000 500,000 500,000 6,893 41,395 129,508 6,893 41,395 129,508
25 250,281 500,000 500,000 500,000 0 13,150 186,506 0 13,150 186,506
30 348,405 500,000 500,000 500,000 0 0 259,584 0 0 259,584
20 173,398 500,000 500,000 500,000 6,893 41,395 129,508 6,893 41,395 129,508
(Age 65)
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If
a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a
smaller premium is paid, the Surrender Value as a percentage of the Total
Account Value will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum mortality and expense risk charges, administrative expense charges,
and premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment
results may be more or less than those shown and will depend on a number of
factors, including the Policyowner's allocations and the Funds' rates of
return. The Total Account Value and Surrender Value for a Policy would be
different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that
these rates of return will definitely be achieved for any one year or
sustained over a period of time.
46
<PAGE>
Table VI
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$5,244.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
SIMPLIFIED ISSUE
CASH VALUE ACCUMULATION TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Return of Annual Investment Return of Annual Investment Return of
End of at ---------------------------------- ---------------------------------- -----------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Per Year Net -1.69% Net 4.31% Net 10.31% Net -1.69% Net 4.31% Net 10.31% Net -1.69% Net 4.31% Net 10.31%
----- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5,244 500,000 500,000 500,000 3,476 3,726 3,976 3,069 3,319 3,569
2 10,750 500,000 500,000 500,000 7,080 7,814 8,579 6,620 7,353 8,118
3 16,532 500,000 500,000 500,000 10,550 12,004 13,581 10,123 11,577 13,155
4 22,602 500,000 500,000 500,000 13,884 16,297 19,024 13,342 15,755 18,482
5 28,976 500,000 500,000 500,000 17,081 20,697 24,950 16,617 20,232 24,486
6 35,669 500,000 500,000 500,000 20,143 25,207 31,413 19,756 24,820 31,026
7 42,697 500,000 500,000 500,000 23,077 29,839 38,478 22,767 29,530 38,168
8 50,076 500,000 500,000 500,000 25,863 34,579 46,188 25,631 34,347 45,956
9 57,823 500,000 500,000 500,000 28,529 39,457 54,641 28,374 39,302 54,486
10 65,958 500,000 500,000 500,000 31,038 44,443 63,880 31,038 44,443 63,880
15 113,158 500,000 500,000 500,000 41,650 72,208 127,485 41,650 72,208 127,485
20 173,398 500,000 500,000 500,000 46,564 102,651 231,472 46,564 102,651 231,472
25 250,281 500,000 500,000 649,007 44,405 135,993 405,630 44,405 135,993 405,630
30 348,405 500,000 500,000 985,198 28,389 168,588 684,165 28,389 168,588 684,165
20 173,398 500,000 500,000 500,000 46,564 102,651 231,472 46,564 102,651 231,472
(Age 65)
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If
a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a
smaller premium is paid, the Surrender Value as a percentage of the Total
Account Value will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current mortality rates assumed.
Current mortality and expense risk charges, administrative expense charges,
and premium load assumed. The current mortality and expense risk charge may
be reduced from .70% to .20% in Policy Years 11 and thereafter. Beginning in
Policy Years 11 and thereafter, the illustrated net annual return is -0.82%,
5.18% and 11.18%.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment
results may be more or less than those shown and will depend on a number of
factors, including the Policyowner's allocations and the Funds' rates of
return. The Total Account Value and Surrender Value for a Policy would be
different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that
these rates of return will definitely be achieved for any one year or
sustained over a period of time.
47
<PAGE>
Table VII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$6,444.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
NONSMOKER RISK
FACE AMOUNT $500,000
GUARANTEED ISSUE
CASH VALUE ACCUMULATION TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Return of Annual Investment Return of Annual Investment Return of
End of at ---------------------------------- ---------------------------------- -----------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Per Year Net -2.09% Net 3.91% Net 9.91% Net -2.09% Net 3.91% Net 9.91% Net -2.09% Net 3.91% Net 9.91%
----- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,444 500,000 500,000 500,000 3,946 4,238 4,531 3,637 3,928 4,221
2 13,210 500,000 500,000 500,000 8,014 8,862 9,749 7,638 8,487 9,373
3 20,315 500,000 500,000 500,000 11,871 13,541 15,357 11,537 13,208 15,023
4 27,774 500,000 500,000 500,000 15,510 18,266 21,384 14,842 17,598 20,716
5 35,607 500,000 500,000 500,000 18,932 23,035 27,873 18,359 22,463 27,300
6 43,832 500,000 500,000 500,000 22,114 27,827 34,846 21,637 27,350 34,369
7 52,467 500,000 500,000 500,000 25,039 32,620 42,336 24,657 32,239 41,954
8 61,534 500,000 500,000 500,000 27,682 37,388 50,372 27,395 37,102 50,085
9 71,055 500,000 500,000 500,000 30,016 42,101 58,985 29,825 41,910 58,795
10 81,052 500,000 500,000 500,000 32,021 46,734 68,222 32,021 46,734 68,222
15 139,052 500,000 500,000 500,000 36,384 67,795 125,921 36,384 67,795 125,921
20 213,077 500,000 500,000 500,000 27,423 80,911 210,650 27,423 80,911 210,650
25 307,553 500,000 500,000 546,709 0 74,421 341,693 0 74,421 341,693
30 428,132 500,000 500,000 767,486 0 22,747 532,976 0 22,747 532,976
20 213,077 500,000 500,000 500,000 27,423 80,911 210,650 27,423 80,911 210,650
(Age 65)
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If
a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a
smaller premium is paid, the Surrender Value as a percentage of the Total
Account Value will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum mortality and expense risk charges, administrative expense charges,
and premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment
results may be more or less than those shown and will depend on a number of
factors, including the Policyowner's allocations and the Funds' rates of
return. The Total Account Value and Surrender Value for a Policy would be
different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that
these rates of return will definitely be achieved for any one year or
sustained over a period of time.
48
<PAGE>
Table VIII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$6,444.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
NONSMOKER RISK
FACE AMOUNT $500,000
GUARANTEED ISSUE
CASH VALUE ACCUMULATION TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit Total Account Value Surrender Value
Accumulated Gross Annual Investment Return of Annual Investment Return of Annual Investment Return of
End of at ---------------------------------- ---------------------------------- -----------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Per Year Net -1.69% Net 4.31% Net 10.31% Net -1.69% Net 4.31% Net 10.31% Net -1.69% Net 4.31% Net 10.31%
----- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,444 500,000 500,000 500,000 4,156 4,460 4,764 3,653 3,957 4,261
2 13,210 500,000 500,000 500,000 8,448 9,335 10,260 7,879 8,766 9,691
3 20,315 500,000 500,000 500,000 12,543 14,294 16,196 12,016 13,767 15,669
4 27,774 500,000 500,000 500,000 16,432 19,331 22,610 15,764 18,663 21,942
5 35,607 500,000 500,000 500,000 20,163 24,497 29,602 19,590 23,924 29,029
6 43,832 500,000 500,000 500,000 23,710 29,768 37,206 23,233 29,291 36,729
7 52,467 500,000 500,000 500,000 27,084 35,161 45,500 26,702 34,780 45,118
8 61,534 500,000 500,000 500,000 30,221 40,617 54,497 29,935 40,331 54,211
9 71,055 500,000 500,000 500,000 33,219 46,235 64,371 33,028 46,044 64,180
10 81,052 500,000 500,000 500,000 35,963 51,908 75,110 35,963 51,908 75,110
15 139,052 500,000 500,000 500,000 46,850 83,009 148,950 46,850 83,009 148,950
20 213,077 500,000 500,000 500,000 49,344 115,531 270,033 49,344 115,531 270,033
25 307,553 500,000 500,000 748,905 39,912 148,007 468,066 39,912 148,007 468,066
30 428,132 500,000 500,000 1,114,939 7,135 173,566 774,263 7,135 173,566 774,263
20 213,077 500,000 500,000 500,000 49,344 115,531 270,033 49,344 115,531 270,033
(Age 65)
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If
a larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a
smaller premium is paid, the Surrender Value as a percentage of the Total
Account Value will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current mortality rates assumed.
Current mortality and expense risk charges, administrative expense charges,
and premium load assumed. The current mortality and expense risk charge may
be reduced from .70% to .20% in Policy Years 11 and thereafter. Beginning in
Policy Years 11 and thereafter, the illustrated net annual return is -0.82%,
5.18% and 11.18%.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment
results may be more or less than those shown and will depend on a number of
factors, including the Policyowner's allocations and the Funds' rates of
return. The Total Account Value and Surrender Value for a Policy would be
different from those shown if the actual investment rates of return averaged
0%, 6%, and 12% over a period of years, but fluctuated above or below those
averages for individual Policy Years. No representations can be made that
these rates of return will definitely be achieved for any one year or
sustained over a period of time.
49
<PAGE>
FINANCIAL STATEMENTS
VARIABLE LIFE ACCOUNT B
Index
Independent Auditors' Report S-2
Statement of Assets and Liabilities S-3
Statement of Operations S-6
Statements of Changes in Net Assets S-7
Notes to Financial Statements S-8
S-1
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and
Policyholders of Variable Life Account B:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Life Account B (the "Account") as
of December 31, 1995, and the related statement of operations for the year
then ended, statements of 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, 1995. These financial statements and condensed financial
information are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements and
condensed financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
condensed financial information are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned as of December 31, 1995, 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 the Aetna Life Insurance and Annuity Company Variable Life
Account B as of December 31, 1995, the results of its operations for the year
then ended, 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, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 16, 1996
S-2
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 2,442,148 shares at $29.06 per share (cost $70,892,640) $ 70,958,031
Aetna Income Shares; 773,062 shares at $13.00 per share (cost $9,861,889) 10,051,167
Aetna Variable Encore Fund; 415,129 shares at $13.30 per share (cost $5,381,253) 5,520,188
Aetna Investment Advisers Fund, Inc.; 639,193 shares at $14.50 per share (cost
$8,238,116) 9,269,700
Alger American Fund--Alger American Small Capitalization Portfolio; 133,920 shares at
$39.41 per share (cost $4,681,829) 5,277,779
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 21,701 shares at $19.27 per share (cost $389,974) 418,176
Growth Portfolio; 41,047 shares at $29.20 per share (cost $1,234,770) 1,198,559
Overseas Portfolio; 34,006 shares at $17.05 per share (cost $557,879) 579,802
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 60,778 shares at $15.79 per share (cost $912,255) 959,690
Contrafund Portfolio; 79,021 shares at $13.78 per share (cost $1,078,657) 1,088,910
Janus Aspen Series:
Aggressive Growth Portfolio; 205,922 shares at $17.08 per share (cost $3,140,545) 3,517,151
Balanced Portfolio; 46,943 shares at $13.03 per share (cost $551,081) 611,670
Growth Portfolio; 187,250 shares at $13.45 per share (cost $2,321,668) 2,518,516
Short-Term Bond Portfolio; 34,655 shares at $10.03 per share (cost $341,510) 347,588
Worldwide Growth Portfolio; 93,270 shares at $15.31 per share (cost $1,200,440) 1,427,963
Scudder Variable Life Investment Fund--International Portfolio; 566,120 shares at $11.82
per share (cost $6,260,081) 6,691,544
TCI Portfolios, Inc.--TCI Growth; 504,092 shares at $12.06 per share (cost $5,079,618) 6,079,345
------------
NET ASSETS $126,515,779
============
</TABLE>
Net assets represented by:
<TABLE>
<CAPTION>
Accumulation
Unit
Policyholders' account values: Units Value
----------- -----------
<S> <C> <C> <C>
Aetna Variable Fund:
AetnaVest 1,615,316.3 $28.351 $45,795,395
AetnaVest II 767,277.4 15.831 12,147,120
AetnaVest Plus 900,446.3 13.301 11,976,945
Corporate Specialty Market 86,433.0 12.016 1,038,571
Aetna Income Shares:
AetnaVest 291,207.2 21.305 6,204,271
AetnaVest II 82,916.4 14.324 1,187,723
AetnaVest Plus 108,102.3 11.470 1,239,985
Corporate Specialty Market 128,186.3 11.071 1,419,188
S-3
<PAGE>
Accumulation
Unit
Policyholders' account values: Units Value
----------- -----------
Aetna Variable Encore Fund:
AetnaVest 216,354.9 $15.891 $3,438,075
AetnaVest II 17,280.3 11.616 200,721
AetnaVest Plus 69,086.7 10.917 754,192
Corporate Specialty Market 107,929.6 10.444 1,127,200
Aetna Investment Advisers Fund, Inc.:
AetnaVest 114,498.0 15.390 1,762,081
AetnaVest II 223,977.3 15.561 3,485,324
AetnaVest Plus 278,606.2 13.050 3,635,852
Corporate Specialty Market 34,014.8 11.361 386,443
Alger American Fund--Alger American
Small Capitalization Portfolio:
AetnaVest 66,765.4 15.562 1,039,005
AetnaVest II 39,259.9 15.563 611,019
AetnaVest Plus 135,063.0 15.555 2,100,905
Corporate Specialty Market 119,296.0 12.799 1,526,850
Fidelity Investments Variable Insurance Products Funds:
Equity-Income Portfolio:
Corporate Specialty Market 37,815.1 11.058 418,176
Growth Portfolio:
Corporate Specialty Market 120,931.6 9.911 1,198,559
Overseas Portfolio:
Corporate Specialty Market 57,811.4 10.029 579,802
Fidelity Investments Variable Insurance Products Funds II:
Asset Manager Portfolio:
Corporate Specialty Market 90,569.7 10.596 959,690
Contrafund Portfolio:
Corporate Specialty Market 105,491.7 10.322 1,088,910
Janus Aspen Series:
Aggressive Growth Portfolio:
AetnaVest 44,764.1 15.114 676,573
AetnaVest II 30,158.9 15.114 455,826
AetnaVest Plus 114,021.3 15.114 1,723,348
Corporate Specialty Market 58,323.5 11.340 661,404
Balanced Portfolio:
AetnaVest 6,403.1 12.142 77,745
AetnaVest II 4,014.0 12.237 49,117
AetnaVest Plus 38,817.0 12.136 471,097
Corporate Specialty Market 1,288.2 10.643 13,711
S-4
<PAGE>
Accumulation
Unit
Policyholders' account values: Units Value
----------- -----------
Growth Portfolio:
AetnaVest 21,515.4 $12.704 $ 273,328
AetnaVest II 37,270.8 12.692 473,053
AetnaVest Plus 79,675.5 12.674 1,009,837
Corporate Specialty Market 73,083.9 10.430 762,298
Short-Term Bond Portfolio:
AetnaVest 887.8 10.967 9,736
AetnaVest II 23,124.1 10.955 253,322
AetnaVest Plus 7,737.1 10.925 84,530
Worldwide Growth Portfolio:
AetnaVest 27,375.5 12.809 350,657
AetnaVest II 23,865.7 12.813 305,784
AetnaVest Plus 60,290.6 12.797 771,522
Scudder Variable Life Investment Fund--International
Portfolio:
AetnaVest 135,108.9 12.798 1,729,105
AetnaVest II 73,569.7 12.719 935,731
AetnaVest Plus 280,624.9 12.648 3,549,365
Corporate Specialty Market 45,040.2 10.598 477,343
TCI Portfolios, Inc.--TCI Growth:
AetnaVest 99,512.9 13.248 1,318,352
AetnaVest II 32,444.9 13.307 431,757
AetnaVest Plus 284,645.5 13.126 3,736,206
Corporate Specialty Market 49,400.2 12.005 593,030
------------
$126,515,779
============
</TABLE>
See Notes to Financial Statements.
S-5
<PAGE>
Variable Life Account B
Statement of Operations--Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividend distributions: (Notes 1 and 3)
Aetna Variable Fund $11,632,771
Aetna Income Shares 602,737
Aetna Variable Encore Fund 3,963
Aetna Investment Advisers Fund, Inc 582,871
Fidelity Investments Variable Insurance Products Fund--
Equity-Income Portfolio 3,272
Fidelity Investments Variable Insurance Products Fund
II--Contrafund Portfolio 14,059
Janus Aspen Series--Aggressive Growth Portfolio 32,796
Janus Aspen Series--Balanced Portfolio 7,676
Janus Aspen Series--Growth Portfolio 49,596
Janus Aspen Series--Short-Term Bond Portfolio 17,025
Janus Aspen Series--Worldwide Growth Portfolio 5,411
Scudder Variable Life Investment Fund--International Portfolio 9,378
TCI Portfolios, Inc.--TCI Growth 3,682
------------
Total investment income 12,965,237
Valuation period deductions (Note 2) (1,149,801)
------------
Net investment income 11,815,436
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1 and 4)
Proceeds from sales $28,828,178
Cost of investments sold 25,993,679
-----------
Net realized gain 2,834,499
Net unrealized gain (loss) on investments:
Beginning of year (4,407,131)
End of year 4,391,574
-----------
Net unrealized gain 8,798,705
------------
Net realized and unrealized gain on investments 11,633,204
------------
Net increase in net assets resulting from operations $23,448,640
============
</TABLE>
See Notes to Financial Statements.
S-6
<PAGE>
Variable Life Account B
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 11,815,436 $ 8,175,684
Net realized and unrealized gain (loss) on investments 11,633,204 (9,665,883)
------------ ------------
Net increase (decrease) in net assets resulting from
operations 23,448,640 (1,490,199)
------------ ------------
FROM UNIT TRANSACTIONS:
Variable life premium payments 44,310,537 28,389,827
Sales charges deducted by the Company (1,381,985) (913,534)
Premiums allocated to the fixed account (3,260,098) (2,052,433)
------------ ------------
Net premiums allocated to the variable account 39,668,454 25,423,860
Transfers from the Company for monthly deductions (11,297,188) (8,879,679)
Redemptions by policyholders (3,238,332) (3,575,365)
Transfers on account of policy loans (2,076,373) (785,448)
Other 41,863 (318,777)
------------ ------------
Net increase in net assets from unit transactions 23,098,424 11,864,591
------------ ------------
Change in net assets 46,547,064 10,374,392
NET ASSETS:
Beginning of year 79,968,715 69,594,323
------------ ------------
End of year $126,515,779 $79,968,715
============ ============
</TABLE>
See Notes to Financial Statements.
S-7
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1995
1. Summary of Significant Accounting Policies
Variable Life Account B ("Account") is registered under the Investment
Company Act of 1940 as a unit investment trust. The Account is sold
exclusively for use with life insurance product contracts as defined under
the Internal Revenue Code of 1986, as amended.
The accompanying financial statements of the Account have been prepared in
accordance with generally accepted accounting principles.
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, 1995:
Aetna Variable Fund
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Alger American Fund--Alger American Small
Capitalization Portfolio
Fidelity Investments Variable Insurance Products
Fund--
(bullet) Equity-Income Portfolio
(bullet) Growth Portfolio
(bullet) Overseas Portfolio
Fidelity Investments Variable Insurance Products
Fund II--
(bullet) Asset Manager Portfolio
(bullet) Contrafund Portfolio
Janus Aspen Series--
(bullet) Aggressive Growth Portfolio
(bullet) Balanced Portfolio
(bullet) Growth Portfolio
(bullet) Short-Term Bond Portfolio
(bullet) Worldwide Growth Portfolio
Scudder Variable Life Investment Fund--
International Portfolio
TCI Portfolios, Inc.--TCI Growth
b. Other
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of Aetna Life Insurance and Annuity Company ("Company") which is
taxed as a life insurance company under the Internal Revenue Code of 1986, as
amended.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made in
accordance with the terms of the policies and are paid to the Company.
S-8
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1995 (continued)
3. Dividend Distributions
On an annual basis the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions paid
to the Account are automatically reinvested in shares of the Funds. The
Account's proportionate share of each Fund's undistributed net investment
income and accumulated net realized gain on investments is included in net
unrealized gain on investments in the Statement of Operations.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the year ended December 31, 1995 aggregated
$71,231,087 and $28,828,178, respectively.
5. Estimates
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.
S-9
<PAGE>
Variable Life Account B
Condensed Financial Information
Change in Value of Accumulation Unit--January 1, 1995 to December 31, 1995
<TABLE>
<CAPTION>
Increase
(Decrease)
Value at Value at in Value of
Beginning End Accumulation
of Period of Period Unit
--------- --------- ------------
<S> <C> <C> <C>
Aetna Variable Fund:
AetnaVest $21.654 $28.351 30.93%
AetnaVest II 12.092 15.831 30.93%
AetnaVest Plus 10.159 13.301 30.93%
Corporate Speciality Market 10.000 12.016 20.16% (2)
Aetna Income Shares:
AetnaVest $18.200 $21.305 17.06%
AetnaVest II 12.236 14.324 17.06%
AetnaVest Plus 9.798 11.470 17.06%
Corporate Speciality Market 10.000 11.071 10.71% (2)
Aetna Variable Encore Fund:
AetnaVest $15.135 $15.891 4.99%
AetnaVest II 11.063 11.616 4.99%
AetnaVest Plus 10.398 10.917 4.99%
Corporate Speciality Market 10.000 10.444 4.44% (1)
Aetna Investment Advisers Fund, Inc.:
AetnaVest $12.202 $15.390 26.13%
AetnaVest II 12.338 15.561 26.13%
AetnaVest Plus 10.347 13.050 26.13%
Corporate Speciality Market 10.000 11.361 13.61% (3)
Alger American Fund--Alger American
Small Capitalization Portfolio:
AetnaVest $10.890 $15.562 42.90%
AetnaVest II 10.893 15.563 42.88%
AetnaVest Plus 10.886 15.555 42.89%
Corporate Speciality Market 10.000 12.799 27.99% (2)
Fidelity Investments Variable Insurance Products Funds:
Equity-Income Portfolio:
Corporate Speciality Market $10.000 $11.058 10.58% (4)
Growth Portfolio:
Corporate Speciality Market $10.000 $ 9.911 (0.89%) (4)
Overseas Portfolio:
Corporate Speciality Market $10.000 $10.029 0.29% (4)
Fidelity Investments Variable Insurance Products Funds II:
Asset Manager Portfolio:
Corporate Speciality Market $10.000 $10.596 5.96% (4)
Contrafund Portfolio:
Corporate Speciality Market $10.000 $10.322 3.22% (4)
S-10
<PAGE>
Variable Life Account B
Increase
(Decrease)
Value at Value at in Value of
Beginning End Accumulation
of Period of Period Unit
--------- --------- ------------
Janus Aspen Series:
Aggressive Growth Portfolio:
AetnaVest $11.976 $15.114 26.21%
AetnaVest II 11.976 15.114 26.21%
AetnaVest Plus 11.975 15.114 26.22%
Corporate Speciality Market 10.000 11.340 13.40% (5)
Balanced Portfolio:
AetnaVest $ 9.837 $12.142 23.43%
AetnaVest II 9.894 12.237 23.67%
AetnaVest Plus 9.823 12.136 23.54%
Corporate Speciality Market 10.000 10.643 6.43% (6)
Growth Portfolio:
AetnaVest $ 9.848 $12.704 28.99%
AetnaVest II 9.848 12.692 28.88%
AetnaVest Plus 9.834 12.674 28.88%
Corporate Speciality Market 10.000 10.430 4.30% (6)
Short-Term Bond Portfolio:
AetnaVest $10.113 $10.967 8.45%
AetnaVest II 10.102 10.955 8.44%
AetnaVest Plus 10.074 10.925 8.45%
Worldwide Growth Portfolio:
AetnaVest $10.165 $12.809 26.01%
AetnaVest II 10.168 12.813 26.01%
AetnaVest Plus 10.155 12.797 26.01%
Scudder Variable Life Investment Fund--International
Portfolio:
AetnaVest $11.633 $12.798 10.01%
AetnaVest II 11.562 12.719 10.01%
AetnaVest Plus 11.497 12.648 10.01%
Corporate Speciality Market 10.000 10.598 5.98% (2)
TCI Portfolios, Inc.--TCI Growth:
AetnaVest $10.216 $13.248 29.68%
AetnaVest II 10.253 13.307 29.80%
AetnaVest Plus 10.113 13.126 29.80%
Corporate Speciality Market 10.000 12.005 20.05% (2)
<FN>
1--Available for investment less than 1 year, contract commenced operations February 1995.
2--Available for investment less than 1 year, contract commenced operations May 1995.
3--Available for investment less than 1 year, contract commenced operations June 1995.
4--Available for investment less than 1 year, contract commenced operations July 1995.
5--Available for investment less than 1 year, contract commenced operations August 1995.
6--Available for investment less than 1 year, contract commenced operations October 1995.
</FN>
</TABLE>
S-11
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Aetna Life Insurance and Annuity Company and Subsidiaries
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1995, 1994, and 1993 F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-4
Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December 31,
1995, 1994 and 1993 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiaries as of December 31, 1995 and
1994, 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, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aetna
Life Insurance and Annuity Company and Subsidiaries as of December 31, 1995
and 1994, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for certain investments in debt and
equity securities.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 6, 1996
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1995 1994 1993
--------- --------- -----------
<S> <C> <C> <C>
Revenue:
Premiums $ 130.8 $ 124.2 $ 82.1
Charges assessed against policyholders 318.9 279.0 251.5
Net investment income 1,004.3 917.2 911.9
Net realized capital gains 41.3 1.5 9.5
Other income 42.0 10.3 9.5
--------- --------- -----------
Total revenue 1,537.3 1,332.2 1,264.5
--------- --------- -----------
Benefits and expenses:
Current and future benefits 915.3 854.1 818.4
Operating expenses 318.7 235.2 207.2
Amortization of deferred policy acquisition costs 43.3 26.4 19.8
--------- --------- -----------
Total benefits and expenses 1,277.3 1,115.7 1,045.4
--------- --------- -----------
Income before federal income taxes 260.0 216.5 219.1
Federal income taxes 84.1 71.2 76.2
--------- --------- -----------
Net income $ 175.9 $ 145.3 $ 142.9
========= ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Balance Sheets
(millions)
<TABLE>
<CAPTION>
December 31,
----------------------
Assets 1995 1994
- ------- --------- ----------
<S> <C> <C>
Investments:
Debt securities, available for sale:
(amortized cost: $11,923.7 and $10,577.8) $12,720.8 $10,191.4
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $51.3 and $43.3) 57.6 47.2
Investment in affiliated mutual funds (cost: $173.4 and
$187.1) 191.8 181.9
Common stock (cost: $6.9 at December 31, 1995) 8.2 --
Short-term investments 15.1 98.0
Mortgage loans 21.2 9.9
Policy loans 338.6 248.7
Limited partnership -- 24.4
--------- ----------
Total investments 13,353.3 10,801.5
Cash and cash equivalents 568.8 623.3
Accrued investment income 175.5 142.2
Premiums due and other receivables 37.3 75.8
Deferred policy acquisition costs 1,341.3 1,164.3
Reinsurance loan to affiliate 655.5 690.3
Other assets 26.2 15.9
Separate Accounts assets 10,987.0 7,420.8
--------- ----------
Total assets $27,144.9 $20,934.1
========= ==========
Liabilities and Shareholder's Equity
- --------------------------------------
Liabilities:
Future policy benefits $ 3,594.6 $ 2,912.7
Unpaid claims and claim expenses 27.2 23.8
Policyholders' funds left with the Company 10,500.1 8,949.3
--------- ----------
Total insurance reserve liabilities 14,121.9 11,885.8
Other liabilities 259.2 302.1
Federal income taxes:
Current 24.2 3.4
Deferred 169.6 233.5
Separate Accounts liabilities 10,987.0 7,420.8
--------- ----------
Total liabilities 25,561.9 19,845.6
--------- ----------
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 407.6 407.6
Net unrealized capital gains (losses) 132.5 (189.0)
Retained earnings 1,040.1 867.1
--------- ----------
Total shareholder's equity 1,583.0 1,088.5
--------- ----------
Total liabilities and shareholder's equity $27,144.9 $20,934.1
========= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,088.5 $1,246.7 $ 990.1
Net change in unrealized capital gains
(losses) 321.5 (303.5) 113.7
Net income 175.9 145.3 142.9
Common stock dividends declared (2.9) -- --
-------- -------- --------
Shareholder's equity, end of year $1,583.0 $1,088.5 $1,246.7
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 175.9 $ 145.3 $ 142.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income (33.3) (17.5) (11.1)
Decrease (increase) in premiums due and other
receivables 25.4 1.3 (5.6)
Increase in policy loans (89.9) (46.0) (36.4)
Increase in deferred policy acquisition costs (177.0) (105.9) (60.5)
Decrease in reinsurance loan to affiliate 34.8 27.8 31.8
Net increase in universal life account balances 393.4 164.7 126.4
Increase in other insurance reserve liabilities 79.0 75.1 86.1
Net increase in other liabilities and other
assets 15.0 53.9 7.0
Decrease in federal income taxes (6.5) (11.7) (3.7)
Net accretion of discount on bonds (66.4) (77.9) (88.1)
Net realized capital gains (41.3) (1.5) (9.5)
Other, net -- (1.0) 0.2
--------- --------- ----------
Net cash provided by operating activities 309.1 206.6 179.5
--------- --------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 4,207.2 3,593.8 473.9
Equity securities 180.8 93.1 89.6
Mortgage loans 10.7 -- --
Limited partnership 26.6 -- --
Investment maturities and collections of:
Debt securities available for sale 583.9 1,289.2 2,133.3
Short-term investments 106.1 30.4 19.7
Cost of investment purchases in:
Debt securities (6,034.0) (5,621.4) (3,669.2)
Equity securities (170.9) (162.5) (157.5)
Short-term investments (24.7) (106.1) (41.3)
Mortgage loans (21.3) -- --
Limited partnership -- (25.0) --
--------- --------- ----------
Net cash used for investing activities (1,135.6) (908.5) (1,151.5)
--------- --------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Cash Flows (continued)
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1994 1993
--------- -------- ----------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Deposits and interest credited for
investment contracts $ 1,884.5 $1,737.8 $ 2,117.8
Withdrawals of investment contracts (1,109.6) (948.7) (1,000.3)
Dividends paid to shareholder (2.9) -- --
--------- -------- ----------
Net cash provided by financing activities 772.0 789.1 1,117.5
--------- -------- ----------
Net (decrease) increase in cash and cash
equivalents (54.5) 87.2 145.5
Cash and cash equivalents, beginning of year 623.3 536.1 390.6
--------- -------- ----------
Cash and cash equivalents, end of year $ 568.8 $ 623.3 $ 536.1
========= ======== ==========
Supplemental cash flow information:
Income taxes paid, net $ 90.2 $ 82.6 $ 79.9
========= ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries
(collectively, the "Company") is a provider of financial services and life
insurance products in the United States. The Company has two business
segments, financial services and life insurance.
The financial services products include individual and group annuity
contracts which offer a variety of funding and distribution options for
personal and employer-sponsored retirement plans that qualify under Internal
Revenue Code Sections 401, 403, 408 and 457, and individual and group
non-qualified annuity contracts. These contracts may be immediate or deferred
and are offered primarily to individuals, pension plans, small businesses and
employer-sponsored groups in the health care, government, education
(collectively "not-for-profit" organizations) and corporate markets.
Financial services also include pension plan administrative services.
The life insurance products include universal life, variable universal life,
interest sensitive whole life and term insurance. These products are offered
primarily to individuals, small businesses, employer sponsored groups and
executives of Fortune 2000 companies.
Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and
Annuity Company and its wholly owned subsidiaries, Aetna Insurance Company of
America and Aetna Private Capital, Inc. Aetna Life Insurance and Annuity
Company is a wholly owned subsidiary of Aetna Retirement Services, Inc.
("ARSI"). ARSI is a wholly owned subsidiary of Aetna Life and Casualty
Company ("Aetna"). Two subsidiaries, Systematized Benefits Administrators,
Inc. ("SBA"), and Aetna Investment Services, Inc. ("AISI"), which were
previously reported in the consolidated financial statements were distributed
in the form of dividends to ARSI in December of 1995. The impact to the
Company's financial statements of distributing these dividends was
immaterial.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Intercompany transactions have been
eliminated. Certain reclassifications have been made to 1994 and 1993
financial information to conform to the 1995 presentation.
Accounting Changes
Accounting for Certain Investments in Debt and Equity Securities
On December 31, 1993, the Company adopted Financial Accounting Standard
("FAS") No. 115, Accounting for Certain Investments in Debt and Equity
Securities, which requires the classification of debt securities into three
categories: "held to maturity", which are carried at amortized cost;
"available for sale", which are carried at fair value with changes in fair
value recognized as a component of shareholder's equity; and "trading", which
are carried at fair value with immediate recognition in income of changes in
fair value.
F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Initial adoption of this standard resulted in a net increase of $106.8
million, net of taxes of $57.5 million, to net unrealized gains in
shareholder's equity. These amounts exclude gains and losses allocable to
experience-rated (including universal life) contractholders. Adoption of FAS
No. 115 did not have a material effect on deferred policy acquisition costs.
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 ninety days or less when purchased.
Investments
Debt Securities
At December 31, 1995 and 1994, all of the Company's debt securities are
classified as available for sale and carried at fair value. These securities
are written down (as realized losses) for other than temporary decline in
value. Unrealized gains and losses related to these securities, after
deducting amounts allocable to experience-rated contractholders and related
taxes, are reflected in shareholder's equity.
Fair values for debt securities are based on quoted market prices or dealer
quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for
similar securities or by using discounted cash flow methods. Cost for
mortgage-backed securities is adjusted for unamortized premiums and
discounts, which are amortized using the interest method over the estimated
remaining term of the securities, adjusted for anticipated prepayments.
Purchases and sales of debt securities are recorded on the trade date.
Equity Securities
Equity securities are classified as available for sale and carried at fair
value based on quoted market prices or dealer quotations. Equity securities
are written down (as realized losses) for other than temporary declines in
value. Unrealized gains and losses related to such securities are reflected
in shareholder's equity. Purchases and sales are recorded on the trade date.
The investment in affiliated mutual funds represents an investment in the
Aetna Series Fund, Inc., a retail mutual fund which has been seeded by the
Company, and is carried at fair value.
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Mortgage Loans and Policy Loans
Mortgage loans and policy loans are carried at unpaid principal balances net
of valuation reserves, which approximates fair value, and are generally
secured. Purchases and sales of mortgage loans are recorded on the closing
date.
Limited Partnership
The Company's limited partnership investment was carried at the amount
invested plus the Company's share of undistributed operating results and
unrealized gains (losses), which approximates fair value. The Company
disposed of the limited partnership during 1995.
Short-Term Investments
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with an original maturity of over ninety days and
less than one year, are considered available for sale and are carried at fair
value, which approximates amortized cost.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business have been deferred. These
costs, all of which vary with and are primarily related to the production of
new 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. For universal life and certain annuity contracts,
such costs are amortized in proportion to estimated gross profits and
adjusted to reflect actual gross profits. These costs are amortized over
twenty years for annuity pension contracts, and over the contract period for
universal life contracts.
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross profits
would not be adequate to cover related losses and expenses.
Insurance Reserve Liabilities
The Company's liabilities include reserves related to fixed ordinary life,
fixed universal life and fixed annuity contracts. Reserves for future policy
benefits for fixed ordinary life contracts are computed on the basis of
assumed investment yield, assumed mortality, withdrawals and expenses,
including a margin for adverse deviation, which generally vary by plan, year
of issue and policy duration. Reserve interest rates range from 2.25% to
10.00%. Assumed 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.
Reserves for fixed universal life (included in Future Policy Benefits) and
fixed deferred annuity contracts (included in Policyholders' Funds Left With
the Company) are equal to the fund value. The fund
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
value is equal to cumulative deposits less charges plus credited interest
thereon, without reduction for possible future penalties assessed on
premature withdrawal. For guaranteed interest options, the interest credited
ranged from 4.00% to 6.38% in 1995 and 4.00% to 5.85% in 1994. For all other
fixed options, the interest credited ranged from 5.00% to 7.00% in 1995 and
5.00% to 7.50% in 1994.
Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the 1971
Individual Annuity Mortality Table, the 1983 Individual Annuity Mortality
Table, the 1983 Group Annuity Mortality Table and, in some cases, mortality
improvement according to scales G and H, at assumed interest rates ranging
from 3.5% to 9.5%. Reserves relating to contracts with life contingencies are
included in Future Policy Benefits. For other contracts, the reserves are
reflected in Policyholders' Funds Left With the Company.
Unpaid claims for all lines of insurance include benefits for reported losses
and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
Premiums are recorded as revenue when due for fixed ordinary life contracts.
Charges assessed against policyholders' funds for cost of insurance,
surrender charges, actuarial margin and other fees are recorded as revenue
for universal life and certain annuity contracts. Policy benefits and
expenses are recorded in relation to the associated premiums or gross profit
so as to result in recognition of profits over the expected lives of the
contracts.
Separate Accounts
Assets held under variable universal life, variable life and variable annuity
contracts are segregated in Separate Accounts and are invested, as designated
by the contractholder or participant under a contract, in shares of Aetna
Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna
Investment Advisers Fund, Inc., Aetna GET Fund, or The Aetna Series Fund
Inc., 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 which
is offered through a Separate Account. The assets of the Separate Account
supporting the guaranteed interest option are carried at an amortized cost of
$322.2 million for 1995 (fair value $343.9 million) and $149.7 million for
1994 (fair value $146.3 million), since the Company bears the investment risk
where the contract is held to maturity. Reserves relating to the guaranteed
interest option are maintained at fund value and reflect interest credited at
rates ranging from 4.5% to 8.38% in both 1995 and 1994. 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 (losses) of the Separate Accounts are not reflected in the
Consolidated Statements of Income (with the exception of realized capital
gains (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.
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Federal 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 benefits result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
2. Investments
Investments in debt securities available for sale as of December 31, 1995
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 539.5 $ 47.5 $ -- $ 587.0
Obligations of states and political
subdivisions 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial 2,764.4 110.3 2.1 2,872.6
Utilities 454.4 27.8 1.0 481.2
Other 2,177.7 159.5 1.2 2,336.0
--------- --------- --------- ---------
Total U.S. Corporate securities 5,396.5 297.6 4.3 5,689.8
Foreign securities:
Government 316.4 26.1 2.0 340.5
Financial 534.2 45.4 3.5 576.1
Utilities 236.3 32.9 -- 269.2
Other 215.7 15.1 -- 230.8
--------- --------- --------- ---------
Total Foreign securities 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Residential pass-throughs 556.7 99.2 1.8 654.1
Residential CMOs 2,383.9 167.6 2.2 2,549.3
--------- --------- --------- ---------
Total Residential mortgage-backed securities 2,940.6 266.8 4.0 3,203.4
Commercial/Multifamily mortgage-backed
securities 741.9 32.3 0.2 774.0
--------- --------- --------- ---------
Total Mortgage-backed securities 3,682.5 299.1 4.2 3,977.4
Other asset-backed securities 961.2 35.5 0.5 996.2
--------- --------- --------- ---------
Total debt securities available for sale $11,923.7 $811.6 $ 14.5 $12,720.8
========= ========= ========= =========
</TABLE>
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in debt securities available for sale as of December 31, 1994
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9
Obligations of states and political
subdivisions 37.9 1.2 -- 39.1
U.S. Corporate securities:
Financial 2,216.9 3.8 109.4 2,111.3
Utilities 100.1 -- 7.9 92.2
Other 1,344.3 6.0 67.9 1,282.4
--------- --------- --------- ---------
Total U.S. Corporate securities 3,661.3 9.8 185.2 3,485.9
Foreign securities:
Government 434.4 1.2 33.9 401.7
Financial 368.2 1.1 23.0 346.3
Utilities 204.4 2.5 9.5 197.4
Other 46.3 0.8 1.5 45.6
--------- --------- --------- ---------
Total Foreign securities 1,053.3 5.6 67.9 991.0
Residential mortgage-backed securities:
Residential pass-throughs 627.1 81.5 5.0 703.6
Residential CMOs 2,671.0 32.9 139.4 2,564.5
--------- --------- --------- ---------
Total Residential mortgage-backed securities 3,298.1 114.4 144.4 3,268.1
Commercial/Multifamily mortgage-backed
securities 435.0 0.2 21.3 413.9
--------- --------- --------- ---------
Total Mortgage-backed securities 3,733.1 114.6 165.7 3,682.0
Other asset-backed securities 696.1 0.2 16.8 679.5
--------- --------- --------- ---------
Total debt securities available for sale $10,577.8 $133.4 $519.8 $10,191.4
========= ========= ========= =========
</TABLE>
At December 31, 1995 and 1994, net unrealized appreciation (depreciation) of
$797.1 million and $(386.4) million, respectively, on available for sale debt
securities included $619.1 million and $(308.6) million, respectively,
related to experience-rated contractholders, which were not included in
shareholder's equity.
The amortized cost and fair value of debt securities for the year ended
December 31, 1995 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be
restructured, called, or prepaid.
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Amortized Fair
Cost Value
--------- ---------
(millions)
Due to mature:
One year or less $ 348.8 $ 351.1
After one year through five years 2,100.2 2,159.5
After five years through ten years 2,516.0 2,663.4
After ten years 2,315.0 2,573.2
Mortgage-backed securities 3,682.5 3,977.4
Other asset-backed securities 961.2 996.2
--------- ---------
Total $11,923.7 $12,720.8
========= =========
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Cash
collateral, which is in excess of the market value of the loaned securities,
is deposited by the borrower with a lending agent, and retained and invested
by the lending agent to generate additional income for the Company. The
market value of the loaned securities is monitored on a daily basis with
additional collateral obtained or refunded as the market value fluctuates. At
December 31, 1995, the Company had loaned securities (which are reflected as
invested assets on the Consolidated Balance Sheets) with a market value of
approximately $264.5 million.
At December 31, 1995 and 1994, debt securities carried at $7.4 million and
$7.0 million, respectively, were on deposit as required by regulatory
authorities.
The valuation reserve for mortgage loans was $3.1 million at December 31,
1994. There was no valuation reserve for mortgage loans at December 31, 1995.
The carrying value of non-income producing investments was $0.1 million and
$0.2 million at December 31, 1995 and 1994, respectively.
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, 1995 are as follows:
Amortized Fair
Debt Securities Cost Value
-------- --------
(millions)
General Electric Corporation $ 314.9 $ 329.3
General Motors Corporation 273.9 284.5
Associates Corporation of North
America 230.2 239.1
Society National Bank 203.5 222.3
Ciesco, L.P. 194.9 194.9
Countrywide Funding 171.2 172.7
Baxter International 168.9 168.9
Time Warner 158.6 166.1
Ford Motor Company 156.7 162.6
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
The portfolio of debt securities at December 31, 1995 and 1994 included
$662.5 million and $318.3 million, respectively, (5% and 3%, respectively, of
the debt securities) of investments that are considered "below investment
grade". "Below investment grade" securities are defined to be securities that
carry a rating below BBB-/Baa3, by Standard & Poors/Moody's Investor
Services, respectively. The increase in below investment grade securities is
the result of a change in investment strategy, which has reduced the
Company's holdings in residential mortgage-back securities and increased the
Company's holdings in corporate securities. Residential mortgage-back
securities are subject to higher prepayment risk and lower credit risk, while
corporate securities earning a comparable yield are subject to higher credit
risk and lower prepayment risk. We expect the percentage of below investment
grade securities will increase in 1996, but we expect that the overall
average quality of the portfolio of debt securities will remain at AA-. Of
these below investment grade assets, $14.5 million and $31.8 million, at
December 31, 1995 and 1994, respectively, were investments that were
purchased at investment grade, but whose ratings have since been downgraded.
Included in residential mortgage-back securities are collateralized mortgage
obligations ("CMOs") with carrying values of $2.5 billion and $2.6 billion at
December 31, 1995 and 1994, respectively. The principal risks inherent in
holding CMOs are prepayment and extension risks related to dramatic decreases
and increases in interest rates whereby the CMOs would be subject to
repayments of principal earlier or later than originally anticipated. At
December 31, 1995 and 1994, approximately 79% and 85%, respectively, of the
Company's CMO holdings consisted of sequential and planned amortization class
debt securities which are subject to less prepayment and extension risk than
other CMO instruments. At December 31, 1995 and 1994, approximately 81% and
82%, respectively, of the Company's CMO holdings were collateralized by
residential mortgage loans, on which the timely payment of principal and
interest was backed by specified government agencies (e.g., GNMA, FNMA,
FHLMC).
If due to declining interest rates, principal was to be repaid earlier than
originally anticipated, the Company could be affected by a decrease in
investment income due to the reinvestment of these funds at a lower interest
rate. Such prepayments may result in a duration mismatch between assets and
liabilities which could be corrected as cash from prepayments could be
reinvested at an appropriate duration to adjust the mismatch.
Conversely, if due to increasing interest rates, principal was to be repaid
slower than originally anticipated, the Company could be affected by a
decrease in cash flow which reduces the ability to reinvest expected
principal repayments at higher interest rates. Such slower payments may
result in a duration mismatch between assets and liabilities which could be
corrected as available cash flow could be reinvested at an appropriate
duration to adjust the mismatch.
At December 31, 1995 and 1994, approximately 3% and 4%, respectively, of the
Company's CMO holdings consisted of interest-only strips ("IOs") or
principal-only strips ("POs"). IOs receive payments of interest and POs
receive payments of principal on the underlying pool of mortgages. The risk
inherent in holding POs is extension risk related to dramatic increases in
interest rates whereby
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
the future payments due on POs could be repaid much slower than originally
anticipated. The extension risks inherent in holding POs was mitigated
somewhat by offsetting positions in IOs. During dramatic increases in
interest rates, IOs would generate more future payments than originally
anticipated.
The risk inherent in holding IOs is prepayment risk related to dramatic
decreases in interest rates whereby future IO cash flows could be much less
than originally anticipated and in some cases could be less than the original
cost of the IO. The risks inherent in IOs are mitigated somewhat by holding
offsetting positions in POs. During dramatic decreases in interest rates POs
would generate future cash flows much quicker than originally anticipated.
Investments in available for sale equity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
------- --------- --------- --------
(millions)
<S> <C> <C> <C> <C>
1995
-------------------
Equity Securities $ 231.6 $27.2 $1.2 $ 257.6
------- --------- --------- --------
1994
-------------------
Equity Securities $ 230.5 $ 6.5 $7.9 $ 229.1
------- --------- --------- --------
</TABLE>
3. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between proceeds received
from investments sold or prepaid, and amortized cost. Net realized capital
gains as reflected in the Consolidated Statements of Income are after
deductions for net realized capital gains (losses) allocated to
experience-rated contracts of $61.1 million, $(29.1) million and $(54.8)
million for the years ended December 31, 1995, 1994, and 1993, respectively.
Net realized capital gains (losses) allocated to experience-rated contracts
are deferred and subsequently reflected in credited rates on an amortized
basis. Net unamortized gains (losses), reflected as a component of
Policyholders' Funds Left With the Company, were $7.3 million and $(50.7)
million at the end of December 31, 1995 and 1994, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities are included in net realized capital gains (losses) and amounted
to $3.1 million, $1.1 million and $(98.5) million, of which $2.2 million,
$0.8 million and $(91.5) million were allocable to experience-rated
contractholders, for the years ended December 31, 1995, 1994 and 1993,
respectively. The 1993 losses were primarily related to writedowns of
interest-only mortgage-backed securities to their fair value.
Net realized capital gains (losses) on investments, net of amounts allocated
to experience-rated contracts, were as follows:
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations (Continued)
1995 1994 1993
----- ---- ------
(millions)
Debt securities $32.8 $1.0 $ 9.6
Equity securities 8.3 0.2 0.1
Mortgage loans 0.2 0.3 (0.2)
----- ---- ------
Pretax realized capital gains $41.3 $1.5 $ 9.5
----- ---- ------
After-tax realized capital
gains $25.8 $1.0 $ 6.2
===== ==== ======
Gross gains of $44.6 million, $26.6 million and $33.3 million and gross
losses of $11.8 million, $25.6 million and $23.7 million were realized from
the sales of investments in debt securities in 1995, 1994 and 1993,
respectively.
Changes in unrealized capital gains (losses), excluding changes in unrealized
capital gains (losses) related to experience-rated contracts, for the years
ended December 31, were as follows:
1995 1994 1993
------ -------- -------
(millions)
Debt securities $255.9 $(242.1) $164.3
Equity securities 27.3 (13.3) 10.6
Limited partnership 1.8 (1.8) --
------ -------- -------
285.0 (257.2) 174.9
Deferred federal income taxes (See Note 6) (36.5) 46.3 61.2
------ -------- -------
Net change in unrealized capital gains
(losses) $321.5 $(303.5) $113.7
====== ======== =======
Net unrealized capital gains (losses) allocable to experience-rated contracts
of $515.0 million and $104.1 million at December 31, 1995 and $(260.9)
million and $(47.7) million at December 31, 1994 are reflected on the
Consolidated Balance Sheet in Policyholders' Funds Left With the Company and
Future Policy Benefits, respectively, and are not included in shareholder's
equity.
Shareholder's equity included the following unrealized capital gains
(losses), which are net of amounts allocable to experience-rated
contractholders, at December 31:
1995 1994 1993
------ ------- -------
(millions)
Debt securities
Gross unrealized capital gains $179.3 $ 27.4 $164.3
Gross unrealized capital
losses (1.3) (105.2) --
------ ------- -------
178.0 (77.8) 164.3
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations (Continued)
1995 1994 1993
------ -------- ------
(millions)
Equity securities
Gross unrealized capital gains $ 27.2 $ 6.5 $ 12.0
Gross unrealized capital losses (1.2) (7.9) (0.1)
------ -------- ------
26.0 (1.4) 11.9
Limited Partnership
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- (1.8) --
------ -------- ------
-- (1.8) --
Deferred federal income taxes (See Note 6) 71.5 108.0 61.7
------ -------- ------
Net unrealized capital gains (losses) $132.5 $(189.0) $114.5
====== ======== ======
4. Net Investment Income
Sources of net investment income were as follows:
1995 1994 1993
-------- ------ -------
(millions)
Debt securities $ 891.5 $823.9 $828.0
Preferred stock 4.2 3.9 2.3
Investment in affiliated mutual funds 14.9 5.2 2.9
Mortgage loans 1.4 1.4 1.5
Policy loans 13.7 11.5 10.8
Reinsurance loan to affiliate 46.5 51.5 53.3
Cash equivalents 38.9 29.5 16.8
Other 8.4 6.7 7.7
-------- ------ -------
Gross investment income 1,019.5 933.6 923.3
Less investment expenses (15.2) (16.4) (11.4)
-------- ------ -------
Net investment income $1,004.3 $917.2 $911.9
======== ====== =======
Net investment income includes amounts allocable to experience-rated
contractholders of $744.2 million, $677.1 million and $661.3 million for the
years ended December 31, 1995, 1994 and 1993, respectively. Interest credited
to contractholders is included in Current and Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.
The amount of dividends that may be paid to the shareholder in 1996 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$70.0 million.
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
5. Dividend Restrictions and Shareholder's Equity (Continued)
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's equity 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 $70.0 million, $64.9 million
and $77.6 million for the years ended December 31, 1995, 1994 and 1993,
respectively. Statutory shareholder's equity was $670.7 million and $615.0
million as of December 31, 1995 and 1994, respectively.
At December 31, 1995 and December 31, 1994, the Company does not utilize any
statutory accounting practices which are not prescribed by insurance
regulators that, individually or in the aggregate, materially affect
statutory shareholder's equity.
6. Federal Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. Aetna allocates to each member an amount approximating the tax it
would have incurred were it not a member of the consolidated group, and
credits the member for the use of its tax saving attributes in the
consolidated return.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was
enacted which resulted in an increase in the federal corporate tax rate from
34% to 35% retroactive to January 1, 1993. The enactment of OBRA resulted in
an increase in the deferred tax liability of $3.4 million at date of
enactment, which is included in the 1993 deferred tax expense.
Components of income tax expense (benefits) were as follows:
1995 1994 1993
------ ------ -------
(millions)
Current taxes (benefits):
Income from operations $ 82.9 $ 78.7 $ 87.1
Net realized capital gains 28.5 (33.2) 18.1
------ ------ -------
111.4 45.5 105.2
------ ------ -------
Deferred taxes (benefits):
Income from operations (14.4) (8.0) (14.2)
Net realized capital gains (12.9) 33.7 (14.8)
------ ------ -------
(27.3) 25.7 (29.0)
------ ------ -------
Total $ 84.1 $ 71.2 $ 76.2
====== ====== =======
Income tax expense was different from the amount computed by applying the
federal income tax rate to income before federal income taxes for the
following reasons:
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
1995 1994 1993
------ ------ -------
(millions)
Income before federal income taxes $260.0 $216.5 $219.1
Tax rate 35% 35 % 35 %
------ ------ -------
Application of the tax rate 91.0 75.8 76.7
------ ------ -------
Tax effect of:
Excludable dividends (9.3) (8.6) (8.7)
Tax reserve adjustments 3.9 2.9 4.7
Reinsurance transaction (0.5) 1.9 (0.2)
Tax rate change on deferred
liabilities -- -- 3.7
Other, net (1.0) (0.8) --
------ ------ -------
Income tax expense $ 84.1 $ 71.2 $ 76.2
====== ====== =======
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1995 1994
------ -------
Deferred tax assets: (millions)
Insurance reserves $290.4 $211.5
Net unrealized capital losses -- 136.3
Unrealized gains allocable to experience-rated
contracts 216.7 --
Investment losses not currently deductible 7.3 15.5
Postretirement benefits other than pensions 7.7 8.4
Other 32.0 28.3
------ -------
Total gross assets 554.1 400.0
Less valuation allowance -- 136.3
------ -------
Deferred tax assets, net of valuation 554.1 263.7
Deferred tax liabilities:
Deferred policy acquisition costs 433.0 385.2
Unrealized losses allocable to experience-rated
contracts -- 108.0
Market discount 4.4 3.6
Net unrealized capital gains 288.2 --
Other (1.9) 0.4
------ -------
Total gross liabilities 723.7 497.2
------ -------
Net deferred tax liability $169.6 $233.5
====== =======
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. At December 31, 1994, $81.0 million of net unrealized
capital losses were reflected in shareholder's equity without deferred tax
benefits. As of December 31, 1995, no valuation allowance was required for
unrealized capital gains and losses. The reversal of the valuation allowance
had no impact on net income in 1995.
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
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, 1995. 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.
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1986. Discussions
are being held with the Service with respect to proposed adjustments.
However, management believes there are adequate defenses against, or
sufficient reserves to provide for, such challenges. The Service has
commenced its examinations for the years 1987 through 1990.
7. Benefit Plans
Employee Pension Plans--The Company, in conjunction with Aetna, has
non-contributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over sixty consecutive months of
highest earnings in a 120 month period). Contributions are determined using
the Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to the amounts that are currently deductible for
tax reporting purposes. The accumulated benefit obligation and plan assets
are recorded by Aetna. The accumulated plan assets exceed accumulated plan
benefits. There has been no funding to the plan for the years 1993 through
1995, and therefore, no expense has been recorded by the Company.
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. The accumulated plan assets
exceed accumulated plan benefits. There has been no funding to the plan for
the years 1993 through 1995, and therefore, no expense has been recorded by
the Company.
Employee Postretirement Benefits--In addition to providing pension benefits,
Aetna also provides certain postretirement health care and life insurance
benefits, subject to certain caps, for retired employees. Medical and dental
benefits are offered to all full-time employees retiring at age 50 with at
least 15 years of service or at age 65 with at least 10 years of service.
Retirees are required to contribute to the plans based on their years of
service with Aetna.
The cost to the Company associated with the Aetna postretirement plans for
1995, 1994 and 1993 were $1.4 million, $1.0 million and $0.8 million,
respectively.
Agent Postretirement Benefits--The Company, in conjunction with Aetna, also
provides certain postemployment health care and life insurance benefits for
certain agents.
The cost to the Company associated to the agents' postretirement plans for
1995, 1994 and 1993 were $0.8 million, $0.7 million and $0.6 million,
respectively.
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Benefit Plans (Continued)
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 $4.9 million, $3.3 million and $3.1 million
in 1995, 1994 and 1993, respectively.
Stock Plans--Aetna has a stock incentive plan that provides for stock options
and deferred contingent common stock or cash awards to certain key employees.
Aetna also has a stock option plan under which executive and middle
management employees of Aetna may be granted options to purchase common stock
of Aetna at the market price on the date of grant or, in connection with
certain business combinations, may be granted options to purchase common
stock on different terms. The cost to the Company associated with the Aetna
stock plans for 1995, 1994 and 1993, was $6.3 million, $1.7 million and $0.4
million, respectively.
8. 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 .25% to 1.80% of
their average daily net assets. The Company also receives fees from the
variable life and annuity mutual funds and The Aetna Series Fund for serving
as investment adviser. Under the advisory agreements, the Funds pay the
Company a daily fee which, on an annual basis, ranges, depending on the fund,
from .25% to 1.00% of their average daily net assets. The advisory agreements
also call for the variable funds to pay their own administrative expenses and
for The Aetna Series Fund to pay certain administrative expenses. The Company
also receives fees (expressed as a percentage of the average daily net
assets) from The Aetna Series Fund for providing administration, shareholder
services and promoting sales. The amount of compensation and fees received
from the Separate Accounts and Funds, included in Charges Assessed Against
Policyholders, amounted to $128.1 million, $104.6 million and $93.6 million
in 1995, 1994 and 1993, respectively. The Company may waive advisory fees at
its discretion.
The Company may, from time to time, make reimbursements to a Fund for some or
all of its operating expenses. Reimbursement arrangements may be terminated
at any time without notice.
Since 1981, all domestic individual non-participating life insurance of Aetna
and its subsidiaries has been issued by the Company. Effective December 31,
1988, the Company entered into a reinsurance agreement with Aetna Life
Insurance Company ("Aetna Life") in which substantially all of the non-
participating individual life and annuity business written by Aetna Life
prior to 1981 was assumed by the Company. A $108.0 million commission, paid
by the Company to Aetna Life in 1988, was capitalized as deferred policy
acquisition costs. The Company maintained insurance reserves of $655.5
million and $690.3 million as of December 31, 1995 and 1994, respectively,
relating to the business assumed. In consideration for the assumption of this
business, a loan was established relating to the
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Related Party Transactions (Continued)
assets held by Aetna Life which support the insurance reserves. The loan is
being reduced in accordance with the decrease in the reserves. The fair value
of this loan was $663.5 million and $630.3 million as of December 31, 1995
and 1994, respectively, and is based upon the fair value of the underlying
assets. Premiums of $28.0 million, $32.8 million and $33.3 million and
current and future benefits of $43.0 million, $43.8 million and $55.4 million
were assumed in 1995, 1994 and 1993, respectively.
Investment income of $46.5 million, $51.5 million and $53.3 million was
generated from the reinsurance loan to affiliate in 1995, 1994 and 1993,
respectively. Net income of approximately $18.4 million, $25.1 million and
$13.6 million resulted from this agreement in 1995, 1994 and 1993,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life for the purchase and administration of a life contingent
single premium variable payout annuity contract. In addition, the Company
also is responsible for administering fixed annuity payments that are made to
annuitants receiving variable payments. Reserves of $28.0 million and $24.2
million were maintained for this contract as of December 31, 1995 and 1994,
respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement with
Aetna Life to reinsure amounts in excess of this limit, up to a maximum of
$8.0 million on any new individual life business, on a yearly renewable term
basis. Premium amounts related to this agreement were $3.2 million, $1.3
million and $0.6 million for 1995, 1994 and 1993, respectively.
The Company received no capital contributions in 1995, 1994 or 1993.
The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.
Premiums due and other receivables include $5.7 million and $27.6 million due
from affiliates in 1995 and 1994, respectively. Other liabilities include
$12.4 million and $27.9 million due to affiliates for 1995 and 1994,
respectively.
Substantially all of the administrative and support functions of the Company
are provided by Aetna and its affiliates. The financial statements reflect
allocated charges for these services based upon measures appropriate for the
type and nature of service provided.
9. 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-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 8 above.
Assumed
Ceded to from
Direct Other Other Net
Amount Companies Companies Amount
------- --------- --------- -------
(millions)
1995
-----------------------------
Premiums:
Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2
Accident and Health
Insurance 7.5 7.5 -- --
Annuities 82.1 -- 0.5 82.6
------- --------- --------- -------
Total earned premiums $118.4 $16.1 $ 28.5 $130.8
======= ========= ========= =======
1994
-----------------------------
Premiums:
Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health
Insurance 9.3 9.3 -- --
Annuities 69.9 -- 0.2 70.1
------- --------- --------- -------
Total earned premiums $106.5 $15.3 $33.0 $124.2
======= ========= ========= =======
1993
-----------------------------
Premiums:
Life Insurance $ 22.4 $ 5.6 $ 33.3 $ 50.1
Accident and Health
Insurance 12.9 12.9 -- --
Annuities 31.3 -- 0.7 32.0
------- --------- --------- -------
Total earned premiums $ 66.6 $18.5 $34.0 $ 82.1
======= ========= ========= =======
10. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
1995 1994
------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- ---------
(millions)
Assets:
Cash and cash equivalents $ 568.8 $ 568.8 $ 623.3 $ 623.3
Short-term investments 15.1 15.1 98.0 98.0
Debt securities 12,720.8 12,720.8 10,191.4 10,191.4
Equity securities 257.6 257.6 229.1 229.1
Limited partnership -- -- 24.4 24.4
Mortgage loans 21.2 21.9 9.9 9.9
Liabilities:
Investment contract
liabilities:
With a fixed maturity 989.1 1,001.2 826.7 833.5
Without a fixed maturity 9,511.0 9,298.4 8,122.6 7,918.2
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 expected 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 and liquidity risk, the fair values
of all assets and liabilities should be taken into consideration, not only
those above.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Short-term instruments: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices are not available, the carrying
amounts reported in the Consolidated Balance Sheets approximates fair value.
Short-term instruments have a maturity date of one year or less and include
cash and cash equivalents, and short-term investments.
Debt and equity securities: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair value is estimated by using quoted market prices for similar
securities or discounted cash flow methods.
Mortgage loans: Fair value is 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. The fair value
estimate of mortgage loans of lower quality, including problem and
restructured loans, is based on the estimated fair value of the underlying
collateral.
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
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 Financial Instruments (including Derivative Financial
Instruments)
During 1995, the Company received $0.4 million for writing call options on
underlying securities. As of December 31, 1995 there were no option contracts
outstanding.
At December 31, 1995, the Company had a forward swap agreement with a
notional amount of $100.0 million and a fair value of $0.1 million.
The Company did not have transactions in derivative instruments in 1994.
The Company also holds investments in certain debt and equity securities with
derivative characteristics (i.e., including the fact that their market value
is at least partially determined by, among other things, levels of or changes
in interest rates, prepayment rates, equity markets or credit ratings/
spreads). The amortized cost and fair value of these securities, included in
the $13.4 billion investment portfolio, as of December 31, 1995 was as
follows:
Amortized Fair
(Millions) Cost Value
-------- ---------
Collateralized mortgage obligations $2,383.9 $2,549.3
Principal-only strips (included above) 38.7 50.0
Interest-only strips (included above) 10.7 20.7
Structured Notes (1) 95.0 100.3
(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.
11. 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, 1995, the Company
had commitments to purchase investments of $31.4
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingent Liabilities (Continued)
million. The fair value of the investments at December 31, 1995 approximated
$31.5 million. There were no outstanding forward commitments at December 31,
1994.
Litigation
There were no material legal proceedings pending against the Company as of
December 31, 1995 or December 31, 1994 which were beyond the ordinary course
of business. The Company is involved in lawsuits arising, for the most part,
in the ordinary course of its business operations as an insurer.
12. Segment Information
The Company's operations are reported through two major business segments:
Life Insurance and Financial Services.
Summarized financial information for the Company's principal operations was
as follows:
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
------------------------------------------------ -------- -------- ---------
<S> <C> <C> <C>
Revenue:
Financial services $1,129.4 $ 946.1 $ 892.8
Life insurance 407.9 386.1 371.7
-------- -------- ---------
Total revenue $1,537.3 $1,332.2 $1,264.5
------------------------------------------------ -------- -------- ---------
Income before federal income taxes:
Financial services $ 158.0 $ 119.7 $ 121.1
Life insurance 102.0 96.8 98.0
-------- -------- ---------
Total income before federal income taxes $ 260.0 $ 216.5 $ 219.1
------------------------------------------------ -------- -------- ---------
Net income:
Financial services $ 113.8 $ 85.5 $ 86.8
Life insurance 62.1 59.8 56.1
-------- -------- ---------
Net income $ 175.9 $ 145.3 $ 142.9
------------------------------------------------ -------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
(Millions) 1995 1994 1993
------------------------------------------------ --------- --------- ----------
<S> <C> <C> <C>
Assets under management, at fair value:
Financial services $23,224.3 $17,785.2 $16,600.5
Life insurance 2,698.1 2,171.7 2,175.5
------------------------------------------------ --------- --------- ----------
Total assets under management $25,922.4 $19,956.9 $18,776.0
------------------------------------------------ --------- --------- ----------
</TABLE>
F-27
<PAGE>
Insurance products offered by:
Aetna Life Insurance and Annuity Company
Securities offered through:
Aetna Investment Services, Inc.
151 Farmington Avenue
Hartford, CT 06156
Visit our home page on the Internet
http://www.aetna.com
[AETNA LOGO]
Aetna
Retirement
Services, Inc.
Printed on recycled paper
75248-1
