Variable Life
Account B
[Arrow] AetnaVest
AetnaVest II
Flexible Premium
Variable Life Insurance Policies
Prospectus Dated:
May 1, 1996
[Aetna logo]
Aetna Life Insurance and Annuity Company
76004-2 Life
<PAGE>
[Aetna logo]
Aetna Life Insurance and
Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
Telephone: 203-275-4995
AetnaVest & AetnaVest II
Variable Life Account B
Prospectus
Dated: May 1, 1996
Flexible Premium Variable Life Insurance Policies
This Prospectus describes two types of variable life insurance policies
issued by Aetna Life Insurance and Annuity Company ("the Company" or "we"):
AetnaVest and AetnaVest II. These policies are intended to provide life
insurance benefits, and are designed to allow flexible premium payments, a
choice of underlying funding options, and a choice of two death benefit
options. Your policy value will vary with the investment performance of the
underlying funding options you choose. The amount of death benefit payable by
the Company upon the death of the Insured may also increase or decrease
depending on the investment performance of the underlying funding options.
Policy values may be used to continue your policy in force, may be borrowed
with 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, or, 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 the value of
the Death Benefit Option (a) in one lump sum, or (b) under one of the annuity
settlement options.
The Policies have a Free-Look Period during which you may return them to
our Home Office for a refund. The refund may be more or less than the
premiums paid. (See "What Is the Free-Look Period?")
The following funding options are available under the Policies: Under the
variable portion of the Policies, the Company offers seventeen open-end
management investment companies (commonly called mutual funds), each with a
different investment objective: Aetna Variable Fund; Aetna Income Shares;
Aetna Variable Encore Fund; Aetna Investment Advisers Fund, Inc.; Aetna
Generation Portfolios, Inc.--Aetna Ascent Variable Portfolio, Aetna
Crossroads Variable Portfolio, and Aetna Legacy Variable Portfolio; Alger
American Fund--Alger American Small Capitalization Portfolio; Fidelity's
Variable Insurance Products Fund II--Contrafund Portfolio; Fidelity's
Variable Insurance Products Fund--Equity-Income Portfolio; Janus Aspen
Series--Growth Portfolio, Aggressive Growth Portfolio, Worldwide Growth
Portfolio, Balanced Portfolio and Short-Term Bond Portfolio; Scudder Variable
Life Investment Fund--International Portfolio Class A Shares; and TCI
Portfolios, Inc.--TCI Growth (collectively, the "Funds"). The fixed interest
option offered under these Policies is the Fixed Account. Amounts held in the
Fixed Account are guaranteed and will earn a minimum interest rate of 4.5%.
Unless specifically mentioned, this Prospectus only describes the variable
investment options.
Not all Funds may be available under all Policies or in all jurisdictions.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance policy with these Policies.
The Policies are not available for use in a pension or profit-sharing plan.
This entire Prospectus, and those of the Funds, should be read carefully
to understand the Policies being offered.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES
FOR THE FUNDS. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
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.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Definitions 3
Summary of Charges and Fees for
AetnaVest and AetnaVest II 5
What Choices Do You Make When You
Buy a Policy? 6
Death Benefit Options 6
Premiums 6
Premium Allocation 7
Mixed and Shared Funding 9
What Happens When Your Premium
Payment is Made? 9
How Is the Value of Your Policy Computed? 9
What Is an Accumulation Unit, and
How Is It Calculated? 9
Can You Make Transfers Among the
Funding Options? 10
Automated Transfers 10
What Is the Maturity Value of Your Policy? 11
What Is the Cash Surrender Value of
Your Policy? 11
What Charges or Deductions Are Made
Under the Policy? 11
When Does the Surrender Charge Apply? 15
Full Surrenders 15
Partial Surrenders 15
How Might Your Policy Lapse?
What Effect Does a Lapse Have? 15
If the Policy Has Lapsed, Can You
Reinstate the Policy? 16
Can You Borrow on Your Policy? 16
Can You Change the Amount of Your Insurance
Coverage? 16
What Is the "Free-Look Period"? 17
Can You Exchange Your Policy? 17
How Will the Death Benefit Be Paid? 17
Settlement Options
When Do Payments Under a Settlement Option
Occur? 18
What Are the Settlement Options? 18
How Will Your Variable Settlement
Option Payments Be Calculated? 19
Description of the Company and the
Separate Account
The Company 20
The Separate Account 20
Directors and Officers of the Company 21
Reports to Policy Owners 23
Right to Instruct Voting of Fund Shares 23
Disregard of Voting Instructions 24
State Regulation 24
Legal Matters 24
Additional Information
The Registration Statement 24
Distribution of the Policies 24
Records and Accounts 25
Independent Auditors 25
Tax Matters
General 25
Federal Tax Status of the Company 25
Life Insurance Qualification 25
General Rules 25
Modified Endowment Contracts 26
Diversification Standards 26
Investor Control 26
Other Tax Considerations 27
Miscellaneous Contract Provisions
The Contract 27
Payment of Benefits 27
Age and Sex 27
Incontestability 28
Suicide 28
Protection of Proceeds 28
Non-Participation 28
Coverage Beyond Maturity 28
Appendix A--Illustrations of Death Benefit,
Total Account Values and Cash Surrender
Values for AetnaVest Policies 29
Appendix B--Illustrations of Death Benefit,
Total Account Values, and Cash Surrender
Values for AetnaVest II Policies 34
Financial Statements of the Separate Account S-1
Financial Statements of the Company F-1
</TABLE>
2
<PAGE>
DEFINITIONS
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 Policy before election of a Settlement Option.
Additional Premiums: Any premium paid in addition to Planned Premiums.
AetnaVest: Flexible premium variable life insurance policy with Policy Form
number 38899 (with suffix variations).
AetnaVest II: Flexible premium variable life insurance policy with Policy
Form number 38899-90 (with suffix variations).
Amount at Risk: The Death Benefit before subtraction of outstanding loans, if
any, divided by 1.0036748, minus the Total Account Value.
Annuitant: A person on whose life annuity pay- ments are based and who may be
entitled to receive such payment.
Annuity: A series of payments for life or for a definite period.
Basic Premium: The amount of premium which must be paid to assure that the
Policy remains in force for at least two years after issue, assuming there
have been no loans or surrenders.
Cash Surrender Value: The amount a Policy Owner can receive in cash by
surrendering the Policy. This equals the Total Account Value minus the
applicable surrender charge and the amount necessary to repay any loans in
full.
Cost of Insurance: The portion of the Monthly Deduction attributable to the
basic insurance coverage, not including riders, supplemental benefits or
monthly expense charges. The Cost of Insurance Rate is stated per $1,000 of
Amount at Risk.
Death Benefit: The amount payable to the beneficiary upon the death of the
Insured, in accordance with the Death Benefit Option elected, after deduction
of the amount necessary to repay any loans in full, and overdue deductions.
Death Benefit Option: Either of two methods for determining the Death
Benefit.
Fixed Account: The fixed interest option offered under the Policy that
guarantees principal and a minimum interest rate of 4.5%.
Fixed Account Value: The portion of the Total Account Value, other than the
Loan Account Value, held in the Company's 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.
Grace Period: The 61-day period following the notification that the Policy's
cash surrender value is insufficient to cover the current Monthly Deduction.
The Policy will lapse without value at the end of the 61-day period unless a
sufficient payment (described in the notification letter) is received by the
Company.
Home Office: The Company's principal executive office located at 151
Farmington Avenue, Hartford, Connecticut 06156.
Insured: The person on whose life the Policy is issued.
Issue Age: The age of the Insured on the nearest birthday on or prior to the
Issue Date.
Issue Date: The date on which the Policy, the benefits and provisions of the
Policy become effective.
Loan Account Value: The sum of all unpaid loans. The amount necessary to
repay all loans in full is the Loan Account Value plus any accrued interest.
Such interest is payable in order to discharge any policy indebtedness.
Maturity Date: The Issue Date anniversary after the insured reaches age 95
(for AetnaVest Policies) or 100 (for AetnaVest II Policies) and the Policy is
considered matured.
Maturity Value: The Total Account Value on the Maturity Date, less the amount
necessary to repay any loans in full.
Monthly Deduction: The monthly deduction from the Total Account Value which
includes the Cost of Insurance, charges for supplemental riders or benefits,
and an adminstrative expense charge, if applicable.
Planned Premiums: The amount of premium the Policy Owner chooses to pay the
Company on a scheduled basis. This is the amount for which the Company sends
a bill.
3
<PAGE>
Policy: The AetnaVest and AetnaVest II life insurance contracts described in
this Prospectus, under which flexible premium payments are permitted and the
death benefit and contract values may vary with the investment performance of
the funding option(s) selected. The term Policy, whenever used in this
Prospectus, includes the individual Certificates issued under group multiple
employer trust plans. These Certificates contain all of the provisions of the
individual variable life insurance policies as described in this Prospectus.
Policy Owner: The owner of the Policy, referred to as "you."
Policy Year: Each twelve-month period, beginning on the Issue Date, during
which the Policy is in effect.
Separate Account: Variable Life Account B is 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 ("Separate Account" also
includes Variable Annuity Account B when referring to a Settlement Option).
Separate Account Value: The portion of the Total Account Value attributable
to Variable Life Account B.
Settlement Option(s): Several ways in which a beneficiary may receive Annuity
payments due from a Death Benefit, or which the Insured may choose to receive
Annuity payments from the Cash Surrender Value of the Policy.
Settlement Option Units: A measure of the net investment results of the
available investment options that are used to calculate the amount of the
Settlement Option payments.
Specified Amount: The amount (at least $100,000) originally chosen by the
Policy Owner, 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.
Total Account Value: The sum of the Fixed Ac- count Value, Separate Account
Value and the Loan Account Value.
Valuation Date: The period of time for which a Fund determines its net asset
value, usually from the close of business each day the New York Stock
Exchange is open until the close of business the next such business day.
Valuation Reserve: A reserve established pursuant to the insurance laws of
Connecticut to measure voting rights during the settlement option period and
the value of a commutation right if available under the "Payments for a
Specified Period" nonlifetime Settlement Option when elected on a variable
basis under the Policy.
4
<PAGE>
SUMMARY OF CHARGES AND FEES
FOR AETNAVEST AND AETNAVEST II*
Premium Load
AetnaVest: A deduction of 2.50% of premiums paid (2.35% for California
residents) will be made to cover applicable premium taxes.
AetnaVest II: A deduction of not more than 6% of premiums paid (currently
3.5%) will be made to cover average applicable premium taxes and other
expenses.
Charges and fees assessed against the Total Account Value
A Monthly Deduction is made from the Total Account Value. 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,
premium class of the Insured, and in most states, sex, as well as the
Specified Amount.
The Monthly Deduction also includes a monthly administrative expense
charge. For AetnaVest Policies, this charge ranges from $0 to $5 per month.
For AetnaVest II Policies, this monthly charge is $20 during the first Policy
Year and $5 during subsequent Policy Years.
Charges and fees associated with the Separate Account
We deduct a daily charge from the assets of the Separate Account for mortality
and expense risks assumed by us. This charge is currently equal to an annual
rate of 0.70% of average daily net assets of the Separate Account. 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 mortality risk assumed is that insureds, as a group, may live for a
shorter period of time than estimated and, therefore, the cost of insurance
charges specified in the Policies will be insufficient to meet actual claims.
The expense risk assumed is that other expenses incurred in issuing and
administrating the Policies and operating the Separate Account will be greater
than the charges assessed for such expenses.
We deduct a daily administrative charge equal to an annual rate of 0.30%
of the average daily net assets of the Separate Account (guaranteed not to
exceed 0.30% for AetnaVest and 0.50% for AetnaVest II). The administrative
charge is assessed to reimburse us for the expenses associated with
administration and maintenance of the Policies.
Other Fund Expenses may apply. Please refer to Appendix C for a chart
illustrating each Fund's Expenses.
Surrender Charge
If you surrender all or a portion of your Policy values during the first
10 years (15 years for AetnaVest II), a surrender charge will be made. 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 Surrender
Charge is based on the Specified Amount, and also depends on the Insured's
Issue Age and sex. (For AetnaVest II Policies issued in Massachusetts and
Montana, the Surrender Charge will not be based on sex.) Once determined, the
Surrender Charge will remain the same for 5 years following the Issue Date.
Thereafter, it declines monthly so that 10 years for AetnaVest (15 years for
AetnaVest II) after the Issue Date (assuming no increases in the Specified
Amount) the Surrender Charge will be zero.
If a partial surrender is made, there will be an additional transaction
charge of $25 or 2% of the amount of the net surrender payment, whichever is
less. The charge will be made against the Total Account Value.
- ----------
* For a complete explanation of the charges, see "What Charges or Deductions
Are Made Under the Policy?"
5
<PAGE>
WHAT CHOICES DO YOU MAKE WHEN YOU BUY A POLICY?
When you buy a Policy, you make three important choices:
1. Which one of the two Death Benefit Options you would like;
2. The amount of premium you intend to pay; and
3. The way your premiums will be allocated to the Funds and/or Fixed Account.
Each of these choices is described in detail below.
Death Benefit Options
At the time of purchase, you must choose between the two available Death
Benefit Options. The amount payable under either option will be determined as
of the date of the Insured's death.
Option 1 generally provides a level Death Benefit. Under Option 1, the
Death Benefit will be the higher of the Specified Amount (a minimum of
$100,000), or the applicable percentage of the Total Account Value. The
percentage is 250% through age 40 and decreases yearly to 100% at age 95 for
AetnaVest Policies (100 for AetnaVest II Policies).
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 selected. Under Option 2, the
Death Benefit will be the higher of either the Specified Amount plus the
Total Account Value; or the applicable percentage (described above) of the
Total Account Value.
Under both Option 1 and Option 2, the Death Benefit may be affected by
partial surrenders. The Death Benefit for both Options will be reduced by the
amount necessary to repay any loans in full.
Premiums
At the time you purchase a Policy, you also choose the amount of premium
you will pay. You may vary premium payments to some extent and still keep
your Policy in force. To understand how this works, there are three terms you
should be familiar with. These are: Basic Premium, Planned Premiums, and
Additional Premiums.
During the first two Policy years, payment of the Basic Premium assures
that the Policy will remain in force as long as there are no surrenders or
loans (if available under the Policy) during that time. The Basic Premium is
stated in the Policy. If Basic Premiums are not paid, or if there are
surrenders or loans taken during the first two Policy Years, the Policy will
lapse if the Cash Surrender Value is less than the Monthly Deduction.
Your Basic Premiums are not current if your actual premiums paid, minus
loans and minus partial surrenders, are less than the Basic Premium
(expressed as a monthly amount) times the number of months the Policy has
been in force.
After the first two Policy Years, as long as the Policy's Cash Surrender
Value is greater than the Monthly Deduction, your Policy will not lapse.
Planned Premiums are those premiums you choose to pay on a scheduled
basis. These are usually equal to or greater than the Basic Premium. We will
bill you annually, semiannually, or quarterly, or at any other agreed-upon
frequency. Pre-authorized monthly check payments may also be arranged.
Additional Premiums are any premiums you pay in addition to Planned
Premiums.
Payment of Basic 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. (See "How Might
Your Policy Lapse? What Effect Does a Lapse Have?")
You may increase your Planned Premium at any time by submitting a written
notice to us or by paying Additional Premiums, except that:
1. We may require evidence of insurability if the Additional Premium or the
new Planned Premium during the current Policy Year would increase 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 without interest and without
participation of such amounts in the underlying funding options;
2. No premiums can be accepted if they would disqualify the Policy as a "life
insurance policy" under federal tax laws;
6
<PAGE>
3. When there is an outstanding loan, all premiums paid in excess of the
Basic Premium will be considered repayment of the Loan Account Value (this
is true in all states for AetnaVest Policies and in all states except
Texas for AetnaVest II Policies).
Under limited circumstances, we may backdate a Policy, upon request, by
assigning an Issue Date 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 Issue Date and the date the initial
premium is credited to the Separate Account. Backdating your Policy will not
affect the date on which your premium payments are credited to the Separate
Account and your policy is credited with Accumulation Units. Your Policy
cannot be credited with Accumulation Units until your net premium is actually
deposited in the Separate Account. See "How is the Value of Your Policy
Computed?" in this Prospectus.
Premium Allocation
The third choice you make when you purchase a Policy is deciding how your
premiums will be allocated to the variable investment options. Allocations
must be in whole percentages.
You may allocate all or a part of your premiums to the Fixed Account,
which will be credited with interest at a rate determined by us from time to
time, but guaranteed to be at least 4.5%. The interest rate credited to each
premium payment will depend on the date the payment is received at our Home
Office.
Credited interest rates reflect the Company's return on the Fixed Account
invested assets and the amortization of any realized gains and/or losses
which the Company may incur on these assets.
You may also allocate all or a portion of your premiums to the Separate
Account and direct that they be invested in one or more of the Funds. Not all
Funds may be available under all Policies or in all jurisdictions. 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 noted, all of the
Funds are diversified, as defined in the Investment Company Act of 1940, as
amended.
(bullet) Aetna Variable Fund seeks to maximize total return through investments
in a diversified portfolio of common stocks and securities convertible into
common stock.
(bullet) Aetna Income Shares seeks to maximize total return, consistent with
reasonable risk, through investments in a diversified portfolio consisting
primarily of debt securities.
(bullet) Aetna Variable Encore Fund seeks to provide high current return
consistent with preservation of capital and liquidity through investment in
high-quality money market instruments. An investment in the Fund is neither
insured nor guaranteed by the U.S. Government.
(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 adviser's judgment of which of those
sectors or mix thereof offers the best investment prospects.
(bullet) Aetna Generation Portfolios, Inc.--Aetna Ascent Variable Portfolio
seeks to provide capital appreciation by allocating its investments among
equities and fixed income securities. Aetna Ascent Variable Portfolio is managed
for investors who generally have an investment horizon exceeding 15 years, and
who have a high level of risk tolerance. See the Fund's prospectus for a
discussion of the risks involved.
(bullet) Aetna Generation Portfolios, Inc.--Aetna Crossroads Variable Portfolio
seeks to provide total return (i.e., income and capital appreciation, both
realized and unrealized) by allocating its investments among equities and fixed
income securities. Aetna Crossroads Variable Portfolio is managed for investors
who generally have an investment horizon exceeding 10 years and who have a
moderate level of risk tolerance.
(bullet) Aetna Generation Portfolios, Inc.--Aetna Legacy Variable Portfolio
seeks to provide total return consistent with preservation of capital by
allocating its investments among equities and fixed income securities. Aetna
Legacy Variable
7
<PAGE>
Portfolio is managed for investors who generally have an investment horizon
exceeding five years and who have a low level of risk tolerance.
(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.
(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.
(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.
(bullet) Janus Aspen Series--Aggressive Growth Portfolio is a nondiversified
portfolio that seeks long- term growth of capital. The Portfolio pursues its
investment objective by normally investing at least 50% of its equity assets in
securities issued by medium-sized companies. Medium-sized companies are those
whose market capitalizations fall within the range of companies in the S&P
MidCap 400 Index, which as of December 29, 1995 included companies with
capitalizations between approximately $118 million and $7.5 billion, but which
is expected to change on a regular basis.
(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.
(bullet) Janus Aspen Series--Growth Portfolio seeks long-term growth of capital
in a manner consistent with the preservation of capital. The Portfolio pursues
its investment objective by investing in common stocks of companies of any size.
(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.
(bullet) Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth
of capital in a manner consistent with the preservation of capital. The
Portfolio pursues its investment objective primarily through investments in
common stocks of foreign and domestic issuers.
(bullet) Scudder Variable Life Investment Fund--International Portfolio Class A
Shares seeks long-term growth of capital primarily through diversified holdings
of marketable foreign equity investments.
(bullet) TCI Portfolios, Inc.--TCI Growth (a Twentieth Century fund) seeks
capital growth. The Fund seeks to achieve its objective by investing in common
stocks (including securities convertible into common stocks) and other
securities that meet certain fundamental and technical standards of selection,
and, in the opinion of TCI Growth's management, have better than average
potential for appreciation.
Some of the above Funds may use instruments known as derivatives as
part of their investment strategies, as described in their respective
prospectuses. The use of certain derivatives such as inverse floaters and
principal only debt instruments may involve higher risk of volatility to a Fund.
The use of leverage in connection with derivatives can also increase risk of
losses. See the prospectuses 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.
8
<PAGE>
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 Policies 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
Policy Owners 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.
WHAT HAPPENS WHEN YOUR PREMIUM PAYMENT IS MADE?
If you make a sufficient premium payment when you apply for a Policy, and
have answered favorably certain questions relating to the Insured's health, a
"temporary insurance agreement" in the amount applied for (subject to stated
maximums) will be provided.
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 will be allocated, as you have directed, as of
the Valuation Date on which each payment is received in the Home Office.
You may reallocate your future premium payments at any time, up to four
times per year, free of charge. After four times, a $10 charge is imposed on
each subsequent change in order to reimburse us for costs associated with
allocation changes. Any reallocation will apply to premium payments made
after you have received written verification from us.
HOW IS THE VALUE OF YOUR POLICY COMPUTED?
Once your Policy has been issued, each premium payment allocated to a
variable funding option of the Separate Account will be credited to your
Policy in the form of Accumulation Units of the funding option based on that
funding option's Accumulation Unit Value. Each premium payment will be
credited to your Policy as of the Valuation Date it is received by us at our
Home Office. The number of Accumulation Units credited is determined by
dividing the net premium (the premium less the Premium Load) by the value of
an Accumulation Unit next computed after we receive the premium. Shares of
the Funds are purchased by the Separate Account at the net asset value next
determined by the Fund following receipt of the Net Premium Payment by the
Separate Account, which will be no later than one business day following the
purchase of the Accumulation Units attributable to the Funds. Since each Fund
has a unique Accumulation Unit Value, a Policy Owner who has elected a
combination of funding options will have Accumulation Units credited to each
funding option.
The value of your Policy is determined by: (a) multiplying the total
number of Accumulation Units credited to the Policy for each funding option,
respectively, by the appropriate current Accumulation Unit Value; and (b) if
you have elected a combination of funding options, totalling the resulting
values for each portion of the Policy; and (c) adding any Fixed Account or
Loan Account Value.
The number of Accumulation Units credited to a Policy will not be impacted
by any subsequent change in the value of an Accumulation Unit. The number of
units is increased by subsequent contributions to or transfers into that
funding option, and decreased by charges and withdrawals from that funding
option.
Fixed Account Values will reflect amounts allocated to the General Account
through either payment of premiums or transfers from the Separate Account.
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, the current Accumulation Unit Values,
and your Total Account Value.
WHAT IS AN ACCUMULATION UNIT, AND HOW IS IT CALCULATED?
An Accumulation Unit is the measure of the net investment result of each
variable funding option. The Accumulation Units are used to calculate the
value of the variable portion of your Policy (prior to the election of a
Settlement Option). Accumulation Units are val-
9
<PAGE>
ued at the end of each business day, whenever the New York Stock Exchange is
open. A Valuation Period is the period of time from the end of one such
business day to the end of the next. 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 the
Separate Account at the end of a Valuation Period, minus (b) the net assets
of the Fund held in the Separate Account at the beginning of that Valuation
Period, plus or minus (c) taxes or provisions for taxes, if any, attributable
to the operation of the Separate Account divided by (d) the value of the
Accumulation Units held by the Separate Account at the beginning of the
Valuation Period, minus (e) a daily charge at an annual rate not to exceed
0.90% of the value of the Fund shares held in the Separate Account for
mortality and expense risks and no more than 0.50% (0.30% for AetnaVest) of
the value of the Fund shares held in the Separate Account for the Company's
administrative expenses attributable to Policies funded through the Separate
Account. The current charge for mortality and expense risks is 0.70% per
year, and the current administrative expense charge is 0.30% per year.
CAN YOU MAKE TRANSFERS AMONG THE FUNDING OPTIONS?
You may elect to transfer your accumulated Separate Account Value among
any of the Funds, or from any of the Funds to the Fixed Account. Within the
45 days after your Policy's anniversary, you may also transfer a portion of
the Fixed Account Value to one or more Funds. This type of transfer is
allowed only once in the 45-day period and will be effective on the Valuation
Date that your request is received in good order at our Home Office. The
amount of such transfer cannot exceed the greater of (1) 25% of the Fixed
Account Value, or (2) $500. If the Fixed Account Value is less than or equal
to $500, you may transfer all or a portion of the Fixed Account Value. We may
increase this limit from time to time. The first four transfers in any one
Policy Year are made free of charge. Each additional transfer will be subject
to a $10 charge.
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 a written request is received by us at our
Home Office. We reserve the right to limit the total number of Funds you may
elect to 15 over the lifetime of the Policy.
For AetnaVest II Policies, we will waive the $10 charge if you are
changing your allocation so that 100% of the existing Separate Account Value
and all future allocations are credited to the Fixed Account.
If you contemplate the transfer of assets, you should consider the risks
inherent in a shift from one funding option to another. In general, frequent
transfers based on short-term expectations will tend to accentuate the danger
that a transfer will be made at an inopportune time.
Automated Transfers (Dollar Cost Averaging)
Dollar Cost Averaging describes a system of investing a uniform sum of
money at regular intervals over an extended period of time. Dollar Cost
Averaging is based on the economic fact that buying a security with a
constant sum of money at fixed intervals results in acquiring more of the
item when prices are low and less of it when prices are high.
It is expected that on or about June 17, 1996, you may establish automated
transfers of Account Values from the Funds on a monthly or quarterly basis
from the Aetna Variable Encore Fund to any other investment option through
written request or other method acceptable to the Company. You must have a
minimum of $5,000 allocated to the Aetna Variable Encore Fund in order to
enroll in the Dollar Cost Averaging program. The minimum automated transfer
amount is $50 per month. You may start or stop participation in the Dollar
Cost Averaging program at any time, but you must give the Company at least 30
days notice to change any automated transfer instructions that are currently
in place. The Company reserves the right to suspend or modify automated
transfer privileges at any time.
Before participating in the Dollar Cost Averaging program, you should
consider the risks involved in switching between investments available under
the Policy. Dollar Cost Averaging requires regular investments regardless of
fluctuating price levels, and does not guarantee profits or prevent losses.
Therefore, you should carefully consider market conditions and each Fund's
investment policies and related risks
10
<PAGE>
before electing to participate in the Dollar Cost Averaging Program.
WHAT IS THE MATURITY VALUE OF YOUR POLICY?
The Maturity Value of the Policy is the Total Account Value on the Maturity
Date, less the amount necessary to repay any loans in full.
WHAT IS THE CASH SURRENDER VALUE OF YOUR POLICY?
The Cash Surrender Value of your Policy is the amount you can receive in
cash by surrendering the policy. The Cash Surrender Value equals the Total
Account Value minus the applicable Surrender Charge, less the amount
necessary to repay any loans in full. As discussed earlier, your Policy's
Total Account Value is equal to the sum of the Fixed Account Value; Separate
Account Value; and Loan Account Value.
The Cash Surrender Value will never be less than zero. All or a part of
the Cash Surrender Value may be applied to one or more of the Settlement
Options.
WHAT CHARGES OR DEDUCTIONS ARE MADE UNDER THE POLICY?
Premium Load
This load represents average applicable state premium taxes (ranging up to
4%) as well as administrative expenses and federal income tax liabilities.
For AetnaVest Policies, a deduction of 2.50% of premiums paid (2.35% for
California issues) will be made. For AetnaVest II Policies, a deduction of
3.5% (guaranteed to be no higher than 6%) will be made to cover such taxes
and other expenses.
Insurance and Administrative Charges
Deductions are made from your Total Account Value on a periodic basis for
insurance and administrative costs. These insurance and administrative
charges and surrender charges are discussed below.
The charges for insurance and administrative costs will vary from Policy
to Policy. They are broken down as follows:
(a) A Monthly Deduction is made from the Total Account Value. This deduction
includes charges for the Cost of Insurance, for any supplemental riders
or benefits, and for administrative expenses.
The Cost of Insurance is equal to the Amount at Risk (the Death Benefit
before deductions for loans, divided by 1.0036748, minus the Total
Account Value), multiplied by the Cost of Insurance Rate which will not
exceed the rate shown in the Policy. (Such rate varies according to the
attained age, premium class and, in most states, sex of the Insured, and
is based on the Commissioner's 1980 Standard Ordinary Mortality Tables
(the "1980 CSO Tables"), nonsmoker and smoker versions.)
Charges for any supplemental riders or benefits are described in the
applicable rider or benefit policy form.
A monthly administrative charge and a daily asset-based charge (see (c)
following) are also charged. These charges are designed to recover
acquisition and maintenance costs under the Policy such as policy
underwriting and issue, policyholder reports and transaction handling. For
AetnaVest Policies, the monthly charge decreases by attained age. At younger
ages, the Account Value builds slowly so the daily asset-based charge is
small. In those years, the monthly charge must be larger to cover the
Company's expenses. As the Total Account Value grows, the asset-based daily
charge can cover the Company's expenses without as high a monthly expense
charge. The monthly charge varies according to the table below:
AETNAVEST
ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Specified Amount
----------------------------------------------
Attained $100,000- $1,000,000
Age 999,999 & Over
- ---------- -------------------- ----------------------
<S> <C> <C>
Up to 29 $5.00 $3.00
30-39 4.00 2.00
40-49 3.00 1.00
50-59 2.00 0.00
60-69 1.00 0.00
70 & Over 0.00 0.00
</TABLE>
For AetnaVest II Policies, the monthly charge for administrative expenses
in the first Policy Year is $20 and in all subsequent Policy Years, the
monthly charge is $5. The monthly administrative charge and the asset-based
administrative charge work together to cover the Company's acquisition and
maintenance costs. In later years of the Policy, revenue collected from the
daily asset-based charge grows with the Total Account Value to
11
<PAGE>
cover increased expenses from Account-based transactional expenses. The
administrative charges 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 cancelling
Accumulation Units and withdrawing the value of the cancelled Accumulation
Units from each funding option in the same proportion as their respective
values have to your Fixed Account and Separate Account Values. The Monthly
Deduction is made at the same time each month, beginning with the Issue Date.
(b) A daily deduction at a rate not to exceed 0.90% per year (currently
0.70%) is taken only from the Separate Account Value for mortality and
expense risks. This charge may be raised or lowered to reflect our
expectations of future mortality and expense experience.
(c) A daily deduction at a rate not to exceed 0.30% per year for AetnaVest,
or 0.50% per year for AetnaVest II (currently 0.30% for both Policies),
is also taken from the Separate Account Value to pay for administrative
expenses as described under (a) above.
Once a Policy is issued, Monthly Deductions, including Cost of Insurance
charges, will be taken from your Policy Values as of the Issue Date, even
if the Issue Date is earlier than the date the application is signed (see
"Premiums"). If the Policy's issuance is delayed due to underwriting
requirements, the charges will not be assessed until the underwriting is
complete and the application for the policy is approved. Cost of
Insurance charges will be in amounts based on the Specified Amount of the
Policy issued, even if the temporary insurance coverage received during
the underwriting period is for a lesser amount. If we decline an
application, we will refund the full premium payment made.
Surrender Charge
There will also be a surrender charge if you surrender your Policy (in
whole or in part) before the end of ten years for AetnaVest Policies and
fifteen years for AetnaVest II Policies, from either the Policy Issue Date or
from the effective date of an increase in the Specified Amount under the
Policy. The Surrender Charge is imposed partially as a deferred sales charge,
and also to enable the Company to recover certain administrative costs.
The initial Surrender Charge is based on the Specified Amount. It also
depends on the Insured's Issue Age and, in most states, sex.
The dollar amount of the Surrender Charge will remain the same for five
years following the Issue Date. Thereafter, the charge will decline monthly
for the next five years so that, ten years after the Issue Date for AetnaVest
Policies and fifteen years after the Issue Date for AetnaVest II Policies
(assuming no increases in the Specified Amount), the Surrender Charge will be
zero.
If you decrease the Specified Amount while the Surrender Charge applies,
the Surrender Charge will remain the same.
If you increase the Specified Amount (which you can do at any time after
the first Policy Year subject to satisfactory evidence of the Insured's
insurability), 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, sex, and underwriting status at the Issue Date
(except for AetnaVest II Policies issued in Massachusetts and Montana where
this charge will not be determined based on sex). The Surrender Charge
applicable to the increase will be 70% of 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
remain constant for five years from the start of the Policy Year in which the
increase occurs, and will decrease to zero at the end of ten years for
AetnaVest Policies and fifteen years for AetnaVest II Policies. See the
example in the box below.
The maximum portion of the Surrender Charge which is to be applied to
reimburse the Company for sales and promotional expenses will be 30% of the
first year's Basic Premium (if you surrender in full during that year). Full
surrenders after the first year will result in the imposition of the same
dollar Surrender Charge for the initial five years and, therefore, the sales
expense portion of the Surrender Charge (expressed as a percentage of Basic
Premiums paid) will decline after the first Policy Year.
12
<PAGE>
AETNAVEST POLICIES: EXAMPLE OF IMPACT OF INCREASE IN
SPECIFIED AMOUNT ON THE SURRENDER CHARGE
This Example assumes that you bought a Policy with an initial Stated
Amount of $100,000 that had a Surrender Charge at the time of issue equal to
$890. The Example is intended to illustrate the impact of an increase in your
Specified Amount by $50,000 at the beginning of the third Policy Year. For
any given year, your Surrender Charge will be less than it would have been
for someone who simply purchased a brand new Policy with a Specified Amount
of $150,000.
As noted above, for original Specified Amounts, the surrender charge is
the same for the first five Policy Years, and thereafter declines monthly
until it is $0 at the end of the tenth Policy Year. For any increase in
Specified Amount, the increase in Surrender Charge applies for five years
from the date of increase, and declines monthly thereafter until it is $0 at
the end of the tenth year following increase.
<TABLE>
<CAPTION>
Additional
Original Surrender Charge --
Surrender Charge -- Increase in
Initial Specified Specified Amount Total
Beginning of Amount at the beginning Surrender
Policy Year: of $100,000 of Policy Year 3 Charges
- ------------- ------------------- ------------------- ---------
<S> <C> <C> <C>
1 $890.00 -- $ 890.00
2 890.00 -- 890.00
3 890.00 $489.50 1,379.50
4 890.00 489.50 1,379.50
5 890.00 489.50 1,379.50
6 890.00 489.50 1,379.50
7 712.00 489.50 1,201.50
8 534.00 489.50 1,023.50
9 356.00 391.60 747.60
10 178.00 293.70 471.70
11 0 195.80 195.80
12 0 97.90 97.90
13 0 0 0
</TABLE>
13
<PAGE>
AETNAVEST II POLICIES: EXAMPLE OF IMPACT OF INCREASE IN
SPECIFIED AMOUNT ON THE SURRENDER CHARGE
This Example assumes that you bought a Policy with an initial Stated
Amount of $100,000 that had a Surrender Charge at the time of issue equal to
$890. The Example is intended to illustrate the impact of an increase in your
Specified Amount by $50,000 at the beginning of the third Policy Year. For
any given year, your Surrender Charge will be less than it would have been
for someone who simply purchased a brand new Policy with a Specified Amount
of $150,000.
As noted above, for original Specified Amounts, the surrender charge is
the same for the first five Policy Years, and thereafter declines monthly
until it is $0 at the end of the tenth Policy Year. For any increase in
Specified Amount, the increase in Surrender Charge applies for five years
from the date of increase, and declines monthly thereafter until it is $0 at
the end of the tenth year following increase.
<TABLE>
<CAPTION>
Additional
Original Surrender Charge --
Surrender Charge -- Increase in
Initial Specified Specified Amount Total
Beginning of Amount at the beginning Surrender
Policy Year: of $100,000 of Policy Year 3 Charges
- ------------- ------------------- ------------------- ---------
<S> <C> <C> <C>
1 $890.00 -- $ 890.00
2 890.00 -- 890.00
3 890.00 $489.50 1,379.50
4 890.00 489.50 1,379.50
5 890.00 489.50 1,379.50
6 890.00 489.50 1,379.50
7 801.00 489.50 1,290.50
8 712.00 489.50 1,201.50
9 623.00 440.55 1,063.55
10 534.00 391.60 925.60
11 445.00 342.65 787.65
12 356.00 293.70 649.70
13 267.00 244.75 511.75
14 178.00 195.80 373.80
15 89.00 146.85 235.85
16 0 97.90 97.90
17 0 48.95 48.95
18 0 0 0
</TABLE>
The Company may offer the Policy in a group arrangement in connection with
a multiple employer trust plan under which a trustee, employer or employers,
or other similar entity purchases a Policy which covers a group of
individuals on a group basis. Certificates replicating all the provisions of
a Policy are issued to individual employees. In such arrangements, an
employer may permit group solicitation of its employees for the purchase of
Policies on either a group or individual basis.
The Company may reduce the Surrender Charge, the Monthly Deduction, or
both, in connection with Policies issued under such arrangements. Generally,
sales and administrative costs per Policy vary with the size of the group or
sponsored arrangement, its stability as indicated by its term of existence
and certain characteristics of its members, the purposes for which Policies
are purchased, and other factors. The amount of reductions will be considered
on a case-by-case basis and will reflect the reduced sales effort and
administrative costs expected as a result of sales to a particular group or
sponsored arrangement.
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.
14
<PAGE>
WHEN DOES THE SURRENDER CHARGE APPLY?
A Surrender Charge applies when you make a full or partial surrender of
the Cash Surrender Value of the Policy, as described below.
Full Surrenders
When you surrender your Policy for the full Cash Surrender Value, all
applicable Surrender Charges are imposed.
Partial Surrenders
When you surrender part of your Policy, we will apply the same proportion
of the total applicable Surrender Charges as the amount to be paid bears to
the total Cash Surrender Value. Once you have made a partial surrender, or
surrenders, future applicable Surrender Charges will be reduced
proportionately. In addition, under Option 1, the Specified Amount will be
reduced by the amount surrendered.
Other rules apply to partial surrenders:
1. No partial surrender can be made until one year after the Issue Date;
2. The amount paid to you on a partial surrender must be at least $500;
3. If a partial surrender is made, there will be a transaction charge of $25
or 2% of the amount of the net surrender payment, whichever is less. The
charge will be made against the Total Account Value;
4. If, at the time of a partial surrender, your Total Account Value is
attributable to more than one funding option, both the Surrender Charge
and the amount paid to you upon the surrender will be taken
proportionately from the values accumulated in each funding option. You
cannot select the funding option to be used in the surrender;
5. A partial surrender will not be allowed if it would cause the Specified
Amount to drop below the minimum allowable Specified Amount; and
6. Partial surrenders may only be made prior to election of a settlement
option.
As mentioned previously, a partial surrender will also reduce the Death
Benefit (and the Specified Amount, if Option 1 is in effect), by the amount
of the reduction in your Total Account Value resulting from the surrender. If
the Specified Amount is reduced, the most recent increase in coverage is
reduced first, then the next most recent coverage, and so forth.
If the Death Benefit on an Option 1 Policy is calculated as a percentage
of the Total Account Value rather than as the Specified Amount, a partial
surrender will reduce the Specified Amount only if the partial surrender
decreases the difference between the Death Benefit and the Total Account
Value. A partial surrender will not reduce the Specified Amount of an Option
2 Policy.
Payment of any amount due from Separate Account Values on a full or
partial surrender will be made within seven calendar days after your written
surrender request is received at our Home Office, except that payment may be
postponed when the New York Stock Exchange has been closed and for such other
periods as the Securities and Exchange Commission may require. Payment of
values from the Fixed Account Value may be deferred for up to six months,
except when used to pay premiums to the Company.
If you surrender your Policy, in whole or in part, there may be tax
implications. Refer to "Tax Matters."
HOW MIGHT YOUR POLICY LAPSE?
WHAT EFFECT DOES A LAPSE HAVE?
A lapse occurs if your Monthly Deduction is greater than the Cash
Surrender Value and no payment to cover the deduction is made within 61 days
of our notifying you. This may happen after the first two Policy Years, or
during the first two Policy Years if your Basic Premiums are not current.
If the Cash Surrender Value of the Policy is insufficient to cover the
Monthly Deduction on the appropriate date, your insurance coverage will
terminate at the end of a 61-day Grace Period. The Grace Period begins with
the mailing of a notice to you, once we discover the insufficiency. We will
require the payment of the amount necessary to keep this Policy in force for
the current month, plus two additional months. During the Grace Period, a
Policy has no Cash Surrender Value, so that if the Policy is terminated at
the end of the Grace Period, no money will be paid to you.
If your Policy's Cash Surrender Value is insufficient to cover the Monthly
Deduction on the appropriate date, an amount equal to the Monthly Deduction
15
<PAGE>
will be removed from the Total Account Value and will not participate in
investment performance. If a premium payment is subsequently made and the
Cash Surrender Value exceeds the amount of the Monthly Deduction, or, within
the first two years the Basic Premiums are paid, the amount removed will be
returned to the Total Account Value and will resume participation in
investment performance.
IF THE POLICY HAS LAPSED, CAN YOU REINSTATE THE POLICY?
We will consider reinstatement within five years after the date of
termination (provided it is before the Maturity Date). We will require
satisfactory evidence of insurability. Regardless of when the Policy lapses,
the original and any additional tables of Surrender Charges that were issued
on this Policy will apply upon reinstatement. The Loan Account Value will be
reinstated. All values will be reinstated as of the date of the Policy's
termination.
Under AetnaVest II Policies issued in most states, if the Policy lapses
during the first two Policy Years, the payment required at reinstatement will
equal the sum of Basic Premiums for each Monthly Deduction day to date, less
premiums previously paid. If the Policy lapses after the first two Policy
Years, you must make a premium payment that will cause the surrender value
upon reinstatement to equal three times the next monthly deduction.
For AetnaVest Policies, upon reinstatement, no Surrender Charge deduction
will apply to coverage which was in force for two or more years (one or more
years for multiple employer trust policies) prior to the date of termination.
For terminated coverage which was in force less than two years, future
Surrender Charges will not be reduced from the original schedule. If you
request reinstatement during the first two Policy Years, the premium required
at reinstatement will be the lesser of (a) a premium sufficient to pay for
three Monthly Deductions plus any applicable Surrender Charge; or (b) overdue
Basic Premiums.
CAN YOU BORROW ON YOUR POLICY?
If you purchase an AetnaVest Policy you may borrow against your Policy
after the end of the second Policy Year (in California and Texas, after the
end of the first Policy Year). AetnaVest II Policy Owners may borrow against
their Policy beginning in the first Policy Year. For all Policies, loans must
be taken before the election of a settlement option.
The most you can borrow is 90% (100% for AetnaVest II policies issued in
Texas) of the Fixed Account and Separate Account Values less the Surrender
Charge applicable at the time of the loan. Interest on the loan, including
preferred loans (as described below), will accrue at 8% per year, payable
once a year at each anniversary of the loan. Any interest not paid when due
becomes part of the loan and bears interest.
The Loan Account Value is credited with the amount of any loans you make
on your Policy, as collateral. The Loan Account Value is credited with
interest at a rate of at least 4.5% per year (6% in New York). Such credited
interest is transferred out of the Loan Account Value monthly and reallocated
proportionately to the applicable funding options.
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 in excess of the
maximum loan amount available for a preferred loan will not be considered a
preferred loan. The portion of the Loan Account Value equal to the preferred
loan will be credited at the policy loan interest rate of 8% per year. The
portion of the Loan Account Value not considered a preferred loan will be
credited interest as described in "What Is the Cash Surrender Value of Your
Policy?" The preferred loan feature is only available in approving states as
stated in your Policy.
If you are using more than one underlying funding option, the amount of
the loan will be withdrawn in proportion to the value held in each funding
option. You cannot select the funding option to be used for the loan.
The amount you receive as a result of the loan will, together with any
accrued but not paid interest, constitute the Loan Account Value. 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.
CAN YOU CHANGE THE AMOUNT OF YOUR INSURANCE COVERAGE?
Beginning one year after the Issue Date, you may increase or decrease the
Specified Amount of your Policy as follows:
1. For an increase, we will require satisfactory evidence of insurability
unless there is no increase in the Amount at Risk;
16
<PAGE>
2. The Cash Surrender Value at the time of an increase must be at least three
times the sum of (a) the most recent Monthly Deduction from Total Account
Value and (b) the amount of the increase, divided by 1000, times the
applicable Cost of Insurance Rate;
3. An increase in the Specified Amount will increase the Surrender Charge
unless there is no increase in the Amount at Risk;
4. Increases are limited to four times the original Specified Amount;
5. Decreases in the Specified Amount will not decrease the Surrender Charge
or your Basic Premium. Decreases during the second year after the Issue
Date will usually not enable you to reduce your Planned Premium below the
Basic Premium without lapsing the Policy;
6. No decrease may reduce the Specified Amount to less than the then-current
minimum for this type of Policy;
7. The decrease will be applied first to the most recent coverage under the
Policy, then to the next most recent, and so forth.
You can also change from one Death Benefit Option to the other.
The Specified Amount will be changed when a change in Death Benefit Option
is made. If the change is from Option 1 to Option 2, the new Specified Amount
will equal the Amount at Risk as of the date of the change. If the change is
from Option 2 to Option 1, the new Specified Amount will equal the Death
Benefit as of the date of the change.
A change in Death Benefit Option will not be allowed if the new Specified
Amount would be less than the then-current minimum. We may require
satisfactory evidence of insurability before allowing the change. There will
be no change in the Surrender Charge (either increase or decrease) at the
time of a change in Death Benefit Option.
WHAT IS THE "FREE-LOOK PERIOD"?
The Policy has a "Free-Look Period" during which it may be returned to our
Home Office for a refund. You may return it to our Home Office 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 latest.
The refund will be the sum of (1) the difference between payments made and
amounts allocated to the Separate Account, (2) the value of the amount
allocated to the Separate Account as of the date the returned Policy is
received by us, and (3) any fees imposed on the amounts allocated to the
Separate Account. If state law does not permit such a refund, then the refund
will equal 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.
CAN YOU EXCHANGE YOUR POLICY?
You may exchange the AetnaVest Policy for a period of two years after the
Issue Date, for a new adjustable premium policy issued by the Company, under
which policy values and benefits do not vary with the investment performance
of a Separate Account. The new policy will have the same Issue Date as the
old Policy, and no evidence of insurability will be required. Since your
Total Account Value will be transferred from the old Policy to the new policy
in its entirety, the Cash Surrender Value under the new policy cannot exceed
the Cash Surrender Value under the old Policy at the time of exchange. We
have the right to adjust the Cash Surrender Value under the new policy to
make sure this is the case. You have the right to select whether the new
policy has the same Death Benefit or net amount at risk as the old Policy.
There may be a charge due to the Company, or a refund due to the Policy
Owner, equal to the difference in cash value between the old Policy and the
new policy.
For AetnaVest II Policies you may simply transfer the entire Separate
Account Value of your Policy to the Fixed Account. No charge will be made for
any such transfer.
HOW WILL THE DEATH BENEFIT BE PAID?
The Death Benefit under the Policy will be paid in a lump sum within seven
days after we receive due proof of 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 described below.
Payment of the Death Benefit may be delayed if the Policy is being
contested. While the Insured is liv-
17
<PAGE>
ing, 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.
All or a part of the proceeds of the Death Benefit may be applied under
one or more of the following Settlement Options, or such options as we may
choose to make available in the future.
If the Policy is assigned as collateral security, we will pay any amount
due the assignee in one lump sum. Any excess Death Benefit proceeds due will
be paid as elected.
SETTLEMENT OPTIONS
WHEN DO PAYMENTS UNDER A SETTLEMENT OPTION OCCUR?
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 following Settlement Options or any we make available (after any
applicable surrender charges have been deducted).
A written request is required to elect, change, or revoke a Settlement
Option. This request will take effect upon receipt or recording of the
written request, in good order, at our Home Office.
The first variable Settlement Option payment will be as of the tenth
Valuation Period following the receipt of the properly completed election
form.
WHAT ARE THE SETTLEMENT OPTIONS?
The Settlement Options are as follows:
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 Annuitant. If also chosen, we
will guarantee payments for 60, 120, 180 or 240 months;
Option 4--Payments during the joint lifetimes of two Annuitants. 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;
(e) 100% of the payment to continue to the survivor if the survivor is the
Annuitant, and 50% of the payment to continue to the survivor if the
survivor is the Second Annuitant.
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 3.5%. We may add interest daily at any higher rate.
Under Option 1, the Annuitant may later tell the Company to (a) pay to him
or her a portion or all of the sum held by the Company; or (b) apply a
portion or all of the sum held by the Company to another settlement option.
Proceeds applied under Options 2, 3 and 4 will be held (a) in 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 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 annum, unless a 5% annual rate is chosen. The Assumed Net
Investment Rate is chosen by the payee.
18
<PAGE>
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 option 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.
Option 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 Annuitant 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 an Annuitant dies while receiving payments under Option 2, 3 or 4,
the present value of any remaining guaranteed payments will either be paid in
one sum to the beneficiary, or upon election by the beneficiary, any
remaining guaranteed payments will continue to the beneficiary. If no
beneficiary exists, the present value of any remaining guaranteed payments
will be paid in one sum to the Annuitant's estate. If the Annuitant 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 Annuitant's estate.
If a 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 the beneficiary. The interest rate used to determine the first
payment will be used to calculate the present value.
Payments will be made upon receipt of a written request filed with us. If
no settlement election has been made by the Policy Owner when the beneficiary
becomes entitled to proceeds, the beneficiary may make the election.
HOW WILL YOUR VARIABLE SETTLEMENT OPTION PAYMENTS BE CALCULATED?
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) 1000; times
(c) the payment rate for the Option chosen.
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:
19
<PAGE>
(i) The net assets of the applicable fund held in Variable Annuity
Account B at the end of a Valuation Period, minus
(ii) The net assets of the applicable fund held in Variable Annuity
Account B at the beginning of that Valuation Period, plus or minus
(iii) Taxes or provision for taxes, if any, attributable to the
operations of Variable Annuity Account B, divided by
(iv) The value of Settlement Option Units and other accumulation units
held in Variable Annuity Account B at the beginning of the Valuation
Period, minus
(v) A daily charge at an annual rate of 1.25% for annuity mortality and
expense risk and a daily administrative expense charge that will not
exceed .25% on an annual basis.
The number of Settlement Option Units remains fixed. However, the dollar
value of the Settlement Option Unit Values and the payment 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 charges.
DESCRIPTION OF THE COMPANY AND THE SEPARATE ACCOUNT
The Company
The 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.
The Separate Account
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 Policy Owner.
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 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 Commission 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.
20
<PAGE>
DIRECTORS AND OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Current Positions Principal Occupation
Name and Address* with the Company During Past Five Years
- ----------------------- -------------------------- ---------------------------------------------------
<S> <C> <C>
Daniel P. Kearney Director, President and President (since December 1993), Aetna Life
Chairman, Executive Insurance and Annuity Company; Executive Vice
Committee (Principal President (since December 1993), and Group
Executive Officer) Executive, Financial Division (February 1991--
December 1993), Aetna Life and Casualty Company.
Christopher J. Burns Director (1991); Senior Senior Vice President, Sales & Service (since
Vice President; Member of February 1996), and Senior Vice President, Life
Executive Committee (March 1991--February 1996), Aetna Life Insurance
and Annuity Company.
Laura R. Estes Director and Senior Vice Senior Vice President, Manage/Design Products and
President; Member of Services (since February 1996), and Senior Vice
Executive Committee President, Pensions (March 1991--February 1996),
Aetna Life Insurance and Annuity Company.
Timothy A. Holt Director, Senior Vice Senior Vice President, Strategy & Finance, and
President and Chief Chief Financial Officer (since February 1996),
Financial Officer (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 Vice President, Service and Retain Customers (since
President 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.
21
<PAGE>
John Y. Kim Director and Senior Vice President (since December 1995), Aeltus Investment
President 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 Vice President, Products Group (since February
President 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.
Glen Salow Director and Vice Vice President, Information Technology (since
President 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 Vice President, Select and Manage Markets (since
President 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 Senior Vice President and General Counsel (since
General Counsel April 1992), Vice President and General Counsel
(July 1990--April 1992), Aetna Life and Casualty
Company.
Susan E. Schechter Counsel and Corporate Counsel (since November 1993), Aetna Life and
Secretary Casualty Company; Associate Attorney (September
1986--October 1993), Steptoe & Johnson.
22
<PAGE>
Eugene M. Trovato Vice President and Vice President and Treasurer, Corporate Controller
Treasurer, Corporate (since February 1996), Vice President and
Controller 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 (since
Compliance Officer 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.
</TABLE>
- ------------
* The address of all Directors and Officers listed is 151 Farmington Avenue,
Hartford, Connecticut.
These individuals may also be directors and/or officers of other affiliates
of the Company.
REPORTS TO POLICY OWNERS
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 Total Account Value and Cash Surrender Value
since the prior report or since the Issue Date, 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. Cash Surrender Value, Death Benefit, and any Loan Account Value, as of
the Policy Anniversary;
3. A projection of Total Account Value, Loan Account Value and Cash
Surrender Value as of the succeeding Policy Anniversary.
If you have Policy values funded in either Separate Account you will
receive such additional 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 the Separate Account in accordance with
instructions received from Policy Owners having a voting interest in the
Funds. Policy Owners having such an interest will receive periodic reports
relating to the Fund, proxy material and a form for giving voting
instructions. The number of shares which You have a right to vote will be
determined as of a record date established by the Fund. The number of votes
that You are entitled to direct with respect to a Fund will be determined by
dividing the portion of Your Total Account Value attributable to that Fund by
the net asset value of one share in the Fund. Voting instructions will be
solicited by written communication at least 14 days before such meeting.
The votes will cast at meetings of the shareholders of the Fund and will
be based on instructions received from Policy Owners. 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.
23
<PAGE>
Fund shares for which no timely instructions are received, and Fund shares
which are not otherwise attributable to Policy Owners, will be voted by us in
the same proportion as the voting instructions which are received for all
Policies participating in each Fund through the Separate Account.
Policy Owners 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 Policy Owner in the investment policy or the investment
adviser of a 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 Policy Owners.
STATE REGULATION
The Company is subject to regulation and supervision by the Insurance
Department of the State of Connecticut, which periodically examines its
affairs. It is 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.
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.
The Policies are offered for sale in all jurisdictions where we are
authorized to do business except the District of Columbia, Guam, Puerto Rico,
and the Virgin Islands.
LEGAL MATTERS
The Company knows of no material legal proceedings pending to which either
Separate Account is a party or which would materially affect either Separate
Account.
The legal validity of the securities described in the Prospectus has been
passed on by Susan E. Bryant, Counsel.
ADDITIONAL INFORMATION
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.
Distribution of the Policies
The Company will serve as underwriter of the securities offered hereunder
as defined by the federal securities laws. The Company is registered as a
broker- dealer with the SEC and is a member of the National Association of
Securities Dealers, Inc. The Company will contract with one or more
registered broker- dealers including broker-dealers affiliated with it
("Distributors") to offer and sell the Policies. The Company may also offer
and sell policies directly. All persons selling the Policies will be
registered representatives of the Distributors, and will also be licensed as
insurance agents to sell variable life insurance.
The maximum commission payable by the Company to salespersons and their
supervising broker- dealers for policy distribution is 55% of the initial
Basic Premium or, in the event of an increase in the Specified Amount, 55% of
the Basic Premium attributable to the increase. In particular circumstances,
we may also pay certain of these professionals for their administrative
expenses.
The Company may also contract with independent third party broker-dealers
who will act as wholesalers by assisting the Company in finding broker-
24
<PAGE>
dealers to offer and sell the Policies. These parties may also provide
training, marketing and other sales related functions for the Company and
other broker-dealers and may provide certain administrative services to the
Company in connection with the Policies. The Company may pay such parties
compensation based on premium payments for the Policies purchased through
broker-dealers selected by the wholesaler.
Records and Accounts
All records and accounts relating to the Separate Accounts and the Funds
will be maintained by the Company. All reports required to be made and
information required to be given will be provided by the Company.
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.
TAX MATTERS
General
The following is a discussion of the federal income tax considerations
relating to the Policies. 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 Policy Owner 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 Policy Owners 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 Policy Owners 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 Policy Owner will be taxed on the Surrender
Value only to the extent that it exceeds the gross premiums paid less prior
untaxed withdrawals. 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.
25
<PAGE>
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
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
26
<PAGE>
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 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 others 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.
MISCELLANEOUS CONTRACT PROVISIONS
The Contract
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.
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 Policy Owner.
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 and Sex
If age or sex 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 correct age and sex. (If the application is taken in a state
where unisex rates are used, the Insured's sex is inapplicable.)
27
<PAGE>
Incontestability
We will not contest coverage under the Policy (other than any waiver of
premium rider) after it has been in force during the lifetime of the Insured
more than two years from the Issue Date.
For coverage which takes effect on a later date (i.e., an increase or
reinstatement of insurance), 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. Any contest of such later coverage will be based on the
supplemental application.
Suicide
In most states, if the Insured commits suicide within two years from the
Issue Date, the only benefit paid will be the sum of (a) plus (b) minus (c),
where:
(a) equals premiums paid less amounts allocated to the Separate Account; and
(b) equals the Separate Account Value on the date of suicide, plus the
portion of the Monthly Deductions deducted from the Separate Account
Value; and
(c) equals 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
Deductions for the increase, in lieu of the face amount of the increase.
All amounts will be calculated as of the date of death.
Protection of Proceeds
To the extent provided by law, the proceeds of the Policy are subject
neither to claims by a beneficiary's creditors nor to any legal process
against any beneficiary.
Non-Participation
Neither Policy is entitled to share in the divisible surplus of the
Company. No dividends are payable.
Coverage Beyond Maturity (AetnaVest II only)
As an AetnaVest II Policy Owner, 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 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.
At this time, uncertainties exist regarding the tax treatment of the
Policy should the Policy continue beyond the Maturity Date. You should
therefore consult with your tax advisor prior to making this election. (See
Tax Matters.) The coverage beyond maturity provision is only available in
approving states. (This provision is not available in New York.)
28
<PAGE>
APPENDIX A
AETNAVEST POLICIES
ILLUSTRATIONS OF DEATH BENEFIT, TOTAL ACCOUNT VALUES AND
CASH SURRENDER VALUES FOR AETNAVEST POLICIES
The following tables illustrate how the Total Account Values, Cash
Surrender Values, and Death Benefits of a Policy change with the investment
experience of the Funds. The tables show how the Total Account Values, Cash
Surrender Values, and Death Benefits 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, annual rate of 0%, 6%,
12%, respectively.
Tables I through IV illustrate Policies issued to males, ages 25 and 40,
in the nonsmoker rate class. The Total Account Values, Cash Surrender Values,
and Death Benefits 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 the stated 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 eleventh columns illustrate the Cash Surrender Values of
each Policy over the designated period. Tables II and IV assume that the
maximum Cost of Insurance Rates 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 is assessed in each
Policy Year. Tables I and III assume that the current scale of Cost of
Insurance Rates applies during all Policy Years. These tables also assume
that the current level of mortality and expense risk charge, 0.70% on an
annual basis, is assessed. A weighted average has been used for the
illustrations assuming that the Policyowner has invested in the Funds as
follows: 30% in Aetna Variable Fund; 3% in Aetna Income Shares; 12% in Aetna
Variable Encore Fund; 3% in Aetna Investment Advisers Fund; 2% in the Aetna
Ascent Variable Portfolio; 2% in the Aetna Crossroads Variable Portfolio; 2%
in the Aetna Legacy Variable Portfolio; 7% in the Alger American Small Cap
Portfolio; 3% in Fidelity's Variable Insurance Products Fund II--Contrafund
Portfolio; 3% in Fidelity's Variable Insurance Products Fund--Equity-Income
Portfolio; 3% in the Janus Aspen Growth Fund; 5% in Janus Aspen Aggressive
Growth Fund; 3% in Janus Aspen Worldwide Growth Fund; 1% in Janus Aspen
Balanced Fund; 1% in the Janus Aspen Short-Term Bond Fund; 10% in the Scudder
International Portfolio and 10% in TCI Growth.
The amounts shown for the Death Benefits, Cash Surrender Values, and Total
Account Values reflect the fact that the net investment return is lower than
the gross, return on the assets held in each Fund as a result of expenses
paid by the Fund and other charges levied by the Separate Account.
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 Benefits, Total Account Values, and Cash 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 are allocated to Variable Life Account B and if no Policy
loans have been made. The tables are also based on the assumptions that the
Policy Owner has not requested an increase or decrease in the Specified
Amount of the Policy, that no partial surrenders have been made, and that no
transfer charges have been incurred.
Upon request, we will provide an illustration based upon the proposed
insured's age, sex, and underwriting classification, the specified amount or
premium requested, the proposed frequency of premium payments and any
available riders requested. A fee of $25 is charged for each such
illustration.
The hypothetical gross annual investment return assumed in such an
illustration will not exceed 12%.
29
<PAGE>
AetnaVest Policy
Table I
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 25
$408.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $100,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 408 100000 100000 100000 182 199 216
2 836 100000 100000 100000 366 412 460
3 1286 100000 100000 100000 548 635 731
4 1759 100000 100000 100000 730 872 1033
5 2254 100000 100000 100000 909 1118 1366
6 2775 100000 100000 100000 1098 1389 1748
7 3322 100000 100000 100000 1280 1668 2166
8 3896 100000 100000 100000 1458 1957 2625
9 4499 100000 100000 100000 1627 2254 3128
10 5132 100000 100000 100000 1788 2559 3677
15 8804 100000 100000 100000 2445 4177 7291
20 13491 100000 100000 100000 2761 5871 12911
25 19473 100000 100000 100000 2538 7426 21651
30 27107 100000 100000 100000 1490 8489 35446
40 (Age 65) 49286 0 100000 114928 0 4900 94203
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 18 64 112
3 200 287 383
4 382 524 685
5 561 770 1018
6 814 1105 1464
7 1065 1453 1951
8 1313 1812 2480
9 1552 2179 3053
10 1782 2553 3671
15 2445 4177 7291
20 2761 5871 12911
25 2538 7426 21651
30 1490 8489 35446
40 (Age 65) 0 4900 94203
</TABLE>
(1) Assumes no Policy loan has been made. Current mortality rates assumed.
Current mortality and expense risk charges, administrative charges, and
premium load assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
30
<PAGE>
AetnaVest Policy
Table II
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 25
$408.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $100,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 408 100000 100000 100000 182 199 216
2 836 100000 100000 100000 364 410 458
3 1286 100000 100000 100000 545 632 728
4 1759 100000 100000 100000 726 867 1027
5 2254 100000 100000 100000 903 1111 1357
6 2775 100000 100000 100000 1089 1378 1734
7 3322 100000 100000 100000 1269 1653 2147
8 3896 100000 100000 100000 1443 1938 2600
9 4499 100000 100000 100000 1610 2230 3094
10 5132 100000 100000 100000 1767 2528 3633
15 8804 100000 100000 100000 2382 4079 7130
20 13491 100000 100000 100000 2646 5661 12497
25 19473 100000 100000 100000 2312 6990 20666
30 27107 100000 100000 100000 1102 7684 33322
40 (Age 65) 49286 0 100000 104608 0 2336 85744
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 16 62 110
3 197 284 380
4 378 519 679
5 555 763 1009
6 805 1094 1450
7 1054 1438 1932
8 1298 1793 2455
9 1535 2155 3019
10 1761 2522 3627
15 2382 4079 7130
20 2646 5661 12497
25 2312 6990 20666
30 1102 7684 33322
40 (Age 65) 0 2336 85744
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
31
<PAGE>
AetnaVest Policy
Table III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 40
$744.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $100,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 744 100000 100000 100000 455 490 525
2 1525 100000 100000 100000 888 987 1090
3 2345 100000 100000 100000 1298 1489 1697
4 3207 100000 100000 100000 1687 1998 2352
5 4111 100000 100000 100000 2051 2512 3056
6 5061 100000 100000 100000 2393 3031 3817
7 6058 100000 100000 100000 2705 3548 4634
8 7105 100000 100000 100000 2985 4062 5509
9 8204 100000 100000 100000 3234 4572 6450
10 9358 100000 100000 100000 3450 5076 7461
15 16054 100000 100000 100000 3942 7396 13812
20 24601 100000 100000 100000 2766 8554 22668
25 35509 0 100000 100000 0 7524 35569
30 49431 0 100000 100000 0 2410 55745
25 (Age 65) 35509 0 100000 100000 0 7524 35569
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 215 314 417
3 625 816 1024
4 1014 1325 1679
5 1378 1839 2383
6 1844 2482 3268
7 2290 3133 4219
8 2705 3782 5229
9 3088 4426 6304
10 3439 5065 7450
15 3942 7396 13812
20 2766 8554 22668
25 0 7524 35569
30 0 2410 55745
25 (Age 65) 0 7524 35569
</TABLE>
(1) Assumes no Policy loan has been made. Current mortality rates assumed.
Current mortality and expense risk charges, administrative charges, and
premium load assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
32
<PAGE>
AetnaVest Policy
Table IV
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 40
$744.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $100,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 744 100000 100000 100000 452 487 522
2 1525 100000 100000 100000 879 977 1080
3 2345 100000 100000 100000 1282 1471 1677
4 3207 100000 100000 100000 1658 1966 2316
5 4111 100000 100000 100000 2008 2462 3000
6 5061 100000 100000 100000 2328 2956 3730
7 6058 100000 100000 100000 2618 3445 4511
8 7105 100000 100000 100000 2876 3928 5345
9 8204 100000 100000 100000 3100 4403 6236
10 9358 100000 100000 100000 3288 4866 7188
15 16054 100000 100000 100000 3598 6892 13046
20 24601 100000 100000 100000 2187 7579 20904
25 35509 0 100000 100000 0 5473 31573
30 49431 0 100000 100000 0 0 45968
25 (Age 65) 35509 0 100000 100000 0 5473 31573
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 206 304 407
3 609 798 1004
4 985 1293 1643
5 1335 1789 2327
6 1779 2407 3181
7 2203 3030 4096
8 2596 3648 5065
9 2954 4257 6090
10 3277 4855 7177
15 3598 6892 13046
20 2187 7579 20904
25 0 5473 31573
30 0 0 45968
25 (Age 65) 0 5473 31573
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
33
<PAGE>
APPENDIX B
AETNAVEST II POLICIES
ILLUSTRATIONS OF DEATH BENEFIT, TOTAL ACCOUNT VALUES AND
CASH SURRENDER VALUES FOR AETNAVEST II POLICIES
The following tables illustrate how the Total Account Values, Cash
Surrender Values, and Death Benefits of a Policy change with the investment
experience of the Funds. The tables show how the Total Account Values, Cash
Surrender Values, and Death Benefits 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, annual rate of 0%, 6%,
12%, respectively.
Tables V through VIII illustrate Policies issued to males, ages 35 and 55,
in the nonsmoker rate class. Tables IX through XII illustrate Policies issued
on a unisex basis, ages 35 and 55, in the nonsmoker rate class. These tables
are provided for use in those states where unisex rates are required. The
Total Account Values, Cash Surrender Values, and Death Benefits 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 the stated 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 eleventh columns illustrate the Cash Surrender Values of
each Policy over the designated period. Tables VI, VIII, X and XII assume
that the maximum Cost of Insurance Rates allowable under the Policy are
charged in all Policy Years. These tables also assume that the maximum
allowable mortality and expense risk charge of .90% on an annual basis, the
maximum allowable administrative charge of .50% and the maximum allowable
premium load of 6% are assessed in each Policy Year. Tables V, VII, IX and XI
assume that the current scale of Cost of Insurance Rates applies during all
Policy Years. These tables also assume that the current mortality and expense
risk charge of .70% on an annual basis, the current administrative charge of
.30% on an annual basis, and the current premium load of 3.5% are assessed. A
weighted average has been used for the illustrations assuming that the
Policyowner has invested in the Funds as follows: 30% in Aetna Variable Fund;
3% in Aetna Income Shares; 12% in Aetna Variable Encore Fund; 3% in Aetna
Investment Advisers Fund; 2% in the Aetna Ascent Variable Portfolio; 2% in
the Aetna Crossroads Variable Portfolio; 2% in the Aetna Legacy Variable
Portfolio; 7% in the Alger American Small Cap Portfolio; 3% in Fidelity's
Variable Insurance Products Fund II--Contrafund Portfolio; 3% in Fidelity's
Variable Insurance Products Fund--Equity-Income Portfolio; 3% in the Janus
Aspen Growth Fund; 5% in Janus Aspen Aggressive Growth Fund; 3% in Janus
Aspen Worldwide Growth Fund; 1% in Janus Aspen Balanced Fund; 1% in Janus
Aspen Short-Term Bond Fund; 10% in the Scudder International Portfolio and
10% in TCI Growth.
The amounts shown for the Death Benefits, Cash Surrender Values, and Total
Account Values reflect the fact that the net investment return is lower than
the gross return on the assets held in each Fund as a result of expenses paid
by each Fund and other charges levied by the Separate Account.
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 Benefits, Total Account Values, and Cash 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 are allocated to Variable Life Account B and if no Policy
loans have been made. The tables are also based on the assumptions that the
Policy Owner has not requested an increase or decrease in the Specified
Amount of the Policy, that no partial surrenders have been made, and that no
transfer charges have been incurred.
Upon request, we will provide an illustration based upon the proposed
insured's age, sex (if necessary), and underwriting classification, the
specified amount or premium requested, the proposed frequency of premium
payments and any available riders requested. A fee of $25 is charged for each
such illustration.
The hypothetical gross annual investment return assumed in such an
illustration will not exceed 12%.
34
<PAGE>
AetnaVest II Policy
Table V
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 35
$1410.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1410 250000 250000 250000 685 746 806
2 2891 250000 250000 250000 1519 1689 1867
3 4445 250000 250000 250000 2314 2648 3011
4 6077 250000 250000 250000 3068 3620 4245
5 7791 250000 250000 250000 3778 4602 5573
6 9591 250000 250000 250000 4441 5592 7005
7 11480 250000 250000 250000 5061 6592 8553
8 13464 250000 250000 250000 5631 7596 10222
9 15547 250000 250000 250000 6152 8606 12027
10 17735 250000 250000 250000 6621 9616 13977
15 30426 250000 250000 250000 7989 14458 26309
20 46623 250000 250000 250000 7243 18300 44465
25 67295 250000 250000 250000 3750 20153 72087
30 93679 0 250000 250000 0 18356 115816
30 (Age 65) 93679 0 250000 250000 0 18356 115816
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 169 339 517
3 964 1298 1661
4 1718 2270 2895
5 2428 3252 4223
6 3215 4366 5779
7 3970 5501 7462
8 4675 6640 9266
9 5331 7785 11206
10 5935 8930 13291
15 7978 14447 26298
20 7243 18300 44465
25 3750 20153 72087
30 0 18356 115816
30 (Age 65) 0 18356 115816
</TABLE>
(1) Assumes no Policy loan has been made. Current mortality rates assumed.
Current mortality and expense risk charges, administrative charges, and
premium load assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
35
<PAGE>
AetnaVest II Policy
Table VI
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 35
$1410.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1410 250000 250000 250000 646 705 763
2 2891 250000 250000 250000 1439 1602 1773
3 4445 250000 250000 250000 2191 2509 2856
4 6077 250000 250000 250000 2899 3424 4020
5 7791 250000 250000 250000 3560 4342 5265
6 9591 250000 250000 250000 4173 5261 6599
7 11480 250000 250000 250000 4731 6175 8024
8 13464 250000 250000 250000 5236 7082 9549
9 15547 250000 250000 250000 5682 7976 11178
10 17735 250000 250000 250000 6069 8857 12923
15 30426 250000 250000 250000 6931 12792 23590
20 46623 250000 250000 250000 5363 15044 38284
25 67295 0 250000 250000 0 13118 57942
30 93679 0 250000 250000 0 2491 84129
30 (Age 65) 93679 0 250000 250000 0 2491 84129
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 89 252 423
3 841 1159 1506
4 1549 2074 2670
5 2210 2992 3915
6 2947 4035 5373
7 3640 5084 6933
8 4280 6126 8593
9 4861 7155 10357
10 5383 8171 12237
15 6920 12781 23579
20 5363 15044 38284
25 0 13118 57942
30 0 2491 84129
30 (Age 65) 0 2491 84129
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum mortality and expense risk charges, administrative charges, and
premium load assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
36
<PAGE>
AetnaVest II Policy
Table VII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 55
$4380.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4380 250000 250000 250000 2272 2465 2659
2 8979 250000 250000 250000 4579 5114 5674
3 13808 250000 250000 250000 6742 7772 8896
4 18878 250000 250000 250000 8758 10436 12344
5 24202 250000 250000 250000 10620 13099 16039
6 29792 250000 250000 250000 12321 15753 20001
7 35662 250000 250000 250000 13855 18392 24256
8 41825 250000 250000 250000 15207 21001 28827
9 48296 250000 250000 250000 16364 23565 33741
10 55091 250000 250000 250000 17283 26040 39000
15 94514 250000 250000 250000 17206 35829 71326
20 144829 250000 250000 250000 6827 38497 120106
25 209045 0 250000 250000 0 23493 201591
30 291002 0 0 369275 0 0 351690
10 (Age 65) 55091 250000 250000 250000 17283 26040 39000
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 1123 1658 2218
3 3286 4316 5440
4 5302 6980 8888
5 7164 9643 12583
6 9182 12614 16862
7 11061 15598 21462
8 12759 18553 26379
9 14262 21463 31639
10 15526 24283 37243
15 17177 35800 71297
20 6827 38497 120106
25 0 23493 201591
30 0 0 351690
10 (Age 65) 15526 24283 37243
</TABLE>
(1) Assumes no Policy loan has been made. Current mortality rates assumed.
Current mortality and expense risk charges, administrative charges, and
premium load assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
37
<PAGE>
AetnaVest II Policy
Table VIII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 55
$4380.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4380 250000 250000 250000 1892 2070 2249
2 8979 250000 250000 250000 3743 4221 4723
3 13808 250000 250000 250000 5365 6264 7248
4 18878 250000 250000 250000 6746 8178 9817
5 24202 250000 250000 250000 7863 9933 12408
6 29792 250000 250000 250000 8691 11494 15002
7 35662 250000 250000 250000 9205 12824 17572
8 41825 250000 250000 250000 9365 13870 20079
9 48296 250000 250000 250000 9122 14568 22473
10 55091 250000 250000 250000 8426 14849 24697
15 94514 0 250000 250000 0 7292 31031
20 144829 0 0 250000 0 0 16952
25 209045 0 0 0 0 0 0
30 291002 0 0 0 0 0 0
10 (Age 65) 55091 250000 250000 250000 8426 14849 24697
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 287 765 1267
3 1909 2808 3792
4 3290 4722 6361
5 4407 6477 8952
6 5552 8355 11863
7 6411 10030 14778
8 6917 11422 17631
9 7020 12466 20371
10 6669 13092 22940
15 0 7263 31002
20 0 0 16952
25 0 0 0
30 0 0 0
10 (Age 65) 6669 13092 22940
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum expense risk charges, administrative charges, and premium load
assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
38
<PAGE>
AetnaVest II Policy
Table IX
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 35
$1350.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1350 250000 250000 250000 640 698 755
2 2768 250000 250000 250000 1428 1589 1757
3 4256 250000 250000 250000 2180 2495 2839
4 5819 250000 250000 250000 2889 3410 4001
5 7460 250000 250000 250000 3554 4333 5251
6 9183 250000 250000 250000 4173 5260 6595
7 10992 250000 250000 250000 4748 6193 8043
8 12891 250000 250000 250000 5273 7126 9603
9 14886 250000 250000 250000 5750 8061 11285
10 16980 250000 250000 250000 6175 8993 13100
15 29131 250000 250000 250000 7458 13521 24647
20 44639 250000 250000 250000 6945 17309 41837
25 64432 250000 250000 250000 3986 19421 68075
30 89692 0 250000 250000 0 18147 109359
30 (Age 65) 89692 0 250000 250000 0 18147 109359
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 138 299 467
3 890 1205 1549
4 1599 2120 2711
5 2264 3043 3961
6 3001 4088 5423
7 3705 5150 7000
8 4359 6212 8689
9 4965 7276 10500
10 5519 8337 12444
15 7447 13510 24636
20 6945 17309 41837
25 3986 19421 68075
30 0 18147 109359
30 (Age 65) 0 18147 109359
</TABLE>
(1) Assumes no Policy loan has been made. Current mortality rates assumed.
Current expense risk charges, administrative charges, and premium load
assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
39
<PAGE>
AetnaVest II Policy
Table X
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 35
$1350.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 1350 250000 250000 250000 603 659 714
2 2768 250000 250000 250000 1351 1506 1667
3 4256 250000 250000 250000 2061 2363 2691
4 5819 250000 250000 250000 2726 3223 3785
5 7460 250000 250000 250000 3345 4084 4955
6 9183 250000 250000 250000 3917 4943 6206
7 10992 250000 250000 250000 4434 5794 7539
8 12891 250000 250000 250000 4901 6639 8965
9 14886 250000 250000 250000 5309 7468 10484
10 16980 250000 250000 250000 5662 8283 12109
15 29131 250000 250000 250000 6398 11883 22010
20 44639 250000 250000 250000 4844 13857 35573
25 64432 0 250000 250000 0 11948 53639
30 89692 0 250000 250000 0 2155 77591
30 (Age 65) 89692 0 250000 250000 0 2155 77591
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 61 216 377
3 771 1073 1401
4 1436 1933 2495
5 2055 2794 3665
6 2745 3771 5034
7 3391 4751 6496
8 3987 5725 8051
9 4524 6683 9699
10 5006 7627 11453
15 6387 11872 21999
20 4844 13857 35573
25 0 11948 53639
30 0 2155 77591
30 (Age 65) 0 2155 77591
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum expense risk charges, administrative charges, and premium load
assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
40
<PAGE>
AetnaVest II Policy
Table XI
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 55
$4,200.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4200 250000 250000 250000 2253 2440 2629
2 8610 250000 250000 250000 4541 5062 5609
3 13241 250000 250000 250000 6697 7706 8806
4 18103 250000 250000 250000 8710 10357 12229
5 23208 250000 250000 250000 10572 13009 15896
6 28568 250000 250000 250000 12276 15654 19829
7 34196 250000 250000 250000 13819 18288 24057
8 40106 250000 250000 250000 15187 20898 28601
9 46312 250000 250000 250000 16371 23474 33494
10 52827 250000 250000 250000 17335 25978 38743
15 90630 250000 250000 250000 17825 36280 71278
20 138877 250000 250000 250000 8519 40053 120426
25 200454 0 250000 250000 0 28329 202666
30 279043 0 0 370462 0 0 352821
10 (Age 65) 52827 250000 250000 250000 17335 25978 38743
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 1229 1750 2297
3 3385 4394 5494
4 5398 7045 8917
5 7260 9697 12584
6 9268 12646 16821
7 11142 15611 21380
8 12841 18552 26255
9 14356 21459 31479
10 15651 24294 37059
15 17797 36252 71250
20 8519 40053 120426
25 0 28329 202666
30 0 0 352821
10 (Age 65) 15651 24294 37059
</TABLE>
(1) Assumes no Policy loan has been made. Current mortality rates assumed.
Current expense risk charges, administrative charges, and premium load
assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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.
41
<PAGE>
AetnaVest II Policy
Table XII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 55
$4,200.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value
at Return of Annual Investment Return of
Policy 5% Interest -------------------------------------------- ---------------------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 4200 250000 250000 250000 1809 1979 2150
2 8610 250000 250000 250000 3595 4053 4534
3 13241 250000 250000 250000 5169 6032 6976
4 18103 250000 250000 250000 6524 7900 9473
5 23208 250000 250000 250000 7647 9639 12018
6 28568 250000 250000 250000 8510 11211 14587
7 34196 250000 250000 250000 9089 12584 17161
8 40106 250000 250000 250000 9347 13708 19704
9 46312 250000 250000 250000 9233 14519 22165
10 52827 250000 250000 250000 8701 14953 24496
15 90630 0 250000 250000 0 9185 32410
20 138877 0 0 250000 0 0 24109
25 200454 0 0 0 0 0 0
30 279043 0 0 0 0 0 0
10 (Age 65) 52827 250000 250000 250000 8701 14953 24496
</TABLE>
<TABLE>
<CAPTION>
Cash Surrender Value
Annual Investment Return of
Policy ---------------------------------------------
Year Gross 0% Gross 6% Gross 12%
- ------------ ------------ ------------ --------------
<S> <C> <C> <C>
1 0 0 0
2 283 741 1222
3 1857 2720 3664
4 3212 4588 6161
5 4335 6327 8706
6 5502 8203 11579
7 6412 9907 14484
8 7001 11362 17358
9 7218 12504 20150
10 7017 13269 22812
15 0 9157 32382
20 0 0 24109
25 0 0 0
30 0 0 0
10 (Age 65) 7017 13269 22812
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed mortality rates assumed.
Maximum expense risk charges, administrative charges, and premium load
assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those
illustrated.
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 Policy Owner's allocations, and the Fund's rates of
return. The Total Account Value and Cash 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>
FINANCIAL STATEMENTS
VARIABLE LIFE ACCOUNT B
Index
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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>
<CAPTION>
<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>
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>
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>
<CAPTION>
<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--
(bullet) 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
Value at Value at (Decrease)
Beginning End in Value of
of of Accumulation
Period 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>
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)
</TABLE>
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.
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)
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
-------- ---------
(millions)
<S> <C> <C>
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
====== =======
</TABLE>
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:
<TABLE>
<CAPTION>
Amortized Fair
Debt Securities Cost Value
------- --------
(millions)
<S> <C> <C>
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
</TABLE>
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)
<TABLE>
<CAPTION>
1995 1994 1993
------ ----- --------
(millions)
<S> <C> <C> <C>
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
==== === ======
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ----------- -----------
(millions)
<S> <C> <C> <C>
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
======= ========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- -----------
(millions)
<S> <C> <C> <C>
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
</TABLE>
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)
<TABLE>
<CAPTION>
1995 1994 1993
----- ------- ------
(millions)
<S> <C> <C> <C>
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
=== ===== ====
</TABLE>
4. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- -------
(millions)
<S> <C> <C> <C>
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
===== === =====
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ---------
(millions)
<S> <C> <C> <C>
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
===== ===== =======
</TABLE>
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)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ---------
(millions)
<S> <C> <C> <C>
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
===== ===== =======
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1995 1994
----- -------
Deferred tax assets: (millions)
<S> <C> <C>
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
=== =====
</TABLE>
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.
<TABLE>
<CAPTION>
Assumed
Ceded to from
Direct Other Other Net
Amount Companies Companies Amount
------ -------- -------- -------
(millions)
<S> <C> <C> <C> <C>
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
==== ====== ====== =====
</TABLE>
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)
<TABLE>
<CAPTION>
1995 1994
------------------ --------------------
Carrying Fair Carrying Fair
Value Value Value Value
------- ------- ------- ---------
(millions)
<S> <C> <C> <C> <C>
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
</TABLE>
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial instrument,
such as estimates of timing and amount of 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:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
------- ---------
<S> <C> <C>
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
</TABLE>
(1) Represents non-leveraged instruments whose fair values and credit risk
are based on underlying securities, including fixed income securities and
interest rate swap agreements.
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
76004-2 Life
