Variable Life
Account B
[Arrow] AetnaVest Plus
Flexible Premium
Variable Life Insurance Policy
Prospectus Dated:
May 1, 1996
Plus
[Aetna logo]
A e t n a L i f e I n s u r a n c e a n d A n n u i t y C o m p a n y
76018-2 Life
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Variable Life Account B
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
(203) 275-4995
Prospectus Dated May 1, 1996
The Flexible Premium Variable Life Insurance Policy
This Prospectus describes AetnaVest Plus, a variable universal life insurance
policy ("Policy") offered by Aetna Life Insurance and Annuity Company (the
"Company"). This Policy is intended to provide life insurance benefits, and
is designed to allow flexible premium payments, a choice of underlying
funding options, and a choice of two death benefit options. Your policy's
cash value may vary with the investment performance of the underlying funding
options you choose. Although policy values may vary, the Policy can be
guaranteed to stay in force through the Guaranteed Death Benefit Provision.
Policy cash value may be used to continue your policy in force, may be
borrowed within certain limits, and may be fully or partially surrendered
(subject to a surrender charge).
You may also choose to select one of the annuity settlement options upon
Maturity of the Policy, 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
(a) the value of the Death Benefit Option in one lump sum, or (b) under one
of the annuity settlement options.
The Policy has a Free-Look Period during which you may return it to the
Company's Home Office for a refund. The refund may be more or less than the
premiums paid. (See "Right to Examine the Policy.")
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance policy with an AetnaVest
Plus Policy. The AetnaVest Plus Policy is not available for use in a pension
or profit-sharing plan.
This Prospectus is intended to describe the variable options used to fund
this Policy through Variable Life Account B (the "Separate Account"). The
variable funding options currently available through the Separate Account are
as follows: Aetna Variable Fund; Aetna Income Shares; Aetna Variable Encore
Fund; Aetna Investment Advisers Fund, Inc.; Aetna Generation Portfolios,
Inc.--Aetna Ascent Variable Portfolio, Aetna Crossroads Variable Portfolio
and Aetna Legacy Variable 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; TCI Portfolios, Inc.--TCI
Growth (collectively, the "Funds"). Unless specifically mentioned, this
Prospectus only describes the variable investment options. Not all Funds may
be available under all Policies or in all jurisdictions.
Please read this Prospectus carefully and retain it for future reference.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC") OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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Table of Contents
Definitions iv
Policy Summary 1
The Separate Account 1
Allocation of Premiums 2
Fixed Account 2
The Funds 2
Mixed and Shared Funding 4
Charges and Fees 4
Premium Load 4
Charges and Fees Assessed Against the Total Account Value 4
Charges and Fees Associated with the Variable Funding Options 5
Surrender Charge 5
Surrender Charges on Full and Partial Surrenders 6
Policy Choices 6
Death Benefit 7
Guaranteed Death Benefit Provision 7
Premium Payments 7
Transfers and Allocations to the Funding Options 9
Automated Transfers (Dollar Cost Averaging) 9
Policy Values 10
Total Account Value 10
Accumulation Unit Value 10
Maturity Value 11
Cash Surrender Value 11
Policy Rights 11
Partial Surrenders 11
No-Lapse Coverage Provision 11
Reinstatement of a Lapsed Policy 12
Policy Loans: Preferred and Nonpreferred 12
Policy Changes 13
Right to Examine the Policy 14
Death Benefit 14
Policy Settlement 15
Settlement Options 15
Calculation of Settlement Payments 16
Special Plans 17
Pension Plans 18
The Company 18
Directors and Officers 18
Additional Information 21
Reports to Policy Owners 21
Right to Instruct Voting of Fund Shares 21
Disregard of Voting Instructions 22
State Regulation 22
Legal Matters 22
The Registration Statement 22
Distribution of the Policies 23
Records and Accounts 23
Independent Auditors 23
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Tax Matters 23
General 23
Federal Tax Status of the Company 23
Life Insurance Qualification 24
General Rules 24
Modified Endowment Contracts 24
Diversification Standards 25
Investor Control 25
Other Tax Considerations 26
Miscellaneous Policy Provisions 27
The Policy 27
Payment of Benefits 27
Age and Sex 27
Incontestability 27
Suicide 27
Coverage Beyond Maturity 27
Protection of Proceeds 28
Nonparticipation 28
Illustrations of Death Benefit, Total Account Values
and Cash Surrender Values 29
Financial Statements of the Separate Account S-1
Financial Statements of the Company F-1
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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.
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 who receives annuity payments.
Annuity: A series of payments for life or for a definite period.
Attained Age: The Issue Age of the insured increased by the number of Policy
Years elapsed.
Basic Premium: The amount of premium which must be paid to assure that the
Policy remains in force for at least five years after issue, assuming there
have been no loans or surrenders.
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.
Death Benefit: The amount payable to the beneficiary in accordance with the
Death Benefit Option elected, upon the death of the Insured, 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% per year.
Fixed Account Value: The non-loaned portion of this Policy's Total Account
Value attributable to the non-variable portion of the Policy. The Fixed
Account Value is held in the General Account.
Fund(s): One or more of the underlying funding options available under the
Policy (as described in this Prospectus). Each of the Funds is an open-end
management investment company (mutual fund) whose shares are available to
fund the benefits provided by the Policy.
General Account: The Company's general asset account, in which assets
attributable to the non-variable portion of Policies are held, i.e., the Loan
Account Value, and the Fixed Account Value.
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Grace Period: The 61-day period beginning on the Monthly Deduction Day on
which the Policy's 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.
Guaranteed Death Benefit Premium: A specified premium that, if paid, will
keep the Policy in force to attained age 80 or 100, even if the cash value is
insufficient to cover current monthly deductions.
Home Office: The Company's principal executive offices, located at 151
Farmington Avenue, Hartford, Connecticut 06156.
Insured: The person on whose life the Policy is issued.
Issue Age: The Insured's age on his/her birthday on or prior to the Policy's
Issue Date.
Issue Date: The effective date of initial coverage. The Date of Issue and the
effective date for any change in coverage will be the Date of Coverage Change
shown in Supplemental Policy Specifications which will be sent to you.
Coverage is conditional on payment of the first premium, if required, and
issue of the Policy as provided in the application.
Loan Account Value: The sum of all unpaid loans (Preferred and Nonpreferred).
The amount necessary to repay all loans in full is the Loan Account Value
plus any interest accrued since the last Policy anniversary. Such interest is
payable in order to discharge any policy indebtedness.
Maturity Date: The Issue Date anniversary on which the Insured reaches
Attained Age 100 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 if the Guaranteed Death Benefit
Provision is not in effect. Otherwise, the greater of the Total Account Value
and the Specified Amount 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 administrative expense charge.
Monthly Deduction Day: The day that the Monthly Deduction is actually taken.
Net Premium: The premium paid, less the premium load.
Nonpreferred Loan: Loans taken in the first ten Policy Years, and beginning
in the eleventh Policy Year, loans taken in excess of the Preferred Loan
Amount.
Planned Premium: The amount of premium the Policy Owner chooses to pay the
Company on a scheduled basis. This is the amount for which the Company sends
a bill.
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Policy: The life insurance contract 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.
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.
Preferred Loan Amount: A portion of the maximum loan amount available
beginning in the eleventh Policy Year, for a loan, at no net cost to the
Policy Owner. The preferred loan is the amount taken.
Separate Account: Variable Life Account B (and 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
investment options 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 Account Value, Separate Account
Value and the Loan Account Value.
Valuation Period: The period of time for which a Fund determines its net
asset value, usually from the close of business each day the New York Stock
Exchange is open until the close of business on 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 Settlement Option 2
when elected on a variable basis.
Variable Life Account B: A Separate Account of the Company established for
the purpose of segregating assets attributable to the variable portion of
life insurance contracts from other assets of the Company. It is organized as
a unit investment trust.
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Policy Summary
This is a flexible premium variable universal life insurance policy. This
Policy provides that cash values may be either fixed or variable or a
combination of fixed and variable.
At the time of purchase, you must choose between the two Death Benefit
Options and decide if you want the Guaranteed Death Benefit Provision. The
amount payable under either option will be determined as of the date of the
Insured's death. Under Option 1, the Death Benefit will be the greater of the
Specified Amount, or the applicable percentage of the Total Account Value.
Under Option 2, the Death Benefit will be the greater of the Specified Amount
plus the Total Account Value, or the applicable percentage of the Total
Account Value. (See "Death Benefit.")
The Policy also offers a Guaranteed Death Benefit Provision (not available in
New York) which ensures that the Policy will stay in force even if the cash
value is insufficient to cover the current monthly deductions due to fund
performance. Sufficient premiums must be paid in order to maintain a
Guaranteed Death Benefit to Age 80 or 100. (See "Guaranteed Death Benefit
Provision.")
At the time of purchase, you must also choose the amount of premium you
intend to pay. You may vary premium payments to some extent and still keep
your Policy in force. However, sufficient premiums must be paid to continue
the Policy in force. Premium reminder notices will be sent for planned
premiums and for premiums required to continue this Policy in force. If this
Policy lapses it may be reinstated. (See "Reinstatement of a Lapsed Policy.")
Finally, you must choose how to allocate Net Premiums. Net Premiums allocated
to the Separate Account must be allocated to one or more Funds, and
allocations must be in whole percentages. The variable portion of this Policy
is supported by the Funds you choose. The cash value in each Fund is not
guaranteed and will vary with the investment performance of that Fund.
If the Fixed Account is selected, the Fixed Account Value will accumulate at
rates of interest we determine. Such rates will not be less than 4.5% a year.
Proceeds as described in this Policy will be paid upon surrender, maturity,
or death of the Insured.
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 briefly 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
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the Company's variable life insurance policies. Any and all distributions
made by the Funds with respect to shares held by the Separate Account will be
reinvested in additional shares at net asset value. The assets maintained in
the Separate Account will not be charged with any liabilities arising out of
any other business conducted by the Company. The Company is, however,
responsible for meeting the obligations of the Policy to the Policyowner.
No stock certificates are issued to the Separate Account for shares of the
Funds held in the Separate Account. Ownership of Fund shares is documented on
the books and records of the Funds and of the Company for the Separate
Account.
The Separate Account is registered with the Securities and Exchange
Commission ("SEC") as a unit investment trust under the Investment Company
Act of 1940 and meets the definition of separate account under the federal
securities laws. Such registration does not involve any approval or
disapproval by the SEC of the Separate Account or the Company's management or
investment practices or policies. The Company does not guarantee the Separate
Account's investment performance.
Allocation of Premiums
You may allocate all or a part of your Net Premiums to the Fixed Account
(part of the Company's General Account) or to the Funds currently available
through the Separate Account in connection with this Policy. Not all Funds
are available under all Policies or on all jurisdictions. The investment
results of the Funds, whose investment 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.
Fixed Account
(bullet) Amounts held in the Fixed Account are guaranteed and will be credited
with interest at rates of not less than 4.5% per year. Credited
interest rates reflect the Company's return on Fixed Account invested
assets and the amortization of any realized gains and/or losses which
the Company may incur on these assets.
The Funds
(bullet) Aetna Variable Fund seeks to maximize total return through investments
in a diversified portfolio of common stocks and securities convertible
into common stocks.(1)
(bullet) Aetna Income Shares seeks to maximize total return, consistent with
reasonable risk, through investments in a diversified portfolio
consisting primarily of debt securities.(1)
(bullet) Aetna Variable Encore Fund seeks to provide high current return,
consistent with preservation of capital and liquidity, through
investment in high-quality money market instruments. An investment in
this Fund is neither insured nor guaranteed by the U.S. Government.(1)
(bullet) Aetna Investment Advisers Fund, Inc. is a managed mutual fund which
seeks to maximize investment return consistent with reasonable safety
of principal by investing in one or more of the following asset
classes: stocks, bonds and cash equivalents based on the Company's
judgment of which of those sectors or mix thereof offers the best
investment prospects.(1)
(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
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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.(1)
(bullet) Aetna Generation Portfolios, Inc.--Aetna Crossroads Variable Portfolio
seeks to provide total return (i.e., income and capital appreciation,
both realized and unrealized) by allocating its investments among
equities and fixed income securities. 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.(1)
(bullet) Aetna Generation Portfolios, Inc.--Aetna Legacy Variable Portfolio
seeks to provide total return consistent with preservation of capital
by allocating its investments among equities and fixed income
securities. Aetna Legacy Variable Portfolio is managed for investors
who generally have an investment horizon exceeding five years and who
have a low level of risk tolerance.(1)
(bullet) Alger American Fund--Alger American Small Capitalization Portfolio
seeks long-term capital appreciation. Except during temporary defensive
periods, the Portfolio invests at least 65% of its total assets in
equity securities of companies that, at the time of purchase of such
securities, have total market capitalization within the range of
companies included in the Russell 2000 Growth Index, updated quarterly.
The Russell 2000 Growth Index is designed to track the performance of
small capitalization companies. At March 31, 1996, the range of market
capitalization of these companies was $20 million to $3.0 billion.(2)
(bullet) Fidelity Investments' Variable Insurance Products Fund II--Contrafund
Portfolio seeks maximum total return over the long term by investing
its assets mainly in equity securities of companies that are
undervalued or out-of-favor.(3)
(bullet) Fidelity Investments' Variable Insurance Products Fund--Equity-Income
Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the
Fund will also consider the potential for capital appreciation.(3)
(bullet) Janus Aspen Series--Aggressive Growth Portfolio is a non-diversified
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.(4)
(bullet) Janus Aspen Series--Balanced Portfolio seeks long-term capital growth
consistent with preservation of capital and balanced by current income.
The Portfolio pursues its investment objective by investing 40%-60% of
its assets in securities selected primarily for their growth potential
and 40%- 60% of its assets in securities selected primarily for their
income potential.(4)
(bullet) Janus Aspen Series--Growth Portfolio seeks long-term growth of capital
consistent with the preservation of capital. The Portfolio pursues its
investment objective by investing in common stocks of a large number of
issuers of any size.(4)
(bullet) Janus Aspen Series--Short-Term Bond Portfolio seeks as high a level of
current income as is consistent with preservation of capital. The
Portfolio pursues its investment objective by investing primarily in
short- and intermediate-term fixed income securities.(4)
(bullet) Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth
of capital consistent with the preservation of capital. The Portfolio
pursues its investment objective primarily through investments in
common stocks of foreign and domestic issuers.(4)
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(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.(5)
(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.(6)
Investment Advisers of the Funds:
(1) Aetna Life Insurance and Annuity Company
(2) Fred Alger Management, Inc.
(3) Fidelity Management & Research Company
(4) Janus Capital Corporation
(5) Scudder, Stevens & Clark, Inc.
(6) Investors Research Corporation
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 of 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.
Mixed and Shared Funding
Shares of the Funds are available to insurance company separate accounts
which fund variable annuity contracts and variable life insurance policies,
including the Policy described in this Prospectus. Because Fund shares are
offered to separate accounts of both affiliated and unaffiliated insurance
companies, it is conceivable that, in the future, it may not be advantageous
for variable life insurance separate accounts and variable annuity separate
accounts to invest in these Funds simultaneously, since the interests of such
Policyowners or contractholders may differ. Although neither the Company nor
the Funds currently foresees any such disadvantages either to variable life
insurance or to variable annuity Policyholders, each Fund's Board of
Trustees/Directors has agreed to monitor events in order to identify any
material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken in response thereto. If such a conflict
were to occur, one of the separate accounts might withdraw its investment in
a Fund. This might force that Fund to sell portfolio securities at
disadvantageous prices.
Charges & Fees
Premium Load
A deduction, currently 3.5% of each premium payment (guaranteed to be no
higher than 6%), will be made to cover the premium load. This load represents
average applicable state premium taxes (ranging up to 4%) as well as
administrative expenses and federal income tax liabilities.
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, risk
class of the Insured, the Specified Amount of the Policy and in all states
except Massachusetts and Montana, sex of the Insured.
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Once a Policy is issued, Monthly Deductions, including Cost of Insurance
charges, will be charged as of the Issue Date, even if the Issue Date is
earlier than the date the application is signed (see "Premium Payments"). 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.
The Monthly Deduction also includes a monthly administrative expense charge
of $20 during the first Policy Year and $7 during subsequent Policy Years.
This charge is for items such as premium billing and collection, policy value
calculation, confirmations and periodic reports and will not exceed our
costs.
The Monthly Deduction is deducted proportionately from each funding option,
if more than one is used. This is accomplished by liquidating Accumulation
Units and withdrawing the value of the liquidated Accumulation Units from
each funding option in the same proportion as their respective values have to
your Fixed Account and Separate Account Values. The Monthly Deduction is made
as of the same day each month, beginning with the Issue Date.
Charges and Fees Associated with the Variable Funding Options
The Company deducts a daily charge from the assets of Variable Life Account B
for mortality and expense risks assumed by it in connection with the Policy.
This charge is currently equal to an annual rate of 0.70% of the 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 morality 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 Policy will be insufficient to meet actual claims.
The expense risk assumed is that other expenses incurred in issuing and
administering the Policies and operating the Separate Account will be greater
than the charges assessed for such expenses.
The Company also deducts a daily administrative charge equivalent on an
annual basis to 0.30% of the average daily net assets of Variable Life
Account B to compensate the Company for expenses associated with the
administration and maintenance of the Policy. These types of expenses are
described above in connection with the monthly administrative charge. The
daily administrative charge and the monthly administrative charge work
together to cover the Company's administrative expenses. In later years of
the Policy, the revenue collected from the daily asset-based charge grows
with the Total Account Value to cover increased expenses from Account-based
transactional expenses. The charge is guaranteed not to exceed 0.50% of the
average daily net assets of the Separate Account on an annual basis.
Other Fund Expenses may apply. Please refer to each Fund's prospectus.
Surrender Charge
If you surrender your Policy (in whole or in part) a surrender charge may
apply, as described below.
This charge is imposed in part as a deferred sales charge and in part to
enable the Company to recover certain first year administrative costs. The
maximum portion of the Surrender Charge applied to reimburse the Company for
sales and promotional expense is 30% of the first year's Basic Premium. (Any
surrenders may result in tax implications, see "Tax Matters.")
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The initial Surrender Charge, as specified in your Policy, is based on the
Specified Amount. It also depends on the Insured's age, risk class and in
most states, sex of the Insured (except for group arrangements described
under "Special Plans"). Once determined, the Surrender Charge will remain the
same for five years following the Issue Date. Thereafter, it declines monthly
so that beginning sixteen years after the Issue Date (assuming no increases
in the Specified Amount) the Surrender Charge will be zero.
If you increase the Specified Amount, a new Surrender Charge will be
applicable, in addition to the then existing Surrender Charge. This charge
will be determined based on the Insured's Attained Age, risk class, and in
most states, sex of the Insured. 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 by the beginning of the sixteenth year.
If you decrease the Specified Amount while the Surrender Charge applies, the
Surrender Charge will remain the same.
Based on its actuarial determination, the Company does not anticipate that
the Surrender Charge will cover all sales and administrative expenses which
the Company will incur in connection with the Policy. Any such shortfall,
including but not limited to payment of sales and distribution expenses,
would be charged to and paid by the Company.
Surrender Charges on Full and Partial Surrenders
Full Surrender: All applicable Surrender Charges are imposed.
Partial Surrender: A proportional percentage of all Surrender Charges is
imposed. The proportional percentage is the amount of the net partial
surrender divided by the sum of the Fixed Account Value and the Separate
Account Value less full Surrender Charges. When a partial surrender is made,
any applicable remaining Surrender Charges will be reduced in the same
proportion. A transaction charge of $25 or 2% of the amount of the net
surrender payment, whichever is less, will be made against the Total Account
Value. (See "Partial Surrenders.")
Note: The surrender charge will vary between 41% and 100% of one year's basic
annual premium, depending on the Insured's age, risk class and in most
states, sex of the Insured.
Policy Choices
When you buy a Policy, you make four important choices:
1) Which one of the two Death Benefit Options you would like;
2) Whether you want the Guaranteed Death Benefit Provision, and to what age;
3) The amount of premium you intend to pay; and
4) The way your premiums will be allocated to the Funds and/or the Fixed
Account.
Each of these choices is described in detail below.
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Death Benefit
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.
Under Option 1, the Death Benefit will be the greater of the Specified Amount
(a minimum of $100,000 on the date of this Prospectus), or the applicable
percentage of the Total Account Value. The percentage is 250% through age 40
and decreases yearly to 100% at age 100. Option 1 generally provides a level
Death Benefit.
Under Option 2, the Death Benefit will be the greater of the Specified Amount
(a minimum of $100,000 on the date of this Prospectus), plus the Total
Account Value, or the applicable percentage (described above) of the Total
Account Value. Option 2 provides a varying Death Benefit which increases or
decreases over time, depending on the amount of premium paid and the
investment performance of the underlying funding options you choose.
Under 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.
Guaranteed Death Benefit Provision
The Guaranteed Death Benefit Provision assures that, as long as the
Guaranteed Death Benefit Premium test, as described below, is met the Policy
will stay in force even if the cash value is insufficient to cover the
current Monthly Deductions.
The Guaranteed Death Benefit Provision must be selected on the application.
It may not be available to all risk classes and is only available in those
states where it has been approved. (Note: not available in New York.) The
Guaranteed Death Benefit Provision is available to age 80 or to age 100.
We will test annually to determine if the cumulative (or sum of all) premiums
paid to date are sufficient to support the Guaranteed Death Benefit
Provision. In order for the Guaranteed Death Benefit Provision to be in
effect, the cumulative premiums paid less partial surrenders must be greater
than or equal to the required monthly Guaranteed Death Benefit Premium times
the number of months elapsed since the Policy's Issue Date.
However, if these premiums are deficient, the Policy Owner will be notified
and given two months to pay the amount deficient. If the Guaranteed Death
Benefit Provision to age 100 had been in place, and the amount deficient is
not received within the two-month period: (1) the Guaranteed Death Benefit
Provision to age 80 will be substituted, but only if the cumulative premium
test is satisfied based on the Guaranteed Death Benefit Premium to age 80; or
(2) the Guaranteed Death Benefit Provision to age 100 will terminate. If the
Guaranteed Death Benefit Provision to age 80 had been in place and the amount
deficient is not received within the two-month period, the Guaranteed Death
Benefit Provision will terminate.
If a Guaranteed Death Benefit Provision is terminated it may not be
reinstated.
Increases, decreases, partial surrenders, and option changes may affect the
Guaranteed Death Benefit Premium. These events and loans may also affect the
Policy's ability to remain in force even if the cumulative annual Guaranteed
Death Benefit Provision test has been met.
Premium Payments
During the first five Policy Years, payment of the Basic Premium assures that
the Policy will remain in force, as long as there are no surrenders or loans
taken during that time. The Basic Premium is stated in the Policy. If Basic
Premiums are not paid, or there are surrenders or loans taken during the
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first five Policy Years, the Policy will lapse if the Cash Surrender Value is
less than the next Monthly Deduction.
Basic Premiums are current if premiums paid, minus loans and minus partial
surrenders, are greater than or equal to the Basic Premium (expressed as a
monthly amount) multiplied by the number of months the Policy has been in
force.
After the first five Policy Years, your Policy will not lapse as long as the
Policy's Cash Surrender Value is sufficient to cover the next Monthly
Deduction.
Planned Premiums are those premiums you choose to pay on a scheduled basis.
We will bill you annually, semiannually, or quarterly, or at any other
agreed-upon frequency. Pre-authorized automatic monthly check payments may
also be arranged.
Additional Premiums are any premiums you pay in addition to Planned Premiums.
Payment of 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. Not paying your
Planned Premiums can, however, cause the Guaranteed Death Benefit Provision
to terminate. (See "Guaranteed Death Benefit Provision.")
You may increase your Planned Premium at any time by submitting a written
notice to us or by paying Additional Premiums, except that:
(bullet) We may require evidence of insurability if the Additional Premium or
the New Planned Premium during the current Policy Year 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.
(bullet) In no event may the total of all premiums paid exceed the then-current
maximum premium limitations established by federal law for a Policy to
qualify as life insurance. (See "Tax Matters--Modified Endowment
Contracts.")
(bullet) If, at any time, a premium is paid which would result in total premiums
exceeding such maximum premium limitation, we will only accept that
portion of the premium which will make total premiums equal the
maximum. Any part of the premium in excess of that amount will be
returned or applied as otherwise agreed and no further premiums will be
accepted until allowed by the then-current maximum premium limitations
prescribed by law.
(bullet) If you make a sufficient premium payment when you apply for a Policy,
and have answered favorably certain questions relating to the Insured's
health, a "temporary insurance agreement" in the amount applied for
(subject to stated maximum) will be provided.
(bullet) After the first premium payment, all premiums must be sent directly to
our Home Office and will be deemed received when actually received at
the Home Office. Your premium payments will be allocated as you have
directed, as of the next Valuation Period after each payment is
received in the Home Office.
(bullet) You may reallocate your future premium payments at any time free of
charge. Any reallocation will apply to premium payments made after you
have received written verification from us.
Under limited circumstances, we may backdate a Policy, upon request, by
assigning an Issue Date earlier than the date the application is signed but
no earlier than six months prior to state approval of the Policy.
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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 invested in the Separate Account. Backdating of your
Policy will not affect the date on which your premium payments are credited
to the Separate Account and you are credited with Accumulation Units. You
cannot be credited with Accumulation Units until your net premium is actually
deposited in the Separate Account. (See "Policy Values--Total Account
Value.")
Transfers and Allocations to Funding Options
At purchase, you must decide how to allocate your Net Premiums among the
Funds and/or the Fixed Account. Net Premiums must be allocated in whole
percentages.
Before the Maturity Date, you may transfer Policy values from one Fund to
another at any time, or from Variable Life Account B to the Fixed Account.
And, within the 45 days after each Policy anniversary, you may also transfer
a portion of the Fixed Account Value to one or more Funds before the Maturity
Date. This type of transfer is allowed only once in the 45-day period after
the Policy anniversary and will be effective as of the next Valuation Period
after your request is received in good order at the Company's Home Office.
The amount of such transfer cannot exceed the greater of (a) 25% of the Fixed
Account Value, or (b) $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.
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. (See "Accumulation Unit Value.") You should carefully consider
current market conditions and each Fund's investment policies and related
risks before allocating money to the Funds. We reserve the right to limit the
total number of Funds you may elect to 15 over the lifetime of the Policy.
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 Fund Account Values 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 before electing to participate in the
Dollar Cost Averaging program.
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Policy Values
Total Account Value
Once your Policy has been issued, each Net Premium allocated to a variable
funding option of the Separate Account is credited in the form of
Accumulation Units of the funding option based on that funding option's
Accumulation Unit value (see below). Each Net Premium will be credited to
your Policy at the Accumulation Unit value(s) determined for the Valuation
Period in which it is received and accepted by us at our Home Office
following the Issue Date of the Policy. The number of Accumulation Units
credited is determined by dividing the Net Premium by the value of an
Accumulation Unit next computed after we receive the premium. Shares in the
Funds are purchased by the Separate Account at the net asset value next
determined by the Fund following receipt of the Net Purchase Premium 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 Total Account Value of your Policy is determined by: (a) multiplying the
total number of Accumulation Units credited to the Policy for each applicable
Fund by its appropriate current Accumulation Unit value; (b) if you have
elected a combination of Funds, totaling the resulting values; and (c) adding
any values attributable to the Fixed Account and any values attributable to
the Loan Account Value.
The number of Accumulation Units credited to a Policy will not be changed by
any subsequent change in the value of an Accumulation Unit. The number is
increased by subsequent contributions to or transfers into that funding
option, and decreased by charges and withdrawals from that funding option.
The Fixed Account Value reflects amounts allocated to the General Account
through payment of premiums or transfers from the Separate Account. The Fixed
Account Value is guaranteed; however, there is no assurance that the Separate
Account Value of the Policy will equal or exceed the Net 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,
the Separate Account Value, the Fixed Account Value, and the Total Account
Value.
Accumulation Unit Value
The value of an Accumulation Unit for any Valuation Period is determined by
multiplying the value of an Accumulation Unit for the immediately preceding
Valuation Period by the net investment factor for the current period for the
appropriate Fund. The net investment factor equals the net investment rate
plus 1.0000000. The net investment rate is determined separately for each
Fund as follows.
The net investment rate equals (a) the net assets of the Fund held in
Variable Life Account B at the end of a Valuation Period, minus (b) the net
assets of the Fund held in Variable Life Account B at the beginning of that
Valuation Period, plus or minus (c) taxes or provisions for taxes, if any,
attributable to the operation of Variable Life Account B, divided by (d) the
value of the Accumulation Units held by Variable Life Account B at the
beginning of the Valuation Period, minus (e) a daily charge for mortality and
expense risk, and administrative expenses. (See "Charges and Fees Associated
with the Variable Funding Options.")
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Maturity Value
The Maturity Value of the Policy is the Total Account Value on the Maturity
Date, less the Loan Account Value and any unpaid accrued interest.
Cash Surrender Value
The Cash Surrender Value of your Policy is the amount you can receive in cash
by surrendering the Policy. All or part of the Cash Surrender Value may be
applied to one or more of the Settlement Options. (See "Surrender Charge.")
Policy Rights
Partial Surrenders
A partial surrender may be made at any time after the first Policy Year.
The amount of a partial surrender may not exceed the Cash Surrender Value on
the date the request is received and may not be less than $500.
Partial surrenders may only be made prior to election of a Settlement Option.
For an Option 1 Policy (see "Death Benefit"), a partial surrender will reduce
the Total Account Value, Death Benefit, and Specified Amount. The Specified
Amount and Total Account Value will be reduced by equal amounts and will
reduce any past increases in the reverse order in which they occurred.
For an Option 2 Policy (see "Death Benefit"), a partial surrender will reduce
the Total Account Value and the Death Benefit, but it will not reduce the
Specified Amount.
Payment of any amount due from the Separate Account Values on a full or
partial surrender will be made within seven calendar days after we receive
your written request at our Home Office in form satisfactory to us. Payment
may be postponed when the New York Stock Exchange has been closed and for
such other periods as the SEC may require. Payment from the Fixed Account
Values may be deferred up to 6 months, except when used to pay premiums to
the Company.
The Specified Amount remaining in force after a partial surrender may not be
less than $100,000. Any request for a partial surrender that would reduce the
Specified Amount below this amount will not be granted. In addition, if,
following the partial surrender and the corresponding decrease in the
Specified Amount, the Policy would not comply with the maximum premium
limitations required by federal tax law, the decrease may be limited to the
extent necessary to meet the federal tax law requirements.
If, at the time of a partial surrender, your Total Account Value is
attributable to more than one funding option, the Surrender Charge,
transaction charge and the amount paid to you upon the surrender will be
taken proportionately from the Accumulation Unit values in each funding
option.
No-Lapse Coverage Provision
This Policy will not terminate during the five-year period after its Issue
Date or the Issue Date of any increase if, on each Monthly Deduction Day
within that period, the sum of premiums paid equals or exceeds: 1) the sum of
the Basic Premiums for each Policy month from the Issue Date, including the
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current month; plus 2) any partial surrenders; plus 3) any increase in Loan
Account Value since the Policy's Issue Date or the Issue Date of any
increase.
If, on each Monthly Deduction Day within the five-year period, the sum of
premiums paid is less than the sum of the items 1, 2, and 3 above, and the
Cash Surrender Value is insufficient to cover the current Monthly Deduction,
the Grace Period provision will apply. (See "Grace Period.")
After the five-year period expires, and depending on the investment
performance of the Funds, the Total Account Value may be insufficient to keep
this Policy in force, and payment of an additional premium may be necessary,
unless the Guaranteed Death Benefit Provision has been elected.
Reinstatement of a Lapsed Policy
A lapse occurs if your Monthly Deduction is greater than the Cash Surrender
Value and no payment to cover the deduction is made within the 61 days of our
notifying you. This may happen after the first five Policy Years, or during
the first five Policy Years if your Basic Premiums are not current.
You can apply for reinstatement within five years after the date of
termination and before the Maturity Date. To reinstate your Policy we will
require satisfactory evidence of insurability and an amount sufficient to pay
for the current Monthly Deduction plus two additional Monthly Deductions.
If the Policy is reinstated within five years of this Policy's Issue Date or
while the No-Lapse Coverage Provision (see "No-Lapse Coverage Provision")
would be in effect if this Policy had not lapsed, all values including the
Loan Account Value will be reinstated to the point they were on the date of
lapse. However, the Guaranteed Death Benefit Provision will not be
reinstated.
If the Policy is reinstated after the No-Lapse Coverage Provision (see
"No-Lapse Coverage Provision") has expired, this Policy will be reinstated on
the Monthly Deduction Day following our approval. This Policy's Total Account
Value at reinstatement will be the Net Premium paid less the Monthly
Deduction due that day. Any Loan Account Value will not be reinstated, and
the Guaranteed Death Benefit will not be reinstated.
If the Policy's Cash Surrender Value less any Loan Account Value plus accrued
interest is not sufficient to cover the full Surrender Charge at the time of
lapse, the remaining portion of the Surrender Charge will also be reinstated
at the time of Policy reinstatement.
Policy Loans: Preferred and Nonpreferred
Unless otherwise required by state law, the maximum loan amount is 90% of the
Cash Surrender Value at the time of a loan.
Loans taken during the first ten Policy Years are considered nonpreferred
loans. Beginning in the eleventh Policy Year, up to 10% of the maximum loan
amount available at the beginning of a Policy Year can be taken as a
preferred loan during that Policy Year. Amounts borrowed that are in excess
of the maximum loan amount available for a preferred loan will be considered
a nonpreferred loan. An amount equal to what you receive for a loan, together
with any interest added to the loan for due and unpaid interest, as described
below, will be added to the Loan Account Value.
If you are using more than one underlying funding option, the amount of the
loan will be withdrawn in proportion to the value of each funding option.
Interest on loans will accrue at an annual rate which will be the greater of:
1) The monthly average (i.e., the Composite Yield on Corporate Bonds as
published by Moody's Investors Service, Inc.) for the calendar month which
ends two months before the month in which the Policy Anniversary occurs, or
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2) 5.5%.
Increases or decreases to the current interest rate will occur only when the
new Policy Year's annual interest rate is greater or lower than the prior
Policy Year's annual interest rate by at least 0.5%.
We will notify you of the current interest rate charged for a loan at the
time a loan is made. If your Policy has a loan outstanding, we will notify
you of any change in the interest rate before the new rate becomes effective.
Interest is payable once a year on each anniversary of the loan, or earlier
upon surrender, payment of proceeds, or maturity of a Policy. Any interest
not paid when due becomes part of the loan and bears interest.
An amount equal to what you receive for a loan, together with any accrued but
not paid interest, will be added to the Loan Account Value. We will credit
interest on the Loan Account Value. The Loan Account Value for nonpreferred
loans will be credited interest, during any Policy Year, at an annual rate
that is the interest rate charged on the loan minus 2%. However, in no case
will the credited interest rate be less than 4.5% annually.
The Loan Account Value on preferred loans will be credited interest at a rate
equal to the interest rate charged. In no case will the credited interest
rate be less than 5.5% annually.
If a policy loan is requested, the amount to be borrowed will be withdrawn by
the Company from the funding options and Fixed Account Value in proportion to
the value of the Policy attributable to each funding option and the Fixed
Account. Repayments on the loan will be allocated among the funding options
in the same proportion the loan was taken from the funding options. The Loan
Account Value will be reduced by the amount of any loan repayment.
Policy Changes
You may make changes to your Policy, as described below, by submitting a
written request to our Home Office in form satisfactory to us.
Increases: Beginning in the second Policy Year, you may increase the
Specified Amount of your Policy subject to the following conditions:
(bullet) Satisfactory evidence of insurability may be required.
(bullet) 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 the
Total Account Value and (b) the amount of the increase, divided by
1000, times the applicable Cost of Insurance Rate.
(bullet) An increase in the Specified Amount will increase the Surrender Charge.
(bullet) The Basic Monthly Premium will be increased when the Specified Amount
is increased. The Policy will not terminate within five years of the
Issue Date of the increase if the conditions of this provision and the
No-Lapse Coverage Provision are met.
(bullet) Increases through the fifth year are limited to four times the initial
Specified Amount.
(bullet) Increases in the Specified Amount will increase the Guaranteed Death
Benefit Provision amount and will affect the Guaranteed Death Benefit
Premium.
Decreases: Beginning in the sixth Policy Year decreases will be allowed,
however:
(bullet) No decrease may reduce the Specified Amount to less than the minimum
for this type of policy. (See Death Benefit.)
(bullet) Any decrease will cause a decrease in the Guaranteed Death Benefit
Provision.
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Death Benefit Option Change:
(bullet) A Death Benefit Option change will be allowed, subject to the following
conditions:
(bullet) The change will take effect on the Monthly Deduction Day on or next
following the date on which the Company receives your written request.
(bullet) There will be no change in the Surrender Charge, and evidence of
insurability may be required.
(bullet) We will not allow a change in the Death Benefit Option if the Specified
Amount will be reduced below the minimum Specified Amount.
(bullet) Changes from Option 1 to Option 2 are allowed beginning in the sixth
Policy Year. The new Specified Amount will equal the Specified Amount
less the Total Account Value at the time of the change.*
(bullet) Changes from Option 2 to Option 1 are allowed after the first Policy
Year. The new Specified Amount will equal the Specified Amount plus the
Total Account Value as of the time of the change.*
*Changes in the Death Benefit Option also affect the Guaranteed Death Benefit
Provision amount and the Guaranteed Death Benefit Premium.
Right to Examine the Policy
The Policy has a free-look period during which you may examine the Policy. If
for any reason you are dissatisfied, it may be returned to our Home Office
for a refund. It must be returned within ten days (state variations may
apply) 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. If you return (cancel) the Policy, we will pay a
refund of (1) the difference between payments made and amounts allocated to
the Separate Account, plus (2) the value of the amount allocated to the
Separate Account as of the date the returned Policy is received by us, plus
(3) any fees imposed on the amounts allocated to the Separate Account. 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.
Death Benefit
The Death Benefit under the Policy will be paid in a lump sum within seven
days after we receive due proof of the Insured's death (a certified copy of
the death certificate), unless you or the beneficiary have elected that it be
paid under one or more of the Settlement Options. (See "Settlement Options.")
Payment of the Death Benefit may be delayed if the Policy is being contested.
While the Insured is living, you may elect a Settlement Option for the
beneficiary and deem it irrevocable. You may revoke or change a prior
election. The beneficiary may make or change an election within 90 days of
the death of the Insured, unless you have made an irrevocable election. A
beneficiary who has elected Settlement Option 1 may elect another option
within two years after the Insured's death.
All or a part of the Death Benefit may be applied under one or more of the
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 due will be paid as
elected.
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Policy Settlement
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 may be made to elect, change, or revoke a Settlement Option
before payments begin under any Settlement Option. This request must be in
form satisfactory to us, and will take effect upon its filing at our Home
Office. If no Settlement Option has been elected by the Policy Owner when the
Death Benefit becomes payable to the beneficiary, that beneficiary may make
the election.
The first variable Settlement Option payment will be as of the tenth
Valuation Period following our receipt of the properly completed election
form.
Settlement Options
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%. 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 held in
Variable Annuity Account B will be used to make payments on a variable basis.
If payments are to be funded on a variable basis (by the Funds), the first
and subsequent payments will vary depending on the Assumed Net Investment
Rate. This rate will be 3% per year, unless a 5% annual rate is chosen. The
Assumed Net Investment Rate is chosen by the payee.
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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% 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% 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 Annuitant's beneficiary, or upon election by that beneficiary, any
remaining guaranteed payments will continue to that beneficiary. If no
beneficiary exists, the present value of any remaining guaranteed payments
will be paid in one sum to the 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 the Annuitant's beneficiary dies (and there is no contingent beneficiary),
while receiving payments, the current value of the account (Option 1), or the
present value of any remaining guaranteed payments will be paid in one sum to
the estate of that beneficiary. The interest rate used to determine the first
payment will be used to calculate the present value.
Calculation of Settlement Payments
When you have chosen payment on a variable basis, the first payment is
calculated as follows:
a) the portion of the proceeds applied to make payments on the variable
basis; divided by
b) 1,000; times
c) the payment rate per $1000 of proceeds for the option chosen as shown in
the policy.
Such amount, or portion, of the variable payment will be divided by the
Settlement Option Unit value (described below), as of the tenth Valuation
Period before the due date of the first payment, to determine the number of
Settlement Option Units. Each future payment is equal to the number of
Settlement Option Units, times the Settlement Option Unit value as of the
tenth Valuation Period prior to the due date of the payment.
16
<PAGE>
For any Valuation Period, the Fund(s) 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 0.9999058; for 5% per year, it is 0.9998663.
The Net Return Factor equals:
1) The net assets of the applicable fund held in Variable Annuity Account B
at the end of a Valuation Period; minus
2) The net assets of the applicable fund held in Variable Annuity Account B
at the beginning of that Valuation Period; plus or minus
3) Taxes or provision for taxes, if any, attributable to the operations of
Variable Annuity Account B; divided by
4) The value of Settlement Option Units and other accumulation units held in
Variable Annuity Account B at the beginning of the Valuation Period; minus
5) A daily charge at an annual rate of 1.25% for annuity mortality and
expense risk and the then-current daily administrative expense charge.
The number of Settlement Option Units remains fixed. However, the dollar
value of the Settlement Option Unit values and the 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 expense charges.
Special Plans
Where allowed by law, the Company may reduce or eliminate certain charges for
Policies issued under special circumstances that result in lower expenses to
the Company (i.e., group arrangements with a sponsoring employer). The amount
of any reduction, the charges to be reduced, and the criteria for applying a
reduction will reflect the reduced sales effort, costs and differing
mortality experience appropriate to the circumstances giving rise to the
reduction. The charges will be reduced in accordance with the Company's
practice in effect when the Policies are issued. Reductions will not be
unfairly discriminatory against any person, including the purchasers to whom
the reduction applies and all other owners of the Policies.
The Company offers Policies on a unisex and simplified underwriting basis to
certain group or sponsored arrangements. A "group arrangement" includes a
program under which an employer purchases individual Policies covering a
group of individuals on a group basis. A "sponsored arrangement" includes a
program under which an employer permits group solicitation of its employees
for the purchase of the Policies on an individual basis. Under both
arrangements, the employer pays all or part of the premium. The benefits and
values of these Policies do not vary based on the sex of the insured in order
to be used by employers in employee benefit plans where sex discrimination is
prohibited by federal or state laws. The Company recommends that any employer
proposing to offer the Policies to employees under either arrangement consult
its attorney before doing so.
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<PAGE>
Pension Plans
AetnaVest Plus is not designed to be used in a pension or profit-sharing plan
as an investment vehicle or to provide life insurance protection. Therefore,
an AetnaVest Plus Policy will not be issued to such a plan. Transfer of
ownership of an AetnaVest Plus Policy to a tax-qualified pension or
profit-sharing plan after the Policy has been issued is not recommended
because the Policy terms may be in conflict with federal law governing these
plans.
The Company
Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company organized under the insurance laws of the State of
Connecticut in 1976. Through a merger, it succeeded to the business of Aetna
Variable Annuity Life Insurance Company (formerly Participating Annuity Life
Insurance Company 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.
Directors & Officers
<TABLE>
<CAPTION>
Name and Address* Position with Company Principal Occupation During Past 5 Years
----------------------- ----------------------------- -----------------------------------------------
<S> <C> <C>
Daniel P. Kearney Director, President and President (since December 1993), Aetna Life
Chairman, Executive Committee Insurance and Annuity Company; Executive Vice
(Principal Executive Officer) President (since December 1993), and Group
Executive, Financial Division (February
1991--December 1993), Aetna Life and Casualty
Company.
Christopher J. Burns Director and Senior Vice Senior Vice President, Sales & Service (since
President February 1996), and Senior Vice President, Life
(March 1991--February 1996), Aetna Life
Insurance and Annuity Company.
18
<PAGE>
Name and Address* Position with Company Principal Occupation During Past 5 Years
----------------------- ----------------------------- -----------------------------------------------
Laura R. Estes Director and Senior Vice Senior Vice President, Manage/Design Products
President and Services (since February 1996), and Senior
Vice 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 Financial Chief Financial Officer (since February 1996),
Officer Aetna Life Insurance and Annuity Company; Vice
President, Portfolio Management/Investment
Group (August 1992--February 1996), Aetna Life
and Casualty Company; Treasurer (February
1990--July 1991), Aeltus Investment Management,
Inc.
Gail P. Johnson Director and Vice President Vice President, Service and Retain Customers
(since February 1996); Vice President, Defined
Benefit Services (September 1994--February
1996); Vice President, Plan Services, Pensions
and Financial Services (December 1992--
September 1994); Managing Director, Business
Strategy (July 1991--December 1992); Assistant
Vice President, Portfolio Management, Financial
Division (June 1987--July 1991); -- Aetna Life
Insurance and Annuity Company.
John Y. Kim Director and Senior Vice President (since December 1995), Aeltus
President Investment Management, Inc.; Chief Investment
Officer (since May 1994), Aetna Life and
Casualty Company; Managing Director (September
1993-- April 1994), Mitchell Hutchins
Institutional Investors (New York, New York);
Vice President and Senior Portfolio Manager
(October 1991--August 1993), and Vice
President, Investor Relations (1990-- 1992),
Aetna Life and Casualty Company.
19
<PAGE>
Name and Address* Position with Company Principal Occupation During Past 5 Years
----------------------- ----------------------------- -----------------------------------------------
Shaun P. Mathews Director and Vice President Vice President, Products Group (since February
1996); Senior Vice President, Strategic Markets
and Products (February 1993--February 1996);
and Senior Vice President, Mutual Funds (March
1991-- February 1993) -- Aetna Life Insurance
and Annuity Company.
Glen Salow Director and Vice President Vice President, Information Technology (since
February 1996), Vice President, Information
Technology, Investments and Financial Services
(February 1995-- February 1996); Vice
President, Investment Systems (1992--1995), AIT
-- Aetna Life Insurance and Annuity Company;
Senior Vice President (December 1986--August
1992), Lehman Brothers.
Creed R. Terry Director and Vice President Vice President, Select and Manage Markets
(since February 1996), Market Strategist
(August 1995--February 1996) -- Aetna Life
Insurance and Annuity Company; President
(1991--1995), Chemical Technology Corporation
(a subsidiary of Chemical Bank).
Zoe Baird Senior Vice President and Senior Vice President and General Counsel
General Counsel (since 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.
Eugene M. Trovato Vice President and Treasurer, Vice President and Treasurer, Corporate
Corporate Controller Controller (since February 1996), Vice
President and Controller (February 1995--
February 1996), Aetna Life Insurance and
Annuity Company; Vice President, Financial
Reporting (December 1991--February 1995),
Assistant Vice President, Financial Reporting
(June 1989--December 1991), Aetna Life and
Casualty Company.
20
<PAGE>
Name and Address* Position with Company Principal Occupation During Past 5 Years
----------------------- ----------------------------- -----------------------------------------------
Diane B. Horn Vice President and Chief Vice President and Chief Compliance Officer
Compliance Officer (since February 1996), and Senior Compliance
Officer (August 1993-- February 1996), Aetna
Life Insurance and Annuity Company; Director of
Compliance (May 1991--July 1993), Kemper Life
Insurance Company.
</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.
Additional Information
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 the 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 the 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 each Separate Account. The votes will be
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.
The number of votes each Policy Owner is entitled to direct with respect to a
Fund will be determined by dividing the portion of Total Account Value
attributable to a Fund, if any, by the net asset value of one share in the
Fund. During the settlement option period, the number of votes is determined
by dividing the Valuation Reserve attributable in the Fund, if any, by the
net asset value of one share of the Fund. Fractional votes will be counted.
Where the value of the Total Account Value or the Valuation Reserve relates
to more than one Fund, the calculation of votes will be performed separately
for each Fund.
21
<PAGE>
The number of shares which a person has a right to vote will be determined as
of a date to be chosen by us, but not more than 90 days before the meeting of
the Fund. Voting instructions will be solicited by written communication at
least 14 days before such meeting.
Fund shares for which no timely instructions are received, and Fund shares
which are not otherwise attributable to 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 Variable Life Account B.
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 the Fund if we reasonably disapprove of such changes.
A change would be disapproved only if the proposed change is contrary to
state law or prohibited by state regulatory authorities or we determined that
the change would have an adverse effect on the Separate Accounts in that the
proposed investment policy for a Fund may result in overly speculative or
unsound investments. In the event we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in
the next annual report to Policy Owners.
State Regulation
We are subject to regulation and supervision by the Insurance Department of
the state of Connecticut, which periodically examines our affairs. We are
also subject to the insurance laws and regulations of all jurisdictions where
we are authorized to do business. The Policies have been approved by the
Insurance Department of the state of Connecticut and in other jurisdictions.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various
jurisdictions in which we do business, for the purposes of determining
solvency and compliance with local insurance laws and regulations.
Legal Matters
The Company knows of no material legal proceedings pending to which the
Separate Account is a party or which would materially affect the Separate
Account.
The legal validity of the securities described in the prospectus has been
passed on by Susan E. Bryant, Counsel.
The Registration Statement
A Registration Statement under the Securities Act of 1933 has been filed with
the Securities and Exchange Commission 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.
The Policies are offered for sale in all jurisdictions where we are
authorized to do business except Guam, Puerto Rico, and the Virgin Islands.
22
<PAGE>
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. ("NASD"). 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 Guaranteed
Death Benefit Premium to age 80, or, in the event of an increase in the
Specified Amount, 55% of the Guaranteed Death Benefit Premium to age 80,
attributable to the increase. In particular circumstances, we may also pay
certain of these professionals for their administrative expenses.
The Company may also contract with independent third party broker-dealers who
will act as wholesalers by assisting the Company in finding broker-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, City Place II, Hartford Connecticut 06103-4103, are
the independent auditors for the Separate Account and for the Company. The
services provided to the Separate Account include primarily the examination
of the Separate Account's financial statements and 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 Policy. This discussion is based on the Company's
understanding of federal income tax laws as they now exist and are currently
interpreted by the Internal Revenue Service ("IRS"). These laws are complex,
and tax results may vary among individuals. A person or persons contemplating
the purchase of or the exercise of elections under the Policy described in
this Prospectus should seek competent tax advice.
Federal Tax Status of the Company
The Company is taxed as a life insurance company in accordance with the
Internal Revenue Code of 1986, as amended ("Code"). For federal income tax
purposes, the operations of the Separate Account form a part of the Company's
total operations and are not taxed separately, although operations of the
Separate Account are treated separately for accounting and financial
statement purposes.
23
<PAGE>
Both investment income and realized capital gains of the Separate Account
(i.e., income, capital gains and dividends distributed to the Separate
Account by the Funds) are reinvested without tax since the Code does not
impose a tax on the Separate Account for these amounts. The Company reserves
the right, however, to make a deduction for such taxes should they be imposed
with respect to such items in the future.
Life Insurance Qualification
Section 7702 of the Code includes a definition of life insurance for tax
purposes. The Secretary of the Treasury has been granted authority to
prescribe regulations to carry out the purposes of this section, and proposed
regulations governing mortality charges were issued in 1991. The Company
believes that the Policy meets the statutory definition of life insurance. As
such, and assuming the diversification standards of Section 817(h) (discussed
below) are satisfied, then except in limited circumstances (a) death benefits
paid under the Policy should generally be excluded from the gross income of
the beneficiary for federal income tax purposes under Section 101(a)(1) of
the Code, and (b) a Policyowner should not generally be taxed on the cash
value under a Policy, including increments thereof, prior to actual receipt.
The principal exceptions to these rules are corporations that are subject to
the alternative minimum tax, and thus may be subject to tax on increments in
the Policy's Total Account Value, and Policyowners who acquire a Policy in a
"transfer for value" and thus can become subject to tax on the portion of the
Death Benefit which exceeds the total of their cost of acquisition and
subsequent premium payments.
The Company intends to comply with any future final regulations issued under
Sections 7702 and 817(h) of the Code, and therefore reserves the right to
make such changes as it deems necessary to ensure such compliance. Any such
changes will apply uniformly to affected Policyowners and will be made only
after advance written notice.
General Rules
Upon the surrender or cancellation of any Policy, whether or not it is a
Modified Endowment Contract, the Policyowner will be taxed on the Surrender
Value only to the extent that it exceeds the gross premiums paid less prior
untaxed withdrawals. The amount of any unpaid Policy Loans will, upon
surrender, be added to the Surrender Value and will be treated for this
purpose as if it had been received.
Assuming the Policy is not a Modified Endowment Contract, the proceeds of any
Partial Surrenders are generally not taxable unless the total amount received
due to such surrenders exceeds total premiums paid less prior untaxed Partial
Surrender amounts. However, Partial Surrenders made within the first 15
Policy Years may be taxable in certain limited instances where the Surrender
Value plus any unpaid Policy debt exceeds the total premiums paid less the
untaxed portion of any prior Partial Surrenders. This result may occur even
if the total amount of any Partial Surrenders does not exceed total premiums
paid to that date.
Loans received under the Policy will ordinarily be considered indebtedness of
the Policy Owner, 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.
24
<PAGE>
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 Policy Owner 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 Policy Owner of a Modified Endowment Contract who is not an
individual. The penalty tax will also apply where taxable Policy Loans are
received by an individual who has not reached the age of 59-1/2. Taxable
policy distributions made to an individual who has not reached the age of
59-1/2 will also be subject to the penalty tax unless those distributions are
attributable to the individual becoming disabled, or are part of a series of
equal periodic payments made not less frequently than annually for the life
or life expectancy of such individual (i.e., an annuity).
Diversification Standards
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate
accounts of insurance companies) underlying the Policy must be "adequately
diversified" in accordance with Treasury regulations in order for the Policy
to qualify as life insurance. The Treasury Department has issued regulations
prescribing the diversification requirements in connection with variable
contracts. The Separate Account, through the Funds, intends to comply with
these requirements.
Investor Control
In certain circumstances, owners of variable contracts may be considered the
owners for federal income tax purposes of the assets of the separate account
used to support their contracts. In those circumstances, income and gains
from separate account assets would be includable in the variable
contractowner's gross income. In several rulings published prior to the
enactment of Section 817(h), the IRS stated that a variable contractowner
will be considered the owner of separate account assets if the contractowner
possesses incidents of ownership in those assets, such as the ability to
exercise
25
<PAGE>
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 Policy Owners were not owners of
separate account assets. For example, a Policy Owner has additional
flexibility in allocating premium payments and account values. While the
Company does not believe that these differences would result in a Policy
Owner 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 Policy Owner
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 Policy Owner's deduction
for interest on loans taken against life insurance covering the lives of
officers, employees, or other financially interested in the Policy Owner'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 Policy Owner'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 Policy
Owner or beneficiary.
26
<PAGE>
Misc. Policy Provisions
The Policy
The Policy which you receive and the application you make when you purchase
the Policy are the whole contract. A copy of the application is attached to
the Policy when it is issued to you. An 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
or under an agreement where unisex rates are used, the Insured's sex is
inapplicable.)
Incontestability
We will not contest coverage under the Policy after the Policy has been in
force during the lifetime of the Insured for a period of two years from the
Policy Issue Date. Our right to contest coverage is not affected by the
Guaranteed Death Benefit Provision.
For coverage which takes effect on a later date (e.g., an increase in
coverage), we will not contest such coverage after it has been in force
during the lifetime of the Insured more than two years from its effective
date.
Suicide
In most states, if the Insured commits suicide within two years from the
Issue Date, the only benefit paid will be the sum of:
a) premiums paid less amounts allocated to the Separate Account; and
b) the Separate Account Value on the date of suicide, plus the portion of the
Monthly Deduction from the Separate Account Value, minus
c) the amount necessary to repay any loans in full and any interest earned on
the Loan Account Value transferred to the Separate Account Value, and any
surrenders from the Fixed Account.
If the Insured commits suicide within two years from the effective date of
any increase in coverage, we will pay as a benefit only the Monthly Deduction
for the increase, in lieu of the face amount of the increase.
All amounts described in (a) and (c) above will be calculated as of the date
of death.
Coverage Beyond Maturity
You may, by written request, in the 30 days before the Maturity Date of this
Policy, elect to continue coverage beyond the Maturity Date. At Age 100, the
Separate Account Value will be transferred to the Fixed Account. If coverage
beyond maturity is elected, we will continue to credit interest to the Total
27
<PAGE>
Account Value of this Policy. Monthly Deductions will be calculated with a
Cost of Insurance rate equal to zero (this provision is not available in New
York).
At this time, uncertainties exist regarding the tax treatment of the Policy
should it continue beyond the Maturity Date. You should therefore consult
with your tax advisor prior to making this election. (See "Tax Matters.")
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.
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company.
No dividends are payable.
28
<PAGE>
ILLUSTRATIONS OF DEATH BENEFIT, TOTAL
ACCOUNT VALUES AND CASH SURRENDER VALUES
The tables on the following pages illustrate how the Death Benefit, Total
Account Values, and Cash Surrender Values of a Policy change with the
investment experience of the Funds. The tables show how the Death Benefit,
Total Account Values, and Cash Surrender Values of a Policy issued to an
insured of a given age and a given premium would vary over time if the
investment return on the assets held in each Fund were a uniform, gross,
annual rate of 0%, 6%, and 12%, respectively.
Tables I through IV illustrate Policies issued to males, age 45, in the
preferred nonsmoker rate class and Policies issued on a unisex basis
according to the Special Plans section of this Prospectus for both males and
females, age 45, in the preferred nonsmoker rate class. Tables V through VIII
illustrate Policies issued on a unisex basis, age 45, in the preferred
nonsmoker rate class for contracts issued in states where unisex rates are
required. The Death Benefit, Total Account Values, and Cash Surrender Values
would be different from those shown if the gross annual investment rates of
return averaged 0%, 6%, and 12%, respectively, over a period of years, but
fluctuated above and below those averages for individual Policy Years.
The second column of each table shows the accumulated values of the premiums
paid at an assumed interest rate of 5%. The third through fifth columns
illustrate the Death Benefitof a Policy over the designated period. The sixth
through eighth columns illustrate the Total Account Values, while the ninth
through the eleventh columns illustrate the Cash Surrender Values of each
Policy over the designated period. Tables I, II, V and VI assume that the
maximum Cost of Insurance allowable under the Policy are charged in all
Policy Years. These tables also assume that the maximum allowable mortality
and expense risk charge of 0.90% on an annual basis, the maximum allowable
administrative expense charge of 0.50% on an annual basis, and the maximum
allowable premium load of 6% are assessed in each Policy Year. Tables III,
IV, VII and VIII 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 0.70% on an annual basis, the current
administrative expense charge of 0.30% on an annual basis, and the current
premium load of 3.5% are assessed.
The amounts shown for Death Benefit, 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 investment advisory fees and other Fund expenses vary by Fund from 0.31%
to 1.37%. 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 Contrafund Portfolio; 3% in Fidelity's Equity- Income
Portfolio; 3% in Janus Aspen Growth Portfolio; 5% in Janus Aspen Aggressive
Growth Portfolio; 3% in Janus Aspen Worldwide Growth Portfolio; 1% in Janus
Aspen Balanced Portfolio; 1% in Janus Aspen Short-Term Bond Portfolio; 10% in
the Scudder International Portfolio; and 10% in TCI Growth.
The hypothetical values shown in the tables do not reflect any Separate
Account charges for federal income taxes, since we are not currently making
such charges. However, such charges may be made in the future, and in that
event, the gross annual investment rate of return would have to exceed 0%,
6%, or 12% by an amount sufficient to cover the tax charges in order to
produce the Death Benefit, Total Account Values, and Cash Surrender Values
illustrated.
29
<PAGE>
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, and no partial surrenders have been made.
Upon request, we will provide an illustration based upon the proposed
Insured's age, sex of Insured (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%.
30
<PAGE>
AetnaVest Plus Policy
Table I
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 45-UNISEX FOR SPECIAL PLAN POLICIES
$6,720.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
Premiums Death Benefit
Accumulated Gross Annual Investment
at Return of
5% Interest --------------------------------
Policy Year Per Year Gross 0% Gross 6% Gross 12%
------------ ------------------- -------- -------- ----------
1 6720 500000 500000 500000
2 13776 500000 500000 500000
3 21185 500000 500000 500000
4 28964 500000 500000 500000
5 37132 500000 500000 500000
6 45709 500000 500000 500000
7 54714 500000 500000 500000
8 64170 500000 500000 500000
9 74099 500000 500000 500000
10 84523 500000 500000 500000
15 145008 500000 500000 500000
20 222203 500000 500000 500000
25 320726 500000 500000 500000
30 446469 500000 500000 674775
20 (Age 65) 222203 500000 500000 500000
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------- --------------------------------
Policy Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
---------- -------- -------- --------- -------- -------- ----------
1 4333 4652 4972 661 980 1300
2 8616 9529 10482 4944 5857 6810
3 12687 14474 16417 9015 10802 12745
4 16544 19484 22813 12872 15812 19141
5 20173 24546 29703 16501 20874 26031
6 23572 29655 37135 20237 26320 33800
7 26712 34784 45136 23744 31816 42168
8 29569 39907 53742 26968 37306 51141
9 32122 45000 62999 29888 42766 60765
10 34337 50026 72945 32470 48159 71078
15 39456 73139 135414 39425 73108 135383
20 30711 88529 228407 30711 88529 228407
25 0 84468 376269 0 84468 376269
30 0 35221 630631 0 35221 630631
20 (Age 65) 30711 88529 228407 30711 88529 228407
(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 Surrender Value for a Policy would
be different from those shown if the actual investment rates of return
averaged 0%, 6%, and 12% over a period of years, but fluctuated above or
below those averages for individual Policy Years. No representations can be
made that these rates of return will definitely be achieved for any one year
or sustained over a period of time.
31
<PAGE>
AetnaVest Plus Policy
Table II
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 45-UNISEX FOR SPECIAL PLAN POLICIES
$4,080.00 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
Premiums Death Benefit
Accumulated Gross Annual Investment
at Return of
5% Interest --------------------------------
Policy Year Per Year Gross 0% Gross 6% Gross 12%
------------ ------------------- -------- -------- ----------
1 4080 500000 500000 500000
2 8364 500000 500000 500000
3 12862 500000 500000 500000
4 17585 500000 500000 500000
5 22545 500000 500000 500000
6 27752 500000 500000 500000
7 33219 500000 500000 500000
8 38960 500000 500000 500000
9 44988 500000 500000 500000
10 51318 500000 500000 500000
15 88041 500000 500000 500000
20 134909 0 500000 500000
25 194727 0 0 500000
30 271070 0 0 0
20 (Age 65) 134909 0 500000 500000
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------- --------------------------------
Policy Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
---------- -------- -------- --------- -------- -------- ----------
1 1894 2063 2234 0 0 0
2 3777 4238 4722 105 566 1050
3 5488 6362 7318 1816 2690 3646
4 7020 8424 10024 3348 4752 6352
5 8358 10402 12834 4686 6730 9162
6 9496 12284 15750 6161 8949 12415
7 10404 14033 18749 7436 11065 15781
8 11052 15610 21808 8451 13009 19207
9 11417 16978 24908 9183 14744 22674
10 11459 18086 28010 9592 16219 26143
15 5765 18023 42405 5734 17992 42374
20 0 1420 49095 0 1420 49095
25 0 0 29511 0 0 29511
30 0 0 0 0 0 0
20 (Age 65) 0 1420 49095 0 1420 49095
(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 Surrender Value for a Policy would
be different from those shown if the actual investment rates of return
averaged 0%, 6%, and 12% over a period of years, but fluctuated above or
below those averages for individual Policy Years. No representations can be
made that these rates of return will definitely be achieved for any one year
or sustained over a period of time.
32
<PAGE>
AetnaVest Plus Policy
Table III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 45-UNISEX FOR SPECIAL PLAN POLICIES
$6,720.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
Premiums Death Benefit
Accumulated Gross Annual Investment
at Return of
5% Interest --------------------------------
Policy Year Per Year Gross 0% Gross 6% Gross 12%
------------ ------------------- -------- -------- ----------
1 6720 500000 500000 500000
2 13776 500000 500000 500000
3 21185 500000 500000 500000
4 28964 500000 500000 500000
5 37132 500000 500000 500000
6 45709 500000 500000 500000
7 54714 500000 500000 500000
8 64170 500000 500000 500000
9 74099 500000 500000 500000
10 84523 500000 500000 500000
15 145008 500000 500000 500000
20 222203 500000 500000 500000
25 320726 500000 500000 628735
30 446469 500000 500000 986422
20 (Age 65) 222203 500000 500000 500000
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------- --------------------------------
Policy Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
---------- -------- -------- --------- -------- -------- ----------
1 4911 5252 5595 1239 1580 1923
2 9825 10822 11861 6153 7150 8189
3 14582 16558 18701 10910 12886 15029
4 19159 22442 26150 15487 18770 22478
5 23530 28454 34245 19858 24782 30573
6 27672 34574 43031 24337 31239 39696
7 31600 40822 52600 28632 37854 49632
8 35327 47215 63050 32726 44614 60449
9 38866 53773 74493 36632 51539 72259
10 42208 60496 87032 40341 58629 85165
15 56322 97305 171555 56291 97274 171524
20 64173 138757 309852 64173 138757 309852
25 63047 184616 542013 63047 184616 542013
30 46279 233513 921889 46279 233513 921889
20 (Age 65) 64173 138757 309852 64173 138757 309852
(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 Surrender Value for a Policy would
be different from those shown if the actual investment rates of return
averaged 0%, 6%, and 12% over a period of years, but fluctuated above or
below those averages for individual Policy Years. No representations can be
made that these rates of return will definitely be achieved for any one year
or sustained over a period of time.
33
<PAGE>
AetnaVest Plus Policy
Table IV
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 45-UNISEX FOR SPECIAL PLAN POLICIES
$4,080.00 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
Premiums Death Benefit
Accumulated Gross Annual Investment
at Return of
5% Interest --------------------------------
Policy Year Per Year Gross 0% Gross 6% Gross 12%
------------ ------------------- -------- -------- ----------
1 4080 500000 500000 500000
2 8364 500000 500000 500000
3 12862 500000 500000 500000
4 17585 500000 500000 500000
5 22545 500000 500000 500000
6 27752 500000 500000 500000
7 33219 500000 500000 500000
8 38960 500000 500000 500000
9 44988 500000 500000 500000
10 51318 500000 500000 500000
15 88041 500000 500000 500000
20 134909 500000 500000 500000
25 194727 500000 500000 500000
30 271070 0 500000 500000
20 (Age 65) 134909 500000 500000 500000
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------- --------------------------------
Policy Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
---------- -------- -------- --------- -------- -------- ----------
1 2398 2587 2776 0 0 0
2 4834 5366 5922 1162 1694 2250
3 7145 8180 9308 3473 4508 5636
4 9306 11004 12929 5634 7332 9257
5 11290 13808 16782 7618 10136 13110
6 13070 16560 20861 9735 13225 17526
7 14660 19272 25205 11692 16304 22237
8 16070 21951 29854 13469 19350 27253
9 17313 24607 34852 15079 22373 32618
10 18378 27225 40229 16511 25358 38362
15 21332 40029 74882 21301 39998 74851
20 18044 49741 126667 18044 49741 126667
25 5119 51951 206276 5119 51951 206276
30 0 36444 334430 0 36444 334430
20 (Age 65) 18044 49741 126667 18044 49741 126667
(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 Surrender Value for a Policy would
be different from those shown if the actual investment rates of return
averaged 0%, 6%, and 12% over a period of years, but fluctuated above or
below those averages for individual Policy Years. No representations can be
made that these rates of return will definitely be achieved for any one year
or sustained over a period of time.
34
<PAGE>
AetnaVest Plus Policy
Table V
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 45
$6,360.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
Premiums Death Benefit
Accumulated Gross Annual Investment
at Return of
5% Interest --------------------------------
Policy Year Per Year Gross 0% Gross 6% Gross 12%
------------ ------------------- -------- -------- ----------
1 6360 500000 500000 500000
2 13038 500000 500000 500000
3 20050 500000 500000 500000
4 27412 500000 500000 500000
5 35143 500000 500000 500000
6 43260 500000 500000 500000
7 51783 500000 500000 500000
8 60732 500000 500000 500000
9 70129 500000 500000 500000
10 79995 500000 500000 500000
15 137240 500000 500000 500000
20 210299 500000 500000 500000
25 303544 500000 500000 500000
30 422551 500000 500000 619183
20 (Age 65) 210299 500000 500000 500000
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------- --------------------------------
Policy Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
---------- -------- -------- --------- -------- -------- ----------
1 4030 4329 4629 520 819 1119
2 8024 8879 9773 4514 5369 6263
3 11820 13492 15311 8310 9982 11801
4 15406 18155 21269 11896 14645 17759
5 18782 22868 27688 15272 19358 24178
6 21940 27620 34607 18752 24432 31419
7 24850 32385 42049 22013 29548 39212
8 27499 37142 50052 25013 34656 47566
9 29858 41864 58652 27723 39729 56517
10 31898 46518 67885 30114 44734 66101
15 36654 67948 125827 36625 67919 125798
20 28864 82375 211752 28864 82375 211752
25 0 78791 346325 0 78791 346325
30 0 34385 578676 0 34385 578676
20 (Age 65) 28864 82375 211752 28864 82375 211752
(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 Surrender Value for a Policy would
be different from those shown if the actual investment rates of return
averaged 0%, 6%, and 12% over a period of years, but fluctuated above or
below those averages for individual Policy Years. No representations can be
made that these rates of return will definitely be achieved for any one year
or sustained over a period of time.
35
<PAGE>
AetnaVest Plus Policy
Table VI
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 45
$3,900.00 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
Premiums Death Benefit
Accumulated Gross Annual Investment
at Return of
5% Interest --------------------------------
Policy Year Per Year Gross 0% Gross 6% Gross 12%
------------ ------------------- -------- -------- ----------
1 3900 500000 500000 500000
2 7995 500000 500000 500000
3 12295 500000 500000 500000
4 16809 500000 500000 500000
5 21550 500000 500000 500000
6 26527 500000 500000 500000
7 31754 500000 500000 500000
8 37242 500000 500000 500000
9 43004 500000 500000 500000
10 49054 500000 500000 500000
15 84156 500000 500000 500000
20 128957 0 500000 500000
25 186136 0 0 500000
30 259112 0 0 0
20 (Age 65) 128957 0 500000 500000
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------- --------------------------------
Policy Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
---------- -------- -------- --------- -------- -------- ----------
1 1757 1917 2078 0 0 0
2 3516 3950 4405 6 440 895
3 5113 5935 6833 1603 2425 3323
4 6534 7851 9354 3024 4341 5844
5 7776 9692 11974 4266 6182 8464
6 8829 11441 14689 5641 8253 11501
7 9662 13059 17475 6825 10222 14638
8 10256 14517 20318 7770 12031 17832
9 10580 15776 23191 8445 13641 21056
10 10602 16788 26061 8818 15004 24277
15 5352 16751 39448 5323 16722 39419
20 0 1843 46070 0 1843 46070
25 0 0 28974 0 0 28974
30 0 0 0 0 0 0
20 (Age 65) 0 1843 46070 0 1843 46070
(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 Surrender Value for a Policy would
be different from those shown if the actual investment rates of return
averaged 0%, 6%, and 12% over a period of years, but fluctuated above or
below those averages for individual Policy Years. No representations can be
made that these rates of return will definitely be achieved for any one year
or sustained over a period of time.
36
<PAGE>
AetnaVest Plus Policy
Table VII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 45
$6,360.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
Premiums Death Benefit
Accumulated Gross Annual Investment
at Return of
5% Interest --------------------------------
Policy Year Per Year Gross 0% Gross 6% Gross 12%
------------ ------------------- -------- -------- ----------
1 6360 500000 500000 500000
2 13038 500000 500000 500000
3 20050 500000 500000 500000
4 27412 500000 500000 500000
5 35143 500000 500000 500000
6 43260 500000 500000 500000
7 51783 500000 500000 500000
8 60732 500000 500000 500000
9 70129 500000 500000 500000
10 79995 500000 500000 500000
15 137240 500000 500000 500000
20 210299 500000 500000 500000
25 303544 500000 500000 591680
30 422551 500000 500000 929111
20 (Age 65) 210299 500000 500000 500000
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------- --------------------------------
Policy Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
---------- -------- -------- --------- -------- -------- ----------
1 4598 4920 5242 1088 1410 1732
2 9205 10142 11120 5695 6632 7610
3 13672 15528 17543 10162 12018 14033
4 17974 21058 24541 14464 17548 21031
5 22095 26720 32160 18585 23210 28650
6 26009 32493 40437 22821 29305 37249
7 29733 38397 49461 26896 35560 46624
8 33272 44444 59321 30786 41958 56835
9 36645 50657 70125 34510 48522 67990
10 39842 57036 81971 38058 55252 80187
15 53421 91986 161757 53392 91957 161728
20 61210 131389 291946 61210 131389 291946
25 60334 174583 510069 60334 174583 510069
30 44689 219942 868328 44689 219942 868328
20 (Age 65) 61210 131389 291946 61210 131389 291946
(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 Surrender Value for a Policy would
be different from those shown if the actual investment rates of return
averaged 0%, 6%, and 12% over a period of years, but fluctuated above or
below those averages for individual Policy Years. No representations can be
made that these rates of return will definitely be achieved for any one year
or sustained over a period of time.
37
<PAGE>
AetnaVest Plus Policy
Table VIII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 45
$3,900.00 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
Premiums Death Benefit
Accumulated Gross Annual Investment
at Return of
5% Interest --------------------------------
Policy Year Per Year Gross 0% Gross 6% Gross 12%
------------ ------------------- -------- -------- ----------
1 3900 500000 500000 500000
2 7995 500000 500000 500000
3 12295 500000 500000 500000
4 16809 500000 500000 500000
5 21550 500000 500000 500000
6 26527 500000 500000 500000
7 31754 500000 500000 500000
8 37242 500000 500000 500000
9 43004 500000 500000 500000
10 49054 500000 500000 500000
15 84156 500000 500000 500000
20 128957 500000 500000 500000
25 186136 500000 500000 500000
30 259112 0 500000 500000
20 (Age 65) 128957 500000 500000 500000
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------- --------------------------------
Policy Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
---------- -------- -------- --------- -------- -------- ----------
1 2257 2436 2616 0 0 0
2 4555 5059 5586 1045 1549 2076
3 6743 7723 8791 3233 4213 5281
4 8795 10402 12225 5285 6892 8715
5 10694 13077 15893 7184 9567 12383
6 12409 15715 19789 9221 12527 16601
7 13958 18330 23953 11121 15493 21116
8 15344 20924 28417 12858 18438 25931
9 16585 23511 33233 14450 21376 31098
10 17668 26078 38425 15884 24294 36641
15 20914 38788 71988 20885 38759 71959
20 18456 48941 122371 18456 48941 122371
25 6799 52148 199568 6799 52148 199568
30 0 39091 323150 0 39091 323150
20 (Age 65) 18456 48941 122371 18456 48941 122371
(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 Surrender Value for a Policy would
be different from those shown if the actual investment rates of return
averaged 0%, 6%, and 12% over a period of years, but fluctuated above or
below those averages for individual Policy Years. No representations can be
made that these rates of return will definitely be achieved for any one year
or sustained over a period of time.
38
<PAGE>
FINANCIAL STATEMENTS
VARIABLE LIFE ACCOUNT B
Index
Independent Auditors' Report S-2
Statement of Assets and Liabilities S-3
Statement of Operations S-6
Statements of Changes in Net Assets S-7
Notes to Financial Statements S-8
S-1
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and
Policyholders of Variable Life Account B:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Life Account B (the "Account") as
of December 31, 1995, and the related statement of operations for the year
then ended, statements of changes in net assets for each of the years in the
two-year period then ended, and condensed financial information for the year
ended December 31, 1995. These financial statements and condensed financial
information are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements and
condensed financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
condensed financial information are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned as of December 31, 1995, by correspondence with the
custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of the Aetna Life Insurance and Annuity Company Variable Life
Account B as of December 31, 1995, the results of its operations for the year
then ended, changes in its net assets for each of the years in the two-year
period then ended, and condensed financial information for the year ended
December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 16, 1996
S-2
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1995
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 2,442,148 shares at $29.06 per share (cost $70,892,640) $ 70,958,031
Aetna Income Shares; 773,062 shares at $13.00 per share (cost $9,861,889) 10,051,167
Aetna Variable Encore Fund; 415,129 shares at $13.30 per share (cost $5,381,253) 5,520,188
Aetna Investment Advisers Fund, Inc.; 639,193 shares at $14.50 per share (cost
$8,238,116) 9,269,700
Alger American Fund--Alger American Small Capitalization Portfolio; 133,920 shares at
$39.41 per share (cost $4,681,829) 5,277,779
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 21,701 shares at $19.27 per share (cost $389,974) 418,176
Growth Portfolio; 41,047 shares at $29.20 per share (cost $1,234,770) 1,198,559
Overseas Portfolio; 34,006 shares at $17.05 per share (cost $557,879) 579,802
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 60,778 shares at $15.79 per share (cost $912,255) 959,690
Contrafund Portfolio; 79,021 shares at $13.78 per share (cost $1,078,657) 1,088,910
Janus Aspen Series:
Aggressive Growth Portfolio; 205,922 shares at $17.08 per share (cost $3,140,545) 3,517,151
Balanced Portfolio; 46,943 shares at $13.03 per share (cost $551,081) 611,670
Growth Portfolio; 187,250 shares at $13.45 per share (cost $2,321,668) 2,518,516
Short-Term Bond Portfolio; 34,655 shares at $10.03 per share (cost $341,510) 347,588
Worldwide Growth Portfolio; 93,270 shares at $15.31 per share (cost $1,200,440) 1,427,963
Scudder Variable Life Investment Fund--International Portfolio; 566,120 shares at $11.82
per share (cost $6,260,081) 6,691,544
TCI Portfolios, Inc.--TCI Growth; 504,092 shares at $12.06 per share (cost $5,079,618) 6,079,345
------------
NET ASSETS $126,515,779
============
</TABLE>
Net assets represented by:
<TABLE>
<CAPTION>
Accumulation
Unit
Units Value
Policyholders' account values: ----------- -----------
<S> <C> <C> <C>
Aetna Variable Fund:
AetnaVest 1,615,316.3 $28.351 $45,795,395
AetnaVest II 767,277.4 15.831 12,147,120
AetnaVest Plus 900,446.3 13.301 11,976,945
Corporate Specialty Market 86,433.0 12.016 1,038,571
Aetna Income Shares:
AetnaVest 291,207.2 21.305 6,204,271
AetnaVest II 82,916.4 14.324 1,187,723
AetnaVest Plus 108,102.3 11.470 1,239,985
Corporate Specialty Market 128,186.3 11.071 1,419,188
S-3
<PAGE>
Accumulation
Unit
Units Value
Policyholders' account values: ----------- -----------
Aetna Variable Encore Fund:
AetnaVest 216,354.9 $15.891 $3,438,075
AetnaVest II 17,280.3 11.616 200,721
AetnaVest Plus 69,086.7 10.917 754,192
Corporate Specialty Market 107,929.6 10.444 1,127,200
Aetna Investment Advisers Fund, Inc.:
AetnaVest 114,498.0 15.390 1,762,081
AetnaVest II 223,977.3 15.561 3,485,324
AetnaVest Plus 278,606.2 13.050 3,635,852
Corporate Specialty Market 34,014.8 11.361 386,443
Alger American Fund--Alger American
Small Capitalization Portfolio:
AetnaVest 66,765.4 15.562 1,039,005
AetnaVest II 39,259.9 15.563 611,019
AetnaVest Plus 135,063.0 15.555 2,100,905
Corporate Specialty Market 119,296.0 12.799 1,526,850
Fidelity Investments Variable Insurance Products Funds:
Equity-Income Portfolio:
Corporate Specialty Market 37,815.1 11.058 418,176
Growth Portfolio:
Corporate Specialty Market 120,931.6 9.911 1,198,559
Overseas Portfolio:
Corporate Specialty Market 57,811.4 10.029 579,802
Fidelity Investments Variable Insurance Products Funds II:
Asset Manager Portfolio:
Corporate Specialty Market 90,569.7 10.596 959,690
Contrafund Portfolio:
Corporate Specialty Market 105,491.7 10.322 1,088,910
Janus Aspen Series:
Aggressive Growth Portfolio:
AetnaVest 44,764.1 15.114 676,573
AetnaVest II 30,158.9 15.114 455,826
AetnaVest Plus 114,021.3 15.114 1,723,348
Corporate Specialty Market 58,323.5 11.340 661,404
Balanced Portfolio:
AetnaVest 6,403.1 12.142 77,745
AetnaVest II 4,014.0 12.237 49,117
AetnaVest Plus 38,817.0 12.136 471,097
Corporate Specialty Market 1,288.2 10.643 13,711
S-4
<PAGE>
Accumulation
Unit
Units Value
Policyholders' account values: ----------- -----------
Growth Portfolio:
AetnaVest 21,515.4 $12.704 $ 273,328
AetnaVest II 37,270.8 12.692 473,053
AetnaVest Plus 79,675.5 12.674 1,009,837
Corporate Specialty Market 73,083.9 10.430 762,298
Short-Term Bond Portfolio:
AetnaVest 887.8 10.967 9,736
AetnaVest II 23,124.1 10.955 253,322
AetnaVest Plus 7,737.1 10.925 84,530
Worldwide Growth Portfolio:
AetnaVest 27,375.5 12.809 350,657
AetnaVest II 23,865.7 12.813 305,784
AetnaVest Plus 60,290.6 12.797 771,522
Scudder Variable Life Investment Fund--International
Portfolio:
AetnaVest 135,108.9 12.798 1,729,105
AetnaVest II 73,569.7 12.719 935,731
AetnaVest Plus 280,624.9 12.648 3,549,365
Corporate Specialty Market 45,040.2 10.598 477,343
TCI Portfolios, Inc.--TCI Growth:
AetnaVest 99,512.9 13.248 1,318,352
AetnaVest II 32,444.9 13.307 431,757
AetnaVest Plus 284,645.5 13.126 3,736,206
Corporate Specialty Market 49,400.2 12.005 593,030
------------
$126,515,779
============
</TABLE>
See Notes to Financial Statements.
S-5
<PAGE>
Variable Life Account B
Statement of Operations--Year Ended December 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividend distributions: (Notes 1 and 3)
Aetna Variable Fund $11,632,771
Aetna Income Shares 602,737
Aetna Variable Encore Fund 3,963
Aetna Investment Advisers Fund, Inc 582,871
Fidelity Investments Variable Insurance Products Fund--
Equity-Income Portfolio 3,272
Fidelity Investments Variable Insurance Products Fund
II--Contrafund Portfolio 14,059
Janus Aspen Series--Aggressive Growth Portfolio 32,796
Janus Aspen Series--Balanced Portfolio 7,676
Janus Aspen Series--Growth Portfolio 49,596
Janus Aspen Series--Short-Term Bond Portfolio 17,025
Janus Aspen Series--Worldwide Growth Portfolio 5,411
Scudder Variable Life Investment Fund--International Portfolio 9,378
TCI Portfolios, Inc.--TCI Growth 3,682
------------
Total investment income 12,965,237
Valuation period deductions (Note 2) (1,149,801)
------------
Net investment income 11,815,436
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1 and 4)
Proceeds from sales $28,828,178
Cost of investments sold 25,993,679
-----------
Net realized gain 2,834,499
Net unrealized gain (loss) on investments:
Beginning of year (4,407,131)
End of year 4,391,574
-----------
Net unrealized gain 8,798,705
------------
Net realized and unrealized gain on investments 11,633,204
------------
Net increase in net assets resulting from operations $23,448,640
============
</TABLE>
See Notes to Financial Statements.
S-6
<PAGE>
Variable Life Account B
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 11,815,436 $ 8,175,684
Net realized and unrealized gain (loss) on investments 11,633,204 (9,665,883)
------------ ------------
Net increase (decrease) in net assets resulting from
operations 23,448,640 (1,490,199)
------------ ------------
FROM UNIT TRANSACTIONS:
Variable life premium payments 44,310,537 28,389,827
Sales charges deducted by the Company (1,381,985) (913,534)
Premiums allocated to the fixed account (3,260,098) (2,052,433)
------------ ------------
Net premiums allocated to the variable account 39,668,454 25,423,860
Transfers from the Company for monthly deductions (11,297,188) (8,879,679)
Redemptions by policyholders (3,238,332) (3,575,365)
Transfers on account of policy loans (2,076,373) (785,448)
Other 41,863 (318,777)
------------ ------------
Net increase in net assets from unit transactions 23,098,424 11,864,591
------------ ------------
Change in net assets 46,547,064 10,374,392
NET ASSETS:
Beginning of year 79,968,715 69,594,323
------------ ------------
End of year $126,515,779 $79,968,715
============ ============
</TABLE>
See Notes to Financial Statements.
S-7
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1995
1. Summary of Significant Accounting Policies
Variable Life Account B ("Account") is registered under the Investment
Company Act of 1940 as a unit investment trust. The Account is sold
exclusively for use with life insurance product contracts as defined under
the Internal Revenue Code of 1986, as amended.
The accompanying financial statements of the Account have been prepared in
accordance with generally accepted accounting principles.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset value
per share as determined by each Fund on December 31, 1995:
Aetna Variable Fund
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Alger American Fund--Alger American Small
Capitalization Portfolio
Fidelity Investments Variable Insurance Products
Fund--
(bullet) Equity-Income Portfolio
(bullet) Growth Portfolio
(bullet) Overseas Portfolio
Fidelity Investments Variable Insurance Products
Fund II--
(bullet) Asset Manager Portfolio
(bullet) Contrafund Portfolio
Janus Aspen Series--
(bullet) Aggressive Growth Portfolio
(bullet) Balanced Portfolio
(bullet) Growth Portfolio
(bullet) Short-Term Bond Portfolio
(bullet) Worldwide Growth Portfolio
Scudder Variable Life Investment Fund--
International Portfolio
TCI Portfolios, Inc.--TCI Growth
b. Other
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of Aetna Life Insurance and Annuity Company ("Company") which is
taxed as a life insurance company under the Internal Revenue Code of 1986, as
amended.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made in
accordance with the terms of the policies and are paid to the Company.
S-8
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1995 (continued)
3. Dividend Distributions
On an annual basis the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions paid
to the Account are automatically reinvested in shares of the Funds. The
Account's proportionate share of each Fund's undistributed net investment
income and accumulated net realized gain on investments is included in net
unrealized gain on investments in the Statement of Operations.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the year ended December 31, 1995 aggregated
$71,231,087 and $28,828,178, respectively.
5. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported therein. Although actual results could differ
from these estimates, any such differences are expected to be immaterial to
the net assets of the Account.
S-9
<PAGE>
Variable Life Account B
Condensed Financial Information
Change in Value of Accumulation Unit--January 1, 1995 to December 31, 1995
<TABLE>
<CAPTION>
Increase
(Decrease)
Value at Value at in Value of
Beginning End Accumulation
of Period of Period Unit
--------- --------- ------------
<S> <C> <C> <C>
Aetna Variable Fund:
AetnaVest $21.654 $28.351 30.93%
AetnaVest II 12.092 15.831 30.93%
AetnaVest Plus 10.159 13.301 30.93%
Corporate Speciality Market 10.000 12.016 20.16% (2)
Aetna Income Shares:
AetnaVest $18.200 $21.305 17.06%
AetnaVest II 12.236 14.324 17.06%
AetnaVest Plus 9.798 11.470 17.06%
Corporate Speciality Market 10.000 11.071 10.71% (2)
Aetna Variable Encore Fund:
AetnaVest $15.135 $15.891 4.99%
AetnaVest II 11.063 11.616 4.99%
AetnaVest Plus 10.398 10.917 4.99%
Corporate Speciality Market 10.000 10.444 4.44% (1)
Aetna Investment Advisers Fund, Inc.:
AetnaVest $12.202 $15.390 26.13%
AetnaVest II 12.338 15.561 26.13%
AetnaVest Plus 10.347 13.050 26.13%
Corporate Speciality Market 10.000 11.361 13.61% (3)
Alger American Fund--Alger American
Small Capitalization Portfolio:
AetnaVest $10.890 $15.562 42.90%
AetnaVest II 10.893 15.563 42.88%
AetnaVest Plus 10.886 15.555 42.89%
Corporate Speciality Market 10.000 12.799 27.99% (2)
Fidelity Investments Variable Insurance Products Funds:
Equity-Income Portfolio:
Corporate Speciality Market $10.000 $11.058 10.58% (4)
Growth Portfolio:
Corporate Speciality Market $10.000 $ 9.911 (0.89%) (4)
Overseas Portfolio:
Corporate Speciality Market $10.000 $10.029 0.29% (4)
Fidelity Investments Variable Insurance Products Funds II:
Asset Manager Portfolio:
Corporate Speciality Market $10.000 $10.596 5.96% (4)
Contrafund Portfolio:
Corporate Speciality Market $10.000 $10.322 3.22% (4)
S-10
<PAGE>
Variable Life Account B
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)
Years Ended December 31,
----------------------------
1995 1994 1993
------- ------- --------
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
======= ======= ========
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 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 value based on quoted market prices or dealer
quotations. Equity securities are written down (as realized losses) for
other than temporary declines in value. Unrealized gains and losses
related to such securities are reflected in shareholder's equity.
Purchases and sales are recorded on the trade date.
The investment in affiliated mutual funds represents an investment in the
Aetna Series Fund, Inc., a retail mutual fund which has been seeded by the
Company, and is carried at fair value.
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Mortgage Loans and Policy Loans
Mortgage loans and policy loans are carried at unpaid principal balances
net of valuation reserves, which approximates fair value, and are
generally secured. Purchases and sales of mortgage loans are recorded on
the closing date.
Limited Partnership
The Company's limited partnership investment was carried at the amount
invested plus the Company's share of undistributed operating results and
unrealized gains (losses), which approximates fair value. The Company
disposed of the limited partnership during 1995.
Short-Term Investments
Short-term investments, consisting primarily of money market instruments
and other debt issues purchased with an original maturity of over ninety
days and less than one year, are considered available for sale and are
carried at fair value, which approximates amortized cost.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business have been deferred. These
costs, all of which vary with and are primarily related to the production
of new business, consist principally of commissions, certain expenses of
underwriting and issuing contracts and certain agency expenses. For fixed
ordinary life contracts, such costs are amortized over expected
premium-paying periods. For universal life and certain annuity contracts,
such costs are amortized in proportion to estimated gross profits and
adjusted to reflect actual gross profits. These costs are amortized over
twenty years for annuity pension contracts, and over the contract period
for universal life contracts.
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross
profits would not be adequate to cover related losses and expenses.
Insurance Reserve Liabilities
The Company's liabilities include reserves related to fixed ordinary life,
fixed universal life and fixed annuity contracts. Reserves for future
policy benefits for fixed ordinary life contracts are computed on the
basis of assumed investment yield, assumed mortality, withdrawals and
expenses, including a margin for adverse deviation, which generally vary
by plan, year of issue and policy duration. Reserve interest rates range
from 2.25% to 10.00%. Assumed investment yield is based on the Company's
experience. Mortality and withdrawal rate assumptions are based on
relevant Aetna experience and are periodically reviewed against both
industry standards and experience.
Reserves for fixed universal life (included in Future Policy Benefits) and
fixed deferred annuity contracts (included in Policyholders' Funds Left
With the Company) are equal to the fund value. The fund
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
value is equal to cumulative deposits less charges plus credited interest
thereon, without reduction for possible future penalties assessed on
premature withdrawal. For guaranteed interest options, the interest
credited ranged from 4.00% to 6.38% in 1995 and 4.00% to 5.85% in 1994.
For all other fixed options, the interest credited ranged from 5.00% to
7.00% in 1995 and 5.00% to 7.50% in 1994.
Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the
1971 Individual Annuity Mortality Table, the 1983 Individual Annuity
Mortality Table, the 1983 Group Annuity Mortality Table and, in some
cases, mortality improvement according to scales G and H, at assumed
interest rates ranging from 3.5% to 9.5%. Reserves relating to contracts
with life contingencies are included in Future Policy Benefits. For other
contracts, the reserves are reflected in Policyholders' Funds Left With
the Company.
Unpaid claims for all lines of insurance include benefits for reported
losses and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
Premiums are recorded as revenue when due for fixed ordinary life
contracts. Charges assessed against policyholders' funds for cost of
insurance, surrender charges, actuarial margin and other fees are recorded
as revenue for universal life and certain annuity contracts. Policy
benefits and expenses are recorded in relation to the associated premiums
or gross profit so as to result in recognition of profits over the
expected lives of the contracts.
Separate Accounts
Assets held under variable universal life, variable life and variable
annuity contracts are segregated in Separate Accounts and are invested, as
designated by the contractholder or participant under a contract, in
shares of Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore
Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund, or The Aetna
Series Fund Inc., which are managed by the Company or other selected
mutual funds not managed by the Company. Separate Accounts assets and
liabilities are carried at fair value except for those relating to a
guaranteed interest option which is offered through a Separate Account.
The assets of the Separate Account supporting the guaranteed interest
option are carried at an amortized cost of $322.2 million for 1995 (fair
value $343.9 million) and $149.7 million for 1994 (fair value $146.3
million), since the Company bears the investment risk where the contract
is held to maturity. Reserves relating to the guaranteed interest option
are maintained at fund value and reflect interest credited at rates
ranging from 4.5% to 8.38% in both 1995 and 1994. Separate Accounts assets
and liabilities are shown as separate captions in the Consolidated Balance
Sheets. Deposits, investment income and net realized and unrealized
capital gains (losses) of the Separate Accounts are not reflected in the
Consolidated Statements of Income (with the exception of realized capital
gains (losses) on the sale of assets supporting the guaranteed interest
option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Federal Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. The Company is taxed at regular corporate rates after adjusting
income reported for financial statement purposes for certain items.
Deferred income tax benefits result from changes during the year in
cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
2. Investments
Investments in debt securities available for sale as of December 31, 1995
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 539.5 $ 47.5 $ -- $ 587.0
Obligations of states and political
subdivisions 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial 2,764.4 110.3 2.1 2,872.6
Utilities 454.4 27.8 1.0 481.2
Other 2,177.7 159.5 1.2 2,336.0
--------- --------- --------- ---------
Total U.S. Corporate securities 5,396.5 297.6 4.3 5,689.8
Foreign securities:
Government 316.4 26.1 2.0 340.5
Financial 534.2 45.4 3.5 576.1
Utilities 236.3 32.9 -- 269.2
Other 215.7 15.1 -- 230.8
--------- --------- --------- ---------
Total Foreign securities 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Residential pass-throughs 556.7 99.2 1.8 654.1
Residential CMOs 2,383.9 167.6 2.2 2,549.3
--------- --------- --------- ---------
Total Residential mortgage-backed securities 2,940.6 266.8 4.0 3,203.4
Commercial/Multifamily mortgage-backed
securities 741.9 32.3 0.2 774.0
--------- --------- --------- ---------
Total Mortgage-backed securities 3,682.5 299.1 4.2 3,977.4
Other asset-backed securities 961.2 35.5 0.5 996.2
--------- --------- --------- ---------
Total debt securities available for sale $11,923.7 $811.6 $ 14.5 $12,720.8
========= ========= ========= =========
</TABLE>
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in debt securities available for sale as of December 31, 1994
were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
(millions)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9
Obligations of states and political
subdivisions 37.9 1.2 -- 39.1
U.S. Corporate securities:
Financial 2,216.9 3.8 109.4 2,111.3
Utilities 100.1 -- 7.9 92.2
Other 1,344.3 6.0 67.9 1,282.4
--------- --------- --------- ---------
Total U.S. Corporate securities 3,661.3 9.8 185.2 3,485.9
Foreign securities:
Government 434.4 1.2 33.9 401.7
Financial 368.2 1.1 23.0 346.3
Utilities 204.4 2.5 9.5 197.4
Other 46.3 0.8 1.5 45.6
--------- --------- --------- ---------
Total Foreign securities 1,053.3 5.6 67.9 991.0
Residential mortgage-backed securities:
Residential pass-throughs 627.1 81.5 5.0 703.6
Residential CMOs 2,671.0 32.9 139.4 2,564.5
--------- --------- --------- ---------
Total Residential mortgage-backed securities 3,298.1 114.4 144.4 3,268.1
Commercial/Multifamily mortgage-backed
securities 435.0 0.2 21.3 413.9
--------- --------- --------- ---------
Total Mortgage-backed securities 3,733.1 114.6 165.7 3,682.0
Other asset-backed securities 696.1 0.2 16.8 679.5
--------- --------- --------- ---------
Total debt securities available for sale $10,577.8 $133.4 $519.8 $10,191.4
========= ========= ========= =========
</TABLE>
At December 31, 1995 and 1994, net unrealized appreciation (depreciation) of
$797.1 million and $(386.4) million, respectively, on available for sale debt
securities included $619.1 million and $(308.6) million, respectively,
related to experience-rated contractholders, which were not included in
shareholder's equity.
The amortized cost and fair value of debt securities for the year ended
December 31, 1995 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be
restructured, called, or prepaid.
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Amortized Fair
Cost Value
--------- ---------
(millions)
Due to mature:
One year or less $ 348.8 $ 351.1
After one year through five years 2,100.2 2,159.5
After five years through ten years 2,516.0 2,663.4
After ten years 2,315.0 2,573.2
Mortgage-backed securities 3,682.5 3,977.4
Other asset-backed securities 961.2 996.2
--------- ---------
Total $11,923.7 $12,720.8
========= =========
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Cash
collateral, which is in excess of the market value of the loaned securities,
is deposited by the borrower with a lending agent, and retained and invested
by the lending agent to generate additional income for the Company. The
market value of the loaned securities is monitored on a daily basis with
additional collateral obtained or refunded as the market value fluctuates. At
December 31, 1995, the Company had loaned securities (which are reflected as
invested assets on the Consolidated Balance Sheets) with a market value of
approximately $264.5 million.
At December 31, 1995 and 1994, debt securities carried at $7.4 million and
$7.0 million, respectively, were on deposit as required by regulatory
authorities.
The valuation reserve for mortgage loans was $3.1 million at December 31,
1994. There was no valuation reserve for mortgage loans at December 31, 1995.
The carrying value of non-income producing investments was $0.1 million and
$0.2 million at December 31, 1995 and 1994, respectively.
Investments in a single issuer, other than obligations of the U.S.
government, with a carrying value in excess of 10% of the Company's
shareholder's equity at December 31, 1995 are as follows:
Amortized Fair
Debt Securities Cost Value
-------- --------
(millions)
General Electric Corporation $ 314.9 $ 329.3
General Motors Corporation 273.9 284.5
Associates Corporation of North America 230.2 239.1
Society National Bank 203.5 222.3
Ciesco, L.P. 194.9 194.9
Countrywide Funding 171.2 172.7
Baxter International 168.9 168.9
Time Warner 158.6 166.1
Ford Motor Company 156.7 162.6
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
The portfolio of debt securities at December 31, 1995 and 1994 included
$662.5 million and $318.3 million, respectively, (5% and 3%, respectively,
of the debt securities) of investments that are considered "below
investment grade". "Below investment grade" securities are defined to be
securities that carry a rating below BBB-/Baa3, by Standard &
Poors/Moody's Investor Services, respectively. The increase in below
investment grade securities is the result of a change in investment
strategy, which has reduced the Company's holdings in residential
mortgage-back securities and increased the Company's holdings in corporate
securities. Residential mortgage-back securities are subject to higher
prepayment risk and lower credit risk, while corporate securities earning
a comparable yield are subject to higher credit risk and lower prepayment
risk. We expect the percentage of below investment grade securities will
increase in 1996, but we expect that the overall average quality of the
portfolio of debt securities will remain at AA-. Of these below investment
grade assets, $14.5 million and $31.8 million, at December 31, 1995 and
1994, respectively, were investments that were purchased at investment
grade, but whose ratings have since been downgraded.
Included in residential mortgage-back securities are collateralized
mortgage obligations ("CMOs") with carrying values of $2.5 billion and
$2.6 billion at December 31, 1995 and 1994, respectively. The principal
risks inherent in holding CMOs are prepayment and extension risks related
to dramatic decreases and increases in interest rates whereby the CMOs
would be subject to repayments of principal earlier or later than
originally anticipated. At December 31, 1995 and 1994, approximately 79%
and 85%, respectively, of the Company's CMO holdings consisted of
sequential and planned amortization class debt securities which are
subject to less prepayment and extension risk than other CMO instruments.
At December 31, 1995 and 1994, approximately 81% and 82%, respectively, of
the Company's CMO holdings were collateralized by residential mortgage
loans, on which the timely payment of principal and interest was backed by
specified government agencies (e.g., GNMA, FNMA, FHLMC).
If due to declining interest rates, principal was to be repaid earlier
than originally anticipated, the Company could be affected by a decrease
in investment income due to the reinvestment of these funds at a lower
interest rate. Such prepayments may result in a duration mismatch between
assets and liabilities which could be corrected as cash from prepayments
could be reinvested at an appropriate duration to adjust the mismatch.
Conversely, if due to increasing interest rates, principal was to be
repaid slower than originally anticipated, the Company could be affected
by a decrease in cash flow which reduces the ability to reinvest expected
principal repayments at higher interest rates. Such slower payments may
result in a duration mismatch between assets and liabilities which could
be corrected as available cash flow could be reinvested at an appropriate
duration to adjust the mismatch.
At December 31, 1995 and 1994, approximately 3% and 4%, respectively, of
the Company's CMO holdings consisted of interest-only strips ("IOs") or
principal-only strips ("POs"). IOs receive payments of interest and POs
receive payments of principal on the underlying pool of mortgages. The
risk inherent in holding POs is extension risk related to dramatic
increases in interest rates whereby
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
the future payments due on POs could be repaid much slower than originally
anticipated. The extension risks inherent in holding POs was mitigated
somewhat by offsetting positions in IOs. During dramatic increases in
interest rates, IOs would generate more future payments than originally
anticipated.
The risk inherent in holding IOs is prepayment risk related to dramatic
decreases in interest rates whereby future IO cash flows could be much
less than originally anticipated and in some cases could be less than the
original cost of the IO. The risks inherent in IOs are mitigated somewhat
by holding offsetting positions in POs. During dramatic decreases in
interest rates POs would generate future cash flows much quicker than
originally anticipated.
Investments in available for sale equity securities were as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
------- --------- --------- --------
(millions)
1995
- ----
Equity Securities $ 231.6 $27.2 $1.2 $ 257.6
------- --------- --------- --------
1994
- ----
Equity Securities $ 230.5 $ 6.5 $7.9 $ 229.1
------- --------- --------- --------
3. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between proceeds
received from investments sold or prepaid, and amortized cost. Net
realized capital gains as reflected in the Consolidated Statements of
Income are after deductions for net realized capital gains (losses)
allocated to experience-rated contracts of $61.1 million, $(29.1) million
and $(54.8) million for the years ended December 31, 1995, 1994, and 1993,
respectively. Net realized capital gains (losses) allocated to
experience-rated contracts are deferred and subsequently reflected in
credited rates on an amortized basis. Net unamortized gains (losses),
reflected as a component of Policyholders' Funds Left With the Company,
were $7.3 million and $(50.7) million at the end of December 31, 1995 and
1994, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities are included in net realized capital gains (losses) and
amounted to $3.1 million, $1.1 million and $(98.5) million, of which $2.2
million, $0.8 million and $(91.5) million were allocable to
experience-rated contractholders, for the years ended December 31, 1995,
1994 and 1993, respectively. The 1993 losses were primarily related to
writedowns of interest-only mortgage-backed securities to their fair
value.
Net realized capital gains (losses) on investments, net of amounts
allocated to experience-rated contracts, were as follows:
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations (Continued)
1995 1994 1993
------ -------- -------
(millions)
Debt securities $32.8 $1.0 $ 9.6
Equity securities 8.3 0.2 0.1
Mortgage loans 0.2 0.3 (0.2)
------ -------- -------
Pretax realized capital gains $41.3 $1.5 $ 9.5
------ -------- -------
After-tax realized capital gains $25.8 $1.0 $ 6.2
====== ======== =======
Gross gains of $44.6 million, $26.6 million and $33.3 million and gross
losses of $11.8 million, $25.6 million and $23.7 million were realized from
the sales of investments in debt securities in 1995, 1994 and 1993,
respectively.
Changes in unrealized capital gains (losses), excluding changes in unrealized
capital gains (losses) related to experience-rated contracts, for the years
ended December 31, were as follows:
1995 1994 1993
------ -------- -------
(millions)
Debt securities $255.9 $(242.1) $164.3
Equity securities 27.3 (13.3) 10.6
Limited partnership 1.8 (1.8) --
------ -------- -------
285.0 (257.2) 174.9
Deferred federal income taxes (See Note 6) (36.5) 46.3 61.2
------ -------- -------
Net change in unrealized capital gains (losses) $321.5 $(303.5) $113.7
====== ======== =======
Net unrealized capital gains (losses) allocable to experience-rated contracts
of $515.0 million and $104.1 million at December 31, 1995 and $(260.9)
million and $(47.7) million at December 31, 1994 are reflected on the
Consolidated Balance Sheet in Policyholders' Funds Left With the Company and
Future Policy Benefits, respectively, and are not included in shareholder's
equity.
Shareholder's equity included the following unrealized capital gains
(losses), which are net of amounts allocable to experience-rated
contractholders, at December 31:
1995 1994 1993
------ -------- -------
(millions)
Debt securities
Gross unrealized capital gains $179.3 $ 27.4 $164.3
Gross unrealized capital losses (1.3) (105.2) --
------ -------- -------
178.0 (77.8) 164.3
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations (Continued)
1995 1994 1993
------ -------- -------
(millions)
Equity securities
Gross unrealized capital gains $ 27.2 $ 6.5 $ 12.0
Gross unrealized capital losses (1.2) (7.9) (0.1)
------ -------- -------
26.0 (1.4) 11.9
Limited Partnership
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- (1.8) --
------ -------- -------
-- (1.8) --
Deferred federal income taxes (See Note 6) 71.5 108.0 61.7
------ -------- -------
Net unrealized capital gains (losses) $132.5 $(189.0) $114.5
====== ======== =======
4. Net Investment Income
Sources of net investment income were as follows:
1995 1994 1993
------ -------- -------
(millions)
Debt securities $ 891.5 $823.9 $828.0
Preferred stock 4.2 3.9 2.3
Investment in affiliated mutual funds 14.9 5.2 2.9
Mortgage loans 1.4 1.4 1.5
Policy loans 13.7 11.5 10.8
Reinsurance loan to affiliate 46.5 51.5 53.3
Cash equivalents 38.9 29.5 16.8
Other 8.4 6.7 7.7
------ -------- -------
Gross investment income 1,019.5 933.6 923.3
Less investment expenses (15.2) (16.4) (11.4)
------ -------- -------
Net investment income $1,004.3 $917.2 $911.9
====== ======== =======
Net investment income includes amounts allocable to experience-rated
contractholders of $744.2 million, $677.1 million and $661.3 million for
the years ended December 31, 1995, 1994 and 1993, respectively. Interest
credited to contractholders is included in Current and Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company distributed $2.9 million in the form of dividends of two of
its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in
1995.
The amount of dividends that may be paid to the shareholder in 1996
without prior approval by the Insurance Commissioner of the State of
Connecticut is $70.0 million.
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
5. Dividend Restrictions and Shareholder's Equity (Continued)
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's equity those amounts determined
in conformity with statutory accounting practices prescribed or permitted
by the Department, which differ in certain respects from generally
accepted accounting principles. Statutory net income was $70.0 million,
$64.9 million and $77.6 million for the years ended December 31, 1995,
1994 and 1993, respectively. Statutory shareholder's equity was $670.7
million and $615.0 million as of December 31, 1995 and 1994, respectively.
At December 31, 1995 and December 31, 1994, the Company does not utilize
any statutory accounting practices which are not prescribed by insurance
regulators that, individually or in the aggregate, materially affect
statutory shareholder's equity.
6. Federal Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. Aetna allocates to each member an amount approximating the tax it
would have incurred were it not a member of the consolidated group, and
credits the member for the use of its tax saving attributes in the
consolidated return.
In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was
enacted which resulted in an increase in the federal corporate tax rate
from 34% to 35% retroactive to January 1, 1993. The enactment of OBRA
resulted in an increase in the deferred tax liability of $3.4 million at
date of enactment, which is included in the 1993 deferred tax expense.
1995 1994 1993
------ -------- -------
(millions)
Current taxes (benefits):
Income from operations $ 82.9 $ 78.7 $ 87.1
Net realized capital gains 28.5 (33.2) 18.1
------ -------- -------
111.4 45.5 105.2
------ -------- -------
Deferred taxes (benefits):
Income from operations (14.4) (8.0) (14.2)
Net realized capital gains (12.9) 33.7 (14.8)
------ -------- -------
(27.3) 25.7 (29.0)
------ -------- -------
Total $ 84.1 $ 71.2 $ 76.2
====== ======== =======
Income tax expense was different from the amount computed by applying the
federal income tax rate to income before federal income taxes for the
following reasons:
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
1995 1994 1993
------ -------- -------
(millions)
Income before federal income taxes $260.0 $216.5 $219.1
Tax rate 35% 35 % 35 %
------ -------- -------
Application of the tax rate 91.0 75.8 76.7
------ -------- -------
Tax effect of:
Excludable dividends (9.3) (8.6) (8.7)
Tax reserve adjustments 3.9 2.9 4.7
Reinsurance transaction (0.5) 1.9 (0.2)
Tax rate change on deferred liabilities -- -- 3.7
Other, net (1.0) (0.8) --
------ -------- -------
Income tax expense $ 84.1 $ 71.2 $ 76.2
====== ======== =======
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
1995 1994
------ ---------
Deferred tax assets: (millions)
Insurance reserves $290.4 $211.5
Net unrealized capital losses -- 136.3
Unrealized gains allocable to experience-rated contracts 216.7 --
Investment losses not currently deductible 7.3 15.5
Postretirement benefits other than pensions 7.7 8.4
Other 32.0 28.3
------ ---------
Total gross assets 554.1 400.0
Less valuation allowance -- 136.3
------ ---------
Deferred tax assets, net of valuation 554.1 263.7
Deferred tax liabilities:
Deferred policy acquisition costs 433.0 385.2
Unrealized losses allocable to experience-rated contracts -- 108.0
Market discount 4.4 3.6
Net unrealized capital gains 288.2 --
Other (1.9) 0.4
------ ---------
Total gross liabilities 723.7 497.2
------ ---------
Net deferred tax liability $169.6 $233.5
====== =========
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. At December 31, 1994, $81.0 million of net
unrealized capital losses were reflected in shareholder's equity without
deferred tax benefits. As of December 31, 1995, no valuation allowance was
required for unrealized capital gains and losses. The reversal of the
valuation allowance had no impact on net income in 1995.
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax
return purposes under the Deficit Reduction Act of 1984. The balance in
such account was approximately $17.2 million at December 31, 1995. This
amount would be taxed only under certain conditions. No income taxes have
been provided on this amount since management believes the conditions
under which such taxes would become payable are remote.
The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1986. Discussions
are being held with the Service with respect to proposed adjustments.
However, management believes there are adequate defenses against, or
sufficient reserves to provide for, such challenges. The Service has
commenced its examinations for the years 1987 through 1990.
7. Benefit Plans
Employee Pension Plans--The Company, in conjunction with Aetna, has
non-contributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service
and average annual compensation (measured over sixty consecutive months of
highest earnings in a 120 month period). Contributions are determined
using the Projected Unit Credit Method and, for qualified plans subject to
ERISA requirements, are limited to the amounts that are currently
deductible for tax reporting purposes. The accumulated benefit obligation
and plan assets are recorded by Aetna. The accumulated plan assets exceed
accumulated plan benefits. There has been no funding to the plan for the
years 1993 through 1995, and therefore, no expense has been recorded by
the Company.
Agent Pension Plans--The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides
pension benefits based on annual commission earnings. The accumulated plan
assets exceed accumulated plan benefits. There has been no funding to the
plan for the years 1993 through 1995, and therefore, no expense has been
recorded by the Company.
Employee Postretirement Benefits--In addition to providing pension
benefits, Aetna also provides certain postretirement health care and life
insurance benefits, subject to certain caps, for retired employees.
Medical and dental benefits are offered to all full-time employees
retiring at age 50 with at least 15 years of service or at age 65 with at
least 10 years of service. Retirees are required to contribute to the
plans based on their years of service with Aetna.
The cost to the Company associated with the Aetna postretirement plans for
1995, 1994 and 1993 were $1.4 million, $1.0 million and $0.8 million,
respectively.
Agent Postretirement Benefits--The Company, in conjunction with Aetna,
also provides certain postemployment health care and life insurance
benefits for certain agents.
The cost to the Company associated to the agents' postretirement plans for
1995, 1994 and 1993 were $0.8 million, $0.7 million and $0.6 million,
respectively.
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Benefit Plans (Continued)
Incentive Savings Plan--Substantially all employees are eligible to
participate in a savings plan under which designated contributions, which
may be invested in common stock of Aetna or certain other investments, are
matched, up to 5% of compensation, by Aetna. Pretax charges to operations
for the incentive savings plan were $4.9 million, $3.3 million and $3.1
million in 1995, 1994 and 1993, respectively.
Stock Plans--Aetna has a stock incentive plan that provides for stock
options and deferred contingent common stock or cash awards to certain key
employees. Aetna also has a stock option plan under which executive and
middle management employees of Aetna may be granted options to purchase
common stock of Aetna at the market price on the date of grant or, in
connection with certain business combinations, may be granted options to
purchase common stock on different terms. The cost to the Company
associated with the Aetna stock plans for 1995, 1994 and 1993, was $6.3
million, $1.7 million and $0.4 million, respectively.
8. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality
and expense risks pertaining to variable life and annuity contracts. Under
the insurance contracts, the Separate Accounts pay the Company a daily fee
which, on an annual basis, ranges, depending on the product, from .25% to
1.80% of their average daily net assets. The Company also receives fees
from the variable life and annuity mutual funds and The Aetna Series Fund
for serving as investment adviser. Under the advisory agreements, the
Funds pay the Company a daily fee which, on an annual basis, ranges,
depending on the fund, from .25% to 1.00% of their average daily net
assets. The advisory agreements also call for the variable funds to pay
their own administrative expenses and for The Aetna Series Fund to pay
certain administrative expenses. The Company also receives fees (expressed
as a percentage of the average daily net assets) from The Aetna Series
Fund for providing administration, shareholder services and promoting
sales. The amount of compensation and fees received from the Separate
Accounts and Funds, included in Charges Assessed Against Policyholders,
amounted to $128.1 million, $104.6 million and $93.6 million in 1995, 1994
and 1993, respectively. The Company may waive advisory fees at its
discretion.
The Company may, from time to time, make reimbursements to a Fund for some
or all of its operating expenses. Reimbursement arrangements may be
terminated at any time without notice.
Since 1981, all domestic individual non-participating life insurance of
Aetna and its subsidiaries has been issued by the Company. Effective
December 31, 1988, the Company entered into a reinsurance agreement with
Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the non- participating individual life and annuity business written by
Aetna Life prior to 1981 was assumed by the Company. A $108.0 million
commission, paid by the Company to Aetna Life in 1988, was capitalized as
deferred policy acquisition costs. The Company maintained insurance
reserves of $655.5 million and $690.3 million as of December 31, 1995 and
1994, respectively, relating to the business assumed. In consideration for
the assumption of this business, a loan was established relating to the
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Related Party Transactions (Continued)
assets held by Aetna Life which support the insurance reserves. The loan
is being reduced in accordance with the decrease in the reserves. The fair
value of this loan was $663.5 million and $630.3 million as of December
31, 1995 and 1994, respectively, and is based upon the fair value of the
underlying assets. Premiums of $28.0 million, $32.8 million and $33.3
million and current and future benefits of $43.0 million, $43.8 million
and $55.4 million were assumed in 1995, 1994 and 1993, respectively.
Investment income of $46.5 million, $51.5 million and $53.3 million was
generated from the reinsurance loan to affiliate in 1995, 1994 and 1993,
respectively. Net income of approximately $18.4 million, $25.1 million and
$13.6 million resulted from this agreement in 1995, 1994 and 1993,
respectively.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life for the purchase and administration of a life contingent
single premium variable payout annuity contract. In addition, the Company
also is responsible for administering fixed annuity payments that are made
to annuitants receiving variable payments. Reserves of $28.0 million and
$24.2 million were maintained for this contract as of December 31, 1995
and 1994, respectively.
Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement
with Aetna Life to reinsure amounts in excess of this limit, up to a
maximum of $8.0 million on any new individual life business, on a yearly
renewable term basis. Premium amounts related to this agreement were $3.2
million, $1.3 million and $0.6 million for 1995, 1994 and 1993,
respectively.
The Company received no capital contributions in 1995, 1994 or 1993.
The Company distributed $2.9 million in the form of dividends of two of
its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in
1995.
Premiums due and other receivables include $5.7 million and $27.6 million
due from affiliates in 1995 and 1994, respectively. Other liabilities
include $12.4 million and $27.9 million due to affiliates for 1995 and
1994, respectively.
Substantially all of the administrative and support functions of the
Company are provided by Aetna and its affiliates. The financial statements
reflect allocated charges for these services based upon measures
appropriate for the type and nature of service provided.
9. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverables deemed
probable of recovery are reflected as assets on the Company's Consolidated
Balance Sheets.
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 8 above.
Assumed
Ceded to from
Direct Other Other Net
Amount Companies Companies Amount
------- --------- --------- -------
(millions)
1995
- ----
Premiums:
Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2
Accident and Health
Insurance 7.5 7.5 -- --
Annuities 82.1 -- 0.5 82.6
------- --------- --------- -------
Total earned premiums $118.4 $16.1 $ 28.5 $130.8
======= ========= ========= =======
1994
- ----
Premiums:
Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health
Insurance 9.3 9.3 -- --
Annuities 69.9 -- 0.2 70.1
------- --------- --------- -------
Total earned premiums $ 106.5 $15.3 $33.0 $124.2
======= ========= ========= =======
1993
- ----
Premiums:
Life Insurance $ 22.4 $ 5.6 $ 33.3 $ 50.1
Accident and Health
Insurance 12.9 12.9 -- --
Annuities 31.3 -- 0.7 32.0
------- --------- --------- -------
Total earned premiums $ 66.6 $18.5 $34.0 $ 82.1
======= ========= ========= =======
10. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
1995 1994
------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- ---------
(millions)
Assets:
Cash and cash equivalents $ 568.8 $ 568.8 $ 623.3 $ 623.3
Short-term investments 15.1 15.1 98.0 98.0
Debt securities 12,720.8 12,720.8 10,191.4 10,191.4
Equity securities 257.6 257.6 229.1 229.1
Limited partnership -- -- 24.4 24.4
Mortgage loans 21.2 21.9 9.9 9.9
Liabilities:
Investment contract
liabilities:
With a fixed maturity 989.1 1,001.2 826.7 833.5
Without a fixed maturity 9,511.0 9,298.4 8,122.6 7,918.2
Fair value estimates are made at a specific point in time, based on
available market information and judgments about the financial
instrument, such as estimates of timing and amount of expected future
cash flows. Such estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument, nor do they consider the
tax impact of the realization of unrealized gains or losses. In many
cases, the fair value estimates cannot be substantiated by comparison to
independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument. In evaluating the Company's management of
interest rate and liquidity risk, the fair values of all assets and
liabilities should be taken into consideration, not only those above.
The following valuation methods and assumptions were used by the Company
in estimating the fair value of the above financial instruments:
Short-term instruments: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices are not available, the
carrying amounts reported in the Consolidated Balance Sheets approximates
fair value. Short-term instruments have a maturity date of one year or
less and include cash and cash equivalents, and short-term investments.
Debt and equity securities: Fair values are based on quoted market prices
or dealer quotations. Where quoted market prices or dealer quotations are
not available, fair value is estimated by using quoted market prices for
similar securities or discounted cash flow methods.
Mortgage loans: Fair value is estimated by discounting expected mortgage
loan cash flows at market rates which reflect the rates at which similar
loans would be made to similar borrowers. The rates reflect management's
assessment of the credit quality and the remaining duration of the loans.
The fair value estimate of mortgage loans of lower quality, including
problem and restructured loans, is based on the estimated fair value of
the underlying collateral.
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
Investment contract liabilities (included in Policyholders' Funds Left
With the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows
at interest rates currently being offered by, or available to, the
Company for similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable
to the contractholder upon demand. However, the Company has the right
under such contracts to delay payment of withdrawals which may ultimately
result in paying an amount different than that determined to be payable
on demand.
Off-Balance-Sheet Financial Instruments (including Derivative Financial
Instruments)
During 1995, the Company received $0.4 million for writing call options
on underlying securities. As of December 31, 1995 there were no option
contracts outstanding.
At December 31, 1995, the Company had a forward swap agreement with a
notional amount of $100.0 million and a fair value of $0.1 million.
The Company did not have transactions in derivative instruments in 1994.
The Company also holds investments in certain debt and equity securities
with derivative characteristics (i.e., including the fact that their
market value is at least partially determined by, among other things,
levels of or changes in interest rates, prepayment rates, equity markets
or credit ratings/ spreads). The amortized cost and fair value of these
securities, included in the $13.4 billion investment portfolio, as of
December 31, 1995 was as follows:
Amortized Fair
(Millions) Cost Value
-------- ---------
Collateralized mortgage obligations $2,383.9 $2,549.3
Principal-only strips (included above) 38.7 50.0
Interest-only strips (included above) 10.7 20.7
Structured Notes (1) 95.0 100.3
(1) Represents non-leveraged instruments whose fair values and credit
risk are based on underlying securities, including fixed income
securities and interest rate swap agreements.
11. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits
to either purchase or sell securities or money market instruments at a
specified future date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments. At December 31, 1995, the
Company had commitments to purchase investments of $31.4
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingent Liabilities (Continued)
million. The fair value of the investments at December 31, 1995
approximated $31.5 million. There were no outstanding forward commitments
at December 31, 1994.
Litigation
There were no material legal proceedings pending against the Company as
of December 31, 1995 or December 31, 1994 which were beyond the ordinary
course of business. The Company is involved in lawsuits arising, for the
most part, in the ordinary course of its business operations as an
insurer.
12. Segment Information
The Company's operations are reported through two major business
segments: Life Insurance and Financial Services.
Summarized financial information for the Company's principal operations
was as follows:
(Millions) 1995 1994 1993
-------------------------------------------- -------- -------- ---------
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
-------------------------------------------- -------- -------- ---------
(Millions) 1995 1994 1993
-------------------------------------------- -------- -------- ---------
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
-------------------------------------------- -------- -------- ---------
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
76018-2 Life
