As filed with the Securities and Exchange Registration No. 33-75248
Commission on November 25, 1997 Registration No. 811-4536
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 6 TO
REGISTRATION STATEMENT
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
- --------------------------------------------------------------------------------
Variable Life Account B of Aetna Life Insurance and Annuity Company
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06l56
Depositor's Telephone Number, including Area Code: (860) 273-4686
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Julie E. Rockmore, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06l56
(Name and Complete Address of Agent for Service)
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
--------
X on November 28, 1997 pursuant to paragraph (b) of Rule 485
--------
60 days after filing pursuant to paragraph (a)(1) of Rule 485
--------
on __________________ pursuant to paragraph (a)(1) of Rule 485
--------
this post-effective amendment designates a new effective date for
-------- a previously filed post-effective amendment
<PAGE>
VARIABLE LIFE ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-8B-2 Part I (Prospectus Dated November 28, 1997)
Item No.
<S> <C>
1 Cover Page; The Separate Account; The Company
2 Cover Page; The Separate Account; The Company
3 Not Applicable
4 Cover Page; The Company; Additional Information - Distribution of the Policies
5 The Separate Account; The Company
6 The Separate Account; The Company
7 Not Applicable
8 Financial Statements
9 Additional Information - Legal Matters
10 The Separate Account; Charges & Fees; Policy Choices; Policy Values; Policy Rights;
Additional Information; Miscellaneous Policy Provisions
11 Allocation of Premiums; Policy Choices
12 Cover Page; Allocation of Premiums
13 Charges & Fees; Policy Choices; Term Insurance Rider; Additional Information - Distribution
of Policies
14 Policy Values; Miscellaneous Policy Provisions
15 Policy Summary; Allocation of Premiums - The Funds; Policy Choices; Policy Values
16 Policy Summary; Allocation of Premiums - The Funds; Policy Values
17 Policy Rights
18 Allocation of Premiums; Policy Choices; Policy Rights
19 Additional Information
20 Not Applicable
21 Policy Rights - Policy Loans: Preferred and Nonpreferred
22 Not Applicable
23 Directors and Officers
24 Miscellaneous Policy Provisions
25 The Company
26 Charges and Fees
27 The Company
<PAGE>
<CAPTION>
Form N-8B-2 Part I (Prospectus Dated November 28, 1997)
Item No.
<S> <C>
28 Directors and Officers
29 The Company
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 The Company; Additional Information
36 Not Applicable
37 Not Applicable
38 Additional Information
39 See Item 25
40 See Item 26
41 See Item 27
42 See Item 28
43 Financial Statements
44 Policy Values - Accumulation Unit Value; Financial Statements
45 Not Applicable
46 The Separate Accounts; Policy Values
47 The Separate Accounts; Allocation of Premiums; Policy Choices; Policy Values
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 Cover Page; Policy Choices; Policy Values
52 The Separate Account; Allocation of Premiums
53 Tax Matters
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
</TABLE>
<PAGE>
Variable Life Account B
Underwritten By:
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
(800) 334-7586
Prospectus Dated November 28, 1997
The Flexible Premium Variable Universal Life Insurance Policy
The Policy offered in connection with this prospectus is Corporate VUL, a
flexible premium variable universal life insurance policy ("Policy") offered by
Aetna Life Insurance and Annuity Company (ALIAC, the Company, we, us or our).
This Policy is intended to provide life insurance benefits. The Policy is
designed to allow flexible premium payments, a choice of underlying funding
options, and a choice from three Death Benefit Options. Your Policy's cash
value may vary with the investment performance of the underlying funding
options You choose. Although Policy values may vary, the Policy can be
guaranteed to stay in force through the Guaranteed Death Benefit provision.
Policy cash value may be used to continue Your Policy in force, may be borrowed
within certain limits, and may be fully or partially surrendered (subject to a
surrender charge).
You may also choose to select one of the annuity settlement options upon
maturity of the Policy. Prior to maturity of the Policy, You may apply the
value of Your Policy (minus any applicable surrender charges and the amount
necessary to repay any loans in full) to one of the annuity settlement options.
Upon death of the Insured, the beneficiary will be paid (a) the value of the
Death Benefit Option in one lump sum, or (b) under one of the annuity
settlement options.
The Policy has a Free-Look Period during which You may return it to our Home
Office for a refund. The refund may be more or less than the premiums paid.
(See "Right to Examine the Policy.")
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance policy with a Corporate VUL
Policy.
The Policies are available on a multiple life basis where the insureds share a
common employment or business relationship, and may be owned individually or by
a corporation, trust, association or similar entity. The Policyowner will have
all rights and privileges under the Policy. The Policies may be used for such
purposes as funding non-qualified executive deferred compensation or salary
continuation plans. These Policies may be used by large corporations as a means
of funding death benefit liabilities incurred under executive retirement plans
or as a source for funding cash flow obligations under such plans. Corporate
VUL is not designed to be used in an employer's pension or profit sharing plan.
i
<PAGE>
Variable Life Account B
This prospectus is intended to describe the variable options used to fund this
Policy through the Separate Account. The variable funding options
(collectively, the "Funds") currently available through the Separate Account
are as follows:
<TABLE>
<S> <C>
o Aetna Variable Fund o Janus Aspen Worldwide Growth
o Aetna Income Shares Portfolio
o Aetna Investment Advisers Fund, Inc. o MFS Total Return Series
o Aetna Variable Encore Fund o MFS World Governments Series
o Aetna Variable Capital Appreciation Portfolio o Oppenheimer Capital Appreciation Fund
o Aetna Variable Growth Portfolio o Oppenheimer Global Securities Fund
o Aetna Variable Index Plus Portfolio o Oppenheimer Growth & Income Fund
o Aetna Variable Small Company Portfolio o Oppenheimer Strategic Bond Fund
o Fidelity VIP Equity-Income Portfolio o Portfolio Partners MFS Emerging Equities Portfolio
o Fidelity VIP Growth Portfolio o Portfolio Partners MFS Research Growth
o Fidelity VIP High Income Portfolio Portfolio
o Fidelity VIP Overseas Portfolio o Portfolio Partners MFS Value Equity
o Fidelity VIP II Asset Manager Portfolio Portfolio
o Fidelity VIP II Contrafund Portfolio o Portfolio Partners Scudder International
o Janus Aspen Aggressive Growth Portfolio Growth Portfolio
o Janus Aspen Balanced Portfolio o Portfolio Partners T. Rowe Price Growth
o Janus Aspen Flexible Income Portfolio Equity Portfolio
o Janus Aspen Growth Portfolio
</TABLE>
The availability of the above Funds is subject to applicable regulatory
approvals. Not all Funds are available in all jurisdictions or under all
Policies. The Statement of Additional Information ("SAI") for any of the Funds
may be obtained by calling 800-334-7586.
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.
THIS PROSPECTUS AND OTHER INFORMATION ABOUT VARIABLE LIFE ACCOUNT B REQUIRED TO
BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION CAN BE FOUND IN THE SEC'S
WEB SITE AT http://www.sec.gov.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
ii
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Policy Definitions .................................................... v
Policy Summary ........................................................ 1
The Separate Account .................................................. 2
Allocation of Premiums ................................................ 3
Fixed Account ........................................................ 3
Separate Account ..................................................... 3
Mixed and Shared Funding ............................................. 7
Charges & Fees ........................................................ 8
Surrender Charge ..................................................... 8
Surrender Charges on Full and Partial Surrenders ..................... 8
Premium Load ......................................................... 8
Charges and Fees Assessed Against the Total Account Value ............ 9
Charges and Fees Associated with the Variable Funding Options ........ 9
Charges Assessed Against the Underlying Funds ........................ 11
Reduction of Charges ................................................. 12
Policy Choices ........................................................ 14
Premium Payments ..................................................... 14
Guaranteed Death Benefit ............................................. 15
Life Insurance Qualification ......................................... 16
Death Benefit Options ................................................ 17
Transfers and Allocations to Funding Options ......................... 18
Policy Values ......................................................... 19
Total Account Value .................................................. 19
Accumulation Unit Value .............................................. 19
Maturity Value ....................................................... 20
Surrender Value ...................................................... 20
Policy Rights ......................................................... 21
Partial Surrenders ................................................... 21
No Lapse Coverage .................................................... 21
Reinstatement of a Lapsed Policy ..................................... 22
Policy Loans: Preferred and Nonpreferred ............................. 22
Policy Changes ....................................................... 23
Right to Examine the Policy .......................................... 25
Death Benefit ......................................................... 26
Policy Settlement ..................................................... 27
Settlement Options ................................................... 27
Calculation of Settlement Payments ................................... 29
Term Insurance Rider .................................................. 30
The Company ........................................................... 31
Directors & Officers .................................................. 32
Additional Information ................................................ 34
Reports to Policyowners .............................................. 34
Right to Instruct Voting of Fund Shares .............................. 34
Disregard of Voting Instructions ..................................... 35
State Regulation ..................................................... 35
Legal Matters ........................................................ 35
The Registration Statement ........................................... 35
Distribution of the Policies ......................................... 35
Records and Accounts ................................................. 36
Independent Auditors ................................................. 37
Tax Matters ........................................................... 38
General .............................................................. 38
Federal Tax Status of the Company .................................... 38
Life Insurance Qualification ......................................... 38
General Rules ........................................................ 39
Modified Endowment Contracts ......................................... 39
Diversification Standards ............................................ 40
Investor Control ..................................................... 40
Other Tax Considerations ............................................. 41
Misc. Policy Provisions ............................................... 42
The Policy ......................................................... 42
</TABLE>
iii
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Payment of Benefits .................................................. 42
Age .................................................................. 42
Incontestability ..................................................... 42
Suicide .............................................................. 42
Coverage Beyond Maturity ............................................. 42
Nonparticipation .................................................... 43
Illustrations of Death Benefits, Total Account Values and Surrender
Values ............................................................... 44
Financial Statements of the Separate Account ....................... S-1
Financial Statements of the Company ................................ F-1
</TABLE>
iv
<PAGE>
Policy Definitions
Accumulated Premium: The sum of all premiums paid from the Date of Issue
accumulated at the Premium Accumulation Rate. The Accumulated Premium is used
with Death Benefit Option 3.
Accumulation Unit: A unit used to measure the value of a Policyowner's interest
in each applicable funding option used to calculate the value of the variable
portion of the Total Account Value before election of a Settlement Option.
Additional Premiums: Any premium paid in addition to Planned Premiums.
Amount at Risk: The Death Benefit before subtraction of outstanding loans, if
any, divided by 1.0032737, minus the Total Account Value.
Annuity: A series of payments for life or for a definite period.
Attained Age: The Issue Age of the Insured increased by the number of Policy
Years elapsed.
Cost of Insurance: The portion of the Monthly Deduction attributable to the
basic insurance coverage, not including riders, supplemental benefits or
monthly expense charges.
Date of Issue: The effective date of initial coverage. The Date of Issue and
the effective date for any change in coverage will be the Date of Coverage
Change shown in Supplemental Policy Specifications which will be sent to You.
Coverage is conditional on payment of the first premium, if required, and issue
of the Policy as provided in the application.
Death Benefit: The amount payable in accordance with the Death Benefit Option
chosen to the beneficiary upon the death of the Insured, after deduction of the
Loan Account Value plus any accrued interest and any overdue deductions.
Death Benefit Option: Any of three methods for determining the Death Benefit.
Fixed Account: The fixed interest option offered under the Policy that
guarantees a minimum interest rate of 4.0% per year.
Fixed Account Value: The non-loaned portion of this Policy's Total Account
Value attributable to the non-variable portion of the Policy. The Fixed Account
Value is held in the General Account.
Fund(s): One or more of the underlying funding options available under the
Policy (as described in this Prospectus). Each of the Funds is an open-end
management investment company whose shares are available to fund the benefits
provided by the Policy.
General Account: The Company's general asset account, in which assets
attributable to the non-variable portion of Policies are held, i.e., the Loan
Account Value and the Fixed Account Value.
v
<PAGE>
Grace Period: The 61-day period beginning on the Monthly Deduction Day on which
the Policy's Surrender Value is insufficient to cover the current Monthly
Deduction. The Policy will terminate without value at the end of the 61-day
period unless a sufficient payment described in the notification letter is
received by the Company.
Guaranteed Death Benefit Premium: A specified premium that, if paid, will keep
the Policy in force to attained age 80 or 100, even if the Surrender Value is
insufficient to cover current monthly deductions.
Home Office: The principal executive office of the Company, located at 151
Farmington Avenue, Hartford, Connecticut.
Insured: The person on whose life the Policy is issued.
Issue Age: The Insured's age on his/her birthday on or prior to the Policy's
Date of Issue.
Loan Account Value: An amount equal to the sum of all unpaid loans. The Loan
Account Value does not include interest accrued since the last Policy
anniversary. Such interest is payable in order to discharge any policy
indebtedness.
Maturity Date: The Policy anniversary on which the Insured reaches Attained Age
100.
Maturity Value: The Total Account Value on the Maturity Date, less Loan Account
Value plus any accrued interest.
Minimum Monthly Premium: The amount of premium which must be paid to assure
that the Policy remains in force for at least five years after issue, assuming
there have been no loans or surrenders.
Monthly Deduction: The Monthly Deduction from the Total Account Value which
includes the Cost of Insurance, charges for supplemental riders or benefits,
and an administrative expense charge. The Monthly Deduction Day is the day that
the deduction is actually taken.
Net Premium: The premium paid, less the premium load.
Nonpreferred Loan: Loans taken in the first ten Policy Years, and beginning in
the eleventh Policy Year, loans taken in excess of the Preferred Loan Amount.
Planned Premium: The amount of premium the Policyowner chooses to pay the
Company on a scheduled basis. This is the amount for which the Company sends a
bill.
Policy: The life insurance contract described in this prospectus.
Policyowner: The owner of the Policy, referred to as "You."
Policy Year: Each twelve-month period, beginning on the Date of Issue, during
which the Policy is in effect.
vi
<PAGE>
Preferred Loan Amount: A portion of the maximum loan amount available beginning
in the eleventh Policy Year at zero net cost to the Policyowner. The preferred
loan is the amount taken.
Premium Accumulation Rate: The annual rate at which premiums paid will be
accumulated to determine the Death Benefit if Death Benefit Option 3 is
selected. This rate is chosen by You at issue. Any amount requested in excess
of 10% may be subject to additional underwriting.
Separate Account(s): Variable Life Account B (and Variable Annuity Account B
when referring to a Settlement Option).
Separate Account Value: The portion of the Policy's Total Account Value
attributable to the variable portion of the Policy. The Separate Account Value
is held in Variable Life Account B.
Settlement Option(s): The manner in which a beneficiary may receive Annuity
payments due from a Death Benefit if elected upon Maturity, or which the
insured may choose to receive Annuity payments from the Surrender Value of the
Policy.
Settlement Option Units: A measure of the net investment results of the
investment options used to calculate the amount of the Settlement Option
payments.
Specified Amount: The amount, originally chosen by the Policyowner, used in
determining the Death Benefit. It is initially equal to the Death Benefit. The
Specified Amount may be increased or decreased as described in this prospectus.
Surrender Charge: The amount retained by the Company, upon the full or partial
surrender of the Policy.
Surrender Value: The amount a Policyowner can receive in cash by surrendering
the Policy. This equals the Total Account Value minus the applicable surrender
charge, the Loan Account Value and any accrued interest, plus any credit for
premium loads paid.
Target Amount: If a Term Insurance Rider is attached to the Policy, the Target
Amount is the Term Insurance Rider's Benefit Amount plus the Policy's Death
Benefit which is dependent upon the Death Benefit Option in effect.
Total Account Value: The sum of the Fixed Account Value, Separate Account Value
and the Loan Account Value.
Valuation Period: The period of time from when the Company determines the
Accumulation Unit Value and Settlement Option Unit Value of a variable
investment option until the next time it determines such unit value. Currently,
the calculation occurs after the close of business of the New York Stock
Exchange on any normal business day, Monday through Friday, that the New York
Stock Exchange is open.
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.
vii
<PAGE>
Policy Summary
This is a flexible premium variable universal life insurance Policy. Proceeds
as described in the Policy will be paid upon surrender, maturity, or death of
the Insured.
At the time of purchase, You must choose from three Death Benefit Options. The
amount payable under the option chosen will be determined as of the date of the
Insured's death. (See "Death Benefit Options.")
Also at the time of purchase, You must choose which life insurance
qualification method bests suits Your needs - Cash Value Accumulation or
Guideline Premium. Both methods require a Policy to provide minimum ratios of
life insurance coverage to Total Account Value. (See "Life Insurance
Qualification.")
The Policy also offers a Guaranteed Death Benefit provision (may not be
available in all states) which ensures that the Policy will stay in force even
if the Surrender Value is insufficient to cover the current monthly deductions
due to fund performance. Sufficient premiums must be paid in order to maintain
a Guaranteed Death Benefit to Age 80 or 100. (See "Guaranteed Death Benefit.")
At the time of purchase, You must also choose the amount of premium You intend
to pay. You may vary premium payments to some extent and still keep Your Policy
in force. However, sufficient premiums must be paid to continue the Policy and
premium reminder notices will be sent for planned premiums and for premiums
required to continue this Policy in force. If this Policy lapses it may be
reinstated as discussed in Reinstatement of a Lapsed Policy.
You must also choose how to allocate Net Premiums. Net Premiums allocated to
the Separate Account must be allocated to one or more Funds, and allocations
must be in whole percentages. The variable portion of this Policy is supported
by the Funds You choose. The Fund value in each Fund is not guaranteed and will
vary with the investment performance of that Fund.
If the Fixed Account is selected, the Fixed Account Value will accumulate at
rates of interest we determine. Such rates will not be less than 4.0% a year.
1
<PAGE>
The Separate Account
The Separate Account established for the purpose of providing Variable Options
to fund the Policy is Variable Life Account B. Amounts allocated to the
Separate Account are invested in the Funds. Each of the Funds is an open-end
management investment company whose shares are purchased by the Separate
Account to fund the benefits provided by the Policy. The Funds currently
available under the Separate Account, including their investment objectives and
their investment advisers, are described in this Prospectus. Complete
descriptions of the Funds' investment objectives and restrictions and other
material information relating to an investment in the Funds are contained in
the prospectuses for each of the Funds which accompany this Prospectus.
Variable Life Account B was established pursuant to a June 18, 1986, resolution
of the Board of Directors of the Company. Under Connecticut insurance law, the
income, gains or losses of the Separate Account are credited without regard to
the other income, gains or losses of the Company. These assets are held for the
Company's variable life insurance policies. Any and all distributions made by
the Funds with respect to shares held by the Separate Account will be
reinvested in additional shares at net asset value. The assets maintained in
the Separate Account will not be charged with any liabilities arising out of
any other business conducted by the Company. The Company is, however,
responsible for meeting the obligations of the Policy to the 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.
2
<PAGE>
Allocation of Premiums
You may allocate all or a part of Your Net Premiums to the Fixed Account (part
of the Company's General Account) or to the Funds currently available through
the Separate Account in connection with the Policy. The total number of
investment options you may select is currently limited to 18 at any one time.
Not all funds may be available under all Policies or in all jurisdictions. In
addition, the Company may add, withdraw or substitute Funds, subject to the
conditions in the Contract and to compliance with regulatory requirements.
The investment results of the Funds, whose objectives are described below, are
likely to differ significantly. You should consider carefully, and on a
continuing basis, which Fund or combination of Funds is best suited to Your
long-term investment objectives. Except where otherwise indicated, all of the
Funds are diversified, as defined in the Investment Company Act of 1940, as
amended.
In states which require a full refund of premiums during the Right of Policy
Examination period (see "Right to Examine the Policy"), the first Net Premium
will be allocated in its entirety to Aetna Variable Encore Fund (a money market
fund), regardless of the policy owner's premium allocation percentages until
the day following the expiration of the Right of Policy Examination period. Any
other Net Premium received prior to that day will also be allocated to Aetna
Variable Encore Fund. On the day following the expiration of the Right of
Policy Examination, the policy value and future Net Premiums will be allocated
in accordance with the policy owner's selected premium allocation percentages.
If the policy is issued, any monies received prior to the policy issue would be
held in Aetna Variable Encore Fund from the date of receipt until the day the
policy is issued or, for states which require the full premium refund, until
the day following the Right of Policy Examination period on the issued policy.
Fixed Account
[bullet] Amounts held in the Fixed Account will be credited with interest at
rates of not less than 4.0% per year. Additional excess interest of up
to 0.5% may be credited to the Fixed Account Value beginning in Policy
Year 11. Credited interest rates reflect the Company's return on Fixed
Account invested assets and the amortization of any realized gains
and/or losses which the Company may incur on these assets.
Separate Account
[bullet] Aetna Variable Fund seeks to maximize total return through investments
in a diversified portfolio of common stocks and securities convertible
into common stock. (1)
[bullet] Aetna Income Shares seeks to maximize total return, consistent with
reasonable risk, through investments in a diversified portfolio of
debt securities. (1)
[bullet] Aetna Variable Encore Fund seeks to provide a high level of current
income consistent with the preservation of capital and liquidity,
primarily through investments in high quality money market
instruments. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government. (1)
[bullet] Aetna Investment Advisers Fund, Inc. is a managed fund which seeks to
maximize investment return consistent with reasonable safety of
principal by
3
<PAGE>
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 Variable Portfolios, Inc.--Aetna Variable Capital Appreciation
Portfolio seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into
common stocks. The Portfolio will use a value-oriented approach in an
attempt to outperform the total return performance of publicly traded
common stocks represented by the S&P 500 Composite Stock Price Index
("S&P 500"), a broad based stock market index composed of 500 common
stocks selected by the Standard & Poor's Corporation. The Portfolio
uses the S&P 500 as a comparative benchmark because it represents
approximately two-thirds of the total market value of all U.S. common
stocks, and is well known to investors. (1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Growth Portfolio seeks
growth of capital through investment in a diversified portfolio of
common stocks and securities convertible into common stocks believed
to offer growth potential. (1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Index Plus Portfolio
seeks to outperform the total return performance of publicly traded
common stocks represented by the S&P 500. (1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Variable Small Company
Portfolio seeks growth of capital primarily through investment in a
diversified portfolio of common stocks and securities convertible into
common stocks of companies with smaller market capitalizations.
Companies with smaller market capitalizations generally will have
market capitalization at the time of purchase of $1 billion or less.
(1)
[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. (2)
[bullet] Fidelity Investments Variable Insurance Products Fund - Growth
Portfolio seeks to achieve capital appreciation by investing primarily
in common stock, although the Fund is not limited to any one type of
security. (2)
[bullet] Fidelity Investments Variable Insurance Products Fund--High Income
Portfolio seeks to obtain a high level of current income by investing
primarily in high-yielding, lower-rated, fixed income securities,
while also considering growth of capital. Lower-rated corporate debt
obligations are commonly known as "junk bonds" or "high yield, high
risk bonds" and involve significant degree of risk (see the Fund's
prospectus for a discussion of the risk factors involved in investing
in lower-rated corporate debt obligations). (2)
[bullet] Fidelity Investments Variable Insurance Products Fund - Overseas
Portfolio seeks long-term growth of capital primarily through
investments in foreign securities (at least 65% from at least three
countries outside of North America). Foreign investments involve
greater risks than U.S. investments, including political and economic
risks and the risk of currency fluctuation. (2)
[bullet] Fidelity Investments Variable Insurance Products Fund II - Asset
Manager Portfolio seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and foreign stocks,
bonds and short-term fixed income instruments. (2)
4
<PAGE>
[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. (2)
[bullet] Janus Aspen Series - Aggressive Growth Portfolio is a nondiversified
portfolio that seeks long-term growth of capital. The Portfolio pursues
its investment objective by normally investing at least 50% of its
equity assets in securities issued by medium-sized companies.
Medium-sized companies are those whose market capitalizations fall
within the range of companies in the S&P MidCap 400 Index, which as of
December 30, 1996 included companies with capitalizations between
approximately $192 million and $6.5 billion, but which is expected to
change on a regular basis. (3)
[bullet] Janus Aspen Series - Balanced Portfolio seeks long-term capital growth
consistent with preservation of capital and balanced by current
income. The Portfolio pursues its investment objective by, under
normal circumstances, investing 40%-60% of its assets in securities
selected primarily for their growth potential and 40%-60% of its
assets in securities selected primarily for their income potential.
(3)
[bullet] Janus Aspen Series--Flexible Income Portfolio seeks to obtain maximum
total return, consistent with preservation of capital. Total return is
expected to result from a combination of current income and capital
appreciation. The Portfolio invests in all types of income producing
securities and may have substantial holdings of debt securities rated
below investment grade (e.g., junk bonds). (3)
[bullet] Janus Aspen Series - Growth Portfolio seeks long-term growth of
capital in a manner consistent with preservation of capital. The
Portfolio pursues its objective by investing in common stocks of
companies of any size. (3)
[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. (3)
[bullet] MFS Total Return Series seeks to provide above-average income
(compared to a portfolio invested entirely in equity securities)
consistent with the prudent employment of capital. Its secondary
objective is to provide a reasonable opportunity for growth of capital
and income. Under normal market conditions, at least 25% of the Total
Return Series' assets will be invested in fixed income securities, and
at least 40% and no more than 75% of the Series' assets will be
invested in equity securities. (4)
[bullet] MFS World Governments Series seeks not only preservation, but also
growth of capital, together with moderate current income. The Series
seeks to achieve its objective through a professionally managed,
internationally diversified portfolio consisting primarily of debt
securities and to a lesser extent equity securities. Consistent with
its investment objective and policies, the Series may invest up to
100% (and generally expects to invest not more than 80%) of its net
assets in foreign securities which are not traded on a U.S. exchange.
(4)
[bullet] Oppenheimer Capital Appreciation Fund seeks to achieve capital
appreciation by investing in "growth-type" companies. (5)
[bullet] Oppenheimer Global Securities Fund seeks long-term capital
appreciation by investing a substantial portion of its assets in
securities of foreign issuers, "growth-type" companies, cyclical
industries and special situations which are
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<PAGE>
considered to have appreciation possibilities. Current income is not an
objective. These securities may be considered to be speculative. (5)
[bullet] Oppenheimer Growth & Income Fund seeks a high total return (which
includes growth in the value of its shares as well as current income)
from equity and debt securities. From time to time this Fund may focus
on small to medium capitalization common stocks, bonds and convertible
securities. (5)
[bullet] Oppenheimer Strategic Bond Fund seeks a high level of current income
principally derived from interest on debt securities and seeks to
enhance such income by writing covered call options on debt
securities. The Fund intends to invest principally in: (i) foreign
government and corporate debt securities, (ii) U.S. Government
securities, and (iii) lower-rated high yield domestic debt securities,
commonly known as "junk bonds", which are subject to a greater risk of
loss of principal and nonpayment of interest than higher-rated
securities. These securities may be considered to be speculative. (5)
[bullet] Portfolio Partners, Inc.--MFS Emerging Equities Portfolio seeks
long-term growth of capital by investing primarily in common stocks
issued by companies that its subadviser believes are early in their
life cycle but which have the potential to become major enterprises
(emerging growth companies). (6)
[bullet] Portfolio Partners, Inc.--MFS Research Growth Portfolio seeks long-term
growth of capital and future income by investing primarily in common
stocks or securities convertible into common stocks issued by companies
that the subadviser believes to possess better-than-average prospects
for long-term growth, and, to a lesser extent, in income-producing
securities including bonds and preferred stock. (6)
[bullet] Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation by investing primarily in common stocks. (6)
[bullet] Portfolio Partners, Inc.--Scudder International Growth Portfolio seeks
long-term growth of capital primarily through a diversified portfolio
of marketable foreign equity securities. (7)
[bullet] Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term growth of capital and, secondarily, seeks to increase
dividend income by investing primarily in common stocks issued by a
diversified group of well-established growth companies. (8)
Investment Advisers for each of the Funds:
(1) Aetna Life Insurance and Annuity Company (adviser);
Aeltus Investment Management, Inc. (sub-adviser)
(2) Fidelity Management & Research Company
(3) Janus Capital Corporation
(4) Massachusetts Financial Services Company ("MFS")
(5) OppenheimerFunds, Inc.
(6) Aetna Life Insurance and Annuity Company (adviser);
Massachusetts Financial Services Company ("MFS") (sub-adviser)
(7) Aetna Life Insurance and Annuity Company (adviser);
Scudder, Stevens & Clark, Inc. (sub-adviser)
(8) Aetna Life Insurance and Annuity Company (adviser);
T. Rowe Price Associates, Inc. (sub-adviser)
The availability of the Funds listed above is subject to applicable regulatory
approvals. Not all Funds are available in all jurisdictions or under all
Policies.
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<PAGE>
There is no assurance that the Funds will achieve their investment objectives.
Policyowners bear the full investment risk of investments in the Funds
selected.
Some of the above Funds may use instruments knowns as derivatives as part of
their investment strategies, as described in their respective prospectuses. The
use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of
leverage in connection with derivatives can also increase risk of losses. See
the prospectus for the Funds for a discussion of the risks associated with an
investment in those funds. You should refer to the accompanying prospectuses of
the Funds for more complete information about their investment policies and
restrictions.
Mixed and Shared Funding
Shares of the Funds are available to insurance company separate accounts which
fund variable annuity contracts and variable life insurance policies, including
the Policy described in this Prospectus. Because Fund shares are offered to
separate accounts of both affiliated and unaffiliated insurance companies, it
is conceivable that, in the future, it may not be advantageous for variable
life insurance separate accounts and variable annuity separate accounts to
invest in these Funds simultaneously, since the interests of such Policyowners
or contractholders may differ. Although neither the Company nor the Funds
currently foresees any such disadvantages either to variable life insurance or
to variable annuity Policyholders, each Fund's Board of Trustees/Directors has
agreed to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response thereto. If such a conflict were to occur, one of the
separate accounts might withdraw its investment in a Fund. This might force
that Fund to sell portfolio securities at disadvantageous prices.
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<PAGE>
Charges & Fees
Surrender Charge
If You surrender Your Policy (in whole or in part) a surrender charge may
apply, as described below.
This charge is imposed in part as a deferred sales charge and in part to enable
the Company to recover certain first year administrative costs. The maximum
portion of the Surrender Charge applied to reimburse the Company for sales and
promotional expense is 30% of the first year's Minimum Monthly Premium. (Any
surrenders may result in tax implications; see "Tax Matters.")
The initial Surrender Charge, as specified in Your Policy, is based on the
Specified Amount. It also depends on the Insured's Attained Age and risk class.
Once determined, the Surrender Charge will decrease annually until it reaches
zero after nine years.
If You increase the Specified Amount, a new Surrender Charge will be
applicable, in addition to the then existing Surrender Charge. This charge will
be determined based on the Insured's Attained Age and risk class. The Surrender
Charge applicable to the increase will be equal to the Surrender Charge on a
new Policy whose Specified Amount equals the amount of the increase, and will
cover administrative expenses. The additional surrender charge will also
decrease annually until it reaches zero after nine years.
If You decrease the Specified Amount while the Surrender Charge applies, the
Surrender Charge will remain the same as it was before the decrease.
Based on its actuarial determination, the Company does not anticipate that the
Surrender Charge will cover all sales and administrative expenses which the
Company will incur in connection with the Policy. Any such shortfall, including
but not limited to payment of sales and distribution expenses, would be charged
to and paid by the Company.
Surrender Charges on Full and Partial Surrenders
Full Surrender: All applicable Surrender Charges are imposed.
Partial Surrender: A proportional percentage of all Surrender Charges is
imposed. The proportional percentage is the amount of the net partial surrender
divided by the sum of the Fixed Account Value and the Separate Account Value
less full Surrender Charges. When a partial surrender is made, any applicable
remaining Surrender Charges will be reduced in the same proportion.
Premium Load
The premium load is deducted from your premium payments. The premium load is
guaranteed to be no higher than 10% of premiums paid up to the first year's
Guaranteed Death Benefit Premium to age 80 (5% in renewal years) and 5% over
the Guaranteed Death Benefit Premium to age 80 in both first and renewal years.
The current premium load for this Policy is 7% of premiums paid up to the first
year's Guaranteed Death Benefit Premium to age 80 (2% in renewal years) and 2%
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<PAGE>
over the Guaranteed Death Benefit Premium to age 80 in both first and renewal
years. This load represents average applicable state premium taxes as well as
administrative expenses. The Company is responsible for payment of premium
taxes and other amounts payable with respect to Your premium payments to the
extent they exceed the premium load. DAC taxes are paid by the Company.
Upon a full surrender of Your Policy within the first 36 months of the Policy,
if Your Policy is not in default you may be entitled to a credit for some or
all of the premium loads which have been deducted from your premium payments
although a Surrender Charge will also apply. For Policies which are surrendered
during the first twelve months after the Date of Issue, the credit will be the
sum of all premium loads deducted. For Policy Months 13 through 36, the credit
will be equal to the sum of all premium loads deducted since the Date of Issue
multiplied by twelve and then divided by the number of Policy Months since the
Date of Issue of the Policy. For example, during Policy Month 24, the credit
would be equal to the total of all premium loads deducted since the Date of
Issue multiplied by 12/24, or half of all premium loads paid. No credits apply
if a Policy is in default.
To determine your Surrender Value, upon a full surrender, the credit will be
applied as well as the applicable Surrender Charge (see "Surrender Charge,"
above). To determine the Surrender Value, for a surrender within the first 36
months of the Policy, the Total Account Value will be reduced by the applicable
Surrender Charge and the amount of any Loan Account Value, including accrued
interest. That amount would be increased by the applicable credit for the
premium load.
Charges and Fees Assessed Against the Total Account Value
A Monthly Deduction is made from the Total Account Value. The Monthly Deduction
is made as of the same day each month, beginning with the Date of Issue. The
Monthly Deduction includes the Cost of Insurance and any charges for
supplemental riders or benefits. The Cost of Insurance depends on the Attained
Age, risk class of the Insured and the Specified Amount of the Policy.
Once a Policy is issued, Monthly Deductions, including Cost of Insurance
charges, will begin as of the Date of Issue, even if the Policy's issuance was
delayed due to underwriting requirements, and will be in amounts based on the
Specified Amount of the Policy issued, even if the temporary insurance coverage
received during the underwriting period was for a lesser amount. If we decline
an application, we will refund the premium payment made.
The Monthly Deduction also includes a monthly administrative expense charge of
$7 during all Policy Years. This charge is for items such as premium billing
and collection, Policy value calculation, confirmations and periodic reports
and will not exceed our costs. The Monthly Deduction is deducted
proportionately from each funding option, if more than one is used. This is
accomplished by liquidating Accumulation Units and withdrawing the value of the
liquidated Accumulation Units from each funding option in the same proportion
as their respective values have to Your Fixed Account and Separate Account
Values.
Charges and Fees Associated with the Variable Funding Options
The Company deducts a daily charge from the assets of Variable Life Account B
for mortality and expense risks assumed by it in connection with the Policy.
During the first ten Policy Years, this charge is currently equal to an annual
rate of 0.70% of
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<PAGE>
the average daily net assets of the Separate Account; beginning in Policy Year
eleven, the current charge decreases to an annual rate of 0.20% of the Separate
Account's average daily net assets. The mortality and expense risk charge is
assessed to compensate the Company for assuming certain mortality and expense
risks under the Policies. The Company reserves the right to increase the
mortality and expense risk charge if it believes that circumstances have
changed so that current charges are no longer adequate. In no event will the
charge exceed 0.90% of average daily net assets on an annual basis.
The Company also deducts a daily administrative charge equivalent on an annual
basis to 0.30% of the average daily net assets of Variable Life Account B to
compensate the Company for expenses associated with the administration and
maintenance of the Policy. These types of expenses are described above in
connection with the monthly administrative charge. The daily administrative
charge and the monthly administrative charge work together to cover the
Company's administrative expenses. In later years of the Policy, the revenue
collected from the daily asset-based charge grows with the Total Account Value
to cover increased expenses from Account-based transactional expenses. The
daily administrative charge is guaranteed not to exceed 0.50% of the average
daily net assets of the Separate Account on an annual basis.
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<PAGE>
Charges Assessed Against the Underlying Funds
The following table illustrates the investment advisory fees, other expenses
and total expenses paid by each of the Funds as a percentage of average net
assets based on figures for the year ended December 31, 1996:
<TABLE>
<CAPTION>
Investment
Advisory Fees(1) Other Expenses Total Fund
(after expense (after expense Annual
reimbursement) reimbursement) Expenses
------------------ ---------------- -----------
<S> <C> <C> <C>
Aetna Income Shares(2) 0.40% 0.08% 0.48%
Aetna Variable Fund(2) 0.50% 0.06% 0.56%
Aetna Investment Advisers Fund, Inc.(2) 0.50% 0.08% 0.58%
Aetna Variable Encore Fund(2) 0.25% 0.10% 0.35%
Aetna Variable Capital Appreciation Portfolio(2) 0.60% 0.15% 0.75%
Aetna Variable Growth Portfolio(2) 0.60% 0.15% 0.75%
Aetna Variable Index Plus Portfolio(2) 0.35% 0.15% 0.50%
Aetna Variable Small Company Portfolio(2) 0.75% 0.15% 0.90%
Fidelity VIP Equity-Income Portfolio(3) 0.51% 0.07% 0.58%
Fidelity VIP Growth Portfolio(3) 0.61% 0.08% 0.69%
Fidelity VIP High Income Portfolio(3) 0.59% 0.12% 0.71%
Fidelity VIP Overseas Portfolio(3) 0.76% 0.17% 0.93%
Fidelity VIP II Asset Manager Portfolio(3) 0.64% 0.10% 0.74%
Fidelity VIP II Contrafund Portfolio(3) 0.61% 0.13% 0.74%
Janus Aspen Aggressive Growth Portfolio(4) 0.72% 0.04% 0.76%
Janus Aspen Balanced Portfolio(4) 0.79% 0.15% 0.94%
Janus Aspen Flexible Income Portfolio(4) 0.65% 0.19% 0.84%
Janus Aspen Growth Portfolio(4) 0.65% 0.04% 0.69%
Janus Aspen Worldwide Growth Portfolio(4) 0.66% 0.14% 0.80%
MFS Total Return Series(5) 0.75% 0.25% 1.00%
MFS World Governments Series(5) 0.75% 0.25% 1.00%
Oppenheimer Capital Appreciation Fund 0.72% 0.03% 0.75%
Oppenheimer Global Securities Fund 0.73% 0.08% 0.81%
Oppenheimer Growth & Income Fund 0.75% 0.25% 1.00%
Oppenheimer Strategic Bond Fund 0.75% 0.10% 0.85%
Portfolio Partners MFS Emerging Equities
Portfolio(6) 0.70%(7) 0.13% 0.83%
Portfolio Partners MFS Research Growth
Portfolio(6) 0.70%(7) 0.15% 0.85%
Portfolio Partners MFS Value Equity
Portfolio(6) 0.65% 0.25% 0.90%
Portfolio Partners Scudder International
Growth Portfolio(6) 0.80% 0.20% 1.00%
Portfolio Partners T. Rowe Price Growth
Equity Portfolio(6) 0.60% 0.15% 0.75%
(1) Certain of the unaffiliated Fund advisers reimburse the Company for administrative costs
incurred in connection with administering the Funds as variable funding options under the
Contract. These reimbursements are paid out of the investment advisory fees and are not
charged to investors.
</TABLE>
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<PAGE>
(2) The Company provides administrative services to the Fund and assumes the
Fund's ordinary recurring direct costs under an Administrative Services
Agreement. The new Administrative Services Agreement became effective on May
1, 1996 for Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore
Fund and Aetna Investment Advisers Fund, Inc. Therefore, for these Funds the
"Other Expenses" shown are not based on actual figures for the year ended
December 31, 1996, but reflect the fee payable under that Agreement. The
Administrative Services Agreement was in effect for Aetna Variable Capital
Appreciation Portfolio, Aetna Variable Growth Portfolio, Aetna Variable
Index Plus Portfolio and Aetna Variable Small Company Portfolio since their
inception. Effective August 1, 1996, Investment Advisory Fees were increased
for Aetna Variable Fund, Aetna Income Shares and Aetna Investment Advisers
Fund, Inc. The Advisory Fees shown above are not based on actual figures for
the year ended December 31, 1996, but reflect the increased Investment
Advisory Fees.
(3) A portion of the brokerage commissions that certain funds pay was used to
reduce expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses would
have been 0.56% for Equity-Income Portfolio, 0.67% for Growth Portfolio,
0.92% for Overseas Portfolio, 0.73% for Asset Manager Portfolio; and 0.71%
for Contrafund Portfolio.
(4) The fees and expenses shown above are based on gross expenses of the Shares
before expense offset arrangements for the fiscal year ended December 31,
1996. The information for each Portfolio is net of fee waivers or reductions
from Janus Capital. Fee reductions for the Aggressive Growth, Balanced,
Growth, and Worldwide Growth Portfolios reduce the management fee to the
level of the corresponding Janus retail fund. Other waivers, if applicable,
are first applied against the management fee and then against other
expenses. Without such waivers or reductions, the Management Fee, Other
Expenses and Total Fund Annual Expenses would have been 0.79%, 0.04% and
0.83% for Aggressive Growth Portfolio; 0.92%, 0.15% and 1.07% for Balanced
Portfolio; 0.79%, 0.04% and 0.83% for Growth Portfolio; and 0.77%, 0.14% and
0.91% for Worldwide Growth Portfolio, respectively. Janus Capital may modify
or terminate the waivers or reductions at any time upon at least 90 days'
notice to the Portfolio's Board of Trustees.
(5) The adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, such that each Series' "Other Expenses" shall
not exceed 0.25% of the average daily net assets of the Series during the
current fiscal year. Otherwise, "Other Expenses" for the MFS Total Return
Series and MFS World Governments Series would be 1.35% and 1.28%,
respectively, and "Total Fund Annual Expenses" would be 2.10% and 2.03%,
respectively, for these Series. Each Series has an expense offset
arrangement which reduces the Series' custodian fee based upon the amount of
cash maintained by the Series with its custodian and dividend disbursing
agent, and may enter into other such arrangements and directed brokerage
arrangements (which would also have the effect of reducing the Series'
expenses). Any such fee reductions are not reflected under "Other Expenses."
(6) The Fund commenced investment operations on November 28, 1997. The fees and
expenses shown above are the contractual rates for the current period.
Portfolio Partners, Inc. was incorporated May 7, 1997. The Company has
agreed to reimburse the Fund for expenses and/or waive its fees so that the
aggregate expenses will not exceed this amount through April 30, 1999.
Without such reimbursements or waivers, Total Annual Fund Expenses are
estimated to be as follows: 1.00% for the Scudder International Growth
Portfolio; .87% for the MFS Emerging Equities Portfolio; .92% for the MFS
Research Growth Portfolio; .90% for the MFS Value Equity Portfolio and .79%
for the T. Rowe Price Growth Equity Portfolio.
(7) The advisory fee is .70% of the first $500 million in assets and .65% on the
excess.
For further details on each Fund's expenses, please refer to that Fund's
prospectus.
Reduction of Charges
This Policy is available for purchase by corporations and other groups or
sponsoring organizations for multiple life sales. We reserve the right to
reduce premium loads or any other charges on certain multiple life sales
("cases") where it is expected that the amount or nature of such cases will
result in savings of sales, underwriting, administrative or other costs.
Eligibility for these reductions and the amount of reductions will be
determined by a number of factors, including the number of lives
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<PAGE>
to be insured, the total premiums expected to be paid, total assets under
management for the Policyowner, the nature of the relationship among the
insured individuals, the purpose for which the policies are being purchased,
expected persistency of the individual policies, and any other circumstances
which We believe to be relevant to the expected reduction of our expenses. Some
of these reductions may be guaranteed and others may be subject to withdrawal
or modification by us on a uniform case basis. Reductions in charges will not
be unfairly discriminatory to any Policyowners.
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<PAGE>
Policy Choices
When You buy a Policy, You make several important choices:
[bullet] The amount of premium You intend to pay and whether You want to pay
the amount necessary to guarantee Your Death Benefit to age 80 or 100;
[bullet] Which Life Insurance Qualification method best suits Your needs --
Cash Value Accumulation or Guideline Premium;
[bullet] Which one of the three Death Benefit Options You would like;
[bullet] The Premium Accumulation Rate You would like if You choose Death
Benefit Option 3;
[bullet] The way Your premiums will be allocated to the Funds and/or the Fixed
Account.
Each of these choices is described in detail below:
Premium Payments
During the first five Policy years, payment of the Minimum Monthly Premium
assures that the Policy will remain in force, as long as there are no partial
surrenders or loans taken during that time. The Minimum Monthly Premium is
stated in the Policy. If Minimum Monthly Premiums are not paid, or there are
partial surrenders or loans taken during the first five Policy Years, the
Policy will lapse if the Surrender Value is less than the next Monthly
Deduction.
Minimum Monthly Premiums are current if premiums paid, minus loans and partial
surrenders, are greater than or equal to the Minimum Monthly Premium multiplied
by the number of months the Policy has been in force.
After the first five Policy Years, Your Policy will not lapse as long as the
Policy's Surrender Value is sufficient to cover the next Monthly Deduction.
Planned Premiums are those premiums You choose to pay on a scheduled basis. We
will bill You annually, semiannually, or quarterly, or at any other agreed-upon
frequency. Pre-authorized automatic monthly check payments may also be
arranged.
Additional Premiums are any premiums You pay in addition to Planned Premiums.
Payment of Minimum Monthly Premiums, Planned Premiums, or Additional Premiums
in any amount will not, except as noted above, guarantee that Your Policy will
remain in force. Conversely, failure to pay Planned Premiums or Additional
Premiums will not necessarily cause Your Policy to lapse. Not paying Your
Planned Premiums can, however, cause the Guaranteed Death Benefit provision to
terminate. (See "Guaranteed Death Benefit.")
At any time, You may increase Your Planned Premium by written notice to us, or
pay Additional Premiums, except that:
[bullet] We may require evidence of insurability if the Additional Premium or
the new Planned Premium during the current Policy Year increases the
difference between the Death Benefit and the Total Account Value. If
satisfactory evidence of insurability is requested and not provided,
we will refund the increase in premium
14
<PAGE>
without interest and without investing such amounts in the underlying
funding options.
[bullet] If You have chosen the Guideline Premium method for Life Insurance
Qualification in no event may the total of all premiums paid exceed
the then-current maximum premium limitations established by federal
income tax law for a Policy to qualify as life insurance. (See "Tax
Considerations for Policyowners.")
[bullet] If, at any time, a premium is paid which would result in total
premiums exceeding such maximum premium limitations, we will only
accept that portion of the premium which will make total premiums
equal to the maximum. Any part of the premium in excess of that amount
will be returned or applied as otherwise agreed and no further
premiums will be accepted until allowed by the then-current maximum
premium limitations prescribed by law.
[bullet] If You make a sufficient premium payment when You apply for a Policy,
and have answered favorably to certain questions relating to the
Insured's health, a "temporary insurance agreement" in the amount
applied for (subject to stated maximums) will be provided.
[bullet] After the first premium payment, all premiums must be sent directly to
our Home Office and will be deemed received when actually received at
the Home Office. Your premium payments received during a Valuation
Period at the Home Office will be allocated as You have directed and
amounts allocated to the Funds will be credited at the Accumulation
Unit value determined at the end of the Valuation Period after each
payment is received in the Home Office.
You may reallocate Your future premium payments at any time free of charge. Any
reallocation will apply to premium payments made after You have received
written verification from us.
Under limited circumstances, we may backdate a Policy, upon request, by
assigning a Date of Issue earlier than the date the application is signed, but
no earlier than six months prior to state approval of the Policy. Backdating
may be desirable, for example, so that You can purchase a particular Policy
Specified Amount for lower cost of insurance rates, based on a younger
insurance age. For a backdated Policy, You must pay the minimum premium payable
for the period between the Date of Issue and the date of initial premium is
invested in the Separate Account. Backdating of your Policy will not affect the
date on which your premium payments are credited to the Separate Account and
you are credited with Accumulation Units. You cannot be credited with
Accumulation Units until your Net Premium is actually deposited in the Separate
Account. (See "Policy Values.")
Guaranteed Death Benefit
The Guaranteed Death Benefit assures that as long as the Guaranteed Death
Benefit Premium test, as described below, is met, the Policy will stay in force
even if the Surrender Value is insufficient to cover monthly deductions.
By paying the required Guaranteed Death Benefit Premium, You can choose which
Guaranteed Death Benefit will be in effect. This benefit may not be available
to all risk classes and is only available in those states where it has been
approved, (eg., not available in New York.) The Guaranteed Death Benefit is
available to age 80 or to age 100.
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<PAGE>
We will test annually to determine if the sum of all premiums paid to date are
sufficient to support the Guaranteed Death Benefit then in effect. In order for
the Guaranteed Death Benefit to be in effect, the cumulative premiums paid less
partial surrenders must be greater than or equal to the required monthly
Guaranteed Death Benefit Premium times the number of months elapsed since the
Policy's Date of Issue.
If these premiums are deficient, the Policyowner will be notified and given 61
days to pay the amount deficient. If the Guaranteed Death Benefit to age 100
had been in place, and the amount deficient is not received within the 61-day
period, the Guaranteed Death Benefit to age 80 will be substituted. If the
cumulative premium test is satisfied based on the Guaranteed Death Benefit
Premium to age 80, the Guaranteed Death Benefit to age 80 will then be in
effect. Otherwise the Guaranteed Death Benefit will terminate. If the
Guaranteed Death Benefit to age 80 had been in effect and the amount deficient
is not received within the 61-day period, the Guaranteed Death Benefit will
terminate.
If the Guaranteed Death Benefit is terminated it may not be reinstated.
Increases, decreases, partial surrenders, and option changes may affect the
Guaranteed Death Benefit Premium. These events and loans may also affect the
Policy's ability to remain in force even if the cumulative annual Guaranteed
Death Benefit test has been met.
Life Insurance Qualification
A Policy must satisfy either of two testing methods to qualify as a life
insurance contract for tax purposes under Section 7702 of the Internal Revenue
Code of 1986, as amended. At the time of purchase, You may choose a Policy
which uses either the Guideline Premium test or the Cash Value Accumulation
test. Both methods require a life insurance Policy to meet minimum ratios of
life insurance coverage to Total Account Value. We refer to the ratios as
Applicable Percentages. We refer to required life insurance coverage in excess
of the Total Account Value as the Death Benefit corridor.
The Applicable Percentages for the Guideline Premium test are 250% through
Attained Age 40, decreasing over time to 100% at Attained Age 95 and above. The
Guideline Premium test also restricts the maximum premiums that may be paid
into a life insurance policy for a specified Death Benefit. The Cash Value
Accumulation test does not limit premiums which may be paid but has higher
required Applicable Percentages. For example, Applicable Percentages for
Non-Smokers range from 716% at Attained Age 20, 372% at Attained Age 40 to 100%
at Attained Age 100.
If Your primary objective were to pay as much premium as possible into the
Policy to target a cash value funding objective, generally a Cash Value
Accumulation method policy would best meet Your needs, since it generally
permits higher premium payments. The choice, however, might result in higher
eventual Cost of Insurance charges because of the higher Death Benefit
corridor. In addition, the payment of higher premiums which would be associated
with choosing the Cash Value Accumulation method, increases the possibility
that the amount paid into the Policy will exceed the amount that would have
been paid had the Policy provided for seven level annual premiums (the "7-pay
test"). If premiums paid exceed such limit during
16
<PAGE>
any 7-pay testing period, any partial surrender or Policy loan may be subject
to federal income taxation. (See "Tax Considerations for Policyowners.")
If Your primary objective were to maximize the potential for growth in Total
Account Value, or to conserve Total Account Value, generally a Guideline
Premium Policy would best meet Your needs. This is because the Applicable
Percentages are lower, resulting in lower Cost of Insurance charges for the
smaller required Death Benefit corridor coverage.
If Your primary objective were to provide a specified Death Benefit at low
cost, then generally there is no difference between the testing methods because
the planned premium will be less than the maximum premium limit under the
Guideline Premium test and additional Death Benefit insurance coverage may not
be necessary under either testing method to comply with the Death Benefit
corridor requirements.
Death Benefit Options
At the time of purchase, You must choose from three available Death Benefit
Options. The amount payable under the option chosen will be determined as of
the date of the Insured's death. The Death Benefit may be affected by partial
surrenders. The Death Benefit for all three options will be reduced by the Loan
Account Value plus any accrued interest.
Under Option 1, the Death Benefit will be the greater of the Specified Amount
or Target Amount if a Term Insurance Rider is attached to the Policy (see "Term
Insurance Rider"), or the Applicable Percentage of the Total Account Value.
Option 1 generally provides a level Death Benefit.
Under Option 2, the Death Benefit will be the greater of the Specified Amount,
plus the Total Account Value or the Target Amount if a Term Insurance Rider is
attached to the Policy (see "Term Insurance Rider"), or the Applicable
Percentage of the Total Account Value. Option 2 provides a varying Death
Benefit which increases or decreases over time, depending on the amount of
premium paid and the investment performance of the underlying funding options
You choose.
Under Option 3, the Death Benefit will be the greater of the Specified Amount
plus the Accumulated Premium(s) accumulated at the Premium Accumulation Rate or
Target Amount if a Term Insurance Rider is attached to the Policy (see "Term
Insurance Rider"), or the Applicable Percentage of the Total Account Value but
will not exceed the total Death Benefit paid under Option 2. This option may
only be selected at issue.
The choice of Death Benefit Option should be based upon the pattern of Death
Benefits which best matches the intended use of the Policy. For example, an
Option 1 Policy should be chosen for a simple, fixed, level total Death Benefit
need. Option 2 would be chosen to provide a level death benefit in addition to
the Policy Total Account Value, and Option 3 would provide a level death
benefit for the Specified Amount plus a return of Accumulated Premiums.
Choosing the option which provides the lowest pattern of Death Benefits which
meets the desired need will be the most efficient for accumulating potential
cash value, since the lower Cost of Insurance charges will improve the growth
or preservation of the Total Account Value. Other than providing the
appropriate pattern
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<PAGE>
of desired Death Benefits, there is no economic advantage of one option over
another, since the Cost of Insurance charges for all three Options is based
upon the amount at risk, the difference between the Death Benefit and the Total
Account Value each month.
The same is true for the choice of a Premium Accumulation Rate under Option 3.
Choice of a higher Premium Accumulation Rate will cause the death benefit to
increase more rapidly, but this will also generate higher Cost of Insurance
charges and lower the potential growth in Total Account Value.
Transfers and Allocations to Funding Options
At purchase, You must decide how to allocate Your Net Premiums among the Funds
and/or the Fixed Account. Net Premiums must be allocated in whole percentages.
You should carefully consider current market conditions and each Fund's
investment policies and related risks before allocating money to or
transferring values among the Funds.
Before the Maturity Date, You may transfer Policy values from one Fund to
another at any time, or to the Fixed Account. The total number of investment
options you may select is currently limited to 18 at any one time. Within 45
days after each Policy anniversary, and before the Maturity Date, You may also
transfer a portion of the Fixed Account Value to one or more Funds. A transfer
from the Fixed Account is allowed only once in the 45-day period after the
Policy anniversary and will be effective as of the next Valuation Period after
Your request is received at the Company's Home Office. The amount of such
transfer cannot exceed the greater of 20% of the greatest amount held in the
Fixed Account Value during the prior 5 years or $1000.
Any transfer among the Funds or to the Fixed Account will result in the
crediting and cancellation of Accumulation Units based on the Accumulation Unit
values determined at the end of the Valuation Period after Your request is
received by us at our Home Office. (See "Accumulation Unit Value.")
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<PAGE>
Policy Values
Total Account Value
Once Your Policy has been issued, each Net Premium allocated to a funding
option through the Separate Account is credited in the form of Accumulation
Units for the funding option based on that funding option's Accumulation Unit
value (see below). If You choose to pay the initial premium upon delivery of
the Policy, the initial premium will be invested in the Separate Account no
later than five days following the later of the Date of Issue, the date the
premium is received or the date the Policy is actually issued. Each Net Premium
will be credited to Your Policy at the Accumulation Unit value(s) determined
for the Valuation Period in which it is received by us at our Home Office
following the Date of Issue of the Policy. (See "Premium Payments.") The number
of Accumulation Units credited is determined by dividing the Net Premium by the
value of an Accumulation Unit computed at the end of the Valuation Period
during which we receive the premium. Shares in each Fund elected by You will be
purchased by the Separate Account at the net asset value next determined by the
Fund following receipt of the Net Premium by the Company. Since each Fund has
its own Accumulation Unit value, a Policyowner who has elected a combination of
funding options will have Accumulation Units credited for each funding option.
The Total Account Value of Your Policy is determined by: (a) multiplying the
total number of Accumulation Units credited to the Policy for each applicable
funding option by its appropriate current Accumulation Unit value; (b) if You
have elected a combination of funding options, totaling the resulting values;
(c) adding any values attributable to the Fixed Account; and (d) any values
attributable to the Loan Account Value.
The number of Accumulation Units credited to a Policy for each funding option
will not be changed by any subsequent change in the value of an Accumulation
Unit. The number is increased by subsequent contributions or transfers into
that funding option, and decreased by charges and withdrawals from that funding
option.
There is no assurance that the Separate Account Value of the Policy will equal
or exceed the premiums paid and allocated to the Separate Account.
You will be advised at least annually as to the number of Accumulation Units
which remain credited to the Policy for each Fund, the current Accumulation
Unit values, the Separate Account Value, the Fixed Account Value, and the Total
Account Value.
Accumulation Unit Value
The value of an Accumulation Unit for any Valuation Period is determined by
multiplying the value of an Accumulation Unit for the immediately preceding
Valuation Period by the net investment factor for the current period for the
appropriate Fund. The net investment factor equals the net investment rate plus
1.0000000. The net investment rate is determined separately for each Fund as
follows:
The net investment rate equals (a) the net assets of the Fund held in Variable
Life Account B at the end of a Valuation Period, minus (b) the net assets of
the Fund held in Variable Life Account B at the beginning of that Valuation
Period, plus or
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<PAGE>
minus (c) taxes or provisions for taxes, if any, attributable to the operation
of Variable Life Account B, divided by (d) the value of the Accumulation Units
held by Variable Life Account B at the beginning of the Valuation Period, minus
(e) a daily charge for mortality and expense risk and for administrative
expenses in connection with these Policies. (See "Charges and Fees Associated
with the Variable Funding Options.")
Maturity Value
The Maturity Value of the Policy is the Total Account Value on the Maturity
Date, less the Loan Account Value and any unpaid accrued interest.
Surrender Value
The Surrender Value of Your Policy is the amount You can receive in cash by
surrendering the Policy. All or part of the Surrender Value may be applied to
one or more of the Settlement Options. (See "Surrender Charge.")
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<PAGE>
Policy Rights
Partial Surrenders
A partial surrender may be made at any time after the first Policy Year. If, at
the time of a partial surrender Your Total Account Value is attributable to
more than one funding option, the Surrender Charge, transaction charge and the
amount paid to You upon the surrender will be taken proportionately from the
Accumulation Unit values in each funding option.
The amount of a partial surrender may not exceed the Surrender Value on the
date the request is received and may not be less than $500.
Partial surrenders may only be made prior to election of a Settlement Option.
For an Option 1 Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value, Death Benefit, and
Specified Amount. The Specified Amount and Total Account Value will be reduced
by equal amounts and will reduce any past increases in the reverse order in
which they occurred.
For an Option 2 Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value and the Death Benefit,
but it will not reduce the Specified Amount.
For an Option 3 Policy (see "Death Benefit Options"):
A partial surrender will reduce the Total Account Value, Death Benefit, and
Specified Amount. The Specified Amount and Total Account Value will be reduced
by equal amounts and will reduce any past increases in the reverse order in
which they occurred.
Payment of any amount due from the Separate Account Values on a full or partial
surrender will be made within seven calendar days after we receive Your written
request at our Home Office in form satisfactory to us. Payment may be postponed
when the New York Stock Exchange has been closed and for such other periods as
the Commission may require. Payment from the Fixed Account Values may be
deferred up to 6 months, except when used to pay premiums to the Company.
The Specified Amount remaining in force after a partial surrender may not be
less than $100,000. Any request for partial surrender that would reduce the
Specified Amount below this amount will not be granted. In addition, if,
following the partial surrender and the corresponding decrease in the Specified
Amount, the Policy would not comply with the maximum premium limitations
required by federal tax law, the decrease may be limited to the extent
necessary to meet the federal tax law requirements.
No Lapse Coverage
This Policy will not terminate during the five-year period after its Date of
Issue or the Date of Issue of any increase if, on each Monthly Deduction Day
within that period, the sum of premiums paid equals or exceeds: 1) the sum of
the Minimum
21
<PAGE>
Monthly Premiums for each Policy month from the Date of Issue, including the
current month; plus, 2) any partial surrenders; plus 3) any increase in Loan
Account Value since the Policy's Date of Issue or the effective date of any
increase.
If, on each Monthly Deduction Day within the five-year period, the sum of
premiums paid is less than the sum of items 1, 2, and 3 above, and the
Surrender Value is insufficient to cover the current Monthly Deduction, the
Grace Period provision will apply. (See "Grace Period.")
After the five-year period expires, and depending on the investment performance
of the Funds, the Total Account Value may be insufficient to keep this Policy
in force, and payment of an additional premium may be necessary, unless the
Guaranteed Death Benefit provision is in effect.
Reinstatement of a Lapsed Policy
A lapse occurs if Your Monthly Deduction is greater than the Surrender Value
and no payment to cover the deduction is made within the 61 days of our
notifying You. This may happen after the first five Policy Years, or during the
first five Policy Years if Your Minimum Monthly Premiums are not current.
You can apply for reinstatement within five years after the date of lapse and
before the Maturity Date. To reinstate Your Policy we will require satisfactory
evidence of insurability and an amount sufficient to pay for the current
Monthly Deduction plus two additional Monthly Deductions.
If the Policy is reinstated within five years of the Policy's Date of Issue, or
while the No Lapse Coverage provision (see "No Lapse Coverage") would be in
effect if this Policy had not lapsed, all values, including the Loan Account
Value, will be reinstated to the point they were on the date of lapse. However,
the Guaranteed Death Benefit provision will not be reinstated.
If the Policy is reinstated after the No Lapse Coverage provision (see "No
Lapse Coverage") has expired, this Policy will be reinstated on the Monthly
Deduction Day following our approval. This Policy's Total Account Value at
reinstatement will be the Net Premium paid less the Monthly Deduction due that
day. Any Loan Account Value will not be reinstated, and the Guaranteed Death
Benefit will not be reinstated.
If the Policy's Surrender Value less any Loan Account Value plus accrued
interest is not sufficient to cover the full Surrender Charge at the time of
lapse, the remaining portion of the Surrender Charge will also be reinstated at
the time of Policy reinstatement.
Policy Loans: Preferred and Nonpreferred
Unless otherwise required by state law, the maximum loan amount is 90% of the
sum of the Fixed Account Value and the Separate Account Value less the
surrender charge applicable at the time of the loan.
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
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<PAGE>
equal to what You receive for a loan, together with any interest added to the
loan for due and unpaid interest, as described below, will be added to the Loan
Account Value.
If a policy loan is requested, the amount to be borrowed will be withdrawn by
Us from the funding options and Fixed Account Value in proportion to the value
of the Policy attributable to each funding option and the Fixed Account.
Repayments on the loan will be allocated among the funding options in the same
proportion the loan was taken from the funding options. The Loan Account Value
will be reduced by the amount of any loan repayment.
Interest on loans will accrue at an annual rate which will be the greater of:
1) The monthly average (i.e., the Composite Yield on Corporate Bonds as
published by Moody's Investors Service, Inc.) for the calendar month which
ends two months before the month in which the Policy Anniversary occurs, or
2) 5.0%.
Increases to the current interest rate may occur only when the maximum interest
rate is at least .5% higher than the interest rate in effect for the prior
Policy Year.
Decreases to the current interest rate will occur only when the maximum
interest rate is at least .5% lower than the interest rate in effect for the
prior Policy Year.
We will notify You of the current interest rate charged for a loan at the time
the loan is made. If Your Policy has a loan outstanding, we will notify You of
any change in the interest rate before the new rate becomes effective.
Interest is payable once a year on each anniversary of the loan, or earlier
upon surrender, payment of proceeds, or maturity of a Policy. Any interest not
paid when due becomes part of the loan and bears interest.
We will credit interest on the Loan Account Value. The Loan Account Value for
the non-preferred loans will be credited interest, during any Policy Year, at
an annual rate that is the interest rate charged on the loan minus 1%. However,
in no case will the credited interest rate be less than 4.0% annually.
The Loan Account Value on preferred loans will be credited interest at a rate
equal to the interest rate charged. In no case will the credited interest rate
be less than 5.0% annually.
Policy Changes
You may make changes to Your Policy as described below by submitting a written
request to our Home Office in a form satisfactory to us.
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Increases: You may increase the Specified Amount of Your Policy any time
subject to the following conditions:
[bullet] Satisfactory evidence of insurability may be required.
[bullet] An increase in the Specified Amount will increase the Surrender
Charge.
[bullet] The Minimum Monthly Premium will be increased when the Specified
Amount is increased.
[bullet] An Increase in the Specified Amount will increase the Guaranteed Death
Benefit amount and will increase the Guaranteed Death Benefit Premium.
[bullet] The 5 year period as described in the No Lapse Coverage provision will
restart on the Date of Issue of an increase.
Decreases: Beginning in the sixth Policy Year decreases will be allowed,
however:
[bullet] No decrease may reduce the Specified Amount to less than the minimum
for this type of Policy. (See "Death Benefit Options.")
[bullet] Any decrease in the Specified Amount will cause a decrease in the
Guaranteed Death Benefit Premium. The Guaranteed Death Benefit Premium
will be based on the new Specified Amount.
Death Benefit Option Change: A Death Benefit Option change will be allowed,
subject to the following conditions:
[bullet] The change will take effect on the Monthly Deduction Day on or next
following the date on which the Company receives Your written request.
[bullet] There will be no change in the Surrender Charge, and evidence of
insurability may be required.
[bullet] We will not allow a change in the Death Benefit Option if the
Specified Amount will be reduced below the minimum.
[bullet] Changes from Option 1 to Option 2 are allowed beginning in the sixth
Policy Year. The new Specified Amount will equal the Specified Amount
less the Total Account Value at the time of the change.*
[bullet] Changes from Option 2 to Option 1 are allowed at anytime. The new
Specified Amount will equal the Specified Amount plus the Total
Account Value as of the time of the change.*
[bullet] Changes from Option 3 to 1 are allowed at anytime. The Specified
Amount will be increased to equal the Specified Amount prior to the
change plus the lesser of the Accumulated Premiums or the Total
Account Value at the time of the change.*
[bullet] Changes from Option 3 to 2 are allowed after the fifth Policy Year.
The Specified Amount will be reduced to equal the Specified Amount
prior to the change minus the difference between the Total Account
Value and the sum of the Accumulated Premiums at the time of the
change.*
[bullet] Changes from Options 1 or 2 to Option 3 are not allowed.*
* Changes in the Death Benefit Option also affect the Guaranteed Death Benefit
amount and the Guaranteed Death Benefit Premium.
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Right to Examine the Policy
The Policy has a Free-Look period during which You may examine the Policy. If
for any reason You are dissatisfied, it may be returned to our Home Office for
a refund. It must be returned within ten days after You receive the Policy and
the written notice of withdrawal right, or within 45 days after You sign the
application for the Policy, whichever occurs later. Some states provide a
longer period of time to exercise these rights. Your Policy will indicate if
you have more than 10 days to review the Policy. If You return (cancel) the
Policy, we will pay a refund of (1) the difference between payments made and
amounts allocated to the Separate Account, plus (2) the value of the amount
allocated to the Separate Account as of the date the returned Policy is
received by us, plus (3) any fees imposed on the amounts allocated to the
Separate Account. Some state laws require the refund equal all premiums paid,
without interest. Refunds will usually occur within seven days of notice of
cancellation, although a refund of premiums paid by check may be delayed until
the check clears Your bank.
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Death Benefit
The Death Benefit under the Policy will be paid in a lump sum within seven days
after we receive due proof of the Insured's death (a certified copy of the
death certificate), unless You or the beneficiary have elected that it be paid
under one or more of the Settlement Options or such options as we may choose to
make available in the future. Payment of the Death Benefit may be delayed if
the Policy is being contested. (See "Settlement Options.")
While the Insured is living, You may elect a Settlement Option for the
beneficiary and deem it irrevocable. You may revoke or change a prior election.
The beneficiary may make or change an election within 90 days of the death of
the Insured, unless You have made an irrevocable election. A beneficiary who
has elected Settlement Option 1 may elect another option within two years after
the Insured's death.
If the Policy is assigned as collateral security, we will pay any amount due
the assignee in one lump sum. Any excess Death Benefit due will be paid as
elected.
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Policy Settlement
Settlement Options
Proceeds in the form of Settlement Options are payable by the Company upon the
Insured's death, upon Maturity of the Policy, or upon election of one of the
Settlement Options (after any applicable Surrender Charges have been deducted).
A written request may be made to elect, change, or revoke a Settlement Option
before payments begin under any Settlement Option. This request must be in form
satisfactory to us, and will take effect upon its filing at our Home Office. If
no Settlement Option has been elected by the Policyowner when the Death Benefit
becomes payable to the beneficiary, that beneficiary may make the election.
The first variable Settlement Option payment will be as of the tenth Valuation
Period following our receipt of the properly completed election form.
The following are the currently available Settlement Options (others may become
available):
Option 1 - Payment of interest on the sum left with us;
Option 2 - Payments for a stated number of years, at least three but no more
than thirty;
Option 3 - Payments for the lifetime of the payee. If also chosen, we will
guarantee payments for 60, 120, 180 or 240 months; or
Option 4 - Payments during the joint lifetimes of two payees. At the death of
either, payments will continue to the survivor. When this option is chosen, a
choice must be made of:
a) 100% of the payment to continue to the survivor;
b) 662/3% of the payment to continue to the survivor;
c) 50% of the payment to continue to the survivor;
d) Payments for a minimum of 120 months, with 100% of the payment to continue
to the survivor; or
e) 100% of the payment to continue to the survivor if the survivor is the
payee, and 50% of the payment to continue to the survivor if the survivor is
the second payee.
In most states, no election may be made that would result in a first payment of
less than $25 or that would result in total yearly payments of less than $120.
If the value of the Policy is insufficient to elect an option for the minimum
amount specified, a lump-sum payment must be elected.
Proceeds applied under Option 1 will be held by us in the General Account.
Proceeds in the General Account will be used to make payments on a fixed-dollar
basis. We will add interest to such proceeds at an annual rate of not less than
3.0%. We may add interest daily at any higher rate.
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Under Option 1, the payee may later tell the Company to (a) pay to him or her a
portion of all of the sum held by the Company; or (b) apply a portion of all of
the sum held by the Company to another Settlement Option.
Proceeds applied under Settlement Options 2, 3 and 4 will be held at the
election of You or Your beneficiary: (a) in a fixed annuity using the General
Account; or (b) in Variable Annuity Account B, invested in one or more of the
available investment options; or (c) a mix of (a) and (b). Proceeds held in
Variable Annuity Account B will be used to make payments on a variable basis.
If payments are to be funded on a variable basis, the first and subsequent
payments will vary depending on the Assumed Net Investment Rate. This rate will
be 3.5% per year, unless a 5% annual rate is chosen. The Assumed Net Investment
Rate is chosen by the payee.
Selection of a 5% rate causes a higher first payment, but subsequent payments
will increase only to the extent the actual net investment rate exceeds 5% on
an annualized basis, and they will decline if the rate is less than 5%. Use of
the 3.5% Assumed Net Investment Rate causes a lower first payment, but
subsequent payments will increase more rapidly or decline more slowly as
changes occur in the actual net investment rate. The investment performance of
the underlying funding option(s) must equal such assumed rate, plus enough to
cover the mortality and expense risk and administrative fee charges, if future
payments on a variable basis are to remain level.
If payments on a variable basis are not to decrease, gross return on the assets
of the underlying funding options must be:
a) 4.75% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge in effect at the time Settlement Option
payments start, if an Assumed Net Investment Rate of 3.5% is chosen; or
b) 6.25% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge in effect at the time Settlement Option
payments start, if an Assumed Net Investment Rate of 5% is chosen.
Settlement Options 2, 3 or 4 may be chosen on a fixed-dollar basis. However, if
the guaranteed payments are less than the payments which would be made from the
purchase of the Company's current single premium immediate annuity, the larger
payment will be made instead.
As to funds held under Option 1, the payee may elect to make a withdrawal or to
change options. Under Option 2, if payments are made on a variable basis, the
current value may be withdrawn at any time. Amounts held in the Fixed Account
may not be withdrawn under Option 2. No withdrawals or changes of option may be
made under Options 3 and 4.
When a payee dies while receiving payments under Options 2, 3 or 4, the present
value of any remaining guaranteed payments will either be paid in one sum to
the payee's beneficiary or upon election by that beneficiary, any remaining
guaranteed payments will continue to that beneficiary. If no beneficiary
exists, the present value of any remaining guaranteed payments will be paid in
one sum to the payee's
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estate. If the payee dies while receiving payments under Option 1, the current
value of the Option will be paid in one sum to the beneficiary, or to the
payee's estate.
If the payee's beneficiary dies (and there is no contingent beneficiary), while
receiving payments, the current value of the account (Option 1), or the present
value of any remaining guaranteed payments will be paid in one sum to the
estate of that beneficiary. The interest rate used to determine the first
payment will be used to calculate the present value.
Calculation of Settlement Payments
When You have chosen payment on a variable basis, the first payment is
calculated as follows:
a) the portion of the proceeds applied to make payments on the variable basis;
divided by
b) 1,000; times
c) the payment rate per $1000 of proceeds for the option chosen as shown in the
Policy.
Such amount, or portion, of the variable payment will be divided by the
Settlement Option Unit value (described below), as of the tenth Valuation
Period before the due date of the first payment, to determine the number of
Settlement Option Units. Each future payment is equal to the number of
Settlement Option Units, times the Settlement Option Unit value as of the tenth
Valuation Period prior to the due date of the payment.
For any Valuation Period, the Settlement Option Unit value is equal to:
a) The Settlement Option Unit value for the previous Valuation Period; times
b) The Net Return Factor (as defined below) for the Valuation Period; times
c) A factor to reflect the Assumed Net Investment Rate.
The factor for 3.5% per year is .9999058; for 5% per year, it is .9998663.
The Net Return Factor equals:
1) The net assets of the applicable fund held in Variable Annuity Account B at
the end of a Valuation Period; minus
2) The net assets of the applicable fund held in Variable Annuity Account B at
the beginning of that Valuation Period; plus or minus
3) Taxes or provision for taxes, if any, attributable to the operations of
Variable Annuity Account B; divided by
4) The value of Settlement Option Units and other accumulation units held in
Variable Annuity Account B at the beginning of the Valuation Period; minus
5) A daily charge at an annual rate of 1.25% for annuity mortality and expense
risk and the then-current daily administrative expense charge.
The number of Settlement Option Units remains fixed. However, the dollar value
of the Settlement Option Unit values and the payments may increase or decrease
due to investment gain or loss.
Payments will not be affected by changes in the mortality or expense results or
administrative expense charges.
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Term Insurance Rider
The Policy can be issued with a Term Insurance Rider as a portion of the total
Death Benefit. The Rider provides term life insurance on the life of the
Insured, which is annually renewable to attained age 100 (70 in New York). The
amount of coverage provided under the Rider's Benefit Amount, varies from month
to month.
The Benefit Amount is the greater of (a) or (b), where (a) is the Target
Amount, which is an amount selected by You, or a percentage of the Total
Account Value as described in the Policy if that percentage is greater than the
Target Amount; less (i) the greater of the Policy's Specified Amount and Total
Account Value, if Death Benefit Option 1 is in effect; or (ii) the Policy's
Specified Amount plus the Total Account Value, if Death Benefit Option 2 is in
effect; or (iii) the Policy's Specified Amount plus the Accumulated Premiums,
if Death Benefit Option 3 is in effect; (b) is zero. The result of Death
Benefit Option 3 will never be greater than the result of Death Benefit Option
2. We may limit the Target Amount selected.
The cost of the Rider is added to the Monthly Deductions, and is based on the
Insured's Attained Age and premium class. We may adjust the monthly rider rate
from time to time, but the rate will never exceed the guaranteed cost of
insurance rates for the Rider for that Policy Year. The cost for this Rider is
added to our calculation of the Minimum Monthly Premium for no lapse protection
and to our calculation of the Guaranteed Death Benefit Premium. The Rider
provides a vehicle for short-term insurance protection for policyholders who
desire lower required premiums under the Policy, in anticipation of growth in
Total Account Value to fund life insurance coverage in later Policy Years.
If the Policy's Death Benefit increases as a result of an increase in Total
Account Value (see "Life Insurance Qualification"), the Rider's Target Death
Benefit will be reduced by an equivalent amount to maintain the total desired
Death Benefit.
The Rider's Death Benefit is included in the total Death Benefit paid under the
Policy. (See "Death Benefit Options.")
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The Company
Aetna Life Insurance and Annuity Company is a stock life insurance company
organized under the insurance laws of the State of Connecticut in 1976. Through
a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance
Company (formerly Participating Annuity Life Insurance Company organized in
1954). The Company is engaged in the business of issuing life insurance
policies and annuity contracts in all states of the United States. The Company
is a wholly owned subsidiary of Aetna Retirement Holdings, Inc., which is in
turn a wholly owned subsidiary of Aetna Retirement Services, Inc. and an
indirect wholly owned subsidiary of Aetna Inc.
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.
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Directors & Officers
<TABLE>
<CAPTION>
Business Experience
Name and Address* Position with Company During Past 5 Years
- ---------------------- -------------------------- --------------------------------------------
<S> <C> <C>
Thomas J. McInerney Director, President and President (since September 1997), Aetna
Chairman, Executive Life Insurance and Annuity Company;
Committee (Principal President (since September 1997), Aetna
Executive Officer) Insurance Company of America;
President (since September 1997), Aetna
Retirement Holdings, Inc.; President
(since August 1997), Aetna Retirement
Services, Inc.; Executive Vice President
(since August 1997), Aetna Inc.; Vice
President, Strategy (March 1997-August
1997), Aetna Inc.; Vice President,
Strategy, Finance, & Administration (July
1995-April 1996), Aetna Inc.; Vice
President, Guaranteed Products
(November 1992-July 1995), Aetna Inc.
Christopher J. Burns Director and Senior Vice President and Chief Executive and
President Operating Officer (since November
1996), Aetna Investment Services Inc.;
Senior Vice President, Sales & Service
(February 1996-September 1997), Senior
Vice President, Sales & Financial
Planning (since September 1997), and
Senior Vice President, Life (March
1991-February 1996), Aetna Life
Insurance and Annuity Company.
J. Scott Fox Director and Senior Vice Managing Director, Chief Operating
President Officer, Chief Financial Officer (since
October 1997), Aeltus Investment
Management, Inc.; Senior Vice President,
Operations (since March 1997), Aetna
Life Insurance and Annuity Company;
Managing Director, Chief Operating
Officer, Chief Financial Officer, Treasurer
(April 1994-March 1997), Aeltus
Investment Management, Inc.; Managing
Director and Treasurer (March 1987-
September 1993), Equitable Capital
Management Corporation.
Timothy A. Holt Director, Senior Vice Senior Vice President, Business Strategy
President and Chief & Finance, and Chief Financial Officer
Financial Officer (since February 1996), Aetna Life
Insurance and Annuity Company; Vice
President, Portfolio Management/
Investment Group (August 1992-
February 1996), Aetna Life and Casualty
Company.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Business Experience
Name and Address* Position with Company During Past 5 Years
- ---------------------- -------------------------- ------------------------------------------
<S> <C> <C>
John Y. Kim Director and Senior Vice President (since December 1995), Aeltus
President Investment Management, Inc.; Chief
Investment Officer (since May 1994),
Aetna Services, Inc. (formerly 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), Aetna Services, Inc.
(formerly Aetna Life and Casualty
Company).
Shaun P. Mathews Director and Senior Vice Senior Vice President, Product
President Management (since September 1997);
Vice President, Products Group (since
February 1996 to September 1997),
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.
Kirk P. Wickman Vice President, General Vice President, General Counsel and
Counsel and Corporate Corporate Secretary (since November
Secretary 1996), Aetna Life Insurance and Annuity
Company; Vice President and Counsel
(June 1992-November 1996), Aetna Life
Insurance Company.
Deborah Koltenuk Vice President and Vice President, Investment Planning and
Treasurer, Corporate Financial Reporting (April 1996 to July
Controller 1996), Aetna Life Insurance Company;
Vice President and Treasurer, Corporate
Controller (since March 1996), Aetna
Retirement Holdings, Inc., Vice
President, Investment Planning and
Financial Reporting (October 1994 to
April 1996), The Aetna Casualty and
Surety Company and The Standard Fire
and Insurance Company; Assistant Vice
President, Finance and Administration
(June 1994 to October 1994), Aetna Life
Insurance Company; Controller
(September 1993 to June 1994), Aetna
Information Technology; Assistant Vice
President (December 1990 to September
1993), Aetna Life and Casualty Company.
Frederick D. Kelsven Vice President and Chief Vice President, Chief Compliance Officer
Compliance Officer (since February 1997), Aetna Life
Assignment Company; Vice President &
Chief Compliance Officer (since
November 1996), Aetna Investment
Services, Inc.; Director of Compliance
(January 1985 to September 1996),
Nationwide Life Insurance Company.
* 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.
</TABLE>
Directors, officers and employees of the Company are covered by a blanket
fidelity bond in the amount of $60 million issued by Aetna Casualty and Surety
Company.
33
<PAGE>
Additional Information
Reports to Policyowners
Within 30 days after each Policy Anniversary and before proceeds are applied to
a Settlement Option, we will send You a report containing the following
information:
1) A statement of changes in the Total Account Value and Surrender Value since
the prior report or since the Date of Issue, if there has been no prior
report. This includes a statement of Monthly Deductions and investment
results and any interest earnings for the report period;
2) Surrender Value, Death Benefit, and any Loan Account Value as of the Policy
Anniversary;
3) A projection of the Total Account Value, Loan Account Value and Surrender
Value as of the succeeding Policy Anniversary.
If You have Policy values funded in a Separate Account You will receive, in
addition, such periodic reports as may be required by the SEC.
Some state laws require additional reports; these requirements vary from state
to state.
Right to Instruct Voting of Fund Shares
In accordance with our view of present applicable law, we will vote the shares
of each of the Funds held in each Separate Account. The votes will be cast at
meetings of the shareholders of the Fund and will be based on instructions
received from Policyowners. However, if the Investment Company Act of 1940 or
any regulations thereunder should be amended or if the present interpretation
thereof should change, and as a result we determine that we are permitted to
vote the shares of the Fund in our own right, we may elect to do so.
The number of Fund shares which each Policyowner is entitled to direct a vote
is determined by dividing the portion of Total Account Value attributable to a
Fund, if any, by the net asset value of one share in the Fund. During the
Settlement Option period, the number of votes is determined by dividing the
Valuation Reserve (as defined below) attributable in the Fund, if any, by the
net asset value of one share of the Fund. Fractional votes will be counted.
Where the value of the Total Account Value or the Valuation Reserve relates to
more than one Fund, the calculation of votes will be performed separately for
each Fund. The Valuation Reserve is established pursuant to the insurance laws
of Connecticut to measure voting rights during the Settlement Option period and
the value of a communication right, if available, under Settlement Option 2
when elected on a variable basis.
The number of shares which a person has a right to vote will be determined as
of a date to be chosen by us, but not more than 90 days before the meeting of
the Fund. Voting instructions will be solicited by written communication at
least 14 days before such meeting.
Fund shares for which no timely instructions are received, and Fund shares
which are not otherwise attributable to Policyowners, will be voted by us in
the same
34
<PAGE>
proportion as the voting instructions which are received for all Policies
participating in each Fund through Variable Life Account B.
Policyowners having a voting interest will receive periodic reports relating to
the Fund, proxy material and a form for giving voting instructions.
Disregard of Voting Instructions
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the shares be voted so as
to cause a change in the sub-classification or investment objectives of a Fund
or to approve or disapprove an investment advisory contract for a Fund. In
addition, we may disregard voting instructions in favor of changes initiated by
a Policyowner in the investment policy or the investment adviser of the Fund if
we reasonably disapprove of such changes.
A change would be disapproved only if the proposed change is contrary to state
law or prohibited by state regulatory authorities or we determined that the
change would have an adverse effect on the Separate Accounts in that the
proposed investment policy for a Fund may result in overly speculative or
unsound investments. In the event we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to Policyowners.
State Regulation
We are subject to regulation and supervision by the Insurance Department of the
state of Connecticut, which periodically examines our affairs. We are also
subject to the insurance laws and regulations of all jurisdictions where we are
authorized to do business. The Policies have been approved by the Insurance
Department of the state of Connecticut and in other jurisdictions where they
are offered.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
in which we do business, for the purposes of determining solvency and
compliance with local insurance laws and regulations.
Legal Matters
The Company knows of no material legal proceedings pending to which the
Separate Account is a party or which would materially affect the Separate
Account.
The legal validity of the securities described in the Prospectus has been
passed on by Counsel of the Company.
The Registration Statement
A Registration Statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this Prospectus. This Prospectus
does not include all the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The omitted information may be obtained at the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed
fees.
Distribution of the Policies
We offer the Policies through life insurance salespersons and certain Home
Office sales employees. Such persons are registered representatives of Aetna
Investment Services, Inc., a wholly owned subsidiary of the Company, (which is
a registered
35
<PAGE>
broker-dealer), or of other registered broker-dealers which have entered into
distribution agreements with the Company. The maximum commission payable by the
Company to salespersons and their supervising broker-dealers for Policy
distribution is 50% of the Guaranteed Death Benefit Premium to age 80, or, in
the event of an increase in the Specified Amount, 50% of the Guaranteed Death
Benefit Premium to age 80, attributable to the increase. In particular
circumstances, we may also pay certain of these professionals for their
administrative expenses. In addition, some sales personnel may receive various
types of non-cash compensation as special sales incentives, including trips and
educational and/or business seminars. Supervisory and other management
personnel of the Company may receive compensation that will vary based on the
relative profitability of the Company of the funding options you select.
Funding options that invest in Funds advised by the Company or its affiliates
are generally more profitable to the Company. The Company may be deemed to be
an underwriter for purposes of the federal securities laws.
The registered representative may be required to return all or part of the
first year commission if the Policy is not continued through the second year.
If a Policy is terminated in the first 2 Policy Years, all or a portion of the
commissions paid will be recalled from life insurance salespersons by the
Company as described below.
If a Policy is terminated in Policy months 1 through 3, 100% of the commissions
paid will be recalled by the Company.
If a Policy is terminated in Policy months 4 through 12, a graded chargeback
will be applied, grading uniformly from 75% in Policy month 4 to 35% in Policy
month 12.
If a Policy is terminated in Policy months 13 through 24, a graded chargeback
will be applied, grading uniformly from 30% in Policy month 13 to 2.5% in
Policy Month 24.
No further commissions will be recalled if a Policy is surrendered in Policy
months 25 and later.
Application forms are completed by the applicant and forwarded to the Company
for acceptance. Upon acceptance, the Policy is prepared, executed by duly
authorized officers of the Company, and forwarded to the Policyowner.
The Policies are offered for sale in all jurisdictions where we are authorized
to do business except Guam, Puerto Rico, and the Virgin Islands.
Records and Accounts
Andesa, TPA, Inc., Suite 102, 1621 N. Cedar Crest Boulevard, Allentown,
Pennsylvania, will act as a Transfer Agent on behalf of Aetna Life Insurance
and Annuity Company as it relates to the policies described in this Prospectus.
In the role of a Transfer Agent, Andesa will perform administrative functions,
such as decreases, increases, surrenders and partial surrenders, fund
allocation changes and transfers on behalf of the Company.
All records and accounts relating to the Separate Accounts and the Funds will
be maintained by the Company. All financial transactions will be handled by the
36
<PAGE>
Company. All reports required to be made and information required to be given
will be provided by Andesa on behalf of the Company.
Independent Auditors
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut, are the independent
auditors for the Separate Account and for the Company. The services provided to
the Separate Account include primarily the examination of the Separate
Account's financial statements and the review of filings made with the SEC.
37
<PAGE>
Tax Matters
General
The following is a discussion of the federal income tax considerations relating
to the Policy. This discussion is based on the Company's understanding of
federal income tax laws as they now exist and are currently interpreted by the
Internal Revenue Service ("IRS"). These laws are complex, and tax results may
vary among individuals. A person or persons contemplating the purchase of or
the exercise of elections under the Policy described in this Prospectus should
seek competent tax advice.
Federal Tax Status of the Company
The Company is taxed as a life insurance company in accordance with the
Internal Revenue Code of 1986, as amended ("Code"). For federal income tax
purposes, the operations of each Separate Account form a part of the Company's
total operations and are not taxed separately, although operations of each
Separate Account are treated separately for accounting and financial statement
purposes.
Both investment income and realized capital gains of the Separate Account
(i.e., income, capital gains and dividends distributed to the Separate Account
by the Funds) are reinvested without tax since the Code does not impose a tax
on the Separate Account for these amounts. The Company reserves the right,
however, to make a deduction for such taxes should they be imposed with respect
to such items in the future.
Life Insurance Qualification
As described more fully on page 14, Section 7702 of the Code includes a
definition of life insurance for tax purposes. These rules generally place
limits on the amount of premiums payable under the contract and the level of
cash surrender value. 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. 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. The Secretary of the Treasury has been granted authority to
prescribe regulations to carry out the purposes of Section 7702, 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.
38
<PAGE>
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 Policyowner, and assuming the Policy is not considered a Modified Endowment
Contract, Policy Loans will not be treated as current distributions subject to
tax. Generally, amounts of loan interest paid by individuals will be considered
nondeductible "personal interest."
Modified Endowment Contracts
A class of contracts known as "Modified Endowment Contracts" has been created
under Section 7702A of the Code. The tax rules applicable to loan proceeds and
proceeds of a Partial Surrender of any Policy that is considered to be a
Modified Endowment Contract will differ from the general rules noted above.
A contract will be considered a Modified Endowment Contract if it fails the
"7-pay test." A Policy fails the 7-pay test if, at any time in the first seven
Policy Years, the amount paid into the Policy exceeds the amount that would
have been paid had the Policy provided for the payment of seven (7) level
annual premiums. In the event of a distribution under the Policy, the Company
will notify the Policyowner if the Policy is a Modified Endowment Contract.
In addition, each Policy is subject to the 7-pay test during the first seven
Policy Years following the 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, or after the
seventh year where the reduced death benefit is lower than the lowest death
39
<PAGE>
benefit provided during the first seven 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, any Policy Loans and most assignments will be
currently taxable to the extent that the Policy's Total Account Value
immediately before payment exceeds gross premiums paid (increased by the amount
of loans previously taxed and reduced by untaxed amounts previously received).
These rules may also apply to Policy Loans or Partial Surrender proceeds
received during the two-year period prior to the time that a Policy becomes a
Modified Endowment Contract. If the Policy becomes a Modified Endowment
Contract, it may be aggregated with other Modified Endowment Contracts
purchased by You from the Company (and its affiliates) during any one calendar
year for purposes of determining the taxable portion of withdrawals from the
Policy.
A penalty tax equal to 10% of the amount includable in income will apply to the
taxable portion of the proceeds of any Policy Surrender or Policy Loan received
by any Policyowner of a Modified Endowment Contract who is not an individual.
Taxable policy distributions made to an individual who has not reached the age
of 591/2 will also be subject to the penalty tax unless those distributions are
attributable to the individual becoming disabled, or are part of a series of
equal periodic payments made not less frequently than annually for the life or
life expectancy of such individual (i.e., an annuity).
Diversification Standards
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate
accounts of insurance companies) underlying the Policy must be "adequately
diversified" in accordance with Treasury regulations in order for the Policy to
qualify as life insurance. The Treasury Department has issued regulations
prescribing the diversification requirements in connection with variable
contracts. The Separate Account, through the Funds, intends to comply with
these requirements.
Investor Control
In certain circumstances, owners of variable contracts may be considered the
owners for federal income tax purposes of the assets of the separate account
used to support their contracts. In those circumstances, income and gains from
separate account assets would be includable in the variable contractowner's
gross income. In several rulings published prior to the enactment of Section
817(h), the IRS stated that a variable contractowner will be considered the
owner of separate account assets if the contractowner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations under Section 817(h) concerning diversification,
that those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor (i.e., You), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular Funds
without being treated as owners of the underlying assets." As of the date of
this Prospectus, no such guidance has been issued.
40
<PAGE>
The ownership rights under the Policy are similar to, but different in certain
respects from those described by the IRS in pre-Section 817(h) rulings in which
it was determined that Policyowners were not owners of separate account assets.
For example, a Policyowner has additional flexibility in allocating premium
payments and account values. While the Company does not believe that these
differences would result in a Policyowner being treated as the owner of a pro
rata portion of the assets of the Separate Account, there is no regulation or
ruling of the IRS that confirms this conclusion. In addition, the Company does
not know what standards will be set forth, if any, in the regulations or
rulings which the Treasury Department has stated it expects to issue. The
Company therefore reserves the right to modify the Policy as necessary or to
limit the number of variable options available to attempt to prevent a
Policyowner from being considered the owner of a pro rata share of the assets
of the Separate Account.
Other Tax Considerations
Business-owned life insurance may be subject to certain additional rules.
Section 264(a)(1) of the Code generally prohibits employers from deducting
premiums on policies covering officers, employees or other financially
interested parties where the employer is a beneficiary under the Policy.
Additions to the Policy's Total Account Value may also be subject to tax under
the corporation alternative minimum tax provisions. In addition, Section
264(a)(4) of the Code limits the Policyowner's deduction for interest on loans
taken against life insurance covering the lives of officers, employees, or
other financially interested in the Policyowner's trade or business. Under
current tax law, interest may generally be deducted on an aggregate total of
$50,000 of loans per covered life only with respect to life insurance policies
covering each officer, employee or others who may have a financial interest in
the Policyowner's trade or business and are considered key persons.
Depending on the circumstances, the exchange of a policy, a change in the
Policy's Death Benefit Option, a Policy Loan, a Full or Partial Surrender, a
change in Ownership or an assignment of the Policy may have federal income tax
consequences. In addition, federal, state and local transfer, estate,
inheritance and other tax consequences of policy ownership, premium payments
and receipt of policy proceeds depend on the circumstances of each Policyowner
or beneficiary. Any person concerned about these tax implications should
consult a competent tax adviser before initiating any transaction.
Generally, a key person means an officer or a 20 percent owner. However, the
number of key persons will be limited to the greater of (a) 5 individuals, or
(b) the lesser of 5 percent of the total officers and employees of the taxpayor
or 20 individuals. Deductible interest for these contracts will be capped based
on applicable Moody's Corporate Bond Rate.
41
<PAGE>
Misc. Policy Provisions
The Policy
The Policy which You receive and the application You make when You purchase the
Policy are the whole contract. A copy of the application is attached to the
Policy when it is issued to You. Any application for changes, once approved by
us, will become part of the Policy.
Payment of Benefits
All benefits are payable at our Home Office. We may require submission of the
Policy before we grant loans, make changes or pay benefits.
Age
If age is misstated on the application, the amount payable on death will be
that which would have been purchased by the most recent monthly deduction at
the current age.
Incontestability
We will not contest coverage under the Policy after the Policy has been in
force during the lifetime of the insured for a period of two years from the
Policy's Date of Issue. Our right to contest coverage is not affected by the
Guaranteed Death Benefit provision.
For coverage which takes effect on a later date (e.g., an increase in
coverage), we will not contest such coverage after it has been in force during
the lifetime of the Insured more than two years from its effective date.
Suicide
In most states, if the Insured commits suicide within two years from the Date
of Issue, the only benefit paid will be the sum of:
a) premiums paid less amounts allocated to the Separate Account; and
b) the Separate Account Value on the date of suicide, plus the portion of the
Monthly Deduction from the Separate Account Value, minus
c) the amount necessary to repay any loans in full and any interest earned on
the Loan Account Value transferred to the Separate Account Value, and any
surrenders from the Fixed Account.
If the Insured commits suicide within two years from the effective date of any
increase in coverage, we will pay as a benefit only the Monthly Deduction for
the increase, in lieu of the face amount of the increase.
All amounts described in (a) and (c) above will be calculated as of the date of
death.
Coverage Beyond Maturity
You may, by written request in the 30 days before the Maturity Date of this
Policy, elect to continue coverage beyond the Maturity Date. At Age 100, the
Separate Account Value will be transferred to the Fixed Account. If coverage
beyond maturity
42
<PAGE>
is elected, we will continue to credit interest to the Total Account Value of
this Policy. Monthly Deductions will be calculated with a Cost of Insurance
rate equal to zero. (This provision is not available in New York.)
At this time, uncertainties exist regarding the tax treatment of the Policy
should it continue beyond the Maturity Date. You should therefore consult with
Your tax advisor prior to making this election. (See "Tax Matters.")
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company. No
dividends are payable.
43
<PAGE>
Illustrations of Death Benefit, Total Account Values and Surrender Values
The following tables illustrate how the Death Benefit, Total Account Values and
Surrender Values of a Policy change with the investment experience of the Fund.
The tables show how the Death Benefit, Total Account Values, and Surrender
Values of a Policy issued to an insured of a given age and a given premium
would vary over time if the investment return on the assets held in each Fund
were a uniform, gross, after tax annual rate of 0%, 6%, and 12%, respectively.
Tables I, II, V and VI illustrate Policies issued on a unisex basis, age 45, in
the preferred nonsmoker rate class. Tables III, IV, VII and VIII illustrate
Policies issued on a unisex basis, age 45 in the nonsmoker rate class. Tables I
through IV show values under the Guideline Premium Test for the definition of
life insurance, and Tables V through VIII show values under the Cash Value
Accumulation Test for the definition of life insurance. The Death Benefit,
Total Account Values, and Surrender Values would be different from those shown
if the gross annual investment rates of return averaged 0%, 6%, and 12%,
respectively, over a period of years, but fluctuated above and below those
averages for individual Policy Years.
The second column of each table shows the accumulated values of the premiums
paid at an assumed interest rate of 5%. The third through fifth columns
illustrate the Death Benefit of a Policy over the designated period. The sixth
through eighth columns illustrate the Total Account Values, while the ninth
through the eleventh columns illustrate the Surrender Values of each Policy
over the designated period. Tables I, III, V and VII assume that the maximum
Cost of Insurance allowable under the Policy are charged in all Policy Years.
These tables also assume that the maximum allowable mortality and expense risk
charge of 0.90% on an annual basis, the maximum allowable administrative
expense charge of 0.50% on an annual basis, and the maximum allowable premium
load of 10% up to the first year's Guaranteed Death Benefit Premium to age 80
and 5% over the Guaranteed Death Benefit Premium to age 80, are assessed in the
first Policy Year and 5% on all premium in all Policy Years thereafter. Tables
II, IV, VI and VIII assume that the current scale of Cost of Insurance Rates
applies during all Policy Years. These tables also assume the current mortality
and expense risk charge of 0.70% on an annual basis for the first 10 Policy
Years and 0.20% for Policy Years 11 and thereafter, the current administrative
expense charge of 0.30% on an annual basis, and the current premium load of 7%
up to the first year's Guaranteed Death Benefit Premium to age 80 and 2% over
the Guaranteed Death Benefit Premium to age 80 are assessed in the first Policy
Year and 2% on all premium in all Policy Years thereafter.
The amounts shown for Death Benefit, Surrender Values, and Total Account Values
reflect the fact that the net investment return is lower than the gross, after
tax return on the assets held in each Fund as a result of expenses paid by each
Fund and Separate Account charges levied.
The values shown take into account the daily investment advisory fee and other
Fund expenses paid by each Fund. See the individual prospectuses for each Fund
for more information.
In addition, a charge for mortality and expense risks of 0.70% for Policy Years
1-10 and 0.20% beginning in Policy Year 11 and thereafter (0.90% maximum) and
administrative expenses of 0.30% (0.50% maximum) has also been reflected in the
44
<PAGE>
values shown. In addition, a charge for mortality and expense risks of 0.70%
for Policy Years 1-10 and 0.20% beginning in Policy Year 11 and thereafter
(0.90% maximum) and administrative expenses of 0.30% (0.50% maximum) has also
been reflected in the values shown. After deduction of these amounts, the
illustrated net annual return is -2.06%, 3.94% and 9.94% on the maximum charge
basis and -1.66%, 4.34% and 10.34% on a current charge basis for Policy Years
1-10. The illustrated net annual return is -1.16%, 4.84% and 10.84% on a
current charge basis for Policy Years 11 and thereafter.
A weighted average has been used for the illustrations assuming that the Policy
Owner has invested in the Funds as follows: 4% in Aetna Variable Fund; 8% in
Aetna Income Shares; 10% in Aetna Variable Encore Fund; 7% in Aetna Investment
Advisers Fund, Inc.; 0% in Aetna Variable Capital Appreciation Portfolio; 0% in
Aetna Variable Growth Portfolio; 0% in Aetna Variable Index Plus Portfolio; 0%
in Aetna Variable Small Company Portfolio; 20% in Fidelity's Variable Insurance
Products Fund--Equity-Income Portfolio; 8% in Fidelity's Variable Insurance
Products Fund--Growth Portfolio; 0% in Fidelity's Variable Insurance Products
Fund--High Income Portfolio; 1% in Fidelity's Variable Insurance Products
Fund--Overseas Portfolio; 2% in Fidelity's Variable Insurance Products Funds
II--Asset Manager Portfolio; 9% in Fidelity's Variable Insurance Products Fund
II--Contrafund Portfolio; 7% in the Janus Aspen Aggressive Growth Portfolio; 3%
in Janus Aspen Balanced Portfolio; 0% in Janus Aspen Flexible Income Portfolio;
4% in Janus Aspen Growth Portfolio; 5% in the Janus Aspen Worldwide Growth
Portfolio; 0% in MFS Total Return Series; 0% in MFS World Governments Series; 0%
Oppenheimer Capital Appreciation Fund; 0% Oppenheimer Global Securities Fund; 0%
Oppenheimer Growth & Income Fund; 0% Oppenheimer Strategic Bond Fund; 7% in
Portfolio Partners MFS Emerging Equities Portfolio; 1% in Portfolio Partners MFS
Research Growth Portfolio; 0% in Portfolio Partners MFS Value Equity Portfolio;
4% in Portfolio Partners Scudder International Growth Portfolio and 0% in
Portfolio Partners T. Rowe Price Growth Equity Portfolio.
The hypothetical values shown in the tables do not reflect any Separate Account
charges for federal income taxes, since we are not currently making such
charges. However, such charges may be made in the future, and in that event,
the gross annual investment rate of return would have to exceed 0%, 6%, or 12%
by an amount sufficient to cover the tax charges in order to produce the Death
Benefit, Total Account Values, and Surrender Values illustrated.
The tables illustrate the Policy Values that would result based upon the
hypothetical investment rates of return if premiums were paid as indicated, if
all Net Premiums were allocated to Variable Life Account B, and if no Policy
loans have been made. The tables are also based on the assumptions that the
Policyowner has not requested an increase or decrease in the Specified Amount
of the Policy, and no partial surrenders have been made.
Upon request, we will provide an illustration based upon the proposed Insured's
age, and underwriting classification, the Specified Amount or premium
requested, the proposed frequency of premium payments and any available riders
requested.
The hypothetical gross annual investment return assumed in such an illustration
will not exceed 12%.
45
<PAGE>
TABLE I FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$5,244.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
SIMPLIFIED ISSUE
GUIDELINE PREMIUM TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Death Benefit
Premiums Gross Annual
Accumulated Investment Returns of
End of at ------------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12%
Year Per Year Net -2.06% Net 3.94% Net 9.94%
- -------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
1 5,506 500,000 500,000 500,000
2 11,288 500,000 500,000 500,000
3 17,358 500,000 500,000 500,000
4 23,732 500,000 500,000 500,000
5 30,425 500,000 500,000 500,000
6 37,453 500,000 500,000 500,000
7 44,832 500,000 500,000 500,000
8 52,579 500,000 500,000 500,000
9 60,714 500,000 500,000 500,000
10 69,256 500,000 500,000 500,000
15 118,816 500,000 500,000 500,000
20 182,068 500,000 500,000 500,000
25 262,795 0 500,000 500,000
30 365,826 0 0 500,000
20 182,068 500,000 500,000 500,000
</TABLE>
<TABLE>
<CAPTION>
Total Account Value Surrender Value
Gross Annual Gross Annual
Investment Returns of Investment Returns of
------------------------------------ -----------------------------------
End of
Policy Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Net -2.06% Net 3.94% Net 9.94% Net -2.06% Net 3.94% Net 9.94%
- -------- ------------ ----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 2,886 3,113 3,341 2,637 2,864 3,091
2 5,854 6,503 7,181 5,551 6,199 6,877
3 8,630 9,894 11,268 8,361 9,624 10,999
4 11,207 13,274 15,618 10,665 12,732 15,076
5 13,582 16,639 20,253 13,118 16,175 19,789
6 15,733 19,963 25,177 15,346 19,576 24,790
7 17,641 23,221 30,401 17,332 22,911 30,091
8 19,279 26,380 35,925 19,047 26,147 35,693
9 20,619 29,404 41,755 20,464 29,249 41,600
10 21,638 32,263 47,900 21,638 32,263 47,900
15 21,109 42,873 83,976 21,109 42,873 83,976
20 6,995 41,663 130,180 6,995 41,663 130,180
25 0 13,576 188,023 0 13,576 188,023
30 0 0 263,018 0 0 263,018
20 6,995 41,663 130,180 6,995 41,663 130,180
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If a
larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment results
may be more or less than those shown and will depend on a number of factors,
including the Policyowner's allocations and the Funds' rates of return. The
Total Account Value and Surrender Value for a Policy would be different from
those shown if the actual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above or below those averages for
individual Policy Years. No representations can be made that these rates of
return will definitely be achieved for any one year or sustained over a period
of time.
46
<PAGE>
TABLE II FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$5,244.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
SIMPLIFIED ISSUE
GUIDELINE PREMIUM TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Death Benefit
Premiums Gross Annual
Accumulated Investment Returns of
End of at -------------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12%
Year Per Year Net -1.66% Net 4.34% Net 10.34%
- -------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
1 5,506 500,000 500,000 500,000
2 11,288 500,000 500,000 500,000
3 17,358 500,000 500,000 500,000
4 23,732 500,000 500,000 500,000
5 30,425 500,000 500,000 500,000
6 37,453 500,000 500,000 500,000
7 44,832 500,000 500,000 500,000
8 52,579 500,000 500,000 500,000
9 60,714 500,000 500,000 500,000
10 69,256 500,000 500,000 500,000
15 118,816 500,000 500,000 500,000
20 182,068 500,000 500,000 500,000
25 262,795 500,000 500,000 500,000
30 365,826 500,000 500,000 765,453
20 182,068 500,000 500,000 500,000
</TABLE>
<TABLE>
<CAPTION>
Total Account Value Surrender Value
Gross Annual Gross Annual
Investment Returns of Investment Returns of
------------------------------------- ------------------------------------
End of
Policy Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Net -1.66% Net 4.34% Net 10.34% Net -1.66% Net 4.34% Net 10.34%
- -------- ------------ ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 3,477 3,727 3,977 3,070 3,320 3,570
2 7,084 7,818 8,583 6,623 7,357 8,122
3 10,557 12,011 13,590 10,130 11,584 13,163
4 13,895 16,310 19,038 13,354 15,768 18,496
5 17,098 20,716 24,973 16,633 20,252 24,509
6 20,165 25,235 31,448 19,778 24,848 31,061
7 23,106 29,878 38,527 22,797 29,568 38,217
8 25,901 34,629 46,255 25,669 34,397 46,023
9 28,575 39,522 54,730 28,420 39,367 54,575
10 31,093 44,523 63,996 31,093 44,523 63,996
15 41,762 72,411 127,851 41,762 72,411 127,851
20 46,745 103,064 232,421 46,745 103,064 232,421
25 44,659 136,747 410,565 44,659 136,747 410,565
30 28,712 169,887 715,377 28,712 169,887 715,377
20 46,745 103,064 232,421 46,745 103,064 232,421
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If a
larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charge may be reduced from
.70% to .20% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.16%, 4.84% and 10.84%.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment results
may be more or less than those shown and will depend on a number of factors,
including the Policyowner's allocations and the Funds' rates of return. The
Total Account Value and Surrender Value for a Policy would be different from
those shown if the actual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above or below those averages for
individual Policy Years. No representations can be made that these rates of
return will definitely be achieved for any one year or sustained over a period
of time.
47
<PAGE>
TABLE III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$6,444.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
NONSMOKER RISK
FACE AMOUNT $500,000
GUARANTEED ISSUE
GUIDELINE PREMIUM TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Death Benefit
Premiums Gross Annual
Accumulated Investment Returns of
End of at ------------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12%
Year Per Year Net -2.06% Net 3.94% Net 9.94%
- -------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
1 6,766 500,000 500,000 500,000
2 13,871 500,000 500,000 500,000
3 21,330 500,000 500,000 500,000
4 29,163 500,000 500,000 500,000
5 37,388 500,000 500,000 500,000
6 46,023 500,000 500,000 500,000
7 55,090 500,000 500,000 500,000
8 64,611 500,000 500,000 500,000
9 74,608 500,000 500,000 500,000
10 85,105 500,000 500,000 500,000
15 146,005 500,000 500,000 500,000
20 223,731 500,000 500,000 500,000
25 322,931 0 500,000 500,000
30 449,539 0 500,000 615,331
20 223,731 500,000 500,000 500,000
</TABLE>
<TABLE>
<CAPTION>
Total Account Value Surrender Value
Gross Annual Gross Annual
Investment Returns of Investment Returns of
------------------------------------ -----------------------------------
End of
Policy Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Net -2.06% Net 3.94% Net 9.94% Net -2.06% Net 3.94% Net 9.94%
- -------- ------------ ----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 3,948 4,239 4,532 3,638 3,930 4,223
2 8,018 8,867 9,753 7,642 8,491 9,378
3 11,879 13,550 15,366 11,545 13,217 15,032
4 15,523 18,281 21,401 14,855 17,613 20,733
5 18,951 23,058 27,899 18,378 22,485 27,326
6 22,139 27,858 34,885 21,662 27,381 34,408
7 25,072 32,663 42,391 24,691 32,281 42,009
8 27,723 37,444 50,446 27,437 37,158 50,160
9 30,067 42,172 59,085 29,876 41,981 58,894
10 32,082 46,823 68,351 32,082 46,823 68,351
15 36,497 68,006 126,310 36,497 68,006 126,310
20 27,588 81,316 211,623 27,588 81,316 211,623
25 0 75,119 344,761 0 75,119 344,761
30 0 23,895 575,075 0 23,895 575,075
20 27,588 81,316 211,623 27,588 81,316 211,623
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If a
larger premium is paid, the Surrender Value as a percentage of the Total Account
Value will be greater than or equal to those illustrated. If a smaller premium
is paid, the Surrender Value as a percentage of the Total Account Value will be
less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment results
may be more or less than those shown and will depend on a number of factors,
including the Policyowner's allocations and the Funds' rates of return. The
Total Account Value and Surrender Value for a Policy would be different from
those shown if the actual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above or below those averages for
individual Policy Years. No representations can be made that these rates of
return will definitely be achieved for any one year or sustained over a period
of time.
48
<PAGE>
TABLE IV FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$6,444.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
NONSMOKER RISK
FACE ACCOUNT $500,000
GUARANTEED ISSUE
GUIDELINE PREMIUM TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Death Benefit
Premiums Gross Annual
Accumulated Investment Returns of
End of at -------------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12%
Year Per Year Net -1.66% Net 4.34% Net 10.34%
- -------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
1 6,766 500,000 500,000 500,000
2 13,871 500,000 500,000 500,000
3 21,330 500,000 500,000 500,000
4 29,163 500,000 500,000 500,000
5 37,388 500,000 500,000 500,000
6 46,023 500,000 500,000 500,000
7 55,090 500,000 500,000 500,000
8 64,611 500,000 500,000 500,000
9 74,608 500,000 500,000 500,000
10 85,105 500,000 500,000 500,000
15 146,005 500,000 500,000 500,000
20 223,731 500,000 500,000 500,000
25 322,931 500,000 500,000 558,759
30 449,539 500,000 500,000 896,020
20 223,731 500,000 500,000 500,000
</TABLE>
<TABLE>
<CAPTION>
Total Account Value Surrender Value
Gross Annual Gross Annual
Investment Returns of Investment Returns of
------------------------------------- ------------------------------------
End of
Policy Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Net -1.66% Net 4.34% Net 10.34% Net -1.66% Net 4.34% Net 10.34%
- -------- ------------ ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 4,158 4,461 4,766 3,655 3,958 4,263
2 8,452 9,339 10,265 7,884 8,770 9,696
3 12,551 14,303 16,206 12,024 13,776 15,679
4 16,445 19,347 22,627 15,777 18,679 21,960
5 20,183 24,520 29,629 19,610 23,948 29,057
6 23,737 29,802 37,246 23,260 29,325 36,769
7 27,119 35,207 45,558 26,737 34,825 45,176
8 30,266 40,677 54,576 29,980 40,391 54,290
9 33,274 46,311 64,477 33,083 46,120 64,287
10 36,029 52,004 75,248 36,029 52,004 75,248
15 46,982 83,250 149,388 46,982 83,250 149,388
20 49,555 116,023 271,176 49,555 116,023 271,176
25 40,204 148,910 481,689 40,204 148,910 481,689
30 7,494 175,155 837,402 7,494 175,155 837,402
20 49,555 116,023 271,176 49,555 116,023 271,176
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If a
larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be less than or equal or those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charge may be reduced from
.70% to .20% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.16%, 4.84% and 10.84%.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment results
may be more or less than those shown and will depend on a number of factors,
including the Policyowner's allocations and the Fund's rates of return. The
Total Account Value and Surrender Value for a Policy would be different from
those shown if the actual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above or below those averages for
individual Policy Years. No representations can be made that these rates of
return will definitely be achieved for any one year or sustained over a period
of time.
49
<PAGE>
TABLE V
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$5,244.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM
TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
SIMPLIFIED ISSUE
CASH VALUE ACCUMULATION TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Death Benefit
Premiums Gross Annual
Accumulated Investment Returns of
End of at ------------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12%
Year Per Year Net -2.06% Net 3.94% Net 9.94%
- -------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
1 5,506 500,000 500,000 500,000
2 11,288 500,000 500,000 500,000
3 17,358 500,000 500,000 500,000
4 23,732 500,000 500,000 500,000
5 30,425 500,000 500,000 500,000
6 37,453 500,000 500,000 500,000
7 44,832 500,000 500,000 500,000
8 52,579 500,000 500,000 500,000
9 60,714 500,000 500,000 500,000
10 69,256 500,000 500,000 500,000
15 118,816 500,000 500,000 500,000
20 182,068 500,000 500,000 500,000
25 262,795 0 500,000 500,000
30 365,826 0 0 500,000
20 182,068 500,000 500,000 500,000
</TABLE>
<TABLE>
<CAPTION>
Total Account Value Surrender Value
Gross Annual Gross Annual
Investment Returns of Investment Returns of
------------------------------------ -----------------------------------
End of
Policy Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Net -2.06% Net 3.94% Net 9.94% Net -2.06% Net 3.94% Net 9.94%
- -------- ------------ ----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 2,886 3,113 3,341 2,637 2,864 3,091
2 5,854 6,503 7,181 5,551 6,199 6,877
3 8,630 9,894 11,268 8,361 9,624 10,999
4 11,207 13,274 15,618 10,665 12,732 15,076
5 13,582 16,639 20,253 13,118 16,175 19,789
6 15,733 19,963 25,177 15,346 19,576 24,790
7 17,641 23,221 30,401 17,332 22,911 30,091
8 19,279 26,380 35,925 19,047 26,147 35,693
9 20,619 29,404 41,755 20,464 29,249 41,600
10 21,638 32,263 47,900 21,638 32,263 47,900
15 21,109 42,873 83,976 21,109 42,873 83,976
20 6,995 41,663 130,180 6,995 41,663 130,180
25 0 13,576 188,023 0 13,576 188,023
30 0 0 263,018 0 0 263,018
20 6,995 41,663 130,180 6,995 41,663 130,180
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If a
larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment results
may be more or less than those shown and will depend on a number of factors,
including the Policyowner's allocations and the Funds' rates of return. The
Total Account Value and Surrender Value for a Policy would be different from
those shown if the actual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above or below those averages for
individual Policy Years. No representations can be made that these rates of
return will definitely be achieved for any one year or sustained over a period
of time.
50
<PAGE>
TABLE VI FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$5,244.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
SIMPLIFIED ISSUE
CASH VALUE ACCUMULATION TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Death Benefit
Premiums Gross Annual
Accumulated Investment Returns of
End of at -------------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12%
Year Per Year Net -1.66% Net 4.34% Net 10.34%
- -------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
1 5,506 500,000 500,000 500,000
2 11,288 500,000 500,000 500,000
3 17,358 500,000 500,000 500,000
4 23,732 500,000 500,000 500,000
5 30,425 500,000 500,000 500,000
6 37,453 500,000 500,000 500,000
7 44,832 500,000 500,000 500,000
8 52,579 500,000 500,000 500,000
9 60,714 500,000 500,000 500,000
10 69,256 500,000 500,000 500,000
15 118,816 500,000 500,000 500,000
20 182,068 500,000 500,000 500,000
25 262,795 500,000 500,000 652,403
30 365,826 500,000 500,000 991,412
20 182,068 500,000 500,000 500,000
</TABLE>
<TABLE>
<CAPTION>
Total Account Value Surrender Value
Gross Annual Gross Annual
Investment Returns of Investment Returns of
------------------------------------- ------------------------------------
End of
Policy Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Net -1.66% Net 4.34% Net 10.34% Net -1.66% Net 4.34% Net 10.34%
- -------- ------------ ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 3,477 3,727 3,977 3,070 3,320 3,570
2 7,084 7,818 8,583 6,623 7,357 8,122
3 10,557 12,011 13,590 10,130 11,584 13,163
4 13,895 16,310 19,038 13,354 15,768 18,496
5 17,098 20,716 24,973 16,633 20,252 24,509
6 20,165 25,235 31,448 19,778 24,848 31,061
7 23,106 29,878 38,527 22,797 29,568 38,217
8 25,901 34,629 46,255 25,669 34,397 46,023
9 28,575 39,522 54,730 28,420 39,367 54,575
10 31,093 44,523 63,996 31,093 44,523 63,996
15 41,762 72,411 127,851 41,762 72,411 127,851
20 46,745 103,064 232,421 46,745 103,064 232,421
25 44,659 136,747 407,752 44,659 136,747 407,752
30 28,712 169,887 688,480 28,712 169,887 688,480
20 46,745 103,064 232,421 46,745 103,064 232,421
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If a
larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charge may be reduced from
.70% to .20% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.16%, 4.84% and 10.84%.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment results
may be more or less than those shown and will depend on a number of factors,
including the Policyowner's allocations and the Funds' rates of return. The
Total Account Value and Surrender Value for a Policy would be different from
those shown if the actual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above or below those averages for
individual Policy Years. No representations can be made that these rates of
return will definitely be achieved for any one year or sustained over a period
of time.
51
<PAGE>
TABLE VII FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$6,444.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
NONSMOKER RISK
FACE AMOUNT $500,000
GUARANTEED ISSUE
CASH VALUE ACCUMULATION TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Death Benefit
Premiums Gross Annual
Accumulated Investment Returns of
End of at ------------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12%
Year Per Year Net -2.06% Net 3.94% Net 9.94%
- -------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
1 6,766 500,000 500,000 500,000
2 13,871 500,000 500,000 500,000
3 21,330 500,000 500,000 500,000
4 29,163 500,000 500,000 500,000
5 37,388 500,000 500,000 500,000
6 46,023 500,000 500,000 500,000
7 55,090 500,000 500,000 500,000
8 64,611 500,000 500,000 500,000
9 74,608 500,000 500,000 500,000
10 85,105 500,000 500,000 500,000
15 146,005 500,000 500,000 500,000
20 223,731 500,000 500,000 500,000
25 322,931 0 500,000 550,159
30 449,539 0 500,000 773,010
20 223,731 500,000 500,000 500,000
</TABLE>
<TABLE>
<CAPTION>
Total Account Value Surrender Value
Gross Annual Gross Annual
Investment Returns of Investment Returns of
------------------------------------ -----------------------------------
End of
Policy Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Net -2.06% Net 3.94% Net 9.94% Net -2.06% Net 3.94% Net 9.94%
- -------- ------------ ----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 3,948 4,239 4,532 3,638 3,930 4,223
2 8,018 8,867 9,753 7,642 8,491 9,378
3 11,879 13,550 15,366 11,545 13,217 15,032
4 15,523 18,281 21,401 14,855 17,613 20,733
5 18,951 23,058 27,899 18,378 22,485 27,326
6 22,139 27,858 34,885 21,662 27,381 34,408
7 25,072 32,663 42,391 24,691 32,281 42,009
8 27,723 37,444 50,446 27,437 37,158 50,160
9 30,067 42,172 59,085 29,876 41,981 58,894
10 32,082 46,823 68,351 32,082 46,823 68,351
15 36,497 68,006 126,310 36,497 68,006 126,310
20 27,588 81,316 211,623 27,588 81,316 211,623
25 0 75,119 343,849 0 75,119 343,849
30 0 23,895 536,812 0 23,895 536,812
20 27,588 81,316 211,623 27,588 81,316 211,623
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If a
larger premium is paid, the Surrender Values as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment results
may be more or less than those shown and will depend on a number of factors,
including the Policyowner's allocations and the Funds' rates of return. The
Total Account Value and Surrender Value for a Policy would be different from
those shown if the actual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above or below those averages for
individual Policy Years. No representations can be made that these rates of
return will definitely be achieved for any one year or sustained over a period
of time.
52
<PAGE>
TABLE VIII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
UNISEX ISSUE AGE 45
$6,444.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM
TO AGE 80
NONSMOKER RISK
FACE AMOUNT $500,000
GUARANTEED ISSUE
CASH VALUE ACCUMULATION TEST
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Death Benefit
Premiums Gross Annual
Accumulated Investment Returns of
End of at -------------------------------------
Policy 5% Interest Gross 0% Gross 6% Gross 12%
Year Per Year Net -1.66% Net 4.34% Net 10.34%
- -------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
1 6,766 500,000 500,000 500,000
2 13,871 500,000 500,000 500,000
3 21,330 500,000 500,000 500,000
4 29,163 500,000 500,000 500,000
5 37,388 500,000 500,000 500,000
6 46,023 500,000 500,000 500,000
7 55,090 500,000 500,000 500,000
8 64,611 500,000 500,000 500,000
9 74,608 500,000 500,000 500,000
10 85,105 500,000 500,000 500,000
15 146,005 500,000 500,000 500,000
20 223,731 500,000 500,000 500,000
25 322,931 500,000 500,000 752,805
30 449,539 500,000 500,000 1,121,921
20 223,731 500,000 500,000 500,000
</TABLE>
<TABLE>
<CAPTION>
Total Account Value Surrender Value
Gross Annual Gross Annual
Investment Returns of Investment Returns of
------------------------------------- ------------------------------------
End of
Policy Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
Year Net -1.66% Net 4.34% Net 10.34% Net -1.66% Net 4.34% Net 10.34%
- -------- ------------ ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 4,158 4,461 4,766 3,655 3,958 4,263
2 8,452 9,339 10,265 7,884 8,770 9,696
3 12,551 14,303 16,206 12,024 13,776 15,679
4 16,445 19,347 22,627 15,777 18,679 21,960
5 20,183 24,520 29,629 19,610 23,948 29,057
6 23,737 29,802 37,246 23,260 29,325 36,769
7 27,119 35,207 45,558 26,737 34,825 45,176
8 30,266 40,677 54,576 29,980 40,391 54,290
9 33,274 46,311 64,477 33,083 46,120 64,287
10 36,029 52,004 75,248 36,029 52,004 75,248
15 46,982 83,250 149,388 46,982 83,250 149,388
20 49,555 116,023 271,176 49,555 116,023 271,176
25 40,204 148,910 470,503 40,204 148,910 470,503
30 7,494 175,155 779,112 7,494 175,155 779,112
20 49,555 116,023 271,176 49,555 116,023 271,176
</TABLE>
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Surrender Values would be less than those illustrated. If a
larger premium is paid, the Surrender Value as a percentage of the Total
Account Value will be greater than or equal to those illustrated. If a smaller
premium is paid, the Surrender Value as a percentage of the Total Account Value
will be less than or equal to those illustrated.
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk charges, administrative charges, and premium
load assumed. The current mortality and expense risk charge may be reduced from
.70% to .20% in Policy Years 11 and thereafter. Beginning in Policy Years 11
and thereafter, the illustrated net annual return is -1.16%, 4.84% and 10.84%.
These investment results are illustrative only and should not be considered a
representation of past or future investment results. Actual investment results
may be more or less than those shown and will depend on a number of factors,
including the Policyowner's allocations and the Funds' rates of return. The
Total Account Value and Surrender Value for a Policy would be different from
those shown if the actual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above or below those averages for
individual Policy Years. No representations can be made that these rates of
return will definitely be achieved for any one year or sustained over a period
of time.
53
<PAGE>
VARIABLE LIFE ACCOUNT B
FINANCIAL STATEMENTS
Index
<TABLE>
<S> <C>
Statement of Assets and Liabilities as of September 30, 1997 (unaudited) ............... S-2
Statements of Operations and Changes in Net Assets for the nine months
ended September 30, 1997 and September 30, 1996 (unaudited) ........................ S-4
Condensed Financial Information for the nine months ended September 30, 1997 (unaudited) S-5
Notes to Financial Statements -- September 30, 1997 (unaudited) ....................... S-8
Statement of Assets and Liabilities -- December 31, 1996 .............................. S-12
Statements of Operations and Changes in Net Assets for the years ended
December 31, 1996 and 1995 ......................................................... S-14
Condensed Financial Information for the year ended December 31, 1996 .................. S-15
Notes to Financial Statements -- December 31, 1996 .................................... S-18
</TABLE>
S-1
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--September 30, 1997 (Unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 3,196,319 shares (cost $99,508,839) ........................ $131,027,138
Aetna Income Shares; 1,442,314 shares (cost $18,506,001) ........................ 18,856,596
Aetna Variable Encore Fund; 1,141,899 shares (cost $15,002,124) .................. 15,053,505
Aetna Investment Advisers Fund, Inc.; 1,269,183 shares (cost $18,194,063) ......... 20,942,265
Aetna Ascent Variable Portfolio; 105,799 shares (cost $1,377,537) ............... 1,597,706
Aetna Crossroads Variable Portfolio; 33,041 shares (cost $412,360) ............... 461,347
Aetna Legacy Variable Portfolio; 47,758 shares (cost $574,815) .................. 603,725
Aetna Variable Index Plus Portfolio; 61,593 shares (cost $852,252) ............... 875,204
Alger American Small Capitalization Portfolio; 443,588 shares (cost $19,897,819) 20,697,798
American Century VP Capital Appreciation Fund; 649,356 shares (cost $6,600,874) ... 7,220,836
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 552,358 shares (cost $11,584,391) ..................... 13,146,117
Growth Portfolio; 134,592 shares (cost $4,465,705) .............................. 5,033,748
Overseas Portfolio; 46,329 shares (cost $848,995) .............................. 953,003
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 119,521 shares (cost $1,854,784) ........................ 2,107,161
Contrafund Portfolio; 872,975 shares (cost $15,798,493) ........................ 17,634,099
Janus Aspen Series:
Aggressive Growth Portfolio; 500,689 shares (cost $9,126,974) .................. 10,103,908
Balanced Portfolio; 373,464 shares (cost $5,583,127) ........................... 6,434,792
Growth Portfolio; 545,924 shares (cost $8,679,709) .............................. 10,225,157
Short-Term Bond Portfolio; 150,415 shares (cost $1,514,462) ..................... 1,537,242
Worldwide Growth Portfolio; 876,969 shares (cost $18,447,152) .................. 21,319,109
Scudder Variable Life Investment Fund--
International Portfolio; 943,907 shares (cost $12,021,744) ..................... 14,120,843
-------------
NET ASSETS (cost $270,852,220) ................................................... $319,951,299
=============
Net assets represented by:
Policyholders' account values: (Notes 1 and 5)
Aetna Variable Fund:
Policyholders' account values ................................................... $131,027,138
Aetna Income Shares:
Policyholders' account values ................................................... 18,856,596
Aetna Variable Encore Fund:
Policyholders' account values ................................................... 15,053,505
Aetna Investment Advisers Fund, Inc.:
Policyholders' account values ................................................... 20,942,265
Aetna Ascent Variable Portfolio:
Policyholders' account values ................................................... 1,597,706
</TABLE>
S-2
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--September 30, 1997 (unaudited &
continued):
<TABLE>
<S> <C>
Aetna Crossroads Variable Portfolio:
Policyholders' account values .............................. $ 461,347
Aetna Legacy Variable Portfolio:
Policyholders' account values .............................. 603,725
Aetna Variable Index Plus Portfolio:
Policyholders' account values .............................. 875,204
Alger American Small Capitalization Portfolio:
Policyholders' account values .............................. 20,697,798
American Century VP Capital Appreciation Fund:
Policyholders' account values .............................. 7,220,836
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Policyholders' account values .............................. 13,146,117
Growth Portfolio:
Policyholders' account values .............................. 5,033,748
Overseas Portfolio:
Policyholders' account values .............................. 953,003
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Policyholders' account values .............................. 2,107,161
Contrafund Portfolio:
Policyholders' account values .............................. 17,634,099
Janus Aspen Series:
Aggressive Growth Portfolio:
Policyholders' account values .............................. 10,103,908
Balanced Portfolio:
Policyholders' account values .............................. 6,434,792
Growth Portfolio:
Policyholders' account values .............................. 10,225,157
Short-Term Bond Portfolio:
Policyholders' account values .............................. 1,537,242
Worldwide Growth Portfolio:
Policyholders' account values .............................. 21,319,109
Scudder Variable Life Investment Fund--International Portfolio:
Policyholders' account values .............................. 14,120,843
-------------
$319,951,299
=============
</TABLE>
See Notes to Financial Statements
S-3
<PAGE>
Variable Life Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
(Unaudited) (Unaudited)
-------------------- -------------------
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ......................................................... $ 11,181,934 $ 3,885,187
Expenses: (Notes 2 and 5)
Valuation Period Deductions ....................................... (1,872,259) (1,080,847)
------------- -------------
Net investment income ............................................. 9,309,675 2,804,340
------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ............................................. 139,757,147 20,651,970
Cost of investments sold .......................................... 128,709,226 18,373,466
------------- -------------
Net realized gain (loss) ....................................... 11,047,921 2,278,504
Net unrealized gain (loss) on investments: (Note 5) ...............
Beginning of period ............................................. 14,132,669 4,391,574
End of period ................................................... 49,099,079 15,114,855
------------- -------------
Net change in unrealized gain (loss) ........................... 34,966,410 10,723,281
------------- -------------
Net realized and unrealized gain (loss) on investments ............ 46,014,331 13,001,785
------------- -------------
Net increase (decrease) in net assets resulting from operations ... 55,324,006 15,806,125
------------- -------------
FROM UNIT TRANSACTIONS:
Variable life premium payments .................................... 84,887,351 79,490,652
Sales and administrative charges deducted by the Company ......... (2,894,734) (2,425,262)
Premiums allocated to the fixed account ........................... (2,076,993) (2,340,043)
------------- -------------
Net premiums allocated to the variable account .................. 79,915,624 74,725,347
Transfers to the Company for monthly deductions .................. (15,533,434) (11,102,414)
Redemptions by contract holders .................................... (20,908,061) (2,903,147)
Transfers on account of policy loans .............................. (2,096,102) (3,395,109)
Other ............................................................ 75,383 (10,234)
------------- -------------
Net increase in net assets from unit transactions (Note 5) ...... 41,453,410 57,314,443
------------- -------------
Change in net assets ............................................. 96,777,416 73,120,568
NET ASSETS:
Beginning of period ................................................ 223,173,883 126,515,779
------------- -------------
End of period ...................................................... $ 319,951,299 $ 199,636,347
============= =============
</TABLE>
See Notes to Financial Statements
S-4
<PAGE>
Variable Life Account B
Condensed Financial Information--Nine Months Ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Value Increase
Per Unit (Decrease)
in Value of Reserves
Beginning End of Accumulation at End
of Period Period Unit of Period
----------- --------- ------------------ ------------
<S> <C> <C> <C> <C>
Aetna Variable Fund:
Aetna Vest ........................ $34.932 $45.812 31.15% $65,467,133
Aetna Vest II ..................... 19.507 25.577 31.12% 20,668,426
Aetna Vest Plus .................. 16.389 21.489 31.12% 35,633,026
Aetna Vest Estate Protector ...... 11.675 15.326 31.27% 886,387
Corporate Specialty Market ...... 14.805 19.413 31.12% 8,372,166
Aetna Income Shares:
Aetna Vest ........................ $21.850 $23.082 5.64% 5,989,256
Aetna Vest II ..................... 14.691 15.519 5.64% 975,075
Aetna Vest Plus .................. 11.764 12.427 5.64% 2,046,769
Aetna Vest Estate Protector ...... 10.452 11.054 5.76% 214,179
Corporate Specialty Market ...... 11.354 11.995 5.64% 9,631,317
Aetna Variable Encore Fund:
Aetna Vest ........................ $16.577 $17.118 3.27% 2,564,616
Aetna Vest II ..................... 12.117 12.513 3.27% 158,376
Aetna Vest Plus .................. 11.388 11.760 3.27% 5,977,410
Aetna Vest Estate Protector ...... 10.333 10.683 3.38% 169,449
Corporate Specialty Market ...... 10.895 11.251 3.27% 6,183,654
Aetna Investment Advisers Fund, Inc.:
Aetna Vest ........................ $17.547 $20.914 19.19% 2,262,647
Aetna Vest II ..................... 17.742 21.143 19.16% 4,931,529
Aetna Vest Plus .................. 14.880 17.731 19.16% 7,889,770
Aetna Vest Estate Protector ...... 11.340 13.314 17.41% (1) 126,662
Corporate Specialty Market ...... 12.954 15.436 19.16% 5,731,657
Aetna Ascent Variable Portfolio:
Aetna Vest ........................ $11.828 $14.221 20.23% 296,098
Aetna Vest II ..................... 11.828 14.212 20.16% 138,916
Aetna Vest Plus .................. 11.828 14.212 20.16% 1,119,184
Aetna Vest Estate Protector ...... 11.886 14.245 19.85% (2) 43,508
Aetna Crossroads Variable Portfolio:
Aetna Vest ........................ $11.474 $13.446 17.19% 68,703
Aetna Vest II ..................... 11.544 13.438 16.41% (1) 29,300
Aetna Vest Plus .................. 11.474 13.438 17.12% 361,206
Aetna Vest Estate Protector ...... 11.487 13.468 17.25% 2,138
Aetna Legacy Variable Portfolio:
Aetna Vest II ..................... $11.263 $12.576 11.66% (2) 11,119
Aetna Vest Plus .................. 11.118 12.576 13.11% 561,269
Aetna Vest Estate Protector ...... 11.344 12.604 11.11% (3) 31,337
Aetna Variable Index Plus Portfolio:
Aetna Vest ........................ $12.017 $12.762 6.20% (4) 94,956
Aetna Vest II ..................... 11.345 12.762 12.49% (4) 76,612
Aetna Vest Plus .................. 11.172 12.762 14.23% (3) 409,202
Aetna Vest Estate Protector ...... 12.371 12.778 3.29% (5) 77,859
Corporate Specialty Market ...... 12.785 12.762 (0.18%)(6) 216,575
</TABLE>
S-5
<PAGE>
Variable Life Account B
Condensed Financial Information--Nine Months Ended September 30, 1997
(unaudited & continued)
<TABLE>
<CAPTION>
Increase
Value Per Unit (Decrease)
in Value of Reserves
Beginning End of Accumulation at End
of Period Period Unit of Period
----------- --------- -------------- -----------
<S> <C> <C> <C> <C>
Alger American Small
Capitalization Portfolio:
Aetna Vest ........................ $16.051 $18.926 17.92% 1,479,421
Aetna Vest II ..................... 16.052 18.928 17.92% 664,375
Aetna Vest Plus .................. 16.043 18.918 17.92% 10,299,964
Aetna Vest Estate Protector ...... 9.982 11.783 18.05% 553,593
Corporate Specialty Market ...... 13.201 15.566 17.92% 7,700,445
American Century VP Capital
Appreciation Fund:
Aetna Vest ........................ $12.534 $13.826 10.31% 881,640
Aetna Vest II ..................... 12.590 13.888 10.31% 294,690
Aetna Vest Plus .................. 12.419 13.698 10.31% 4,592,275
Aetna Vest Estate Protector ...... 9.511 10.503 10.43% 100,399
Corporate Specialty Market ...... 11.358 12.528 10.31% 1,351,832
Fidelity Investments Variable
Insurance Products Fund:
Equity-Income Portfolio:
Aetna Vest ........................ $10.871 $13.549 24.64% 169,511
Aetna Vest II ..................... 10.871 13.549 24.64% 67,118
Aetna Vest Plus .................. 10.871 13.549 24.64% 4,134,876
Aetna Vest Estate Protector ...... 10.883 13.580 24.78% 585,334
Corporate Specialty Market ...... 12.512 15.594 24.64% 8,189,278
Fidelity Investments Variable
Insurance Products Fund:
Growth Portfolio:
Corporate Specialty Market ...... $11.255 $13.906 23.55% 5,033,748
Overseas Portfolio:
Corporate Specialty Market ...... $11.241 $13.335 18.62% 953,003
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market ...... $12.022 $14.093 17.23% 2,107,161
Contrafund Portfolio:
Aetna Vest ........................ $11.525 $14.386 24.82% 481,708
Aetna Vest II ..................... 11.525 14.386 24.82% 106,699
Aetna Vest Plus .................. 11.525 14.386 24.82% 3,455,189
Aetna Vest Estate Protector ...... 11.538 14.419 24.96% 520,560
Corporate Specialty Market ...... 12.396 15.474 24.83% 13,069,943
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest ........................ $16.153 $17.738 9.81% 905,943
Aetna Vest II ..................... 16.153 17.738 9.81% 531,805
Aetna Vest Plus .................. 16.153 17.738 9.81% 5,523,172
Aetna Vest Estate Protector ...... 9.797 10.770 9.93% 627,618
Corporate Specialty Market ...... 12.120 13.309 9.81% 2,515,370
</TABLE>
S-6
<PAGE>
Variable Life Account B
Condensed Financial Information--Nine Months Ended September 30, 1997
(unaudited & continued):
<TABLE>
<CAPTION>
Increase
Value Per Unit (Decrease)
in Value of Reserves
Beginning End of Accumulation at End
of Period Period Unit of Period
----------- --------- ----------------- -----------
<S> <C> <C> <C> <C>
Balanced Portfolio:
Aetna Vest ........................ $13.966 $16.550 18.50% 126,696
Aetna Vest II ..................... 14.075 16.679 18.50% 166,787
Aetna Vest Plus .................. 13.960 16.542 18.50% 3,046,452
Aetna Vest Estate Protector ...... 11.101 13.169 18.63% 110,546
Corporate Specialty Market ...... 12.242 14.507 18.50% 2,984,311
Growth Portfolio:
Aetna Vest ........................ $14.898 $18.346 23.14% 684,594
Aetna Vest II ..................... 14.884 18.326 23.14% 1,143,611
Aetna Vest Plus .................. 14.863 18.303 23.14% 6,587,329
Aetna Vest Estate Protector ...... 10.857 13.385 23.28% 492,886
Corporate Specialty Market ...... 12.232 15.063 23.14% 1,316,737
Short-Term Bond Portfolio:
Aetna Vest ........................ $11.289 $11.772 4.27% 7,426
Aetna Vest II ..................... 11.277 11.759 4.27% 1,534
Aetna Vest Plus .................. 11.247 11.727 4.27% 529,601
Aetna Vest Estate Protector ...... 10.389 10.818 4.13% (1) 9,958
Corporate Specialty Market ...... 10.468 10.916 4.27% 988,724
Worldwide Growth Portfolio:
Aetna Vest ........................ $16.364 $20.576 25.74% 2,234,729
Aetna Vest II ..................... 16.368 20.582 25.74% 1,184,713
Aetna Vest Plus .................. 16.348 20.556 25.74% 10,139,649
Aetna Vest Estate Protector ...... 11.811 14.868 25.88% 648,134
Corporate Specialty Market ...... 13.459 16.924 25.74% 7,111,884
Scudder Variable Life Investment
Fund--International Portfolio:
Aetna Vest ........................ $14.543 $16.692 14.78% 2,307,215
Aetna Vest II ..................... 14.453 16.589 14.78% 746,333
Aetna Vest Plus .................. 14.373 16.496 14.78% 6,951,136
Aetna Vest Estate Protector ...... 10.898 12.522 14.90% 201,188
Corporate Specialty Market ...... 12.043 13.823 14.78% 3,914,970
</TABLE>
Notes to Condensed Financial Information:
(1)--Reflects less than a full year of performance activity. Funds were
first received in this option during January 1997.
(2)--Reflects less than a full year of performance activity. Funds were
first received in this option during February 1997.
(3)--Reflects less than a full year of performance activity. Funds were
first received in this option during May 1997.
(4)--Reflects less than a full year of performance activity. Funds were
first received in this option during June 1997.
(5)--Reflects less than a full year of performance activity. Funds were
first received in this option during July 1997.
(6)--Reflects less than a full year of performance activity. Funds were
first received in this option during August 1997.
S-7
<PAGE>
Variable Life Account B
Notes to Financial Statements--September 30, 1997 (Unaudited):
1. Summary of Significant Accounting Policies
Variable Life Account B ("Account") is a separate account established by
Aetna Life Insurance and Annuity Company and is registered under the
Investment Company Act of 1940 as a unit investment trust. The Account is
sold exclusively for use with variable life insurance product contracts as
defined under the Internal Revenue Code of 1986, as amended.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Although actual results
could differ from these estimates, any such differences are expected to be
immaterial to the net assets of the Account.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset
value per share as determined by each fund on September 30, 1997:
Aetna Variable Fund Janus Aspen Series:
Aetna Income Shares [bullet] Aggressive Growth Portfolio
Aetna Variable Encore Fund [bullet] Balanced Portfolio
Aetna Investment Advisers Fund, Inc. [bullet] Growth Portfolio
Aetna Ascent Variable Portfolio [bullet] Short-Term Bond Portfolio
Aetna Crossroads Variable Portfolio [bullet] Worldwide Growth Portfolio
Aetna Legacy Variable Portfolio Scudder Variable Life Investment
Aetna Variable Index Plus Portfolio Fund--International Portfolio
Alger American Small
Capitalization Portfolio
American Century VP Capital
Appreciation Fund
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
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--September 30, 1997 (unaudited & continued):
3. Dividend Income
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 (distributions in excess of net investment income) and accumulated
net realized gain (loss) on investments is included in net unrealized gain
(loss) on investments in the Statements of Operations and Changes in Net
Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the nine month periods ended September 30, 1997
and September 30, 1996 aggregated $190,520,232 and $139,757,147 and
$80,774,933 and $20,651,970, respectively.
S-9
<PAGE>
Variable Life Account B
Notes to Financial Statements--September 30, 1997 (unaudited & continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets--Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Valuation Proceeds Cost of Net
Period from Invesments Realized
Dividends Deductions Sales Sold Gain (Loss)
------------- ---------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund:
PolicyHolders' account values ...... $ 4,806,166 $ (759,765) $ 7,628,880 $ 5,575,341 $ 2,053,539
Aetna Income Shares:
PolicyHolders' account values ...... 371,054 (97,068) 1,779,972 1,823,228 (43,256)
Aetna Variable Encore Fund:
PolicyHolders' account values ...... 372,968 (100,707) 43,104,359 42,850,706 253,653
Aetna Investment Advisers Fund, Inc.:
PolicyHolders' account values ...... 1,720,435 (127,224) 1,636,280 1,316,961 319,319
Aetna Ascent Variable Portfolio:
PolicyHolders' account values ...... 13,550 (7,125) 779,440 770,289 9,151
Aetna Crossroads Variable Portfolio:
PolicyHolders' account values ...... 4,060 (1,903) 181,294 178,792 2,502
Aetna Legacy Variable Portfolio:
PolicyHolders' account values ...... 7,636 (2,023) 216,181 198,502 17,679
Aetna Variable Index Plus Portfolio:
PolicyHolders' account values ...... 0 (1,350) 2,893 2,642 251
Alger American Small Capitalization
Portfolio:
PolicyHolders' account values ...... 576,583 (97,515) 27,120,190 25,868,551 1,251,639
American Century VP Capital
Appreciation Fund:
PolicyHolders' account values ...... 132,455 (45,867) 3,235,827 3,442,376 (206,549)
Fidelity Investments Variable Insurance
Products Fund:
Equity-Income Portfolio:
PolicyHolders' account values ...... 1,485,715 (123,125) 11,734,663 9,571,434 2,163,229
Growth Portfolio:
PolicyHolders' account values ...... 192,233 (39,162) 6,082,672 5,284,973 797,699
Overseas Portfolio:
PolicyHolders' account values ...... 46,706 (4,712) 46,070 41,030 5,040
Fidelity Investments Variable Insurance
Products Fund II:
Asset Manager Portfolio:
PolicyHolders' account values ...... 175,953 (12,238) 96,650 91,251 5,399
Contrafund Portfolio:
PolicyHolders' account values ...... 235,708 (63,309) 4,141,445 3,321,787 819,658
Janus Aspen Series:
Aggressive Growth Portfolio:
PolicyHolders' account values ...... 0 (67,528) 15,604,169 15,153,080 451,089
Balanced Portfolio:
PolicyHolders' account values ...... 123,266 (34,252) 982,085 824,394 157,691
Growth Portfolio:
PolicyHolders' account values ...... 277,232 (61,963) 3,109,251 2,424,122 685,129
Short-Term Bond Portfolio:
PolicyHolders' account values ...... 101,542 (28,323) 3,489,096 3,386,095 103,001
Worldwide Growth Portfolio:
PolicyHolders' account values ...... 274,427 (109,951) 5,994,187 4,447,419 1,546,768
Scudder Variable Life Investment Fund--
International Portfolio:
PolicyHolders' account values ...... 264,245 (87,149) 2,791,543 2,136,253 655,290
------------ ------------ ------------- ------------- -----------
Total Variable Life Account B ...... $11,181,934 $ (1,872,259) $139,757,147 $128,709,226 $11,047,921
============ ============ ============= ============= ===========
</TABLE>
S-10
<PAGE>
<TABLE>
<CAPTION>
Net Increase
Net Unrealized Net (Decrease) In
Gain (Loss) Change in Net Assets Net Assets
Beginning End Unrealized from Unit Beginning End
of Period of Period Gain (Loss) Transactions of Period of Period
- ------------- ------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$ 7,294,643 $31,518,299 $24,223,656 $ 7,831,916 $ 92,871,626 $131,027,138
(190,180) 350,595 540,775 4,905,304 13,179,787 18,856,596
106,394 51,381 (55,013) 5,490,419 9,092,185 15,053,505
1,383,931 2,748,202 1,364,271 1,873,923 15,791,541 20,942,265
15,645 220,169 204,524 832,228 545,378 1,597,706
(191) 48,987 49,178 283,818 123,692 461,347
20 28,909 28,889 537,581 13,963 603,725
0 22,952 22,952 853,351 0 875,204
172,057 799,979 627,922 5,253,086 13,086,083 20,697,798
(146,911) 619,963 766,874 91,398 6,482,525 7,220,836
1,096,283 1,561,726 465,443 (4,155,358) 13,310,213 13,146,117
294,867 568,043 273,176 (1,242,727) 5,052,529 5,033,748
37,941 104,008 66,067 307,575 532,327 953,003
134,978 252,377 117,399 410,462 1,410,186 2,107,161
730,883 1,835,606 1,104,723 8,625,629 6,911,690 17,634,099
249,074 976,934 727,860 (670,440) 9,662,927 10,103,908
243,163 851,665 608,502 2,005,240 3,574,345 6,434,792
566,478 1,545,448 978,970 1,171,142 7,174,647 10,225,157
26,773 22,780 (3,993) (2,462,833) 3,827,848 1,537,242
872,277 2,871,957 1,999,680 7,693,049 9,915,136 21,319,109
1,244,544 2,099,099 854,555 1,818,647 10,615,255 14,120,843
----------- ------------ ----------- ------------ ------------- -------------
$14,132,669 $49,099,079 $34,966,410 $41,453,410 $223,173,883 $319,951,299
=========== ============ =========== ============ ============= =============
</TABLE>
S-11
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 2,867,163 shares (cost $85,576,983) ........................ $ 92,871,626
Aetna Income Shares; 1,044,098 shares (cost $13,369,967) ........................ 13,179,787
Aetna Variable Encore Fund; 689,138 shares (cost $8,985,791) ..................... 9,092,185
Aetna Investment Advisers Fund, Inc.; 1,044,556 shares (cost $14,407,610)......... 15,791,541
Aetna Ascent Variable Portfolio; 43,217 shares (cost $529,733) .................. 545,378
Aetna Crossroads Variable Portfolio; 10,326 shares (cost $123,882) ............... 123,692
Aetna Legacy Variable Portfolio; 1,241 shares (cost $13,943) ..................... 13,963
Alger American Small Capitalization Portfolio; 319,875 shares (cost $12,914,026) 13,086,083
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 632,915 shares (cost $12,213,929) ..................... 13,310,213
Growth Portfolio; 162,252 shares (cost $4,757,662) .............................. 5,052,529
Overseas Portfolio; 28,255 shares (cost $494,386) .............................. 532,327
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 83,295 shares (cost $1,275,209) ........................ 1,410,186
Contrafund Portfolio; 417,373 shares (cost $6,180,807)........................... 6,911,690
Janus Aspen Series:
Aggressive Growth Portfolio; 529,766 shares (cost $9,413,853) .................. 9,662,927
Balanced Portfolio; 242,000 shares (cost $3,331,182) ........................... 3,574,345
Growth Portfolio; 462,582 shares (cost $6,608,169) .............................. 7,174,647
Short-Term Bond Portfolio; 383,937 shares (cost $3,801,075) ..................... 3,827,848
Worldwide Growth Portfolio; 510,038 shares (cost $9,042,860)..................... 9,915,136
Scudder Variable Life Investment Fund--
International Portfolio; 801,151 shares (cost $9,370,711)........................ 10,615,255
TCI Portfolios, Inc.--Growth Fund; 633,059 shares (cost $6,629,436)............... 6,482,525
-------------
NET ASSETS (cost $209,041,214) ................................................... $223,173,883
=============
Net assets represented by:
Policyholders' account values: (Notes 1 and 5)
Aetna Variable Fund:
Policyholders' account values ................................................... $ 92,871,626
Aetna Income Shares:
Policyholders' account values ................................................... 13,179,787
Aetna Variable Encore Fund:
Policyholders' account values ................................................... 9,092,185
Aetna Investment Advisers Fund, Inc.:
Policyholders' account values ................................................... 15,791,541
Aetna Ascent Variable Portfolio:
Policyholders' account values ................................................... 545,378
Aetna Crossroads Variable Portfolio:
Policyholders' account values ................................................... 123,692
</TABLE>
See Notes to Financial Statements
S-12
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1996 (continued):
<TABLE>
<S> <C>
Aetna Legacy Variable Portfolio:
Policyholders' account values .............................. $ 13,963
Alger American Small Capitalization Portfolio:
Policyholders' account values .............................. 13,086,083
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Policyholders' account values .............................. 13,310,213
Growth Portfolio:
Policyholders' account values .............................. 5,052,529
Overseas Portfolio:
Policyholders' account values .............................. 532,327
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Policyholders' account values .............................. 1,410,186
Contrafund Portfolio:
Policyholders' account values .............................. 6,911,690
Janus Aspen Series:
Aggressive Growth Portfolio:
Policyholders' account values .............................. 9,662,927
Balanced Portfolio:
Policyholders' account values .............................. 3,574,345
Growth Portfolio:
Policyholders' account values .............................. 7,174,647
Short-Term Bond Portfolio:
Policyholders' account values .............................. 3,827,848
Worldwide Growth Portfolio:
Policyholders' account values .............................. 9,915,136
Scudder Variable Life Investment Fund--International Portfolio:
Policyholders' account values .............................. 10,615,255
TCI Portfolios, Inc.--Growth Fund:
Policyholders' account values .............................. 6,482,525
-------------
$223,173,883
=============
</TABLE>
See Notes to Financial Statements
S-13
<PAGE>
Variable Life Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ...................................................... $ 13,813,478 $ 12,965,237
Expenses: (Notes 2 and 5)
Valuation Period Deductions .................................... (1,905,137) (1,149,801)
------------- -------------
Net investment income ............................................. 11,908,341 11,815,436
------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ............................................. 29,656,908 28,828,178
Cost of investments sold ....................................... 26,434,292 25,993,679
------------- -------------
Net realized gain ............................................. 3,222,616 2,834,499
------------- -------------
Net unrealized gain (loss) on investments: (Note 5)
Beginning of year ................................................ 4,391,574 (4,407,131)
End of year ...................................................... 14,132,669 4,391,574
------------- -------------
Net change in unrealized gain ................................. 9,741,095 8,798,705
------------- -------------
Net realized and unrealized gain on investments .................. 12,963,711 11,633,204
------------- -------------
Net increase in net assets resulting from operations ............ 24,872,052 23,448,640
------------- -------------
FROM UNIT TRANSACTIONS:
Variable life premium payments .................................... 101,416,302 44,310,537
Sales and administrative charges deducted by the Company ......... (3,032,151) (1,381,985)
Premiums allocated to the fixed account ........................... (3,127,437) (3,260,098)
------------- -------------
Net premiums allocated to the variable account .................. 95,256,714 39,668,454
Transfers to the Company for monthly deductions .................. (15,491,673) (11,297,188)
Redemptions by contract holders ................................. (4,154,465) (3,238,332)
Transfers on account of policy loans .............................. (3,783,533) (2,076,373)
Other ............................................................ (40,991) 41,863
------------- -------------
Net increase in net assets from unit transactions (Note 5) ...... 71,786,052 23,098,424
------------- -------------
Change in net assets ............................................. 96,658,104 46,547,064
NET ASSETS:
Beginning of year ................................................ 126,515,779 79,968,715
------------- -------------
End of year ...................................................... $223,173,883 $126,515,779
============= =============
</TABLE>
See Notes to Financial Statements
S-14
<PAGE>
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1996
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
----------- --------- --------------------- ------------- -------------------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund:
Aetna Vest ........................ $28.351 $34.932 23.21% 1,517,474.5 $53,008,643
Aetna Vest II ..................... 15.831 19.507 23.21% 794,275.5 15,493,624
Aetna Vest Plus .................. 13.301 16.389 23.21% 1,323,444.4 21,689,765
Aetna Vest Estate Protector ...... 10.000 11.675 16.75%(2) 11,748.7 137,170
Corporate Specialty Market ......... 12.016 14.805 23.21% 171,723.7 2,542,424
Aetna Income Shares:
Aetna Vest ........................ $21.305 $21.850 2.56% 279,436.3 $ 6,105,721
Aetna Vest II ..................... 14.324 14.691 2.56% 67,932.7 997,974
Aetna Vest Plus .................. 11.470 11.764 2.56% 132,814.7 1,562,403
Aetna Vest Estate Protector ...... 10.000 10.452 4.52%(2) 17.0 177
Corporate Specialty Market ......... 11.071 11.354 2.56% 397,512.3 4,513,512
Aetna Variable Encore Fund:
Aetna Vest ........................ $15.891 $16.577 4.32% 165,067.7 $ 2,736,269
Aetna Vest II ..................... 11.616 12.117 4.32% 17,257.4 209,105
Aetna Vest Plus .................. 10.917 11.388 4.32% 277,635.4 3,161,633
Aetna Vest Estate Protector ...... 10.000 10.333 3.33%(2) 55,176.3 570,162
Corporate Specialty Market ......... 10.444 10.895 4.32% 221,672.3 2,415,016
Aetna Investment Advisers Fund, Inc.:
Aetna Vest ........................ $15.390 $17.547 14.02% 106,202.5 $ 1,863,538
Aetna Vest II ..................... 15.561 17.742 14.02% 228,951.9 4,062,177
Aetna Vest Plus .................. 13.050 14.880 14.02% 393,635.7 5,857,138
Corporate Specialty Market ......... 11.361 12.954 14.02% 309,462.5 4,008,688
Aetna Ascent Variable Portfolio:
Aetna Vest ........................ $10.000 $11.828 18.28%(2) 3,460.3 $ 40,930
Aetna Vest II ..................... 10.000 11.828 18.28%(2) 2,054.0 24,295
Aetna Vest Plus .................. 10.000 11.828 18.28%(2) 40,593.4 480,153
Aetna Crossroads Variable Portfolio:
Aetna Vest ........................ $10.000 $11.474 14.74%(2) 99.8 $ 1,145
Aetna Vest Plus .................. 10.000 11.474 14.74%(2) 10,665.0 122,368
Aetna Vest Estate Protector ...... 10.000 11.487 14.87%(2) 15.6 179
Aetna Legacy Variable Portfolio:
Aetna Vest Plus .................. $10.000 $11.118 11.18%(2) 1,255.9 $ 13,963
Alger American Small
Capitalization Portfolio:
Aetna Vest ........................ $15.562 $16.051 3.14% 77,047.6 $ 1,236,667
Aetna Vest II ..................... 15.563 16.052 3.14% 52,282.1 839,239
Aetna Vest Plus .................. 15.555 16.043 3.14% 381,746.1 6,124,522
Aetna Vest Estate Protector ...... 10.000 9.982 (0.18%)(2) 21,147.3 211,085
Corporate Specialty Market ......... 12.799 13.201 3.14% 354,114.8 4,674,570
</TABLE>
S-15
<PAGE>
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1996 (continued):
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
----------- --------- --------------------- ------------- -----------------------
<S> <C> <C> <C> <C> <C>
Fidelity Investments Variable
Insurance Products Fund:
Equity-Income Portfolio:
Aetna Vest ........................ $10.000 $10.871 8.71%(2) 6,532.8 $ 71,015
Aetna Vest II ..................... 10.000 10.871 8.71%(2) 2,200.1 23,916
Aetna Vest Plus .................. 10.000 10.871 8.71%(2) 118,798.4 1,291,404
Aetna Vest Estate Protector ...... 10.000 10.883 8.83%(2) 10,991.4 119,619
Corporate Specialty Market ...... 11.058 12.512 13.14% 943,466.6 11,804,259
Growth Portfolio:
Corporate Specialty Market ...... $ 9.911 $11.255 13.56% 448,921.8 $ 5,052,529
Overseas Portfolio:
Corporate Specialty Market ...... $10.029 $11.241 12.09% 47,354.8 $ 532,327
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market ...... $10.596 $12.022 13.46% 117,298.4 $ 1,410,186
Contrafund Portfolio:
Aetna Vest ........................ $10.000 $11.525 15.25%(2) 17,996.4 $ 207,415
Aetna Vest II ..................... 10.000 11.525 15.25%(2) 3,659.1 42,173
Aetna Vest Plus .................. 10.000 11.525 15.25%(2) 80,966.3 933,168
Aetna Vest Estate Protector ...... 10.000 11.538 15.38%(2) 10,537.3 121,585
Corporate Specialty Market ...... 10.322 12.396 20.10% 452,333.3 5,607,349
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest ........................ $15.114 $16.153 6.87% 55,921.6 $ 903,288
Aetna Vest II ..................... 15.114 16.153 6.87% 35,775.8 577,877
Aetna Vest Plus .................. 15.114 16.153 6.87% 221,641.2 3,580,130
Aetna Vest Estate Protector ...... 10.000 9.797 (2.03%)(2) 15,306.0 149,948
Corporate Specialty Market ...... 11.340 12.120 6.87% 367,315.7 4,451,684
Balanced Portfolio:
Aetna Vest ........................ $12.142 $13.966 15.02% 6,502.2 $ 90,808
Aetna Vest II ..................... 12.237 14.075 15.02% 4,206.4 59,204
Aetna Vest Plus .................. 12.136 13.960 15.02% 124,211.8 1,733,938
Aetna Vest Estate Protector ...... 10.000 11.101 11.01%(2) 3,134.9 34,800
Corporate Specialty Market ...... 10.643 12.242 15.02% 135,240.2 1,655,595
Growth Portfolio:
Aetna Vest ........................ $12.704 $14.898 17.27% 30,969.1 $ 461,370
Aetna Vest II ..................... 12.692 14.884 17.27% 65,830.7 979,838
Aetna Vest Plus .................. 12.674 14.863 17.27% 234,144.3 3,480,132
Aetna Vest Estate Protector ...... 10.000 10.857 8.57%(2) 1,608.1 17,459
Corporate Specialty Market ...... 10.430 12.232 17.27% 182,790.8 2,235,848
</TABLE>
S-16
<PAGE>
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1996 (continued):
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
----------- --------- --------------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
Short-Term Bond Portfolio:
Aetna Vest ........................ $10.967 $11.289 2.94% 595.3 $ 6,721
Aetna Vest II ..................... 10.955 11.277 2.94% 751.0 8,469
Aetna Vest Plus .................. 10.925 11.247 2.94% 17,621.2 198,177
Corporate Specialty Market ...... 10.094 10.468 3.71%(1) 345,277.1 3,614,481
Worldwide Growth Portfolio:
Aetna Vest ........................ $12.809 $16.364 27.75% 75,637.0 $ 1,237,686
Aetna Vest II ..................... 12.813 16.368 27.75% 50,270.3 822,823
Aetna Vest Plus .................. 12.797 16.348 27.75% 279,744.3 4,573,155
Aetna Vest Estate Protector ...... 10.000 11.811 18.11%(2) 10,429.7 123,180
Corporate Specialty Market ...... 10.964 13.459 22.76%(3) 234,655.4 3,158,292
Scudder Variable Life Investment
Fund--International Portfolio:
Aetna Vest ........................ $12.798 $14.543 13.63% 164,419.0 $ 2,391,112
Aetna Vest II ..................... 12.719 14.453 13.63% 48,351.0 698,823
Aetna Vest Plus .................. 12.648 14.373 13.63% 360,050.5 5,174,856
Aetna Vest Estate Protector ...... 10.000 10.898 8.98%(2) 4,363.0 47,548
Corporate Specialty Market ...... 10.598 12.043 13.63% 191,221.6 2,302,916
TCI Portfolios, Inc.--Growth Fund:
Aetna Vest ........................ $13.248 $12.534 (5.39%) 84,078.3 $ 1,053,865
Aetna Vest II ..................... 13.307 12.590 (5.39%) 29,273.6 368,568
Aetna Vest Plus .................. 13.126 12.419 (5.39%) 361,778.0 4,492,803
Aetna Vest Estate Protector ...... 10.000 9.511 (4.89%)(2) 29.2 278
Corporate Specialty Market ...... 12.005 11.358 (5.39%) 49,922.3 567,011
</TABLE>
Notes to Condensed Financial Information:
(1)--Reflects less than a full year of performance activity. Funds were first
received in this option during February 1996.
(2)--Available for investment less than 1 year, contract commenced operations
during March 1996.
(3)--Reflects less than a full year of performance activity. Funds were first
received in this option during March 1996.
See Notes to Financial Statements
S-17
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1996
1. Summary of Significant Accounting Policies
Variable Life Account B ("Account") is a separate account established by
Aetna Life Insurance and Annuity Company and is registered under the
Investment Company Act of 1940 as a unit investment trust. The Account is
sold exclusively for use with variable life insurance product contracts as
defined under the Internal Revenue Code of 1986, as amended.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Although actual results
could differ from these estimates, any such differences are expected to be
immaterial to the net assets of the Account.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset
value per share as determined by each fund on December 31, 1996:
Aetna Variable Fund Janus Aspen Series:
Aetna Income Shares [bullet] Aggressive Growth Portfolio
Aetna Variable Encore Fund [bullet] Balanced Portfolio
Aetna Investment Advisers Fund, Inc. [bullet] Growth Portfolio
Aetna Ascent Variable Portfolio [bullet] Short-Term Bond Portfolio
Aetna Crossroads Variable Portfolio [bullet] Worldwide Growth Portfolio
Aetna Legacy Variable Portfolio Scudder Variable Life Investment
Alger American Small Fund--International Portfolio
Capitalization Portfolio TCI Portfolios, Inc.--Growth Fund
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
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-18
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1996 (continued):
3. Dividend Income
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 (distributions in excess of net investment income) and accumulated
net realized gain (loss) on investments is included in net unrealized gain
(loss) on investments in the Statements of Operations and Changes in Net
Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the years ended December 31, 1996 and December
31, 1995 aggregated $113,349,117 and $29,656,908 and $71,231,087 and
$28,828,178, respectively.
S-19
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1996 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets--
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Valuation Proceeds Cost of Net
Period from Invesments Realized
Dividends Deductions Sales Sold Gain (Loss)
------------- ---------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund:
PolicyHolder's account values ......... $ 9,712,578 ($ 991,737) $ 5,373,083 $ 4,466,494 $ 906,589
Aetna Income Shares:
PolicyHolder's account values ......... 810,294 (121,325) 1,564,483 1,544,041 20,442
Aetna Variable Encore Fund:
PolicyHolder's account values ......... 477,308 (71,555) 9,490,775 9,560,169 (69,394)
Aetna Investment Advisers Fund, Inc.:
PolicyHolder's account values ......... 1,201,085 (127,990) 1,717,127 1,435,761 281,366
Aetna Ascent Variable Portfolio:
PolicyHolder's account values ......... 18,222 (1,210) 127,981 124,671 3,310
Aetna Crossroads Variable Portfolio:
PolicyHolder's account values ......... 2,462 (91) 1,317 1,263 54
Aetna Legacy Variable Portfolio:
PolicyHolder's account values ......... 671 (36) 503 486 17
Alger American Small Capitalization
Portfolio:
PolicyHolder's account values ......... 33,925 (93,143) 2,003,029 1,400,608 602,421
Fidelity Investments Variable Insurance
Products Fund:
Equity-Income Portfolio:
PolicyHolder's account values ......... 19,619 (57,181) 625,427 574,716 50,711
Growth Portfolio:
PolicyHolder's account values ......... 85,627 (30,149) 243,345 245,938 (2,593)
Overseas Portfolio:
PolicyHolder's account values ......... 14,172 (4,004) 478,644 450,003 28,641
Fidelity Investments Variable Insurance
Products Fund II:
Asset Manager Portfolio:
PolicyHolder's account values ......... 62,788 (13,383) 981,022 966,124 14,898
Contrafund Portfolio:
PolicyHolder's account values ......... 10,199 (36,829) 353,531 314,886 38,645
Janus Aspen Series:
Aggressive Growth Portfolio:
PolicyHolder's account values ......... 79,809 (68,571) 1,171,119 858,482 312,637
Balanced Portfolio:
PolicyHolder's account values ......... 70,301 (23,444) 452,062 367,517 84,545
Growth Portfolio:
PolicyHolder's account values ......... 140,964 (46,593) 808,709 590,651 218,058
Short-Term Bond Portfolio:
PolicyHolder's account values ......... 84,482 (17,596) 424,360 415,377 8,983
Worldwide Growth Portfolio:
PolicyHolder's account values ......... 105,214 (49,874) 1,127,422 777,300 350,122
Scudder Variable Life Investment Fund -
International Portfolio:
PolicyHolder's account values ......... 173,534 (85,922) 1,752,475 1,537,715 214,760
TCI Portfolios, Inc.--Growth Fund:
PolicyHolder's account values ......... 710,224 (64,504) 960,494 802,090 158,404
------------ ------------ ------------ ------------ ----------
Total Variable Life Account B ......... $13,813,478 ($ 1,905,137) $29,656,908 $26,434,292 $3,222,616
============ ============ ============ ============ ==========
</TABLE>
S-20
<PAGE>
<TABLE>
<CAPTION>
Net Increase
Net Unrealized Net (Decrease) In
Gain (Loss) Change in Net Assets Net Assets
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ------------ ------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$ 65,391 $ 7,294,643 $ 7,229,252 $ 5,056,913 $ 70,958,031 $ 92,871,626
189,278 (190,180) (379,458) 2,798,667 10,051,167 13,179,787
138,935 106,394 (32,541) 3,268,179 5,520,188 9,092,185
1,031,584 1,383,931 352,347 4,815,033 9,269,700 15,791,541
0 15,645 15,645 509,411 0 545,378
0 (191) (191) 121,458 0 123,692
0 20 20 13,291 0 13,963
595,950 172,057 (423,893) 7,688,994 5,277,779 13,086,083
28,202 1,096,283 1,068,081 11,810,807 418,176 13,310,213
(36,211) 294,867 331,078 3,470,007 1,198,559 5,052,529
21,923 37,941 16,018 (102,302) 579,802 532,327
47,435 134,978 87,543 298,650 959,690 1,410,186
10,253 730,883 720,630 5,090,135 1,088,910 6,911,690
376,606 249,074 (127,532) 5,949,433 3,517,151 9,662,927
60,589 243,163 182,574 2,648,699 611,670 3,574,345
196,848 566,478 369,630 3,974,072 2,518,516 7,174,647
6,078 26,773 20,695 3,383,696 347,588 3,827,848
227,523 872,277 644,754 7,436,957 1,427,963 9,915,136
431,463 1,244,544 813,081 2,808,258 6,691,544 10,615,255
999,727 (146,911) (1,146,638) 745,694 6,079,345 6,482,525
---------- ----------- ------------ ----------- ------------- -------------
$4,391,574 $14,132,669 $ 9,741,095 $71,786,052 $126,515,779 $223,173,883
========== =========== ============ =========== ============= =============
</TABLE>
S-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Statements of Income for the three and nine months ended September 30, 1997
and 1996 (unaudited) ................................................................. F-2
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 F-3
Consolidated Statements of Changes in Shareholder's Equity for the nine months ended
September 30, 1997 and 1996 (unaudited) ............................................. F-4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and
1996 (unaudited) ...................................................................... F-5
Condensed Notes to Consolidated Financial Statements as of September 30, 1997 (unaudited) F-7
Independent Auditors' Report ............................................................ F-10
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 F-11
Consolidated Balance Sheets as of December 31, 1996 and 1995 ........................... F-12
Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December
31, 1996, 1995 and 1994 .............................................................. F-13
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and F-14
1994
Notes to Consolidated Financial Statements ............................................. F-16
</TABLE>
F-1
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
----------------- ------------------
(unaudited) (unaudited)
1997 1996 1997 1996
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue:
Premiums $ 68.2 $ 35.5 $ 200.1 $ 99.9
Charges assessed against policyholders 127.7 99.1 350.2 289.3
Net investment income 269.5 259.7 804.9 771.8
Net realized capital gains 8.8 0.1 17.9 17.2
Other income 9.6 9.4 28.8 34.6
------- ------- --------- ---------
Total revenue 483.8 403.8 1,401.9 1,212.8
Benefits and expenses:
Current and future benefits 286.5 245.6 853.4 719.1
Operating expenses 84.5 84.6 247.3 261.3
Amortization of deferred policy acquisition costs 40.1 17.9 92.4 46.6
Severance and facilities charges -- 47.3 -- 61.3
------- ------- --------- ---------
Total benefits and expenses 411.1 395.4 1,193.1 1,088.3
Income before income taxes 72.7 8.4 208.8 124.5
Income taxes 21.3 1.4 63.9 34.3
------- ------- --------- ---------
Net income $ 51.4 $ 7.0 $ 144.9 $ 90.2
======= ======= ========= =========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------------- -------------
Assets (unaudited)
- ----------------------------------------------------------------- ---------------
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(amortized cost:$12,736.4 and $12,539.1) $13,257.1 $12,905.5
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $143.4 and $107.6) 166.5 119.0
Investment in affiliated mutual funds (cost: $42.0 and $77.3) 55.1 81.1
Common stock .8 .3
Short-term investments 111.8 34.8
Mortgage loans 12.9 13.0
Policy loans 453.7 399.3
---------- ----------
Total investments 14,057.9 13,553.0
Cash and cash equivalents 614.2 459.1
Accrued investment income 183.0 159.0
Premiums due and other receivables 37.3 26.6
Deferred policy acquisition costs 1,620.6 1,515.3
Reinsurance loan to affiliate 474.4 628.3
Other assets 40.1 33.7
Separate accounts assets 21,494.5 15,318.3
---------- ----------
Total assets $38,522.0 $31,693.3
========== ==========
Liabilities and Shareholder's Equity
- ----------------------------------------------------------------
Liabilities:
Future policy benefits $ 3,757.8 $ 3,617.0
Unpaid claims and claim expenses 28.0 28.9
Policyholders' funds left with the Company 11,074.5 10,663.7
---------- ----------
Total insurance reserve liabilities 14,860.3 14,309.6
Other liabilities 295.2 354.7
Income taxes:
Current 37.1 20.7
Deferred 74.8 80.5
Separate accounts liabilities 21,468.6 15,318.3
---------- ----------
Total liabilities 36,736.0 30,083.8
========== ==========
Shareholder's equity:
Common stock, par value $50 (100,000 shares authorized; 55,000
shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Net unrealized capital gains 96.7 60.5
Retained earnings 1,268.5 1,128.2
---------- ----------
Total shareholder's equity 1,786.0 1,609.5
---------- ----------
Total liabilities and shareholder's equity $38,522.0 $31,693.3
========== ==========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
9 Months Ended September 30,
----------------------------
(unaudited)
1997 1996
---------- -------------
Shareholder's equity, beginning of year $1,609.5 $ 1,583.0
Net change in unrealized capital gains 36.2 (93.4)
Net income 144.9 90.2
Common stock dividends (8.3) (1.5)
Other changes 3.7 --
-------- ----------
Shareholder's equity, end of period $1,786.0 $ 1,578.3
======== ==========
See Condensed Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
9 Months Ended September 30,
----------------------------
(unaudited)
1997 1996
------------ -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 144.9 $ 90.2
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Increase in accrued investment income (24.0) (13.0)
Increase in premiums due and other receivables (8.8) (2.3)
Increase in policy loans (54.4) (29.5)
Increase in deferred policy acquisition costs (105.3) (127.2)
Decrease in reinsurance loan to affiliate 153.9 22.1
Net increase in universal life account balances 224.1 172.5
Decrease in other insurance reserve liabilities (165.5) (125.2)
Net (decrease) increase in other liabilities and other assets (122.4) 126.8
Decrease in income taxes (3.9) (23.5)
Net accretion of discount on investments (51.9) (51.1)
Net realized capital gains (17.9) (17.2)
---------- ----------
Net cash (used for) provided by operating activities (31.2) 22.6
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 3,828.5 3,830.6
Equity securities 61.3 114.5
Mortgage loans 0.1 8.6
Investment maturities and collections of:
Debt securities available for sale 966.8 681.8
Short-term investments 43.2 21.5
Cost of investment purchases in:
Debt securities available for sale (4,811.0) (4,996.5)
Equity securities (53.6) (63.7)
Short-term investments (120.1) (35.5)
Other, net -- (9.1)
---------- ----------
Net cash used for investing activities (84.8) (447.8)
---------- ----------
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows (Continued)
(millions)
<TABLE>
<CAPTION>
9 Months Ended Sept. 30,
--------------------------
(unaudited)
1997 1996
---------- -------------
<S> <C> <C>
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts $1,230.2 $ 1,140.6
Withdrawals of investment contracts (925.8) (860.7)
Dividends paid to shareholder (8.3) (1.5)
Capital contribution to Separate Account (25.0) --
-------- ----------
Net cash provided by financing activities 271.1 278.4
-------- ----------
Net increase (decrease) in cash and cash equivalents 155.1 (146.8)
Cash and cash equivalents, beginning of period 459.1 568.8
-------- ----------
Cash and cash equivalents, end of period $ 614.2 $ 422.0
-------- ----------
Supplemental cash flow information:
Income taxes paid, net $ 68.7 $ 61.4
======== ==========
</TABLE>
See Condensed Notes to Consolidated Financial Statements.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
1. 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. (collectively, the "Company"). Aetna Life
Insurance and Annuity Company is a wholly owned subsidiary of Aetna Retirement
Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna
Retirement Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna").
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1996 financial information to conform to
the 1997 presentation. These interim statements necessarily rely heavily on
estimates, including assumptions as to annualized tax rates. In the opinion of
management, all adjustments necessary for a fair statement of results for the
interim periods have been made. All such adjustments are of a normal, recurring
nature. The accompanying condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related
notes as presented in the Company's 1996 Annual Report on Form 10-K. Certain
financial information that is normally included in annual financial statements
prepared in accordance with generally accepted accounting principles, but that
is not required for interim reporting purposes, has been condensed or omitted.
2. Future Application of Accounting Standards
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued in
June 1996 and provides accounting and reporting standards for transfers of
financial assets and extinguishments of liabilities.
FAS No. 125 is effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending are not effective until January 1, 1998. Provisions effective in 1997
did not have a material effect on the Company's financial position or results
of operations. The Company does not expect adoption of this statement for
provisions effective in 1998 to have a material effect on its financial
position or results of operations.
FAS No. 130, Reporting Comprehensive Income, was issued in June 1997 and
establishes standards for the reporting and presentation of comprehensive
income and its components in a full set of financial statements. Comprehensive
income encompasses all changes in shareholder's equity (except those arising
from transactions with owners) and includes net income, net unrealized capital
gains or losses on available for sale securities. As this new standard only
requires additional information in a financial statement, it will not affect
the Company's financial position or results of operations. FAS No. 130 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. The Company is currently evaluating the presentation
alternatives permitted by the statement.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
2. Future Application of Accounting Standards (Continued)
FAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, was issued in June 1997 and establishes standards for the
reporting of information relating to operating segments in annual financial
statements, as well as disclosure of selected information in interim financial
reports. This statement supersedes FAS No. 14, Financial Reporting for Segments
of a Business Enterprise, which requires reporting segment information by
industry and geographic area (industry approach). Under FAS No. 131, operating
segments are defined as components of a company for which separate financial
information is available and is used by management to allocate resources and
assess performance (management approach). This statement is effective for
year-end 1998 financial statements. Interim financial information will be
required beginning in 1999 (with comparative 1998 information). The Company
does not anticipate that this standard will significantly impact the
composition of its current operating segments, which are consistent with the
management approach.
3. Financial Instruments
The Company engages in hedging activities to manage interest rate and price
risks. Such hedging activities have principally consisted of using off-balance
sheet instruments such as futures and forward contracts and interest rate swap
agreements. There were no such contracts or agreements open as of September 30,
1997.
4. Severance and Facilities Charges
In the second quarter of 1996, the Company was allocated severance and
facilities reserves from Aetna to reflect actions taken or to be taken to
reduce the level of corporate expenses and other costs previously absorbed by
Aetna's property-casualty operations.
In the third quarter of 1996, the Company established severance and facilities
reserves in the Financial Services and Individual Life Insurance segments to
reflect actions taken or to be taken in order to make its businesses more
competitive.
Activity for the nine months ended September 30, 1997 within the severance and
facilities reserves (pretax, in millions) and positions eliminated related to
such actions were as follows:
Reserve Positions
---------- ----------
Balance at December 31, 1996 ...... $ 47.9 524
Actions taken (1) .................. (19.5) (129)
-------- -----
Balance at September 30, 1997 ...... $ 28.4 395
======== =====
(1) Includes $9.9 million of severance-related actions and $7.0 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed by
March 31, 1998. The corporate allocation actions and vacating of certain leased
office space are expected to be substantially completed in 1997.
F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
5. Related Party Transactions
Effective December 31, 1988, the Company entered into a reinsurance agreement
with Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the nonparticipating individual life and annuity business written by Aetna Life
prior to 1981 was assumed by the Company. Effective January 1, 1997, this
agreement has been amended to transition (based on underlying investment
rollover in Aetna Life) from a modified coinsurance to a coinsurance
arrangement. As a result of this change, reserves will be ceded to the Company
from Aetna Life as investment rollover occurs and the loan previously
established will be reduced.
6. Litigation
The Company is involved in numerous lawsuits arising, for the most part, in the
ordinary course of its business operations. While the ultimate outcome of
litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, it is not expected to result in liability for amounts material to
the financial condition of the Company, although it may adversely affect
results of operations in future periods.
7. Dividends
On June 27, 1997 and August 15, 1997, the Company paid a $5.3 million and $3.0
million, respectively, dividend to HOLDCO. The additional amount of dividends
that may be paid by the Company to HOLDCO in 1997 without prior approval by the
Insurance Commissioner of the State of Connecticut is $62.8 million.
F-9
<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, 1996 and
1995, 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, 1996. 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, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 4, 1997
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Revenue:
Premiums $ 133.6 $ 212.7 $ 191.6
Charges assessed against policyholders 396.5 318.9 279.0
Net investment income 1,045.6 1,004.3 917.2
Net realized capital gains 19.7 41.3 1.5
Other income 45.4 42.0 10.3
--------- --------- ---------
Total revenue 1,640.8 1,619.2 1,399.6
Benefits and expenses:
Current and future benefits 968.6 997.2 921.5
Operating expenses 342.2 310.8 225.7
Amortization of deferred policy acquisition costs 69.8 48.0 31.5
Severance and facilities charges 61.3 -- --
--------- --------- ---------
Total benefits and expenses 1,441.9 1,356.0 1,178.7
--------- --------- ---------
Income before income taxes 198.9 263.2 220.9
Income taxes 57.8 87.3 75.6
--------- --------- ---------
Net income $ 141.1 $ 175.9 $ 145.3
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)--
<TABLE>
<CAPTION>
December 31,
-------------------------
Assets 1996 1995
- ------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
Investments:
Debt securities, available for sale:
(amortized cost: $12,539.1 and $11,923.7) $12,905.5 $12,720.8
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $107.6 and $51.3) 119.0 57.6
Investment in affiliated mutual funds (cost: $77.3 and $173.4) 81.1 191.8
Common stock (cost: $0.0 and $6.9) 0.3 8.2
Short-term investments 34.8 15.1
Mortgage loans 13.0 21.2
Policy loans 399.3 338.6
---------- -----------
Total investments 13,553.0 13,353.3
Cash and cash equivalents 459.1 568.8
Accrued investment income 159.0 175.5
Premiums due and other receivables 26.6 37.3
Deferred policy acquisition costs 1,515.3 1,341.3
Reinsurance loan to affiliate 628.3 655.5
Other assets 33.7 26.2
Separate Accounts assets 15,318.3 10,987.0
---------- -----------
Total assets $31,693.3 $27,144.9
========== ===========
Liabilities and Shareholder's Equity
- -----------------------------------------------------------------
Liabilities:
Future policy benefits $ 3,617.0 $ 3,594.6
Unpaid claims and claim expenses 28.9 27.2
Policyholders' funds left with the Company 10,663.7 10,500.1
---------- -----------
Total insurance reserve liabilities 14,309.6 14,121.9
Other liabilities 354.7 257.2
Income taxes:
Current 20.7 26.2
Deferred 80.5 169.6
Separate Accounts liabilities 15,318.3 10,987.0
---------- -----------
Total liabilities 30,083.8 25,561.9
---------- -----------
Shareholder's equity:
Common stock, par value $50 (100,000 shares authorized; 55,000
shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 407.6
Net unrealized capital gains 60.5 132.5
Retained earnings 1,128.2 1,040.1
---------- -----------
Total shareholder's equity 1,609.5 1,583.0
---------- -----------
Total liabilities and shareholder's equity $31,693.3 $27,144.9
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
---------- ------------- -------------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,583.0 $ 1,088.5 $ 1,246.7
Capital contributions 10.4 -- --
Net change in unrealized capital gains (losses) (72.0) 321.5 (303.5)
Net income 141.1 175.9 145.3
Other changes (49.5) -- --
Common stock dividends declared (3.5) (2.9) --
-------- ---------- ----------
Shareholder's equity, end of year $1,609.5 $ 1,583.0 $ 1,088.5
======== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 141.1 $ 175.9 $ 145.3
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Decrease (increase) in accrued investment income 16.5 (33.3) (17.5)
Decrease in premiums due and other receivables 1.6 25.4 1.3
Increase in policy loans (60.7) (89.9) (46.0)
Increase in deferred policy acquisition costs (174.0) (177.0) (105.9)
Decrease in reinsurance loan to affiliate 27.2 34.8 27.8
Net increase in universal life account balances 243.2 393.4 164.7
(Decrease) increase in other insurance reserve liabilities (211.5) 79.0 75.1
Net increase in other liabilities and other assets 3.1 13.0 52.5
Decrease in income taxes (26.7) (4.5) (10.3)
Net accretion of discount on investments (68.0) (66.4) (77.9)
Net realized capital gains (19.7) (41.3) (1.5)
Other, net 1.1 -- (1.0)
---------- ---------- ----------
Net cash (used for) provided by operating activities (126.8) 309.1 206.6
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,182.2 4,207.2 3,593.8
Equity securities 190.5 180.8 93.1
Mortgage loans 8.7 10.7 --
Limited partnership -- 26.6 --
Investment maturities and collections of:
Debt securities available for sale 885.2 583.9 1,289.2
Short-term investments 35.0 106.1 30.4
Cost of investment purchases in:
Debt securities available for sale (6,534.3) (6,034.0) (5,621.4)
Equity securities (118.1) (170.9) (162.5)
Short-term investments (54.7) (24.7) (106.1)
Mortgage loans -- (21.3) --
Limited partnership -- -- (25.0)
Other, net (17.6) -- --
---------- ---------- ----------
Net cash used for investing activities (423.1) (1,135.6) (908.5)
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows (Continued)
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,579.5 1,884.5 1,737.8
Withdrawals of investment contracts (1,146.2) (1,109.6) (948.7)
Additional capital contributions 10.4 -- --
Dividends paid to shareholder (3.5) (2.9) --
---------- ---------- ---------
Net cash provided by financing activities 440.2 772.0 789.1
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (109.7) (54.5) 87.2
Cash and cash equivalents, beginning of year 568.8 623.3 536.1
---------- ---------- ---------
Cash and cash equivalents, end of year $ 459.1 $ 568.8 $ 623.3
========== ========== =========
Supplemental cash flow information:
Income taxes paid, net $ 85.5 $ 92.8 $ 85.9
========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned 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 individual life insurance.
Financial services products include annuity contracts that offer a variety of
funding and payout options for individual and employer-sponsored retirement
plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, and
non-qualified annuity contracts. These contracts may be deferred or immediate
("payout annuities"). Financial services also include investment advisory
services, financial planning and pension plan administrative services.
Individual life insurance products include universal life, variable universal
life, traditional whole life and term insurance.
Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and Annuity
Company and its wholly owned 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 Holdings, Inc. ("HOLDCO"). HOLDCO
is a wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate
parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have been
made to 1995 and 1994 financial information to conform to the 1996
presentation.
Future Application of Accounting Standards
Financial Accounting Standard ("FAS") No. 125 , Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued in
June 1996. This statement provides accounting and reporting standards for
transfers of financial assets and extinguishments of liabilities. Transactions
covered by this statement would include securitizations, sales of partial
interests in assets, repurchase agreements and securities lending. This
statement requires that after a transfer of financial assets, an entity would
recognize any assets it controls and liabilities it has incurred. An entity
would not recognize assets when control has been surrendered or liabilities
have been satisfied. Portions of this statement are effective for each of 1997
and 1998 financial statements and early adoption is not permitted. The Company
does not expect adoption of this statement to have a material effect on its
financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from reported results using those estimates.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
Investments
All of the Company's debt and equity securities are classified as available for
sale and carried at fair value. These securities are written down (as realized
capital losses) for other than temporary declines in value. Unrealized capital
gains and losses related to available for sale investments, other than amounts
allocable to experience rated contractholders, are reflected in shareholder's
equity, net of related taxes.
Fair values for debt and equity securities are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for similar
securities or by using discounted cash flow methods. Cost for mortgage-backed
securities is adjusted for unamortized premiums and discounts, which are
amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds primarily 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.
Mortgage loans and policy loans are carried at unpaid principal balances, net
of impairment reserves. Sales of mortgage loans are recorded on the closing
date.
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which approximates
amortized cost.
Futures contracts are carried at fair value and require daily cash settlement.
Changes in the fair value of futures contracts that qualify as hedges are
deferred and recognized as an adjustment to the hedged asset or liability.
Deferred gains or losses on such futures contracts are amortized over the life
of the acquired asset or liability as a yield adjustment or through net
realized capital gains or losses upon disposal of an asset. Changes in the fair
value of futures contracts that do not qualify as hedges are recorded in net
realized capital gains or losses. Hedge designation requires specific asset or
liability identification, a probability at inception of high correlation with
the position underlying the hedge, and that high correlation be maintained
throughout the hedge period. If a hedging instrument ceases to be highly
correlated with the position underlying the hedge, hedge accounting ceases at
that date and excess gains and losses on the hedging instrument are reflected
in net realized capital gains or losses.
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Swap agreements which are designated as interest rate risk management
instruments at inception are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such
agreements is reported in net investment income. There is no recognition in the
Consolidated Balance Sheets for changes in the fair value of the agreement.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs, all of
which vary with and are primarily related to the production of new and renewal
business, consist principally of commissions, certain expenses of underwriting
and issuing contracts, and certain agency expenses. For fixed ordinary life
contracts, such costs are amortized over expected premium-paying periods (up to
20 years). For universal life and certain annuity contracts, such costs are
amortized in proportion to estimated gross profits and adjusted to reflect
actual gross profits over the life of the contracts (up to 20 years).
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross profits
are not adequate to cover related losses and expenses.
Insurance Reserve Liabilities
Future Policy Benefits include reserves for universal life, immediate annuities
with life contingent payouts and traditional life insurance contracts. Reserves
for universal life contracts are equal to cumulative deposits less charges and
withdrawals plus credited interest thereon. Reserves for immediate annuities
with life contingent payouts and traditional life insurance contracts are
computed on the basis of assumed investment yield, mortality, and expenses,
including a margin for adverse deviations. Such assumptions generally vary by
plan, year of issue and policy duration. Reserve interest rates range from
2.25% to 12.00%. Investment yield is based on the Company's experience.
Mortality and withdrawal rate assumptions are based on relevant Aetna
experience and are periodically reviewed against both industry standards and
experience.
Policyholders' Funds Left With the Company include reserves for deferred
annuity investment contracts and immediate annuities without life contingent
payouts. Reserves on such contracts are equal to cumulative deposits less
charges and withdrawals plus credited interest thereon (rates range from 4.00%
to 7.00%), net of adjustments for investment experience that the Company is
entitled to reflect in future credited interest. Reserves on contracts subject
to experience rating reflect the rights of contractholders, plan participants
and the Company.
Unpaid claims for all lines of insurance include benefits for reported losses
and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges, actuarial
margin and other fees are recorded as revenue in
F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
charges assessed against policyholders. Other amounts received for these
contracts are reflected as deposits and are not recorded as revenue. Life
insurance premiums, other than premiums for universal life and certain annuity
contracts, are recorded as premium revenue when due. Related policy benefits
are recorded in relation to the associated premiums or gross profit so that
profits are recognized over the expected lives of the contracts. When annuity
payments begin under contracts with life contingent payouts that were initially
investment contracts, the accumulated balance in the account is treated as a
single premium for the purchase of an annuity, reflected as an offsetting
amount in both premiums and current and future benefits in the Consolidated
Statements of Income.
Separate Accounts
Assets held under variable universal life and variable annuity contracts are
segregated in Separate Accounts and are invested, as designated by the
contractholder or participant under a contract, in shares of Aetna Variable
Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment
Advisers Fund, Inc., Aetna GET Fund, the Aetna Series Fund Inc., or the Aetna
Generation Funds (collectively, "Funds"), which are managed by the Company, or
other selected mutual funds not managed by the Company.
Separate Accounts assets and liabilities are carried at fair value except for
those relating to a guaranteed interest option. Since the Company bears the
investment risk where the contract is held to maturity, the assets of the
Separate Account supporting the guaranteed interest option are carried at an
amortized cost of $515.6 million for 1996 (fair value $523.0 million) and
$322.2 million for 1995 (fair value $343.9 million). Reserves relating to the
guaranteed interest option are maintained at fund value and reflect interest
credited at rates ranging from 4.10% to 8.00% in 1996 and 4.50% to 8.38% in
1995.
Separate Accounts assets and liabilities are shown as separate captions in the
Consolidated Balance Sheets. Deposits, investment income and net realized and
unrealized capital gains and losses of the Separate Accounts are not reflected
in the Consolidated Statements of Income (with the exception of realized
capital gains and losses on the sale of assets supporting the guaranteed
interest option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of Aetna.
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. Deferred income tax
expenses/benefits result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government agencies and
authorities $ 1,072.4 $ 20.5 $ 4.5 $ 1,088.4
States, municipalities and political subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other 141.5 3.0 -- 144.5
---------- ------- ------ ----------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
---------- ------- ------ ----------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
---------- ------- ------ ----------
Total residential mortgage-backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
---------- ------- ------ ----------
Total Debt Securities $12,539.1 $432.6 $66.2 $12,905.5
========== ======= ====== ==========
</TABLE>
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Debt securities available for sale as of December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ -----------
(millions)
<S> <C> <C> <C> <C>
U.S. government and government agencies and
authorities $ 539.5 $ 47.5 $ -- $ 587.0
States, municipalities and political subdivisions 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial 2,764.4 110.3 2.1 2,872.6
Food & fiber 310.8 20.8 0.6 331.0
Healthcare & consumer products 766.0 59.2 0.2 825.0
Media & broadcast 191.7 10.0 -- 201.7
Natural resources 186.9 12.6 0.2 199.3
Transportation & capital goods 602.4 46.7 0.2 648.9
Utilities 454.4 27.8 1.0 481.2
Other 119.9 10.2 -- 130.1
---------- ------- ------ -----------
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
Utilities 236.3 32.9 269.2
Other 749.9 60.5 3.5 806.9
---------- ------- ------ -----------
Total foreign securities 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Pass-throughs 556.7 99.2 1.8 654.1
Collateralized mortgage obligations 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
Other asset-backed securities 961.2 35.5 0.5 996.2
---------- ------- ------ -----------
Total Debt Securities $11,923.7 $811.6 $14.5 $ 12,720.8
========== ======= ====== ===========
</TABLE>
At December 31, 1996 and 1995, net unrealized appreciation of $366.4 million
and $797.1 million, respectively, on available for sale debt securities
included $288.5 million and $619.1 million, respectively, related to experience
rated contracts, which were not reflected in shareholder's equity but in Future
Policy Benefits and Policyholders' Funds Left With the Company.
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
The amortized cost and fair value of debt securities for the year ended
December 31, 1996 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be restructured,
called, or prepaid.
Amortized Fair
Cost Value
----------- ----------
(millions)
Due to mature:
One year or less ........................ $ 424.4 $ 425.7
After one year through five years ...... 2,162.4 2,194.2
After five years through ten years ...... 2,467.4 2,509.6
After ten years ........................ 2,568.4 2,675.4
Mortgage-backed securities ............... 4,028.7 4,204.3
Other asset-backed securities ............ 887.8 896.3
---------- ----------
Total ................................. $12,539.1 $12,905.5
========== ==========
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time.
Collateral, primarily cash, 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, 1996 and 1995, the Company had loaned securities
(which are reflected as invested assets) with a market value of approximately
$444.7 million and $264.5 million, respectively.
At December 31, 1996 and 1995, debt securities carried at $7.6 million and $7.4
million, respectively, were on deposit as required by regulatory authorities.
The carrying value of non-income producing investments was $0.9 million and
$0.1 million at December 31, 1996 and 1995, respectively.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10% of
the Company's shareholder's equity at December 31, 1996.
Included in the Company's total debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
<TABLE>
<CAPTION>
1996 1995
-------------------------- ------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
------------ ----------- ----------- ----------
(millions)
<S> <C> <C> <C> <C>
Total residential CMOs (1) $2,309.0 $2,227.8 $2,549.4 $2,383.9
=========== ========= =========== =========
Percentage of total:
Supporting experience rated products 84.2% 85.3%
Supporting remaining products 15.8% 14.7%
----------- -----------
100.0% 100.0%
=========== ===========
</TABLE>
(1) At December 31, 1996 and 1995, approximately 71% and 81%, respectively, of
the Company's residential CMO holdings were backed by government agencies
such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees of
risk from changes in interest rates and, for nonagency-backed CMOs, defaults.
The principal risks inherent in holding CMOs are prepayment and extension risks
related to dramatic decreases and increases in interest rates resulting in the
repayment of principal from the underlying mortgages either earlier or later
than originally anticipated.
At December 31, 1996 and 1995, approximately 68% and 79%, respectively, of the
Company's CMO holdings were in planned amortization class ("PAC") and
sequential structure tranches, which are subject to less prepayment and
extension risk than other types of CMO instruments. At December 31, 1996 and
1995, approximately 3% of the Company's CMO holdings were in the interest-only
("IOs") and principal-only ("POs") tranches, which are subject to more
prepayment and extension risks than other types of CMO instruments. Remaining
CMO holdings are in other tranches that have prepayment and extension risks
which fall between the degree of risk associated with PACs and sequentials, and
IOs and POs.
Investments in available for sale equity securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ --------
(millions)
1996
- -----------------
Equity Securities $184.9 $16.3 $0.8 $ 200.4
------- ------ ----- --------
1995
- -----------------
Equity Securities $231.6 $27.2 $1.2 $ 257.6
------- ------ ----- --------
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ---------- ----------
(millions)
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 13.0 $ 13.2 $ 21.2 $ 21.9
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 1,014.1 $ 1,028.8 $ 989.1 $1,001.2
Without a fixed maturity 9,649.6 9,427.6 9,511.0 9,298.4
</TABLE>
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument, nor do
they consider the tax impact of the realization of unrealized gains or losses.
In many cases, the fair value estimates cannot be substantiated by comparison
to independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument. In evaluating the Company's management of
interest rate, price and liquidity risks, the fair values of all assets and
liabilities should be taken into consideration, not only those presented above.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans.
Investment contract liabilities (included in Policyholders' Funds Left With the
Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to the
contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in paying
an amount different than that determined to be payable on demand.
Off-Balance-Sheet and Other Financial Instruments (including Derivative
Financial Instruments)
The Company uses off-balance-sheet and other financial instruments primarily to
manage portfolio risks, including interest rate, prepayment/call, credit,
price, and liquidity risks. In 1996, Treasury
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
futures contracts were used to manage interest rate risk in the Company's bond
portfolio and stock index futures contracts were used to manage price risk in
the Company's equity portfolio. In 1996 and 1995, interest rate swaps and
forward commitments to enter into interest rate swaps, respectively, were also
used to manage interest rate risk in the Company's bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell underlying
assets at a specified future date. Futures contracts trade on organized
exchanges and, therefore, have minimal credit risk. Cash settlements are made
daily based on changes in the prices of the underlying assets. There were no
futures contracts open as of December 31, 1996 and 1995.
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to exchange
interest amounts calculated by reference to an agreed notional principal
amount. Generally, no cash is exchanged at the outset of the contract and no
principal payments are made. A single net payment is usually made by one
counterparty at each due date or upon termination of the contract. The Company
would be exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, however, the Company controls its
exposure to credit risk through credit approvals, credit limits and regular
monitoring procedures. The credit exposure of interest rate swaps is
represented by the fair value (market value) of contracts with a positive fair
value (market value) at the reporting date. There were no interest rate swap
agreements open as of December 31, 1996. At December 31, 1995, the Company had
an open forward swap agreement with a notional amount of $100.0 million and a
fair value of $0.1 million.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1996. As
of December 31, 1996 and 1995, there were no option contracts outstanding.
The Company also had investments in certain debt instruments with derivative
characteristics, including those whose market value is at least partially
determined by, among other things, levels of or changes in domestic and/or
foreign interest rates (short or long term), exchange rates, prepayment rates,
equity markets or credit ratings/spreads. The amortized cost and fair value of
these securities, included in the debt securities portfolio, as of December 31,
1996 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- ----------
(millions)
<S> <C> <C>
Residential collateralized mortgage obligations ..................... $ 2,227.8 $2,309.0
Principal-only strips (included above) .............................. 44.5 53.3
Interest-only strips (included above) .............................. 10.3 22.8
Other structured securities with derivative characteristics (1) ...... 126.3 129.2
</TABLE>
(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
(millions)
<S> <C> <C> <C>
Debt securities $ 945.3 $ 891.5 $ 823.9
Preferred stock 5.9 4.2 3.9
Investment in affiliated mutual funds 14.3 14.9 5.2
Mortgage loans 2.2 1.4 1.4
Policy loans 18.4 13.7 11.5
Reinsurance loan to affiliate 44.1 46.5 51.5
Cash equivalents 29.4 38.9 29.5
Other 2.1 8.4 6.7
--------- --------- --------
Gross investment income 1,061.7 1,019.5 933.6
Less investment expenses (16.1) (15.2) (16.4)
--------- --------- --------
Net investment income $ 1,045.6 $ 1,004.3 $ 917.2
========= ========= ========
</TABLE>
Net investment income includes amounts allocable to experience rated
contractholders of $787.6 million, $744.2 million and $677.1 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Interest credited
to contractholders is included in Current and Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995, the
Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services, Inc.,
to Aetna Retirement Services, Inc. (the Company's former parent).
The amount of dividends that may be paid to the shareholder in 1997 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$71.1 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus those amounts
determined in conformity with statutory accounting practices prescribed or
permitted by the Department, which differ in certain respects from generally
accepted accounting principles. Statutory net income was $57.8 million, $70.0
million and $64.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Statutory capital and surplus was $713.6 million and $670.7
million as of December 31, 1996 and 1995, respectively.
As of December 31, 1996 the Company does not utilize any statutory accounting
practices which are not prescribed by state regulatory authorities that,
individually or in the aggregate, materially affect statutory capital and
surplus.
Realized capital gains or losses are the difference between the carrying value
and sale proceeds of specific investments sold.
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Net realized capital gains on investments were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
(millions)
<S> <C> <C> <C>
Debt securities $ 11.1 $ 32.8 $ 1.0
Equity securities 8.6 8.3 0.2
Mortgage loans -- 0.2 0.3
------- ------- ------
Pretax realized capital gains $ 19.7 $ 41.3 $ 1.5
------- ------- ------
After tax realized capital gains $ 13.0 $ 25.8 $ 1.0
======= ======= ======
</TABLE>
Net realized capital gains of $53.1 million and $61.1 million for 1996 and
1995, respectively, and net realized capital losses of $29.1 million for 1994,
allocable to experience rated contracts, were deducted from net realized
capital gains (losses) and an offsetting amount was reflected in policy-holder
funds' left with the Company. Net unamortized gains were $53.3 million and $7.3
million at December 31, 1996 and 1995, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities for other than temporary declines in value are included in net
realized capital gains (losses) and amounted to $(3.3) million, $3.1 million
and $1.1 million, of which $(3.2) million, $2.2 million and $0.8 million were
allocable to experience rated contractholders, for the years ended December 31,
1996, 1995 and 1994, respectively. There was no valuation reserve for mortgage
loans at December 31, 1996 or at December 31, 1995.
Proceeds from the sale of available for sale debt securities and the related
gross gains and losses were as follows:
1996 1995 1994
----------- ----------- ----------
(millions)
Proceeds on Sales $ 5,182.2 $ 4,207.2 $3,593.8
Gross gains 24.3 44.6 26.6
Gross losses 13.2 11.8 25.6
Changes in shareholder's equity related to changes in unrealized capital gains
(losses), (excluding those related to experience rated contractholders), were
as follows:
F-27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------- ------------
(millions)
<S> <C> <C> <C>
Debt securities $ (100.1) $ 255.9 $ (242.1)
Equity securities (10.5) 27.3 (13.3)
Limited partnership -- 1.8 (1.8)
---------- -------- ---------
(110.6) 285.0 (257.2)
Deferred income taxes (See Note 8) (38.6) (36.5) 46.3
---------- -------- ---------
Net change in unrealized capital gains (losses) $ (72.0) $ 321.5 $ (303.5)
========== ======== =========
</TABLE>
Net unrealized capital gains allocable to experience rated contracts of $245.2
million and $43.3 million at December 31, 1996 and $515.0 million and $104.1
million at December 31, 1995 are reflected on the Consolidated Balance Sheets
in Policyholders' Funds Left With the Company and Future Policy Benefits,
respectively, and are not included in shareholder's equity.
Shareholder's equity included the following unrealized capital gains (losses),
which are net of amounts allocable to experience rated contractholders, at
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(millions)
<S> <C> <C> <C>
Debt securities
Gross unrealized capital gains $ 101.7 $ 179.3 $ 27.4
Gross unrealized capital losses (23.8) (1.3) (105.2)
-------- -------- ---------
77.9 178.0 (77.8)
Equity securities
Gross unrealized capital gains 16.3 27.2 6.5
Gross unrealized capital losses (0.8) (1.2) (7.9)
-------- -------- ---------
15.5 26.0 (1.4)
Limited Partnership -- -- --
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- -- (1.8)
-------- -------- ---------
-- -- (1.8)
Deferred income taxes (See Note 8) 32.9 71.5 108.0
-------- -------- ---------
Net unrealized capital gains (losses) $ 60.5 $ 132.5 $ (189.0)
======== ======== =========
</TABLE>
F-28
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, included the
following (pretax):
<TABLE>
<CAPTION>
Vacated
Asset Leased Corporate
(Millions) Severance Write-Off Property Other Allocation Total
- --------------------------- ----------- ----------- ---------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Financial Services $ 29.1 $ 1.0 $ 1.3 $ 1.7 $ -- $ 33.1
Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2
Corporate Allocation -- -- -- -- 14.0 14.0
------- ------ ------ ------ ------ -------
Total Company $ 41.6 $ 1.4 $ 1.8 $ 2.5 $14.0 $ 61.3
- -------------------------- ------- ------ ------ ------ ------ -------
</TABLE>
In the third quarter of 1996, the Company recorded a $30.7 million after tax
($47.3 million pretax) charge principally related to actions taken or expected
to be taken to improve its cost structure relative to its competitors. The
severance portion of the charge is based on a plan to eliminate 702 positions
(primarily customer service, sales and information technology support staff).
The facilities portion of the charge is based on a plan to consolidate
sales/service field offices.
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions taken or
expected to be taken to reduce the level of corporate expenses and other costs
previously absorbed by Aetna's property-casualty operations. The cost allocated
to the Company associated with this charge was $9.1 million after tax ($14.0
million pretax).
The activity during 1996 within the severance and facilities reserve (pretax,
in millions) and the number of positions eliminated related to such actions
were as follows:
Reserve Positions
- --------------------------------- --------- ----------
Beginning of year $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
------- -----
End of year $ 47.9 524
- --------------------------------- ------- -----
(1) Includes $8.0 million of severance-related actions and $4.1 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed by
March 31, 1998. The corporate allocation actions and the vacating of the leased
office space are expected to be substantially completed in 1997.
8. Income Taxes
The Company is included in the consolidated federal income tax return and
combined Connecticut and New York state income tax returns of Aetna. Aetna
allocates to each member an amount approximating the
F-29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
tax it would have incurred were it not a member of the consolidated group, and
credits the member for the use of its tax saving attributes used in the
consolidated returns.
Income taxes for the years ended December 31, consist of:
1996 1995 1994
------- ------- ------
(millions)
Current taxes (benefits):
Income Taxes:
Federal $ 50.9 $ 82.9 $ 78.7
State 3.7 3.2 4.4
Net realized capital gains (losses) 25.3 28.5 (33.2)
------ ------ ------
79.9 114.6 49.9
------ ------ ------
Deferred taxes (benefits):
Income Taxes:
Federal ( 3.5) (14.4) ( 8.0)
Net realized capital gains (losses) (18.6) (12.9) 33.7
------ ------ ------
(22.1) (27.3) 25.7
------ ------ ------
Total $ 57.8 $ 87.3 $ 75.6
====== ====== ======
Income taxes were different from the amount computed by applying the federal
income tax rate to income before income taxes for the following reasons:
1996 1995 1994
------- ------- -------
(millions)
Income before income taxes $198.9 $263.2 $220.9
Tax rate 35% 35% 35%
------ ------ ------
Application of the tax rate 69.6 92.1 77.3
------ ------ ------
Tax effect of:
State income tax, net of federal benefit 2.4 2.1 2.9
Excludable dividends (8.7) (9.3) (8.6)
Other, net (5.5) 2.4 4.0
------ ------ ------
Income taxes $ 57.8 $ 87.3 $ 75.6
====== ====== ======
F-30
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
1996 1995
------- -----
(millions)
<S> <C> <C>
Deferred tax assets:
Insurance reserves $344.6 $290.4
Unrealized gains allocable to experience rated contracts 100.8 216.7
Investment losses 7.5 7.3
Postretirement benefits other than pensions 27.0 7.7
Deferred compensation 25.0 18.9
Pension 7.6 5.7
Other 29.3 9.2
------ ------
Total gross assets 541.8 555.9
Deferred tax liabilities:
Deferred policy acquisition costs 482.1 433.0
Market discount 6.8 4.4
Net unrealized capital gains 133.7 288.2
Other (0.3) (0.1)
------ ------
Total gross liabilities 622.3 725.5
------ ------
Net deferred tax liability $ 80.5 $169.6
====== ======
</TABLE>
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. Valuation allowances are provided when it is not
considered more likely than not that deferred tax assets will be realized. As
of December 31, 1996 and 1995, no valuation allowances were required for
unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that has
not been subject to taxation. As of December 31, 1983, no further additions
could be made to the Policyholders' Surplus Account for tax return purposes
under the Deficit Reduction Act of 1984. The balance in such account was
approximately $17.2 million at December 31, 1996. 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 1990. Discussions are
being held with the Service with respect to proposed adjustments. Management
believes there are adequate defenses against, or sufficient reserves to provide
for, any such adjustments. The Service has commenced its examinations for the
years 1991 through 1994.
F-31
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans
Employee Pension Plans--The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to the amounts that are tax-deductible. As of
December 31, 1996, Aetna's accrued pension cost has been allocated to its
subsidiaries, including the Company, under an allocation based on eligible
salaries. Data on a separate company basis regarding the proportionate share of
the projected benefit obligation and plan assets is not available. The
accumulated benefit obligation and plan assets are recorded by Aetna. As of the
measurement date (i.e., September 30), the accumulated plan assets exceeded
accumulated plan benefits. Allocated pretax charges to operations for the
pension plan (based on the Company's total salary cost as a percentage of
Aetna's total salary cost) were $4.3 million, $6.1 million and $5.5 million for
the years ended December 31, 1996, 1995 and 1994, respectively.
Employee Postretirement Benefits--In addition to providing pension benefits,
Aetna currently provides certain health care and life insurance benefits,
subject to certain caps, for retired employees. A comprehensive medical and
dental plan is offered to all full-time employees retiring at age 50 with 15
years of service or at age 65 with 10 years of service. Retirees are generally
required to contribute to the plans based on their years of service with Aetna.
The costs to the Company associated with the Aetna postretirement plans for
1996, 1995 and 1994 were $1.8 million, $1.4 million and $1.0 million,
respectively.
As of December 31, 1996, Aetna transferred to the Company approximately $77.7
million of accrued liabilities, primarily related to the pension and
postretirement benefit plans described above, that had been previously recorded
by Aetna. The after tax amount of this transfer (approximately $50.5 million)
is reported as a reduction in retained earnings.
Agent Pension Plans--The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides pension
benefits based on annual commission earnings. As of the measurement date (i.e.,
September 30), the accumulated plan assets exceeded accumulated plan benefits.
Agent Postretirement Benefits--The Company, in conjunction with Aetna, also
provides certain postretirement health care and life insurance benefits for
certain agents. The costs to the Company associated with the agents'
postretirement plans for 1996, 1995 and 1994 were $0.7 million, $0.8 million
and $0.7 million, respectively.
Incentive Savings Plan--Substantially all employees are eligible to participate
in a savings plan under which designated contributions, which may be invested
in common stock of Aetna or certain other investments, are matched, up to 5% of
compensation, by Aetna. Pretax charges to operations for the incentive savings
plan were $5.4 million, $4.9 million and $3.3 million in 1996, 1995 and 1994,
respectively.
F-32
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
Stock Plans--Aetna has a stock incentive plan that provides for stock options,
deferred contingent common stock or equivalent cash awards or restricted stock
to certain key employees. Executive and middle management employees may be
granted options to purchase common stock of Aetna at or above the market price
on the date of grant. Options generally become 100% vested three years after
the grant is made, with one-third of the options vesting each year. Aetna does
not recognize compensation expense for stock options granted at or above the
market price on the date of grant under its stock incentive plans. In addition,
executives may be granted incentive units which are rights to receive common
stock or an equivalent value in cash. The incentive units may vest within a
range from 0% to 175% at the end of a four year period based on the attainment
of performance goals. The costs to the Company associated with the Aetna stock
plans for 1996, 1995 and 1994, were $8.1 million, $6.3 million and $1.7
million, respectively. As of December 31, 1996, Aetna transferred to the
Company approximately $1.1 million of deferred tax benefits related to stock
options. This amount is reported as an increase in retained earnings.
10. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable life and annuity contracts. Under the
insurance contracts, the Separate Accounts pay the Company a daily fee which,
on an annual basis, ranges, depending on the product, from .10% to 1.90% 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 .85% of their average daily net assets. The Company also receives fees
(expressed as a percentage of the average daily net assets) from the variable
life and annuity mutual funds and The Aetna Series Fund for providing
administration services, and from The Aetna Series Fund for providing
shareholder services and promoting sales. The amount of compensation and fees
received from the Separate Accounts and Funds, included in Charges Assessed
Against Policyholders, amounted to $185.4 million, $128.1 million and $104.6
million in 1996, 1995 and 1994, respectively. The Company may waive advisory
fees at its discretion.
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting as
Subadvisor of all affiliated mutual funds and of most of the General Account
assets. Fees paid by the Company to Aeltus, included in both Charges Assessed
Against Policyholders and Net Investment Income, on an annual basis, range from
.06% to .55% of the average daily net assets under management. For the year
ended December 31, 1996, the Company paid $16.0 million in such fees.
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.
F-33
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
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. An additional $6.1 million commission, paid by the Company to Aetna Life
in 1996, was capitalized as deferred policy acquisition costs. The Company
maintained insurance reserves of $628.3 million and $655.5 million as of
December 31, 1996 and 1995, respectively, relating to the business assumed. In
consideration for the assumption of this business, a loan was established
relating to the assets held by Aetna Life which support the insurance reserves.
The loan is being reduced in accordance with the decrease in the reserves. The
fair value of this loan was $625.3 million and $663.5 million as of December
31, 1996 and 1995, respectively, and is based upon the fair value of the
underlying assets. Premiums of $25.3 million, $28.0 million and $32.8 million
and current and future benefits of $39.5 million, $43.0 million and $43.8
million were assumed in 1996, 1995 and 1994, respectively.
Investment income of $44.1 million, $46.5 million and $51.5 million was
generated from the reinsurance loan to affiliate in 1996, 1995 and 1994,
respectively. Net income of approximately $8.1 million, $18.4 million and $25.1
million resulted from this agreement in 1996, 1995 and 1994, 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 $28.9 million and $28.0
million were maintained for this contract as of December 31, 1996 and 1995,
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 $5.2 million, $3.2 million and
$1.3 million for 1996, 1995 and 1994, respectively.
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1995 or 1994.
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995, the
Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services, Inc.,
to Aetna Retirement Services, Inc. (the Company's former parent).
Premiums due and other receivables include $2.8 million and $5.7 million due
from affiliates in 1996 and 1995, respectively. Other liabilities include $10.7
million and $12.4 million due to affiliates for 1996 and 1995, respectively.
F-34
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
Substantially all of the administrative and support functions of the Company
are provided by Aetna and its affiliates. The financial statements reflect
allocated charges for these services based upon measures appropriate for the
type and nature of service provided.
11. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its exposure to
large losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
the primary liability of the Company as direct insurer of the risks reinsured.
The Company evaluates the financial strength of potential reinsurers and
continually monitors the financial condition of reinsurers. Only those
reinsurance recoverables deemed probable of recovery are reflected as assets on
the Company's Consolidated Balance Sheets.
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 10 above.
<TABLE>
<CAPTION>
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
--------- ----------- ------------ --------
(millions)
<S> <C> <C> <C> <C>
1996
- ----
Premiums:
Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
-------- ------- ------- --------
Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6
======== ======= ======= ========
1995
- ----
Premiums:
Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
-------- ------- ------- --------
Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7
======== ======= ======= ========
1994
- ----
Premiums:
Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health Insurance 9.3 9.3 -- --
Annuities 137.3 -- 0.2 137.5
-------- ------- ------- --------
Total earned premiums $ 173.9 $ 15.3 $ 33.0 $ 191.6
======== ======= ======= ========
</TABLE>
F-35
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of counterparties
to honor these commitments may result in either higher or lower replacement
cost. Also, there is likely to be a change in the value of the securities
underlying the commitments. At December 31, 1996, the Company had commitments
to purchase investments of $17.9 million. The fair value of the investments at
December 31, 1996 approximated $18.3 million.
Litigation
The Company is involved in numerous lawsuits arising, for the most part, in the
ordinary course of its business operations. While the ultimate outcome of
litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, it is not expected to result in liability for amounts material to
the financial condition of the Company, although it may adversely affect
results of operations in future periods.
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance.
Summarized financial information for the Company's principal operations was as
follows:
(Millions) 1996 1995 1994
- ------------------------------------ ----------- ----------- ----------
Revenue:
Financial Services $ 1,195.1 $ 1,211.3 $1,013.5
Individual Life Insurance 445.7 407.9 386.1
---------- ---------- ----------
Total revenue $ 1,640.8 $ 1,619.2 $1,399.6
- ----------------------------------- ---------- ---------- ----------
Income before income taxes: (2)
Financial Services $ 129.9 $ 160.1 $ 122.5
Individual Life Insurance 83.0 103.1 98.4
---------- ---------- ----------
Total income before income taxes $ 212.9 $ 263.2 $ 220.9
- ----------------------------------- ---------- ---------- ----------
Net income: (2)
Financial Services $ 94.3 $ 113.8 $ 85.5
Individual Life Insurance 55.9 62.1 59.8
---------- ---------- ----------
Net income $ 150.2 $ 175.9 $ 145.3
- ----------------------------------- ---------- ---------- ----------
F-36
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
13. Segment Information (1) (Continued)
Assets under management: (3)
Financial Services $ 27,268.1 $ 22,534.4 $18,122.9
Individual Life Insurance 2,830.5 2,590.9 2,220.5
- -------------------------------- ----------- ----------- -----------
Total assets under management $ 30,098.6 $ 25,125.3 $20,343.4
- -------------------------------- ----------- ----------- -----------
(1) The 1996 results include severance and facilities charges of $30.7
million, after tax. Of this charge $21.5 million related to the Financial
Services segment and $9.2 million related to the Individual Life Insurance
segment.
(2) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the Financial Services and
Individual Life Insurance segments. (Refer to Note 7).
(3) Excludes net unrealized capital gains (losses) of $366.4 million, $797.1
million and $(386.4) million at December 31, 1996, 1995 and 1994, respectively.
F-37
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
UNDERTAKING PURSUANT TO RULE 484
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A) OF
THE INVESTMENT COMPANY ACT OF 1940
Aetna Life Insurance and Annuity Company represents that the fees and charges
deducted under the policies covered by this registration statement, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the insurance company.
CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 6 TO
REGISTRATION STATEMENT
This Post-Effective Amendment No. 6 to Registration Statement No. 33-75248 is
comprised of the following papers and documents:
(bullet) The facing sheet.
(bullet) One Corporate Variable Universal Life (Corporate VUL) prospectus
consisting of 119 pages
(bullet) The undertaking to file reports
(bullet) The undertaking pursuant to Rule 484
<PAGE>
(bullet) Representation pursuant to Section 26(e)(2)(A) of the Investment
Company Act of 1940
(bullet) The signatures
(bullet) Written consents of the following persons:
A. Consent of Counsel (included as part of Exhibit No. 2 below)
B. Actuarial Consent (included as part of Exhibit No. 6 below)
C. Consent of Independent Auditors (included as Exhibit No. 7 below)
The following Exhibits:
1. Exhibits required by paragraph A of instructions to exhibits for
Form N-8B-2:
(1) Resolution establishing Variable Life Account B(1)
(2) Not Applicable
(3)(i) Form of Specialty Broker Agreement(2)
(3)(ii) Form of Life Insurance Broker-Dealer Agreements
(10/94)(3)
(3)(iii) Restated and Amended Third Party Administration and
Transfer Agent Agreement(4)
(4) Not Applicable
(5)(i) Corporate VUL Policy (Containing information about Cash
Value Accumulation Method of Death Benefit Options
(70180-93US))(5)
(5)(ii) Corporate VUL Policy (Containing Tables of percentages
for the Guideline Premium Method for Death Benefit
Options (70182-93US))(5)
(5)(iii) Term Rider (70181-94US) to Corporate VUL Policy
70182-93US(5)
(6)(i) Certificate of Incorporation of Aetna Life Insurance
and Annuity Company(6)
(6)(ii) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company(7)
(6)(iii) By-Laws, as amended September 17, 1997, of Aetna Life
Insurance and Annuity Company(8)
(7) Not Applicable
(8)(i) Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Variable Insurance
Products Fund and Fidelity Distributors Corporation
dated February 1, 1994 and amended on December 15,
1994, February 1, 1995, May 1, 1995, January 1, 1996
and March 1, 1996(7)
(8)(ii) Fifth Amendment dated as of May 1, 1997 to the Fund
Participation Agreement between Aetna Life Insurance
and Annuity Company, Variable Insurance Products Fund
and Fidelity Distributors Corporation dated February 1,
1994 and amended on December 15, 1994, February 1,
1995, May 1, 1995, January 1, 1996 and March 1, 1996(9)
(8)(iii) Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Variable Insurance
Products Fund II and Fidelity Distributors Corporation
dated February 1, 1994 and amended on December 15,
1994, February 1, 1995, May 1, 1995, January 1, 1996
and March 1, 1996(7)
(8)(iv) Fifth Amendment dated as of May 1, 1997 to the Fund
Participation Agreement between Aetna Life Insurance
and Annuity Company, Variable
<PAGE>
Insurance Products Fund II and Fidelity Distributors
Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995,
January 1, 1996 and March 1, 1996(9)
(8)(v) Service Agreement between Aetna Life Insurance and
Annuity Company and Fidelity Investment Institutional
Operations Company dated November 1, 1995(10)
(8)(vi) Fund Participation Agreement between Aetna Life
Insurance and Annuity Company and Janus Aspen Series
dated April 19, 1994 and amended June 15, 1994, July
31, 1995 and March 1, 1996(9)
8 (vii) Third Amendment dated as of November 28, 1997 to
Participation Agreement among MFS Variable Insurance
Trust, Aetna Life Insurance and Annuity Company and
Massachusetts Financial Services Company dated April
30, 1996 and amended on September 3, 1996 and March 14,
1997.
(9) Not Applicable
(10.1) Form of Application for Corporate VUL Policy
(38900-93)(11)
(10.2) Supplement (70268-97) to Form of Application for
Corporate VUL Policy (4)
2. Opinion and Consent of Counsel
3. Not Applicable
4. Not Applicable
5. See Item No. (27)
6 Actuarial Opinion and Consent
7. Consent of Independent Auditors
8. Copy of Power of Attorney(12)
(27) Financial Data Schedule
1. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form S-6 (File No. 33-76004), as filed electronically on
February 16, 1996 (Accession No. 0000912057-96-0027723).
2. Incorporated by referenced to Pre-Effective Amendment No. 1 to Registration
Statement on Form S-6 (File No. 33-75248), as filed on June 8, 1994.
3. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form S-6 (File No. 33-75248), as filed on April 25, 1995.
4. Incorporated by reference to Post-Effective Amendment No. 5 to Registration
Statement on Form S-6 (File No. 33-75248), as filed electronically on July
29, 1997 (Accession No. 0000950146-97-001104).
5. Incorporated by reference to Post-Effective Amendment No. 4 to Registration
Statement on Form S-6 (File No. 33-75248), as filed electronically on April
22, 1997 (Accession No. 0000950146-97-000629).
6. Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-60477), as filed electronically on April
15, 1996 (Accession No. 0000950146-96-000534).
7. Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-75964), as filed
electronically on February 11, 1997 (Accession No. 0000950146-96-00159).
8. Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-91846), as filed
electronically on October 30, 1997 (Accession No. 0000950146-97-000158).
<PAGE>
9. Incorporated by reference to Post-Effective Amendment No. 5 to Registration
Statement on Form N-4 (File No. 33-34370), as filed electronically on
September 29, 1997 (Accession No. 0000950146-97-001485).
10. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-4 (File No. 33-88720), as filed electronically on June
28, 1996 (Accession No. 0000928389-96-00136).
11. Incorporated by reference to Registration Statement on Form S-6 (File No.
33-75248), as filed on February 10, 1994.
12. Incorporated by reference to Post-Effective Amendment No. 30 to
Registration Statement on Form N-4 (File No. 33-34370), as filed
electronically on September 29, 1997 (Accession No. 0000950146-97-001485).
In addition, a certified copy of the resolution adopted by the Depositor's
Board of Directors authorizing filings pursuant to a power of attorney as
required by Rule 478 under the Securities Act of 1933 is incorporated by
reference to Post-Effective Amendment No. 5 to Registration Statement on
Form N-4 (File No. 33-75986), as filed electronically on April 12, 1996
(Accession No. 0000912057-96-006383).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the "1933 Act"), the
Registrant, Variable Life Account B of Aetna Life Insurance and Annuity Company,
certifies that it meets all of the requirements of Securities Act Rule 485(b)
for effectiveness of this Post-Effective Amendment No. 6 to its Registration
Statement on Form S-6 (File No. 33-75248) and has duly caused this
Post-Effective Amendment to be to be signed on its behalf by the undersigned,
thereunto duly authorized, and the seal of the Depositor to be hereunto affixed
and attested, all in the City of Hartford, and State of Connecticut, on this
25th day of November, 1997.
VARIABLE LIFE ACCOUNT B OF
AETNA LIFE INSURANCE AND
ANNUITY COMPANY
(Registrant)
(SEAL)
ATTEST: /s/ Karen A. Peddle
---------------------------------
Karen A. Peddle
Assistant Corporate Secretary
By: AETNA LIFE INSURANCE AND
ANNUITY COMPANY
(Depositor)
By: Thomas McInerney*
------------------------------
Thomas McInerney
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 6 to the Registration Statement No. 33-75248 has been signed below
by the following persons in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Thomas McInerney* Director and President )
- ------------------------------------ (Principal Executive Officer) )
Thomas McInerney )
)
)
Christopher J. Burns* Director ) November
- ------------------------------------ ) 25, 1997
Christopher J. Burns )
)
<PAGE>
J. Scott Fox* Director )
- ------------------------------------ )
J. Scott Fox )
)
)
Timothy A. Holt* Director )
- ------------------------------------ )
Timothy A. Holt )
)
)
John Y. Kim* Director )
- ------------------------------------ )
John Y. Kim )
)
)
Shaun P. Mathews* Director )
- ------------------------------------ )
Shaun P. Mathews )
)
)
Deborah Koltenuk* Vice President and Treasurer, Corporate Controller )
- ------------------------------------ )
Deborah Koltenuk )
</TABLE>
By: /s/ Julie E. Rockmore
----------------------------
*Julie E. Rockmore
Attorney-in-Fact
<PAGE>
VARIABLE LIFE ACCOUNT B
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-1.1 Resolution of the Board of Directors of Aetna Life Insurance and Annuity *
Company establishing Variable Life Account B
99-1.3(i) Form of Specialty Broker Agreement *
99-1.3(ii) Form of Life Insurance Broker-Dealer Agreements (10/94) *
99-1.3(iii) Restated and Amended Third Party Administration and Transfer Agent Agreement *
99-1.5(i) Corporate VUL Policy (Containing information about Cash Value Accumulation *
Method of Death Benefit Options)
(70180-93US)
99-1.5(ii) Corporate VUL Policy (Containing Tables of percentages for the Guideline *
Premium Method for Death Benefit Options)
(70182-93US)
99-1.5(iii) Term Rider (70181-94US) to Corporate VUL Policy *
70182-93US
99-1.6(i) Certificate of Incorporation of Aetna Life Insurance and Annuity Company *
99-1.6(ii) Amendment of the Certificate of Incorporation of Aetna Life Insurance and *
Annuity Company
99-1.6(iii) By-Laws, as amended September 17, 1997, of Aetna Life Insurance and Annuity *
Company
99-1.8(i) Fund Participation Agreement between Aetna Life Insurance and Annuity Company, *
Variable Insurance Products Fund and Fidelity Distributors Corporation dated
February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1,
1995, January 1, 1996 and March 1, 1996
</TABLE>
*Incorporated by reference
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Exhibit Page
- ----------- ------- ----
<S> <C> <C>
99-1.8(ii) Fifth Amendment dated as of May 1, 1997 to the Fund Participation Agreement *
between Aetna Life Insurance and Annuity Company, Variable Insurance Products
Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended
on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March
1, 1996
99-1.8(iii) Fund Participation Agreement between Aetna Life Insurance and Annuity Company, *
Variable Insurance Products Fund II and Fidelity Distributors Corporation dated
February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1,
1995, January 1, 1996 and March 1, 1996
99-1.8(iv) Fifth Amendment dated as of May 1, 1997 to the Fund Participation Agreement *
between Aetna Life Insurance and Annuity Company, Variable Insurance Products
Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended
on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1,
1996
99-1.8(v) Service Agreement between Aetna Life Insurance and Annuity Company and Fidelity *
Investment Institutional Operations Company dated November 1, 1995
99-1.8(vi) Fund Participation Agreement between Aetna Life Insurance and Annuity Company *
and Janus Aspen Series dated April 19, 1994 and amended June 15, 1994, July
31, 1995 and March 1, 1996
99-1.8(vii) Third Amendment dated as of November 28, 1997 to Participation Agreement among ------------------
MFS Variable Insurance Trust, Aetna Life Insurance and Annuity Company and
Massachusetts Financial Services Company dated April 30, 1996 and amended on
September 3, 1996 and March 14, 1997
99-1.10.1 Form of Application for Corporate VUL Policy (38900-93) *
99-1.10.2 Supplement (70268-97) to Form of Application for Corporate VUL Policy *
99-2 Opinion and Consent of Counsel
------------------
99-6 Actuarial Opinion and Consent
------------------
99-7 Consent of Independent Auditors
------------------
</TABLE>
*Incorporated by reference
<PAGE>
Exhibit No. Exhibit Page
- ----------- ------- ----
99-8 Copy of Power of Attorney *
27 Financial Data Schedule
------------------
*Incorporated by reference
THIRD AMENDMENT TO
PARTICIPATION AGREEMENT
THIS THIRD AMENDMENT TO THE PARTICIPATION AGREEMENT (the "Third
Amendment") is made and entered into as of the 28th day of November, 1997, by
and among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), AETNA LIFE INSURANCE AND ANNUITY COMPANY, a Connecticut corporation
(the "Company") on its own behalf and on behalf of each of the segregated asset
accounts of the Company set forth in Schedule A hereto (the "Accounts") and
MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation ("MFS").
WITNESSETH
WHEREAS the Trust, the Company and MFS are parties to a Participation
Agreement dated April 30, 1996, as supplemented by First Amendment to
Participation Agreement dated as of September 3rd, 1996 and Second Amendment to
Participation Agreement dated March 14, 1997 (the "Original Agreement"); and
WHEREAS the Trust, the Company and MFS now desire to modify the Original
Agreement to add an additional segregated asset account (Variable Life Account
B) to which shares of the listed portfolios will be made available, to delete a
previously listed segregated asset account (Variable Annuity Account D) which
will no longer utilize the portfolios, and to delete certain portfolios
previously used in Variable Annuity Account B.
NOW THEREFORE, in consideration of the premises and the mutual covenants
and promises expressed herein, the parties agree as follows:
1. Schedule A of the Original Agreement is hereby deleted and replaced with
Schedule A, attached hereto; and
2. the Original Agreement, as supplemented by this Third Amendment, is ratified
and confirmed, and
3. this Third Amendment may be executed in two or more counterparts, which
together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Third Amendment as of
the date first above written.
AETNA LIFE INSURANCE AND
ANNUITY COMPANY
By its authorized officer,
By: /s/ Laurie M. LeBlanc
----------------------------------
Name: Laurie M. Leblanc
----------------------------------
Title: Vice President
----------------------------------
<TABLE>
<CAPTION>
<S> <C>
MFS VARIABLE INSURANCE TRUST, MASSACHUSETTS FINANCIAL SERVICES COMPANY by its
on behalf of the Portfolios authorized officer
By its authorized officer and not individually,
By: /s/ Arnold D. Scott By: /s/ A. Keith Brodkin
--------------------------------------------- -----------------------------------------------------
Name: Arnold D. Scott Name: A. Keith Brodkin
--------------------------------------------- -----------------------------------------------------
Title: Senior Executive Vice President and Title: Chairman
Secretary
--------------------------------------------- -----------------------------------------------------
</TABLE>
<PAGE>
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------- -------------------------------------- --------------------------------------
Name of Separate Account and Date Policies Funded by Separate Account Portfolios Applicable to Policies
Established by Board of Directors
- --------------------------------------- -------------------------------------- --------------------------------------
- --------------------------------------- -------------------------------------- --------------------------------------
Variable Annuity Account B Variable Annuity World Governments Series
(Est. October 18, 1976)
- --------------------------------------- -------------------------------------- --------------------------------------
- --------------------------------------- -------------------------------------- --------------------------------------
Variable Life Account B Variable Life World Governments Series
(Est. June 18, 1986) Total Return Series
- --------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
151 Farmington Avenue
Hartford, CT 06156
Julie E. Rockmore
Counsel
Law Division, RE4A
Investments & Financial Services
November 25, 1997 (860) 273-4686
Fax: (860) 273-8340
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Filing Desk
Re: Aetna Life Insurance and Annuity Company and its Variable Life Account B
Post-Effective Amendment No. 6 to Registration Statement on Form S-6
Prospectus Title: Corporate Variable Universal Life
File Nos.: 33-75248 and 811-4536
Dear Sir or Madam:
The undersigned serves as counsel to Aetna Life Insurance and Annuity Company, a
Connecticut life insurance company (the "Company"). It is my understanding that
the Company, as depositor, has registered an indefinite amount of securities
(the "Securities") under the Securities Act of 1933 (the "Securities Act") as
provided in Rule 24f-2 under the Investment Company Act of 1940 (the "Investment
Company Act").
In connection with this opinion, I have reviewed the S-6 Registration Statement
as amended to the date hereof and this Post-Effective Amendment No. 6. I have
also examined originals or copies, certified or otherwise identified to my
satisfaction, of such documents, trust records and other instruments I have
deemed necessary or appropriate for the purpose of rendering this opinion. For
purposes of such examination, I have assumed the genuineness of all signatures
on original documents and the conformity to the original of all copies.
I am admitted to practice law in Connecticut, and do not purport to be an expert
on the laws of any other state. My opinion herein as to any other law is based
upon a limited inquiry thereof which I have deemed appropriate under the
circumstances.
<PAGE>
Based upon the foregoing, I am of the opinion that the Securities have been
legally authorized and, assuming that the Securities have been issued and sold
in accordance with the provisions of the prospectus being registered, will be
legally issued.
I consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Julie E. Rockmore
Julie E. Rockmore
[AETNA LOGO] 151 Farmington Avenue
[AETNA LETTERHEAD] Hartford, CT 06156
Mark S. Reilly, FSA, MAAA
Pricing Actuary
Life Products Group, TN41
(860) 273-4436
Fax: (860) 273-4438
November 13, 1997
Re: CVUL (File No. 33-75248)
Dear Sir or Madam:
In my capacity as Actuary of Aetna Life Insurance and Annuity Company (ALIAC), I
have provided actuarial advice concerning ALIAC's Corporate Variable Universal
Life Flexible Premium Variable Universal Life Insurance Policy (the "Policy"). I
also provided actuarial advice concerning the preparation of Post-Effective
Amendment No. 6 to Registration Statement on Form S-6, File No. 33-75248 (the
"Registration Statement") for filing with the Securities and Exchange Commission
under the Securities Act of 1933 in connection with the Policy.
In my opinion the illustrations of benefits under the Policy included in the
prospectus under the caption "Illustrations of Death Benefit, Total Account
Values and Surrender Values" are, based on the assumptions stated in the
illustrations, consistent with the provisions of the Policy. Also, in my opinion
the age selected in the illustrations is representative of the manner in which
the Policy operates.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Mark S. Reilly
- ------------------
Mark S. Reilly
Pricing Actuary
Consent of Independent Auditors
The Board of Directors of Aetna Life Insurance and Annuity Company
and Policyholders of Aetna Variable Life Account B:
We consent to the use of our reports dated February 4, 1997 and February 14,
1997 included in registration statement (No. 33-75248) on Form S-6 and to the
reference to our firm under the caption "Independent Auditors" in the
prospectus.
/s/ KPMG Peat Marwick LLP
---------------------
KPMG Peat Marwick LLP
Hartford, Connecticut
November 25, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000785986
<NAME> Aetna Variable Life Account B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 209,041,214
<INVESTMENTS-AT-VALUE> 223,173,883
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 223,173,883
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 223,173,883
<DIVIDEND-INCOME> 13,813,478
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 1,905,137
<NET-INVESTMENT-INCOME> 11,908,341
<REALIZED-GAINS-CURRENT> 3,222,616
<APPREC-INCREASE-CURRENT> 9,741,095
<NET-CHANGE-FROM-OPS> 24,872,052
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996 FOR AETNA LIFE INSURANCE AND ANNUITY COMPANY AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785986
<NAME> AETNA LIFE INSURANCE AND ANNUITY COMPANY
<MULTIPLIER> 1,000,000
<CURRENCY> U.S Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 12,906
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 200
<EQUITIES> 13
<MORTGAGE> 0
<REAL-ESTATE> 13,553
<TOTAL-INVEST> 459
<CASH> 10
<RECOVER-REINSURE> 1,515
<DEFERRED-ACQUISITION> 31,693
<TOTAL-ASSETS> 3,617
<POLICY-LOSSES> 1
<UNEARNED-PREMIUMS> 28
<POLICY-OTHER> 10,664
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
3
<COMMON> 1,607
<OTHER-SE> 31,693
<TOTAL-LIABILITY-AND-EQUITY> 134
1,046
<INVESTMENT-INCOME> 20
<INVESTMENT-GAINS> 45
<OTHER-INCOME> 969
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 199
<INCOME-PRETAX> 58
<INCOME-TAX> 141
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 141
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000785986
<NAME> Aetna Variable Life Account B
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 270,852,220
<INVESTMENTS-AT-VALUE> 319,951,299
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 319,951,299
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 319,951,299
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 319,951,299
<DIVIDEND-INCOME> 11,181,934
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (1,872,259)
<NET-INVESTMENT-INCOME> 9,309,675
<REALIZED-GAINS-CURRENT> 11,047,921
<APPREC-INCREASE-CURRENT> 34,966,410
<NET-CHANGE-FROM-OPS> 55,324,006
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-Q FOR THE FISCAL QUARTER ENDED
SEPTEMBER 30, 1997 FOR AETNA LIFE INSURANCE AND ANNUITY COMPANY AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000785986
<NAME> Aetna Life Insurance and Annuity Company
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 13,257
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 222
<MORTGAGE> 13
<REAL-ESTATE> 0
<TOTAL-INVEST> 14,058
<CASH> 614
<RECOVER-REINSURE> 9
<DEFERRED-ACQUISITION> 1,621
<TOTAL-ASSETS> 38,522
<POLICY-LOSSES> 3,758
<UNEARNED-PREMIUMS> 1
<POLICY-OTHER> 27
<POLICY-HOLDER-FUNDS> 11,075
<NOTES-PAYABLE> 0
0
0
<COMMON> 3
<OTHER-SE> 1,783
<TOTAL-LIABILITY-AND-EQUITY> 38,522
200
<INVESTMENT-INCOME> 805
<INVESTMENT-GAINS> 18
<OTHER-INCOME> 29
<BENEFITS> 853
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 209
<INCOME-TAX> 64
<INCOME-CONTINUING> 145
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
