President's Letter
Dear Valued Client,
In August of 1997, I assumed leadership of Aetna's retirement, investment, and
life insurance areas, known collectively as Aetna Retirement Services (ARS).
Through its operating companies, ARS provides individuals with a full range of
financial services, investment management, and other important products and
services. I'm delighted to be heading this company because our mission is to
help people clarify, plan for, and achieve their personal retirement dreams.
That's a mission that's important to us and to you.
Overall, 1997 proved to be another strong year for the stock market. The year
began with some skepticism as to whether or not stocks could produce a third
consecutive year of 20%-plus total returns. At year end, the turbulence in the
Asian markets contributed to wild swings in domestic markets. And, in spite of
it all, the S & P 500 Index rose more than 33%, while the Dow Jones Industrial
Average climbed nearly 25%. The resilience of the market helped equity investors
enjoy yet another year of record returns.*
In the fall of 1997, the ARS organization formed a management investment company
named Portfolio Partners, Inc. (PPI) in order to give many of our clients access
to a wider array of fund management styles, with reduced fees. With the addition
of PPI, our variable insurance product investment options include funds
subadvised by T. Rowe Price Associates, Inc., Massachusetts Financial Services,
Inc. (MFS), and Scudder Kemper Investments, Inc. (Scudder). Aetna funds,
subadvised by Aeltus Investment Management, Inc., remain in our expanding list
of fund families, and together, give you valuable diversification across
markets.
Market swings, economic twists, changes in state and federal tax laws. All offer
opportunities - and confusion for investors. That's why it's so important for
you to pursue an investment strategy that fits your needs and to wisely choose
your retirement planning partner. Thank you for choosing Aetna Retirement
Services, and for your continued trust and business.
Sincerely,
/s/ Thomas J. McInerney
Thomas J. McInerney
*Past performance is no indication of future results.
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities -- December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 3,935,729 shares (cost $126,171,024) ............................ $132,379,023
Aetna Income Shares; 1,642,350 shares (cost $21,116,917) ............................. 21,104,804
Aetna Variable Encore Fund; 1,520,490 shares (cost $20,249,343) ...................... 20,320,201
Aetna Investment Advisers Fund, Inc.; 1,517,909 shares (cost $22,364,815) ............ 24,336,071
Aetna Ascent Variable Portfolio; 127,672 shares (cost $1,774,627) .................... 1,802,553
Aetna Crossroads Variable Portfolio; 54,282 shares (cost $705,224) ................... 710,292
Aetna Legacy Variable Portfolio; 53,730 shares (cost $649,521) ....................... 650,139
Aetna Variable Index Plus Portfolio; 139,939 shares (cost $1,985,472) ................ 1,961,545
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 831,279 shares (cost $18,659,751) .......................... 20,183,450
Growth Portfolio; 191,918 shares (cost $6,740,034) .................................. 7,120,144
Overseas Portfolio; 93,214 shares (cost $1,797,983) ................................. 1,789,714
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 140,740 shares (cost $2,253,029) ........................... 2,534,727
Contrafund Portfolio; 1,014,044 shares (cost $18,714,668) ........................... 20,220,028
Janus Aspen Series:
Aggressive Growth Portfolio; 603,521 shares (cost $11,557,498) ...................... 12,402,365
Balanced Portfolio; 469,699 shares (cost $7,320,172) ................................ 8,205,641
Growth Portfolio; 648,268 shares (cost $10,619,569) ................................. 11,980,000
Worldwide Growth Portfolio; 1,039,046 shares (cost $22,485,938) ..................... 24,303,287
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio; 444,333 shares (cost $19,019,357) .............. 19,061,872
PPI MFS Research Growth Portfolio; 736,167 shares (cost $7,234,426) ................. 7,148,181
PPI Scudder International Growth Portfolio; 1,014,972 shares (cost $14,118,551) ..... 14,311,110
------------
NET ASSETS (cost $335,537,919) ........................................................ $352,525,147
============
Net assets represented by:
Policyholders' account values: (Notes 1 and 5)
Aetna Variable Fund:
Policyholders' account values ....................................................... $132,379,023
Aetna Income Shares:
Policyholders' account values ....................................................... 21,104,804
Aetna Variable Encore Fund:
Policyholders' account values ....................................................... 20,320,201
Aetna Investment Advisers Fund, Inc.:
Policyholders' account values ....................................................... 24,336,071
Aetna Ascent Variable Portfolio:
Policyholders' account values ....................................................... 1,802,553
Aetna Crossroads Variable Portfolio:
Policyholders' account values ....................................................... 710,292
Aetna Legacy Variable Portfolio:
Policyholders' account values ....................................................... 650,139
Aetna Variable Index Plus Portfolio:
Policyholders' account values ....................................................... 1,961,545
</TABLE>
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities -- December 31, 1997 (continued):
<TABLE>
<S> <C>
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Policyholders' account values ...................... $ 20,183,450
Growth Portfolio:
Policyholders' account values ...................... 7,120,144
Overseas Portfolio:
Policyholders' account values ...................... 1,789,714
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Policyholders' account values ...................... 2,534,727
Contrafund Portfolio:
Policyholders' account values ....................... 20,220,028
Janus Aspen Series:
Aggressive Growth Portfolio:
Policyholders' account values ...................... 12,402,365
Balanced Portfolio:
Policyholders' account values ...................... 8,205,641
Growth Portfolio:
Policyholders' account values ...................... 11,980,000
Worldwide Growth Portfolio:
Policyholders' account values ...................... 24,303,287
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio:
Policyholders' account values ...................... 19,061,872
PPI MFS Research Growth Portfolio:
Policyholders' account values ...................... 7,148,181
PPI Scudder International Growth Portfolio:
Policyholders' account values ...................... 14,311,110
------------
$352,525,147
============
</TABLE>
See Notes to Financial Statements
<PAGE>
Variable Life Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
------------ ------------
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends .......................................................... $ 35,222,623 $ 13,813,478
Expenses: (Notes 2 and 5)
Valuation Period Deductions ........................................ (2,713,203) (1,905,137)
------------ ------------
Net investment income ............................................... 32,509,420 11,908,341
------------ ------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ................................................ 260,329,704 29,656,908
Cost of investments sold ........................................... 245,858,726 26,434,292
------------ ------------
Net realized gain ................................................. 14,470,978 3,222,616
Net unrealized gain on investments: (Note 5)
Beginning of year .................................................. 14,132,669 4,391,574
End of year ........................................................ 16,987,228 14,132,669
------------ ------------
Net change in unrealized gain ..................................... 2,854,559 9,741,095
------------ ------------
Net realized and unrealized gain on investments ..................... 17,325,537 12,963,711
------------ ------------
Net increase in net assets resulting from operations ................ 49,834,957 24,872,052
------------ ------------
FROM UNIT TRANSACTIONS:
Variable life premium payments ...................................... 135,098,143 101,416,302
Sales and administrative charges deducted by the Company ............ (4,620,884) (3,032,151)
Premiums allocated to the fixed account ............................. (2,741,149) (3,127,437)
------------ ------------
Net premiums allocated to the variable account ..................... 127,736,110 95,256,714
Transfers to the Company for monthly deductions ..................... (21,545,914) (15,491,673)
Redemptions by contract holders ..................................... (24,062,185) (4,154,465)
Transfers on account of policy loans ................................ (2,875,077) (3,783,533)
Other ............................................................... 263,373 (40,991)
------------ ------------
Net increase in net assets from unit transactions (Note 5) ......... 79,516,307 71,786,052
------------ ------------
Change in net assets ................................................ 129,351,264 96,658,104
NET ASSETS:
Beginning of year ................................................... 223,173,883 126,515,779
------------ ------------
End of year ......................................................... $352,525,147 $223,173,883
============ ============
</TABLE>
See Notes to Financial Statements
<PAGE>
Variable Life Account B
Condensed Financial Information -- Year Ended December 31, 1997
<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 Period of Year
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund:
Aetna Vest $ 34.932 $ 44.936 28.64% 1,403,227.0 $ $63,055,847
Aetna Vest II 19.507 25.085 28.60% 805,944.5 20,216,852
Aetna Vest Plus 16.389 21.075 28.58% 1,783,619.4 37,590,494
Aetna Vest Estate Protector 11.675 15.037 28.79% 70,938.6 1,066,670
Corporate Specialty Market 14.805 19.039 28.60% 548,828.8 10,449,160
- -----------------------------------------------------------------------------------------------------------------------
Aetna Income Shares:
Aetna Vest 21.850 23.428 7.22% 257,674.2 6,036,890
Aetna Vest II 14.691 15.752 7.22% 61,987.6 976,413
Aetna Vest Plus 11.764 12.613 7.22% 187,384.8 2,363,574
Aetna Vest Estate Protector 10.452 11.224 7.38% 18,991.8 213,166
Corporate Specialty Market 11.354 12.175 7.22% 945,807.8 11,514,761
- -----------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund:
Aetna Vest 16.577 17.310 4.43% 151,657.5 2,625,230
Aetna Vest II 12.117 12.653 4.43% 13,650.7 172,723
Aetna Vest Plus 11.388 11.892 4.43% 566,497.4 6,736,612
Aetna Vest Estate Protector 10.333 10.807 4.58% 36,266.4 391,929
Corporate Specialty Market 10.895 11.377 4.43% 913,597.2 10,393,707
- -----------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.:
Aetna Vest 17.547 21.286 21.31% 106,658.2 2,270,280
Aetna Vest II 17.742 21.515 21.27% 234,300.7 5,041,082
Aetna Vest Plus 14.880 18.044 21.27% 493,793.3 8,909,876
Aetna Vest Estate Protector 11.340 13.554 19.53% (1) 11,121.3 150,741
Corporate Specialty Market 12.954 15.708 21.27% 506,998.4 7,964,092
- -----------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio:
Aetna Vest 11.828 14.055 18.84% 16,408.7 230,615
Aetna Vest II 11.828 14.040 18.70% 10,217.2 143,453
Aetna Vest Plus 11.828 14.040 18.70% 96,649.5 1,356,995
Aetna Vest Estate Protector 11.886 14.077 18.43% (1) 5,078.4 71,490
- -----------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio:
Aetna Vest 11.474 13.369 16.52% 5,240.7 70,064
Aetna Vest II 11.544 13.356 15.69% (1) 5,740.1 76,663
Aetna Vest Plus 11.474 13.356 16.40% 40,129.7 535,965
Aetna Vest Estate Protector 11.487 13.391 16.58% 2,061.1 27,600
- -----------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio:
Aetna Vest II 11.263 12.604 11.91% (2) 894.7 11,277
Aetna Vest Plus 11.118 12.604 13.37% 48,206.0 607,607
Aetna Vest Estate Protector 11.344 12.638 11.40% (3) 2,473.2 31,255
- -----------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio:
Aetna Vest 12.017 13.081 8.86% (4) 11,393.3 149,038
Aetna Vest II 11.345 13.081 15.30% (4) 7,240.3 94,713
Aetna Vest Plus 11.172 13.081 17.09% (3) 86,063.0 1,125,815
Aetna Vest Estate Protector 12.371 13.102 5.91% (5) 17,901.0 234,541
Corporate Specialty Market 12.785 13.081 2.32% (6) 27,324.3 357,438
- -----------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Funds
Equity-Income Portfolio:
Aetna Vest 10.871 13.788 26.83% 16,476.3 227,168
Aetna Vest II 10.871 13.788 26.83% 5,186.7 71,513
Aetna Vest Plus 10.871 13.788 26.83% 545,391.4 7,519,612
Aetna Vest Estate Protector 10.883 13.824 27.02% 62,365.5 862,136
Corporate Specialty Market 12.512 15.869 26.83% 724,876.8 11,503,021
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Variable Life Account B
Condensed Financial Information -- Year Ended December 31, 1997 (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
------------------------ in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Period Unit of Period of Period
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fidelity Investments Variable Insurance Products
Fund:
Growth Portfolio:
Corporate Specialty Market $ 11.255 $ 13.759 22.25% 517,477.9 $ 7,120,144
- ------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio:
Corporate Specialty Market 11.241 12.415 10.45% 144,152.5 1,789,714
- ------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products
Fund II:
Asset Manager Portfolio:
Corporate Specialty Market 12.022 14.361 19.46% 176,505.1 2,534,727
- ------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio:
Aetna Vest 11.525 14.166 22.91% 34,241.1 485,043
Aetna Vest II 11.525 14.166 22.91% 7,039.4 99,717
Aetna Vest Plus 11.525 14.166 22.91% 319,136.2 4,520,728
Aetna Vest Estate Protector 11.538 14.203 23.09% 44,043.2 625,540
Corporate Specialty Market 12.396 15.236 22.91% 950,961.4 14,489,000
- ------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest 16.153 18.017 11.54% 62,426.4 1,124,758
Aetna Vest II 16.153 18.017 11.54% 29,971.2 540,002
Aetna Vest Plus 16.153 18.017 11.54% 340,401.2 6,133,150
Aetna Vest Estate Protector 9.797 10.944 11.71% 65,486.4 716,682
Corporate Specialty Market 12.120 13.519 11.54% 287,588.9 3,887,773
- ------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio:
Aetna Vest 13.966 16.883 20.89% 7,765.1 131,096
Aetna Vest II 14.075 17.015 20.89% 10,401.5 176,977
Aetna Vest Plus 13.960 16.875 20.89% 247,390.9 4,174,751
Aetna Vest Estate Protector 11.101 13.440 21.07% 17,145.8 230,433
Corporate Specialty Market 12.242 14.799 20.89% 235,992.1 3,492,384
- ------------------------------------------------------------------------------------------------------------------------
Growth Portfolio:
Aetna Vest 14.898 18.105 21.53% 37,937.8 686,846
Aetna Vest II 14.884 18.088 21.53% 61,620.8 1,114,603
Aetna Vest Plus 14.863 18.063 21.53% 431,965.3 7,802,391
Aetna Vest Estate Protector 10.857 13.214 21.71% 44,074.0 582,402
Corporate Specialty Market 12.232 14.865 21.53% 120,672.6 1,793,758
- ------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio:
Aetna Vest 16.364 19.790 20.94% 108,747.3 2,152,075
Aetna Vest II 16.368 19.795 20.94% 55,876.7 1,106,085
Aetna Vest Plus 16.348 19.770 20.94% 557,760.6 11,027,190
Aetna Vest Estate Protector 11.811 14.305 21.12% 58,328.9 834,389
Corporate Specialty Market 13.459 16.277 20.94% 564,191.6 9,183,548
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio:
Aetna Vest 17.571 17.357 (1.22%) (7) 70,564.4 1,224,807
Aetna Vest II 17.573 17.359 (1.22%) (7) 34,713.7 602,592
Aetna Vest Plus 17.563 17.349 (1.22%) (7) 477,392.0 8,282,500
Aetna Vest Estate Protector 10.942 10.810 (1.21%) (7) 66,830.1 722,463
Corporate Specialty Market 14.451 14.275 (1.22%) (7) 576,485.2 8,229,510
- ------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio:
Aetna Vest 12.277 12.042 (1.91%) (7) 64,898.6 781,537
Aetna Vest II 12.332 12.096 (1.91%) (7) 23,240.4 281,124
Aetna Vest Plus 12.163 11.931 (1.91%) (7) 352,781.7 4,209,155
Aetna Vest Estate Protector 9.329 9.152 (1.90%) (7) 10,326.6 94,508
Corporate Specialty Market 11.124 10.912 (1.91%) (7) 163,291.1 1,781,857
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Variable Life Account B
Condensed Financial Information -- Year Ended December 31, 1997 (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
------------------------ in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Period Unit of Period of Period
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PPI Scudder International Growth Portfolio:
Aetna Vest $ 15.495 $ 15.692 1.27% (7) 131,667.0 $2,066,166
Aetna Vest II 15.399 15.596 1.27% (7) 44,659.7 696,495
Aetna Vest Plus 15.314 15.509 1.27% (7) 449,154.4 6,965,802
Aetna Vest Estate Protector 11.627 11.777 1.29% (7) 21,515.0 253,383
Corporate Specialty Market 12.832 12.995 1.27% (7) 333,144.4 4,329,264
- --------------------------------------------------------------------------------------------------------------------------
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 March 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.
(7) - Reflects less than a full year of performance activity. Funds were first received in this option during November 1997.
</TABLE>
See Notes to Financial Statements
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1997
1. Summary of Significant Accounting Policies
Variable Life Account B (the"Account") is a separate account established by
Aetna Life Insurance and Annuity Company (the "Company) and is registered
under the Investment Company Act of 1940 as a unit investment trust. The
Account is sold exclusively for use with variable 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, 1997:
Aetna Variable Fund Fidelity Investments Variable
Aetna Income Shares Insurance Products Fund II:
Aetna Variable Encore Fund o Asset Manager Portfolio
Aetna Investment Advisers Fund, Inc. o Contrafund Portfolio
Aetna Ascent Variable Portfolio Janus Aspen Series:
Aetna Crossroads Variable Portfolio o Aggressive Growth Portfolio
Aetna Legacy Variable Portfolio o Balanced Portfolio
Aetna Variable Index Plus Portfolio o Growth Portfolio
Fidelity Investments Variable Insurance o Worldwide Growth Portfolio
Products Fund: Portfolio Partners, Inc.:
o Equity-Income Portfolio o PPI MFS Emerging Equities
o Growth Portfolio Portfolio
o Overseas Portfolio o PPI MFS Research Growth Portfolio
o PPI Scudder International
Growth Portfolio
b. Other
Investment transactions are accounted for on a trade date basis and
dividend income is recorded on the ex-dividend date. The cost of
investments sold is determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of the Company which is taxed as a life insurance company under
the Internal Revenue Code of 1986, as amended.
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.
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, 1997 and 1996
aggregated $372,355,431 and $260,329,704 and $113,349,117 and $29,656,908,
respectively.
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1997 (continued):
5.
Supplemental Information to Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ---------------------------------------------------------------------------------------------
Valuation
Period
Dividends Deductions
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Aetna Variable Fund: $26,573,304 ($ 1,085,553)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Income Shares: 1,087,150 (148,230)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 372,968 (144,720)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 2,876,287 (185,443)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 112,004 (11,360)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 45,840 (3,290)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 38,169 (3,596)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 77,848 (4,920)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: (1) 576,583 (128,523)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
American Century VP Capital Appreciation Fund: (2) 132,455 (57,820)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 1,485,715 (163,582)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Growth Portfolio: 192,233 (54,856)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Overseas Portfolio: 46,706 (8,253)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 175,953 (18,257)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Contrafund Portfolio: 235,708 (110,146)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (95,697)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Balanced Portfolio: 192,757 (52,872)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
-------------- ------------- --------------
<S> <C> <C> <C>
Aetna Variable Fund: $11,219,896 $ 7,857,508 $3,362,388
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Income Shares: 2,358,910 2,406,924 (48,014)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 74,201,538 73,731,940 469,598
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 1,960,106 1,561,449 398,657
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 1,279,898 1,184,906 94,992
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 198,099 193,283 4,816
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 225,894 207,391 18,503
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 143,972 131,418 12,554
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: (1) 53,957,227 53,285,312 671,915
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation Fund: (2) 15,197,338 15,512,673 (315,335)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 14,420,981 11,843,310 2,577,671
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Growth Portfolio: 6,814,876 5,870,796 944,080
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Overseas Portfolio: 359,668 322,274 37,394
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 244,742 220,690 24,052
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 4,519,164 3,602,586 916,578
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 18,445,996 17,632,824 813,172
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Balanced Portfolio: 1,238,408 1,021,789 216,61
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
- ------------------------------------ Change in In Net Assets ------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -------------------- ------------- -------------- -------------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$7,294,643 $6,207,999 ($1,086,644) $11,743,902
$92,871,626 $132,379,023
- -------------------------------------------------------------------------------------------------------------
(190,180) (12,114) 178,066 6,856,045
13,179,787 21,104,804
- -------------------------------------------------------------------------------------------------------------
106,394 70,857 (35,537) 10,565,707
9,092,185 20,320,201
- -------------------------------------------------------------------------------------------------------------
1,383,931 1,971,257 587,326 4,867,703
15,791,541 24,336,071
- -------------------------------------------------------------------------------------------------------------
15,645 27,927 12,282 1,049,257
545,378 1,802,553
- -------------------------------------------------------------------------------------------------------------
(191) 5,069 5,260 533,974
123,692 710,292
- -------------------------------------------------------------------------------------------------------------
20 618 598 582,502
13,963 650,139
- -------------------------------------------------------------------------------------------------------------
0 (23,927) (23,927) 1,899,990
0 1,961,545
- -------------------------------------------------------------------------------------------------------------
172,057 0 (172,057) (14,034,001)
13,086,083 0
- -------------------------------------------------------------------------------------------------------------
(146,911) 0 146,911 (6,388,736)
6,482,525 0
- -------------------------------------------------------------------------------------------------------------
1,096,283 1,523,698 427,415 2,546,018
13,310,213 20,183,450
- -------------------------------------------------------------------------------------------------------------
294,867 380,110 85,243 900,915
5,052,529 7,120,144
- -------------------------------------------------------------------------------------------------------------
37,941 (8,270) (46,211) 1,227,751
532,327 1,789,714
- -------------------------------------------------------------------------------------------------------------
134,978 281,699 146,721 796,072
1,410,186 2,534,727
- -------------------------------------------------------------------------------------------------------------
730,883 1,505,359 774,476 11,491,722
6,911,690 20,220,028
- -------------------------------------------------------------------------------------------------------------
249,074 844,868 595,794 1,426,169
9,662,927 12,402,365
- -------------------------------------------------------------------------------------------------------------
243,163 885,469 642,306 3,632,486
3,574,345 8,205,641
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1997 (continued):
5.
Supplemental Information to Statements of Operations and Changes in Net
Assets (continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Portfolio: $ 309,334 ($90,076) $ 3,312,122 $ 2,585,617 $ 726,505
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (3) 101,542 (32,381) 9,071,413 8,891,967 179,446
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 325,821 (167,065) 7,022,675 5,257,711 1,764,964
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Inc.:
PPI MFS Emerging Equities Portfolio: 0 (17,086) 9,834,242 9,998,952 (164,710)
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 0 (6,128) 1,889,839 1,891,124 (1,285)
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 0 (12,927) 1,858,258 1,827,173 31,085
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund --
International Portfolio: (4) 264,246 (110,422) 20,554,442 18,819,109 1,735,333
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Total Variable Life Account B $35,222,623 ($ 2,713,203) $260,329,704 $245,858,726 $14,470,978
===============================================================================================================================
(1) Effective November 28, 1997, assets from this fund were transferred into the PPI MFS Emerging Equity Portfolio.
(2) Effective November 28, 1997, assets from this fund were transferred into the PPI MFS Research Growth Portfolio.
(3) Effective November 28, 1997, assets from this fund were transferred into the Aetna Variable Encore Fund.
(4) Effective November 28, 1997, assets from this fund were transferred into the PPI Scuddder International Growth Portfolio.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
- -------------------------------- Change in In Net Assets --------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -------------- --------------- --------------- -------------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$566,478 $1,360,430 $793,952 $3,065,638
$ 7,174,647 $ 11,980,000
- -----------------------------------------------------------------------------------------------------------
26,773 0 (26,773) (4,049,682)
3,827,848 0
- -----------------------------------------------------------------------------------------------------------
872,277 1,817,349 945,072 11,519,359
9,915,136 24,303,287
- -----------------------------------------------------------------------------------------------------------
0 42,515 42,515 19,201,153
0 19,061,872
- -----------------------------------------------------------------------------------------------------------
0 (86,245) (86,245) 7,241,839
0 7,148,181
- -----------------------------------------------------------------------------------------------------------
0 192,560 192,560 14,100,392
0 14,311,110
- -----------------------------------------------------------------------------------------------------------
1,244,544 0 (1,244,544) (11,259,868)
10,615,255 0
- -----------------------------------------------------------------------------------------------------------
$14,132,669 $16,987,228 $ 2,854,559 $ 79,516,307 $223,173,883 $352,525,147
===========================================================================================================
</TABLE>
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1997 (continued):
5.
Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation
Period
Dividends Deductions
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Aetna Variable Fund: $9,712,578 ($ 991,737)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Aetna Income Shares: 810,294 (121,325)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 477,308 (71,555)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 1,201,085 (127,990)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 18,222 (1,210)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 2,462 (91)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 671 (36)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: 33,925 (93,143)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 19,619 (57,181)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Growth Portfolio: 85,627 (30,149)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Overseas Portfolio: 14,172 (4,004)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 62,788 (13,383)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Contrafund Portfolio: 10,199 (36,829)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 79,809 (68,571)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Balanced Portfolio: 70,301 (23,444)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Growth Portfolio: 140,964 (46,593)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: 84,482 (17,596)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1996
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
------------- ------------- ------------
<S> <C> <C> <C>
Aetna Variable Fund: $5,373,083 $4,466,494 $ 906,589
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Aetna Income Shares: 1,564,483 1,544,041 20,442
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 9,490,775 9,560,169 (69,394)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 1,717,127 1,435,761 281,366
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 127,981 124,671 3,310
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 1,317 1,263 54
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 503 486 17
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: 2,003,029 1,400,608 602,421
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 625,427 574,716 50,711
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Growth Portfolio: 243,345 245,938 (2,593)
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Overseas Portfolio: 478,644 450,003 28,641
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 981,022 966,124 14,898
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 353,531 314,886 38,645
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 1,171,119 858,482 312,637
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Balanced Portfolio: 452,062 367,517 84,545
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Growth Portfolio: 808,709 590,651 218,058
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: 424,360 415,377 8,983
PolicyHolders' account values
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
- --------------------------------- Change in In Net Assets -------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ----------------- ------------- -------------- -------------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 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
</TABLE>
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1997 (continued):
5.
Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
-------------- ---------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Janus Aspen Series (continued):
Worldwide Growth Portfolio: $ 105,214 ($ 49,874) $ 1,127,422 $ 777,300 $ 350,122
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund --
International Portfolio: 173,534 (85,922) 1,752,475 1,537,715 214,760
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc.--Growth Fund: 710,224 (64,504) 960,494 802,090 158,404
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------
Total Variable Life Account B $13,813,478 ($ 1,905,137) $29,656,908 $26,434,292 $3,222,616
======================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
- ------------------------------------ Change in In Net Assets -------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ------------------ --------------- --------------- -------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$ 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>
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and
Policyholders of Variable Life Account B:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Life Account B (the "Account") as
of December 31, 1997, and the related statements of operations and changes in
net assets for each of the years in the two-year period then ended and
condensed financial information for the year ended December 31, 1997. These
financial statements and condensed financial information are the responsibility
of the Account's management. Our responsibility is to express an opinion on
these financial statements and condensed financial information based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and condensed
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and condensed financial information. Our procedures
included confirmation of securities owned as of December 31, 1997, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company Variable Life Account B as
of December 31, 1997, the results of its operations and changes in its net
assets for each of the years in the two-year period then ended and condensed
financial information for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 27, 1998
