As filed with the Securities and Exchange Registration No. 33-64277
Commission on April 16, 1998 Registration No. 811-4536
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 4 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
- --------------------------------------------------------------------------------
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)
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It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1998 pursuant to paragraph (b) 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
N-8B-2
Item
No. Part I Prospectus
- ------- -----------------
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
Policy
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 and Fees; Policy Choices; Policy Values;
Policy Rights; Additional Information
11 Allocation of Premiums - Fund Additions, Deletions or Substitutions;
Policy Choices
12 Cover Page; Allocation of Premiums - The Funds
13 Charges & Fees; Additional Information - Distribution of the Policy
14 Policy Values; Additional Information; Miscellaneous Policy Provisions
15 Policy Summary; Allocation of Premiums; 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; Tax Matters
19 Additional Information - Reports to Policy Owners
20 Not Applicable
21 Policy Rights - Policy Loans
22 Not Applicable
23 Directors and Officers
<PAGE>
24 Not Applicable
25 The Company
26 Charges and Fees
27 The Company
28 Directors and Officers
29 The Company
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 Additional Information - State Regulation
36 Not Applicable
37 Not Applicable
38 Additional Information - Distribution of the Policy
39 The Company
40 Charges and Fees
41 The Company
42 Director and Officers
43 Financial Statements
44 Policy Values; Financial Statements
45 Not Applicable
46 The Separate Account; Policy Values
47 The Separate Account; Policy Choices; Policy Values
48 Not Applicable
49 Not Applicable
50 The Separate Account
51 Cover Page; Policy Choices
52 The Separate Account; Allocation of Premiums - Fund Additions, Deletions
or Substitutions
<PAGE>
53 Tax Matters
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements
<PAGE>
Variable Life Account B
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
800-334-7586
Prospectus Dated May 1, 1998
The Flexible Premium Variable Life Insurance Policy on the Lives of Two
Insureds
The Policy offered in connection with this Prospectus is the AetnaVest Estate
Protector Policy, a flexible premium variable life insurance policy on the
lives of two Insureds (the "Policy") issued and underwritten by Aetna Life
Insurance and Annuity Company (the "Company"). The Policy is intended to
provide life insurance and pay a benefit, as described in this Prospectus, upon
surrender, maturity or Second Death. The Policy is designed to allow flexible
premium payments, Policy Loans, Partial Surrenders, a choice of two Death
Benefit Options and account values that may be invested in either a fixed or
variable or a combination of fixed and variable basis. Net Premiums may be
allocated to Variable Life Account B, the Fixed Account, or both Accounts. The
Variable Options support the benefits provided by the variable portion of the
Policy. The Fund Account Value in each Variable Option is not guaranteed and
will vary with the investment performance of the associated Fund. Net Premiums
allocated to the Fixed Account will accumulate at rates of interest We
determine. Such rates will not be less than 4% a year. Net Premiums allocated
to Variable Life Account B must be allocated to one or more of the Variable
Options We make available. Sufficient premiums must be paid to continue the
Policy in force or to qualify for a Guaranteed Death Benefit. Premium reminder
notices will be sent for Planned Premiums and for premiums required to continue
the Policy in force. The Policy may be reinstated.
The Policy has a free look period during which You may return the Policy or
rescind an increase in the Specified Amount. (See Right of Policy Examination)
This Prospectus also describes the Variable Options, (collectively, the
"Funds"), used to fund the Policy through Variable Life Account B (the
"Separate Account"). Unless specifically mentioned, this Prospectus only
describes the Variable Options. The Variable Options are:
<TABLE>
<S> <C> <C> <C>
[bullet] Aetna Ascent VP [bullet] Fidelity VIP Equity-Income Portfolio
(formerly Aetna Ascent Variable Portfolio) [bullet] Fidelity VIP II--Contrafund Portfolio
[bullet] Aetna Balanced VP, Inc. [bullet] Janus Aspen Aggressive Growth Portfolio
(formerly Aetna Investment Advisers Fund, Inc.) [bullet] Janus Aspen Balanced Portfolio
[bullet] Aetna Income Shares d/b/a Aetna Bond VP [bullet] Janus Aspen Growth Portfolio
[bullet] Aetna Crossroads VP [bullet] Janus Aspen Worldwide Growth Portfolio
(formerly Aetna Crossroads Variable Portfolio) [bullet] Oppenheimer Global Securities Fund
[bullet] Aetna Variable Fund [bullet] Oppenheimer Strategic Bond Fund
d/b/a Aetna Growth and Income VP [bullet] Portfolio Partners MFS Emerging Equities Portfolio
[bullet] Aetna Index Plus Large Cap VP Portfolio
(formerly Aetna Variable Index Plus Portfolio) [bullet] Portfolio Partners MFS Research
[bullet] Aetna Legacy VP Growth Portfolio
(formerly Aetna Legacy Variable Portfolio) [bullet] Portfolio Partners MFS Value Equity Portfolio
[bullet] Aetna Variable Encore Fund [bullet] Portfolio Partners Scudder International
d/b/a Aetna Money Market VP Growth Portfolio
[bullet] Portfolio Partners T. Rowe Price Growth
Equity Portfolio
</TABLE>
i
<PAGE>
Not all Funds may be available under all Policies or in all jurisdictions. The
Statement of Additional Information ("SAI") for any of the Funds may be
obtained by calling (800) 334-7586.
Replacing existing insurance or supplementing an existing flexible premium
variable life insurance policy with the Policy may not be to your advantage.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS. BOTH THIS PROSPECTUS AND THE UNDERLYING FUND PROSPECTUSES SHOULD BE
READ AND RETAINED FOR FUTURE REFERENCE.
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>
Definitions ....................................................... v
Policy Summary .................................................... 1
The Separate Account .............................................. 1
Charges & Fees .................................................... 2
Charges & Fees Assessed Against Premium ......................... 2
Charges & Fees Assessed Against the Total Account Value.......... 2
Charges & Fees Assessed Against the Separate Account ............ 3
Charges Assessed Against the Underlying Funds ................... 4
Charges Deducted Upon Surrender ................................. 5
Allocation of Premiums ............................................ 6
The Funds ....................................................... 6
Investment Advisers of the Funds ................................ 8
Mixed and Shared Funding; Conflicts of Interest ................. 8
Fund Additions, Deletions or Substitutions ...................... 8
Fixed Account ................................................... 9
Policy Choices .................................................... 10
Premium Payments ................................................ 10
Guaranteed Death Benefit ........................................ 11
No Lapse Coverage Provision ..................................... 11
Death Benefit Options ........................................... 12
Transfers and Allocations to Funding Options .................... 12
Telephone Transfers ............................................. 12
Automated Transfers (Dollar Cost Averaging) ..................... 13
Policy Values ..................................................... 13
Total Account Value ............................................. 13
Accumulation Unit Value ......................................... 14
Maturity Value .................................................. 14
Surrender Value ................................................. 14
Policy Rights ..................................................... 14
Full Surrenders ................................................. 14
Partial Surrenders .............................................. 15
Paid-Up Nonforfeiture Option .................................... 15
Grace Period .................................................... 16
Reinstatement of a Lapsed Policy ................................ 16
Coverage Beyond Maturity ........................................ 16
Right to Defer Payment .......................................... 16
Policy Loans .................................................... 17
Policy Changes .................................................. 17
Right of Policy Examination ..................................... 18
Supplemental Benefits ........................................... 19
Death Benefit ..................................................... 19
Policy Settlement ................................................. 20
Settlement Options .............................................. 20
The Company ....................................................... 21
Directors & Officers .............................................. 21
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Additional Information ..................................................... 24
Reports to Policyowners .................................................. 24
Right to Instruct Voting of Fund Shares .................................. 24
Disregard of Voting Instructions ......................................... 24
State Regulation ......................................................... 25
Legal Matters ............................................................ 25
The Registration Statement ............................................... 25
Distribution of the Policy ............................................... 25
Independent Auditors ..................................................... 26
Year 2000 ................................................................ 26
Tax Matters ................................................................ 26
General .................................................................. 26
Federal Tax Status of the Company ........................................ 26
Life Insurance Qualification ............................................. 27
General Rules ............................................................ 27
Modified Endowment Contracts ............................................. 27
Diversification Standards ................................................ 28
Investor Control ......................................................... 28
Other Tax Considerations ................................................. 29
Withholding .............................................................. 29
Miscellaneous Policy Provisions ............................................ 30
The Policy ............................................................... 30
Payment of Benefits ...................................................... 30
Suicide and Incontestability ............................................. 30
Protection of Proceeds ................................................... 31
Nonparticipation ......................................................... 31
Changes in Owner and Beneficiary; Assignment ............................. 31
Misstatement as to Age and/or Sex ........................................ 31
Performance Reporting and Advertising .................................... 31
Illustrations of Death Benefit, Total Account Values and Surrender Values 32
Financial Statements of the Separate Account ............................... S-1
Financial Statements of the Company ........................................ F-1
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THE PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE
PROTECTION. LIFE INSURANCE IS A LONG-TERM INVESTMENT. POLICYOWNERS SHOULD
CONSIDER THEIR NEED FOR INSURANCE COVERAGE AND THE POLICY'S LONG-TERM
INVESTMENT POTENTIAL. NO CLAIM IS MADE THAT THE POLICY IS ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
iv
<PAGE>
Definitions
Accumulation Unit: A unit used to measure the value of the Policyowner's
interest in each applicable Variable Option. An Accumulation Unit is used to
calculate the value of the variable portion of the Policy before the election
of a Settlement Option.
Additional Premiums: Any premiums paid in addition to Planned Premiums.
Amount at Risk: The Death Benefit divided by 1.0032737, minus the Total Account
Value on that date before computing the monthly deductions for the Cost of
Insurance for this Policy.
Annuitant: A person who receives annuity payments.
Annuity: A series of payments for life or for a definite period.
Attained Age: Issue Age of the Insured increased by the number of Policy Years
elapsed.
Basic Monthly Premium: The amount of premium to assure that the Policy remains
in force for a period of at least 5 Policy Years beginning on the Issue Date or
the Issue Date of an Increase or until the younger Insured's Attained Age 80
even if the Surrender Value is insufficient to satisfy the current Monthly
Deduction.
Company: Aetna Life Insurance and Annuity Company.
Cost of Insurance: A charge related to the Company's expected mortality cost
for Your basic insurance coverage under the Policy, not including any
supplemental benefit provision that You may elect through a Policy rider. It is
equal to the Amount at Risk multiplied by a monthly Cost of Insurance rate.
Death Benefit: The amount described in the Policy Choices section which is
payable on the date of the Second Death, subject to all provisions contained in
the Policy.
Death Benefit Options: Either of the two methods for determining the Death
Benefit.
Fixed Account: A non-variable funding option available on the Policy that
guarantees a minimum interest rate of 4% per year.
Fixed Account Value: The non-loaned portion of the Policy's Total Account Value
attributable to the non-variable portion of the Policy. The Fixed Account Value
is part of the general assets of the Company.
Full Surrender: A Policy right whereby You may terminate the Policy in exchange
for payment of its Full Surrender Value.
Full Surrender Value: Equals the Total Account Value on the date of surrender
less any Surrender Charge, less the Loan Account Value and less any accrued
interest.
v
<PAGE>
Fund(s): One or more of the underlying variable funding options available under
the Policy (as described in this Prospectus). Each of the Funds is an open-end
management investment company (mutual fund) whose shares are purchased by the
Separate Account to fund the benefits provided by the policy.
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 lapse without value at the end of the 61-day period
unless a sufficient payment is received by the Company.
Guaranteed Death Benefit: A provision of the Policy which assures that the
Policy will stay in force, even if the Total Account Value is insufficient to
cover the current Monthly Deductions. The Guaranteed Death Benefit is available
to the younger Insured's Attained Age 80 or to the younger Insured's Attained
Age 100.
Guaranteed Death Benefit to the Younger Insured's Age 100 Premium: The amount
of premium that must be paid to assure that the Policy remains in force until
the younger Insured's Attained Age 100.
Guideline Annual Premium: An amount of annual payment necessary to provide
future benefits under the Policy determined pursuant to federal securities
laws.
Home Office: The Company's principal executive offices at 151 Farmington
Avenue, Hartford, Connecticut 06156.
Insureds: The two persons on whose lives the Policy is issued.
Issue Age: The age of each Insured on his/her birthday nearest to the Policy's
Issue Date.
Issue Date: The effective date on which coverage begins under the Policy.
Loan Account Value: The sum of all unpaid Policy Loans. The amount necessary to
repay Policy Loans in full is the Loan Account Value plus any accrued interest.
Loan Value: Is 90% of the sum of the Fixed Account Value and the Separate
Account Value.
Maturity Date: The Policy Anniversary on which the younger Insured reaches
Attained Age 100.
Maturity Value: The Total Account Value on the Maturity Date, less the amount
necessary to repay any Policy Loans in full, including interest.
Monthly Deduction: A charge assessed against the Total Account Value which
includes the Cost of Insurance, a monthly administrative charge and any charges
for supplemental benefit riders. Monthly Deductions begin on the Issue Date and
occur on each Monthly Deduction Day thereafter.
Monthly Deduction Day: The first Monthly Deduction Day is the Issue Date.
Monthly Deduction Days occur each month thereafter on the same day as the Issue
Date.
Net Premium: The Net Premium is equal to the amount of the premium paid less
the deduction for Premium Load.
vi
<PAGE>
Net Single Premium: The amount required to purchase a guaranteed benefit
assuming the Policy's Total Account Value is allocated to the Fixed Account,
using the Insureds' Attained Ages and premium classes. The Net Single Premium
is determined using guaranteed interest of 4% per year and guaranteed maximum
Cost of Insurance rates.
Partial Surrenders: The amount You can receive in cash by surrendering a part
of the Policy.
Planned Premiums: Premiums We agree to bill.
Policy: The life insurance contract described in this Prospectus, under which
flexible premium payments are permitted and the Death Benefit may and Total
Account Values will vary with the investment performance of the Fund(s).
Policy Loan: The amount received by borrowing from the Total Account Value.
Policyowner: The person or persons having rights to the benefits under the
Policy; referred to as "You".
Policy Year/Policy Anniversary: The first Policy Year is the 12 month period
beginning on the Issue Date. Your Policy Anniversary is equal to the Issue Date
plus 1 Year, 2 Years, etc.
Premium Loads: A charge assessed against the premium to cover certain expenses
associated with start-up and maintenance costs of the Policy.
Second Death: Death of the Surviving Insured.
SEC: Securities and Exchange Commission.
Separate Account: A separate account established by Aetna Life Insurance and
Annuity Company for the purpose of funding the Policy: Variable Life Account B.
Separate Account Value: The portion of the Policy's Total Account Value
attributable to the variable portion of the Policy.
Settlement Option(s): The method by which payment may be made to a beneficiary
due from a Death Benefit or upon the Full Surrender of the Policy.
Specified Amount: The amount chosen by the Policyowner at application and used
in determining the Death Benefit. It may be increased or decreased as described
in this Prospectus.
Surrender Charge: An amount retained by the Company upon the Full or Partial
Surrender of the Policy.
Surrender Value: The amount You can receive in cash by surrendering the Policy.
Surviving Insured:The Insured living after the first death.
Total Account Value: The sum of the Fixed Account Value, the Separate Account
Value and the Loan Account Value.
vii
<PAGE>
Valuation Date: The date and time at which the Accumulation Unit Value of a
variable investment option is calculated. Currently, this 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.
Valuation Period: The period of time from when the Company determines the
Accumulation 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 Account Value: The Accumulation Unit Value for a Variable Option
multiplied by the number of Accumulation Units for that Variable Option
credited to the Policy.
Variable Option: One or more of the variable funding options available under
the Policy (as described in this Prospectus).
We, Our, Us, Company: Aetna Life Insurance and Annuity Company, its successors,
or assigns.
Written Request: A request in writing, in a form satisfactory to Us and
received by Us at the Home Office.
viii
<PAGE>
Policy Summary
The Policy offered in connection with this Prospectus is a flexible premium
variable life insurance policy issued on the lives of two Insureds. The Policy
is intended to provide life insurance and pay a benefit (subject to adjustment
under the Policy's Age and/or Sex, Suicide and Incontestability, and Grace
Period provisions) upon surrender, maturity or Second Death. The Policy is
designed to allow flexible premium payments, Policy Loans, Partial Surrenders,
a choice of two Death Benefit Options and account values that may be either
fixed or variable or a combination of fixed and variable.
Charges and fees will be assessed against premium payments, the Total Account
Value, the Separate Account, the underlying Funds and upon surrender. These
charges and fees are described within this Prospectus.
You must purchase Your variable life insurance policy from a registered
representative. The Policy, the initial application on the Insureds, any
subsequent applications and any riders constitute the entire contract.
At the time of application, You must choose a Death Benefit Option, decide on
the amount of premium We agree to bill and determine how to allocate Net
Premiums. You may elect to supplement the benefits afforded by the Policy
through the addition of riders We make available.
The proceeds payable upon the Second Death is based on the Death Benefit Option
chosen. Under Option 1 the Death Benefit would be the greater of the Specified
Amount or a percentage of the Total Account Value. Under Option 2, the Death
Benefit would be the greater of the Specified Amount plus the Total Account
Value on the date of death or a percentage of the Total Account Value.
Although the Policy is designed to allow flexible premiums, sufficient premiums
must be paid to continue the Policy in force to the Maturity Date or to qualify
for a Guaranteed Death Benefit. Premium reminder notices will be sent for
Planned Premiums and for premiums required to continue the Policy. Should Your
Policy lapse, it may be reinstated.
Net Premiums may be allocated to the Separate Account, the Fixed Account or
both Accounts. Net Premiums allocated to the Separate Account must be allocated
to one or more Variable Options and allocations must be in whole percentages.
The variable portion of the Policy is supported by the Variable Options you
choose and will vary with the investment performance of the associated Fund.
Net Premiums allocated to the Fixed Account will accumulate at rates of
interest We determine. Such rates will not be less than 4% a year.
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 (mutual fund) 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 are delivered with 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 is credited
1
<PAGE>
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 SEC as a unit investment trust
under the Investment Company Act of 1940 and meets the definition of separate
account under the federal securities laws. Such registration does not involve
any approval or disapproval by the Commission of the Separate Account or the
Company's management or investment practices or policies. The Company does not
guarantee the Separate Account's investment performance.
Charges & Fees
Charges & Fees Assessed Against Premium
Premium Load
Before a premium is allocated to the Policy's Total Account Value, a percentage
of the premium is deducted to cover certain expenses associated with start-up
and maintenance costs of the Policy. These expenses include a 9% sales load, a
2.1% state premium tax charge and a 1.25% federal income tax charge. The state
premium tax charge reimburses the Company for taxes it pays to states and
municipalities in which the Policy is sold. The amount of tax assessed by a
state or municipality may be more or less than the charge. The federal income
tax charge reimburses the Company for its increased federal tax liability under
the Federal Tax Laws. The Company has determined that these tax charges are
reasonable in relation to its increased tax liability, but reserves the right
to increase these tax charges due to changes in the Tax Laws that increase the
Company's tax liability. The total Premium Load is equal to 12.35% of each
premium payment.
Charges & Fees Assessed Against the Total Account Value
Charges and fees assessed against the Total Account Value will be deducted from
the Separate Account Value and the Fixed Account Value in the same proportion
that these values bear to the sum of the Fixed Account Value and the Separate
Account Value on the date of the deduction. This is accomplished by liquidating
Accumulation Units and withdrawing the value of the liquidated Accumulation
Units from each Variable Option in the same proportion as their respective
values have to the sum of Your Fixed Account and Separate Account Values. (See
Accumulation Units)
Transfers within Accounts
You may transfer all or part of each Fund to any other Fund or to the Fixed
Account Value at any time. We reserve the right to charge an administrative fee
of $25 for each transfer over 12 transfers per year and limit the number of
Funds you may elect over the lifetime of the Policy to 17.
Monthly Deductions
The Monthly Deduction includes the Cost of Insurance, a Policy fee, a monthly
administrative expense charge and any charges for Supplementary Benefits.
Monthly Deductions begin on the Issue Date, even if the Issue Date is earlier
than the date the application is signed, and occur on each Monthly Deduction
Day thereafter. If the Policy's
2
<PAGE>
issuance is delayed due to underwriting requirements, the charges will not be
assessed until the underwriting is complete and the application for the Policy
is approved. (See Premium Payments)
Cost of Insurance
The Cost of Insurance charge is related to the Company's expected mortality
cost for Your basic insurance coverage under the Policy, not including any
supplemental benefit provisions that You may elect through a Policy rider. The
Cost of Insurance charge is equal to the Amount at Risk multiplied by a monthly
Cost of Insurance rate. The Cost of Insurance rate is variable and is based on
both Insureds' issue ages, sex (where permitted by law), number of Policy Years
elapsed and premium class. Because the Total Account Value and, under certain
circumstances, the Death Benefit of the Policy may vary from month to month,
the Cost of Insurance charge may also vary on each Monthly Deduction Day. In
addition, You should note that the Cost of Insurance charge is related to the
difference between the Death Benefit payable under the Policy and the Total
Account Value of the Policy. An increase in the Total Account Value or a
decrease in the Death Benefit may result in a smaller Cost of Insurance charge
while a decrease in the Total Account Value or an increase in the Death Benefit
may result in a larger cost of insurance charge.
The Cost of Insurance rate for standard risks will not exceed those based on
the 1980 Commissioners Standard Ordinary Mortality Tables (1980 Tables).
Substandard risks will have monthly deductions based on Cost of Insurance rates
which may be higher than those set forth in the 1980 Tables. A table of
guaranteed maximum Cost of Insurance rates per $1,000 of the Amount at Risk
will be included in each Policy. The Monthly Cost of Insurance rates may be
adjusted by Us from time to time. Adjustments will be on a class basis and will
be based on Our estimates for future factors such as mortality, investment
income, expenses, and the length of time Policies stay in force. Any
adjustments will be made on a nondiscriminatory basis.
Policy Fee and Monthly Administrative Expense Charge
The Monthly Deduction amount also includes a Policy fee of $69 a month during
the first Policy Year and $9 a month during subsequent Policy Years (We reserve
the right to charge $74 a month during the first Policy Year and $14 a month
during subsequent Policy Years) and an administrative expense charge of $0.01 a
month per $1,000 of Specified Amount for 20 Policy Years from the Issue Date of
the Policy or increase. (We reserve the right to charge $0.03 a month per
$1,000 of Specified Amount for all Policy Years). These charges are for items
such as underwriting and issuance, premium billing and collection, policy value
calculation, confirmations and periodic reports. The monthly Policy fee and
administrative expense charge is not expected to exceed our actual costs.
Charges for Supplemental Benefits
If You elect any supplemental benefits through adding riders to the Policy, a
supplemental benefits charge will be included in the Monthly Deduction amount.
The amount of the charge will vary depending upon the actual supplemental
benefits selected and is described on each applicable Policy rider.
Charges & Fees Assessed Against the Separate Account
Mortality and Expense Risk Charge
A mortality and expense risk charge will be deducted from the Separate Account
Value to compensate the Company for the aggregate mortality and expense risk
assumed in connection with the Policy. The mortality risk assumed by the
Company is that Insureds, as a group, may live for a shorter period of time
than estimated and that the Company will, therefore, pay a Death Benefit before
collecting a sufficient Cost of Insurance charge. The expense risk assumed is
that expenses incurred in issuing and administering the Policies and operating
the Separate Account will be greater than the administrative charges estimated
for such expenses.
The mortality and expense risk charge will be deducted daily and currently
equals an annual rate of 0.85% of the average daily net assets of the Separate
Account. The Company reserves the right to increase or decrease the
3
<PAGE>
mortality and expense risk charge if it believes that circumstances have
changed so that current charges are no longer appropriate. However, in no event
will the charge exceed 0.90% of average daily net assets on an annual basis. If
the mortality and expense risk charge in effect at any time after the later of
Policy Year 10 or the Younger Insured's Attained Age 65 is less than 0.90%, the
amount of this daily charge at that time will be reduced to 0.00% although the
Company reserves the right to increase the charge thereafter to 0.90%.
The Separate Account is not subject to any taxes. However, if taxes are
assessed against the Separate Account, We reserve the right to assess taxes
against the Separate Account Value.
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, 1997 unless otherwise
indicated:
<TABLE>
<CAPTION>
Investment
Advisory Fees1 Other Expenses Total Fund
(after expense (after expense Annual
reimbursement) reimbursement) Expenses
-------------- -------------- ----------
<S> <C> <C> <C>
Aetna Ascent VP(2)(3) 0.57% 0.23% 0.80%
Aetna Balanced VP, Inc.(3) 0.50% 0.10% 0.60%
Aetna Bond VP(3) 0.40% 0.10% 0.50%
Aetna Crossroads VP(2)(3) 0.55% 0.25% 0.80%
Aetna Growth and Income VP(3) 0.50% 0.09% 0.59%
Aetna Index Plus Large Cap VP(2)(3) 0.32% 0.23% 0.55%
Aetna Legacy VP(2)(3) 0.49% 0.31% 0.80%
Aetna Money Market VP(3) 0.25% 0.10% 0.35%
Fidelity VIP Equity-Income Portfolio(4) 0.50% 0.08% 0.58%
Fidelity VIP II Contrafund Portfolio(4) 0.60% 0.11% 0.71%
Janus Aspen Aggressive Growth Portfolio(5) 0.73% 0.03% 0.76%
Janus Aspen Balanced Portfolio(5) 0.76% 0.07% 0.83%
Janus Aspen Growth Portfolio(5) 0.65% 0.05% 0.70%
Janus Aspen Worldwide Growth Portfolio(5) 0.66% 0.08% 0.74%
Oppenheimer Global Securities Fund 0.70% 0.06% 0.76%
Oppenheimer Strategic Bond Fund 0.75% 0.08% 0.83%
Portfolio Partners MFS Emerging Equities Portfolio(6)(7) 0.68% 0.13% 0.81%
Portfolio Partners MFS Research Growth Portfolio(6)(7) 0.70% 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%
</TABLE>
(1) Certain of the 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.
(2) Effective May 1, 1998, the Portfolios' adviser has agreed to waive a
portion of its fee or to reimburse certain expenses so that aggregate
expenses do not exceed the total expenses shown above. These fee
waiver/expense reimbursement arrangements will increase total return and
may be modified or terminated at any time.
Without these fee waiver/expense reimbursement arrangements Management Fees
and Total Expenses for the Portfolio would be higher. Management Fees and
Total Expenses would be as follows: 0.60% and 0.83% for Ascent VP; 0.60% and
0.85% for Crossroads VP; 0.35% and 0.58% for Index Plus Large Cap VP and
0.60% and 0.91% for Legacy VP.
(3) Prior to May 1, 1998, the investment adviser provided administrative
services to the Fund and assumed the Fund's ordinary recurring direct
costs under an Administrative Services Agreement. Effective May 1, 1998,
the investment adviser will continue to provide administrative services to
the Fund but will no longer assume all of the Fund's ordinary recurring
direct costs under the Administrative Services Agreement. The
Administrative Fee is 0.075% on the first $5 billion in assets and 0.050%
on all assets over $5 billion. The "Other Expenses" shown are not based on
actual figures for the year ended December 31, 1997, but reflect the fee
payable under the new Administrative Services Agreement and estimates of
the Fund's ordinary recurring direct costs.
4
<PAGE>
(4) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into
arrangements with their custodian whereby credits realized, as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses would have been 0.57% for
Equity-Income Portfolio and 0.68% for Contrafund Portfolio.
(5) Management fees for Aggressive Growth, Balanced, Growth and Worldwide
Growth Portfolios reflect a reduced fee schedule effective July 1, 1997.
The management fees shown above are based on the new rate applied to net
assets as of December 31, 1997. Other expenses are based on gross expenses
of the Shares before expense offset arrangements for the fiscal year ended
December 31, 1997. 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 Operating Expenses for the Shares
would have been 0.74%, 0.04%, and 0.78% for Aggressive Growth Portfolio;
0.77%, 0.06%, and 0.83% for Balanced Portfolio; 0.74%, 0.04%, and 0.78%
for Growth Portfolio; and 0.72%, 0.09%, and 0.81% 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 Trustees.
(6) Each Portfolio's aggregate expenses are contractually limited to the
advisory and administrative fees disclosed above. The investment adviser
will not seek an increase in its advisory or administrative fees at any
time prior to May 1, 1999.
(7) The advisory fee is 0.70% of the first $500 million in assets and 0.65% on
the excess.
For further details on each Fund's expenses please refer to that Fund's
prospectus. Additional copies of each Fund's prospectus and the Statement of
Additional Information for each Fund may be obtained free of charge by calling
(800) 334-7586.
Charges Deducted Upon Surrender
If, during the first 20 Policy Years, the Policy is totally surrendered or
lapses, or a Partial Surrender reduces the Specified Amount, a Surrender Charge
will be deducted from the Total Account Value. This charge is imposed in part
to recoup distribution expenses and in part to recover certain first year
administrative costs. The maximum Surrender Charges are included in each Policy
and are in compliance with each state's nonforfeiture law.
The maximum Surrender Charge, as specified in the Policy, is based on the
Specified Amount. It also depends on the Issue Age, risk classification and, in
most states, sex of the Insureds.
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 effective on the Issue Date for the increase and remain in effect for twenty
years. In general, the additional Surrender Charge will be calculated assuming
that all premium payments received after the increase are proportionately
allocated as payments on the initial Specified Amount and on the incremental
increase in the Specified Amount. Supplemental Policy Specifications will be
sent to You once the change is complete and will reflect the maximum additional
Surrender Charge in the Table of Maximum Surrender Charges.
Any decrease in the Specified Amount will not reduce the original or any
additional Surrender Charge.
Any Surrender Charge imposed is based upon the premium actually paid under the
Policy and will comply with SEC rules for maximum sales loads. This will vary
with the Issue Ages, premium class, sex (where allowed), Specified Amount of
insurance and the existence of certain supplementary benefits. For the
illustration contained in this Prospectus, using a Planned Premium of $2,688,
the Surrender Charge would be, at all times, limited to the lesser of (a) or
(b) where (a) is $4,914 (180% of the Guideline Annual Premium for the Policy)
minus 9% of premium previously paid and (b) is 41% of premium previously paid.
At all times during the first 2 Policy Years, the Surrender Charge is
additionally limited to 20% of premium paid up to $2,730 (the Guideline Annual
Premium for the Policy), plus 1% of premium up to $5,460 (200% of the Guideline
Annual Premium for the Policy). The Guideline Annual Premium for Your Policy
will be set forth in the Policy Specifications.
The illustration contained in this Prospectus shows Surrender Charges that have
been limited based on the illustrated premium.
5
<PAGE>
Surrender Charges on Full and Partial Surrenders
All applicable surrender Charges are imposed on Full surrenders.
A proportional percentage of all Surrender Charges is imposed on Partial
Surrenders. The proportional percentage is the amount of the net Partial
Surrender divided by the sum of the Separate Account Value and the Fixed
Account Value less full Surrender Charges. When a Partial Surrender is made,
any applicable remaining Surrender Charges will be reduced in the same
proportion. A transaction charge of $25 will be made against the Separate
Account for each Partial Surrender. (See Partial Surrenders)
Allocation of Premiums
You may allocate all or a part of Your Net Premiums to the Funds currently
available through the Separate Account in connection with the Policy and/or You
may allocate all or a part of Your Net Premiums to the Fixed Account.
The Funds
The Separate Account currently invests in shares of the Funds listed below. Net
Premiums applied to the Separate Account will be invested in the Funds in
accordance with the selection made by the Policyowner. Funds may be added or
withdrawn as permitted by applicable law. We reserve the right to limit the
total number of Funds You may elect to 17 over the lifetime of the Policy.
Shares of the Funds are not sold directly to the general public. Each of the
Funds is available only through the purchase of variable annuities or variable
life insurance policies. (See Mixed and Shared Funding)
The investment results of the Funds, whose investment objectives are described
below, are likely to differ significantly. There is no assurance that any of
the Funds will achieve their respective investment objectives. Investment in
some of the Funds involves special risks, which are described in their
respective prospectuses. You should read the prospectuses for the Funds and
consider carefully, and on a continuing basis, which Fund or combination of
Funds is best suited to Your long-term investment objectives. Except where
otherwise noted, all of the Funds are diversified, as defined in the Investment
Company Act of 1940.
[bullet] Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund,
Inc.) seeks to maximize investment return, consistent with reasonable
safety of principal by investing in a diversified portfolio of one or
more of the following asset classes: stocks, bonds and cash
equivalents, based on the investment adviser's judgment of which of
those sectors or mix thereof offers the best investment prospects.(1)
[bullet] Aetna Income Shares d/b/a Aetna Bond VP seeks to maximize total
return, consistent with reasonable risk, through investments in a
diversified portfolio consisting primarily of debt securities.(1)
[bullet] Aetna Variable Fund d/b/a Aetna Growth and Income VP seeks to maximize
total return through investments in a diversified portfolio of common
stocks and securities convertible into common stock.(1)
[bullet] Aetna Variable Encore Fund d/b/a Aetna Money Market VP seeks to
provide high current return consistent with preservation of capital
and liquidity through investment in high-quality money market
instruments. An investment in the Fund is neither insured nor
guaranteed by the U.S. Government.(1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Ascent VP (formerly Aetna
Ascent Variable Portfolio) seeks to provide capital appreciation. The
Portfolio is designed for investors who have an investment horizon
exceeding 15 years and who have a high level of risk tolerance. (1)
[bullet] Aetna Generation Portfolios, Inc.--Aetna Crossroads VP (formerly Aetna
Crossroads Variable Portfolio) seeks to provide total return (i.e.,
income and capital appreciation, both realized and unrealized). The
Portfolio is designed for investors who have an investment horizon
exceeding 10 years and who have a moderate level of risk tolerance.(1)
6
<PAGE>
[bullet] Aetna Generation Portfolios, Inc.--Aetna Legacy VP (formerly Aetna
Legacy Variable Portfolio) seeks to provide total return consistent
with preservation of capital. The Portfolio is designed for investors
who have an investment horizon exceeding five years and who have a low
level of risk tolerance.(1)
[bullet] Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP
(formerly Aetna Variable Index Plus Portfolio) seeks to outperform the
total return performance of publicly traded common stocks represented
by the S&P 500 Composite Stock Price Index.(1)
[bullet] Fidelity Investments Variable Insurance Products Fund--Equity-Income
Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In selecting investments, the fund
also considers the potential for capital appreciation.(2)
[bullet] Fidelity Investments Variable Insurance Products Fund II--Contrafund
Portfolio seeks maximum total return over the long term by investing
mainly in securities of companies whose value the investment adviser
believes is not fully recognized by the public.(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 31, 1997 included companies with capitalizations between
approximately $213 million and $13.7 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--Growth Portfolio seeks long-term growth of capital
in a manner consistent with the preservation of capital. The Portfolio
pursues its investment objective by investing primarily in common
stocks of issuers of any size. This Portfolio generally invests in
larger, more established issuers.(3)
[bullet] Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth
of capital in a manner consistent with the preservation of capital.
The Portfolio pursues its investment objective primarily through
investments in common stocks of foreign and domestic issuers.(3)
[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 considered to have
appreciation possibiities but which may be considered to be
speculative.(4)
[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) securities of the U.S.
Government and its agencies and instrumentalities ("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. Current income is not an objective.(4)
[bullet] Portfolio Partners, Inc. --MFS Emerging Equities Portfolio seeks to
provide long-term growth of capital. Dividend and interest income from
portfolio securities, if any, is incidental to the Portfolio's
investment objective.(5)(a)
[bullet] Portfolio Partners, Inc.--MFS Research Growth Portfolio seeks
long-term growth of capital and future income.(5)(a)
7
<PAGE>
[bullet] Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation. Dividend income, if any, is a consideration incidental
to the Portfolio's objective of capital appreciation. (5)(a)
[bullet] Portfolio Partners, Inc.--Scudder International Growth Portfolio seeks
long-term growth of capital primarily through a diversified portfolio
of marketable foreign equity securities. (5)(b)
[bullet] Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term growth of capital and, secondarily, to increase dividend
income by investing primarily in common stocks of well established
growth companies. (5)(c)
Investment Advisers for each of the Funds:
(1)Aeltus Investment Management, Inc.
(2)Fidelity Management & Research Company
(3)Janus Capital Corporation
(4)OppenheimerFunds, Inc.
(5)Aetna Life Insurance and Annuity Company (Adviser);
(a)Massachusetts Financial Services Company ("MFS")(Subadviser)
(b)Scudder Kemper Investments, Inc. (Subadviser)
(c)T. Rowe Price Associates, Inc. (Subadviser)
Some of the above Funds may use instruments known as derivatives as part of
their investment strategies, as described in their respective prospectuses. The
use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of
leverage in connection with derivatives can also increase risk of losses. See
the prospectus for the Fund 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; Conflicts of Interest
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 Policyowners, 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.
Fund Additions, Deletions or Substitutions
The Company reserves the right, subject to compliance with appropriate state
and federal laws, to add additional Fund(s) or cease to make Fund shares
available under the Policy prospectively. The Company may substitute shares of
one Fund for shares of another Fund if, among other things, (a) it is
determined that a Fund no longer suits the purpose of the Policy due to a
change in its investment objectives or restrictions; (b) the shares of a Fund
are no longer available for investment; or (c) in the Company's view, it has
become inappropriate to continue investing in the shares of the Fund.
Substitution may be made with respect to both existing investments and the
investment of any future premium payments. However, no substitution of
securities will be made without prior
8
<PAGE>
notice to Policyowners, and without prior approval of the SEC or such other
regulatory authorities as may be necessary, all to the extent required and
permitted by the Investment Company Act of 1940 or other applicable law.
Fixed Account
Interests in the Fixed Account have not been registered with the SEC in
reliance upon exemptions under the Securities Act of 1933, as amended. However,
disclosure in this Prospectus regarding the Fixed Account may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of the statements. Disclosure in this
Prospectus relating to the Fixed Account has not been reviewed by the SEC.
The Fixed Account is a fixed funding option available under the Policy. The
Company guarantees a minimum interest rate on amounts in the Fixed Account and
assumes the risk of investment gain or loss. The investment gain or loss of the
Separate Account or any of the Funds does not affect the Fixed Account Value.
The Fixed Account is secured by the general assets of the Company. The general
assets of the Company include all assets of the Company other than those held
in separate accounts sponsored by the Company or its affiliates. The Company
will invest the assets of the Fixed Account in those assets chosen by the
Company, as allowed by applicable law. Investment income of such Fixed Account
assets will be allocated by the Company between itself and those policies
participating in the Fixed Account.
The Company guarantees that, at any time, the Fixed Account Value will not be
less than the amount of the Net Premiums allocated to the Fixed Account, plus
interest at an annual rate of not less than 4%, less the amount of any Partial
Surrenders, Policy Loans or Monthly Deductions. If the interest rate credited
is greater than 4%, additional guaranteed excess interest of .85% will be
credited to the Fixed Account Value beginning in Policy Year 11 or, if later,
at the younger Insured's Attained Age 65.
9
<PAGE>
Policy Choices
Premium Payments
The Policy is a flexible premium life insurance policy in that the Policyowner
has the right to decide when to make premium payments and in what amounts. Your
Policy provides various premium levels at which You may make payments. They are
the Planned Premium, Basic Monthly Premium and the Guaranteed Death Benefit to
the Younger Insured's Attained Age 100 Premium. The amount of each of Your
premium levels will be shown in Your Policy. Alternatively, You make any other
premium payments You wish as Additional Premiums. (See Guaranteed Death
Benefit)
Payment of the Basic Monthly Premium, Guaranteed Death Benefit to the Younger
Insured's Age 100 Premium, Planned Premiums, or Additional Premiums in any
amount will not, except as noted below, guarantee that Your policy will remain
in force. Conversely, failure to pay Basic Monthly Premiums, Planned Premiums
or Additional Premiums will not necessarily cause Your Policy to lapse. Not
paying Your applicable Guaranteed Death Benefit premium will, however, cause
the Guaranteed Death Benefit to terminate and may cause the No Lapse Coverage
not to be applicable. (See Guaranteed Death Benefit and No Lapse Coverage)
Planned Premiums are those premiums You request and We agree to bill on an
annual, semiannual or quarterly basis. Pre-authorized automatic monthly check
payments may also be arranged. Planned Premium due dates are measured from the
Issue Date. The Planned Premium is also due on the Issue Date. You may request
as Your Planned Premium for Your Policy the Basic Monthly Premium or the
Guaranteed Death Benefit to the Younger Insured's Attained Age 100 Premium.
Currently, there is no minimum Planned Premium.
You may increase Your Planned Premium at any time by submitting a Written
Request to us or by paying Additional Premium. We may require evidence of
insurability if the Additional Premium or the new Planned Premium during the
current Policy Year would increase the difference between the Death Benefit and
the Total Account Value. If satisfactory evidence of insurability is requested
and not provided, We will refund the increase in premium without interest and
without participation of such amounts in the Funds.
In no event may the total of all premiums paid exceed the then-current maximum
premium limitations established by federal law for a Policy to qualify as life
insurance. (See "Tax Matters") 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.
Premiums paid in excess of the Planned Premium or an increase in Your Planned
Premium may cause the Policy to be classified as a "Modified Endowment
Contract" for federal income tax purposes. (See Tax Matters)
At the time You apply for a Policy, if You have paid at least the amount equal
to Your Basic Monthly Premium prior to the Issue Date and have answered
favorably certain questions relating to each Insured's health, a temporary
insurance agreement (where approved for use and subject to certain maximums)
will be provided.
Under limited circumstances, We may backdate a Policy, upon request, by
assigning an Issue Date earlier than the date the application is signed but no
earlier than six months prior to state approval of the Policy. Backdating may
be desirable, for example, so that You can purchase a particular Policy
Specified Amount for lower Cost of Insurance Rates based on a younger insurance
age. For a backdated Policy, You must pay the premium for the period between
the Issue Date and the date the application is received at the Home Office.
Backdating of Your
10
<PAGE>
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 Accumulation Units)
The initial premium equal to at least your Basic Monthly Premium should be made
by check or money order and made payable to the Company and given to the agent
with Your application. 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. All Your premium payments, including Your first
premium payment, will be allocated as You have directed, and amounts allocated
to the Funds will be credited to your Policy at the Accumulation Unit Value
computed on the Valuation Date following receipt of your premium at the Home
Office. (See Right of Policy Examination)
You may reallocate Your future premium payments at any time by Your request to
us. Allocations must be changed in whole percentages. The change will be
effective as of the date of the next premium payment after You notify Us. We
will send You confirmation of the change. (See Transfers and Allocations to
Funding Options)
Guaranteed Death Benefit
The Guaranteed Death Benefit provision assures that, the Policy will not lapse
if certain premiums are paid when due. As long as there are no outstanding
Policy Loans, have been no Partial Surrenders and all the Guaranteed Death
Benefit premiums due since the Issue Date are paid on or before each Monthly
Deduction Day, the Policy will not lapse even if the Surrender Value is
insufficient to satisfy the current Monthly Deductions. If on a Monthly
Deduction Day, all or part of the applicable Guaranteed Death Benefit premiums
have not been paid, You will have 61 days from the Monthly Deduction Day to pay
the amount of the applicable Guaranteed Death Benefit premiums due. Failure to
do so will cause the corresponding Guaranteed Death benefit to terminate. The
Guaranteed Death Benefit is available to the younger Insured's Attained Age 80
or to the younger Insured's Attained Age 100.
The Guaranteed Death Benefit to the Younger Insured's Attained Age 80 assures
that Your Policy will not lapse prior to the later of the younger Insured's
Attained Age 80 or 10 Policy Years from the Issue Date. The premium for this
Guaranteed Death Benefit is the Basic Monthly Premium.
The Guaranteed Death Benefit to the Younger Insured's Attained Age 100 assures
that Your Policy will not lapse prior to the younger Insured's Attained Age
100. The premium for this Guaranteed Death Benefit is the Guaranteed Death
Benefit to the Younger Insured's Age 100 Premium.
If the Guaranteed Death Benefit to the Younger Insured's Attained Age 100 has
terminated because sufficient payments have not been made, We will determine if
the condition for the Guaranteed Death Benefit to the Younger Insured's
Attained Age 80 has been satisfied. If satisfied, the Guaranteed Death Benefit
Provision to the Younger Insured's Age 100 will terminate and the conditions
set forth in the Guaranteed Death Benefit to the Younger Insured's Age 80
provision will be applicable.
The Guaranteed Death Benefit may not be available in all circumstances and is
only available in those states where it is approved. The Guaranteed Death
Benefit to the Younger Insured's Attained Age 80 and the Guaranteed Death
Benefit to the Younger Insured's Age 100 are not available to Policies issued in
the Commonwealth of Massachusetts. Once terminated, the Guaranteed Death Benefit
to the Younger Insured's Attained Age 80 and the Guaranteed Death Benefit to the
Younger Insured's Attained Age 100 provisions cannot be reinstated.
No Lapse Coverage Provision
The Policy will not terminate within the 5-year period after its Issue Date or
the Issue Date of any increase if sufficient premiums have been paid. The
Policy will not terminate if on any Monthly Deduction Day within that period
the sum of premiums paid within that period equals or exceeds (a) the sum of
the Basic Monthly Premiums for each Policy Month from the start of the period,
including the current month; plus (b) any Partial Surrenders; plus (c) any
increase in the Loan Account Value since the start of the period.
11
<PAGE>
If on any Monthly Deduction Day within the 5-year period the sum of premiums
paid is less than the sum of items (a), (b) and (c) above and the Total Account
Value is less than the Monthly Deduction the Policy will enter the Grace
Period. Additional premiums payments must be paid to prevent the termination of
the Policy. (See Grace Period)
After the 5-year period expires, on each Monthly Deduction Day, the Surrender
Value must be greater than the Monthly Deduction to prevent activation of the
Grace Period provision of the Policy, unless a Guaranteed Death Benefit is in
force. (See Guaranteed Death Benefit and Grace Period)
This provision is available in all states.
Death Benefit Options
At the time of purchase, You must choose between the two available Death
Benefit Options. The amount payable upon the Second Death is based upon one of
the following Death Benefit Options You choose.
Under Option 1 the Death Benefit will be the greater of: (a) the Specified
Amount or (b) a percentage of the Total Account Value. This Percentage is 1
divided by the Net Single Premium per dollar of Specified Amount.
Under Option 2 the Death Benefit will be the greater of: (a) the Specified
Amount plus the Total Account Value on the date of death or (b) a percentage of
the Total Account Value. This percentage is 1 divided by the Net Single Premium
per dollar of Specified Amount. Option 2 provides a varying Death Benefit which
increases or decreases over time, depending upon the amount of premium paid and
the investment performance of the Fund(s) You choose.
Under both Option 1 and Option 2, the Death Benefit may be affected by Partial
Surrenders. The Death Benefit payable under either Option will be reduced by
the amount necessary to repay the Loan Account Value in full and, if the Policy
is within the Grace Period, any payment required to keep the Policy in force.
(See Partial Surrenders)
Transfers and Allocations to Funding Options
At any time prior to the Maturity Date, You may transfer all or part of each
Fund Account Value to any other Fund or to the Fixed Account Value at any time.
Funds may be transferred between the Funds or from the Funds to the Fixed
Account. We reserve the right to charge an administrative fee of $25 for more
than 12 transfers per year.
Within the forty-five days following the Policy Anniversary, You may request a
transfer of a portion of the Fixed Account Value to one or more of the Funds.
This type of transfer is allowed only once within this forty-five day period,
and We must receive Your request at the Home Office within the forty-five day
period. The transfer will be effective on the Valuation Date that Your request
is received by the Home Office. The amount of such transfer cannot exceed 25%
of the Fixed Account Value.
Accumulation Units for each Variable Option will be added to or subtracted from
Your Separate Account Value, based on each Variable Option's Accumulation Unit
Value computed on the next Valuation Date following our receipt of your request
for transfer. A dollar amount will be added to or subtracted from the Fixed
Account Value according to the terms of Your request for transfer. You should
carefully consider current market conditions and each Fund's investment
policies and related risks before allocating money to the Funds. (See Premium
Payments and Accumulation Units)
Telephone Transfers
You may request a transfer of Account Values either in writing or by telephone.
In order to make telephone transfers, a written telephone transfer
authorization form must be completed by the Policyowner and returned to the
Company at its Home Office. Once the form is processed, the Policyowner may
request a transfer by telephoning the Company at (800) 334-7586. All transfers
must be in accordance with the terms of the Policy.
Transfer instructions are currently accepted on each Valuation Date. Once
instructions have been accepted, they may not be rescinded; however, new
telephone instructions may be given on the following day. If the transfer
instructions are not in good order, the Company will not execute the transfer
and You will be notified.
12
<PAGE>
We will use reasonable procedures, such as requiring identifying information
from callers, recording telephone instructions, and providing written
confirmation of transactions, in order to confirm that telephone instructions
are genuine. Any telephone instructions which We reasonably believe to be
genuine will be Your responsibility, including losses arising from any errors
in the communication of instructions. As a result of this procedure, the
Policyowner will bear the risk of loss. If the Company does not use reasonable
procedures, as described above, it may be liable for losses due to unauthorized
instructions.
Automated Transfers (Dollar Cost Averaging)
Dollar Cost Averaging describes a system of investing a uniform sum of money at
regular intervals over an extended period of time. Dollar Cost Averaging is
based on the economic fact that buying a security with a constant sum of money
at fixed intervals results in acquiring more of the item when prices are low
and less of it when prices are high.
You may establish automated transfers of Fund Account Values on a monthly or
quarterly basis from the Aetna Money Market VP to any other Fund through
Written Request or other method acceptable to the Company. Dollar Cost
Averaging is not permitted to or from the Fixed Account. You must have a
minimum of $5,000 allocated to the Aetna Money Market VP in order to enroll in
the Dollar Cost Averaging program. The minimum automated transfer amount is $50
per month. There is no additional charge for the program. You may start or stop
participation in the Dollar Cost Averaging program at any time, but You must
give the Company at least 30 days' notice to change any automated transfer
instructions that are currently in place. The Company reserves the right to
suspend or modify automated transfer privileges at any time.
Before participating in the Dollar Cost Averaging program, You should consider
the risks involved in switching between investments available under the Policy.
Dollar Cost Averaging requires regular investments regardless of fluctuating
price levels, and does not guarantee profits or prevent losses. Therefore, You
should carefully consider market conditions and each Fund's investment policies
and related risks before electing to participate in the Dollar Cost Averaging
Program.
Policy Values
Total Account Value
Once Your Policy has been issued, each Net Premium allocated to a Variable
Option of the Separate Account is credited in the form of Accumulation Units of
the Variable Option based on that Variable Option's Accumulation Unit Value.
Each Net Premium will be credited to Your Policy at the Accumulation Unit
Value(s) computed on the next Valuation Date following our receipt of the
premium at Our Home Office following the Issue Date of the Policy. The number
of Accumulation Units credited is determined by dividing the Net Premium by the
value of an Accumulation Unit computed after the premium is received and
accepted by Us. Since each Variable Option has a unique Accumulation Unit
Value, if You have elected a combination of Variable Options You will have
Accumulation Units credited to Your Separate Account Value for each Variable
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
Variable Option by its appropriate current Accumulation Unit Value; (b) if You
have elected a combination of Variable Options, totaling the resulting value;
and (c) adding any values attributable to the Fixed Account and any values
attributable to the Loan Account Value.
13
<PAGE>
The number of Accumulation Units credited to a Policy will not be changed by
any subsequent change in the value of an Accumulation Unit. The number is
increased by subsequent contributions to or transfers into a Variable Option,
and decreased by charges and withdrawals from that Variable Option.
The Fixed Account Value reflects amounts allocated to the general account
through payment of premiums or transfers from the Separate Account. Amounts
allocated to the Fixed Account Value are guaranteed; however there is no
assurance that the Separate Account Value of the Policy will equal or exceed
the Net Premiums paid and allocated to the Separate Account.
You will be advised at least annually as to the number of Accumulation Units
which remain credited to the Policy, the current Accumulation Unit Values, the
Separate Account Value, the Fixed Account Value, and the Total Account Value.
Accumulation Unit Value
The value of an Accumulation Unit is determined on the Valuation Date. A
Valuation Period is the time from one Valuation Date to the next Valuation
Date. 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 Variable Option. The net investment factor equals the net
investment rate plus 1.0. The net investment rate is determined separately for
each Variable Option as follows:
The net investment rate equals (a) the net assets of the Variable Option held
in Variable Life Account B at the end of a Valuation Period; minus (b) the net
assets of the Variable Option held in Variable Life Account B at the beginning
of that Valuation Period, adjusted by any taxes or provisions for taxes
attributable to the operation of Variable Life Account B; divided by (c) the
value of the Variable Option's Accumulation Units held in Variable Life Account
B at the beginning of the Valuation Period; minus (d) a daily charge for
mortality and expense risk expenses.
Maturity Value
The Maturity Value of the Policy is the Total Account Value less the Loan
Account Value less any unpaid accrued interest.
Surrender Value
The Surrender Value of the 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 described in this Prospectus or in any
manner to which We agree and that We make available. (See Charges Deducted Upon
Surrender)
Policy Rights
Full Surrenders
By Written Request, You may surrender the Policy for its Full Surrender Value
at any time before the Maturity Date while one or both Insureds is alive. All
insurance coverage under the Policy will end on the date of the Full Surrender.
The Full Surrender Value will equal (a) the Total Account Value on the date of
surrender; less (b) the Surrender Charge; less (c) the Loan Account Value plus
any accrued interest. We will require return of the Policy. (See Right to Defer
Payment, Policy Settlement and Payment of Benefits)
14
<PAGE>
Partial Surrenders
By Written Request, You may, at any time after the expiration of the Right of
Policy Examination, partially surrender the Policy. A Partial Surrender Charge
will be deducted from the amount of the Total Account Value which is
surrendered. The minimum amount of any Partial Surrender after any Partial
Surrender charge is applied is $500. We may also charge an administrative fee
of $25.
The Partial Surrender charge will be in proportion to the Surrender Charge that
would apply to a Full Surrender. The proportion will be computed as the amount
of the net Partial Surrender divided by the sum of the Fixed Account Value and
the Separate Account Value less the Full Surrender Charge. When the Partial
Surrender is made, any future Surrender Charge will be reduced in the same
proportion.
The Partial Surrender Charge, and the net amount surrendered will reduce the
Policy's values as described in the Charges Deducted Upon Surrender section.
If the Death Benefit Option for the Policy is Option 1, 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.
However, We will not allow a Partial Surrender if the Specified Amount will be
reduced below the minimum Specified Amount of $250,000.
If the Death Benefit Option for the Policy is Option 2, a Partial Surrender
will reduce the Total Account Value and the Death Benefit. The Specified Amount
will not be reduced.
If the Death Benefit for the Policy is determined as the Total Account Value
divided by the Net Single Premium, the Partial Surrender may not reduce the
Specified Amount.
A reduction in the Specified Amount will cause a reduction in the required
premiums for the Guaranteed Death Benefit. The future premium required to
maintain the Guaranteed Death Benefit will be based on the new Specified
Amount.
If, at the time of a Partial Surrender, Your Total Account Value is
attributable to the Separate Account and the Fixed Account, the Surrender
Charge, the transaction charge and the amount paid to You upon the Partial
Surrender will be deducted from the Separate Account Value and the Fixed
Account Value in the same proportion as these values bear to the sum of the
Fixed Account Value and the Separate Account Value on the date of the
deduction. This is accomplished by liquidating Accumulation Units and
withdrawing the value of the liquidated Accumulation Units from each Variable
Option in the same proportion as their respective values have to the sum of
Your Fixed Account and Separate Account Values. (See Right to Defer Payment,
Policy Changes and Payment of Benefits)
Paid-Up Nonforfeiture Option
By Written Request, You may elect, at any time before the Maturity Date, to
continue the Policy as paid-up life insurance.
The Surrender Value will be applied as a Net Single Premium to determine the
Specified Amount of the paid-up insurance. The cost of the paid-up insurance
will be based on the guaranteed maximum Cost of Insurance Rates in the Policy
and an interest rate of 4.0% compounded annually. However, the Specified Amount
of the paid-up insurance cannot exceed the Death Benefit under the Policy as of
the effective date of the paid-up insurance. Any excess Surrender Value will be
refunded to You.
Full and Partial Surrenders and Policy Loans, as described in this Prospectus,
will be allowed if the Policy is continued in force as paid up insurance.
Proceeds payable under this option upon death or maturity will equal the
Specified Amount less debt of the paid-up insurance. (See Tax Matters)
15
<PAGE>
Grace Period
If the Surrender Value is insufficient to satisfy a Monthly Deduction on the
Monthly Deduction Day, We will allow You 61 days of grace for payment of an
amount sufficient to continue coverage. We may require payment of the amount
necessary to keep the Policy in force for the current month plus two additional
months.
Written notice will be mailed to Your last known address, according to Our
records, not less than 61 days before termination of the Policy. This notice
will also be mailed to the last known address of any assignee of record.
During the days of grace the Policy will stay in force. If the Second Death
occurs during the days of grace, We will deduct an amount required to keep the
Policy in force from the Death Benefit.
If payment is not made within 61 days after the Monthly Deduction Day, the
Policy will terminate without value at the end of the Grace Period. The
termination will be effective on the Monthly Deduction Day for the first unpaid
Monthly Deduction.
Reinstatement of a Lapsed Policy
If the Policy terminates as provided in its Grace Period benefit, it may be
reinstated. To reinstate the Policy, the following conditions must be met:
- -- The Policy has not been fully surrendered.
- -- You must apply for reinstatement within 5 years after the date of
termination and before the Maturity Date.
- -- We must receive evidence of insurability, satisfactory to Us, on each
Insured.
- -- We must receive a premium payment sufficient to keep the Policy in force for
the current month plus two additional months.
Supplemental Benefits will be reinstated only with Our consent. (See Grace
Period and Premium Payments)
Coverage Beyond Maturity
You may elect to continue coverage beyond the Maturity Date provided the Policy
is in force on the Maturity Date. If elected, on the Maturity Date the Separate
Account Value of the Policy will be transferred to the Fixed Account where it
will continue to earn interest as described in the Policy. Monthly Deduction
Amounts will continue to be deducted, with a Cost of Insurance rate equal to
zero. Only payments required to keep the policy in force will be accepted
beyond the Maturity Date.
The Policy may be subject to certain adverse tax consequences when continued
beyond the Maturity Date.
All other rights and benefits as described in the Policy will be available
before the Second Death.
Coverage Beyond Maturity may not be available in all states.
Right to Defer Payment
Payments of any Separate Account Value will be made within 7 days after Our
receipt of Your Written Request. However, the Company reserves the right to
suspend or postpone the date of any payment of any benefit or values for any
Valuation Period (1) when the New York Stock Exchange is closed (except
holidays or weekends); (2) when trading on the Exchange is restricted; (3) when
an emergency exists as determined by the SEC so that disposal of the securities
held in the Funds is not reasonably practicable or it is not reasonably
practicable to determine the value of the Funds' net assets; or (4) during any
other period when the SEC, by order, so permits for the protection of security
holders. For payment from the Separate Account in such instances, We may defer
payment of Full Surrender and Partial Surrender Values, any Death Benefit in
excess of the current Specified Amount, and any portion of the Loan Value.
Payment of any Fixed Account Value may be deferred for up to six months, except
when used to pay amounts
due Us.
16
<PAGE>
Policy Loans
We will grant loans at any time after the expiration of the Right of Policy
Examination and before the Maturity Date. The amount of the loan will not be
more than the Loan Value. Unless otherwise required by state law, the Loan
Value for this Policy 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.
The amount of the loan will be transferred out of the Fixed Account and
Separate Account Values in proportion to the value of the Fixed Account and
each Variable Option. The loan amount increases the Loan Account Value. The
loan may be repaid in full or in part at any time prior to the Maturity Date as
long as this Policy is in force and one or both Insureds is alive. The amount
necessary to repay all loans in full is the Loan Account Value plus any accrued
interest. Loan repayments will be allocated to the Fixed Account Value and the
Separate Account Value in the same proportion in which the loan was taken. The
Loan Account Value will be reduced by payments You identify as loan repayments.
All other payments will be considered premium payments.
The amount of interest earned on the Loan Account Value and the amount of
interest charged to You on a loan depends on whether the loan is considered
preferred. A preferred loan is a loan beginning in the 11th Policy Year or upon
the younger Insured's Attained Age 65, whichever is later, and on each Policy
Anniversary thereafter, that is taken from the Separate Account Value. The
interest rate charged on the preferred loan and the interest rate credited to
the Loan Account Value is 4%.
For all other loans, the loan interest rate charged is 8%. The Loan Account
Value will earn interest at the guaranteed rate of 4%; however, We may credit
interest in excess of this rate.
Interest is due and payable on the next Policy Anniversary, the date this
Policy ends or upon full repayment of the Loan Account Value. Any interest not
paid when due will be added to the Loan Account Value on the Policy Anniversary
and will itself bear interest on the same terms.
An outstanding loan amount will decrease the Surrender Value available under
the Policy. For example, if a Policy has a Surrender Value of $10,000, You may
take a loan of 90% or $9,000, leaving a new Surrender Value of $1,000. If a
loan is not repaid, it will permanently decrease the Surrender Value which
could cause the Policy to lapse. In addition, the Death Benefit will be
decreased because of an outstanding Policy Loan. Furthermore, even if the loan
is repaid, the amount of the Death Benefit and the Policy's Surrender Value may
be permanently affected since the Loan Account Value is not credited with the
investment experience of the Funds.
Policy Changes
You may make changes to Your Policy, as described below, by submitting a
Written Request to Our Home Office. Supplemental Policy Specifications and/or a
notice confirming the change will be sent to You once the change is completed.
Increase in Specified Amount
Increases will be allowed at any time while this Policy is in force while both
Insureds are alive subject to the following conditions. The increase may be
rescinded by You within 45 days of the subsequent application or within 10 days
of receipt of the supplemental Policy Specifications and/or notice of the right
to rescind the increase, whichever is latest.
- -- Satisfactory evidence of insurability on both Insureds will be required.
- -- The Issue Date for any increase will be shown in the supplemental Policy
Specifications.
- -- The Surrender Value immediately after an increase must be at least three
times the sum of (a) the most recent Monthly Deduction from the Total
Account Value and (b) the Specified Amount of the increase multiplied by the
applicable Cost of Insurance Rate divided by 1000.
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<PAGE>
- -- An increase in the Specified Amount will increase the Surrender Charge.
- -- The 5-year period as described in the No Lapse Coverage provision will
restart on the Issue Date of the increase.
- -- The Basic Monthly Premium and the premium required to satisfy the Guaranteed
Death Benefit to the Younger Insured's Age 100 will be adjusted when the
Specified Amount is increased.
Decrease in Specified Amount
You may decrease the Specified Amount of this Policy after the 5th Policy Year,
however:
- -- We will not allow a decrease in the Specified Amount if the Specified Amount
would be reduced below the minimum Specified Amount of $250,000.
- -- For a decrease in the Specified Amount, the Issue Date will be the Monthly
Deduction Day on or next following the date on which Your Written Request is
received.
- -- The decrease will reduce any past increases in the reverse order in which
they occurred.
- -- The Basic Monthly Premium and the premium required to satisfy the Guaranteed
Death Benefit to the Younger Insured's Age 100 will be based on the new
Specified Amount.
- -- There will be no change in the Surrender Charge.
Change in Death Benefit Option
Any change in the Death Benefit Option is subject to the following conditions:
- -- We will not allow a change in the Death Benefit Option if the Specified
Amount will be reduced below the minimum Specified Amount of $250,000.
- -- The change will take effect on the Monthly Deduction Day on or next
following the date on which Your Written Request is received.
- -- There will be no change in the Surrender Charge.
- -- Evidence of insurability may be required.
- -- Changes from Option 1 to 2 will be allowed at any time while this Policy is
in force. The Specified Amount will be reduced to equal the Specified Amount
less the Total Account Value at the time of the change.
- -- Changes from Option 2 to 1 will be allowed at any time while this policy is
in force. The new Specified Amount will be increased to equal the Specified
Amount plus the Total Account Value as of the date of the change.
(See Surrender Charge and Right of Policy Examination)
Right of Policy Examination
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 Aetna or its
representative within 45 days of Application, within 10 days of receipt of the
Policy or 10 days after Aetna mails notice of right to cancel, whichever is
latest. Return the Policy to Aetna, Individual Life Insurance, at 151
Farmington Avenue, Hartford, Connecticut 06156. Upon its return, the Policy
will be deemed void from its beginning. The amount refunded will be (a) the
difference between payments made and amounts allocated to Variable Life Account
B plus (b) the value of amount allocated to Variable Life Account B on the date
the returned contract is received by Aetna plus (c) any charges made under this
Policy's terms on the amounts allocated to Variable Life Account B or (d) where
required by State law, the entire payment made.
18
<PAGE>
The Right of Policy Examination also applies to Increases in the Specified
Amount. The increase may, for any reason, be rescinded by You within 45 days of
the Subsequent Application, or within 10 days of receipt of the Supplemental
Policy Specifications and/or notice of the right to rescind the increase,
whichever is latest.
Supplemental Benefits
The supplemental benefits currently available as riders to the Policy include
the following (may not be available in all states):
[BALLOTBOX] Disability Benefit Rider--provides for a credit of the benefit
amount described in the Policy in the event of the total disability
of the covered Insured.
[BALLOTBOX] Split Option Amendment Rider--allows You, upon election, to exchange
the Policy for two individual policies, one on each Insured named in
the Policy, subject to the terms of the rider.
The exercise of the option provided by this Rider may have tax
consequences. You should consult a competent tax advisor if you are
considering purchasing this rider or exercising its option.
[BALLOTBOX] Four Year Term Rider--provides non-participating term insurance for
the first four Policy Years. The benefit amount described in the
Policy increases the Policy's Death Benefit.
Other riders for supplemental benefits may become available under the Policy
from time to time. The charges for each of these riders are illustrated in Your
Policy.
Death Benefit
The Death Benefit under the Policy will be paid in a lump sum unless You or the
beneficiary have elected that it be paid under one or more of the Settlement
Options.
Payment of the Death Benefit may be delayed if the Policy is being contested.
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 Second Death, unless You have made an
irrevocable election. The beneficiary who has elected Settlement Option 1 may
elect another option after the Second Death.
All or part of the Death Benefit may be applied under one of the Settlement
Options, or such options as We may choose to make available in the future.
If the Policy is assigned as collateral security, We will pay any amount due
the assignee in a lump sum. Any excess Death Benefit due will be paid as
elected.
(See Right to Defer Payment and Policy Settlement)
19
<PAGE>
Policy Settlement
Proceeds in the form of Settlement Options are payable by the Company upon the
death of the Surviving Insured or upon Full Surrender or upon maturity and may
be paid in a lump sum, in whole or in part, under any of the Settlement Options
available under the Policy.
A Written Request may be made to elect, change or revoke a Settlement Option
before payments begin under any Settlement Option. This request will take
effect upon its filing at our Home Office. If no Settlement Option has been
elected by You when the Death Benefit becomes payable to the beneficiary, that
beneficiary may make the election.
The first variable Settlement Option payment will be as of the tenth Valuation
Period following Our receipt of the properly-completed election form.
Settlement Options are funded by Variable Annuity Account B, a separate account
of the Company established in 1976 in accordance with the insurance laws of the
State of Connecticut. Variable Annuity Account B was formed for the purpose of
segregating assets attributable to the variable portion of the variable annuity
contracts and variable life settlement options from the Company's other assets.
Variable Annuity Account B is registered as a unit investment trust under the
Investment Company Act of 1940, and meets the definition of separate account
under the federal securities laws. A Variable Annuity Account B prospectus will
be provided in connection with selecting a Settlement Option.
Settlement Options
The following Settlement Options are available under the Policy:
Option 1--Payment of interest on the sum left with Us.
Option 2--Payments for a stated number of years, but no more than thirty.
Option 3--Payments for the lifetime of the Annuitant. If also chosen, We will
guarantee payments for 60, 120, 180, or 240 months.
Option 4--Life Income Based Upon the Lives of Two Payees--an annuity will be
paid during the joint lifetimes of two Annuitants. Payments will continue until
both Annuitants have died. When this option is chosen, a choice must be made
of:
a) 100% of the payment to continue after the first death;
b) 66-2/3%% of the payment to continue after the first death;
c) 50% of the payment to continue after the first death;
d) Payments for a minimum of 120 months, with 100% of the payment to continue
after the first death; or
e) 100% of the payment to continue to the survivor if the survivor is the
original 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.
Calculation of Settlement Option Values
The value of the Settlement Options will be calculated as set forth in the
Policy.
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<PAGE>
The Company
The Aetna Life Insurance and Annuity Company is a stock life insurance company
organized under the insurance laws of the State of Connecticut in 1976. Through
a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance
Company (formerly Participating Annuity Life Insurance Company organized in
1954). The Company is engaged in the business of issuing life insurance
policies and annuity contracts in all states of the United States. The Company
is a wholly owned subsidiary of Aetna Retirement Holdings Inc., which is in
turn a wholly owned subsidiary of Aetna Retirement Services, Inc. and an
indirect wholly owned subsidiary of Aetna Inc.
The Company is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers. As
such it serves as the principal underwriter for the securities offered
hereunder and also acts as the principal underwriter for Variable Annuity
Accounts B, C and G (separate accounts of the Company registered as unit
investment trusts), and Variable Annuity Account I (a separate account of Aetna
Insurance Company of America registered as a unit investment trust).
Additionally, the Company is registered as an investment adviser under the
Investment Advisers Act of 1940 and, as such, is the investment adviser for
Portfolio Partners, Inc. The Company is also the depositor of Variable Annuity
Accounts B, C and G.
Directors & Officers
<TABLE>
<CAPTION>
Name and Address* Position with Company Business Experience During Past 5 Years
- --------------------- ----------------------------------- -------------------------------------------------
<S> <C> <C>
Thomas J. McInerney Director, President and Chairman, President (since September 1997), Aetna Life
Executive Committee (Principal Insurance and Annuity Company; President
Executive Officer) (since September 1997), Aetna Insurance
Company of America; Director and President
(since September 1997), Aetna Retirement
Holdings, Inc.; President (since August 1997),
Aetna Retirement Services, Inc.; Executive Vice
President (since August 1997), Aetna Inc., Aetna
Services, Inc. and Aetna Life Insurance
Company; Vice President, Strategy (March
1997 - August 1997) Aetna Inc., Aetna Services,
Inc. and Aetna Life Insurance Company, Vice
President, Sales (December 1996 - March 1997)
and Vice President National Accounts (April
1996 - March 1997), Aetna US Healthcare Inc.;
Vice President, Strategy, Finance, &
Administration (July 1995 - April 1996), Aetna
Inc.; Vice President, Guaranteed Products
(November 1992 - July 1995), Aetna Life
Insurance Company.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Name and Address* Position with Company Business Experience During Past 5 Years
- --------------------- ----------------------------------- -------------------------------------------------
<S> <C> <C>
Shaun P. Mathews Director and Senior Vice Senior Vice President, Product Management
President (since September 1997), Vice President,
Products Group (February 1996 - September
1997), Senior Vice President, Strategic Markets
and Products (February 1993 - February 1996)
and Senior Vice President, Mutual Funds.
Catherine Hale Smith Director, Chief Financial Officer Chief Financial Officer and Senior Vice
and Senior Vice President President, Strategy and Finance (Since February
1998), Aetna Life Insurance and Annuity
Company; Chief Financial Officer (since February
1998), Aetna Retirement Services, Inc.; Vice
President, Strategy, Finance and Administration,
Financial Relations (September 1996 - February
1998), Aetna Inc.; Chief of Staff, Health/Group
Life, Strategy and Communication (April 1993 -
September 1996).
Kirk P. Wickman Vice President, General Counsel Vice President, General Counsel and Corporate
and Corporate Secretary Secretary (since November 1996), Aetna Life
Insurance and Annuity Company; Vice President
and Counsel (June 1992 - November 1996),
Aetna Life Insurance Company.
Deborah Koltenuk Vice President and Treasurer, Vice President and Treasurer, Corporate
Corporate Controller Controller (since July 1996), Aetna Life
Insurance and Annuity Company; Vice President
and Treasurer, Corporate Controller (since July
1996), Aetna Retirement Holdings, Inc.; Vice
President, Investment Financial Reporting and
Securities Operations (April 1996 - July 1996),
Aetna Life Insurance Company; Vice President,
Investment Planning and Financial Reporting
(October 1994 - April 1996), The Aetna Casualty
and Surety Company and The Standard Fire and
Insurance Company; Assistant Vice President,
Finance and Administration (June 1994 -
October 1994), Aetna Life Insurance Company;
Controller (September 1993 - June 1994), Aetna
Information Technology; Assistant Vice
President (December 1990 - September 1993),
Aetna Life and Casualty Company.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Name and Address* Position with Company Business Experience During Past 5 Years
- --------------------- ----------------------------------- -------------------------------------------------
<S> <C> <C>
Frederick D. Kelsven Vice President and Chief Vice President, Chief Compliance Officer (since
Compliance Officer February 1997), Aetna Life Assignment
Company; Vice President & Chief Compliance
Officer (since November 1996), Aetna
Investment Services, Inc.; Director of
Compliance (January 1985 - September 1996),
Nationwide Life Insurance Company.
</TABLE>
*The address of all Directors and Officers listed is 151 Farmington Avenue,
Hartford, Connecticut. These individuals may also be directors and/or officers
of other affiliates of the Company.
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.
23
<PAGE>
Additional Information
Reports to Policyowners
The Company will maintain all records relating to the Separate Account. At
least once in each Policy Year, the Company will send You a statement
containing the following information:
(1) A statement of changes (including a statement of monthly deductions and
investment results and any interest earnings for the report period) in the
Total Account Value and Surrender Value since the prior report or since the
Issue Date, if there has been no prior report;
(2) Surrender Value, Death Benefit, and any Loan Account Value as of the Policy
Anniversary; and
(3) a projection of the Total Account Value, Loan Account Value and Surrender
Value as of the succeeding Policy Anniversary.
If any portion of Your Total Account Value is allocated to the Separate
Account, You will receive such additional periodic reports as may be required
by the SEC. Some state laws require additional reports; these requirements vary
from state to state.
Right to Instruct Voting of Fund Shares
In accordance with our view of present applicable law, We will vote the shares
of each of the Funds held in the Separate Account in accordance with
instructions received from Policyowners having a voting interest in the Funds.
Policyowners having such an interest will receive periodic reports relating to
the Fund, proxy material and a form for giving voting instructions. The number
of shares which You have a right to vote will be determined as of a record date
established by the Fund. The number of votes that You are entitled to direct
with respect to a Fund will be determined by dividing the portion of Your Total
Account Value attributable to that Fund by the net asset value of one share in
the Fund. Voting instructions will be solicited by written communication at
least 14 days before such meeting.
The votes will 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.
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
proportion as the voting instructions which are received for all Policies
participating in each Fund through the Separate Account.
Disregard of Voting Instructions
When required by state insurance regulatory authorities, We may 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 initiated by a Policyowner in
favor of changes 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 if We determine that the change would have an adverse
effect on the Separate Account if the proposed investment policy for a Fund
would result in overly speculative or unsound investments. In the event that 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.
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<PAGE>
State Regulation
With the exception of Guam, Puerto Rico and the Virgin Islands, the Policy will
be offered for sale in all jurisdictions where the Company is authorized to do
business and where the Policy has been approved by the appropriate Insurance
Department or regulatory authorities.
The Company is subject to regulation and supervision by the Insurance
Department of the State of Connecticut, which periodically examines its
affairs. The Company is also subject to the insurance laws and regulations of
all jurisdictions where it is authorized to do business. 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 either the
Separate Account or the Company 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 for 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 of 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, DC, upon payment of the SEC's prescribed
fees.
Distribution of the Policy
The Company will serve as underwriter of the securities offered hereunder as
defined by the federal securities laws. The Company is registered as a
broker-dealer with the SEC and is a member of the National Association of
Securities Dealers, Inc. The Company will contract with one or more registered
broker-dealers, including broker-dealers affiliated with it ("Distributors"),
to offer and sell the Policies. The Company may also offer and sell policies
directly. All persons selling the Policies will be registered representatives
of the Distributors, and will also be licensed as insurance agents to sell
variable life insurance.
The Company may also contract with independent third party broker-dealers who
will act as wholesalers by assisting the Company in finding broker-dealers to
offer and sell the Policies. These parties may also provide training, marketing
and other sales related functions for the Company and other broker-dealers and
may provide certain administrative services to the Company in connection with
the Policies. The Company may pay such parties compensation based on premium
payments for the Policies purchased through broker-dealers selected by the
wholesaler. 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 to 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.
Salespersons and their supervising broker-dealers will be compensated for sales
of the Policy on a commission and service fee basis. The maximum sales
commission to be paid for policy distribution is 40% of the first year premium
up to the Guaranteed Death Benefit to the younger Insured's Attained Age 100
Premium. In the event of an increase in Specified Amount, the maximum sales
commission will be 40% of the succeeding year's premium up to the Guaranteed
Death Benefit to the younger Insured's Attained Age 100 Premium attributable to
the increase. The maximum sales commission on all other premiums is 3% for
Policy Years 2 through 10 and 1.5%
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<PAGE>
after Policy Year 11. In lieu of premium-based commission, the Company may pay
equivalent amounts based on Total Account Value. In addition, certain
production, persistency and managerial bonuses as well as expense allowances
may be paid.
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 review of filings made with the SEC.
Year 2000
As a healthcare and financial services enterprise, Aetna Inc. (referred to
collectively with its affiliates and subsidiaries as Aetna), is dependent on
computer systems and applications to conduct its business. Aetna has developed
and is currently executing a comprehensive risk-based plan designed to make its
computer systems, applications and facilities Year 2000 ready. The plan covers
four stages including (i) inventory, (ii) assessment, (iii) remediation and
(iv) testing and certification. At year end 1997, Aetna, including the Company,
had substantially completed the inventory and assessment stages. The
remediation process is currently underway and targeted for completion by
December 31, 1998. Testing and certification of these systems and applications
are targeted for completion by mid-1999. The costs of these efforts will not
affect the Separate Account.
The Company, its affiliates and the mutual funds that serve as investment
options for the Separate Account also have relationships with investment
advisers, broker dealers, transfer agents, custodians or other securities
industry participants or other service providers that are not affiliated with
Aetna. Aetna, including the Company, is initiating communication with its
critical external relationships to determine the extent to which Aetna may be
vulnerable to such parties' failure to resolve their own Year 2000 issues.
Where practicable Aetna and the Company will assess and attempt to mitigate
their risks with respect to the failure of these parties to be Year 2000
ready. There can be no assurance that failure of third parties to complete
adequate preparations in a timely manner, and any resulting systems
interruptions or other consequences, would not have an adverse effect, directly
or indirectly, on the Separate Account, including, without limitation, its
operation or the valuation of its assets and units.
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) that are credited to Policy reserves are reinvested
26
<PAGE>
without tax since the Code does not impose a tax on the Separate Account for
these amounts. The Company reserves the right, however, to make a deduction for
such taxes should they be imposed with respect to such items in the future.
Life Insurance Qualification
Section 7702 of the Code includes a definition of life insurance for tax
purposes. 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.
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 in connection with reductions in Death Benefits may be taxable in limited
circumstances 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.
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<PAGE>
A contract will be considered a Modified Endowment Contract if it fails the
"7-pay test." A Policy fails the 7-pay test if, at any time in the first seven
Policy Years, the amount paid into the Policy exceeds the amount that would
have been paid had the Policy provided for the payment of seven (7) level
annual premiums. In the event of a distribution under the Policy, the Company
will notify the Policyowner if the Policy is a Modified Endowment Contract.
Each Policy is subject to testing under the 7-pay test during the first seven
Policy Years and for the 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 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 59 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,
28
<PAGE>
to be treated as the owner of the assets in the account." This announcement
also stated that guidance would be issued by way of regulations or rulings on
the "extent to which policyholders may direct their investments to particular
Funds without being treated as owners of the underlying assets." As of the date
of this Prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in certain
respects from those described by the IRS in pre-Section 817(h) rulings in which
it was determined that Policyowners were not owners of separate account assets.
For example, a Policyowner has additional flexibility in allocating premium
payments and account values. While the Company does not believe that these
differences would result in a Policyowner being treated as the owner of a pro
rata portion of the assets of the Separate Account, there is no regulation or
ruling of the IRS that confirms this conclusion. In addition, the Company does
not know what standards will be set forth, if any, in the regulations or
rulings which the Treasury Department has stated it expects to issue. The
Company therefore reserves the right to modify the Policy as necessary to
attempt to prevent a Policyowner from being considered the owner of a pro rata
share of the assets of the Separate Account.
Other Tax Considerations
Business-owned life insurance may be subject to certain additional rules.
Section 264(a)(1) of the Code generally prohibits employers from deducting
premiums on policies covering officers, employees or other financially
interested parties 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
others financially interested in the Policyowner's trade or business. Under
current tax law, interest may generally be deducted on an aggregate total of
$50,000 of loans per covered life 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.
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 taxpayer
or 20 individuals. Deductible interest for these contracts will be capped based
on applicable Moody's Corporate Bond Rate.
Section 264(f) of the Code denies a deduction for a portion of a Policyowner's
otherwise deductible interest that is allocable to unborrowed policy cash
values. The nondeductible interest amount is the amount that bears the same
ratio to such interest as the company's average unborrowed cash value of life
insurance and annuity policies issued after June 8, 1997 bears to the sum of
the average unborrowed cash values of policies plus the average adjusted tax
basis of other assets owned by the company. This provision does not apply to
policies in which the insured is a 20% owner, officer, director or employee of
the business, including policies jointly covering such individual and his or
her spouse. The rule also will not apply where the Policyowner is a natural
person, unless a trade or business is directly or indirectly the beneficiary of
the policy.
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 advisor before initiating any transaction.
Withholding
Generally, unless you provide us with a written election to the contrary before
we make the distribution, we are required to withhold income tax from any
portion of a distribution we make to you that is includable in your income. If
you do not wish us to withhold tax from the payment, or if enough is not
withheld, you may have to pay later. You may also have to pay penalties if your
withholding and estimated tax payments are insufficient.
29
<PAGE>
Misc. Policy Provisions
The Policy
The Policy which You receive, the application You make when You purchase the
Policy, any applications for any changes approved by Us and any riders
constitute the whole contract. Copies of all applications are attached to and
made a part of the Policy.
Application forms are completed by the applicants and forwarded to the Company
for acceptance. Upon acceptance, the Policy is prepared, executed by duly
authorized officers of the Company, and forwarded to You.
We reserve the right to make a change in the Policy; however, we will not
change any terms of the Policy beneficial to You. Only the President, Executive
Vice President or the Corporate Secretary may agree to a change in the Policy,
and then only in writing.
Payment of Benefits
All benefits are payable at Our Home Office. We may require submission of the
Policy before We grant Policy Loans, make changes or pay benefits.
Suicide and Incontestability
Suicide Exclusion
In most states, if one or both Insureds die by suicide, while sane or insane,
within 2 years from the Issue Date of this Policy, this Policy will end and We
will pay:
1. the difference between payments made and amounts allocated to the Separate
Account; plus
2. the Separate Account Value; plus
3. any charges made under this Policy's terms on the Separate Account Value;
less
4. the sum of:
(a) the Loan Account Value transferred from the Fixed Account Value; plus
(b) the interest due on the Loan Account Value; plus
(c) the value of any Partial Surrenders transferred from the Fixed Account
Value; plus
(d) any interest earned on the Loan Account Value transferred to the Separate
Account Value.
In most states, if one or both Insureds die by suicide while sane or insane,
within 2 years from the Issue Date of any increase in coverage, We will pay
only the Monthly Deductions for the increase in coverage.
In most states, if one or both Insureds die by suicide while sane or insane,
more than 2 years from the Issue Date of this Policy but within 2 years from
the Issue Date of any increase in coverage, We will pay:
1. the Proceeds on death for any coverage in effect more than 2 years from the
Issue Date of this Policy; plus
2. the Monthly Deductions for the increase in coverage.
All amounts will be calculated as of the date of the suicide.
Incontestability
In most states, with respect to statements made in the initial application or
any Subsequent Application for each Insured: We will not contest this Policy
after it has been in force during the lifetime of each Insured for 2 years from
its Issue Date.
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<PAGE>
In most states, with respect to statements made in any subsequent application
for one or both Insureds: We will not contest coverage relating to subsequent
applications after coverage has been in force during the lifetime of each
Insured for 2 years from the Issue Date of such coverage or from the effective
date of any reinstatement.
If this Policy is contested, Your rights or the Beneficiary's rights may be
affected.
Protection of Proceeds
To the extent provided by law, the proceeds of the Policy are subject neither
to claims by a beneficiary's creditors nor to any legal process against any
beneficiary.
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company. No
dividends are payable.
Changes in Owner and Beneficiary; Assignment
Unless otherwise stated in the Policy, You may change the Policyowner and the
beneficiary, or both, at any time while the Policy is in force. A request for
such change must be made in writing and sent to the Company at the Home Office.
After We have agreed, in writing, to the change, it will take effect as of the
date on which Your Written Request was signed.
The Policy may also be assigned. No assignment of a Policy will be binding on
Us unless made in writing and sent to Us at our Home Office. The Company will
use reasonable procedures to confirm that the assignment is authentic,
including verification of signature. If the Company fails to follow its
procedures, it would be liable for any losses to You directly resulting from
the failure. Otherwise, We are not responsible for the validity of any
assignment. The rights of the Policyowner and the interest of the beneficiary
will be subject to the rights of any assignee of record.
Misstatement as to Age and/or Sex
If the age and/or the sex of one or both Insureds is misstated, the amount of
the Death Benefit will be adjusted to reflect the coverage that would have been
purchased by the most recent pre-Maturity Date Monthly Deduction at the correct
age and/or sex.
Performance Reporting and Advertising
From time to time, the Company may report different types of historical
performance for the Variable Options of the Separate Account available under
the Policy. The Company may report the average annualized total returns of the
Funds over various time periods. Such returns will reflect an annual reduction
for investment management fees and fund expenses, but not deductions at the
separate account or policy level for mortality and expense risk charges and
policy expenses, which, if included, would reduce performance. The Company will
accompany the returns of the Funds with at least one of the following: (i)
returns of the variable options for the same periods as shown for the Funds,
which will include, in addition to deduction for investment management fees and
Fund expenses, deductions under the Separate Account for the mortality and
expense risk charge of 0.85% (0.90% guaranteed), but not other charges under
the policy; or (ii) an illustration of Total Account Value and Surrender Values
as of the performance reporting date for hypothetical Insureds of a given age,
sex, underwriting classification, premium level and policy amount. Such
illustrations will assume for each Variable Option that 100% of each Net
Premium was allocated to that option. The illustrations of the Surrender Value
will assume that all Fund charges, the mortality and expense risk charge and
all other Policy charges are deducted, including Premium Loads, Cost of
Insurance charges, administrative charges, Policy fees and Surrender Charges.
The illustrations of the Total Account Value will assume that all such charges
except the Surrender Charge are deducted.
We may also distribute sales literature that compares the percentage change in
the net asset values of the Funds or in Accumulation Unit Values for any of the
Variable Options to established market indices such as the Standard
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& Poor's 500 Stock Index and the Dow Jones Industrial Average or to the
percentage change in values of other mutual funds or variable options that have
investment objectives similar to the Fund or Variable Option being compared.
Illustrations of Death Benefit, Total Account Values and Cash Surrender Values
The following pages provide a hypothetical illustration of how the Death
Benefit, Total Account Values, and Surrender Values of a Policy can change over
time for a Policy issued to two opposite gender 45-year old Insureds if the
investment return on the assets held in each Fund were a uniform, gross, annual
rate of 0%, 6% and 12%, respectively, and are based upon a number of
assumptions.
There are two pages of values. One page illustrates the assumption that the
Guaranteed Maximum Cost of Insurance rates and other charges at guaranteed
rates are charged in all years. The other page illustrates the assumption that
the current scale of Cost of Insurance rates and other charges at current rates
are charged in all years. The Cost of Insurance rates vary by age and sex
(where permitted by state law).
The values shown in these illustrations vary according to assumptions used for
charges and gross rates of investment returns. The actual investment returns
experienced by the Policy and the charges deducted may be higher or lower than
those illustrated. The charges reflected on the first page consist of the
maximum allowable charges under the Policy, including 0.90% for mortality and
expense risks in all Policy Years and 12.35% for Premium Loads; the first page
also reflects 0.72% for expenses of the Funds based on the allocation described
below. The charges reflected on the second page consist of the current charges
imposed under the Policy, including 0.85% for mortality and expense risks in
Policy Years 1 through 20 only and 12.35% for Premium Loads; the second page
also reflects 0.72% for Fund expenses based on the allocation described below.
The charge for Fund expenses reflected in the illustrations assumes that Total
Account Values have been allocated equally among all funds and represent a
fixed average of the investment advisory fees and other expenses charged by
each of the Funds.
After deduction of these amounts, the illustrated gross annual investment rates
of return of 0%, 6% and 12% correspond to approximate net annual rates of
- -1.57%, 4.43% and 10.43%, respectively, during the first 20 Policy Years, and
- -0.72%, 5.28% and 11.28%, respectively, thereafter on a current basis. On a
guaranteed basis, the illustrated gross annual investment rates of return of
0%, 6% and 12% correspond to approximate net annual rates of -1.62%, 4.38% and
10.38%, respectively.
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% over a period of years, but fluctuated above and below those averages
for individual Policy Years. The illustrations also assume that premiums are
paid as indicated, no Policy Loans are made, no increases or decreases in
Specified Amount are requested, no Death Benefit Option changes, and no Partial
Surrenders are made.
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.
Upon request, We will provide a comparable personalized illustration based upon
the age, sex (if necessary), and underwriting classification of the proposed
Insureds, including the Specified Amount and premium requested, the proposed
frequency of premium payments and any available riders requested. A fee of $25
may be charged for each such illustration. The hypothetical gross annual
investment return assumed in such an illustration will not exceed 12%.
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FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY ON THE LIVES OF TWO INSUREDS
FEMALE AND MALE ISSUE AGE 45 SELECT NONSMOKER RISK
$2,688 ANNUAL GUARANTEED DEATH BENEFIT
TO THE YOUNGER INSURED'S AGE 100 PREMIUM
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
GUARANTEED CHARGES
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value*
at Returns of Annual Investment Returns of Annual Investment Returns of
5% Interest ------------------------------- ------------------------------- -------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------ ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,822 250,000 250,000 250,000 1,346 1,456 1,566 782 892 1,002
2 5,786 250,000 250,000 250,000 3,378 3,706 4,048 2,779 3,107 3,449
3 8,898 250,000 250,000 250,000 5,371 6,049 6,781 2,065 2,743 3,475
4 12,165 250,000 250,000 250,000 7,324 8,486 9,790 3,378 4,540 5,844
5 15,596 250,000 250,000 250,000 9,236 11,020 13,101 5,532 7,316 9,397
6 19,198 250,000 250,000 250,000 11,106 13,654 16,745 7,644 10,192 13,283
7 22,980 250,000 250,000 250,000 12,932 16,390 20,753 9,712 13,170 17,533
8 26,951 250,000 250,000 250,000 14,712 19,230 25,161 11,734 16,252 22,183
9 31,121 250,000 250,000 250,000 16,444 22,175 30,009 13,708 19,439 27,273
10 35,500 250,000 250,000 250,000 18,124 25,225 35,337 15,630 22,731 32,843
15 60,903 250,000 250,000 250,000 25,611 42,077 71,021 24,326 40,792 69,736
20 93,325 250,000 250,000 273,334 30,898 61,386 128,267 30,898 61,386 128,267
25 134,705 250,000 250,000 393,004 31,770 81,846 217,996 31,770 81,846 217,996
30 187,517 250,000 250,000 549,640 23,219 100,446 353,876 23,219 100,446 353,876
20(Age 65) 93,325 250,000 250,000 273,334 30,898 61,386 128,267 30,898 61,386 128,267
</TABLE>
Assumes no policy loans has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk and administrative expense charges
assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the Policy Owner's allocations, and the Fund's rate of return. The
Total Account Value and Cash Value for a Policy would be different from those
shown in 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.
* The Cash Surrender Values reflect the application of the maximum Surrender
Charge under the Contract and allowed in most states. The Surrender Charge may
be limited to a lower amount in certain states.
33
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY ON THE LIVES OF TWO INSUREDS
FEMALE AND MALE ISSUE AGE 45 SELECT NONSMOKER RISK
$2,688 ANNUAL GUARANTEED DEATH BENEFIT
TO THE YOUNGER INSURED'S AGE 100 PREMIUM
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
CURRENT CHARGES
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value*
at Returns of Annual Investment Returns of Annual Investment Returns of
5% Interest ------------------------------- ------------------------------- -------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,822 250,000 250,000 250,000 1,466 1,579 1,693 902 1,015 1,129
2 5,786 250,000 250,000 250,000 3,617 3,960 4,318 3,018 3,361 3,719
3 8,898 250,000 250,000 250,000 5,728 6,440 7,209 2,422 3,134 3,903
4 12,165 250,000 250,000 250,000 7,798 9,021 10,393 3,852 5,075 6,447
5 15,596 250,000 250,000 250,000 9,826 11,708 13,900 6,122 8,004 10,196
6 19,198 250,000 250,000 250,000 11,811 14,502 17,761 8,349 11,040 14,299
7 22,980 250,000 250,000 250,000 13,752 17,406 22,012 10,532 14,186 18,792
8 26,951 250,000 250,000 250,000 15,647 20,423 26,691 12,669 17,445 23,713
9 31,121 250,000 250,000 250,000 17,492 23,555 31,838 14,756 20,819 29,102
10 35,500 250,000 250,000 250,000 19,284 26,802 37,501 16,790 24,308 35,007
15 60,903 250,000 250,000 250,000 27,323 44,811 75,526 26,038 43,526 74,241
20 93,325 250,000 250,000 291,366 33,154 65,643 136,729 33,154 65,643 136,729
25 134,705 250,000 250,000 435,945 36,265 92,008 241,815 36,265 92,008 241,815
30 187,517 250,000 250,000 633,697 30,051 120,229 407,994 30,051 120,229 407,994
20 (Age 65) 93,325 250,000 250,000 291,366 33,154 65,643 136,729 33,154 65,643 136,729
</TABLE>
Assumes no policy loans has been made. Current cost of insurance rates assumed.
Current mortality and expense risk and administrative expense charges assumed.
If premiums are paid more frequently than annually, the Death Benefits, Total
Account Values, and Cash Surrender Values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the Policy Owner's allocations, and the Fund's rate of return. The
Total Account Value and Cash Value for a Policy would be different from those
shown in 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 time.
* The Cash Surrender Values reflect the application of the maximum Surrender
Charge under the Contract and allowed in most states. The Surrender Charge may
be limited to a lower amount in certain states.
34
<PAGE>
FINANCIAL STATEMENTS
VARIABLE LIFE ACCOUNT B
Index
Statement of Assets and Liabilities ......................... S-2
Statements of Operations and Changes in Net Assets .......... S-4
Condensed Financial Information ............................. S-5
Notes to Financial Statements ............................... S-9
Independent Auditors' Report ................................ S-20
S-1
<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
</TABLE>
S-2
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1997 (continued):
Aetna Legacy Variable Portfolio:
Policyholders' account values ....................... $ 650,139
Aetna Variable Index Plus Portfolio:
Policyholders' account values ....................... 1,961,545
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
============
See Notes to Financial Statements
S-3
<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
S-4
<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>
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
</TABLE>
S-5
<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>
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 Fund:
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
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
</TABLE>
S-6
<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>
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>
S-7
<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>
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
</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 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.
See Notes to Financial Statements
S-8
<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
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Aetna Ascent Variable Portfolio
Aetna Crossroads Variable Portfolio
Aetna Legacy Variable Portfolio
Aetna Variable Index Plus Portfolio
Fidelity Investments Variable Insurance
Products Fund:
[bullet] Equity-Income Portfolio
[bullet] Growth Portfolio
[bullet] Overseas Portfolio
Fidelity Investments Variable Insurance
Products Fund II:
[bullet] Asset Manager Portfolio
[bullet] Contrafund Portfolio
Janus Aspen Series:
[bullet] Aggressive Growth Portfolio
[bullet] Balanced Portfolio
[bullet] Growth Portfolio
[bullet] Worldwide Growth Portfolio
Portfolio Partners, Inc.:
[bullet] PPI MFS Emerging Equities Portfolio
[bullet] PPI MFS Research Growth Portfolio
[bullet] 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.
S-9
<PAGE>
Variable Life Account B
Notes to Financial Statements--December 31, 1997 (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, 1997 and 1996
aggregated $372,355,431 and $260,329,704 and $113,349,117 and $29,656,908,
respectively.
S-10
<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--
Year Ended December 31, 1997
<TABLE>
<CAPTION>
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>
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 1,021,789 216,619
PolicyHolders' account values
</TABLE>
S-12
<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>
$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>
S-13
<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--
Year Ended December 31, 1997 (continued)
<TABLE>
<CAPTION>
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
=========== ========== ============ ============ ===========
</TABLE>
(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 Scudder
International Growth Portfolio.
S-14
<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>
$ 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>
S-15
<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--Year Ended December 31, 1996 (continued)
<TABLE>
<CAPTION>
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund: $9,712,578 ($ 991,737) $5,373,083 $4,466,494 $906,589
PolicyHolders' account values
Aetna Income Shares: 810,294 (121,325) 1,564,483 1,544,041 20,442
PolicyHolders' account values
Aetna Variable Encore Fund: 477,308 (71,555) 9,490,775 9,560,169 (69,394)
PolicyHolders' account values
Aetna Investment Advisers Fund, Inc.: 1,201,085 (127,990) 1,717,127 1,435,761 281,366
PolicyHolders' account values
Aetna Ascent Variable Portfolio: 18,222 (1,210) 127,981 124,671 3,310
PolicyHolders' account values
Aetna Crossroads Variable Portfolio: 2,462 (91) 1,317 1,263 54
PolicyHolders' account values
Aetna Legacy Variable Portfolio: 671 (36) 503 486 17
PolicyHolders' account values
Alger American Small Capitalization Portfolio: 33,925 (93,143) 2,003,029 1,400,608 602,421
PolicyHolders' account values
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 19,619 (57,181) 625,427 574,716 50,711
PolicyHolders' account values
Growth Portfolio: 85,627 (30,149) 243,345 245,938 (2,593)
PolicyHolders' account values
Overseas Portfolio:
PolicyHolders' account values 14,172 (4,004) 478,644 450,003 28,641
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 62,788 (13,383) 981,022 966,124 14,898
PolicyHolders' account values
Contrafund Portfolio: 10,199 (36,829) 353,531 314,886 38,645
PolicyHolders' account values
Janus Aspen Series:
Aggressive Growth Portfolio: 79,809 (68,571) 1,171,119 858,482 312,637
PolicyHolders' account values
Balanced Portfolio: 70,301 (23,444) 452,062 367,517 84,545
PolicyHolders' account values
Growth Portfolio: 140,964 (46,593) 808,709 590,651 218,058
PolicyHolders' account values
Short-Term Bond Portfolio: 84,482 (17,596) 424,360 415,377 8,983
PolicyHolders' account values
</TABLE>
S-16
<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
</TABLE>
S-17
<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--Year Ended December 31, 1996 (continued)
<TABLE>
<CAPTION>
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>
S-18
<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>
$ 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-19
<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.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 27, 1998
S-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements
------------------------------------------
Page
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995 F-3
Consolidated Balance Sheets as of December 31, 1997
and 1996 F-4
Consolidated Statements of Changes in Shareholder's Equity
for the Years Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiary as of December 31, 1997 and 1996,
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, 1997. 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 statements 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 Subsidiary at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 3, 1998
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
--------------------------------
1997 1996 1995
------- ------- -------
Revenue:
Premiums $267.1 $133.6 $212.7
Charges assessed against policyholders 475.0 396.5 318.9
Net investment income 1,080.5 1,045.6 1,004.3
Net realized capital gains 36.0 19.7 41.3
Other income 39.7 45.4 42.0
------- ------- -------
Total revenue 1,898.3 1,640.8 1,619.2
------- ------- -------
Benefits and expenses:
Current and future benefits 1,127.8 968.6 997.2
Operating expenses 347.4 342.2 310.8
Amortization of deferred policy
acquisition costs 128.4 69.8 48.0
Severance and facilities charges -- 61.3 --
------- ------- -------
Total benefits and expenses 1,603.6 1,441.9 1,356.0
------- ------- -------
Income before income taxes 294.7 198.9 263.2
Income taxes 89.4 57.8 87.3
------- ------- -------
Net income $205.3 $141.1 $175.9
======= ======= =======
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
Assets 1997 1996
- ------ ---- ----
<S> <C> <C>
Investments:
Debt securities available for sale, at fair value
(amortized cost: $12,912.2 and $12,539.1) $13,463.8 $12,905.5
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $131.7 and $107.6) 147.6 119.0
Investment in affiliated mutual funds (cost: $78.1 and $77.3) 83.0 81.1
Common stock (cost: $0.2 and $0.0) .6 .3
Short-term investments 95.6 34.8
Mortgage loans 12.8 13.0
Policy loans 469.6 399.3
--------- --------
Total investments 14,273.0 13,553.0
Cash and cash equivalents 565.4 459.1
Accrued investment income 163.0 159.0
Premiums due and other receivables 63.7 26.6
Deferred policy acquisition costs 1,654.6 1,515.3
Reinsurance loan to affiliate 397.2 628.3
Other assets 46.8 33.7
Separate accounts assets 22,982.7 15,318.3
--------- --------
Total assets $40,146.4 $31,693.3
========= ========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $3,763.7 $3,617.0
Unpaid claims and claim expenses 38.0 28.9
Policyholders' funds left with the Company 11,143.5 10,663.7
--------- --------
Total insurance reserve liabilities 14,945.2 14,309.6
Other liabilities 312.8 354.7
Income taxes:
Current 12.4 20.7
Deferred 72.0 80.5
Separate accounts liabilities 22,970.0 15,318.3
--------- --------
Total liabilities 38,312.4 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
Accumulated other comprehensive income 92.9 60.5
Retained earnings 1,320.3 1,128.2
--------- --------
Total shareholder's equity 1,834.0 1,609.5
--------- --------
Total liabilities and shareholder's equity $40,146.4 $31,693.3
========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,609.5 $1,583.0 $1,088.5
Comprehensive income
Net income 205.3 141.1 175.9
Other comprehensive income, net of tax
Unrealized gains (losses) on securities ($50.1
million, $(110.8) million and $494.6 million, 32.4 (72.0) 321.5
pretax, respectively)
-------- -------- --------
Total comprehensive income 237.7 69.1 497.4
-------- -------- --------
Capital contributions -- 10.4 0.0
Other changes 4.1 (49.5) 0.0
Common stock dividends (17.3) (3.5) (2.9)
-------- -------- --------
Shareholder's equity, end of year $1,834.0 $1,609.5 $1,583.0
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $205.3 $141.1 $175.9
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
(Increase) decrease in accrued investment income (4.0) 16.5 (33.3)
(Increase) decrease in premiums due and other receivables (33.3) 1.6 25.4
Increase in policy loans (70.3) (60.7) (89.9)
Increase in deferred policy acquisition costs (139.3) (174.0) (177.0)
Decrease in reinsurance loan to affiliate 231.1 27.2 34.8
Net increase in universal life account balances 286.4 243.2 393.4
(Decrease) increase in other insurance reserve liabilities (249.6) (211.5) 79.0
Net (decrease) increase in other liabilities and other assets (41.7) 3.1 13.0
Decrease in income taxes (31.4) (26.7) (4.5)
Net accretion of discount on investments (66.4) (68.0) (66.4)
Net realized capital gains (36.0) (19.7) (41.3)
Other, net -- 1.1 --
-------- -------- --------
Net cash provided by (used for) operating activities 50.8 (126.8) 309.1
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,311.3 5,182.2 4,207.2
Equity securities 103.1 190.5 180.8
Mortgage loans 0.2 8.7 10.7
Limited partnership -- -- 26.6
Investment maturities and collections of:
Debt securities available for sale 1,212.7 885.2 583.9
Short-term investments 89.3 35.0 106.1
Cost of investment purchases in:
Debt securities available for sale (6,732.8) (6,534.3) (6,034.0)
Equity securities (113.3) (118.1) (170.9)
Short-term investments (149.9) (54.7) (24.7)
Mortgage loans -- -- (21.3)
Other, net -- (17.6) --
-------- -------- --------
Net cash used for investing activities (279.4) (423.1) (1,135.6)
-------- -------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,621.2 1,579.5 1,884.5
Withdrawals of investment contracts (1,256.3) (1,146.2) (1,109.6)
Capital contribution to Separate Account (25.0) -- --
Return of capital from Separate Account 12.3 -- --
Capital contribution from HOLDCO -- 10.4 --
Dividends paid to shareholder (17.3) (3.5) (2.9)
-------- -------- --------
Net cash provided by financing activities 334.9 440.2 772.0
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 106.3 (109.7) (54.5)
Cash and cash equivalents, beginning of year 459.1 568.8 623.3
-------- -------- --------
Cash and cash equivalents, end of year $565.4 $459.1 $568.8
======== ======== ========
Supplemental cash flow information:
Income taxes paid, net $119.6 $85.5 $92.8
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(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 subsidiary
(collectively, the "Company") are providers 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 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 subsidiary, Aetna Insurance Company of
America. 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 1996 and 1995 financial information to conform to the 1997
presentation.
New Accounting Standard
-----------------------
As of December 31, 1997 the Company adopted Financial Accounting Standard
("FAS") No. 130, Reporting Comprehensive Income. This statement 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 shareholders) and includes net income and net unrealized
capital gains or losses on available-for-sale securities. As this new
standard only requires additional information in a financial statement, it
does not affect the Company's financial position or results of operations.
Future Application of Accounting Standards
------------------------------------------
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
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.
F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Future Application of Accounting Standards (Continued)
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.
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments, which provides guidance for
determining when an insurance or other enterprise should recognize a
liability for guaranty-fund and other insurance related assessments and
guidance for measuring the liability. This statement is effective for 1999
financial statements with early adoption 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.
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
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.
F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
The company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of a loaned domestic security and 105% of the market value of
a loaned foreign security. The collateral is deposited by the borrower with
a lending agent, and retained and invested by the lending agent according
to the Company's guidelines to generate additional income. The market value
of the loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market value of the loaned
securities fluctuates. At December 31, 1997 and 1996, the Company loaned
securities (which are reflected as invested assets) with a market value of
approximately $385.1 million and $444.7 million, respectively.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds represents an investment in Aetna
managed mutual funds which have 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.
The Company utilizes futures contracts, swap agreements and warrants for
other than trading purposes in order to manage investment returns and price
risk and to align maturities, interest rates, and funds availability with
its obligations. (Refer to Note 3.)
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.
Interest rate 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
F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Investments (Continued)
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.
Warrants represent the right to purchase specific securities and are
accounted for as hedges. Upon exercise, the cost of the warrants are added
to the basis of the securities purchased.
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% for all
years presented. 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 3.50% to 9.50% for all years presented) 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.
F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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 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 with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity and 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 mutual 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 $658.6 million for 1997 (fair value $668.7 million)
and $515.6 million for 1996 (fair value $523.0 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 both 1997 and in
1996.
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-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(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, 1997 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 $1,219.7 $74.0 $0.1 $1,293.6
States, municipalities and political
subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Financial 2,370.7 84.6 1.3 2,454.0
Food & fiber 195.4 9.3 -- 204.7
Healthcare & consumer products 728.5 27.0 2.6 752.9
Media & broadcast 252.9 14.7 0.1 267.5
Natural resources 143.5 5.5 - 149.0
Transportation & capital goods 528.2 33.2 0.1 561.3
Utilities 521.3 23.5 0.9 543.9
Other corporate securities 96.9 3.2 - 100.1
---------- -------- -------- -----------
Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4
Foreign Securities:
Government 612.5 36.7 23.6 625.6
Utilities 177.5 28.7 -- 206.2
Other 857.9 27.7 42.8 842.8
---------- -------- -------- -----------
Total foreign securities 1,647.9 93.1 66.4 1,674.6
Residential mortgage-backed securities:
Pass-throughs 784.4 71.3 2.0 853.7
Collateralized mortgage obligations 2,280.5 137.4 2.0 2,415.9
---------- -------- -------- -----------
Total residential mortgage-
backed securities 3,064.9 208.7 4.0 3,269.6
Commercial/Multifamily mortgage-
backed securities 1,127.8 34.0 0.4 1,161.4
Other asset-backed securities 1,014.2 17.1 0.4 1,030.9
---------- -------- -------- -----------
Total Debt Securities $12,912.2 $627.9 $76.3 $13,463.8
========== ======== ======== ===========
</TABLE>
F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(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, 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 corporate securities 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-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
At December 31, 1997 and 1996, net unrealized appreciation of $551.6
million and $366.4 million, respectively, on available-for-sale debt
securities included $429.3 million and $288.5 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.
The carrying and fair value of debt securities for the year ended December
31, 1997 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 $367.3 $367.6
After one year through five years 2,165.1 2,195.4
After five years through ten years 2,367.3 2,407.0
After ten years 2,805.6 3,031.9
Mortgage-backed securities 4,192.7 4,431.0
Other asset-backed securities 1,014.2 1,030.9
--------- ---------
Total $12,912.2 $13,463.8
========= =========
At December 31, 1997 and 1996, debt securities carried at $8.2 million and
$7.6 million, respectively, were on deposit as required by regulatory
authorities.
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, 1997.
F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1997 1996
--------------------- ------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
-------- -------- -------- --------
(millions)
<S> <C> <C> <C> <C>
Total residential CMOs(1) $2,415.9 $2,280.5 $2,309.0 $2,227.8
======== ======== ======== ========
Percentage of total:
Supporting experience rated products 81.6% 84.2%
Supporting remaining products 18.4% 15.8%
----- -----
100.0% 100.0%
===== =====
</TABLE>
(1) At December 31, 1997 and 1996, approximately 73% and 71%,
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, 1997
and 1996, approximately 4% and 3%, respectively, of the Company's CMO
holdings were invested in types of CMOs which are subject to more
prepayment and extension risk than traditional CMOs (such as interest- or
principal-only strips).
F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Investments in equity securities available for sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(millions)
1997
Equity Securities $210.0 $21.3 $0.1 $231.2
====== ===== ==== ======
1996
Equity Securities $184.9 $16.3 $0.8 $200.4
====== ===== ==== ======
3. Financial Instruments
Estimated Fair Value
--------------------
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1997 and 1996 were as follows:
1997 1996
-------------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- ------ -------- -----
(millions)
Assets:
Mortgage loans $ 12.8 $ 12.4 $ 13.0 $ 13.2
Liabilities:
Investment contract
liabilities:
With a fixed maturity $ 1,030.3 $1,005.4 $1,014.1 $1,028.8
Without a fixed
maturity 10,113.2 9,587.5 9,649.6 9,427.6
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.
F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Estimated Fair Value (Continued)
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
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 1997 and 1996,
Treasury futures contracts were used to manage interest rate risk in the
Company's bond portfolio; and, in 1996, 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
securities at a specified future date and at a specified price or yield.
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, 1997 and 1996.
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
F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
Off-Balance-Sheet and Other Financial Instruments (Including Derivative
Instruments) (Continued)
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, 1997 and 1996.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1997
and 1996.
Warrants:
Warrants are instruments giving the Company the right, but not the
obligation to buy a security at a given price during a specified period. As
of December 31, 1997 and 1996, the Company had open warrants to purchase
equity securities with a fair value of $0.6 million and $0.3 million,
respectively.
Debt Instruments with Derivative Characteristics:
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, 1997 was as follows:
Amortized Fair
Cost Value
--------- ----
(millions)
Residential collateralized mortgage
obligations $2,280.5 $2,415.9
Principal-only strips (included above) 59.0 67.0
Interest-only strips (included above) 12.8 24.3
Other structured securities with derivative
characteristics (1) 107.4 105.2
(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-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(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:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $962.8 $945.3 $891.5
Nonredeemable preferred stock 13.7 5.9 4.2
Investment in affiliated
mutual funds 4.9 14.3 14.9
Mortgage loans 1.3 2.2 1.4
Policy loans 19.9 18.4 13.7
Reinsurance loan to affiliate 37.5 44.1 46.5
Cash equivalents 44.2 29.4 38.9
Other 10.0 2.1 8.4
-------- -------- --------
Gross investment income 1,094.3 1,061.7 1,019.5
Less investment expenses (13.8) (16.1) (15.2)
-------- -------- --------
Net investment income $1,080.5 $1,045.6 $1,004.3
======== ======== ========
Net investment income includes amounts allocable to experience rated
contractholders of $823.1 million, $787.6 million and $744.2 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Interest
credited to contractholders is included in current and future benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively.
The amount of dividends that may be paid to the shareholder in 1998 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$77.6 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
$80.5 million, $57.8 million and $70.0 million for the years ended December
31, 1997, 1996 and 1995, respectively. Statutory capital and surplus was
$778.7 million and $713.6 million as of December 31, 1997 and 1996,
respectively.
As of December 31, 1997 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.
F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains on investments were as follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $22.5 $11.1 $32.8
Equity securities 9.9 8.6 8.3
Other 3.6 -- 0.2
------ -------- ------
Pretax realized capital gains $36.0 $19.7 $41.3
====== ======== ======
After tax realized capital gains $23.2 $13.0 $25.8
====== ======== ======
Net realized capital gains of $96.1 million, $53.1 million and $61.1
million for 1997, 1996 and 1995, respectively, allocable to experience
rated contracts, were deducted from net realized capital gains and an
offsetting amount was reflected in policyholders' funds left with the
Company. Net unamortized gains were $138.1 million and $53.3 million at
December 31, 1997 and 1996, respectively.
Proceeds from the sale of available-for-sale debt securities and the
related gross gains and losses were as follows:
1997 1996 1995
----- ----- ----
(millions)
Proceeds on Sales $5,311.3 $5,182.2 $4,207.2
Gross Gains 25.8 24.3 44.6
Gross Losses 3.3 13.2 11.8
F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities)
(excluding those related to experience rated contractholders) were as
follows:
1997 1996 1995
---- ---- ----
(millions)
Debt securities $44.3 $(100.1) $255.9
Equity securities 5.6 (10.5) 27.3
Limited partnership -- -- 1.8
----- ------- ------
49.9 (110.6) 285.0
Increase (decrease) in deferred
income taxes (See Note 8) 17.5 (38.6) (36.5)
----- ------- ------
Net changes in accumulated other
comprehensive income $32.4 $(72.0) $321.5
===== ======= ======
Net unrealized capital gains allocable to experience rated contracts of
$356.7 million and $72.6 million at December 31, 1997 and $245.2 million
and $43.3 million at December 31, 1996 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 accumulated other comprehensive
income, which are net of amounts allocable to experience rated
contractholders, at December 31:
1997 1996 1995
---- ---- ----
(millions)
Debt securities
Gross unrealized capital gains $140.6 $101.7 $179.3
Gross unrealized capital losses (18.4) (23.8) (1.3)
----- ----- -----
122.2 77.9 178.0
Equity securities
Gross unrealized capital gains 21.2 16.3 27.2
Gross unrealized capital losses (0.1) (0.8) (1.2)
---- ---- -----
21.1 15.5 26.0
Deferred income taxes (See Note 8) 50.4 32.9 71.5
---- ---- -----
Net accumulated other
comprehensive income $92.9 $60.5 $132.5
==== ==== =====
F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to
experience rated contractholders) were as follows:
1997 1996 1995
---- ---- ----
(millions)
Unrealized holding gains (losses)
arising during the period (1) $98.8 $(14.8) $390.5
Less: reclassification adjustment
for gains and other items included
in net income (2) 66.4 57.2 69.0
----- ------ ------
Net unrealized gains (losses)
on securities $32.4 $(72.0) $321.5
===== ====== ======
(1) Pretax unrealized holding gains (losses) arising during the
period were $152.0 million, ($22.8) million and $600.8 million
for 1997, 1996 and 1995, respectively.
(2) Pretax reclassification adjustments for gains and other items
included in net income were $102.4 million, $87.7 million and
$107.5 million for 1997, 1996 and 1995, respectively.
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.
F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges (Continued)
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,
which were sold in April 1996. The cost allocated to the Company associated
with this charge was $9.1 million after tax ($14.0 million pretax).
Activity for 1997 and 1996 within the severance and facilities reserve
(pretax, in millions) and the number of positions eliminated related to
such actions were as follows:
(Millions) Reserve Positions
----------------------------------- ---------- ---------
Balance at December 31, 1995 $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
---------- ---------
Balance at December 31, 1996 47.9 524
Actions taken (1) (27.1) (163)
---------- ---------
Balance at December 31, 1997 $20.8 361
========== =========
(1) Includes $15.9 million and $8.0 million in 1997 and 1996,
respectively, of severance-related actions and $7.9 million and $4.1
million in 1997 and 1996, respectively, of corporate
allocation-related actions.
The Company's severance actions are expected to be substantially completed
by September 30, 1998. The corporate allocation actions were substantially
completed in 1997.
F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return, the
Illinois Unitary return and the Connecticut and the New York combined state
income tax returns of Aetna. Aetna allocates to each member an amount
approximating the tax it would have incurred were it not a member of the
consolidated group, and credits the member for the use of its tax saving
attributes used in the consolidated federal income tax return.
Income taxes for the years ended December 31, consist of:
1997 1996 1995
---- ---- ----
(millions)
Current taxes:
Income Taxes:
Federal income tax $64.5 $50.9 $82.9
State income tax 3.7 3.7 3.2
Net realized capital gains 45.6 25.3 28.5
----- ---- ----
113.8 79.9 114.6
----- ---- -----
Deferred taxes (benefits):
Income taxes:
Federal 8.4 (3.5) (14.4)
Net realized capital gains (losses) (32.8) (18.6) (12.9)
----- ----- -----
(24.4) (22.1) (27.3)
----- ----- -----
Total $89.4 $57.8 $87.3
===== ===== =====
Income taxes were different from the amount computed by applying the
federal income tax rate to income before income taxes for the following
reasons:
1997 1996 1995
---- ---- ----
(millions)
Income before income taxes $294.7 $198.9 $263.2
Tax rate 35% 35% 35%
------- ------- -------
Application of the tax rate 103.1 69.6 92.1
------- ------- -------
Tax effect of:
State income tax, net of
federal benefit 2.4 2.4 2.1
Excludable dividends (15.9) (8.7) (9.3)
Other, net (0.2) (5.5) 2.4
------- ------- --------
Income taxes $89.4 $57.8 $87.3
======= ======= ========
F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(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:
1997 1996
---- ----
(millions)
Deferred tax assets:
Insurance reserves $415.8 $344.6
Unrealized gains allocable to
experience rated contracts 150.1 100.8
Investment losses 6.6 7.5
Postretirement benefits other
than pensions 26.3 27.0
Deferred compensation 31.2 25.0
Pension (3.6) 7.6
Restructuring charge 9.5 17.6
Depreciation 3.9 2.6
Other 8.8 9.1
--------- --------
Total gross assets 648.6 541.8
Deferred tax liabilities:
Deferred policy acquisition costs 515.6 482.1
Market discount 5.1 6.8
Net unrealized capital gains 200.5 133.7
Other (0.6) (0.3)
--------- ---------
Total gross liabilities 720.6 622.3
--------- ---------
Net deferred tax liability $72.0 $80.5
========= =========
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes. As of December 31, 1997 and 1996, 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, 1997. 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.
F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
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.
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 amounts that are tax-deductible. As of
December 31, 1997, 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 $2.7 million, $4.3
million and $6.1 million for the years ended December 31, 1997, 1996 and
1995, respectively.
Employee Postretirement Benefits - In addition to providing pension
benefits, Aetna currently provides certain health care and life insurance
benefits 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. There is a cap on the
portion of the cost paid by the Company relating to medical and dental
benefits. 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 1997, 1996 and 1995 were $2.7
million, $1.8 million and $1.4 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. In 1997,
other changes in shareholder's equity includes an additional $0.8 million
reduction reflecting revisions to the allocation of these accrued
liabilities.
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.
F-26
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
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 1997, 1996 and 1995 were $0.6 million,
$0.7 million and $0.8 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 $4.4 million, $5.4 million and $4.9
million in 1997, 1996 and 1995, respectively.
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 1997, 1996
and 1995, were $2.9 million, $8.1 million and $6.3 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. In 1997, other changes in
shareholder's equity include an additional increase of $2.3 million
reflecting revisions to the allocation of the deferred tax benefit.
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 0.10% to
1.90% of their average daily net assets. The Company also receives fees
from Aetna managed mutual funds for serving as investment adviser. Under
the advisory agreements, these funds pay the Company a daily fee which, on
an annual basis, ranges, depending on the fund, from 0.25% to 0.85% of
their average daily net assets. The Company also receives fees (expressed
as a percentage of the average daily net assets) from some of its funds 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 mutual funds,
included in charges assessed against policyholders, amounted to $271.2
million, $186.8 million and $128.1 million in 1997, 1996 and 1995,
respectively. The Company may waive advisory fees at its discretion.
F-27
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
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 for affiliated mutual funds and adviser for 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 0.06% to 0.55% of the average daily net assets
under management. For the years ended December 31, 1997 and 1996, the
Company paid $45.5 million and $16.0 million in such fees.
The Company may, from time to time, make reimbursements to an Aetna managed
mutual fund for some or all of its operating expenses. Reimbursement
arrangements may be terminated at any time without notice.
Since 1981, all domestic individual non-participating life insurance of
Aetna and its subsidiaries has been issued by the Company. Effective
December 31, 1988, the Company entered into a reinsurance agreement with
Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the non-participating individual life and annuity business written by Aetna
Life prior to 1981 was assumed by the Company. A $6.1 million and a $108.0
million commission, paid by the Company to Aetna Life in 1996 and 1988,
respectively, was capitalized as deferred policy acquisition costs. 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. 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. The
Company maintained insurance reserves of $574.5 million ($397.2 million
relating to the modified coinsurance agreement and $177.3 million relating
to the coinsurance agreement) and $628.3 million as of December 31, 1997
and 1996, respectively, relating to the business assumed. The fair value of
the loan relating to assets held by Aetna Life was $412.3 million and
$625.3 million as of December 31, 1997 and 1996, respectively, and is based
upon the fair value of the underlying assets. Premiums of $176.7 million,
$25.3 million and $28.0 million and current and future benefits of $183.9
million, $39.5 million and $43.0 million were assumed in 1997, 1996 and
1995, respectively.
Investment income of $37.5 million, $44.1 million and $46.5 million was
generated from the reinsurance loan to affiliate in 1997, 1996 and 1995,
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 $32.5 million and
$28.9 million were maintained for this contract as of December 31, 1997 and
1996, 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
F-28
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
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 $5.9 million, $5.2 million and $3.2 million for 1997, 1996 and 1995,
respectively.
Effective October 1, 1997, the Company entered into a reinsurance agreement
with Aetna Life to assume amounts in excess of $0.2 million for certain of
its participating life insurance, on a yearly renewable term basis. Premium
amounts related to this agreement were $0.7 million in 1997.
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1997 or
1995.
The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO
in 1997 and 1996, respectively. 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 $37.0 million and $2.8 million
due from affiliates in 1997 and 1996, respectively. Other liabilities
include $1.2 million and $10.7 million due to affiliates for 1997 and 1996,
respectively.
As of December 31, 1997, Aetna transferred to the Company $2.5 million
based on its decision not to settle state tax liabilities for the years
1996 and 1997. This amount has been reported as an other increase in
retained earnings.
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.
F-29
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
11. Reinsurance (Continued)
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>
1997
----
Premiums:
Life Insurance $ 35.7 $15.1 $177.4 $198.0
Accident and Health Insurance 5.6 5.6 -- --
Annuities 67.9 -- 1.2 69.1
------- ------------- ----------- ---------
Total earned premiums $109.2 $20.7 $178.6 $267.1
======= ============= =========== =========
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
======= ============= =========== =========
</TABLE>
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, 1997, the
Company had commitments to purchase investments of $38.7 million. The fair
value of the investments at December 31, 1997 approximated $39.0 million.
F-30
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
(A wholly owned subsidiary of Aetna
Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities (Continued)
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:
1997 1996 1995
--------- --------- ---------
(millions)
Revenue:
Financial Services $1,277.9 $1,195.1 $1,211.3
Individual Life Insurance 620.4 445.7 407.9
--------- --------- ---------
Total revenue $1,898.3 $1,640.8 $1,619.2
========= ========= =========
Income before income taxes: (2)
Financial Services $188.2 $129.9 $160.1
Individual Life Insurance 106.5 83.0 103.1
--------- --------- ---------
Total income before
income taxes $294.7 $212.9 $263.2
========= ========= =========
Net income: (2)
Financial Services $137.5 $94.3 $113.8
Individual Life Insurance 67.8 55.9 62.1
--------- --------- ---------
Net income $205.3 $150.2 $175.9
========= ========= =========
Assets under management: (3)
Financial Services (4) $37,609.3 $27,268.1 $22,534.4
Individual Life Insurance 3,096.1 2,830.5 2,590.9
--------- --------- ---------
Total assets under management 40,705.4 $30,098.6 $25,125.3
========= ========= =========
(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 $551.5 million,
$366.4 million and $797.1 million at December 31, 1997, 1996 and
1995, respectively.
(4) The December 31, 1997 balance includes the transfer of $4,078.5
million of assets under management that were previously reported
by an affiliate.
F-31
<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. 4 TO
THE REGISTRATION STATEMENT
This Post-Effective Amendment No. 4 to Registration Statement No. 33-64277 is
comprised of the following papers and documents:
[bullet] The facing sheet.
[bullet] One Prospectus for the AetnaVest Estate Protector Variable Life
Insurance Policy consisting of 93 pages
[bullet] The undertaking to file reports
<PAGE>
[bullet] The undertaking pursuant to Rule 484
[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) Master General Agent Agreement(1)
(3)(ii) Life Insurance General Agent Agreement(1)
(3)(iii) Broker Agreement(1)
(3)(iv) Life Insurance Broker-Dealer Agreement(1)
(4) Not Applicable
(5)(i) AetnaVest Estate Protector Policy (70225-95)(2)
(5)(ii) Disability Benefit Rider(2)
(5)(iii) Four Year Term Rider(2)
(5)(iv) Split Option Amendment Rider(2)
(6)(i) Certificate of Incorporation of Aetna Life Insurance
and Annuity Company(3)
(6)(ii) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company(4)
(6)(iii) By-Laws as amended September 17, 1997 of Aetna Life
Insurance and Annuity Company(5)
(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(4)
(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(6)
(8)(iii) Sixth Amendment dated November 6, 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, March 1, 1996 and
May 1, 1997(7)
<PAGE>
(8)(iv) Form of Seventh Amendment dated as of May 1, 1998 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,
March 1, 1996, May 1, 1997 and November 6, 1997(8)
(8)(v) 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(4)
(8)(vi) 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(6)
(8)(vii) Sixth Amendment dated as of January 20, 1998 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,
March 1, 1996 and May 1, 1997(9)
(8)(viii) Form of Seventh Amendment dated as of May 1, 1998 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,
March 1, 1996, May 1, 1997 and January 20, 1998(8)
(8)(ix) Service Agreement between Aetna Life Insurance and
Annuity Company and Fidelity Investments Institutional
Operations Company dated as of November 1, 1995(6)
(8)(x) Amendment dated January 1, 1997 to Service Agreement
between Aetna Life Insurance and Annuity Company and
Fidelity Investments Institutional Operations Company
dated as of November 1, 1995(10)
(8)(xi) Fund Participation Agreement among Janus Aspen Series
and Aetna Life Insurance and Annuity Company and Janus
Capital Corporation dated December 8, 1997(11)
(8)(xii) Service Agreement between Janus Capital Corporation and
Aetna Life Insurance and Annuity Company dated December
8, 1997(11)
(8)(xiii) Fund Participation Agreement between Aetna Life
Insurance and Annuity Company and Oppenheimer Variable
Annuity Account Funds and Oppenheimer Funds, Inc.(12)
(8)(xiv) Service Agreement between Oppenheimer Funds, Inc. and
Aetna Life Insurance and Annuity Company(12)
(9) Not Applicable
<PAGE>
(10)(i) Application (70059-96)(13)
(10)(ii) Application (70559-96ZNY)(13)
(10)(iii) Application Supplement (70268-97 (3/98))(13)
(11) Insurance Transfer and Redemption Procedures(14)
2. Opinion and Consent of Counsel
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Actuarial Opinion and Consent
7. Consent of Independent Auditors
8. Copy of Power of Attorney(8)
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 reference to Post-Effective Amendment No. 1 to Registration
Statement on Form S-6 (File No. 33-64277), as filed electronically on
November 15, 1995 (Accession No. 00009026287-95-000062).
3. 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).
4. 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. 0000950146-97-000159).
5. 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. 0000950146-97-001589).
6. 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. 0000928389-96-000136).
7. Incorporated by Reference to Post-Effective Amendment No. 16 to
Registration Statement on Form N-4 (File No. 33-75964), as filed
electronically on February 9, 1998 (Accession No. 0000950146-98-000179).
8. Incorporated by reference to Post-Effective Amendment No. 9 to Registration
Statement on Form N-4 (File No. 333-01107), as filed electronically on
April 7, 1998 (Accession No. 0000950146-98-000564). 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).
9. Incorporated by Reference to Post-Effective Amendment No. 7 to Registration
Statement on Form S-6 (File No. 33-75248), as filed electronically on
February 24, 1998 (Accession No. 0000950146-98-000267).
<PAGE>
10. 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).
11. Incorporated by reference to Post-Effective Amendment No. 10 to
Registration Statement on Form N-4 (File No. 33-75992), as filed
electronically on December 31, 1997 (Accession No. 0000950146-97-001982).
12. Incorporated by reference to Post-Effective Amendment No. 27 to
Registration Statement on Form N-4 (File No. 33-34370), as filed
electronically on April 16, 1997 (Accession No. 0000950146-97-000617).
13. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form S-6 (File No. 333-15817), as filed electronically on
April 16, 1998 (Accession No. 0000950146-98-000637).
14. Incorporated by reference to Registration Statement on Form S-6 (File No.
333-27337), as filed electronically on May 16, 1997 (Accession No.
0001029869-97-000636).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Variable Life Account B of Aetna Life Insurance and Annuity Company, certifies
that it meets the requirements of Securities Act Rule 485(b) for effectiveness
of this Post-Effective Amendment to its Registration Statement on Form S-6 (File
No. 33-64277) and has duly caused this Post-Effective Amendment No. 4 to its
Registration Statement 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 16th
day of April, 1998.
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 J. McInerney*
---------------------------
Thomas J. McInerney
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 4 to the Registration Statement has been signed below by the
following persons in the capacities indicated and on the dates indicated.
Signature Title Date
Thomas J. McInerney* Director and President ) April
- -------------------------- (Principal Executive Officer) )
Thomas J. McInerney ) 16, 1998
)
)
Catherine H. Smith* Director and )
- -------------------------- Chief Financial Officer )
Catherine H. Smith )
<PAGE>
Signature Title Date
- --------- ----- ----
)
Shaun P. Mathews* Director )
- -------------------------- )
Shaun P. Mathews )
)
)
Deborah Koltenuk* Vice President and Treasurer, )
- -------------------------- Corporate Controller )
Deborah Koltenuk )
By: /s/ Julie E. Rockmore
--------------------------
Julie E. Rockmore
*Attorney-in-Fact
<PAGE>
VARIABLE LIFE ACCOUNT B
EXHIBIT INDEX
Exhibit No. Exhibit Page
- ----------- ------- ----
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) Master General Agent Agreement *
99-1.3(ii) Life Insurance General Agent Agreement *
99-1.3(iii) Broker-Dealer Agreement *
99-1.3(iv) Life Insurance Broker-Dealer Agreement *
99-1.5(i) AetnaVest Estate Protector Policy (70225-95) *
99-1.5(ii) Disability Benefit Rider *
99-1.5(iii) Four Year Term Rider *
99-1.5(iv) Split Option Amendment Rider *
99-1.6(i) Certification of Incorporation and By-Laws of Depositor *
99-1.6(ii) Amendment of 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
*Incorporated by reference
<PAGE>
Exhibit No. Exhibit Page
- ----------- ------- ----
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) Sixth Amendment dated November 6, 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, March 1, 1996 and May 1, 1997
99-1.8(iv) Form of Seventh Amendment dated as of May 1, 1998 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, March 1,
1996, May 1, 1997 and November 6, 1997
99-1.8(v) 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(vi) 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
*Incorporated by reference
<PAGE>
Exhibit No. Exhibit Page
- ----------- ------- ----
99-1.8(vii) Sixth Amendment dated as of January 20, 1998 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, March 1, 1996 and May 1, 1997
99-1.8(viii) Form of Seventh Amendment dated as of May 1, 1998 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, March 1,
1996, May 1, 1997 and January 20, 1998
99-1.8(ix) Service Agreement between Aetna Life Insurance and *
Annuity Company and Fidelity Investments Institutional
Operations Company dated as of November 1, 1995
99-1.8(x) Amendment dated January 1, 1997 to Service Agreement *
between Aetna Life Insurance and Annuity Company and
Fidelity Investments Institutional Operations Company
dated as of November 1, 1995
99-1.8(xi) Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company and Janus Aspen Series
dated April 19, 1994 and amended March 1, 1996
99-1.8(xii) Service Agreement between Janus Capital Corporation and *
Aetna Life Insurance and Annuity Company dated December
8, 1997
99-1.8(xiii) Fund Participation Agreement between Aetna Life *
Insurance and Annuity Company and Oppenheimer Variable
Annuity Account Funds and Oppenheimer Funds, Inc.
99-1.8(xiv) Service Agreement between Oppenheimer Funds, Inc. and *
Aetna Life Insurance and Annuity Company
99-1.10(i) Application (70059-96) *
*Incorporated by reference
<PAGE>
Exhibit No. Exhibit Page
- ----------- ------- ----
99-1.10(ii) Application (70559-96ZNY) *
99-1.10(iii) Application Supplement (70268-97 (5/98)) *
99-1.11 Insurance Transfer and Redemption Procedures *
99-2 Opinion and Consent of Counsel _______
99-6 Actuarial Opinion and Consent _______
99-7 Consent of Independent Auditors _______
99-8 Copy of Power of Attorney *
*Incorporated by reference
[Aetna Letterhead] 151 Farmington Avenue
[Aetna Logo] Hartford, CT 06156
Julie E. Rockmore
Counsel
Law Division, RE4A
April 16, 1998 Investments & Financial Services
(860) 273-4686
Fax: (860) 273-8340
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Aetna Life Insurance and Annuity Company and its
Variable Life Account B
Post-Effective Amendment No. 4 to Registration
Statement on Form S-6
Prospectus Title: AetnaVest Estate Protector
File Nos. 33-64277 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. 4. 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 Letterhead] 151 Farmington Avenue
[Aetna Retirement Services Logo] Hartford, CT 06156
Mark S. Reilly, FSA, MAAA
Pricing Actuary
Product & Brand Management
Retail Markets, TN41
Office: (860)273-8129
Fax: (860)273-4438
March 29, 1998
Re: AetnaVest Estate Protector (File No. 33-64277)
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 AetnaVest
Estate Protector Flexible Premium Variable Life Insurance Policy (the
"Policy"). I also provided actuarial advice concerning the preparation of
Post-Effective Amendment No. 4 to Registration Statement on Form S-6, File
No. 33-64277 (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 3, 1998 and February 27,
1998 included in this Post-Effective Amendment No. 4 to Registration Statement
(No. 33-64277) on Form S-6 and to the reference to our firm under the heading
"Independent Auditors" in the prospectus.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
April 16, 1998
