As filed with the Securities and Exchange Commission on April 27, 1999
Registration No. 33-76004*
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
Registration Statement
on
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 12 TO
REGISTRATION STATEMENT
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
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Variable Life Account B of
Aetna Life Insurance and Annuity Company
(Exact Name of Registrant)
Aetna Life Insurance and Annuity Company
(Name of Depositor)
151 Farmington Avenue, RE4A, Hartford, Connecticut 06156
Depositor's Telephone Number, including Area Code
(860) 273-4686
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Julie E. Rockmore, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06156
(Name and Complete Address of Agent for Service)
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Copy to George N. Gingold, Esq
197 King Philip Drive
West Hartford, CT 06117-1409
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on April 30, 1999, pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on pursuant to paragraph (a)(1) of Rule 485
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
*Pursuant to Rule 429(a) under the Securities Act of 1933, the Registrant has
included a combined prospectus under this Registration Statement which includes
all the information which would currently be required in a prospectus relating
to the securities covered by Registration Statement No. 33-02339.
================================================================================
<PAGE>
VARIABLE LIFE ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-8B-2
Item No Part I--Prospectus
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<S> <C>
1 Cover Page; The Company, the Separate Account and the General Account
2 Cover Page; The Company, the Separate Account and the General Account
3 Not Applicable
4 Cover Page; The Company; Additional Information--Distribution of the Policies
5 The Company, the Separate Account and the General Account
6 The Company, the Separate Account and the General Account
7 Not Applicable
8 Financial Statements
9 Legal Matters
10 Policy Summary; Charges and Deductions; Accumulation Unit; Policy Values; What Choices Do You Make When
You Buy a Policy?; Right to Instruct Voting of Fund Shares; Policy Lapse; Reinstatement of a Lapsed Policy;
Cash Surrender Value; Maturity Value; Death Benefit; Settlement Options; Policy Loans; Right to Examine the
Policy; Additional Information; Miscellaneous Provisions
11 Policy Summary; Policy Premium Payments; The Company, the Separate Account and the General Account
12 Not Applicable
13 Policy Summary; Charges and Deductions; Surrender Charge
14 Premium Payments; Policy Values; Accumulation Unit;
15 Policy Summary; The Funds; Premium Payments; Policy Values; Accumulation Unit
16 Policy Summary; The Funds; Premium Payments
17 Cash Surrender Value; Surrender Charges; Policy Loans
18 Tax Matters
19 Reports to Policy Owners; Right to Instruct Voting of Fund
Shares; Records and Accounts
20 Not Applicable
21 Policy Loans
22 Not Applicable
23 Directors and Officers of the Company
24 Miscellaneous Policy Provisions
25 The Company
26 Not Applicable
27 The Company
28 The Company; Directors and Officers of the Company
29 The Company
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 Additional Information
36 Not Applicable
37 Not Applicable
38 Additional Information
39 The Company
40 Not Applicable
41 The Company
42 Not Applicable
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
43 Not Applicable
44 Policy Values; Accumulation Unit
45 Not Applicable
46 Illustrations of Death Benefit, Total Account Values and Cash Surrender Values for AetnaVest Policies;
Illustrations of Death Benefits, Total Account Values and Cash Surrender Values for AetnaVest II Policies
47 Policy Summary; Policy Values
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 Not Applicable
52 The Separate Account
53 Tax Matters
54 Not Applicable
</TABLE>
3
<PAGE>
[Aetna Logo] AetnaVest & AetnaVest II
Aetna Life Insurance and Administrative Office: Variable Life Account B
Annuity Company Variable Life Account B Prospectus
Home Office: Personal Service Center, MVLI Dated: May 1, 1999
151 Farmington Avenue 350 Church Street
Hartford, Connecticut 06156 Hartford, CT 06103-1106
Telephone: (800) 334-7586 Telephone: (800) 334-7586
- --------------------------------------------------------------------------------
Flexible Premium Variable Life Insurance Policies
- --------------------------------------------------------------------------------
This Prospectus describes AetnaVest and AetnaVest II, two flexible premium
variable life insurance contracts (the "Policies" or "Certificates"), offered by
Aetna Life Insurance and Annuity Company (the "Company", "we", "us").
In October 1998, the Company and life insurance affiliates of Lincoln
Financial Group ("Lincoln") entered into a transaction whereby nearly all of
the Company's variable life insurance business was reinsured by the Lincoln
affiliates.
The Policies feature: - flexible premium payments;
- a choice of one of two death benefit options; and
- a choice of underlying investment options.
Each fund has its own investment objective. Not all funds may be available
under all Policies or in all jurisdictions. You should review each fund's
Prospectus before making your decision. The mutual funds ("Funds" or
"sub-accounts") that make up the Separate Account are:
<TABLE>
<S> <C>
o Aetna Ascent VP o Janus Aspen Balanced Portfolio
o Aetna Balanced VP, Inc. o Janus Aspen Growth Portfolio
o Aetna Income Shares d/b/a Aetna Bond VP o Janus Aspen Worldwide Growth Portfolio
o Aetna Crossroads VP o Oppenheimer Global Securities Fund/VA
o Aetna Variable Fund d/b/a Aetna Growth and Income VP o Oppenheimer Strategic Bond Fund/VA
o Aetna Index Plus Large Cap VP o Portfolio Partners MFS Emerging
o Aetna Legacy VP Equities Portfolio
o Aetna Variable Encore Fund d/b/a Aetna Money Market VP o Portfolio Partners MFS Research Growth Portfolio
o Fidelity Variable Insurance Products Fund (VIP) o Portfolio Partners MFS Value Equity Portfolio
Equity-Income Portfolio o Portfolio Partners Scudder International
o Fidelity Variable Insurance Products Fund II (VIP II) Growth Portfolio
Contrafund Portfolio o Portfolio Partners T. Rowe Price Growth
o Janus Aspen Aggressive Growth Portfolio Equity Portfolio
</TABLE>
Net premiums allocated to the Fixed Account earn fixed rates of interest. We
determine the rates periodically, but we guarantee that they will never be less
than 4.5% a year.
This Prospectus and other information about Variable Life Account B filed with
the Securities and Exchange Commission ("Commission") can be found in the SEC'S
web site at http://www.sec.gov. You can get copies of this information by
visiting the Commission's Public Reference Room or writing the Commission's
Public Reference Section, Washington, D.C. 20549-6009 and paying a duplicating
fee. You can get information on the operation of the Public Reference Room by
calling 1-800-SEC-0330.
The Commission has not approved or disapproved these securities or determined
if this Prospectus is accurate or complete. It is a criminal offense to state
otherwise.
To be valid, this Prospectus must have the current mutual funds' Prospectuses
with it. You should read the Prospectus and the attached prospectus for any
available Fund if you are considering buying a Certificate or exercising
elections under a Certificate. You should also keep them for future reference.
You can obtain any fund's Statement of Additional Information (SAI), which
provides more information about a fund, by calling (800) 334-7586.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Policy Summary .................................... 3
Initial Choices to be Made ....................... 3
Level on Varying Death Benefit ................... 3
Amount of Premium Payment ........................ 4
Selection of Funding Vehicles .................... 4
Charges and Fees ................................. 4
Policy Loans ..................................... 5
The Company, the Separate Account and the
General Account .................................. 6
The Company ...................................... 6
The Separate Account ............................. 6
The General Account .............................. 6
Death Benefit Options ............................. 7
Premiums .......................................... 7
The Fixed Account ................................. 8
The Funds ......................................... 8
Mixed and Shared Funding .......................... 10
Premium Payments .................................. 11
Accumulation Unit ................................. 11
Policy Values ..................................... 12
Transfers Among the Funding Options ............... 12
Telephone Transfers ............................... 13
Limits on Frequent Transfers ...................... 13
Automated Transfers (Dollar Cost Averaging) ....... 14
Maturity Value .................................... 14
Cash Surrender Value .............................. 14
Charges and Deductions ............................ 14
Premium Charge ................................... 14
Insurance and Administrative Charges ............. 14
Charges Assessed Against the Underlying Funds .... 17
Surrender Charges ................................ 18
Policy Surrender .................................. 20
Full Surrenders .................................. 20
Partial Surrenders ............................... 20
Policy Lapse ...................................... 21
Reinstatement of a Lapsed Policy .................. 22
Policy Loans ...................................... 22
Policy Changes .................................... 23
Right to Examine the Policy ....................... 23
Exchanging Your Policy ............................ 24
Death Benefit ..................................... 24
<CAPTION>
Page
<S> <C>
Policy Settlement ................................. 24
Settlement Options ............................... 25
Calculation of Settlement Payments ............... 26
Directors and Officers of the Company ............. 27
Reports to Policy Owners .......................... 30
Right to Instruct Voting of Fund Shares ........... 30
Disregard of Voting Instructions ................. 30
State Regulation .................................. 31
Legal Matters ..................................... 31
Additional Information ............................ 31
The Registration Statement ....................... 31
Distribution of the Policies ..................... 31
Records and Accounts ............................. 32
Independent Auditors ............................. 32
Year 2000 ........................................ 32
Tax Matters ....................................... 32
General .......................................... 32
Federal Tax Status of the Company ................ 32
Life Insurance Qualification ..................... 33
General Rules .................................... 33
Modified Endowment Contracts ..................... 34
Diversification Standards ........................ 34
Investor Control ................................. 34
Other Tax Considerations ......................... 35
Withholding ...................................... 36
Miscellaneous Policy Provisions ................... 36
The Policy ....................................... 36
Payment of Benefits .............................. 36
Age and Sex ...................................... 36
Incontestability ................................. 36
Suicide .......................................... 36
Protection of Proceeds ........................... 37
Non-Participation ................................ 37
Coverage Beyond Maturity ......................... 37
Appendix A--Illustrations of Death Benefit,
Total Account Values and Cash Surrender
Values for AetnaVest Policies .................... 38
Appendix B--Illustrations of Death Benefit,
Total Account Values, and Cash Surrender
Values for AetnaVest II Policies ................. 43
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 where
prohibited. No dealer, salesman or other person is authorized to give any
information or make any representation in connection with this offering other
than those contained in this Prospectus, or other sales material authorized by
the Company and if given or made, such other information or representations
must not be relied upon.
The purpose of the policy is to provide insurance protection. Life
insurance is a long-term investment. Owners should consider their need for
insurance coverage and the policy's long-term investment potential. We do not
claim that the policy is in any way similar or comparable to an investment in a
mutual fund.
2
<PAGE>
POLICY SUMMARY
This section is an overview of key Policy features for AetnaVest and
AetnaVest II. (Regulations in your state may vary the provisions of your own
Policy.) Your Policy is a flexible premium variable life insurance policy,
under which flexible premium payments are permitted and the death benefit and
policy values may vary with the investment performance of the funding option(s)
selected. Its value may change on a:
1) fixed basis;
2) variable basis; or a
3) combination of both fixed and variable basis.
Review your personal financial objectives and discuss them with a
qualified financial counselor before you buy a variable life insurance policy.
This Policy may, or may not, be appropriate for your individual financial
goals. The value of the Policy and, under one option, the death benefit amount
depend on the investment results of the funding options you select.
At all times, your Policy must qualify as life insurance under the
Internal Revenue Code of 1986 ("Code") to receive favorable tax treatment under
Federal law. If these requirements are met, you may benefit from favorable
federal tax treatment. The Company reserves the right to return your premium
payment if it results in your Policy's failing to meet federal tax law
requirements.
This Policy may also be offered to employers on a group basis. In this
case, individual Certificates are issued to each employee under a group
multiple employer trust plan. These Certificates contain all the provisions of
the individual Policies.
Initial Choices to be Made
The policy owner (the "Owner" or "you") is the person named in the policy
specifications who has all of the Policy ownership rights. If no Owner is
named, the Insured (the person whose life is insured under the Policy) will be
the Owner of the Policy. You, as the Owner, have three important choices to
make when the Policy is first purchased. You need to choose:
1) either the level or varying death benefit option;
2) the amount of premium you want to pay;
3) the amount of your net premium payment to be placed in each of the
funding options you select. The net premium payment is the balance of
your premium payment that remains after certain charges are deducted
from it;
Level or Varying Death Benefit
The death benefit is the amount the Company pays to the beneficiary(ies)
when the Insured dies. Before we pay the beneficiary(ies), any outstanding loan
account balances or outstanding amounts due are subtracted from the death
benefit. We calculate the death benefit payable, as of the date the Insured
died.
If you choose the level death benefit option, the death benefit will be
the greater of:
1) the "specified amount" in effect for the Policy at the time of the
Insured's death (the initial specified amount may be found on the
Policy's specification page); or
2) the applicable percentage of the "total account value" (the total of
the balances in the Fixed Account and the Separate Account minus any
outstanding Loan Account amounts);
If you choose the varying death benefit option, the death benefit will be
the greater of:
3
<PAGE>
1) the specified amount plus the total account value or
2) the applicable percentage of the total account value
See page 7 for more details.
If you have borrowed against your Policy or surrendered a portion of your
Policy, the Loan Account balance and any surrendered amount will reduce your
initial death benefit.
You may borrow within described limits against the Policy. You may
surrender the Policy in full or withdraw part of its value. A surrender charge
is applied if the Policy is surrendered totally.
Amount of Premium Payment
When you first buy your Policy, you must decide how much premium to pay.
Premium payments may be changed within the limits described on page 11. If your
Policy lapses because your monthly deduction is larger than the "cash surrender
value" (total account value minus the surrender charge and the amount necessary
to repay any loans) you may reinstate your Policy. See page 22.
You may use the value of the Policy to pay the premiums due and continue
the Policy in force if sufficient values are available for premium payments. Be
careful; if the investment options you choose do not do as well as you expect,
there may not be enough value to continue the Policy in force without more
premium payments. Charges against Policy values for the Cost of Insurance (see
page 15) increase as the Insured gets older.
When you first receive your Policy you will have 10 days to look it over
(more in some states). This is called the right-to-examine time period. Use
this time to review your Policy and make sure it meets your needs. During this
time period, your initial premium payment will be allocated to the funding
options you initially select. If you then decide you do not want your policy,
you will receive a refund. See page 23.
Selection of Funding Vehicles
This Prospectus focuses on the Separate Account investment information
that makes up the variable part of the Policy. If you put money into the
variable funding options, you take all the investment risk on that money. This
means that if the mutual fund(s) you select go up in value, the value of your
Policy, net of charges and expenses, also goes up. If those funds lose value,
so does your Policy. See page 12.
You must choose the Fund(s) sub-accounts in which you want to place each
net premium payment. Each sub-account invests in shares of a certain Fund. A
sub-account is not guaranteed and will increase or decrease in value according
to the particular Fund's investment performance.
You may also choose to place your net premium payment or part of it into
the Fixed Account. Net premium payments put into the Fixed Account become part
of the Company's General Account, do not share the investment experience of the
Separate Account and have a guaranteed minimum interest rate of 4.5% per year.
For additional information on the Fixed Account, see page 8.
Charges and Fees
We deduct a premium charge from all of your premium payments. For
AetnaVest, this is 2.50% (2.35% for California residents). For AetnaVest II,
this is currently 3.5%, and will never exceed 6%.
Monthly deductions are made from the total account value for
administrative expenses and the Cost of Insurance along with any supplemental
riders or benefits that are placed on your Policy. For AetnaVest Policies, this
administrative expense charge ranges from $0 to $5 per month. For AetnaVest II
Policies, this charge is $20 during the first policy year and $5 during
subsequent policy years.
Daily deductions are subtracted from the Separate Account for mortality
and expense risk. The current charge for mortality and expense risk under the
AetnaVest Policies varies:
4
<PAGE>
<TABLE>
<S> <C>
Aetna Ascent VP; Aetna Crossroads VP and Aetna Legacy VP ......... 0.55%
Aetna Balanced VP, Inc. and Aetna Growth and Income VP ........... 0.65%
For all other Funds available under AetnaVest Policies ........... 0.70%
</TABLE>
The current charge under AetnaVest II Policies is 0.70% of the average
daily net assets of the separate account. We reserve the right to change this
charge but it will never exceed 0.90%.
Currently, we deduct from Variable Life Account B (the separate account) a
daily administrative charge for the administration and maintenance of the
Policies. This charge is at an annual rate of 0.30% of the average daily net
assets of the separate account. It will never exceed 0.30% for AetnaVest and
0.50% for AetnaVest II.
Each Fund has its own management fee charge also deducted daily.
Investment results for the Funds you choose will be affected by the fund
management charges and other expenses. The table on page 16 shows you the
charges and other expenses currently in effect for each Fund.
At any time, you may make transfers between funding options without
charge. Within 45 days after each policy anniversary, you may also transfer to
the separate account $500 or, if greater, 25% of the fixed account value. The
Company may increase this limit in the future.
If you surrender your Policy, in full or in part, within the first 10
policy years, (15 years for AetnaVest II) a surrender charge will be deducted
from the amount paid to you. The initial surrender charge is based on the
specified amount and depends on the Insured's age and, in most states, the sex
of the Insured. This surrender charge will remain the same for policy years
1-5. For policy years 6 through 10 (6 through 15 for AetnaVest II) this charge
reduces on a monthly basis to zero.
For partial surrenders, the surrender charge is imposed in proportion to
the total of the account value less full surrender charges. A charge of the
lesser of $25 or 2% of the net surrender payment will be made against the total
account value.
If you surrender your Policy within the first 10 years (15 years for
AetnaVest II) after an increase in the specified amount, a surrender charge
will also be imposed which will be 70% of what the surrender charge would be on
a new policy with that specified amount. This charge will also apply for the
same time frame as stated previously. If the specified amount is decreased
within the first 10 policy years (15 years for AetnaVest II), the surrender
charge will remain the same. See page 19.
Policy Loans
If you decide to borrow against your Policy, interest will be charged to
the loan account. Currently, the interest rate on loans accrues at an annual
rate of 8%.
There are two types of policy loans: nonpreferred (those taken within the
first ten policy years); and preferred (those taken in the eleventh policy year
and beyond).
Annual interest will be credited on the loan account value at the same
rate interest is charged, for preferred loans, and at 4.5% per year (6% in New
York) for nonpreferred loans. See page 22.
5
<PAGE>
THE COMPANY, THE SEPARATE ACCOUNT, AND THE GENERAL ACCOUNT
The Company is registered as an investment adviser under the Investment
Advisers Act of 1940. It is also registered as a broker-dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. ("NASD").
The Separate Account
Variable Life Account B is the separate account that supports the variable
options. If you allocate any of your total account value to the variable
options, that value is invested in the separate account. The separate account
purchases shares of the Funds to fund the benefits provided by the
Certificates. We describe the currently available Funds, their investment
objectives, and their investment advisers in this Prospectus. Each Fund also
has a prospectus, which contains complete descriptions of the Fund's investment
objectives, investment restrictions and other material information relating to
an investment in the Fund. Any and all Fund distributions for Fund shares held
by the separate account will be reinvested in additional Fund shares at net
asset value.
We created Variable Life Account B in 1986 under Connecticut law. We hold
the separate account assets to satisfy the claims of the Certificate Owners to
the extent that they have allocated amounts to the Separate Account. Our other
creditors could reach only those separate account assets (if any) that are in
excess of the amount of our reserves and liabilities under the Certificates
with respect to the separate account. The Company is responsible for meeting
all obligations to Owners under the Certificates.
The separate account is registered with the Commission as a unit
investment trust under the Investment Company Act of 1940 (the "1940 Act") and
meets the definition of separate account under the federal securities laws. The
registration of the separate account involves no 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.
The General Account
The General Account is the Company's general asset account, in which
assets attributable to the non-variable portion of the Policies are held. Both
the fixed account value and the loan account value are held in the General
Account.
The Lincoln National Life Insurance Company ("Lincoln") and its affiliates
perform certain administrative functions relating to the Policies, and
maintains books and records necessary to operate and administer the Policies.
6
<PAGE>
DEATH BENEFIT OPTIONS
At the time of purchase, you must choose between the two available death
benefit options. The amount payable under either option will be determined as
of the date of the Insured's death.
Option 1 generally provides a level death benefit. Under Option 1, the
death benefit will be the higher of the Specified Amount (a minimum of
$100,000), or the applicable percentage of the Total Account Value. The
percentage is 250% through age 40 and decreases yearly to 100% at age 95.
Option 2 provides a varying death benefit which increases or decreases
over time, depending on the amount of premium paid and the investment
performance of the underlying funding options selected. Under Option 2, the
death benefit will be the higher of either the specified amount plus the total
account value; or the applicable percentage of the total account value.
Under both Option 1 and Option 2, the death benefit may be affected by
partial surrenders. The death benefit for both options will be reduced by the
amount necessary to repay any loans in full.
PREMIUMS
At the time you purchase a Policy, you also choose the amount of premium
you will pay. You may vary premium payments to some extent and still keep your
Policy in force. To understand how this works, there are three terms you should
be familiar with. These are: basic premium, planned premiums, and additional
premiums.
Basic premium is that premium which must be paid to assure that the Policy
remains in force for at least 2 years after issue, assuming there have been no
loans or surrenders. The basic premium is stated in the Policy. If basic
premiums are not paid, or if there are surrenders or loans taken during the
first two Policy Years, the Policy will lapse if the cash surrender value is
less than the monthly deduction.
Your basic premiums are not current if your actual premiums paid, minus
loans and minus partial surrenders, are less than the basic premium (expressed
as a monthly amount) times the number of months the Policy has been in force.
After the first two Policy years, as long as the Policy's cash surrender
value is greater than the monthly deduction, your Policy will not lapse.
Planned premiums are those premiums you choose to pay on a scheduled
basis. These are usually equal to or greater than the basic premium. We will
bill you annually, semiannually, or quarterly, or at any other agreed-upon
frequency. Pre-authorized monthly check payments may also be arranged.
Additional premiums are any premiums you pay in addition to planned
premiums.
Payment of basic premiums, planned premiums or additional premiums in any
amount will not, except as noted above, guarantee that your Policy will remain
in force. Conversely, failure to pay planned premiums or additional premiums
will not necessarily cause your Policy to lapse. (See "Policy Lapse." Page 21)
You may increase your planned premium at any time by submitting a written
notice to us or by paying additional premiums, except that:
1) We may require evidence of insurability if the additional premium or
the new planned premium during the current policy year would increase
the difference between the death benefit and the total account value. If
satisfactory evidence of insurability is requested and not provided, we
will refund the increase in premium without interest and without
participation of such amounts in the underlying funding options;
7
<PAGE>
2) No premiums can be accepted if they would disqualify the Policy as a
"life insurance policy" under federal tax laws. 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; and
3) When there is an outstanding loan, all premiums paid in excess of the
basic premium will be considered repayment of the loan account value
(this is true in all states for AetnaVest Policies and in all states
except Texas for AetnaVest II Policies).
Under limited circumstances, we may backdate a Policy, upon request, by
assigning an issue date earlier than the date the application is signed but no
earlier than six months prior to state approval of the Policy. Backdating may
be desirable, for example, so that you can purchase a particular specified
amount for lower cost of insurance rates, based on a younger insurance age. For
a backdated Policy, you must pay the minimum premium payable for the period
between the issue date and the date the initial premium is credited to the
separate account. Backdating your Policy will not affect the date on which your
premium payments are credited to the separate account and your policy is
credited with "accumulation units." Your Policy cannot be credited with
accumulation units until your net premium is actually deposited in the separate
account. (See "Policy Values.")
THE FIXED ACCOUNT
You may allocate all or a part of your premiums to the Fixed Account,
which will be credited with interest at a rate determined by us from time to
time, but guaranteed to be at least 4.5% per year. The interest rate credited
to each premium payment will depend on the date the payment is received at our
Administrative Office.
Credited interest rates reflect the Company's return on the Fixed Account
invested assets and the amortization of any realized gains and/or losses which
the Company may incur on these assets.
THE FUNDS
You may also allocate all or a portion of your premiums to the Separate
Account and direct that they be invested in one or more of the Funds. Each of
the Funds is an open-end, management investment company whose shares are
available to fund the benefits provided by the Policy. Not all Funds may be
available under all Policies or in all jurisdictions. In addition, the Company
may add, withdraw or substitute Funds, subject to the conditions in the Policy
and to compliance with regulatory requirements. The investment results of the
Funds are likely to differ significantly and there is no assurance that any of
the Funds will achieve their respective investment objectives. Shares of the
Funds will rise and fall in value and you could lose money by investing in the
Funds. Shares of the Funds are not bank deposits and are not guaranteed,
endorsed or insured by any financial institutions, the Federal Deposit
Insurance Corporation or any other government agency. Unless otherwise noted,
all Funds are diversified, as defined under the Investment Company Act of 1940.
Refer to the Fund prospectuses for additional information. Fund prospectuses
may be obtained free of charge from our Administrative Office at the address
and phone number listed on the cover of this Prospectus, or by contacting the
SEC Public Reference Room. Orders for the purchase of Fund shares may be
subject to acceptance by the Fund. We reserve the right to reject, without
prior notice, any amounts allocated to a sub-account if the sub-account
investment in the corresponding Fund is not accepted by the Fund for any
reason.
o Aetna Balanced VP, 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)
8
<PAGE>
o 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. It is anticipated that
capital appreciation and investment income will both be major factors in
achieving total return.(1)
o 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. It is anticipated that capital
appreciation and investment income will both be major factors in achieving
total return.(1)
o 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)
o Aetna Generation Portfolios, Inc.--Aetna Ascent VP seeks to provide capital
appreciation. The Portfolio is designed for investors who generally have an
investment horizon exceeding 15 years and who have a high level of risk
tolerance.(1)
o Aetna Generation Portfolios, Inc.--Aetna Crossroads VP seeks to provide
total return (i.e., income and capital appreciation, both realized and
unrealized). The Portfolio is designed for investors who generally have an
investment horizon exceeding 10 years and who have a moderate level of risk
tolerance.(1)
o Aetna Generation Portfolios, Inc.--Aetna Legacy VP seeks to provide total
return consistent with preservation of capital. The Portfolio is designed
for investors who generally have an investment horizon exceeding five years
and who have a low level of risk tolerance.(1)
o Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP seeks to
outperform the total return performance of the Standard & Poor's 500
Composite Index (S&P 500), while maintaining a market level of risk.(1)
o Fidelity Variable Insurance Products Fund Equity-Income Portfolio seeks
reasonable income. The fund will also consider the potential for capital
appreciation. The fund seeks a yield which exceeds the composite yield on
the securities comprising the S&P 500.(2)
o Fidelity Variable Insurance Products Fund II--Contrafund Portfolio seeks
long term capital appreciation by investing primarily in common stocks of
companies whose value the investment adviser believes is not fully
recognized by the public.(2)
o Janus Aspen Series--Aggressive Growth Portfolio is a nondiversified
portfolio that seeks long-term growth of capital. The Portfolio pursues its
investment objective by investing primarily in common stocks selected for
their growth potential, and normally invests at least 50% of its equity
assets in medium-sized companies. Medium-sized companies are those whose
market capitalizations at the time of investment fall within the range of
companies in the S&P MidCap 400 Index. Market capitalization is a commonly
used measure of the size and value of a company. The market capitalizations
within the Index will vary, but as of December 31, 1998, they ranged from
approximately $142 million to $73 billion.(3)
o 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 normally 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. This Portfolio normally invests at least 25% of its assets in
fixed-income securities.(3)
o 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 selected
for their growth potential. Although the Portfolio can invest in companies
of any size, it generally invests in larger, more established issuers.(3)
9
<PAGE>
o 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 by investing primarily in common
stocks of companies of any size throughout the world. The Portfolio
normally invests in issuers from at least five different countries,
including the United States. The Portfolio may at times invest in fewer
than five countries or even a single country.(3)
o Oppenheimer Global Securities Fund/VA 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 possibilities but
which may be considered to be speculative.(4)
o Oppenheimer Strategic Bond Fund/VA 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)
o Portfolio Partners, Inc.--MFS Emerging Equities Portfolio seeks to provide
long-term growth of capital.(5)(a)
o Portfolio Partners, Inc.--MFS Research Growth Portfolio seeks long-term
growth of capital and future income.(5)(a)
o Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation.(5)(a)
o Portfolio Partners, Inc.--Scudder International Growth Portfolio seeks
long-term growth of capital primarily through a diversified portfolio of
marketable foreign equity securities with high growth potential.(5)(b)
o Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term capital growth and, secondarily, increasing dividend
income.(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 (subadviser)
(b) Scudder Kemper Investments, Inc. (subadviser)
(c) T. Rowe Price Associates, Inc. (subadviser)
MIXED AND SHARED FUNDING
Shares of the Funds are available to insurance company separate accounts
which fund variable annuity contracts and variable life insurance policies,
including the Policies described in this Prospectus. Because Fund shares are
offered to separate accounts of both affiliated and unaffiliated insurance
companies, it is conceivable that, in the future, it may not be advantageous
for variable life insurance separate accounts and variable annuity separate
accounts to invest in these Funds simultaneously, since the interests of such
Policy Owners or contractholders may differ. Although neither the Company nor
the Funds currently foresees any such disadvantages either to variable life
insurance or to variable annuity policyholders, each Fund's Board of
Trustees/Directors has agreed to monitor events in order to identify any
material irreconcilable conflicts which
10
<PAGE>
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.
PREMIUM PAYMENTS
If you make a sufficient premium payment when you apply for a Policy, and
have answered favorably certain questions relating to the Insured's health, a
"temporary insurance agreement" in the amount applied for (subject to stated
maximums) will be provided.
After the first premium payment, all premiums must be sent directly to our
Administrative Office and will be deemed received when actually received at the
Administrative Office. Your premium payments will be allocated, as you have
directed, as of the valuation date on which each payment is received in the
Administrative Office.
You may reallocate your future premium payments at any time, up to four
times per year, free of charge. After four times, a $10 charge is imposed on
each subsequent change in order to reimburse us for costs associated with
allocation changes. Any reallocation will apply to premium payments made after
you have received written verification from us.
ACCUMULATION UNIT
An "accumulation unit" is the measure of the net investment result of each
variable funding option. Accumulation units are used to calculate the value of
the variable portion of your Policy (prior to the election of a settlement
option). Accumulation units are valued at the end of each normal business day
Monday through Friday that the New York Stock Exchange is open (valuation
date). A "valuation period" is the period of 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 Fund. The net investment factor equals the
net investment rate plus 1.0000000. The net investment rate is determined
separately for each Fund as follows:
The net investment rate equals
(a) the net assets of the Fund held in the separate account at the end of a
valuation period, minus
(b) the net assets of the Fund held in the separate account at the beginning
of that valuation period, plus or minus
(c) taxes or provisions for taxes, if any, attributable to the operation of
the separate account divided by
(d) the value of the accumulation units held by the separate account at the
beginning of the valuation period, minus
(e) a daily charge at an annual rate not to exceed 0.90% of the value of the
Fund shares held in the separate account for mortality and expense risks
and no more than 0.50% (0.30% for AetnaVest) of the value of the Fund
shares held in the separate account for the Company's administrative
expenses attributable to Policies funded through the separate account.
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<PAGE>
The current charge for mortality and expense risk under AetnaVest Policies is
equal to annual rates as follows, applied to the average daily net assets of
the Funds:
<TABLE>
<S> <C>
Aetna Ascent VP, Aetna Crossroads VP and Aetna Legacy VP ......... 0.55%
Aetna Balanced VP, Inc. and Aetna Growth and Income VP ........... 0.65%
For all other Funds available under AetnaVest Policies ........... 0.70%
</TABLE>
The current charge for mortality and expense risk under AetnaVest II Policies
is equal to an annual rate of 0.70% of the Funds' average daily net assets.
A daily deduction at a rate not to exceed 0.30% per year for AetnaVest, or
0.50% per year for AetnaVest II (currently 0.30% for both Policies), is also
taken from the separate account value to pay for administrative expenses.
POLICY VALUES
Once your Policy has been issued, each premium payment allocated to a
variable funding option of the separate account will be credited to your Policy
in the form of accumulation units of the funding option based on that funding
option's accumulation unit value (AUV). Initial premium will be credited to
your account at the AUV computed on the next valuation date following our
acceptance of the application. Each subsequent premium received by the Company
by the close of business of the New York Stock Exchange will be credited to
your account at the AUV computed on the next valuation date following our
receipt of your premium. The AUV may increase or decrease. The number of
accumulation units credited is determined by dividing the net premium (the
premium less the charge deducted from it) by the AUV next computed after we
receive the premium. Shares of a Fund are purchased by the Separate Account at
the net asset value next determined by the Fund following receipt of the net
premium payment by the Company. Since each Fund has a unique AUV, a policy
owner who has elected a combination of funding options will have accumulation
units credited to each funding option.
The value of your Policy is determined by:
(a) multiplying the total number of accumulation units credited to the
Policy for each funding option, respectively, by the appropriate current
AUV; and
(b) if you have elected a combination of funding options, totaling the
resulting values for each portion of the Policy; and
(c) adding any fixed account or loan account value.
The number of accumulation units credited to a Policy will not be impacted
by any subsequent change in the value of an accumulation unit. The number of
units is increased by subsequent contributions to or transfers into that
funding option, and decreased by charges and withdrawals from that funding
option.
Fixed Account values will reflect amounts allocated to the General Account
through either payment of premiums or transfers from the separate account.
There is no assurance that the separate account value of the Policy will equal
or exceed the premiums paid and allocated to the separate account. You will be
advised at least annually as to the number of accumulation units which remain
credited to the Policy, the current accumulation unit values, and your total
account value.
TRANSFERS AMONG THE FUNDING OPTIONS
You may elect to transfer your accumulated separate account value among
any of the Funds, or from any of the Funds to the Fixed Account. Within the 45
days after your Policy's anniversary, you may also transfer a portion of the
fixed account value to one or more Funds. This type of transfer is allowed only
once in the 45-day period and will be effective on the valuation date that your
request is received in good order at our
12
<PAGE>
Administrative Office. The amount of such transfer cannot exceed the greater of
(1) 25% of the fixed account value, or (2) $500. If the fixed account value is
less than or equal to $500, you may transfer all or a portion of the fixed
account value. We may increase this limit from time to time. The first four
transfers in any one policy year are made free of charge. Each additional
transfer will be subject to a $10 charge.
Any transfer among the Funds or to the Fixed Account will result in the
crediting and cancellation of accumulation units based on the accumulation unit
values next determined after a written request is received by us at our
Administrative Office, provided the request is received by the close of
business of the New York Stock Exchange. We reserve the right to limit the
total number of Funds you may elect to 17 over the lifetime of the Policy.
For AetnaVest II Policies, we will waive the $10 charge if you are
changing your allocation so that 100% of the existing separate account value
and all future allocations are credited to the Fixed Account.
If you contemplate the transfer of assets, you should consider the risks
inherent in a shift from one funding option to another. In general, frequent
transfers based on short-term expectations will tend to accentuate the danger
that a transfer will be made at an inopportune time.
Orders for the purchase of Fund shares may be subject to acceptance by the
Fund. We reserve the right to reject, without prior notice, any transfer
request to a subaccount if the subaccount's investment in the corresponding
Fund is not accepted by the Fund for any reason.
TELEPHONE TRANSFERS
You may request a transfer of account values either in writing or by
telephone. In order to make telephone transfers, you must complete a written
telephone transfer authorization form and return it to the Administrative
Office. Once the form is processed, you 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 and processed, 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.
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, you 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.
LIMITS ON FREQUENT TRANSFERS
The Policy is not designed to serve as a vehicle for frequent trading in
response to short-term fluctuations in the market. Such frequent trading can
disrupt management of a Fund and raise its expenses. This in turn can have an
adverse effect on Fund performance. Accordingly, organizations and individuals
who use market-timing investment strategies and make frequent transfers should
not purchase the Policy.
We reserve the right to restrict, in our sole discretion and without prior
notice, transfers initiated by a market-timing organization or individual or
other party authorized to give transfer instructions on behalf of multiple
policy owners. Such restrictions could include:
(1) Not accepting transfer instructions from an agent acting on behalf of
more than one policy owner; and
(2) Not accepting preauthorized transfer forms from market-timers or other
entities acting on behalf of more than one policy owner at a time.
13
<PAGE>
We further reserve the right to impose, without prior notice, restrictions
on any transfers that we determine, in our sole discretion, will disadvantage
or potentially hurt the rights or interests of other policy owners.
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 account values from the Funds on
a monthly or quarterly basis from the Aetna Money Market VP to any other
investment option through written request or other method acceptable to the
Company. You must have a minimum of $5,000 allocated to the Aetna Money Market
VP in order to enroll in the dollar cost averaging program. The minimum
automated transfer amount is $50 per month. There is currently no charge for
the dollar cost averaging 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. We reserve 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.
MATURITY VALUE
The maturity value of the Policy is the total account value on the
maturity date, less the amount necessary to repay any loans in full.
CASH SURRENDER VALUE
The cash surrender value of your Policy is the amount you can receive in
cash by surrendering the policy. The cash surrender value equals the total
account value minus the applicable surrender charge, less the amount necessary
to repay any loans in full. Your Policy's total account value is equal to the
sum of the fixed account value the separate account value and loan account
value.
The cash surrender value will never be less than zero. All or a part of
the cash surrender value may be applied to one or more of the settlement
options.
CHARGES AND DEDUCTIONS
Premium Charge
This deduction represents average applicable state premium taxes (ranging
up to 4%) as well as administrative expenses and federal income tax
liabilities. For AetnaVest Policies, a deduction of 2.50% of premiums paid
(2.35% for California issues) will be made. For AetnaVest II Policies, a
deduction of 3.5% (guaranteed to be no higher than 6%) will be made to cover
such taxes and other expenses.
Insurance and Administrative Charges
Deductions are made from your total account value on a periodic basis for
insurance and administrative costs. The charges for insurance and
administrative costs will vary from Policy to Policy. They are broken down as
follows:
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<PAGE>
(a) A monthly deduction is made from the total account value. This deduction
includes charges for the Cost of Insurance, for any supplemental riders or
benefits, and for administrative expenses.
The Cost of Insurance is equal to the Amount at Risk (the death benefit
before deductions for loans, divided by 1.0036748, minus the total account
value), multiplied by the Cost of Insurance rate which will not exceed the rate
shown in the Policy. (Such rate varies according to the attained age, premium
class and, in most states, sex of the Insured, and is based on the
Commissioner's 1980 Standard Ordinary Mortality Tables (the "1980 CSO Tables"),
nonsmoker and smoker versions.)
Charges for any supplemental riders or benefits are described in the
applicable rider or benefit policy form.
A monthly administrative charge and a daily asset-based charge (see (c)
following) are also charged. These charges are designed to recover acquisition
and maintenance costs under the Policy such as policy underwriting and issue,
policyholder reports and transaction handling. For AetnaVest Policies, the
monthly charge decreases by attained age. At younger ages, the account value
builds slowly so the daily asset-based charge is small. In those years, the
monthly charge must be larger to cover the Company's expenses. As the total
account value grows, the asset-based daily charge can cover the Company's
expenses without as high a monthly expense charge. The monthly charge varies
for AetnaVest Policies according to the table below:
AETNAVEST
ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Specified Amount
-------------------------
Attained $100,000- $1,000,000
Age 999,999 & Over
- ------------- ----------- -----------
<S> <C> <C>
Up to 29 $ 5.00 $ 3.00
30-39 4.00 2.00
40-49 3.00 1.00
50-59 2.00 0.00
60-69 1.00 0.00
70 & Over 0.00 0.00
</TABLE>
For AetnaVest II Policies, the monthly charge for administrative expenses
in the first Policy Year is $20 and in all subsequent Policy Years, the monthly
charge is $5. The monthly administrative charge and the asset-based
administrative charge work together to cover the Company's acquisition and
maintenance costs. In later years of the Policy, revenue collected from the
daily asset-based charge grows with the total account value to cover increased
expenses from account-based transactional expenses. The administrative charges
will not exceed our costs.
The monthly deduction is taken proportionately from each funding option,
if more than one is used. This is accomplished by canceling accumulation units
and withdrawing the value of the canceled accumulation units from each funding
option in the same proportion as their respective values have to your fixed
account and separate account values. The monthly deduction is made at the same
time each month, beginning with the issue date.
(b) A daily deduction at a rate not to exceed 0.90% per year is taken only from
the separate account value for mortality and expense risks. This deduction
is currently set at the following amounts:
<TABLE>
<S> <C>
1) AetnaVest Policies:
Aetna Ascent VP, Aetna Crossroads VP and Aetna Legacy VP ......... 0.55%
Aetna Balanced VP, Inc. and Aetna Growth and Income VP ........... 0.65%
For all other Funds available under AetnaVest .................... 0.70%
2) For all Funds available under AetnaVest II .................... 0.70%
</TABLE>
This charge may be increased or decreased to reflect our expectations of future
mortality and expense experience.
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<PAGE>
(c) A daily deduction at a rate not to exceed 0.30% per year for AetnaVest, or
0.50% per year for AetnaVest II (currently 0.30% for both Policies), is
also taken from the separate account value to pay for administrative
expenses as described under (a) above.
Once a Policy is issued, monthly deductions, including Cost of Insurance
charges, will be taken from your Policy values as of the issue date, even if
the issue date is earlier than the date the application is signed (See
"Premiums"). If the Policy's issuance is delayed due to underwriting
requirements, the charges will not be assessed until the underwriting is
complete and the application for the policy is approved. Cost of Insurance
charges will be in amounts based on the specified amount of the Policy issued,
even if the temporary insurance coverage received during the underwriting
period is for a lesser amount. If we decline an application, we will refund the
full premium payment made.
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<PAGE>
Charges Assessed Against the Underlying Funds
The following table illustrates the investment advisory fees, other
expenses and total expenses paid by each of the Funds as a percentage of
average net assets based on figures for the year ended December 31, 1998 unless
otherwise indicated:
<TABLE>
<CAPTION>
Net Fund
Total Fund Annual
Annual Operating Expenses
Investment Expenses Without Total After
Advisory Other Waivers or Waivers and Waivers or
Fund Name Fees(1) Expenses Reductions Reductions Reductions
- -------------------------------------------------- ------------ ---------- ------------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP(2)(3) 0.60% 0.15% 0.75% 0.00% 0.75%
Aetna Balanced VP, Inc.(3) 0.50% 0.09% 0.59% -- 0.59%
Aetna Bond VP(3) 0.40% 0.10% 0.50% -- 0.50%
Aetna Crossroads VP(2)(3) 0.60% 0.15% 0.75% 0.00% 0.75%
Aetna Growth and Income VP(3) 0.50% 0.08% 0.58% -- 0.58%
Aetna Index Plus Large Cap VP(2)(3)) 0.35% 0.10% 0.45% 0.00% 0.45%
Aetna Legacy VP(2)(3) 0.60% 0.16% 0.76% 0.00% 0.76%
Aetna Money Market VP(3) 0.25% 0.09% 0.34% -- 0.34%
Fidelity VIP Equity-Income Portfolio(4) 0.49% 0.09% 0.58% 0.01% 0.57%
Fidelity VIP II Contrafund Portfolio(4) 0.59% 0.11% 0.70% 0.04% 0.66%
Janus Aspen Aggressive Growth Portfolio(5) 0.72% 0.03% 0.75% 0.00% 0.75%
Janus Aspen Balanced Portfolio(5) 0.72% 0.02% 0.74% 0.00% 0.74%
Janus Aspen Growth Portfolio(5) 0.72% 0.03% 0.75% 0.07% 0.68%
Janus Aspen Worldwide Growth Portfolio(5) 0.67% 0.07% 0.74% 0.02% 0.72%
Oppenheimer Global Securities Fund/VA(6) 0.68% 0.06% 0.74% -- 0.74%
Oppenheimer Strategic Bond Fund/VA(6) 0.74% 0.06% 0.80% -- 0.80%
Portfolio Partners, Inc. MFS Emerging
Equities Portfolio(7) 0.68% 0.13% 0.81% 0.00% 0.83%
Portfolio Partners MFS Research
Growth Portfolio(7) 0.70% 0.15% 0.85% -- 0.85%
Portfolio Partners MFS Value Equity Portfolio(7) 0.65% 0.25% 0.90% -- 0.90%
Portfolio Partners Scudder International
Growth Portfolio(7) 0.80% 0.20% 1.00% -- 1.00%
Portfolio Partners T. Rowe Price Growth
Equity Portfolio(7) 0.60% 0.15% 0.75% -- 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 generally paid out of
the management fees and are not charged to investors.
(2) The investment adviser is contractually obligated through December 31, 1999
to waive all or a portion of its investment advisory fee and/or its
administrative services fee and/or to reimburse a portion of other
expenses in order to ensure that the portfolio's Total Fund Annual
Expenses do not exceed the percentage reflected under Net Fund Annual
Expenses After Waivers or Reductions.
(3) Prior to May 1, 1998, the portfolio's investment adviser provided
administrative services to the portfolio and assumed the portfolio's
ordinary recurring direct costs under an administrative services
agreement. After that date, the portfolio's investment adviser provided
administrative services but no longer assumed all of the portfolio's
ordinary recurring direct costs under an 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,
1998, but reflect the fee payable under the new administrative services
agreement and estimates the portfolio's ordinary recurring direct costs.
17
<PAGE>
(4) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds, or the investment
adviser on behalf of 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. These credits are
included under Total Waivers and Reductions.
(5) All expenses are stated both with and without contractual waivers and fee
reductions by 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. Janus Capital has agreed to continue the other waivers and
fee reduction until at least the next annual renewal of the advisory
agreement.
(6) Fee waiver/expense reimbursement obligations do not apply to these
portfolios.
(7) The investment adviser has agreed to reimburse the portfolios for expenses
and/or waive its fees, so that, through at least April 30, 2000, the
aggregate of each portfolio's expenses will not exceed the combined
investment advisory fees and other expenses shown under the Net Fund
Annual Expenses After Waivers or Reductions column above. For the
Portfolio Partners MFS Emerging Equities Portfolio, the Total Fund Annual
Expenses Without Waivers or Reductions for 1998 were less than the
percentage reflected under the Net Fund Annual Expenses After Waivers or
Reductions column. Nevertheless, the investment adviser will waive fees
and/or reimburse expenses if that portfolio's Total Fund Annual Expenses
Without Waivers or Reductions for 1999 exceed the percentage reflected
under the Net Fund Annual Expenses After Waivers or Reductions column.
For further details on each Fund's expenses please refer to that Fund's
prospectus.
Surrender Charges
The surrender charge is the amount retained by the Company upon the full
or partial surrender of the Policy. There will be a surrender charge if you
surrender your Policy (in whole or in part) before the end of ten years for
AetnaVest Policies and fifteen years for AetnaVest II Policies, from either the
Policy issue date or from the effective date of an increase in the specified
amount under the Policy. The surrender charge is imposed partially as a
deferred sales charge, and also to enable the Company to recover certain
administrative costs.
The initial surrender charge is based on the specified amount. It also
depends on the Insured's issue age and, in most states, sex.
The dollar amount of the surrender charge will remain the same for five
years following the issue date. Thereafter, the charge will decline monthly for
the next five years (ten for AetnaVest II) so that, ten years after the issue
date for AetnaVest Policies and fifteen years after the issue date for
AetnaVest II Policies (assuming no increases in the specified amount), the
surrender charge will be zero.
If you decrease the specified amount while the surrender charge applies,
the surrender charge will remain the same.
If you increase the specified amount (which you can do at any time after
the first policy year subject to satisfactory evidence of the Insured's
insurability), a new surrender charge will be applicable, in addition to the
then-existing surrender charge. This charge will be determined based on the
Insured's attained age, sex, and underwriting status at the issue date (except
for AetnaVest II Policies issued in Massachusetts and Montana where this charge
will not be determined based on sex). The surrender charge applicable to the
increase will be 70% of the surrender charge on a new policy whose specified
amount equals the amount of the increase, and will cover administrative
expenses. The additional surrender charge will also remain constant for five
years from the start of the policy year in which the increase occurs, and will
decrease to zero at the
18
<PAGE>
end of ten years for AetnaVest Policies and fifteen years for AetnaVest II
Policies. See the example in the boxes on page 19 and page 20.
The maximum portion of the surrender charge which is to be applied to
reimburse the Company for sales and promotional expenses will be 30% of the
first year's basic premium (if you surrender in full during that year). Full
surrenders after the first year will result in the imposition of the same
dollar surrender charge for the initial five years and, therefore, the sales
expense portion of the surrender charge (expressed as a percentage of basic
premiums paid) will decline after the first policy year.
AETNAVEST POLICIES: EXAMPLE OF IMPACT OF INCREASE IN
SPECIFIED AMOUNT ON THE SURRENDER CHARGE
This example assumes that you bought a Policy with an initial specified
amount of $100,000 that had a surrender charge at the time of issue equal to
$890. The example illustrates the impact of an increase in your specified
amount by $50,000 at the beginning of the third policy year. For any given
year, your surrender charge will be less than it would have been for someone
who simply purchased a brand new Policy with a specified amount of $150,000.
As noted above, for original specified amounts, the surrender charge is
the same for the first five Policy Years, and thereafter declines monthly until
it is $0 at the end of the tenth Policy Year. For any increase in specified
amount, the increase in surrender charge applies for five years from the date
of increase, and declines monthly thereafter until it is $0 at the end of the
tenth year following increase.
<TABLE>
<CAPTION>
Additional
Original Surrender Charge --
Surrender Charge -- Increase in
Initial Specified Specified Amount Total
Beginning of Amount at the beginning Surrender
Policy Year: of $100,000 of Policy Year 3 Charges
- -------------- --------------------- -------------------- ------------
<S> <C> <C> <C>
1 $ 890.00 -- $ 890.00
2 890.00 -- 890.00
3 890.00 $ 489.50 1,379.50
4 890.00 489.50 1,379.50
5 890.00 489.50 1,379.50
6 890.00 489.50 1,379.50
7 712.00 489.50 1,201.50
8 534.00 489.50 1,023.50
9 356.00 391.60 747.60
10 178.00 293.70 471.70
11 0 195.80 195.80
12 0 97.90 97.90
13 0 0 0
</TABLE>
AETNAVEST II POLICIES: EXAMPLE OF IMPACT OF INCREASE IN
SPECIFIED AMOUNT ON THE SURRENDER CHARGE
This example assumes that you bought a Policy with an initial specified
amount of $100,000 that had a surrender charge at the time of issue equal to
$890. The example illustrates the impact of an increase in your specified
amount by $50,000 at the beginning of the third policy year. For any given
year, your surrender charge will be less than it would have been for someone
who simply purchased a brand new policy with a specified amount of $150,000.
As noted above, for original specified amounts, the surrender charge is
the same for the first five Policy Years, and thereafter declines monthly until
it is $0 at the end of the fifteenth policy year. For any increase in specified
amount, the increase in surrender charge applies for five years from the date
of increase, and declines monthly thereafter until it is $0 at the end of the
fifteenth year following increase.
19
<PAGE>
<TABLE>
<CAPTION>
Additional
Original Surrender Charge --
Surrender Charge -- Increase in
Initial Specified Specified Amount Total
Beginning of Amount at the beginning Surrender
Policy Year: of $100,000 of Policy Year 3 Charges
- -------------- --------------------- -------------------- ------------
<S> <C> <C> <C>
1 $ 890.00 -- $ 890.00
2 890.00 -- 890.00
3 890.00 $ 489.50 1,379.50
4 890.00 489.50 1,379.50
5 890.00 489.50 1,379.50
6 890.00 489.50 1,379.50
7 801.00 489.50 1,290.50
8 712.00 489.50 1,201.50
9 623.00 440.55 1,063.55
10 534.00 391.60 925.60
11 445.00 342.65 787.65
12 356.00 293.70 649.70
13 267.00 244.75 511.75
14 178.00 195.80 373.80
15 89.00 146.85 235.85
16 0 97.90 97.90
17 0 48.95 48.95
18 0 0 0
</TABLE>
The Company may offer the Policy in a group arrangement in connection with
a multiple employer trust plan under which a trustee, employer or employers, or
other similar entity purchases a Policy which covers a group of individuals on
a group basis. Certificates replicating all the provisions of a Policy are
issued to individual employees. In such arrangements, an employer may permit
group solicitation of its employees for the purchase of Policies on either a
group or individual basis.
The Company may reduce the surrender charge, the monthly deduction, or
both, in connection with Policies issued under such arrangements. Generally,
sales and administrative costs per Policy vary with the size of the group or
sponsored arrangement, its stability as indicated by its term of existence and
certain characteristics of its members, the purposes for which Policies are
purchased, and other factors. The amount of reductions will be considered on a
case-by-case basis and will reflect the reduced sales effort and administrative
costs expected as a result of sales to a particular group or sponsored
arrangement.
Based on its actuarial determination, the Company does not anticipate that
the surrender charge will cover all sales and administrative expenses which the
Company will incur in connection with the Policy. Any such shortfall, including
but not limited to, payment of sales and distribution expenses, would be
charged to and paid by the Company.
POLICY SURRENDER
Full Surrenders
When you surrender your Policy for the full cash surrender value, all
applicable surrender charges are imposed.
Partial Surrenders
When you surrender part of your Policy, we will apply the same proportion
of the total applicable surrender charges as the amount to be paid on surrender
bears to the total cash surrender value. Once you have made a partial
surrender, or surrenders, future applicable surrender charges will be reduced
proportionately. In addition, under Option 1, the specified amount will be
reduced by the amount surrendered.
20
<PAGE>
Other rules apply to partial surrenders:
1) No partial surrender can be made until one year after the issue date;
2) The amount paid to you on a partial surrender must be at least $500;
3) If a partial surrender is made, there will be a transaction charge, made
against the total account value, of $25 or 2% of the amount of the net
surrender payment, whichever is less.
4) If, at the time of a partial surrender, your total account value is
attributable to more than one funding option, both the surrender charge
and the amount paid to you upon the surrender will be taken
proportionately from the values accumulated in each funding option. You
cannot select the funding option to be used in the surrender;
5) A partial surrender will not be allowed if it would cause the specified
amount to drop below the minimum allowable specified amount; and
6) Partial surrenders may only be made prior to election of a settlement
option.
As mentioned previously, a partial surrender will also reduce the death
benefit (and the specified amount, if Option 1 is in effect), by the amount of
the reduction in your total account value resulting from the surrender. If the
specified amount is reduced, the most recent increase in coverage is reduced
first, then the next most recent coverage, and so forth.
If the death benefit on an Option 1 Policy is calculated as a percentage
of the total account value rather than as the specified amount, a partial
surrender will reduce the specified amount only if the partial surrender
decreases the difference between the death benefit and the total account value.
A partial surrender will not reduce the specified amount of an Option 2 Policy.
Payment of any amount due from separate account values on a full or
partial surrender will be made within seven calendar days after your written
surrender request is received at our Administrative Office, except that payment
may be postponed when the New York Stock Exchange has been closed and for such
other periods as the Commission may require. Payment of values from the fixed
account value may be deferred for up to six months, except when used to pay
premiums to the Company.
If you surrender your Policy, in whole or in part, there may be tax
implications. (See "Tax Matters.")
POLICY LAPSE
A lapse occurs if your monthly deduction is greater than the cash
surrender value and no payment to cover the deduction is made within 61 days of
our notifying you. This may happen after the first two policy years, or during
the first two policy years if your basic premiums are not current.
If the cash surrender value of the Policy is insufficient to cover the
monthly deduction on the appropriate date, your insurance coverage will
terminate at the end of a 61-day grace period. The grace period begins with the
mailing of a notice to you, once we discover the insufficiency. We will require
the payment of the amount necessary to keep this Policy in force for the
current month, plus two additional months. During the grace period, a Policy
has no cash surrender value, so that if the Policy is terminated at the end of
the grace period, no money will be paid to you.
If your policy's cash surrender value is insufficient to cover the monthly
deduction on the appropriate date, an amount equal to the monthly deduction
will be removed from the total account value and will not participate in
investment performance. If a premium payment is subsequently made and the cash
surrender value exceeds the amount of the monthly deduction, or, within the
first two years the basic premiums are paid, the amount removed will be
returned to the total account value and will resume participation in investment
performance.
21
<PAGE>
REINSTATEMENT OF LAPSED POLICY
We will consider reinstatement within five years after the date of
termination (provided it is before the maturity date). We will require
satisfactory evidence of insurability. Regardless of when the Policy lapses,
the original and any additional tables of surrender charges that were issued on
this Policy will apply upon reinstatement. The loan account value will be
reinstated. All values will be reinstated as of the date of the Policy's
termination.
Under AetnaVest II Policies issued in most states, if the Policy lapses
during the first two policy years, the payment required at reinstatement will
equal the sum of basic premiums for each monthly deduction day to date, less
premiums previously paid. If the Policy lapses after the first two policy
years, you must make a premium payment that will cause the surrender value upon
reinstatement to equal three times the next monthly deduction.
For AetnaVest Policies, upon reinstatement, no surrender charge deduction
will apply to coverage which was in force for two or more years (one or more
years for multiple employer trust policies) prior to the date of termination.
For terminated coverage which was in force less than two years, future
surrender charges will not be reduced from the original schedule. If you
request reinstatement during the first two policy years, the premium required
at reinstatement will be the lesser of (a) a premium sufficient to pay for
three monthly deductions plus any applicable surrender charge; or (b) overdue
basic premiums.
POLICY LOANS
If you purchase an AetnaVest Policy you may borrow against your Policy
after the end of the second policy year (in California and Texas, after the end
of the first policy year). AetnaVest II Policy Owners may borrow against their
Policy beginning in the first policy year. For all Policies, loans must be
taken before the election of a settlement option.
The most you can borrow is 90% (100% for AetnaVest II policies issued in
Texas) of the fixed account and separate account values less the surrender
charge applicable at the time of the loan. Interest on the loan, including
preferred loans, will accrue at 8% per year, payable once a year at each
anniversary of the loan. Any interest not paid when due becomes part of the
loan and bears interest.
The amount you receive as a result of the loan will, together with any
accrued but not paid interest, constitute the loan account value. Repayments on
the loan will be allocated among the funding options in the same proportion the
loan was taken from the funding options. The loan account value will be reduced
by the amount of any loan repayment. The amount necessary to repay all loans in
full is the loan account value plus any accrued interest.
The loan account value is credited with the amount of any loans you make
on your Policy, as collateral. The loan account value is credited with interest
at a rate of at least 4.5% per year (6% in New York). Such credited interest is
transferred out of the loan account value monthly and reallocated
proportionately to the applicable funding options.
Beginning in the eleventh policy year, up to 10% of the maximum loan
amount available, at the beginning of a policy year, can be taken as a
preferred loan during that policy year. Amounts borrowed in excess of the
maximum loan amount available for a preferred loan will not be considered a
preferred loan. The portion of the loan account value equal to the preferred
loan will be credited at the policy loan interest rate of 8% per year. The
portion of the loan account value not considered a preferred loan will be
credited interest at 4.5% per year (6% in New York). The preferred loan feature
is only available in approving states as stated in your Policy.
If you are using more than one underlying funding option, the amount of
the loan will be withdrawn in proportion to the value held in each funding
option. You cannot select the funding option to be used for the loan.
22
<PAGE>
POLICY CHANGES
You may make changes to your Policy, as described below, by submitting a
written request to our Administrative Office in a form satisfactory to us.
Beginning one year after the issue date, you may increase or decrease the
specified amount of your Policy as follows:
1) For an increase, we will require satisfactory evidence of insurability
unless there is no increase in the amount at risk;
2) The cash surrender value at the time of an increase must be at least
three times the sum of (a) the most recent monthly deduction from total
account value and (b) the amount of the increase, divided by 1000, times
the applicable Cost of Insurance Rate;
3) An increase in the specified amount will increase the surrender charge
unless there is no increase in the amount at risk;
4) Increases are limited to four times the original specified amount;
5) Decreases in the specified amount will not decrease the surrender charge
or your basic premium. Decreases during the second year after the issue
date will usually not enable you to reduce your planned premium below the
basic premium without lapsing the Policy;
6) No decrease may reduce the specified amount to less than the
then-current minimum for this type of Policy;
7) The decrease will be applied first to the most recent coverage under the
Policy, then to the next most recent, and so forth.
You can also change from one death benefit option to the other.
The specified amount will be changed when a change in death benefit option
is made. If the change is from Option 1 to Option 2, the new specified amount
will equal the amount at risk as of the date of the change. If the change is
from Option 2 to Option 1, the new specified amount will equal the death
benefit as of the date of the change.
A change in death benefit option will not be allowed if the new specified
amount would be less than the then-current minimum. We may require satisfactory
evidence of insurability before allowing the change. There will be no change in
the surrender charge (either increase or decrease) at the time of a change in
death benefit option.
RIGHT TO EXAMINE THE POLICY
The Policy has a specific period during which you may examine the Policy.
If for any reason you are dissatisfied, it may be returned to our
Administrative Office for a refund. It must be returned within ten days (state
variations may apply) after you receive the Policy and the written notice of
withdrawal right, or within 45 days after you sign the application for the
Policy, whichever occurs latest.
If you return (cancel) the Policy, we will pay a refund of
1) the difference between payments made and amounts allocated to the
separate account,
2) the value of the amount allocated to the separate account as of the date
the returned Policy is received by us, and
3) any fees imposed on the amounts allocated to the separate account.
23
<PAGE>
If state law does not permit such a refund, then the refund will equal
premiums paid, without interest. Refunds will usually occur within seven days
of notice of cancellation, although a refund of premiums paid by check may be
delayed until the check clears your bank.
EXCHANGING YOUR POLICY
You may exchange the AetnaVest Policy for a period of two years after the
issue date, for a new adjustable premium policy issued by the Company, under
which policy values and benefits do not vary with the investment performance of
a separate account. The new policy will have the same issue date as the old
Policy, and no evidence of insurability will be required. Since your total
account value will be transferred from the old Policy to the new policy in its
entirety, the cash surrender value under the new policy cannot exceed the cash
surrender value under the old Policy at the time of exchange. We have the right
to adjust the cash surrender value under the new policy to make sure this is
the case. You have the right to select whether the new policy has the same
death benefit or net amount at risk as the old Policy. There may be a charge
due to the Company, or a refund due to you, equal to the difference in cash
value between the old Policy and the new policy.
For AetnaVest II Policies you may simply transfer the entire separate
account value of your Policy to the Fixed Account. No charge will be made for
any such transfer.
DEATH BENEFIT
The death benefit is the amount payable to the beneficiary upon the death
of the Insured. Any outstanding loan amounts or overdue deductions are withheld
from the death benefit prior to payment.
The death benefit under the Policy will be paid in a lump sum within seven
days after we receive due proof of death (a certified copy of the death
certificate) at our Administrative Office, unless you or the beneficiary have
elected that it be paid under one or more of the settlement options described
below.
Payment of the death benefit may be delayed if the Policy is being
contested. While the Insured is living, you may elect a settlement option for
the beneficiary and deem it irrevocable. You may revoke or change a prior
election. The beneficiary may make or change an election within 90 days of the
death of the Insured, unless you have made an irrevocable election. A
beneficiary who has elected Settlement Option 1 may elect another option within
two years after the insured's death.
All or a part of the proceeds of the death benefit may be applied under
one or more of the following settlement options, or such options as we may
choose to make available in the future.
If the Policy is assigned as collateral security, we will pay any amount
due the assignee in one lump sum. Any excess death benefit proceeds due will be
paid as elected.
POLICY SETTLEMENT
There are several ways in which a beneficiary may receive annuity payments
due from a death benefit, or which the Insured may choose to receive annuity
payments from the cash surrender value of the Policy.
Proceeds in the form of settlement options are payable by the Company upon
the Insured's death; upon maturity of the Policy; or upon election of one of
the following settlement options or any we make available (after any applicable
surrender charges have been deducted).
A written request is required to elect, change, or revoke a settlement
option. This request will take effect upon receipt or recording of the written
request, in good order, at our Administrative Office.
The first variable settlement option payment will be as of the tenth
valuation period following the receipt of the properly completed election form.
24
<PAGE>
Settlement Options
Options 2, 3 and 4 are in the form of an annuity, which is a series of
payments for life or a definite period. An "annuitant" is the person or persons
on whose life annuity payments are based and who may be entitled to receive
such payment.
Option 1--Payment of interest on the sum left with us;
Option 2--Payments for a stated number of years, at least three but no
more than thirty;
Option 3--Payments for the lifetime of the annuitant. If also chosen, we
will guarantee payments for 60, 120, 180 or 240 months;
Option 4--Payments during the joint lifetimes of two annuitants. At the
death of either, payments will continue to the survivor. When this option is
chosen, a choice must be made of:
(a) 100% of the payment to continue to the survivor;
(b) 66% of the payment to continue to the survivor;
(c) 50% of the payment to continue to the survivor;
(d) Payments for a minimum of 120 months, with 100% of the payment to
continue to the survivor;
(e) 100% of the payment to continue to the survivor if the survivor is
the annuitant, and 50% of the payment to continue to the survivor if the
survivor is the second annuitant.
In most states, no election may be made that would result in a first
payment of less than $25 or that would result in total yearly payments of less
than $120. If the value of the Policy is insufficient to elect an option for
the minimum amount specified, a lump-sum payment must be elected.
Proceeds applied under Option 1 will be held by us in our General Account.
Proceeds in the General Account will be used to make payments on a fixed dollar
basis. We will add interest to such proceeds at an annual rate of not less than
3.5%. We may add interest daily at any higher rate.
Under Option 1, the annuitant may later tell the Company to (a) pay to him
or her a portion or all of the sum held by the Company; or (b) apply a portion
or all of the sum held by the Company to another settlement option.
Proceeds applied under Options 2, 3 and 4 will be held (a) in the General
Account; or (b) in the Company's Variable Annuity Account B, invested in one or
more of the available investment options; or (c) a mix of (a) and (b). Proceeds
in Variable Annuity Account B will be used to make payments on a variable
basis.
If payments are to be funded on a variable basis, the first and subsequent
payments will vary depending on the Assumed Net Investment Rate. This rate will
be 3.5% per annum, unless a 5% annual rate is chosen. The Assumed Net
Investment Rate is chosen by the payee.
Selection of a 5% rate causes a higher first payment, but subsequent
payments will increase only to the extent the actual net investment rate
exceeds 5% on an annualized basis, and they will decline if the rate is less
than 5%. Use of the 3.5% Assumed Net Investment Rate causes a lower first
payment, but subsequent payments will increase more rapidly or decline more
slowly as changes occur in the actual net investment rate. The investment
performance of the underlying funding option(s) must equal such assumed rate,
plus enough to cover the mortality and expense risk and administrative fee
charges, if future payments on a variable basis are to remain level.
If payments on a variable basis are not to decrease, gross return on the
assets of the underlying funding option must be:
25
<PAGE>
(a) 4.75% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge in effect at the time settlement option
payments start, if an Assumed Net Investment Rate of 3.5% is chosen; or
(b) 6.25% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge in effect at the time settlement option
payments start, if an Assumed Net Investment Rate of 5% is chosen.
Option 2, 3, or 4 may be chosen on a fixed dollar basis. However, if the
guaranteed payments are less than the payments which would be made from the
purchase of the Company's current single premium immediate annuity, the larger
payment will be made instead.
As to funds held under Option 1, the annuitant may elect to make a
withdrawal or to change options. Under Option 2, if payments are made on a
variable basis, the current value may be withdrawn at any time. Amounts held in
the Fixed Account may not be withdrawn under Option 2. No withdrawals or
changes of option may be made under Options 3 and 4.
When an annuitant dies while receiving payments under Option 2, 3 or 4,
the present value of any remaining guaranteed payments will either be paid in
one sum to the beneficiary, or upon election by the beneficiary, any remaining
guaranteed payments will continue to the beneficiary. If no beneficiary exists,
the present value of any remaining guaranteed payments will be paid in one sum
to the annuitant's estate. If the annuitant dies while receiving payments under
Option 1, the current value of the Option will be paid in one sum to the
beneficiary, or to the annuitant's estate.
If a beneficiary dies (and there is no contingent beneficiary), while
receiving payments, the current value of the account (Option 1), or the present
value of any remaining guaranteed payments will be paid in one sum to the
estate of the beneficiary. The interest rate used to determine the first
payment will be used to calculate the present value.
Payments will be made upon receipt of a written request filed with us. If
the Owner has made no settlement election when the beneficiary becomes entitled
to proceeds, the beneficiary may make the election.
Calculation of Settlement Payments
When you have chosen payment on a variable basis, the first payment is
calculated as follows:
(a) the portion of the proceeds applied to make payments on the variable
basis; divided by
(b) 1000; times
(c) the payment rate for the option chosen.
Such amount, or portion, of the variable payment will be divided by the
Settlement Option Unit Value (described below), as of the tenth valuation
period (the period of time between one valuation Date and the next valuation
Date) before the due date of the first payment, to determine the number of
Settlement Option Units. Each future payment is equal to the number of
Settlement Option Units, times the Settlement Option Unit Value as of the tenth
valuation period prior to the due date of the payment.
For any valuation period, the Settlement Option Unit Value is equal to:
(a) The Settlement Option Unit value for the previous valuation period;
times
(b) The Net Return Factor (as defined below) for the valuation period;
times
(c) A factor to reflect the Assumed Net Investment Rate. The factor for
3.5% per year is .9999058; for 5% per year, it is .9998663.
26
<PAGE>
The Net Return Factor equals:
(i) The net assets of the applicable fund held in Variable Annuity Account
B at the end of a valuation period, minus
(ii) The net assets of the applicable fund held in Variable Annuity
Account B at the beginning of that valuation period, plus or minus
(iii) Taxes or provision for taxes, if any, attributable to the operations
of Variable Annuity Account B, divided by
(iv) The value of Settlement Option Units and other accumulation units
held in Variable Annuity Account B at the beginning of the valuation
period, minus
(v) A daily charge at an annual rate of 1.25% for annuity mortality and
expense risk and a daily administrative expense charge that will not
exceed .25% on an annual basis.
The number of Settlement Option Units remains fixed. However, the dollar
value of the Settlement Option Unit Values and the payment may increase or
decrease due to investment gain or loss.
Payments will not be affected by changes in the mortality or expense
results or administrative charges.
DIRECTORS AND OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Name and Address*
Positions with Company Business Experience During Past 5 Years
- -------------------------- -------------------------------------------------------------------------------
<S> <C>
Thomas J. McInerney President (since October 1998) Aetna Investment Advisor Holding Company,
Director, President and Inc., Aetna Retail Holding Company, Inc., Aetna Services Holding Company,
Chairman, Executive Inc.; President (since September 1997), Aetna Life Insurance and Annuity
Committee (Principal Company; President (since September 1997), Aetna Insurance Company of
Executive Officer) America; President (since September 1997), Aetna Retirement Holdings, Inc.;
President (since August 1997), Aetna Retirement Services, Inc.; Executive
Vice President (since August 1997), Aetna Inc., 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.
Shaun P. Mathews President (December 1998--February 1999) Aetna Investment Services, Inc.;
Director and Senior Vice Senior Vice President (since October 1998) Aetna Investment Advisor Holding
President Company, Inc., Aetna Retail Holding Company, Inc., Aetna Services Holding
Company, Inc.; Senior Vice President, Product and Brand Management (since
September 1998), Senior Vice President, Product Management (September
1997--September 1998). Vice President, Products Group (February 1996--
September 1997), Senior Vice President, Strategic Markets and Products
(February 1993--February 1996) Aetna Life Insurance and Annuity Company.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Name and Address*
Positions with Company Business Experience During Past 5 Years
- --------------------------- --------------------------------------------------------------------------------
<S> <C>
Catherine Hale Smith Senior Vice President (since October 1998) Aetna Investment Advisor Holding
Director, Chief Financial Company, Inc., Aetna Retail Holding Company, Inc., Aetna Services Holding
Officer and Senior Vice Company, Inc.; Chief Financial Officer and Senior Vice President, Business
President Strategy and Finance (Since February 1998), Aetna Life Insurance and
Annuity Company; Director and Senior Vice President (since March 1999),
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) Aetna Life
Insurance Company.
Kirk P. Wickman Vice President, General Counsel and Corporate Secretary (since October 1998)
Senior Vice President, Aetna Investment Advisor Holding Company, Inc., Aetna Retail Holding
General Counsel and Company, Inc., Aetna Services Holding Company, Inc.; Vice President,
Corporate Secretary General Counsel and Assistant Secretary (since April 1997) Aetna Retirement
Services, Inc.; Senior Vice President (since March 1999), Vice President
(November 1996--March 1999), General Counsel and Corporate 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, Treasurer and Corporate Controller (since October 1998)
Vice President and Aetna Investment Advisor Holding Company, Inc., Aetna Retail Holding
Treasurer, Corporate Company, Inc., Aetna Services Holding Company, Inc.; Vice President,
Controller Treasurer and Corporate Controller (since July 1996), Aetna Life Insurance
and Annuity Company and 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.
Therese A. Squillacote Vice President and Chief Compliance Officer (since February 1999) Aetna
Vice President and Chief Insurance Company of America; Vice President and Chief Compliance Officer
Compliance Officer (since December 1998) Aetna Life Insurance and Annuity Company; Vice
President and Chief Compliance Officer (since December 1998) Aetna
Investment Services, Inc.; Chief Compliance Officer (since December 1998)
Systematized Benefits Administrators, Inc.; Vice President, Compliance (since
March 1998) Aetna Financial Services, Inc.; Compliance Manager (May 1997
to December 1998) Aetna Life Insurance and Annuity Company; Registered
Principal (since July 1997) Aetna Investment Services, Inc.; Director,
Compliance (December 1995 to May 1997) Connecticut General Life
Insurance Company; Registered Principal (December 1995--May 1997)
CIGNA Financial Advisors, Inc.; Chief Compliance Officer (September 1989
to December 1995) G.R. Phelps & Co., Inc.; Chief Compliance Officer
(December 1992--December 1995) Connecticut Mutual Financial
Services, Inc.
</TABLE>
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* 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.
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REPORTS TO POLICY OWNERS
Within 30 days after each Policy anniversary and before proceeds are
applied to a settlement option, we will send you a report containing the
following information:
1. A statement of changes in total account value and cash surrender value
since the prior report or since the issue date, if there has been no
prior report. This includes a statement of monthly deductions and
investment results and any interest earnings for the report period;
2. Cash surrender value, death benefit, and any loan account value, as of
the Policy anniversary;
3. A projection of total account value, loan account value and cash
surrender value as of the succeeding Policy Anniversary.
If you have Policy values funded in either separate account you will
receive such additional periodic reports as may be required by the Commission.
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, the Company will
vote the shares of each of the Funds held in the separate account in accordance
with instructions received from Policy owners having a voting interest in the
Funds. Policy owners having such an interest will receive periodic reports
relating to the Fund, proxy material and a form for giving voting instructions.
The number of shares which you have a right to vote will be determined as of a
record date established by the Fund. The number of votes that you are entitled
to direct with respect to a Fund will be determined by dividing the portion of
your total account value attributable to that Fund by the net asset value of
one share in the Fund. Voting instructions will be solicited by written
communication at least 14 days before such meeting.
The votes will be cast at meetings of the shareholders of the Fund and
will be based on instructions received from Policy owners. However, if the
Investment Company Act of 1940 or any regulations thereunder should be amended
or if the present interpretation 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 Policy owners, will be voted by us in
the same proportion as the voting instructions which are received for all
Policies participating in each Fund through the separate account.
Policy owners having a voting interest will receive periodic reports
relating to the Fund, proxy material and a form for giving voting instructions.
Disregard of Voting Instructions
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the shares be voted so as
to cause a change in the sub-classification or investment objectives of a Fund
or to approve or disapprove an investment advisory contract for a Fund. In
addition, we may disregard voting instructions in favor of changes initiated by
a Policy owner in the investment policy or the investment adviser of a Fund if
we reasonably disapprove of such changes.
A change would be disapproved only if the proposed change is contrary to
state law or prohibited by state regulatory authorities or we determined that
the change would have an adverse effect on the separate accounts in that the
proposed investment policy for a Fund may result in overly speculative or
unsound investments. In the event we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to Policy owners.
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STATE REGULATION
The Company is subject to regulation and supervision by the Insurance
Department of the State of Connecticut, which periodically examines its
affairs. It is also subject to the insurance laws and regulations of all
jurisdictions where we are authorized to do business. The Policies have been
approved by the Insurance Department of the State of Connecticut and in other
jurisdictions.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
in which we do business, for the purposes of determining solvency and
compliance with local insurance laws and regulations.
The Policies are offered for sale in all jurisdictions where we are
authorized to do business except the District of Columbia, Guam, Puerto Rico,
and the Virgin Islands.
LEGAL MATTERS
The Company knows of no material legal proceedings pending to which the
separate account is a party or which would materially affect the separate
account.
The legal validity of the securities described in the Prospectus has been
passed on by Counsel for the Company.
ADDITIONAL INFORMATION
The Registration Statement
A Registration Statement under the Securities Act of 1933 has been filed
with the Commission relating to the offering described in this Prospectus. This
Prospectus does not include all the information set forth in the Registration
Statement, certain portions of which have been omitted pursuant to the rules
and regulations of the Commission. The omitted information may be obtained at
the Commission's principal office in Washington, DC upon payment of the
Commission's prescribed fees.
Distribution of the Policies
The Company will serve as underwriter of the securities offered hereunder
as defined by the federal securities laws. The Company is registered as a
broker-dealer with the Commission and is a member of the NASD. The Company will
contract with one or more registered broker-dealers including broker-dealers
affiliated with it ("distributors") to offer and sell the Policies. The Company
may also offer and sell policies directly. All persons selling the Policies
will be registered representatives of the distributors, and will also be
licensed as insurance agents to sell variable life insurance.
The maximum commission payable by the Company to salespersons and their
supervising broker-dealers for policy distribution is 55% of the initial basic
premium or, in the event of an increase in the specified amount, 55% of the
basic premium attributable to the increase. In lieu of premium-based
commission, the Company may pay equivalent amounts based on total account
value. In particular circumstances, we may also pay certain of these
professionals for their administrative expenses. In addition, some sales
personnel may receive various types of non-cash compensation as special sales
incentives, including trips and educational and/or business seminars. However,
all such compensation will be in accordance with NASD rules. 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.
The registered representative may be required to return all or part of any
commission if the Policy is not continued for a certain period.
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
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provide training, marketing and other sales related functions for the Company
and other broker-dealers and may provide certain administrative services to the
Company in connection with the Policies. The Company may pay such parties
compensation based on premium payments for the Policies purchased through
broker-dealers selected by the wholesaler.
Records and Accounts
All records and accounts relating to the separate accounts and the Funds
will be maintained by the Company. All reports required to be made and
information required to be given will be provided by the Company.
The Lincoln National Life Insurance Company ("Lincoln") and its affiliates
perform certain administrative functions relating to the Policies, and maintain
books and records necessary to operate and administer the Policies.
Independent Auditors
KPMG LLP, CityPlace II, Hartford, Connecticut, are the independent
auditors for the separate account and for the Company. The services provided to
the separate account include primarily the examination of the separate
account's financial statements and the review of filings made with the
Commission.
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
mission-critical information technology ("IT") systems and embedded systems
Year 2000 ready. The plan for IT systems covers five stages including (i)
assessment, (ii) remediation (iii) testing (iv) implementation and (v) Year
2000 approval. At year end 1997, Aetna, including the Company, had
substantially completed the assessment stage. The remediation of
mission-critical IT systems was completed year end 1998. Testing of all
mission-critical IT systems is underway with Year 2000 approval 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, has initiated 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.
Aetna and the Company have assessed and are prioritizing responses in an
attempt to mitigate 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 Policies. This discussion is based on the Company's
understanding of federal income tax laws as they now exist and are currently
interpreted by the Internal Revenue Service ("IRS"). These laws are complex,
and tax results may vary among individuals. A person or persons contemplating
the purchase of or the exercise of elections under the Policy described in this
Prospectus should seek competent tax advice.
Federal Tax Status of the Company
The Company is taxed as a life insurance company under the Code. The
separate account is not a separate entity from the Company. Therefore, the
separate account is not taxed separately as a "regulated investment company,"
but is taxed as part of the Company. Investment income and realized capital
gains
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attributable to the separate account are automatically applied to increase
reserves under the policy. Because of this, under existing federal income tax
law we believe that any such income and gains will not be taxed to the extent
that such income and gains are applied to increase reserves under the policy.
In addition, any foreign tax credits attributable to the separate account will
first be used to reduce any income taxes imposed on the separate account before
being used by the Company.
In summary, we do not expect that we will incur any federal income tax
liability attributable to the separate account and we do not intend to make
provisions for any such taxes. However, if changes in the federal tax laws or
their interpretation result in our being taxed on income or gains attributable
to the separate account, then we may impose a charge against the separate
account (with respect to the policy) to set aside provisions to pay such taxes.
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 Policy owner should not generally be taxed on
the cash value under a Policy, including increments thereof, prior to actual
receipt. The principal exceptions to these rules are corporations that are
subject to the alternative minimum tax, and thus may be subject to tax on
increments in the Policy's total account value, and Policy owners who acquire a
Policy in a "transfer for value" and thus can become subject to tax on the
portion of the death benefit which exceeds the total of their cost of
acquisition and subsequent premium payments.
The Company intends to comply with any future final regulations issued
under Sections 7702 and 817(h) of the Code, and therefore reserves the right to
make such changes as it deems necessary to ensure such compliance. Any such
changes will apply uniformly to affected Policy owners and will be made only
after advance written notice.
General Rules
Upon the surrender or cancellation of any Policy, whether or not it is a
modified endowment contract (see "Modified Endowment Contracts" below), the
Policy owner will be taxed on the surrender value only to the extent that it
exceeds the gross premiums paid less prior untaxed withdrawals. The amount of
any unpaid Policy loans will, upon surrender, be added to the surrender value
and will be treated for this purpose as if it had been received.
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 of specified amounts may be taxable
in certain limited instances where the surrender value plus any unpaid Policy
debt exceeds the total premiums paid less the untaxed portion of any prior
partial surrenders. This result may occur even if the total amount of any
partial surrenders does not exceed total premiums paid to that date.
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Loans received under the Policy will ordinarily be considered indebtedness
of the Policy owner, and assuming the Policy is not considered a modified
endowment contract, Policy loans will not be treated as current distributions
subject to tax. Generally, amounts of loan interest paid by individuals will be
considered nondeductible "personal interest."
Modified Endowment Contracts
A class of contracts known as "modified endowment contracts" has been
created under Section 7702A of the Code. The tax rules applicable to loan
proceeds and proceeds of a partial surrender of any Policy that is considered
to be a modified endowment contract will differ from the general rules noted
above.
A contract will be considered a modified endowment contract if it fails
the "7-pay test." A Policy fails the 7-pay test if, at any time in the first
seven policy years, the amount paid into the Policy exceeds the amount that
would have been paid had the Policy provided for the payment of seven (7) level
annual premiums. In the event of a distribution under the Policy, the Company
will notify the Policy owner if the Policy is a modified endowment contract.
Each Policy is subject to 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 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 1/2 will also be subject to the penalty tax unless those
distributions are attributable to the individual becoming disabled, or are part
of a series of equal periodic payments made not less frequently than annually
for the life or life expectancy of such individual (i.e., an annuity).
Diversification Standards
Section 817(h) of the Code provides that separate account investments (or
the investments of a mutual fund, the shares of which are owned by separate
accounts of insurance companies) underlying the Policy must be "adequately
diversified" in accordance with Treasury regulations in order for the Policy to
qualify as life insurance. The Treasury Department has issued regulations
prescribing the diversification requirements in connection with variable
contracts. The Separate Account, through the Funds, intends to comply with
these requirements.
Investor Control
In certain circumstances, owners of variable contracts may be considered
the owners for federal income tax purposes of the assets of the separate
account used to support their contracts. In those circumstances, income and
gains from separate account assets would be includable in the variable
contractowner's gross
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income. In several rulings published prior to the enactment of Section 817(h),
the IRS stated that a variable contractowner will be considered the owner of
separate account assets if the contractowner possesses incidents of ownership
in those assets, such as the ability to exercise investment control over the
assets. The Treasury Department has also announced, in connection with the
issuance of regulations under Section 817(h) concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor (i.e., you), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular Funds
without being treated as owners of the underlying assets." As of the date of
this Prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in
certain respects from those described by the IRS in pre-Section 817(h) rulings
in which it was determined that Policy owners were not owners of separate
account assets. For example, a Policy owner has additional flexibility in
allocating premium payments and account values. While the Company does not
believe that these differences would result in a Policy owner being treated as
the owner of a pro rata portion of the assets of the Separate Account, there is
no regulation or ruling of the IRS that confirms this conclusion. In addition,
the Company does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. The Company therefore reserves the right to modify the Policy as
necessary to attempt to prevent a Policy owner from being considered the owner
of a pro rata share of the assets of the Separate Account.
Other Tax Considerations
Business-owned life insurance may be subject to certain additional rules.
Section 264(a)(1) of the Code generally prohibits employers from deducting
premiums on policies covering officers, employees or other financially
interested parties 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 Policy owner's deduction for interest on loans
taken against life insurance covering the lives of officers, employees, or
others financially interested in the Policy owner's trade or business. Under
current tax law, interest may generally be deducted on an aggregate total of
$50,000 of loans per covered life only with respect to life insurance policies
covering each officer, employee or others who may have a financial interest in
the Policy owner'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 policies will be capped based on the
applicable Moody's Corporate Bond Rate.
Section 264(f) of the Code denies a deduction for a portion of a Policy
owner'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 Policy owner 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 Policy owner
or beneficiary. Any person concerned about these tax implications should
consult a competent tax advisor before initiating any transactions.
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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.
MISCELLANEOUS POLICY PROVISIONS
The Policy
The Policy which you receive and the application you make when you
purchase the Policy are the whole contract. A copy of the application is
attached to the Policy when it is issued to you. Any application for changes,
once approved by us, will become part of the Policy.
Application forms are completed by the applicant and forwarded to the
Company for acceptance. Upon acceptance, the Policy is prepared, executed by
duly authorized officers of the Company, and forwarded to the Policy owner.
Payment of Benefits
All benefits are payable at our Administrative Office. We may require
submission of the Policy before we grant loans, make changes or pay benefits.
Age and Sex
If age or sex is misstated on the application, the amount payable on death
will be that which would have been purchased by the most recent monthly
deduction at the correct age and sex. (If the application is taken in a state
where unisex rates are used, the Insured's sex is inapplicable.)
Incontestability
We will not contest coverage under the Policy (other than any waiver of
premium rider) after it has been in force during the lifetime of the Insured
more than two years from the issue date.
For coverage which takes effect on a later date (i.e., an increase or
reinstatement of insurance), we will not contest such coverage after it has
been in force during the lifetime of the Insured more than two years from its
effective date. Any contest of such later coverage will be based on the
supplemental application.
Suicide
In most states, if the Insured commits suicide within two years from the
issue date, the only benefit paid will be the sum of (a) plus (b) minus (c),
where:
(a) equals premiums paid less amounts allocated to the separate account; and
(b) equals the separate account value on the date of suicide, plus the portion
of the monthly deductions deducted from the separate account value; and
(c) equals the amount necessary to repay any loans in full and any interest
earned on the loan account value transferred to the separate account
value, and any surrenders from the Fixed Account.
If the Insured commits suicide within two years from the effective date of
any increase in coverage, we will pay as a benefit only the monthly deductions
for the increase, in lieu of the face amount of the increase.
All amounts will be calculated as of the date of death.
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Protection of Proceeds
To the extent provided by law, the proceeds of the Policy are subject
neither to claims by a beneficiary's creditors nor to any legal process against
any beneficiary.
Non-Participation
The Policy is not entitled to share in the divisible surplus of the
Company. No dividends are payable.
Coverage Beyond Maturity
The Policy is considered matured on the issue date anniversary after which
the Insured has reached age 95 (for AetnaVest Policies) or 100 (for AetnaVest
II Policies). This is the Maturity Date.
For AetnaVest II Policies only, you may, by written request in the 30 days
before the maturity date of this Policy, elect to continue coverage beyond the
maturity date. At Age 100, the separate account value will be transferred to
the Fixed Account. If coverage beyond maturity is elected, we will continue to
credit interest to the total account value of this Policy. Monthly deductions
will be calculated with a Cost of Insurance rate equal to zero.
At this time, uncertainties exist regarding the tax treatment of the
Policy should the Policy continue beyond the maturity date. You should
therefore consult with your tax advisor prior to making this election. (See Tax
Matters.) The coverage beyond maturity provision is only available in approving
states. (This provision is not available in New York.)
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APPENDIX A
AETNAVEST
ILLUSTRATIONS OF DEATH BENEFIT, TOTAL ACCOUNT VALUES AND
CASH SURRENDER VALUES
The following tables illustrate how the total account values, cash
surrender values, and death benefits of a Policy change with the investment
experience of the variable funding options. The tables show how the total
account values, cash surrender values, and death benefits of a Policy issued to
an insured of a given age and a given premium would vary over time if the
investment return on the assets held in each Fund were a uniform, gross, annual
rate of 0%, 6%, 12%, respectively.
Tables I through IV illustrate Policies issued to males, ages 25 and 40,
in the nonsmoker rate class. The total account values, cash surrender values,
and death benefits would be different from those shown if the gross annual
investment rates of return averaged 0%, 6%, and 12% respectively, over a period
of years, but fluctuated above and below those averages for individual Policy
Years.
The second column of each table shows the accumulated values of the
premiums paid at the stated interest rate of 5%. The third through fifth
columns illustrate the death benefit of a Policy over the designated period.
The sixth through eighth columns illustrate the total account values, while the
ninth through eleventh columns illustrate the cash surrender values of each
Policy over the designated period. Tables II and IV assume that the maximum
Cost of Insurance Rates allowable under the Policy are charged in all policy
years. These tables also assume that the maximum allowable mortality and
expense risk charge of 0.90% on an annual basis is assessed in each policy
year. Tables I and III assume that the current scale of Cost of Insurance Rates
applies during all policy years. These tables also assume the current level of
mortality and expense risk charge assessed on an annual basis: 0.65% for Aetna
Balanced VP, Inc., 0.65% for Aetna Growth and Income VP; 0.55% for Aetna Ascent
VP; 0.55% for Aetna Crossroads VP; 0.55% for Aetna Legacy VP and 0.70% for all
other Funds available under the AetnaVest Policies. The tables also assume a
0.30% current (0.50% guaranteed) administration charge.
The investment advisory fees and other Fund expenses, net of waivers and
reductions (see the table on page 17), vary by Fund from .34% to 1.00%. An
arithmetic average of 0.71% has been used for the illustrations.
The amounts shown for the death benefits, cash surrender values, and total
account values reflect the fact that the net investment return is lower than
the gross, return on the assets held in each Fund as a result of expenses paid
by the Fund and other charges levied by the Separate Account. 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 -1.68%, 4.32%,
and 10.32%, respectively 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 -1.91%, 4.09%, and 10.09%,
respectively.
The hypothetical values shown in the tables do not reflect any Separate
Account charges for federal income taxes, since we are not currently making
such charges. However, such charges may be made in the future, and in that
event, the gross annual investment rate of return would have to exceed 0%, 6%,
or 12% by an amount sufficient to cover the tax charges in order to produce the
death benefits, total account values, and cash surrender values illustrated.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums were paid as indicated, if
all net premiums are allocated to Variable Life Account B and if no Policy
loans have been made. The tables are also based on the assumptions that the
policy owner has not requested an increase or decrease in the specified amount
of the Policy, that no partial surrenders have been made, and that no transfer
charges have been incurred.
Upon request, we will provide an illustration based upon the proposed
insured's age, sex, and underwriting classification, the specified amount or
premium requested, the proposed frequency of premium payments and any available
riders requested. A fee of $25 is charged for each such illustration.
The hypothetical gross annual investment return assumed in such an
illustration will not exceed 12%.
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AetnaVest Policy
Table I
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 25
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$408.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $100,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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>
1 428 100,000 100,000 100,000 182 199 216 0 0 0
2 878 100,000 100,000 100,000 365 411 459 17 63 111
3 1,351 100,000 100,000 100,000 548 635 730 200 287 382
4 1,846 100,000 100,000 100,000 729 870 1,031 381 522 683
5 2,367 100,000 100,000 100,000 908 1,116 1,364 560 768 1,016
6 2,914 100,000 100,000 100,000 1,096 1,386 1,744 811 1,102 1,460
7 3,488 100,000 100,000 100,000 1,278 1,664 2,161 1,063 1,450 1,947
8 4,091 100,000 100,000 100,000 1,454 1,952 2,619 1,309 1,807 2,474
9 4,724 100,000 100,000 100,000 1,623 2,248 3,119 1,547 2,173 3,044
10 5,388 100,000 100,000 100,000 1,783 2,551 3,666 1,777 2,545 3,660
15 9,244 100,000 100,000 100,000 2,435 4,158 7,257 2,435 4,158 7,257
20 14,165 100,000 100,000 100,000 2,744 5,834 12,825 2,744 5,834 12,825
25 20,446 100,000 100,000 100,000 2,515 7,360 21,459 2,515 7,360 21,459
30 28,462 100,000 100,000 100,000 1,463 8,383 35,041 1,463 8,383 35,041
40 (Age 65) 51,751 0 100,000 112,943 0 4,668 92,576 0 4,668 92,576
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
39
<PAGE>
AetnaVest Policy
Table II
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 25
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$408.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $100,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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>
1 428 100,000 100,000 100,000 181 198 216 0 0 0
2 878 100,000 100,000 100,000 364 409 458 16 61 110
3 1,351 100,000 100,000 100,000 544 631 726 196 283 378
4 1,846 100,000 100,000 100,000 724 865 1,025 376 517 677
5 2,367 100,000 100,000 100,000 900 1,108 1,354 552 760 1,006
6 2,914 100,000 100,000 100,000 1,086 1,374 1,729 801 1,089 1,445
7 3,488 100,000 100,000 100,000 1,265 1,648 2,140 1,050 1,433 1,925
8 4,091 100,000 100,000 100,000 1,438 1,930 2,590 1,293 1,785 2,445
9 4,724 100,000 100,000 100,000 1,603 2,220 3,080 1,527 2,145 3,005
10 5,388 100,000 100,000 100,000 1,759 2,516 3,615 1,753 2,510 3,610
15 9,244 100,000 100,000 100,000 2,366 4,049 7,076 2,366 4,049 7,076
20 14,165 100,000 100,000 100,000 2,620 5,603 12,364 2,620 5,603 12,364
25 20,446 100,000 100,000 100,000 2,277 6,889 20,370 2,277 6,889 20,370
30 28,462 100,000 100,000 100,000 1,062 7,524 32,705 1,062 7,524 32,705
40 (Age 65) 51,751 0 100,000 101,576 0 2,000 83,259 0 2,000 83,259
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
40
<PAGE>
AetnaVest Policy
Table III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 40
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$744.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $100,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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>
1 781 100,000 100,000 100,000 455 490 525 0 0 0
2 1,601 100,000 100,000 100,000 887 986 1,089 215 313 417
3 2,463 100,000 100,000 100,000 1,297 1,488 1,695 624 815 1,023
4 3,367 100,000 100,000 100,000 1,684 1,995 2,348 1,012 1,323 1,676
5 4,317 100,000 100,000 100,000 2,048 2,508 3,051 1,375 1,835 2,379
6 5,314 100,000 100,000 100,000 2,388 3,025 3,810 1,839 2,476 3,261
7 6,361 100,000 100,000 100,000 2,699 3,540 4,623 2,284 3,126 4,209
8 7,460 100,000 100,000 100,000 2,978 4,052 5,495 2,697 3,772 5,215
9 8,614 100,000 100,000 100,000 3,225 4,559 6,432 3,079 4,413 6,286
10 9,826 100,000 100,000 100,000 3,439 5,059 7,438 3,427 5,048 7,426
15 16,857 100,000 100,000 100,000 3,921 7,357 13,741 3,921 7,357 13,741
20 25,831 100,000 100,000 100,000 2,736 8,481 22,492 2,736 8,481 22,492
25 37,284 0 100,000 100,000 0 7,404 35,174 0 7,404 35,174
30 51,902 0 100,000 100,000 0 2,228 54,891 0 2,228 54,891
25 (Age 65) 37,284 0 100,000 100,000 0 7,404 35,174 0 7,404 35,174
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
41
<PAGE>
AetnaVest Policy
Table IV
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 40
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$744.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $100,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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>
1 781 100,000 100,000 100,000 451 486 522 0 0 0
2 1,601 100,000 100,000 100,000 878 976 1,079 205 303 406
3 2,463 100,000 100,000 100,000 1,279 1,468 1,675 607 796 1,002
4 3,367 100,000 100,000 100,000 1,654 1,962 2,311 981 1,289 1,638
5 4,317 100,000 100,000 100,000 2,002 2,455 2,992 1,329 1,783 2,319
6 5,314 100,000 100,000 100,000 2,321 2,946 3,719 1,771 2,397 3,170
7 6,361 100,000 100,000 100,000 2,608 3,433 4,495 2,193 3,018 4,080
8 7,460 100,000 100,000 100,000 2,864 3,912 5,323 2,583 3,632 5,043
9 8,614 100,000 100,000 100,000 3,085 4,383 6,207 2,940 4,237 6,062
10 9,826 100,000 100,000 100,000 3,271 4,841 7,151 3,259 4,830 7,140
15 16,857 100,000 100,000 100,000 3,567 6,833 12,936 3,567 6,833 12,936
20 25,831 100,000 100,000 100,000 2,143 7,470 20,637 2,143 7,470 20,637
25 37,284 0 100,000 100,000 0 5,297 30,982 0 5,297 30,982
30 51,902 0 0 100,000 0 0 44,688 0 0 44,688
25 (Age 65) 37,284 0 100,000 100,000 0 5,297 30,982 0 5,297 30,982
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
42
<PAGE>
APPENDIX B
AETNAVEST II
ILLUSTRATIONS OF DEATH BENEFIT, TOTAL ACCOUNT VALUES AND
CASH SURRENDER VALUES
The following tables illustrate how the total account values, cash
surrender values, and death benefits of a Policy change with the investment
experience of the variable funding options. The tables show how the total
account values, cash surrender values, and death benefits of a Policy issued to
an insured of a given age and a given premium would vary over time if the
investment return on the assets held in each Fund were a uniform, gross, annual
rate of 0%, 6%, 12%, respectively.
Tables V through VIII illustrate Policies issued to males, ages 35 and 55,
in the nonsmoker rate class. Tables IX through XII illustrate Policies issued
on a unisex basis, ages 35 and 55, in the nonsmoker rate class. These tables
are provided for use in those states where unisex rates are required. The total
account values, cash surrender values, and death benefits would be different
from those shown if the gross annual investment rates of return averaged 0%,
6%, and 12%, respectively, over a period of years, but fluctuated above and
below those averages for individual policy years.
The second column of each table shows the accumulated values of the
premiums paid at the stated interest rate of 5%. The third through fifth
columns illustrate the death benefit of a Policy over the designated period.
The sixth through eighth columns illustrate the total account values, while the
ninth through eleventh columns illustrate the cash surrender values of each
Policy over the designated period. Tables VI, VIII, X and XII assume that the
maximum Cost of Insurance Rates allowable under the Policy are charged in all
policy years. These tables also assume that the maximum allowable mortality and
expense risk charge of .90% on an annual basis, the maximum allowable
administrative charge of .50% and the maximum allowable premium load of 6% are
assessed in each policy year. Tables V, VII, IX and XI assume that the current
scale of Cost of Insurance Rates applies during all policy years. These tables
also assume the current level of mortality and expense risk charges of 0.70% on
an annual basis.
The investment advisory fees and other Fund expenses, net of waivers and
reductions (see the table on page 16), vary by Fund from .34% to 1.00%. An
arithmetic average of .71% has been used for the illustrations.
The amounts shown for the death benefits, cash surrender values, and total
account values reflect the fact that the net investment return is lower than
the gross return on the assets held in each Fund as a result of expenses paid
by each Fund and other charges levied by the Separate Account. 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 -1.71%, 4.29%,
and 10.29%, respectively 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 -2.11%, 3.89%, and 9.89%,
respectively.
The hypothetical values shown in the tables do not reflect any Separate
Account charges for federal income taxes, since we are not currently making
such charges. However, such charges may be made in the future, and in that
event, the gross annual investment rate of return would have to exceed 0%, 6%,
or 12% by an amount sufficient to cover the tax charges in order to produce the
death benefits, total account values, and cash surrender values illustrated.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums were paid as indicated, if
all net premiums are allocated to Variable Life Account B and if no Policy
loans have been made. The tables are also based on the assumptions that the
Policy Owner has not requested an increase or decrease in the Specified Amount
of the Policy, that no partial surrenders have been made, and that no transfer
charges have been incurred.
Upon request, we will provide an illustration based upon the proposed
insured's age, sex (if necessary), and underwriting classification, the
specified amount or premium requested, the proposed frequency of premium
payments and any available riders requested. A fee of $25 is charged for each
such illustration.
The hypothetical gross annual investment return assumed in such an
illustration will not exceed 12%.
43
<PAGE>
AetnaVest II Policy
Table V
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 35
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$1,410.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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 1,480 250,000 250,000 250,000 684 745 805 0 0 0
2 3,035 250,000 250,000 250,000 1,517 1,687 1,864 167 742 919
3 4,667 250,000 250,000 250,000 2,310 2,643 3,006 960 1,698 2,061
4 6,381 250,000 250,000 250,000 3,061 3,612 4,236 1,711 2,667 3,921
5 8,181 250,000 250,000 250,000 3,768 4,590 5,559 2,418 3,645 4,614
6 10,070 250,000 250,000 250,000 4,427 5,575 6,984 3,201 4,717 6,126
7 12,054 250,000 250,000 250,000 5,043 6,569 8,523 3,951 5,805 7,759
8 14,137 250,000 250,000 250,000 5,608 7,566 10,182 4,652 6,897 9,513
9 16,325 250,000 250,000 250,000 6,125 8,568 11,973 5,304 7,993 11,398
10 18,622 250,000 250,000 250,000 6,588 9,568 13,907 5,902 9,088 13,427
15 31,947 250,000 250,000 250,000 7,926 14,343 26,100 7,915 14,332 26,089
20 48,954 250,000 250,000 250,000 7,151 18,081 43,949 7,151 18,081 43,949
25 70,660 250,000 250,000 250,000 3,637 19,785 70,940 3,637 19,785 70,940
30 98,363 0 250,000 250,000 0 17,787 113,400 0 17,787 113,400
30 (Age 65) 98,363 0 250,000 250,000 0 17,787 113,400 0 17,787 113,400
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
44
<PAGE>
AetnaVest II Policy
Table VI
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 35
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$1,410.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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 1,480 250,000 250,000 250,000 646 704 762 0 0 0
2 3,035 250,000 250,000 250,000 1,437 1,600 1,770 87 250 420
3 4,667 250,000 250,000 250,000 2,187 2,505 2,852 837 1,155 1,502
4 6,381 250,000 250,000 250,000 2,892 3,417 4,011 1,542 2,067 2,661
5 8,181 250,000 250,000 250,000 3,551 4,331 5,252 2,201 2,981 3,902
6 10,070 250,000 250,000 250,000 4,160 5,245 6,579 2,934 4,019 5,353
7 12,054 250,000 250,000 250,000 4,715 6,153 7,996 3,623 5,062 6,905
8 14,137 250,000 250,000 250,000 5,215 7,054 9,511 4,259 6,097 8,555
9 16,325 250,000 250,000 250,000 5,656 7,940 11,128 4,835 7,119 10,307
10 18,622 250,000 250,000 250,000 6,039 8,812 12,858 5,353 8,126 12,171
15 31,947 250,000 250,000 250,000 6,875 12,688 23,398 6,863 12,677 23,387
20 48,954 250,000 250,000 250,000 5,284 14,850 37,824 5,284 14,850 37,824
25 70,660 0 250,000 250,000 0 12,807 56,941 0 12,807 56,941
30 98,363 0 250,000 250,000 0 2,042 82,057 0 2,042 82,057
30 (Age 65) 98,363 0 250,000 250,000 0 2,042 82,057 0 2,042 82,057
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
45
<PAGE>
AetnaVest II Policy
Table VII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 55
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$4,380.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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 4,599 250,000 250,000 250,000 2,270 2,462 2,656 0 0 0
2 9,428 250,000 250,000 250,000 4,572 5,107 5,667 1,116 1,651 2,211
3 14,498 250,000 250,000 250,000 6,729 7,757 8,880 3,273 4,301 5,424
4 19,822 250,000 250,000 250,000 8,737 10,412 12,317 5,281 6,956 8,861
5 25,412 250,000 250,000 250,000 10,590 13,063 15,997 7,134 9,607 12,541
6 31,282 250,000 250,000 250,000 12,280 15,703 19,939 9,141 12,563 16,799
7 37,445 250,000 250,000 250,000 13,802 18,323 24,168 11,008 15,530 21,374
8 43,916 250,000 250,000 250,000 15,141 20,911 28,707 12,693 18,463 26,259
9 50,711 250,000 250,000 250,000 16,284 23,452 33,581 14,182 21,349 31,478
10 57,846 250,000 250,000 250,000 17,188 25,899 38,792 15,431 24,142 37,036
15 99,240 250,000 250,000 250,000 17,031 35,492 70,689 17,002 35,464 70,661
20 152,070 250,000 250,000 250,000 6,581 37,842 118,453 6,581 37,842 118,453
25 219,497 0 250,000 250,000 0 22,336 197,481 0 22,336 197,481
30 305,552 0 0 360,390 0 0 343,228 0 0 343,228
10 (Age 65) 57,846 250,000 250,000 250,000 17,188 25,899 38,792 15,431 24,142 37,036
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
46
<PAGE>
AetnaVest II Policy
Table VIII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 55
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$4,380.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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 4,599 250,000 250,000 250,000 1,890 2,068 2,247 0 0 0
2 9,428 250,000 250,000 250,000 3,737 4,215 4,716 281 759 1,260
3 14,498 250,000 250,000 250,000 5,353 6,251 7,235 1,897 2,795 3,779
4 19,822 250,000 250,000 250,000 6,728 8,158 9,793 3,272 4,702 6,337
5 25,412 250,000 250,000 250,000 7,837 9,903 12,373 4,381 6,447 8,917
6 31,282 250,000 250,000 250,000 8,658 11,453 14,950 5,519 8,314 11,814
7 37,445 250,000 250,000 250,000 9,163 12,769 17,500 6,370 9,976 14,706
8 43,916 250,000 250,000 250,000 9,314 13,800 19,982 6,866 11,352 17,534
9 50,711 250,000 250,000 250,000 9,063 14,481 22,347 6,960 12,379 20,245
10 57,846 250,000 250,000 250,000 8,358 14,744 24,537 6,601 12,987 22,780
15 99,240 0 250,000 250,000 0 7,081 30,587 0 7,052 30,558
20 152,070 0 0 250,000 0 0 15,914 0 0 15,914
25 219,497 0 0 0 0 0 0 0 0 0
30 305,552 0 0 0 0 0 0 0 0 0
10 (Age 65) 57,846 250,000 250,000 250,000 8,358 14,744 24,537 6,601 12,987 22,780
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
47
<PAGE>
AetnaVest II Policy
Table IX
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 35
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$1,350.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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 1,417 250,000 250,000 250,000 639 697 754 0 0 0
2 2,906 250,000 250,000 250,000 1,426 1,587 1,755 136 297 465
3 4,469 250,000 250,000 250,000 2,176 2,491 2,834 886 1,201 1,544
4 6,110 250,000 250,000 250,000 2,882 3,403 3,993 1,592 2,113 2,703
5 7,833 250,000 250,000 250,000 3,545 4,321 5,238 2,255 3,031 3,948
6 9,642 250,000 250,000 250,000 4,160 5,244 6,575 2,989 4,072 5,403
7 11,541 250,000 250,000 250,000 4,731 6,171 8,016 3,688 5,128 6,973
8 13,536 250,000 250,000 250,000 5,252 7,098 9,565 4,338 6,184 8,651
9 15,630 250,000 250,000 250,000 5,724 8,025 11,235 4,939 7,240 10,450
10 17,829 250,000 250,000 250,000 6,144 8,947 13,034 5,488 8,292 12,379
15 30,588 250,000 250,000 250,000 7,399 13,414 24,450 7,389 13,403 24,440
20 46,871 250,000 250,000 250,000 6,858 17,104 41,353 6,858 17,104 41,353
25 67,653 250,000 250,000 250,000 3,879 19,076 67,002 3,879 19,076 67,002
30 94,177 0 250,000 250,000 0 17,611 107,103 0 17,611 107,103
30 (Age 65) 94,177 0 250,000 250,000 0 17,611 107,103 0 17,611 107,103
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
48
<PAGE>
AetnaVest II Policy
Table X
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 35
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$1,350.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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 1,417 250,000 250,000 250,000 603 658 713 0 0 0
2 2,906 250,000 250,000 250,000 1,349 1,504 1,665 59 214 375
3 4,469 250,000 250,000 250,000 2,058 2,359 2,686 768 1,069 1,396
4 6,110 250,000 250,000 250,000 2,720 3,216 3,777 1,430 1,926 2,487
5 7,833 250,000 250,000 250,000 3,336 4,073 4,942 2,046 2,783 3,652
6 9,642 250,000 250,000 250,000 3,904 4,928 6,187 2,733 3,756 5,015
7 11,541 250,000 250,000 250,000 4,418 5,774 7,512 3,375 4,731 6,470
8 13,536 250,000 250,000 250,000 4,881 6,613 8,929 3,967 5,699 8,015
9 15,630 250,000 250,000 250,000 5,285 7,434 10,437 4,500 6,649 9,652
10 17,829 250,000 250,000 250,000 5,633 8,241 12,048 4,978 7,585 11,393
15 30,588 250,000 250,000 250,000 6,345 11,786 21,830 6,334 11,775 21,820
20 46,871 250,000 250,000 250,000 4,770 13,676 35,142 4,770 13,676 35,142
25 67,653 0 250,000 250,000 0 11,659 53,707 0 11,659 52,707
30 94,177 0 250,000 250,000 0 1,741 75,673 0 1,741 75,673
30 (Age 65) 94,177 0 250,000 250,000 0 1,741 75,673 0 1,741 75,673
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
49
<PAGE>
AetnaVest II Policy
Table XI
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 55
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$4,200.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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 4,410 250,000 250,000 250,000 2,251 2,438 2,626 0 0 0
2 9,041 250,000 250,000 250,000 4,534 5,055 5,602 1,222 1,743 2,290
3 13,903 250,000 250,000 250,000 6,685 7,692 8,791 3,373 4,380 5,479
4 19,008 250,000 250,000 250,000 8,689 10,333 12,202 5,377 7,021 8,890
5 24,368 250,000 250,000 250,000 10,542 12,973 15,854 7,230 9,661 12,542
6 29,996 250,000 250,000 250,000 12,236 15,604 19,768 9,227 12,595 16,759
7 35,906 250,000 250,000 250,000 13,767 18,221 23,970 11,089 15,543 21,293
8 42,112 250,000 250,000 250,000 15,122 20,810 28,483 12,276 18,464 26,137
9 48,627 250,000 250,000 250,000 16,292 23,362 33,336 14,277 21,347 31,322
10 55,469 250,000 250,000 250,000 17,241 25,839 38,539 15,557 24,155 36,855
15 95,161 250,000 250,000 250,000 17,651 35,948 70,651 17,623 35,920 70,623
20 145,821 250,000 250,000 250,000 8,272 39,404 118,804 8,272 39,404 118,804
25 210,477 0 250,000 250,000 0 27,183 198,664 0 27,183 198,664
30 292,995 0 0 361,834 0 0 344,603 0 0 344,603
10 (Age 65) 55,469 250,000 250,000 250,000 17,241 25,839 38,539 15,557 24,155 36,855
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
50
<PAGE>
AetnaVest II Policy
Table XII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 55
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$4,200.00 ANNUAL BASIC PREMIUM
NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 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 4,410 250,000 250,000 250,000 1,806 1,976 2,148 0 0 0
2 9,041 250,000 250,000 250,000 3,589 4,047 4,528 277 735 1,216
3 13,903 250,000 250,000 250,000 5,158 6,020 6,963 1,846 2,708 3,651
4 19,008 250,000 250,000 250,000 6,507 7,880 9,451 3,195 4,568 6,139
5 24,368 250,000 250,000 250,000 7,623 9,610 11,984 4,311 6,298 8,672
6 29,996 250,000 250,000 250,000 8,478 11,171 14,537 5,469 8,162 11,529
7 35,906 250,000 250,000 250,000 9,049 12,531 17,092 6,372 9,854 14,415
8 42,112 250,000 250,000 250,000 9,298 13,640 19,611 6,952 11,294 17,265
9 48,627 250,000 250,000 250,000 9,175 14,434 22,043 7,160 12,420 20,029
10 55,469 250,000 250,000 250,000 8,635 14,851 24,341 6,951 13,168 22,657
15 95,161 0 250,000 250,000 0 8,977 31,978 0 8,949 31,950
20 145,821 0 0 250,000 0 0 23,095 0 0 23,095
25 210,477 0 0 0 0 0 0 0 0 0
30 292,995 0 0 0 0 0 0 0 0 0
10 (Age 65) 55,469 250,000 250,000 250,000 8,635 14,851 24,341 6,951 13,168 22,657
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative charges,
and premium load assumed.
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.
51
<PAGE>
FINANCIAL STATEMENTS
VARIABLE LIFE ACCOUNT B
Index
<TABLE>
<S> <C>
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-19
</TABLE>
S-1
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities -- December 31, 1998
<TABLE>
<CAPTION>
ASSETS:
Investments, at net asset value: (Note 1)
Net
Shares Cost Assets
<S> <C> <C> <C>
Aetna Ascent VP: 198,115 $ 2,831,006 $ 2,777,568
Aetna Balanced VP: 2,167,178 34,177,879 34,089,711
Aetna Bond VP: 2,295,254 29,997,078 29,976,022
Aetna Crossroads VP: 154,345 2,069,533 2,055,869
Aetna Growth and Income VP: 4,919,365 162,790,910 156,730,966
Aetna Index Plus Large Cap VP: 758,705 12,317,717 13,345,627
Aetna Legacy VP: 81,480 1,017,019 1,007,913
Aetna Money Market VP: 2,738,801 36,398,167 36,665,421
Aetna Small Company VP: 77,201 1,010,893 987,401
Aetna Value Opportunity VP: 3,879 43,415 55,900
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 1,443,313 34,623,612 36,730,553
Growth Portfolio: 429,501 15,334,389 19,271,725
High Income Portfolio: 20,499 259,107 236,353
Overseas Portfolio: 155,353 2,924,055 3,114,830
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 172,391 2,863,661 3,130,614
Contrafund Portfolio: 1,569,966 32,468,622 38,429,965
Janus Aspen Series:
Aggressive Growth Portfolio: 849,184 19,610,984 23,428,999
Balanced Portfolio: 952,003 17,985,644 21,420,076
Growth Portfolio: 994,148 19,672,123 23,402,244
Worldwide Growth Portfolio: 1,497,256 38,062,628 43,555,170
Oppenheimer Funds:
Global Securities Fund: 14,366 297,779 317,052
Growth & Income Fund: 3,670 64,123 75,171
Strategic Bond Fund: 138,959 694,732 711,472
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 554,349 27,030,853 30,733,122
PPI MFS Research Growth Portfolio: 982,828 10,760,071 11,734,970
PPI MFS Value Equity Portfolio: 21,279 722,801 805,423
PPI Scudder International Growth Portfolio: 994,201 15,964,583 16,662,810
PPI T. Rowe Price Growth Equity Portfolio: 24,523 1,206,669 1,356,360
------------ ------------
NET ASSETS $523,200,053 $552,809,307
============ ============
Net assets represented by:
Policyholders' account values: (Notes 1 and 5)
Aetna Ascent VP:
Policyholders' account values ......................................................... $ 2,777,568
Aetna Balanced VP:
Policyholders' account values ......................................................... 34,089,711
Aetna Bond VP:
Policyholders' account values ......................................................... 29,976,022
Aetna Crossroads VP:
Policyholders' account values ......................................................... 2,055,869
Aetna Growth and Income VP:
Policyholders' account values ......................................................... 156,730,966
</TABLE>
S-2
<PAGE>
Variable Life Account B
Statement of Assets and Liabilities -- December 31, 1998 (continued):
<TABLE>
<S> <C>
Aetna Index Plus Large Cap VP:
Policyholders' account values ........................ $ 13,345,627
Aetna Legacy VP:
Policyholders' account values ........................ 1,007,913
Aetna Money Market VP:
Policyholders' account values ........................ 36,665,421
Aetna Small Company VP:
Policyholders' account values ........................ 987,401
Aetna Value Opportunity VP:
Policyholders' account values ........................ 55,900
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Policyholders' account values ....................... 36,730,553
Growth Portfolio:
Policyholders' account values ....................... 19,271,725
High Income Portfolio:
Policyholders' account values ....................... 236,353
Overseas Portfolio:
Policyholders' account values ....................... 3,114,830
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Policyholders' account values ....................... 3,130,614
Contrafund Portfolio:
Policyholders' account values ....................... 38,429,965
Janus Aspen Series:
Aggressive Growth Portfolio:
Policyholders' account values ....................... 23,428,999
Balanced Portfolio:
Policyholders' account values ....................... 21,420,076
Growth Portfolio:
Policyholders' account values ....................... 23,402,244
Worldwide Growth Portfolio:
Policyholders' account values ....................... 43,555,170
Oppenheimer Funds:
Global Securities Fund:
Policyholders' account values ....................... 317,052
Growth & Income Fund:
Policyholders' account values ....................... 75,171
Strategic Bond Fund:
Policyholders' account values ....................... 711,472
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio:
Policyholders' account values ....................... 30,733,122
PPI MFS Research Growth Portfolio:
Policyholders' account values ....................... 11,734,970
PPI MFS Value Equity Portfolio:
Policyholders' account values ....................... 805,423
PPI Scudder International Growth Portfolio:
Policyholders' account values ....................... 16,662,810
PPI T. Rowe Price Growth Equity Portfolio:
Policyholders' account values ....................... 1,356,360
------------
$552,809,307
============
</TABLE>
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,
1998 1997
------------- -------------
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends .......................................................... $ 43,340,466 $ 35,222,623
Expenses: (Notes 2 and 5)
Valuation period deductions ........................................ (4,390,578) (2,713,203)
------------- -------------
Net investment income ............................................... 38,949,888 32,509,420
------------- -------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ................................................ 481,590,756 260,329,704
Cost of investments sold ........................................... 454,360,016 245,858,726
------------- -------------
Net realized gain ................................................. 27,230,740 14,470,978
Net unrealized gain on investments: (Note 5)
Beginning of year .................................................. 16,987,228 14,132,669
End of year ........................................................ 29,609,254 16,987,228
------------- -------------
Net change in unrealized gain ..................................... 12,622,026 2,854,559
------------- -------------
Net realized and unrealized gain on investments ..................... 39,852,766 17,325,537
------------- -------------
Net increase in net assets resulting from operations ................ 78,802,654 49,834,957
------------- -------------
FROM UNIT TRANSACTIONS:
Variable life premium payments ...................................... 171,088,399 127,736,110
Transfers to the Company for monthly deductions ..................... (29,899,398) (21,545,914)
Redemptions by contract holders ..................................... (15,359,273) (24,062,185)
Transfers on account of policy loans ................................ (4,006,080) (2,875,077)
Other ............................................................... (342,142) 263,373
------------- -------------
Net increase in net assets from unit transactions (Note 5) ......... 121,481,506 79,516,307
------------- -------------
Change in net assets ................................................ 200,284,160 129,351,264
NET ASSETS:
Beginning of year ................................................... 352,525,147 223,173,883
------------- -------------
End of year ......................................................... $ 552,809,307 $ 352,525,147
============= =============
</TABLE>
See Notes to Financial Statements
S-4
<PAGE>
Variable Life Account B
Condensed Financial Information -- Year Ended December 31, 1998
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
-------------------------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
----------- ------------ --------------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP:
Aetna Vest $ 14.055 $ 14.535 3.42% 16,652.7 $ 242,052
Aetna Vest II 14.040 14.499 3.27% 9,886.9 143,349
Aetna Vest Plus 14.040 14.499 3.27% 144,736.7 2,098,518
Aetna Vest Estate Protector 14.077 14.559 3.42% 18,230.2 265,412
Aetna Vest Estate Protector II 10.441 10.038 (3.86%) (3) 2,813.1 28,237
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP:
Aetna Vest 21.286 24.655 15.83% 107,033.9 2,638,924
Aetna Vest II 21.515 24.909 15.78% 225,846.4 5,625,574
Aetna Vest Plus 18.044 20.890 15.77% 510,123.9 10,656,282
Aetna Vest Estate Protector 13.554 15.716 15.95% 23,850.0 374,815
Aetna Vest Estate Protector II 10.434 11.233 7.66% (3) 40,381.8 453,600
Corporate Specialty Market 15.708 18.186 15.78% 788,514.1 14,339,789
NYSUT Individual Life 12.865 13.516 5.06% (4) 53.8 727
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP:
Aetna Vest 23.428 25.084 7.07% 256,292.6 6,428,790
Aetna Vest II 15.752 16.865 7.07% 73,422.3 1,238,247
Aetna Vest Plus 12.613 13.505 7.07% 300,416.1 4,057,035
Aetna Vest Estate Protector 11.224 12.035 7.23% 24,203.4 291,294
Aetna Vest Estate Protector II 10.069 10.614 5.41% (2) 41,583.2 441,368
Corporate Specialty Market 12.175 13.035 7.06% 1,343,974.6 17,518,380
NYSUT Individual Life 11.028 11.441 3.75% (4) 79.4 908
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP:
Aetna Vest 13.369 14.040 5.02% 6,371.5 89,454
Aetna Vest II 13.356 14.005 4.86% 3,504.8 49,083
Aetna Vest Plus 13.356 14.005 4.86% 132,933.4 1,861,676
Aetna Vest Estate Protector 13.391 14.063 5.02% 290.5 4,085
Aetna Vest Estate Protector II 10.470 10.244 (2.16%) (2) 5,034.4 51,571
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP:
Aetna Vest 44.936 50.962 13.41% 1,299,467.8 66,222,877
Aetna Vest II 25.085 28.434 13.35% 793,662.0 22,566,909
Aetna Vest Plus 21.075 23.889 13.35% 2,078,634.2 49,657,181
Aetna Vest Estate Protector 15.037 17.070 13.52% 114,615.8 1,956,460
Aetna Vest Estate Protector II 10.767 10.966 1.85% (1) 75,394.9 826,779
Corporate Specialty Market 19.039 21.581 13.35% 717,978.2 15,494,720
NYSUT Individual Life 13.251 13.623 2.81% (4) 443.4 6,040
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP:
Aetna Vest 13.081 17.044 30.30% 59,247.4 1,009,797
Aetna Vest II 13.081 17.044 30.30% 16,362.9 278,884
Aetna Vest Plus 13.081 17.044 30.30% 322,679.7 5,499,673
Aetna Vest Estate Protector 13.102 17.096 30.48% 69,615.6 1,190,179
Aetna Vest Estate Protector II 10.794 12.397 14.85% (1) 78,843.7 977,436
Corporate Specialty Market 13.081 17.044 30.30% 255,439.6 4,353,649
NYSUT Individual Life 14.077 15.850 12.60% (4) 2,271.9 36,009
- ------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP:
Aetna Vest 12.479 13.378 7.20% (7) 556.2 7,442
Aetna Vest II 12.604 13.345 5.88% 925.7 12,353
Aetna Vest Plus 12.604 13.345 5.88% 61,022.7 814,343
Aetna Vest Estate Protector 12.638 13.400 6.03% 2,909.9 38,994
Aetna Vest Estate Protector II 10.310 10.379 0.67% (2) 12,964.6 134,563
NYSUT Individual Life 10.310 11.902 15.44% (2) 18.3 218
</TABLE>
S-5
<PAGE>
Variable Life Account B
Condensed Financial Information -- Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
Value
Per Unit
------------------------
Beginning End of
of Year Year
----------- ------------
<S> <C> <C>
Aetna Money Market VP:
Aetna Vest $ 17.310 $ 18.074
Aetna Vest II 12.653 13.211
Aetna Vest Plus 11.892 12.416
Aetna Vest Estate Protector 10.807 11.301
Aetna Vest Estate Protector II 10.045 10.413
Corporate Specialty Market 11.377 11.878
NYSUT Individual Life 10.603 10.849
- ---------------------------------------------------------------------------------
Aetna Small Company VP:
Corporate Specialty Market 11.484 10.085
- ---------------------------------------------------------------------------------
Aetna Value Opportunity VP:
Corporate Specialty Market 9.567 12.266
- ---------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Aetna Vest 13.788 15.238
Aetna Vest II 13.788 15.238
Aetna Vest Plus 13.788 15.238
Aetna Vest Estate Protector 13.824 15.301
Aetna Vest Estate Protector II 10.851 10.733
Corporate Specialty Market 15.869 17.538
NYSUT Individual Life 12.924 13.031
- ---------------------------------------------------------------------------------
Growth Portfolio:
Corporate Specialty Market 13.759 19.002
- ---------------------------------------------------------------------------------
High Income Portfolio:
Corporate Specialty Market 10.575 9.588
- ---------------------------------------------------------------------------------
Overseas Portfolio:
Corporate Specialty Market 12.415 13.859
- ---------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market 14.361 16.358
- ---------------------------------------------------------------------------------
Contrafund Portfolio:
Aetna Vest 14.166 18.229
Aetna Vest II 14.166 18.229
Aetna Vest Plus 14.166 18.229
Aetna Vest Estate Protector 14.203 18.305
Aetna Vest Estate Protector II 10.825 12.417
Corporate Specialty Market 15.236 19.607
NYSUT Individual Life 13.744 15.355
- ---------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest 18.017 23.949
Aetna Vest II 18.017 23.949
Aetna Vest Plus 18.017 23.949
Aetna Vest Estate Protector 10.944 14.569
Aetna Vest Estate Protector II 10.705 12.855
Corporate Specialty Market 13.519 17.969
NYSUT Individual Life 10.705 15.506
<CAPTION>
Increase (Decrease) Units
in Value of Outstanding Reserves
Accumulation at End at End
Unit of Year of Year
--------------------- --------------- -------------
<S> <C> <C> <C> <C>
Aetna Money Market VP:
Aetna Vest 4.41% 118,796.8 $ 2,147,105
Aetna Vest II 4.41% 42,027.0 555,225
Aetna Vest Plus 4.41% 1,069,947.5 13,284,681
Aetna Vest Estate Protector 4.57% 57,290.6 647,417
Aetna Vest Estate Protector II 3.66% (1) 276,653.4 2,880,793
Corporate Specialty Market 4.40% 1,436,476.9 17,063,155
NYSUT Individual Life 2.32% (4) 8,023.2 87,045
- -----------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP:
Corporate Specialty Market (12.18%) (2) 97,904.2 987,401
- -----------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP:
Corporate Specialty Market 28.21% (6) 4,557.2 55,900
- -----------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Aetna Vest 10.52% 16,969.9 258,580
Aetna Vest II 10.52% 14,601.3 222,487
Aetna Vest Plus 10.52% 670,325.9 10,214,130
Aetna Vest Estate Protector 10.68% 106,752.9 1,633,394
Aetna Vest Estate Protector II ( 1.09%) (2) 43,643.7 468,407
Corporate Specialty Market 10.52% 1,364,494.0 23,930,267
NYSUT Individual Life 0.83% (4) 252.3 3,288
- -----------------------------------------------------------------------------------------------------------------------
Growth Portfolio:
Corporate Specialty Market 38.11% 1,014,192.3 19,271,725
- -----------------------------------------------------------------------------------------------------------------------
High Income Portfolio:
Corporate Specialty Market ( 9.33%) (3) 24,649.9 236,353
- -----------------------------------------------------------------------------------------------------------------------
Overseas Portfolio:
Corporate Specialty Market 11.63% 224,748.4 3,114,830
- -----------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market 13.91% 191,384.9 3,130,614
- -----------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio:
Aetna Vest 28.68% 45,254.8 824,956
Aetna Vest II 28.68% 17,282.1 315,037
Aetna Vest Plus 28.68% 582,925.1 10,626,213
Aetna Vest Estate Protector 28.88% 73,829.1 1,351,411
Aetna Vest Estate Protector II 14.71% (1) 55,697.8 691,620
Corporate Specialty Market 28.69% 1,255,443.5 24,615,341
NYSUT Individual Life 11.72% (4) 350.9 5,387
- -----------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest 32.92% 49,127.2 1,176,559
Aetna Vest II 32.92% 35,013.7 838,551
Aetna Vest Plus 32.92% 525,450.3 12,584,179
Aetna Vest Estate Protector 33.12% 77,832.2 1,133,931
Aetna Vest Estate Protector II 20.08% (3) 29,088.0 373,931
Corporate Specialty Market 32.92% 407,461.9 7,321,785
NYSUT Individual Life 44.85% (3) 4.0 63
</TABLE>
S-6
<PAGE>
Variable Life Account B
Condensed Financial Information -- Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
------------------------ in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
----------- ------------ --------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Portfolio:
Aetna Vest $ 16.883 $ 22.446 32.95% 12,438.1 $ 279,181
Aetna Vest II 17.015 22.621 32.95% 6,532.6 147,773
Aetna Vest Plus 16.875 22.435 32.95% 385,905.8 8,657,958
Aetna Vest Estate Protector 13.440 17.895 33.15% 35,860.6 641,715
Aetna Vest Estate Protector II 10.519 12.622 19.99% (2) 51,710.9 652,707
Corporate Specialty Market 14.799 19.675 32.95% 561,147.2 11,040,492
NYSUT Individual Life 13.283 15.198 14.42% (4) 16.5 250
- --------------------------------------------------------------------------------------------------------------------------
Growth Portfolio:
Aetna Vest 18.105 24.316 34.31% 35,825.5 871,140
Aetna Vest II 18.088 24.294 34.31% 60,612.1 1,472,515
Aetna Vest Plus 18.063 24.260 34.31% 556,030.4 13,489,166
Aetna Vest Estate Protector 13.214 17.775 34.52% 72,533.7 1,289,254
Aetna Vest Estate Protector II 10.474 12.564 19.95% (3) 51,852.8 651,475
Corporate Specialty Market 14.865 19.965 34.31% 281,900.4 5,628,055
NYSUT Individual Life 10.474 15.384 46.88% (3) 41.5 639
- --------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio:
Aetna Vest 19.790 25.260 27.64% 111,720.0 2,822,005
Aetna Vest II 19.795 25.267 27.64% 49,640.2 1,254,234
Aetna Vest Plus 19.770 25.235 27.64% 772,265.6 19,488,204
Aetna Vest Estate Protector 14.305 18.286 27.83% 92,116.0 1,684,451
Aetna Vest Estate Protector II 11.034 12.017 8.91% (1) 56,926.9 684,105
Corporate Specialty Market 16.277 20.776 27.64% 847,989.7 17,618,234
NYSUT Individual Life 14.268 14.465 1.38% (4) 272.2 3,937
- --------------------------------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Global Securities Fund:
Aetna Vest 10.531 10.828 2.82% (2) 724.6 7,846
Aetna Vest Plus 10.717 10.828 1.04% (2) 21,426.9 232,014
Aetna Vest Estate Protector 10.759 10.842 0.77% (3) 1,644.5 17,830
Aetna Vest Estate Protector II 10.892 11.082 1.74% (2) 5,356.6 59,362
Corporate Specialty Market 9.178 10.550 14.95% (6) 7,125.3 75,171
- --------------------------------------------------------------------------------------------------------------------------
Strategic Bond Fund:
Aetna Vest 10.117 10.027 (0.89%) (4) 1,044.9 10,477
Aetna Vest Plus 10.071 10.027 (0.44%) (1) 45,400.4 455,225
Aetna Vest Estate Protector 10.112 10.040 (0.71%) (3) 310.5 3,118
Aetna Vest Estate Protector II 10.083 10.036 (0.47%) (2) 24,167.5 242,542
NYSUT Individual Life 10.083 10.040 (0.43%) (2) 10.9 110
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio:
Aetna Vest 17.357 22.283 28.38% 66,915.3 1,491,046
Aetna Vest II 17.359 22.285 28.38% 25,989.8 579,174
Aetna Vest Plus 17.349 22.273 28.38% 630,942.7 14,052,694
Aetna Vest Estate Protector 10.810 13.899 28.58% 121,028.5 1,682,153
Aetna Vest Estate Protector II 10.616 11.576 9.04% (3) 22,597.4 261,585
Corporate Specialty Market 14.275 18.326 28.38% 691,165.5 12,666,345
NYSUT Individual Life 10.616 14.396 35.61% (3) 8.7 125
- --------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio:
Aetna Vest 12.042 14.665 21.78% 60,057.0 880,720
Aetna Vest II 12.096 14.730 21.78% 22,158.9 326,410
Aetna Vest Plus 11.931 14.529 21.78% 461,604.4 6,706,855
Aetna Vest Estate Protector 9.152 11.161 21.95% 32,093.6 358,210
Aetna Vest Estate Protector II 10.650 11.518 8.15% (3) 30,342.2 349,483
Corporate Specialty Market 10.912 13.288 21.77% 234,278.4 3,113,170
NYSUT Individual Life 11.944 12.394 3.77% (4) 9.8 122
</TABLE>
S-7
<PAGE>
Variable Life Account B
Condensed Financial Information -- Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
Value
Per Unit Increase (Decrease) Units
------------------------ in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
----------- ------------ --------------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
PPI MFS Value Equity Portfolio:
Aetna Vest $ 10.779 $ 11.408 5.84% (2) 89.2 $ 1,018
Aetna Vest II 10.910 11.408 4.56% (2) 82.4 940
Aetna Vest Plus 10.757 11.408 6.05% (2) 45,259.8 516,312
Aetna Vest Estate Protector 10.562 11.422 8.14% (2) 1,479.4 16,898
Aetna Vest Estate Protector II 11.017 11.699 6.19% (2) 23,082.2 270,039
NYSUT Individual Life 10.870 11.422 5.08% (5) 18.9 216
- --------------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio:
Aetna Vest 15.692 18.503 17.91% 112,140.9 2,074,918
Aetna Vest II 15.596 18.389 17.91% 33,578.6 617,467
Aetna Vest Plus 15.509 18.286 17.91% 492,196.5 9,000,421
Aetna Vest Estate Protector 11.777 13.907 18.09% 33,167.3 461,260
Aetna Vest Estate Protector II 11.304 11.198 (0.94%) (3) 6,453.1 72,263
Corporate Specialty Market 12.995 15.323 17.91% 289,540.0 4,436,481
- --------------------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio:
Aetna Vest 10.689 11.539 7.95% (2) 9,432.4 108,839
Aetna Vest II 11.000 11.539 4.90% (5) 56.9 656
Aetna Vest Plus 10.422 11.539 10.72% (1) 72,473.9 836,267
Aetna Vest Estate Protector 10.452 11.553 10.53% (3) 15,572.9 179,921
Aetna Vest Estate Protector II 10.805 11.839 9.57% (2) 19,467.9 230,474
NYSUT Individual Life 10.805 11.553 6.92% (2) 17.6 203
</TABLE>
Notes to Condensed Financial Information:
(1) - Reflects less than a full year of performance activity. Funds were first
received in this option during March 1998.
(2) - Reflects less than a full year of performance activity. Funds were first
received in this option during April 1998.
(3) - Reflects less than a full year of performance activity. Funds were first
received in this option during May 1998.
(4) - Reflects less than a full year of performance activity. Funds were first
received in this option during June 1998.
(5) - Reflects less than a full year of performance activity. Funds were first
received in this option during July 1998.
(6) - Reflects less than a full year of performance activity. Funds were first
received in this option during September 1998.
(7) - Reflects less than a full year of performance activity. Funds were first
received in this option during October 1998.
See Notes to Financial Statements
S-8
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1998
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, 1998:
Aetna Ascent VP
Aetna Balanced VP
Aetna Bond VP
Aetna Crossroads VP
Aetna Growth and Income VP
Aetna Index Plus Large Cap VP
Aetna Legacy VP
Aetna Money Market VP
Aetna Small Company VP
Aetna Value Opportunity VP
Fidelity Investments Variable Insurance
Products Fund:
o Equity-Income Portfolio
o Growth Portfolio
o High Income Portfolio
o Overseas Portfolio
Fidelity Investments Variable Insurance
Products Fund II:
o Asset Manager Portfolio
o Contrafund Portfolio
Janus Aspen Series:
o Aggressive Growth Portfolio
o Balanced Portfolio
o Growth Portfolio
o Worldwide Growth Portfolio
Oppenheimer Funds:
o Global Securities Fund
o Growth & Income Fund
o Strategic Bond Fund
Portfolio Partners, Inc. (PPI):
o PPI MFS Emerging Equities Portfolio
o PPI MFS Research Growth Portfolio
o PPI MFS Value Equity Portfolio
o PPI Scudder International Growth Portfolio
o PPI T. Rowe Price Growth Equity Portfolio
b. Other
Investment transactions are accounted for on a trade date basis and
dividend income is recorded on the ex-dividend date. The cost of
investments sold is determined by specific identification.
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of the Company which is taxed as a life insurance company under
the Internal Revenue Code of 1986, as amended.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made
in accordance with the terms of the policies and are paid to the Company.
3. Dividend Income
On an annual basis the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions paid
to the Account are automatically reinvested in shares of the Funds. The
Account's proportionate share of each Fund's undistributed net investment
income (distributions in excess of net investment
S-9
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1998 (continued):
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, 1998 and 1997
aggregated $642,022,151 and $481,590,756 and $372,355,431 and $260,329,704,
respectively.
S-10
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Valuation
Period
Dividends Deductions
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Aetna Ascent VP: (1) $ 129,523 ($22,620)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Aetna Balanced VP: (2) 5,079,318 (289,232)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Aetna Bond VP: (3) 1,751,860 (257,828)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Aetna Crossroads VP: (4) 77,190 (14,622)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Aetna Growth and Income VP: (5) 27,303,998 (1,392,329)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP: (6) 591,905 (73,086)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Aetna Legacy VP: (7) 44,001 (8,540)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Aetna Money Market VP: (8) 940,509 (288,392)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Aetna Small Company VP: (9) 8,723 (5,056)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Aetna Value Opportunity VP: (10) 298 (130)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 1,381,671 (281,139)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Growth Portfolio: 1,011,596 (128,591)
Policyholders' account values
- --------------------------------------------------------------------------------------------
High Income Portfolio: 0 (1,531)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Overseas Portfolio: 141,761 (22,734)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 329,918 (29,778)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Contrafund Portfolio: 1,313,979 (283,258)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (142,378)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Balanced Portfolio: 709,668 (145,407)
Policyholders' account values
- --------------------------------------------------------------------------------------------
Growth Portfolio: 1,062,152 (162,916)
Policyholders' account values
- --------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1998
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Ascent VP: (1) $393,522 $353,120 $40,402
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Aetna Balanced VP: (2) 8,936,646 7,346,946 1,589,700
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Aetna Bond VP: (3) 6,762,101 6,468,168 293,933
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Aetna Crossroads VP: (4) 473,877 453,989 19,888
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP: (5) 39,271,149 34,639,034 4,632,115
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP: (6) 3,515,589 3,029,008 486,581
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Aetna Legacy VP: (7) 377,983 360,207 17,776
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Aetna Money Market VP: (8) 130,650,119 130,229,304 420,815
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Aetna Small Company VP: (9) 362,699 395,417 (32,718)
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP: (10) 44,207 44,499 (292)
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 8,873,609 7,588,754 1,284,855
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Growth Portfolio: 2,784,250 2,517,613 266,637
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
High Income Portfolio: 31,686 34,229 (2,543)
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Overseas Portfolio: 562,478 539,506 22,972
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 2,518,344 2,406,138 112,206
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 12,306,538 10,124,110 2,182,428
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 19,717,643 17,285,188 2,432,455
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Balanced Portfolio: 5,250,108 3,955,227 1,294,881
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
Growth Portfolio: 8,751,672 6,729,863 2,021,809
Policyholders' account values
- -----------------------------------------------------------------------------------------------------------
</TABLE>
S-11
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
- ------------------------------- Change in In Net Assets -------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$27,927 ($53,438) ($81,365) $909,075
$ 1,802,553 $ 2,777,568
- ---------------------------------------------------------------------------------------------------------
1,971,257 (88,169) (2,059,426) 5,433,280
24,336,071 34,089,711
- ---------------------------------------------------------------------------------------------------------
(12,114) (21,056) (8,942) 7,092,195
21,104,804 29,976,022
- ---------------------------------------------------------------------------------------------------------
5,069 (13,664) (18,733) 1,281,854
710,292 2,055,869
- ---------------------------------------------------------------------------------------------------------
6,207,999 (6,059,944) (12,267,943) 6,076,102
132,379,023 156,730,966
- ---------------------------------------------------------------------------------------------------------
(23,927) 1,027,911 1,051,838 9,326,844
1,961,545 13,345,627
- ---------------------------------------------------------------------------------------------------------
618 (9,107) (9,725) 314,262
650,139 1,007,913
- ---------------------------------------------------------------------------------------------------------
70,857 267,256 196,399 15,075,889
20,320,201 36,665,421
- ---------------------------------------------------------------------------------------------------------
0 (23,492) (23,492) 1,039,944
0 987,401
- ---------------------------------------------------------------------------------------------------------
0 12,485 12,485 43,539
0 55,900
- ---------------------------------------------------------------------------------------------------------
1,523,698 2,106,941 583,243 13,578,473
20,183,450 36,730,553
- ---------------------------------------------------------------------------------------------------------
380,110 3,937,336 3,557,226 7,444,713
7,120,144 19,271,725
- ---------------------------------------------------------------------------------------------------------
0 (22,754) (22,754) 263,181
0 236,353
- ---------------------------------------------------------------------------------------------------------
(8,270) 190,775 199,045 984,072
1,789,714 3,114,830
- ---------------------------------------------------------------------------------------------------------
281,699 266,952 (14,747) 198,288
2,534,727 3,130,614
- ---------------------------------------------------------------------------------------------------------
1,505,359 5,961,343 4,455,984 10,540,804
20,220,028 38,429,965
- ---------------------------------------------------------------------------------------------------------
844,868 3,818,015 2,973,147 5,763,410
12,402,365 23,428,999
- ---------------------------------------------------------------------------------------------------------
885,469 3,434,432 2,548,963 8,806,330
8,205,641 21,420,076
- ---------------------------------------------------------------------------------------------------------
1,360,430 3,730,121 2,369,691 6,131,508
11,980,000 23,402,244
- ---------------------------------------------------------------------------------------------------------
</TABLE>
S-12
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Worldwide Growth Portfolio: $ 1,360,015 ($ 344,460) $ 13,676,121 $ 10,222,511 $ 3,453,610
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Global Securities Fund: 0 (1,051) 10,993 12,018 (1,025)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund: 0 (183) 65,110 66,180 (1,070)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Strategic Bond Fund: 104 (2,331) 315,681 319,744 (4,063)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 68,284 (239,521) 100,307,103 97,276,639 3,030,464
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 2,113 (88,033) 22,358,392 21,336,998 1,021,394
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 628 (2,334) 188,157 215,959 (27,802)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 27,896 (158,883) 92,935,246 90,246,159 2,689,087
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio: 3,356 (4,215) 149,733 163,488 (13,755)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Total Variable Life Account B $43,340,466 ($ 4,390,578) $481,590,756 $454,360,016 $27,230,740
============================================================================================================================
</TABLE>
(1) Effective May 1, 1998, Aetna Ascent Variable Portfolio's name changed to
Aetna Ascent VP.
(2) Effective May 1, 1998, Aetna Investment Advisors Fund's name changed to
Aetna Balanced Fund VP.
(3) Effective May 1, 1998, Aetna Income Shares' name changed to Aetna Bond Fund
VP.
(4) Effective May 1, 1998, Aetna Crossroads Variable Portfolio's name changed
to Aetna Crossroads VP.
(5) Effective May 1, 1998, Aetna Variable Fund's name changed to Aetna Growth
and Income VP.
(6) Effective May 1, 1998, Aetna Variable Index Plus Portfolio's name changed
to Aetna Index Plus Large Cap VP.
(7) Effective May 1, 1998, Aetna Legacy Variable Portfolio's name changed to
Aetna Legacy VP.
(8) Effective May 1, 1998, Aetna Variable Encore Fund's name changed to Aetna
Money Market VP.
(9) Effective May 1, 1998, Aetna Variable Small Company Portfolio's name
changed to Aetna Small Company VP.
(10) Effective May 1, 1998, Aetna Variable Capital Appreciation Portfolio's
name changed to Aetna Value Opportunity VP.
S-13
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
- -------------------------------- Change in In Net Assets ------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1,817,349 $5,492,542 $3,675,193 $11,107,525
$ 24,303,287 $ 43,555,170
- ---------------------------------------------------------------------------------------------------------
0 19,272 19,272 299,856
0 317,052
- ---------------------------------------------------------------------------------------------------------
0 11,048 11,048 65,376
0 75,171
- ---------------------------------------------------------------------------------------------------------
0 16,740 16,740 701,022
0 711,472
- ---------------------------------------------------------------------------------------------------------
42,515 3,702,269 3,659,754 5,152,269
19,061,872 30,733,122
- ---------------------------------------------------------------------------------------------------------
(86,245) 974,898 1,061,143 2,590,172
7,148,181 11,734,970
- ---------------------------------------------------------------------------------------------------------
0 82,622 82,622 752,309
0 805,423
- ---------------------------------------------------------------------------------------------------------
192,560 698,227 505,667 (712,067)
14,311,110 16,662,810
- ---------------------------------------------------------------------------------------------------------
0 149,693 149,693 1,221,281
0 1,356,360
- ---------------------------------------------------------------------------------------------------------
$16,987,228 $29,609,254 $12,622,026 $121,481,506 $352,525,147 $552,809,307
=========================================================================================================
</TABLE>
S-14
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
Valuation
Period
Dividends Deductions
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Aetna Variable Fund: $26,573,304 ($ 1,085,553)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Income Shares: 1,087,150 (148,230)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 372,968 (144,720)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 2,876,287 (185,443)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 112,004 (11,360)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 45,840 (3,290)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 38,169 (3,596)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 77,848 (4,920)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: (1) 576,583 (128,523)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
American Century VP Capital Appreciation Fund: (2) 132,455 (57,820)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 1,485,715 (163,582)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Growth Portfolio: 192,233 (54,856)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Overseas Portfolio: 46,706 (8,253)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 175,953 (18,257)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Contrafund Portfolio: 235,708 (110,146)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (95,697)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
Balanced Portfolio: 192,757 (52,872)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------
<CAPTION>
Year Ended December 31, 1997
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Variable Fund: $11,219,896 $ 7,857,508 $3,362,388
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Income Shares: 2,358,910 2,406,924 (48,014)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 74,201,538 73,731,940 469,598
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 1,960,106 1,561,449 398,657
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 1,279,898 1,184,906 94,992
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 198,099 193,283 4,816
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 225,894 207,391 18,503
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 143,972 131,418 12,554
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: (1) 53,957,227 53,285,312 671,915
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation Fund: (2) 15,197,338 15,512,673 (315,335)
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 14,420,981 11,843,310 2,577,671
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Growth Portfolio: 6,814,876 5,870,796 944,080
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Overseas Portfolio: 359,668 322,274 37,394
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 244,742 220,690 24,052
PolicyHolders' account values
- ---------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 4,519,164 3,602,586 916,577
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-15
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
- ------------------------------- Change in In Net Assets --------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$7,294,643 $6,207,999 ($1,086,644) $11,743,902
$92,871,626 $132,379,023
- --------------------------------------------------------------------------------------------------------
(190,180) (12,114) 178,066 6,856,045
13,179,787 21,104,804
- --------------------------------------------------------------------------------------------------------
106,394 70,857 (35,537) 10,565,707
9,092,185 20,320,201
- --------------------------------------------------------------------------------------------------------
1,383,931 1,971,257 587,326 4,867,703
15,791,541 24,336,071
- --------------------------------------------------------------------------------------------------------
15,645 27,927 12,282 1,049,257
545,378 1,802,553
- --------------------------------------------------------------------------------------------------------
(191) 5,069 5,260 533,974
123,692 710,292
- --------------------------------------------------------------------------------------------------------
20 618 598 582,502
13,963 650,139
- --------------------------------------------------------------------------------------------------------
0 (23,927) (23,927) 1,899,990
0 1,961,545
- --------------------------------------------------------------------------------------------------------
172,057 0 (172,057) (14,034,001)
13,086,083 0
- --------------------------------------------------------------------------------------------------------
(146,911) 0 146,911 (6,388,736)
6,482,525 0
- --------------------------------------------------------------------------------------------------------
1,096,283 1,523,698 427,415 2,546,018
13,310,213 20,183,450
- --------------------------------------------------------------------------------------------------------
294,867 380,110 85,243 900,915
5,052,529 7,120,144
- --------------------------------------------------------------------------------------------------------
37,941 (8,270) (46,211) 1,227,751
532,327 1,789,714
- --------------------------------------------------------------------------------------------------------
134,978 281,699 146,721 796,072
1,410,186 2,534,727
- --------------------------------------------------------------------------------------------------------
730,883 1,505,359 774,476 11,491,722
6,911,690 20,220,028
- --------------------------------------------------------------------------------------------------------
249,074 844,868 595,794 1,426,169
9,662,927 12,402,365
- --------------------------------------------------------------------------------------------------------
243,163 885,469 642,306 3,632,486
3,574,345 8,205,641
- --------------------------------------------------------------------------------------------------------
</TABLE>
S-16
<PAGE>
Variable Life Account B
Notes to Financial Statements -- December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Portfolio: $ 309,334 ($ 90,076) $ 3,312,122 $ 2,585,617 $ 726,505
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (3) 101,542 (32,381) 9,071,413 8,891,967 179,446
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 325,821 (167,065) 7,022,675 5,257,711 1,764,964
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio: 0 (17,086) 9,834,242 9,998,952 (164,710)
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 0 (6,128) 1,889,839 1,891,124 (1,285)
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 0 (12,927) 1,858,258 1,827,173 31,085
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund --
International Portfolio: (4) 264,246 (110,422) 20,554,442 18,819,109 1,735,333
PolicyHolders' account values
- -------------------------------------------------------------------------------------------------------------------------------
Total Variable Life Account B $35,222,623 ($ 2,713,203) $260,329,704 $245,858,726 $14,470,978
===============================================================================================================================
</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 Scuddder International Growth Portfolio.
S-17
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
- -------------------------------- Change in In Net Assets --------------------------------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$566,478 $1,360,430 $793,952 $3,065,638
$ 7,174,647 $ 11,980,000
- ------------------------------------------------------------------------------------------------------------
26,773 0 (26,773) (4,049,682)
3,827,848 0
- ------------------------------------------------------------------------------------------------------------
872,277 1,817,349 945,072 11,519,359
9,915,136 24,303,287
- ------------------------------------------------------------------------------------------------------------
0 42,515 42,515 19,201,153
0 19,061,872
- ------------------------------------------------------------------------------------------------------------
0 (86,245) (86,245) 7,241,839
0 7,148,181
- ------------------------------------------------------------------------------------------------------------
0 192,560 192,560 14,100,392
0 14,311,110
- ------------------------------------------------------------------------------------------------------------
1,244,544 0 (1,244,544) (11,259,868)
10,615,255 0
- ------------------------------------------------------------------------------------------------------------
$14,132,669 $16,987,228 $ 2,854,559 $ 79,516,307 $223,173,883 $352,525,147
===========================================================================================================
</TABLE>
S-18
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and
Contract Owners 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, 1998, 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, 1998. 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, 1998, 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, 1998, 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, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
Hartford, Connecticut
February 26, 1999
S-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Page
---
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996 F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4
Consolidated Statements of Changes in Shareholder's Equity For the Years
Ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:
We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiary as of December 31, 1998 and 1997,
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, 1998. 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 aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Aetna Life
Insurance and Annuity Company and Subsidiary at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
February 3, 1999
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)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Premiums $ 79.4 $ 69.1 $ 84.9
Charges assessed against policyholders 324.3 262.0 197.0
Net investment income 877.6 878.8 852.6
Net realized capital gains 10.4 29.7 17.0
Other income 29.6 38.3 43.6
-------- -------- --------
Total revenue 1,321.3 1,277.9 1,195.1
-------- -------- --------
Benefits and expenses:
Current and future benefits 714.4 720.4 728.3
Operating expenses 313.2 286.5 275.8
Amortization of deferred policy acquisition costs 106.7 82.8 28.0
Severance and facilities charges -- -- 47.1
-------- -------- --------
Total benefits and expenses 1,134.3 1,089.7 1,079.2
-------- -------- --------
Income from continuing operations before
income taxes 187.0 188.2 115.9
Income taxes 47.4 50.7 30.7
-------- -------- --------
Income from continuing operations 139.6 137.5 85.2
Discontinued Operations, net of tax
Income from operations 61.8 67.8 55.9
Gain on sale 59.0 -- --
-------- -------- --------
Net income $ 260.4 $ 205.3 $ 141.1
======== ======== ========
</TABLE>
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,
1998 1997
------------- --------------
<S> <C> <C>
Assets
Investments:
Debt securities available for sale, at fair value,
(amortized cost: $11,570.3 and $12,912.2) $ 12,067.2 $ 13,463.8
Equity securities, at fair value,
Nonredeemable preferred stock (cost: $202.6 and $131.7) 203.3 147.6
Investment in affiliated mutual funds (cost: $96.8 and$78.1) 100.1 83.0
Common stock (cost: $1.0 and $0.2) 2.0 .6
Short-term investments 47.9 95.6
Mortgage loans 12.7 12.8
Policy loans 292.2 469.6
----------- -----------
Total investments 12,725.4 14,273.0
Cash and cash equivalents 608.4 565.4
Short-term investments under securities loan agreement 277.3 --
Accrued investment income 151.6 163.0
Premiums due and other receivables 46.7 51.9
Reinsurance recoverable 2,959.8 11.8
Deferred policy acquisition costs 864.0 1,654.6
Reinsurance loan to affiliate -- 397.2
Deferred tax asset 120.6 --
Other assets 66.6 46.8
Separate accounts assets 29,458.4 22,982.7
----------- -----------
Total assets $ 47,278.8 $ 40,146.4
=========== ===========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $ 3,815.9 $ 3,763.7
Unpaid claims and claim expenses 18.8 38.0
Policyholders' funds left with the Company 11,305.6 11,143.5
----------- -----------
Total insurance reserve liabilities 15,140.3 14,945.2
Payables under securities loan agreement 277.3 --
Other liabilities 793.2 312.8
Income taxes:
Current 279.8 12.4
Deferred -- 72.0
Separate accounts liabilities 29,430.2 22,970.0
----------- -----------
Total liabilities 45,920.8 38,312.4
----------- -----------
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 427.3 418.0
Accumulated other comprehensive income 104.8 92.9
Retained earnings 823.1 1,320.3
----------- -----------
Total shareholder's equity 1,358.0 1,834.0
----------- -----------
Total liabilities and shareholder's equity $ 47,278.8 $ 40,146.4
=========== ===========
</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,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $ 1,834.0 $ 1,609.5 $ 1,583.0
Comprehensive income
Net income 260.4 205.3 141.1
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
($18.2 million, $49.9 million and
$(110.6) million, pretax, respectively) 11.9 32.4 (72.0)
---------- ---------- ----------
Total comprehensive income 272.3 237.7 69.1
---------- ---------- ----------
Capital contributions 9.3 -- 10.4
Other changes 1.4 4.1 (49.5)
Common stock dividends (759.0) (17.3) (3.5)
---------- ---------- ----------
Shareholder's equity, end of year $ 1,358.0 $ 1,834.0 $ 1,609.5
========== ========== ==========
</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,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 260.4 $ 205.3 $ 141.1
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Net accretion of discount on investments (29.5) (66.4) (68.0)
Gain on sale of discontinued operations (88.3) -- --
---------- ---------- ----------
Cash flows provided by operating activities and net realized capital
gains before changes in assets and liabilities 142.6 138.9 73.1
Net realized capital gains (11.1) (36.0) (19.7)
---------- ---------- ----------
Cash flows provided by operating activities before changes in assets
and liabilities 131.5 102.9 53.4
Changes in assets and liabilities:
Decrease (increase) in accrued investment income 11.4 ( 4.0) 16.5
(Increase) decrease in premiums due and other receivables (16.3) (33.3) 1.6
Decrease (increase) in policy loans 177.4 (70.3) (60.7)
Increase in deferred policy acquisition costs (117.3) (139.3) (174.0)
Decrease in reinsurance loan to affiliate 397.2 231.1 27.2
Net increase in universal life account balances 122.9 157.1 146.6
Decrease in other insurance reserve liabilities (41.8) (120.3) (114.9)
Net (decrease) increase in other liabilities and other assets (50.8) (41.7) 3.1
Increase (decrease) in income taxes 100.4 (31.4) (26.7)
Other, net -- -- 1.1
---------- ---------- ----------
Net cash provided by (used for) operating activities 714.6 50.8 (126.8)
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 6,790.2 5,311.3 5,182.2
Equity securities 150.1 103.1 190.5
Mortgage loans 0.3 0.2 8.7
Life business 966.5 -- --
Investment maturities and collections of:
Debt securities available for sale 1,290.3 1,212.7 885.2
Short-term investments 129.9 89.3 35.0
Cost of investment purchases in:
Debt securities available for sale (6,701.4) (6,732.8) (6,534.3)
Equity securities (125.7) (113.3) (118.1)
Other investments (2,725.9) -- --
Short-term investments (81.9) (149.9) (54.7)
Other, net -- -- (17.6)
---------- ---------- ----------
Net cash used for investing activities (307.6) (279.4) (423.1)
---------- ---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,571.1 1,621.2 1,579.5
Withdrawals of investment contracts (1,393.1) (1,256.3) (1,146.2)
Capital contribution to Separate Account -- (25.0) --
Return of capital from Separate Account 1.7 12.3 --
Capital contribution from HOLDCO 9.3 -- 10.4
Dividends paid to shareholder (553.0) (17.3) (3.5)
---------- ---------- ----------
Net cash (used for) provided by financing activities (364.0) 334.9 440.2
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 43.0 106.3 (109.7)
Cash and cash equivalents, beginning of year 565.4 459.1 568.8
---------- ---------- ----------
Cash and cash equivalents, end of year $ 608.4 $ 565.4 $ 459.1
========== ========== ==========
Supplemental cash flow information:
Income taxes paid, net $ 48.4 $ 119.6 $ 85.5
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
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 in the United
States. Prior to the sale of the domestic individual life insurance business on
October 1, 1998, the Company had two business segments: financial services and
individual life insurance. On October 1, 1998, the Company sold its domestic
individual life insurance operations to Lincoln National Corporation
("Lincoln") and accordingly they are now classified as Discontinued Operations.
(Refer to note 2)
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.
Discontinued Operations 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. ("ARS"), 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 1997 and 1996 financial information to conform to the 1998
presentation.
New Accounting Standards
Disclosures about Segments of an Enterprise and Related Information
As of December 31, 1998, the Company adopted Financial Accounting Standard
("FAS") No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for the reporting of
information relating to operating segments. This statement supersedes FAS No.
14, Financial Reporting for Segments of a Business Enterprise, which requires
reporting segment information by industry and geographic area (industry
approach). Under FAS No. 131, operating segments are defined as components of a
company for which separate financial information is available and is used by
management to allocate resources and assess performance (management approach).
The adoption of this statement did not change the composition or the results of
operations of any of the operating segments of the Company, which are
consistent with the management approach.
F-7
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Accounting for the Costs of Computer Software Developed and Obtained for
Internal Use
On January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use, issued by the American Institute of Certified Public Accountants
("AICPA"). This statement requires that certain costs incurred in developing
internal use computer software (in process at, and subsequent to the adoption
date) be capitalized, and provides guidance for determining whether computer
software is considered to be for internal use. The Company amortizes these
costs over a period of 3 to 5 years. Previously, the Company expensed the cost
of internal-use computer software as incurred. The adoption of this statement
resulted in a net after-tax increase to the results of operations of $6.5
million for the year ended December 31, 1998.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB") issued FAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, that provides accounting and reporting
standards for transfers of financial assets and extinguishments of liabilities.
FAS No. 125 was effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending were not effective until January 1, 1998. The adoption of those
provisions effective in 1998 did not have a material effect on the Company's
financial position or results of operations.
Future Application of Accounting Standards
Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do
Not Transfer Insurance Risk
In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which
provides guidance on how to account for all insurance and reinsurance contracts
that do not transfer insurance risk, except for long-duration life and health
insurance contracts. This statement is effective for the Company's financial
statements beginning January 1, 2000, with early adoption permitted. The
Company is currently evaluating the impact of the adoption of this statement
and the potential effect on its financial position and results of operations.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This standard requires companies to record
all derivatives on the balance sheet as either assets or liabilities and
measure those instruments at fair value. The manner in which companies are to
record gains or losses resulting from changes in the values of those
derivatives depends on the use of the derivative and whether it qualifies for
hedge accounting. This standard is effective for the Company's financial
statements beginning January 1, 2000, with early adoption permitted. The
Company is currently evaluating the impact of adoption of this statement and
the potential effect on its financial position and results of operations.
F-8
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments
In December 1997, the AICPA issued SOP 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. The Company does not accrue
interest on problem debt securities when management believes the collection of
interest is unlikely.
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.
F-9
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
At December 31, 1998 and 1997, the Company loaned securities (which are
reflected as invested assets) with a fair value of approximately $277.3 million
and $385.1 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 an original 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 for other than trading purposes in order
to hedge interest rate risk (i.e. market risk, refer to Note 4.)
Futures contracts are carried at fair value and require daily cash settlement.
Changes in the fair value of futures contracts allocable to experience rated
contracts are deducted from capital gains and losses with an offsetting amount
reported in future policy benefits. Changes in the fair value of futures
contracts allocable to non-experienced-rated 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 or losses on the hedging instrument are reflected in
net realized capital gains or losses.
Included in common stock are warrants which represent the right to purchase
specific securities. Upon exercise, the cost of the warrants is 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 (prior to the sale of the domestic individual life insurance business
to Lincoln on October 1, 1998, refer to Note 2), such costs are amortized over
expected premium-paying periods (up to 20 years). For universal life (prior to
the sale of the domestic individual life insurance business to Lincoln on
October 1, 1998, refer to Note 2), and certain annuity contracts,
F-10
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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 50 years
for universal life and up to 20 years for certain annuity contracts). Deferred
policy acquisition costs are written off to the extent that it is determined
that future policy premiums and investment income or gross profits 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. Prior to
the sale of the domestic individual life insurance business on October 1, 1998,
(refer to note 2), reserves for universal life products were equal to
cumulative deposits less withdrawals and charges plus credited interest
thereon, plus (less) net realized capital gains (losses) (which were reflected
through credited interest rates). These reserves also included unrealized
capital gains (losses) related to FAS No. 115. As a result of the sale and
transfer of assets supporting the business, reserves for universal life
products will no longer include net realized capital gains (losses) and
unrealized gains (losses) related to FAS No. 115 for the years ended December
31, 1998 and beyond.
Reserves for immediate annuities with life contingent payouts and traditional
life insurance contracts are 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 1.50% to 11.25% 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.
Because the sale of the domestic individual life insurance business was
substantially in the form of an indemnity reinsurance agreement, the Company
reported an addition to its reinsurance recoverable approximating the Company's
total individual life reserves at the sale date.
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 3.00%
to 8.10% for all years presented) net of adjustments for investment experience
that the Company is entitled to reflect in future credited interest. These
reserves also include unrealized gains/losses related to FAS No. 115. 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-11
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life (prior to the sale of the domestic individual life insurance
business to Lincoln on October 1, 1998, refer to Note 2) 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 (prior to the sale
of the domestic individual life insurance business to Lincoln on October 1,
1998, refer to Note 2) 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 (who bears the investment risk
subject, in some cases, to minimum guaranteed rates) in shares of mutual funds
which are managed by an affiliate of the Company, or other selected mutual
funds not managed by the Company.
As of December 31, 1998, Separate Accounts assets are carried at fair value. At
December 31, 1998, unrealized gains of $10.0 million, after taxes, on assets
supporting a guaranteed interest option are reflected in shareholder's equity.
At December 31, 1997, Separate Account assets supporting the guaranteed
interest option were carried at an amortized cost of $658.6 million (fair value
$668.7 million). Separate Accounts liabilities are carried at fair value,
except for those relating to the guaranteed interest option. Reserves relating
to the guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 3.00% to 8.10% in 1998 and 4.10% to
8.10% in 1997.
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 Financial Statements (with the exception of realized and
unrealized capital gains and losses on the assets supporting the guaranteed
interest option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
F-12
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its exposure to
large losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
the primary liability of the Company as direct insurer of the risks reinsured.
The Company evaluates the financial strength of potential reinsurers and
continually monitors the financial condition of reinsurers. Only those
reinsurance recoverables deemed probable of recovery are reflected as assets on
the Company's Consolidated Balance Sheets. The majority of the reinsurance
recoverable on the Consolidated Balance Sheets at December 31, 1998 is related
to the reinsurance recoverable from Lincoln arising from the sale of the
domestic life insurance business. (Refer to Note 2)
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.
2. Discontinued Operations-Individual Life Insurance
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The transaction was generally in
the form of an indemnity reinsurance arrangement, under which Lincoln
contractually assumed from the Company certain policyholder liabilities and
obligations, although the Company remains directly obligated to policyholders.
Insurance reserves ceded as of December 31, 1998 were $2.9 billion. Deferred
policy acquisition costs related to the life policies of $907.9 million were
written off against the gain on the sale. Certain invested assets related to
and supporting the life policies were sold to consummate the life sale, and the
Company recorded a reinsurance recoverable from Lincoln. The transaction
resulted in an after-tax gain on the sale of approximately $117 million, of
which $58 million will be deferred and amortized over approximately 15 years
(as profits in the book of business sold emerge). The remaining portion of the
gain was recognized immediately in net income and was largely attributed to the
sale of the domestic life insurance business for access to the agency sales
force and brokerage distribution channel. The unamortized portion of the gain
is presented in other liabilities on the Consolidated Balance Sheets.
The operating results of the domestic individual life insurance business are
presented as Discontinued Operations. All prior year income statement data has
been restated to reflect the presentation as Discontinued Operations. Revenues
for the individual life segment were $652.2 million, $620.4 million and $445.7
million for 1998, 1997 and 1996, respectively. Premiums ceded and reinsurance
recoveries made in 1998 totaled $153.4 million and $57.7 million, respectively.
F-13
<PAGE>
Notes to Consolidated Financial Statements (continued)
3. Investments
Debt securities available for sale as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 (Millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and government agencies
and authorities $ 718.9 $ 60.4 $ 0.2 $ 779.1
States, municipalities and political subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Utilities 615.2 29.8 4.1 640.9
Financial 2,259.2 94.6 5.6 2,348.2
Transportation/capital goods 580.8 33.0 1.1 612.7
Health care/consumer products 1,328.2 69.8 4.8 1,393.2
Natural resources 254.5 6.9 2.3 259.1
Other corporate securities 261.7 5.8 7.4 260.1
- ----------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 5,299.6 239.9 25.3 5,514.2
- ----------------------------------------------------------------------------------------------------------------
Foreign securities:
Government, including political subdivisions 507.6 30.4 32.9 505.1
Utilities 147.0 32.4 -- 179.4
Other 511.2 14.9 1.8 524.3
- ----------------------------------------------------------------------------------------------------------------
Total foreign securities 1,165.8 77.7 34.7 1,208.8
- ----------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 671.9 38.4 2.9 707.4
Collateralized mortgage obligations 1,879.6 119.7 10.4 1,988.9
- ----------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 2,551.5 158.1 13.3 2,696.3
- ----------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed
securities 1,114.9 30.9 9.8 1,136.0
Other asset-backed securities 719.3 13.8 0.6 732.5
- ----------------------------------------------------------------------------------------------------------------
Total debt securities $ 11,570.3 $ 580.8 $ 83.9 $ 12,067.2
================================================================================================================
</TABLE>
F-14
<PAGE>
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
Debt securities available for sale as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 (Millions) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<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:
Utilities 521.3 23.5 0.9 543.9
Financial 2,370.7 84.6 1.3 2,454.0
Transportation & capital goods 528.2 33.2 0.1 561.3
Healthcare & consumer products 728.5 27.0 2.6 752.9
Natural resources 143.5 5.5 -- 149.0
Other corporate securities 545.2 27.2 0.1 572.3
- -----------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4
- -----------------------------------------------------------------------------------------------------------------
Foreign securities:
Government, including political subdivisions 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-15
<PAGE>
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
At December 31, 1998 and 1997, net unrealized appreciation of $496.9 million
and $551.6 million, respectively, on available-for-sale debt securities
included $355.8 million and $429.3 million, respectively, related to
experience-rated contracts, which were not reflected in shareholder's equity
but in insurance reserves.
The amortized cost and fair value of debt securities for the year ended
December 31, 1998 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be restructured,
called, or prepaid.
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
- ---------------------------------------------------------------------------
<S> <C> <C>
Due to mature:
One year or less $ 553.5 $ 554.6
After one year through five years 2,619.7 2,692.4
After five years through ten years 1,754.0 1,801.7
After ten years 2,257.4 2,453.7
Mortgage-backed securities 3,666.4 3,832.3
Other asset-backed securities 719.3 732.5
- --------------------------------------------------------------------------
Total $ 11,570.3 $ 12,067.2
==========================================================================
</TABLE>
At December 31, 1998 and 1997, debt securities carried at $8.8 million and $8.2
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, 1998.
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
Fair Amortized Fair Amortized
(Millions) Value Cost Value Cost
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total residential CMOs (1) $ 1,988.9 $ 1,879.6 $ 2,415.9 $ 2,280.5
=======================================================================================================
Percentage of total:
Supporting experience rated products 81.7% 81.6%
Supporting remaining products 18.3% 18.4%
- ----------------------------------------- ---------- ----------
100.0% 100.0%
========================================= ========== ==========
</TABLE>
(1) At December 31, 1998 and 1997, approximately 66% and 73%, respectively, of
the Company's residential CMO holdings were backed by government agencies
such as GNMA, FNMA, FHLMC.
F-16
<PAGE>
Notes to Consolidated Financial Statements (continued)
3. Investments (continued)
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, 1998 and 1997, approximately 2%
and 4%, 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).
Investments in equity securities available for sale as of December 31 were as
follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997
- ----------------------------------------------------
<S> <C> <C>
Amortized Cost $ 300.4 $ 210.0
Gross unrealized gains 13.1 21.3
Gross unrealized losses 8.1 .1
- ----------------------------------------------------
Fair Value $ 305.4 $ 231.2
====================================================
</TABLE>
4. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- ---------------------------
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 12.7 $ 12.3 $ 12.8 $ 12.4
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 1,063.9 $ 984.3 $ 1,030.3 $ 1,005.4
Without a fixed maturity 10,241.7 9,686.2 10,113.2 9,587.5
- -------------------------------------------------------------------------------------------
</TABLE>
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument, nor do
they consider the tax impact of the realization of unrealized gains or losses.
In many cases, the fair value estimates cannot be substantiated by comparison
to independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument. In evaluating the Company's management of
interest rate, price and liquidity risks, the fair values of all assets and
liabilities should be taken into consideration, not only those presented above.
F-17
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Financial Instruments (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
Futures Contracts:
Futures contracts are used to manage interest rate risk in the Company's bond
portfolio. 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. The notional amounts, carrying values and estimated fair
values of the Company's open treasury futures as of December 31, 1998 were
$250.9 million, $.1 million, and $.1 million, respectively.
Warrants:
Included in common stocks are warrants which are instruments giving the Company
the right, but not the obligation to buy a security at a given price during a
specified period. The carrying values and estimated fair values of the
Company's warrants to purchase equity securities as of December 31, 1998 were
$1.5 million, respectively. The carrying values and estimated fair values as of
December 31, 1997 were $.6 million, respectively.
F-18
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Financial Instruments (continued)
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,
1998 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
Residential collateralized mortgage obligations $ 1,879.6 $ 1,988.9
Principal-only strips (included above) 20.2 24.0
Interest-only strips (included above) 17.3 18.0
Other structured securities with derivative
characteristics (1) 87.3 80.6
- --------------------------------------------------------------------------------
</TABLE>
(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.
5. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 798.8 $ 814.6 $ 805.3
Nonredeemable preferred stock 18.4 12.9 5.8
Investment in affiliated mutual funds 6.6 3.8 10.8
Mortgage loans 0.6 0.3 0.6
Policy loans 7.2 5.7 6.4
Reinsurance loan to affiliate 2.3 5.5 9.3
Cash equivalents 44.6 38.8 27.1
Other 16.7 9.5 1.8
- --------------------------------------------------------------------------------
Gross investment income 895.2 891.1 867.1
Less: investment expenses ( 17.6) ( 12.3) ( 14.5)
- --------------------------------------------------------------------------------
Net investment income $ 877.6 $ 878.8 $ 852.6
================================================================================
</TABLE>
Net investment income includes amounts allocable to experience rated
contractholders of $655.6 million, $673.8 million and $649.5 million for the
years ended December 31, 1998, 1997 and 1996, respectively. Interest credited
to contractholders is included in current and future benefits.
F-19
<PAGE>
Notes to Consolidated Financial Statements (continued)
6. Dividend Restrictions and Shareholder's Equity
The Company paid $553.0 million and $17.3 million in cash dividends to HOLDCO
in 1998 and 1997, respectively. Additionally, at December 31, 1998, the Company
accrued $206.0 million in dividends. Of the $759.0 million dividends paid and
accrued in 1998, $756.0 million (all of which was approved by the Insurance
Commissioner of the State of Connecticut) was attributable to proceeds from the
sale of the domestic individual life insurance business.
In January 1999, the accrued dividends of $206.0 million were paid by the
Company to HOLDCO. Further dividends to be paid by the Company to HOLDCO during
1999 will need to be approved by the Insurance Department of the State of
Connecticut (the "Department") prior to payment.
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 $148.1
million, $80.5 million and $57.8 million for the years ended December 31, 1998,
1997 and 1996, respectively. Statutory capital and surplus was $773.0 million
and $778.7 million as of December 31, 1998 and 1997, respectively.
As of December 31, 1998, 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.
7. 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:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 7.4 $ 21.1 $ 9.5
Equity securities 3.0 8.6 7.5
- ----------------------------------------------------------------------
Pretax realized capital gains $ 10.4 $ 29.7 $ 17.0
======================================================================
After-tax realized capital gains $ 7.3 $ 19.2 $ 11.1
======================================================================
</TABLE>
Net realized capital gains of $15.0 million, $83.7 million and $52.5 million
for 1998, 1997 and 1996, 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 $118.6 million and $120.1 million at December 31, 1998 and 1997,
respectively.
F-20
<PAGE>
Notes to Consolidated Financial Statements (continued)
7. Capital Gains and Losses on Investment Operations (continued)
Proceeds from the sale of available-for-sale debt securities and the related
gross gains and losses were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds on sales $ 6,790.2 $ 5,311.3 $ 5,182.2
Gross gains 98.8 23.8 22.1
Gross losses 91.4 2.7 12.6
- --------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 18.9 $ 44.3 $ (100.1)
Equity securities (16.1) 5.6 ( 10.5)
Other 15.4 -- --
- --------------------------------------------------------------------------------------
Subtotal 18.2 49.9 (110.6)
Increase (decrease) in deferred income taxes
(Refer to note 8) 6.3 17.5 ( 38.6)
- --------------------------------------------------------------------------------------
Net changes in accumulated other
comprehensive income $ 11.9 $ 32.4 $ (72.0)
=====================================================================================
</TABLE>
Net unrealized capital gains allocable to experience-rated contracts of $355.8
million at December 31, 1998 are reflected on the Consolidated Balance Sheets
in Policyholders' funds left with the Company and are not included in
shareholder's equity. At December 31, 1997, net unrealized capital gains of
$356.7 million and $72.6 million at December 31, 1997 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.
F-21
<PAGE>
Notes to Consolidated Financial Statements (continued)
7. Capital Gains and Losses on Investment Operations (continued)
Shareholder's equity included the following accumulated other comprehensive
income, which are net of amounts allocable to experience-rated contractholders,
at December 31:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Gross unrealized capital gains $ 157.3 $ 140.6 $ 101.7
Gross unrealized capital losses (16.2) (18.4) (23.8)
- -------------------------------------------------------------------------------------
141.1 122.2 77.9
- -------------------------------------------------------------------------------------
Equity securities:
Gross unrealized capital gains 13.1 21.2 16.3
Gross unrealized capital losses (8.1) (0.1) (0.8)
- -------------------------------------------------------------------------------------
5.0 21.1 15.5
- -------------------------------------------------------------------------------------
Other:
Gross unrealized capital gains 17.1 -- --
Gross unrealized capital losses (1.7) -- --
- -------------------------------------------------------------------------------------
15.4 -- --
- -------------------------------------------------------------------------------------
Deferred income taxes (Refer to note 8) 56.7 50.4 32.9
- -------------------------------------------------------------------------------------
Net accumulated other comprehensive income $104.8 $92.9 $ 60.5
=====================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during the year (1) $ 38.3 $ 98.8 $ (14.8)
Less: reclassification adjustment for gains and
other items included in net income (2) 26.4 66.4 57.2
- ---------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $ 11.9 $ 32.4 $ (72.0)
=======================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the year were
$58.8 million, $152.3 million and ($22.9) million for 1998, 1997 and 1996,
respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $40.6 million, $102.4 million and $87.7 million for 1998,
1997 and 1996, respectively.
F-22
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Income Taxes
The Company is included in the consolidated federal income tax return, the
combined returns of Connecticut and New York, and the Illinois unitary 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 in the consolidated federal income tax return.
Income taxes from continuing operations consist of the following:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes (benefits):
Federal $ 246.4 $ 28.7 $ 30.0
State 1.3 2.0 2.3
Net realized capital gains 16.8 39.1 24.4
- -----------------------------------------------------------------------
264.5 69.8 56.7
- -----------------------------------------------------------------------
Deferred taxes (benefits):
Federal (203.2) 9.4 ( 7.6)
Net realized capital (losses) ( 13.9) (28.5) (18.4)
- -----------------------------------------------------------------------
(217.1) (19.1) (26.0)
- -----------------------------------------------------------------------
Total $ 47.4 $ 50.7 $ 30.7
=======================================================================
</TABLE>
Income taxes were different from the amount computed by applying the federal
income tax rate to income from continuing operations before income taxes for
the following reasons:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations before
income taxes $ 187.0 $ 188.2 $115.9
Tax rate 35% 35% 35%
- -----------------------------------------------------------------------------------
Application of the tax rate 65.5 65.9 40.6
Tax effect of:
State income tax, net of federal benefit 0.9 1.3 1.5
Excludable dividends (17.1) (15.6) (0.8)
Other, net ( 1.9) ( 0.9) (0.6)
- ------------------------------------------------------------------------------------
Income taxes $ 47.4 $ 50.7 $ 30.7
====================================================================================
</TABLE>
F-23
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
(Millions) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 324.1 $ 415.8
Unrealized gains allocable to experience
rated contracts 124.5 150.1
Investment (gains) losses (0.3) 6.6
Postretirement benefits other than pensions 26.0 26.3
Deferred compensation 38.6 31.2
Restructuring charge 2.9 9.5
Depreciation 1.7 3.9
Sale of individual life 48.9 -
Other 16.0 8.8
- -------------------------------------------------------------------------
Total gross assets 582.4 652.2
- -------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 272.7 515.6
Market discount 4.5 5.1
Net unrealized capital gains 181.2 200.5
Pension 3.9 3.6
Other (0.5) (0.6)
- -------------------------------------------------------------------------
Total gross liabilities 461.8 724.2
- -------------------------------------------------------------------------
Net deferred tax (asset) liability $ (120.6) $ 72.0
=========================================================================
</TABLE>
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. As of December 31, 1998 and 1997, no valuation
allowances were required for unrealized capital gains and losses.
Management believes that it is more likely than not that the Company will
realize the benefit of the net deferred tax asset. The Company expects
sufficient taxable income in the future to realize the net deferred tax asset
because of the Company's long-term history of having taxable income, which is
projected to continue.
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, 1998. This amount would be taxed
only under certain conditions.
F-24
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (Continued)
No income taxes have been provided on this amount since management believes
under current tax law the conditions under which such taxes would become
payable are remote.
The Internal Revenue Service (the "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
Aetna has noncontributory defined benefit pension plans covering substantially
all employees. 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 $0.8 million, $2.7 million and $4.3 million for
the years ended December 31, 1998, 1997 and 1996, respectively.
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 1998, 1997 and 1996 were $0.9 million,
$2.7 million and $1.8 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.
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.
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 1998, 1997 and
1996 were $1.4 million, $0.6 million and $0.7 million, respectively.
Effective January 1, 1999, the Company, in conjunction with Aetna, changed the
formula for providing pension benefits from the existing final average pay
formula to a cash balance formula,
F-25
<PAGE>
Notes to Consolidated Financial Statements (continued)
9. Benefit Plans (continued)
which will credit employees annually with an amount equal to a percentage of
eligible pay based on age and years of service as well as an interest credit
based on individual account balances. The formula also provides for a
transition period until December 1, 2006, which allows certain employees to
receive vested benefits at the higher of the final average pay or cash balance
formula. The changing of this formula will not have a material effect on the
Company's results of operations, liquidity or financial condition.
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 $4.7 million, $4.4 million and $5.4 million in 1998, 1997 and 1996,
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 1998, 1997 and 1996, were $4.1 million, $2.9 million and $8.1
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 1998,
other changes in shareholder's equity include an additional increase of $0.7
million reflecting revisions to the allocation of the deferred tax benefit.
10. Related Party Transactions
Investment Advisory and Other Fees
In February 1998 and May 1998, Aeltus Investment Management Inc. ("Aeltus"), an
affiliate of the Company, assumed investment advisory services for Aetna
managed mutual funds and variable funds (collectively, the Funds),
respectively. In connection with that assumption of duties, Aeltus entered into
participation agreements with the Company. Participation fees paid to the
Company, from Aeltus, included in charges assessed against policyholders
amounted to $26.9 million for 1998. Prior to assuming investment advisory
services, Aeltus served as subadvisor to the Funds. Since August 1996, Aeltus
has served as advisor for most of the Company's 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, 1998, 1997 and 1996, the Company paid $21.7 million, $45.5 million
and $16.0 million, respectively, in such fees.
Prior to February 1998 and May 1998, the Company served as investment advisor
to the Funds. Under the advisory agreements, the funds paid the Company a daily
fee which, on an annual basis, ranged,
F-26
<PAGE>
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions (continued)
depending on the fund, from 0.25% to 0.85% of their average daily net assets.
The Company is also compensated by the Separate Accounts (variable funds) for
bearing mortality and expense risks pertaining to variable life and annuity
contracts. Under the insurance and annuity contracts, the Separate Accounts pay
the Company a daily fee which, on an annual basis is, depending on the product,
up to 2.15% of their average daily net assets. The amount of compensation and
fees received from the Funds and Separate Accounts, included in charges
assessed against policyholders, amounted to $287.0 million, $271.2 million and
$186.6 million in 1998, 1997 and 1996, respectively.
Reinsurance Transactions
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 was 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 were ceded to the Company
from Aetna Life as investment rollover occurred and the loan previously
established was 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) as of December 31, 1997
relating to the business assumed. The fair value of the loan relating to assets
held by Aetna Life was $412.3 million as of December 31, 1997 and was based
upon the fair value of the underlying assets.
Effective October 1, 1998, this agreement was fully transitioned to a
coinsurance arrangement and this business along with the Company's direct
domestic individual non-participating life insurance business was sold to
Lincoln. (Refer to note 2).
The operating results of the domestic individual life business are presented as
Discontinued Operations. Premiums of $336.3 million, $176.7 million and $25.3
million and current and future benefits of $341.1 million, $183.9 million and
$39.5 million, were assumed in 1998, 1997 and 1996, respectively. Investment
income of $17.0 million, $37.5 million and $44.1 million was generated from the
reinsurance loan to affiliate for the years ended December 31, 1998, 1997 and
1996, respectively.
Prior to the sale of the domestic individual life insurance business to Lincoln
on October 1, 1998, the Company's retention limit per individual life was $2.0
million and amounts in excess of this limit, up to a maximum of $8.0 million on
any new individual life business was reinsured with Aetna Life on a yearly
renewable term basis. Premium amounts related to this agreement were $2.0
million, $5.9 million and $5.2 million for 1998, 1997 and 1996, respectively.
This agreement was terminated effective October 1, 1998.
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
F-27
<PAGE>
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions (continued)
renewable term basis. Premium amounts related to this agreement were $4.4
million and $0.7 million in 1998 and 1997, respectively. The business assumed
under this agreement was retroceded to Lincoln effective October 1, 1998.
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 is also
responsible for administering fixed annuity payments that are made to
annuitants receiving variable payments. Reserves of $87.8 million and $32.5
million were maintained for this contract as of December 31, 1998 and 1997,
respectively.
Capital Transactions
The Company received a capital contribution of $9.3 million and $10.4 million
in cash from HOLDCO in 1998 and 1996, respectively. The Company received no
capital contributions in 1997.
The Company paid $553.0 million, $17.3 million and 3.5 million in cash
dividends to HOLDCO in 1998, 1997 and 1996, respectively. Additionally, in
1998, the Company accrued $206.0 million in dividends. (Refer to Note 6)
Other
Premiums due and other receivables include $1.6 million and $37.0 million due
from affiliates in 1998 and 1997, respectively. Other liabilities include $2.2
million and $1.2 million due to affiliates for 1998 and 1997, respectively.
As of December 31, 1998, Aetna transferred to the Company $0.7 million based on
its decision not to settle state tax liabilities for the years 1998 and 1997.
The amount transferred as of December 31, 1997 was $2.5 million. This amount
has been reported as an other change 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
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The transaction is generally in the
form of an indemnity reinsurance arrangement, under which Lincoln contractually
assumed from the Company certain policyholder liabilities and obligations,
although the Company remains directly obligated to policyholders. (Refer to
note 2)
Effective January 1, 1998, 90% of the mortality risk on substantially all
individual universal life product business written from June 1, 1991 through
October 31, 1997 was reinsured externally. Beginning November 1, 1997, 90% of
new business written on these products was reinsured externally. Effective
October 1, 1998 this agreement was assigned from the third party reinsurer to
Lincoln.
F-28
<PAGE>
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
(Millions) Amount Companies Companies Amount
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
- -------------
Premiums:
Discontinued Operations $ 166.8 $ 165.4 $ 340.6 $ 342.0
Accident and Health Insurance 16.3 16.3 -- --
Annuities 80.8 2.9 1.5 79.4
- ----------------------------------------------------------------------------------------
Total earned premiums $ 263.9 $ 184.6 $ 342.1 $ 421.4
========================================================================================
1997
- -------------
Premiums:
Discontinued Operations $ 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:
Discontinued Operations $ 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
========================================================================================
</TABLE>
F-29
<PAGE>
Notes to Consolidated Financial Statements (continued)
12. Segment Information
Prior to October 1, 1998, the Company's operations were reported through two
major business segments: Financial Services and Individual Life Insurance (now
Discontinued Operations). Summarized financial information for the Company's
principal operations was as follows:
<TABLE>
<CAPTION>
(4) (4)
Financial Discontinued
1998 (Millions) Services Operations Other Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 433.3 -- -- $ 433.3
Net investment income 877.6 -- -- 877.6
- ----------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains $ 1,310.9 -- -- $ 1,310.9
====================================================================================================
Amortization of deferred policy
acquisition costs $ 106.7 -- -- $ 106.7
- ----------------------------------------------------------------------------------------------------
Income taxes $ 57.7 $ (10.3) $ 47.4
- ----------------------------------------------------------------------------------------------------
Operating earnings (1) $ 151.5 -- -- $ 151.5
Unusual items (2) -- -- $ (19.2) ( 19.2)
Realized capital gains, net of tax 7.3 -- -- 7.3
- ----------------------------------------------------------------------------------------------------
Income from continuing operations $ 158.8 -- $ (19.2) $ 139.6
Discontinued operations, net of tax:
Income from operations -- $ 61.8 -- 61.8
Gain on sale -- 59.0 -- 59.0
- ----------------------------------------------------------------------------------------------------
Net income $ 158.8 $ 120.8 $ (19.2) $ 260.4
====================================================================================================
Segment assets $ 43,458.6 $ 3,820.2 -- $ 47,278.8
- ----------------------------------------------------------------------------------------------------
Expenditures for long-lived assets (3) -- -- $ 5.3 $ 5.3
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating earnings are comprised of net income excluding net realized
capital gains and any unusual items.
(2) Unusual items excluded from operating earnings include an after-tax
severance benefit of $1.6 million and after-tax Year 2000 costs of $20.8
million.
(3) Expenditures of long-lived assets represents additions to property and
equipment not allocable to business segments.
(4) Financial Services products include annuity contracts and Discontinued
Operations include life insurance products. (Refer to Note 1)
F-30
<PAGE>
Notes to Consolidated Financial Statements (continued)
12. Segment Information (Continued)
<TABLE>
<CAPTION>
(3) (3)
Financial Discontinued
1997 (Millions) Services Operations Other Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 369.4 -- -- $ 369.4
Net investment income 878.8 -- -- 878.8
- --------------------------------------------------------------------------------------------------
Total revenue excluding realized
capital gains $ 1,248.2 -- -- $ 1,248.2
==================================================================================================
Amortization of deferred policy
acquisition costs $ 82.8 -- -- $ 82.8
- --------------------------------------------------------------------------------------------------
Income taxes $ 50.7 -- -- $ 50.7
- --------------------------------------------------------------------------------------------------
Operating earnings (1) $ 118.3 -- -- $ 118.3
Realized capital gains, net of tax 19.2 -- -- 19.2
- --------------------------------------------------------------------------------------------------
Income from continuing operations $ 137.5 -- -- $ 137.5
Discontinued Operations, net of tax:
Income from operations - $ 67.8 -- 67.8
- --------------------------------------------------------------------------------------------------
Net Income $ 137.5 $ 67.8 -- $ 205.3
==================================================================================================
Segment assets $ 36,638.8 $ 3,507.6 -- $ 40,146.4
- --------------------------------------------------------------------------------------------------
Expenditures for long-lived assets (2) -- -- $ 9.6 $ 9.6
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Operating earnings are comprised of net income excluding net realized
capital gains and any unusual items.
(2) Expenditures for long-lived assets represents additions to property and
equipment not allocable to business segments.
(3) Financial Services products include annuity contracts and Discontinued
Operations include life insurance products. (Refer to Note 1)
F-31
<PAGE>
Notes to Consolidated Financial Statements (continued)
12. Segment Information (Continued)
<TABLE>
<CAPTION>
(3) (3)
Financial Discontinued
1996 (Millions) Services Operations Other Total
- --------------------------------------------- ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue from external customers $ 325.5 -- -- $ 325.5
Net investment income 852.6 -- -- 852.6
- ------------------------------------------------------------------------------------------------------
Total revenue excluding realized capital
gains $ 1,178.1 -- -- $ 1,178.1
======================================================================================================
Amortization of deferred policy acquisition
costs $ 28.0 -- -- $ 28.0
- ------------------------------------------------------------------------------------------------------
Income taxes $ 35.6 -- $ (4.9) $ 30.7
- ------------------------------------------------------------------------------------------------------
Operating earnings (losses) (1) $ 83.2 -- -- $ 83.2
Unusual items (2) -- -- (9.1) ( 9.1)
Realized capital gains, net of tax: 11.1 -- -- 11.1
- ------------------------------------------------------------------------------------------------------
Income from continuing operations $ 94.3 $ (9.1) $ 85.2
Discontinued operations, net of tax
Income from operations -- $ 55.9 -- 55.9
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ 94.3 $ 55.9 $ (9.1) $ 141.1
======================================================================================================
</TABLE>
(1) Operating earnings are comprised of net income excluding net realized
capital gains and any unusual items.
(2) Unusual items excluded from operating earnings represent $9.1 million
after-tax corporate facilities and severance charges not directly
allocable to the business segments.
(3) Financial Services products include annuity contracts and Discontinued
Operations include life insurance products. (Refer to Note 1)
13. 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, 1998 and 1997, the Company had
commitments to purchase investments of $68.7 million and $38.7 million,
respectively. The fair value of the investments at December 31, 1998 and 1997
approximated $68.9 million and $39.0 million, respectively.
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.
F-32
<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. 12 TO
THE REGISTRATION STATEMENT
This Post-Effective Amendment No. 12 to Registration Statement No.
33-76004 is comprised of the following papers and documents:
o The facing sheet.
o One Prospectus for the AetnaVest and AetnaVest II Flexible Premium Life
Insurance Policies consisting of 102 pages
o The undertaking to file reports
o The undertaking pursuant to Rule 484
o Representation pursuant to Section 26(e)(2)(A) of the Investment Company Act
of 1940
o The signatures
o 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)
<PAGE>
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 I Policy (Policy No. 38899)(2)
(5)(ii) Endorsement (70279-97) to Policy No. 38899(3)
(5)(iii) AetnaVest II Policy, including Term Rider (Policy No.
38899-90)(2)
(5)(iv) Amendment Rider (70194-94) to AetnaVest I Policy (Policy No.
38899)(2)
(5)(v) Amendment Rider (70195-94) (NY) to AetnaVest II Policy (Policy
No. 38899-90)(2)
(6)(i) Certificate of Incorporation of Aetna Life Insurance and Annuity
Company(4)
(6)(ii) Amendment of Certificate of Incorporation of Aetna Life
Insurance and Annuity Company(5)
(6)(iii) By-Laws as amended September 17, 1997 of Aetna Life Insurance
and Annuity Company(6)
(7) Not Applicable
(8)(i) Fund Participation Agreement by and among Aetna Life Insurance
and Annuity Company and Aetna Variable Fund, Aetna Variable
Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna
GET Fund on behalf of each of its series, Aetna Generation
Portfolios, Inc. on behalf of each of its series, Aetna Variable
Portfolios, Inc. on behalf of each of its series, and Aeltus
Investment Management, Inc. dated as of May 1, 1998(7)
(8)(ii) Amendment dated November 9, 1998 to Fund Participation Agreement
by and among Aetna Life Insurance and Annuity Company and Aetna
Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares,
Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its
series, Aetna Generation Portfolios, Inc. on behalf of each of its
series, Aetna Variable Portfolios, Inc. on behalf of each of its
series, and Aeltus Investment Management, Inc. dated as of May 1,
1998(8)
(8)(iii) Service Agreement between Aeltus Investment Management, Inc. and
Aetna Life Insurance and Annuity Company in connection with the
sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund,
Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on
behalf of each of its series, Aetna Generation Portfolios, Inc. on
behalf of each of its series, and Aetna Variable Portfolios, Inc.,
on behalf of each of its series, dated as of May 1, 1998(7).
(8)(iv) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company, Variable Insurance Products Fund and Fidelity
Distributors Corporation dated February 1,
<PAGE>
1994 and amended on December 15, 1994, February 1, 1995, May 1,
1995, January 1, 1996 and March 1, 1996(5)
(8)(v) Fifth Amendment dated as of May 1, 1997 to the Fund
Participation Agreement between Aetna Life Insurance and Annuity
Company, Variable Insurance Products Fund and Fidelity
Distributors Corporation dated February 1, 1994 and amended on
December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996
and March 1, 1996(9)
(8)(vi) 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(10)
(8)(vii) 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(7)
(8)(viii) 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(5)
(8)(ix) 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(9)
(8)(x) 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(11)
(8)(xi) 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(7)
(8)(xii) Service Agreement between Aetna Life Insurance and Annuity Company
and Fidelity Investments Institutional Operations Company dated as
of November 1, 1995(12)
(8)(xiii) 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(9)
(8)(xiv) Fund Participation Agreement among Janus Aspen Series and Aetna
Life Insurance and Annuity Company and Janus Capital Corporation
dated December 8, 1997(13)
(8)(xv) Amendment dated October 12, 1998 to Fund Participation Agreement
among Janus Aspen Series and Aetna Life Insurance and Annuity
Company and Janus Capital Corporation dated December 8, 1997(8)
<PAGE>
(8)(xvi) Service Agreement between Janus Capital Corporation and Aetna Life
Insurance and Annuity Company dated December 8, 1997(13)
(8)(xvii) Fund Participation Agreement between Aetna Life Insurance and
Annuity Company and Oppenheimer Variable Annuity Account Funds and
Oppenheimer Funds, Inc.(14)
(8)(xviii) Service Agreement effective as of March 11, 1997 between
Oppenheimer Funds, Inc. and Aetna Life Insurance and Annuity
Company(14)
(9) Not Applicable
(10)(i) Application (70059-96)(15)
(10)(ii) Application (70059-96ZNY) (15)
(10)(iii) Application Supplement (70268-97 (3/98))(15)
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(16)
1. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form S-6 (File No. 33-76004), as filed on February 16, 1996.
2. Incorporated by reference to Post-Effective Amendment No. 6 to Registration
Statement on Form S-6 (File No. 33-76004), as filed on April 22, 1997.
3. Incorporated by reference to Post-Effective Amendment No. 8 to Registration
Statement on Form S-6 (File No. 33-76004), as filed on July 14, 1997.
4. Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-60477), as filed on April 15, 1996.
5. Incorporated by reference to Post-Effective Amendment No. 12 to Registration
Statement on Form N-4 (File No. 33-75964), as filed on February 11, 1997.
6. Incorporated by reference to Post-Effective Amendment No. 12 to Registration
Statement on Form N-4 (File No. 33-91846), as filed on October 30, 1997.
7. Incorporated by reference to Registration Statement on Form N-4 (File No.
333-56297) as filed on June 8, 1998.
8. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form N-4 (File No. 333-56297), as filed on December 14, 1998.
9. Incorporated by Reference to Post-Effective Amendment No. 30 to Registration
Statement on Form N-4 (File No. 33-34370), as filed on September 29, 1997.
10. Incorporated by Reference to Post-Effective Amendment No. 16 to
Registration Statement on Form N-4 (File No. 33-75964), as filed on February 9,
1998.
<PAGE>
11. Incorporated by Reference to Post-Effective Amendment No. 7 to Registration
Statement on Form S-6 (File No. 33-75248), as filed on February 24, 1998.
12. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form N-4 (File No. 33-88720), as filed on June 28, 1996.
13. Incorporated by reference to Post-Effective Amendment No. 10 to
Registration Statement on Form N-4 (File No. 33-75992), as filed on December
31, 1997.
14. Incorporated by reference to Post-Effective Amendment No. 27 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on April 16,
1997.
15. Incorporated by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form S-6 (File No. 33-64277), as filed on February 25, 1998.
16. Incorporated by reference to Post-Effective Amendment No. 5 to Registration
Statement on Form N-4 (File No. 333-56297), as filed on February 25, 1999.
<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. 33-76004) and has duly caused this Post-Effective Amendment No.12 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
27th day of April, 1999.
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. 12 to the Registration Statement has been signed below by the
following persons in the capacities indicated and on the dates indicated.
<TABLE>
<S> <C> <C> <C>
Signature Title Date
- ---------------------- ------------------------------- ---------
Thomas J. McInerney* Director and President )
- ---------------------- (Principal Executive Officer) )
Thomas J. McInerney )
)
) April
Catherine H. Smith* Director) ) 27, 1999
- ---------------------- )
Catherine H. Smith )
)
)
Shaun P. Mathews* Director )
- ---------------------- )
Shaun P. Mathews )
)
)
Deborah Koltenuk* Vice President and Treasurer, )
- ---------------------- Corporate Controller) )
Deborah Koltenuk )
</TABLE>
By: /s/ J. Neil McMurdie
J. Neil McMurdie
*Attorney-in-Fact
<PAGE>
VARIABLE LIFE ACCOUNT B
EXHIBIT INDEX
<TABLE>
<S> <C>
Exhibit No. Exhibit
- ------------- ---------------------------------
99-2 Opinion and Consent of Counsel
99-6 Actuarial Opinion and Consent
99-7 Consent of Independent Auditors
</TABLE>
151 Farmington Avenue
Hartford, CT 06156
Julie E. Rockmore
Counsel
Law Division, RE4A
April 27, 1999 Investments & Financial Services
(860) 273-4686
Fax: (860) 273-8340
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Filing Desk
Re: Aetna Life Insurance and Annuity Company and its Variable Life Account B
Post-Effective Amendment No. 12 to Registration Statement on Form S-6
Prospectus Title: AetnaVest and AetnaVest II
File Nos.: 33-76004* 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, or those for whom I have supervisory
responsibility, have reviewed the S-6 Registration Statement as amended to the
date hereof, and this Post-Effective Amendment No.12. 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
* Pursuant to Rule 429(a) under the Securities Act of 1933, the Registrant has
included a combined prospectus under this Registration Statement which
includes all the information which would currently be required in a prospectus
relating to the securities covered by Registration Statement 33-02339.
[letterhead]
[logo] Lincoln
(R) -------
Financial Group
Lincoln Life
Lincoln National Life Insurance Co.
350 Church Street
Hartford, CT 06103-1106
April 20, 1999
Re: AetnaVest and AetnaVest II (File No. 33-76004)
Dear Sir or Madam:
In my capacity as Actuary of The Lincoln National Life Insurance Company,
administrator for the above referenced Aetna Life Insurance and Annuity Company
(ALIAC) policies, I have provided actuarial advice concerning ALIAC's AetnaVest
and AetnaVest II Flexible Premium Variable Life Insurance Policy (the
"Policies"). I also provided actuarial advice concerning the preparation of
Post-Effective Amendment No. 12 to Registration Statement on Form S-6, File No.
33-76004 (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 Policies 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 Policies. Also, in my
opinion the ages selected in the illustrations are representative of the manner
in which the Policies operate.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Ronald D. Franzluebbers
Ronald D. Franzluebbers
Assistant Vice President & Actuary
www.lincolnlife.com
Lincoln Financial Group is the marketing name for Lincoln National Corporation
and its affiliates.
Consent of Independent Auditors
To the Board of Directors of Aetna Life Insurance and Annuity Company and
Policyholders of Variable Life Account B:
We consent to the use of our reports dated February 3, 1999 and February 26,
1999 included in this Post-Effective Amendment No. 12 to Registration Statement
(File No. 33-76004) on Form S-6 and to the reference to our firm under the
heading "Independent Auditors" in the prospectus.
/s/ KPMG LLP
Hartford, Connecticut
April 27, 1999
