As filed with the Securities and Exchange Registration No. 333-15817
Commission on April 16, 1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM S-6
POST-EFFECTIVE AMENDMENT NO. 4 TO
REGISTRATION STATEMENT
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
- --------------------------------------------------------------------------------
Variable Life Account B of Aetna Life Insurance and Annuity Company
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06l56
Depositor's Telephone Number, including Area Code: (860) 273-4686
- --------------------------------------------------------------------------------
Julie E. Rockmore, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4A, Hartford, Connecticut 06l56
(Name and Complete Address of Agent for Service)
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective:
<TABLE>
<S> <C>
-------- immediately upon filing pursuant to paragraph (b)
of Rule 485
X
-------- on May 3, 1999 pursuant to paragraph (b) of Rule 485
-------- this post-effective amendment designates a new
effective date for a previously
filed post-effective amendment
</TABLE>
<PAGE>
VARIABLE LIFE ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Cross Reference Sheet
<TABLE>
<CAPTION>
N-8B-2
Item No. Part I - Prospectus
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1 Cover Page; The Separate Account; The Company and Management
2 Cover Page; The Separate Account; The Company and Management
3 Not Applicable
4 Distribution of the Certificates
5 The Separate Account; The Company and Management
6 The Separate Account; The Company and Management
7 Not Applicable
8 Not Applicable
9 Additional Information - Legal Matters
10 The Separate Account; Certificate Rights; Certificate Choices;
Additional Information; Miscellaneous Certificate Provisions;
Termination or Change in Coverage; Allocation of Premiums - Fund
Additions, Deletions or Substitutions
11 Allocation of Premiums - The Funds
12 Allocation of Premiums - The Funds
13 Charges & Fees
14 Certificate Choices
15 Allocation of Premiums; Certificate Choices; Certificate Values
16 The Separate Account; Allocation of Premiums - The Funds;
Certificate Values
17 Certificate Rights
18 The Separate Account
19 Additional Information - Reports to Owners
20 Not Applicable
21 Certificate Rights - Certificate Loans
22 Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-8B-2
Item No. Part I - Prospectus
<S> <C>
23 The Company and Management
24 Not Applicable
25 The Company and Management
26 Not Applicable
27 The Company and Management
28 The Company and Management
29 The Company and Management
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 Additional Information - State Regulation
36 Not Applicable
37 Not Applicable
38 Additional Information - Distribution of the Certificates
39 The Company and Management
40 Not Applicable
41 The Company and Management
42 Not Applicable
43 Not Applicable
44 Charges & Fees; Certificate Values
45 Not Applicable
46 The Separate Account; Certificate Values
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 The Separate Account
51 Cover Page; Certificate Choices
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
N-8B-2
Item No. Part I - Prospectus
<S> <C>
52 Allocation of Premiums - Fund Additions, Deletions or
Substitutions; Termination or Change in Coverage
53 Tax Matters
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Financial Statements of Separate Account; Financial Statements
of Insurance Company
</TABLE>
<PAGE>
Variable Life Account B
Aetna Life Insurance and Annuity Company (the "Company")
151 Farmington Avenue
Hartford, Connecticut 06156
(800)-677-4636
Prospectus Dated May 3, 1999
Flexible Premium Group Variable Universal Life Insurance for New York State
United Teachers Benefit Trust
("NYSUT Benefit Trust")
This Prospectus describes Certificates that provide life insurance coverage for
eligible Members of New York State United Teachers "NYSUT" and their spouses and
children. The Company issues the Certificates under a group Policy held by NYSUT
Benefit Trust.
The Certificates allow you to make flexible premium payments, as long as you pay
enough premiums to:
o cover charges, or
o qualify for the Certificate's No Lapse Coverage, which is available during
the first 5 years after the Certificate's issuance or after a coverage
increase.
You may choose (and later change) whether the amount of the Certificate's death
benefit coverage generally remains constant or varies with the Certificate's
account value. We pay the death benefit when the insured person dies. You also
may choose to (a) borrow from the Certificate; (b) surrender the Certificate in
whole or part; (c) increase or decrease insurance coverage; and (d) elect
certain optional supplemental benefits. These choices are subject to limitations
described in this Prospectus.
Your account value is the amount of Net Premiums you pay, increased (or
decreased) by the investment return (positive or negative) the Net Premiums
earn, less the charges described in this Prospectus. You decide whether your
account value is invested in Variable Life Account B under one or more Variable
Options, and/or in the Fixed Account. The account value you invest in each
Variable Option is not guaranteed and will vary with the investment performance
of an associated Fund. The attached Fund prospectuses provide detailed
information about these associated Funds.
The Variable Options are:
<TABLE>
<S> <C>
o Aetna Ascent VP o Janus Aspen Aggressive Growth Portfolio
o Aetna Balanced VP, Inc. o Janus Aspen Balanced Portfolio
o Aetna Income Shares d/b/a Aetna Bond VP o Janus Aspen Growth Portfolio
o Aetna Crossroads VP o Janus Aspen Worldwide Growth Portfolio
o Aetna Variable Fund d/b/a Aetna Growth and o Oppenheimer Global Securities Fund/VA
Income VP o Oppenheimer Strategic Bond Fund/VA
o Aetna Index Plus Large Cap VP o Portfolio Partners MFS Emerging Equities
o Aetna Legacy VP Portfolio
o Aetna Variable Encore Fund d/b/a Aetna Money o Portfolio Partners MFS Research Growth Portfolio
Market VP o Portfolio Partners MFS Value Equity Portfolio
o Fidelity Variable Insurance Products Fund (VIP) o Portfolio Partners Scudder International Growth
Equity-Income Portfolio Portfolio
o Fidelity Variable Insurance Products Fund II o Portfolio Partners T. Rowe Price Growth Equity
(VIP II)--Contrafund Portfolio Portfolio
</TABLE>
Net Premiums allocated to the Fixed Account earn fixed rates of interest. We
determine these rates periodically, but we guarantee that they will never be
less than 4% a year.
i
<PAGE>
Replacing existing insurance or supplementing an existing flexible premium
variable life insurance policy with a Certificate may not be in your best
interest. The Certificates have a "free look" period during which you may return
the Certificate to us for a refund. (See Right of Certificate Examination)
In certain circumstances, NYSUT Benefit Trust or the Company may terminate the
group Policy and outstanding Certificates (including your coverage) without your
consent. (See Termination or Change in Coverage) Also, NYSUT Benefit Trust, by
agreement with the Company, may make changes in the Certificate (and your
coverage) without your consent. Your consent is required, however, if such
changes result in a reduction in benefits or an increase in guaranteed charges.
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) 677-4636.
Additional Disclosure Information. The SEC has not approved or disapproved these
securities or determined if this Prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Getting Additional Information. This Prospectus and other information about
Variable Life Account B required to be filed with the Securities and Exchange
Commission (SEC) can be found in the SEC's web site at http://www.sec.gov. You
can get copies of this information by visiting the SEC's Public Reference Room
or writing the SEC 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 the SEC at 1-800-SEC-0330.
ii
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Definitions .......................................................... v
The Separate Account ................................................. 1
Charges & Fees ....................................................... 1
Premium Load ....................................................... 1
Charges and Fees Assessed Against the Total Account Value.......... 1
Monthly Deduction ................................................ 1
Cost of Insurance ................................................ 2
Certificate Fee .................................................. 2
Charges for Supplemental Benefits ................................ 2
Transfer and Partial Surrender Charges ........................... 2
Charges Assessed Against the Separate Account ...................... 3
Mortality and Expense Risk Charge ................................ 3
Charges Assessed Against the Underlying Funds ...................... 3
Allocation of Premiums ............................................... 5
The Funds .......................................................... 5
Mixed and Shared Funding; Conflicts of Interest .................... 7
Fund Additions, Deletions or Substitutions ......................... 7
Limits Imposed by the Funds ........................................ 7
Fixed Account ...................................................... 7
Certificate Choices .................................................. 9
Premium Payments ................................................... 9
Commencement of Coverage ........................................... 9
5-Year No Lapse Coverage Provision ................................. 10
Death Benefit Options .............................................. 10
Transfers .......................................................... 11
Telephone Transfers ................................................ 11
Transfer Limitations ............................................... 11
Automated Transfers (Dollar Cost Averaging) ........................ 12
Termination or Change in Coverage .................................... 13
Certificate Values ................................................... 15
Total Account Value ................................................ 15
Accumulation Unit Value ............................................ 15
Maturity Value ..................................................... 15
Certificate Rights ................................................... 16
Full Surrenders .................................................... 16
Partial Surrenders ................................................. 16
Paid-Up Nonforfeiture Option ....................................... 16
Grace Period ....................................................... 17
Reinstatement of a Lapsed Certificate .............................. 17
Certificate Loans .................................................. 18
Certificate Changes .................................................. 19
Increase in Specified Amount ....................................... 19
Decrease in Specified Amount ....................................... 19
Change in Death Benefit Option ..................................... 19
Right of Certificate Examination ................................... 20
Supplemental Benefits .............................................. 20
Certificate Settlement ............................................... 20
Settlement Options ................................................. 21
Calculation of Variable Payment Settlement Option Values ........... 22
The Company and Management ........................................... 22
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Additional Information ............................................ 26
Reports to Owners ............................................... 26
Right to Instruct Voting of Fund Shares ......................... 26
State Regulation ................................................ 26
Legal Matters ................................................... 26
The Registration Statement ...................................... 26
Distribution of the Certificates ................................ 26
Independent Auditors ............................................ 27
Year 2000 ....................................................... 27
Tax Matters ....................................................... 28
Federal Tax Status of the Company ............................... 28
Life Insurance Qualification .................................... 28
General Rules ................................................... 29
Modified Endowment Contracts .................................... 29
Diversification Standards ....................................... 30
Investor Control ................................................ 30
Withholding ..................................................... 30
Other Tax Considerations ........................................ 30
Miscellaneous Certificate Provisions .............................. 31
The Certificates ................................................ 31
Payment and Deferral of Benefits ................................ 31
Suicide and Incontestability .................................... 32
Protection of Proceeds .......................................... 32
Nonparticipation ................................................ 32
Changes in Owner and Beneficiary; Assignment .................... 32
Performance Reporting and Advertising ........................... 32
Illustrations of Death Benefit and Total Account Values......... 33
Financial Statements of 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 certificates is to provide insurance protection. Life
insurance is a long-term investment. Owners should consider their need for
insurance coverage and the certificates' long-term investment potential. We do
not claim that the certificates are in any way similar or comparable to an
investment in a mutual fund.
iv
<PAGE>
Definitions
Accumulation Unit: A unit used to measure the value of the Owner's interest in
each applicable Variable Option.
Attained Age: An Insured's age (as of his or her closest birthday) nearest the
Certificate Issue Date, plus the number of full Certificate Years elapsed.
Amount at Risk: The Death Benefit under a Certificate divided by 1.0032737,
minus the Certificate's Total Account Value.
Annuitant: A person whose life determines the amount of life contingent annuity
payments.
Annuity: A series of payments for life or for a definite period.
Basic Monthly Premium: The minimum amount of premium that you must pay to keep
the 5-year No Lapse Coverage in effect, assuming there have been no Certificate
Loans or Partial Surrenders.
Certificate Loan: The amount received by borrowing from the Total Account Value.
Certificate Year/Certificate Anniversary: The first Certificate Year is the
12-month period beginning on the Issue Date of the Certificate. Your Certificate
Anniversary is the Certificate Issue Date plus 1 year, 2 years, etc.
Company: Aetna Life Insurance and Annuity Company.
Cost of Insurance: A monthly charge related to the Company's expected mortality
cost for an Insured's basic insurance coverage under a Certificate. This charge
does not include any supplemental benefit provisions that you elect through a
Certificate rider. The charge is equal to the Amount at Risk for the Insured on
the Monthly Deduction Day, multiplied by that Insured's monthly Cost of
Insurance rate.
Death Benefit: The amount we pay following an Insured's death. We describe this
payment in the Death Benefit Options section. Payment of the Death Benefit is
subject to all provisions contained in the Certificate.
Death Benefit Option: Either of the two methods that you may elect for
determining a Death Benefit.
Fixed Account: A non-variable funding option available under the Certificates
that guarantees a minimum interest rate of 4% per year.
Fixed Account Value: The portion of a Certificate's Total Account Value held in
the Fixed Account. The Fixed Account Value is part of the general assets of the
Company.
Full Surrender: Your right to terminate a Certificate in exchange for payment of
its Surrender Value.
Fund(s): One or more of the mutual funds (open-end management investment
companies or a separate series thereof) available under the Certificate. Our
Separate Account purchases shares of the Funds to fund the benefits provided by
the Certificates.
v
<PAGE>
Grace Period: The 61-day period beginning on any Monthly Deduction Day on which
a Certificate's Surrender Value is insufficient to cover the current Monthly
Deduction. A similar Grace Period also applies if the amount of any loan and any
accrued loan interest exceeds the Total Account Value. The Certificate will
lapse without value at the end of the Grace Period unless a sufficient payment
is received by the Company or unless the 5-year No Lapse Coverage is in effect.
Home Office: The Company's principal executive offices at 151 Farmington Avenue,
Hartford, Connecticut 06156.
Insured: The person on whose life a Certificate is issued. For initial or
continued coverage, an Insured must be (a) a Member or (b) an Insured Member's
spouse. However, we do not offer coverage for an Insured Member's spouse if the
spouse's Attained Age is 80 or older at the Issue Date of the spouse's
Certificate.
Issue Date: The Issue Date for a Certificate, or for a Specified Amount
increase, is stated in the Certificate Specifications or Supplemental
Certificate Specifications in your Certificate.
Loan Account Value: The sum of all unpaid Certificate Loans. To repay
Certificate Loans in full, you must pay the Loan Account Value plus any accrued
interest.
Loan Value: 90% of the Total Account Value of a Certificate.
Maturity Date: The Certificate Anniversary on which the Insured's Attained Age
is 100.
Member: An eligible member of NYSUT or a NYSUT agency fee payer.
Monthly Deduction: A monthly charge assessed against the Total Account Value.
The Monthly Deduction includes the Cost of Insurance, the Certificate fee and
any charges for supplemental benefit riders.
Monthly Deduction Day: The first Monthly Deduction Day is the Issue Date.
Monthly Deduction Days occur each month thereafter on the same day as the Issue
Date of the Certificate.
Net Premium: The Net Premium equals the amount of the premium you pay less the
then-current Premium Load deduction.
Net Single Premium: The amount required to purchase a guaranteed benefit (using
the Insured's Age and premium class) if the Net Premium is allocated to the
Fixed Account. The Net Single Premium is determined using a guaranteed interest
rate of 4% per year and the Certificate's guaranteed maximum Cost of Insurance
rates.
No Lapse Coverage: A provision in the Certificate providing that, if at least
the Basic Monthly Premiums are paid, a Certificate will remain in force for a
period of at least 5 years beginning on the (a) Issue Date or (b) the Issue Date
of an increase in Specified Amount. Under this provision, the Certificate
remains in force even if the Surrender Value is insufficient to pay the current
Monthly Deduction.
Owner: The person to whom a Certificate is issued. The Owner is entitled to
exercise all rights under the Certificate, and is also referred to as "you."
Unless otherwise specified in the Certificate or application form, the
Certificate is owned by the Insured.
Partial Surrender: The amount you receive in cash by surrendering a part of a
Certificate.
vi
<PAGE>
Planned Premiums: Premiums we agree to bill.
Policy: The group life insurance contract owned by NYSUT Benefit Trust, pursuant
to which the Certificates are issued. The Certificates are subject to the terms
of the Policy.
Pro-Rata Basis: In the same proportion that each of the Variable Options and the
Fixed Account Value under a Certificate bear to the sum of Certificate's
Separate Account Value and Fixed Account Value.
SEC: Securities and Exchange Commission.
Separate Account: A separate account maintained by the Company for the purpose
of funding the Certificates; Variable Life Account B.
Separate Account Value: The portion of a Certificate's Total Account Value
attributable to the variable portion of the Certificate. The variable portion of
the Certificate includes all amounts held in one or more of the Variable
Options.
Settlement Option(s): The method(s) by which payment may be made (a) from a
Death Benefit, (b) at the Maturity Date, or (c) at the Full Surrender of a
Certificate.
Specified Amount: The amount chosen by the Owner at enrollment that is used in
determining the Death Benefit. The Owner may increase or decrease the Specified
Amount as described in this Prospectus.
Surrender Value: The Total Account Value on the date of surrender, less (a) the
Loan Account Value and (b) any accrued interest.
Total Account Value: The sum of the (a) Fixed Account Value, the (b) Separate
Account Value and the (c) Loan Account Value.
Valuation Date: The date and time when we calculate the Accumulation Unit Value
of a Variable Option. Currently, this calculation occurs after the close of
business of the New York Stock Exchange on any normal business day, Monday
through Friday, that the New York Stock Exchange is open.
Valuation Period: The period of time between successive Valuation Dates.
Variable Option: One or more of the variable funding options available under the
Certificate as described in this Prospectus.
we, our, us, Company: Aetna Life Insurance and Annuity Company.
Written Request: A request in writing, in a form satisfactory to us and received
by us at the Home Office.
you, your: The person entitled to purchase or exercise any rights or privileges
under a Certificate or a Settlement Option. This is generally the Owner (or,
during a Settlement Option, the payee).
vii
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THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
The Separate Account
Our 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's 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 SEC 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 SEC of the Separate
Account or the Company's management or investment practices or policies. The
Company does not guarantee the Separate Account's investment performance.
Charges & Fees
Premium Load
We deduct a charge equal to 8% of the premium before the premium is allocated to
the Certificate's Total Account Value. We use the proceeds of this charge to
cover certain expenses and taxes associated with the sales, start-up and
maintenance of the Certificates. We reserve the right to increase this charge to
not more than 10% under both new and previously-issued Certificates.
Charges and Fees Assessed Against the Total Account Value
When we assess charges and fees against the Total Account Value, we deduct them
from each of a Certificate's Variable Options and the Fixed Account Value on a
Pro Rata Basis. This means we deduct charges in proportion to the amount of
Total Account Value you then have in each of the investment options.
Monthly Deduction. The Monthly Deduction includes the Cost of Insurance, a
Certificate fee, and any charges for supplemental benefits. We deduct the first
Monthly Deduction on the Issue Date, even if the Issue Date is earlier than the
date the application form for a Certificate is signed. Monthly Deductions then
occur on each Monthly Deduction Day thereafter. If the Certificate's issuance is
delayed due to underwriting requirements, we will not assess charges until we
complete the underwriting and approve the application for the Certificate.
For a discussion of when insurance coverage and investment performance commence
under a Certificate, see Commencement of Coverage.
1
<PAGE>
Cost of Insurance. The Cost of Insurance charge is based on (a) the cost of our
base insurance rates under a Certificate and (b) our Amount at Risk, on the date
of the deduction. (Base insurance rates do not include any supplemental benefits
you elect through a Certificate rider.)
The Cost of Insurance charge is equal to (a) the Certificate's Amount at Risk on
the Monthly Deduction Day, (b) multiplied by a monthly Cost of Insurance rate.
Our Amount at Risk at any time is approximately the difference between the
Certificate's then-applicable Death Benefit and its Total Account Value. An
increase in the Total Account Value or a decrease in the Death Benefit will
result in a smaller Cost of Insurance charge. A decrease in the Total Account
Value or an increase in the Death Benefit will result in a larger Cost of
Insurance charge.
The Cost of Insurance rate generally increases over the life of a Certificate.
The rate is based on the Insured's Attained Age and risk class. The Cost of
Insurance rates for "standard risk" Insureds will not exceed those based on a
50% male/50% female blend under the 1980 Commissioners Standard Ordinary
Mortality Table, smoker or non-smoker (1980 Tables). "Substandard risk" Insureds
have monthly deductions based on Cost of Insurance rates that may be higher than
those in the 1980 Tables. A table of guaranteed maximum Cost of Insurance rates
per $1,000 of the Amount at Risk is included in each Certificate. We may adjust
the monthly Cost of Insurance rates from time to time, but they will never
exceed the applicable guaranteed maximum rates.
Current cost of insurance rates are generally lowest for Certificates having
Specified Amounts of at least $250,000. We expect to review our current cost of
insurance rates at least annually in light of the actual mortality experience of
participants under the NYSUT Benefit Trust group Policy. In many cases, we
expect that these periodic reviews will result in upward or downward revisions
to the current Cost of Insurance rates. These rate revisions will apply both to
previously and subsequently-issued Certificates. We use the same Cost of
Insurance rates for male and female insureds. Our rates will generally be lower
for non-smokers than for smokers. We also offer preferred Cost of Insurance
rates for both smokers and non-smokers who meet more stringent requirements than
do standard risk smokers and non-smokers, respectively. If an Insured classified
"smoker" changes his or her smoking habits so as to fall within our non-smoker
category, he or she may make a Written Request for reclassification after the
first Certificate Year.
We base Cost of Insurance rates for an increase in Specified Amount on the
Insured's risk class at the time of the increase. You must provide evidence of
insurability.
Certificate Fee. The Monthly Deduction also includes a Certificate fee of $14 a
month during the first Certificate Year, or the first year of an increase in
Specified Amount. This fee starts on the Issue Date of the Certificate and the
date of the increase. The Certificate fee then drops to $6 a month. We use the
proceeds of this charge for administrative expenses, such as risk underwriting
and Certificate issuance, premium billing and collection, Certificate value
calculation, confirmation of Certificate transactions, and periodic reports to
Owners. We reserve the right to raise this charge, both for new and
previously-issued Certificates. The maximum charge is $19 a month during the
first Certificate Year (whether from the Issue Date of the Certificate or after
an increase in Specified Amount) and $11 a month thereafter. We do not expect
the monthly Certificate fee to exceed our actual annual administrative costs
over time.
Charges for Supplemental Benefits. The Monthly Deduction includes a supplemental
benefits charge if you elect any supplemental benefits. (You may elect
supplemental benefits by adding riders to the Certificate.) The amount of this
charge varies depending on the riders you select. The charge is described in
each applicable Certificate rider.
Transfer and Partial Surrender Charges. We reserve the right to charge an
administrative fee of up to $25 for each transfer between investment options in
excess of 12 transfers per year. For Partial Surrenders, we reserve the right to
charge an administrative fee of $25 or, if less, 2% of the surrender amount. We
are not currently assessing this charge.
2
<PAGE>
Charges Assessed Against the Separate Account
Mortality and Expense Risk Charge. We deduct a mortality and expense risk charge
from the Separate Account Value. This charge compensates the Company for the
aggregate mortality and expense risk assumed in connection with the
Certificates. The mortality risk assumed by the Company is that Insureds, as a
group, may live for a shorter period of time than estimated. If so, the Company
could end up paying more in Death Benefits than it collects with Cost of
Insurance charges. The expense risk assumed is that the expenses incurred (a)
issuing and administering the Certificates and (b) operating the Separate
Account will be greater than the administrative charges that the Company can
impose for such expenses. We expect to earn a profit from this charge.
The mortality and expense risk charge currently equals an annual rate of 0.85%
of the average daily net assets of the Separate Account during the first 10
Certificate years, and 0% thereafter. This charge is deducted daily. Because we
first offered the Certificates for sale in 1997, the planned reduction after the
tenth year is not yet in effect for any outstanding Certificate. The Company
reserves the right to increase or decrease the rate or period of the mortality
and expense risk charge, if it believes that circumstances have changed so that
current charges are no longer appropriate. However, we guarantee that the annual
rate of this charge will never exceed (a) 1.25% during the first 10 Certificate
years or (b) 0.40% thereafter.
The Separate Account currently is not subject to any taxes. However, if taxes
are assessed against the Separate Account, we reserve the right to assess the
amount of the taxes against the Separate Account Value.
Charges Assessed Against the Underlying Funds
The following table illustrates the investment advisory fees, other expenses and
total expenses paid by each of the Funds as a percentage of average net assets.
These amounts are based on figures for the year ended December 31, 1998, unless
otherwise indicated:
<TABLE>
<CAPTION>
Total Fund Net Fund
Annual Annual
Expenses Expenses
Investment Without Total After
Advisory Other Waivers or Waivers and Waivers or
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 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%
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Total Fund Net Fund
Annual Annual
Expenses Expenses
Investment Without Total After
Advisory Other Waivers or Waivers and Waivers or
Fees(1) Expenses Reductions Reductions Reductions
------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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 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.
(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.
4
<PAGE>
Allocation of Premiums
You may allocate all or a part of your Net Premiums to the Funds currently
available through the Separate Account under your Certificate. You also may
allocate all or a part of your Net Premiums to the Fixed Account.
The Funds
The investment objectives of the Funds are described below. 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 institution, 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 Home Office at the
address and phone number listed on the cover page of the Prospectus, or by
contacting the SEC at its web site, or by contacting the SEC Public Reference
Room.
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)
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)
5
<PAGE>
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)
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.(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.(4)
o Portfolio Partners, Inc.--MFS Emerging Equities Portfolio seeks to provide
long-term growth of capital.(5a)
o Portfolio Partners, Inc.--MFS Research Growth Portfolio seeks long-term growth
of capital and future income.(5a)
o Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation.(5a)
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.(5b)
o Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term capital growth and, secondarily, increasing dividend income.(5c)
6
<PAGE>
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; Conflicts of Interest
The Funds only sell shares to separate accounts of insurance companies that may
or may not be affiliated with the Company. These separate accounts may fund
variable annuity contracts or variable life insurance policies, such as the
Certificates described in this Prospectus. We currently do not foresee any
disadvantages to you arising out of this. Nevertheless, differences in treatment
under tax and other laws, as well as other considerations, could cause the
interests of various contract owners to conflict. For example, violation of the
federal tax laws by one separate account investing in the Funds could cause the
contracts funded through another separate account to lose their tax-deferred
status, unless remedial action were taken. However, each Fund has advised us
that its board of trustees (or directors) intends to monitor events in order to
identify any material irreconcilable conflicts that possibly may arise and to
determine what action, if any, should be taken in response. If we believe that a
Fund's response to any such event insufficiently protects Certificate holders,
we will see to it that appropriate action to protect is taken. If it becomes
necessary for any separate account to replace shares of any Fund in which it
invests, that Fund may have to liquidate securities in its portfolio on a
disadvantageous basis.
Fund Additions, Deletions or Substitutions
Orders for the purchase of Fund shares may be subject to acceptance by the Fund.
The Company may add additional Funds as investment options under your
Certificate at any time. The Company also has the right to replace shares of a
Fund with shares of another Fund if the Company believes that the Fund is no
longer appropriate as an investment option under the Certificate. The Company
may also stop accepting premium allocations to a Fund at any time. If the
Company stops accepting premium allocations to a Fund, and shares of that Fund
are not replaced with shares of another Fund, amounts you have deposited in that
Fund could stay in the Fund. Also, any dividends or capital gains earned on that
Fund could be reinvested in the Fund. To do any of these actions, the Company
must comply with (a) the terms of the 1940 Act and (b) any insurance laws or
regulations applicable at the time. The Company will provide notice to you
before replacing a Fund or closing a Fund to new payments. The Company will also
provide notice about any new Fund that is added.
Limits Imposed by the Funds
Orders for the purchase of shares of a Fund may be subject to acceptance by the
Fund. We reserve the right to reject, without prior notice, any transfer request
directed to a particular Fund if the Separate Account's investment in that Fund
is not accepted by the Fund for any reason.
Fixed Account
The Company has not registered interests in the Fixed Account with the SEC,
based on an exclusion under the Securities Act of 1933. The SEC has not reviewed
the disclosures in this Prospectus relating to the Fixed Account. These
disclosures, however, may be subject to certain anti-fraud provisions of the
federal securities laws relating to the accuracy and completeness of the
statements. The Fixed Account available under the Certificates is a fixed
7
<PAGE>
funding option. We credit interest on amounts in the Fixed Account (the Fixed
Account Value) at rates that we declare from time to time. We determine these
rates in our sole discretion. We guarantee a 4% minimum annual interest rate,
compounded monthly. Current interest rates may also vary depending on when you
allocate an amount to the Fixed Account.
The Fixed Account is supported by the general assets of the Company. The general
assets of the Company include all assets of the Company except those held in
legally-segregated separate accounts sponsored by the Company or its affiliates.
The Company invests the assets attributable to the Fixed Account in investments
chosen by the Company, as applicable law permits. Fixed Account assets and
investments, and any investment income they generate, are solely the property of
the Company.
8
<PAGE>
Certificate Choices
Premium Payments
The Certificates are flexible premium variable universal life insurance. This
means that you have the right to decide, within certain limits,
o when to make premium payments and
o the amount of the payments.
Each Certificate specifies Planned Premiums and Basic Monthly Premiums. If you
fail to pay your premiums, your Certificate may not remain in force (lapse).
However, payment of Planned or Basic Monthly Premiums does not guarantee that
your Certificate will remain in force. Your Certificate remains in force only as
long as (a) your Surrender Value is adequate to cover the Monthly Deductions
under the Certificate or (b) you have made enough premium payments to keep the
5-year No Lapse Coverage provision of your Certificate in effect. (See No Lapse
Coverage) Your Surrender Value is increased by your premium payments and any
positive investment returns they generate. Your Surrender Value is decreased by
the charges we deduct, and any negative investment returns you experience.
Planned Premiums are those premiums you request and we agree to bill on an
annual, semiannual, quarterly or other periodic basis. You can also arrange
pre-authorized automatic monthly check payments, or salary or pension deduction
arrangements through the Member's employer. You may change your Planned Premium
at any time by submitting a Written Request to us. Premiums paid by payroll
deduction are generally forwarded by your employer to NYSUT Benefit Trust, which
forwards them to us. We are not responsible for errors and delays caused by, or
other conduct of, your employer or NYSUT Benefit Trust.
We may require evidence of insurability if payment of any premium would increase
the difference between the Death Benefit and the Total Account Value (thus
increasing our Amount at Risk). If you fail to provide satisfactory evidence of
insurability, we will refund the refused premium.
We may also refuse to accept any premium payment (other than one required to
keep a Certificate in force) if it would cause the Certificate to fail to be
treated as life insurance for federal income tax purposes. Additionally, if you
pay premiums in excess of the Planned Premium, or increase your Planned Premium
too much, you may cause the Certificate to be classified as a "Modified
Endowment Contract" for federal income tax purposes. (See Tax Matters) In that
case, we will notify you and, if you wish to avoid Modified Endowment Contract
status, we will refund the excess premium.
When we refuse or refund excess premiums, we do not (a) pay interest on the
premiums or (b) increase or decrease the premiums to give effect to their
investment in the Funds.
Commencement of Coverage
The insurance coverage under a Certificate starts when:
o we approve the insurance based on the application and any other information
required to be submitted by the Insured;
o we or our representative receives at least the first Basic Monthly Premium;
and
o the Insured is eligible for coverage.
Therefore, coverage may not commence until some time after you submit an
application for a Certificate. We may
9
<PAGE>
offer immediate temporary fixed insurance coverage. This coverage may be
available if, with your application (a) you submit at least the full first Basic
Monthly Premium for the billing frequency, or a completed Payroll Deduction
Authorization, and (b) certain other requirements are met. For more information
about the availability, terms and conditions of this coverage, you should
consult your Aetna representative, who can also provide you with a copy of our
conditional receipt.
The Issue Date of a Certificate is generally the date that we approve a
Certificate. You may request that we backdate a Certificate. We may grant this
request, under limited circumstances, by assigning an Issue Date that is up to 6
months earlier than otherwise would apply. You may desire backdating, for
example, so that you can purchase coverage at lower Cost of Insurance rates
based on a younger insurance age. For a backdated Certificate, you must pay the
cost of insurance and other charges from the requested Issue Date to the Issue
Date that would have applied without backdating. Of course, because the
Certificate was not in effect prior to the original Issue Date, you would not
receive insurance coverage or be credited with interest or investment return for
periods prior to the original Issue Date of your Certificate.
Your initial premium payment starts earning a return in the Separate Account or
the Fixed Account on the later of the (a) Issue Date of the Certificate or (b)
the date that we receive at least the first Basic Monthly Premium at our Home
Office. After the first premium payment, you must send all premiums to our Home
Office. We deem all premiums, except the first one, received when we actually
receive them at the Home Office, together with any identifying information we
require from the Member's employer or NYSUT Benefit Trust. We allocate your
premium payment as you direct, effective at the end of the Valuation Period in
which we receive the payment.
You may reallocate your future premium payments at any time. You must use whole
percentages when changing allocations. We effect the change with the next
premium payment after we receive your request. We will send you confirmation of
the change. (See Transfers)
5-Year No Lapse Coverage Provision
Your Certificate includes a 5-year No Lapse Coverage Provision. If you pay the
specified amount of premiums, this provision provides that during the 5-year
period after either the (a) Issue Date or (b) the Issue Date of any Specified
Amount increase, your Certificate will not enter a Grace Period--and therefore
will not terminate. We calculate the specified amount of premiums you must pay
as follows: the sum of premiums paid within the 5-year period must equal or
exceed (a) the sum of the Basic Monthly Premiums for each Certificate Month from
the start of the period, including the current month; plus (b) any Partial
Surrenders since the start of the period; plus (c) any increase in the Loan
Account Value since the start of the period.
The 5-year No Lapse Coverage Provision is lost if (a) you have not paid the
specified amount of premiums on any Monthly Deduction Day within the applicable
5-year period, and (b) the Surrender Value of your Certificate is less than the
Monthly Deduction for that day. This means that the Certificate will enter the
Grace Period. You must then make additional premium payments to prevent the
termination of the Certificate. (See Grace Period)
While your Certificate is operating under the 5-year No Lapse Coverage
Provision, we keep track of the amount of all Monthly Deductions that we do not
collect. When you pay Net Premiums at a later date, we deduct these uncollected
amounts from any Surrender Value created by your Net Premium payments.
Your Certificate's 5-year No Lapse Coverage Provision no longer operates at the
end of the applicable 5-year period. At that time your Certificate may lapse
unless you pay sufficient premiums to permit us to collect the full amount of
previously uncollected Monthly Deductions, if any. (See Grace Period)
Death Benefit Options
At the time of enrollment, you must choose between the two available Death
Benefit Options.
10
<PAGE>
Under Option 1, the Death Benefit will be the greater of: (a) the Specified
Amount or (b) the applicable percentage of the Total Account Value. The
applicable percentage is 250% through age 40, and decreases yearly to 100% at
age 95. Option 1 generally provides a level Death Benefit.
Under Option 2, the Death Benefit will be the greater of: (a) the Specified
Amount plus the Total Account Value or (b) the applicable percentage (described
above) of the Total Account Value. Option 2 provides a varying Death Benefit
which increases or decreases over time, depending upon the amount of premiums
paid and the investment performance of the Fund(s) you choose.
We calculate the Death Benefit payable under either Option as of the date of
death of the Insured. We reduce the Death Benefit by (a) the amount necessary to
repay any Loan Account Value in full, with all accrued interest; (b) if the
Certificate is within the Grace Period, the amount required to keep the
Certificate in force through the date of death; and (c) the amount of any other
Monthly Deductions that we were unable to collect. (See 5-year No Lapse Coverage
Provision)
Transfers
You may transfer all or part of your Separate Account Value in any Variable
Option to any other Variable Option or to the Fixed Account. You must make all
transfers before the Certificate's Maturity Date. We reserve the right to (a)
charge an administrative fee of $25 for each transfer over 12 per year and (b)
limit the total number of Variable Options you may elect to 15 over the lifetime
of the Certificate.
You may also request a transfer of a portion of the Fixed Account Value to one
or more of the Variable Options. You must make this request within the 45-day
period following a Certificate Anniversary. We allow this type of transfer only
once within this 45-day period, and we must receive your request at the Home
Office within the 45-day period. We effect the transfer at the end of the
Valuation Period in which we receive your request at our Home Office. The amount
of any such transfer cannot exceed the greater of 25% of the Fixed Account Value
or $500.
Telephone Transfers
You may request a transfer of account values either by Written Request (as set
forth above) or by telephone. All transfers must comply with the terms of the
Certificate.
We currently accept transfer instructions on each Valuation Date. Once we accept
instructions, you may not rescind them. You may give new telephone instructions,
however, on the following day. The Company will not execute a transfer if the
transfer instructions are not in good order. The Company will notify you in this
event.
We will use reasonable procedures, such as (a) requiring identifying information
from callers, (b) recording telephone instructions, and (c) providing written
confirmation of transactions, in order to confirm that telephone instructions
are genuine. You are responsible for the results of any telephone instructions
that we reasonably believe to be genuine, even if losses result from errors in
the communication of instructions. As a result of this procedure, the Owner will
bear the risk of loss. If the Company does not use reasonable procedures, as
described above, we may be liable for losses that result from any unauthorized
instructions.
Transfer Limitations
The Certificate 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.
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
Owners. Such restrictions could include: (a) Not accepting transfer instructions
from an agent acting on behalf of
11
<PAGE>
more than one Owner; and (b) not accepting preauthorized transfer forms from
market timers or other entities acting on behalf of more than one Owner at a
time.
We further reserve the right to impose, without prior notice, restrictions on
transfers that we determine, in our sole discretion, will disadvantage or
potentially hurt the rights or interests of other Owners.
Automated Transfers (Dollar Cost Averaging)
Dollar Cost Averaging describes an automated system of investing the same amount
of money at regular intervals over a period of time. Dollar Cost Averaging is
based on the principle that acquiring Accumulation Units with the same amount of
money at fixed intervals results in acquiring more units when prices are low and
fewer units when prices are high.
You may establish a Dollar Cost Averaging program for either a 1, 2 or 3 year
period. Under your program, you may make automated transfers of amounts on a
monthly or quarterly basis. You may transfer amounts from the Aetna Money Market
VP Fund Variable Option to any other Variable Option through a Written Request
or other method acceptable to the Company. We do not permit Dollar Cost
Averaging to or from the Fixed Account. You must have a minimum of $5,000
allocated to the Aetna Money Market VP Variable Option in order to enroll in the
Dollar Cost Averaging program. The minimum automated transfer amount is $50 per
month. There is no additional charge for this 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 include automated transfers when we
determine the number of charge-free transfers that you can make. The Company
reserves the right to suspend or modify automated transfer privileges at any
time.
12
<PAGE>
Termination or Change in Coverage
Your Certificate, and all coverage thereunder, may be terminated without your
consent if any of the following occur. Your Certificate could be terminated even
if your Certificate's 5-year No Lapse Coverage is still in effect, and even if
you have paid enough premiums to prevent your Certificate from lapsing.
(1) NYSUT may notify the Company that NYSUT wishes to terminate the group
Policy. NYSUT Benefit Trust has agreed to provide each Insured with advance
notice of Policy cancellation or discontinuance. NYSUT Benefit Trust must mail
or deliver the notice to the Insured at the last known address of record at
least 15 days before the effective date of the Policy cancellation or
discontinuance. Prior to the termination date, you could exercise your rights to
make a Full Surrender or to convert your Certificate to paid-up fixed life
insurance. (See Paid-Up Nonforfeiture Option)
(2) We may terminate the group Policy, and your Certificate, if NYSUT Benefit
Trust stops sending payroll deduction premiums to us. In this event, we could
terminate the group Policy and your Certificate regardless of (a) whether you
paid premiums for your Certificate by payroll deduction, (b) the amount of
premium you paid, or (c) the available Surrender Value under your Certificate.
Prior to any termination, we would provide NYSUT Benefit Trust with an
opportunity to cure the problem in accordance with the terms of the group
Policy.
(3) We also will terminate your Certificate immediately when the Insured ceases
to be within at least one of the categories of persons that is eligible for
coverage under a Certificate. Those eligibility requirements are set forth above
under Definitions--Insured. A non-member Insured who (a) is eligible only as the
spouse of an Insured Member and (b) loses eligibility may elect to become a
Member within 31 days after loss of eligibility. In this event, we will continue
the Certificate uninterrupted. We must receive notice of your election at the
Home Office within the 31-day period. Otherwise, we will pay you the
Certificate's Surrender Value that we calculate at the end of the last Valuation
Period during which the Certificate was in force.
If your Certificate terminates for one of the above reasons, you have the option
of converting your coverage to an individual policy. We make the conversion
privilege available only within the 31-day period following (a) termination of
the group Policy by NYSUT Benefit Trust or us, or (b) termination of a
Certificate upon the Insured's ineligibility for continued coverage. You may
convert your Certificate to any substantially comparable flexible premium
general account life insurance policy that we offer for these purposes under the
terms of your Certificate. Term insurance is not available. We must receive
notice of your conversion and the first premium under the conversion policy at
the Home Office within the 31-day period.
Upon conversion, you receive the same amount of insurance that you had under
your Certificate. The terms of the conversion policy, however, may involve
additional charges or may not be as attractive to you as those under the
Certificate. We reserve the right to permit you to pay only the initial premium
for the conversion policy at the time of conversion. If the initial premium for
the conversion policy is less than the Surrender Value under the terminating
Certificate, we will distribute to you the rest of the Surrender Value as of the
Certificate's termination date. You may be required to pay income taxes with
respect to a partial distribution in connection with a conversion or any other
distribution of Surrender Value following termination of a Certificate. (See Tax
Matters)
The Company will notify the Owner of the right to convert. We will require no
evidence of insurability.
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<PAGE>
If we receive a timely conversion request, and the Insured dies during the time
allowed for conversion, we will pay as a death benefit the amount that could
have been converted. If we have not received a conversion request, we only pay a
Death Benefit if the Insured dies within the 31-day conversion period. We pay
the Death Benefit to the Beneficiary designated by the Insured. If there is no
designated beneficiary, we may pay from the Death Benefit up to $500 to any
person that we believe is entitled to this money because that person incurred
funeral expenses incident to the death of the Insured.
NYSUT Benefit Trust, by agreement with us, may make changes in your Certificate
(and your coverage) without your consent. Your consent is required if a change
results in a reduction in benefit or an increase in guaranteed charges.
We reserve the right at any time to cease issuing new Certificates to any class
of Members or their relations.
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<PAGE>
Certificate Values
Total Account Value
If you allocate amounts under a Certificate to a Variable Option of the Separate
Account, we credit you with Accumulation Units of that Variable Option. The
number of Accumulation Units we credit is determined by dividing (a) the amount
you allocate by (b) the appropriate current Accumulation Unit Value. Each
Variable Option has a unique Accumulation Unit Value. If you select a
combination of Variable Options, we credit you with Accumulation Units for each
Variable Option that you select.
We determine the Total Account Value of your Certificate as follows:
o for any Variable Option, we multiply the total number of Accumulation Units
credited to the Certificate by the current Accumulation Unit Value for that
Variable Option;
o for a combination of Variable Options, we total the resulting values; and
o we add any Fixed Account Value and any Loan Account Value.
The value of an Accumulation Unit varies based on the positive or negative
investment performance of the related Fund and the charges we deduct. We do not
increase or decrease the number of Accumulation Units credited to a Certificate
based on any subsequent changes in the value of an Accumulation Unit. We
increase the number of Accumulation Units you hold for a Variable Option when
you allocate Net Premiums or other account value to that Variable Option.
Similarly, we cancel Accumulation Units in a Variable Option when (a) you remove
any account value from a Variable Option (such as upon transfer, Full or Partial
Surrender, or Certificate Loan) or (b) we make a Monthly Deduction. The number
of units we cancel is determined by dividing (a) the amount of account value
removed by (b) the appropriate current Accumulation Unit Value.
The Fixed Account Value includes (a) all amounts allocated to the Fixed Account
under a Certificate and (b) any interest credited thereon. We reduce the Fixed
Account Value by amounts removed from the Fixed Account, such as upon a
transfer, Full or Partial Surrender, Certificate Loan or Monthly Deduction.
We will advise you at least annually as to (a) the number of Accumulation Units
then credited to your Certificate, (b) the current Accumulation Unit Values, (c)
the Separate Account Value, (d) the Fixed Account Value, and (e) the Total
Account Value. (See Reports to Owners)
Accumulation Unit Value
We determine the value of an Accumulation Unit for any Valuation Period by
multiplying (a) the value of an Accumulation Unit for the immediately preceding
Valuation Period by (b) the sum of 1 plus the net investment rate for the
current period for the appropriate Variable Option.
The net investment rate equals (a) the value of the net assets of the Variable
Option held in the Separate Account at the end of a Valuation Period (before any
adjustment for amounts allocated to or removed from the Variable Option during
the period); plus or minus (b) the value of the net assets of the Variable
Option held in the Separate Account at the beginning of that Valuation Period,
adjusted by any taxes or provisions for taxes attributable to the operation of
the Separate Account (with any federal tax liability offset by foreign tax
credits to the extent allowed); divided by (c) the value of the Variable
Option's Accumulation Units held in the Separate Account at the beginning of the
Valuation Period; minus (d) the rate of any applicable daily charge for
mortality and expense risk.
Maturity Value
The Maturity Value of a Certificate is the Surrender Value on the Maturity Date.
You may apply all or part of the Surrender Value to one or more of the
Settlement Options. (See Certificate Settlement)
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Certificate Rights
Full Surrenders
By Written Request, you may surrender your Certificate for its Surrender Value
at any time before the Maturity Date. The Insured must be alive to surrender
your Certificate. All insurance coverage under the Certificate ends on the date
of the Full Surrender. The Surrender Value equals the Total Account Value on the
date of surrender, less the Loan Account Value and less any unpaid accrued
interest. We may require return of the Certificate for a Full Surrender.
We compute the Surrender Value as of the end of the Valuation Period in which we
receive your Written Request for surrender.
Partial Surrenders
By Written Requests, you may partially surrender your Certificate at any time
(a) after the first Certificate Year and (b) before the Maturity Date.
The minimum amount of any Partial Surrender is $500. We may also charge an
administrative fee of $25 or, if less, 2% of the amount surrendered. We deduct
any Partial Surrender and any related administration charge on a Pro-Rata Basis
from each investment option in use under the Certificate.
If the Death Benefit Option for a Certificate is Option 1, your Partial
Surrender reduces the Total Account Value, Death Benefit, and Specified Amount
of your Certificate. The Total Account Value and Specified Amount are each
reduced by the amount of the surrender. We will not allow a Partial Surrender if
the Specified Amount will be reduced below the minimum Specified Amount set
forth in the Certificate Specifications. Your Partial Surrender may not reduce
the Specified Amount, however, if the Death Benefit for the Certificate
immediately prior to the surrender is determined based on the applicable
percentage of the Total Account Value.
If your Specified Amount is reduced from above $250,000 to less than $250,000,
your current Cost of Insurance rate may also increase. (See Cost of Insurance) A
Specified Amount reduction also reduces the required Basic Monthly Premium for
the 5-year No Lapse Coverage. We determine the future premium required to
maintain the 5-year No Lapse Coverage based on the new Specified Amount. We will
deliver to you a supplemental Certificate Specifications page that states the
amount of this future premium.
If the Death Benefit Option for a Certificate is Option 2, your Partial
Surrender reduces both the Total Account Value and the Death Benefit, but not
the Specified Amount. The Total Account Value and the Death Benefit are each
reduced by the amount of the surrender.
Paid-Up Nonforfeiture Option
By Written Request, you may elect, at any time before the Maturity Date, to
continue your Certificate as fixed (non-variable) paid-up life insurance.
We apply your Surrender Value as a Net Single Premium to determine the Specified
Amount of the paid-up insurance. We base the cost of the paid-up insurance on
the guaranteed maximum Cost of Insurance rates in the Certificate and an
interest rate of 4% compounded annually. The Specified Amount of the paid-up
insurance cannot exceed the Death Benefit under the Certificate as of the
effective date of the paid-up insurance. Excess Surrender Value is distributed
to you and is treated as a partial distribution for federal income tax purposes.
(See Tax Matters) The effective date of the paid-up coverage is the first
Monthly Deduction Day that occurs on or after our receipt of your Written
Request.
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We allow Full Surrenders and Certificate Loans, as described in this Prospectus,
if you continue your Certificate in force as paid-up insurance. All supplemental
rider benefits terminate and are not available with the paid-up coverage. The
Surrender Value of the paid-up insurance is the Net Single Premium for that
insurance on the date of surrender, less any outstanding loan balance. Partial
Surrenders are not available.
Under this option, we pay proceeds upon death of the Insured or maturity that
equal (a) the Specified Amount, less (b) any Certificate Loans and accrued
unpaid interest under the paid-up insurance. See "Tax Matters" for a discussion
of possible tax consequences resulting from your electing the paid-up
nonforfeiture option.
Grace Period
If your Surrender Value is insufficient to allow a Monthly Deduction on the
Monthly Deduction Day, we allow you 61 days of grace for payment of an amount
sufficient to allow the Monthly Deduction.
If your Surrender Value is insufficient because of outstanding loans, and you
have paid sufficient premiums to meet the conditions of the 5-year No Lapse
Coverage period, we may require payment of the amount equal to the lesser of (1)
or (2) where:
(1) is the amount necessary to meet the loan-related conditions of the No Lapse
Coverage provision; or
(2) is an amount sufficient to cover the Monthly Deduction(s) that would result
in the Surrender Value being greater than zero.
If you have not paid sufficient premiums to meet the conditions of the 5-year No
Lapse Coverage period, we may require payment of the amount necessary to keep
your Certificate in force for the current month plus two additional months.
If you do not make payment within the 61-day Grace Period, the Certificate will
terminate without value at the end of the Grace Period. This termination is
effective on the Monthly Deduction Day for the first unpaid Monthly Deduction.
We will mail written notice to your last address known to us at least 31 days
before termination of a Certificate. We will also mail this notice to the last
known address of any assignee of record.
During the days of grace, this Certificate stays in force. If the Insured's
death occurs during the days of grace, we deduct from the Death Benefit the
amount required to keep a Certificate in force.
Reinstatement of a Lapsed Certificate
You may reinstate a Certificate terminated after its Grace Period. Upon
reinstatement, we calculate the Certificate Year as if there had never been a
lapse in coverage. You must apply for reinstatement (a) within 5 years after the
date of termination and (b) before the Maturity Date.
Also, we must receive (a) evidence of the Insured's current insurability that is
satisfactory to us, and (b) a premium payment that at least equals the following
amount: the sum of (1) and (2), where (1) is any portion of the Loan Account
Value plus accrued interest on the date of lapse exceeding the Total Account
Value on the date of lapse and (2) is a premium payment sufficient to keep the
Certificate in force for the current month plus 2 additional months.
If we reinstate your Certificate within a 5-year No Lapse Coverage period, all
values, including the Loan Account Value, are reinstated as they were on the
date of lapse.
If we reinstate your Certificate after a 5-year No Lapse Coverage period has
expired, the coverage would be reinstated on the Monthly Deduction Day following
our approval. We first apply your payment to pay any positive excess of (1) over
(2), where (1) is the Loan Account Value plus accrued interest on the date of
lapse, and (2) is the Total Account Value on the date of lapse. We treat any
remainder as a premium. The Total Account Value at reinstatement is the Net
Premium paid, less the Monthly Deduction for that day. We do not reinstate any
Loan Account Value.
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We restart Monthly Deductions and investment performance on the Monthly
Deduction Day on or first following our approval of the reinstatement. We pay
the reinstated Death Benefit if the Insured dies prior to that date, but only if
we have received (a) a reinstatement request and (b) all payments and
information required for us to grant the request.
We must consent before we reinstate any supplemental benefit rider. If the
Certificate lapsed within a 5-year No Lapse Coverage period, and that period has
not yet expired by the time of reinstatement, we will reinstate any Certificate
Loan Value and consider as due any prior uncollected Monthly Deductions. (See
5-year No Lapse Coverage Provision) We will also restore any portion of the No
Lapse Coverage period that still remains by the time of reinstatement. In that
case, you may put the No Lapse Coverage into effect for any time during such
remaining period, provided you have paid at least the cumulative amount of all
Basic Monthly Premiums required to date for this purpose. This cumulative amount
includes any amount of unpaid Basic Monthly Premiums due for periods prior to
the reinstatement.
A reinstatement may result in restarting the test used for determining whether
the Certificate is a Modified Endowment Contract. (See Tax Matters)
Certificate Loans
We grant loans at any time (a) after the expiration of the Right of Certificate
Examination and (b) before the Maturity Date. The amount of the loan may not be
more than the Loan Value. The Loan Value is 90% of the Total Account Value,
unless state law otherwise requires. We transfer the amount of the loan out of
the Fixed Account and any Variable Options on a Pro-Rata Basis. We instead hold
the amount of the loan as part of the Loan Account Value. We effect loans and
loan repayments as of the end of the Valuation Period in which we receive the
Written Request for the loan or the repayment.
You may repay the loan in full or in part at any time prior to the Maturity
Date, as long as the Certificate is in force and the Insured is alive. The
amount necessary to repay all loans in full is the Loan Account Value plus any
accrued interest. We allocate loan repayments to the Fixed Account Value and the
Separate Account Value in the same proportion in which the loan was taken.
Unless you specifically instruct us otherwise, we consider Additional Premiums
received as loan repayments. The full Surrender Value under this Certificate
equals (a) the Total Account Value on the date of surrender, (b) less the Loan
Account Value plus any accrued interest. If you do not repay a loan prior to the
Maturity Date, the amount payable at the Maturity Date equals (a) the Total
Account Value on the Maturity Date, (b) less the Loan Account Value on the
Maturity Date plus any accrued interest.
The amount of interest you earn on the Loan Account Value and the amount of
interest we charge on a loan depends on whether the loan is considered
preferred. Beginning in the 11th Certificate Year and on each Certificate
Anniversary thereafter, that portion of the Loan Value attributable to the
Separate Account Value will be considered preferred (Preferred Loans). All other
loans will be considered non-preferred (non-Preferred Loans).
Preferred Loans earn interest at a rate of 4.0% and are charged interest at a
rate of 4.0%. In other words, the interest rate credited equals the interest
rate charged.
Non-Preferred Loans earn interest at a rate of no less than 6.0% and are
currently charged interest at a rate of 8%.
We may credit interest in excess of these rates, in our sole discretion.
Accordingly, since we credit the Loan Account Value with interest rather than
with the investment experience of the Funds, a loan may permanently affect the
amount of your Death Benefit and the Certificate's Surrender Value, even if you
repay the loan.
Loan interest is due and payable on (a) each Certificate Anniversary, (b) the
date the Certificate ends or (c) upon full repayment of the Loan Account Value.
We add any interest not paid when due to the Loan Account Value on the
Certificate Anniversary. Any amount of unpaid interest bears interest on the
same terms.
For a discussion of the federal income tax consequences of Certificate Loans,
see Tax Matters.
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Certificate Changes
You may make certain changes to your Certificate, as described below, by
submitting a Written Request. We will send you supplemental Certificate
Specifications once the change is completed. If you decrease a Specified Amount
larger than $250,000 to less than $250,000 (or vice-versa), you can cause an
increase (or decrease) in your current Cost of Insurance Rate. (See Monthly
Deduction)
Increase in Specified Amount
We allow increases in Specified Amounts at any time while a Certificate is in
force. We may require you to provide satisfactory evidence of insurability. Your
Surrender Value immediately after an increase must be at least 3 times the sum
of (a) the most recent Monthly Deduction from the Total Account Value and (b)
the Specified Amount of the increase multiplied by the applicable Cost of
Insurance rate divided by 1000. You must request Specified Amount increases in
multiples of $1,000. We show any maximum limit on your Specified Amount in the
Certificate Specifications.
We also show the Issue Date for any increase in the supplemental Certificate
Specifications. We restart the 5-year period of the No Lapse Coverage provision
applicable to the increase on the Issue Date of the increase. We determine the
Basic Monthly Premium after the increase based on the Insured's Attained Age and
new Specified Amount.
For possible tax consequences of an increase in Specified Amount, see Tax
Matters.
Decrease in Specified Amount
You may decrease the Specified Amount of a Certificate after the first
Certificate Year. We do not allow a decrease in the Specified Amount if (a) your
Specified Amount is reduced below the minimum Specified Amount set forth in the
Certificate Specifications or (b) your Certificate would be treated as other
than life insurance for income tax purposes.
The Issue Date of the decrease is the Monthly Deduction Day on or next following
the date on which we receive your Written Request. The decrease reduces any past
increases in the reverse order in which the increases occurred. (We follow this
same order for decreases in Specified Amount resulting from changes in Death
Benefit Option or a Partial Surrender.) If the 5-year No Lapse Coverage
provision is still applicable, we adjust the Basic Monthly Premium for that
purpose based on the reduced Specified Amount.
A Specified Amount decrease can cause a Certificate to be taxed as a Modified
Endowment Contract. For a discussion of tax considerations in connection with
Specified Amount decreases, see Tax Matters.
Change in Death Benefit Option
We allow changes from Option 1 to Option 2 at any time while a Certificate is in
force. We reduce the Specified Amount to equal the Specified Amount less the
Total Account Value at the time of the change. We also allow changes from Option
2 to Option 1 at any time while a Certificate is in force. We increase the
Specified Amount to equal the Specified Amount plus the Total Account Value as
of the date of the change. If the Death Benefit at the time of the change is
determined based on the applicable percentage of the Total Account Value, we may
calculate the new Specified Amount differently from the foregoing description.
We do not allow a change in the Death Benefit Option if (a) the Specified Amount
is reduced below the minimum Specified Amount set forth in the Certificate
Specifications or (b) your Certificate would be treated as other than life
insurance for income tax purposes. Also, we may require evidence of
insurability. We effect the change on the
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Monthly Deduction Day on or next following the date on which we receive your
Written Request. In cases where we require evidence of insurability, we must
also approve the increase.
Following any change in Death Benefit Option, we will adjust the Basic Monthly
Premium so that it will be based on the new Specified Amount. A change in Death
Benefit Option may restart the test for determining whether a Certificate is a
Modified Endowment Contract for federal income tax purposes. (See Tax Matters)
Right of Certificate Examination
Your Certificate includes a 10-day free look period. If for any reason you are
dissatisfied with your Certificate, you may return it to us or to our
representative within 10 days of receipt for a refund. If you return your
Certificate, we will deem it void from its beginning. We will refund to you an
amount equal to (a) the premiums paid or (b) where permitted by state law, the
premiums paid, adjusted for any positive or negative investment performance in
the Variable Options you selected (but not deducting any charges made under the
Certificate).
Supplemental Benefits
The supplemental benefits currently available as riders to a Certificate are
listed below. Your Aetna representative can provide you with additional
information about these riders. The riders contain other terms and conditions.
o Disability Benefit Rider--provides for a credit of the benefit amount
described in the rider if the covered Insured is totally disabled. As a
general matter, you may not increase the Specified Amount of your Certificate
while we are providing benefits under this rider.
o Accelerated Death Benefit Rider--provides for the advance payment to you of a
portion of the Specified Amount if the Insured provides requisite evidence
that the Insured has less than one year to live. There is no charge for this
rider.
o Accidental Death Benefit Rider--provides for the payment of up to $200,000 to
provide a double Death Benefit if the Insured dies as a result of an accident
as defined in the rider.
o Child Insurance Rider--provides for non-participating term life insurance on
the child(ren) of the Insured.
We may make other riders for supplemental benefits available under the
Certificate from time to time. We will set forth the charges for such riders in
your Certificate Specifications. You may add or cancel supplemental benefit
riders at any time, pursuant to our procedures then in effect. Any change you
make in supplemental benefits may cause us to revise the amount of the Basic
Monthly Premium. If so, we will provide you with supplemental Certificate
Specifications that set forth the new amount. A change in supplemental benefit
rider coverage may also have tax consequences. (See Tax Matters)
Certificate Settlement
The Company generally pays proceeds in a lump sum upon (a) the death of the
Insured, (b) a Full Surrender or (c) maturity. You may elect one or more of the
Settlement Options discussed below. We may agree to other Settlement Options at
our discretion.
You may make a Written Request to elect, change or revoke a Settlement Option
before payments begin under any Settlement Option. We give effect to your
request upon its receipt at our Home Office. If you have not elected a
Settlement Option when your proceeds become payable, your payee may make the
election. We must consent to
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the election of any Settlement Option if the Certificate has been assigned. We
pay any excess Death Benefit due as elected. The payee is entitled to exercise
any rights and privileges that are permitted under a Settlement Option.
You may not elect a fixed or variable Settlement Option that results in (a) a
first payment of less than $50 or (b) total yearly payments of less than $250.
You must elect a lump-sum payment if your selected payment option fails to meet
these minimum requirements. We may refuse to permit a Settlement Option if (a)
the payee is not a natural person or (b) the Annuitant's age (plus the number of
years for which any payments under the annuity option chosen) exceeds 95 years.
The several Settlement Options may differ in their tax consequences.
Settlement Options
The Settlement Options listed below are available under the Certificates.
Options 1, 2 and 3 are available on either a fixed payment or a variable payment
basis. We determine the amount of the first payment under Options 1, 2 and 3
(whether on a fixed or variable basis) based on the option chosen, using the
annuity rates specified in the Certificate. This rate is the same regardless of
whether an Annuitant is male or female.
For a fixed Settlement Option, the amount of the first and each subsequent
payment is the same. We base that amount on an interest rate of at least 3%.
Our then current settlement option rate could provide higher payments on a
comparable fixed premium annuity at the time payments commence. If so, we use
the higher rate for fixed Settlement Options under a Certificate.
For a variable Settlement Option, we determine the first payment using an
assumed interest rate of 3.5% or 5%, as specified by you or the payee.
Subsequent payments then vary based on Fund performance, as discussed below
under Calculation of Variable Payment Settlement Option Values. If you elect 5%,
the initial payment is higher, but subsequent payments increase less with
favorable Fund performance (and decrease more with unfavorable Fund performance)
than if 3.5% is elected.
Once payments begin you cannot make withdrawals from or changes to Settlement
Options 1, 2 and 3, except to the extent noted below for Option 1.
Option 1 -- We provide payments for a stated number of years, but no more than
30. You must select a payment period of at least 5 years. If variable payments
are selected, you may withdraw all or a portion of the remaining payments at any
time.
Option 2 -- We provide payments for the lifetime of the Annuitant. If you chose,
we also will guarantee payments for a number of years from 5 to 30, or provide a
"cash refund" upon the Annuitant's death. The cash refund election is available
only if you allocate the entire amount on a fixed basis. The amount of the cash
refund is (a) the amount applied to the option at the time of settlement, less
(b) the total amount of payments received under the option prior to the
Annuitant's death.
Option 3 -- Life Income Based Upon the Lives of Two Annuitants-- We provide
payments during the joint lifetimes of two Annuitants. We continue payments
until both Annuitants have died. When you select this option, you must choose
from among the following payment methods: (a) 100%, 66-2/3% or 50% of the
payment continues after the first death; (b) payments for a minimum of 5 to 30
years, with 100% of the payment to continue after the first death; (c) 100% of
the payment to continue to the surviving Annuitant if the survivor is the
original payee, and 50% of the payment to continue to the survivor if the
surviving Annuitant is the second payee; or (d) 100% of the payment to continue
after the first death, with a "cash refund" feature comparable to that described
for Option 2 above.
Option 4 -- We provide payment of interest on the sum left with us at 3%, or
such higher rate as we may, in our sole discretion, declare. After commencement
of this option, the payee may make a Written Request to receive all
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or a portion of the amount held under this option as a lump sum or have it
applied to one or more of the other available Settlement Options.
Upon the death of the Annuitant(s) (or the payee under Option 4), we will pay
(a) the current value of the funds held under Option 4 and (b) the present value
of any remaining guaranteed payments under the other Options. We continue paying
any remaining guaranteed payments to the beneficiary unless the beneficiary
elects to receive the present value of any remaining guaranteed payments in a
lump sum. If the beneficiary subsequently dies, we will pay the present value of
any remaining guaranteed payments in one sum to the beneficiary's' estate.
You may elect to receive monthly payments as described above, or elect to
receive quarterly, semi-annual or annual payments instead.
Calculation of Variable Payment Settlement Option Values
Variable Settlement Options are supported by the available Funds of the
Company's Variable Annuity Account B (Account B). Account B is a separate
account very similar to the Separate Account, except that Account B supports
variable annuity benefits, rather than variable life insurance benefits. We
reserve the right to permit a maximum of only four Funds to be used at any one
time for a Settlement Option. We will provide an Account B prospectus in
connection with selection of a Settlement Option. That prospectus describes the
available Funds, the costs and expenses of the Funds, and the charges imposed on
Account B. Account B may differ from the Separate Account in terms of the (a)
Funds available for selection and (b) charges imposed. Accordingly, you should
review the Account B prospectus, as well as the prospectuses for Account B's
underlying Funds, prior to selecting any variable payment Settlement Option.
We determine the amount of each variable annuity payment after the first payment
by a formula described in the Certificates. This formula is generally used by
actuaries for making these types of calculations. Speaking generally, the
formula works as follows: if the total return of the Fund for any month, less a
mortality and expense risk deduction currently equivalent to an annual rate of
1.25%, exceeds the Settlement Option's assumed interest rate (3.5% or 5%, as
discussed above), the next variable payment will be larger than the previous
one. On the other hand, if the Fund's total return for any month, as adjusted
for the mortality and expense risk deduction, is less than the assumed interest
rate, the next variable payment will be smaller than the previous one. The
amount of any increase or decrease in variable annuity payments does not bear a
direct relationship to the Fund's total returns. We expect to make a profit on
the mortality and expense risk deduction.
You may make transfers among Funds under our administrative procedures in effect
at the time. Currently, we limit the number of transfers to four per Calendar
Year, but we can change this limit in the future.
The Company and Management
Aetna Life Insurance and Annuity Company is a stock life insurance company
organized under the insurance laws of the State of Connecticut in 1976. Through
a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance
Company (formerly Participating Annuity Life Insurance Company, an Arkansas life
insurance company organized in 1954). The Company is engaged in the business of
issuing life insurance policies and variable annuity contracts. The Company is
an indirect wholly-owned subsidiary of Aetna, Inc., a publicly traded healthcare
and financial services company, whose principal offices are at the same location
as the Company's Home Office.
The Company serves as the principal underwriter for the securities offered
hereunder and also acts as the principal underwriter for Variable Annuity
Accounts B, C and G (separate accounts of the Company registered as unit
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investment trusts), and Variable Annuity Account I (a separate account of Aetna
Insurance Company of America registered as a unit investment trust).
Additionally, the Company is registered as an investment adviser under the
Investment Advisers Act of 1940 and, as such, is the investment adviser for
Portfolio Partners, Inc. The Company is also the depositor of Variable Annuity
Accounts B, C and G.
The following are the Directors and Executive Officers of Aetna Life Insurance
and Annuity Company. Unless otherwise indicated, the principal business address
for all individuals is the Company's Home Office.
<TABLE>
<CAPTION>
Name & Address Position with the Company Business Experience During the Past 5 Years
- -------------- ------------------------- -------------------------------------------
<S> <C> <C>
Thomas J. McInerney Director, President and Chairman, President (since October 1998) Aetna Investment
Executive Committee (Principal Advisor Holding Company, Inc., Aetna Retail
Executive Officer) Holding Company, Inc., Aetna Services Holding
Company, Inc.; President (since September 1997)
Aetna Life Insurance and Annuity Company;
President (since September 1997) Aetna Insurance
Company of America; President (since September
1997) Aetna Retirement Holdings, Inc.; President
(since August 1997) Aetna Retirement Services,
Inc.; Executive Vice President (since August 1997)
Aetna Inc., 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 Director and Senior Vice President President (January 1998--February 1999) Aetna
Investment Services, Inc.; Senior Vice President
(since October 1998) Aetna Investment Advisor
Holding 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>
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<TABLE>
<CAPTION>
Name & Address Position with the Company Business Experience During the Past 5 Years
- -------------- ------------------------- -------------------------------------------
<S> <C> <C>
Catherine Hale Smith Director, Chief Financial Officer Senior Vice President (since October 1998) Aetna
and Senior Vice President Investment Advisor Holding Company, Inc., Aetna
Retail Holding Company, Inc., Aetna Services
Holding Company, Inc.; Chief Financial Officer and
Senior Vice President, Business 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 Vice President, General Counsel and Corporate
and Corporate Secretary Secretary (since October 1998) Aetna Investment
Advisor Holding Company, Inc., Aetna Retail
Holding Company, Inc., Aetna Services Holding
Company, Inc.; Vice President, General Counsel
and Assistant Secretary (since April 1997) Aetna
Retirement Services, Inc.; Senior Vice President
(since March 1999), Vice President, 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 Vice President, Treasurer and Corporate Controller
Corporate Controller (since October 1998) Aetna Investment Advisor
Holding Company, Inc., Aetna Retail Holding
Company, Inc., Aetna Services Holding Company,
Inc.; Vice President, 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; Assistant
Vice President (December 1990--September 1993)
Aetna Life and Casualty Company.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Name & Address Position with the Company Business Experience During the Past 5 Years
- -------------- ------------------------- -------------------------------------------
<S> <C> <C>
Therese A. Squillacote Vice President and Chief Vice President and Chief Compliance Officer (since
Compliance Officer February 1999) Aetna Insurance Company of
America; Vice President and Chief 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 to May
1997) CIGNA Financial Advisors, Inc.; Chief
Compliance Officer (September 1989 to December
1995) G.R. Phelps & Co., Inc.; Chief Compliance
Officer (December 1992 to December 1995)
Connecticut Mutual Financial Services, Inc.
</TABLE>
Directors, officers and employees of the Company are covered by a blanket
fidelity bond in the amount of $60 million issued by Aetna Casualty and Surety
Company.
25
<PAGE>
Additional Information
Reports to Owners
The Company maintains all records relating to the Separate Account and the
Certificates. At least once in each Certificate Year, the Company will send you
a report containing the Certificate Values (see Total Account Value) as of the
most recent Certificate Anniversary. If you allocate any portion of your Total
Account Value to the Separate Account, we will send you those additional
periodic reports that the SEC requires us to send to you. (See Right to Instruct
Voting of Fund Shares)
Right to Instruct Voting of Fund Shares
You are entitled to instruct us how to vote Fund shares held in the Variable
Options of the Separate Account and attributable to your Certificate at
meetings of shareholders of the Funds. The number of votes for which you may
give directions will be determined as of the record date for the meeting. The
number of votes you are entitled to direct with respect to a particular Fund is
equal to (a) your Total Account Value invested in that Fund divided by (b) the
net asset value of one share of that Fund. Fractional votes will be recognized.
The Separate Account will vote all shares of each Fund that it holds of record
in the same proportion as those shares for which we have received instructions
from owners participating in that Fund through the Separate Account.
If you are entitled to give us voting instructions, we will send you proxy
material and a form for providing such instructions. In certain cases, we may
disregard instructions relating to changes in a Fund's investment manager or its
investment policies. We will advise you if we do and detail the reasons in our
next report to Certificate owners.
We reserve the right to modify these procedures in any manner consistent with
applicable legal requirements and interpretations as in effect from time to
time.
State Regulation
The Company, in its sole discretion, selects the states where it will offer the
Certificates for sale. One or more eligible purchasers must reside in a selected
state. The Company is subject to regulation and supervision by the Insurance
Department of the State of Connecticut, which periodically examines its affairs.
The Company is also subject to the insurance laws and regulations of all other
jurisdictions where it is authorized to do business. We are required to submit
annual statements of our operations, including financial statements, to the
insurance departments of those jurisdictions for the purposes of determining
solvency and compliance with local insurance laws and regulations.
Legal Matters
The Company knows of no material legal proceedings pending (a) to which either
the Separate Account or the Company is a party or (b) that would materially
affect the Separate Account. Counsel to the Company passed upon the legal
validity of the securities described in this Prospectus.
The Registration Statement
We filed a Registration Statement under the Securities Act of 1933 with the SEC
relating to the offering described in this Prospectus. Consistent with SEC rules
and regulations, we did not include in this Prospectus all of the information
set forth in the Registration Statement. You may obtain information omitted from
the Prospectus at the SEC's principal office in Washington, DC, upon payment of
the SEC's prescribed fees.
Distribution of the Certificates
The Company serves as principal underwriter of the securities sold by this
Prospectus, as defined by the federal securities laws. Aetna Investment
Services, Inc. ("Aetna Services"), an affiliate of the Company, distributes the
Certificates. The Company and Aetna Services are registered as broker-dealers
with the SEC and are members of
26
<PAGE>
the National Association of Securities Dealers, Inc. All persons offering or
selling the Certificates will be (a) registered representatives of Aetna
Services, and (b) licensed as the Company's insurance agents to sell variable
life insurance. The Company and NYSUT Benefit Trust entered into an agreement
that calls (a) for NYSUT Benefit Trust to exclusively endorse the Certificate to
Members for supplemental group variable universal life insurance and (b) for
NYSUT Benefit Trust to perform administrative services. The administrative
services NYSUT Benefit Trust performs includes making available NYSUT Benefit
Trust payroll slots to facilitate premium remittances to the Company. Under the
agreement, the Company paid NYSUT Benefit Trust $70,000 in 1998 and will pay
NYSUT Benefit Trust $100,000 in 1999. NYSUT Benefit Trust indicated to the
Company that it intends to use these amounts to enhance benefits to its members.
Salespersons selling Certificates may earn salaries or commissions. The maximum
sales commission paid for Certificate distribution is 25% of the first year
premium up to 12 Basic Monthly Premiums. For an increase in Specified Amount,
the maximum sales commission is 25% of 12 times the amount of Basic Monthly
Premium attributable to the increase. The maximum sales commission on all other
premiums is 2% through the 15th Certificate year, or the 15th year following a
Specified Amount increase. 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
paid in accordance with NASD rules.
Independent Auditors
KPMG LLP, CityPlace II, Hartford, Connecticut, are the independent auditors for
the Separate Account and for the Company. The independent auditors provide
services to the Separate Account that include primarily the examination of the
Separate Account's financial statements and the review of filings made with the
SEC.
Year 2000
As a healthcare and financial services enterprise, Aetna Inc. (referred to
collectively with its affiliates and subsidiaries as "Aetna"), is dependent on
computer systems and applications to conduct its business. Aetna has developed
and is currently executing a comprehensive risk-based plan designed to make its
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.
27
<PAGE>
Tax Matters
The following discussion reflects our understanding of current federal income
tax laws. These laws are complex, and tax results may vary among individuals.
This discussion is general in nature, and you should not consider it as tax
advice. You should seek competent tax advice if you are considering the purchase
of a Certificate or exercising elections under a Certificate. Please note that
your taxable income is not reduced by premium payments you pay by payroll
deduction.
Federal Tax Status of the Company
The Company is taxed as a life insurance company under the Internal Revenue Code
of 1986, as amended ("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 attributable to the Separate Account are
automatically applied to increase reserves under the Certificate. 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 Certificates. 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 in income or gains attributable to the
Separate Account, then we may impose a charge against the Separate Account (with
respect to some or all of the Certificates) to set aside provisions to pay such
taxes.
Life Insurance Qualification
A Certificate is treated as "life insurance" for federal income tax purposes if
(a) it meets the definition of life insurance under Section 7702 of the Code and
(b) the investments of the underlying Funds satisfy certain investment
diversification requirements under Section 817(h) of the Code. We believe that
the Certificates will meet these requirements and that:
o the death benefit that the beneficiary receives under your Certificate or
riders to your Certificate will not be subject to federal income tax; and
o increases in your Certificate's Total Account Value as a result of interest or
investment experience will not be subject to federal income tax unless and
until there is a distribution from your Certificate, such as a surrender or a
partial surrender.
The federal income tax consequences of a distribution from your Certificate can
be affected by whether your Certificate is a Modified Endowment Contract
(discussed below). In all cases, however, the character of all income that we
describe below as taxable to the payee will be ordinary income (as opposed to
capital gain).
Among other things, Section 7702 places limits on the amount of premium payments
that you may make under a Certificate. For that reason, we will accept only that
portion of any premium payment that will not exceed those limits. We will return
to you, or apply as you and we otherwise agree, any portion of the premium
payment that exceeds the then-applicable limitations.
We intend to comply with Sections 7702 and 817(h) of the Code. For that reason,
we reserve the right to make any changes to the Certificate or group policy that
we believe are necessary to ensure compliance. We will apply
28
<PAGE>
any changes uniformly to affected Owners and make changes only after giving you
advance written notice. In some cases, we may need to distribute to you amounts
from your Certificate to assure that it continues to qualify and be taxed as
life insurance. Any amounts we distribute to you may be includible in your
taxable income.
General Rules
As long as your Certificate remains in force during the insured person's
lifetime, as a non-modified endowment contract, a Certificate loan will be
treated as indebtedness, and no part of the loan proceeds will be subject to
current federal income tax. Interest you pay on the loan generally is considered
"personal interest," and will not be tax deductible.
After the first 15 Certificate years, the proceeds from a partial surrender will
not be subject to federal income tax except to the extent such proceeds exceed
your "basis" in your Certificate. (Your basis generally will equal the premiums
you have paid, less the amount of any previous distributions from your
Certificate that were not taxable.) During the first 15 Certificate years, the
proceeds from a partial surrender, under limited circumstances, could be subject
to federal income tax, under a complex formula, to the extent that your Total
Account Value exceeds your basis in your Certificate. This result may occur even
if the total amount of distributions from the Certificate to that date does not
exceed total premiums paid to that date.
On the maturity date or upon full surrender, any excess in the amount of
proceeds we pay (including amounts we use to discharge any Certificate loan)
over your basis in the Certificate, will be subject to federal income tax. In
addition, if a Certificate terminates after a grace period while there is a
policy loan outstanding, the cancellation of such loan and accrued loan interest
will be treated as a distribution and could be subject to tax under the above
rules.
Modified Endowment Contracts
A Certificate will be a Modified Endowment Contract if it fails the "7-pay
test." A Certificate fails the 7-pay test if, at any time in the first seven
Certificate Years, the amount paid into the Certificate exceeds the amount that
would have been paid had the Certificate been designed to become paid up after
payment of seven equal annual premiums. A new 7-pay test begins at any time a
material change takes effect. A material change, for example, may include a
change in death benefit option, the selection of additional rider benefits, an
increase in your Certificate's specified amount of coverage, and certain other
changes.
In the event of a reduction in future benefits during the first seven
Certificate Years (or within the first seven Certificate Years after a material
change), we recalculate the 7-pay test retroactively based on the reduced level
of benefits. (For example, a reduction in future benefits could result if you
request a decrease in Specified Amount, Partial Surrender or termination of
additional benefits under a Rider.) If the premiums previously paid are greater
than the recalculated 7-pay test limit, the Certificate will be a Modified
Endowment Contract.
A Certificate received in exchange for a Modified Endowment Contract will also
be a Modified Endowment Contract.
If the Certificate is a Modified Endowment Contract, the proceeds of any Partial
Surrender, Certificate Loans, assignments, pledges or other distributions from
the Certificate will be currently includable in the Certificate Owner's income
to the extent that the Certificate's Total Account Value immediately before
payment exceeds total premiums paid (increased by the amount of distributions
previously taxed and reduced by untaxed amounts previously distributed from the
Certificate). All Modified Endowment Contracts that you purchase from the
Company (and its affiliates) during the same calendar year, will be aggregated
for purposes of determining the taxable portion of distributions from the
Certificate.
Distributions during any Certificate year in which a Certificate becomes a
Modified Endowment Contract and any subsequent Certificate Year will be taxed as
described above. In addition, distributions from a Certificate within two years
before it becomes a Modified Endowment Contract may also be subject to tax in
this manner. Thus, a
29
<PAGE>
distribution made from a Certificate that is not a Modified Endowment Contract
could later become taxable as a distribution from a Modified Endowment Contract.
If the Certificate is a Modified Endowment Contract, a penalty will apply to the
taxable portion of most distributions, unless the Owner has reached the age of
59-1/2. The penalty tax does not, however, apply to any full or partial
distributions that are made while the Owner is disabled (within the meaning of
the Code) or that are part of a series of equal periodic payments made not less
frequently than annually for the life or life expectancy of such Owner or the
joint lives (or joint life expectancies) of such Owner and his or her
beneficiary (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 Certificate must be "adequately
diversified" in accordance with Treasury regulations. The Treasury Department
has issued regulations prescribing the diversification requirements in
connection with variable contracts. Our failure to comply with these regulations
would disqualify your Certificate as a life insurance policy under Section 7702
of the Code. If this were to occur, you would be subject to federal income tax
on the income under the Certificate for the period of the disqualification and
for subsequent periods. Also, if the Insured died during the period of the
disqualification, a portion of the death benefit proceeds would be considered
taxable income for the recipient. The Separate Account, through the Funds,
intends to comply with these requirements.
Investor Control
The IRS has stated in published rulings that a variable contract owner will be
considered the owner of separate account assets if the owner possesses incidents
of investment control over the assets. In these circumstances, income and gains
from the separate account assets would be includible in the variable contract
owner's gross income. The Treasury announced that it will issue guidance
regarding the extent to which owners could direct their investments among
subaccounts without being treated as owners of the underlying assets of the
separate account. It is possible that the Treasury's position, when announced,
may adversely affect the tax treatment of existing contracts.
The Company reserves the right to modify the Certificate as necessary to attempt
to prevent a holder from being considered the federal tax owner of a pro rata
share of the assets of the Separate Account.
Withholding
Generally, we are required to withhold income tax from any portion of a
distribution we make to you that is includable in your income. However, we will
not withhold income tax if you provide us with a written election request before
we make the distribution. If you request that we not withhold tax from the
distribution, or if enough tax is not withheld, you may have to pay these taxes
later. You may also have to pay penalties if your withholding and estimated tax
payments are insufficient.
Other Tax Considerations
Changes you make to your Certificate (for example, a decrease in benefits) may
have other effects on your Certificate. Such effects may include limiting the
amount of premiums that you can pay under your Certificate, as well as the
amount of Total Account Value that you may maintain under your Certificate.
If the insured person is the Certificate's owner, the death benefit under a
Certificate will generally be includable in the owner's estate for purposes of
federal estate tax. If the owner is not the insured person, under certain
conditions, an amount approximately equal to the cash surrender value of the
Certificate would be includable in the owner's estate, if the owner died before
the insured. Federal estate tax is integrated with federal gift tax under a
unified rate schedule. In general, estates less than $650,000 (or larger amounts
specified in the Code to commence
30
<PAGE>
in certain future years) will not incur a federal estate tax liability. In
addition, an unlimited marital deduction may be available for federal estate tax
purposes.
As a general rule, if a "transfer" is made to a person two or more generations
younger than the Certificate's owner, a generation skipping tax may be payable
at rates similar to the maximum estate tax rate in effect at the time. The
generation skipping tax provisions generally apply to "transfers" that would be
subject to the gift and estate tax rules. Individuals are generally allowed an
aggregate generation skipping tax exemption of $1 million. Because these rules
are complex, you should consult with a qualified tax adviser for specific
information, especially where benefits are passing to younger generations.
The particular situation of each Certificate owner, insured person or
beneficiary will determine how ownership or receipt of Certificate proceeds will
be treated for purposes of federal estate and generation skipping taxes, as well
as state and local estate, inheritance, transfer, income and other taxes. We do
not intend for the foregoing summary to be complete or to cover all situations.
You should consult counsel and other advisors for more complete information.
Finally, The U.S. Congress frequently considers legislation that, if enacted,
could change the tax treatment of life insurance policies. In addition, the
Treasury Department may amend existing regulations, issue regulations on the
qualification of life insurance and modified endowment contracts, or adopt new
interpretations of existing law. State and local tax law or, if you are not a
U.S. citizen and resident, foreign tax law, may also affect the tax consequences
to you, the insured person or your beneficiary, and are subject to change. Any
changes in federal, state, local or foreign tax law or interpretation could have
a retroactive effect. We suggest you consult a qualified tax adviser.
Misc. Certificate Provisions
The Certificates
We consider your variable life insurance contract to consist of the following
documents: (a) the Certificate you receive; (b) the related group Policy owned
by NYSUT Benefit Trust; (c) the application form you completed to purchase your
Certificate; (d) any applications for any changes we approve; and (e) any
riders. Copies of all applications are attached to and made a part of the
Certificate. Only the Company's President, Executive Vice President or the
Corporate Secretary may agree with you to a change in the Certificate or the
Policy. Any change in the Certificate or the Policy must be in writing.
Payment and Deferral of Benefits
We pay all benefits at our Home Office. We may require you to submit your
Certificate to our Home Office before we grant Certificate Loans, make changes
or pay benefits.
We ordinarily make payments of any Separate Account Value within 7 days after
our receipt of your Written Request. However, the Company reserves the right to
suspend or postpone the date of any payment of any benefit or values for any
Valuation Period (a) when the New York Stock Exchange is closed (except holidays
or weekends); (b) when trading on the Exchange is restricted; (c) when the SEC
determines an emergency exists so that it is not reasonably practicable for the
Fund to dispose of the securities it holds or to determine the value of the
Funds' net assets. In these instances, we also may defer payment from the
Separate Account of Full Surrender and Partial Surrender Values, any Death
Benefit in excess of the current Specified Amount, and any portion of the Loan
Value.
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<PAGE>
We may defer payment of any Fixed Account Value for up to 6 months, except when
used to pay amounts due us. We may also delay payment of the Death Benefit if
the Certificate is being contested.
Suicide and Incontestability
In most states, we pay only a limited benefit if the Insured dies by suicide
within 2 years from the Issue Date of a Certificate. Generally, this benefit
consists of a refund of premiums paid, subject to any positive or negative
adjustment to reflect investment performance in the Separate Account. In most
states, if the Insured dies by suicide within 2 years from the Issue Date of any
increase in coverage, we pay as to that increase only the amount of prior
Monthly Deductions that were attributable to that increase.
In most states, we will not contest any coverage under a Certificate after it
has been in force for 2 years from its Issue Date, because of statements made in
the initial application form or any subsequent application. However, if the Age
of the Insured is misstated, regardless how long the coverage has been in
effect, we will adjust the amount of the Death Benefit to reflect the coverage
that would have been purchased by the most recent pre-Maturity Date Monthly
Deduction at the correct Age.
Protection of Proceeds
To the extent provided by law, the proceeds of the Certificate are not subject
to (a) claims by a beneficiary's creditors or (b) any legal process against any
beneficiary.
Nonparticipation
The Certificate is not entitled to share in the divisible surplus of the
Company. We will pay no dividends to you.
Changes in Owner and Beneficiary; Assignment
Unless otherwise stated in the Certificate, you may change the Owner and/or the
beneficiary or beneficiaries, or both, at any time while the Certificate is in
force. You must make a request for these types of changes by Written Request.
After we agree to the change in writing, the change takes effect as of the date
on which your Written Request was signed. On the insured's death, we pay Death
Benefit proceeds to each named beneficiary as specified in your then effective
beneficiary designation. We pay all proceeds to the Owner or the Owner's estate
if no named beneficiary is living at the date of the Insured's death. If there
is no designated beneficiary, as required by state law we may pay from the Death
Benefit up to $500 to any person that we believe is entitled to this money
because that person incurred funeral expenses incident to the death of the
Insured.
You may assign a Certificate. We will not consider an assignment of a
Certificate binding on us unless the assignment is made in writing and received
by us at our Home Office. We use reasonable procedures to confirm that the
assignment is authentic, including verification of signature. If we fail to
follow our procedures, we would be liable for any losses to you directly
resulting from the failure. Otherwise, we are not responsible for the validity
of any assignment. The rights of the Owner and the interest of the beneficiary
are subject to the rights of any assignee of record.
Assignment or change of Owner can have adverse tax consequences. (See Tax
Matters)
Performance Reporting and Advertising
From time to time, the Company may advertise different types of historical
performance for the Variable Options of the Separate Account available under the
Certificates. We may also distribute sales literature that compares (a) to (b)
or to (c), where: (a) is the percentage change in Accumulation Unit Values for
any of the Variable Options; (b) is established market indices such as the
Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average; and (c)
is the percentage change in values of other mutual funds that have investment
objectives similar to the Variable Option being compared.
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<PAGE>
Illustrations of Death Benefit and Total Account Values
The following pages provide a hypothetical illustration of how the Option 1
Death Benefit and Total Account Values can change over time for a Certificate.
This hypothetical illustration is based on a Certificate issued to an Age 45,
preferred risk, non-smoker Insured. The second column in each table shows the
accumulated values of the premiums paid at an annual interest rate of 5%. The
remaining columns show the hypothetical Death Benefits, Total Account Values and
Surrender Values assuming that the investment return on the assets held in each
Fund is a uniform gross annual rate of either 0%, 6%, and 12%. Additional
assumptions are listed on each illustration.
We provide two pages of values. The first page illustrates the assumption that
the maximum rates for all charges under the Certificate, including the
guaranteed maximum Cost of Insurance rates, are charged in all years. The
maximum allowable charges under the Certificate include (a) 1.25% for years
1-10, and 0.40% for the 11th year and after, for mortality and expense risk in
all Certificate Years, and (b) 10% of each premium as the maximum premium load,
and (c) $19 a month during the first Certificate Year and $11 a month thereafter
for the maximum Certificate Fee.
The second page illustrates the assumption that the current rates for all
charges, including the scale of Cost of Insurance rates for a $250,000 Specified
Amount, are charged in all years. Current cost of insurance rates are generally
lowest for Certificates having Specified Amounts of at least $250,000. The
current charges imposed under the Certificates include (a) 0.85% for mortality
and expense risk in Certificate Years 1 through 10 only, and as is currently
planned, 0% thereafter, (b) 8% of each premium as the current premium load, and
(c) $14 a month during the first Certificate Year and $6 a month thereafter as
the current Certificate Fee. We expect to review our current cost of insurance
rates at least annually in light of the actual mortality experience of
participants under the NYSUT group Certificate.
The values shown in these illustrations vary according to assumptions used for
charges and gross rates of investment return. You may experience actual
investment returns and charges that are higher or lower than those illustrated.
The annual charge for Fund expenses reflected in both sets of illustrations is
.71%. This figure assumes that Total Account Values have been allocated equally
among all Funds and represent a fixed, unweighted average of the investment
advisory fees charged to each of the Funds as of December 31, 1998 (without
waivers or deductions) and other operating expenses (without waivers or
deductions) for the year then ended.
After deduction of charges, the illustrated gross annual investment rates of
return of 0%, 6% and 12% correspond to approximate net annual rates of -1.56%,
4.44% and 10.44%, respectively, during the first 10 Certificate Years, and
- -.71%, 5.29% and 11.29%, respectively, thereafter on a current basis. On a
guaranteed basis, the illustrated gross annual investment rates of return of 0%,
6% and 12% correspond to approximate net annual rates of -1.96%, 4.04% and
10.04% during the first 10 years and -1.11%, 4.89% and 10.89% during the 11th
year and after, respectively.
The Death Benefit and Total Account Values would be different from those shown
if the gross annual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above and below those averages for individual
Certificate Years. The illustrations also assume payment of premiums as
indicated, no Certificate Loans, no increases or decreases in Specified Amount,
no Death Benefit Option changes, no Partial Surrenders and no supplemental rider
benefits.
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, we may make such charges in the future. In that event, the
gross annual investment rate of return would have to exceed 0%, 6%, or 12% by an
amount sufficient to cover the tax charges in order to produce the Death Benefit
and Total Account Values shown.
Upon request, we will provide a comparable personalized illustration based upon
the Age and underwriting classification of the proposed Insured, including the
Specified Amount and premium requested, the proposed frequency of premium
payments and any available riders requested. We may charge a fee of $25 for each
illustration. The hypothetical gross annual investment return assumed in such an
illustration will not exceed 12%.
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FLEXIBLE PREMIUM
VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
UNISEX AGE 45
$1,548.48 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1 (GUARANTEED VALUES)
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Surrender Value
at Returns of Annual Investment Returns of Annual Investment Returns of
Certificate 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 1,626 250,000 250,000 250,000 364 415 467 364 415 467
2 3,333 250,000 250,000 250,000 761 888 1,023 761 888 1,023
3 5,126 250,000 250,000 250,000 1,088 1,317 1,569 1,088 1,317 1,569
4 7,008 250,000 250,000 250,000 1,343 1,695 2,102 1,343 1,695 2,102
5 8,984 250,000 250,000 250,000 1,521 2,015 2,613 1,521 2,015 2,613
6 11,059 250,000 250,000 250,000 1,615 2,266 3,093 1,615 2,266 3,093
7 13,238 250,000 250,000 250,000 1,617 2,435 3,526 1,617 2,435 3,526
8 15,526 250,000 250,000 250,000 1,511 2,501 3,892 1,511 2,501 3,892
9 17,928 250,000 250,000 250,000 1,287 2,446 4,170 1,287 2,446 4,170
10 20,450 250,000 250,000 250,000 935 2,255 4,341 935 2,255 4,341
15 35,085 0 0 250,000 0 0 2,901 0 0 2,901
20 53,762 0 0 0 0 0 0 0 0 0
25 77,600 0 0 0 0 0 0 0 0 0
30 108,023 0 0 0 0 0 0 0 0 0
20 Age 65 53,762 0 0 0 0 0 0 0 0 0
</TABLE>
Assumes no policy loan has been made and no supplemental rider benefits have
been elected. If premiums are paid more frequently than annually, the Death
Benefits, Total Account Values and Surrender Values would be less than those
illustrated. Zeros indicate that the Certificate lapses if additional premiums
are not paid.
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 Certificate Owner's allocations, and the
Fund's rate of return. The Total Account Value and Surrender Value for a
Certificate 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 years.
34
<PAGE>
FLEXIBLE PREMIUM
VARIABLE UNIVERSAL LIFE INSURANCE CERTIFICATE
UNISEX AGE 45
$1,548.48 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1 (CURRENT VALUES)
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Surrender Value
at Returns of Annual Investment Returns of Annual Investment Returns of
Certificate 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 1,626 250,000 250,000 250,000 670 732 794 670 732 794
2 3,333 250,000 250,000 250,000 1,420 1,590 1,768 1,420 1,590 1,768
3 5,126 250,000 250,000 250,000 2,155 2,483 2,840 2,155 2,483 2,840
4 7,008 250,000 250,000 250,000 2,875 3,411 4,020 2,875 3,411 4,020
5 8,984 250,000 250,000 250,000 3,579 4,377 5,321 3,579 4,377 5,321
6 11,059 250,000 250,000 250,000 4,268 5,383 6,755 4,268 5,383 6,755
7 13,238 250,000 250,000 250,000 4,942 6,429 8,337 4,942 6,429 8,337
8 15,526 250,000 250,000 250,000 5,601 7,519 10,081 5,601 7,519 10,081
9 17,928 250,000 250,000 250,000 6,246 8,654 12,007 6,246 8,654 12,007
10 20,450 250,000 250,000 250,000 6,853 9,813 14,108 6,853 9,813 14,108
15 35,085 250,000 250,000 250,000 8,721 15,551 27,915 8,721 15,551 27,915
20 53,762 250,000 250,000 250,000 7,130 19,313 47,911 7,130 19,313 47,911
25 77,600 250,000 250,000 250,000 752 19,162 78,317 752 19,162 78,317
30 108,023 0 250,000 250,000 0 10,678 126,965 0 10,678 126,965
20 Age 65 53,762 250,000 250,000 250,000 7,130 19,313 47,911 7,130 19,313 47,911
</TABLE>
Assumes no policy loan has been made and no supplemental rider benefits have
been elected. If premiums are paid more frequently than annually, the Death
Benefits, Total Account Values and Surrender Values would be less than those
illustrated. Zeros indicate that the Certificate lapses if additional premiums
are not paid.
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 Certificate Owner's allocations, and the
Fund's rate of return. The Total Account Value and Surrender Value for a
Certificate 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 years.
35
<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
ASSETS:
Investments, at net asset value: (Note 1)
<TABLE>
<CAPTION>
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>
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 Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Money Market VP:
Aetna Vest $ 17.310 $ 18.074 4.41% 118,796.8 $ 2,147,105
Aetna Vest II 12.653 13.211 4.41% 42,027.0 555,225
Aetna Vest Plus 11.892 12.416 4.41% 1,069,947.5 13,284,681
Aetna Vest Estate Protector 10.807 11.301 4.57% 57,290.6 647,417
Aetna Vest Estate Protector II 10.045 10.413 3.66% (1) 276,653.4 2,880,793
Corporate Specialty Market 11.377 11.878 4.40% 1,436,476.9 17,063,155
NYSUT Individual Life 10.603 10.849 2.32% (4) 8,023.2 87,045
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP:
Corporate Specialty Market 11.484 10.085 (12.18%) (2) 97,904.2 987,401
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP:
Corporate Specialty Market 9.567 12.266 28.21% (6) 4,557.2 55,900
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Aetna Vest 13.788 15.238 10.52% 16,969.9 258,580
Aetna Vest II 13.788 15.238 10.52% 14,601.3 222,487
Aetna Vest Plus 13.788 15.238 10.52% 670,325.9 10,214,130
Aetna Vest Estate Protector 13.824 15.301 10.68% 106,752.9 1,633,394
Aetna Vest Estate Protector II 10.851 10.733 (1.09%) (2) 43,643.7 468,407
Corporate Specialty Market 15.869 17.538 10.52% 1,364,494.0 23,930,267
NYSUT Individual Life 12.924 13.031 0.83% (4) 252.3 3,288
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio:
Corporate Specialty Market 13.759 19.002 38.11% 1,014,192.3 19,271,725
- ------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio:
Corporate Specialty Market 10.575 9.588 (9.33%) (3) 24,649.9 236,353
- ------------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio:
Corporate Specialty Market 12.415 13.859 11.63% 224,748.4 3,114,830
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market 14.361 16.358 13.91% 191,384.9 3,130,614
- ------------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio:
Aetna Vest 14.166 18.229 28.68% 45,254.8 824,956
Aetna Vest II 14.166 18.229 28.68% 17,282.1 315,037
Aetna Vest Plus 14.166 18.229 28.68% 582,925.1 10,626,213
Aetna Vest Estate Protector 14.203 18.305 28.88% 73,829.1 1,351,411
Aetna Vest Estate Protector II 10.825 12.417 14.71% (1) 55,697.8 691,620
Corporate Specialty Market 15.236 19.607 28.69% 1,255,443.5 24,615,341
NYSUT Individual Life 13.744 15.355 11.72% (4) 350.9 5,387
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest 18.017 23.949 32.92% 49,127.2 1,176,559
Aetna Vest II 18.017 23.949 32.92% 35,013.7 838,551
Aetna Vest Plus 18.017 23.949 32.92% 525,450.3 12,584,179
Aetna Vest Estate Protector 10.944 14.569 33.12% 77,832.2 1,133,931
Aetna Vest Estate Protector II 10.705 12.855 20.08% (3) 29,088.0 373,931
Corporate Specialty Market 13.519 17.969 32.92% 407,461.9 7,321,785
NYSUT Individual Life 10.705 15.506 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>
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>
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:
<TABLE>
<S> <C>
Aetna Ascent VP Janus Aspen Series:
Aetna Balanced VP o Aggressive Growth Portfolio
Aetna Bond VP o Balanced Portfolio
Aetna Crossroads VP o Growth Portfolio
Aetna Growth and Income VP o Worldwide Growth Portfolio
Aetna Index Plus Large Cap VP Oppenheimer Funds:
Aetna Legacy VP o Global Securities Fund
Aetna Money Market VP o Growth & Income Fund
Aetna Small Company VP o Strategic Bond Fund
Aetna Value Opportunity VP Portfolio Partners, Inc. (PPI):
Fidelity Investments Variable Insurance o PPI MFS Emerging Equities Portfolio
Products Fund: o PPI MFS Research Growth Portfolio
o Equity-Income Portfolio o PPI MFS Value Equity Portfolio
o Growth Portfolio o PPI Scudder International Growth Portfolio
o High Income Portfolio o PPI T. Rowe Price Growth Equity Portfolio
o Overseas Portfolio
Fidelity Investments Variable Insurance
Products Fund II:
o Asset Manager Portfolio
o Contrafund Portfolio
</TABLE>
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 Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP: (1) $129,523 ($22,620) $393,522 $353,120 $40,402
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP: (2) 5,079,318 (289,232) 8,936,646 7,346,946 1,589,700
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP: (3) 1,751,860 (257,828) 6,762,101 6,468,168 293,933
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP: (4) 77,190 (14,622) 473,877 453,989 19,888
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP: (5) 27,303,998 (1,392,329) 39,271,149 34,639,034 4,632,115
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP: (6) 591,905 (73,086) 3,515,589 3,029,008 486,581
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP: (7) 44,001 (8,540) 377,983 360,207 17,776
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP: (8) 940,509 (288,392) 130,650,119 130,229,304 420,815
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP: (9) 8,723 (5,056) 362,699 395,417 (32,718)
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP: (10) 298 (130) 44,207 44,499 (292)
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 1,381,671 (281,139) 8,873,609 7,588,754 1,284,855
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 1,011,596 (128,591) 2,784,250 2,517,613 266,637
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio: 0 (1,531) 31,686 34,229 (2,543)
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 141,761 (22,734) 562,478 539,506 22,972
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 329,918 (29,778) 2,518,344 2,406,138 112,206
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 1,313,979 (283,258) 12,306,538 10,124,110 2,182,428
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (142,378) 19,717,643 17,285,188 2,432,455
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 709,668 (145,407) 5,250,108 3,955,227 1,294,881
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 1,062,152 (162,916) 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 Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund: $26,573,304 ($1,085,553) $11,219,896 $7,857,508 $3,362,388
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares: 1,087,150 (148,230) 2,358,910 2,406,924 (48,014)
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 372,968 (144,720) 74,201,538 73,731,940 469,598
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 2,876,287 (185,443) 1,960,106 1,561,449 398,657
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 112,004 (11,360) 1,279,898 1,184,906 94,992
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 45,840 (3,290) 198,099 193,283 4,816
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 38,169 (3,596) 225,894 207,391 18,503
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 77,848 (4,920) 143,972 131,418 12,554
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: (1) 576,583 (128,523) 53,957,227 53,285,312 671,915
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation Fund: (2) 132,455 (57,820) 15,197,338 15,512,673 (315,335)
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 1,485,715 (163,582) 14,420,981 11,843,310 2,577,671
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 192,233 (54,856) 6,814,876 5,870,796 944,080
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 46,706 (8,253) 359,668 322,274 37,394
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 175,953 (18,257) 244,742 220,690 24,052
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 235,708 (110,146) 4,519,164 3,602,586 916,577
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (95,697) 18,445,996 17,632,824 813,172
PolicyHolders' account values
- ----------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 192,757 (52,872) 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.
/s/ KPMG LLP
Hartford, Connecticut
February 26, 1999
S-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
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) (10.8)
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. 4 TO
THE REGISTRATION STATEMENT
This Post-Effective Amendment No. 4 to Registration Statement No. 333-15817 is
comprised of the following papers and documents:
o The facing sheet.
o One prospectus consisting of 86 pages for the Flexible Premium Group
Variable Universal Life Insurance Policy for New York State United Teachers
Benefit Trust
o The undertaking to file reports
<PAGE>
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)
The following Exhibits:
1. Exhibits required by paragraph A of instructions to exhibits for Form
N-8B-2:
<TABLE>
<S> <C>
(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)
(3)(v) Restated and Amended Third Party Administration and
Transfer Agent Agreement(2)
(4) Not Applicable
(5)(i) Group Policy (70262-97)(3)
(5)(ii) Certificate (70263-97) Under Group Policy(3)
(5)(iii) Disability Benefit Rider (70264-97)(3)
(5)(iv) Accelerated Death Benefit Rider (70265-97)(3)
(5)(v) Accidental Death Benefit Rider (70266-97)(3)
(5)(vi) Accelerated Death Benefit Disclosure Statement
(DISC/NYSUT)(3)
(5)(vii) Children Insurance Rider Term Insurance (70267-97)(3)
(6)(i) Certificate of Incorporation of Aetna Life Insurance
and Annuity Company, Depositor(4)
(6)(ii) Amendment of Certificate of Incorporation of
Aetna Life Insurance and Annuity Company, Depositor(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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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) Amendment dated November 4, 1998 to 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(8)
(8)(v) 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) 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)(vii) 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)(viii) 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)(ix) 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)(x) Fifth Amendment dated as of May 1, 1997 to the Fund
Participation Agreement between Aetna Life Insurance
and Annuity Company, Variable
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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)(xi) 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)(xii) 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)(xiii) Service Agreement between Aetna Life Insurance and
Annuity Company and Fidelity Investment Institutional
Operations Company dated as of November 1, 1995(12)
(8)(xiv) Amendment dated January 1, 1997 to Service Agreement
between Aetna Life Insurance and Annuity Company and
Fidelity Investment Institutional Operations Company
dated as of November 1, 1995(9)
(8)(xv) Service Contract between Fidelity Distributors
Corporation and Aetna Life Insurance and Annuity Company
dated May 2, 1997(8)
(8)(xvi) Fund Participation Agreement among Janus Aspen Series
and Aetna Life Insurance and Annuity Company and
Janus Capital Corporation dated December 8, 1997(13)
(8)(xvii) 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)
(8)(xviii) Service Agreement between Janus Capital Corporation
and Aetna Life Insurance and Annuity Company dated
December 8, 1997(13)
(8)(xix) Fund Participation Agreement dated March 11, 1997
between Aetna Life Insurance and Annuity Company and
Oppenheimer Variable Annuity Account Funds and
Oppenheimer Funds, Inc.(14)
(8)(xx) 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 for Group Variable Universal Life Insurance
(Application for Group Policy) (70262-1997NYAPP)(3)
(10)(ii) Life Insurance Pre-APP (70272-97)(3)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(10)(iii) Group Life Insurance Application (70272-97(A)ZNY)(3)
(10)(iv) Supplement (70268-97(5/98)) to Application for Variable
Life Insurance(3)
(11) Issuance, Transfer and Redemption Procedures(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)
</TABLE>
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. 5 to Registration
Statement on Form S-6 (File No. 33-75248), as filed on July 29, 1997.
3. Incorporated by reference to Post-Effective Amendment No. 2 to Registration
Statement on Form S-6 (File No. 333-15817), as filed on April 16, 1998.
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.
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 Registration Statement on Form S-6 (File No.
333-27337), as filed on May 16, 1997.
<PAGE>
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.
In addition, a certified copy of the resolution adopted by the Depositor's
Board of Directors authorizing filings pursuant to a power of attorney as
required by Rule 478 under the Securities Act of 1933 is incorporated by
reference to Post-Effective Amendment No. 5 to Registration Statement on
Form N-4 (File No. 33-75986), as filed on April 12, 1996.
<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. 333-15817) and has duly caused this Post-Effective Amendment No. 4 to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, and the seal of the Depositor to be hereunto affixed and
attested, all in the City of Hartford, and State of Connecticut, on this 16th
day of April, 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. 4 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>
Signature Title Date
- --------- ----- ----
Thomas J. McInerney* Director and President )
- --------------------- (Principal Executive Officer) )
Thomas J. McInerney )
) April
Shawn P. Mathews* Director ) 16, 1999
- --------------------- )
Shawn P. Mathews
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Signature Title Date
- --------- ----- ----
)
Catherine H. Smith* Director and Chief Financial )
- --------------------- Officer )
Catherine H. Smith )
)
Deborah Koltenuk* Vice President, Treasurer and )
- --------------------- Corporate Controller )
Deborah Koltenuk )
By: /s/ Julie E. Rockmore
---------------------
Julie E. Rockmore
*Attorney-in-Fact
</TABLE>
<PAGE>
VARIABLE LIFE ACCOUNT B
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C> <C>
99-2 Opinion and Consent of Counsel
-----------------
99-7 Consent of Independent Auditors
-----------------
</TABLE>
[Aetna Logo] 151 Farmington Avenue
[Aetna Letterhead] Hartford, CT 06156
Julie E. Rockmore
Counsel
Law Division, RE4A
Investments & Financial Services
April 16, 1999 (860) 273-4686
Fax: (860) 273-8340
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Aetna Life Insurance and Annuity Company and its Variable Life Account B
Post Effective Amendment No. 4 to the Registration Statement on Form S-6
Prospectus Title: Flexible Premium Group Variable Universal Life
Insurance for New York State United Teachers Benefit Trust ("NYSUT Trust")
SEC File Nos.: 333-15817 and 811-4536
Gentlemen:
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")
pursuant to 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. 4 (the "Registration
Statement"). 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 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 are 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
PRICEWATERHOUSECOOPERS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
Actuarial Consulting Services
One Financial Plaza
Hartford CT 06103
Telephone (860) 240 2000
Facsimile (860) 240 2055
March 29, 1999
Re: Flexible Premium Group Variable Universal Life Insurance
of New York state United Teachers Benefit Trust
(File No. 333-15817)
Dear Sir or Madam:
I have reviewed materials provided by Aetna Life Insurance and Annuity Company
(ALIAC) regarding ALIAC's Flexible Premium Group Variable Universal Life
Insurance contract that is offered to the New York State United Teachers Benefit
Trust (the "Policy"). These materials included in the Policy and Certificate
forms, the illustrated values to be included in the prospectus, and rates
currently used by the system administering in-force certificates under this
Policy.
Based on my review of these materials, in my opinion, the illustrations of
benefits under the Policy included in the prospectus under the caption
"Illustrations of Death Benefit and Total Account Values" reflect the
assumptions stated in the illustrations and are consistent with the provisions
of the policy. Also, in my opinion, the age selected for the illustrations
fairly represents the manner in which the Policy operates.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ John B. Dinius
- -------------------------
John B. Dinius, FSA, MAAA
Consulting Actuary
Consent of Independent Auditors
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. 4 to Registration Statement
(File No. 333-15817) 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 16, 1998
