<PAGE>
AetnaVest Plus
Variable Life Account B
Prospectus
Dated: May 1, 2000
Aetna Life Insurance and
Annuity Company Administrative Office:
Home Office: Personal Service Center, MVLI
151 Farmington Avenue 350 Church Street
Hartford, CT 06103-1106 Hartford, Connecticut 06156
Telephone: (800) 334-7586 Telephone: (800) 334-7586
- --------------------------------------------------------------------------------
Flexible Premium Variable Life Insurance Policies
- --------------------------------------------------------------------------------
This Prospectus describes AetnaVest Plus, a flexible premium variable life
insurance contract (the "Policy" or "Policies"), offered by Aetna Life Insurance
and Annuity Company (the "Company", "we", "us").
In October 1998, the Company and life insurance affiliates of Lincoln
Financial Group ("Lincoln") entered into a transaction whereby nearly all of the
Company's variable life insurance business was reinsured by the Lincoln
affiliates.
The Policies feature: - flexible premium payments;
- a choice of one of two death benefit options; and
- a choice of underlying investment options.
You may allocate net premiums to subaccounts which invest in the funds
listed below. Each fund has its own investment objective. Not all funds may be
available under all Policies or in all jurisdictions. You should review each
fund's Prospectus before making your decision.
<TABLE>
<S> <C>
o Aetna Ascent VP o Janus Aspen Growth Portfolio
o Aetna Balanced VP, Inc. o Janus Aspen Worldwide Growth Portfolio
o Aetna Income Shares d/b/a Aetna Bond VP o Oppenheimer Global Securities Fund/VA
o Aetna Crossroads VP o Oppenheimer Strategic Bond Fund/VA
o Aetna Variable Fund d/b/a Aetna Growth and Income VP o Portfolio Partners, Inc. (PPI) MFS Capital
o Aetna Index Plus Large Cap VP Opportunities Portfolio (formerly PPI MFS
o Aetna Legacy VP Value Equity Portfolio)
o Aetna Variable Encore Fund d/b/a Aetna Money Market VP o Portfolio Partners, Inc. (PPI) MFS Emerging
o Fidelity Variable Insurance Products Fund (VIP) Equities Portfolio
Equity-Income Portfolio o Portfolio Partners, Inc. (PPI) MFS Research
o Fidelity Variable Insurance Products Fund II (VIP II) Growth Portfolio
Contrafund[RegTM] Portfolio o Portfolio Partners, Inc. (PPI) Scudder
o Janus Aspen Aggressive Growth Portfolio International Growth Portfolio
o Janus Aspen Balanced Portfolio o Portfolio Partners, Inc. (PPI) T. Rowe Price
Growth Equity Portfolio
</TABLE>
Net premiums allocated to the Fixed Account earn fixed rates of interest. We
determine the rates periodically, but we guarantee that they will never be less
than 4.5% a year.
This Prospectus and other information about Variable Life Account B filed with
the Securities and Exchange Commission ("Commission") can be found in the
Commission's web site at http://www.sec.gov. You can get copies of this
information by visiting the Commission's Public Reference Room or writing the
Commission's Public Reference Section, Washington, D.C. 20549-6009 and paying a
duplicating fee. You can get information on the operation of the Public
Reference Room by calling 1-800-SEC-0330.
The Commission has not approved or disapproved these securities or determined
if this Prospectus is accurate or complete. It is a criminal offense to state
otherwise.
To be valid, this Prospectus must have the current mutual funds' Prospectuses
with it. You should read the Prospectus and the attached prospectus for any
available Fund if you are considering buying a Policy or exercising elections
under a Policy. You should also keep them for future reference. You can obtain
any fund's Statement of Additional Information (SAI), which provides more
information about a fund, by calling (800) 334-7586.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Policy Summary ................................. 1
Replacements .................................. 1
Initial Choices to be Made .................... 1
Level or Varying Death Benefit ................ 1
Amount of Premium Payment ..................... 2
Selection of Funding Vehicles ................. 2
Guaranteed Death Benefit Provision ............ 3
No-Lapse Coverage Provision ................... 3
Charges and Fees .............................. 3
Policy Loans .................................. 4
Changes in Specified Amount ................... 4
The Company .................................... 4
The Separate Account ........................... 5
Allocation of Premiums ......................... 5
The Funds ..................................... 6
Mixed and Shared Funding ...................... 8
Fixed Account ................................. 9
Charges and Fees ............................... 9
Premium Charge ................................ 9
Charges and Fees Assessed Against the
Total Account Value .......................... 9
Charges and Fees Assessed Against the
Separate Account ............................. 10
Charges Assessed Against the Underlying
Funds ........................................ 11
Surrender Charge .............................. 12
Surrender Charges on Full and
Partial Surrenders ........................... 13
Policy Choices ................................. 13
Death Benefit ................................. 13
Guaranteed Death Benefit Provision ............ 13
Premium Payments .............................. 14
Initial Allocations to
Funding Options .............................. 15
Transfers Between Funding Options ............. 15
Limits on Frequent Transfers .................. 16
Telephone Transfers ........................... 16
Automated Transfers (Dollar Cost
Averaging) ................................... 17
Policy Values .................................. 17
Total Account Value ........................... 17
Accumulation Unit Value ....................... 18
Maturity Value ................................ 18
Cash Surrender Value .......................... 18
Policy Rights .................................. 20
Partial Surrenders ............................ 20
Avoiding Loss of Coverage ..................... 20
No-Lapse Coverage Provision ................... 20
Reinstatement of a Lapsed Policy .............. 21
Policy Loans: Preferred and Nonpreferred ...... 21
Policy Changes
Increases .................................... 22
Decreases .................................... 23
Death Benefit Option Change ................... 23
Right to Examine the Policy ................... 23
Payment of Death Benefit ....................... 24
Policy Settlement .............................. 24
Settlement Options ............................ 24
Calculation of Settlement Payments on a
Variable Basis ............................... 26
Special Plans .................................. 27
Directors and Officers ......................... 28
Additional Information ......................... 31
Reports to Policy Owners ...................... 31
Right to Instruct Voting of Fund Shares ....... 31
Disregard of Voting Instructions .............. 31
State Regulation .............................. 32
Legal Matters and Proceedings ................. 32
The Registration Statement .................... 32
Distribution of the Policies .................. 32
Records and Accounts .......................... 33
Independent Auditors .......................... 33
Tax Matters .................................... 33
General ....................................... 33
Federal Tax Status of the Company ............. 33
Life Insurance Qualification .................. 34
General Rules ................................. 34
Modified Endowment Contracts .................. 35
Diversification Standards ..................... 36
Investor Control .............................. 36
Other Tax Considerations ...................... 36
Withholding ................................... 37
Miscellaneous Policy Provisions ................ 37
The Policy .................................... 37
Payment of Benefits ........................... 37
Age and Sex ................................... 37
Incontestability .............................. 38
Suicide ....................................... 38
Coverage Beyond Maturity ...................... 38
Protection of Proceeds ........................ 38
Nonparticipation .............................. 38
Illustrations of Death Benefit, Total Account
Values and Cash Surrender Values .............. 39
Financial Statements of the Separate Account S-1
Financial Statements of the Company ............ F-1
</TABLE>
This Prospectus does not constitute an offer in any jurisdiction where
prohibited. No dealer, salesman or other person is authorized to give any
information or make any representation in connection with this offering other
than those contained in this Prospectus, or other sales material authorized by
the Company and if given or made, such other information or representations
must not be relied upon.
The purpose of the policy is to provide insurance protection. Life insurance is
a long-term investment. Owners should consider their need for insurance
coverage and the policy's long-term investment potential. We do not claim that
the policy is in any way similar or comparable to an investment in a mutual
fund.
<PAGE>
Policy Summary
This section is an overview of key Policy features for AetnaVest Plus.
(Regulations in your state may vary the provisions of your own Policy.) Your
Policy is a flexible premium variable life insurance policy, under which
flexible premium payments are permitted and the death benefit and policy values
may vary with the investment performance of the funding option(s) selected. Its
value may change on a:
1) fixed basis;
2) variable basis; or a
3) combination of both fixed and variable basis.
Review your personal financial objectives and discuss them with a qualified
financial counselor before you buy a variable life insurance policy. This
Policy may, or may not, be appropriate for your individual financial goals. The
value of the Policy and, under one option, the death benefit amount depend on
the investment results of the funding options you select.
At all times, your Policy must qualify as life insurance under the Internal
Revenue Code of 1986 (the "Code") to receive favorable tax treatment under
Federal law. If these requirements are met, you may benefit from favorable
federal tax treatment. The Company reserves the right to return your premium
payment if it results in your Policy's failing to meet federal tax law
requirements.
Replacements
It may not be advantageous to replace insurance or supplement an existing
flexible premium variable life insurance policy with this Policy. This
Prospectus and prospectuses of the Funds should be read carefully to understand
the Policy being offered.
Initial Choices to be Made
The Policy Owner (the "Owner" or "you") is the person named in the "policy
specifications" who has all of the Policy ownership rights. If no Owner is
named, the Insured (the person whose life is insured under the Policy) will be
the Owner of the Policy. You, as the Owner, have four important choices to make
when the Policy is first purchased. You need to choose:
1) either the level or varying death benefit option;
2) the amount of premium you want to pay;
3) the amount of your net premium payment to be placed in each of the funding
options you select. The net premium payment is the balance of your
premium payment that remains after certain charges are deducted from it;
4) if you want the guaranteed death benefit provision, and to what age (see
"Guaranteed Death Benefit Provision.")
Level or Varying Death Benefit
The death benefit is the amount the Company pays to the beneficiary(ies) when
the Insured dies. Before we pay the beneficiary(ies), any outstanding loan
account balances or outstanding amounts due are subtracted from the death
benefit. We calculate the death benefit payable, as of the date the Insured
died.
1
<PAGE>
If you choose the level death benefit option, the death benefit will be the
greater of:
1) the "specified amount" in effect for the Policy at the time of the
Insured's death (The initial specified amount may be found on the
Policy's specification page); or
2) the applicable percentage of the "total account value" (The total account
value is the total of the balances in the Fixed Account and the separate
account minus any outstanding Loan Account amounts).
If you choose the varying death benefit option, the death benefit will be the
greater of:
1) the specified amount plus the total account value; or
2) the applicable percentage of the total account value.
See "Policy Choices."
If you have borrowed against your Policy or surrendered a portion of your
Policy, the Loan Account balance and any surrendered amount will reduce your
initial death benefit. See "Policy Choices."
You may borrow within described limits against the Policy. You may surrender
the Policy in full or withdraw part of its value. A surrender charge is applied
if the Policy is surrendered totally.
Amount of Premium Payment
When you first buy your Policy, you must decide how much premium to pay.
Premium payments may be changed within certain limits. See "Policy
Choices--Premium Payments." If your Policy lapses because your monthly
deduction is larger than the "cash surrender value" (total account value minus
the surrender charge and the amount necessary to repay any loans), you may
reinstate your Policy. See "Policy Rights--Reinstatement of a Lapsed Policy."
You may use the value of the Policy to pay the premiums due and continue the
Policy in force if sufficient values are available for premium payments. Be
careful; if the investment options you choose do not do as well as you expect,
there may not be enough value to continue the Policy in force without more
premium payments. Charges against Policy values for the cost of insurance
increase as the Insured gets older. See "Charges and Fees".
When you first receive your Policy you will have 10 days to look it over (more
in some states). This is called the right-to-examine time period. Use this time
to review your Policy and make sure it meets your needs. During this time
period, your initial premium payment will be allocated to the funding options
you initially select. If you then decide you do not want your Policy, you will
receive a refund. See "Policy Rights--Right to Examine the Policy."
Selection of Funding Vehicles
This Prospectus focuses on the Separate Account investment information that
makes up the variable part of the Policy. If you put money into the variable
funding options, you take all the investment risk on that money. This means
that if the mutual fund(s) you select go up in value, the value of your Policy,
net of charges and expenses, also goes up. If those Funds lose value, so does
your Policy. See "Allocation of Premiums."
You must choose the sub-accounts in which you want to place each net premium
payment. Each sub-account invests in shares of a certain Fund. A sub-account is
not guaranteed and will increase or decrease in value according to the
particular Fund's investment performance.
2
<PAGE>
You may also choose to place your net premium payment or part of it into the
Fixed Account. Net premium payments put into the Fixed Account become part of
the Company's General Account, do not share the investment experience of the
Separate Account and have a guaranteed minimum interest rate of 4.5% per year.
For additional information on the Fixed Account, see "Allocation of
Premiums--Fixed Accounts."
Guaranteed Death Benefit Provision
You may elect to have a guaranteed death benefit provision to age 80 or age
100. This means that your Policy will remain in force even though the cash
value is not enough to pay the current monthly deductions as long as the
guaranteed death benefit premium test is met. Each year the Company will
determine that the sum of premiums to that point in time is sufficient to
support the guaranteed death benefit provision. Your total premiums paid to
date minus the partial surrenders must be equal to the required monthly
guaranteed death benefit premium times the number of months that have passed
since the original policy issue date. See "Policy Choices--Guaranteed Death
Benefit Provision."
No Lapse Coverage Provision
Your Policy will not terminate during the first five years after the initial
issue date or the issue date of any increase in the specified amount if:
1) the sum of the basic premiums for each Policy month from the issue date,
along with that month's basic premium; plus
2) any partial surrenders; plus
3) any increase in the loan account value within that same five years,
equals or is more than the sum of premiums paid.
Charges and Fees
A deduction, currently 3.5%, of each premium payment will be made. Monthly
deductions are made for administrative expenses ($20 per month for the first
Policy Year and $7 per month afterwards) and the cost of insurance along with
any riders that are placed on your Policy. Daily deductions are subtracted from
the separate account for mortality and expense risk. At this time the charge is
at an annual rate of .70%. We reserve the right to change this charge but it
will never exceed .90% annually. Currently, we deduct from the separate account
a daily administrative charge for the administration and maintenance of the
Policy. This charge is at an annual rate of .30%. It will never exceed .50%
annually.
Each Fund has its own management fee charge also deducted daily. Investment
results for the Funds you choose will be affected by the fund management
charges and other expenses. The table in section "Charges and Fees--Charges
Assessed Against the Underlying Funds," shows you the charges and other
expenses currently in effect for each Fund.
At any time, you may make transfers between funding options without charge.
Within 45 days after each policy anniversary, you may also transfer to the
separate account $500 or, if greater, 25% of the Fixed Account value. The
Company may increase this limit in the future.
If you surrender your Policy, in full or in part, within the first 15 policy
years, a surrender charge will be deducted from the amount paid to you. The
initial surrender charge is based on the specified amount and depends on the
Insured's age, risk class and, in most states, the sex of the
3
<PAGE>
Insured. This surrender charge will remain the same for policy years 1-5. For
policy years 6 through 15 this charge reduces on a monthly basis to zero.
For partial surrenders, the surrender charge is imposed in proportion to the
total of the account value less full surrender charges. A charge of the lesser
of $25 or 2% of the net surrender payment will be made against the total
account value.
If you surrender your Policy within the first 15 years after an increase in the
specified amount, a surrender charge will also be imposed which will be 70% of
what the surrender charge would be on a new policy with that specified amount.
This charge will also apply for the same time frame as stated previously. If
the specified amount is decreased within the first 15 policy years, the
surrender charge will remain the same. See the "Charges and Fees" section
appearing later in this prospectus.
Policy Loans
If you decide to borrow against your Policy, interest will be charged to the
Loan Account. Currently, the interest rate on loans accrues at an annual rate
of 5.5%, or, if greater, the monthly average of the composite yield on
corporate bonds as published by Moody's Investors Service, Inc. for the
calendar month ending two months before the Policy Anniversary month.
There are two types of policy loans: nonpreferred (those taken within the first
ten policy years); and preferred (those taken in the eleventh policy year and
beyond).
Annual interest is credited on the loan account value at the same rate interest
is charged, for preferred loans, and at 2% per year less for nonpreferred
loans. See "Policy Rights--Policy Loans: Preferred and Nonpreferred.
Changes in Specified Amount
Within certain limits, you may decrease or, with satisfactory evidence of
insurability, increase the specified amount. A request to increase the
specified amount may be made beginning with the second Policy Year. A request
to decrease the specified amount may be made beginning with the sixth Policy
Year. Currently, the minimum specified amount is $100,000. Such changes will
affect other aspects of your Policy. See page 22.
The Company
Aetna Life Insurance and Annuity Company is a stock life insurance company
organized under the insurance laws of the State of Connecticut in 1976. Through
a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance
Company (formerly Participating Annuity Life Insurance Company organized in
1954). The Company is engaged in the business of issuing life insurance
policies and 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 Life Account
C and Variable Annuity Accounts B, C and G (separate accounts of the Company
registered as unit investment trusts), and Variable Annuity Account I (a
separate account of Aetna Insurance Company of America, registered as a unit
investment trust). Additionally, the Company is registered as an investment
adviser under the
4
<PAGE>
Investment Advisers Act of 1940, and as such, is the investment adviser for
Portfolio Partners, Inc. The Company is also the depositor of Variable Life
Accounts B and C and Variable Annuity Accounts B, C and G.
The Lincoln National Life Insurance Company ("Lincoln") and its affiliates
perform certain administrative functions relating to the Policies, and maintain
books and records necessary to operate and administer the Policies.
The Separate Account
Variable Life Account B is the separate account providing variable options to
fund the Policy. Amounts allocated to the separate account are invested in the
Funds. Each of the Funds is an open-end management investment company (mutual
fund) whose shares are purchased by the separate account to fund the benefits
provided by the Policy. The Funds currently available under the separate
account, including their investment objectives and their investment advisers,
are described briefly in this Prospectus. Complete descriptions of the Funds'
investment objectives and restrictions and other material information relating
to an investment in the Funds are contained in the prospectuses for each of the
Funds which are delivered with this Prospectus.
Variable Life Account B was established pursuant to a June 18, 1986 resolution
of the Board of Directors of the Company. Under Connecticut insurance law, the
income, gains or losses of the separate account are credited without regard to
the other income, gains or losses of the Company. These assets are held for the
Company's variable life insurance policies. Any and all distributions made by
the Funds with respect to shares held by the separate account will be
reinvested in additional shares at net asset value. The assets maintained in
the separate account will not be charged with any liabilities arising out of
any other business conducted by the Company. The Company is, however,
responsible for meeting the obligations of the Policy to the policyowner.
No stock certificates are issued to the separate account for shares of the
Funds held in the separate account. Ownership of Fund shares is documented on
the books and records of the Funds and of the Company for the separate account.
The separate account is registered with the Commission as a unit investment
trust under the Investment Company Act of 1940 ("1940 Act") and meets the
definition of separate account under the federal securities laws. Such
registration does not involve any approval or disapproval by the SEC of the
separate account or the Company's management or investment practices or
policies. The Company does not guarantee the separate account's investment
performance.
Allocation of Premiums
You may allocate your net premiums to one or more of the subaccounts currently
available through the separate account in connection with this Policy or to the
Fixed Account (part of the Company's General Account). Each subaccount invests
in a Fund. Not all Funds are available under all Policies or in all
jurisdictions. In addition, the Company may add, withdraw or substitute Funds,
subject to the conditions in the Policy and in compliance with regulatory
requirements. Substitute Funds may
5
<PAGE>
have higher charges than the Funds being replaced. We reserve the right to
limit the total number of Funds you may elect to 17 over the lifetime of the
Policy.
The investment results of the Funds are likely to differ significantly and
there is no assurance that any of the Funds will achieve their respective
investment objectives. Shares of the Funds will rise and fall in value and you
could lose money by investing in the Funds. Shares of the Funds are not bank
deposits and are not guaranteed, endorsed or insured by any financial
institutions, the Federal Deposit Insurance Corporation, or any other
government agency. Unless otherwise noted, all Funds are diversified, as
defined under the 1940 Act. Refer to the Funds' prospectuses for additional
information. Fund prospectuses may be obtained, free of charge, from our
Administrative Office at the address and phone number listed on the cover of
this Prospectus, or by contacting the SEC Public Reference Room. Orders for the
purchase of Fund shares may be subject to acceptance by the Fund. We reserve
the right to reject, without prior notice, any allocation to a sub-account if
the sub-account's investment in the corresponding Fund is not accepted by the
Fund for any reason.
Each fund described below is an investment vehicle for one or more insurance
company separate accounts. A given fund may have a similar investment objective
and principal investment strategy to those for another mutual fund managed by
the same investment adviser or subadviser. However, because of timing of
investments and other variables we cannot guarantee that there will be any
correlation between the two investments. Even though the management strategy
and the objectives of the funds are simular, the investment results may vary.
The Funds
The investment results of the mutual funds (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. Investments in the
funds are not bank deposits and are not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government agency. Except as noted,
all funds are diversified, as defined under the Investment Company Act of 1940.
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)
6
<PAGE>
o Aetna Generation Portfolios, Inc.--Aetna Ascent VP seeks to provide capital
appreciation. The Portfolio is managed 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 managed 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 managed for
investors who generally have an investment horizon exceeding five years and
who have a low level of risk tolerance.(1)
o Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP seeks to
outperform the total return performance of the Standard & Poor's 500
Composite Index (S&P 500), while maintaining a market level of risk.(1)
o Fidelity Variable Insurance Products Fund Equity-Income Portfolio seeks
reasonable income. The fund will also consider the potential for capital
appreciation. The fund seeks a yield which exceeds the composite yield on
the securities comprising the S&P 500.(2)
o Fidelity Variable Insurance Products Fund II--Contrafund[RegTM] 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)(a)
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, 1999, they ranged from
approximately $170 million to $37 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)
7
<PAGE>
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. (PPI)--MFS Capital Opportunities Portfolio (formerly
known as PPI MFS Value Equity Portfolio) seeks capital appreciation.(5)(a)
o Portfolio Partners, Inc. (PPI)--MFS Emerging Equities Portfolio seeks
long-term growth of capital.(5)(a)
o Portfolio Partners, Inc. (PPI)--MFS Research Growth Portfolio seeks long-term
growth of capital and future income.(5)(a)
o Portfolio Partners, Inc. (PPI)--Scudder International Growth Portfolio seeks
long-term growth of capital.(5)(b)
o Portfolio Partners, Inc. (PPI)--T. Rowe Price Growth Equity Portfolio seeks
long-term capital growth, and secondarily, increasing dividend income.(5)(c)
Investment Adviser:
(1) Investment Adviser: Aeltus Investment Management, Inc.
(2) Investment Adviser: Fidelity Management & Research Company
(a) Fidelity Management & Research (U.K.) Inc. (subadviser)
Fidelity Management & Research Far East Inc. (subadviser)
Fidelity Investments Japan Limited (subadviser)
(3) Investment Adviser: Janus Capital Corporation
(4) Investment Adviser: OppenheimerFunds, Inc.
(5) Investment Adviser: Aetna Life Insurance and Annuity Company
(a) Massachusetts Financial Services Company (subadviser)
(b) Scudder Kemper Investments, Inc. (subadviser)
(c) T. Rowe Price Associates, Inc. (subadviser)
Some of the above Funds may use instruments known as derivatives as part of
their investment strategies, as described in their respective prospectuses. The
use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of
leverage in connection with derivatives can also increase risk of losses. See
the current prospectuses of the Funds for a discussion of the risks associated
with an investment in those Funds.
More comprehensive information, including a discussion of potential risks, and
more complete information about their investment policies and restrictions is
found in the current prospectus for each Fund which is distributed with and
accompanies this Prospectus. You should read the Fund prospectuses and consider
carefully, and on a continuing basis, which Fund or combination of Funds is
best suited to your long-term investment objectives. Additional prospectuses
and Statements of Additional Information for each of the Funds can be obtained
from the Company's Administrative Office at the address and telephone number
listed on the cover of this Prospectus.
Mixed and Shared Funding
Shares of the Funds are available to insurance company separate accounts which
fund both variable annuity contracts and variable life insurance policies,
including the Policy described in this Prospectus. Because Fund shares are
offered to separate accounts of both affiliated and
8
<PAGE>
unaffiliated insurance companies, it is conceivable that, in the future, it may
not be advantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in these Funds simultaneously, since the
interests of such policyowners or contractholders may differ. Although neither
the Company nor the Funds currently foresees any such disadvantages either to
variable life insurance or to variable annuity policyholders, each Fund's Board
of Trustees/Directors has agreed to monitor events in order to identify any
material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken in response. If such a conflict occurs,
one of the separate accounts might withdraw its investment in a Fund. This
might force that Fund to sell portfolio securities at disadvantageous prices.
Fixed Account
The Fixed Account is a fixed funding option available under the Policy that
guarantees principal and a minimum interest rate of 4.5% per year. The Company
assumes the risk of investment gain or loss. The investment gain or loss of the
separate account or any of the Funds does not affect the Fixed Account value.
The Fixed Account is secured by the general assets of the Company, which
include all assets other than those held in separate accounts sponsored by the
Company or its affiliates. The Company will invest the assets of the Fixed
Account in those assets chosen by the Company, as allowed by applicable law.
Investment income of such Fixed Account assets will be allocated by the Company
between itself and those policies participating in the Fixed Account.
Amounts held in the Fixed Account are guaranteed and will be credited with
interest at rates of not less than 4.5% per year. Credited interest rates
reflect the Company's return on Fixed Account invested assets and the
amortization of any realized gains and/or losses which the Company may incur on
these assets.
Interests in the Fixed Account have not been registered with the Commission in
reliance upon exemptions under the Securities Act of 1933, as amended. However,
disclosure in this Prospectus regarding the Fixed Account may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of the statements. Disclosure in this
Prospectus relating to the Fixed Account has not been reviewed by the
Commission.
Charges & Fees
Premium Charge
A deduction, called the premium charge, currently 3.5% of each premium payment
and guaranteed to be no higher than 6%, will be made to cover average
applicable state premium taxes (ranging up to 4%) as well as administrative
expenses and federal income tax liabilities.
Charges and Fees Assessed Against the Total Account Value
A monthly deduction is made from the total account value. The monthly deduction
includes the cost of insurance attributable to the basic insurance coverage and
any charges for supplemental riders or benefits. The cost of insurance depends
on the attained age, risk class of the Insured, the specified amount of the
Policy and in most states, sex of the Insured. The attained age is the issue
age of the Insured increased by the number of elapsed policy years.
9
<PAGE>
Once a Policy is issued, the monthly deductions will be charged as of the issue
date, even if the issue date is earlier than the date the application is signed
(see "Premium Payments"). The issue date is the effective date of initial
coverage. Coverage is conditional on payment of the first premium, if required,
and issue of the Policy as provided in the application. The date of issue and
the effective date for any change in coverage will be the date of coverage
change that is found in your supplemental policy specifications. If the
Policy's issuance is delayed due to underwriting requirements, the charges will
not be assessed until the underwriting is complete and the application for the
policy is approved. Cost of insurance charges will be in amounts based on the
specified amount of the Policy issued, even if the temporary insurance coverage
received during the underwriting period is for a lesser amount. If we decline
an application, we will refund the full premium payment made.
The monthly deduction also includes a monthly administrative expense charge of
$20 during the first policy year and $7 during subsequent policy years. This
charge is for items such as premium billing and collection, policy value
calculation, confirmations and periodic reports and will not exceed our costs.
The monthly deduction is deducted proportionately from each funding option, if
more than one is used. This is accomplished by liquidating accumulation units
and withdrawing the value of the liquidated accumulation units from each
funding option in the same proportion as their respective values have to your
Fixed Account and separate account values. The monthly deduction is
made as of the same day each month, beginning with the Issue Date. This day is
called the monthly deduction day.
If the Policy's cash surrender value is not sufficient to cover the current
monthly deduction, you will be notified by the Company, and a 61-day period
called the grace period will begin. The Policy will lapse without value at the
end of the 61-day period, unless a sufficient payment described in the
notification letter is received by the Company.
Charges and Fees Assessed Against the Separate Account
The Company deducts a daily charge from the assets of Variable Life Account B
for mortality and expense risk assumed by it in connection with the Policy.
This charge is currently equal to an annual rate of 0.70% of the average daily
net assets of the separate account attributable to the Policies. The mortality
and expense risk charge is assessed to compensate the Company for assuming
certain mortality and expense risks under the Policies.
The Company reserves the right to increase the mortality and expense risk
charge if it believes that circumstances have changed so that current charges
are no longer adequate. In no event will the charge exceed 0.90% of average
daily net assets on an annual basis.
The mortality risk assumed is that insureds, as a group, may live for a shorter
period of time than estimated and, therefore, the cost of insurance charges
specified in the Policy will be insufficient to meet actual claims. The expense
risk assumed is that other expenses incurred in issuing and administering the
Policies and operating the separate account will be greater than the charges
assessed for such expenses.
The Company also deducts a daily administrative charge equivalent on an annual
basis to 0.30% of the average daily net assets of Variable Life Account B
attributable to the Policies to compensate the Company for expenses associated
with the administration and maintenance of the Policy. These types of expenses
are described above in connection with the monthly administrative charge. The
10
<PAGE>
daily administrative charge and the monthly administrative charge work together
to cover the Company's administrative expenses. In later years of the Policy,
the revenue collected from the daily asset-based charge grows with the total
account value to cover increased expenses from account-based transactional
expenses. The charge is guaranteed not to exceed 0.50% of the average daily net
assets of the separate account attributable to the Policies on an annual basis.
Charges Assessed Against the Underlying Funds
The following table illustrates the investment advisory fees, other expenses
and total expenses of the Funds as a percentage of average net assets based on
figures for the year ended December 31, 1999 unless otherwise indicated.
Expenses of the Funds are not fixed or specified under the terms of the
Policies, and actual expenses may vary.
<TABLE>
<CAPTION>
Total Fund Net Fund
Annual Annual
Expenses Expenses
Investment Without Total After
Advisory Other Waivers or Waivers and Waivers or
Fund Name Fees(1) Expenses Reductions Reductions Reductions
--------- ------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP(2) 0.60% 0.14% 0.74% 0.00% 0.74%
Aetna Balanced VP, Inc. 0.50% 0.09% 0.59% -- 0.59%
Aetna Bond VP 0.40% 0.09% 0.49% -- 0.49%
Aetna Crossroads VP(2) 0.60% 0.14% 0.74% 0.04% 0.70%
Aetna Growth and Income VP 0.50% 0.08% 0.58% -- 0.58%
Aetna Index Plus Large Cap VP(2) 0.35% 0.10% 0.45% 0.00% 0.45%
Aetna Legacy VP(2) 0.60% 0.15% 0.75% 0.10% 0.65%
Aetna Money Market VP 0.25% 0.09% 0.34% -- 0.34%
Fidelity VIP Equity-Income Portfolio(3) 0.48% 0.09% 0.57% -- 0.57%
Fidelity VIP II Contrafund[RegTM] Portfolio(3) 0.58% 0.09% 0.67% -- 0.67%
Janus Aspen Aggressive Growth Portfolio(4) 0.65% 0.02% 0.67% 0.00% 0.67%
Janus Aspen Balanced Portfolio(4) 0.65% 0.02% 0.67% 0.00% 0.67%
Janus Aspen Growth Portfolio(4) 0.65% 0.02% 0.67% 0.00% 0.67%
Janus Aspen Worldwide Growth Portfolio(4) 0.65% 0.05% 0.70% 0.00% 0.70%
Oppenheimer Global Securities Fund/VA 0.67% 0.02% 0.69% -- 0.69%
Oppenheimer Strategic Bond Fund/VA 0.74% 0.04% 0.78% -- 0.78%
PPI MFS Capital Opportunities Portfolio(5) 0.65% 0.25% 0.90% 0.00% 0.90%
PPI MFS Emerging Equities Portfolio(5) 0.67% 0.13% 0.80% 0.00% 0.80%
PPI MFS Research Growth Portfolio(5) 0.70% 0.15% 0.85% 0.00% 0.85%
PPI Scudder International Growth Portfolio(5) 0.80% 0.20% 1.00% 0.00% 1.00%
PPI T. Rowe Price Growth Equity Portfolio(5) 0.60% 0.15% 0.75% 0.00% 0.75%
</TABLE>
(1) Certain of the fund advisers reimburse the company for administrative costs
incurred in connection with administering the funds as variable funding
options under the contract. These reimbursements are generally paid out of
the Investment Advisory Fees and are not charged to investors.
(2) The investment adviser is contractually obligated through December 31, 2000
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 fund's "Total Fund Annual Expenses
Without Waivers or Reductions" do not exceed the percentage reflected
under "Net Fund Annual Expenses After Waivers or Reductions."
(3) A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, through arrangements with certain
funds', or the investment adviser on
11
<PAGE>
behalf of certain funds', custodian, credits realized as a result of
uninvested cash balances were used to reduce a portion of each applicable
fund's expenses. These credits are not included under Total Waivers and
Reductions. If these credits had been included, the amounts shown under Net
Fund Annual Expenses After Waivers or Reductions presented in the table
would have been 0.56% for Fidelity VIP Equity-Income Portfolio and 0.65% for
Fidelity VIP II Contrafund[RegTM] Portfolio.
(4) Expenses are based upon expenses for the fiscal year ended December 31,
1999, restated to reflect a reduction in the management fee for Aggressive
Growth, Balanced, Growth and Worldwide Growth Portfolios. All expenses are
shown without the effect of expense offset arrangements.
(5) The investment adviser has agreed to reimburse the portfolios for expenses
and/or waive its fees, so that, through at least April 30, 2001, 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 further details on each Fund's expenses, please refer to that Fund's
prospectus.
Surrender Charge
If you surrender your Policy (in whole or in part) a surrender charge may
apply, as described below.
This charge is retained by the Company and is imposed in part as a deferred
sales charge and in part to enable the Company to recover certain first year
administrative costs. The maximum portion of the surrender charge applied to
reimburse the Company for sales and promotional expense is 30% of the first
year's basic premium. (Any surrenders may result in tax implications. See "Tax
Matters.")
The initial surrender charge, as specified in your Policy, is based on the
specified amount. It also depends on the Insured's age, risk class and in most
states, sex of the Insured (except for group arrangements described under
"Special Plans"). Once determined, the surrender charge will remain the same
for five years following the issue date. Thereafter, it declines monthly so
that beginning sixteen years after the issue date (assuming no increases in the
specified amount) the surrender charge will be zero.
If you increase the specified amount, a new surrender charge will be
applicable, in addition to the then existing surrender charge. This charge will
be determined based on the Insured's attained age, risk class, and in most
states, sex of the Insured. The surrender charge applicable to the increase
will be 70% of the surrender charge on a new policy whose specified amount
equals the amount of the increase, and will cover administrative expenses. The
additional surrender charge will also remain constant for five years from the
start of the policy year in which the increase occurs, and will decrease to
zero by the beginning of the sixteenth year.
If you decrease the specified amount while the surrender charge applies, the
surrender charge will remain the same.
Based on its actuarial determination, the Company does not anticipate that the
surrender charge will cover all sales and administrative expenses which the
Company will incur in connection with the Policy. Any such shortfall, including
but not limited to payment of sales and distribution expenses, would be charged
to and paid by the Company.
12
<PAGE>
Surrender Charges on Full and Partial Surrenders
Full Surrender: All applicable surrender charges are imposed.
Partial Surrender: A proportional percentage of all surrender charges is
imposed. The proportional percentage is the amount of the net partial surrender
divided by the sum of the fixed account value and the separate account value
less full surrender charges. When a partial surrender is made, any applicable
remaining surrender charges will be reduced in the same proportion. A
transaction charge of $25 or 2% of the amount of the net surrender payment,
whichever is less, will be made against the total account value. (See "Partial
Surrenders.")
Note: The surrender charge will vary between 41% and 100% of one year's basic
annual premium, depending on the Insured's age, risk class and in most states,
sex of the Insured.
Policy Choices
When you buy a Policy, you make four important choices:
1) Which one of the two death benefit options you would like;
2) Whether you want the guaranteed death benefit provision, and to what age;
3) The amount of premium you intend to pay; and
4) The way your premiums will be allocated to the Funds and/or the Fixed
Account.
Each of these choices is described in detail below.
Death Benefit
At the time of purchase, you must choose between the two available death
benefit options. The amount payable under either option will be determined as
of the date of the Insured's death.
Under Option 1, the death benefit will be the greater of the specified amount
(a minimum of $100,000 on the date of this Prospectus), or the applicable
percentage of the total account value. The percentage is 250% through age 40
and decreases yearly to 100% at age 100. Option 1 generally provides a level
death benefit.
Under Option 2, the death benefit will be the greater of the specified amount
(a minimum of $100,000 on the date of this Prospectus), plus the total account
value, or the applicable percentage (described above) of the total account
value. Option 2 provides a varying death benefit which increases or decreases
over time, depending on the amount of premium paid and the investment
performance of the underlying funding options you choose.
Under both Option 1 and Option 2, the death benefit may be affected by partial
surrenders. The death benefit for both options will be reduced by the amount
necessary to repay any loans in full.
Guaranteed Death Benefit Provision
The guaranteed death benefit provision assures that, as long as the guaranteed
death benefit premium test as described below is met, the Policy will stay in
force even if the cash value is insufficient to cover the current monthly
deductions. The guaranteed death benefit premium is a specified amount of
premium required to keep the Policy in force to either age 80 or age 100.
13
<PAGE>
The guaranteed death benefit provision must be selected on the application. It
may not be available to all risk classes and is only available in those states
where it has been approved. (Note: not available in New York.) The guaranteed
death benefit provision is available to age 80 or to age 100.
We will test annually to determine if the sum of all premiums paid to date is
sufficient to support the guaranteed death benefit provision. In order for the
guaranteed death benefit provision to be in effect, the sum of all premiums
paid less partial surrenders must be greater than or equal to the required
monthly guaranteed death benefit premium times the number of months elapsed
since the policy's issue date.
However, if these premiums are not sufficient, the policy owner will be
notified and given two months (61 days in New Jersey) to pay the amount needed.
If the guaranteed death benefit provision to age 100 had been in place, and the
amount needed is not received within the two-month period; the guaranteed death
benefit provision to age 80 will be substituted, if there is enough premium; if
not the guaranteed death benefit provision to age 100 will terminate. If the
guaranteed death benefit provision to age 80 had been in place and the amount
needed is not received within the two-month period (61 days in New Jersey), the
guaranteed death benefit provision will terminate.
If a guaranteed death benefit provision is terminated it may not be reinstated.
Increases, decreases, partial surrenders, and option changes may affect the
guaranteed death benefit premium. These events and loans may also affect the
Policy's ability to remain in force even if the cumulative annual guaranteed
death benefit provision test has been met.
Premium Payments
During the first five policy years, payment of the basic premium assures that
the Policy will remain in force for that five year period, as long as there are
no surrenders or loans taken during that time. The basic premium is stated in
the Policy. If basic premiums are not paid, or there are surrenders or loans
taken during the first five policy years, the Policy will lapse if the cash
surrender value is less than the next monthly deduction.
Basic premiums are current if premiums paid, minus loans and minus partial
surrenders, are greater than or equal to the basic premium (expressed as a
monthly amount) multiplied by the number of months the Policy has been in
force.
After the first five policy years, your Policy will not lapse as long as the
Policy's cash surrender value is sufficient to cover the next monthly
deduction.
Planned premiums are those premiums you choose to pay on a scheduled basis. We
will bill you annually, semiannually, or quarterly, or at any other agreed-upon
frequency. Pre-authorized automatic monthly check payments may also be
arranged.
Additional premiums are any premiums you pay in addition to planned premiums.
Payment of basic premiums, planned premiums, or additional premiums in any
amount will not, except as noted above, guarantee that your Policy will remain
in force. Failure to pay planned premiums or additional premiums will not
necessarily cause your Policy to lapse. Not paying your planned premiums can,
however, cause the guaranteed death benefit provision to terminate. (See
"Guaranteed Death Benefit Provision.")
You may increase your planned premium at any time by submitting a written
notice to us or by paying additional premiums, except that:
14
<PAGE>
o We may require evidence of insurability if the additional premium or the new
planned premium during the current policy year would increase the difference
between the death benefit and the total account value. If satisfactory
evidence of insurability is requested and not provided, we will refund the
increase in premium without interest and without participation of such
amounts in the underlying funding options.
o In no event may the total of all premiums paid exceed the then-current
maximum premium limitations established by federal law for a Policy to
qualify as life insurance. (See "Tax Matters.") If, at any time, a premium
is paid which would result in total premiums exceeding such maximum premium
limitation, we will only accept that portion of the premium which will make
total premiums equal the maximum. Any part of the premium in excess of that
amount will be returned or applied as otherwise agreed and no further
premiums will be accepted until allowed by the then-current maximum premium
limitations prescribed by law.
o If you make a sufficient premium payment when you apply for a Policy, and
have answered favorably certain questions relating to the Insured's health,
a "temporary insurance agreement" in the amount applied for (subject to
stated maximum) will be provided.
o After the first premium payment, all premiums must be sent directly to our
Administrative Office and will be deemed received when actually received at
the Administrative Office. Your premium payments will be allocated as you
have directed, and amounts allocated to the Funds will be credited to your
Policy at the accumulation unit value as of the next valuation period after
each payment is received in the Administrative Office.
o You may reallocate your future premium payments at any time free of charge.
Any reallocation will apply to premium payments made after you have received
written verification from us.
We may backdate a Policy, upon request and under limited circumstances, by
assigning an issue date earlier than the date the application is signed but no
earlier than six months prior to state approval of the Policy. Backdating may
be desirable, for example, so that you can purchase a particular policy
specified amount for lower cost of insurance rates based on a younger insurance
age. For a backdated Policy, you must pay the minimum premium payable for the
period between the issue date and the date the initial premium is invested in
the separate account. Backdating of your Policy will not affect the date on
which your premium payments are credited to the Separate Account and you are
credited with accumulation units. You cannot be credited with accumulation
units until your net premium is actually deposited in the separate account.
(See "Policy Values--
Total Account Value.")
Initial Allocations to Funding Options
At purchase, you must decide how to allocate your net premiums among the Funds
and/or the Fixed Account. Net premiums must be allocated in whole percentages.
Transfers Between Funding Options
Up until the maturity date, you may transfer policy values from one Fund to
another at any time, or from Variable Life Account B to the Fixed Account. And,
within the 45 days after each policy anniversary, you may also transfer a
portion of the fixed account value to one or more Funds before the maturity
date. This type of transfer is allowed only once in the 45-day period after the
policy anniversary and will be effective as of the next valuation period after
your request is received in good order at the Administrative Office. The amount
of such transfer cannot exceed the greater of
15
<PAGE>
(a) 25% of the fixed account value, or (b) $500. If the fixed account value is
less than or equal to $500, you may transfer all or a portion of the fixed
account value. We may increase this limit from time to time.
Any transfer among the Funds or to the Fixed Account will result in the
crediting and cancellation of accumulation units based on the accumulation unit
values determined for the valuation period in which a written request is
received at our Administrative Office. (See "Accumulation Unit Value.") You
should carefully consider current market conditions and each Fund's investment
policies and related risks before allocating money to the Funds.
Order for the purchase of Fund shares may be subject to acceptance by the Fund.
We reserve the right to reject, without prior notice, any transfer request to a
subaccount if the subaccount's investment in the corresponding Fund is not
accepted by the Fund for any reason.
Limits on Frequent Transfers
The Policy is not designed to serve as a vehicle for frequent trading in
response to short-term fluctuations in the market. Such frequent trading can
disrupt management of a Fund and raise its expenses. This in turn can have an
adverse effect on Fund performance. Accordingly, organizations and individuals
who use market-timing investment strategies and make frequent transfers should
not purchase the Policy.
We reserve the right to restrict, in our sole discretion and without prior
notice, transfers initiated by a market-timing organization or individual or
other party authorized to give transfer instructions on behalf of multiple
policy owners. Such restrictions could include:
(1) Not accepting transfer instructions from an agent acting on behalf of more
than one policy owner; and
(2) Not accepting preauthorized transfer forms from market-timers or other
entities acting on behalf of more than one policy owner at a time.
We further reserve the right to impose, without prior notice, restrictions on
any transfers that we determine, in our sole discretion, will disadvantage or
potentially hurt the rights or interests of other policy owners.
Telephone Transfers
You may request a transfer of account values either in writing or by telephone.
In order to make telephone transfers, a written telephone transfer
authorization form must be completed by the policyowner and returned to the
Administrative Office. Once the form is processed, the policy owner may request
a transfer by telephoning the Administrative Office. All transfers must be in
accordance with the terms of the Policy.
Transfer instructions are currently accepted for each valuation period. Once
instructions have been accepted and processed, they may not be rescinded;
however, new telephone instructions may be given on the following day. If the
transfer instructions are not in good order, the Company will not execute the
transfer and you will be notified.
We will use reasonable procedures, such as requiring identifying information
from callers, recording telephone instructions, and providing written
confirmation of transactions, in order to confirm that telephone instructions
are genuine. Any telephone instructions which we reasonably believe to be
genuine will be your responsibility, including losses arising from any errors
in the communication of
16
<PAGE>
instructions. As a result of this procedure, the policy owner will bear the
risk of loss. If the Company does not use reasonable procedures, as described
above, it may be liable for losses due to unauthorized instructions.
Automated Transfers (Dollar Cost Averaging)
Dollar cost averaging describes a program of investing a uniform sum of money
at regular intervals over an extended period of time. Dollar cost averaging is
based on the economic fact that buying a security with a constant sum of money
at fixed intervals results in acquiring more of the item when prices are low
and less of it when prices are high.
You may establish automated transfers of fund account values on a monthly or
quarterly basis from the Aetna Money Market VP to any other investment option
through written request or other method acceptable to the Company. You must
have a minimum of $5,000 allocated to the Aetna Money Market VP in order to
enroll in the dollar cost averaging program. The minimum automated transfer
amount is $50 per month. There is no additional charge for the program. You may
start or stop participation in the dollar cost averaging program at any time,
but you must give the Company at least 30 days notice to change any automated
transfer instructions that are currently in place. The Company reserves the
right to suspend or modify automated transfer privileges at any time.
Before participating in the dollar cost averaging program, you should consider
the risks involved in switching between investments available under the Policy.
Dollar cost averaging requires regular investments regardless of fluctuating
price levels, and does not guarantee profits or prevent losses. Therefore, you
should carefully consider market conditions and each Fund's investment policies
and related risks before electing to participate in the dollar cost averaging
program.
Policy Values
Total Account Value
The total account value is the sum of the fixed account value, the separate
account value and the loan account value.
Once your Policy has been issued, each net premium (the premium paid less the
premium load) allocated to a variable funding option of the Separate Account is
credited in the form of accumulation units of the funding option, based on that
funding option's accumulation unit value (AUV). Each net premium will be
credited to your Policy at the AUV determined for the valuation period in which
it is received and accepted by us at our Administrative Office following the
issue date of the Policy. The number of accumulation units credited is
determined by dividing the net premium by the value of an accumulation unit
next computed after we receive the premium. Shares in the Funds are purchased
by the separate account at the net asset value determined by the Fund for the
valuation period in which the net premium is received by the Company. Since
each Fund has a unique AUV, a policy owner who has elected a combination of
funding options will have accumulation units credited to each funding option.
The total account value of your Policy is determined by:
(a) multiplying the total number of accumulation units credited to the Policy
for each applicable Fund by its appropriate current AUV;
17
<PAGE>
(b) if you have elected a combination of Funds, totaling the resulting values;
and
(c) adding any fixed account and loan account values.
The number of accumulation units credited to a Policy will not be changed by any
subsequent change in the value of an accumulation unit. The number is increased
by subsequent contributions to or transfers into that funding option, and
decreased by charges and withdrawals from that funding option.
The fixed account value reflects amounts allocated to the General Account
through payment of premiums or transfers from the separate account. The fixed
account value is guaranteed; however, there is no assurance that the separate
account value of the Policy will equal or exceed the net premiums paid and
allocated to the separate account.
The loan account value is the sum of all unpaid loans, preferred and
nonpreferred.
You will be advised at least annually as to the number of accumulation units
which remain credited to the Policy, the current AUV, the separate account
value, the fixed account value, and the total account value.
Accumulation Unit Value
The value of an accumulation unit for any valuation period is determined by
multiplying the value of an accumulation unit for the immediately preceding
valuation period by the net investment factor for the current period for the
appropriate Fund. The net investment factor equals the net investment rate plus
1.0000000. The net investment rate is determined separately for each Fund. It is
computed according to a formula that is equivalent to the following:
(a) the net assets of the Fund held in Variable Life Account B at the end of a
valuation period, minus
(b) the net assets of the Fund held in Variable Life Account B at the beginning
of that valuation period, plus or minus
(c) taxes or provisions for taxes, if any, attributable to the operation of
Variable Life Account B (with any federal tax liability offset by foreign tax
credits to the extent allowed), divided by
(d) the value of the accumulation units held by Variable Life Account B at the
beginning of the valuation period, minus
(e) a daily charge for mortality and expense risk, and administrative expenses.
(See "Charges and Fees Assessed against the Separate Account.")
Maturity Value
The maturity value of your Policy depends on whether or not the guaranteed death
benefit provision is in effect. If it is, the maturity value is the greater of
the total account value and the specified amount on the maturity date, less the
amount necessary to repay all loans in full. If it is not, the maturity value is
the total account value on the maturity date, less the amount necessary to repay
all loans in full.
Cash Surrender Value
The cash surrender value of your Policy is the amount you can receive in cash by
surrendering the Policy. This equals the total account value minus the
applicable surrender charge and the amount necessary to repay any loans in full.
All or part of the cash surrender value may be applied to one or more of the
settlement options. (See "Surrender Charge.")
18
<PAGE>
Policy Rights
Partial Surrenders
A partial surrender may be made at any time after the first policy year.
The amount of a partial surrender may not exceed the cash surrender value on
the date the request is received and may not be less than $500.
Partial surrenders may only be made prior to election of a settlement option.
For an Option 1 Policy (see "Death Benefit"), a partial surrender will reduce
the total account value, death benefit, and specified amount. The specified
amount and total account value will be reduced by equal amounts and will reduce
any past increases in the reverse order in which they occurred.
For an Option 2 Policy (see "Death Benefit"), a partial surrender will reduce
the total account value and the death benefit, but it will not reduce the
specified amount.
Payment of any amount due from the separate account values on a full or partial
surrender will be made within seven calendar days after we receive your written
request at our Administrative Office in form satisfactory to us. Payment may be
postponed when the New York Stock Exchange has been closed and for such other
periods as the Commission may require. Payment from the fixed account values
may be deferred up to 6 months, except when used to pay premiums to the
Company.
The specified amount remaining in force after a partial surrender may not be
less than $100,000. Any request for a partial surrender that would reduce the
specified amount below this amount will not be granted. In addition, if,
following the partial surrender and the corresponding decrease in the specified
amount, the Policy would not comply with the maximum premium limitations
required by federal tax law, the decrease may be limited to the extent
necessary to meet the federal tax law requirements.
If, at the time of a partial surrender, your total account value is
attributable to more than one funding option, the surrender charge, transaction
charge and the amount paid to you upon the surrender will be taken
proportionately from the accumulation unit values in each funding option.
Avoiding Loss of Coverage
Take note: The following explanations of the No-Lapse Coverage Provision and
the Reinstatement of a Lapsed Policy should be read together with the
Guaranteed Death Benefit Provision, discussed earlier under Policy Choices.
These three provisions, and the interrelationship between them, determine
whether you keep or lose your insurance. If you have any questions about how
they operate and how each provision affects the others, please contact the
Administrative Office.
No-Lapse Coverage Provision
This Policy will not terminate during the five-year period after its issue date
or the issue date of any increase if, on each monthly deduction day within that
period, the sum of premiums paid equals or exceeds:
1) the sum of the basic premiums for each Policy month from the issue date,
including the current month; plus
19
<PAGE>
2) any partial surrenders; plus
3) any increase in loan account value since the Policy's issue date or the
issue date of any increase.
If, on each monthly deduction day within the five-year period, the sum of
premiums paid is less than the sum of the items 1, 2, and 3 above, and the cash
surrender value is insufficient to cover the current monthly deduction, the
grace period provision will apply. (See "Grace Period.")
After the five-year period expires, and depending on the investment performance
of the Funds, the total account value may be insufficient to keep this Policy
in force, and payment of an additional premium may be necessary, unless the
guaranteed death benefit provision has been elected.
Reinstatement of a Lapsed Policy
A lapse occurs if your monthly deduction is greater than the cash surrender
value and no payment to cover the deduction is made within the 61 days of our
notifying you. This may happen after the first five policy years, or during the
first five policy years if your basic premiums are not current.
You can apply for reinstatement within five years after the date of termination
and before the maturity date. To reinstate your Policy we will require
satisfactory evidence of insurability and an amount sufficient to pay for the
current monthly deduction plus two additional monthly deductions.
If the Policy is reinstated within five years of this policy's issue date or
while the no-lapse coverage provision (see "No-Lapse Coverage Provision") would
be in effect if this Policy had not lapsed, all values including the loan
account value will be reinstated to the point they were on the date of lapse.
However, the guaranteed death benefit provision will not be reinstated.
If the Policy is reinstated after the no-lapse coverage provision (see
"No-Lapse Coverage Provision") has expired, this Policy will be reinstated on
the monthly deduction day following our approval. This Policy's total account
value at reinstatement will be the net premium paid less the monthly deduction
due that day. Any loan account value will not be reinstated, and the guaranteed
death benefit will not be reinstated.
If the Policy's cash surrender value less any loan account value plus accrued
interest is not sufficient to cover the full surrender charge at the time of
lapse, the remaining portion of the surrender charge will also be reinstated at
the time of Policy reinstatement.
Policy Loans: Preferred and Nonpreferred
Unless otherwise required by state law, the maximum loan amount is 90% of the
cash surrender value at the time of a loan.
Loans taken during the first ten policy years are considered nonpreferred
loans. Beginning in the eleventh policy year, up to 10% of the maximum loan
amount available at the beginning of a policy year can be taken as a preferred
loan during that policy year. Amounts borrowed that are in excess of the
maximum loan amount available for a preferred loan will be considered a
nonpreferred loan. An amount equal to what you receive for a loan, together
with any interest added to the loan for due and unpaid interest, as described
below, will be added to the loan account value.
If you are using more than one underlying funding option, the amount of the
loan will be withdrawn in proportion to the value of each funding option.
20
<PAGE>
Interest on loans will accrue at an annual rate which will be the greater of:
1) The monthly average (i.e., the composite yield on corporate bonds as
published by Moody's Investors Service, Inc.) for the calendar month which ends
two months before the month in which the Policy Anniversary occurs, or
2) 5.5%.
Increases or decreases to the current interest rate will occur only when the
new policy year's annual interest rate is greater or lower than the prior
policy year's annual interest rate by at least 0.5%.
We will notify you of the current interest rate charged for a loan at the time
a loan is made. If your Policy has a loan outstanding, we will notify you of
any change in the interest rate before the new rate becomes effective.
Interest is payable by you once a year on each anniversary of the loan, or
earlier upon surrender, payment of proceeds, or maturity of a Policy. Any
interest you do not pay when due becomes part of the loan and bears interest.
An amount equal to what you receive for a loan, together with any interest
accrued but not paid, will be added to the loan account value. We will credit
interest on the loan account value. The loan account value for nonpreferred
loans will be credited interest, during any policy year, at an annual rate that
is the interest rate charged on the loan minus 2%. However, in no case will the
credited interest rate be less than 4.5% annually.
The loan account value on preferred loans will be credited interest at a rate
equal to the interest rate charged. In no case will the credited interest rate
be less than 5.5% annually.
If a policy loan is requested, the amount to be borrowed will be withdrawn by
the Company from the funding options and fixed account value in proportion to
the value of the Policy attributable to each funding option and the Fixed
Account. Repayments on the loan will be allocated among the funding options in
the same proportion the loan was taken from the funding options. The loan
account value will be reduced by the amount of any loan repayment.
The amount necessary to repay all loans in full is the loan account value plus
any interest accrued since the last policy anniversary. Such interest is
payable in order to discharge any policy indebtedness.
Policy Changes
You may make changes to your Policy, as described below, by submitting a
written request to our Administrative Office in a form satisfactory to us.
Increases: Beginning in the second policy year, you may increase the specified
amount of your Policy subject to the following conditions:
o Satisfactory evidence of insurability may be required.
o The cash surrender value at the time of an increase must be at least three
times the sum of (a) the most recent monthly deduction from the total
account value and (b) the amount of the increase, divided by 1000, times the
applicable cost of insurance rate.
o An increase in the specified amount will increase the surrender charge.
21
<PAGE>
o The basic monthly premium will be increased when the specified amount is
increased. The Policy will not terminate within five years of the Issue Date
of the increase if the conditions of this provision and the no-lapse
coverage provision are met.
o Increases through the fifth year are limited to four times the initial
specified amount.
o Increases in the specified amount will increase the guaranteed death benefit
provision amount and will affect the guaranteed death benefit premium.
Decreases: Beginning in the sixth policy year decreases will be allowed,
however:
o No decrease may reduce the specified amount to less than the minimum for this
type of policy. (See Death Benefit.)
o Any decrease will cause a decrease in the guaranteed death benefit provision.
Death Benefit Option Change: A death benefit option change will be allowed,
subject to the following conditions:
o The change will take effect on the monthly deduction day on or next following
the date on which the Administrative Office receives your written request.
o There will be no change in the surrender charge, and evidence of insurability
may be required.
o We will not allow a change in the death benefit option if the specified
amount will be reduced below the minimum specified amount.
o Changes from Option 1 to Option 2 are allowed beginning in the sixth policy
year. The new specified amount will equal the specified amount less the
total account value at the time of the change.*
o Changes from Option 2 to Option 1 are allowed after the first policy year.
The new specified amount will equal the specified amount plus the total
account value as of the time of the change.*
*Changes in the death benefit option also affect the guaranteed death benefit
provision amount and the guaranteed death benefit premium.
Right to Examine the Policy
The Policy has a period during which you may examine the Policy. If for any
reason you are dissatisfied, it may be returned to our Administrative Office
for a refund. It must be returned within ten days (state variations may apply)
after you receive the Policy and the written notice of withdrawal right, or
within 45 days after you sign the application for the Policy, whichever occurs
latest. If you return (cancel) the Policy, we will pay a refund of:
(1) the difference between payments made and amounts allocated to the separate
account, plus
(2) the value of the amount allocated to the separate account as of the date
the returned Policy is received by us, plus
(3) any fees imposed on the amounts allocated to the separate account.
If state law does not permit such a refund, then the refund will equal premiums
paid, without interest. Refunds will usually occur within seven days of notice
of cancellation, although a refund of premiums paid by check may be delayed
until the check clears your bank.
22
<PAGE>
Payment of Death Benefit
The death benefit is the amount payable to the beneficiary upon the death of
the Insured. Any outstanding loan amounts or overdue deductions are withheld
from the death benefit prior to payment.
The death benefit under the Policy will be paid in a lump sum within seven days
after we receive due proof of the Insured's death (a certified copy of the
death certificate) at our Administrative Office, unless you or the beneficiary
have elected that it be paid under one or more of the settlement options. (See
"Settlement Options.")
Payment of the death benefit may be delayed if the Policy is being contested.
While the Insured is living, you may elect a settlement option for the
beneficiary and deem it irrevocable. You may revoke or change a prior election.
The beneficiary may make or change an election within 90 days of the death of
the Insured, unless you have made an irrevocable election. A beneficiary who
has elected settlement option 1 may elect another option within two years after
the Insured's death.
All or a part of the death benefit may be applied under one or more of the
settlement options, or such options as we may choose to make available in the
future.
If the Policy is assigned as collateral security, we will pay any amount due
the assignee in one lump sum. Any excess death benefit due will be paid as
elected.
Policy Settlement
There are several ways in which a beneficiary may receive annuity payments from
a death benefit. These are called settlement options. If the Owner surrenders
the Policy, settlement options are available for the amount of the policy cash
surrender value.
Proceeds in the form of settlement options are payable by the Company upon the
Insured's death, upon maturity of the policy, or upon election of one of the
following settlement options or any we make available (after any applicable
surrender charges have been deducted).
A written request may be made to elect, change, or revoke a settlement option
before payments begin under any settlement option. This request must be in form
satisfactory to us, and will take effect upon its filing at our Administrative
Office. If no settlement option has been elected by the policy owner when the
death benefit becomes payable to the beneficiary, that beneficiary may make the
election.
The first variable settlement option payment will be as of the tenth valuation
period following our receipt of the properly completed election form.
Settlement Options
Options 2, 3 and 4 are in the form of an annuity, which is a series of payments
for life or a definite period of time. The person receiving the payments is
called the annuitant.
Option 1 -- Payment of interest on the sum left with us;
23
<PAGE>
Option 2 -- Payments for a stated number of years, at least three but no more
than thirty;
Option 3 -- Payments for the lifetime of the annuitant. If also chosen, we will
guarantee payments for 60, 120, 180, or 240 months;
Option 4 -- Payments during the joint lifetimes of two annuitants. At the death
of either, payments will continue to the survivor. When this option is chosen,
a choice must be made of:
a) 100% of the payment to continue to the survivor;
b) 66-2/3% of the payment to continue to the survivor;
c) 50% of the payment to continue to the survivor;
d) Payments for a minimum of 120 months, with 100% of the payment to continue
to the survivor;
e) 100% of the payment to continue to the survivor if the survivor is the
annuitant, and 50% of the payment to continue to the survivor if the survivor
is the second annuitant.
In most states, no election may be made that would result in a first payment of
less than $25 or that would result in total yearly payments of less than $120.
If the value of the Policy is insufficient to elect an option for the minimum
amount specified, a lump-sum payment must be elected.
Proceeds applied under Option 1 will be held by us in the General Account.
Proceeds in the General Account will be used to make payments on a fixed-dollar
basis. We will add interest to such proceeds at an annual rate of not less than
3%. We may add interest daily at any higher rate.
Under Option 1, the annuitant may later tell the Company to (a) pay to him or
her a portion or all of the sum held by the Company; or (b) apply a portion or
all of the sum held by the Company to another settlement option.
Proceeds applied under Options 2, 3 and 4 will be held (a) in the General
Account; or (b) in Variable Annuity Account B, invested in one or more of the
available investment options, or (c) a mix of (a) and (b). Proceeds held in
Variable Annuity Account B will be used to make payments on a variable basis.
If payments are to be funded on a variable basis (by the Funds), the first and
subsequent payments will vary depending on the assumed net investment rate.
This rate will be 3-1/2% per year, unless a 5% annual rate is chosen. The
assumed net investment rate is chosen by the payee.
Selection of a 5% rate causes a higher first payment, but subsequent payments
will increase only to the extent the actual net investment rate exceeds 5% on
an annualized basis, and they will decline if the rate is less than 5%. Use of
the 3-1/2% assumed net investment rate causes a lower first payment, but
subsequent payments will increase more rapidly or decline more slowly as
changes occur in the actual net investment rate. The investment performance of
the underlying funding option(s) must equal such assumed rate, plus enough to
cover the mortality and expense risk and administrative fee charges, if future
payments on a variable basis are to remain level.
If payments on a variable basis are not to decrease, gross return on the assets
of the underlying funding option must be:
24
<PAGE>
a) 4.75% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge in effect at the time settlement option
payments start, if an assumed net investment rate of 3-1/2% is chosen; or
b) 6.25% on an annual basis, plus an annual return of up to .25% needed to
offset the administrative charge in effect at the time settlement option
payments start, if an assumed net investment rate of 5% is chosen.
Option 2, 3 or 4 may be chosen on a fixed-dollar basis. However, if the
guaranteed payments are less than the payments which would be made from the
purchase of the Company's current single premium immediate annuity, the larger
payment will be made instead.
As to funds held under Option 1, the annuitant may elect to make a withdrawal
or to change options. Under Option 2, if payments are made on a variable basis,
the current value may be withdrawn at any time. Amounts held in the Fixed
Account may not be withdrawn under Option 2. No withdrawals or changes of
option may be made under Options 3 and 4.
When an annuitant dies while receiving payments under Option 2, 3 or 4, the
present value of any remaining guaranteed payments will either be paid in one
sum to the annuitant's beneficiary, or upon election by that beneficiary, any
remaining guaranteed payments will continue to that beneficiary. If no
beneficiary exists, the present value of any remaining guaranteed payments will
be paid in one sum to the annuitant's estate. If the annuitant dies while
receiving payments under Option 1, the current value of the option will be paid
in one sum to the beneficiary, or to the annuitant's estate.
If the annuitant's beneficiary dies (and there is no contingent beneficiary),
while receiving payments, the current value of the account (Option 1), or the
present value of any remaining guaranteed payments will be paid in one sum to
the estate of that beneficiary. The interest rate used to determine the first
payment will be used to calculate the present value.
Calculation of Settlement Payments on a Variable Basis
When you have chosen payment on a variable basis, the first payment is
calculated as follows:
a) the portion of the proceeds applied to make payments on the variable basis;
divided by
b) 1,000; times
c) the payment rate per $1000 of proceeds for the option chosen as shown in
the policy.
Such amount, or portion, of the variable payment will be divided by the
settlement option unit value (described below), as of the tenth valuation
period before the due date of the first payment, to determine the number of
settlement option units. Each future payment is equal to the number of
settlement option units, times the settlement option unit value as of the tenth
valuation period prior to the due date of the payment.
For any valuation period, the Fund(s) settlement option unit value is equal to:
a) The settlement option unit value for the previous valuation period; times
b) The net return factor (as defined below) for the valuation period; times
c) A factor to reflect the assumed net investment rate.
The factor for 3.5% per year is 0.9999058; for 5% per year, it is 0.9998663.
The net return factor equals:
25
<PAGE>
1) The net assets of the applicable fund held in Variable Annuity Account B at
the end of a valuation period; minus
2) The net assets of the applicable fund held in Variable Annuity Account B at
the beginning of that valuation period; plus or minus
3) Taxes or provision for taxes, if any, attributable to the operations of
Variable Annuity Account B; divided by
4) The value of settlement option units and other accumulation units held in
Variable Annuity Account B at the beginning of the valuation period; minus
5) A daily charge at an annual rate of 1.25% of your account value invested in
the subaccount for annuity mortality and expense risk and the then-current
daily administrative expense charge.
The number of settlement option units remains fixed. However, the dollar value
of the settlement option unit values and the payment may increase or decrease
due to investment gain or loss.
Payments will not be affected by changes in the mortality or expense results or
administrative expense charges.
Special Plans
Where allowed by law, the Company may reduce or eliminate certain charges for
Policies issued under special circumstances that result in lower expenses to
the Company (i.e., group arrangements with a sponsoring employer). The amount
of any reduction, the charges to be reduced, and the criteria for applying a
reduction will reflect the reduced sales effort, costs and differing mortality
experience appropriate to the circumstances giving rise to the reduction. The
charges will be reduced in accordance with the Company's practice in effect
when the Policies are issued. Reductions will not be unfairly discriminatory
against any person, including the purchasers to whom the reduction applies and
all other owners of the Policies.
The Company offers Policies on a unisex and simplified underwriting basis to
certain group or sponsored arrangements. A "group arrangement" includes a
program under which an employer purchases individual Policies covering a group
of individuals on a group basis. A "sponsored arrangement" includes a program
under which an employer permits group solicitation of its employees for the
purchase of the Policies on an individual basis. Under both arrangements, the
employer pays all or part of the premium. The benefits and values of these
Policies do not vary based on the sex of the insured in order to be used by
employers in employee benefit plans where sex discrimination is prohibited by
federal or state laws. The Company recommends that any employer proposing to
offer the Policies to employees under either arrangement consult its attorney
before doing so.
26
<PAGE>
Directors & Officers
<TABLE>
<CAPTION>
Name and Address*
Position with Company Business Experience During Past 5 Years
- --------------------- ---------------------------------------
<S> <C>
Thomas J. McInerney President (since October 1998) Aetna Investment Adviser Holding
Director, President and Company, Inc., Aetna Retail Holding Company, Inc., Aetna Services
Chairman, Executive Holding Company, Inc.; President (since September 1997) Aetna Life
Committee (Principal Insurance and Annuity Company; President (since September 1997)
Executive Officer) 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 President (January 1998 - February 1999) Aetna Investment Services,
Director and Senior Vice Inc; Senior Vice President (since June 1999) Aetna Retirement Holdings,
President Inc.; Senior Vice President (since June 1999) Aetna Retirement Holdings,
Inc.; Senior Vice President (since October 1998) Aetna Investment
Adviser 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.
Catherine Hale Smith Senior Vice President (since October 1998) Aetna Investment Adviser
Director, Chief Financial Holding Company, Inc., Aetna Retail Holding Company, Inc., Aetna
Officer and Senior Vice Services Holding Company, Inc.; Chief Financial Officer and Senior Vice
President President, Business Strategy and Finance (since February 1998) Aetna
Life Insurance and Annuity Company; 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.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Name and Address*
Position with Company Business Experience During Past 5 Years
- --------------------- ----------------------------------------
<S> <C>
Kirk P. Wickman Senior Vice President, General Counsel and Corporate Secretary (since
Senior Vice President, June 1999) Aetna Retirement Holdings, Inc., Aetna Investment Adviser
General Counsel and Holding Company, Inc., Aetna Retail Holding Company, Inc., Aetna
Corporate Secretary Services Holding Company, Inc.; Senior Vice President, General Counsel
and Corporate Secretary (since April 1999) Aetna Retirement Services,
Inc.; Vice President, General Counsel and Corporate Secretary (October
1998 - June 1999) Aetna Investment Advisor Holding Company, Inc.,
Aetna Retail Holding Company, Inc., Aetna Services Holding Company,
Inc.; Vice President, General Counsel and Assistant Secretary (April
1997 - April 1999) Aetna Retirement Services, Inc.; Vice President,
General Counsel and Corporate Secretary (December 1996 - June 1999)
Aetna Retirement Holdings, Inc.; Senior Vice President (since March
1999), General Counsel and Corporate Secretary (since November 1996),
Vice President (November 1996- March 1999) Aetna Life Insurance and
Annuity Company; Vice President and Counsel (June 1992 - November
1996) Aetna Life Insurance Company.
Deborah Koltenuk Vice President, Corporate Controller, and Assistant Treasurer (since
Vice President, Corporate July 1999) Aetna Retirement Services, Inc.; Vice President, Corporate
Controller, and Assistant Controller, and Assistant Treasurer (since June 1999) Aetna Investment
Treasurer Adviser Holding Company, Inc., Aetna Retail Holding Company, Inc.,
Aetna Services Holding Company, Inc., Aetna Life Insurance and Annuity
Company, Aetna Insurance Company of America; Vice President,
Corporate Controller and Assistant Treasurer, (April 1999 - July 1999)
Aetna Retirement Services, Inc.; Vice President, Treasurer and Corporate
Controller (October 1998 - June 1999) Aetna Investment Adviser Holding
Company, Inc., Aetna Retail Holding Company, Inc., Aetna Services
Holding Company, Inc.; Vice President and Controller (April 1997 - April
1999) Aetna Retirement Services, Inc.; Vice President, Treasurer and
Corporate Controller (July 1996 - June 1999) Aetna Life Insurance and
Annuity Company; Vice President, Treasurer and Corporate Controller
(September 1996 - June 1999) Aetna Retirement Holdings, Inc.; Vice
President and Treasurer, Corporate Controller (April 1997 - June 1999)
Aetna Insurance Company of America; 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.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Name and Address*
Position with Company Business Experience During Past 5 Years
- -------------------------- --------------------------------------------------------------------------
<S> <C>
Therese A. Squillacote Vice President and Chief Compliance Officer (since February 1999)
Vice President and Chief Aetna Insurance Company of America; Vice President and Chief
Compliance Officer Compliance Officer (since December 1998) Aetna Life Insurance and
Annuity Company; Vice President and Chief Compliance Officer (since
December 1998) Aetna Investment Services, Inc.; Chief Compliance
Officer (since December 1998) Systematized Benefits Administrators, Inc.;
Vice President, Compliance (since March 1998) Aetna Financial Services,
Inc.; Compliance Manager (May 1997 to December 1998) Aetna Life
Insurance and Annuity Company; Registered Principal (since July 1997)
Aetna Investment Services, Inc.; Director, Compliance (December 1995
to May 1997) Connecticut General Life Insurance Company; Registered
Principal (December 1995 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>
*The address of all Directors and Officers listed is 151 Farmington Avenue,
Hartford, Connecticut.
These individuals may also be directors and/or officers of other affiliates of
the Company.
Directors, officers and employees of the Company are covered by a blanket
fidelity bond in the amount of $60 million issued by Travelers Casualty and
Surety Company of America.
29
<PAGE>
Additional Information
Reports to Policy Owners
Within 30 days after each policy anniversary and before proceeds are applied to
a settlement option, we or our designee, will send you a report containing the
following information:
1) A statement of changes in the total account value and cash surrender value
since the prior report or since the issue date, if there has been no prior
report. This includes a statement of monthly deductions and investment results
and any interest earnings for the report period;
2) Cash surrender value, death benefit, and any loan account value as of the
policy anniversary;
3) A projection of the total account value, loan account value and cash
surrender value as of the succeeding policy anniversary.
If you have policy values funded in either Separate Account you will receive
such additional periodic reports as may be required by the Commission.
Some state laws require additional reports; these requirements vary from state
to state.
Right to Instruct Voting of Fund Shares
In accordance with our view of present applicable law, we will vote the shares
of each of the Funds held in each Separate Account. The votes will be cast at
meetings of the shareholders of the Fund and will be based on instructions
received from policy owners. However, if the 1940 Act or any regulations
thereunder should be amended or if the present interpretation should change,
and as a result we determine that we are permitted to vote the shares of the
Fund in our own right, we may elect to do so.
To determine how many votes each policy owner is entitled to direct with
respect to a Fund, first we will calculate the dollar amount of your account
value attributable to that Fund. Second, we will divide that amount by $100.00.
The result is the number of votes you may direct. During the settlement option
period, the number of votes is determined by dividing the valuation reserve
attributable in the Fund, if any, by the net asset value of one share of the
Fund. Fractional votes will be counted. Where the value of the total account
value or the valuation reserve relates to more than one Fund, the calculation
of votes will be performed separately for each Fund.
The number of shares which a person has a right to vote will be determined as
of a date to be chosen by us, but not more than 90 days before the meeting of
the Fund. Voting instructions will be solicited by written communication at
least 14 days before such meeting.
Fund shares for which no timely instructions are received, and Fund shares
which are not otherwise attributable to policy owners, will be voted by us in
the same proportion as the voting instructions which are received for all
Policies participating in each Fund through Variable Life Account B. Policy
owners having a voting interest will receive periodic reports relating to the
Fund, proxy material and a form for giving voting instructions.
Disregard of Voting Instructions
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that the shares be voted so as
to cause a change in the sub-classification or investment objectives of a Fund
or to approve or disapprove an investment advisory contract for a Fund. In
addition, we may disregard voting instructions in favor of changes initiated by
a policy
30
<PAGE>
owner in the investment policy or the investment adviser of the Fund if we
reasonably disapprove of such changes.
A change would be disapproved only if the proposed change is contrary to state
law or prohibited by state regulatory authorities or we determined that the
change would have an adverse effect on the Separate Accounts in that the
proposed investment policy for a Fund may result in overly speculative or
unsound investments. In the event we do disregard voting instructions, a
summary of that action and the reasons for such action will be included in the
next annual report to policy owners.
State Regulation
We are subject to regulation and supervision by the Insurance Department of the
State of Connecticut, which periodically examines our affairs. We are also
subject to the insurance laws and regulations of all jurisdictions where we are
authorized to do business. The Policies have been approved by the Insurance
Department of the State of Connecticut and in other jurisdictions.
We are required to submit annual statements of our operations, including
financial statements, to the insurance departments of the various jurisdictions
in which we do business, for the purposes of determining solvency and
compliance with local insurance laws and regulations.
Legal Matters and Proceedings
We are aware of no material legal proceedings pending which involve the
separate account as a party or which would materially affect the separate
account. The validity of the securities offered by this prospectus has been
passed upon by Counsel to the Company.
In recent years, several life insurance and annuity companies have been named
as defendants in lawsuits, including class action lawsuits, relating to life
insurance and annuity pricing and sales practices. A purported class action
complaint was filed in the Circuit Court of Lauderdale County, Alabama on March
28, 2000 by Loretta Shaner against the Company (the "Shaner Complaint"). The
Shaner Complaint seeks unspecified compensatory damages from the Company and
unnamed affiliates of the Company. The Shaner Complaint claims that the
Company's sale of deferred annuity products for use as investments in
tax-deferred contributory retirement plans (e.g., IRAs) is improper. This
litigation is in the preliminary stages. The Company intends to defend the
action vigorously.
The Company also is a party to other litigation and arbitration proceedings in
the ordinary course of its business, none of which is expected to have a
material adverse effect on the Company.
The Registration Statement
A Registration Statement under the Securities Act of 1933 has been filed with
the Commission relating to the offering described in this Prospectus. This
Prospectus does not include all the information set forth in the Registration
Statement, certain portions of which have been omitted pursuant to the rules
and regulations of the Commission. The omitted information may be obtained at
the Commission's principal office in Washington, DC, upon payment of the
Commission's prescribed fees.
The Policies are offered for sale in all jurisdictions where we are authorized
to do business except Guam, Puerto Rico, and the Virgin Islands.
Distribution of the Policies
The Company will serve as underwriter of the securities offered hereunder as
defined by the federal securities laws. The Company is registered as a
broker-dealer with the Commission and is a member of the National Association
of Securities Dealers, Inc. ("NASD"). The Company will
31
<PAGE>
contract with one or more registered broker-dealers including broker-dealers
affiliated with it ("distributors") to offer and sell the Policies. The Company
may also offer and sell policies directly. All persons selling the Policies
will be registered representatives of the distributors, and will also be
licensed as insurance agents to sell variable life insurance.
The maximum commission payable by the Company to salespersons and their
supervising broker-dealers for policy distribution is 55% of the guaranteed
death benefit premium to age 80, or, in the event of an increase in the
specified amount, 55% of the guaranteed death benefit premium to age 80,
attributable to the increase. In lieu of premium-based commission, the Company
may pay equivalent amounts based on total account value. In particular
circumstances, we may also pay certain of these professionals for their
administrative expenses. In addition, some sales personnel may receive various
types of non-cash compensation as special sales incentives, including trips and
educational and/or business seminars. However, all such compensation will be
paid in accordance with NASD rules.
The Company may also contract with independent third party broker-dealers who
will act as wholesalers by assisting the Company in finding broker-dealers to
offer and sell the Policies. These parties may also provide training, marketing
and other sales related functions for the Company and other broker-dealers and
may provide certain administrative services to the Company in connection with
the Policies. The Company may pay such parties compensation based on premium
payments for the Policies purchased through broker-dealers selected by the
wholesaler.
Records and Accounts
All records and accounts relating to the separate accounts and the Funds will
be maintained by the Company or its designee. All reports required to be made
and information required to be given will be provided by the Company or its
designee.
Independent Auditors
KPMG LLP, CityPlace II, Hartford, Connecticut, were the independent auditors
for the Separate Account for the years ended December 31, 1997 and 1998, and
continue to be the independent auditors for the Company. Ernst & Young LLP, Ft.
Wayne, Indiana, were the independent auditors for the Separate Account for the
year ended December 31, 1999. 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.
Tax Matters
General
The following is a discussion of the federal income tax considerations relating
to the Policy. This discussion is based on the Company's understanding of
federal income tax laws as they now exist and are currently interpreted by the
Internal Revenue Service ("IRS"). These laws are complex, and tax results may
vary among individuals. A person or persons contemplating the purchase of or
the exercise of elections under the Policy described in this Prospectus should
seek competent tax advice.
Federal Tax Status of the Company
The Company is taxed as a life insurance company under the Code. The separate
account is a 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
32
<PAGE>
capital gains attributable to the separate account are automatically applied to
increase reserves under the policy. Because of this, under existing federal
income tax law we believe that any such income and gains will not be taxed to
the extent that such income and gains are applied to increase reserves under
the policy. In addition, any foreign tax credits attributable to the separate
account will first be used to reduce any income taxes imposed on the separate
account before being used by the Company.
In summary, we do not expect that we will incur any federal income tax
liability attributable to the separate account and we do not intend to make
provisions for any such taxes. However, if changes in the federal tax laws or
their interpretation result in our being taxed on income or gains attributable
to the separate account, then we may impose a charge against the separate
account (with respect to the policy) to set aside provisions to pay such taxes.
Life Insurance Qualification
Section 7702 of the Code includes a definition of life insurance for tax
purposes. These rules generally place limits on the amount of premiums payable
under the contract and the level of cash surrender value. In no event may the
total of all premiums paid exceed the then-current maximum premium limitations
established by federal law for a Policy to qualify as life insurance. If, at
any time, a premium is paid which would result in total premiums exceeding such
maximum premium limitation, we will only accept that portion of the premium
which will make total premiums equal the maximum. Any part of the premium in
excess of that amount will be returned or applied as otherwise agreed and no
further premiums will be accepted until allowed by the then-current maximum
premium limitations prescribed by law. The Secretary of the Treasury has been
granted authority to prescribe regulations to carry out the purposes of Section
7702, and proposed regulations governing mortality charges were issued in 1991.
The Company believes that the Policy meets the statutory definition of life
insurance. As such, and assuming the diversification standards of Section
817(h) (discussed below) are satisfied, then except in limited circumstances
(a) death benefits paid under the Policy should generally be excluded from the
gross income of the beneficiary for federal income tax purposes under Section
101(a)(1) of the Code, and (b) a policy owner should not generally be taxed on
the cash value under a Policy, including increments thereof, prior to actual
receipt. The principal exceptions to these rules are corporations that are
subject to the alternative minimum tax, and thus may be subject to tax on
increments in the Policy's total account value, and policy owners who acquire a
Policy in a "transfer for value" and thus can become subject to tax on the
portion of the death benefit which exceeds the total of their cost of
acquisition and subsequent premium payments.
The Company intends to comply with any future final regulations issued under
Sections 7702 and 817(h) of the Code, and therefore reserves the right to make
such changes as it deems necessary to ensure such compliance. Any such changes
will apply uniformly to affected policy owners and will be made only after
advance written notice.
General Rules
Upon the surrender or cancellation of any Policy, whether or not it is a
modified endowment contract (see "Modified Endowment Contracts" below), the
policy owner will be taxed on the surrender value only to the extent that it
exceeds the gross premiums paid less prior untaxed withdrawals. The amount of
any unpaid policy loans will, upon surrender, be added to the surrender value
and will be treated for this purpose as if it had been received.
Assuming the Policy is not a modified endowment contract, the proceeds of any
partial surrenders are generally not taxable unless the total amount received
due to such surrenders exceeds total premiums
33
<PAGE>
paid less prior untaxed partial surrender amounts. However, partial surrenders
made within the first 15 policy years in connection with reductions in death
benefits may be taxable in limited circumstances in certain limited instances
where the surrender value plus any unpaid Policy debt exceeds the total
premiums paid less the untaxed portion of any prior partial surrenders. This
result may occur even if the total amount of any partial surrenders does not
exceed total premiums paid to that date.
Loans received under the Policy will ordinarily be considered indebtedness of
the policy owner, and assuming the Policy is not considered a modified
endowment contract, policy loans will not be treated as current distributions
subject to tax. Generally, amounts of loan interest paid by individuals will be
considered nondeductible "personal interest."
Modified Endowment Contracts
A class of contracts known as "modified endowment contracts" has been created
under Section 7702A of the Code. The tax rules applicable to loan proceeds and
proceeds of a partial surrender of any Policy that is considered to be a
modified endowment contract will differ from the general rules noted above.
A contract will be considered a modified endowment contract if it fails the
"7-pay test." A Policy fails the 7-pay test if, at any time in the first seven
policy years, the amount paid into the Policy exceeds the amount that would
have been paid had the Policy provided for the payment of seven (7) level
annual premiums. In the event of a distribution under the Policy, the Company
will notify the policy owner if the Policy is a modified endowment contract.
Each Policy is subject to testing under the 7-pay test during the first seven
policy years and at any time a material change takes effect. A material change,
for these purposes, includes the exchange of a life insurance policy for
another life insurance policy or the conversion of a term life insurance policy
into a whole life or universal life insurance policy. In addition, an increase
in the future benefits provided constitutes a material change unless the
increase is attributable to (1) the payment of premiums necessary to fund the
lowest death benefit payable in the first seven policy years or (2) the
crediting of interest or other earnings with respect to such premiums. A
reduction in death benefits during the first seven policy years may also cause
a Policy to be considered a modified endowment contract.
If the Policy is considered to be a modified endowment contract, the proceeds
of any partial surrenders, any policy loans and most assignments, will be
currently taxable to the extent that the Policy's total account value
immediately before payment exceeds gross premiums paid (increased by the amount
of loans previously taxed and reduced by untaxed amounts previously received).
These rules may also apply to policy loans or partial surrender proceeds
received during the two-year period prior to the time that a Policy becomes a
modified endowment contract. If the Policy becomes a modified endowment
contract, it may be aggregated with other modified endowment contracts
purchased by you from the Company (and its affiliates) during any one calendar
year for purposes of determining the taxable portion of withdrawals from the
Policy.
A penalty tax equal to 10% of the amount includable in income will apply to the
taxable portion of the proceeds of any policy surrender or policy loan received
by any policy owner of a modified endowment contract who is not an individual.
The penalty tax will also apply where taxable policy loans are received by an
individual who has not reached the age of 591/2. Taxable policy distributions
made to an individual who has not reached the age of 591/2 will also be subject
to the penalty tax unless those distributions are attributable to the
individual becoming disabled, or are part of a series of equal periodic
payments made not less frequently than annually for the life or life expectancy
of such individual (i.e., an annuity).
34
<PAGE>
Diversification Standards
Section 817(h) of the Code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate
accounts of insurance companies) underlying the Policy must be "adequately
diversified" in accordance with Treasury regulations in order for the Policy to
qualify as life insurance. The Treasury Department has issued regulations
prescribing the diversification requirements in connection with variable
contracts. The separate account, through the Funds, intends to comply with
these requirements.
Investor Control
In certain circumstances, owners of variable contracts may be considered the
owners for federal income tax purposes of the assets of the separate account
used to support their contracts. In those circumstances, income and gains from
separate account assets would be includable in the variable contractowner's
gross income. In several rulings published prior to the enactment of Section
817(h), the IRS stated that a variable contractowner will be considered the
owner of separate account assets if the contractowner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations under Section 817(h) concerning diversification,
that those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor (i.e., you), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement also
stated that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular Funds
without being treated as owners of the underlying assets." As of the date of
this Prospectus, no such guidance has been issued.
The ownership rights under the Policy are similar to, but different in certain
respects from those described by the IRS in pre-Section 817(h) rulings in which
it was determined that policy owners were not owners of separate account
assets. For example, a policy owner has additional flexibility in allocating
premium payments and account values. While the Company does not believe that
these differences would result in a policy owner being treated as the owner of
a pro rata portion of the assets of the separate account, there is no
regulation or ruling of the IRS that confirms this conclusion. In addition, the
Company does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. The Company therefore reserves the right to modify the Policy as
necessary to attempt to prevent a policy owner from being considered the owner
of a pro rata share of the assets of the separate account.
Other Tax Considerations
Business-owned life insurance may be subject to certain additional rules.
Section 264(a)(1) of the Code generally prohibits employers from deducting
premiums on policies covering officers, employees or other financially
interested parties where the employer is a beneficiary under the Policy.
Additions to the Policy's total account value may also be subject to tax under
the corporation alternative minimum tax provisions. In addition, Section
264(a)(4) of the Code limits the policy owner's deduction for interest on loans
taken against life insurance covering the lives of officers, employees, or
other financially interested in the policy owner's trade or business. Under
current tax law, interest may generally be deducted on an aggregate total of
$50,000 of loans per covered life only with respect to life insurance policies
covering each officer, employee or others who may have a financial interest in
the policy owner's trade or business.
35
<PAGE>
Generally, a key person means an officer or a 20 percent owner. However, the
number of key persons will be limited to the greater of (a) 5 individuals, or
(b) the lesser of 5 percent of the total officers and employees of the taxpayer
or 20 individuals. Deductible interest for these contracts will be capped based
on applicable Moody's corporate bond rates.
Section 264(f) of the Code denies a deduction for a portion of a policy owner's
otherwise deductible interest that is allocable to unborrowed policy cash
values. The nondeductible interest amount is the amount that bears the same
ratio to such interest as the company's average unborrowed cash value of life
insurance and annuity policies issued after June 8, 1997 bears to the sum of
the average unborrowed cash values of policies plus the average adjusted tax
basis of other assets owned by the company. This provision does not apply to
policies in which the insured is a 20 percent owner, officer, director or
employee of the business, including policies jointly covering such individual
and his or her spouse. The rule also will not apply where the policy owner is a
natural person, unless a trade or business is directly or indirectly the
beneficiary of the policy.
Depending on the circumstances, the exchange of a policy, a change in the
Policy's death benefit option, a policy loan, a full or partial surrender, a
change in ownership or an assignment of the Policy may have federal income tax
consequences. In addition, federal, state and local transfer, estate,
inheritance and other tax consequences of policy ownership, premium payments
and receipt of policy proceeds depend on the circumstances of each policy owner
or beneficiary.
Withholding
Generally, unless you provide us with a written election to the contrary before
we make the distribution, we are required to withhold income tax from any
portion of a distribution we make to you that is includable in your income. If
you do not wish us to withhold tax from the payment, or if enough is not
withheld, you may have to pay later. You may also have to pay penalties if your
withholding and estimated tax payments are insufficient.
Miscellaneous Policy Provisions
The Policy
The Policy which you receive and the application you make when you purchase the
Policy are the whole contract. A copy of the application is attached to the
Policy when it is issued to you. An application for changes, once approved by
us, will become part of the Policy.
Application forms are completed by the applicant and forwarded to the Company
for acceptance. Upon acceptance, the Policy is prepared, executed by duly
authorized officers of the Company, and forwarded to the policy owner.
Payment of Benefits
All benefits are payable at our Administrative Office. We may require
submission of the Policy before we grant loans, make changes or pay benefits.
Age and Sex
If age or sex is misstated on the application, the amount payable on death will
be that which would have been purchased by the most recent monthly deduction at
the correct age and sex. (If the application is taken in a state or under an
agreement where unisex rates are used, the Insured's sex is inapplicable.)
36
<PAGE>
Incontestability
We will not contest coverage under the Policy after the Policy has been in
force during the lifetime of the Insured for a period of two years from the
policy issue date. Our right to contest coverage is not affected by the
guaranteed death benefit provision.
For coverage which takes effect on a later date (e.g., an increase in
coverage), we will not contest such coverage after it has been in force during
the lifetime of the Insured more than two years from its effective date.
Suicide
In most states, if the Insured commits suicide within two years from the issue
date, the only benefit paid will be the sum of:
a) premiums paid less amounts allocated to the separate account; and
b) the separate account value on the date of suicide, plus the portion of the
monthly deduction from the separate account value, minus
c) the amount necessary to repay any loans in full and any interest earned on
the loan account value transferred to the separate account value, and any
surrenders from the Fixed Account.
If the Insured commits suicide within two years from the effective date of any
increase in coverage, we will pay as a benefit only the monthly deduction for
the increase, in lieu of the face amount of the increase.
All amounts described in (a) and (c) above will be calculated as of the date of
death.
Coverage Beyond Maturity
The Policy is considered matured on the issue date anniversary on which the
Insured reaches attained age 100. This is the maturity date.
You may, by written request, in the 30 days before the maturity date of this
Policy, elect to continue coverage beyond the maturity date. At Age 100, the
separate account value will be transferred to the Fixed Account. If coverage
beyond maturity is elected, we will continue to credit interest to the total
account value of this Policy. Monthly deductions will be calculated with a cost
of insurance rate equal to zero (this provision is not available in New York).
At this time, uncertainties exist regarding the tax treatment of the Policy
should it continue beyond the maturity date. You should therefore consult with
your tax advisor prior to making this election. (See "Tax Matters.")
Protection of Proceeds
To the extent provided by law, the proceeds of the Policy are subject neither
to claims by a beneficiary's creditors nor to any legal process against any
beneficiary.
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company. No
dividends are payable.
37
<PAGE>
Illustrations of Death Benefit,
Total Account Values and
Cash Surrender Values
The tables on the following pages illustrate how the death benefit, total
account values, and cash surrender values of a Policy change with the
investment experience of the variable funding options. The tables show how the
death benefit, total account values, and cash surrender values of a Policy
issued to an insured of a given age and a given premium would vary over time if
the investment return on the assets held in each Fund were a uniform, gross,
annual rate of 0%, 6%, and 12%, respectively.
Tables I through IV illustrate Policies issued to males, age 45, in the
preferred nonsmoker rate class and Policies issued on a unisex basis according
to the special plans section of this Prospectus for both males and females, age
45, in the preferred nonsmoker rate class. Tables V through VIII illustrate
Policies issued on a unisex basis, age 45, in the preferred nonsmoker rate
class for contracts issued in states where unisex rates are required. The death
benefit, total account values, and cash surrender values would be different
from those shown if the gross annual investment rates of return averaged 0%,
6%, and 12%, respectively, over a period of years, but fluctuated above and
below those averages for individual policy years.
The second column of each table shows the accumulated values of the premiums
paid at an assumed interest rate of 5%. The third through fifth columns
illustrate the death benefit of a Policy over the designated period. The sixth
through eighth columns illustrate the total account values, while the ninth
through the eleventh columns illustrate the cash surrender values of each
Policy over the designated period. Tables I, II, V and VI assume that the
maximum Cost of Insurance rates allowable under the Policy are charged in all
policy years. These tables also assume that the maximum allowable mortality and
expense risk charge of 0.90% on an annual basis, the maximum allowable
administrative expense charge of 0.50% on an annual basis, and the maximum
allowable premium load of 6% are assessed in each policy year. Tables III, IV,
VII and VIII assume that the current scale of Cost of Insurance Rates applies
during all policy years. These tables also assume that the current mortality
and expense risk charge of 0.70% on an annual basis, the current administrative
expense charge of 0.30% on an annual basis, and the current premium load of
3.5% are assessed.
The amounts shown for death benefit, cash surrender values, and total account
values reflect the fact that the net investment return is lower than the gross
return on the assets held in each Fund as a result of expenses paid by each
Fund and other charges levied by the separate account. After deduction of these
amounts, the illustrated gross annual investment rates of return of 0%, 6%, and
12% correspond to approximate net annual rates of -1.68%, 4.32%, and 10.32%,
respectively on a current basis. On a guaranteed basis, the illustrated gross
annual investment rates of return of 0%, 6%, and 12% correspond to approximate
net annual rates of -2.08%, 3.92%, and 9.92%, respectively.
The investment advisory fees and other Fund expenses vary by Fund from .34% to
1.00%. An arithmetic average of .68% has been used for the illustrations.
38
<PAGE>
The hypothetical values shown in the tables do not reflect any separate account
charges for federal income taxes, since we are not currently making such
charges. However, such charges may be made in the future, and in that event,
the gross annual investment rate of return would have to exceed 0%, 6%, or 12%
by an amount sufficient to cover the tax charges in order to produce the death
benefit, total account values, and cash surrender values illustrated.
The tables illustrate the policy values that would result based upon the
hypothetical investment rates of return if premiums were paid as indicated, if
all net premiums are allocated to Variable Life Account B and if no policy
loans have been made. The tables are also based on the assumptions that the
policy owner has not requested an increase or decrease in the specified amount
of the Policy, and no partial surrenders have been made.
Upon request, we will provide an illustration based upon the proposed Insured's
age, sex of Insured (if necessary), and underwriting classification, the
specified amount or premium requested, the proposed frequency of premium
payments and any available riders requested. A fee of $25 is charged for each
such illustration.
The hypothetical gross annual investment return assumed in such an illustration
will not exceed 12%.
39
<PAGE>
AetnaVest Plus Policy
Table I
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 45 - UNISEX FOR SPECIAL PLAN POLICIES
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$6,720.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,056 500,000 500,000 500,000 4,330 4,649 4,969 658 977 1,297
2 14,465 500,000 500,000 500,000 8,608 9,521 10,474 4,936 5,849 6,802
3 22,244 500,000 500,000 500,000 12,673 14,459 16,400 9,001 10,787 12,728
4 30,412 500,000 500,000 500,000 16,521 19,458 22,784 12,849 15,786 19,112
5 38,989 500,000 500,000 500,000 20,140 24,506 29,657 16,468 20,834 25,985
6 47,994 500,000 500,000 500,000 23,526 29,599 37,066 20,191 26,264 33,731
7 57,450 500,000 500,000 500,000 26,653 34,709 45,039 23,685 31,741 42,071
8 67,379 500,000 500,000 500,000 29,495 39,807 53,609 26,894 37,206 51,008
9 77,803 500,000 500,000 500,000 32,032 44,873 62,823 29,798 42,639 60,589
10 88,750 500,000 500,000 500,000 34,229 49,869 72,716 32,362 48,002 70,849
15 152,258 500,000 500,000 500,000 39,253 72,764 134,722 39,222 72,733 134,691
20 233,313 500,000 500,000 500,000 30,414 87,804 226,667 30,414 87,804 226,667
25 336,762 500,000 500,000 500,000 0 83,205 372,174 0 83,205 372,174
30 468,793 500,000 500,000 665,910 0 33,112 622,346 0 33,112 622,346
20 (Age 65) 233,313 500,000 500,000 500,000 30,414 87,804 226,667 30,414 87,804 226,667
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative
charges, and premium load assumed.
If premiums are paid more frequently than annually, the death benefits, total
account values, and cash surrender values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the policy owner's allocations, and the Fund's rate of return. The
total account value and cash value for a Policy would be different from those
shown in the actual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below those averages for individual
policy years. No representations can be made that these rates of return will
definitely be achieved for any one year or sustained over a period of time.
40
<PAGE>
AetnaVest Plus Policy
Table II
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 45 - UNISEX FOR SPECIAL PLAN POLICIES
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$4,080.00 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,284 500,000 500,000 500,000 1,892 2,062 2,232 0 0 0
2 8,782 500,000 500,000 500,000 3,773 4,234 4,717 101 562 1,045
3 13,505 500,000 500,000 500,000 5,481 6,355 7,310 1,809 2,683 3,638
4 18,465 500,000 500,000 500,000 7,009 8,411 10,010 3,337 4,739 6,338
5 23,672 500,000 500,000 500,000 8,342 10,383 12,812 4,670 6,711 9,140
6 29,139 500,000 500,000 500,000 9,475 12,258 15,717 6,140 8,923 12,382
7 34,880 500,000 500,000 500,000 10,377 13,999 18,704 7,409 11,031 15,736
8 40,908 500,000 500,000 500,000 11,020 15,566 21,749 8,419 12,965 19,148
9 47,238 500,000 500,000 500,000 11,379 16,923 24,830 9,145 14,689 22,596
10 53,884 500,000 500,000 500,000 11,415 18,019 27,910 9,548 16,152 26,043
15 92,443 500,000 500,000 500,000 5,695 17,882 42,127 5,664 17,851 42,096
20 141,655 0 500,000 500,000 0 1,196 48,466 0 1,196 48,466
25 204,463 0 0 500,000 0 0 28,221 0 0 28,221
30 284,624 0 0 0 0 0 0 0 0 0
20 (Age 65) 141,655 0 500,000 500,000 0 1,196 48,466 0 1,196 48,466
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative
charges, and premium load assumed.
If premiums are paid more frequently than annually, the death benefits, total
account values, and cash surrender values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the policy owner's allocations, and the Fund's rate of return. The
total account value and cash value for a Policy would be different from those
shown in the actual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below those averages for individual
policy years. No representations can be made that these rates of return will
definitely be achieved for any one year or sustained over a period of time.
41
<PAGE>
AetnaVest Plus Policy
Table III
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 45 - UNISEX FOR SPECIAL PLAN POLICIES
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$6,720.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,056 500,000 500,000 500,000 4,908 5,249 5,592 1,236 1,577 1,920
2 14,465 500,000 500,000 500,000 9,817 10,813 11,852 6,145 7,141 8,180
3 22,244 500,000 500,000 500,000 14,566 16,540 18,683 10,894 12,868 15,011
4 30,412 500,000 500,000 500,000 19,133 22,413 26,117 15,461 18,741 22,445
5 38,989 500,000 500,000 500,000 23,493 28,410 34,193 19,821 24,738 30,521
6 47,994 500,000 500,000 500,000 27,620 34,511 42,953 24,285 31,176 39,618
7 57,450 500,000 500,000 500,000 31,532 40,735 52,490 28,564 37,767 49,522
8 67,379 500,000 500,000 500,000 35,242 47,101 62,899 32,641 44,500 60,298
9 77,803 500,000 500,000 500,000 38,761 53,628 74,291 36,527 51,394 72,057
10 88,750 500,000 500,000 500,000 42,082 60,314 86,768 40,215 58,447 84,901
15 152,258 500,000 500,000 500,000 56,072 96,853 170,736 56,041 96,822 170,705
20 233,313 500,000 500,000 500,000 63,773 137,946 307,759 63,773 137,846 307,759
25 336,762 500,000 500,000 623,257 62,486 182,965 537,290 62,486 182,965 537,290
30 468,793 500,000 500,000 976,054 45,557 230,664 912,200 45,557 230,664 912,200
20 (Age 65) 233,313 500,000 500,000 500,000 63,773 137,846 307,759 63,773 137,846 307,759
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative
charges, and premium load assumed.
If premiums are paid more frequently than annually, the death benefits, total
account values, and cash surrender values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the policy owner's allocations, and the Fund's rate of return. The
total account value and cash value for a Policy would be different from those
shown in the actual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below those averages for individual
policy years. No representations can be made that these rates of return will
definitely be achieved for any one year or sustained over a period of time.
42
<PAGE>
AetnaVest Plus Policy
Table IV
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
MALE ISSUE AGE 45 - UNISEX FOR SPECIAL PLAN POLICIES
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$4,080.00 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,284 500,000 500,000 500,000 2,397 2,585 2,774 0 0 0
2 8,782 500,000 500,000 500,000 4,830 5,361 5,918 1,158 1,689 2,246
3 13,505 500,000 500,000 500,000 7,137 8,171 9,298 3,465 4,499 5,626
4 18,465 500,000 500,000 500,000 9,293 10,989 12,912 5,621 7,317 9,240
5 23,672 500,000 500,000 500,000 11,271 13,785 16,755 7,599 10,113 13,083
6 29,139 500,000 500,000 500,000 13,044 16,528 20,821 9,709 13,193 17,486
7 34,880 500,000 500,000 500,000 14,626 19,229 25,149 11,658 16,261 22,181
8 40,908 500,000 500,000 500,000 16,028 21,895 29,778 13,427 19,294 27,177
9 47,238 500,000 500,000 500,000 17,262 24,535 34,752 15,028 22,301 32,518
10 53,884 500,000 500,000 500,000 18,318 27,137 40,099 16,451 25,270 38,232
15 92,443 500,000 500,000 500,000 21,221 39,820 74,494 21,190 39,789 74,463
20 141,655 500,000 500,000 500,000 17,881 49,343 125,708 17,881 49,343 125,708
25 204,463 500,000 500,000 500,000 4,924 51,280 204,115 4,924 51,280 204,115
30 284,624 0 500,000 500,000 0 35,390 329,721 0 35,390 329,721
20 (Age 65) 141,655 500,000 500,000 500,000 17,881 49,343 125,708 17,881 49,343 125,708
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative
charges, and premium load assumed.
If premiums are paid more frequently than annually, the death benefits, total
account values, and cash surrender values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the policy owner's allocations, and the Fund's rate of return. The
total account value and cash value for a Policy would be different from those
shown in the actual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below those averages for individual
policy years. No representations can be made that these rates of return will
definitely be achieved for any one year or sustained over a period of time.
43
<PAGE>
AetnaVest Plus Policy
Table V
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 45
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$6,360.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,678 500,000 500,000 500,000 4,027 4,327 4,627 517 817 1,117
2 13,690 500,000 500,000 500,000 8,017 8,872 9,765 4,507 5,362 6,255
3 21,052 500,000 500,000 500,000 11,807 13,478 15,295 8,297 9,968 11,785
4 28,783 500,000 500,000 500,000 15,385 18,131 21,241 11,875 14,621 17,731
5 36,900 500,000 500,000 500,000 18,751 22,831 27,645 15,241 19,321 24,135
6 45,423 500,000 500,000 500,000 21,897 27,568 34,543 18,709 24,380 31,355
7 54,372 500,000 500,000 500,000 24,795 32,314 41,958 21,958 29,479 39,121
8 63,769 500,000 500,000 500,000 27,430 37,049 49,929 24,944 34,563 47,443
9 73,635 500,000 500,000 500,000 29,774 41,747 58,488 27,639 39,612 56,353
10 83,995 500,000 500,000 500,000 31,798 46,372 67,672 30,014 44,588 65,888
15 144,102 500,000 500,000 500,000 36,466 67,599 125,184 36,437 67,570 125,155
20 220,814 500,000 500,000 500,000 28,590 81,704 210,143 28,590 81,704 210,143
25 318,722 500,000 500,000 500,000 0 77,632 342,572 0 77,632 342,572
30 443,679 500,000 500,000 610,767 0 32,479 570,811 0 32,479 570,811
20 (Age 65) 220,814 500,000 500,000 500,000 28,590 81,704 210,143 28,590 81,704 210,143
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative
charges, and premium load assumed.
If premiums are paid more frequently than annually, the death benefits, total
account values, and cash surrender values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the policy owner's allocations, and the Fund's rate of return. The
total account value and cash value for a Policy would be different from those
shown in the actual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below those averages for individual
policy years. No representations can be made that these rates of return will
definitely be achieved for any one year or sustained over a period of time.
44
<PAGE>
AetnaVest Plus Policy
Table VI
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 45
GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED
$3,900.00 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,095 500,000 500,000 500,000 1,755 1,916 2,077 0 0 0
2 8,395 500,000 500,000 500,000 3,512 3,946 4,401 2 436 891
3 12,909 500,000 500,000 500,000 5,107 5,927 6,826 1,597 2,417 3,316
4 17,650 500,000 500,000 500,000 6,523 7,840 9,341 3,013 4,330 5,831
5 22,627 500,000 500,000 500,000 7,761 9,675 11,953 4,251 6,125 8,443
6 27,854 500,000 500,000 500,000 8,809 11,417 14,659 5,621 8,229 11,471
7 33,342 500,000 500,000 500,000 9,637 13,027 17,433 6,800 10,190 14,596
8 39,104 500,000 500,000 500,000 10,225 14,476 20,262 7,739 11,990 17,776
9 45,154 500,000 500,000 500,000 10,545 15,725 23,118 8,410 13,590 20,983
10 51,506 500,000 500,000 500,000 10,560 16,726 25,968 8,776 14,942 24,184
15 88,364 500,000 500,000 500,000 5,287 16,619 39,189 5,258 16,590 39,160
20 135,405 0 500,000 500,000 0 1,636 45,487 0 1,636 45,487
25 195,442 0 0 500,000 0 0 27,786 0 0 27,786
30 272,067 0 0 0 0 0 0 0 0 0
20 (Age 65) 135,405 0 500,000 500,000 0 1,636 45,487 0 1,636 45,487
</TABLE>
(1) Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk charges, administrative
charges, and premium load assumed.
If premiums are paid more frequently than annually, the death benefits, total
account values, and cash surrender values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the policy owner's allocations, and the Fund's rate of return. The
total account value and cash value for a Policy would be different from those
shown in the actual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below those averages for individual
policy years. No representations can be made that these rates of return will
definitely be achieved for any one year or sustained over a period of time.
45
<PAGE>
AetnaVest Plus Policy
Table VII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 45
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$3,900.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,678 500,000 500,000 500,000 4,595 4,917 5,239 1,085 1,407 1,729
2 13,690 500,000 500,000 500,000 9,197 10,134 11,112 5,687 6,624 7,602
3 21,052 500,000 500,000 500,000 13,657 15,512 17,525 10,147 12,002 14,015
4 28,783 500,000 500,000 500,000 17,950 21,030 24,510 14,440 17,520 21,000
5 36,900 500,000 500,000 500,000 22,060 26,679 32,111 18,550 23,169 28,601
6 45,423 500,000 500,000 500,000 25,960 32,433 40,364 22,772 29,245 37,176
7 54,372 500,000 500,000 500,000 29,669 38,116 49,358 26,832 35,478 46,521
8 63,769 500,000 500,000 500,000 33,192 44,337 59,179 30,706 41,851 56,693
9 73,635 500,000 500,000 500,000 36,547 50,520 69,936 34,412 48,385 67,801
10 83,995 500,000 500,000 500,000 39,724 56,864 81,723 37,940 55,080 79,939
15 144,102 500,000 500,000 500,000 53,186 91,561 160,988 53,157 91,532 160,959
20 220,814 500,000 500,000 500,000 60,833 130,533 289,984 60,833 130,533 289,984
25 318,722 500,000 500,000 586,508 59,804 173,035 505,610 59,804 173,035 505,610
30 443,679 500,000 500,000 919,322 44,010 217,283 859,180 44,010 217,283 859,180
20 (Age 65) 220,814 500,000 500,000 500,000 60,833 130,533 289,984 60,833 130,533 289,984
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative
charges, and premium load assumed.
If premiums are paid more frequently than annually, the death benefits, total
account values, and cash surrender values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the policy owner's allocations, and the Fund's rate of return. The
total account value and cash value for a Policy would be different from those
shown in the actual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below those averages for individual
policy years. No representations can be made that these rates of return will
definitely be achieved for any one year or sustained over a period of time.
46
<PAGE>
AetnaVest Plus Policy
Table VIII
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1)
UNISEX ISSUE AGE 45
CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED
$3,900.00 ANNUAL BASIC PREMIUM
PREFERRED NONSMOKER RISK
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
<TABLE>
<CAPTION>
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value
at Return of Annual Investment Return of Annual Investment Return of
Policy 5% Interest --------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------------- ------------ ---------- ---------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,095 500,000 500,000 500,000 2,256 2,434 2,614 0 0 0
2 8,395 500,000 500,000 500,000 4,551 5,055 5,582 1,041 1,545 2,072
3 12,909 500,000 500,000 500,000 6,735 7,715 8,782 3,225 4,205 5,272
4 17,650 500,000 500,000 500,000 8,782 10,388 12,209 5,272 6,878 8,699
5 22,627 500,000 500,000 500,000 10,676 13,056 15,868 7,166 9,546 12,358
6 27,854 500,000 500,000 500,000 12,384 15,685 19,751 9,196 12,497 16,563
7 33,342 500,000 500,000 500,000 13,926 18,289 23,900 11,089 15,452 21,063
8 39,104 500,000 500,000 500,000 15,304 20,870 28,346 12,818 18,384 25,860
9 45,154 500,000 500,000 500,000 16,535 23,443 33,138 14,401 21,308 31,003
10 51,506 500,000 500,000 500,000 17,610 25,994 38,302 15,826 24,210 36,518
15 88,364 500,000 500,000 500,000 20,807 38,589 71,619 20,778 38,560 71,590
20 135,405 500,000 500,000 500,000 18,298 48,560 121,458 18,298 48,560 121,458
25 195,442 500,000 500,000 500,000 6,608 51,502 197,511 6,608 51,502 197,511
30 272,067 0 500,000 500,000 0 38,076 318,683 0 38,076 318,683
20 (Age 65) 135,405 500,000 500,000 500,000 18,298 48,560 121,458 18,298 48,560 121,458
</TABLE>
(1) Assumes no Policy loan has been made. Current cost of insurance rates
assumed. Current mortality and expense risk charges, administrative
charges, and premium load assumed.
If premiums are paid more frequently than annually, the death benefits, total
account values, and cash surrender values would be less than those illustrated.
The investment results are illustrative only and should not be considered a
representation of past or future investments results. Actual investment results
may be more or less than those shown and will depend on a number of factors
including the policy owner's allocations, and the Fund's rate of return. The
total account value and cash value for a Policy would be different from those
shown in the actual investment rates of return averaged 0%, 6%, and 12% over a
period of years, but fluctuated above or below those averages for individual
policy years. No representations can be made that these rates of return will
definitely be achieved for any one year or sustained over a period of time.
47
<PAGE>
FINANCIAL STATEMENTS
VARIABLE LIFE ACCOUNT B
Index
<TABLE>
<CAPTION>
Page
<S> <C>
Statement of Assets and Liabilities........................................S-2
Statements of Operations and Changes in Net Assets.........................S-5
Notes to Financial Statements..............................................S-6
Independent Auditors' Report...............................................S-19
</TABLE>
S-1
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Statement of Assets and Liabilities -- December 31, 1999
ASSETS:
Investments, at net asset value: (Note 1)
<TABLE>
<CAPTION>
Total
Shares Cost Assets
--------- ------------ ------------
<S> <C> <C> <C>
Aetna Ascent VP 210,193 $ 3,021,614 $ 3,136,076
Aetna Balanced VP, Inc. 1,840,829 28,411,306 28,661,711
Aetna Bond VP 1,585,677 20,656,384 19,297,688
Aetna Crossroads VP 173,950 2,335,123 2,395,290
Aetna Growth and Income VP 5,612,663 185,527,276 172,252,616
Aetna Growth VP 3,353 52,285 58,067
Aetna Index Plus Large Cap VP 984,575 18,690,522 20,548,071
Aetna Legacy VP 89,319 1,115,863 1,115,594
Aetna Money Market VP 2,865,679 38,252,424 38,443,372
Aetna Small Company VP 38,381 525,384 634,048
Aetna Value Opportunity VP 8,229 130,042 135,120
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio 1,233,869 30,324,637 31,722,779
Growth Portfolio 370,659 16,510,133 20,360,310
High Income Portfolio 95,391 1,092,091 1,078,868
Overseas Portfolio 165,315 3,310,781 4,536,234
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio 92,841 1,602,587 1,733,346
Contrafund Portfolio 996,741 22,982,190 29,054,986
Janus Aspen Series:
Aggressive Growth Portfolio 962,665 45,420,154 57,461,476
Balanced Portfolio 800,621 18,485,162 22,353,327
Flexible Income Portfolio 5,978 69,472 68,267
Growth Portfolio 1,017,622 26,378,071 34,242,981
Worldwide Growth Portfolio 1,381,919 46,635,796 65,986,620
MFS Variable Insurance Trust:
Total Return Series 639 11,219 11,344
World Government Series 198 2,000 1,984
Oppenheimer Funds:
Aggressive Growth Fund 8,969 728,396 738,203
Global Securities Fund 19,315 516,931 645,319
Growth & Income Fund 12,694 303,537 312,661
Strategic Bond Fund 264,204 1,274,694 1,313,094
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio 419,434 28,129,870 34,741,713
PPI MFS Research Growth Portfolio 1,075,876 13,315,190 15,901,444
PPI MFS Value Equity Portfolio 53,473 2,451,631 2,928,730
PPI Scudder International Growth Portfolio 959,535 21,745,757 24,458,534
PPI T. Rowe Price Growth Equity Portfolio 36,443 1,968,414 2,405,261
------------ ------------
TOTAL ASSETS $581,976,936 $638,735,134
============ ============
Net assets represented by:
Policyholders' account values: (Notes 1 and 5)
Aetna Ascent VP
Policyholders' account values ......................................................... $ 3,136,076
Aetna Balanced VP, Inc.
Policyholders' account values ......................................................... 28,661,711
</TABLE>
See accompanying notes to financial statements.
S-2
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Statement of Assets and Liabilities -- December 31, 1999 (continued):
<TABLE>
<S> <C>
Aetna Bond VP
Policyholders' account values ........................ $19,297,688
Aetna Crossroads VP
Policyholders' account values ........................ 2,395,290
Aetna Growth and Income VP
Policyholders' account values ........................ 172,252,616
Aetna Growth VP
Policyholders' account values ........................ 58,067
Aetna Index Plus Large Cap VP
Policyholders' account values ........................ 20,548,071
Aetna Legacy VP
Policyholders' account values ........................ 1,115,594
Aetna Money Market VP
Policyholders' account values ........................ 38,443,372
Aetna Small Company VP
Policyholders' account values ........................ 634,048
Aetna Value Opportunity VP
Policyholders' account values ........................ 135,120
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio
Policyholders' account values ....................... 31,722,779
Growth Portfolio
Policyholders' account values ....................... 20,360,310
High Income Portfolio
Policyholders' account values ....................... 1,078,868
Overseas Portfolio
Policyholders' account values ....................... 4,536,234
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio
Policyholders' account values ....................... 1,733,346
Contrafund Portfolio
Policyholders' account values ....................... 29,054,986
Janus Aspen Series:
Aggressive Growth Portfolio
Policyholders' account values ....................... 57,461,476
Balanced Portfolio
Policyholders' account values ....................... 22,353,327
Flexible Income Portfolio
Policyholders' account values ....................... 68,267
Growth Portfolio
Policyholders' account values ....................... 34,242,981
Worldwide Growth Portfolio
Policyholders' account values ....................... 65,986,620
MFS Variable Insurance Trust:
Total Return Series
Policyholders' account values ....................... 11,344
World Government Series
Policyholders' account values ....................... 1,984
Oppenheimer Funds:
Aggressive Growth Fund
Policyholders' account values ....................... 738,203
</TABLE>
See accompanying notes to financial statements.
S-3
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Statement of Assets and Liabilities -- December 31, 1999 (continued):
<TABLE>
<S> <C>
Global Securities Fund
Policyholders' account values ......... $ 645,319
Growth & Income Fund
Policyholders' account values ......... 312,661
Strategic Bond Fund
Policyholders' account values ......... 1,313,094
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio
Policyholders' account values ......... 34,741,713
PPI MFS Research Growth Portfolio
Policyholders' account values ......... 15,901,444
PPI MFS Value Equity Portfolio
Policyholders' account values ......... 2,928,730
PPI Scudder International Growth Portfolio
Policyholders' account values ......... 24,458,534
PPI T. Rowe Price Growth Equity Portfolio
Policyholders' account values ......... 2,405,261
------------
$638,735,134
============
</TABLE>
See accompanying notes to financial statements.
S-4
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ................................................... $ 48,867,068 $ 43,340,466 $ 35,222,623
Expenses: (Notes 2 and 5)
Valuation period deduction .................................. (5,991,275) (4,390,578) (2,713,203)
-------------- ------------- -------------
Net Investment Income ........................................ 42,875,793 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 ......................................... 874,382,151 481,590,756 260,329,704
Cost of investments sold .................................... 793,957,391 454,360,016 245,858,726
-------------- ------------- -------------
Net realized gain .......................................... 80,424,760 27,230,740 14,470,978
Net unrealized gain on investments: (Note 5)
Beginning of year ........................................... 29,609,254 16,987,228 14,132,669
End of year ................................................. 56,758,198 29,609,254 16,987,228
-------------- ------------- -------------
Net change in unrealized gain .............................. 27,148,944 12,622,026 2,854,559
-------------- ------------- -------------
Net realized and unrealized gain on investments .............. 107,573,704 39,852,766 17,325,537
-------------- ------------- -------------
Net increase in net assets resulting from operations ......... 150,449,497 78,802,654 49,834,957
-------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS:
Variable life premium payments ............................... 135,305,924 171,088,399 127,736,110
Transfers to the Company for monthly deductions .............. (32,799,767) (29,899,398) (21,545,914)
Redemptions by policyholders ................................. (162,896,593) (15,359,273) (24,062,185)
Transfers on account of policy loans ......................... (4,913,122) (4,006,080) (2,875,077)
Other ........................................................ 779,888 (342,142) 263,373
-------------- ------------- -------------
Net increase (decrease) in net assets resulting from unit
transactions (Note 5) ....................................... (64,523,670) 121,481,506 79,516,307
-------------- ------------- -------------
Net changes in net assets .................................... 85,925,827 200,284,160 129,351,264
NET ASSETS:
Beginning of period .......................................... 552,809,307 352,525,147 223,173,883
-------------- ------------- -------------
End of period ................................................ $ 638,735,134 $ 552,809,307 $ 352,525,147
============== ============= =============
</TABLE>
See accompanying notes to financial statements.
S-5
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999
1. Summary of Significant Accounting Policies & Account Information
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 Variable Account consists of eight products which are listed
below.
o Aetna Vest
o Aetna Vest II
o Aetna Vest Plus
o Aetna Vest Estate Protector
o Aetna Vest Estate Protector II
o Corporate Specialty Market
o Corporate Specialty Market II
o NYSUT Individual Life
Effective October 1, 1998, Aetna Life Insurance Company and Aetna Life
Insurance & Annuity Company contracted the administrative servicing
obligations to its individual variable life business to The Lincoln
National Life Insurance Company (Lincoln Life) and Lincoln Life & Annuity
Company of New York (LLANY). Although the Company is responsible for all
policy terms and conditions, Lincoln Life and LLANY are responsible for
servicing the individual life contracts, including the payment of benefits,
oversight of investment management and contract administration. The assets
of the Variable Account are owned by Lincoln Life. The portion of the
Variable Account's assets supporting the variable life policies may not be
used to satisfy liabilities arising out of any other business of Lincoln
Life.
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, 1999:
<TABLE>
<S> <C>
Aetna Ascent VP Janus Aspen Series:
Aetna Balanced VP, Inc. o Aggressive Growth Portfolio
Aetna Bond VP o Balanced Portfolio
Aetna Crossroads VP o Flexible Income Portfolio
Aetna Growth and Income VP o Growth Portfolio
Aetna Growth VP o Worldwide Growth Portfolio
Aetna Index Plus Large Cap VP MFS Variable Insurance Trust:
Aetna Legacy VP o Total Return Series
Aetna Money Market VP o World Government Series
Aetna Small Company VP Oppenheimer Funds:
Aetna Value Opportunity VP o Aggressive Growth Fund
Fidelity Investments o Global Securities Fund
Insurance Products Fund: o Growth & Income Fund
o Equity-Income Portfolio o Strategic Bond Fund
o Growth Portfolio Portfolio Partners Inc. (PPI):
o High Income Portfolio o PPI MFS Emerging Equities Portfolio
o Overseas Portfolio o PPI MFS Research Growth Portfolio
Fidelity Investments Variable Insurance o PPI MFS Value Equity Portfolio
Products Fund II: o PPI Scudder International Growth Portfolio
o Asset Manager Portfolio o PPI T. Rowe Price Growth Equity Portfolio
o Contrafund Portfolio
</TABLE>
S-6
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
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 operation 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. The Account will not be
taxed as a regulated investment company under Subchapter M of the Internal
Revenue Code. Under current federal income tax law, no federal income taxes
are payable with respect to the Variable Account's net investment income
and the net realized gain on investments.
2. Mortality & Expense Guarantees & Other Transactions with Affiliates
The Company charges each variable sub-account for mortality and expense
risk. The amount charged is deducted daily at rates per year specified in
each policy.
The Company deducts a premium load from each premium payment to cover
administration expenses, state taxes, and Federal income tax liabilities.
The percentage deducted from each premium payment is specified in each
policy.
The Company charges monthly administrative fees for items such as
underwriting and issuance, premium billing and collection, policy value
calculation, confirmations and periodic reports. The amount of the monthly
administrative fees are specified in each policy.
The Company charges a monthly deduction for the cost of insurance and any
charges for supplemental riders. The cost of insurance charge is equal to
the amount at risk multiplied by a monthly cost of insurance rate. The cost
of insurance rate is variable and is based on the insured's issue age, sex
(where permitted by law), number of policy years elapsed and premium class.
Under certain circumstances, the Company reserves the right to charge a
transfer fee between sub-accounts. The amount of the transfer fee is
specified in each policy.
The Company, upon full surrender of a policy, may charge a surrender
charge. This charge is in part a deferred sales charge and in part a
recovery of certain first year administrative costs. The amount of the
surrender charge, if any, will depend on the specified amount, insured's
age, risk class and sex (where permitted by law). The maximum surrender
charges are included in each policy and are in compliance with each state's
nonforfeiture law.
3. Dividend Income
On an annual basis, the underlying mutual funds in which the Account
invests 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 underlying mutual funds. The
Account's proportionate share of each underlying mutual fund's
undistributed net investment income and accumulated net realized gain
(loss) on investments is included in net unrealized gain (loss) on
investments in the Statements of Operations and Changes in Net Assets of
the Account.
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, 1999, 1998 and 1997
aggregated $852,734,274 and $874,382,151, $642,022,151 and $481,590,756,
and $372,335,431 and $260,329,704, respectively.
S-7
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Valuation Proceeds
Period from
Dividends Deductions Sales
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Ascent VP: $ 207,334 ($27,423) $ 797,996
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 4,927,154 (362,224) 24,237,521
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Bond VP 1,443,656 (280,638) 18,417,017
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 150,412 (21,636) 728,894
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP 30,198,699 (1,580,938) 32,617,948
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Growth VP(1) 3,015 (34,261) 5,715,725
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 881,321 (196,915) 14,299,931
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Legacy VP 62,497 (9,474) 227,116
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Money Market VP 1,696,087 (398,471) 240,430,804
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Small Company VP 8,993 (28,237) 4,384,995
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 6,310 (991) 96,462
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio 1,764,504 (369,449) 17,136,392
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Growth Portfolio 2,197,635 (205,229) 16,307,193
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
High Income Portfolio 62,986 (7,432) 326,086
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Overseas Portfolio 125,931 (32,249) 1,315,907
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio 232,267 (29,020) 2,871,385
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Contrafund Portfolio 1,565,873 (381,504) 26,236,688
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio 1,087,970 (302,514) 130,280,210
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Balanced Portfolio 550,807 (265,810) 17,853,236
Policyholders' account values
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Net Unrealized
Gain (Loss)
Cost of Net -----------
Investments Realized Beginning End
Sold Gain (Loss) of Period of Period
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aetna Ascent VP: $ 774,178 $ 23,818 ($53,438) $ 114,462
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 25,666,801 (1,429,280) (88,169) 250,405
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP 18,670,143 (253,126) (21,056) (1,358,696)
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 729,509 (615) (13,664) 60,167
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP 29,355,401 3,262,547 (6,059,944) (13,274,660)
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP(1) 5,103,503 612,222 - 5,782
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 11,770,545 2,529,386 1,027,911 1,857,549
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 226,972 144 (9,107) (269)
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP 240,018,029 412,775 267,256 190,948
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 3,960,970 424,025 (23,492) 108,664
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 76,961 19,501 12,485 5,078
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio 15,738,454 1,397,938 2,106,941 1,398,142
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Growth Portfolio 12,435,135 3,872,058 3,937,336 3,850,177
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
High Income Portfolio 352,715 (26,629) (22,754) (13,223)
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio 1,200,968 114,939 190,775 1,225,453
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio 2,692,023 179,362 266,952 130,759
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio 20,796,590 5,440,098 5,961,343 6,072,796
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio 109,911,278 20,368,932 3,818,015 12,041,322
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 12,910,893 4,942,343 3,434,432 3,868,165
Policyholders' account values
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Net Net Increase Net Assets
Change in (Decrease) in ------------------------------
Unrealized Net Assets Resulting Beginning End
Gain (Loss) From Unit Transactions of Period of Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aetna Ascent VP: $ 167,900 ($13,121)
Policyholders' account values $ 2,777,568 $ 3,136,076
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 338,574 (8,902,224)
Policyholders' account values 34,089,711 28,661,711
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP (1,337,640) (10,250,586)
Policyholders' account values 29,976,022 19,297,688
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 73,831 137,429
Policyholders' account values 2,055,869 2,395,290
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP (7,214,716) (9,143,942)
Policyholders' account values 156,730,966 172,252,616
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP(1) 5,782 (528,691)
Policyholders' account values - 58,067
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 829,638 3,159,014
Policyholders' account values 13,345,627 20,548,071
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 8,838 45,676
Policyholders' account values 1,007,913 1,115,594
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP (76,308) 143,868
Policyholders' account values 36,665,421 38,443,372
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP 132,156 (890,290)
Policyholders' account values 987,401 634,048
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP (7,407) 61,807
Policyholders' account values 55,900 135,120
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio (708,799) (7,091,968)
Policyholders' account values 36,730,553 31,722,779
- -----------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio (87,159) (4,688,720)
Policyholders' account values 19,271,725 20,360,310
- -----------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio 9,531 804,059
Policyholders' account values 236,353 1,078,868
- -----------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio 1,034,678 178,105
Policyholders' account values 3,114,830 4,536,234
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio (136,193) (1,643,684)
Policyholders' account values 3,130,614 1,733,346
- -----------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio 111,453 (16,110,899)
Policyholders' account values 38,429,965 29,054,986
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio 8,223,307 4,654,782
Policyholders' account values 23,428,999 57,461,476
- -----------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio 433,733 (4,727,822)
Policyholders' account values 21,420,076 22,353,327
===================================================================================================================================
</TABLE>
S-8
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ----------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Valuation Proceeds
Period from
Dividends Deductions Sales
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Flexible Income Portfolio (2) $ 5,337 ($658) $ 122,746
Policyholders' account values
- ----------------------------------------------------------------------------------------------
Growth Portfolio 202,497 (257,076) 21,130,544
Policyholders' account values
- ----------------------------------------------------------------------------------------------
Worldwide Growth Portfolio 96,897 (512,954) 56,371,577
Policyholders' account values
- ----------------------------------------------------------------------------------------------
MFS Variable Insurance Trust:
Total Return Series (3) 26 (6) 1,588
Policyholders' account values
- ----------------------------------------------------------------------------------------------
World Government Series (4) -- (1) --
Policyholders' account values
- ----------------------------------------------------------------------------------------------
Oppenheimer Funds:
Aggressive Growth Fund (5) -- (45) 22
Policyholders' account values
- ----------------------------------------------------------------------------------------------
Global Securities Fund 12,736 (3,636) 751,030
Policyholders' account values
- ----------------------------------------------------------------------------------------------
Growth & Income Fund 1,424 (2,052) 710,579
Policyholders' account values
- ----------------------------------------------------------------------------------------------
Strategic Bond Fund 40,196 (11,335) 1,349,254
Policyholders' account values
- ----------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio 329,059 (312,763) 92,317,033
Policyholders' account values
- ----------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio 26,665 (127,616) 11,385,569
Policyholders' account values
- ----------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio 39,629 (11,919) 1,177,567
Policyholders' account values
- ----------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio 885,006 (199,531) 134,290,559
Policyholders' account values
- ----------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio 54,145 (17,268) 492,577
Policyholders' account values
- ----------------------------------------------------------------------------------------------
Total Variable Life Account B $48,867,068 ($5,991,275) $874,382,151
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Net Unrealized
Gain (Loss) Net
Cost of Net ----------- Change in
Investments Realized Beginning End Unrealized
Sold Gain (Loss) of Period of Period Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Flexible Income Portfolio (2) $ 124,997 ($2,251) $ - ($1,205) ($1,205)
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
Growth Portfolio 15,320,528 5,810,016 3,730,121 7,864,910 4,134,789
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio 42,528,486 13,843,091 5,492,542 19,350,824 13,858,282
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
MFS Variable Insurance Trust:
Total Return Series (3) 1,601 (13) -- 125 125
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
World Government Series (4) -- -- -- (16) (16)
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Aggressive Growth Fund (5) 20 2 -- 9,807 9,807
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
Global Securities Fund 654,790 96,240 19,272 128,388 109,116
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund 654,333 56,246 11,048 9,124 (1,924)
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
Strategic Bond Fund 1,342,562 6,692 16,740 38,400 21,660
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio 82,923,450 9,393,583 3,702,269 6,611,843 2,909,574
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio 10,005,001 1,380,568 974,898 2,586,254 1,611,356
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio 900,465 277,102 82,622 477,099 394,477
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio 126,685,605 7,604,954 698,227 2,712,777 2,014,550
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio 424,485 68,092 149,693 436,847 287,154
Policyholders' account values
- ------------------------------------------------------------------------------------------------------------------------
Total Variable Life Account B $793,957,391 $80,424,760 $29,609,254 $56,758,198 $27,148,944
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
Net Increase Net Assets
(Decrease) in ----------
Net Assets Resulting Beginning End
From Unit Transactions of Period of Period
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Flexible Income Portfolio (2) $ 67,044
Policyholders' account values $ - $ 68,267
- ---------------------------------------------------------------------------------------------------
Growth Portfolio 950,511
Policyholders' account values 23,402,244 34,242,981
- ---------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio (4,853,866)
Policyholders' account values 43,555,170 65,986,620
- ---------------------------------------------------------------------------------------------------
MFS Variable Insurance Trust:
Total Return Series (3) 11,212
Policyholders' account values -- 11,344
- ---------------------------------------------------------------------------------------------------
World Government Series (4) 2,001
Policyholders' account values -- 1,984
- ---------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Aggressive Growth Fund (5) 728,439
Policyholders' account values -- 738,203
- ---------------------------------------------------------------------------------------------------
Global Securities Fund 113,811
Policyholders' account values 317,052 645,319
- ---------------------------------------------------------------------------------------------------
Growth & Income Fund 183,796
Policyholders' account values 75,171 312,661
- ---------------------------------------------------------------------------------------------------
Strategic Bond Fund 544,409
Policyholders' account values 711,472 1,313,094
- ---------------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio (8,310,862)
Policyholders' account values 30,733,122 34,741,713
- ---------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio 1,275,501
Policyholders' account values 11,734,970 15,901,444
- ---------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio 1,424,018
Policyholders' account values 805,423 2,928,730
- ---------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio (2,509,255)
Policyholders' account values 16,662,810 24,458,534
- ---------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio 656,778
Policyholders' account values 1,356,360 2,405,261
- ---------------------------------------------------------------------------------------------------
Total Variable Life Account B ($ 64,523,670) $552,809,307 $638,735,134
===================================================================================================
</TABLE>
(1) - Reflects less than a full year of activity. Funds were first received in
this option during January 1999.
(2) - Reflects less than a full year of activity. Funds were first received in
this option during February 1999.
(3) - Reflects less than a full year of activity. Funds were first received in
this option during March 1999.
(4) - Reflects seed money. No funds have been received for this option.
(5) - Reflects less than a full year of activity. Funds were first received in
this option during December 1999.
S-9
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Valuation Proceeds
Period from
Dividends Deductions Sales
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Ascent VP: (1) $ 129,523 ($22,620) $ 393,522
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc.: (2) 5,079,318 (289,232) 8,936,646
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Bond VP: (3) 1,751,860 (257,828) 6,762,101
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Crossroads VP: (4) 77,190 (14,622) 473,877
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP: (5) 27,303,998 (1,392,329) 39,271,149
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP: (6) 591,905 (73,086) 3,515,589
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Legacy VP: (7) 44,001 (8,540) 377,983
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Money Market VP: (8) 940,509 (288,392) 130,650,119
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Small Company VP: (9) 8,723 (5,056) 362,699
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP: (10) 298 (130) 44,207
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity--Income Portfolio: 1,381,671 (281,139) 8,873,609
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Growth Portfolio: 1,011,596 (128,591) 2,784,250
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
High Income Portfolio: -- (1,531) 31,686
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Overseas Portfolio: 141,761 (22,734) 562,478
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 329,918 (29,778) 2,518,344
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 1,313,979 (283,258) 12,306,538
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: -- (142,378) 19,717,643
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Balanced Portfolio: 709,668 (145,407) 5,250,108
Policyholders' account values
- ---------------------------------------------------------------------------------------------------------
Growth Portfolio: 1,062,152 (162,916) 8,751,672
Policyholders' account values
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Net Unrealized
Gain (Loss)
Cost of Net -----------
Investments Realized Beginning End
Sold Gain (Loss) of Period of Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aetna Ascent VP: (1) $ 353,120 $ 40,402 $ 27,927 ($53,438)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc.: (2) 7,346,946 1,589,700 1,971,257 (88,169)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Aetna Bond VP: (3) 6,468,168 293,933 (12,114) (21,056)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP: (4) 453,989 19,888 5,069 (13,664)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP: (5) 34,639,034 4,632,115 6,207,999 (6,059,944)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP: (6) 3,029,008 486,581 (23,927) 1,027,911
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP: (7) 360,207 17,776 618 (9,107)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP: (8) 130,229,304 420,815 70,857 267,256
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP: (9) 395,417 (32,718) -- (23,492)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP: (10) 44,499 (292) -- 12,485
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity--Income Portfolio: 7,588,754 1,284,855 1,523,698 2,106,941
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 2,517,613 266,637 380,110 3,937,336
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
High Income Portfolio: 34,229 (2,543) -- (22,754)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 539,506 22,972 (8,270) 190,775
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 2,406,138 112,206 281,699 266,952
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 10,124,110 2,182,428 1,505,359 5,961,343
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 17,285,188 2,432,455 844,868 3,818,015
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 3,955,227 1,294,881 885,469 3,434,432
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 6,729,863 2,021,809 1,360,430 3,730,121
Policyholders' account values
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Net Net Increase Net Assets
Change in (Decrease) in ----------
Unrealized Net Assets Resulting Beginning End
Gain (Loss) From Unit Transactions of Period of Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aetna Ascent VP: (1) ($81,365) $ 909,075
Policyholders' account values $ 1,802,553 $ 2,777,568
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc.: (2) (2,059,426) 5,433,280
Policyholders' account values 24,336,071 34,089,711
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP: (3) (8,942) 7,092,195
Policyholders' account values 21,104,804 29,976,022
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP: (4) (18,733) 1,281,854
Policyholders' account values 710,292 2,055,869
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP: (5) (12,267,943) 6,076,102
Policyholders' account values 132,379,023 156,730,966
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP: (6) 1,051,838 9,326,844
Policyholders' account values 1,961,545 13,345,627
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP: (7) (9,725) 314,262
Policyholders' account values 650,139 1,007,913
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP: (8) 196,399 15,075,889
Policyholders' account values 20,320,201 36,665,421
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP: (9) (23,492) 1,039,944
Policyholders' account values -- 987,401
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP: (10) 12,485 43,539
Policyholders' account values -- 55,900
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity--Income Portfolio: 583,243 13,578,473
Policyholders' account values 20,183,450 36,730,553
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 3,557,226 7,444,713
Policyholders' account values 7,120,144 19,271,725
- ------------------------------------------------------------------------------------------------------------------------------------
High Income Portfolio: (22,754) 263,181
Policyholders' account values -- 236,353
- ------------------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 199,045 984,072
Policyholders' account values 1,789,714 3,114,830
- ------------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: (14,747) 198,288
Policyholders' account values 2,534,727 3,130,614
- ------------------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 4,455,984 10,540,804
Policyholders' account values 20,220,028 38,429,965
- ------------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 2,973,147 5,763,410
Policyholders' account values 12,402,365 23,428,999
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 2,548,963 8,806,330
Policyholders' account values 8,205,641 21,420,076
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 2,369,691 6,131,508
Policyholders' account values 11,980,000 23,402,244
====================================================================================================================================
</TABLE>
S-10
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- -------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Valuation Proceeds
Period from
Dividends Deductions Sales
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Worldwide Growth Portfolio: $ 1,360,015 ($344,460) $ 13,676,121
Policyholders' account values
- -------------------------------------------------------------------------------------------
Global Securities Fund -- (1,051) 10,993
Policyholders' account values
- -------------------------------------------------------------------------------------------
Growth & Income Fund -- (183) 65,110
Policyholders' account values
- -------------------------------------------------------------------------------------------
Strategic Bond Fund 104 (2,331) 315,681
Policyholders' account values
- -------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 68,284 (239,521) 100,307,103
Policyholders' account values
- -------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 2,113 (88,033) 22,358,392
Policyholders' account values
- -------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 628 (2,334) 188,157
Policyholders' account values
- -------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 27,896 (158,883) 92,935,246
Policyholders' account values
- -------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio: 3,356 (4,215) 149,733
Policyholders' account values
- -------------------------------------------------------------------------------------------
Total Variable Life Account B $43,340,466 ($4,390,578) $481,590,756
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Net Unrealized
Gain (Loss) Net
Cost of Net ----------- Change in
Investments Realized Beginning End Unrealized
Sold Gain (Loss) of Period of Period Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Worldwide Growth Portfolio: $ 10,222,511 $ 3,453,610 $ 1,817,349 $ 5,492,542 $ 3,675,193
Policyholders' account values
- -------------------------------------------------------------------------------------------------------------------------
Global Securities Fund 12,018 (1,025) -- 19,272 19,272
Policyholders' account values
- -------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund 66,180 (1,070) -- 11,048 11,048
Policyholders' account values
- -------------------------------------------------------------------------------------------------------------------------
Strategic Bond Fund 319,744 (4,063) -- 16,740 16,740
Policyholders' account values
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 97,276,639 3,030,464 42,515 3,702,269 3,659,754
Policyholders' account values
- -------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 21,336,998 1,021,394 (86,245) 974,898 1,061,143
Policyholders' account values
- -------------------------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 215,959 (27,802) -- 82,622 82,622
Policyholders' account values
- -------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 90,246,159 2,689,087 192,560 698,227 505,667
Policyholders' account values
- -------------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio: 163,488 (13,755) -- 149,693 149,693
Policyholders' account values
- -------------------------------------------------------------------------------------------------------------------------
Total Variable Life Account B $454,360,016 $27,230,740 $16,987,228 $29,609,254 $12,622,026
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Net Increase Net Assets
(Decrease) in ----------
Net Assets Resulting Beginning End
From Unit Transactions of Period of Period
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Worldwide Growth Portfolio: $ 11,107,525
Policyholders' account values $ 24,303,287 $ 43,555,170
- ---------------------------------------------------------------------------------------------------
Global Securities Fund 299,856
Policyholders' account values -- 317,052
- ---------------------------------------------------------------------------------------------------
Growth & Income Fund 65,376
Policyholders' account values -- 75,171
- ---------------------------------------------------------------------------------------------------
Strategic Bond Fund 701,022
Policyholders' account values -- 711,472
- ---------------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 5,152,269
Policyholders' account values 19,061,872 30,733,122
- ---------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 2,590,172
Policyholders' account values 7,148,181 11,734,970
- ---------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 752,309
Policyholders' account values -- 805,423
- ---------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: (712,067)
Policyholders' account values 14,311,110 16,662,810
- ---------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio: 1,221,281
Policyholders' account values -- 1,356,360
- ---------------------------------------------------------------------------------------------------
Total Variable Life Account B $121,481,506 $352,525,147 $552,809,307
===================================================================================================
</TABLE>
(1) - Effective May 1, 1998, Aetna Ascent 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 Funds' 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 Funds' 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-11
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- --------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds
Period from
Dividends Deductions Sales
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Variable Fund: $26,573,304 ($1,085,553) $11,219,896
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Aetna Income Shares: 1,087,150 (148,230) 2,358,910
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 372,968 (144,720) 74,201,538
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 2,876,287 (185,443) 1,960,106
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 112,004 (11,360) 1,279,898
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Aetna Crossroads Varible Portfolio: 45,840 (3,290) 198,099
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Aetna Legacy Varible Portfolio: 38,169 (3,596) 225,894
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 77,848 (4,920) 143,972
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: (1) 576,583 (128,523) 53,957,227
Policyholders' account values
- --------------------------------------------------------------------------------------------------
American Century VP Capital Apprecition Fund: (2) 132,455 (57,820) 15,197,338
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity--Income Portfolio: 1,485,715 (163,582) 14,420,981
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Growth Portfolio: 192,233 (54,856) 6,814,876
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Overseas Portfolio: 46,706 (8,253) 359,668
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 175,953 (18,257) 244,742
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Contrafund Portfolio: 235,708 (110,146) 4,519,164
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: -- (95,697) 18,445,996
Policyholders' account values
- --------------------------------------------------------------------------------------------------
Balanced Portfolio: 192,757 (52,872) 1,238,408
Policyholders' account values
==================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Net Unrealized
Gain (Loss) Net
Cost of Net ----------- Change in
Investments Realized Beginning End Unrealized
Sold Gain (Loss) of Period of Period Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund: $ 7,857,508 $3,362,388 $7,294,643 $6,207,999 ($1,086,644)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares: 2,406,924 (48,014) (190,180) (12,114) 178,066
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 73,731,940 469,598 106,394 70,857 (35,537)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 1,561,449 398,657 1,383,931 1,971,257 587,326
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 1,184,906 94,992 15,645 27,927 12,282
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Varible Portfolio: 193,283 4,816 (191) 5,069 5,260
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Varible Portfolio: 207,391 18,503 20 618 598
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 131,418 12,554 -- (23,927) (23,927)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: (1) 53,285,312 671,915 172,057 -- (172,057)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Apprecition Fund: (2) 15,512,673 (315,335) (146,911) -- 146,911
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity--Income Portfolio: 11,843,310 2,577,671 1,096,283 1,523,698 427,415
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 5,870,796 944,080 294,867 380,110 85,243
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio: 322,274 37,394 37,941 (8,270) (46,211)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 220,690 24,052 134,978 281,699 146,721
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 3,602,586 916,578 730,883 1,505,359 774,476
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 17,632,824 813,172 249,074 844,868 595,794
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 1,021,789 216,619 243,163 885,469 642,306
Policyholders' account values
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Net Increase Net Assets
(Decrease) in ----------
Net Assets Resulting Beginning End
From Unit Transactions of Period of Period
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Variable Fund: $ 11,743,902
Policyholders' account values $92,871,626 $132,379,023
- ----------------------------------------------------------------------------------------------------------
Aetna Income Shares: 6,856,045
Policyholders' account values 13,179,787 21,104,804
- ----------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 10,565,707
Policyholders' account values 9,092,185 20,320,201
- ----------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 4,867,703
Policyholders' account values 15,791,541 24,336,071
- ----------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 1,049,257
Policyholders' account values 545,378 1,802,553
- ----------------------------------------------------------------------------------------------------------
Aetna Crossroads Varible Portfolio: 533,974
Policyholders' account values 123,692 710,292
- ----------------------------------------------------------------------------------------------------------
Aetna Legacy Varible Portfolio: 582,502
Policyholders' account values 13,963 650,139
- ----------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 1,899,990
Policyholders' account values -- 1,961,545
- ----------------------------------------------------------------------------------------------------------
Alger American Small Capitalization Portfolio: (1) (14,034,001)
Policyholders' account values 13,086,083 --
- ----------------------------------------------------------------------------------------------------------
American Century VP Capital Apprecition Fund: (2) (6,388,736)
Policyholders' account values 6,482,525 --
- ----------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity--Income Portfolio: 2,546,018
Policyholders' account values 13,310,213 20,183,450
- ----------------------------------------------------------------------------------------------------------
Growth Portfolio: 900,915
Policyholders' account values 5,052,529 7,120,144
- ----------------------------------------------------------------------------------------------------------
Overseas Portfolio: 1,227,751
Policyholders' account values 532,327 1,789,714
- ----------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 796,072
Policyholders' account values 1,410,186 2,534,727
- ----------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 11,491,722
Policyholders' account values 6,911,690 20,220,028
- ----------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 1,426,169
Policyholders' account values 9,662,927 12,402,365
- ----------------------------------------------------------------------------------------------------------
Balanced Portfolio: 3,632,486
Policyholders' account values 3,574,345 8,205,641
==========================================================================================================
</TABLE>
S-12
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
<TABLE>
<CAPTION>
5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- --------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds
Period from
Dividends Deductions Sales
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Portfolio: $ 309,334 ($90,076) $ 3,312,122
Policyholders' account values
- --------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (3) 101,542 (32,381) 9,071,413
Policyholders' account values
- --------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 325,821 (167,065) 7,022,675
Policyholders' account values
- --------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio: -- (17,086) 9,834,242
Policyholders' account values
- --------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: -- (6,128) 1,889,839
Policyholders' account values
- --------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: -- (12,927) 1,858,258
Policyholders' account values
- --------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund:
International Portfolio: (4) 264,246 (110,422) 20,554,442
Policyholders' account values
- --------------------------------------------------------------------------------------------
Total Variable Life Account B $35,222,623 ($2,713,203) $260,329,704
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Net Unrealized
Gain (Loss) Net
Cost of Net ----------- Change in
Investments Realized Beginning End Unrealized
Sold Gain (Loss) of Period of Period Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Portfolio: $ 2,585,617 $ 726,505 $ 566,478 $ 1,360,430 $ 793,952
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (3) 8,891,967 179,446 26,773 -- (26,773)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 5,257,711 1,764,964 872,277 1,817,349 945,072
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 9,998,952 (164,710) -- 42,515 42,515
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 1,891,124 (1,285) -- (86,245) (86,245)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 1,827,173 31,085 -- 192,560 192,560
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund:
International Portfolio: (4) 18,819,109 1,735,333 1,244,544 -- (1,244,544)
Policyholders' account values
- ----------------------------------------------------------------------------------------------------------------------------
Total Variable Life Account B $245,858,726 $14,470,978 $14,132,669 $16,987,228 $ 2,854,559
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Net Increase Net Assets
(Decrease) in ----------
Net Assets Resulting Beginning End
From Unit Transactions of Period of Period
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Portfolio: $ 3,065,638
Policyholders' account values 7,174,647 11,980,000
- ----------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (3) (4,049,682)
Policyholders' account values 3,827,848 --
- ----------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 11,519,359
Policyholders' account values 9,915,136 24,303,287
- ----------------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 19,201,153
Policyholders' account values -- 19,061,872
- ----------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 7,241,839
Policyholders' account values -- 7,148,181
- ----------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 14,100,392
Policyholders' account values -- 14,311,110
- ----------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund:
International Portfolio: (4) (11,259,868)
Policyholders' account values 10,615,255 --
- ----------------------------------------------------------------------------------------------------
Total Variable Life Account B $ 79,516,307 $223,173,883 $352,525,147
====================================================================================================
</TABLE>
(1) - Effective November 28, 1997, assets from this fund were transferred into
the PPI MFS Emerging Equity Portfolio.
(2) - Effective November 28, 1997, assets from this fund were transferred into
the PPI MFS Research Growth Portfolio.
(3) - Effective November 28, 1997, assets from this fund were transferred into
the Aetna Variable Encore Fund.
(4) - Effective November 28, 1997, assets from this fund were transferred into
the PPI Scudder International Growth Portfolio.
S-13
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
6. Condensed Financial Information
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units Policyholders'
-------- in Value of Outstanding Account Values
Beginning End of Accumulation at End at End
of Period Period Unit Period of Period
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP:
Aetna Vest $ 14.535 $ 16.480 13.38% 8,108.4 $ 133,629
Aetna Vest II 14.499 16.415 13.21% 4,820.1 79,120
Aetna Vest Plus 14.499 16.415 13.21% 152,300.6 2,499,946
Aetna Vest Estate Protector 14.559 16.507 13.38% 19,644.4 324,275
Aetna Vest Estate Protector II 10.038 11.404 13.61% 8,690.6 99,106
- -------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc.:
Aetna Vest 24.655 27.745 12.53% 101,885.7 2,826,794
Aetna Vest II 24.909 28.016 12.47% 204,589.9 5,731,870
Aetna Vest Plus 20.890 23.496 12.47% 506,450.0 11,899,396
Aetna Vest Estate Protector 15.716 17.703 12.64% 27,963.4 495,026
Aetna Vest Estate Protector II 11.233 12.678 12.87% 72,757.6 922,452
Corporate Specialty Market 18.186 20.455 12.47% 330,977.4 6,770,020
Corporate Specialty Market II - 12.667 - 81.2 (1) 1,028
NYSUT Individual Life 13.516 15.225 12.64% 993.4 15,125
- -------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP:
Aetna Vest 25.084 24.650 (1.73%) 238,723.8 5,884,656
Aetna Vest II 16.865 16.573 (1.73%) 62,569.1 1,036,982
Aetna Vest Plus 13.505 13.271 (1.73%) 318,545.3 4,227,550
Aetna Vest Estate Protector 12.035 11.845 (1.58%) 43,161.3 511,251
Aetna Vest Estate Protector II 10.614 10.470 (1.36%) 68,097.4 712,967
Corporate Specialty Market 13.035 12.810 (1.73%) 527,603.9 6,758,389
Corporate Specialty Market II - 10.457 - 15,480.3 (4) 161,885
NYSUT Individual Life 11.441 11.260 (1.58%) 355.9 4,008
- -------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP:
Aetna Vest 14.040 15.343 9.28% 3,856.3 59,167
Aetna Vest II 14.005 15.282 9.12% 3,676.4 56,182
Aetna Vest Plus 14.005 15.282 9.12% 142,144.1 2,172,206
Aetna Vest Estate Protector 14.063 15.368 9.28% 419.3 6,444
Aetna Vest Estate Protector II 10.244 11.217 9.50% 9,029.9 101,291
- -------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP:
Aetna Vest 50.962 59.274 16.31% 1,158,596.7 68,674,147
Aetna Vest II 28.434 33.055 16.25% 739,037.9 24,428,941
Aetna Vest Plus 23.889 27.772 16.25% 2,074,042.4 57,600,081
Aetna Vest Estate Protector 17.070 19.874 16.42% 126,208.8 2,508,237
Aetna Vest Estate Protector II 10.966 12.793 16.66% 150,942.3 1,930,981
Corporate Specialty Market 21.581 25.089 16.25% 679,447.2 17,046,334
Corporate Specialty Market II - 12.781 - 2,764.0 (4) 35,327
NYSUT Individual Life 13.623 15.860 16.43% 1,801.2 28,568
- -------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP:
Corporate Specialty Market - 17.615 - 3,234.8 (2) 56,983
Corporate Specialty Market II - 17.226 - 62.9 (1) 1,084
- -------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP:
Aetna Vest 17.044 20.975 23.06% 91,316.0 1,915,309
Aetna Vest II 17.044 20.975 23.06% 32,056.5 672,369
Aetna Vest Plus 17.044 20.975 23.06% 412,230.7 8,646,340
Aetna Vest Estate Protector 17.096 21.071 23.25% 74,181.7 1,563,077
Aetna Vest Estate Protector II 12.397 15.310 23.50% 190,679.2 2,919,241
Corporate Specialty Market 17.044 20.975 23.06% 210,675.0 4,418,818
Corporate Specialty Market II - 15.295 - 22,261.8 (4) 340,501
NYSUT Individual Life 15.850 19.535 23.25% 3,707.1 72,416
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-14
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
6. Condensed Financial Information
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units Policyholders'
-------- in Value of Outstanding Account Values
Beginning End of Accumulation at End at End
of Period Period Unit of Period of Period
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Legacy VP:
Aetna Vest $ 13.378 $ 14.206 6.19% 854.8 $ 12,144
Aetna Vest II 13.345 14.150 6.03% 949.2 13,431
Aetna Vest Plus 13.345 14.150 6.03% 60,327.0 853,620
Aetna Vest Estate Protector 13.400 14.230 6.19% 3,283.5 46,723
Aetna Vest Estate Protector II 10.379 11.044 6.41% 17,050.0 188,297
NYSUT Individual Life 11.902 12.639 6.19% 109.1 1,379
- -------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP:
Aetna Vest 18.074 18.803 4.03% 142,725.6 2,683,604
Aetna Vest II 13.211 13.744 4.03% 42,777.2 587,924
Aetna Vest Plus 12.416 12.917 4.03% 1,113,716.2 14,385,720
Aetna Vest Estate Protector 11.301 11.774 4.18% 66,839.9 786,966
Aetna Vest Estate Protector II 10.413 10.871 4.40% 128,032.1 1,391,821
Corporate Specialty Market 11.878 12.357 4.04% 1,497,529.1 18,505,645
Corporate Specialty Market II - 10.861 - 6,736.3 (2) 73,160
NYSUT Individual Life 10.849 11.304 4.19% 2,524.2 28,532
- -------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP:
Corporate Specialty Market 10.085 13.065 29.55% 48,446.2 632,957
Corporate Specialty Market II - 12.420 - 87.8 (1) 1,091
- -------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP:
Corporate Specialty Market 12.266 14.521 18.39% 9,236.5 134,125
Corporate Specialty Market II - 13.658 - 72.8 (1) 995
- -------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Aetna Vest 15.238 16.041 5.27% 16,109.0 258,402
Aetna Vest II 15.238 16.041 5.27% 17,559.9 281,675
Aetna Vest Plus 15.238 16.041 5.27% 721,177.1 11,568,312
Aetna Vest Estate Protector 15.301 16.132 5.43% 118,968.5 1,919,142
Aetna Vest Estate Protector II 10.733 11.338 5.64% 115,816.5 1,313,121
Corporate Specialty Market 17.538 18.462 5.27% 875,042.6 16,155,452
Corporate Specialty Market II - 11.327 - 18,694.6 (5) 211,759
NYSUT Individual Life 13.031 13.739 5.43% 1,085.7 14,916
- -------------------------------------------------------------------------------------------------------------------------
Growth Portfolio:
Corporate Specialty Market 19.002 25.856 36.07% 787,399.8 20,359,247
Corporate Specialty Market II - 17.930 - 59.3 (1) 1,063
- -------------------------------------------------------------------------------------------------------------------------
High Income Portfolio:
Corporate Specialty Market 9.588 10.271 7.12% 104,943.0 1,077,856
Corporate Specialty Market II - 9.902 - 102.2 (1) 1,012
- -------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio:
Corporate Specialty Market 13.859 19.568 41.19% 231,765.2 4,535,149
Corporate Specialty Market II - 15.111 - 71.8 (1) 1,085
- -------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market 16.358 17.991 9.98% 96,286.7 1,732,320
Corporate Specialty Market II - 12.223 - 83.9 (1) 1,026
- -------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio:
Aetna Vest 18.229 22.425 23.02% 50,642.2 1,135,635
Aetna Vest II 18.229 22.425 23.02% 20,952.5 469,853
Aetna Vest Plus 18.229 22.425 23.02% 630,388.5 14,136,214
Aetna Vest Estate Protector 18.305 22.551 23.20% 78,555.6 1,771,520
Aetna Vest Estate Protector II 12.417 15.329 23.45% 131,432.8 2,014,695
Corporate Specialty Market 19.607 24.119 23.01% 385,619.2 9,300,909
Corporate Specialty Market II - 15.314 - 13,049.1 (4) 199,838
NYSUT Individual Life 15.355 18.918 23.20% 1,391.4 26,322
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-15
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
6. Condensed Financial Information
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units Policyholders'
-------- in Value of Outstanding Account Values
Beginning End of Accumulation at End at End
of Period Period Unit of Period of Period
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest $ 23.949 $ 53.447 123.17% 78,595.7 $ 4,200,721
Aetna Vest II 23.949 53.447 123.17% 36,544.0 1,953,171
Aetna Vest Plus 23.949 53.447 123.17% 615,554.6 32,899,806
Aetna Vest Estate Protector 14.569 32.562 123.50% 115,022.2 3,745,343
Aetna Vest Estate Protector II 12.855 28.789 123.95% 92,599.5 2,665,841
Corporate Specialty Market 17.969 40.102 123.17% 292,816.6 11,742,518
Corporate Specialty Market II - 28.762 - 8,727.2 (4) 251,013
NYSUT Individual Life 15.506 34.657 123.50% 88.4 3,063
- ---------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio:
Aetna Vest 22.446 28.168 25.49% 20,837.1 586,949
Aetna Vest II 22.621 28.388 25.50% 7,862.9 223,214
Aetna Vest Plus 22.435 28.156 25.50% 463,856.2 13,060,229
Aetna Vest Estate Protector 17.895 22.491 25.68% 39,932.2 898,116
Aetna Vest Estate Protector II 12.622 15.896 25.94% 136,489.4 2,169,638
Corporate Specialty Market 19.675 24.691 25.50% 207,597.6 5,125,875
Corporate Specialty Market II - 15.881 - 17,176.7 (4) 272,785
NYSUT Individual Life 15.198 19.102 25.68% 864.9 16,521
- ---------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio:
Corporate Specialty Market - 11.019 - 6,104.4 (3) 67,265
Corporate Specialty Market II - 10.678 - 93.8 (1) 1,002
- ---------------------------------------------------------------------------------------------------------------------------
Growth Portfolio:
Aetna Vest 24.316 34.664 42.55% 45,552.7 1,579,018
Aetna Vest II 24.294 34.632 42.55% 66,432.0 2,300,676
Aetna Vest Plus 24.260 34.583 42.55% 670,451.6 23,186,343
Aetna Vest Estate Protector 17.775 25.376 42.76% 90,466.0 2,295,685
Aetna Vest Estate Protector II 12.564 17.973 43.05% 132,777.4 2,386,410
Corporate Specialty Market 19.965 28.461 42.55% 83,369.6 2,372,762
Corporate Specialty Market II - 17.956 - 5,674.5 (5) 101,893
NYSUT Individual Life 15.384 21.964 42.77% 919.4 20,194
- ---------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio:
Aetna Vest 25.260 41.127 62.81% 111,800.0 4,597,968
Aetna Vest II 25.267 41.138 62.81% 54,942.3 2,260,212
Aetna Vest Plus 25.235 41.087 62.82% 866,585.5 35,605,247
Aetna Vest Estate Protector 18.286 29.817 63.06% 133,793.7 3,989,387
Aetna Vest Estate Protector II 12.017 19.634 63.39% 175,254.1 3,441,022
Corporate Specialty Market 20.776 33.827 62.82% 468,018.3 15,831,874
Corporate Specialty Market II - 19.616 - 12,499.1 (4) 245,183
NYSUT Individual Life 14.465 23.587 63.06% 666.8 15,727
- ---------------------------------------------------------------------------------------------------------------------------
MFS Variable Insurance Trust
Total Return Series:
Corporate Specialty Market - 11.518 - 897.9 (7) 10,343
Corporate Specialty Market II - 11.167 - 89.7 (1) 1,001
- ---------------------------------------------------------------------------------------------------------------------------
World Government Series:
Corporate Specialty Market - 10.192 - 97.3 (1) 992
Corporate Specialty Market II - 10.272 - 96.5 (1) 992
- ---------------------------------------------------------------------------------------------------------------------------
Oppenheimer Aggressive Growth Fund:
Corporate Specialty Market - 19.578 - 37,648.5 (7) 737,069
Corporate Specialty Market II - 19.458 - 58.3 (1) 1,134
- ---------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund:
Aetna Vest 10.828 16.991 56.91% 530.2 9,008
Aetna Vest II - 16.990 - 80.4 (1) 1,366
Aetna Vest Plus 10.828 16.991 56.91% 28,329.2 481,330
Aetna Vest Estate Protector 10.842 17.038 57.14% 1,533.3 26,124
Aetna Vest Estate Protector II 11.082 17.450 57.46% 7,181.2 125,309
Corporate Specialty Market 10.550 17.971 70.34% 60.7 1,091
Corporate Specialty Market II - 17.532 - 62.2 (1) 1,091
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-16
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
6. Condensed Financial Information
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units Policyholder
-------- in Value of Outstanding Account Value
Beginning End of Accumulation at End at End
of Period Period Unit of Period of Period
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Oppenheimer Growth & Income Fund:
Corporate Specialty Market $ - $ 12.711 - 16,095.7 (4) $ 204,601
Corporate Specialty Market II - 12.033 - 8,980.1 (5) 108,060
- ----------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund:
Aetna Vest 10.027 10.208 1.80% 4,611.8 47,076
Aetna Vest II - 10.207 - 100.3 (1) 1,024
Aetna Vest Plus 10.027 10.208 1.80% 62,229.8 635,239
Aetna Vest Estate Protector 10.040 10.236 1.95% 18,761.9 192,046
Aetna Vest Estate Protector II 10.036 10.253 2.16% 32,613.6 334,376
Corporate Specialty Market - 10.480 - 95.5 (1) 1,001
Corporate Specialty Market II - 10.262 - 9,903.4 (4) 101,626
NYSUT Individual Life 10.040 10.236 1.96% 69.0 706
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Inc. (PPI):
PPI MFS Emerging Equities Portfolio:
Aetna Vest 22.283 33.285 49.37% 55,607.9 1,850,914
Aetna Vest II 22.285 33.288 49.37% 23,443.9 780,405
Aetna Vest Plus 22.273 33.270 49.37% 595,667.2 19,817,897
Aetna Vest Estate Protector 13.899 20.793 49.60% 70,939.0 1,475,019
Aetna Vest Estate Protector II 11.576 17.352 49.90% 33,469.0 580,761
Corporate Specialty Market 18.326 27.375 49.38% 373,848.2 10,234,094
Corporate Specialty Market II - 17.339 - 66.4 (1) 1,152
NYSUT Individual Life 14.396 21.537 49.60% 68.3 1,471
- ----------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio:
Aetna Vest 14.665 18.009 22.80% 53,119.5 956,611
Aetna Vest II 14.730 18.089 22.81% 22,767.3 411,846
Aetna Vest Plus 14.529 17.843 22.81% 490,083.9 8,744,344
Aetna Vest Estate Protector 11.161 13.727 22.99% 21,110.1 289,781
Aetna Vest Estate Protector II 11.518 14.194 23.23% 51,498.0 730,964
Corporate Specialty Market 13.288 16.318 22.81% 292,084.8 4,766,382
Corporate Specialty Market II - 14.182 - 74.7 (1) 1,060
NYSUT Individual Life 12.394 15.243 22.99% 29.9 456
- ----------------------------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio:
Aetna Vest 11.408 16.805 47.31% 3,672.2 61,712
Aetna Vest II 11.408 16.805 47.31% 76.1 1,279
Aetna Vest Plus 11.408 16.805 47.31% 118,377.4 1,989,331
Aetna Vest Estate Protector 11.422 16.851 47.53% 13,787.2 232,334
Aetna Vest Estate Protector II 11.699 17.294 47.83% 36,907.3 638,291
Corporate Specialty Market - 18.361 - 59.6 (1) 1,094
Corporate Specialty Market II - 17.491 - 62.6 (1) 1,094
NYSUT Individual Life 11.422 16.851 47.53% 213.3 3,595
- ----------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio:
Aetna Vest 18.503 29.019 56.83% 101,117.4 2,934,330
Aetna Vest II 18.389 28.840 56.83% 29,315.3 845,458
Aetna Vest Plus 18.286 28.679 56.84% 510,350.3 14,636,580
Aetna Vest Estate Protector 13.907 21.844 57.07% 44,976.9 982,475
Aetna Vest Estate Protector II 11.198 17.624 57.39% 11,999.5 211,482
Corporate Specialty Market 15.323 24.031 56.83% 191,821.0 4,609,695
Corporate Specialty Market II - 17.608 - 13,545.9 (6) 238,514
- ----------------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio:
Aetna Vest 11.539 13.975 21.11% 8,785.9 122,779
Aetna Vest II 11.539 13.974 21.10% 149.0 2,081
Aetna Vest Plus 11.539 13.975 21.11% 107,827.6 1,506,845
Aetna Vest Estate Protector 11.553 14.013 21.30% 4,053.9 56,808
Aetna Vest Estate Protector II 11.839 14.388 21.53% 47,493.8 683,338
Corporate Specialty Market - 15.481 - 2,040.5 (6) 31,590
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-17
<PAGE>
Aetna Life Insurance and Annuity Company Variable Life Account B
Notes to Financial Statements -- December 31, 1999 (continued):
6. Condensed Financial Information
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units Policyholders'
-------- in Value of Outstanding Account Values
Beginning End of Accumulation at End at End
of Period Period Unit of Period of Period
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate Specialty Market II $ - $ 14.536 - 72.3 (1) $1,052
NYSUT Individual Life 11.553 14.013 21.29% 54.8 768
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) - Reflects seed money. No funds have been received for this option.
(2) - Reflects less than a full year of activity. Funds were first received in
this option during January 1999.
(3) - Reflects less than a full year of activity. Funds were first received in
this option during February 1999.
(4) - Reflects less than a full year of activity. Funds were first received in
this option during March 1999.
(5) - Reflects less than a full year of activity. Funds were first received in
this option during April 1999.
(6) - Reflects less than a full year of activity. Funds were first received in
this option during October 1999.
(7) - Reflects less than a full year of activity. Funds were first received in
this option during December 1999.
S-18
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors of The Lincoln National Life Insurance Company
and
Contract Owners of Aetna Life Insurance and Annuity Company 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")
(comprised of the Aetna Ascent VP, Aetna Balanced VP, Inc., Aetna Bond VP,
Aetna Crossroads VP, Aetna Growth and Income VP, Aetna Growth VP, Aetna Index
Plus Large Cap VP, Aetna Legacy VP, Aetna Money Market VP, Aetna Small Company
VP, Aetna Value Opportunity VP, Fidelity Investments Variable Insurance
Products Fund Equity-Income Portfolio, Fidelity Investments Variable Insurance
Products Fund Growth Portfolio, Fidelity Investments Variable Insurance
Products Fund High Income Portfolio, Fidelity Investments Variable Insurance
Products Fund Overseas Portfolio, Fidelity Investments Variable Insurance
Products Fund II Asset Manager Portfolio, Fidelity Investments Variable
Insurance Products Fund II Contrafund Portfolio, Janus Aspen Series Aggressive
Growth Portfolio, Janus Aspen Series Balanced Portfolio, Janus Aspen Series
Flexible Income Portfolio, Janus Aspen Series Growth Portfolio, Janus Aspen
Series Worldwide Growth Portfolio, MFS Variable Insurance Trust Total Return
Series, MFS Variable Insurance Trust World Government Series, Oppenheimer Funds
Aggressive Growth Fund, Oppenheimer Funds Global Securities Fund, Oppenheimer
Funds Growth & Income Fund, Oppenheimer Funds Strategic Bond Fund, Portfolio
Partners Inc. (PPI) MFS Emerging Equities Portfolio, Portfolio Partners Inc.
(PPI) MFS Research Growth Portfolio, Portfolio Partners Inc. (PPI) MFS Value
Equity Portfolio, Portfolio Partners Inc. (PPI) Scudder International Growth
Portfolio, and Portfolio Partners Inc. (PPI) T. Rowe Price Growth Equity
Portfolio subaccounts), as of December 31, 1999, and the related statement of
operations and changes in net assets for the year then ended. These financial
statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The accompanying financial statements of the Account for the years
ended December 31, 1998 and 1997, were audited by other auditors whose report
dated February 26, 1999, expressed an unqualified opinion on those financial
statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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.
Our procedures included confirmation of investments owned as of December 31,
1999, 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting the Aetna Life Insurance and Annuity Company Variable
Life Account B at December 31, 1999, and the results of their operations and
changes in their net assets for the year then ended, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
February 28, 2000
S-19
<PAGE>
Independent Auditors' Report
Board of Directors of Aetna Life Insurance and Annuity Company and
Contract Owners of Variable Life Account B:
We have audited the accompanying statements 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-years 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
[KPMG LLP LOGO]
Hartford, Connecticut
February 26, 1999
S-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
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, 1999,
1998 and 1997.................................................................. F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998..................... F-4
Consolidated Statements of Changes in Shareholder's Equity for the Years Ended
December 31, 1999, 1998 and 1997............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997....................................................................... 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 Subsidiaries as of December 31, 1999 and
1998, 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, 1999. 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 Subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
February 7, 2000
F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Premiums $ 107.5 $ 79.4 $ 69.1
Charges assessed against policyholders 388.3 324.3 262.0
Net investment income 886.3 871.8 881.7
Net realized capital (losses) gains (21.5) 10.4 29.7
Other income 129.7 100.2 96.8
-------- -------- --------
Total revenue 1,490.3 1,386.1 1,339.3
-------- -------- --------
Benefits and expenses:
Current and future benefits 746.2 714.4 720.4
Operating expenses:
Salaries and related benefits 153.0 141.0 133.5
Other 214.9 200.8 182.8
Amortization of deferred policy acquisition costs 104.9 91.2 66.3
-------- -------- --------
Total benefits and expenses 1,219.0 1,147.4 1,103.0
-------- -------- --------
Income from continuing operations before income
taxes 271.3 238.7 236.3
Income taxes 90.1 66.6 68.4
-------- -------- --------
Income from continuing operations 181.2 172.1 167.9
Discontinued operations, net of tax:
Income from operations -- 61.8 67.8
Amortization of deferred gain on sale 5.7 -- --
Immediate gain on sale -- 59.0 --
-------- -------- --------
Net income $ 186.9 $ 292.9 $ 235.7
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------- --------------
<S> <C> <C>
Assets
Investments:
Debt securities available for sale, at fair value
(amortized cost: $11,657.9 and $11,571.3) $11,410.1 $12,068.2
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $134.7 and $202.6) 130.9 203.3
Investment in affiliated mutual funds (cost: $63.5 and $96.8) 64.1 100.1
Common stock (cost: $6.7 and $1.0) 11.5 2.0
Short-term investments 74.2 48.9
Mortgage loans 6.7 12.7
Policy loans 314.0 292.2
Other investments 13.2 12.7
----------- -----------
Total investments 12,024.7 12,740.1
Cash and cash equivalents 693.3 628.3
Short-term investments under securities loan agreement 232.5 277.3
Accrued investment income 150.7 151.6
Premiums due and other receivables 298.3 61.1
Reinsurance recoverable 3,001.2 2,959.8
Deferred income taxes 150.4 114.3
Deferred policy acquisition costs 1,046.4 893.1
Other assets 96.5 70.4
Separate Accounts assets 38,692.6 29,430.2
----------- -----------
Total assets $56,386.6 $47,326.2
=========== ===========
Liabilities and Shareholder's Equity
Liabilities:
Future policy benefits $ 3,850.4 $ 3,815.9
Unpaid claims and claim expenses 27.3 18.8
Policyholders' funds left with the Company 11,121.7 11,305.6
----------- -----------
Total insurance reserve liabilities 14,999.4 15,140.3
Payables under securities loan agreement 232.5 277.3
Current income taxes 14.7 279.6
Other liabilities 1,063.0 805.5
Separate Accounts liabilities 38,692.6 29,430.2
----------- -----------
Total liabilities 55,002.2 45,932.9
----------- -----------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 431.8 431.8
Accumulated other comprehensive (loss) income (44.8) 104.8
Retained earnings 994.6 853.9
----------- -----------
Total shareholder's equity 1,384.4 1,393.3
----------- -----------
Total liabilities and shareholder's equity $56,386.6 $47,326.2
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $1,393.3 $1,852.8 $1,618.3
Comprehensive income:
Net income 186.9 292.9 235.7
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities
($(230.2), $18.2 $49.9, pretax)(1) (149.6) 11.9 32.4
---------- ---------- ----------
Total comprehensive income 37.3 304.8 268.1
---------- ---------- ----------
Capital contribution -- 9.3 (5.0)
Other changes 2.8 2.4 5.7
---------- ---------- ----------
Common stock dividends (49.0) (776.0) (34.3)
---------- ---------- ----------
Shareholder's equity, end of year $1,384.4 $1,393.3 $1,852.8
========== ========== ==========
</TABLE>
(1) Net of reclassification adjustments.
See Notes to Consolidated Financial Statements
F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 186.9 $ 292.9 $ 235.7
Adjustments to reconcile net income to net cash (used for) provided by
operating activities:
Net accretion of discount on investments (26.5) (29.5) (66.8)
Amortization of deferred gain on sale ( 5.7) -- --
Immediate gain on sale -- (59.0) --
Net realized capital losses (gains) 21.5 (11.1) (36.0)
Changes in assets and liabilities:
Decrease (increase) in accrued investment income 0.9 11.4 ( 4.0)
Increase in premiums due and other receivables 23.3 (23.7) (30.0)
(Increase) decrease in policy loans (21.8) 177.4 (70.3)
Increase in deferred policy acquisition costs (153.3) (132.8) (155.8)
Decrease in reinsurance loan to affiliate -- 397.2 231.1
Net increase in universal life account balances 55.7 122.9 157.1
Decrease in other insurance reserve liabilities (28.6) (41.8) (120.3)
Decrease in other liabilities and other assets (53.9) (53.6) (74.0)
(Decrease) increase in income taxes (259.8) 106.4 (25.8)
---------- ---------- ----------
Net cash (used for) provided by operating activities (261.3) 756.7 40.9
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,890.1 6,790.2 5,311.4
Equity securities 111.2 150.1 103.1
Mortgage loans 6.1 0.3 0.2
Life Business -- 966.5 --
Investment maturities and collections of:
Debt securities available for sale 1,216.5 1,296.3 1,212.7
Short-term investments 80.6 135.3 108.4
Cost of investment purchases in:
Debt securities available for sale (7,099.7) (6,706.4) (6,734.8)
Equity securities (13.0) (125.7) (113.3)
Short-term investments (106.0) (83.9) (167.1)
Increase in property and equipment 5.7 9.0 10.0
Other, net 3.7 (2,725.9) --
---------- ---------- ----------
Net cash provided by (used for) investing activities 95.2 (294.2) (269.4)
---------- ---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 2,040.2 1,571.1 1,621.2
Withdrawals of investment contracts (1,680.8) (1,393.1) (1,256.3)
Capital contribution to Separate Account -- -- (25.0)
Return of capital from Separate Account -- 1.7 12.3
Capital contribution from HOLDCO -- 9.3 (5.0)
Dividends paid to shareholder (255.0) (570.0) (34.3)
Other, net 126.7 (34.3) 26.4
---------- ---------- ----------
Net cash provided by (used for) financing activities 231.1 (415.3) 339.3
---------- ---------- ----------
Net increase in cash and cash equivalents 65.0 47.2 110.8
Cash and cash equivalents, beginning of year 628.3 581.1 470.3
---------- ---------- ----------
Cash and cash equivalents, end of year $ 693.3 $ 628.3 $ 581.1
========== ========== ==========
Supplemental cash flow information:
Income taxes paid, net $ 316.5 $ 60.5 $ 130.3
========== ========== ==========
</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 ("ALIAC") and its wholly owned
subsidiaries (collectively, the "Company") are providers of financial products
and services and investment management services in the United States. The
Company has two business segments: Financial Products and Investment Management
Services. On October 1, 1998, the Company sold its individual life insurance
business to Lincoln National Corporation ("Lincoln") and accordingly, it is now
classified as Discontinued Operations (refer to note 3).
Financial 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,
nonqualified annuity contracts and mutual funds. Annuity contracts may be
deferred or immediate ("payout annuities"). These products also include
programs offered to qualified plans and nonqualified deferred compensation
plans that package administrative and recordkeeping services along with a menu
of investment options, including mutual funds (both ALIAC and nonaffiliated
mutual funds), variable and fixed investment options. Financial Products also
include investment advisory services and pension plan administrative services.
Investment Management Services provides: investment advisory services to
affiliated and unaffiliated institutional and retail clients on a
fee-for-service basis; underwriting services to the Aetna Series Fund Inc.;
distribution services for other Aetna products; and trustee, administrative,
and other fiduciary services to retirement plans requiring or otherwise
utilizing a trustee or custodian.
Discontinued Operations include universal life, variable universal life,
traditional whole life and term insurance.
Principles of Consolidation
The consolidated financial statements include ALIAC and its wholly owned
subsidiaries, Aetna Insurance Company of America ("AICA") and Aetna Investment
Adviser Holding Company, Inc. ("IA Holdco"). ALIAC is a wholly owned subsidiary
of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned
subsidiary of Aetna Retirement Services, Inc. whose ultimate parent is Aetna
Inc. ("Aetna"). On July 1, 1999, HOLDCO contributed IA Holdco to the Company
(refer to note 2).
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. The contribution of IA Holdco to the
Company was accounted for in a manner similar to that of a pooling-of-interests
and accordingly, the Company's historical consolidated financial statements
have been restated to include the accounts and results of operations of IA
Holdco. Certain reclassifications have been made to 1998 and 1997 financial
information to conform to the 1999 presentation.
F-7
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
New Accounting Standards
Accounting by Insurance and Other Enterprises for Insurance-Related Assesments
As of January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments, issued by the American Institute of Certified Public Accountants
("AICPA"). This statement 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. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations, as the Company had previously
accounted for guaranty-fund and other insurance-related assessments in a manner
consistent with this standard.
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. The Company does not expect the adoption
of this standard to have a material effect on its financial position and
results of operations.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("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. As amended by FAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, this standard is effective for the Company's financial
statements beginning January 1, 2001, with early adoption permitted. The impact
of FAS No. 133 on the Company's financial statements will vary based on certain
factors including future interpretative guidance from the FASB, the extent of
the Company's hedging activities, the types of hedging instruments used and the
effectiveness of such instruments. The Company is evaluating the impact of
adoption of this standard and currently does not believe that it will have a
material effect on its financial position and 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
F-8
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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. Securities are written down (as realized capital losses) for other
than temporary declines in value. Included in available-for-sale securities are
investments that support experience-rated products.
Experience-rated products are products where the customer, not the Company,
assumes investment (including realized capital gains and losses) and other
risks, subject to, among other things, minimum guarantees. As long as minimum
guarantees are not triggered, the effect of experience- rated products'
investment performance does not impact the Company's results of operations.
Realized and unrealized capital gains and losses on investments supporting
these products are reflected in policyholder's funds left with the Company.
Realized capital gains and losses on all other investments are reflected in the
Company's results of operations. Unrealized capital gains and losses on all
other investments are reflected in shareholders' equity, net of related income
taxes. Purchases and sales of debt and equity securities are recorded on the
trade date. Sales of mortgage loans are recorded on the closing date.
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. At December
31, 1999 and 1998, the Company loaned securities (which are reflected as
invested assets) with a fair value of approximately $232.5 million and $277.3
million, respectively.
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.
F-9
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Mortgage loans and policy loans are carried at unpaid principal balances, net
of impairment reserves.
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 5.)
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.
On occasion, the Company sells call options written on underlying securities
which are carried at fair value. Changes in fair value of these options are
recorded in net realized capital gains or losses.
Deferred Policy Acquisition Costs
Certain costs of acquiring certain 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 certain
annuity and pension contracts, such costs are amortized in proportion to
estimated gross profits and adjusted to reflect actual gross profits over the
life of the contracts (up to 20 years for annuity and pension contracts.)
Periodically, modifications may be made to deferred annuity contract features,
such as shortening the surrender charge period or waiving the surrender charge,
changing the mortality and expense fees, etc. Unamortized deferred policy
acquisition costs associated with these modified contracts are not written off,
but rather, continue to be associated with the original block of business to
F-10
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
which these costs were previously recorded. Such costs are amortized based on
revised estimates of expected gross profits based upon the contract after the
modification. Unamortized deferred policy acquisition costs related to deferred
annuity products were approximately $1.0 billion and $893 million as of
December 31, 1999 and 1998, respectively.
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 expenses.
Insurance Reserve Liabilities
Future policy benefits include reserves for universal life, immediate annuities
with life contingent payouts and traditional life insurance contracts. Reserves
for universal life products are equal to cumulative deposits less withdrawals
and charges plus credited interest thereon. Reserves for traditional life
insurance contracts represent the present value of future benefits to be paid
to or on behalf of policyholders and related expenses less the present value of
future net premiums.
Reserves for immediate annuities with life contingent payouts 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 1.50%
to 11.25% 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.
Revenue Recognition
For 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
F-11
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
and are not recorded as revenue. 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
Separate Accounts assets and liabilities generally represent funds maintained
to meet specific investment objectives of contractholders who bear the
investment risk, subject, in some cases, to minimum guaranteed rates.
Investment income and investment gains and losses generally accrue directly to
such contractholders. The assets of each account are legally segregated and are
not subject to claims that arise out of any other business of the Company.
Separate Accounts assets supporting variable options under universal life and
annuity contracts are invested, as designated by the contractholder or
participant under a contract (who bears the investment risk subject, in limited
cases, to minimum guaranteed rates) in shares of mutual funds which are managed
by the Company, or other selected mutual funds not managed by the Company.
Separate Accounts assets are carried at fair value. At December 31, 1999 and
1998 , unrealized losses of $8.0 million and unrealized gains of $10.0 million,
respectively, after taxes, on assets supporting a guaranteed interest option
are reflected in shareholder's equity. 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 3.70% to 12.00%
in 1999 and 3.00 to 8.10% in 1998.
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.
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 recoverable deemed probable of recovery are reflected as assets on
the Company's Consolidated Balance Sheets. Of the reinsurance recoverable on
the Consolidated Balance Sheets at December 31, 1999 and 1998, $2,989 million
and $2,946 million, respectively, is related to the reinsurance recoverable
from Lincoln arising from the sale of the domestic life insurance business.
(Refer to note 3)
F-12
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
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. Contribution of IA Holdco from HOLDCO
On July 1, 1999, HOLDCO contributed IA Holdco to the Company. The primary
operating subsidiary of IA Holdco is Aeltus Investment Management, Inc.
("Aeltus") which has two wholly-owned operating subsidiaries: Aeltus Capital,
Inc. ("ACI"), a broker dealer, and Aeltus Trust Company ("ATC"), a limited
purpose banking entity. Aeltus is a registered investment advisor under the
Investment Advisers Act of 1940 and provides investment advisory services to
institutional and retail clients on a fee-for-service basis. In addition,
Aeltus, through its ACI subsidiary, provides distribution services for certain
Aetna mutual funds and other Aetna products. Aeltus' ATC subsidiary provides
trustee, administrative, and other fiduciary services to retirement plans
requiring or otherwise utilizing a trustee or custodian.
3. 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.
Assets related to and supporting the life policies were transferred to Lincoln
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 $57.7 million was deferred and was being recognized over
approximately 15 years. The remaining portion of the gain is recognized
immediately in net income and was largely attributed to access to the agency
sales force and brokerage distribution channel. Approximately $5.2 million
(after tax) of the deferred gain was recognized during 1999. During the fourth
quarter of 1999, the Company refined certain accrual and tax estimates which
had been established in connection with the recording of the deferred gain. As
a result, the deferred gain was increased by $12.9 million (after tax) to $65.4
million at December 31, 1999. The remaining deferred gain will be recognized
over approximately 14 years. The unamortized portion of the deferred 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 and $620.4 million for 1998
and 1997. Premiums ceded and reinsurance recoveries made in 1999 totaled $476.5
million and $513.4 million, respectively, and in 1998 totaled $153.4 million
and $70.5 million, respectively.
F-13
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Investments
Debt securities available for sale as of December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 (Millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and government agencies
and authorities $ 1,087.2 $ 4.6 $ 22.1 $ 1,069.7
States, municipalities and political subdivisions 0.3 -- -- 0.3
U.S. corporate securities:
Utilities 514.5 5.6 12.7 507.4
Financial 1,869.8 8.2 44.7 1,833.3
Transportation/capital goods 623.4 .9 39.0 585.3
Health care/consumer products 1,138.7 9.3 51.3 1,096.7
Natural resources 424.6 1.3 15.4 410.5
Other corporate securities 214.0 1.0 14.9 200.1
- ----------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 4,785.0 26.3 178.0 4,633.3
- ----------------------------------------------------------------------------------------------------------------
Foreign securities:
Government, including political subdivisions 364.6 17.1 11.9 369.8
Utilities 196.4 7.3 .4 203.3
Other 748.2 8.9 34.3 722.8
- ----------------------------------------------------------------------------------------------------------------
Total foreign securities 1,309.2 33.3 46.6 1,295.9
- ----------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 1,055.9 19.8 17.6 1,058.1
Collateralized mortgage obligations 1,683.1 25.1 37.7 1,670.5
- ----------------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 2,739.0 44.9 55.3 2,728.6
- ----------------------------------------------------------------------------------------------------------------
Commercial/Multifamily mortgage-backed
securities 1,031.5 3.4 48.7 986.2
Other asset-backed securities 705.7 0.3 9.9 696.1
- ----------------------------------------------------------------------------------------------------------------
Total debt securities $ 11,657.9 $ 112.8 $ 360.6 $ 11,410.1
================================================================================================================
</TABLE>
F-14
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
Debt securities available for sale as of December 31 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 2,260.2 94.6 5.6 2,349.2
Transportation/capital goods 580.8 33.0 1.1 612.7
Healthcare/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 5,300.6 239.9 25.3 5,515.2
- ----------------------------------------------------------------------------------------------------------------
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 $ 11,571.3 $ 580.8 $ 83.9 $ 12,068.2
================================================================================================================
</TABLE>
F-15
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Investments (continued)
At December 31, 1999 and 1998, net unrealized (depreciation) appreciation of
$(247.8) million and $496.9 million, respectively, on available-for-sale debt
securities included $(189.7) million and $355.8 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, 1999 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 $ 266.4 $ 266.5
After one year through five years 2,838.4 2,798.7
After five years through ten years 1,718.0 1,674.6
After ten years 2,351.4 2,250.1
Mortgage-backed securities 3,776.5 3,722.3
Other asset-backed securities 707.2 697.9
- -------------------------------------------------------------------------
Total $ 11,657.9 $ 11,410.1
=========================================================================
</TABLE>
At December 31, 1999 and 1998, debt securities carried at fair value of $8.7
million and $8.8 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, 1999.
Included in the Company's debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>
1999 1998
----------------------------- --------------------------
Amortized Fair Amortized Fair
(Millions) Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total residential CMOs (1) $ 1,683.1 $ 1,670.5 $ 1,879.6 $ 1,988.9
=====================================================================================================
Percentage of total:
Supporting experience rated products 80.7% 81.7%
Supporting remaining products 19.3% 18.3%
- -----------------------------------------------------------------------------------------------------
100.0% 100.0%
=====================================================================================================
</TABLE>
(1) At December 31, 1999 and 1998, approximately 81% and 66%, 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)
4. Investments (continued)
There are various categories of CMOs which are subject to different degrees of
risk from changes in interest rates and, for CMO's that are not agency-backed,
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, 1999 and 1998,
approximately 1% and 2%, 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) 1999 1998
- ----------------------------------------------------
<S> <C> <C>
Amortized Cost $ 204.9 $ 300.4
Gross unrealized gains 12.5 13.1
Gross unrealized losses 10.9 8.1
- ----------------------------------------------------
Fair Value $ 206.5 $ 305.4
====================================================
</TABLE>
5. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ----------------------
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Mortgage loans $ 6.7 $ 6.8 $ 12.7 $ 12.3
Liabilities:
Investment contract liabilities:
With a fixed maturity 1,055.3 991.0 1,063.9 984.3
Without a fixed maturity 10,066.4 9,452.8 10,241.7 9,686.2
- ------------------------------------------------------------------------------------------
</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)
5. 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.
Off-Balance-Sheet and Other Financial Instruments
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.
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. There were no open
treasury futures as of December 31, 1999.
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, 1999 were
both $6.5 million. The carrying values and estimated fair values as of December
31, 1998 were both $1.5 million.
Options:
During 1999, the Company earned $0.4 million of investment income for writing
call options on underlying securities. The Company did not write any call
options in 1998. As of December 31, 1999 and 1998, there were no option
contracts outstanding.
F-18
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. 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,
1999 was as follows:
<TABLE>
<CAPTION>
Amortized Fair
(Millions) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Residential collateralized mortgage obligations $ 1,683.1 $ 1,670.5
Principal-only strips (included above) 9.2 9.7
Interest-only strips (included above) 10.7 14.6
Other structured securities with derivative
characteristics (1) 81.7 67.2
- --------------------------------------------------------------------------------
</TABLE>
(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.
6. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 823.3 $ 798.8 $ 814.6
Nonredeemable preferred stock 17.1 18.4 12.9
Investment in affiliated mutual funds 2.4 6.6 3.8
Mortgage loans 1.1 0.6 0.3
Policy loans 7.7 7.2 5.7
Reinsurance loan to affiliate -- 2.3 5.5
Cash equivalents 39.0 46.1 40.2
Other 15.3 13.2 16.1
- --------------------------------------------------------------------------------
Gross investment income 905.9 893.2 899.1
Less: investment expenses (19.6) (21.4) (17.4)
- --------------------------------------------------------------------------------
Net investment income $ 886.3 $ 871.8 $ 881.7
================================================================================
</TABLE>
Net investment income includes amounts allocable to experience rated
contractholders of $659.6 million, $655.6 million and $673.8 million for the
years ended December 31, 1999, 1998 and 1997, respectively. Interest credited
to contractholders is included in current and future benefits.
F-19
<PAGE>
Notes to Consolidated Financial Statements (continued)
7. Dividend Restrictions and Shareholder's Equity
The Company paid $255.0 million, $570.0 million and $34.3 million in cash
dividends to HOLDCO in 1999,1998 and 1997, respectively. Of the $255.0 million
paid in 1999, $206 million was accrued for in 1998. Of the $776.0 million
dividends paid or 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.
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 $133.9
million, $148.1 million and $80.5 million for the years ended December 31,
1999, 1998 and 1997, respectively. Statutory capital and surplus was $845.2
million and $773.0 million as of December 31, 1999 and 1998, respectively.
As of December 31, 1999, 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.
8. 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 (losses) gains on investments were as follows:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ (23.6) $ 7.4 $ 21.1
Equity securities 2.1 3.0 8.6
- ----------------------------------------------------------------------------------
Pretax realized capital (losses) gains $ (21.5) $ 10.4 $ 29.7
==================================================================================
After-tax realized capital (losses) gains $ (14.0) $ 7.3 $ 19.2
==================================================================================
</TABLE>
Net realized capital (losses) gains of $(36.7) million, $15.0 million and $83.7
million for 1999, 1998 and 1997, 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 allocable to experienced-rated contractholders were $68.5
million and $118.6 million at December 31, 1999 and 1998, respectively.
F-20
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. 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) 1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds on sales $ 5,890.1 $ 6,790.2 $ 5,311.3
Gross gains 10.5 98.8 23.8
Gross losses 34.1 91.4 2.7
- ------------------------------------------------------------------
</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) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ (199.2) $ 18.9 $ 44.3
Equity securities (3.4) (16.1) 5.6
Other (27.6) 15.4 --
- -------------------------------------------------------------------------------------
Subtotal (230.2) 18.2 49.9
(Decrease) increase in deferred income taxes
(Refer to note 9) (80.6) 6.3 17.5
- -------------------------------------------------------------------------------------
Net changes in accumulated other
comprehensive (loss) income $ (149.6) $ 11.9 $ 32.4
=====================================================================================
</TABLE>
Net unrealized capital (losses) gains allocable to experience-rated contracts
of $(189.7) and $355.8 million at December 31, 1999 and December 31, 1998
respectively, are reflected on the Consolidated Balance Sheets in
Policyholders' funds left with the Company and are not included in
shareholder's equity.
F-21
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Capital Gains and Losses on Investment Operations (continued)
Shareholder's equity included the following accumulated other comprehensive
(loss) income, which is net of amounts allocable to experience-rated
contractholders, at December 31:
<TABLE>
<CAPTION>
(Millions) 1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Gross unrealized capital gains $ 18.6 $ 157.3 $ 140.6
Gross unrealized capital losses (76.7) (16.2) (18.4)
- -----------------------------------------------------------------------------------
(58.1) 141.1 122.2
- -----------------------------------------------------------------------------------
Equity securities:
Gross unrealized capital gains 12.5 13.1 21.2
Gross unrealized capital losses (10.9) (8.1) (0.1)
- -----------------------------------------------------------------------------------
1.6 5.0 21.1
- -----------------------------------------------------------------------------------
Other:
Gross unrealized capital gains 1.3 17.1 --
Gross unrealized capital losses (13.7) (1.8) --
- -----------------------------------------------------------------------------------
(12.4) 15.3 --
- -----------------------------------------------------------------------------------
Deferred income taxes (Refer to note 9) (24.1) 56.6 50.4
- -----------------------------------------------------------------------------------
Net accumulated other comprehensive (loss)
income $ (44.8) $ 104.8 $ 92.9
===================================================================================
</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) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding (losses) gains arising
during the year (1) $ (146.3) $ 38.3 $ 99.2
Less: reclassification adjustment for gains and
other items included in net income (2) 3.3 26.4 66.8
========================================================================================
Net unrealized (losses) gains on securities $ (149.6) $ 11.9 $ 32.4
========================================================================================
</TABLE>
(1) Pretax unrealized holding (losses) gains arising during the year were
$(225.2) million, $58.8 million and $152.7 million for 1999, 1998 and
1997, respectively.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $5.0 million, $40.6 million and $102.8 million for 1999,
1998 and 1997, respectively.
F-22
<PAGE>
Notes to Consolidated Financial Statements (continued)
9. Income Taxes
The Company is included in the consolidated federal income tax return, the
combined New York return, and Illinois unitary state income tax return of
Aetna. Aetna allocates to each member, as permitted under a tax sharing
arrangement, 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) 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes (benefits):
Federal $ 63.8 $ 257.4 $ 40.0
State 2.5 3.0 3.3
Net realized capital (losses) gains (20.1) 16.8 39.1
- -----------------------------------------------------------------------------
46.2 277.2 82.4
- -----------------------------------------------------------------------------
Deferred taxes (benefits):
Federal 31.3 (196.7) 14.3
Net realized capital gains (losses) 12.6 (13.9) (28.3)
- -----------------------------------------------------------------------------
43.9 (210.6) (14.0)
- -----------------------------------------------------------------------------
Total $ 90.1 $ 66.6 $ 68.4
=============================================================================
</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) 1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from continuing operations before
income taxes $ 271.3 $ 238.7 $ 236.3
Tax rate 35% 35% 35%
- ------------------------------------------------------------------------------------
Application of the tax rate 95.0 83.5 82.7
Tax effect of:
State income tax, net of federal benefit 1.6 2.0 2.1
Excludable dividends (6.1) (17.1) (15.6)
Other, net (0.4) (1.8) (0.8)
- ------------------------------------------------------------------------------------
Income taxes $ 90.1 $ 66.6 $ 68.4
=====================================================================================
</TABLE>
F-23
<PAGE>
Notes to Consolidated Financial Statements (continued)
9. 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) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 323.1 $ 324.1
Unrealized gains allocable to experience rated contracts -- 124.5
Net unrealized capital losses 90.5 --
Investment losses 1.3 --
Postretirement benefits other than pensions 24.8 27.6
Deferred compensation 42.5 37.3
Sale of individual life 44.9 48.9
Other 20.2 20.4
- ---------------------------------------------------------------------------------------
Total gross assets 547.3 582.8
- ---------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 324.0 282.9
Market discount 6.5 4.5
Net unrealized capital gains -- 181.1
Unrealized losses allocable to experience rated contracts 66.4 --
- ---------------------------------------------------------------------------------------
Total gross liabilities 396.9 468.5
- ---------------------------------------------------------------------------------------
Net deferred tax asset $ 150.4 $ 114.3
=======================================================================================
</TABLE>
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes.
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, 1999. This amount would be taxed
only under certain conditions. 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 1994. 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 1995 through 1997.
F-24
<PAGE>
Notes to Consolidated Financial Statements (continued)
10. 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 (September 30), fair value of plan assets exceed projected
benefit obligations. 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 $6.6 million and $3.0 million for the years ended December
31, 1999 and 1997, respectively. There were no charges in 1998 due to favorable
plan asset performance.
Effective January 1, 1999, the Company, in conjunction with Aetna, changed the
formula from the previous final average pay formula to a cash balance formula,
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 did not have a material effect on the
Company's results of operations, liquidity or financial condition.
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
45 with 10 years of service. The company provides subsidized benefits to
employees whose sum of age and service is at least equal to 65. There is a cap
on the portion of the cost paid by the Company relating to medical and dental
benefits. The costs to the Company associated with the Aetna postretirement
plans for 1999, 1998 and 1997 were $2.1 million, $1.0 million and $2.4 million,
respectively.
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 (September 30), accumulated
benefit obligations exceeded fair value of plan assets.
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 1999, 1998 and
1997 were $2.1 million, $1.4 million and $0.6 million, respectively.
Incentive Savings Plan--Substantially all employees are eligible to participate
in a savings plan under which designated contributions, which may be invested
in common stock of Aetna or certain other investments, are matched, up to 5% of
compensation, by Aetna. Pretax charges to operations for the incentive savings
plan were $7.7 million, $5.3 million and $5.0 million in 1999, 1998 and 1997,
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 employees. Executive, middle
F-25
<PAGE>
Notes to Consolidated Financial Statements (continued)
10. Benefit Plans (continued)
management and non-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,
from time to time, 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 1999, 1998 and 1997, were $0.4 million, $4.2 million and
$2.9 million, respectively.
11. Related Party Transactions
Investment Advisory and Other Fees
The Company serves as investment advisor to the Aetna managed mutual funds and
variable funds (collectively, the Funds). Under the advisory agreements, the
Funds pay the Company a daily fee which, on an annual basis, ranged, depending
on the fund, from 0.25% to 0.95% 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 and other income, amounted to $424.2 million, $349.0
million and $271.2 million in 1999, 1998 and 1997, respectively.
Reinsurance Transactions
Effective December 31, 1988, the Company entered into a modified coinsurance
reinsurance agreement ("MODCO") with Aetna Life Insurance Company ("Aetna
Life"), an affiliate company, 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. Effective January 1, 1997, this
agreement was amended to transition (based on underlying investment rollover in
Aetna Life) from a modified coinsurance arrangement to a coinsurance agreement.
As a result of this change, reserves were ceded to the Company from Aetna Life
as investment rollover occurred. Effective October 1, 1998, this agreement was
fully transitioned to a coinsurance arrangement and this business along with
the Company's direct individual non-participation life insurance business was
sold to Lincoln. (Refer to note 3).
The operating results of the domestic individual life business are presented as
Discontinued Operations. Premiums of $17.9 million, $336.3 million and $176.7
million and current and future benefits of $8.6 million, $341.1 million and
$183.9 million, were assumed in 1999, 1998 and 1997, respectively. Investment
income of $17.0 million and $37.5 million was generated from a reinsurance loan
to affiliate for the years ended December 31, 1998 and 1997, 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
F-26
<PAGE>
Notes to Consolidated Financial Statements (continued)
11. Related Party Transactions (continued)
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 and $5.9 million for 1998 and 1997,
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 renewable term basis. Premium amounts
related to this agreement were $4.4 million in1998. 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 $115.3 million and $87.8
million were maintained for this contract as of December 31, 1999 and 1998,
respectively.
Capital Transactions
The Company received no capital contributions in 1999. In 1998, the Company
received a capital contribution of $9.3 million in cash from HOLDCO. In 1997,
the Company returned capital of $5.0 million to HOLDCO.
Refer to note 7 for dividends paid to HOLDCO.
Other
Premiums due and other receivables include $10.5 million and $1.6 million due
from affiliates in 1999 and 1998, respectively. Other liabilities include $1.9
million and $2.2 million due to affiliates for 1999 and 1998, respectively.
Aetna transferred to the Company $0.8 million, $1.7 million and $3.8 million
based on its decision not to settle state tax liabilities for the years 1999,
1998 and 1997, respectively, as permitted under the tax sharing arrangement,
which is reported in other changes 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.
12. 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 3)
F-27
<PAGE>
Notes to Consolidated Financial Statements (continued)
12. Reinsurance (continued)
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.
The following table includes premium amounts ceded/assumed as discussed in note
11.
<TABLE>
<CAPTION>
Ceded to Assumed
Direct Other from Other Net
(Millions) Amount Companies Companies Amount
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
----
Premiums:
Discontinued Operations $ 460.1 $ 478.0 $ 17.9 $ --
Accident and Health Insurance 33.4 33.4 -- --
Annuities 111.5 4.9 .9 107.5
- ---------------------------------------------------------------------------------------
Total earned premiums $ 605.0 $ 516.3 $ 18.8 $ 107.5
=======================================================================================
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
=======================================================================================
</TABLE>
F-28
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Segment Information
Summarized financial information for the Company's principal operations was as
follows:
<TABLE>
<CAPTION>
Investment
Year ended December 31, Financial Management Discontinued
1999 (Millions) Products (1) Services (1) Operations (1) Other (1) Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external
customers $ 551.1 $ 118.3 -- $ (43.9) $ 625.5
Net investment income 881.5 1.5 -- 3.3 886.3
- ---------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital losses $ 1,432.6 $ 119.8 -- $ (40.6) $ 1,511.8
=========================================================================================================
Amortization of deferred policy
acquisition costs $ 93.4 $ 11.5 $ 104.9
- ---------------------------------------------------------------------------------------------------------
Income taxes (benefits) $ 87.0 $ 16.5 $ (13.4) $ 90.1
- ---------------------------------------------------------------------------------------------------------
Operating earnings (losses) (2) $ 192.1 $ 28.1 -- $ (7.5) $ 212.7
Other item (3) -- -- (17.5) (17.5)
Net realized capital losses,
net of tax (14.0) -- -- (14.0)
- ---------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations 178.1 28.1 -- (25.0) 181.2
Discontinued operations,
net of tax:
Amortization of deferred
gain on sale -- $ 5.7 -- 5.7
- ---------------------------------------------------------------------------------------------------------
Net income (loss) $ 178.1 $ 28.1 $ 5.7 $ (25.0) $ 186.9
=========================================================================================================
Segment assets $ 53,324.4 $ 73.2 $ 2,989.0 $ 56,386.6
- ---------------------------------------------------------------------------------------------------------
Expenditures for long-lived
assets (4) -- -- -- $ 5.7 $ 5.7
- ---------------------------------------------------------------------------------------------------------
Balance of long-lived assets -- -- -- $ 16.5 $ 16.5
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Financial Products include: deferred and immediate annuity contracts,
mutual funds, programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment Management
Services include the following services: investment advisory to affiliated
and unaffiliated institutional and retail clients, underwriting,
distribution for Company products and trustee, administrative and other
fiduciary services to retirement plans. (Refer to notes 1 and 2.)
Discontinued operations include life insurance products. (Refer to note
3.) Other includes consolidating adjustments and Year 2000 costs.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any other items. While operating
earnings is the measure of profit or loss used by the Company's management
when assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
(3) Other item excluded from operating earnings represents after-tax Year 2000
costs of $17.5 million
(4) Expenditures of long-lived assets represents additions to property and
equipment not allocable to business segments.
F-29
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>
Investment
Year ended December 31, Financial Management Discontinued
1998 (Millions) Products (1) Services (1) Operations (1) Other (1) Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external
customers $ 445.6 $ 96.7 -- $ (38.4) $ 503.9
Net investment income 865.3 1.5 -- 5.0 871.8
- --------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains $ 1,310.9 $ 98.2 -- $ (33.4) $ 1,375.7
========================================================================================================
Amortization of deferred policy
acquisition costs $ 80.3 -- -- $ 10.9 $ 91.2
- --------------------------------------------------------------------------------------------------------
Income Taxes (benefits) $ 67.7 $ 14.7 -- $ (15.8) $ 66.6
- --------------------------------- ---------- ------- -- ------- ----------
Operating earnings (2) $ 170.3 $ 24.0 -- $ (7.1) $ 187.2
Other item (3) -- -- -- (22.4) (22.4)
Net realized capital gains,
net of tax 7.3 -- -- -- 7.3
- --------------------------------------------------------------------------------------------------------
Income from continuing
operations 177.6 24.0 -- (29.5) 172.1
Discontinued operations,
net of tax:
Income from operations -- -- $ 61.8 -- 61.8
Immediate gain on sale -- -- 59.0 -- 59.0
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 177.6 $ 24.0 $ 120.8 $ (29.5) $ 292.9
========================================================================================================
Segment assets $ 44,366.4 $ 13.4 $ 2,946.4 $ 47,326.2
- --------------------------------------------------------------------------------------------------------
Expenditures for long-lived
assets (4) -- -- -- $ 9.0 $ 9.0
- --------------------------------------------------------------------------------------------------------
Balance of long-lived assets $ 14.8 $ 14.8
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Financial products include: deferred and immediate annuity contracts,
mutual funds, programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment Management
Services include the following services: investment advisory to affiliated
and unaffiliated institutional and retail clients, underwriting,
distribution for Company products and trustee, administrative and other
fiduciary services to retirement plans. (Refer to notes 1 and 2.)
Discontinued operations include life insurance products. (Refer to note
3.) Other includes consolidating adjustments and Year 2000 costs.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any other items. While operating
earnings is the measure of profit or loss used by the Company's management
when assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
(3) Other item excluded from operating earnings represents after-tax Year 2000
costs of $22.4 million
(4) Expenditures of long-lived assets represents additions to property and
equipment not allocable to business segments.
F-30
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Segment Information (continued)
<TABLE>
<CAPTION>
Investment
Year ended December 31, Financial Management Discontinued
1997 (Millions) Products (1) Services (1) Operations (1) Other (1) Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external
customers $ 371.5 $80.3 -- $(23.9) $ 427.9
Net investment income 876.7 1.4 -- 3.6 881.7
- --------------------------------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains $ 1,248.2 $81.7 -- $(20.3) $ 1,309.6
========================================================================================================
Amortization of deferred policy
acquisition costs $ 57.2 -- -- $ 9.1 $ 66.3
- --------------------------------------------------------------------------------------------------------
Income Taxes (benefits) $ 59.7 $11.9 -- $ (3.2) $ 68.4
- --------------------------------------------------------------------------------------------------------
Operating earnings (2) $ 134.9 $19.7 -- $ (5.9) $ 148.7
Net realized capital gains,
net of tax 19.2 -- -- -- 19.2
- --------------------------------------------------------------------------------------------------------
Income from continuing
operations 154.1 $19.7 -- (5.9) 167.9
Discontinued operations,
net of tax:
Income from operations -- -- $ 67.8 -- 67.8
Deferred gain on sale -- -- -- -- --
- --------------------------------------------------------------------------------------------------------
Net income (loss) $ 154.1 $19.7 $ 67.8 $ (5.9) $ 235.7
========================================================================================================
Segment assets $ 36,379.5 $17.9 $ 3,792.5 -- $ 40,189.9
- --------------------------------------------------------------------------------------------------------
Expenditures for long-lived
assets (3) -- -- -- $ 10.0 $ 10.0
- --------------------------------------------------------------------------------------------------------
Balance of long-lived assets $ 12.7 $ 12.7
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) Financial products include: deferred and immediate annuity contracts,
mutual funds, programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and recordkeeping
services along with a menu of investment options, investment advisory
services and pension plan administrative services. Investment Management
Services include the following services: investment advisory to affiliated
and unaffiliated institutional and retail clients, underwriting,
distribution for Company products and trustee, administrative and other
fiduciary services to retirement plans. (Refer to notes 1 and 2.)
Discontinued operations include life insurance products. (Refer to note
3.) Other includes consolidating adjustments and Year 2000 costs.
(2) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses and any other items. While operating
earnings is the measure of profit or loss used by the Company's management
when assessing performance or making operating decisions, it does not
replace operating income or net income as a measure of profitability.
(3) Expenditures of long-lived assets represents additions to property and
equipment not allocable to business segments.
F-31
<PAGE>
Notes to Consolidated Financial Statements (continued)
14. 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, the Company had off-balance
sheet commitments to purchase investments of $68.7 million with an estimated
fair value of $68.9 million. At December 31, 1999, there were no off-balance
sheet commitments.
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
