Contract Prospectus - May 3, 1999
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[Begin sidebar]
The Funds
o Aetna Ascent VP
o Aetna Balanced VP, Inc.
o Aetna Income Shares d/b/a Aetna Bond VP
o Aetna Crossroads VP
o Aetna Growth VP
o Aetna Variable Fund d/b/a Aetna Growth and Income VP
o Aetna Index Plus Large Cap VP
o Aetna International VP
o Aetna Legacy VP
o Aetna Variable Encore Fund d/b/a Aetna Money Market VP
o Aetna Real Estate Securities VP
o Aetna Small Company VP
o Aetna Value Opportunity VP
o Calvert Social Balanced Portfolio
o Fidelity Variable Insurance Product Fund (VIP) Equity-Income Portfolio
o Fidelity Variable Insurance Product Fund (VIP) Growth Portfolio
o Fidelity Variable Insurance Product Fund (VIP) High Income Portfolio
o Fidelity Variable Insurance Product Fund (VIP) Overseas Portfolio
o Fidelity Variable Insurance Product Fund II (VIP II) Asset Manager Portfolio
o Fidelity Variable Insurance Product Fund II (VIP II) Contrafund Portfolio
o Fidelity Variable Insurance Product Fund II (VIP II) Index 500 Portfolio
o Janus Aspen Aggressive Growth Portfolio
o Janus Aspen Balanced Portfolio
o Janus Aspen Flexible Income Portfolio
o Janus Aspen Growth Portfolio
o Janus Aspen Worldwide Growth Portfolio
o MFS Total Return Series
o MFS Global Governments Series
o Oppenheimer Aggressive Growth Fund/VA
o Oppenheimer Global Securities Fund/VA
o Oppenheimer Main Street Growth and Income Fund/VA
o Oppenheimer Strategic Bond Fund/VA
o Portfolio Partners MFS Emerging Equities Portfolio
o Portfolio Partners MFS Research Growth Portfolio
o Portfolio Partners MFS Value Equity Portfolio
o Portfolio Partners Scudder International Growth Portfolio
o Portfolio Partners T. Rowe Price Growth Equity Portfolio
[End sidebar]
The Contract. The contracts described in this prospectus are group or individual
"Aetna Marathon Plus" deferred variable annuity contracts issued by Aetna
Insurance Company of America (the Company, we, us). They are issued as either a
nonqualified deferred annuity; a qualified individual retirement annuity (IRA)
under section 408(b) of the Internal Revenue Code of 1986, as amended (Tax
Code); a qualified Roth IRA under section 408A of the Tax Code; or as a
qualified contract for use with certain employer sponsored retirement plans.
Prior to May 1, 1998, the contracts were available as tax deferred annuities as
described under section 401(a) of the Tax Code.
The contracts are not available as SIMPLE IRAs under Tax Code section 408(p).
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Why Reading this Prospectus Is Important This prospectus contains facts about
the contracts and the available investment options you should know before
purchasing. Read this prospectus carefully. If you purchase the contract, retain
this prospectus for future reference.
Table of Contents . . . page 3
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Contract Design. The contracts described in this prospectus are designed to:
> Help you save for retirement security while receiving beneficial tax treatment
> Offer a variety of investment options to help meet long-term financial goals
> Provide a death benefit to the beneficiary you designate
> Provide payments for life or for a specified period
Getting Additional Information. You may obtain the May 3, 1999, Statement of
Additional Information (SAI) about the separate account by indicating your
request on your application or calling us at 1-800-531-4547. You may also obtain
an SAI for any of the funds by calling that number. This prospectus, the SAI and
other information about the separate account are posted on the Securities and
Exchange Commission (SEC) website, http://www.sec.gov and may be obtained, free
of charge, by contacting the SEC Public Reference Room at 202-942-8090. The SAI
table of contents is listed on page 48 of this prospectus. The SAI is
incorporated into this prospectus by reference.
Additional Disclosure Information. Neither the SEC nor any state securities
commission has approved or disapproved the securities offered through this
prospectus or passed on the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense. We do not intend for this
prospectus to be an offer to sell or a solicitation of an offer to buy these
securities in any state that does not permit their sale. We have not authorized
anyone to provide you with information that is different than that contained in
this prospectus.
Investment Options. The contracts offer variable investment options and fixed
interest options. When we establish your account you instruct us to direct
account dollars to any of the available options.
<PAGE>
Prospectus - May 3, 1999 (continued)
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Variable Investment Options. These options are called subaccounts. The
subaccounts are within Variable Annuity Account I (the separate account), a
separate account of the Company. Each subaccount invests in one of the mutual
funds listed above. Earnings on amounts invested in a subaccount will vary
depending upon the performance of its underlying fund. You do not invest
directly in or hold shares of the funds.
Risks Associated with Investing in the Funds. The funds in which the subaccounts
invest have various risks. Information about the risks of investing in the funds
is located in the "Investment Option" section in this prospectus and in each
fund prospectus. Read this prospectus in conjunction with the fund prospectuses,
and retain the prospectuses for future reference.
Fixed Interest Options.
> AICA Guaranteed Account (the Guaranteed Account)
> Fixed Account
Except as specifically mentioned, this prospectus describes only the investment
options offered through the separate account. However, we describe the fixed
interest options in appendices to this prospectus. There is also a separate
Guaranteed Account prospectus.
Availability of Options. Some funds or fixed interest options may be unavailable
through your contract or in your state.
These contracts are not deposits with, obligations of or guaranteed by any bank,
nor are they insured by the FDIC. The contracts are subject to investment risk,
including the possible loss of the principal amount of your investment.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
Contract Overview ....................................... 4
Contract Design
Contract Facts
Questions: Contacting the Company
Sending Forms and Written Requests in Good Order
Contract Phases: The Accumulation Phase, The Income Phase
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</TABLE>
<TABLE>
<S> <C>
Fee Table ............................... 6
Condensed Financial Information ......... 11
Investment Options ...................... 11
Transfers ............................... 13
Purchase and Rights ..................... 14
Right to Cancel ......................... 16
Fees .................................... 17
Your Account Value ...................... 22
Withdrawals ............................. 24
Systematic Distribution Options ......... 26
Death Benefit ........................... 27
The Income Phase ........................ 31
Taxation ................................ 34
Other Topics ............................ 43
</TABLE>
The Company -- Variable Annuity Account I -- Contract Distribution -- Payment of
Commissions -- Payment Delay or Suspension -- Performance Reporting -- Voting
Rights -- Contract Modifications -- Transfer of Ownership: Assignment --
Involuntary Terminations -- Legal Matters and Proceedings -- Year 2000 Readiness
<TABLE>
<S> <C>
Contents of the Statement of Additional Information ......... 48
Appendix I--AICA Guaranteed Account ......................... 49
Appendix II -- Fixed Account ................................ 52
Appendix III -- Description of Underlying Funds ............. 53
Appendix IV -- Condensed Financial Information .............. 73
</TABLE>
3
<PAGE>
[Begin sidebar]
Questions: Contacting the Company. To answer your questions, contact your local
representative or write or call our Home Office at:
Aetna Retirement Services
Annuity Services
151 Farmington Avenue
Hartford, CT 06156-1277
1-800-531-4547
Sending Forms and Written Requests in Good Order.
If you are writing to change your beneficiary, request a withdrawal, or for any
other purpose, contact your local representative or the Company to learn what
information is required for the request to be in "good order." We can only act
upon requests that are received in good order.
[End sidebar]
Contract Overview
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The following is intended as a summary. Please read each section of this
prospectus for additional detail.
Contract Design
The contract described in this prospectus is a group or individual deferred
variable annuity contract. It is intended to be a retirement savings vehicle
that receives beneficial tax treatment and offers a variety of investment
options to help meet long-term financial goals.
Contract Facts
Free Look/Right to Cancel: You may cancel your contract within 10 days (or
longer if required by state law) of receipt. See "Right To Cancel."
Death Benefit: Your beneficiary may receive a financial benefit in the event of
your death prior to the income phase. Benefits during the income phase depend
upon the payment option selected. See "Death Benefit" and "The Income Phase."
Withdrawals: During the accumulation phase, you may withdraw all or part of your
account value. Certain fees, taxes and early withdrawal penalties may apply. In
addition, the Tax Code restricts full and partial withdrawals in some
circumstances. See "Withdrawals." Amounts withdrawn from the Guaranteed Account
may be subject to a market value adjustment. See Appendix I.
Systematic Distribution Options: These are made available for you to receive
periodic withdrawals from your account, while retaining the account in the
accumulation phase. See "Systematic Distribution Options."
Fees and Expenses: Certain fees and expenses are deducted from the value of your
contract. See "Fee Table" and "Fees."
Taxation: The contract is designed to help defer taxes while saving for
retirement. Taxes will generally be due when you receive a distribution from
amounts accumulated. Tax penalties may apply in some circumstances. See
"Taxation."
4
<PAGE>
Contract Phases
I. The Accumulation Phase (accumulating dollars)
STEP 1: You provide us with your completed application and initial payment. We
establish an account for you.
STEP 2: You direct us to invest your payments in one or more of the following:
(a) Fixed Interest Options
(b) Variable Investment Options
(The variable investment options are the subaccounts of Variable Annuity
Account I. Each one invests in a specific mutual fund.)
STEP 3: Each subaccount you select purchases shares of its assigned fund.
II. The Income Phase When you want to begin receiving payments from your
contract, you may select from the options available. The contract offers
several payment options (see "The Income Phase"). In general, you may:
> Receive payments for a specified period of time or for life
> Receive payments monthly, quarterly, semi-annually or annually
> Select an option that provides for payments to beneficiaries
> Select fixed payments or payments that vary based upon the performance of the
variable investment options you select
[graphic]
Payments to
Your Account
Step 1 (down arrow)
Aetna Insurance Company of America
(a) Step 2 (b)
Variable Annuity
Fixed Separate Account I
Interest
Options Variable Investment Options
The Subaccounts
A B Etc.
(down arrow) Step 3 (down arrow)
Mutual Mutual
Fund A Fund B
[end graphic]
5
<PAGE>
[Begin sidebar]
In this Section:
> Maximum Transaction Fees
> Maximum Fees Deducted from Investments in the Separate Account
> Fees Deducted by the Funds
> Examples of Fee Deductions
Also see the "Fees" section for:
> How, When and Why Fees are Deducted
> Reduction, Waiver and/or Elimination of Certain Fees
[End sidebar]
Fee Table
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The tables and examples in this section show the fees that may affect your
account value while you are accumulating dollars under the contract (the
accumulation phase). See "The Income Phase" for fees that may apply after you
begin receiving payments under the contract. The fees shown below do not include
premium taxes that may be applicable.
Maximum Transaction Fees
Early Withdrawal Charge (As a percentage of the purchase payments withdrawn.)
<TABLE>
<CAPTION>
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Contracts Other Than Roth IRA Contracts Roth IRA Contracts(1)
- ------------------------------------------- -----------------------------------------
Years From Early Early
Receipt of Withdrawal Completed Withdrawal
Payment Charge Account Years Charge
- ---------------------------- ------------ --------------------------- -----------
<S> <C> <C> <C>
Less than 2 7% Less than 1 5%
2 or more but less than 4 6% 1 or more but less than 2 4%
4 or more but less than 5 5% 2 or more but less than 3 3%
5 or more but less than 6 4% 3 or more but less than 4 2%
6 or more but less than 7 3% 4 or more but less than 5 1%
7 or more 0% 5 or more 0%
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</TABLE>
Annual Maintenance Fee................................................$30.00(2)
Transfer charge........................................................$0.00(3)
Maximum Fees Deducted from Investments in the Separate Account
(Daily deductions equal to the given percentage on an annual basis.)
Contracts other than Roth IRA Contracts Issued before May 1, 1998
Mortality and Expense Risk Charge......................................1.25%
Administrative Expense Charge..........................................0.15%(4)
-----
Total Separate Account Annual Expenses.................................1.40%
=====
Contracts Issued on or after May 1, 1998, and all Roth IRA Contracts
Mortality and Expense Risk Charge......................................1.10%(5)
Administrative Expense Charge..........................................0.15%(4)
-----
Total Separate Account Annual Expenses.................................1.25%
=====
(1)If the purchase payment is a rollover from another contract issued by us or
one of our affiliates and the early withdrawal charge was waived, the early
withdrawal charge will be based on the number of completed account years
since the date of the initial payment to the former contract.
(2)The annual maintenance fee will be waived if your account value is $50,000 or
greater on the date this fee is due. See "Fees -- Annual Maintenance Fee."
(3)During the accumulation phase, we currently allow you 12 free transfers each
calendar year. We reserve the right to charge $10 for each additional
transfer. We currently do not impose this charge. See "Transfers."
(4)We currently do not deduct an administrative expense charge during the income
phase; however, we reserve the right to deduct a daily charge of not more
than 0.25% per year. See "The Income Phase -- Charges Deducted."
(5)Under certain contracts the mortality and expense risk charge during the
accumulation period may be reduced. See "Fees -- Mortality and Expense Risk
Charge."
6
<PAGE>
Fees Deducted by the Funds
Using this information. The following table shows the investment advisory fees
and other expenses charged annually by each fund. Fund fees are one factor that
impacts the value of a fund share. To learn more about additional factors
impacting the share value, refer to the fund prospectus.
How fees are deducted. The fund fees are not deducted from account values.
Instead, they are deducted from the value of the fund shares on a daily basis,
which in turn affects the value of each subaccount that purchases fund shares.
Except as noted below, the following figures are a percentage of the average net
assets of each fund, and are based on figures for the year ended December 31,
1998.
Fund Expense Table
<TABLE>
<CAPTION>
Total Fund Net Fund
Annual Annual
Expenses Expenses
Investment Without Total After
Advisory Other Waivers or Waivers and Waivers or
Fees(1) Expenses Reductions Reductions Reductions
------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP(2)(3) 0.60% 0.15% 0.75% 0.00% 0.75%
Aetna Balanced VP, Inc.(3) 0.50% 0.09% 0.59% -- 0.59%
Aetna Bond VP(3) 0.40% 0.10% 0.50% -- 0.50%
Aetna Crossroads VP(2)(3) 0.60% 0.15% 0.75% 0.00% 0.75%
Aetna Growth VP(2)(3) 0.60% 0.15% 0.75% 0.00% 0.75%
Aetna Growth and Income VP(3) 0.50% 0.08% 0.58% -- 0.58%
Aetna Index Plus Large Cap VP(2)(3) 0.35% 0.10% 0.45% 0.00% 0.45%
Aetna International VP(2)(3) 0.85% 1.22% 2.07% 0.92% 1.15%
Aetna Legacy VP(2)(3) 0.60% 0.16% 0.76% 0.00% 0.76%
Aetna Money Market VP(3) 0.25% 0.09% 0.34% -- 0.34%
Aetna Real Estate Securities VP(2)(3) 0.75% 0.73% 1.48% 0.53% 0.95%
Aetna Small Company VP(2)(3) 0.75% 0.14% 0.89% 0.00% 0.89%
Aetna Value Opportunity VP(2)(3) 0.60% 0.14% 0.74% 0.00% 0.74%
Calvert Social Balanced Portfolio(5) 0.70% 0.18% 0.88% 0.02% 0.86%
Fidelity VIP Equity-Income Portfolio(6) 0.49% 0.09% 0.58% 0.01% 0.57%
Fidelity VIP Growth Portfolio(6) 0.59% 0.09% 0.68% 0.02% 0.66%
Fidelity VIP High Income Portfolio(6) 0.58% 0.12% 0.70% 0.00% 0.70%
Fidelity VIP Overseas Portfolio(6) 0.74% 0.17% 0.91% 0.02% 0.89%
Fidelity VIP II Asset Manager Portfolio(6) 0.54% 0.10% 0.64% 0.01% 0.63%
Fidelity VIP II Contrafund Portfolio(6) 0.59% 0.11% 0.70% 0.04% 0.66%
Fidelity VIP II Index 500 Portfolio(6) 0.24% 0.11% 0.35% 0.07% 0.28%
Janus Aspen Aggressive Growth Portfolio(7) 0.72% 0.03% 0.75% 0.00% 0.75%
Janus Aspen Balanced Portfolio(7) 0.72% 0.02% 0.74% 0.00% 0.74%
Janus Aspen Flexible Income Portfolio(7) 0.65% 0.08% 0.73% 0.00% 0.73%
Janus Aspen Growth Portfolio(7) 0.72% 0.03% 0.75% 0.07% 0.68%
Janus Aspen Worldwide Growth Portfolio(7) 0.67% 0.07% 0.74% 0.02% 0.72%
MFS Total Return Series(8) 0.75% 0.16% 0.91% 0.00% 0.91%
MFS Global Governments Series(8)(9) 0.75% 0.36% 1.11% 0.10% 1.01%
Oppenheimer Aggressive Growth Fund/VA(4) 0.69% 0.02% 0.71% -- 0.71%
Oppenheimer Global Securities Fund/VA(4) 0.68% 0.06% 0.74% -- 0.74%
Oppenheimer Main Street Growth and Income Fund/VA(4) 0.74% 0.05% 0.79% -- 0.79%
Oppenheimer Strategic Bond Fund/VA(4) 0.74% 0.06% 0.80% -- 0.80%
Portfolio Partners MFS Emerging Equities Portfolio(10) 0.68% 0.13% 0.81% 0.00% 0.83%
Portfolio Partners MFS Research Growth Portfolio(10) 0.70% 0.15% 0.85% -- 0.85%
Portfolio Partners MFS Value Equity Portfolio(10) 0.65% 0.25% 0.90% -- 0.90%
Portfolio Partners Scudder International Growth Portfolio(10) 0.80% 0.20% 1.00% -- 1.00%
Portfolio Partners T. Rowe Price Growth Equity Portfolio(10) 0.60% 0.15% 0.75% -- 0.75%
</TABLE>
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Footnotes to the Fund Expense Table
(1)Certain of the fund advisers reimburse the company for administrative costs
incurred in connection with administering the funds as variable funding
options under the contract. These reimbursements are generally paid out of
the management fees and are not charged to investors.
7
<PAGE>
(2)The investment adviser is contractually obligated through December 31, 1999
to waive all or a portion of its investment advisory fee and/or its
administrative services fee and/or to reimburse a portion of other expenses
in order to ensure that the portfolio's Total Fund Annual Expenses do not
exceed the percentage reflected under Net Fund Annual Expenses After Waivers
or Reductions.
(3)Prior to May 1, 1998, the portfolio's investment adviser provided
administrative services to the portfolio and assumed the portfolio's
ordinary recurring direct costs under an administrative services agreement.
After that date, the portfolio's investment adviser provided administrative
services but no longer assumed all of the portfolio's ordinary recurring
direct costs under an administrative services agreement. The administrative
fee is 0.075% on the first $5 billion in assets and 0.050% on all assets
over $5 billion. The "Other Expenses" shown are not based on actual figures
for the year ended December 31, 1998, but reflect the fee payable under the
new administrative services agreement and estimates the portfolio's ordinary
recurring direct costs.
(4)Fee waiver/expense reimbursement obligations do not apply to these
portfolios.
(5)The figures above are based on expenses for fiscal year 1998, and have been
restated to reflect the elimination of a performance adjustment. The
restatement includes the addition of 0.01% to the portfolio management fee.
Other Expenses reflect an indirect fee of 0.02% relating to an expense
offset arrangement with the portfolio's custodian. Amounts shown under Total
Waivers and Reductions reflect a voluntary reduction of fees paid
indirectly.
(6)A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds, or the investment adviser
on behalf of certain funds, have entered into arrangements with their
custodian whereby credits realized as a result of uninvested cash balances
were used to reduce custodian expenses. These credits are included under
Total Waivers and Reductions.
(7)All expenses are stated both with and without contractual waivers and fee
reductions by Janus Capital. Fee reductions for the Aggressive Growth,
Balanced, Growth and Worldwide Growth Portfolios reduce the Management fee
to the level of the corresponding Janus retail fund. Other waivers, if
applicable, are first applied against the Management Fee and then against
Other Expenses. Janus Capital has agreed to continue the other waivers and
fee reduction until at least the next annual renewal of the advisory
agreement.
(8)Each series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each series may enter into
other such arrangements and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. Expenses do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series.
(9)MFS has agreed to bear expenses for this series, subject to reimbursement by
the series, such that the series' "other Expenses" shall not exceed 0.25% of
the average daily net assets of the series during the current fiscal year.
The payments made by MFS on behalf of the series under this arrangement are
subject to reimbursement by the series to MFS, which will be accomplished by
the payment of an expense reimbursement fee by the series to MFS computed
and paid monthly at a percentage of the series' average daily net assets for
its then current fiscal year, with a limitation that immediately after such
payment the series' "Other Expenses" will not exceed the percentage set
forth above. The obligation of MFS to bear a series' "Other Expenses"
pursuant to this arrangement, and the series' obligation to pay the
reimbursement fee to MFS, terminates on the earlier of the date on which
payments made by the series' equal the prior payment of such reimbursable
expenses by MFS, or December 31, 2004. MFS may, in its discretion, terminate
this arrangement at an earlier date, provided that the arrangement will
continue until at least May 1, 2000, unless terminated with the consent of
the board of trustees which oversees the series.
(10)The investment adviser has agreed to reimburse the portfolios for expenses
and/or waive its fees, so that, through at least April 30, 2000, the
aggregate of each portfolio's expenses will not exceed the combined
investment advisory fees and other expenses shown under the Net Fund Annual
Expenses After Waivers or Reductions column above. For the Portfolio
Partners MFS Emerging Equities Portfolio, the Total Fund Annual Expenses
Without Waivers or Reductions for 1998 were less than the percentage
reflected under the Net Fund Annual Expenses After Waivers or Reductions
column. Nevertheless, the investment adviser will waive fees and/or
reimburse expenses if that portfolio's Total Fund Annual Expenses Without
Waivers or Reductions for 1999 exceed the percentage reflected under the Net
Fund Annual Expenses After Waivers or Reductions column.
8
<PAGE>
Hypothetical Example: For Contracts Other Than Roth IRA Contracts
Account Fees You May Incur Over Time. The following hypothetical examples show
the fees and expenses paid over time if you invest $1,000 in the contract and
assume a 5% annual return on the investment. For the purpose of these examples,
we deducted total annual fund expenses, the maximum mortality and expense risk
charge of 1.25% annually, an administrative expense charge of 0.15% annually,
and the maximum annual maintenance fee of $30 (converted to a percentage of
assets equal to 0.018%). The total annual fund expenses used are those shown in
the "Total Annual Expenses Without Waivers or Reductions" column in the Fund
Expense Table.
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> These examples are purely hypothetical.
> They should not be considered a representation of past or future expenses or
expected returns.
> Actual expenses and/or returns may be more or less than those shown in these
examples.
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<TABLE>
<CAPTION>
EXAMPLE A
If you withdraw your entire account value
at the end of the periods shown, you
would pay the following expenses,
including any applicable early
withdrawal charge:
Fund Name 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Aetna Ascent VP $85 $121 $152 $250
Aetna Balanced VP, Inc. $83 $116 $144 $234
Aetna Bond VP $82 $114 $139 $224
Aetna Crossroads VP $85 $121 $152 $250
Aetna Growth VP $85 $121 $152 $250
Aetna Growth and Income VP $83 $116 $143 $233
Aetna Index Plus Large Cap VP $82 $112 $136 $219
Aetna International VP $98 $161 $217 $376
Aetna Legacy VP $85 $122 $152 $251
Aetna Money Market VP $81 $109 $131 $207
Aetna Real Estate Securities VP $92 $143 $188 $322
Aetna Small Company VP $86 $126 $159 $264
Aetna Value Opportunity VP $85 $121 $151 $249
Calvert Social Balanced Portfolio $86 $125 $158 $263
Fidelity VIP Equity-Income Portfolio $83 $116 $143 $233
Fidelity VIP Growth Portfolio $84 $119 $148 $243
Fidelity VIP High Income Portfolio $84 $120 $149 $245
Fidelity VIP Overseas Portfolio $86 $126 $160 $266
Fidelity VIP II Asset Manager Portfolio $84 $118 $146 $239
Fidelity VIP II Contrafund Portfolio $84 $120 $149 $245
Fidelity VIP II Index 500 Portfolio $81 $109 $131 $208
Janus Aspen Aggressive Growth Portfolio $85 $121 $152 $250
Janus Aspen Balanced Portfolio $85 $121 $151 $249
Janus Aspen Flexible Income Portfolio $85 $121 $151 $248
Janus Aspen Growth Portfolio $85 $121 $152 $250
Janus Aspen Worldwide Growth Portfolio $85 $121 $151 $249
MFS Total Return Series $86 $126 $160 $266
MFS Global Governments Series $88 $132 $170 $286
Oppenheimer Aggressive Growth Fund/VA $84 $120 $150 $246
Oppenheimer Global Securities Fund/VA $85 $121 $151 $249
Oppenheimer Main Street Growth & Income $85 $123 $154 $254
Fund/VA
Oppenheimer Strategic Bond Fund/VA $85 $123 $154 $255
Portfolio Partners MFS Emerging Equities Portfolio $85 $123 $155 $256
Portfolio Partners MFS Research Growth Portfolio $86 $124 $157 $260
Portfolio Partners MFS Value Equity Portfolio $86 $126 $159 $265
Portfolio Partners Scudder International Growth $87 $129 $164 $275
Portfolio
Portfolio Partners T. Rowe Price Growth Equity $85 $121 $152 $250
Portfolio
<CAPTION>
EXAMPLE B
If at the end of the periods shown you (1)
leave your entire account value invested
or (2) select an income phase payment
option, you would pay the following
expenses (no early withdrawal charge is
reflected):*
Fund Name 1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Aetna Ascent VP $22 $ 68 $116 $250
Aetna Balanced VP, Inc. $20 $ 63 $108 $234
Aetna Bond VP $19 $ 60 $104 $224
Aetna Crossroads VP $22 $ 68 $116 $250
Aetna Growth VP $22 $ 68 $116 $250
Aetna Growth and Income VP $20 $ 63 $108 $233
Aetna Index Plus Large Cap VP $19 $ 59 $101 $219
Aetna International VP $35 $107 $181 $376
Aetna Legacy VP $22 $ 68 $117 $251
Aetna Money Market VP $18 $ 55 $ 95 $207
Aetna Real Estate Securities VP $29 $ 90 $153 $322
Aetna Small Company VP $23 $ 72 $123 $264
Aetna Value Opportunity VP $22 $ 68 $116 $249
Calvert Social Balanced Portfolio $23 $ 72 $123 $263
Fidelity VIP Equity-Income Portfolio $20 $ 63 $108 $233
Fidelity VIP Growth Portfolio $21 $ 66 $113 $243
Fidelity VIP High Income Portfolio $21 $ 66 $114 $245
Fidelity VIP Overseas Portfolio $24 $ 73 $124 $266
Fidelity VIP II Asset Manager Portfolio $21 $ 65 $111 $239
Fidelity VIP II Contrafund Portfolio $21 $ 66 $114 $245
Fidelity VIP II Index 500 Portfolio $18 $ 56 $ 96 $208
Janus Aspen Aggressive Growth Portfolio $22 $ 68 $116 $250
Janus Aspen Balanced Portfolio $22 $ 68 $116 $249
Janus Aspen Flexible Income Portfolio $22 $ 67 $115 $248
Janus Aspen Growth Portfolio $22 $ 68 $116 $250
Janus Aspen Worldwide Growth Portfolio $22 $ 68 $116 $249
MFS Total Return Series $24 $ 73 $124 $266
MFS Global Governments Series $26 $ 79 $134 $286
Oppenheimer Aggressive Growth Fund/VA $22 $ 67 $114 $246
Oppenheimer Global Securities Fund/VA $22 $ 68 $116 $249
Oppenheimer Main Street Growth & Income $22 $ 69 $118 $254
Fund/VA
Oppenheimer Strategic Bond Fund/VA $22 $ 69 $119 $255
Portfolio Partners MFS Emerging Equities Portfolio $23 $ 70 $119 $256
Portfolio Partners MFS Research Growth Portfolio $23 $ 71 $121 $260
Portfolio Partners MFS Value Equity Portfolio $23 $ 72 $124 $265
Portfolio Partners Scudder International Growth $24 $ 75 $129 $275
Portfolio
Portfolio Partners T. Rowe Price Growth Equity $22 $ 68 $116 $250
Portfolio
</TABLE>
- -----------------
*This example does not apply during the income phase if you select a
nonlifetime payment option with variable payments and take a lump-sum
withdrawal within three years after payments start. In this case, the lump
sum payment is treated as a withdrawal during the accumulation phase and may
be subject to an early withdrawal charge (refer to Example A).
9
<PAGE>
Hypothetical Example: For Roth IRA Contracts
Account Fees You May Incur Over Time. The following hypothetical examples show
the fees and expenses paid over time if you invest $1,000 in the contract and
assume a 5% annual return on the investment. For the purpose of these examples,
we deducted total annual fund expenses, the maximum mortality and expense risk
charge of 1.10% annually, an administrative expense charge of 0.15% annually,
and the maximum annual maintenance fee of $30 (converted to a percentage of
assets equal to 0.018%). The total annual fund expenses used are those shown in
the "Total Annual Expenses Without Waivers or Reductions" column in the Fund
Expense Table.
- --------------------------------------------------------------------------------
> These examples are purely hypothetical.
> They should not be considered a representation of past or future expenses or
expected returns.
> Actual expenses and/or returns may be more or less than those shown in these
examples.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXAMPLE A
If you withdraw your entire account value
at the end of the periods shown, you
would pay the following expenses,
including any applicable early
withdrawal charge:
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Aetna Ascent VP $58 $ 86 $116 $250
Aetna Balanced VP, Inc. $56 $ 81 $108 $234
Aetna Bond VP $55 $ 78 $104 $224
Aetna Crossroads, VP $58 $ 86 $116 $250
Aetna Growth VP $58 $ 86 $116 $250
Aetna Growth and Income VP $56 $ 81 $108 $233
Aetna Index Plus Large Cap VP $55 $ 77 $101 $219
Aetna International VP $71 $125 $181 $376
Aetna Legacy VP $58 $ 86 $117 $251
Aetna Money Market VP $54 $ 73 $ 95 $207
Aetna Real Estate Securities VP $65 $108 $153 $322
Aetna Small Company VP $59 $ 90 $123 $264
Aetna Value Opportunity VP $58 $ 85 $116 $249
Calvert Social Balanced Portfolio $59 $ 90 $123 $263
Fidelity VIP Equity-Income Portfolio $56 $ 81 $108 $233
Fidelity VIP Growth Portfolio $57 $ 84 $113 $243
Fidelity VIP High Income Portfolio $57 $ 84 $114 $245
Fidelity Overseas Portfolio $59 $ 91 $124 $266
Fidelity VIP II Asset Manager Portfolio $57 $ 82 $111 $239
Fidelity VIP II Contrafund Portfolio $57 $ 84 $114 $245
Fidelity VIP II Index 500 Portfolio $54 $ 73 $ 96 $208
Janus Aspen Aggressive Growth Portfolio $58 $ 86 $116 $250
Janus Aspen Balanced Portfolio $58 $ 85 $116 $249
Janus Aspen Flexible Income Portfolio $58 $ 85 $115 $248
Janus Aspen Growth Portfolio $58 $ 86 $116 $250
Janus Aspen Worldwide Growth Portfolio $58 $ 85 $116 $249
MFS Total Return Series $59 $ 91 $124 $266
MFS Global Governments Series $61 $ 97 $134 $286
Oppenheimer Aggressive Growth Fund/VA $57 $ 84 $114 $246
Oppenheimer Global Securities Fund/VA $58 $ 85 $116 $249
Oppenheimer Main Street Growth & Income Fund/ $58 $ 87 $118 $254
VA
Oppenheimer Strategic Bond Fund/VA $58 $ 87 $119 $255
Portfolio Partners MFS Emerging Equities Portfolio $58 $ 87 $119 $256
Portfolio Partners MFS Research Growth Portfolio $59 $ 89 $121 $260
Portfolio Partners MFS Value Equity Portfolio $59 $ 90 $124 $265
Portfolio Partners Scudder International Growth $60 $ 93 $129 $275
Portfolio
Portfolio Partners T. Rowe Price Growth Equity $58 $ 86 $116 $250
Portfolio
<CAPTION>
EXAMPLE B
If at the end of the periods shown you (1)
leave your entire account value invested
or (2) select an income phase payment
option, you would pay the following
expenses (no early withdrawal charge is
reflected):*
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Aetna Ascent VP $22 $ 68 $116 $250
Aetna Balanced VP, Inc. $20 $ 63 $108 $234
Aetna Bond VP $19 $ 60 $104 $224
Aetna Crossroads, VP $22 $ 68 $116 $250
Aetna Growth VP $22 $ 68 $116 $250
Aetna Growth and Income VP $20 $ 63 $108 $233
Aetna Index Plus Large Cap VP $19 $ 59 $101 $219
Aetna International VP $35 $107 $181 $376
Aetna Legacy VP $22 $ 68 $117 $251
Aetna Money Market VP $18 $ 55 $ 95 $207
Aetna Real Estate Securities VP $29 $ 90 $153 $322
Aetna Small Company VP $23 $ 72 $123 $264
Aetna Value Opportunity VP $22 $ 68 $116 $249
Calvert Social Balanced Portfolio $23 $ 72 $123 $263
Fidelity VIP Equity-Income Portfolio $20 $ 63 $108 $233
Fidelity VIP Growth Portfolio $21 $ 66 $113 $243
Fidelity VIP High Income Portfolio $21 $ 66 $114 $245
Fidelity Overseas Portfolio $24 $ 73 $124 $266
Fidelity VIP II Asset Manager Portfolio $21 $ 65 $111 $239
Fidelity VIP II Contrafund Portfolio $21 $ 66 $114 $245
Fidelity VIP II Index 500 Portfolio $18 $ 56 $ 96 $208
Janus Aspen Aggressive Growth Portfolio $22 $ 68 $116 $250
Janus Aspen Balanced Portfolio $22 $ 68 $116 $249
Janus Aspen Flexible Income Portfolio $22 $ 67 $115 $248
Janus Aspen Growth Portfolio $22 $ 68 $116 $250
Janus Aspen Worldwide Growth Portfolio $22 $ 68 $116 $249
MFS Total Return Series $24 $ 73 $124 $266
MFS Global Governments Series $26 $ 79 $134 $286
Oppenheimer Aggressive Growth Fund/VA $22 $ 67 $114 $246
Oppenheimer Global Securities Fund/VA $22 $ 68 $116 $249
Oppenheimer Main Street Growth & Income Fund/ $22 $ 69 $118 $254
VA
Oppenheimer Strategic Bond Fund/VA $22 $ 69 $119 $255
Portfolio Partners MFS Emerging Equities Portfolio $23 $ 70 $119 $256
Portfolio Partners MFS Research Growth Portfolio $23 $ 71 $121 $260
Portfolio Partners MFS Value Equity Portfolio $23 $ 72 $124 $265
Portfolio Partners Scudder International Growth $24 $ 75 $129 $275
Portfolio
Portfolio Partners T. Rowe Price Growth Equity $22 $ 68 $116 $250
Portfolio
</TABLE>
- -----------------
*This example does not apply during the income phase if you select a
nonlifetime payment option with variable payments and take a lump-sum
withdrawal within three years after payments start. In this case, the lump
sum payment is treated as a withdrawal during the accumulation phase and may
be subject to an early withdrawal charge (refer to Example A).
10
<PAGE>
Condensed Financial Information
- --------------------------------------------------------------------------------
Understanding Condensed Financial Information. In Appendix IV of this
prospectus, we provide condensed financial information about the Variable
Annuity Account I (the separate account) subaccounts you may invest in through
the contract. The numbers show the year-end unit values of each subaccount from
the time payments were first received in the subaccounts under the contract.
Investment Options
- --------------------------------------------------------------------------------
The contract offers variable investment options and fixed interest options.
Variable Investment Options. These options are called subaccounts. The
subaccounts are within Variable Annuity Account I (the separate account), a
separate account of the Company. Each subaccount invests in one of the funds
described in Appendix III. You do not invest directly in or hold shares of the
funds.
> Mutual Fund (fund) Descriptions. We provide brief descriptions of the funds in
Appendix III. Investment results of the funds are likely to differ
significantly and there is no assurance that any of the funds will achieve
their respective investment objectives. Shares of the funds will rise and fall
in value and you could lose money by investing in the funds. Shares of the
funds are not bank deposits and are not guaranteed, endorsed or insured by any
financial institution, the Federal Deposit Insurance Corporation or any other
government agency. Unless otherwise noted, all funds are diversified as
defined under the Investment Company Act of 1940. Refer to the fund
prospectuses for additional information. Fund prospectuses may be obtained,
free of charge, from our Home Office at the address and phone number listed in
"Contract Overview-- Questions: Contacting the Company" or by contacting the
SEC Public Reference Room.
Fixed Interest Options. The AICA Guaranteed Account (the Guaranteed Account) and
the Fixed Account are the fixed interest options that may be available under
your contract. The Guaranteed Account offers certain guaranteed minimum interest
rates for a stated period of time. Amounts must remain in the Guaranteed Account
for specific periods to receive the quoted interest rates, or a market value
adjustment will be applied. The market value adjustment may be positive or
negative. The Fixed Account guarantees payment of the minimum interest rate
specified in the contract. The fixed account is only available in certain
states. For a description of these options see Appendices I and II and the
Guaranteed Account prospectus.
11
<PAGE>
- --------------------------------------------------------------------------------
Selecting Investment Options
o Choose options appropriate for you. Your Company representative can help you
evaluate which investment options may be appropriate for your financial
goals.
o Understand the risks associated with the options you choose. Some subaccounts
invest in funds that are considered riskier than others. Funds with
additional risks are expected to have values that rise and fall more rapidly
and to a greater degree than other funds. For example, funds investing in
foreign or international securities are subject to additional risks not
associated with domestic investments, and their performance may vary
accordingly. Also, funds using derivatives in their investment strategy may
be subject to additional risks.
o Be informed. Read this prospectus, the fund prospectuses, the Guaranteed
Account and Fixed Account appendices and the Guaranteed Account prospectus.
- --------------------------------------------------------------------------------
Limits on Availability of Options. Some funds or fixed interest options may be
unavailable through your contract or in your state. We may add, withdraw or
substitute funds, subject to the conditions in the contract and compliance with
regulatory requirements.
Limits on How Many Investment Options You May Select. Although we reserve the
right to limit the number of investment options you may select during the
accumulation phase, there is currently no limit. The number of investment
options you may select at any one time, however, is limited to 18. Each
subaccount and each guaranteed term of the Guaranteed Account, or an investment
in the Fixed Account in certain contracts where the Guaranteed Account is not
available, is considered an option.
Limits Imposed by the Underlying Fund. 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 of payments to a subaccount if the
subaccount's investment in the corresponding fund is not accepted by the fund
for any reason.
Additional Risks of Investing in the Funds (Mixed and Shared Funding). "Shared
funding" occurs when shares of a fund, which the subaccounts buy for variable
annuity contracts, are also bought by other insurance companies for their
variable annuity contracts.
"Mixed funding" occurs when shares of a fund, which the subaccounts buy for
variable annuity contracts, are bought for variable life insurance contracts
issued by the Company or other insurance companies.
> Shared--bought by more than one company
> Mixed--bought for annuities and life insurance
It is possible that a conflict of interest may arise due to mixed and/or shared
funding, which could adversely impact the value of a fund. For example, if a
conflict of interest occurred and one of the subaccounts withdrew its investment
in a fund, the fund may be forced to sell its securities at disadvantageous
prices, causing its share value to decrease. Each fund's Board of Directors or
Trustees will monitor events to identify any conflicts which may arise and to
determine what action, if any, should be taken to address such conflicts.
12
<PAGE>
Transfers
- --------------------------------------------------------------------------------
During the accumulation phase, you may transfer amounts among the available
subaccounts. Transfers from the Guaranteed Account are subject to certain
restrictions and may be subject to a market value adjustment. Transfers from the
Fixed Account are subject to certain restrictions, and transfers into the Fixed
Account from any of the other investment options are not allowed. During the
income phase, if approved in your state, transfers are limited to four per year
and allowed only if you select variable payments. Transfers must be made in
accordance with the terms of your contract.
Transfer Requests. Requests may be made in writing, by telephone or, where
applicable, electronically.
Limits on Frequent Transfers. The contract 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 or individuals that use market-timing investment strategies and
make frequent transfers should not purchase the contract.
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
contract holders. Such restrictions could include: (1) Not accepting transfer
instructions from an agent acting on behalf of more than one contract holder;
and (2) not accepting preauthorized transfer forms from market timers or other
entities acting on behalf of more than one contract holder at a time.
We further reserve the right to impose, without prior notice, restrictions on
transfers that we determine, in our sole discretion, will disadvantage or
potentially hurt the rights or interests of other contract holders.
Additionally, orders for the purchase of fund shares may be subject to
acceptance by the fund. We reserve the right to reject, without prior notice,
any transfer request to a subaccount if the subaccount's investment in the
corresponding fund is not accepted for any reason.
Charges for Transfers. During the accumulation phase, we allow you 12 free
transfers each calendar year. We reserve the right to charge $10 for each
additional transfer. We currently do not impose this charge.
Value of Your Transferred Dollars. The value of amounts transferred into or out
of subaccounts will be based upon the subaccount unit values next determined
after we receive your transfer request at our Home Office.
Telephone Transfers: Security Measures. To prevent fraudulent use of telephone
transactions, we have established security procedures. These include recording
calls on our toll-free telephone lines and requiring use of a personal
identification number (PIN) to execute transactions. You are responsible for
keeping your PIN and account information confidential. If we fail to follow
reasonable security procedures, we may be liable for losses due to unauthorized
or fraudulent telephone transactions. We are not liable for losses resulting
from telephone instructions we believe to be genuine. If a loss occurs when we
rely on such instructions, you will bear the loss.
13
<PAGE>
The Dollar Cost Averaging Program. Dollar cost averaging is an investment
strategy whereby you purchase fixed dollar amounts of an investment at regular
intervals, regardless of price. Under this program a fixed dollar amount is
automatically transferred from certain subaccounts and/or the Guaranteed Account
or Fixed Account to any of the other subaccounts. A market value adjustment will
not be applied to dollar cost averaging transfers from a guaranteed term of the
Guaranteed Account during participation in the dollar cost averaging program. If
such participation is discontinued, we will automatically transfer the remaining
balance in that guaranteed term to another guaranteed term of the same duration,
unless you initiate a transfer into another investment option. In either case, a
market value adjustment will apply. See Appendix I for more information about
dollar cost averaging from the Guaranteed Account. If dollar cost averaging is
stopped with respect to amounts invested in the Fixed Account, the remaining
balance will be transferred to the money market subaccount.
Dollar cost averaging neither ensures a profit nor guarantees against loss in a
declining market. You should consider your financial ability to continue
purchases through periods of low price levels. There is no additional charge for
this program and transfers made under this program do not count as transfers
when determining the number of free transfers that may be made each calendar
year. For additional information about this program, contact your local
representative or call us at the number listed in "Contract Overview--Questions:
Contacting the Company."
In certain states, premiums allocated to the Fixed Account may require
participation in the dollar cost averaging program.
Dollar cost averaging is not available if you elect a Systematic Distribution
Option or participate in the account rebalancing program.
The Account Rebalancing Program. Account rebalancing allows you to reallocate
your account value to match the investment allocations you originally selected.
Only account values invested in the subaccounts may be rebalanced. We
automatically reallocate your account value annually (or more frequently as we
allow). Account rebalancing neither ensures a profit nor guarantees against loss
in a declining market. There is no additional charge for this program and
transfers made under this program do not count as transfers when determining the
number of free transfers that may be made each calendar year. You may
participate in this program by completing the account rebalancing section of
your application, or by contacting us at the address and/or number listed in
"Contract Overview--Questions: Contacting the Company."
Account rebalancing is not available if you elect to participate in the dollar
cost averaging program.
Purchase and Rights
- --------------------------------------------------------------------------------
How to Purchase
> Individual Contracts. In some states, where group contracts are not available,
you may purchase the contract directly from us by completing an application
and delivering it and your initial payment to us. Upon our
14
<PAGE>
approval we will issue you a contract and set up an account for you under the
contract.
> Group Contracts. In most states we have distributors, usually broker/dealers
or banks, who hold the contract as a group contract. (See "Distribution") You
may purchase an interest (or, in other words, participate) in the group
contract by contacting a distributor and completing an application and
delivering it with payment to that distributor. Upon our approval, we will set
up an account for you under the group contract and issue you a certificate
showing your rights under the contract.
> Joint Contracts (generally spouses). For a nonqualified contract, you may
participate in a group contract as a joint contract holder. References to
"contract holder" in this prospectus mean both contract holders under joint
contracts. The Tax law prohibits the purchase of qualified contracts by joint
contract holders.
The maximum issue age for the annuitant on the date we issue the contract is 90
(age 85 for those contracts or certificates issued in Pennsylvania).
Your Rights Under the Contract
> Individual Contracts. You have all contract rights.
> Group Contracts. The holder of the group contract has title to the contract
and, generally, only the right to accept or reject any modifications to the
Contract. You have all other rights to your account under the contract.
> Joint Contracts. Joint contract holders have equal rights under the contract
with respect to their account. All rights under the contract must be exercised
by both joint contract holders with the exception of transfers among
investment options. See the "Death Benefit" section for the rights of the
surviving joint contract holder upon the death of a joint contract holder
prior to the income phase start date.
Payment Methods. The following payment methods are allowed:
> One lump sum
> Periodic payments
> Transfer or rollover from a pre-existing retirement plan or account*
We reserve the right to reject any payments to a prospective or existing
account without advance notice.
*In some states, an IRA contract can only accept a lump sum, rollover payment.
Payment Amounts.
> For nonqualified contracts the minimum initial payment amount is $5,000.
> For qualified contracts the minimum initial payment amount is $1,500. The Tax
Code imposes a maximum limit on annual payments which may be excluded from
your gross income.
Any additional payments must be at least $1,000 or at least $50 per month as
paid by electronic funds transfer. (We may change these amounts from time to
time.) A payment of more than $1,000,000 will be allowed only with our consent.
15
<PAGE>
Acceptance or Rejection of Your Application. We must accept or reject your
application within two business days of receipt. If the application is
incomplete, we may hold any forms and accompanying payment(s) for five business
days. Payments may be held for longer periods only with your consent, pending
acceptance of the application. If the application is rejected, the application
and any payments will be returned to you.
Allocating Payments to the Investment Options. We will allocate your payments
among the investment options you select. Allocations must be in whole
percentages and there may be limits on the number of investment options you may
select. When selecting investment options, you may find it helpful to review the
"Investment Options" section.
Right to Cancel
- --------------------------------------------------------------------------------
When and How to Cancel. You may cancel your contract or certificate within ten
days of receipt (some states allow longer) by returning it to our Home Office
along with a written notice of cancellation.
Refunds. We will issue you a refund within seven days of our receipt of your
contract or certificate and written notice of cancellation. Unless your state
requires otherwise or unless you purchased an IRA, your refund will equal the
payments made plus any earnings or minus any losses attributable to those
payments allocated among the subaccounts. In other words, you will bear the
entire investment risk for amounts allocated among the subaccounts during this
period and the amount refunded could be less than the amount paid. If your state
requires or if you purchased an IRA, we will refund all payments made.
If the payments for your canceled contract came from a rollover from another
contract issued by us or one of our affiliates where an early withdrawal charge
was reduced or eliminated, the payments will be restored to your prior contract.
16
<PAGE>
[Begin sidebar]
Types of Fees
There are four types of fees or deductions that may affect your account.
TRANSACTION FEES
> Early Withdrawal Charge
> Annual Maintenance Fee
> Transfer Charge
FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT
> Mortality and Expense Risk Charge
> Administrative Expense Charge
FEES DEDUCTED BY THE FUNDS
> Investment Advisory Fees
> Other Expenses
PREMIUM AND OTHER TAXES
[End sidebar]
Fees
- --------------------------------------------------------------------------------
The following repeats and adds to information provided in the "Fee Table"
section. Please review both sections for information on fees.
TRANSACTION FEES
Early Withdrawal Charge
Withdrawals of all or a portion of your account value may be subject to a
charge.
Amount. A percentage of the payments that you withdraw. The percentage will be
determined by the early withdrawal charge schedule that applies to your account.
Early Withdrawal Charge Schedules
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Contracts Other Than Roth IRA Contracts Roth IRA Contracts*
- ------------------------------------------- -----------------------------------------
Years From Early Early
Receipt of Withdrawal Completed Withdrawal
Payment Charge Account Years Charge
- ---------------------------- ------------ --------------------------- -----------
<S> <C> <C> <C>
Less than 2 7% Less than 1 5%
2 or more but less than 4 6% 1 or more but less than 2 4%
4 or more but less than 5 5% 2 or more but less than 3 3%
5 or more but less than 6 4% 3 or more but less than 4 2%
6 or more but less than 7 3% 4 or more but less than 5 1%
7 or more 0% 5 or more 0%
- ---------------------------------------------------------------------------------------
</TABLE>
- -------------------------
* If the purchase payment is a rollover from another contract issued by us or
one of our affiliates and the early withdrawal charge was waived, the early
withdrawal charge will be based upon the number of completed account years
since the date of the initial payment to the former contract.
Purpose. This is a deferred sales charge. It reimburses us for some of the sales
and administrative expenses associated with the contract. Our remaining sales
and administrative expenses will be covered by our general assets which are
attributable in part to the mortality and expense risk charge described in this
section.
First In, First Out. The early withdrawal charge is calculated separately for
each payment withdrawn. For purposes of calculating your early withdrawal
charge, we consider that your first payment to the account (first in) is the
first you withdraw (first out).
For example: For contracts other than Roth IRAs, we calculate the early
withdrawal charge based upon the number of years since the payment was received.
If your initial payment was made three years ago, we will deduct an early
withdrawal charge equal to 6% of the portion of that payment withdrawn. The next
time you make a withdrawal we will assess the charge against the portion of the
first payment that you did not withdraw and/or your subsequent payments to your
account in the order they were received.
For Roth IRAs, we calculate the early withdrawal charge based upon the number of
completed account years. If three years have elapsed since your initial payment
was made, we will deduct an early withdrawal charge equal to 2% of the portion
of that payment withdrawn. The next time you make a withdrawal we will assess
the charge against the portion of the first payment that you did not withdraw
and/or your subsequent payments to your account in the order they were received.
17
<PAGE>
Earnings may be withdrawn after all payments have been withdrawn. There is no
early withdrawal charge for withdrawal of earnings.
Free Withdrawals. There is no early withdrawal charge if, during each calendar
year, the amount withdrawn is 10% or less than:
> Your account value as of the last valuation day of the preceding calendar year
or the date of your first payment, whichever is later (if approved in your
state), or
> Your account value on the next valuation day after we receive your withdrawal
request
The free withdrawal amount will be adjusted for amounts withdrawn under a
systematic distribution option or taken as a required minimum distribution
during the calendar year.
Waiver. The early withdrawal charge is waived for payments withdrawn if the
withdrawal is based upon any of the following:
> Used to provide payments to you during the income phase
> Paid due to the annuitant's death during the accumulation phase (in an amount
up to the sum of payments in the account on the date of the annuitant's death)
> Paid on a full withdrawal where your account value is $2,500 or less and no
part of the account has been withdrawn during the prior 12 months
> Taken because of the election of a systematic distribution option (See
"Systematic Distribution Options")
> Applied as a rollover to certain Roth IRAs issued by us or an affiliate
> If approved in your state, taken under a qualified contract, when the amount
withdrawn is equal to the minimum distribution required by the Tax Code for
your account calculated using a method permitted under the Tax Code and agreed
to by the Company
> Paid upon termination of your account by us (see "Other Topics -- Involuntary
Terminations")
Reduction or Elimination. We may reduce or eliminate the early withdrawal charge
if we anticipate savings on our administrative expenses due to any one of the
following:
> The size and type of group to whom the contract is offered
> The amount of expected payments
> A prior or existing relationship with the Company such as being an employee of
the Company or any affiliate, receiving distributions or making transfers from
other contracts issued by us, or transferring amounts held under qualified
retirement plans sponsored by us or one of our affiliates
We will not unfairly discriminate against any person if we reduce or eliminate
the early withdrawal charge. Any reduction or elimination of this fee will be
subject to state approval.
Nursing Home Waiver. You may withdraw all or a portion of your account value
without an early withdrawal charge if:
> More than one year has elapsed since the account effective date
18
<PAGE>
> The withdrawal is requested within three years of the annuitant's admission to
a licensed nursing care facility (in New Hampshire non-licensed facilities are
included), and
> The annuitant has spent at least 45 consecutive days in such nursing care
facility
We will not waive the early withdrawal charge if the annuitant was in a nursing
care facility on the date we established your account. It will also not apply if
otherwise prohibited by state law.
Annual Maintenance Fee
Maximum Amount. $30.00
When/How. Each year during the accumulation phase we deduct this fee from your
account value. We deduct it on your account anniversary and at the time of full
withdrawal. It is deducted proportionally from each investment option.
Purpose. This fee reimburses our administrative expenses relating to the
establishment and maintenance of your account.
Elimination. We will not deduct the annual maintenance fee if your account value
is $50,000 or more on the date the annual maintenance fee is deducted.
Reduction or Elimination. We may reduce or eliminate the annual maintenance fee.
Factors we consider reflect differences in our level of administrative costs and
services, such as:
> The size and type of the group to whom the contract is offered
> The amount of expected payments
We will not unfairly discriminate against any person if we reduce or eliminate
the annual maintenance fee. Any reduction or elimination of this fee will be
done according to our own rules in effect at the time a contract is issued. We
reserve the right to change these rules from time to time.
Transfer Charge
Amount. During the accumulation phase, we currently allow you 12 free transfers
each calendar year. We reserve the right to charge $10 for each additional
transfer. We currently do not impose this charge.
Purpose. This fee reimburses the Company for administrative expenses associated
with transferring your dollars among investment options.
FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT
Mortality and Expense Risk Charge
Maximum Amount. This charge, on an annual basis, is equal to the following
percentages of your account value invested in the subaccounts:
o Contracts other than Roth IRA Issued before May 1, 1998...............1.25%
o Contracts Issued on or after May 1, 1998, and all Roth
IRA Contracts.........................................................1.10%
When/How. We deduct this fee daily from the subaccounts corresponding to the
funds you select. We do not deduct this fee from any fixed interest option.
19
<PAGE>
Purpose. This fee compensates us for the mortality and expense risks we assume
under the contract.
> The mortality risk is the risk associated with our promise to make lifetime
payments based upon annuity rates specified in the contract.
> The expense risk is the risk that the actual expenses we incur under the
contracts will exceed the maximum costs that we can charge.
If the amount we deduct for this fee is not enough to cover our mortality costs
and expenses under the contract, we will bear the loss. You may use any excess
to recover distribution costs relating to the contract and as a source of
profit. We expect to make a profit from this fee.
Reduction. We will reduce this fee based upon consideration of one or more of
the following:
> The size and type of the group to whom the contract is offered
> The type and frequency of administrative and sales services provided
> The level of annual maintenance fee and early withdrawal charges
We will not unfairly discriminate against any person if we reduce the mortality
and expense risk charge. Any reduction or elimination of his fee will be done
according to our own rules in effect at the time the contract is issued. We
reserve the right to change these rules from time to time.
Administrative Expense Charge
Maximum Amount. 0.15% of your account value invested in the subaccounts during
the accumulation phase.
There is currently no administrative expense charge during the income phase;
however, we reserve the right to charge an administrative expense fee of up to
0.25% during the income phase.
When/How. If imposed, we deduct this fee daily from the subaccounts
corresponding to the funds you select. We do not deduct this fee from the fixed
interest options. This charge may be assessed during the accumulation phase or
the income phase. If we are currently imposing this fee when you enter the
income phase, the fee will apply to you during the entire income phase.
Purpose. This fee helps defray our administrative expenses that cannot be
covered by the mortality and expense risk charges described above. The charge is
not intended to exceed the average expected cost of administering the contracts.
We do not expect to make a profit from this fee.
Reduction or Elimination. We may reduce or eliminate the administrative expense
charge. Factors we consider reflect differences in our level of administrative
costs and services, such as:
> The size and type of the group to whom the contract is offered
> The amount of expected payments
We will not unfairly discriminate against any person if we reduce or eliminate
the administrative expense charge. Any reduction or elimination of this fee will
be done according to our rules in effect at the time a contract is issued. We
reserve the right to change these rules from time to time.
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<PAGE>
FEES DEDUCTED BY THE FUNDS
Maximum Amount. Each fund's advisory fee and expenses are different. They are
set forth in "Fee Table--Fees Deducted by the Funds" and described in more
detail in each fund prospectus.
When/How. The fund fees are not deducted from your account value. Instead, fund
expenses are reflected in the daily value of fund shares, which in turn will
affect the daily value of the subaccounts.
Purpose. These expenses help to pay the fund investment adviser and operating
expenses.
PREMIUM AND OTHER TAXES
Maximum Amount. Some states and municipalities charge a premium tax on
annuities. These taxes currently range from 0% to 4%, depending upon
jurisdiction.
When/How. We reserve the right to deduct premium taxes from your account value
or from payments to the account at any time, but not before there is a tax
liability under state law. Our current practice is to deduct premium taxes at
the time of a complete withdrawal or the commencement of income payments. We
will not deduct any municipal premium tax of 1% or less, but we reserve the
right to reflect such an expense in our annuity purchase rates.
In addition, the Company reserves the right to assess a charge for any federal
taxes due against the separate account. See "Taxation."
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<PAGE>
Your Account Value
- --------------------------------------------------------------------------------
During the accumulation phase, your account value at any given time equals:
> The current dollar value of amounts invested in the subaccounts; plus
> The current dollar values of amounts invested in the fixed interest options,
including interest earnings to date
Subaccount Accumulation Units. When a fund is selected as an investment option,
your account dollars invest in "accumulation units" of the Variable Annuity
Account I subaccount dedicated to that fund. The subaccount invests directly in
the fund shares. The value of your interests in a subaccount is expressed as the
number of accumulation units you hold multiplied by an "Accumulation Unit
Value," as described below, for each unit.
Accumulation Unit Value (AUV). The value of each accumulation unit in a
subaccount is called the accumulation unit value or AUV. The AUV varies daily in
relation to the underlying fund's investment performance. The value also
reflects deductions for fund fees and expenses, the mortality and expense risk
charge, and the administrative charge (if any). We discuss these deductions in
more detail in "Fee Table" and "Fees."
Valuation. We determine the AUV every business day after the close of the New
York Stock Exchange. At that time, we calculate the current AUV by multiplying
the AUV last calculated by the "net investment factor" of the subaccount. The
net investment factor measures the investment performance of the subaccount from
one valuation to the next.
Current AUV = Prior AUV x Net Investment Factor
Net Investment Factor. The net investment factor for a subaccount between two
consecutive valuations equals the sum of 1.0000 plus the net investment rate.
Net Investment Rate. The net investment rate is computed according to a formula
that is equivalent to the following:
> The net assets of the fund held by the subaccount as of the current valuation;
minus
> The net assets of the fund held by the subaccount at the preceding valuation;
plus or minus
> Taxes or provisions for taxes, if any, due to subaccount operations (with any
federal income tax liability offset by foreign tax credits to the extent
allowed); divided by
> The total value of the subaccount's units at the preceding valuation; minus
> A daily deduction for the mortality and expense risk charge and the
administrative expense charge (if any). See "Fees."
The net investment rate may be either positive or negative.
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<PAGE>
Hypothetical Illustration. As a hypothetical illustration, assume that an
investor contributes $5,000 to his account and directs us to invest $3,000 in
Fund A and $2,000 in Fund B. After receiving the contribution and following the
next close of business of the New York Stock Exchange, the applicable AUV's are
$10 for Subaccount A, and $25 for Subaccount B. The investor's account is
credited with 300 accumulation units of Subaccount A, and 80 accumulation units
of Subaccount B.
Step 1: An investor contributes $5000
Step 2:
A. He directs us to invest $3,000 in Fund A. His dollars purchase 300
accumulation units of Subaccount A ($3,000 divided by the current $10 AUV).
B. He directs us to invest $2,000 in Fund B. His dollars purchase 80
accumulation units of Subaccount B ($2,000 divided by the current $25 AUV).
Step 3: The separate account then purchases shares of the applicable funds at
the current market value.
The fund's subsequent investment performance, expenses and charges, and the
daily charges deducted from the subaccount, will cause the AUV to move up or
down on a daily basis.
Payments to Your Account. If all or a portion of initial payments are directed
to the subaccounts, they will purchase subaccount accumulation units at the AUV
next computed after our acceptance of the applicable application as described in
"Purchase and Rights." Subsequent payments or transfers directed to the
subaccounts will purchase subaccount accumulation units at the AUV next computed
following our receipt of the payment or transfer request. The value of
subaccounts may vary day to day.
[graphic]
$5,000 contribution
Step 1 (down arrow)
Aetna Insurance Company of America
Step 2 (down arrow)
Variable Annuity Account I
Subaccount A Subaccount B Etc.
300 80
accumulation accumulation
units units
(down arrow) Step 3 (down arrow)
Fund A Fund B
[end graphic]
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<PAGE>
[Begin sidebar]
Taxes, Fees and Deductions
Amounts withdrawn may be subject to one or more of the following:
> Early Withdrawal Charge (see "Fees--Early Withdrawal Charge")
> Maintenance Fee (see "Fees--Maintenance Fee")
> Market Value Adjustment for amounts held in the Guaranteed Account (see
Appendix I and the Guaranteed Account prospectus)
> Tax Penalty (see "Taxation")
> Tax Withholding (see "Taxation")
To determine which may apply, refer to the appropriate sections of this
prospectus, contact your local representative or call us at the number listed in
"Contract Overview--Questions: Contacting the Company."
[End sidebar]
Withdrawals
- --------------------------------------------------------------------------------
You may withdraw all or a portion of your account value at any time during the
accumulation phase. If you participate in the contract through a 403(b) plan,
certain restrictions apply. See "Restrictions on Withdrawals From 403(b) Plan
Accounts."
Steps for Making A Withdrawal
> Select the withdrawal amount
(1) Full Withdrawal: You will receive, reduced by any required withholding tax,
your account value allocated to the subaccounts, the Guaranteed Account
(plus or minus any applicable market value adjustment) and the Fixed
Account, minus any applicable early withdrawal charge and annual maintenance
fee.
(2) Partial Withdrawal (Percentage or Specified Dollar Amount): You will
receive, reduced by any required withholding tax, the amount you specify,
subject to the value available in your account. However, the amount actually
withdrawn from your account will be adjusted by any applicable early
withdrawal charge for amounts withdrawn from the subaccounts, the Guaranteed
Account or the Fixed Account, and any positive or negative market value
adjustment for amounts withdrawn from the Guaranteed Account.
See Appendices I and II and the Guaranteed Account prospectus for more
information.
> Select investment options. If you do not specify this, we will withdraw
dollars proportionally from each of your investment options
> Properly complete a disbursement form and deliver it to our Home Office
Restrictions on Withdrawals From 403(b) Plan Accounts. Under Section 403(b)
contracts, the withdrawal of salary reduction contributions and earnings on such
contributions is generally prohibited prior to the participant's death,
disability, attainment of age 59-1/2, separation from service or financial
hardship. See "Taxation."
Calculation of Your Withdrawal. We determine your account value every normal
business day after the close of the New York Stock Exchange. We pay withdrawal
amounts based upon your account value as of the next valuation after we receive
a request for withdrawal in good order at our Home Office.
Delivery of Payment. Payments for withdrawal requests will be made in accordance
with SEC requirements. Normally, your withdrawal amount will be sent no later
than seven calendar days following our receipt of your properly- completed
disbursement form in good order.
Reinvesting a Full Withdrawal. Within 30 days after a full withdrawal, if
allowed by law and the contract, you may elect to reinvest all or a portion of
your withdrawal. We must receive reinvested amounts within 60 days of the
withdrawal. We reserve the right, however, to accept a reinvestment election
received more than 30 days after the withdrawal and accept proceeds received
more than 60 days after the withdrawal. We will credit the account for the
amount reinvested based upon the subaccount values next computed following our
receipt of your request and the amount to be reinvested. We will credit the
amount reinvested proportionally for maintenance fees and early withdrawal
24
<PAGE>
charges imposed at the time of withdrawal. We will deduct from the amounts
reinvested any maintenance fee which fell due after the withdrawal and before
the reinvestment. We will reinvest in the same investment options and
proportions in place at the time of withdrawal. The reinvestment privilege may
be used only once. Special rules apply to reinvestments of amounts withdrawn
from the Guaranteed Account (see Appendix I and the Guaranteed Account
prospectus). We will not credit your account for market value adjustments that
we deducted at the time of your withdrawal. Seek competent advice regarding the
tax consequences associated with reinvestment.
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<PAGE>
[Begin sidebar]
Features of a Systematic Distribution Option (SDO)
An SDO allows you to receive regular payments from your contract, without moving
into the income phase. By remaining in the accumulation phase, you retain
certain rights and investment flexibility not available during the income phase.
[End sidebar]
Systematic Distribution Options
- --------------------------------------------------------------------------------
The following SDOs may be available:
> SWO--Systematic Withdrawal Option. SWO is a series of automatic partial
withdrawals from your account based upon a payment method you select. Consider
this option if you would like a periodic income while retaining investment
flexibility for amounts accumulated under the account.
> ECO--Estate Conservation Option. ECO offers the same investment flexibility as
SWO, but is designed for those who want to receive only the minimum
distribution that the Tax Code requires each year.
Under ECO, we calculate the minimum distribution amount required by law,
generally at age 70-1/2, and pay you that amount once a year. ECO is not
available under nonqualified contracts. An early withdrawal charge will not be
deducted from and a market value adjustment will not be applied to any part of
your account value paid under an ECO.
> LEO--Life Expectancy Option. LEO provides for annual payments for a number of
years equal to your life expectancy or the life expectancy of you and a
designated beneficiary. It is designed to meet the substantially equal
periodic payment exception to the 10% premature distribution penalty under Tax
Code section 72. See "Taxation."
> Other SDOs. We may add additional SDOs from time to time. You may obtain
additional information relating to any of the SDOs from your local
representative or by calling us at the number listed in "Contract Overview--
Contract Questions: Contacting the Company."
Eligibility for an SDO. To determine if you meet the age and account value
criteria and to assess terms and conditions that may apply, contact your local
representative or the Company at the number listed in "Contract Overview--
Questions: Contacting the Company."
SDO Availability. If allowed by applicable law, we reserve the right to
discontinue the availability of one or all of the SDOs for new elections at any
time, and/or to change the terms of future elections.
Terminating an SDO. You may revoke an SDO at any time by submitting a written
request to our Home Office. ECO, once revoked, may not, unless allowed under the
Tax Code, be elected again.
Charges and Taxation. When you elect an SDO, your account value remains in the
accumulation phase and subject to the charges and deductions described in the
"Fees" and "Fee Table" sections. Taking a withdrawal under an SDO may have tax
consequences. If you are concerned about tax implications, consult a qualified
tax adviser before electing an option.
26
<PAGE>
[Begin sidebar]
This section provides information about the death benefit during the
accumulation phase. For death benefit information applicable to the income phase
see "The Income Phase."
Terms to understand:
Account Year/Account Anniversary: A period of 12 months measured from the date
we established your account and each anniversary of this date. Account
anniversaries are measured from this date.
Annuitant: The person(s) on whose life or life expectancy(ies) the income phase
payments are based.
Beneficiary(ies): The person(s) or entity(ies) entitled to receive death
benefit proceeds under the contract.
Claim Date: The date due proof of death and the beneficiary's right to receive
the death benefit are received in good order at our Home Office.
Contract Holder (You/Your): The contract holder of an individually owned
contract or the certificate holder of a group contract. The contract holder and
annuitant may be the same person.
Market Value Adjustment: An adjustment that may be made to amounts withdrawn
from the Guaranteed Account. The adjustment may be positive or negative.
[End sidebar]
Death Benefit
- --------------------------------------------------------------------------------
During the Accumulation Phase
Who Receives Death Benefit Proceeds? If you would like certain individuals or
entities to receive the death benefit when it becomes payable, you may name them
as your beneficiaries. However, if you are a joint contract holder and you die,
the beneficiary will automatically be the surviving joint contract holder. In
this circumstance, any other beneficiary you have named will be treated as the
primary or contingent beneficiary, as originally named, of the surviving joint
contract holder. The surviving joint contract holder may change that beneficiary
designation. If you die and no beneficiary exists, the death benefit will be
paid in a lump sum to your estate.
Designating Your Beneficiary. You may designate a beneficiary on your
application or by contacting your local representative or calling us at the
number listed in the "Contract Overview -- Questions: Contacting the Company."
When is a Death Benefit Payable? During the accumulation phase a death benefit
is payable when the contract holder or the annuitant dies. If there are joint
contract holders, the death benefit is payable when either one dies.
Prior to the election of a death benefit payment by the beneficiary, the account
value will remain in the account and continue to be affected by the investment
performance of the investment option(s) selected. The beneficiary has the right
to allocate or transfer any amount to any available investment option (subject
to a market value adjustment, as applicable).
Death Benefit Amount
Minimum Guaranteed Death Benefit. If approved in your state, upon the death of
the annuitant the death benefit will be the greater of:
(1) The account value on the claim date; or
(2) The minimum guaranteed death benefit as of the date of death, adjusted for
payments made and any amounts deducted from your account (including
withdrawals, payments made under an income phase payment plan, and fees and
expenses) since the date the minimum guaranteed death benefit was determined
Determining the Minimum Guaranteed Death Benefit. On the day we establish your
account, the minimum guaranteed death benefit equals the amount of your initial
payment. Thereafter the minimum guaranteed death benefit is determined once a
year on the account anniversary (until the account anniversary immediately
before the annuitant's 85th birthday) and equals the greater of:
(a) The minimum guaranteed death benefit as last determined, adjusted for any
payments made and any amounts deducted from your account (including
withdrawals, payments made under an income phase payment plan, and fees and
expenses) since the date the minimum guaranteed death benefit was
determined; or
(b) Your account value on that account anniversary
After the annuitant's 85th birthday, the minimum guaranteed death benefit equals
the minimum guaranteed death benefit on the account anniversary immediately
before the annuitant's 85th birthday, adjusted for payments made
27
<PAGE>
and any amounts deducted from your account (including withdrawals, payments made
under an income phase payment plan, and fees and expenses) since that account
anniversary.
Death Benefit Greater than the Account Value. If the minimum guaranteed death
benefit is greater than your account value on the claim date, we will allocate
an amount equal to the excess to the money market subaccount. The account value
on the claim date plus any excess deposited into the money market subaccount
becomes the new account value under the contract, and the death benefit paid
will equal the account value when the request for payment is made. No early
withdrawal charge will apply upon payment of the death benefit.
Death Benefit in Certain Cases
If the Contract Holder is not the Annuitant. Under nonqualified contracts only,
if the contract holder who is not the annuitant dies, the minimum guaranteed
death benefit described above will not apply. Rather, in this circumstance the
death benefit proceeds will be equal to the account value on the claim date,
plus or minus any market value adjustment. An early withdrawal charge may apply
to any full or partial payment of this death benefit.
Likewise, if a spousal beneficiary continues the account at the death of the
contract holder who was not also the annuitant, the annuitant will not change
and the minimum guaranteed death benefit will not apply on the death of the
spousal beneficiary. Rather, in this circumstance the death benefit proceeds
will equal the account value on the claim date, plus or minus any market value
adjustment, and minus any applicable early withdrawal charge.
If a Spousal Beneficiary Continues the Account. If a spousal beneficiary
continues the account at the death of the contract holder who was also the
annuitant, the spousal beneficiary becomes the annuitant. In this circumstance,
the minimum guaranteed death benefit payable at the death of a spousal
beneficiary shall be determined as described above, except that the initial
minimum guaranteed death benefit will equal the minimum guaranteed death benefit
payable at the death of the original contract holder/annuitant.
Alternative Death Benefit. If the minimum guaranteed death benefit is not
approved in your state, the following death benefit will apply:
Upon the death of the annuitant, the death benefit will be the greatest of:
(1) The total payments made to your account, adjusted for any amounts deducted
from your account (including withdrawals, payments made under an income
phase payment plan, and fees and expenses);
(2) The highest account value on any account anniversary until the account
anniversary immediately before the annuitant's 75th birthday (85th birthday
for contracts issued in New York) or date of death, whichever is earlier,
adjusted for payments made and any amounts deducted from your account
(including withdrawals, payments made under an income phase payment plan,
and fees and expenses) since that account anniversary; or
(3) The account value as of the date of death
Death Benefit Greater than the Account Value. If the alternative death benefit
is greater than the account value as of the date of death, we will allocate an
amount equal to the excess to the money market subaccount. The account value
28
<PAGE>
on the claim date plus any excess deposited into the money market subaccount
becomes the new account value under the contract, and the death benefit paid
will equal the account value when the request for payment is received. No early
withdrawal charge will apply upon payment of the death benefit.
Death Benefit in Certain Cases
If the Certificate Holder is not the Annuitant. Under nonqualified contracts
only, if the contract holder who is not the annuitant dies, the alternative
death benefit described above will not apply. Rather, in this circumstance the
death benefit proceeds will be equal to the account value on the date the
request for payment is received, plus or minus any market value adjustment. An
early withdrawal charge may apply to any full or partial payment of this death
benefit.
Likewise, if the spousal beneficiary continues the account at the death of the
contract holder who was not the annuitant, the annuitant will not change and the
alternative death benefit described above will not apply on the death of the
spousal beneficiary. Rather, in this circumstance the death benefit proceeds
will equal the account value on the date the request for payment is received,
plus or minus any market value adjustment, and minus any early withdrawal
charge, if approved in your state. If your state has not approved deduction of
an early withdrawal charge in this situation, then an early withdrawal charge
will apply only to payments made since the death of the original contract
holder/annuitant.
If a Spousal Beneficiary Continues the Account. If the spousal beneficiary
continues the account at the death of the contract holder who was also the
annuitant, the spousal beneficiary will become the annuitant. In this
circumstance, the death benefit payable at the death of a spousal beneficiary
shall equal the account value on the date the request for payment is received,
plus or minus any market value adjustment, and minus any applicable early
withdrawal charge applicable to payments made since the death of the original
contract holder/annuitant.
Death Benefit--Methods of Payment
For Qualified Contracts. Under a qualified contract, if the annuitant dies the
beneficiary has the following options:
> Apply some or all of the account value, plus or minus any market value
adjustment, to any of the income phase payment options (subject to the Tax
Code distribution rules)
> Receive, at any time, a lump sum payment equal to all or a portion of the
account value, plus or minus any market value adjustment, or
> Elect SWO or ECO or LEO (described in "Systematic Distribution Options"),
provided the election would satisfy the Tax Code minimum distribution rules
Payments from a Systematic Distribution Option. If the annuitant was receiving
payments under SWO or ECO or LEO and died before the Tax Code's required
beginning date for minimum distributions, payments under SWO or ECO or LEO will
stop. The beneficiary, or contract holder on behalf of the beneficiary, may
elect SWO or ECO or LEO provided the election is permitted under the Tax Code
minimum distribution rules. If the annuitant dies after the required beginning
date for minimum distributions, payments will continue as permitted under the
Tax Code minimum distribution rules, unless the option is revoked.
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<PAGE>
Distribution Requirements. Subject to Tax Code limitations, a beneficiary may be
able to defer distribution of the death benefit. Death benefit payments must
satisfy the distribution rules in Tax Code Section 401(a)(9). See "Taxation."
For Nonqualified Contracts.
(1) If you die and the beneficiary is your surviving spouse, or if you are a
non-natural person and the annuitant dies and the beneficiary is the
annuitant's surviving spouse, then the beneficiary becomes the successor
contract holder.
As the successor contract holder, the beneficiary may exercise all rights
under the account and has the following options:
(a) Continue the contract in the accumulation phase
(b) Elect to apply some or all of the account value, plus or minus any
market value adjustment, to any of the income phase payment plans
(c) Receive at any time a lump-sum payment equal to all or a portion of the
account value, plus or any market value adjustment. If you die and are
not the annuitant, an early withdrawal charge will apply if a lump sum
is elected
In this circumstance, the Tax Code does not require distributions under the
contract until the successor contract holder's death.
(2) If you die and the beneficiary is not your surviving spouse, he or she may
elect option 1(b) or option 1(c) above.
In this circumstance, the Tax Code requires any portion of the account
value, plus or minus any market value adjustment, not distributed in
installments over the beneficiary's life or life expectancy, beginning
within one year of your death, must be paid within five years of your death.
See "Taxation."
(3) If you are a natural person but not the annuitant and the annuitant dies,
the beneficiary may elect option 1(b) or 1(c) above. If the beneficiary does
not elect option 1(b) within 60 days from the date of death, the gain, if
any, will be included in the beneficiary's income in the year the annuitant
dies.
Payments from a Systematic Distribution Option. If the contract holder or
annuitant dies and payments were made under SWO, payments will stop. A
beneficiary, however, may elect to continue SWO.
Taxation. Your beneficiary(ies) may be subject to tax penalties if they do not
begin receiving death benefit payments within a time frame required by the Tax
Code. See "Taxation."
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<PAGE>
[Begin sidebar]
We may have used the following terms in prior prospectuses:
Annuity Phase -- Income Phase
Annuity Option -- Payment Option
Annuity Payment -- Income Phase Payment
[End sidebar]
The Income Phase
- --------------------------------------------------------------------------------
During the income phase you stop contributing dollars to your account and start
receiving payments from your accumulated account value.
Initiating Payments. At least 30 days prior to the date you want to start
receiving payments, you must notify us in writing of all of the following:
> Start date
> Payment option (see the payment options table in this section)
> Payment frequency (i.e., monthly, quarterly, semi-annually or annually)
> Choice of fixed or variable payments
> Selection of an assumed net investment rate (only if variable payments are
elected)
Your account will continue in the accumulation phase until you properly initiate
payments. Once a payment option is selected, it may not be changed.
What Affects Payment Amounts? Some of the factors that may affect payment
amounts include your age, your gender, your account value, the payment option
selected, number of guaranteed payments (if any) selected, and whether you
select variable or fixed payments.
Fixed Payments. Amounts funding fixed payments will be held in the Company's
general account. Fixed payment amounts do not vary over time.
Variable Payments. Amounts funding your variable income payments will be held in
the subaccount(s) you select. Payment amounts will vary depending upon the
performance of the subaccounts you select. For variable payments, an assumed net
investment rate must be selected.
You may also select a combination of both fixed and variable payments.
Assumed Net Investment Rate. For variable payments, an assumed net investment
rate must be selected. If you select a 5% rate, your first payment will be
higher, but subsequent payments will increase only if the investment performance
of the subaccounts you selected is greater than 5% annually, after deduction of
fees. Payment amounts will decline if the investment performance is less than
5%, after deduction of fees.
If you select a 3-1/2% rate, your first payment will be lower and subsequent
payments will increase more rapidly or decline more slowly depending upon
changes to the net investment rate of the subaccounts you selected. For more
information about selecting an assumed net investment rate, call us for a copy
of the SAI. See "Contract Overview--Questions: Contacting the Company."
Minimum Payment Amounts. The payment option you select must result in:
> A first payment of at least $50, or
> Total yearly payments of at least $250
If your account value is too low to meet these minimum payment amounts, you will
receive one lump sum payment. Unless prohibited by law, we reserve the right to
increase the minimum payment amount based upon increases reflected in the
Consumer Price Index-Urban (CPI-U), since July 1, 1993.
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<PAGE>
Restrictions on Start Dates and the Duration of Payments. Payments may not begin
during the first account year, or, unless we consent later than the later of:
(a) The first day of the month following the annuitant's 85th birthday, or
(b) The tenth anniversary of the last payment made to your account (fifth
anniversary for contracts issued in Pennsylvania)
When payments start, the age of the annuitant plus the number of years for which
payments are guaranteed may not exceed 95.
For qualified contracts only, payments may not extend beyond:
(a) The life of the annuitant
(b) The joint lives of the annuitant and beneficiary
(c) A guaranteed period greater than the annuitant's life expectancy
(d) A guaranteed period greater than the joint life expectancies of the
annuitant and beneficiary
For qualified contracts other than IRAs and for five-percent owners of other
qualified contracts, minimum distributions from the contract generally must
begin by April 1 of the calendar year following the calendar year in which you
attain age 70-1/2 or retire, whichever occurs later. For Roth IRAs these minimum
distribution rules do not apply. See "Taxation" for further discussion of rules
relating to income phase payments.
Charges Deducted. We make a daily deduction for mortality and expense risks from
amounts held in the subaccounts. Therefore, if you choose variable payments and
a nonlifetime payment option, we still make this deduction from the subaccounts
you select, even though we no longer assume any mortality risks. We may also
deduct a daily administrative charge from amounts held in the subaccounts. See
"Fees."
Death Benefit during the Income Phase. The death benefits that may be available
to a beneficiary are outlined in the payment option table below. If a lump-sum
payment is due as a death benefit, we will make payment within seven calendar
days after we receive proof of death acceptable to us and the request for the
payment in good order at our Home Office. If the continuing payments are
elected, the beneficiary may not elect to receive a lump sum at a future date
unless the option specifically allows a withdrawal right. We will calculate the
value of any death benefit at the next valuation after we receive proof of death
and a request for payment. Such value will be reduced by any payments made after
the date of death.
Beneficiary Rights. A beneficiary's right to elect an income phase payment
option or receive a lump sum payment may have been restricted by the contract
holder. If so, such rights or options will not be available to the beneficiary.
Partial Entry into the Income Phase. You may elect a payment option for a
portion of your account dollars, while leaving the remaining portion invested in
the accumulation phase. Whether the Tax Code considers such payments taxable as
income phase payments or as withdrawals is currently unclear; therefore, you
should consult with a qualified tax adviser before electing this option. The
same or different payment option may be selected for the portion left invested
in the accumulation phase.
Taxation. To avoid certain tax penalties, you or your beneficiary must meet the
distribution rules imposed by the Tax Code. Additionally, when selecting a
payment option, the Tax Code requires that your expected payments will not
exceed certain amounts. See "Taxation" for additional information.
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<PAGE>
Payment Options.
The following table lists the payment options and accompanying death benefits
available during the income phase. We may offer additional payment options under
the contract from time to time.
Once income phase payments begin, you may not change the payment option
selected.
Terms to understand:
Annuitant: The person(s) on whose life expectancy(ies) the income phase payments
are based.
Beneficiary: The person(s) or entity(ies) entitled to receive a death benefit.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Lifetime Payment Options
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Life Income Length of Payments: For as long as the annuitant lives. It is possible that only one payment will be made
should the annuitant die prior to the second payment's due date.
Death Benefit--None: All payments end upon the annuitant's death.
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Life Income-- Length of Payments: For as long as the annuitant lives, with payments guaranteed for your choice of 5-30
Guaranteed years or as otherwise specified in the contract.
Payments Death Benefit--Payment to the Beneficiary: If the annuitant dies before we have made all the guaranteed
payments, we will pay the beneficiary a lump-sum (unless otherwise requested) equal to the present
value of the remaining guaranteed payments.
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Life Income--Two Length of Payments: For as long as either annuitant lives. It is possible that only one payment will be made
Lives should both annuitants die before the second payment's due date.
Continuing Payments:
(a) When you select this option you choose for 100%, 66-2/3% or 50% of the payment to continue to the
surviving annuitant after the first death; or
(b) 100% of the payment to continue to the annuitant on the second annuitant's death, and 50% of the
payment will continue to the second annuitant on the annuitant's death.
Death Benefit -- None: All payments end upon the death of both annuitants.
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Life Income -- Two Length of Payments: For as long as either annuitant lives, with payments guaranteed from 5-30 years or as
Lives -- otherwise specified in the contract.
Guaranteed Continuing Payments: 100% of the payment to continue after the first death.
Payments Death Benefit -- Payment to the Beneficiary: If both annuitants die before the guaranteed payments have all
been paid, we will pay the beneficiary a lump sum (unless otherwise requested) equal to the present value of
the remaining guaranteed payments.
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Life Income -- Length of Payments: For as long as the annuitant lives.
Cash Refund Death Benefit -- Payment to the Beneficiary: Following the annuitant's death, we will pay a lump sum
Option (limited payment equal to the amount originally applied to the payment option (less any premium tax) and less the
availability -- fixed total amount of fixed payment paid.
payment only)
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Life Income -- Two Length of Payments: For as long as either annuitant lives.
Lives--Cash Refund Continuing Payments: 100% of the payment to continue after the first death.
Option (limited Death Benefit -- Payment to the Beneficiary: When both annuitants die, we will pay a lump sum payment
availability -- fixed equal to the amount applied to the payment option (less any premium tax) and less the total amount of
payment only) fixed payment paid.
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<CAPTION>
Nonlifetime Payment Plan
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Length of Payments: You may select payments for 5 to 30 years. In certain cases a lump-sum payment may be
Nonlifetime-- requested at any time (see below).
Guaranteed Death Benefit--Payment to the Beneficiary: If the annuitant dies before we make all the guaranteed
Payments payments, we will pay the beneficiary a lump-sum (unless otherwise requested) equal to the present value of
the remaining guaranteed payments, and we will not impose any early withdrawal charge.
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</TABLE>
Lump Sum Payment: If the "Nonlifetime--Guaranteed Payments" option is elected
with variable payments, you may request at any time that all or a portion of the
present value of the remaining payments be paid in one lump-sum. A lump sum
elected before three years of payments have been completed will be treated as a
withdrawal during the accumulation phase and we will charge any applicable early
withdrawal charge. See "Fees--Early Withdrawal Charge." Lump-sum payments will
be sent within seven calendar days after we receive the request for payment in
good order at the Home Office.
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Calculation of Lump Sum Payments. If a lump sum payment is available under the
payment options above, the rate used to calculate the present value of the
remaining guaranteed payments will be the same rate we used to calculate the
income phase payments (i.e., the actual fixed rate used for fixed payments or
the 3-1/2% or 5% assumed net investment rate used for variable payments).
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[Begin sidebar]
In this Section
INTRODUCTION
CONTRACT TYPE
WITHDRAWALS AND OTHER DISTRIBUTIONS
> Taxation of Distributions
> 10% Penalty Tax
> Withholding for Federal Income Tax Liability
MINIMUM DISTRIBUTION REQUIREMENTS
> Minimum Distribution of Death Benefit Proceeds (Except Nonqualified Contracts)
> Minimum Distribution of Death Benefit Proceeds (Nonqualified Contracts)
RULES SPECIFIC TO CERTAIN PLANS
> 401(a) Plans
> 403(b) Plans
> 408(b) and 408A IRAs
e 457(b) Plans
TAXATION OF NONQUALIFIED CONTRACTS
TAXATION OF THE COMPANY
When consulting a tax adviser, be certain that he or she has expertise in the
Tax Code sections applicable to your tax concerns.
[End sidebar]
Taxation
- --------------------------------------------------------------------------------
INTRODUCTION
This section discusses our understanding of current federal income tax laws
affecting the contract. You should keep the following in mind when reading it:
> Your tax position (or the tax position of the beneficiary, as applicable)
determines federal taxation of amounts held or paid out under the contract
> Tax laws change. It is possible that a change in the future could affect
contracts issued in the past
> This section addresses federal income tax rules and does not discuss federal
estate and gift tax implications, state and local taxes or any other tax
provisions
> We do not make any guarantee about the tax treatment of the contract or
transaction involving the contract
> Contract holder means the contract holder of an individually owned contract or
the certificate holder of a group contract
> The term "payment" in this section refers to income phase payments
- --------------------------------------------------------------------------------
We do not intend this information to be tax advice. For advice about the effect
of federal income taxes or any other taxes on amounts held or paid out under the
contract, consult a tax adviser.
- --------------------------------------------------------------------------------
Taxation of Gains Prior to Distribution. Generally no amounts accumulated under
a variable contract will be taxable prior to the time of actual distribution.
However, the IRS has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the contract owner
possesses incidents of investment control over the assets. In these
circumstances, income and gains from the separate account assets would be
currently includible in the variable contract owner's gross income. The Treasury
announced that it will issue guidance regarding the extent to which owners could
direct their investments among subaccounts without being treated as owners of
the underlying assets of the separate account. It is possible that the
Treasury's position, when announced, may adversely affect the tax treatment of
existing contracts. The Company therefore reserves the right to modify the
contract as necessary to attempt to prevent the contract holder from being
considered the federal tax owner of a pro rata share of the assets of the
separate account.
CONTRACT TYPE
The Contract is designed for use on a non-tax qualified basis as a nonqualified
contract, or with certain retirement arrangements that qualify under Tax Code
sections 403(b), 408(b) or 408A. Prior to May 1, 1998, the contract was
available with certain retirement arrangements that qualify under Tax Code
sections 401(a) or 457(b).
Tax Rules. The tax rules vary according to whether the contract is a
nonqualified contract or used with a retirement arrangement. If used with a
retirement arrangement, you need to know the Tax Code section under which your
arrangement qualifies. Contact your plan sponsor, local representative or the
Company to learn which Tax Code section applies to your arrangement.
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<PAGE>
The Contract. Contract holders are responsible for determining that
contributions, distributions and other transactions satisfy applicable laws.
Legal counsel and a tax adviser should be consulted regarding the suitability of
the contract. If the contract is purchased in conjunction with a retirement
plan, the plan is not a part of the contract and we are not bound by the plan's
terms or conditions.
WITHDRAWALS AND OTHER DISTRIBUTIONS
Certain tax rules apply to distributions from the contract. A distribution is
any amount taken from the contract including withdrawals, income payments,
rollovers, exchanges and death benefit proceeds.
We report the taxable portion of all distributions to the IRS.
Taxation of Distributions
Nonqualified Contracts. A full withdrawal of a nonqualified contract is taxable
to the extent that the amount received exceeds the investment in the contract. A
partial withdrawal is taxable to the extent that the account value immediately
before the withdrawal exceeds the investment in the contract. In other words, a
partial withdrawal is treated first as a withdrawal of taxable earnings.
For payments, a portion of each payment which represents the investment in the
contract is not taxable. An exclusion ratio is calculated to determine the
nontaxable portion.
For fixed payments, in general, there is no tax on the portion of each payment
which represents the same ratio that the investment in the contract bears to the
total dollar amount of the expected payments as defined in Tax Code section
72(d). The entire payment will be taxable once the recipient has recovered the
investment in the contract.
For variable payments, an equation is used to establish a specific dollar amount
of each payment that is not taxed. The dollar amount is determined by dividing
the investment in the contract by the total number of expected periodic
payments. The entire payment will be taxable once the recipient has recovered
the investment in the contract.
All deferred nonqualified annuity contracts that are issued by the Company (or
its affiliates) to the same contract holder during any calendar year are treated
as one annuity contract for purposes of determining the amount includible in
gross income under Tax Code section 72(e). In addition, the Treasury Department
has specific authority to issue regulations that prevent the avoidance of Tax
Code section 72(e) through the serial purchase of annuity contracts or
otherwise.
401(a) or 403(b) Plans. All distributions from these plans are taxed as received
unless:
> The distribution is rolled over to another plan of the same type or to a
traditional individual retirement annuity/account (IRA) in accordance with the
Tax Code, or
> You made after-tax contributions to the plan. In this case, depending upon the
type of distribution, the amount will be taxed according to the rules detailed
in the Tax Code
408(b) Individual Retirement Annuity (IRA). All distributions from a traditional
IRA are taxed as received unless:
35
<PAGE>
> The distribution is rolled over to another traditional IRA or, if the IRA
contains only amounts previously rolled over from a 401(a), 401(k), or 403(b)
plan, to another plan of the same type; or
> You made after-tax contributions to the plan. In this case, the distribution
will be taxed according to rules detailed in the Tax Code
408A Roth IRA. A qualified distribution from a Roth IRA is not taxed when it is
received. A qualified distribution is a distribution:
> Made after the 5-taxable year period beginning with the first taxable year for
which a contribution was made, and
> Made after you attain age 59-1/2, die, become permanently and totally
disabled, or for a qualified first-time home purchase
If a distribution is not qualified, the accumulated earnings are taxable. A
partial distribution will first be treated as a return of contributions which is
not taxable.
457(b) Plans. All amounts received under a 457(b) plan are includible in taxable
income when paid or otherwise made available to you or your beneficiary.
Taxation of Death Benefit Proceeds. In general, payments received by your
beneficiaries after your death are taxed in the same manner as if you had
received those payments.
10% Penalty Tax
Under certain circumstances, the Tax Code may impose a 10% penalty tax on the
taxable portion of any distribution from a nonqualified contract or from a
contract used with a 401(a), 403(b), 408(b) or 408A arrangement. The 10% penalty
tax does not apply to a distribution from a 457 plan.
Nonqualified Contract. The 10% penalty tax applies to the taxable portion of a
distribution from a nonqualified annuity unless one or more of the following
have occurred:
(a) The taxpayer has attained age 59-1/2
(b) The taxpayer has become totally and permanently disabled
(c) The contract holder has died
(d) The distribution is made in substantially equal periodic payments (at least
annually) over the life or life expectancy of the taxpayer or the joint
lives or joint life expectancies of the taxpayer and beneficiary
(e) The distribution is allocable to investment in the contract before August
14, 1982
401(a) or 403(b) Plan. The 10% penalty tax applies to the taxable portion of a
distribution from a 401(a) or 403(b) plan, unless one or more of the following
have occurred:
(a) You have attained age 59-1/2
(b) You have become totally and permanently disabled
(c) You have died
(d) You have separated from service with the plan sponsor at or after age 55
(e) The distribution is rolled over into another plan of the same type or to an
IRA in accordance with the Tax Code
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<PAGE>
(f) The distribution is made in substantially equal periodic payments (at least
annually) over your life or life expectancy or the joint lives or joint life
expectancies of you and your beneficiary. Also, you must have separated from
service with the plan sponsor
(g) The distribution is equal to unreimbursed medical expenses that qualify for
deduction as specified in the Tax Code
408(b) IRA. In general, the exceptions for 401(a) and 403(b) plans also apply to
distributions from an IRA except for the separation from service exception in
(d) above. This includes a distribution from a Roth IRA that is not a qualified
distribution or a rollover to a Roth IRA that is not a qualified rollover
contribution. The penalty tax is also waived on a distribution made from an IRA
to pay for health insurance premiums for certain unemployed individuals or used
for qualified first-time home purchase or for higher education expenses.
Withholding for Federal Income Tax Liability
Any distributions under the contract are generally subject to withholding.
Federal income tax liability rates vary according to the type of distribution
and the recipient's tax status.
Nonqualified Contract. Generally, you or a beneficiary may elect not to have tax
withheld from distributions.
401(a) or 403(b) Plans. Generally, distributions from these plans are subject to
a mandatory 20% federal income tax withholding. However, you or a beneficiary
may elect not to have tax withheld from certain distributions.
408(b) and 408A IRAs. Generally, you or a beneficiary may elect not to have tax
withheld from distributions.
457 Plans. All distributions from a 457 plan, except death benefit proceeds, are
subject to mandatory federal income tax withholding as wages. No withholding is
required on payments to beneficiaries.
Non-resident Aliens. If you or your beneficiary is a non-resident alien, then
any withholding is governed by Tax Code section 1441 based on the individual's
citizenship, the country of domicile and treaty status.
MINIMUM DISTRIBUTION REQUIREMENTS
To avoid certain tax penalties, you and any beneficiary must meet the minimum
distribution requirements imposed by the Tax Code. The requirements do not apply
to either nonqualified contracts or Roth IRA contracts, except with regard to
death benefits. These rules may dictate one or more of the following:
> Start date for distributions
> The time period in which all amounts in your account(s) must be distributed
> Distribution amounts
Start Date. Generally, you must begin receiving distributions by April 1 of the
calendar year following the calendar year in which you attain age 70-1/2 or
retire, whichever occurs later, unless:
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<PAGE>
> You are a 5% owner or the contract is an IRA, in which case such distributions
must begin by April 1 of the calendar year following the calendar year in
which you attain age 70-1/2, or
> Under 403(b) plans, if the Company maintains separate records of amounts held
as of December 31, 1986. In this case, distribution of these amounts generally
must begin by the end of the calendar year in which you attain age 75 or
retire, if later. However, if you take any distributions in excess of the
minimum required amount, then special rules require that some or all of the
December 31, 1986 balance be distributed earlier
Time Period. We must pay out distributions from the contract over one of the
following time periods:
> Over your life or the joint lives of you and your beneficiary, or
> Over a period not greater than your life expectancy or the joint life
expectancies of you and your beneficiary
Amount (457(b) Plans Only). Any distribution from a 457(b) plan, payable over a
period of more than one year, must be made in substantially non-increasing
amounts.
50% Excise Tax. If you fail to receive the minimum required distribution for any
tax year, a 50% excise tax is imposed on the required amount that was not
distributed.
Minimum Distribution of Death Benefit Proceeds
(Except Nonqualified Contracts)
The following applies to 408(b) and 408A IRAs and 401(a), 403(b) and 457 plans.
Different distribution requirements apply if your death occurs:
> After you begin receiving minimum distributions under the contract, or
> Before you begin receiving such distributions
If your death occurs after you begin receiving minimum distributions under the
contract, distributions must be made at least as rapidly as under the method in
effect at the time of your death. Tax Code section 401(a)(9) provides specific
rules for calculating the minimum required distributions at your death. The
rules differ, dependent upon the following:
> Whether your minimum required distribution was calculated each year based on
your single life expectancy or the joint life expectancies of you and your
beneficiary
> Whether life expectancy was recalculated
The rules are complex and any beneficiary should consult with a tax adviser
before electing the method of calculation to satisfy the minimum distribution
requirements.
If your death occurs before you begin receiving minimum distributions under the
contract, your entire balance must be distributed by December 31 of the calendar
year containing the fifth anniversary of the date of your death. For example, if
you die September 1, 1999, your entire balance must be distributed to the
beneficiary by December 31, 2004. However, if the distribution begins by
December 31 of the calendar year following the calendar year of your death, then
payments may be made in either of the following timeframes:
> Over the life of the beneficiary
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<PAGE>
> Over a period not extending beyond the life expectancy of the beneficiary
For 457(b) plans, if the beneficiary is not your spouse, the time-frame may not
exceed fifteen years.
Start Dates for Spousal Beneficiaries. If the beneficiary is your spouse, the
distribution must begin on or before the later of the following:
> December 31 of the calendar year following the calendar year of your death
> December 31 of the calendar year in which you would have attained age 70-1/2
Special Rule for IRA Spousal Beneficiaries. In lieu of taking a distribution
under these rules, a spousal beneficiary may elect to treat the account as his
or her own IRA and defer taking a distribution until his or her age 70-1/2. The
surviving spouse is deemed to have made such an election if the surviving spouse
makes a rollover to or from the account or fails to take a distribution within
the required time period.
Minimum Distribution of Death Benefit Proceeds
(Nonqualified Contracts)
Death of the Contract Holder. The following requirements apply to nonqualified
contracts at the death of the contract holder. Different distribution
requirements apply if you are the contract holder and your death occurs:
> After you begin receiving annuity payments under the contract, or
> Before you begin receiving such distributions
If your death occurs after you begin receiving payments, distribution must be
made at least as rapidly as under the method in effect at the time of your
death.
If your death occurs before you begin receiving payments, your entire balance
must be distributed within five years after the date of your death. For example,
if you die on September 1, 1999, your entire balance must be distributed by
August 31, 2004. However, if the distribution begins within one year of your
death, then payments may be made in one of the following time-frames:
> Over the life of the beneficiary
> Over a period not extending beyond the life expectancy of the beneficiary
Spousal Beneficiaries. If the beneficiary is your spouse, the account may be
continued with the surviving spouse as the new contract holder.
Death of Annuitant. If the contract holder is a non-natural person and the
annuitant dies, the same rules apply as outlined above for death of a contract
holder. If the contract holder is a natural person but not the annuitant and the
annuitant dies, the beneficiary must elect a payment option within 60 days of
the date of death, or any gain under the contract will be includible in the
beneficiary's income in the year the annuitant dies.
RULES SPECIFIC TO CERTAIN PLANS
401(a) Plans.
Tax Code section 401(a) permits certain employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
39
<PAGE>
establish various types of retirement plans for themselves and for their
employees. These retirement plans may permit the purchase of the contracts to
accumulate retirement savings under the plans.
Assignment or Transfer of Contracts. Adverse tax consequences to the 401(a) plan
and/or to you may result if your beneficial interest in the contract is assigned
or transferred to persons other than: A plan participant as a means to provide
benefit payments; an alternate payee under a qualified domestic relations order
in accordance with Tax Code section 414(p); or to the Company as collateral for
a loan.
Exclusion From Gross Income. The Tax Code imposes a maximum limit on annual
payments to your 401(a) account(s) that may be excluded from gross income. The
employer must calculate this limit under the plan in accordance with Tax Code
section 415. This limit is generally the lesser of 25% of your compensation or
$30,000. Compensation means your compensation from the employer sponsoring the
plan and, for years beginning after December 31, 1997, includes any elective
deferrals under Tax Code section 402(g) and any amounts not includible in gross
income under Tax Code sections 125 or 457. The limit applies to your
contributions as well as any contributions made by your employer on your behalf.
In addition, payments to your account(s) will be excluded from your gross income
only if the plan meets certain nondiscrimination requirements.
403(b) Plans.
Under Tax Code section 403(b), contributions made by public school systems or
nonprofit healthcare organizations and other Tax Code section 501(c)(3) tax
exempt organizations to purchase annuity contracts for their employees are
generally excludable from the gross income of the employee.
Assignment or Transfer of Contracts. Adverse tax consequences to the plan and/or
to you may result if your beneficial interest in the contract is assigned or
transferred to any person except to an alternate payee under a qualified
domestic relations order in accordance with Tax Code section 414(p) or to the
Company as collateral for a loan.
Exclusions from Gross Income. In order to be excludable from gross income, total
annual contributions made by you and your employer to a 403(b) plan cannot
exceed the lesser of the following limits set by the Tax Code:
> The first limit, under Tax Code section 415, is generally the lesser of 25% of
your compensation or $30,000. Compensation means your compensation from the
employer sponsoring the plan and, for years beginning after December 31, 1997,
includes any elective deferrals under Tax Code section 402(g) and any amounts
not includible in gross income under Tax Code sections 125 or 457
> The second limit, which is the exclusion allowance under Tax Code section
403(b), is usually calculated according to a formula that takes into account
your length of employment, any pretax contributions you and your employer have
already made under the plan, and any pretax contributions to certain other
retirement plans
These two limits apply to your contributions as well as to any contributions
made by your employer on your behalf.
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<PAGE>
> An additional limit specifically limits your salary reduction contributions to
generally no more than $10,000 annually (subject to indexing). Your own limit
may be higher or lower, depending upon certain conditions
Payments to your account(s) will be excluded from your gross income only if the
plan meets certain nondiscrimination requirements.
Restrictions on Distributions. Tax Code section 403(b)(11) restricts the
distribution under Tax Code section 403(b) contracts of:
(1) Salary reduction contributions made after December 31, 1988
(2) Earnings on those contributions
(3) Earnings during such period on amounts held as of December 31, 1988
Distribution of those amounts may only occur upon your death, attainment of age
59-1/2, separation from service, disability, or financial hardship. Income
attributable to salary reduction contributions and credited on or after January
1, 1989 may not be distributed in the case of hardship.
408(b) and 408A IRAs.
Tax Code section 408(b) permits eligible individuals to contribute to a
traditional Individual Retirement Annuity (IRA) on a pre-tax (deductible) basis.
Employers may establish Simplified Employee Pension (SEP) plans and contribute
to a traditional IRA owned by the employee. Tax Code section 408A permits
eligible individuals to contribute to a Roth IRA on an after-tax (nondeductible)
basis.
Assignment or Transfer of Contracts. Adverse tax consequences may result if you
assign or transfer your interest in the contract to persons other than your
spouse incident to a divorce.
Eligibility. Eligibility to contribute to a traditional IRA on a pre-tax basis
or to establish a Roth IRA or to roll over or transfer from a traditional IRA to
a Roth IRA depends upon your adjusted gross income.
Rollovers and Transfers. Rollovers and direct transfers are permitted from a
401, 403(a) or a 403(b) arrangement to a traditional IRA. Distributions from
these arrangements are not permitted to be transferred or rolled over to a Roth
IRA. A Roth IRA can accept transfers/rollovers only from a traditional IRA,
subject to ordinary income tax, or from another Roth IRA.
457 (b) Plans.
Tax Code section 457(b) provides for certain deferred compensation plans. These
plans may be offered by state governments, local governments, political
subdivisions, agencies, instrumentalities and certain affiliates of such
entities, and non-government tax exempt entities. The plan may permit
participants to specify the form of investment in their deferred compensation
account.
Trust Requirement. 457(b) plans maintained by state or local governments, their
political subdivisions, agencies, instrumentalities and certain affiliates are
required to hold all assets and income of the plan in trust for the exclusive
benefit of plan participants and their beneficiaries. For purposes of meeting
this requirement, custodial accounts and annuity contracts are treated as
trusts.
Contributions Excluded from Gross Income. If your employer's plan is a 457(b)
plan, the Tax Code imposes a maximum limit on annual contributions
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to your account(s) that may be excluded from your gross income. For section
457(b) plan participants, such limit is generally the lesser of $8,000, as
adjusted to reflect changes in the cost of living, or 33% of your includible
compensation (25% of gross compensation).
Restrictions on Distributions. Under a 457(b) plan, amounts may not be made
available to you earlier than (1) the calendar year you attain age 70-1/2, (2)
when you separate from service with the employer or (3) when you are faced with
an unforeseeable emergency. A 457(b) plan may permit a one-time in-service
distribution if the total amount payable to the participant does not exceed
$5,000 and no amounts have been deferred by the participant during the 2-year
period ending on the date of distribution.
TAXATION OF NONQUALIFIED CONTRACTS
In General. Tax Code section 72 governs taxation of annuities in general. A
contract holder under a nonqualified contract who is a natural person generally
is not taxed on increases in the account value until distribution occurs by
withdrawing all or part of such account value. The taxable portion of a
distribution is taxable as ordinary income.
Non-Natural Contract Holders of a Nonqualified Contract. If the contract holder
is not a natural person, a nonqualified contract generally is not treated as an
annuity for income tax purposes and the income on the contract for the taxable
year is currently taxable as ordinary income. Income on the contract is any
increase over the year in the surrender value, adjusted for purchase payments
made during the year, amounts previously distributed and amounts previously
included in income. There are some exceptions to the rule and a non-natural
person should consult with its tax adviser prior to purchasing this contract. A
non-natural person exempt from federal income taxes should consult with its tax
adviser regarding treatment of income on the contract for purposes of the
unrelated business income tax. When the contract holder is not a natural person,
a change in annuitant is treated as the death of the contract holder.
Diversification. Tax Code section 817(h) requires that in a nonqualified
contract the investments of the funds be "adequately diversified" in accordance
with Treasury Regulations in order for the contracts to qualify as annuity
contracts under federal tax law. The separate account, through the funds,
intends to comply with the diversification requirements prescribed by the
Treasury in Reg. Sec. 1.817-5, which affects how the funds' assets may be
invested.
Transfers, Assignments or Exchanges of a Nonqualified Contract. A transfer of
ownership of a nonqualified contract, the designation of an annuitant, payee or
other beneficiary who is not also the contract holder, the selection of certain
annuity dates, or the exchange of a contract may result in certain tax
consequences. The assignment, pledge, or agreement to assign or pledge any
portion of the account value generally will be treated as a distribution. Anyone
contemplating any such designation, transfer, assignment, selection, or exchange
should contact a tax adviser regarding the potential tax effects of such a
transaction.
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TAXATION OF THE COMPANY
We are taxed as a life insurance company under the Tax Code. Variable Annuity
Account I is not a separate entity from us. Therefore, it is not taxed
separately as a "regulated investment company", but is taxed as part of the
Company.
We automatically apply investment income and capital gains attributable to the
separate account to increase reserves under the contracts. Because of this,
under existing federal 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 contracts. In addition, any foreign tax credits attributable
to the separate account will be first 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 any provision
for such taxes. However, changes in federal tax laws and/or their interpretation
may result in our being taxed on income or gains attributable to the separate
account. In this case, we may impose a charge against the separate account (with
respect to some or all of the contracts) to set aside provisions to pay such
taxes. We may deduct this amount from the separate account, including from your
account value invested in the subaccounts.
Other Topics
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The Company
Aetna Insurance Company of America (the Company, we, us) issues the contracts
described in this prospectus and is responsible for providing each contract's
insurance and annuity benefits. We are a stock life insurance company organized
under the insurance laws of the State of Connecticut in 1990 and an indirect
wholly-owned subsidiary of Aetna Inc.
We are engaged in the business of selling life insurance and annuities. Our
principal executive offices are located at:
151 Farmington Avenue
Hartford Connecticut 06156
Variable Annuity Account I
We established Variable Annuity Account I (the separate account) in 1994 as a
segregated asset account to fund our variable annuity contracts. The separate
account is registered as a unit investment trust under the Investment Company
Act of 1940 (the "40 Act"). It also meets the definition of "separate account"
under the federal securities laws.
The separate account is divided into subaccounts. These subaccounts invest
directly in shares of a pre-assigned fund.
Although we hold title to the assets of the separate account, such assets are
not chargeable with the liabilities of any other business that we conduct.
Income, gains or losses of the separate account are credited to or charged
against the assets of the separate account without regard to other income, gains
or losses
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of the Company. All obligations arising under the contract are obligations of
the Company.
Contract Distribution
Aetna Life Insurance and Annuity Company (ALIAC), an affiliate of the Company,
serves as the principal underwriter for the securities sold by this prospectus.
ALIAC is registered as a broker-dealer with the SEC and a member of the National
Association of Securities Dealers, Inc. (NASD).
As principal underwriter, ALIAC will enter into arrangements with one or more
registered broker-dealers, including at least one affiliate of the Company, to
offer and sell the contracts described in this prospectus. We may also enter
into these arrangements with banks that may be acting as broker dealers without
separate registration under the Securities Exchange Act of 1934 pursuant to
legal and regulatory exceptions. In this prospectus, we refer to the registered
broker-dealers and the banks described above as "distributors." ALIAC and one or
more of our affiliates may also sell the contracts directly. All individuals
offering and selling the contracts must be registered representatives of a
broker-dealer, or employees of a bank exempt from registration under the
Securities Exchange Act of 1934, and must be licensed as insurance agents to
sell variable annuity contracts.
Occasionally, ALIAC may enter into arrangements with independent entities to
help find broker-dealers or banks interested in distributing the contract or to
provide training, marketing and other sales-related functions, or administrative
services. ALIAC will reimburse such entities for expenses related to and may pay
fees to such entities in return for these services.
ALIAC may offer customers of certain broker-dealers special guaranteed rates in
connection with the Guaranteed Account offered through the contracts, and may
negotiate different commissions for these broker-dealers.
ALIAC may also contract with independent third party broker-dealers who will
act as wholesalers by assisting us in selecting broker-dealers or banks
interested in acting as distributors. These wholesalers may also provide
training, marketing and other sales related functions and the distributors and
may provide certain administrative services in connection with the contracts.
ALIAC may pay such wholesalers compensation based on payments to contracts
purchased through distributors that they select.
ALIAC may also designate third parties to provide services in connection with
the contracts such as reviewing applications for completeness and compliance
with insurance requirements and providing the distributors with approved
marketing material, prospectuses or other supplies. These parties will also
receive payments based on payments for their services, to the extent such
payments are allowed by applicable securities laws. ALIAC will pay all costs and
expenses related to these services.
Payment of Commissions
Distributors and their registered representatives who sell the contracts are
paid commissions and service fees. Pursuant to agreements between ALIAC (as
underwriter) and the distributor, commissions will be paid up to an amount
currently equal to 6.5% of payments or as a combination of a certain percentage
of payments at time of sale and a trail commission as a percentage of assets.
Under the latter arrangement, commission payments may exceed 6.5% of payments
over the life of the contract. Some sales personnel may
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receive various types of non-cash compensation as special sales incentives,
including trips and educational and/or business seminars. However, any such
compensation will be paid in accordance with NASD rules. In addition, additional
compensation may be paid to the supervisory and other management personnel of
the Company or its affiliates if the overall amount of investments in funds
advised by the Company or its affiliates increases over time.
Commissions, fees and related distribution expenses are paid out of any early
withdrawal charges assessed or out of our general assets, including investment
income and any profit from investment advisory fees and mortality and expense
risk charges. No additional deductions or charges are imposed for commissions
and related expenses.
Payment Delay or Suspension
We reserve the right to suspend or postpone the date of any payment of benefits
or values under any one of the following circumstances:
> On any valuation date when the New York Stock Exchange is closed (except
customary weekend and holiday closings) or when trading on the New York Stock
Exchange is restricted
> When an emergency exists as determined by the SEC so that disposal of the
securities held in the subaccounts is not reasonably practicable or it is not
reasonably practicable to fairly determine the value of the subaccount's
assets
> During any other periods the SEC may by order permit for the protection of
investors
The conditions under which restricted trading or an emergency exists shall be
determined by the rules and regulations of the SEC.
Performance Reporting
We may advertise different types of historical performance for the subaccounts
including:
> Standardized average annual total returns
> Non-standardized average annual total returns
We may also advertise certain ratings, rankings or other information related to
the Company, the subaccounts or the funds. For further details regarding
performance reporting and advertising you may request an SAI by calling us at
the number listed in "Contract Overview--Questions: Contacting the Company."
Standardized Average Annual Total Returns. We calculate standardized average
annual total returns according to a formula prescribed by the SEC. This shows
the percentage return applicable to $1,000 invested in the subaccounts over the
most recent one, five and 10-year periods. If the investment option was not
available for the full period, we give a history from the date money was first
received in that option under the separate account. We include all recurring
charges during each period (i.e., mortality and expense risk charges, annual
maintenance fees, administrative expense charges, if any, and any applicable
early withdrawal charges).
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Non-Standardized Average Annual Total Returns. We calculate non-standardized
average annual total returns in a similar manner as that stated above, except we
do not include the deduction of any applicable early withdrawal charge. Some
non-standardized returns may also exclude the effect of a maintenance fee. If we
reflected these charges in the calculation, they would decrease the level of
performance reflected by the calculation. Non-standardized returns may also
include performance from the fund's inception date, if that date is earlier than
the one we use for standardized returns.
Voting Rights
Each of the subaccounts holds shares in a fund and each is entitled to vote at
regular and special meetings of that fund. Under our current view of applicable
law, we will vote the shares for each subaccount as instructed by persons having
a voting interest in the separate account. If you are a contract holder under a
group contract, you have a fully vested interest in the contract and may
instruct the group contract holder how to direct the Company to cast a certain
number of votes. We will vote shares for which instructions have not been
received in the same proportion as those for which we received instructions.
Each person who has a voting interest in the separate account will receive
periodic reports relating to the funds in which he or she has an interest, as
well as any proxy materials and a form on which to give voting instructions.
Voting instructions will be solicited by a written communication at least 14
days before the meeting.
The number of votes (including fractional votes) you are entitled to direct will
be determined as of the record date set by any fund you invest in through the
subaccounts.
> During the accumulation phase the number of votes is equal to the portion of
your account value invested in the fund, divided by the net asset value of one
share of that fund.
> During the income phase the number of votes is equal to the portion of
reserves set aside for the contract's share of the fund, divided by the net
asset value of one share of that fund.
Contract Modifications
We may change the contract as required by federal or state law. In addition, we
may, upon 30 days' written notice to the group contract holder, make other
changes to a group contract that would apply only to individuals who become
participants under that contract after the effective date of such changes. If a
group contract holder does not agree to a change, we reserve the right to refuse
to establish new accounts under the contract. Certain changes will require the
approval of appropriate state or federal regulatory authorities.
Transfer of Ownership: Assignment
We will accept assignments or transfers of ownership of a nonqualified contract
or a qualified contract where such assignments or transfers are not prohibited,
with proper notification. The date of any assignment or transfer of ownership
will be the date we receive the notification at our Home Office. An assignment
or transfer of ownership may have tax consequences and you should consult with a
tax adviser before assigning or transferring ownership of the contract.
An assignment of a contract will only be binding on the Company if it is made in
writing and sent to the Company at our Home Office. We will use
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reasonable procedures to confirm that the assignment is authentic, including
verification of signature. If we fail to follow our own procedures, we will be
liable for any losses to you directly resulting from such failure. Otherwise, we
are not responsible for the validity of any assignment. The rights of the
contract holder and the interest of the annuitant and any beneficiary will be
subject to the rights of any assignee we have on our records.
Involuntary Terminations
We reserve the right to terminate any account with a value of $2,500 or less
immediately following a partial withdrawal. However, an IRA may only be closed
out when payments to the contract have not been received for a 24-month period
and the paid-up annuity benefit at maturity would be less than $20 per month. If
such right is exercised, you will be given 90 days' advance written notice. No
early withdrawal charge will be deducted for involuntary terminations. We do not
intend to exercise this right in cases where the account value is reduced to
$2,500 or less solely due to investment performance.
Legal Matters and Proceedings
We are aware of no material legal proceedings pending which involve the separate
account or the Company 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.
Year 2000 Readiness
As a healthcare and financial services enterprise, Aetna Inc. (referred to
collectively with its affiliates and subsidiaries as Aetna), is dependent upon
computer systems and applications to conduct its business. Aetna has developed
and is currently executing a comprehensive risk-based plan designed to make its
mission-critical information technology (IT) systems and embedded systems Year
2000 ready. The plan for IT systems covers five stages including (i) assessment,
(ii) remediation, (iii) testing, (iv) implementation and (v) Year 2000 approval.
At year end 1997, Aetna, including the Company, had substantially completed the
assessment stage. The remediation of mission- critical IT systems was completed
by year end 1998. Testing of all mission- critical IT systems is underway with
Year 2000 approval targeted for completion by mid-1999. The costs of these
efforts will not affect the separate account.
The Company, its affiliates and the mutual funds that serve as investment
options for the separate account also have relationships with investment
advisers, broker-dealers, transfer agents, custodians or other securities
industry participants or other service providers that are not affiliated with
Aetna. Aetna, including the Company, has initiated communication with its
critical external relationships to determine the extent to which Aetna may be
vulnerable to such parties' failure to resolve their own Year 2000 issues. Aetna
and the Company have assessed and are prioritizing responses in an attempt to
mitigate risks with respect to the failure of these parties to be Year 2000
ready. There can be no assurance that failure of third parties to complete
adequate preparations in a timely manner, and any resulting systems
interruptions or other consequences, would not have an adverse effect, directly
or indirectly, on the separate account, including, without limitation, its
operation or the valuation of its assets and units.
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Contents of the Statement of Additional
Information
- --------------------------------------------------------------------------------
The Statement of Additional Information (SAI) contains more specific information
on the separate account and the contract, as well as the financial statements of
the separate account and the Company. The following is a list of the contents of
the SAI.
<TABLE>
<S> <C>
General Information and History .................................... 2
Variable Annuity Account I ......................................... 2
Offering and Purchase of Contract .................................. 3
Performance Data ................................................... 3
General ........................................................ 3
Average Annual Total Return Quotations ......................... 3
Income Phase Payments .............................................. 6
Sales Material and Advertising ..................................... 7
Independent Auditors ............................................... 7
Financial Statements of the Separate Account ....................... S-1
Financial Statements of Aetna Insurance Company of America ......... F-1
</TABLE>
You may request an SAI by calling the Company at the number listed in "Contract
Overview--Questions: Contacting the Company".
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Appendix I
AICA Guaranteed Account
- --------------------------------------------------------------------------------
The AICA Guaranteed Account (the Guaranteed Account) is a fixed interest option
available during the accumulation phase under the contract. This appendix is
only a summary of certain facts about the Guaranteed Account. Please read the
Guaranteed Account prospectus carefully before investing in this option.
In General. Amounts invested in the Guaranteed Account earn specified interest
rates if left in the Guaranteed Account for specified periods of time. If you
withdraw or transfer those amounts before the specified periods elapse, we may
apply a market value adjustment (described below) which may be positive or
negative.
When deciding to invest in the Guaranteed Account, contact your representative
or the Company to learn:
> The interest rate(s) we will apply to amounts invested in the Guaranteed
Account
We change the rate(s) periodically. Be certain you know the rate we guarantee
on the day your account dollars are invested in the Guaranteed Account.
Guaranteed interest rates will never be less than an annual effective rate of
3%.
> The period of time your account dollars need to remain in the Guaranteed
Account in order to earn the rate(s) You are required to leave your account
dollars in the Guaranteed Account for a specified period of time in order to
earn the guaranteed interest rate(s).
Deposit Period. During a deposit period, we offer a specific interest rate for
dollars invested for a certain guaranteed term. For a specific interest rate and
guaranteed term to apply, account dollars must be invested in the Guaranteed
Account during the deposit period for which that rate and term are offered.
Interest Rates. We guarantee different interest rates, depending upon when
account dollars are invested in the Guaranteed Account. For guaranteed terms one
year or longer, we may apply more than one specified interest rate. The interest
rate we guarantee is an annual effective yield. That means the rate reflects a
full year's interest. We credit interest daily at a rate that will provide the
guaranteed annual effective yield over one year. Guaranteed interest rates will
never be less than an annual effective rate of 3%.
Guaranteed Terms. The guaranteed term is the period of time account dollars must
be left in the Guaranteed Account in order to earn the guaranteed interest rate.
For guaranteed terms one year or longer, we may offer different rates for
specified time periods within a guaranteed term. We offer different guaranteed
terms at different times. We also may offer more than one guaranteed term of the
same duration with different interest rates. Check with your representative or
the Company to learn what terms are being offered. The Company also reserves the
right to limit the number of guaranteed terms or the availability of certain
guaranteed terms.
Fees and Other Deductions. If all or a portion of your account value in the
Guaranteed Account is withdrawn or transferred, you may incur one or more of the
following:
> Market Value Adjustment (MVA)--as described in this appendix and in the
Guaranteed Account prospectus
> Tax penalties and/or tax withholding--see "Taxation"
> Early withdrawal charge--see "Fees"
> Maintenance fee--see "Fees"
We do not make deductions from amounts in the Guaranteed Account to cover
mortality and expense risks. Rather, we consider these risks when determining
the interest rate to be credited.
Market Value Adjustment (MVA). If your account value is withdrawn or transferred
from the Guaranteed Account before the guaranteed term is completed, an MVA may
apply. The MVA reflects investment value changes caused by changes in interest
rates occurring since the date of deposit. The MVA may be positive or negative.
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If interest rates at the time of withdrawal or transfer have increased since the
date of deposit, the value of the investment decreases and the MVA will be
negative. This could result in your receiving less than the amount you paid into
the Guaranteed Account. If interest rates at the time of withdrawal or transfer
have decreased since the date of deposit, the value of the investment increases
and the MVA will be positive.
MVA Waiver. For withdrawals or transfers from a guaranteed term before the
guaranteed term matures, the MVA may be waived for:
> Transfers due to participation in the dollar cost averaging program
> Withdrawals taken due to your election of SWO or ECO (described in "Systematic
Distribution Options"), if available
> Withdrawals for minimum distributions required by the Tax Code and for which
the early withdrawal charge is waived
Death Benefit. When a death benefit is paid under the contract within six months
of the date of death, only a positive aggregate MVA amount, if any, is applied
to the account value attributable to amounts withdrawn from the Guaranteed
Account. This provision does not apply upon the death of a spousal beneficiary
or joint contract holder who continued the account after the first death. If a
death benefit is paid more than six months from the date of death, a positive or
negative aggregate MVA amount, as applicable, will be applied.
Partial Withdrawals. For partial withdrawals during the accumulation phase,
amounts to be withdrawn from the Guaranteed Account will be withdrawn
proportionally from each group of deposits having the same length of time until
the maturity date ("Guaranteed Term Group"). Within a Guaranteed Term Group, the
amount will be withdrawn first from the oldest deposit period, then from the
next oldest, and so on until the amount requested is satisfied.
Guaranteed Terms Maturity. As a guaranteed term matures, assets accumulating
under the Guaranteed Account may be (a) transferred to a new guaranteed term,
(b) transferred to other available investment options, or (c) withdrawn. Amounts
withdrawn may be subject to an early withdrawal charge, taxation and, if you are
under age 59-1/2, tax penalties may apply.
If no direction is received from you at our Home Office by the maturity date of
a guaranteed term, the amount from the maturing guaranteed term will be
transferred to a new guaranteed term of a similar length. If the same guaranteed
term is no longer available, the next shortest guaranteed term available in the
current deposit period will be used. If no shorter guaranteed term is available,
the next longer guaranteed term will be used.
If you do not provide instructions concerning the maturity value of a maturing
guaranteed term, the maturity value transfer provision applies. This provision
allows transfers or withdrawals without an MVA if the transfer or withdrawal
occurs during the calendar month immediately following a guaranteed term
maturity date. This waiver of the MVA only applies to the first transaction
regardless of the amount involved in the transaction.
Under the Guaranteed Account, each guaranteed term is counted as one funding
option. If a guaranteed term matures, and is renewed for the same term, it will
not count as an additional investment option for purposes of any limitation on
the number of investment options.
Subsequent Payments. Payments received after your initial payment to the
Guaranteed Account will be allocated in the same proportions as the last
allocation, unless you properly instruct us to do otherwise. If the same
guaranteed term(s) are not available, the next shortest term will be used. If no
shorter guaranteed term is available, the next longer guaranteed term will be
used.
Dollar Cost Averaging. The Company may offer more than one guaranteed term of
the same duration and credit one with a higher rate contingent upon use only
with the dollar cost averaging program. If amounts are applied to a guaranteed
term which is credited with a higher rate using dollar cost averaging and the
dollar cost averaging is discontinued, the amounts will be transferred to
another guaranteed term of the same duration and an MVA will apply.
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Transfer of Account Dollars. Generally, account dollars invested in the
Guaranteed Account may be transferred among guaranteed terms offered through the
Guaranteed Account, and/or to other investment options offered through the
contract. However, transfers may not be made during the deposit period in which
your account dollars are invested in the Guaranteed Account or for 90 days after
the close of that deposit period. We will apply an MVA to transfers made before
the end of a guaranteed term. The 90 day wait does not apply to (1) amounts
transferred on the maturity date or under the maturity value transfer provision;
(2) amounts transferred from the Guaranteed Account before the maturity date due
to the election of an income phase payment option; (3) amounts distributed under
the ECO or SWO (See "Systematic Distribution Options"); and (4) amounts
transferred from an available guaranteed term in connection with the dollar cost
averaging program.
Transfers after the 90-day period are permitted from guaranteed term(s) to other
guaranteed term(s) available during a deposit period or to other available
investment options. Transfers of the Guaranteed Account values on or within one
calendar month of a term's maturity date are not counted as one of the 12 free
transfers of accumulated values in the account.
Reinvesting Amounts Withdrawn from the Guaranteed Account. If amounts are
withdrawn and then reinvested in the Guaranteed Account, we apply the reinvested
amount to the current deposit period. This means the guaranteed annual interest
rate and guaranteed terms available on the date of reinvestment will apply. We
reinvest amounts proportionately in the same way as they were allocated before
withdrawal. Your account value will not be credited for any negative MVA that
was deducted at the time of withdrawal.
The Income Phase. The Guaranteed Account cannot be used as an investment option
during the income phase. However, you may notify us at least 30 days in advance
to elect a fixed or variable payment option and to transfer your Guaranteed
Account dollars to the general account or any of the subaccounts available
during the income phase. Transfers made due to the election of a lifetime
payment option will be subject to only a positive aggregate MVA.
Distribution. Aetna Life Insurance and Annuity Company (ALIAC) is the principal
underwriter of the contract. ALIAC is registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934 as a
broker-dealer, and is a member of the National Association of Securities
Dealers, Inc. From time to time, ALIAC may offer customers of certain
broker-dealers special guaranteed rates in connection with the Guaranteed
Account offered through the contracts, and may negotiate different commissions
for these broker-dealers.
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Appendix II
Fixed Account
- --------------------------------------------------------------------------------
General Disclosure.
> The Fixed Account is an investment option available during the accumulation
phase under the contracts
> Amounts allocated to the Fixed Account are held in the Company's general
account which supports insurance and annuity obligations
> Interests in the Fixed Account have not been registered with the SEC in
reliance on exemptions under the Securities Act of 1933, as amended
> 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 appendix regarding the Fixed Account has not been reviewed
by the SEC
> Additional information about this option may be found in the contract
Interest Rates.
> The Fixed Account guarantees that amounts allocated to this option will earn
the minimum interest rate specified in the contract. We may credit a higher
interest rate from time to time, but the rate we credit will never fall below
the guaranteed minimum specified in the contract. Amounts applied to the Fixed
Account will earn the interest rate in effect at the time money is applied.
Amounts in the Fixed Account will reflect a compound interest rate as credited
by us. The rate we quote is an annual effective yield
> Our determination of interest rates reflects the investment income earned on
invested assets and the amortization of any capital gains and/or losses
realized on the sale of invested assets. Under this option, we assume the risk
of investment gain or loss by guaranteeing the amounts you allocate to this
option and promising a minimum interest rate and income phase payment
Dollar Cost Averaging. Amounts you invest in the Fixed Account must be
transferred into the other investment options available under the contract over
a period not to exceed 12 months. If you discontinue dollar cost averaging, the
remaining balance amounts in the Fixed Account will be transferred into the
money market subaccount available under the contract, unless you direct us to
transfer the balance into other available options.
Withdrawals. Under certain emergency conditions, we may defer payment of any
withdrawal for a period of up to 6 months or as provided by federal law.
Charges. We do not make deductions from amounts in the Fixed Account to cover
mortality and expense risks. We consider these risks when determining the
credited rate. If you make a withdrawal from amounts in the Fixed Account, an
early withdrawal charge may apply. See "Fees."
Transfers. During the accumulation phase, you may transfer account dollars from
the Fixed Account to any other available investment option. We may vary the
dollar amount that you are allowed to transfer, but it will never be less than
10% of your account value held in the Fixed Account.
By notifying the Home Office at least 30 days before income payments begin, you
may elect to have amounts transferred to one or more of the subaccounts
available during the income phase to provide variable payments.
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Appendix III
Description of Underlying 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. Shares of the
funds are not bank deposits and are not guaranteed, endorsed or insured by any
financial institution, the Federal Deposit Insurance Corporation or any other
government agency. Except as noted, all funds are diversified, as defined under
the Investment Company Act of 1940.
Aetna Balanced VP, Inc.
Investment Objective
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.
Policies
Under normal market conditions, allocates assets among the following asset
classes: 1) equities such as common and preferred stocks; and 2) debt such as
bonds, mortgage-related and other asset-backed securities, and U.S. Government
securities. Typically maintains approximately 60% of total assets in equities
and 40% of total assets in debt (including money market instruments), although
those percentages may vary from time to time.
Risks
Principal risks are those generally attributable to stock and bond investing.
The success of the fund's strategy depends on the investment adviser's skill in
allocating fund assets between equities and debt and in choosing investments
within those categories. Risks attributable to stock investing include sudden
and unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Stocks of smaller companies tend to be less
liquid and more volatile than stocks of larger companies and can be particularly
sensitive to expected changes in interest rates, borrowing costs and earnings.
Fixed-income investments are subject to the risk that interest rates will rise,
which generally causes bond prices to fall. Also, economic and market conditions
may cause issuers to default or go bankrupt. Values of high-yield bonds are even
more sensitive to economic and market conditions than other bonds. Prices of
mortgage-related securities, in addition to being sensitive to changes in
interest rates, also are sensitive to changes in the prepayment patterns on the
underlying instruments.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Income Shares d/b/a Aetna Bond VP
Investment Objective
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.
Policies
Under normal market conditions, invests at least 65% of total assets in
high-grade corporate bonds, mortgage-related and other asset-backed securities,
and securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities. High-grade securities are rated at least A by Standard &
Poor's Corporation (S&P) or Moody's Investors Service, Inc. (Moody's), or if
unrated, considered by the investment adviser to be of comparable quality. May
also invest up to 15% of total assets in high-yield bonds, and up to 25% of
total assets in foreign debt securities.
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Risks
Principal risks are those generally attributable to debt investing, including
increases in interest rates and loss of principal. Generally, when interest
rates rise, bond prices fall. Bonds with longer maturities tend to be more
sensitive to changes in interest rates. For all bonds there is a risk that the
issuer will default. High-yield bonds generally are more susceptible to the risk
of default than higher rated bonds. Prices of mortgage-related securities, in
addition to being sensitive to changes in interest rates, also are sensitive to
changes in the prepayment patterns on the underlying instruments. Foreign
securities have additional risks. Some foreign securities tend to be less liquid
and more volatile than their U.S. counterparts. In addition, accounting
standards and market regulations tend to be less standardized. These risks are
usually higher for securities of companies in emerging markets. Securities of
foreign companies may be denominated in foreign currency. Exchange rate
fluctuations may reduce or eliminate gains or create losses.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Fund d/b/a Aetna Growth and Income VP
Investment Objective
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.
Policies
Under normal market conditions, invests at least 65% of total assets in common
stocks that the investment adviser believes have significant potential for
capital or income growth. Tends to emphasize stocks of larger companies. Also
invests assets across other asset classes (including stocks of small and
medium-sized companies, international stock, real estate securities and fixed
income securities).
Risks
Principal risks are those generally attributable to stock investing. These risks
include sudden and unpredictable drops in the value of the market as a whole and
periods of lackluster or negative performance. The success of the fund's
strategy also depends significantly on the investment adviser's skill in
allocating assets and in choosing investments within each asset class.
Growth-oriented stocks typically sell at relatively high valuations as compared
to other types of stocks. If a growth stock does not exhibit the level of growth
expected, its price may drop sharply. Historically, growth-oriented stocks have
been more volatile than value-oriented stocks. Although the investment adviser
emphasizes large cap stocks, the fund is more diversified across asset classes
than most other funds with a similar investment objective. Therefore, it may not
perform as well as those funds when large cap stocks are in favor.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Encore Fund d/b/a Aetna Money Market VP
Investment Objective
Seeks to provide high current return, consistent with preservation of capital
and liquidity, through investment in high-quality money market instruments.
Policies
Invests only in a diversified portfolio of high-quality fixed income securities
denominated in U.S. dollars, with short remaining maturities. These securities
include U.S. Government securities, such as U.S. Treasury bills and securities
issued or sponsored by U.S. government agencies. They also may include corporate
debt securities, finance company commercial paper, asset-backed securities and
certain obligations of U.S. and foreign banks, each of which must be highly
rated by independent rating agencies or, if unrated, considered by the
investment adviser to be of comparable quality. Maintains a dollar-weighted
average portfolio maturity of 90 days or less.
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Risks
It is possible to lose money by investing in the fund. There is no guaranty the
fund will achieve its investment objective. Shares of the fund are not bank
deposits and are not guaranteed, endorsed or insured by any financial
institution, the FDIC or any other government agency.
A weak economy, strong equity markets and changes by the Federal Reserve in its
monetary policies all could affect short-term interest rates and therefore the
value and yield of the fund's shares.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Generation Portfolios, Inc.--Aetna Ascent VP
Investment Objective
Seeks to provide capital appreciation.
Policies
Designed for investors seeking capital appreciation who generally have an
investment horizon exceeding 15 years and who have a high level of risk
tolerance. Under normal market conditions, allocates assets among several
classes of equities, fixed-income securities, and money market instruments. The
investment adviser has instituted both a benchmark percentage allocation and a
fund level range allocation for each asset class. Asset allocation may vary from
the benchmark allocation (within the permissible range) based on the investment
adviser's ongoing evaluation of the expected returns and risks of each asset
class relative to other classes. May invest up to 15% of total assets in
high-yield bonds.
The benchmark portfolio is 80% equities and 20% fixed income under neutral
market conditions.
Risks
The success of the fund's strategy depends significantly on the investment
adviser's skill in choosing investments and in allocating assets among the
different investment classes. Principal risks are those generally attributable
to stock and bond investing. For stock investments, risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Stocks of smaller companies tend to be less
liquid and more volatile. Risks associated with real estate securities include
periodic declines in the value of real estate, generally, or in the rents and
other income generated by real estate. For bonds, generally, when interest rates
rise, bond prices fall. Economic and market conditions may cause issuers to
default or go bankrupt. Values of high-yield bonds are even more sensitive to
economic and market conditions than other bonds. Prices of mortgage-related
securities, in addition to being sensitive to changes in interest rates, also
are sensitive to changes in the prepayment patterns on the underlying
instruments. Foreign securities have additional risks. Some foreign securities
tend to be less liquid and more volatile than their U.S. counterparts. In
addition, accounting standards and market regulations tend to be less
standardized. These risks are usually higher for securities of companies in
emerging markets. Securities of foreign companies may be denominated in foreign
currency. Exchange rate fluctuations may reduce or eliminate gains or create
losses.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Generation Portfolios, Inc.--Aetna Crossroads VP
Investment Objective
Seeks to provide total return (i.e., income and capital appreciation, both
realized and unrealized).
Policies
Designed for investors seeking a balance between income and capital appreciation
who generally have an investment horizon exceeding ten years and who have a
moderate level of risk tolerance. Under normal market conditions, allocates
assets among several classes of equities, fixed-income securities, and money
market instruments. The investment adviser has instituted both a benchmark
percentage allocation and a fund level range allocation for each asset class.
Asset allocation may vary from the benchmark allocation (within the
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permissible range) based on the investment adviser's ongoing evaluation of the
expected returns and risks of each asset class relative to other classes. May
invest up to 15% of total assets in high-yield bonds.
The benchmark portfolio is 60% equities and 40% fixed income under neutral
market conditions.
Risks
The success of the fund's strategy depends significantly on the investment
adviser's skill in choosing investments and in allocating assets among
thedifferent investment classes. Principal risks are those generally
attributable to stock and bond investing. For stock investments, risks include
sudden and unpredictable drops in the value of the market as a whole and periods
of lackluster or negative performance. Stocks of smaller companies tend to be
less liquid and more volatile. Risks associated with real estate securities
include periodic declines in the value of real estate, generally, or in the
rents and other income generated by real estate. For bonds, generally, when
interest rates rise, bond prices fall. Economic and market conditions may cause
issuers to default or go bankrupt. Values of high-yield bonds are even more
sensitive to economic and market conditions than other bonds. Prices of
mortgage-related securities, in addition to being sensitive to changes in
interest rates, also are sensitive to changes in the prepayment patterns on the
underlying instruments. Foreign securities have additional risks. Some foreign
securities tend to be less liquid and more volatile than their U.S.
counterparts. In addition, accounting standards and market regulations tend to
be less standardized. These risks are usually higher for securities of companies
in emerging markets. Securities of foreign companies may be denominated in
foreign currency. Exchange rate fluctuations may reduce or eliminate gains or
create losses.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Generation Portfolios, Inc.--Aetna Legacy VP
Investment Objective
Seeks to provide total return consistent with preservation of capital.
Policies
Designed for investors primarily seeking total return consistent with capital
preservation who generally have an investment horizon exceeding five years and
who have a low level of risk tolerance. Under normal market conditions,
allocates assets among several classes of equities, fixed-income securities, and
money market instruments. The investment adviser has instituted both a benchmark
percentage allocation and a fund level range allocation for each asset class.
Asset allocation may vary from the benchmark allocation (within the permissible
range) based on the investment adviser's ongoing evaluation of the expected
returns and risks of each asset class relative to other classes. May invest up
to 15% of total assets in high-yield bonds.
The benchmark portfolio is 40% equities and 60% fixed income under neutral
market conditions.
Risks
The success of the fund's strategy depends significantly on the investment
adviser's skill in choosing investments and in allocating assets among the
different investment classes. Principal risks are those generally attributable
to stock and bond investing. For stock investments, risks include sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative performance. Stocks of smaller companies tend to be less
liquid and more volatile. Risks associated with real estate securities include
periodic declines in the value of real estate, generally, or in the rents and
other income generated by real estate. For bonds, generally, when interest rates
rise, bond prices fall. Economic and market conditions may cause issuers to
default or go bankrupt. Values of high-yield bonds are even more sensitive to
economic and market conditions than other bonds. Prices of mortgage-related
securities, in addition to being sensitive to changes in interest rates, also
are sensitive to changes in the prepayment patterns on the underlying
instruments. Foreign securities have additional risks. Some foreign securities
tend to be less liquid and more volatile than their U.S. counterparts. In
addition, accounting standards and market regulations tend to be less
standardized. These risks are usually higher for securities of companies in
emerging markets. Securities of foreign companies may be denominated in foreign
currency. Exchange rate fluctuations may reduce or eliminate gains or create
losses.
Investment Adviser: Aeltus Investment Management, Inc.
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Aetna Variable Portfolios, Inc.--Aetna Growth VP
Investment Objective
Seeks growth of capital through investment in a diversified portfolio of common
stocks and securities convertible into common stocks believed to offer growth
potential.
Policies
Under normal market conditions, invests at least 65% of total assets in common
stocks. Tends to emphasize stocks of larger companies, although may invest in
companies of any size. Focuses on companies that the investment adviser believes
have strong, sustainable and improving earnings growth, and established market
positions in a particular industry.
Risks
Principal risks are those generally attributable to stock investing. They
include sudden and unpredictable drops in the value of the market as a whole and
periods of lackluster or negative performance. Growth-oriented stocks typically
sell at relatively high valuations as compared to other types of stocks. If a
growth stock does not exhibit the consistent level of growth expected, its price
may drop sharply. Historically, growth-oriented stocks have been more volatile
than value-oriented stocks.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP
Investment Objective
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.
Policies
Invests at least 80% of net assets in stocks included in the S&P 500 (other than
Aetna Inc. common stock). The investment adviser attempts to achieve the
objective by overweighting those stocks in the S&P 500 that the investment
adviser believes will outperform the index, and underweighting (or avoiding
altogether) those stocks that the investment adviser believes will underperform
the index. In determining stock weightings, the portfolio manager uses
quantitative computer models to evaluate various criteria, such as the financial
strength of each company and its potential for strong, sustained earnings
growth. Although the fund will not hold all the stocks in the S&P 500, the
investment adviser expects that there will be a close correlation between the
performance of the fund and that of the S&P 500 in both rising and falling
markets.
Risks
Principal risks are those generally attributable to stock investing. These risks
include sudden and unpredictable drops in the value of the market as a whole and
periods of lackluster or negative performance. The success of the fund's
strategy depends significantly on the investment adviser's skill in determining
which securities to overweight, underweight or avoid altogether.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna International VP
Investment Objective
Seeks long-term capital growth primarily through investment in a diversified
portfolio of common stocks principally traded in countries outside of the
United States. The fund will not target any given level of current income.
Policies
Under normal market conditions, invests at least 65% of total assets in
securities principally traded in three or more countries outside of North
America. These securities may include common stocks as well as securities
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convertible into common stocks. Invests primarily in established foreign
securities markets, although may invest in emerging markets as well. Employs
currency hedging strategies to protect from adverse effects on the U.S. dollar.
Risks
Principal risks are those generally attributable to stock investing. These risks
include sudden and unpredictable drops in the value of the market as a whole and
periods of lackluster or negative performance. Stocks of foreign companies
present additional risks for U.S. investors, including the following: stocks of
foreign companies tend to be less liquid and more volatile than their U.S.
counterparts; accounting standards and market regulations tend to be less
standardized in certain foreign countries; and economic and political climates
tend to be less stable. Stocks of foreign companies may be denominated in
foreign currency. Exchange rate fluctuations may reduce or eliminate gains or
create losses. A hedging strategy adds to the fund's expenses and may not
perform as expected.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Real Estate Securities VP
Investment Objective
Seeks maximum total return primarily through investment in a diversified
portfolio of equity securities issued by real estate companies, the majority of
which are real estate investment trusts (REITs).
Policies
Under normal market conditions, invests at least 65% of total assets in stocks,
convertible securities and preferred stocks of companies principally engaged in
the real estate industry. These companies may invest in, among other things,
shopping malls, healthcare facilities, office parks and apartment communities,
or may provide real estate management and development services.
Risks
Concentrating in stocks of real estate-related companies presents certain risks
that are more closely associated with investing in real estate directly than
with investing in the stock market generally. Those risks include: periodic
declines in the value of real estate, generally, or in the rents and other
income generated by real estate; periodic over-building, which creates gluts in
the market, as well as changes in laws (such as zoning laws) that impair the
property rights of real estate owners; adverse developments in the real estate
industry, which may have a greater impact on this fund than a fund that is more
broadly diversified. Performance also may be adversely affected by sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster or negative stock market performance. Although the fund is subject to
the risks generally attributable to stock investing, because the fund has
concentrated its assets in one industry it may be subject to more abrupt swings
in value than would a fund that does not concentrate its assets in one industry.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Small Company VP
Investment Objective
Seeks growth of capital primarily through investment in a diversified portfolio
of common stocks and securities convertible into common stocks of companies with
smaller market capitalizations.
Policies
Under normal market conditions, invests at least 65% of total assets in common
stocks of small-capitalization companies, defined as: the 2,000 smallest of the
3,000 largest U.S. companies (as measured by market capitalization); all
companies not included above that are included in the Standard & Poor's SmallCap
600 Index or the Russell 2000 Index; and companies with market capitalizations
lower than any companies included in the first two categories. For purposes of
the 65% policy, the largest company in this group in which the fund intends to
invest currently has a market capitalization of approximately $1.5 billion.
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Risks
Principal risks are those generally attributable to stock investing. These risks
include sudden and unpredictable drops in the value of the market as a whole and
periods of lackluster or negative performance. Stocks of smaller companies carry
higher risks than stocks of larger companies. This is because smaller companies
may lack the management experience, financial resources, product
diversification, and competitive strengths of larger companies. In many
instances, the frequency and volume of trading in these stocks is substantially
less than is typical of stocks of larger companies. As a result, the stocks of
smaller companies may be subject to wider price fluctuations or may be less
liquid. When selling a large quantity of a particular stock, the fund may have
to sell at a discount from quoted prices or may have to make a series of small
sales over an extended period of time due to the more limited trading volume of
smaller company stocks. Stocks of smaller companies can be particularly
sensitive to expected changes in interest rates, borrowing costs and earnings.
Investment Adviser: Aeltus Investment Management, Inc.
Aetna Variable Portfolios, Inc.--Aetna Value Opportunity VP
Investment Objective
Seeks growth of capital primarily through investment in a diversified portfolio
of common stocks and securities convertible into common stocks.
Policies
Under normal market conditions, invests at least 65% of total assets in common
stocks. The subadviser tends to invest in larger companies it believes are
trading below their real value, although it may invest in companies of any size.
The subadviser believes that the investment objective can best be achieved by
investing in companies whose stock price has been excessively discounted due to
perceived problems. The subadviser evaluates financial and other characteristics
of companies, attempting to find those companies that appear to possess a
catalyst for positive change, such as strong management, solid assets, or market
position, rather than those companies whose stocks are simply inexpensive. The
subadviser looks to sell a security when company business fundamentals deviate
from expectations or when stop-loss levels are triggered.
Risks
Principal risks are those generally attributable to stock investing. They
include sudden and unpredictable drops in the value of the market as a whole and
periods of lackluster or negative performance. Stocks that appear to be
undervalued may never appreciate to the extent expected. Further, because the
prices of value-oriented stocks tend to correlate more closely with economic
cycles than growth-oriented stocks, they are more sensitive to changing economic
conditions, such as changes in interest rates, corporate earnings and industrial
production.
Investment Adviser: Aeltus Investment Management, Inc.
Subadviser: Bradley, Foster & Sargent, Inc.
Calvert Social Balanced Portfolio
Investment Objective
Seeks to achieve a competitive total return through an actively managed,
nondiversified portfolio of stocks, bonds, and money market instruments which
offer income and capital growth opportunity and which satisfy the investment and
social criteria for the Portfolio.
Policies
The Portfolio may purchase both common and preferred stocks. Although there is
no predetermined percentage of assets allocated to stocks, bonds, or money
market instruments, the Portfolio will invest at least 25% of its assets in
senior fixed income securities. The Portfolio normally invests in
investment-grade bonds rated in one of the four highest rating categories by
Standard & Poor's Corporation or by Moody's Investors Service, Inc. or, if not
rated, that are determined by the Portfolio's investment adviser to be of
comparable quality. The Portfolio may invest up to 10% of its assets in foreign
securities.
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Risks
Since the Portfolio is nondiversified, the value of the shares may be more
susceptible to any single economic, political, or regulatory event than the
shares of a diversified portfolio. Fixed income investments are subject to
interest rate risk. There are also risks involved in investing in foreign
securities. These include currency risks, less publicly available information
about foreign companies, different audit and financial reporting standards, and
less government supervision and regulation.
Investment Adviser: Calvert Asset Management Company, Inc.
Fidelity Variable Insurance Products Fund--Equity Income Portfolio
Investment Objective
Seeks reasonable income. Also considers the potential for capital appreciation.
Seeks a yield which exceeds the composite yield on the securities comprising the
S&P 500.
Policies
Normally invests at least 65% of total assets in income-producing equity
securities. May also invest in other types of equity securities and debt
securities, including lower-quality debt securities. May invest in securities of
both foreign and domestic issuers. Emphasis on above-average income-producing
equity securities tends to lead to investments in large cap "value" stocks. In
making investment decisions, the investment adviser relies on fundamental
analysis of each issuer and its potential for success in light of its current
financial condition, its industry position, and economic and market conditions.
May use various techniques, such as buying and selling futures contracts, to
increase or decrease exposure to changing security prices, or other factors that
affect security values.
Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can fluctuate
dramatically in response to these developments. Debt securities have varying
levels of sensitivity to changes in interest rates. In general, the price of a
debt security can fall when interest rates rise. Securities with longer
maturities and mortgage securities can be more sensitive to interest rate
changes. Foreign investments, especially those in emerging markets, can be more
volatile and potentially less liquid than U.S. investments due to increased
risks of adverse issuer, political, regulatory, market or economic developments.
Lower-quality debt securities (those of less than investment-grade quality) can
be more volatile due to increased sensitivity to adverse issuer, political,
regulatory, market or economic developments. Lower-quality debt securities
involve greater risk of default or price changes due to changes in the credit
quality of the issuer. "Value" stocks can react differently to issuer,
political, market and economic developments than the market as a whole and other
types of stocks. "Value" stocks may not ever realize their full value.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund--Growth Portfolio
Investment Objective
Seeks capital appreciation.
Policies
Normally invests primarily in common stocks of companies the investment adviser
believes have above-average growth potential. Companies with high growth
potential tend to be companies with higher than average price/ earning (P/E)
ratios and are often called "growth" stocks. May invest in securities of both
foreign and domestic issuers. In making investment decisions, the investment
adviser relies on fundamental analysis of each issuer and its potential for
success in light of its current financial condition, its industry position, and
economic and market conditions. May use various techniques, such as buying and
selling futures contracts, to increase or decrease exposure to changing security
prices, or other factors that affect security values.
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Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can fluctuate
dramatically in response to these developments. Foreign investments, especially
those in emerging markets, can be more volatile and potentially less liquid than
U.S. investments due to increased risks of adverse issuer, political,
regulatory, market or economic developments. "Growth" stocks tend to be
sensitive to changes in their earnings and more volatile than other types of
stocks.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund--High Income Portfolio
Investment Objective
Seeks a high level of current income while also considering growth of capital.
Policies
Normally invests at least 65% of total assets in income-producing debt
securities, preferred stocks and convertible securities, with an emphasis on
lower-quality debt securities. May also invest in non-income producing
securities, including defaulted securities and common stocks. Currently intends
to limit common stocks to 10% of total assets. May invest in securities of both
foreign and domestic issuers. In making investment decisions, the investment
adviser relies on fundamental analysis of each issuer and its potential for
success in light of its current financial condition, its industry position, and
economic and market conditions. May use various techniques, such as buying and
selling futures contracts, to increase or decrease exposure to changing security
prices, interest rates or other factors that affect security values.
Risks
Debt securities have varying levels of sensitivity to changes in interest rates.
In general, the price of a debt security can fall when interest rates rise.
Securities with longer maturities and mortgage securities can be more sensitive
to interest rate changes. The value of equity securities fluctuates in response
to issuer, political, market and economic developments. In the short term,
equity prices can fluctuate dramatically in response to these developments.
Foreign investments, especially those in emerging markets, can be more volatile
and potentially less liquid than U.S. investments due to increased risks of
adverse issuer, political, regulatory, market or economic developments.
Lower-quality debt securities (those of less than investment-grade quality) can
be more volatile due to increased sensitivity to adverse issuer, political,
regulatory, market or economic developments. Lower-quality debt securities
involve greater risk of default or price changes due to changes in the credit
quality of the issuer.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund--Overseas Portfolio
Investment Objective
Seeks long-term growth of capital.
Policies
Normally invests at least 65% of total assets in foreign securities, primarily
in common stocks. Investments are allocated across countries and regions, with
consideration given to the size of the market in each country and region
relative to the size of the international market as a whole. In making
investment decisions, the investment adviser relies on fundamental analysis of
each issuer and its potential for success in light of its current financial
condition, its industry position, and economic and market conditions. May use
various techniques, such as buying and selling futures contracts, to increase or
decrease exposure to changing security prices or other factors that affect
security values.
Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can fluctuate
dramatically in response to these developments. Debt securities have
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varying levels of sensitivity to changes in interest rates. In general, the
price of a debt security can fall when interest rates rise. Securities with
longer maturities and mortgage securities can be more sensitive to interest rate
changes. Foreign investments, especially those in emerging markets, can be more
volatile and potentially less liquid than U.S. investments due to increased
risks of adverse issuer, political, regulatory, market or economic developments.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund II--Asset Manager Portfolio
Investment Objective
Seeks high total return with reduced risk over the long term by allocating its
assets among stocks, bonds and short-term instruments.
Policies
Assets are allocated among the following classes, or types, of investments. The
stock class (can range from 30%-- 70%) includes equity securities of all types.
The bond class (can range from 20%--60%) includes all varieties of fixed-income
securities, including lower-quality debt securities, maturing in more than one
year. The short-term/ money market class (can range from 0%--50%) includes all
types of short-term and money market instruments. Fixed-income securities may be
classified in the bond or short-term/money market class according to interest
rate sensitivity as well as maturity. May also invest in other instruments that
do not fall within these classes. May invest in securities of both foreign and
domestic issuers. In making investment decisions, the investment adviser
generally analyzes the issuer of a security using fundamental factors (e.g.,
growth potential, earnings estimates and management) and/or quantitative factors
(e.g., historical earnings, dividend yield and earnings per share) and evaluates
each security's current price relative to its estimated long-term value. May use
various techniques, such as buying and selling futures contracts, to increase or
decrease exposure to changing security prices, interest rates or other factors
that affect security values.
Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can fluctuate
dramatically in response to these developments. Debt securities have varying
levels of sensitivity to changes in interest rates. In general, the price of a
debt security can fall when interest rates rise. Securities with longer
maturities and mortgage securities can be more sensitive to interest rate
changes. Foreign investments, especially those in emerging markets, can be more
volatile and potentially less liquid than U.S. investments due to increased
risks of adverse issuer, political, regulatory, market or economic developments.
Many types of debt securities, including mortgage securities, are subject to
prepayment risk. Securities subject to prepayment are subject to greater price
volatility if interest rates change. Lower-quality debt securities (those of
less than investment-grade quality) can be more volatile due to increased
sensitivity to adverse issuer, political, regulatory, market or economic
developments. Lower-quality debt securities involve greater risk of default or
price changes due to changes in the credit quality of the issuer.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund II--Contrafund Portfolio
Investment Objective
Seeks long-term capital appreciation.
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Policies
Normally invests primarily in common stocks of companies whose value the
investment adviser believes is not fully recognized by the public. May invest in
securities of both foreign and domestic issuers. May tend to buy "growth" stocks
or "value" stocks, or a combination of both types. In making investment
decisions, the investment adviser relies on fundamental analysis of each issuer
and its potential for success in light of its current financial condition, its
industry position, and economic and market conditions. May use various
techniques, such as buying and selling futures contracts, to increase or
decrease exposure to changing security prices, interest rates or other factors
that affect security values.
Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can fluctuate
dramatically in response to these developments. Debt securities have varying
levels of sensitivity to changes in interest rates. In general, the price of a
debt security can fall when interest rates rise. Securities with longer
maturities and mortgage securities can be more sensitive to interest rate
changes. Foreign investments, especially those in emerging markets, can be more
volatile and potentially less liquid than U.S. investments due to increased
risks of adverse issuer, political, regulatory, market or economic developments.
"Growth" stocks tend to be sensitive to changes in their earnings and more
volatile than other types of stocks. "Value" stocks can react differently to
issuer, political, market and economic developments than the market as a whole
and other types of stocks. "Value" stocks may not ever realize their full value.
Investment Adviser: Fidelity Management & Research Company
Fidelity Variable Insurance Products Fund II--Index 500 Portfolio
Investment Objective
Seeks investment results that correspond to the total return of common stocks
publicly traded in the United States, as represented by the S&P 500.
Policies
Normally invests at least 80%of assets in common stocks included in the S&P 500.
The S&P 500 is a widely recognized, unmanaged index of common stock prices.
Seeks to achieve a 98% or better correlation between its total return and the
total return of the index. May use various techniques, such as buying and
selling futures contracts, to increase or decrease exposure to changing security
prices or other factors that affect security values.
Risks
The value of equity securities fluctuates in response to issuer, political,
market and economic developments. In the short term, equity prices can fluctuate
dramatically in response to these developments. Debt securities have varying
levels of sensitivity to changes in interest rates. In general, the price of a
debt security can fall when interest rates rise. Securities with longer
maturities and mortgage securities can be more sensitive to interest rate
changes.
An investment in the fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Investment Adviser: Fidelity Management & Research Company; Subadviser: Bankers
Trust Company
Janus Aspen Series--Aggressive Growth Portfolio
Investment Objective
Seeks long-term growth of capital.
Policies
A nondiversified portfolio that invests primarily in common stocks selected for
their growth potential and normally invests at least 50 percent 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 Standard and
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Poor's (S&P) MidCap 400 Index. The market capitalizations within the Index will
vary, but as of December 31, 1998, they ranged from approximately $142 million
to $73 billion. May at times hold substantial positions in cash or similar
investments.
Risks
Because the Portfolio may invest substantially all of its assets in common
stocks, the main risk is that the value of the stocks it holds might decrease in
response to the activities of an individual company or in response to general
market and/or economic conditions. In addition, a nondiversified portfolio has
the ability to take larger positions in a smaller number of issuers. Because the
appreciation or depreciation of a single stock may have a greater impact on the
net asset value of a nondiversified portfolio, its share price can be expected
to fluctuate more than a diversified portfolio. Performance may also be affected
by risks specific to certain types of investments, such as foreign securities,
derivative investments, non-investment grade debt securities
(high-yield/high-risk securities or "junk" bonds) or companies with relatively
small market capitalizations. Smaller or newer companies may suffer more
significant losses as well as realize more substantial growth than larger or
more established issuers. Investments in such companies tend to be more volatile
and somewhat more speculative. Issues associated with investing in foreign
securities include currency risk, political and economic risk, regulatory risk,
market risk and transaction costs. High-yield/high-risk securities are generally
more dependent on the ability of the issuer to meet interest and principal
payments (i.e., credit risk). They are more vulnerable to real or perceived
economic changes, political changes or other adverse developments specific to
the issuer.
Investment Adviser: Janus Capital Corporation
Janus Aspen Series--Balanced Portfolio
Investment Objective
Seeks long-term capital growth, consistent with preservation of capital and
balanced by current income.
Policies
Normally invests 40-60 percent of its assets in securities selected primarily
for their growth potential and 40-60 percent of its assets in securities
selected primarily for their income potential. Will normally invest at least 25
percent of its assets in fixed-income securities. Assets may shift between the
growth and income components of the Portfolio based on the portfolio manager's
analysis of relevant market, financial and economic conditions. May at times
hold substantial positions in cash or similar investments.
Risks
Because the Portfolio may invest a significant portion of its assets in common
stocks, the main risk is that the value of the stocks it holds might decrease in
response to the activities of an individual company or in response to general
market and/or economic conditions. The income component of the Portfolio's
holdings includes fixed-income securities which generally will decrease in value
when interest rates rise. Another risk associated with fixed-income securities
is the risk that an issuer of a bond will be unable to make principal and
interest payments when due (i.e. credit risk). Performance may also be affected
by risks specific to certain types of investments, such as foreign securities,
derivative investments, non-investment grade debt securities
(high-yield/high-risk securities or "junk" bonds) or companies with relatively
small market capitalizations. Smaller or newer companies may suffer more
significant losses as well as realize more substantial growth than larger or
more established issuers. Investments in such companies tend to be more volatile
and somewhat more speculative. Issues associated with investing in foreign
securities include currency risk, political and economic risk, regulatory risk,
market risk and transaction costs. High-yield/high-risk securities are generally
more susceptible to credit risk. They are more vulnerable to real or perceived
economic changes, political changes or other adverse developments specific to
the issuer.
Investment Adviser: Janus Capital Corporation
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Janus Aspen Series--Flexible Income Portfolio
Investment Objective
Seeks to obtain maximum total return, consistent with the preservation of
capital.
Policies
Invests primarily in a wide variety of income-producing securities such as
corporate bonds and notes, government securities and preferred stock. Will
invest at least 80 percent of its assets in income-producing securities. May own
an unlimited amount of high-yield/high-risk securities ("junk bonds") which may
be a big part of the portfolio. May at times hold substantial positions in cash
or similar investments.
Risks
Because the Portfolio invests substantially all of its assets in fixed-income
securities, it is subject to risks such as credit or default risks or decreased
value due to interest rate increases. Generally, a fixed-income security will
increase in value when interest rates fall and decrease in value when interest
rates rise. Performance may also be affected by risks specific to certain types
of investments, such as foreign securities, derivative investments, non-
investment grade debt securities (high-yield/high-risk securities or "junk"
bonds) or companies with relatively small market capitalizations. Smaller or
newer companies may suffer more significant losses as well as realize more
substantial growth than larger or more established issuers. Investments in such
companies tend to be more volatile and somewhat more speculative. Issues
associated with investing in foreign securities include currency risk, political
and economic risk, regulatory risk, market risk and transaction costs.
High-yield/high-risk securities are generally more dependent on the ability of
the issuer to meet interest and principal payments (i.e., credit risk). They are
more vulnerable to real or perceived economic changes, political changes or
other adverse developments specific to the issuer.
Investment Adviser: Janus Capital Corporation
Janus Aspen Series--Growth Portfolio
Investment Objective
Seeks long-term growth of capital in a manner consistent with the preservation
of capital.
Policies
Generally invests primarily in common stocks of larger, more established
companies selected for their growth potential, although it can invest in
companies of any size. May at times hold substantial positions in cash or
similar investments.
Risks
Because the Portfolio may invest substantially all of its assets in common
stocks, the main risk is that the value of the stocks it holds might decrease in
response to the activities of an individual company or in response to general
market and/or economic conditions. Performance may also be affected by risks
specific to certain types of investments, such as foreign securities, derivative
investments, non-investment grade debt securities (high-yield/ high-risk
securities or "junk" bonds) or companies with relatively small market
capitalizations. Smaller or newer companies may suffer more significant losses
as well as realize more substantial growth than larger or more established
issuers. Investments in such companies tend to be more volatile and somewhat
more speculative. Issues associated with investing in foreign securities include
currency risk, political and economic risk, regulatory risk, market risk and
transaction costs. High-yield/high-risk securities are generally more dependent
on the ability of the issuer to meet interest and principal payments (i.e.,
credit risk). They are more vulnerable to real or perceived economic changes,
political changes or other adverse developments specific to the issuer.
Investment Adviser: Janus Capital Corporation
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Janus Aspen Series--Worldwide Growth Portfolio
Investment Objective
Seeks long-term growth of capital in a manner consistent with the preservation
of capital.
Policies
Invests primarily in common stocks of companies of any size throughout the
world. Normally invests in issuers from at least five different countries,
including the United States. May at times invest in fewer than five countries or
even in a single country. May hold substantial positions in cash or similar
investments.
Risks
Because the Portfolio may invest substantially all of its assets in common
stocks, the main risk is that the value of the stocks it holds might decrease in
response to the activities of an individual company or in response to general
market and/or economic conditions. Performance may also be affected by risks
specific to certain types of investments, such as foreign securities, derivative
investments, non-investment grade debt securities (high-yield/ high-risk
securities or "junk" bonds) or companies with relatively small market
capitalizations. Smaller or newer companies may suffer more significant losses
as well as realize more substantial growth than larger or more established
issuers. Investments in such companies tend to be more volatile and somewhat
more speculative. Issues associated with investing in foreign securities include
currency risk, political and economic risk, regulatory risk, market risk and
transaction costs. High-yield/high-risk securities are generally more dependent
on the ability of the issuer to meet interest and principal payments (i.e.,
credit risk). They are more vulnerable to real or perceived economic changes,
political changes or other adverse developments specific to the issuer.
Investment Adviser: Janus Capital Corporation
MFS Total Return Series
Investment Objective
Seeks primarily to provide above-average income (compared to a portfolio
invested entirely in equity securities) consistent with the prudent employment
of capital. Its secondary objective is to provide a reasonable opportunity for
growth of capital and income.
Policies
Under normal market conditions, invests at least 40%, but no more than 75%, of
net assets in common stocks and related securities (referred to as equity
securities); bonds, warrants or rights convertible into stock; and depositary
receipts for those securities. Invests at least 25% of net assets in
non-convertible fixed income securities. May vary the percentage of assets
invested in any one type of security (within the limits described above).
Generally, seeks to purchase equity securities that the investment adviser
believes are undervalued in the market relative to their long-term potential
focusing on companies with relatively large market capitalization (i.e., market
capitalizations of $5 billion or more). Fixed income securities include U.S.
government securities, mortgage-backed and asset-backed securities, and
corporate bonds.
Risks
In allocating investments, the series could miss attractive investment
opportunities by underweighting markets where there are significant returns, and
could lose value by overweighting markets where there are significant declines.
The value of securities held by the series may decline due to changing economic,
political or market conditions, or disappointing earnings results. If
anticipated events do not occur or are delayed, or if investor perceptions about
undervalued securities do not improve, the market price of these securities may
not rise or may fall. Fixed income securities are subject to interest rate risk
(the risk that when interest rates rise, the prices of fixed income securities
will generally fall) and credit risk (the risk that the issuer of a fixed income
security will not be able to pay principal and interest when due). Securities
with longer maturities are affected more by interest rate risk. Fixed income
securities traded in the over-the-counter market may be harder to purchase or
sell at a fair price. The inability to purchase or sell these fixed income
securities at a fair price could have a negative impact on the series'
performance.
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Investment Adviser: Massachusetts Financial Services Company
MFS Global Governments Series
Investment Objective
Seeks to provide income and capital appreciation.
Policies
Under normal market conditions, invests at least 65% of total assets in U.S.
government securities and foreign government securities, including emerging
market governments. May also invest in corporate bonds, including lower rated
bonds, commonly known as junk bonds, which are bonds assigned low credit ratings
by credit rating agencies or which are unrated and considered by the investment
adviser to be comparable to lower rated bonds, and mortgage-backed and
asset-backed securities. May invest in derivative securities. The series is a
non-diversified mutual series. This means that the series may invest a
relatively high percentage of its assets in a small number of issuers.
Risks
Investments in foreign securities involve risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. All of the risks of investing in foreign securities are
heightened by investing in emerging markets countries. In allocating
investments, the series could miss attractive investment opportunities by
underweighting markets where there are significant returns, and could lose value
by overweighting markets where there are significant declines. The value of
securities held by the series may decline due to changing economic, political or
market conditions, or disappointing earnings results. Fixed income securities
are subject to interest rate risk (the risk that when interest rates rise, the
prices of fixed income securities will generally fall) and credit risk (the risk
that the issuer of a fixed income security will not be able to pay principal and
interest when due). Securities with longer maturities are affected more by
interest rate risk. Junk bonds are subject to a substantially higher degree of
credit risk than higher rated bonds. Derivatives may be used to hedge against an
opposite position that the fund also holds. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains. Gains or losses from
derivative investments may be substantially greater than the derivative's
original cost. Because the series is non-diversified, investing its assets in a
small number of issuers, the series is more susceptible to any single economic,
political or regulatory event affecting those issuers than is a diversified
fund.
Investment Adviser: Massachusetts Financial Services Company
Oppenheimer Aggressive Growth Fund/VA
Investment Objective
Seeks to achieve long-term capital appreciation by investing in "growth-type"
companies.
Policies
Invests mainly in equity securities, such as common stocks, preferred stocks and
convertible securities, of issuers in the U.S. and foreign countries. The fund
can invest in any country, including countries with developed or emerging
markets, but currently emphasizes investments in developed markets. As a
fundamental policy, the fund will normally invest in at least four countries
(including the United States). The fund emphasizes investments in securities of
"growth-type" companies. The fund may also invest in cyclical industries and in
"special situations" that the fund's investment manager believes present
opportunities for capital growth. "Special situations" are anticipated
acquisitions, mergers or other unusual developments which, in the opinion of the
manager, will increase the value of an issuer's securities, regardless of
general business conditions or market movements.
Risks
The fund's investments in stocks are subject to changes in their value from a
number of factors. They include changes in general stock market movements, or
the change in value of particular stocks because of an event affecting the
issuer. The fund expects to have substantial amounts of its investments in
foreign securities.
67
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Therefore, it will be subject to the risks that economic, political or other
events can have on the values of securities of issuers in particular foreign
countries. Changes in interest rates can also affect stock prices. Investing in
securities with high growth potential, which are often newer companies having a
market capitalization of $200 million or less, involves substantially greater
risks of loss and price fluctuations than larger cap issuers. Small-cap stock
investments also pose certain risks because their stocks may be less liquid than
those of larger issuers.
Investment Adviser: Oppenheimer Funds, Inc.
Oppenheimer Global Securities Fund/VA
Investment Objective
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.
Policies
Invests mainly in equity securities, such as common stocks, preferred stocks and
convertible securities, of issuers in the U.S. and foreign countries. The fund
can invest in any country, including countries with developed or emerging
markets, but currently emphasizes investments in developed markets. As a
fundamental policy, the fund will normally invest in at least four countries
(including the United States). In selecting securities for the fund, the fund's
portfolio manager looks primarily for foreign companies with high growth
potential using fundamental analysis of a company's financial statements and
management structure, and analysis of the company's operations and product
development, as well as the industry of which the issuer is part. The fund's
diversification strategies, both with respect to different issuers, different
themes and different countries, is intended to help reduce volatility of the
fund's share price while seeking growth.
Risks
Stock prices will fluctuate. Foreign securities markets may be less liquid and
more volatile than the markets in the U.S. Risks of foreign securities may
include foreign withholding taxation, changes in currency, less publicly
available information, and differences between domestic and foreign legal,
auditing brokerage and economic standards. The fund can use derivatives to seek
increased returns or to try to hedge investment risks. If the issuer of the
derivative does not pay the amount due, the fund can lose money on the
investment. Using derivatives can cause the fund to lose money on its investment
and/or increase the volatility of its share prices.
Investment Adviser: Oppenheimer Funds, Inc.
Oppenheimer Main Street Growth & Income Fund/VA
Investment Objective
Seeks a high total return (which includes growth in the value of its shares as
well as current income) from equity and debt securities.
Policies
Invests in equity securities, such as common stocks, preferred stocks and
convertible securities and in debt securities, of issuers in the U.S. and
foreign countries. Although the fund can invest in securities of issues of all
market capitalization ranges, it may focus from time to time on small to medium
capitalization issuers (having a market capitalization of less than $5 billion).
The fund can also use hedging instruments and certain derivative investments to
try to manage investment risks.
Risks
The fund's investments in stocks and bonds are subject to changes in their value
from a number of factors. They include changes in general stock and bond market
movements, or the change in value of particular stocks or bonds because of an
event affecting the issuer. High-yield, lower-grade bonds are subject to greater
credit risks than investment-grade securities. The fund can have significant
amounts of its assets invested in foreign securities.
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<PAGE>
Therefore, it will be subject to the risks of economic, political or other
events that can affect the values of securities of issuers in particular foreign
countries. Changes in interest rates can also affect stock and bond prices.
Investment Adviser: Oppenheimer Funds, Inc.
Oppenheimer Strategic Bond Fund/VA
Investment Objective
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.
Policies
Invests mainly in debt securities of issuers in three market sectors: foreign
governments and companies, U.S. government securities and lower-rated high-yield
securities of U.S. companies. Under normal market conditions, the fund invests
in each of those three market sectors. However, the fund is not obligated to do
so, and the amount of its assets in each of the three sectors will vary over
time. The fund can invest up to 100% of its assets in any one sector at any
time, if the manager believes that in doing so the fund can achieve its
objective without undue risk. The fund's foreign investments can include debt
securities of issuers in developed markets as well as emerging markets, which
have special risks. The fund can also use hedging instruments and certain
derivative investments to try to enhance income or try to manage investment
risks.
Risks
The fund's investments in debt securities are subject to changes in their value
from a number of factors. They include changes in general bond market movements
in the U.S. and abroad, or the change in value of particular bonds because of an
event affecting the issuer. The fund can focus significant amounts of its
investments in foreign debt securities. Therefore, it will be subject to the
risks that economic, political or other events can have on the values of
securities of issuers in particular foreign countries. These risks are
heightened in the case of emerging market debt securities. Changes in interest
rates can also affect securities prices.
Investment Adviser: Oppenheimer Funds, Inc.
Portfolio Partners MFS Emerging Equities Portfolio
Investment Objective
Seeks long-term growth of capital.
Policies
Invests, under normal market conditions, at least 80% of total assets in common
stocks and related securities, such as preferred stock, convertible securities
and depositary receipts, of emerging growth companies. Emerging growth companies
are companies believed to be either early in their life cycle but which have the
potential to become major enterprises, or major enterprises whose rates of
earnings growth are expected to accelerate. Investments may include securities
traded in the over-the-counter markets.
May also invest in foreign securities and may have exposure to foreign
currencies through its investment in these securities, its direct holdings of
foreign currencies or through its use of foreign currency exchange contracts for
the purchase or sale of a fixed quantity of foreign currency at a future date.
Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security.
o Emerging Growth Risk: The portfolio's performance is particularly sensitive to
changes in the value of emerging growth companies. Investments in emerging
growth companies may be subject to more abrupt or erratic market movements and
may involve greater risks than investments in other companies.
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<PAGE>
o Over the Counter Risk: Equity securities that are traded over the counter may
be more volatile than exchange listed securities, and the portfolio may
experience difficulty in purchasing or selling these securities at a fair
price.
o Foreign Markets Risk: Investment in foreign securities involves risks related
to political, social and economic developments abroad. These risks result from
differences between the regulations to which U.S. and foreign issuers and
Markets are subject.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline if the U.S. dollar strengthens against these
currencies or if foreign governments intervene in the currency markets.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Massachusetts Financial Services Company
Portfolio Partners MFS Research Growth Portfolio
Investment Objective
Seeks long-term growth of capital and future income.
Policies
Invests primarily (at least 65% of total assets) in common stocks and related
securities, such as preferred stock, convertible securities and depositary
receipts. Focuses on companies believed to have favorable prospects for
long-term growth, attractive valuations based on current and expected earnings
or cash flow, dominant or growing market share and superior management. May
invest in companies of any size. Investments may also include securities traded
on securities exchanges or in the over-the-counter markets.
May invest in foreign securities and may have exposure to foreign currencies
through its investment in these securities, its direct holdings of foreign
currencies or through its use of foreign currency exchange contracts for the
purchase or sale of a fixed quantity of foreign currency at a future date.
Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security. In
addition, securities of growth companies may be more volatile because such
companies usually invest a high portion of their earnings in their businesses
and may lack the dividends of value companies, which can cushion the security
prices in a declining market.
o Over-the-Counter Risk: Equity securities that are traded over-the-counter may
be more volatile than exchange-listed stocks, and the portfolio may experience
difficulty in purchasing or selling these securities at a fair price.
o Foreign Markets Risk: Investment in foreign securities involves additional
risks relating to political, social and economic developments abroad. Other
risks from these investments result from the differences between the
regulations to which U.S. and foreign issuers and markets are subject.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline if the U.S. dollar strengthens against these
currencies or if foreign governments intervene in the currency markets.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Massachusetts Financial Services Company
Portfolio Partners MFS Value Equity Portfolio
Investment Objectives
Seeks capital appreciation.
Policies
Invests primarily (at least 65% of total assets) in common stocks and related
securities, such as preferred stock,
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convertible securities and depositary receipts. Focuses on companies believed to
have favorable growth prospects and attractive valuations based on current and
expected earnings or cash flow. Investments may include securities traded in the
over-the-counter markets.
May invest in foreign securities (including emerging market securities) and may
have exposure to foreign currencies through its investment in these securities,
its direct holdings of foreign currencies or through its use of foreign currency
exchange contracts for the purchase or sale of a fixed quantity of a foreign
currency at a future date.
Also may invest in debt securities issued by both U.S. and foreign companies,
including non-investment grade debt securities.
Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security. In
addition, securities of growth companies may be more volatile because such
companies usually invest a high portion of their earnings in their businesses
and may lack the dividends of value companies, which can cushion the security
prices in a declining market.
o Over the Counter Risk: Equity securities that are traded over the counter may
be more volatile than exchange listed securities, and the portfolio may
experience difficulty in purchasing or selling these securities at a fair
price.
o Foreign Markets Risk: The portfolio's investment in foreign securities
involves additional risks relating to political, social and economic
developments abroad. Other risks from these investments result from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject.
o Emerging Markets Risk: Emerging markets are generally defined as countries in
the initial stages of their industrialization cycles with low per capita
income. Investments in emerging markets securities involve all of the risks of
investment in foreign securities, and also have additional risks.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline in the event that the U.S. dollar
strengthens against these currencies, or in the event that foreign governments
intervene in the currency markets.
o Interest Rate Risk: The portfolio's investment in debt securities involves
risks relating to interest rate movement. If interest rates go up, the value
of debt securities held by the portfolio will decline.
o Credit Risk: The portfolio's investment in non-investment grade debt
securities involves credit risk because issuers of non-investment grade
securities are more likely to have difficulty making timely payments of
interest or principal.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Massachusetts Financial Services Company
Portfolio Partners Scudder International Growth Portfolio
Investment Objective
Seeks long-term growth of capital.
Policies
Invests primarily (at least 65% of total assets) in the equity securities of
foreign companies believed to have high growth potential. Normally invests in
securities of at least three different countries other than the U.S. Focuses on
issuers located primarily in Europe, Latin America, and the emerging markets of
the Pacific Basin and Japan, but also may invest in select issues from elsewhere
outside the U.S. Will invest in securities in both developed and developing
markets. Seeks to invest in those companies believed to be best able to
capitalize on the growth and changes taking place within and between various
regions of the world. Typically, these are companies with leading or rapidly
developing business franchises, strong financial positions, and high quality
management capable of defining and implementing strategies to take advantage of
local, regional or global markets.
Also may invest in debt securities issued by both U.S. and foreign companies,
including non-investment grade debt securities.
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Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security. In
addition, securities of growth companies may be more volatile because such
companies usually invest a high portion of their earnings in their businesses
and may lack the dividends of value companies, which can cushion the security
prices in a declining market.
o Foreign Markets Risk: The portfolio's investment in foreign securities
involves additional risks relating to political, social and economic
developments abroad. Other risks from these investments result from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline in the event that the U.S. dollar
strengthens against these currencies, or in the event that foreign governments
intervene in the currency markets.
o Emerging Growth Risk: The portfolio's performance is particularly sensitive to
changes in the value of emerging growth companies. Investments in emerging
growth companies may be subject to more abrupt or erratic market movements and
may involve greater risks than investments in other companies.
o Interest Rate Risk: The portfolio's investment in debt securities involves
risks relating to interest rate movement. If interest rates go up, the value
of debt securities held by the portfolio will decline.
o Credit Risk: The portfolio's investment in non-investment grade debt
securities involves credit risk because issuers of non-investment grade
securities are more likely to have difficulty making timely payments of
interest or principal.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser:
Scudder Kemper Investments, Inc.
Portfolio Partners T. Rowe Price Growth Equity Portfolio
Investment Objective
Seeks long-term capital growth, and, secondarily, increasing dividend income.
Policies
Invests primarily (at least 65% of total assets) in the common stocks of a
diversified group of growth companies. The subadviser seeks companies with a
lucrative niche in the economy that it believes will give them the ability to
sustain earnings momentum even during times of slow economic growth. The
subadviser believes that when a company's earnings grow faster than both
inflation and the overall economy, the market will eventually reward it with a
higher stock price.
May invest in foreign securities and may have exposure to foreign currencies
through its investment in these securities, its direct holdings of foreign
currencies or through its use of foreign currency exchange contracts for the
purchase or sale of a fixed quantity of foreign currency at a future date.
Risks
Investment in the portfolio is subject to the following risks:
o Market and Company Risk: The value of the securities in which the portfolio
invests may decline due to changing economic, political or market conditions,
or due to the financial condition of the company which issued the security. In
addition, securities of growth companies may be more volatile because such
companies usually invest a high portion of their earnings in their businesses
and may lack the dividends of value companies, which can cushion the security
prices in a declining market.
o Foreign Markets Risk: The portfolio's investment in foreign securities
involves additional risks relating to political, social and economic
developments abroad. Other risks from these investments result from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject.
o Currency Risk: The portfolio's exposure to foreign currencies may cause the
value of the portfolio to decline in the event that the U.S. dollar
strengthens against these currencies, or in the event that foreign governments
intervene in the currency markets.
Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser: T.
Rowe Price Associates, Inc.
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Appendix IV
Condensed Financial Information
- --------------------------------------------------------------------------------
(Selected data for accumulation units outstanding throughout each period)
================================================================================
The condensed financial information presented below for each of the periods in
the three-year period ended December 31, 1998 (as applicable), is derived from
the financial statements of the separate account, which have been audited by
KPMG LLP, independent auditors. The financial statements and the independent
auditors' report thereon for the year ended December 31, 1998 are included in
the Statement of Additional Information.
Table I -- For Contracts with Total Separate Account Charges of 1.40%
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
AETNA ASCENT VP
Value at beginning of period $14.983 $12.674 $11.003(1)
Value at end of period $15.409 $14.983 $12.674
Number of accumulation units outstanding at end of period 83,798 72,383 91,927
AETNA BALANCED VP, INC.
Value at beginning of period $14.228 $11.781 $10.582(2)
Value at end of period $16.405 $14.228 $11.781
Number of accumulation units outstanding at end of period 369,652 314,447 59,639
AETNA BOND VP
Value at beginning of period $11.201 $10.489 $10.260(3)
Value at end of period $11.943 $11.201 $10.489
Number of accumulation units outstanding at end of period 500,098 269,675 95,644
AETNA CROSSROADS VP
Value at beginning of period $14.054 $12.123 $10.932(1)
Value at end of period $14.676 $14.054 $12.123
Number of accumulation units outstanding at end of period 40,712 29,532 6,330
AETNA GROWTH VP
Value at beginning of period $13.158 $10.667(4)
Value at end of period $17.862 $13.158
Number of accumulation units outstanding at end of period 284,771 68,840
AETNA GROWTH AND INCOME VP
Value at beginning of period $16.354 $12.769 $10.101(3)
Value at end of period $18.461 $16.354 $12.769
Number of accumulation units outstanding at end of period 1,217,448 946,796 299,882
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $14.414 $10.919 $10.000(5)
Value at end of period $18.704 $14.414 $10.919
Number of accumulation units outstanding at end of period 654,767 271,628 2,960
AETNA INTERNATIONAL VP
Value at beginning of period $10.149(6)
Value at end of period $9.754
Number of accumulation units outstanding at end of period 1,816
AETNA LEGACY VP
Value at beginning of period $13.112 $11.613 $10.601(7)
Value at end of period $13.825 $13.112 $11.613
Number of accumulation units outstanding at end of period 95,815 60,533 8,642
AETNA MONEY MARKET VP
Value at beginning of period $10.900 $10.481 $10.151(2)
Value at end of period $11.335 $10.900 $10.481
Number of accumulation units outstanding at end of period 2,041,170 1,409,840 799,456
AETNA REAL ESTATE SECURITIES VP
Value at beginning of period $10.115(6)
Value at end of period $8.863
Number of accumulation units outstanding at end of period 2,217
AETNA SMALL COMPANY VP
Value at beginning of period $13.638 $11.313(4)
Value at end of period $13.595 $13.638
Number of accumulation units outstanding at end of period 225,982 188,818
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $13.246 $10.856(4)
Value at end of period $15.985 $13.246
Number of accumulation units outstanding at end of period 311,397 67,303
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $9.976 $9.824(8)
Value at end of period $11.437 $9.976
Number of accumulation units outstanding at end of period 12,288 3,258
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $14.974 $11.855 $10.301(3)
Value at end of period $16.482 $14.974 $11.855
Number of accumulation units outstanding at end of period 2,792,889 2,292,971 1,000,050
</TABLE>
73
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $13.320 $10.940 $9.005(3)
Value at end of period $18.320 $13.320 $10.940
Number of accumulation units outstanding at end of period 1,869,306 1,399,424 870,922
FIDELITY VIP HIGH INCOME PORTFOLIO
Value at beginning of period $13.238 $11.410 $10.493(9)
Value at end of period $12.488 $13.238 $11.410
Number of accumulation units outstanding at end of period 1,196,922 862,284 239,917
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $12.590 $11.447 $10.304(9)
Value at end of period $13.997 $12.590 $11.447
Number of accumulation units outstanding at end of period 261,377 237,376 115,487
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Value at beginning of period $13.888 $11.674 $10.539(10)
Value at end of period $15.754 $13.888 $11.674
Number of accumulation units outstanding at end of period 408,019 272,789 104,229
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $14.802 $12.093 $10.273(9)
Value at end of period $18.970 $14.802 $12.093
Number of accumulation units outstanding at end of period 1,853,911 1,682,029 540,936
FIDELITY VIP II INDEX 500 PORTFOLIO
Value at beginning of period $16.646 $12.722 $10.828(9)
Value at end of period $21.063 $16.646 $12.722
Number of accumulation units outstanding at end of period 1,953,506 1,375,721 384,282
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $12.637 $11.376 $10.988(9)
Value at end of period $16.729 $12.637 $11.376
Number of accumulation units outstanding at end of period 601,047 518,686 242,113
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $14.492 $12.038 $10.836(9)
Value at end of period $19.189 $14.492 $12.038
Number of accumulation units outstanding at end of period 927,779 533,138 165,079
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $12.272 $11.136 $10.173(10)
Value at end of period $13.202 $12.272 $11.136
Number of accumulation units outstanding at end of period 267,031 163,048 35,326
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $14.731 $12.171 $11.002(9)
Value at end of period $19.704 $14.731 $12.171
Number of accumulation units outstanding at end of period 807,576 684,113 255,831
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $16.131 $13.393 $10.536(3)
Value at end of period $20.506 $16.131 $13.393
Number of accumulation units outstanding at end of period 3,185,557 2,772,831 1,030,570
MFS TOTAL RETURN SERIES
Value at beginning of period $13.030 $10.894 $10.000(11)
Value at end of period $14.432 $13.030 $10.894
Number of accumulation units outstanding at end of period 943,853 523,291 108,482
MFS GLOBAL GOVERNMENT SERIES
Value at beginning of period $10.207 $10.471 $10.000(11)
Value at end of period $10.860 $10.207 $10.471
Number of accumulation units outstanding at end of period 69,957 52,302 20,479
OPPENHEIMER AGGRESSIVE GROWTH FUND/VA
Value at beginning of period $12.204 $10.516(4)
Value at end of period $13.520 $12.204
Number of accumulation units outstanding at end of period 179,861 65,695
OPPENHEIMER GLOBAL SECURITIES FUND/VA
Value at beginning of period $11.539 $10.488(4)
Value at end of period $12.982 $11.539
Number of accumulation units outstanding at end of period 134,449 87,559
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA
Value at beginning of period $12.785 $10.497(4)
Value at end of period $13.199 $12.785
Number of accumulation units outstanding at end of period 693,695 354,269
OPPENHEIMER STRATEGIC BOND FUND/VA
Value at beginning of period $10.764 $10.187(4)
Value at end of period $10.921 $10.764
Number of accumulation units outstanding at end of period 328,546 128,720
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $10.554 $10.689(12)
Value at end of period $13.494 $10.554
Number of accumulation units outstanding at end of period 2,557,155 2,394,861
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $8.786 $8.960(12)
Value at end of period $10.656 $8.786
Number of accumulation units outstanding at end of period 1,761,234 1,615,395
</TABLE>
74
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $10.152 $10.009(12)
Value at end of period $12.686 $10.152
Number of accumulation units outstanding at end of period 358,518 216,273
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $9.912 $9.791(12)
Value at end of period $11.640 $9.912
Number of accumulation units outstanding at end of period 79,756 2,569
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH EQUITY
PORTFOLIO
Value at beginning of period $13.834 $13.560(12)
Value at end of period $17.406 $13.834
Number of accumulation units outstanding at end of period 1,616,748 1,572,718
</TABLE>
- -----------------
(1) Funds were first received in this option during July 1996.
(2) Funds were first received in this option during February 1996.
(3) Funds were first received in this option during January 1996.
(4) Funds were first received in this option during May 1997.
(5) The initial accumulation unit value was established at $10.000 during
September 1996 when the portfolio became available under the option.
(6) Funds were first received in this option during May 1998.
(7) Funds were first received in this option during May 1996.
(8) Funds were first received in this option during December 1997.
(9) Funds were first received in this option during March 1996.
(10) Funds were first received in this option during April 1996.
(11) The initial accumulation unit value was established at $10.000 during May
1996 when the fund became available under the option.
(12) Funds were first received in this option during November 1997.
75
<PAGE>
Condensed Financial Information
- --------------------------------------------------------------------------------
(Selected data for accumulation units outstanding throughout each period)
================================================================================
The condensed financial information presented below for the period ended
December 31, 1998, is derived from the financial statements of the separate
account, which have been audited by KPMG LLP, independent auditors. The
financial statements and the independent auditors' report thereon for the year
ended December 31, 1998 are included in the Statement of Additional Information.
Table II -- For Contracts with Total Separate Account Charges of 1.25%
<TABLE>
<CAPTION>
1998
----
<S> <C>
AETNA ASCENT VP
Value at beginning of period $10.694(1)
Value at end of period $10.059
Number of accumulation units outstanding at end of period 17,615
AETNA BALANCED VP, INC.
Value at beginning of period $10.708(1)
Value at end of period $11.312
Number of accumulation units outstanding at end of period 112,689
AETNA BOND VP
Value at beginning of period $10.118(1)
Value at end of period $10.606
Number of accumulation units outstanding at end of period 211,071
AETNA CROSSROADS VP
Value at beginning of period $10.504(1)
Value at end of period $10.270
Number of accumulation units outstanding at end of period 18,307
AETNA GROWTH VP
Value at beginning of period $11.455(1)
Value at end of period $12.977
Number of accumulation units outstanding at end of period 75,506
AETNA GROWTH AND INCOME VP
Value at beginning of period $11.063(1)
Value at end of period $11.063
Number of accumulation units outstanding at end of period 794,335
AETNA INDEX PLUS LARGE CAP VP
Value at beginning of period $11.157(1)
Value at end of period $12.535
Number of accumulation units outstanding at end of period 215,324
AETNA INTERNATIONAL VP
Value at beginning of period $9.851(2)
Value at end of period $9.764
Number of accumulation units outstanding at end of period 2,693
AETNA LEGACY VP
Value at beginning of period $10.404(1)
Value at end of period $10.380
Number of accumulation units outstanding at end of period 29,301
AETNA MONEY MARKET VP
Value at beginning of period $10.097(1)
Value at end of period $10.371
Number of accumulation units outstanding at end of period 319,753
AETNA REAL ESTATE SECURITIES VP
Value at beginning of period $9.918(1)
Value at end of period $8.872
Number of accumulation units outstanding at end of period 2,257
AETNA SMALL COMPANY VP
Value at beginning of period $11.126(1)
Value at end of period $9.724
Number of accumulation units outstanding at end of period 71,465
AETNA VALUE OPPORTUNITY VP
Value at beginning of period $11.097(1)
Value at end of period $11.644
Number of accumulation units outstanding at end of period 110,097
CALVERT SOCIAL BALANCED PORTFOLIO
Value at beginning of period $10.596(1)
Value at end of period $11.208
Number of accumulation units outstanding at end of period 11,121
FIDELITY VIP EQUITY-INCOME PORTFOLIO
Value at beginning of period $10.957(1)
Value at end of period $10.806
Number of accumulation units outstanding at end of period 476,634
FIDELITY VIP GROWTH PORTFOLIO
Value at beginning of period $11.094(1)
Value at end of period $13.253
Number of accumulation units outstanding at end of period 307,937
</TABLE>
76
<PAGE>
Condensed Financial Information (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
----
<S> <C>
FIDELITY VIP HIGH INCOME PORTFOLIO
Value at beginning of period $10.292(1)
Value at end of period $9.222
Number of accumulation units outstanding at end of period 270,627
FIDELITY VIP OVERSEAS PORTFOLIO
Value at beginning of period $11.082(1)
Value at end of period $10.487
Number of accumulation units outstanding at end of period 45,606
FIDELITY VIP II ASSET MANAGER PORTFOLIO
Value at beginning of period $10.607(1)
Value at end of period $11.165
Number of accumulation units outstanding at end of period 152,533
FIDELITY VIP II CONTRAFUND PORTFOLIO
Value at beginning of period $11.136(1)
Value at end of period $12.537
Number of accumulation units outstanding at end of period 353,548
FIDELITY VIP II INDEX 500 PORTFOLIO
Value at beginning of period $11.159(1)
Value at end of period $12.259
Number of accumulation units outstanding at end of period 409,685
JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO
Value at beginning of period $11.125(1)
Value at end of period $13.003
Number of accumulation units outstanding at end of period 47,713
JANUS ASPEN BALANCED PORTFOLIO
Value at beginning of period $10.904(1)
Value at end of period $12.689
Number of accumulation units outstanding at end of period 230,693
JANUS ASPEN FLEXIBLE INCOME PORTFOLIO
Value at beginning of period $10.191(1)
Value at end of period $10.599
Number of accumulation units outstanding at end of period 106,626
JANUS ASPEN GROWTH PORTFOLIO
Value at beginning of period $11.091(1)
Value at end of period $12.784
Number of accumulation units outstanding at end of period 178,276
JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO
Value at beginning of period $11.375(1)
Value at end of period $11.960
Number of accumulation units outstanding at end of period 420,428
MFS TOTAL RETURN SERIES
Value at beginning of period $10.639(1)
Value at end of period $10.942
Number of accumulation units outstanding at end of period 253,311
MFS GLOBAL GOVERNMENT SERIES
Value at beginning of period $10.032(2)
Value at end of period $10.514
Number of accumulation units outstanding at end of period 591
OPPENHEIMER AGGRESSIVE GROWTH FUND/VA
Value at beginning of period $11.304(1)
Value at end of period $10.886
Number of accumulation units outstanding at end of period 88,310
OPPENHEIMER GLOBAL SECURITIES FUND/VA
Value at beginning of period $10.941(1)
Value at end of period $10.949
Number of accumulation units outstanding at end of period 29,176
OPPENHEIMER MAIN STREET GROWTH & INCOME FUND/VA
Value at beginning of period $11.377(1)
Value at end of period $10.111
Number of accumulation units outstanding at end of period 232,433
OPPENHEIMER STRATEGIC BOND FUND/VA
Value at beginning of period $10.118(1)
Value at end of period $10.037
Number of accumulation units outstanding at end of period 85,477
PORTFOLIO PARTNERS MFS EMERGING EQUITIES
PORTFOLIO
Value at beginning of period $11.104(1)
Value at end of period $11.797
Number of accumulation units outstanding at end of period 205,549
PORTFOLIO PARTNERS MFS RESEARCH GROWTH
PORTFOLIO
Value at beginning of period $11.178(1)
Value at end of period $11.634
Number of accumulation units outstanding at end of period 131,761
</TABLE>
77
<PAGE>
Condensed Financial Information (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
----
<S> <C>
PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO
Value at beginning of period $11.503(1)
Value at end of period $12.005
Number of accumulation units outstanding at end of period 108,102
PORTFOLIO PARTNERS SCUDDER INTERNATIONAL
GROWTH PORTFOLIO
Value at beginning of period $11.145(1)
Value at end of period $10.995
Number of accumulation units outstanding at end of period 30,516
PORTFOLIO PARTNERS T. ROWE PRICE GROWTH EQUITY
PORTFOLIO
Value at beginning of period $11.120(1)
Value at end of period $12.103
Number of accumulation units outstanding at end of period 120,157
</TABLE>
- -----------------
(1) Funds were first received in this option during May 1998.
(2) Funds were first received in this option during June 1998.
78
<PAGE>
- -------------------------------------------------------------------------------
VARIABLE ANNUITY ACCOUNT I
OF
AETNA INSURANCE COMPANY OF AMERICA
- -------------------------------------------------------------------------------
Statement of Additional Information dated May 3, 1999
AETNA MARATHON PLUS
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Variable Annuity Account I (the
"separate account") dated May 3, 1999.
A free prospectus is available upon request from the local Aetna Insurance
Company of America office or by writing to or calling:
Aetna Retirement Services
Annuity Services
151 Farmington Avenue
Hartford, Connecticut 06156-1277
1-800-531-4547
Read the prospectus before you invest. Unless otherwise indicated, terms used in
this Statement of Additional Information shall have the same meaning as in the
prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information and History.......................................... 2
Variable Annuity Account I............................................... 2
Offering and Purchase of Contract........................................ 3
Performance Data......................................................... 3
General............................................................. 3
Average Annual Total Return Quotations.............................. 3
Income Phase Payments.................................................... 6
Sales Material and Advertising........................................... 7
Independent Auditors..................................................... 7
Financial Statements of the Separate Account............................. S-1
Financial Statements of Aetna Insurance Company of America............... F-1
</TABLE>
<PAGE>
GENERAL INFORMATION AND HISTORY
Aetna Insurance Company of America (the Company, we, us) issues the contracts
described in the prospectus and is responsible for providing each contract's
insurance and annuity benefits. We are a stock life insurance company which was
organized under the insurance laws of the State of Connecticut in 1990 and an
indirect wholly-owned subsidiary of Aetna Inc. Our Home Office is located at
151 Farmington Avenue, Hartford, Connecticut 06156.
In addition to serving as the principal underwriter and the depositor for the
separate account, the Company is a registered investment adviser under the
Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934.
Other than the mortality and expense risk charge and administrative expense
charge described in the prospectus, all expenses incurred in the operations of
the separate account are borne by the Company. See "Fees" in the prospectus. We
receive reimbursement for certain administrative costs from some advisers of the
funds used as funding options under the contract. These fees generally range up
to 0.425%. The assets of the separate account are held by the Company. The
separate account has no custodian. However, the funds in whose shares the assets
of the separate account are invested each have custodians, as discussed in their
respective prospectuses.
From this point forward, the term "contract(s)" refers only to those offered
through the prospectus.
VARIABLE ANNUITY ACCOUNT I
Variable Annuity Account I is a separate account established by the Company for
the purpose of funding variable annuity contracts issued by the Company. The
separate account is registered with the Securities and Exchange Commission as a
unit investment trust under the Investment Company Act of 1940, as amended.
Payments to accounts under the contract may be allocated to one or more of the
subaccounts. Each subaccount invests in the shares of only one of the funds
listed below. We may make additions to, deletions from or substitutions of
available investment options as permitted by law and subject to the conditions
of the contract. The availability of the funds is subject to applicable
regulatory authorization. Not all funds are available in all jurisdictions or
under all contracts. The funds currently available under the contract are as
follows:
<TABLE>
<S> <C>
Aetna Ascent VP Fidelity Variable Insurance Products II (VIP II)
Aetna Balanced VP, Inc. Contrafund Portfolio
Aetna Income Shares d/b/a Aetna Bond VP Fidelity Variable Insurance Products II (VIP II)
Aetna Crossroads VP Index 500 Portfolio
Aetna Growth VP Janus Aspen Aggressive Growth Portfolio
Aetna Variable Fund d/b/a Aetna Growth and Income VP Janus Aspen Balanced Portfolio
Aetna Index Plus Large Cap VP Janus Aspen Flexible Income Portfolio
Aetna International VP Janus Aspen Growth Portfolio
Aetna Legacy VP Janus Aspen Worldwide Growth Portfolio
Aetna Variable Encore Fund d/b/a Aetna Money Market VP MFS Total Return Series
Aetna Real Estate Securities VP MFS Global Governments Series
Aetna Small Company VP Oppenheimer Aggressive Growth Fund/VA
Aetna Value Opportunity VP Oppenheimer Global Securities Fund/VA
Calvert Social Balanced Portfolio Oppenheimer Main Street Growth and Income Fund/VA
Fidelity Variable Insurance Products (VIP) Equity-Income Oppenheimer Strategic Bond Fund/VA
Portfolio Portfolio Partners MFS Emerging Equities Portfolio
Fidelity Variable Insurance Products (VIP) Growth Portfolio Portfolio Partners MFS Research Growth Portfolio
Fidelity Variable Insurance Products (VIP) High Income Portfolio Portfolio Partners MFS Value Equity Portfolio
Fidelity Variable Insurance Products (VIP) Overseas Portfolio Portfolio Partners Scudder International Growth Portfolio
Fidelity Variable Insurance Products II (VIP II) Asset Portfolio Partners T. Rowe Price Growth Equity Portfolio
Manager Portfolio
</TABLE>
2
<PAGE>
Complete descriptions of each of the funds, including their investment
objectives, policies, risks and fees and expenses, are contained in the
prospectuses and statements of additional information for each of the funds.
OFFERING AND PURCHASE OF CONTRACT
The Company is both the depositor and the principal underwriter for the
securities sold by the prospectus. We offer the contracts through life insurance
agents licensed to sell variable annuities who are registered representatives of
the Company or of other registered broker-dealers who have sales agreements with
the Company. The offering of the contracts is continuous. A description of the
manner in which the contracts are purchased can be found in the prospectus under
the sections titled "Purchase and Rights" and "Your Account Value."
PERFORMANCE DATA
GENERAL
From time to time, we may advertise different types of historical performance
for the subaccounts of the separate account available under the contracts. We
may advertise the "standardized average annual total returns," calculated in a
manner prescribed by the Securities and Exchange Commission (the "standardized
return"), as well as "non-standardized returns," both of which are described
below.
The standardized and non-standardized total return figures are computed
according to a formula in which a hypothetical initial payment of $1,000 is
applied to the various subaccounts under the contract, and then related to the
ending redeemable values over one, five and ten year periods (or fractional
periods thereof). The redeemable value is then divided by the initial investment
and this quotient is taken to the Nth root (N represents the number of years in
the period) and 1 is subtracted from the result which is then expressed as a
percentage, carried to at least the nearest hundredth of a percent. The
standardized figures use the actual returns of the fund since the date
contributions were first received in the fund under the separate account,
adjusted to reflect the deduction of the maximum recurring charges under the
contracts during each period (e.g., 1.25% mortality and expense risk charge, $30
annual maintenance fee, 0.15% administrative charge, and early withdrawal charge
of 7% of purchase payments grading down to 0% after seven years). These charges
will be deducted on a pro rata basis in the case of fractional periods. The
annual maintenance fee is converted to a percentage of assets based on the
average account size under the contracts described in the prospectus. The total
return figures shown below may be different from the actual historical total
returns under your contract because for periods prior to 1994, the subaccount's
investment performance was based on the performance of the underlying fund plus
any cash held by the subaccount.
The non-standardized figures will be calculated in a similar manner, except that
they will not reflect the deduction of any applicable early withdrawal charge,
and in some advertisements will also exclude the effect of the annual
maintenance fee. The deduction of the early withdrawal charge and the annual
maintenance fee would decrease the level of performance shown if reflected in
these calculations. The non-standardized figures may also include monthly,
quarterly, year-to-date and three-year periods, and may include returns
calculated from the fund's inception date and/or the date contributions were
first received in the fund under the separate account. The non-standardized
returns shown in the tables below reflect the deduction of the maximum recurring
charges under the contract except the early withdrawal charge. The annual
maintenance fee has been deducted for the purposes of calculating the returns.
Investment results of the funds will fluctuate over time, and any presentation
of the subaccounts' total return quotations for any prior period should not be
considered as a representation of how the subaccounts will perform in any future
period. Additionally, the account value upon redemption may be more or less than
your original cost.
AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized
The tables below reflect the average annual standardized and non-standardized
total return quotation figures for the periods ended December 31, 1998 for the
subaccounts under the contracts. The standardized returns assume the maximum
charges under the contract as described under "General" above. The
non-standardized returns assume the same charges but do not include the early
withdrawal charges.
For the subaccounts funded by the Portfolio Partners portfolios, two sets of
performance returns are shown for each subaccount: one showing performance based
solely on the performance of the Portfolio Partners portfolio from November 28,
1997, the date the Portfolio commenced operations; and one quotation based on
(a) performance through November 26, 1997 of the fund it replaced under many
contracts and; (b) after November 26, 1997, based on the performance of the
Portfolio Partners portfolio.
For those subaccounts where results are not available for the full calendar
period indicated, performance for such partial periods is shown in the column
labeled "Since Inception." For standardized performance, the "Since Inception"
column shows the average annual return since the date contributions were first
received in the fund under the separate account. For non-standardized
performance, the "Since Inception" column shows average annual total return
since the fund's inception date.
3
<PAGE>
<TABLE>
<CAPTION>
Date
Contributions
STANDARDIZED First Received
Under the
Separate Account
- ----------------------------------------------------------------------------------------------------------------------------------
Since
SUBACCOUNT 1 Year 5 Year 10 Year Inception*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aetna Ascent VP (3.46%) 12.84% 07/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 9.09% 15.31% 02/29/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP 0.36% 3.42% 01/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP (1.86%) 11.13% 07/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 29.69% 32.02% 05/30/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP 6.66% 19.17% 01/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 23.65% 29.19% 10/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna International VP (10.64%) 05/05/1998
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP (0.84%) 8.33% 05/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1) (2.31%) 2.15% 02/29/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP (18.53%) 05/05/1998
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP (6.64%) 8.58% 05/30/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 14.51% 23.38% 05/30/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio 8.43% 9.13% 11/28/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio 3.82% 14.20% 01/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio 31.48% 22.74% 01/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio (12.03%) 4.76% 03/29/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio 4.93% 8.99% 03/29/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 7.22% 14.06% 04/30/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 22.04% 22.57% 03/29/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio 20.40% 25.21% 03/29/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 26.29% 12.47% 03/29/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 26.32% 21.53% 03/29/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 1.31% 8.16% 04/30/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 27.68% 21.23% 03/29/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 20.99% 23.33% 01/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
MFS Total Return Series 4.52% 13.50% 05/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
MFS Global Governments Series 0.12% 1.15% 05/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Aggressive Growth Fund/VA 4.55% 9.42% 05/30/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund/VA 6.28% 9.51% 05/30/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Main Street Growth & Income Fund/VA (3.06%) 9.93% 05/30/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund/VA (4.85%) 0.36% 05/30/1997
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio 21.73% 18.30% 11/28/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners
MFS Emerging Equities(2) 21.73% 11.09% 01/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio 15.11% 11.62% 11/28/1997
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/Portfolio
Partners MFS Research Growth(2) 15.11% 1.64% 03/30/1996
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio 18.82% 18.76% 11/28/1997
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth Portfolio 11.23% 11.58% 11/28/1997
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth
Equity Portfolio 19.68% 20.22% 11/28/1997
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners T. Rowe
Price Growth Equity(2) 19.68% 19.33% 01/31/1996
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
* Reflects performance from the date contributions were first received in the
fund under the separate account.
4
<PAGE>
(1) The current yield for the subaccount for the seven-day period ended
December 31, 1998 (on an annualized basis) was 3.62%. Current yield more
closely reflects current earnings than does total return. The current yield
reflects the deduction of all charges under the contract that are deducted
from the total return quotations shown above except the maximum 7% early
withdrawal charge.
(2) The fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced fund may not have been available under all
contracts. The "Date Contributions First Received Under the Separate
Account" refers to the applicable date for the replaced fund.
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Fund
NON-STANDARDIZED Inception
Date
- -----------------------------------------------------------------------------------------------------------------------------------
Since
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP 2.83% 13.98% 14.91% 07/05/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP, Inc. 15.28% 16.48% 14.23% 11.37% 04/03/1989
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP(1) 6.61% 5.14% 5.12% 7.73%
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP 4.41% 12.33% 13.14% 07/05/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP 35.74% 33.36% 12/13/1996
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP(1) 12.87% 21.04% 17.68% 14.97%
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP 29.74% 31.43% 09/16/1996
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna International VP 17.24% 19.83% 12/22/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP 5.42% 10.24% 11.02% 07/05/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP(1)(2) 3.97% 3.94% 3.78% 4.25%
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP (14.09%) (10.59%) 12/15/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP (0.33%) 15.23% 12/27/1996
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP 20.66% 29.27% 12/13/1996
- -----------------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio(1) 14.63% 14.63% 12.95% 11.28%
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Equity-Income Portfolio(1) 10.05% 16.12% 17.10% 14.00%
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Growth Portfolio(1) 37.52% 23.70% 20.02% 17.73%
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP High Income Portfolio(1) (5.69%) 7.14% 7.26% 9.51%
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Overseas Portfolio(1) 11.16% 10.89% 8.15% 8.53%
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 13.42% 15.08% 10.23% 11.39% 09/06/1989
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Contrafund Portfolio 28.14% 23.29% 26.83% 01/03/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP II Index 500 Portfolio 26.51% 26.07% 21.98% 19.47% 08/27/1992
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Aggressive Growth Portfolio 32.36% 16.09% 17.66% 20.21% 09/13/1993
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Balanced Portfolio 32.39% 22.21% 17.43% 17.81% 09/13/1993
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Flexible Income Portfolio 7.56% 8.45% 8.76% 8.30% 09/13/1993
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Growth Portfolio 33.74% 23.63% 19.70% 19.17% 09/13/1993
- -----------------------------------------------------------------------------------------------------------------------------------
Janus Aspen Worldwide Growth Portfolio 27.10% 24.87% 19.60% 22.28% 09/13/1993
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Total Return Series 10.74% 14.30% 17.06% 01/03/1995
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Global Governments Series 6.37% 2.06% 4.07% 06/14/1994
- -----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Aggressive Growth Fund/VA(1) 10.77% 13.06% 11.46% 14.35%
- -----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Global Securities Fund/VA 12.49% 16.39% 8.11% 10.90% 11/12/1990
- -----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Main Street Growth & Income Fund/VA 3.22% 20.76% 25.19% 07/06/1995
- -----------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Strategic Bond Fund/VA 1.44% 6.29% 5.31% 5.27% 05/03/1993
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Emerging Equities Portfolio 27.83% 23.81% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Small Cap/Portfolio Partners MFS
Emerging Equities(3) 27.83% 12.23% 13.65% 19.30%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Research Growth Portfolio 21.26% 17.20% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
American Century VP Capital Appreciation/Portfolio
Partners MFS Research Growth(3) 21.26% 3.04% 6.62% 9.69%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners MFS Value Equity Portfolio 24.95% 24.27% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Neuberger Berman AMT Growth/Portfolio
Partners MFS Value Equity(3) 24.95% 18.74% 15.29% 13.09%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners Scudder International Growth
Portfolio 17.41% 17.17% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Scudder International Portfolio Class A/Portfolio
Partners Scudder International Growth(3) 17.41% 12.59% 8.85% 10.43%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------
Fund
NON-STANDARDIZED Inception
Date
- -----------------------------------------------------------------------------------------------------------------------------------
Since
SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception**
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners T. Rowe Price Growth
Equity Portfolio 25.80% 25.71% 11/28/1997
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth/Portfolio Partners T.
Rowe Price Growth Equity(3) 25.80% 21.13% 19.04% 18.78% 01/09/1989
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Please refer to the discussion preceding the tables for an explanation of the
charges included and methodology used in the standardized and non-standardized
figures. These figures represent historical performance and should not be
considered a projection of future performance.
** Reflects performance from the fund's inception date.
(1) These funds have been in operation for more than ten years.
(2) The current yield for the subaccount for the 7-day period ended December
31, 1998 (on an annualized basis) was 3.62%. Current yield more closely
reflects current earnings than does total return. The current yield
reflects the deduction of all charges under the contract that are deducted
from the total return quotations shown above. As in the table above, the
maximum 7% early withdrawal charge is not reflected.
(3) The fund first listed was replaced with the applicable Portfolio Partners
Portfolio after the close of business on November 26, 1997. The performance
shown is based on the performance of the replaced fund until November 26,
1997, and the performance of the applicable Portfolio Partners Portfolio
after that date. The replaced fund may not have been available under all
contracts. The "Fund Inception Date" refers to the applicable date for the
replaced fund. If no date is shown, the replaced fund has been in operation
for more than ten years.
INCOME PHASE PAYMENTS
When you begin receiving payments under the contract during the income phase
(see "Income Phase" in the prospectus), the value of your account is determined
using accumulation unit values as of the tenth valuation before the first
payment is due. Such value (less any applicable premium tax) is applied to
provide payments to you in accordance with the payment option and investment
options elected.
The annuity option tables found in the contract show, for each option, the
amount of the first payment for each $1,000 of value applied. Thereafter,
variable payments fluctuate as the annuity unit value(s) fluctuates with the
investment experience of the selected investment option(s). The first payment
and subsequent payments also vary depending on the assumed net investment rate
selected (3.5% or 5% per annum). Selection of a 5% rate causes a higher first
payment, but payments will increase thereafter only to the extent that the
investment performance of the subaccounts you selected is greater than 5%
annually after deduction of fees. Payments would decline if the performance was
less than 5%. Use of the 3.5% assumed rate causes a lower first payment, but
subsequent payments would increase more rapidly or decline more slowly as
changes occur in the performance of the subaccounts selected.
When the income phase begins, the annuitant is credited with a fixed number of
annuity units (which does not change thereafter) in each of the designated
investment options. This number is calculated by dividing (a) by (b), where (a)
is the amount of the first payment based on a particular investment option, and
(b) is the then current annuity unit value for that investment option. As noted,
annuity unit values fluctuate from one valuation to the next (see "Your Account
Value" in the prospectus); such fluctuations reflect changes in the net
investment factor for the appropriate subaccount(s) (with a ten valuation lag
which gives the Company time to process payments) and a mathematical adjustment
which offsets the assumed net investment rate of 3.5% or 5% per annum.
The operation of all these factors can be illustrated by the following
hypothetical example. These procedures will be performed separately for the
investment options selected during the income phase.
EXAMPLE:
Assume that, at the date payments are to begin, there are 3,000 accumulation
units credited under a particular contract and that the value of an accumulation
unit for the tenth valuation prior to retirement was $13.650000.
This produces a total value of $40,950.
Assume also that no premium tax is payable and that the annuity table in the
contract provides, for the payment option elected, a first monthly variable
payment of $6.68 per $1000 of value applied; the annuitant's first monthly
payment would thus be $40.950 multiplied by $6.68, or $273.55.
Assume then that the value of an annuity unit upon the valuation on which the
first payment was due was $13.400000. When this value is divided into the first
monthly payment, the number of annuity units is determined to be 20.414. The
value of this number of annuity units will be paid in each subsequent month. If
the net investment factor with respect to the appropriate subaccount is
1.0015000 as of the tenth valuation preceding the due date of the second monthly
payment, multiplying this factor by .9999058* (to neutralize the assumed net
investment rate of 3.5% per annum built into the number of annuity units
determined above) produces a result of 1.0014057. This is then multiplied by the
annuity unit value for the prior valuation (assume such value to be $13.504376)
to produce
6
<PAGE>
an annuity unit value of $13.523359 for the valuation occurring when
the second payment is due. The second monthly payment is then determined by
multiplying the number of annuity units by the current annuity unit value, or
20.414 times $13.523359, which produces a payment of $276.07.
*If an assumed net investment rate of 5% is elected, the appropriate factor to
neutralize such assumed rate would be .9998663.
SALES MATERIAL AND ADVERTISING
We may include hypothetical illustrations in our sales literature that explain
the mathematical principles of dollar cost averaging, compounded interest, tax
deferred accumulation, and the mechanics of variable annuity contracts. We may
also discuss the difference between variable annuity contracts and other types
of savings or investment products such as personal savings accounts and
certificates of deposit.
We may distribute sales literature that compares the percentage change in
accumulation unit values for any of the subaccounts to established market
indices such as the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average or to the percentage change in values of other management
investment companies that have investment objectives similar to the subaccount
being compared.
We may publish in advertisements and reports, the ratings and other information
assigned to us by one or more independent rating organizations such as A.M. Best
Company, Duff & Phelps, Standard & Poor's Corporation and Moody's Investors
Service, Inc. The purpose of the ratings is to reflect our financial strength
and/or claims-paying ability. We may also quote ranking services such as
Morningstar's Variable Annuity/Life Performance Report and Lipper's Variable
Insurance Products Performance Analysis Service (VIPPAS), which rank variable
annuity or life subaccounts or their underlying funds by performance and/or
investment objective. We may categorize the underlying funds in terms of the
asset classes they represent and use such categories in marketing materials for
the contracts. We may illustrate in advertisements the performance of the
underlying funds, if accompanied by performance which also shows the performance
of such funds reduced by applicable charges under the separate account. We may
also show in advertisements the portfolio holdings of the underlying funds,
updated at various intervals. From time to time, we will quote articles from
newspapers and magazines or other publications or reports such as The Wall
Street Journal, Money magazine, USA Today and The VARDS Report.
We may provide in advertising, sales literature, periodic publications or other
materials information on various topics of interest to current and prospective
contract holders. These topics may include the relationship between sectors of
the economy and the economy as a whole and its effect on various securities
markets, investment strategies and techniques (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer and
account rebalancing), the advantages and disadvantages of investing in
tax-deferred and taxable investments, customer profiles and hypothetical
purchase and investment scenarios, financial management and tax and retirement
planning, and investment alternatives to certificates of deposit and other
financial instruments, including comparison between the contracts and the
characteristics of and market for such financial instruments.
INDEPENDENT AUDITORS
KPMG LLP, CityPlace II, Hartford, Connecticut 06103-4103, are the independent
auditors for the separate account and for the Company. The services provided to
the separate account include primarily the examination of the separate account's
financial statements and the review of filings made with the SEC.
7
<PAGE>
FINANCIAL STATEMENTS OF THE SEPARATE ACCOUNT
VARIABLE ANNUITY ACCOUNT I
Index
<TABLE>
<S> <C>
Statement of Assets and Liabilities....................................... S-2
Statements of Operations and Changes in Net Assets........................ S-6
Condensed Financial Information........................................... S-8
Notes to Financial Statements............................................. S-10
Independent Auditor's Report.............................................. S-26
</TABLE>
S-1
<PAGE>
Variable Annuity Account I
Statement of Assets and Liabilities - December 31, 1998
ASSETS:
Investments at net asset value: (Note 1)
<TABLE>
Net
Shares Cost Assets
------ ---- ------
<S> <C> <C> <C>
Aetna Ascent VP: 104,739 $ 1,543,462 $ 1,468,439
Aetna Balanced VP: 466,540 7,374,965 7,338,678
Aetna Bond VP: 628,747 8,330,232 8,211,438
Aetna Crossroads VP: 58,972 785,680 785,501
Aetna Growth and Income VP: 982,351 33,447,658 31,297,697
Aetna Growth VP: 451,105 5,319,141 6,103,448
Aetna Index Plus Large Cap VP: 849,667 13,688,423 14,945,637
Aetna International VP: 3,797 41,261 44,011
Aetna Legacy VP: 133,748 1,660,761 1,654,467
Aetna Money Market VP: 1,975,904 26,236,238 26,452,214
Aetna Real Estate Securities VP: 4,651 43,996 39,671
Aetna Small Company VP: 294,544 3,279,774 3,767,223
Aetna Value Opportunity VP: 434,406 5,636,469 6,259,793
Alger American Funds:
Balanced Portfolio: 108,171 1,100,460 1,404,059
Income and Growth Portfolio: 310,627 3,299,115 4,075,424
Leveraged AllCap Portfolio: 104,148 2,270,569 3,634,760
American Century Investments:
Balanced Fund: 66,794 515,655 557,006
International Fund: 243,103 1,624,446 1,852,446
Calvert Social Balanced Portfolio: 124,088 259,747 265,177
Fidelity Investments Variable Insurance Product Fund:
Equity-Income Portfolio: 2,013,434 47,204,298 51,181,501
Growth Portfolio: 854,304 31,178,486 38,326,577
High Income Portfolio: 1,512,768 19,151,904 17,442,220
Overseas Portfolio: 206,337 4,004,605 4,136,808
Fidelity Investments Variable Insurance Product Fund II:
Asset Manager Portfolio: 447,745 7,570,709 8,131,050
Contrafund Portfolio: 1,620,361 31,130,912 39,601,618
Index 500 Portfolio: 326,815 38,214,324 46,168,328
Investment Grade Bond Portfolio: 94,123 1,128,605 1,219,839
Insurance Management Series:
American Leaders Fund II: 6,824,761 109,150,633 147,960,825
Equity Income Fund II: 2,004,210 24,767,711 28,359,570
Growth Strategies Fund II: 1,962,559 28,120,682 35,149,425
High Income Bond Fund II: 2,717,067 28,282,860 29,670,377
International Equity Fund II: 1,796,331 21,260,207 27,645,530
Prime Money Fund II: 4,666,589 4,665,273 4,666,589
U.S. Government Securities Fund II: 585,366 6,085,740 6,526,831
Utility Fund II: 1,734,312 20,695,200 26,482,939
Janus Aspen Series:
Aggressive Growth Portfolio: 386,923 9,583,635 10,675,204
Balanced Portfolio: 921,338 16,804,227 20,730,112
Flexible Income Portfolio: 386,017 4,666,753 4,655,365
</TABLE>
S-2
<PAGE>
Variable Annuity Account I
Statement of Assets and Liabilities - December 31, 1998 (continued):
<TABLE>
Net
Shares Cost Assets
------ ---- ------
<S> <C> <C> <C>
Growth Portfolio: 774,377 $ 14,923,215 $ 18,228,835
Worldwide Growth Portfolio: 2,418,350 60,413,840 70,349,793
Lexington Emerging Markets Fund: 110,605 1,133,387 627,133
Lexington Natural Resources Trust Fund: 78,858 1,151,725 869,806
MFS Funds:
Total Return Series: 904,731 15,015,459 16,393,724
Worldwide Government Series: 70,397 727,002 765,918
Oppenheimer Funds:
Aggressive Growth Fund: 75,688 3,107,624 3,393,073
Global Securities Fund: 93,561 1,992,083 2,064,889
Growth & Income Fund: 561,831 11,689,993 11,506,303
Strategic Bond Fund: 868,342 4,445,390 4,445,909
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 666,143 30,422,970 36,930,956
PPI MFS Research Growth Portfolio: 1,700,156 17,369,033 20,299,859
PPI MFS Value Equity Portfolio: 155,399 5,324,611 5,881,864
PPI Scudder International Growth Portfolio: 75,410 1,213,809 1,263,880
PPI T. Rowe Price Growth Equity Portfolio: 535,071 23,443,670 29,594,758
------------ ------------
NET ASSETS $762,498,627 $891,504,497
============ ============
</TABLE>
Net assets represented by:
Reserves for annuity contracts in accumulation and payment period:
(Notes 1 and 5)
<TABLE>
<S> <C>
Aetna Ascent VP:
Annuity contracts in accumulation ................................................... $ 1,468,439
Aetna Balanced VP:
Annuity contracts in accumulation ................................................... 7,338,678
Aetna Bond VP:
Annuity contracts in accumulation ................................................... 8,211,438
Aetna Crossroads VP:
Annuity contracts in accumulation ................................................... 785,501
Aetna Growth and Income VP:
Annuity contracts in accumulation ................................................... 31,263,322
Annuity contracts in payment period ................................................. 34,375
Aetna Growth VP:
Annuity contracts in accumulation ................................................... 6,066,474
Annuity contracts in payment period ................................................. 36,974
Aetna Index Plus Large Cap VP:
Annuity contracts in accumulation ................................................... 14,945,637
Aetna International VP:
Annuity contracts in accumulation ................................................... 44,011
Aetna Legacy VP:
Annuity contracts in accumulation ................................................... 1,628,799
Annuity contracts in payment period ................................................. 25,668
Aetna Money Market VP:
Annuity contracts in accumulation ................................................... 26,452,214
Aetna Real Estate Securities VP:
Annuity contracts in accumulation ................................................... 39,671
Aetna Small Company VP:
Annuity contracts in accumulation ................................................... 3,767,223
</TABLE>
S-3
<PAGE>
Variable Annuity Account I
Statement of Assets and Liabilities - December 31, 1998 (continued):
<TABLE>
<S> <C>
Aetna Value Opportunity VP:
Annuity contracts in accumulation .................. $ 6,259,793
Alger American Funds:
Balanced Portfolio:
Annuity contracts in accumulation .................. 1,404,059
Income and Growth Portfolio:
Annuity contracts in accumulation .................. 4,075,424
Leveraged AllCap Portfolio:
Annuity contracts in accumulation .................. 3,634,760
American Century Investments:
Balanced Fund:
Annuity contracts in accumulation .................. 557,006
International Fund:
Annuity contracts in accumulation .................. 1,852,446
Calvert Social Balanced Portfolio:
Annuity contracts in accumulation .................. 265,177
Fidelity Investments Variable Insurance Product Fund:
Equity-Income Portfolio:
Annuity contracts in accumulation .................. 51,181,501
Growth Portfolio:
Annuity contracts in accumulation .................. 38,326,577
High Income Portfolio:
Annuity contracts in accumulation .................. 17,442,220
Overseas Portfolio:
Annuity contracts in accumulation .................. 4,136,808
Fidelity Investments Variable Insurance Product Fund II:
Asset Manager Portfolio:
Annuity contracts in accumulation .................. 8,131,050
Contrafund Portfolio:
Annuity contracts in accumulation .................. 39,601,618
Index 500 Portfolio:
Annuity contracts in accumulation .................. 46,168,328
Investment Grade Bond Portfolio:
Annuity contracts in accumulation .................. 1,219,839
Insurance Management Series:
American Leaders Fund II:
Annuity contracts in accumulation .................. 147,843,450
Annuity contracts in payment period ................ 117,375
Equity Income Fund II:
Annuity contracts in accumulation .................. 28,317,427
Annuity contracts in payment period ................ 42,143
Growth Strategies Fund II:
Annuity contracts in accumulation .................. 35,149,425
High Income Bond Fund II:
Annuity contracts in accumulation .................. 29,644,378
Annuity contracts in payment period ................ 25,999
International Equity Fund II:
Annuity contracts in accumulation .................. 27,616,968
Annuity contracts in payment period ................ 28,562
</TABLE>
S-4
<PAGE>
Variable Annuity Account I
Statement of Assets and Liabilities - December 31, 1998 (continued):
<TABLE>
<S> <C>
Prime Money Fund II:
Annuity contracts in accumulation .................. $ 4,666,589
U.S. Government Securities Fund II:
Annuity contracts in accumulation .................. 6,526,831
Utility Fund II:
Annuity contracts in accumulation .................. 26,418,108
Annuity contracts in payment period ................ 64,831
Janus Aspen Series:
Aggressive Growth Portfolio:
Annuity contracts in accumulation .................. 10,675,204
Balanced Portfolio:
Annuity contracts in accumulation .................. 20,730,112
Flexible Income Portfolio:
Annuity contracts in accumulation .................. 4,655,365
Growth Portfolio:
Annuity contracts in accumulation .................. 18,191,718
Annuity contracts in payment period ................ 37,117
Worldwide Growth Portfolio:
Annuity contracts in accumulation .................. 70,349,793
Lexington Emerging Markets Fund:
Annuity contracts in accumulation .................. 627,133
Lexington Natural Resources Trust Fund:
Annuity contracts in accumulation .................. 869,806
MFS Funds:
Total Return Series:
Annuity contracts in accumulation .................. 16,393,724
Worldwide Government Series:
Annuity contracts in accumulation .................. 765,918
Oppenheimer Funds:
Aggressive Growth Fund:
Annuity contracts in accumulation .................. 3,393,073
Global Securities Fund:
Annuity contracts in accumulation .................. 2,064,889
Growth & Income Fund:
Annuity contracts in accumulation .................. 11,506,303
Strategic Bond Fund:
Annuity contracts in accumulation .................. 4,445,909
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio:
Annuity contracts in accumulation .................. 36,930,956
PPI MFS Research Growth Portfolio:
Annuity contracts in accumulation .................. 20,299,859
PPI MFS Value Equity Portfolio:
Annuity contracts in accumulation .................. 5,846,092
Annuity contracts in payment period ................ 35,772
PPI Scudder International Growth Portfolio:
Annuity contracts in accumulation .................. 1,263,880
PPI T. Rowe Price Growth Equity Portfolio:
Annuity contracts in accumulation .................. 29,594,758
------------
$891,504,497
============
</TABLE>
See Notes to Financial Statements
S-5
<PAGE>
Variable Annuity Account I
Statements of Operations and Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
---- ----
<S> <C> <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends .......................................................... $ 36,268,129 $ 13,569,495
Expenses: (Notes 2 and 5)
Valuation period deductions ........................................ (10,257,915) (5,565,448)
------------- -------------
Net investment income ............................................... 26,010,214 8,004,047
------------- -------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ................................................ 438,314,806 170,076,421
Cost of investments sold ........................................... 412,797,023 157,030,583
------------- -------------
Net realized gain .................................................. 25,517,783 13,045,838
Net unrealized gain on investments: (Note 5)
Beginning of year .................................................. 62,528,168 13,871,018
End of year ........................................................ 129,005,870 62,528,168
------------- -------------
Net change in unrealized gain ..................................... 66,477,702 48,657,150
------------- -------------
Net realized and unrealized gain on investments ..................... 91,995,485 61,702,988
------------- -------------
Net increase in net assets resulting from operations ................ 118,005,699 69,707,035
------------- -------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments ......................... 168,355,044 230,999,062
Transfers from the Company's fixed account options .................. 75,081,637 55,038,062
Redemptions by contract holders ..................................... (31,854,396) (14,064,451)
Annuity payments .................................................... (83,247) (14,846)
Other ............................................................... 1,337,372 99,606
------------- -------------
Net increase in net assets from unit transactions (Note 5) ......... 212,836,410 272,057,433
------------- -------------
Change in net assets ................................................ 330,842,109 341,764,468
NET ASSETS:
Beginning of year ................................................... 560,662,388 218,897,920
------------- -------------
End of year ......................................................... $ 891,504,497 $ 560,662,388
============= =============
</TABLE>
See Notes to Financial Statements
S-6
<PAGE>
Variable Annuity Account I
Condensed Financial Information - Year Ended December 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aetna Ascent VP:
AICA I $ 14.983 $ 15.409 2.84% 83,798.0 $ 1,291,246
AICA II 10.694 10.059 ( 5.94%) (1) 17,615.1 177,193
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP:
AICA I 14.228 16.405 15.30% 369,651.5 6,063,987
AICA II 10.708 11.312 5.64% (1) 112,689.3 1,274,691
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Bond VP:
AICA I 11.201 11.943 6.62% 500,098.0 5,972,864
AICA II 10.118 10.606 4.82% (1) 211,071.3 2,238,574
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP:
AICA I 14.054 14.676 4.43% 40,711.8 597,491
AICA II 10.504 10.270 ( 2.23%) (1) 18,307.3 188,010
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP:
AICA I 16.354 18.461 12.88% 1,217,448.2 22,475,910
AICA II 11.063 11.063 0.00% (1) 794,334.9 8,787,412
Annuity contracts in payment period 34,375
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Growth VP:
AICA I 13.158 17.862 35.75% 284,771.1 5,086,654
AICA II 11.455 12.977 13.29% (1) 75,505.9 979,820
Annuity contracts in payment period 36,974
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP:
AICA I 14.414 18.704 29.76% 654,766.9 12,246,441
AICA II 11.157 12.535 12.35% (1) 215,324.4 2,699,196
- ---------------------------------------------------------------------------------------------------------------------------
Aetna International VP:
AICA I 10.149 9.754 ( 3.89%) (1) 1,816.4 17,717
AICA II 9.851 9.764 ( 0.88%) (2) 2,693.0 26,294
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP:
AICA I 13.112 13.825 5.44% 95,815.1 1,324,652
AICA II 10.404 10.380 ( 0.23%) (1) 29,301.4 304,147
Annuity contracts in payment period 25,668
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP:
AICA I 10.900 11.335 3.99% 2,041,170.4 23,136,033
AICA II 10.097 10.371 2.71% (1) 319,752.5 3,316,181
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP:
AICA I 10.115 8.863 (12.38%) (1) 2,216.9 19,648
AICA II 9.918 8.872 (10.55%) (1) 2,256.8 20,023
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP:
AICA I 13.638 13.595 ( 0.32%) 225,981.5 3,072,277
AICA II 11.126 9.724 (12.60%) (1) 71,464.8 694,946
- ---------------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP:
AICA I 13.246 15.985 20.68% 311,396.8 4,977,799
AICA II 11.097 11.644 4.93% (1) 110,096.6 1,281,994
- ---------------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio:
AICA I 12.657 16.412 29.67% 85,549.6 1,404,059
- ---------------------------------------------------------------------------------------------------------------------------
Income and Growth Portfolio:
AICA I 15.229 19.880 30.54% 205,001.6 4,075,424
- ---------------------------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio:
AICA I 13.203 20.547 55.62% 176,900.2 3,634,760
- ---------------------------------------------------------------------------------------------------------------------------
American Century Investments:
Balanced Fund:
AICA I 12.885 14.709 14.16% 37,869.0 557,006
- ---------------------------------------------------------------------------------------------------------------------------
International Fund:
AICA I 13.538 15.853 17.10% 116,852.2 1,852,446
- ---------------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio:
AICA I 9.976 11.437 14.65% 12,287.9 140,540
AICA II 10.596 11.208 5.78% (1) 11,120.5 124,637
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-7
<PAGE>
Variable Annuity Account I
Condensed Financial Information - Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Value
Per Unit Increase (Decrease) Units
-------- in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fidelity Investments Variable
Insurance Product Fund:
Equity-Income Portfolio:
AICA I $ 14.974 $ 16.482 10.07% 2,792,888.9 $ 46,031,203
AICA II 10.957 10.806 ( 1.38%) (1) 476,634.1 5,150,298
- ----------------------------------------------------------------------------------------------------------------------------
Growth Portfolio:
AICA I 13.320 18.320 37.54% 1,869,305.9 34,245,624
AICA II 11.094 13.253 19.46% (1) 307,937.0 4,080,953
- ----------------------------------------------------------------------------------------------------------------------------
High Income Portfolio:
AICA I 13.238 12.488 ( 5.67%) 1,196,921.6 14,946,591
AICA II 10.292 9.222 (10.40%) (1) 270,626.6 2,495,629
- ----------------------------------------------------------------------------------------------------------------------------
Overseas Portfolio:
AICA I 12.590 13.997 11.18% 261,377.1 3,658,529
AICA II 11.082 10.487 ( 5.37%) (1) 45,606.3 478,279
Fidelity Investments Variable Insurance
- ----------------------------------------------------------------------------------------------------------------------------
Product Fund II:
Asset Manager Portfolio:
AICA I 13.888 15.754 13.44% 408,018.8 6,428,060
AICA II 10.607 11.165 5.26% (1) 152,533.0 1,702,990
- ----------------------------------------------------------------------------------------------------------------------------
Contrafund Portfolio:
AICA I 14.802 18.970 28.16% 1,853,911.1 35,169,124
AICA II 11.136 12.537 12.58% (1) 353,547.6 4,432,494
- ----------------------------------------------------------------------------------------------------------------------------
Index 500 Portfolio:
AICA I 16.646 21.063 26.53% 1,953,506.1 41,145,842
AICA II 11.159 12.259 9.86% (1) 409,684.6 5,022,486
- ----------------------------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio:
AICA I 11.242 12.066 7.33% 101,099.9 1,219,839
- ----------------------------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II:
AICA I 17.796 20.639 15.98% 7,163,133.1 147,843,450
Annuity contracts in payment period 117,375
- ----------------------------------------------------------------------------------------------------------------------------
Equity Income Fund II:
AICA I 12.305 14.022 13.95% 2,019,440.7 28,317,427
Annuity contracts in payment period 42,143
- ----------------------------------------------------------------------------------------------------------------------------
Growth Strategies Fund II:
AICA I 15.777 18.269 15.80% 1,923,943.6 35,149,425
- ----------------------------------------------------------------------------------------------------------------------------
High Income Bond Fund II:
AICA I 13.379 13.547 1.26% 2,188,220.6 29,644,378
Annuity contracts in payment period 25,999
- ----------------------------------------------------------------------------------------------------------------------------
International Equity Fund II:
AICA I 11.858 14.682 23.82% 1,881,029.6 27,616,968
Annuity contracts in payment period 28,562
- ----------------------------------------------------------------------------------------------------------------------------
Prime Money Fund II:
AICA I 10.877 11.253 3.46% 414,692.7 4,666,589
U.S. Government Securities Fund II:
AICA I 11.572 12.284 6.15% 531,319.3 6,526,831
- ----------------------------------------------------------------------------------------------------------------------------
Utility Fund II:
AICA I 15.434 17.341 12.36% 1,523,423.7 26,418,108
Annuity contracts in payment period 64,831
- ----------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio:
AICA I 12.637 16.729 32.38% 601,046.9 10,054,808
AICA II 11.125 13.003 16.88% (1) 47,713.2 620,396
- ----------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio:
AICA I 14.492 19.189 32.41% 927,778.7 17,802,853
AICA II 10.904 12.689 16.37% (1) 230,692.8 2,927,259
- ----------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio:
AICA I 12.272 13.202 7.58% 267,030.6 3,525,265
AICA II 10.191 10.599 4.00% (1) 106,625.5 1,130,100
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-8
<PAGE>
Variable Annuity Account I
Condensed Financial Information - Year Ended December 31, 1998 (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Value
Per Unit
--------
Beginning End of
of Year Year
- --------------------------------------------------------------------
<S> <C> <C>
Growth Portfolio:
AICA I $ 14.731 $ 19.704
AICA II 11.091 12.784
Annuity contracts in payment period
- --------------------------------------------------------------------
Worldwide Growth Portfolio:
AICA I 16.131 20.506
AICA II 11.375 11.960
- --------------------------------------------------------------------
Lexington Emerging Markets Fund:
AICA I 9.007 6.399
- --------------------------------------------------------------------
Lexington Natural Resources Trust Fund:
AICA I 13.939 11.047
- --------------------------------------------------------------------
MFS Funds:
Total Return Series:
AICA I 13.030 14.432
AICA II 10.639 10.942
- --------------------------------------------------------------------
Worldwide Government Series:
AICA I 10.207 10.860
AICA II 10.032 10.514
- --------------------------------------------------------------------
Oppenheimer Funds:
Aggressive Growth Fund:
AICA I 12.204 13.520
AICA II 11.304 10.886
- --------------------------------------------------------------------
Global Securities Fund:
AICA I 11.539 12.982
AICA II 10.941 10.949
- --------------------------------------------------------------------
Growth & Income Fund:
AICA I 12.785 13.199
AICA II 11.377 10.111
- --------------------------------------------------------------------
Strategic Bond Fund:
AICA I 10.764 10.921
AICA II 10.118 10.037
- --------------------------------------------------------------------
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio:
AICA I 10.554 13.494
AICA II 11.104 11.797
- --------------------------------------------------------------------
PPI MFS Research Growth Portfolio:
AICA I 8.786 10.656
AICA II 11.178 11.634
- --------------------------------------------------------------------
PPI MFS Value Equity Portfolio:
AICA I 10.152 12.686
AICA II 11.503 12.005
Annuity contracts in payment period
- --------------------------------------------------------------------
PPI Scudder International Growth Portfolio:
AICA I 9.912 11.640
AICA II 11.145 10.995
- --------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio:
AICA I 13.834 17.406
AICA II 11.120 12.103
- --------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Increase (Decrease) Units
in Value of Outstanding Reserves
Accumulation at End at End
Unit of Year of Year
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Portfolio:
AICA I 33.76% 807,575.7 $15,912,701
AICA II 15.26% (1) 178,276.3 2,279,017
Annuity contracts in payment period 37,117
- ---------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio:
AICA I 27.12% 3,185,556.5 65,321,610
AICA II 5.14% (1) 420,428.4 5,028,183
- ---------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund:
AICA I (28.96%) 98,010.6 627,133
- ---------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund:
AICA I (20.75%) 78,736.7 869,806
- ---------------------------------------------------------------------------------------------------
MFS Funds:
Total Return Series:
AICA I 10.76% 943,853.4 13,621,896
AICA II 2.85% (1) 253,311.0 2,771,828
- ---------------------------------------------------------------------------------------------------
Worldwide Government Series:
AICA I 6.40% 69,956.8 759,700
AICA II 4.80% (2) 591.4 6,218
- ---------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Aggressive Growth Fund:
AICA I 10.78% 179,860.9 2,431,715
AICA II (3.70%) (1) 88,309.9 961,358
- ---------------------------------------------------------------------------------------------------
Global Securities Fund:
AICA I 12.51% 134,448.6 1,745,444
AICA II 0.07% (1) 29,175.9 319,445
- ---------------------------------------------------------------------------------------------------
Growth & Income Fund:
AICA I 3.24% 693,694.9 9,156,069
AICA II (11.13%) (1) 232,433.2 2,350,234
- ---------------------------------------------------------------------------------------------------
Strategic Bond Fund:
AICA I 1.46% 328,545.6 3,588,020
AICA II (0.80%) (1) 85,476.9 857,889
- ---------------------------------------------------------------------------------------------------
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio:
AICA I 27.86% 2,557,154.8 34,505,993
AICA II 6.24% (1) 205,549.0 2,424,963
- ---------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio:
AICA I 21.28% 1,761,234.3 18,766,935
AICA II 4.08% (1) 131,760.5 1,532,924
- ---------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio:
AICA I 24.96% 358,518.3 4,548,303
AICA II 4.36% (1) 108,102.4 1,297,789
Annuity contracts in payment period 35,772
- ---------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio:
AICA I 17.43% 79,756.2 928,340
AICA II (1.35%) (1) 30,516.2 335,540
- ---------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio:
AICA I 25.82% 1,616,747.9 28,140,515
AICA II 8.84% (1) 120,156.6 1,454,243
- ---------------------------------------------------------------------------------------------------
</TABLE>
AICA I - Certain individual and group contracts issued as non-qualified deferred
annuity contracts or Individual Retirement Annuity contracts issued since June
28, 1995.
AICA II - Certain individual and group contracts issued as
non-qualified deferred annuity contracts or Individual Retirement Annuity
contracts issued since May 1, 1998.
Notes to Condensed Financial Information:
(1) - Reflects less than a full year of performance activity. Funds were first
received in this option during May 1998.
(2) - Reflects less than a full year of
performance activity. Funds were first received in this option during June 1998.
See Notes to Financial Statements
S-9
<PAGE>
Variable Annuity Account I
Notes to Financial Statements - December 31, 1998
1. Summary of Significant Accounting Policies
Variable Annuity Account I (the "Account") is a separate account established
by Aetna Insurance Company of America (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 annuity contracts that may be entitled
to tax-deferred treatment under specific sections of the Internal Revenue
Code of 1986, as amended. The Account commenced operations on June, 1995.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported therein. Although actual results could differ
from these estimates, any such differences are expected to be immaterial to
the net assets of the Account.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset value
per share as determined by each Fund on December 31, 1998:
Aetna Ascent VP
Aetna Balanced VP
Aetna Bond VP
Aetna Crossroads VP
Aetna Growth and Income VP
Aetna Growth VP
Aetna Index Plus Large Cap VP
Aetna International VP
Aetna Legacy VP
Aetna Money Market VP
Aetna Real Estate Securities VP
Aetna Small Company VP
Aetna Value Opportunity VP
Alger American Funds:
o Balanced Portfolio
o Income and Growth Portfolio
o Leveraged AllCap Portfolio
American Century Investments:
o Balanced Fund
o International Fund
Calvert Social Balanced Portfolio
Fidelity Investments Variable Insurance Products Fund:
o Equity-Income Portfolio
o Growth Portfolio
o High Income Portfolio
o Overseas Portfolio
Fidelity Investments Variable Insurance Products Fund II:
o Asset Manager Portfolio
o Contrafund Portfolio
o Index 500 Portfolio
o Investment Grade Bond Portfolio
Insurance Management Series:
o American Leaders Fund II
o Equity Income Fund II
o Growth Strategies Fund II
o High Income Bond Fund II
o International Equity Fund II
o Prime Money Fund II
o U.S. Government Securities Fund II
o Utility Fund II
Janus Aspen Series:
o Aggressive Growth Portfolio
o Balanced Portfolio
o Flexible Income Portfolio
o Growth Portfolio
o Worldwide Growth Portfolio
Lexington Emerging Markets Fund
Lexington Natural Resources Trust Fund
MFS Funds:
o Total Return Series
o Worldwide Government Series
Oppenheimer Funds:
o Aggressive Growth Fund
o Global Securities Fund
o Growth & Income Fund
o Strategic Bond Fund
Portfolio Partners, Inc. (PPI):
o PPI MFS Emerging Equities Portfolio
o PPI MFS Research Growth Portfolio
o PPI MFS Value Equity Portfolio
o PPI Scudder International Growth Portfolio
o PPI T. Rowe Price Growth Equity Portfolio
b. Other
Investment transactions are accounted for on a trade date basis and dividend
income is recorded on the ex-dividend date. The cost of investments sold is
determined by specific identification.
S-10
<PAGE>
Variable Annuity Account I
Notes to Financial Statements - December 31, 1998 (continued):
c. Federal Income Taxes
The operations of the Account form a part of, and are taxed with, the total
operations of the Company which is taxed as a life insurance company under
the Internal Revenue Code of 1986, as amended.
d. Annuity Reserves
Annuity reserves held in the Separate Accounts are computed for currently
payable contracts according to the 83a and 83GAM tables using various assumed
interest rates. Mortality experience is monitored by the Company. Charges to
annuity reserves for mortality experience are reimbursed to the Company if
the reserves required are less than originally estimated. If additional
reserves are required, the Company reimburses the Account.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made in
accordance with the terms of the contracts and are paid to the Company.
3. Dividend Income
On an annual basis, the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions to the
Account are automatically reinvested in shares of the Funds. The Account's
proportionate share of each Fund's undistributed net investment income
(distributions in excess of net investment income) and accumulated net
realized gain (loss) on investments is included in net unrealized gain (loss)
in the Statements of Operations and Changes in Net Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the years ended December 31, 1998 and 1997
aggregated $677,161,429 and $438,314,806; $450,137,902 and $170,076,421,
respectively.
S-11
<PAGE>
Variable Annuity Account I
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental information to Statements of Operations and Changes in Net
Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Ascent VP: (1) $ 71,800 ($19,502) $ 673,031 $ 668,648 $ 4,383
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Aetna Balanced VP: (2) 990,418 (80,461) 1,792,080 1,696,266 95,814
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Aetna Bond VP: (3) 431,716 (72,965) 4,486,268 4,387,120 99,148
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Aetna Crossroads VP: (4) 29,801 (8,675) 155,691 141,072 14,619
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Aetna Growth and Income VP: (5) 4,637,602 (297,037) 33,298,888 34,084,318 (785,430)
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------
Aetna Growth VP: (6) 11,767 (50,232) 2,569,530 2,639,070 (69,540)
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------
Aetna Index Plus Large Cap VP: (7) 660,099 (124,498) 9,779,183 9,124,915 654,268
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Aetna International VP: (8) 2,114 (215) 38,105 39,540 (1,435)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Aetna Legacy VP: (9) 71,808 (17,570) 157,163 143,237 13,926
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------
Aetna Money Market VP: (10) 821,419 (301,700) 85,211,294 84,897,725 313,569
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Aetna Real Estate Securities VP: (11) 1,888 (319) 19,063 21,385 (2,322)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Aetna Small Company VP: (12) 34,904 (47,717) 5,571,439 6,248,167 (676,728)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Aetna Value Opportunity VP: (13) 61,137 (49,913) 1,542,126 1,589,981 (47,855)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 121,184 (20,212) 372,244 302,913 69,331
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Income and Growth Portfolio:
Annuity contracts in accumulation 379,349 (53,943) 785,199 640,145 145,054
- -----------------------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio:
Annuity contracts in accumulation 141,107 (43,691) 747,610 539,018 208,592
- -----------------------------------------------------------------------------------------------------------------------
American Century Investments:
Balanced Fund: 81,193 (8,558) 189,467 179,893 9,574
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
International Fund: 127,270 (27,807) 562,465 470,481 91,984
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 19,179 (1,776) 24,753 27,598 (2,845)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
S-12
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($42,941) ($75,022) ($32,081) $359,326
$1,084,513 $1,468,439
- ---------------------------------------------------------------------------------------------------------
93,604 (36,287) (129,891) 1,988,879
4,473,919 7,338,678
- ---------------------------------------------------------------------------------------------------------
(10,865) (118,794) (107,929) 4,840,848
3,020,620 8,211,438
- ---------------------------------------------------------------------------------------------------------
3,424 (178) (3,602) 338,325
415,033 785,501
- ---------------------------------------------------------------------------------------------------------
(1,131,268) (2,149,960) (1,018,692) 13,277,579
15,483,675 31,263,322
0 34,375
- ---------------------------------------------------------------------------------------------------------
(264,795) 784,306 1,049,101 4,256,569
905,783 6,066,474
0 36,974
- ---------------------------------------------------------------------------------------------------------
106,638 1,257,214 1,150,576 8,689,925
3,915,267 14,945,637
- ---------------------------------------------------------------------------------------------------------
0 2,750 2,750 40,797
0 44,011
- ---------------------------------------------------------------------------------------------------------
4,308 (6,294) (10,602) 769,986
793,678 1,628,799
33,241 25,668
- ---------------------------------------------------------------------------------------------------------
203,382 215,976 12,594 10,238,451
15,367,881 26,452,214
- ---------------------------------------------------------------------------------------------------------
0 (4,325) (4,325) 44,749
0 39,671
- ---------------------------------------------------------------------------------------------------------
(169,978) 487,449 657,427 1,224,164
2,575,173 3,767,223
- ---------------------------------------------------------------------------------------------------------
(130,696) 623,324 754,020 4,650,918
891,486 6,259,793
- ---------------------------------------------------------------------------------------------------------
125,129 303,599 178,470 (345,746)
1,401,032 1,404,059
- ---------------------------------------------------------------------------------------------------------
245,881 776,309 530,428 (693,378)
3,767,914 4,075,424
- ---------------------------------------------------------------------------------------------------------
265,618 1,364,191 1,098,573 (689,303)
2,919,482 3,634,760
- ---------------------------------------------------------------------------------------------------------
44,098 41,409 (2,689) (179,238)
656,724 557,006
- ---------------------------------------------------------------------------------------------------------
108,904 228,000 119,096 (505,703)
2,047,606 1,852,446
- ---------------------------------------------------------------------------------------------------------
(5,832) 5,430 11,262 206,857
32,500 265,177
- ---------------------------------------------------------------------------------------------------------
</TABLE>
S-13
<PAGE>
Variable Annuity Account I
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Valuation
Period
Dividends Deductions
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: $2,271,527 ($618,549)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
Growth Portfolio: 2,644,108 (381,295)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
High Income Portfolio: 1,474,357 (221,958)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
Overseas Portfolio: 233,121 (53,772)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Product Fund II:
Asset Manager Portfolio: 523,249 (84,936)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
Contrafund Portfolio: 1,534,561 (426,807)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
Index 500 Portfolio: 981,068 (488,490)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 73,857 (18,586)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 8,099,929 (1,877,678)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------
Equity Income Fund II: 91,670 (295,623)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------
Growth Strategies Fund II: 1,646,118 (414,206)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
High Income Bond Fund II: 795,943 (408,858)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------
International Equity Fund II: 28,894 (359,609)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------
Prime Money Fund II: 211,667 (62,627)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 99,559 (83,453)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------
Utility Fund II: 1,407,516 (327,505)
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: $15,606,753 $12,759,366 $2,847,387
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
Growth Portfolio: 12,032,669 9,870,234 2,162,435
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
High Income Portfolio: 5,402,639 5,517,939 (115,300)
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
Overseas Portfolio: 15,311,424 15,163,882 147,542
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Product Fund II:
Asset Manager Portfolio: 1,323,072 1,302,771 20,301
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 7,291,380 5,323,524 1,967,856
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 8,828,912 6,299,987 2,528,925
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 375,674 366,141 9,533
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 4,239,643 2,620,457 1,619,186
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------------------
Equity Income Fund II: 1,065,676 844,287 221,389
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 1,857,899 1,425,043 432,856
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 3,342,335 3,079,403 262,932
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------------------
International Equity Fund II: 1,808,323 1,321,140 487,183
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------------------
Prime Money Fund II: 4,154,382 4,154,382 0
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
U.S. Government Securities Fund II: 1,719,925 1,600,469 119,456
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------
Utility Fund II: 1,448,374 1,070,900 377,474
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------------------
</TABLE>
S-14
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4,573,383 $3,977,202 ($596,181) $12,941,401
$34,335,916 $51,181,501
- -----------------------------------------------------------------------------------------------------------
2,613,104 7,153,104 4,540,000 10,721,202
18,640,127 38,326,577
- -----------------------------------------------------------------------------------------------------------
678,175 (1,709,684) (2,387,859) 7,278,178
11,414,802 17,442,220
- -----------------------------------------------------------------------------------------------------------
83,223 131,756 48,533 772,708
2,988,676 4,136,808
- -----------------------------------------------------------------------------------------------------------
247,841 560,341 312,500 3,571,525
3,788,411 8,131,050
- -----------------------------------------------------------------------------------------------------------
3,303,522 8,470,707 5,167,185 6,461,571
24,897,252 39,601,618
- -----------------------------------------------------------------------------------------------------------
2,903,863 7,949,380 5,045,517 15,200,754
22,900,554 46,168,328
- -----------------------------------------------------------------------------------------------------------
63,100 91,234 28,134 (314,286)
1,441,187 1,219,839
- -----------------------------------------------------------------------------------------------------------
27,572,894 38,810,192 11,237,298 14,814,848
114,050,410 147,843,450
16,832 117,375
- -----------------------------------------------------------------------------------------------------------
716,240 3,591,859 2,875,619 12,524,130
12,942,385 28,317,427
0 42,143
- -----------------------------------------------------------------------------------------------------------
4,379,010 7,028,743 2,649,733 6,249,006
24,585,918 35,149,425
- -----------------------------------------------------------------------------------------------------------
1,855,372 1,387,517 (467,855) 3,527,318
25,944,158 29,644,378
16,739 25,999
- -----------------------------------------------------------------------------------------------------------
1,842,212 6,385,323 4,543,111 2,840,676
20,105,275 27,616,968
0 28,562
- -----------------------------------------------------------------------------------------------------------
0 1,316 1,316 757,047
3,759,186 4,666,589
- -----------------------------------------------------------------------------------------------------------
224,916 441,091 216,175 530,017
5,645,077 6,526,831
- -----------------------------------------------------------------------------------------------------------
4,421,460 5,787,739 1,366,279 2,535,912
21,104,322 26,418,108
18,941 64,831
- -----------------------------------------------------------------------------------------------------------
</TABLE>
S-15
<PAGE>
Variable Annuity Account I
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Janus Aspen Series:
Aggressive Growth Portfolio: $0 ($115,274) $50,864,976 $48,298,175 $2,566,801
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 595,970 (174,733) 2,029,779 1,535,395 494,384
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 235,389 (45,468) 1,385,219 1,308,029 77,190
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 870,829 (185,099) 5,214,196 4,131,907 1,082,289
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 2,336,194 (835,432) 24,476,251 18,059,755 6,416,496
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 66,337 (11,442) 369,448 511,215 (141,767)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 73,010 (15,445) 348,129 355,188 (7,059)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
MFS Funds:
Total Return Series: 295,218 (157,641) 1,431,298 1,180,363 250,935
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Worldwide Government Series: 8,377 (9,148) 309,659 301,566 8,093
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Aggressive Growth Fund: 37,225 (35,416) 47,122,397 46,966,784 155,613
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Global Securities Fund: 149,505 (24,845) 719,379 757,991 (38,612)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund: 475,900 (140,773) 5,499,885 5,888,453 (388,568)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Strategic Bond Fund: 65,788 (43,976) 704,382 714,269 (9,887)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Partners, Inc. (PPI):
PPI MFS Emerging Equities Portfolio: 88,752 (435,112) 11,342,689 10,460,671 882,018
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 4,104 (238,253) 4,855,332 4,530,115 325,217
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 7,644 (70,872) 4,030,146 3,786,613 243,533
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 4,297 (11,632) 40,667,463 40,626,409 41,054
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio: 140,691 (356,611) 3,159,498 2,822,708 336,790
Annuity contracts in accumulation
Total Variable Annuity Account I $36,268,129 ($ 10,257,915) $438,314,806 $412,797,023 $25,517,783
==============================================================================================================================
</TABLE>
(1) Effective May 1, 1998, Aetna Ascent Variable Portfolio's name changed to
Aetna Ascent VP.
(2) Effective May 1, 1998, Aetna Investment Advisors Fund's name changed to
Aetna Balanced VP.
(3) Effective May 1, 1998, Aetna Income Shares' name changed to Aetna Bond Fund
VP.
(4) Effective May 1, 1998, Aetna Crossroads Variable Portfolio's name changed
to Aetna Crossroads VP.
(5) Effective May 1, 1998, Aetna Variable Fund's name changed to Aetna Growth
and Income VP.
(6) Effective May 1, 1998, Aetna Variable Growth Portfolio's name changed to
Aetna Growth VP.
(7) Effective May 1, 1998, Aetna Variable Index Plus Portfolio's name changed
to Aetna Index Plus Large Cap VP.
(8) Effective May 1, 1998, Aetna International Portfolio's name changed to
Aetna International VP.
(9) Effective May 1, 1998, Aetna Legacy Variable Portfolio's name changed to
Aetna Legacy VP.
(10) Effective May 1, 1998, Aetna Variable Encore Fund's name changed to Aetna
Money Market VP.
(11) Effective May 1, 1998, Aetna Real Estate Securities Portfolio's name
changed to Aetna Real Estate Securities VP.
(12) Effective May 1, 1998, Aetna Variable Small Company Portfolio's name
changed to Aetna Small Company VP.
(13) Effective May 1, 1998, Aetna Variable Capital Appreciation Portfolio's name
changed to Aetna Value Opportunity VP.
S-16
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 685,946 $ 1,091,568 $ 405,622 $ 1,263,440
$ 6,554,615 $ 10,675,204
- -------------------------------------------------------------------------------------------------------------
746,135 3,925,885 3,179,750 8,908,355
7,726,386 20,730,112
- -------------------------------------------------------------------------------------------------------------
32,134 (11,388) (43,522) 2,430,909
2,000,867 4,655,365
- -------------------------------------------------------------------------------------------------------------
1,026,518 3,305,620 2,279,102 4,104,069
10,077,645 18,191,718
0 37,117
- -------------------------------------------------------------------------------------------------------------
4,733,621 9,935,954 5,202,333 12,501,656
44,728,546 70,349,793
- -------------------------------------------------------------------------------------------------------------
(302,429) (506,254) (203,825) (312,229)
1,230,059 627,133
- -------------------------------------------------------------------------------------------------------------
11,212 (281,919) (293,131) (322,903)
1,435,334 869,806
- -------------------------------------------------------------------------------------------------------------
595,567 1,378,265 782,698 8,404,056
6,818,458 16,393,724
- -------------------------------------------------------------------------------------------------------------
4,445 38,917 34,472 190,257
533,867 765,918
- -------------------------------------------------------------------------------------------------------------
(12,997) 285,448 298,445 2,135,488
801,718 3,393,073
- -------------------------------------------------------------------------------------------------------------
6,826 72,806 65,980 902,520
1,010,341 2,064,889
- -------------------------------------------------------------------------------------------------------------
136,910 (183,690) (320,600) 7,350,914
4,529,430 11,506,303
- -------------------------------------------------------------------------------------------------------------
(6,794) 519 7,313 3,041,102
1,385,569 4,445,909
- -------------------------------------------------------------------------------------------------------------
(271,841) 6,507,986 6,779,827 4,339,155
25,276,316 36,930,956
- -------------------------------------------------------------------------------------------------------------
(235,756) 2,930,826 3,166,582 2,849,219
14,192,990 20,299,859
- -------------------------------------------------------------------------------------------------------------
24,196 557,253 533,057 2,972,891
2,195,611 5,846,092
0 35,772
- -------------------------------------------------------------------------------------------------------------
(460) 50,071 50,531 1,154,164
25,466 1,263,880
- -------------------------------------------------------------------------------------------------------------
432,009 6,151,086 5,719,077 1,997,336
21,757,475 29,594,758
- -------------------------------------------------------------------------------------------------------------
$62,528,168 $129,005,870 $66,477,702 $212,836,410 $560,662,388 $891,504,497
=============================================================================================================
</TABLE>
S-17
<PAGE>
Variable Annuity Account I
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aetna Variable Fund: $2,917,442 ($ 125,993) $ 772,972 $ 648,307 $ 124,665
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares: 151,053 (26,889) 754,709 750,000 4,709
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund: 322,525 (170,170) 19,808,667 19,627,696 180,971
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.: 443,088 (36,303) 411,120 371,132 39,988
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio: 66,289 (9,238) 1,580,817 1,443,402 137,415
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio: 26,978 (2,883) 5,444 4,842 602
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio: 45,122 (6,136) 199,255 188,641 10,614
Annuity contracts in accumulation
Annuity contracts in payment period
- -------------------------------------------------------------------------------------------------------------------------
Aetna Variable Portfolios, Inc.:
Aetna Variable Capital Appreciation Portfolio: 141,848 (2,366) 140,737 134,978 5,759
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Aetna Variable Growth Portfolio: 242,318 (2,483) 311,238 305,917 5,321
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio: 156,860 (28,110) 1,772,894 1,552,332 220,562
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Aetna Variable Small Company Portfolio: 155,307 (7,993) 104,643 86,811 17,832
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Alger American Funds:
Balanced Portfolio: 24,076 (13,590) 120,684 99,159 21,525
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: (1) 89,153 (132,536) 15,600,119 13,181,627 2,418,492
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Income and Growth Portfolio: 65,111 (31,295) 1,374,610 1,109,169 265,441
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Leveraged AllCap Portfolio: 0 (36,689) 1,293,544 1,102,668 190,876
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
MidCap Portfolio: (1) 80,363 (75,046) 9,541,316 8,551,109 990,207
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
Small Capitalization Portfolio: (2) 338,930 (118,559) 12,725,130 12,057,293 667,837
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
American Century Investments:
- -------------------------------------------------------------------------------------------------------------------------
Balanced Fund: 29,309 (8,128) 203,349 186,540 16,809
Annuity contracts in accumulation
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($143,001) ($1,131,268) ($988,267) $9,726,519
$3,829,309 $15,483,675
- ---------------------------------------------------------------------------------------------------------
(21,783) (10,865) 10,918 1,877,585
1,003,244 3,020,620
- ---------------------------------------------------------------------------------------------------------
61,606 203,382 141,776 6,513,403
8,379,376 15,367,881
- ---------------------------------------------------------------------------------------------------------
15,913 93,604 77,691 3,246,840
702,615 4,473,919
- ---------------------------------------------------------------------------------------------------------
56,427 (42,941) (99,368) (175,693)
1,165,108 1,084,513
- ---------------------------------------------------------------------------------------------------------
(282) 3,424 3,706 309,890
76,740 415,033
- ---------------------------------------------------------------------------------------------------------
(3,582) 4,308 7,890 669,065
100,364 793,678
0 33,241
- ---------------------------------------------------------------------------------------------------------
0 (130,696) (130,696) 876,941
0 891,486
- ---------------------------------------------------------------------------------------------------------
0 (264,795) (264,795) 925,422
0 905,783
- ---------------------------------------------------------------------------------------------------------
(786) 106,638 107,424 3,426,210
32,321 3,915,267
- ---------------------------------------------------------------------------------------------------------
0 (169,978) (169,978) 2,580,005
0 2,575,173
- ---------------------------------------------------------------------------------------------------------
19,051 125,129 106,078 755,128
507,815 1,401,032
- ---------------------------------------------------------------------------------------------------------
331,002 0 (331,002) (8,508,847)
6,464,740 0
- ---------------------------------------------------------------------------------------------------------
43,184 245,881 202,697 2,618,690
647,270 3,767,914
- ---------------------------------------------------------------------------------------------------------
53,728 265,618 211,890 540,838
2,012,567 2,919,482
- ---------------------------------------------------------------------------------------------------------
172,467 0 (172,467) (4,925,256)
4,102,199 0
- ---------------------------------------------------------------------------------------------------------
(40,650) 0 40,650 (7,934,029)
7,005,171 0
- ---------------------------------------------------------------------------------------------------------
10,011 44,098 34,087 211,174
373,473 656,724
- ---------------------------------------------------------------------------------------------------------
</TABLE>
S-19
<PAGE>
Variable Annuity Account I
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation
Period
Dividends Deductions
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Capital Appreciation Fund: (3) $ 13,359 ($10,581)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
International Fund: 43,440 (24,794)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 0 (2)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 1,381,407 (329,134)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Growth Portfolio: 387,748 (199,645)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
High Income Portfolio: 258,910 (88,291)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Overseas Portfolio: 123,104 (32,314)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 167,003 (32,759)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 273,634 (226,793)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 198,117 (197,448)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 34,282 (13,109)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 2,021,951 (1,254,649)
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------------------------
Equity Income Fund II: 42,089 (75,051)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 83,791 (249,588)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 1,053,521 (275,549)
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------------------------
International Equity Fund II: 15,632 (226,665)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Prime Money Fund II: 210,825 (62,256)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Appreciation Fund: (3) $1,483,901 $1,555,024 ($71,123)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
International Fund: 793,249 675,144 118,105
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Calvert Social Balanced Portfolio: 6,738 7,426 (688)
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio: 1,006,879 870,117 136,762
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Growth Portfolio: 1,523,787 1,391,777 132,010
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
High Income Portfolio: 1,389,256 1,263,386 125,870
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Overseas Portfolio: 372,931 345,379 27,552
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio: 95,686 90,640 5,046
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Contrafund Portfolio: 624,535 485,003 139,532
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Index 500 Portfolio: 2,562,053 1,860,408 701,645
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Investment Grade Bond Portfolio: 292,775 284,565 8,210
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Insurance Management Series:
American Leaders Fund II: 3,672,802 2,283,020 1,389,782
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------------------------
Equity Income Fund II: 125,938 117,498 8,440
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Growth Strategies Fund II: 644,437 464,629 179,808
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
High Income Bond Fund II: 1,329,211 1,199,797 129,414
Annuity contracts in accumulation
Annuity contracts in payment period
- ---------------------------------------------------------------------------------------------------------
International Equity Fund II: 792,013 683,940 108,073
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
Prime Money Fund II: 5,616,613 5,616,577 36
Annuity contracts in accumulation
- ---------------------------------------------------------------------------------------------------------
</TABLE>
S-20
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($11,204) $0 $11,204 ($403,000)
$460,141 $0
- ---------------------------------------------------------------------------------------------------------
47,176 108,904 61,728 1,023,868
825,259 2,047,606
- ---------------------------------------------------------------------------------------------------------
0 (5,832) (5,832) 39,022
0 32,500
- ---------------------------------------------------------------------------------------------------------
763,902 4,573,383 3,809,481 17,482,048
11,855,352 34,335,916
- ---------------------------------------------------------------------------------------------------------
339,925 2,613,104 2,273,179 6,518,902
9,527,933 18,640,127
- ---------------------------------------------------------------------------------------------------------
99,376 678,175 578,799 7,802,056
2,737,458 11,414,802
- ---------------------------------------------------------------------------------------------------------
66,703 83,223 16,520 1,531,886
1,321,928 2,988,676
- ---------------------------------------------------------------------------------------------------------
56,785 247,841 191,056 2,241,299
1,216,766 3,788,411
- ---------------------------------------------------------------------------------------------------------
438,859 3,303,522 2,864,663 15,304,885
6,541,331 24,897,252
- ---------------------------------------------------------------------------------------------------------
375,527 2,903,863 2,528,336 14,780,907
4,888,997 22,900,554
- ---------------------------------------------------------------------------------------------------------
10,325 63,100 52,775 910,396
448,634 1,441,187
- ---------------------------------------------------------------------------------------------------------
7,073,040 27,572,894 20,499,854 33,372,942
58,037,362 114,050,410
0 16,832
- ---------------------------------------------------------------------------------------------------------
0 716,240 716,240 12,250,666
0 12,942,385
- ---------------------------------------------------------------------------------------------------------
890,268 4,379,010 3,488,742 11,282,487
9,800,678 24,585,918
- ---------------------------------------------------------------------------------------------------------
442,872 1,855,372 1,412,500 12,049,585
11,591,426 25,944,158
0 16,739
- ---------------------------------------------------------------------------------------------------------
599,852 1,842,212 1,242,360 7,630,546
11,335,329 20,105,275
- ---------------------------------------------------------------------------------------------------------
0 0 0 102,916
3,507,665 3,759,186
- ---------------------------------------------------------------------------------------------------------
</TABLE>
S-21
<PAGE>
Variable Annuity Account I
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation Proceeds Cost of Net
Period from Investments Realized
Dividends Deductions Sales Sold Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government Securities Fund II: $136,009 ($57,878) $815,197 $816,209 ($1,012)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Utility Fund II: 698,490 (236,725) 1,251,178 1,013,333 237,845
Annuity contracts in accumulation
Annuity contracts in payment period
- ------------------------------------------------------------------------------------------------------------------------
Janus Aspen Series:
Aggressive Growth Portfolio: 0 (64,625) 1,801,019 1,701,173 99,846
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Balanced Portfolio: 181,361 (69,510) 417,457 346,860 70,597
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Flexible Income Portfolio: 87,894 (14,471) 333,439 322,660 10,779
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Growth Portfolio: 219,777 (99,435) 947,759 774,701 173,058
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Portfolio: (4) 10,649 (6,397) 1,087,777 1,072,304 15,473
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Worldwide Growth Portfolio: 522,386 (448,359) 2,135,232 1,701,774 433,458
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund: 1,295 (21,167) 1,232,664 1,305,131 (72,467)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund: 41,210 (18,555) 1,350,194 1,215,906 134,288
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
MFS Funds:
Emerging Growth Series: (2) 0 (116,977) 15,517,072 13,662,725 1,854,347
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Research Series: (3) 0 (100,752) 13,471,461 12,125,968 1,345,493
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Total Return Series: 0 (54,566) 831,314 702,549 128,765
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Value Series: (5) 0 (5,724) 1,671,063 1,502,195 168,868
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
World Government Series: 15,615 (8,914) 711,009 723,530 (12,521)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Oppenheimer Funds:
Capital Appreciation Fund: 0 (2,638) 62,476 58,435 4,041
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Global Securities Fund: 0 (3,510) 38,265 35,536 2,729
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
Growth and Income Fund: 12,626 (13,385) 107,192 95,273 11,919
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
($201) $224,916 $225,117 $2,886,389
$2,456,452 $5,645,077
- ---------------------------------------------------------------------------------------------------
1,106,478 4,421,460 3,314,982 3,773,450
13,335,221 21,104,322
0 18,941
- ---------------------------------------------------------------------------------------------------
17,905 685,946 668,041 3,097,139
2,754,214 6,554,615
- ---------------------------------------------------------------------------------------------------
46,718 746,135 699,417 4,857,371
1,987,150 7,726,386
- ---------------------------------------------------------------------------------------------------
5,974 32,134 26,160 1,497,111
393,394 2,000,867
- ---------------------------------------------------------------------------------------------------
90,906 1,026,518 935,612 5,734,794
3,113,839 10,077,645
- ---------------------------------------------------------------------------------------------------
(1,799) 0 1,799 (335,569)
314,045 0
- ---------------------------------------------------------------------------------------------------
658,071 4,733,621 4,075,550 26,343,094
13,802,417 44,728,546
- ---------------------------------------------------------------------------------------------------
(4,649) (302,429) (297,780) 854,308
765,870 1,230,059
- ---------------------------------------------------------------------------------------------------
98,720 11,212 (87,508) 36,049
1,329,850 1,435,334
- ---------------------------------------------------------------------------------------------------
13,628 0 (13,628) (5,940,064)
4,216,322 0
- ---------------------------------------------------------------------------------------------------
66,161 0 (66,161) (3,668,017)
2,489,437 0
- ---------------------------------------------------------------------------------------------------
22,362 595,567 573,205 4,989,205
1,181,849 6,818,458
- ---------------------------------------------------------------------------------------------------
156 0 (156) (207,849)
44,861 0
- ---------------------------------------------------------------------------------------------------
3,877 4,445 568 324,691
214,428 533,867
- ---------------------------------------------------------------------------------------------------
0 (12,997) (12,997) 813,312
0 801,718
- ---------------------------------------------------------------------------------------------------
0 6,826 6,826 1,004,296
0 1,010,341
- ---------------------------------------------------------------------------------------------------
0 136,910 136,910 4,381,360
0 4,529,430
- ---------------------------------------------------------------------------------------------------
</TABLE>
S-23
<PAGE>
Variable Annuity Account I
Notes to Financial Statements - December 31, 1998 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets (continued):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1997
Valuation
Period
Dividends Deductions
- --------------------------------------------------------------------------------
<S> <C> <C>
Strategic Bond Fund: $37,598 ($5,530)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio: 0 (33,567)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 0 (18,615)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 0 (2,523)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 0 (5)
Annuity contracts in accumulation
- --------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio: 0 (28,585)
Annuity contracts in accumulation
Total Variable Annuity Account I $13,569,495 ($5,565,448)
================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Proceeds Cost of Net
from Investments Realized
Sales Sold Gain (Loss)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Strategic Bond Fund: $50,466 $49,763 $703
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
Portfolio Partners, Inc.:
PPI MFS Emerging Equities Portfolio: 14,301,627 14,309,825 (8,198)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
PPI MFS Research Growth Portfolio: 13,341,021 13,351,443 (10,422)
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
PPI MFS Value Equity Portfolio: 1,560,760 1,560,280 480
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
PPI Scudder International Growth Portfolio: 4 4 0
Annuity contracts in accumulation
- ----------------------------------------------------------------------------------------------
PPI T. Rowe Price Growth Equity Portfolio: 7,986,723 7,987,053 (330)
Annuity contracts in accumulation
Total Variable Annuity Account I $170,076,421 $157,030,583 $13,045,838
==============================================================================================
</TABLE>
(1) Effective November 28, 1997, assets from these funds were transferred to
the PPI T. Rowe Price Growth Equity Portfolio.
(2) Effective November 28, 1997, assets from these funds were transferred to
the PPI MFS Emerging Equities Portfolio.
(3) Effective November 28, 1997, assets from these funds were transferred to
the PPI MFS Research Growth Portfolio.
(4) Effective November 28, 1997, assets from these funds were transferred to
the Aetna Variable Encore Fund.
(5) Effective November 28, 1997, assets from these funds were transferred to
the PPI MFS Value Equity Portfolio.
S-24
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Net Unrealized Net
Gain (Loss) Net Increase (Decrease) Net Assets
----------- Change in In Net Assets ----------
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0 ($6,794) ($6,794) $1,359,592
$0 $1,385,569
- -----------------------------------------------------------------------------------------------------------
0 (271,841) (271,841) 25,589,922
0 25,276,316
- -----------------------------------------------------------------------------------------------------------
0 (235,756) (235,756) 14,457,783
0 14,192,990
- -----------------------------------------------------------------------------------------------------------
0 24,196 24,196 2,173,458
0 2,195,611
- -----------------------------------------------------------------------------------------------------------
0 (460) (460) 25,931
0 25,466
- -----------------------------------------------------------------------------------------------------------
0 432,009 432,009 21,354,381
0 21,757,475
- -----------------------------------------------------------------------------------------------------------
$13,871,018 $62,528,168 $48,657,150 $272,057,433 $218,897,920 $560,662,388
===========================================================================================================
</TABLE>
S-25
<PAGE>
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and Contract
Owners of Variable Annuity Account I:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Annuity Account I (the "Account") as
of December 31, 1998, and the related statements of operations and changes in
net assets for each of the years in the two-year period then ended and condensed
financial information for the year ended December 31, 1998. These financial
statements and condensed financial information are the responsibility of the
Account's management. Our responsibility is to express an opinion on these
financial statements and condensed financial information based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and condensed
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and condensed financial information. Our procedures
included confirmation of securities owned as of December 31, 1998, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company Variable Annuity Account I
as of December 31, 1998, the results of its operations and changes in its net
assets for each of the years in the two-year period then ended and condensed
financial information for the year ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
February 26, 1999
S-26
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
Index to Financial Statements
------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Financial Statements:
Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 F-3
Balance Sheets as of December 31, 1998 and 1997 F-4
Statements of Changes in Shareholder's Equity
For the Years Ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Shareholder and Board of Directors
Aetna Insurance Company of America:
We have audited the accompanying balance sheets of Aetna Insurance Company of
America as of December 31, 1998 and 1997, and the related statements of income,
changes in shareholder's equity, and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 statement presentation.
We believe that our audits provide 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 Aetna Insurance Company of
America at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1997, the Company changed
its method for accounting for guaranty-fund and other insurance related
assessments.
/s/ KPMG LLP
Hartford, Connecticut
March 24, 1999
F-2
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Income
(Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenue:
Charges assessed against policyholders $ 11.5 $ 6.1 $ 1.3
Net investment income 10.4 7.1 1.5
Net realized capital gains (losses) (0.2) 0.1 --
Other income 0.6 0.2 0.1
-------- ------- -------
Total revenue 22.3 13.5 2.9
Benefits and expenses:
Current and future benefits 9.0 6.5 1.7
Operating expenses 6.2 3.7 2.4
Amortization of deferred policy acquisition costs 3.9 0.8 0.2
-------- ------- -------
Total benefits and expenses 19.1 11.0 4.3
Income (loss) before income taxes (benefits)
and cumulative effect adjustment 3.2 2.5 (1.4)
Income taxes (benefits) 0.6 0.8 (0.7)
-------- ------- -------
Income (loss) before cumulative effect
adjustments 2.6 1.7 (0.7)
Cumulative effect adjustment, net of tax -- 0.5 --
-------- ------- -------
Net income (loss) $ 2.6 $ 1.2 $ (0.7)
======== ======= ========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Balance Sheets
(Millions, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Assets
Investments:
Debt securities, available for sale, at fair value
(amortized cost: $138.2 and $135.8) $ 142.3 $ 137.9
Equity securities, available for sale
Nonredeemable preferred stock (amortized cost: $3.1) 3.0 --
Cash and cash equivalents 16.5 12.5
Deferred policy acquisition costs 59.9 45.4
Accrued investment income 2.1 2.0
Premiums due and other receivables 13.3 1.6
Deferred tax asset -- 2.1
Income taxes receivable -- 1.4
Other assets 0.4 2.5
Separate Accounts assets 1,008.0 676.7
----------- ----------
Total assets $ 1,245.5 $ 882.1
=========== ==========
Liabilities and Shareholder's Equity
Liabilities:
Policyholders' funds left with the Company $ 153.2 $ 145.6
Other liabilities 13.3 6.8
Due to parent and affiliates 0.9 0.8
Income taxes
Current 0.1 --
Deferred 0.7 --
Separate Accounts liabilities 1,006.5 676.7
----------- ----------
Total liabilities 1,174.7 829.9
----------- ----------
Shareholder's equity:
Common capital stock, par value $2,000 (1,275 shares authorized,
issued and outstanding) 2.5 2.5
Paid-in capital 62.5 47.5
Accumulated other comprehensive income 1.2 0.2
Retained earnings 4.6 2.0
----------- ----------
Total shareholder's equity 70.8 52.2
----------- ----------
Total liabilities and shareholder's equity $ 1,245.5 $ 882.1
=========== ==========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Changes in Shareholder's Equity
(Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Shareholder's equity, beginning of year $ 52.2 $ 31.3 $ 12.1
Comprehensive income:
Net income (loss) 2.6 1.2 (0.7)
Other comprehensive income (loss), net of tax
Unrealized gains (losses), on securities
($1.5 million, $0.0 million and $(0.1)
million, pretax) 1.0 -- (0.1)
----------- ----------- -----------
Total comprehensive income (loss) 3.6 1.2 (0.8)
----------- ----------- -----------
Capital contributions 15.0 20.0 20.0
Other changes -- (0.3) --
----------- ----------- -----------
Shareholder's equity, end of year $ 70.8 $ 52.2 $ 31.3
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
AETNA INSURANCE COMPANY OF AMERICA
(A wholly owned subsidiary of Aetna Life Insurance and Annuity Company)
Statements of Cash Flows
(Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 2.6 $ 1.2 $ (0.7)
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Net amortization of discount on debt securities (0.1) (0.4) (0.1)
------- -------- --------
Cash flows provided by (used for) operating activities
and net realized capital (gains) losses before changes
in assets and liabilities 2.5 0.8 (0.8)
Net realized capital (gains) losses 0.2 (0.1) --
------- -------- --------
Cash flows provided by (used for) operating activities
before changes in assets and liabilities 2.7 0.7 (0.8)
Changes in assets and liabilities:
Increase in accrued investment income (0.1) (1.7) (0.2)
Increase in deferred policy acquisition costs (14.5) (24.3) (19.0)
Net change in amounts due to/from parent and affiliates 0.9 0.5 0.2
Net (decrease) increase in other assets and liabilities (2.2) 0.9 --
Net change in income taxes 2.4 (1.4) (2.7)
------- -------- --------
Net cash used for operating activities (10.8) (25.3) (22.5)
------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 27.8 16.6 2.5
Investment maturities and repayments of:
Debt securites available for sale 3.4 3.2 --
Short-term investments -- 1.0 --
Cost of investment purchases in:
Debt securities available for sale (36.8) (132.8) (16.7)
Short-term investments -- (1.0) --
------- -------- --------
Net cash used for investing activities (5.6) (113.0) (14.2)
------- -------- --------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 19.7 84.7 65.0
Withdrawals of investment contracts (14.3) (5.7) (0.4)
Capital contributions 15.0 20.0 20.0
------- -------- --------
Net cash provided by financing activities 20.4 99.0 84.6
------- -------- --------
Net increase (decrease) in cash and cash equivalents 4.0 (39.3) 47.8
Cash and cash equivalents, beginning of year 12.5 51.8 4.0
------- -------- --------
Cash and cash equivalents, end of year $ 16.5 $ 12.5 $ 51.8
======= ======== ========
Supplemental cash flow information:
Income taxes (received) paid, net $ (3.3) $ 1.5 $ 1.9
======= ======== ========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Aetna Insurance Company of America (the "Company") is a provider of financial
services in the United States. The Company is a wholly owned subsidiary of
Aetna Life Insurance and Annuity Company ("ALIAC"). 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").
Basis of Presentation
These financial statements have been prepared in conformity with generally
accepted accounting principles. Certain reclassifications have been made to
1997 and 1996 financial information to conform to the 1998 presentation.
New Accounting Standards
Disclosures about Segments of an Enterprise and Related Information
As of December 31, 1998, the Company adopted Financial Accounting Standard
("FAS") No. 131, Disclosures about Segments of an Enterprise and Related
Information. This statement establishes standards for the reporting of
information relating to operating segments. This statement supersedes FAS No.
14, Financial Reporting for Segments of a Business Enterprise, which requires
reporting segment information by industry and geographic area (industry
approach). Under FAS No. 131, operating segments are defined as components of
a company for which separate financial information is available and is used
by management to allocate resources and assess performance (management
approach). The adoption of this statement did not change the composition or
the results of operations of the operating segment of the Company, which are
consistent with the management approach.
Accounting for the costs of Computer Software Developed and Obtained for
Internal Use
On January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1,
Accounting for the costs of Computer Software Developed or Obtained for
Internal Use, issued by the American Institute of Certified Public
Accountants ("AICPA"). This statement requires that certain costs incurred in
developing internal-use computer software (in process at, and subsequent to
the adoption date) be capitalized, and provides guidance for determining
whether computer software is considered to be for internal use. The Company
will amortize these costs over a period of 3 to 5 years. Previously, the
Company expensed the cost of internal-use computer software as incurred. The
Company did not receive any allocation of benefits due to the adoption of
this statement.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
In June 1996, the Financial Accounting Standard Board ("FASB") issued No. 125
, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, that provides accounting and reporting
standards for transfers of financial assets and extinguishments of
liabilities. FAS No. 125 was effective for 1997 financial statements,
however, certain provisions
F-7
<PAGE>
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
relating to accounting for repurchase agreements and securities lending are
not effective until January 1, 1998. The adoption of those provisions
effective in 1998 did not have a material effect on the Company's financial
position or results of operations.
Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments
In 1997, the Company adopted the AICPA's SOP 97-3, Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments, effective as of
January 1, 1997. This statement required that the Company recognize a
liability for guaranty-fund and other insurance related assessments when such
assessments were probable and could not be reasonably estimated. A cumulative
effect charge of $0.5 million, net of taxes of $0.3 million, related to the
adoption of this statement is reflected in the 1997 Statements of Income.
There was no after-tax charge to earnings for guaranty fund obligations for
the year ended December 31, 1998.
Future Application Accounting Standards
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This standard
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and measure those instruments at fair value. The manner
in which companies are to record gains or losses resulting from changes in
the values of those derivatives depends on the use of the derivative and
whether it qualifies for hedge accounting. This standard is effective for the
Company's financial statements beginning January 1, 2000, with early adoption
permitted. The Company is currently evaluating the impact of adoption of this
statement and the potential effect on its financial position and results of
operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from reported results using those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
F-8
<PAGE>
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Investments
Debt and equity securities are classified as available for sale and carried
at fair value. These securities are written down (as realized capital losses)
for other than temporary declines in value. Unrealized capital gains and
losses related to available for sale investments, other than amounts
allocable to experience-rated contractholders, are reflected in shareholder's
equity, net of related taxes.
Fair values for debt and equity securities are based on quoted market prices
or dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for
similar securities or by using discounted cash flow methods. Cost for
mortgage-backed securities is adjusted for unamortized premiums and
discounts, which are amortized using the interest method over the estimated
remaining term of the securities, adjusted for anticipated prepayments.
The Company 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, 1998 and 1997, the Company had no securities out on loan.
Purchases and sales of debt and equity securities are recorded on the trade
date.
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which
approximates amortized cost.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs, all
of which vary with and are primarily related to the production of new and
renewal business, consist principally of commissions, certain expenses of
underwriting and issuing contracts and certain agency expenses. Such costs
are amortized in proportion to estimated gross profits and adjusted to
reflect actual gross profits and are amortized over a period of up to twenty
years. Deferred policy acquisition costs are written off to the extent that
it is determined that future policy premiums and investment income or gross
profits are not adequate to cover related losses and expenses.
Reserves
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
F-9
<PAGE>
Notes to Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
equal to cumulative deposits less charges and withdrawals plus credited
interest thereon (rates range from 3.00% to 8.10% for all years presented),
net of adjustments for investment experience that the Company is entitled to
reflect in future credited interest. Reserves on contracts subject to
experience rating reflect the rights of contractholders, plan participants
and the Company. 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.
Charges Assessed Against Policyholders and Other Income
Charges assessed against policyholders' funds for surrender charges,
actuarial margin and other fees are recorded as revenue when earned. Other
amounts received for these contracts are reflected as deposits and are not
recorded as revenue.
Separate Accounts
Assets held under variable annuity contracts are segregated in Separate
Accounts and are invested, as designated by the contractholder (who bears the
investment risk subject, in some cases, to minimum guarantee) in shares of
mutual funds that are managed by Aeltus Investment Management, Inc.
("Aeltus") or other selected mutual funds not managed by Aeltus.
As of December 31, 1998 Separate Accounts assets are carried at fair value.
At December 31, 1998, unrealized gains of $1.0 million, after taxes, on
assets supporting the guaranteed interest option are reflected in
shareholder's equity. At December 31, 1997, Separate Accounts assets
supporting the guaranteed interest option were carried at an amortized cost
of $90.8 million (fair value $91.5 million). Separate Accounts liabilities
are carried at fair value, except those relating to the guaranteed interest
option. Reserves relating to the guaranteed interest option are maintained at
fund value and reflect interest credited at rates ranging from 3.00% to 8.10%
in 1998 and 4.10% to 8.00% in 1997.
Separate Accounts assets and liabilities are shown as separate captions in
the Balance Sheets. Deposits, investment income and net realized and
unrealized capital gains and losses of the Separate Accounts are not
reflected in the Financial Statements (with the exception of realized and
unrealized capital gains and losses on the assets supporting the guaranteed
interest option). The Statements of Cash Flows do not reflect investment
activity of the Separate Accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna. The Company is taxed at regular corporate rates after adjusting income
reported for financial statement purposes for certain items. Deferred income
tax expenses/benefits result from changes during the year in cumulative
temporary differences between the tax basis and book basis of assets and
liabilities.
F-10
<PAGE>
Notes to Financial Statements (continued)
2. Investments
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 $ 22.6 $ 0.7 $ -- $ 23.3
- --------------------------------------------------------------------------------------------------------
U.S. corporate securities:
Utilities 7.0 0.1 -- 7.1
Financial 37.9 1.2 0.1 39.0
Transportation/capital goods 8.6 0.3 -- 8.9
Health care/consumer products 15.3 0.6 -- 15.9
Natural resources 8.6 0.3 -- 8.9
Other corporate securities 0.7 0.2 -- 0.9
- --------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 78.1 2.7 0.1 80.7
- --------------------------------------------------------------------------------------------------------
Foreign securities:
Government 1.1 -- -- 1.1
Other 8.0 0.2 0.3 7.9
- --------------------------------------------------------------------------------------------------------
Total foreign securities 9.1 0.2 0.3 9.0
- --------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 0.7 -- -- 0.7
Collateralized mortgage obligations 8.7 0.4 -- 9.1
- --------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 9.4 0.4 -- 9.8
- --------------------------------------------------------------------------------------------------------
Commercial/multifamily mortgage-
backed securities 10.3 0.3 -- 10.6
- --------------------------------------------------------------------------------------------------------
Other asset-backed securities 8.7 0.2 -- 8.9
- --------------------------------------------------------------------------------------------------------
Total debt securities $ 138.2 $ 4.5 $ 0.4 $ 142.3
========================================================================================================
</TABLE>
F-11
<PAGE>
Notes to Financial Statements (continued)
2. Investments (continued)
Debt securities available for sale as of December 31, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 (Millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and government
agencies and authorities $ 37.8 $ 1.0 $ -- $ 38.8
- --------------------------------------------------------------------------------------------------------
U.S. corporate securities:
Financial 31.3 0.7 -- 32.0
Healthcare & consumer products 6.5 0.2 -- 6.7
Media & broadcast 1.0 0.1 -- 1.1
Natural resources 5.1 0.1 -- 5.2
Transportation & capital goods 5.3 0.1 -- 5.4
Utilities 6.0 0.1 -- 6.1
Other corporate securities 0.8 -- -- 0.8
- --------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 56.0 1.3 -- 57.3
- --------------------------------------------------------------------------------------------------------
Foreign securities:
Government 1.0 -- 0.3 0.7
Other 12.2 0.2 0.8 11.6
- --------------------------------------------------------------------------------------------------------
Total foreign securities 13.2 0.2 1.1 12.3
- --------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities:
Pass-throughs 1.2 -- -- 1.2
Collateralized mortgage obligations 8.6 0.4 -- 9.0
- --------------------------------------------------------------------------------------------------------
Total residential mortgage-backed securities 9.8 0.4 -- 10.2
- --------------------------------------------------------------------------------------------------------
Commercial/multifamily mortgage
backed securities 8.6 0.2 -- 8.8
- --------------------------------------------------------------------------------------------------------
Other asset-backed securities 10.4 0.1 -- 10.5
- --------------------------------------------------------------------------------------------------------
Total Debt Securities $ 135.8 $ 3.2 $ 1.1 $ 137.9
========================================================================================================
</TABLE>
F-12
<PAGE>
Notes to Financial Statements (continued)
2. Investments (continued)
At December 31, 1998 and 1997 net unrealized appreciation of $4.1 million and
$2.1 million respectively, on available-for-sale debt securities included
unrealized gains of $3.8 million and $1.8 million, respectively, related to
experience-rated contracts, which were not reflected in shareholder's equity
but in policyholders' funds left with the Company.
The amortized cost and fair value of debt securities for the year ended
December 31, 1998 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be
restructured, called or prepaid.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Amortized Fair
(Millions) Cost Value
-----------------------------------------------------------------
<S> <C> <C>
Due to mature:
One year or less $ 12.0 $ 12.0
After one year through five years 53.2 54.4
After five years through ten years 20.1 21.2
After ten years 24.5 25.4
Mortgage-backed securities 19.7 20.4
Other asset-backed securities 8.7 8.9
-----------------------------------------------------------------
Total $ 138.2 $ 142.3
=================================================================
</TABLE>
At December 31, 1998 and 1997, debt securities carried at $5.4 million and
$5.0 million, respectively, were on deposit as required by various state
regulatory agencies.
Investments in equity securities available for sale as of December 31, were
as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997
--------------------------------------------
<S> <C> <C>
Cost $ 3.1 --
Gross unrealized gains -- --
Gross unrealized losses (0.1) --
--------------------------------------------
Fair value $ 3.0 --
=============================================
</TABLE>
The Company does not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10% of
the Company's shareholder's equity at December 31, 1998.
F-13
<PAGE>
Notes to Financial Statements (continued)
3. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 0.6 $ 0.5 $ 0.3 $ 0.3
Without a fixed maturity $ 152.6 $ 143.8 $ 145.3 $ 134.8
----------------------------------------------------------------------------------------
</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.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Investment contract liabilities (included in policyholders' funds left with
the Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in
paying an amount different than that determined to be payable.
Off-Balance-Sheet and Other Financial Instruments
The Company did not have transactions in off-balance-sheet instruments in
1998 or 1997.
F-14
<PAGE>
Notes to Financial Statements (continued)
4. Net Investment Income
Sources of net investment income were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 9.0 $ 6.0 $ 0.5
Nonredeemable preferred stock 0.3 -- --
Cash equivalents 0.7 1.2 1.0
Other 0.6 -- --
------------------------------------------------------------------------
Gross investment income 10.6 7.2 1.5
Less: investment expenses 0.2 0.1 --
------------------------------------------------------------------------
Net investment income $ 10.4 $ 7.1 $ 1.5
========================================================================
</TABLE>
Net investment income includes amounts allocable to experience-rated
contractholders of $8.9 million, $7.0 million and $0.9 million for the years
ended December 31, 1998, 1997 and 1996, respectively. Interest credited to
contractholders is included in current and future benefits.
5. Dividend Restrictions and Shareholder's Equity
All dividends that may be paid to the shareholder in 1999 must have prior
approval by the Insurance Commissioner of the State of Connecticut.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus, those amounts
determined in conformity with statutory accounting practices prescribed or
permitted by the Department, which differ in certain respects from generally
accepted accounting principles ("GAAP"). Statutory net income (loss) was
$(5.2) million, $0.4 million and $(7.9) million for the years ended December
31, 1998, 1997 and 1996, respectively. Statutory capital and surplus was
$53.4 million and $43.4 million as of December 31, 1998 and 1997,
respectively. The Company has entered into support agreements with ALIAC
under which ALIAC has agreed to cause the Company to have sufficient capital
to meet a certain capital and surplus level. The Company received capital
contributions relating to these agreements of $15.0 million and $20.0 million
from ALIAC in 1998 and 1997, respectively.
As of December 31, 1998, the Company does not utilize any statutory
accounting practices which are not prescribed by state regulatory authorities
that, individually or in the aggregate, materially affect statutory capital
and surplus.
6. Capital Gains and Losses on Investment Operations
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold.
Net realized capital gains (losses) on debt securities, as reflected in the
Statements of Income for the years ended December 31, 1998 and 1997, were
$(0.2) million and $0.1 million, respectively. Net realized capital gains
(losses) on debt securities for 1996 were immaterial.
F-15
<PAGE>
Notes to Financial Statements (continued)
6. Capital Gains and Losses on Investment Operations (continued)
Net realized capital (losses) gains of $(0.2) million and $0.2 million
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 in 1998 and 1997, respectively. Net unamortized gains
were $0.2 million at December 31, 1997. The amounts in 1998 were immaterial.
There were no such amounts for 1996.
Proceeds from the sale of available-for-sale debt securities and the related
gross gains and losses (excluding those related to experience rated
contractholders in 1998 and 1997) were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Proceeds on sales $ 27.8 $ 16.6 $ 2.5
Gross gains 0.6 0.1 --
Gross losses 0.8 -- --
---------------------------------------------------------
</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 in 1998 and
1997), were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities $ 0.1 -- $ (0.1)
Equity securities (0.1) -- --
Other 1.6 --
----------------------------------------------------------------------------------
Subtotal 1.6 -- (0.1)
Increase in deferred income taxes (See Note 7) 0.6 -- --
----------------------------------------------------------------------------------
Net change in accumulated other
comprehensive income $ 1.0 -- $ (0.1)
==================================================================================
</TABLE>
Net unrealized capital gains (losses) allocable to experience-rated contracts
of $3.8 million and $1.8 million at December 31, 1998 and 1997, respectively,
are reflected on the Balance Sheets in policyholders' funds left with the
Company and are not included in shareholder's equity.
F-16
<PAGE>
Notes to Financial Statements (continued)
6. Capital Gains and Losses on Investment Operations (continued)
Shareholder's equity included the following accumulated other comprehensive
income, which is net of amounts allocable to experience rated contractholders
in 1998 and 1997, at December 31:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt securities:
Gross unrealized gains $ 0.3 $ 0.2 $ 0.2
Gross unrealized losses -- -- --
---------------------------------------------------------------------------------------
0.3 0.2 0.2
---------------------------------------------------------------------------------------
Equity securities:
Gross unrealized gains -- -- --
Gross unrealized losses (0.1) -- --
---------------------------------------------------------------------------------------
(0.1) -- --
---------------------------------------------------------------------------------------
Other:
Gross unrealized gains 1.9 -- --
Gross unrealized losses (0.3) -- --
---------------------------------------------------------------------------------------
1.6 -- --
---------------------------------------------------------------------------------------
Less: deferred federal income taxes (see Note 7) 0.6 -- --
---------------------------------------------------------------------------------------
Net unrealized capital gains $ 1.2 $ 0.2 $ 0.2
=======================================================================================
</TABLE>
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders) were as follows:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during the period (1) $ 0.9 $ 0.3 $ --
Less: reclassification adjustment for gains and
other items included in net income (2) (0.1) 0.3 0.1
------------------------------------------------------------------------------------
Net unrealized gains (losses) on securities $ 1.0 $ -- $ (0.1)
====================================================================================
</TABLE>
(1) Pretax unrealized holding gains (losses) arising during the period were
$1.3 million and $0.4 million for 1998 and 1997, respectively. There were
no unrealized holding gains (losses) arising in 1996.
(2) Pretax reclassification adjustments for gains and other items included in
net income were $(0.2) million, $0.4 million and $0.1 million for 1998,
1997 and 1996, respectively.
F-17
<PAGE>
Notes to Financial Statements (continued)
7. Income Taxes
The Company is included in the consolidated federal income tax return of
Aetna and combined Connecticut state income tax return of Aetna. Aetna
allocates to each member an amount approximating the tax it would have
incurred were it not a member of the consolidated group, and credits the
member for the use of its tax saving attributes used in the consolidated
returns.
Income taxes for the years ended December 31, consist of:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
----------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes (benefits):
Federal $ (1.7) $ 1.2 $ 0.1
State 0.1 -- (0.1)
Net realized capital gains (losses) (0.1) 0.1 --
----------------------------------------------------------------------------
(1.7) 1.3 --
----------------------------------------------------------------------------
Deferred taxes (benefits):
Federal 2.3 (0.4) (0.7)
Net realized capital losses -- (0.1) --
----------------------------------------------------------------------------
2.3 (0.5) (0.7)
----------------------------------------------------------------------------
Total $ 0.6 $ 0.8 $ (0.7)
============================================================================
</TABLE>
Income taxes were different from the amount computed by applying the federal
income tax rate to income before income taxes for the following reasons:
<TABLE>
<CAPTION>
(Millions) 1998 1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes (benefits) and
cumulative effect adjustment $ 3.2 $ 2.5 $ (1.4)
Tax rate 35% 35% 35%
---------------------------------------------------------------------------------------
Application of the tax rate 1.1 0.9 (0.5)
Tax effect of:
Excludable dividends (0.5) (0.1) (0.2)
---------------------------------------------------------------------------------------
Income taxes (benefits) $ 0.6 $ 0.8 $ (0.7)
=======================================================================================
</TABLE>
F-18
<PAGE>
Notes to Financial Statements (continued)
7. Income Taxes (continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
<TABLE>
<CAPTION>
(Millions) 1998 1997
-------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Policyholders' funds left with the Company $ 16.6 $ 14.3
Unrealized gains allocable to experience-rated
contracts 1.3 0.7
Guaranty fund assessments 0.1 0.1
Pension -- 0.2
Other 0.1 --
-------------------------------------------------------------------------
Total gross assets 18.1 15.3
-------------------------------------------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 16.9 12.5
Net unrealized capital gains 1.9 0.7
-------------------------------------------------------------------------
Total gross liabilities 18.8 13.2
-------------------------------------------------------------------------
Net deferred tax (asset) liability $ 0.7 $ (2.1)
=========================================================================
</TABLE>
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. As of December 31, 1998 and 1997, no valuation
allowances were required for unrealized capital gains and losses.
The Internal Revenue Service (the "Service") has completed examinations of
the consolidated federal income tax returns of Aetna through 1990.
Discussions are being held with the Service with respect to proposed
adjustments. Management believes there are adequate defenses against, or
sufficient reserves to provide for, any such adjustments. The Service has
commenced its examinations for the years 1991 through 1994.
8. Benefit Plans
The Company utilizes the employees of Aetna and its affiliates (primarily
ALIAC). The benefit plan charges allocated to the Company were $0.2 million
in 1998. In 1997 and 1996 the charges were immaterial.
As of December 31, 1996, Aetna transferred to the Company approximately $0.1
million of accrued liabilities, primarily related to the allocation of ALIAC
pension and postretirement benefit plans that had been previously recorded by
Aetna. The after-tax amount of this transfer (approximately $0.1 million) is
reported as a reduction in retained earnings. In 1997, other changes in
shareholder's equity includes an additional $0.3 million reduction reflecting
revisions to the allocation of these accrued liabilities.
F-19
<PAGE>
Notes to Financial Statements (continued)
9. Related Party Transactions
Substantially all of the administrative and support functions of the Company
are provided by Aetna and its affiliates. The financial statements reflect
allocated charges, at cost, for these services based upon measures
appropriate for the type and nature of service provided. Total charges
allocated to the Company, including rent, salaries and other administrative
expenses, were $10.5 million and $7.3 million for the years ended December
31, 1998 and 1997, respectively, (of which $5.5 million and $4.5 million,
respectively, were capitalized as deferred policy acquisition costs).
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable annuity contracts. Under the insurance
contracts, the Separate Accounts pay the Company a daily fee which, on an
annual basis, ranged from 1.25% to 1.40% of their average daily net assets.
The amount of compensation and fees received from the Separate Accounts,
included in charges assessed against policyholders, amounted to $10.3
million, $5.6 million and $1.3 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company received capital contributions of $15.0 million in cash from
ALIAC in 1998 and $20.0 million in both 1997 and 1996.
Since August 1996, Aeltus, an affiliate of the Company, has been acting as
adviser for the general account assets. The Company pays Aeltus a fee which,
on an annual basis, is .06% of the average daily net assets under management.
The amount of such fees for the years ended December 31, 1998 and 1997
amounted to $0.2 million and $0.1 million, respectively. The amount for such
fees in 1996 was immaterial.
10. Commitments and Contingent Liabilities
Commitments
At December 31, 1998 and 1997 the Company had no commitments or contingent
liabilities.
Litigation
The Company is not currently involved in any material litigation.
F-20
<PAGE>
Form No. SAI.59749-99 AICA Ed. May, 1999
