-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E6J6EEnWdgm490q41ai3sCchoECiR33fDyo9JvXRJGd7p0dkywJWyHpHHb7gFlWL cjKNMiKka7ryE6d3Hl0y+A== 0000950146-98-001851.txt : 19981105 0000950146-98-001851.hdr.sgml : 19981105 ACCESSION NUMBER: 0000950146-98-001851 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19981104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIABLE ANNUITY ACCOUNT B OF AETNA LIFE INS & ANNUITY CO CENTRAL INDEX KEY: 0000103005 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 333-09515 FILM NUMBER: 98737622 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032734808 MAIL ADDRESS: STREET 1: AETNA LIFE & CASUALTY STREET 2: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 FORMER COMPANY: FORMER CONFORMED NAME: VARIABLE ANNUITY ACCOUNT B OF AETNA VARIABLE ANNUITY LIFE IN DATE OF NAME CHANGE: 19791108 497 1 VARIABLE ANNUITY ACCOUNT B A FIXED AND VARIABLE SINGLE PREMIUM IMMEDIATE ANNUITY ISSUED BY AETNA LIFE INSURANCE AND ANNUITY COMPANY PROSPECTUS ================================================================================ The Contract offered in connection with this Prospectus is a combination fixed and/or variable single premium immediate annuity contract (the "Contract") issued by Aetna Life Insurance and Annuity Company (the "Company"). The Contract is designed to provide regular income payments for a certain period or for life (with or without a guaranteed period) commencing immediately after purchase under the payment method that you select. The Contract provides that your Purchase Payment may be allocated to a fixed dollar option and/or one or more of the Subaccounts of Variable Annuity Account B, a separate account of the Company. The Subaccounts invest directly in shares of the following Funds: (bullet) Aetna Ascent VP (formerly Aetna Ascent Variable Portfolio) (bullet) Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund, Inc.) (bullet) Aetna Income Shares d/b/a Aetna Bond VP (bullet) Aetna Crossroads VP (formerly Aetna Crossroads Variable Portfolio) (bullet) Aetna Growth VP (formerly Aetna Variable Growth Portfolio) (bullet) Aetna Variable Fund d/b/a Aetna Growth and Income VP (bullet) Aetna Index Plus Large Cap VP (formerly Aetna Variable Index Plus Portfolio) (bullet) Aetna International VP (bullet) Aetna Legacy VP (formerly Aetna Legacy Variable Portfolio) (bullet) Aetna Variable Encore Fund d/b/a Aetna Money Market VP (bullet) Aetna Real Estate Securities VP (bullet) Aetna Small Company VP (formerly Aetna Variable Small Company Portfolio) (bullet) AIM V.I. Capital Appreciation Fund (bullet) AIM V.I. Growth Fund (bullet) AIM V.I. Growth and Income Fund (bullet) AIM V.I. Value Fund (bullet) Fidelity VIP High Income Portfolio (bullet) Janus Aspen Growth Portfolio (bullet) Janus Aspen Worldwide Growth Portfolio (bullet) Oppenheimer Strategic Bond Fund (bullet) Portfolio Partners MFS Emerging Equities Portfolio (bullet) Portfolio Partners MFS Value Equity Portfolio (bullet) Portfolio Partners Scudder International Growth Portfolio (bullet) Portfolio Partners T. Rowe Price Growth Equity Portfolio The availability of the Funds is subject to applicable regulatory authorization. Not all Funds may be available in all jurisdictions or under all Contracts. This Prospectus provides information that you should know before purchasing the Contract. Additional information about the Contract and the Separate Account is contained in a Statement of Additional Information ("SAI") dated October 30, 1998. The SAI has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The Table of Contents for the SAI is printed on page 12 of this Prospectus. For a free copy of the SAI, call us at (800) 238-6273 or write us at: 151 Farmington Avenue, Hartford, Connecticut 06156, Attention: ARS Settlements. You may also obtain an SAI for any of the Funds by calling that phone number. THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE CURRENT PROSPECTUSES OF THE FUNDS. ALL PROSPECTUSES SHOULD BE RETAINED FOR FUTURE REFERENCE. THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) CAN BE FOUND IN THE SEC'S WEB SITE AT http://www.sec.gov. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS IS DATED OCTOBER 30, 1998. TABLE OF CONTENTS ================================================================================ DEFINITIONS ............................... DEFINITIONS-1 PROSPECTUS SUMMARY ........................... SUMMARY-1 FEE TABLE .................................. FEE TABLE-1 CONDENSED FINANCIAL INFORMATION ...................... 1 THE VARIABLE ANNUITY CONTRACT ........................ 1 ANNUITY PAYMENTS ..................................... 1 Annuity Elections .................................. 1 Annuity Options .................................... 1 Annuity Payments ................................... 2 Valuation of Annuity Unit Values ................... 2 PURCHASE ............................................. 3 Purchase Payments .................................. 3 How to Purchase .................................... 3 Allocation of Purchase Payment ..................... 3 Free Look Period ................................... 3 INVESTMENT OPTIONS ................................... 4 Fund Availability and Substitution ................. 4 Fixed Dollar Option ................................ 4 Transfers Among Subaccounts ........................ 4 CHARGES AND DEDUCTIONS ............................... 5 Mortality and Expense Risk Charge .................. 5 Administrative Charge .............................. 5 Withdrawal Charge .................................. 5 Fund Expenses ...................................... 6 Premium and Other Taxes ............................ 6 TAXES ................................................ 6 Introduction ....................................... 6 Taxation of Annuity Payments ....................... 6 Taxation of Withdrawals ............................ 7 Distributions--Tax-Deferred Annuities .............. 7 Tax Penalty ........................................ 7 Nonnatural Owners .................................. 8 WITHDRAWALS--ACCESS TO YOUR MONEY .................... 8 Commutation ........................................ 8 Commuted Value ..................................... 8 PERFORMANCE .......................................... 8 DEATH BENEFIT ........................................ 9 Death Benefit Commutation .......................... 9 OTHER INFORMATION .................................... 9 The Company ........................................ 9 The Separate Account ............................... 9 Distribution ....................................... 10 Ownership .......................................... 10 Beneficiary ........................................ 10
Delay or Suspension of Payments .................... 10 Voting Rights ...................................... 11 Modification of the Contract ....................... 11 Legal Matters and Proceedings ...................... 11 Financial Statements ............................... 11 Year 2000 .......................................... 11 CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION .. 12 APPENDIX A--THE FIXED DOLLAR OPTION .................. 13 APPENDIX B--CONDENSED FINANCIAL INFORMATION .......... 16 APPENDIX C--DESCRIPTION OF UNDERLYING FUNDS .......... 20
DEFINITIONS ================================================================================ The following terms are defined as they are used in this Prospectus: Annuitant/Joint Annuitant: An individual named in the contract (1) whose life determines the amount or continuation of life-contingent payments, and/or (2) whose death results in the payment of death benefits. Annuity Payment(s): A series of payments for life, a certain period or a combination of the two. Beneficiary(ies): The person or persons who are designated by the Contract Holder to receive any death benefit proceeds payable under the Contract. Commutation: The right to receive in a lump sum the present value of all or a portion of future Guaranteed Payments under a Period Certain Annuity. This right may be subject to a withdrawal charge. Commuted Value: The present value of any future Guaranteed Payments which have not yet been paid under the Contract. Company (We, Us): Aetna Life Insurance and Annuity Company. Contract: The individual single premium immediate annuity contract offered in connection with this Prospectus. Contract Effective Date: The date that the money is applied to the Contract and all paperwork is received in good order at the Company's Home Office. Contract Holder (You): The person to whom the Contract is issued. The Company reserves the right to limit ownership to natural persons. Fund(s): An open-end registered management investment company whose shares are purchased by the Separate Account to fund the benefits provided by the Contract. Guaranteed Payment: A payment that is due whether or not the Annuitant, or Joint Annuitant (if applicable), is alive on the Payment Due Date. Home Office: The Company's principal executive offices located at 151 Farmington Avenue, Hartford, Connecticut 06156. Life Annuity: An annuity with payments that are based solely on whether or not the Annuitant, or Joint Annuitant (if applicable), is alive on the Payment Due Date. Payee: A person who receives Annuity Payments. The Contract Holder shall be the Payee unless the Contract Holder designates otherwise in writing. Payment Due Date: The date on which each Annuity Payment is scheduled to be paid. Such date can be either monthly, quarterly, semi-annually or annually, at the election of the Contract Holder. Period Certain Annuity: An annuity with a specified number of Guaranteed Payments that are payable whether or not the Annuitant, or Joint Annuitant (if applicable), is alive on the Payment Due Date. Separate Account: Variable Annuity Account B, a separate account established by the Company for the purpose of funding variable annuity contracts issued by the Company. Subaccount(s): The portion of the assets of the Separate Account that is allocated to a particular Fund. Each Subaccount invests in the shares of only one corresponding Fund. Valuation Date: The date and time at which the Annuity Unit Value of a Subaccount is calculated. Currently, this calculation occurs after the close of business of the New York Stock Exchange on any normal business day, Monday through Friday, that the New York Stock Exchange is open. - ------------------------------------------------------------------------------- DEFINITIONS - 1 PROSPECTUS SUMMARY ================================================================================ THE VARIABLE ANNUITY CONTRACT The fixed and variable single premium immediate annuity contract offered by the Company represents a contract between you and Aetna Life Insurance and Annuity Company. The purpose of the Contract is to provide regular income payments for a certain period or for life (with or without a guaranteed period) commencing immediately after purchase under the payment method that you select. PURCHASE You may purchase the Contract with a single Purchase Payment of $5,000 or more. Your registered representative can help you fill out the proper forms. The Contract is available to persons who wish to receive annuity income payments. Contracts may be issued on a nonqualified basis. Contracts may also be issued in connection with employer sponsored Section 401(a), Section 403(b) and Section 457 plans, or as an Individual Retirement Annuity (IRA). (Contracts sold in New York are not available for Section 457 plans.) The maximum issue age is 85 to 90 depending on the option selected. The Company reserves the right to modify the maximum issue age. (See "Purchase.") FREE LOOK PERIOD If you cancel the Contract within 10 days after receiving it (or whatever period is required in your state), we will return your money without assessing a withdrawal charge. You will receive whatever your Contract is worth on the day we receive your request, less any Annuity Payments already made. This amount may be more or less than your original Purchase Payment. (See "Purchase--Free Look Period.") ANNUITY PAYMENTS Annuity Payments may be made on either a fixed, variable or combination fixed and variable basis. If a variable payout is selected, the payments will vary with the investment performance of the Subaccount(s) selected. You have the right to select the payment plan, or "Annuity Option," under which Annuity Payments are to be made. These Options can provide payments for life or for the joint lives of two Annuitants, with or without a Guaranteed Period, or for a certain period or number of payments. (See "Annuity Payments.") INVESTMENT OPTIONS You can put all or some of your money in up to four Subaccounts at any one time. These Subaccounts invest directly in shares of the Funds as listed on the first page of this Prospectus. Since the value of a Subaccount's units is affected by the performance of the underlying Fund, depending on market conditions, you can make or lose money by investing in any of the Subaccounts. For a complete list of the Funds available under the Contract, and a description of their investment objectives and their investment advisers, see Appendix C of this Prospectus, as well as the prospectus for each of the Funds. You can also put all or some of your money into a fixed dollar option which guarantees a fixed payment, as specified in the Contract. The fixed dollar option is described in Appendix A to this Prospectus. Transfers are currently not permitted into or out of the fixed dollar option. TRANSFERS You may make transfers among the Subaccounts at any time. The Company reserves the right to limit such transfers to twelve (12) in any calendar year. Aetna may establish a minimum transfer amount. See "Investment Options--Transfers.") - ------------------------------------------------------------------------------- SUMMARY - 1 CHARGES AND DEDUCTIONS The Contract has insurance features and investment features, and there are costs related to each. These charges include daily deductions from the Separate Account (the mortality and expense risk charge and an administrative charge), as well as fees and expenses which are deducted directly from the Funds. (See the Fee Table and "Charges and Deductions.") WITHDRAWALS Under a variable Period Certain Annuity, you may elect to receive the Commuted Value of all or a portion of future Guaranteed Payments, less any applicable withdrawal charge. The Commuted Value will be determined as of the Valuation Date next following the Company's receipt of your written request for Commutation. Withdrawals during the free look period will not incur a withdrawal charge. Withdrawals may also be subject to income tax and a federal tax penalty. (See "Withdrawals--Access to Your Money.") DEATH BENEFIT A death benefit may be payable if your Contract is issued under certain Annuity Options. The death benefit is the right to receive any remaining Guaranteed Payments. The death benefit is payable upon the death of the Annuitant, or the survivor if there is a Joint Annuitant. Under Lifetime Annuity Options with Guaranteed Payments, the Beneficiary may elect, within six months of such death, to receive the Commuted Value of any remaining Guaranteed Payments. However, under a Period Certain Annuity, the Beneficiary may make such election at any time. No withdrawal charge will apply to the Commuted Value of the death benefit. (See "Death Benefit.") TAXES All or a portion of each Annuity Payment will generally be includable in gross income and subject to federal income tax. A 10% federal tax penalty may be imposed on certain Annuity Payments or withdrawals. (See "Taxes.") INQUIRIES Questions or requests for additional information may be directed to your agent or local representative, or you may contact the Company as follows: (bullet) Write to: Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, Connecticut 06156 Attention: ARS Settlements (bullet) Telephone: 1-800-238-6273 - ------------------------------------------------------------------------------- SUMMARY - 2 FEE TABLE ================================================================================ This information is intended to help you understand the various costs and expenses incurred under your Contract. The table reflects expenses of the Subaccounts as well as of the Funds. Some expenses may vary as explained under "Charges and Deductions." Charges shown do not include premium taxes that may be applicable. For more information regarding fees and expenses paid out of the assets of a particular Fund, see the Fund's prospectus. CONTRACT HOLDER TRANSACTION EXPENSES WITHDRAWAL CHARGE Under a variable Period Certain Annuity, Commutations are subject to the following charges:
Number of years from Withdrawal Charge Contract Effective Date % of Commuted Value(1) - ----------------------- ---------------------- Fewer than 1 5% 1 or more, but fewer than 2 5% 2 or more, but fewer than 3 4% 3 or more, but fewer than 4 4% 4 or more, but fewer than 5 3% 5 or more, but fewer than 6 2% 6 or more, but fewer than 7 1% 7 or more 0%
- ------------------ (1) The Company will monitor the applicable deductions for the Withdrawal Charge to ensure it will never exceed 8.5% of the Purchase Payment. SEPARATE ACCOUNT ANNUAL EXPENSES Each Subaccount pays these expenses out of its assets. The charges are reflected in the Subaccount's daily Unit Value and are not charged directly to you. The Separate Account charges include: Mortality and Expense Risk Charge ................ 1.25% Administrative Charge(2) ......................... 0.00% ---- Total Separate Account Annual Expenses ......... 1.25% ====
- ------------------ (2) We currently do not impose an administrative charge. However, we reserve the right to deduct a daily charge from the Subaccounts, equivalent on an annual basis to not more than 0.25%. - ------------------------------------------------------------------------------- FEE TABLE - 1 ANNUAL EXPENSES OF THE FUNDS The following table illustrates the advisory fees and other expenses applicable to the Funds. These figures are a percentage of each Fund's average net assets and, except as noted, are based on figures for the year ended December 31, 1997 unless otherwise indicated. A Fund's "Other Expenses" include operating costs of the Fund. Investment Advisory fees and other expenses are deducted from each Fund's net asset value and are not deducted from the value of your Contract.
Investment Advisory Fees(1) Other Expenses (after expense (after expense Total Annual reimbursement) reimbursement) Fund Expenses ------------------ ---------------- -------------- Aetna Ascent VP(2)(3) 0.57% 0.23% 0.80% Aetna Balanced VP, Inc.(2) 0.50% 0.10% 0.60% Aetna Bond VP(2) 0.40% 0.10% 0.50% Aetna Crossroads VP(2)(3) 0.55% 0.25% 0.80% Aetna Growth VP(2)(3) 0.16% 0.64% 0.80% Aetna Growth and Income VP(2) 0.50% 0.09% 0.59% Aetna Index Plus Large Cap VP(2)(3) 0.32% 0.23% 0.55% Aetna International VP(2)(3) 0.77% 0.38% 1.15% Aetna Legacy VP(2)(3) 0.49% 0.31% 0.80% Aetna Money Market VP(2) 0.25% 0.10% 0.35% Aetna Real Estate Securities VP(2)(3) 0.62% 0.33% 0.95% Aetna Small Company VP(2)(3) 0.35% 0.60% 0.95% AIM V.I. Capital Appreciation Fund(4) 0.63% 0.05% 0.68% AIM V.I. Growth Fund(4) 0.65% 0.08% 0.73% AIM V.I. Growth and Income Fund(4) 0.63% 0.06% 0.69% AIM V.I. Value Fund(4) 0.62% 0.08% 0.70% Fidelity VIP High Income Portfolio(5) 0.59% 0.12% 0.71% Janus Aspen Growth Portfolio(6) 0.65% 0.05% 0.70% Janus Aspen Worldwide Growth Portfolio(6) 0.66% 0.08% 0.74% Oppenheimer Strategic Bond Fund 0.75% 0.08% 0.83% Portfolio Partners MFS Emerging Equities Portfolio(7)(8) 0.68% 0.13% 0.81% Portfolio Partners MFS Value Equity Portfolio(7) 0.65% 0.25% 0.90% Portfolio Partners Scudder International Growth Portfolio(7) 0.80% 0.20% 1.00% Portfolio Partners T. Rowe Price Growth Equity Portfolio(7) 0.60% 0.15% 0.75%
- ------------------ (1) Certain of the Fund advisers reimburse the Company for administrative costs incurred in connection with administering the Funds as variable funding options under the Contract. These reimbursements are paid out of the investment advisory fees and are not charged to investors. (2) Prior to May 1, 1998, the investment adviser provided administrative services to the Fund and assumed the Fund's ordinary recurring direct costs under an Administrative Services Agreement. Effective May 1, 1998, the investment adviser will continue to provide administrative services to the Fund but will no longer assume all of the Fund's ordinary recurring direct costs under the Administrative Services Agreement. The Administrative Fee is 0.075% on the first $5 billion of the Fund's average daily net assets and 0.050% on all remaining net assets over $5 billion. The "Other Expenses" shown are not based on actual figures for the year ended December 31, 1997, but reflect the fee payable under the new Administrative Services Agreement and estimates of the Fund's ordinary recurring direct costs. International VP and Real Estate Securities VP commenced operations in December 1997, therefore, estimates are based on expenses incurred for similar funds. Actual expenses incurred may be more or less than the amounts shown above. (3) Effective May 1, 1998, the Portfolios' adviser has agreed to waive a portion of its fee or to reimburse certain expenses so that aggregate expenses do not exceed the total expenses shown above. These fee waiver/expense reimbursement arrangements will increase total return and may be modified or terminated at any time. Without these fee waiver/expense reimbursement arrangements, Management Fees and Total Expenses for the Portfolio would be higher. Management Fees and Total Expenses would be as follows: 0.60% and 0.85% for Crossroads VP; 0.60% and 1.24% for Growth VP; 0.35% and 0.58% for Index Plus Large Cap VP; 0.85% and 1.23% for International VP; 0.60% and 0.91% for Legacy VP; 0.75% and 1.08% for Real Estate Securities VP; 0.75% and 1.35% for Small Company VP, respectively. - ------------------------------------------------------------------------------- FEE TABLE - 2 (4) AIM Advisors, Inc. (AIM) may from time to time voluntarily waive or reduce its respective fees. Effective May 1, 1998, the Funds reimburse AIM in an amount up to 0.25% of the average net asset value of each Fund, for expenses incurred in providing or assuring that participating insurance companies provide, certain administrative services. Currently, the fee only applies to the average net asset value of each Fund in excess of the net asset value of each Fund as calculated on April 30, 1998. (5) A portion of the brokerage commissions that certain funds pay was used to reduce fund expenses. In addition, certain funds have entered into arrangements with their custodian whereby credits realized, as a result of uninvested cash balances were used to reduce custodian expenses. Including these reductions, the total operating expense would have been 0.71% for High Income Portfolio. (6) Management fees for Growth and Worldwide Growth Portfolios reflect a reduced fee schedule effective July 1, 1997. The management fees shown above are based on the new rate applied to net assets as of December 31, 1997. Other expenses are based on gross expenses of the Shares before expense offset arrangements for the fiscal year ended December 31, 1997. The information for each Portfolio is net of fee waivers or reductions from Janus Capital. Fee reductions for the Growth and Worldwide Growth Portfolios reduce the management fee to the level of the corresponding Janus retail fund. Other waivers, if applicable, are first applied against the management fee and then against other expenses. Without such waivers or reductions, the Management Fee, Other Expenses and Total Operating Expenses for the Shares would have been 0.74%, 0.04%, and 0.78% for Growth Portfolio; and 0.72%, 0.09%, and 0.81% for Worldwide Growth Portfolio, respectively. Janus Capital may modify or terminate the waivers or reductions at any time upon at least 90 days' notice to the Trustees. (7) Each Portfolio's aggregate expenses are contractually limited to the advisory and administrative fees disclosed above. The investment adviser will not seek an increase in its advisory or administrative fee at any time prior to May 1, 1999. (8) The advisory fee is 0.70% of the first $500 million in assets and 0.65% on the excess. - ------------------------------------------------------------------------------- FEE TABLE - 3 HYPOTHETICAL ILLUSTRATION THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW. The following Examples illustrate the expenses that would have been paid assuming a $1,000 investment in the Single Premium Immediate Annuity Contract and 5% return on assets. For the purposes of these Examples, the calculations assume that Annuity Payments are made based on a 15 year Period Certain Annuity with a 3.5% Assumed Annual Net Return Rate.
EXAMPLE A EXAMPLE B ------------------------------------- -------------------------------------- If you withdraw your entire Commuted Value at the end of the periods shown, you would If you do not withdraw your Commuted Value pay the following expenses, including any you would pay the following expenses (no applicable withdrawal charge: withdrawal charge is reflected): 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years -------- --------- --------- -------- -------- --------- --------- --------- Aetna Ascent VP $67 $89 $102 $143 $20 $56 $ 88 $143 Aetna Balanced VP, Inc. $65 $84 $ 94 $130 $18 $51 $ 79 $130 Aetna Bond VP $64 $81 $ 90 $124 $17 $48 $ 75 $124 Aetna Crossroads VP $67 $89 $102 $143 $20 $56 $ 88 $143 Aetna Growth VP $67 $89 $102 $143 $20 $56 $ 88 $143 Aetna Growth and Income VP $65 $84 $ 93 $129 $18 $51 $ 79 $129 Aetna Index Plus Large Cap VP $65 $83 $ 92 $127 $18 $50 $ 77 $127 Aetna International VP $70 $98 $116 $165 $23 $65 $102 $165 Aetna Legacy VP $67 $89 $102 $143 $20 $56 $ 88 $143 Aetna Money Market VP $63 $78 $ 83 $114 $16 $44 $ 69 $114 Aetna Real Estate Securities VP $68 $93 $108 $152 $21 $60 $ 94 $152 Aetna Small Company VP $68 $93 $108 $152 $21 $60 $ 94 $152 AIM V.I. Capital Appreciation Fund $66 $86 $ 97 $135 $19 $53 $ 83 $135 AIM V.I. Growth Fund $66 $87 $ 99 $138 $19 $54 $ 85 $138 AIM V.I. Growth and Income Fund $66 $86 $ 97 $136 $19 $53 $ 83 $136 AIM V.I. Value Fund $66 $87 $ 98 $137 $19 $54 $ 83 $137 Fidelity VIP High Income Portfolio $66 $87 $ 98 $137 $19 $54 $ 84 $137 Janus Aspen Growth Portfolio $66 $87 $ 98 $137 $19 $54 $ 83 $137 Janus Aspen Worldwide Growth Portfolio $67 $88 $ 99 $139 $19 $55 $ 85 $139 Oppenheimer Strategic Bond Fund $67 $90 $103 $145 $20 $57 $ 89 $145 Portfolio Partners MFS Emerging Equities Portfolio $67 $89 $102 $144 $20 $56 $ 88 $144 Portfolio Partners MFS Value Equity Portfolio $68 $92 $106 $149 $21 $59 $ 92 $149 Portfolio Partners Scudder International Growth Portfolio $69 $94 $110 $156 $22 $62 $ 96 $156 Portfolio Partners T. Rowe Price Growth Equity Portfolio $67 $88 $100 $140 $19 $55 $ 86 $140
- ------------------------------------------------------------------------------- FEE TABLE - 4 CONDENSED FINANCIAL INFORMATION ================================================================================ Condensed Financial Information for the Separate Account is shown in Appendix B. THE VARIABLE ANNUITY CONTRACT ================================================================================ The fixed and variable single premium immediate annuity contract offered by the Company represents a contract between you and Aetna Life Insurance and Annuity Company, an insurance company. The purpose of the Contract is to provide regular income payments for a certain period or for life (with or without a guaranteed period) commencing immediately after purchase under the payment method that you select. You must select one of the annuity income options described under "Annuity Payments" below. Additionally, you may allocate your Purchase Payment to up to four of the twenty-four different Subaccounts described in Appendix C to the Prospectus or to the fixed dollar option described in Appendix A to the Prospectus. Specific information on how to purchase a Contract and to whom the Contract is available is discussed under "Purchase." ANNUITY PAYMENTS ================================================================================ ANNUITY ELECTIONS Under the Contract, the Company will make regular income payments to you or to a Payee you designate in writing. You can choose to have payments made on a monthly, quarterly, semi-annual or annual basis. The first payment will generally be due on the last day of the payment period you select. If an annual frequency is elected, the payment will be due one day before one year after the Contract Effective Date. An alternate first payment date may be elected subject to the Company's approval and compliance with IRS regulations. If you choose to have any portion of your Annuity Payments come from the Subaccounts, the dollar amount of your payment will depend upon three things: (1) the value of that portion of your Contract that is allocated to the Subaccounts on the Annuity Date; (2) the Assumed Annual Net Return Rate that you select; and (3) the performance of the Subaccounts that you select. If the net return rate of the Subaccounts exceeds the Assumed Annual Net Return Rate stated in your Contract, your Annuity Payments will increase. Conversely, if the net return rate of the Subaccounts is less than the Assumed Annual Net Return Rate, your Annuity Payments will decrease. ANNUITY OPTIONS You must choose one of the following Annuity Options. The option may not be changed after the Contract is issued. The options are listed in two groups: Lifetime and Nonlifetime. A Lifetime Annuity Option means that Annuity Payments are based on the life of one or two Annuitants and will continue for as long as such Annuitant(s) is alive. Certain Lifetime Annuity Options may also contain a guarantee of payments for a certain period. A Nonlifetime Annuity Option means that Annuity Payments are guaranteed to continue for a certain period; the continuation of payments under such option is not based on the continued life of the Annuitant(s). Lifetime Annuity Options: (bullet) Option 1--Single Life Annuity--A stream of Annuity Payments that is payable for the life of the Annuitant. Payments cease upon the death of the Annuitant. (bullet) Option 2--Single Life Annuity with Guaranteed Payments--A stream of Annuity Payments that is payable for the life of the Annuitant. If the Annuitant dies prior to the payment of all of the Guaranteed Payments, any remaining payments will be made to the Beneficiary. (bullet) Option 3--Joint and Survivor Annuity--A stream of Annuity Payments that is payable for the lives of the - -------------------------------------------------------------------------------- 1 Annuitant and Joint Annuitant. Upon the death of either Annuitant, payments continue for the life of the survivor at the full or reduced amount depending upon the option elected. Payments cease upon the death of the survivor. Option 4--Joint and Full Survivor Annuity with Guaranteed Payments--A stream of Annuity Payments that is payable for the lives of the Annuitant and the Joint Annuitant. Upon the death of either Annuitant, the full payment continues for the life of the survivor. If the survivor dies prior to the payment of all of the Guaranteed Payments, any remaining Guaranteed Payments will be paid to the Beneficiary. Option 5--Joint and Contingent Annuity--A stream of Annuity Payments that is payable for the lives of the Annuitant and the Joint Annuitant. If the Annuitant is the first to die, payments continue for the life of the Joint Annuitant at a reduced amount. If the Joint Annuitant is the first to die, the full payment continues for the life of the Annuitant. Payments cease upon the death of the survivor. If you elect Lifetime Option 1, 3 or 5, it is possible that no Annuity Payments would be made if the Annuitant under Option 1 dies, or both the Annuitant and the Joint Annuitant under Option 3 or 5, die prior to the first Annuity Payment Date. Lifetime Annuity Options do not provide for any withdrawal rights. Nonlifetime Annuity Options: (bullet) Option 6--Period Certain--A stream of Annuity Payments that continues for a certain period of time, as provided under your Contract. Payments are guaranteed for the number of Guaranteed Payments selected, and cease after the selected number of Guaranteed Payments have been made. If Option 6 is elected on a variable basis, you may request to receive the Commuted Value at any time. Any such withdrawal may be subject to a withdrawal charge. (See "Charges and Deductions--Withdrawal Charge.") ANNUITY PAYMENTS Duration of Payments. Guaranteed Payments under a qualified annuity contract may not extend beyond (a) the life expectancy of the Annuitant, or (b) the joint life expectancies of the Annuitant and Beneficiary. In any event, qualified contract Annuity Payments must comply with the minimum distribution requirements of Code Section 401(a)(9). Amount of Each Annuity Payment. The amount of each payment depends on (1) the amount of your Purchase Payment, (2) how you allocate the Purchase Payment between the fixed dollar option and the Subaccounts, and (3) the Annuity Option and any features chosen. The initial Annuity Payment must be at least $50 per month, or aggregate to $250 per year for payments of any other frequency. For any portion of your Annuity Payments that is made on a variable basis, the first and subsequent payments will vary depending on the Assumed Annual Net Return Rate (3-1/2% or 5% per annum). Selection of a 5% rate causes a higher first payment, but Annuity Payments will increase thereafter only to the extent that the net return rate on the Subaccounts in which you have invested exceeds 5% on an annualized basis. Annuity Payments would decline if the net return rate was below 5%. Use of the 3 1/2% Assumed Annual Net Return Rate causes a lower first payment, but subsequent payments would increase more rapidly or decline more slowly as changes occur in the net return rate. (See the Statement of Additional Information for further discussion on the impact of selecting an Assumed Annual Net Return Rate.) VALUATION OF ANNUITY UNIT VALUES The amount of any Annuity Payment from a Subaccount is determined by multiplying the number of "Annuity Units" that you hold, by an Annuity Unit Value ("AUV") for each unit. The AUV on any Valuation Date is determined by multiplying the value on the immediately preceding Valuation Date by the net return factor of that Subaccount for the period between the immediately preceding Valuation Date and the current Valuation Date (see "Net Return Factor" below), and by a factor to reflect the Assumed Annual Net Return Rate. The AUV will be affected by the investment performance, expenses and charges of the applicable Fund and is reduced each day by a percentage that accounts for the daily assessment of mortality and expense risk charges and the administrative charge (if any). Net Return Factor. The net return factor is used to measure the investment performance of a Subaccount from one Valuation Date to the next. The net return factor for a Subaccount for any valuation period is equal to the sum of 1.000000 plus the net return rate. The net return rate equals: - -------------------------------------------------------------------------------- 2 (a) the value of the shares of the Fund held by the Subaccount on the current Valuation Date, minus (b) the value of the shares of the Fund held by the Subaccount on the preceding Valuation Date, plus or minus (c) taxes (or reserves for taxes) attributable to the operation of the Subaccount (if any); (d) divided by the total value of the Subaccount's Annuity Units on the preceding Valuation Date; (e) minus a daily charge at the annual effective rate of 1.25% for mortality and expense risks and up to 0.25% for administrative expenses (currently 0%). A net return rate may be more or less than 0%. PURCHASE ================================================================================ PURCHASE PAYMENTS A "Purchase Payment" is the money that you give us to buy the Contract. The minimum amount that we will accept is $5,000. The Contract is designed to be a single premium contract, which means that no additional payments may be made under the Contract. The Company reserves the right to establish a maximum Purchase Payment amount and to reject any Purchase Payment exceeding the maximum. The Contract is available to persons who wish to receive annuity income payments. Contracts may be issued on a nonqualified basis. Contracts may also be issued in connection with employer sponsored Section 401(a), Section 403(b) and Section 457 plans, or as an Individual Retirement Annuity (IRA). (Contracts sold in New York are not available for Section 457 plans.) The maximum issue age is 85 to 90 depending on the option selected. The Company reserves the right to modify the maximum issue age. HOW TO PURCHASE You may purchase a Contract by submitting an application to the Company. The Company must accept or reject the application within two business days of receipt. If the application is incomplete, the Company may hold any forms and accompanying Purchase Payment for five days. A Purchase Payment may be held for longer periods only with your consent, pending acceptance of the forms. Any Purchase Payment accompanying the application, or received prior to the acceptance of the application, will be invested as of the date of acceptance. If the application is rejected, the application and any Purchase Payment will be returned. ALLOCATION OF PURCHASE PAYMENT Your Purchase Payment less applicable premium taxes ("Net Purchase Payment") will be allocated among the investment options that you designate on your application. You may select up to four Subaccounts at any one time from the available choices. You may also select a fixed dollar option and allocate all or a portion of your Purchase Payment to the Company's general account. Allocations must be in whole percentages. You may change your choices after the Contract is issued by calling or writing to the Company at its Home Office. The Company reserves the right to restrict fund transfers to no more than twelve in any calendar year and to establish a minimum transfer amount. FREE LOOK PERIOD If you change your mind about owning this Contract, you have the right to cancel it within 10 days of receiving it (or such longer period of time as may be required by your state). To exercise your right to cancel, both the Contract and a written notice of cancellation should be sent to the Company at its Home Office. (For Contracts issued in the state of New York, your exercise of this right is deemed to occur on the earlier of the date we receive the Contract or the notice of cancellation.) If you cancel the Contract during the time period described above, you will not be assessed with a withdrawal charge. Following cancellation, you will receive back whatever your Contract is worth on the day we receive your request for cancellation, less any Annuity Payments already made. In certain states (or if you have purchased the Contract as an IRA), we may be required to return your entire Purchase Payment. - -------------------------------------------------------------------------------- 3 INVESTMENT OPTIONS ================================================================================ The Contract offers a number of different variable investment options through the Separate Account. The Separate Account is divided into "Subaccounts" which do not invest directly in stocks, bonds or other investments. Instead, each Subaccount buys and sells shares of a corresponding Fund. Your Purchase Payment may be allocated at any one time to up to four of the Subaccounts as designated on the application. You may also allocate all or a portion of your Purchase Payment to the fixed dollar option. Orders for the purchase of Fund shares may be subject to acceptance or rejection by the Fund. The Company reserves the right to reject any allocation of Purchase Payments to a Subaccount if the Subaccount's investment in the corresponding Fund is rejected or not accepted by the Fund for any reason. The Funds are described in Appendix C of this Prospectus. More comprehensive information, including a discussion of potential risks, is found in the current prospectus for each Fund. You should read the Fund prospectuses and consider carefully, and on a continuing basis, which Fund or combination of Funds is best suited to your long-term investment objectives. Additional prospectuses and Statements of Additional Information for this Prospectus and for each of the Funds can be obtained from the Company's Home Office at the address and telephone number listed in the "Prospectus Summary--Inquiries" section of this Prospectus. Risks Associated with Investment in the Funds. Some of the Funds may use instruments known as derivatives as part of their investment strategies. The use of certain derivatives may involve high risk of volatility to a Fund, and the use of leverage in connection with such derivatives can also increase risk of losses. Some of the Funds may also invest in foreign or international securities which involve greater risks than U.S. investments. Conflicts of Interest (Mixed and Shared Funding). Shares of the Funds are sold to each of the Subaccounts for funding the variable annuity contracts issued by the Company. Shares of the Funds may also be sold to other insurance companies for the same purpose. This is referred to as "shared funding." Shares of the Funds may also be used for funding variable life insurance contracts issued by the Company or by third parties. This is referred to as "mixed funding." Because the Funds available under the Contract are sold to fund variable annuity contracts and variable life insurance policies issued by us or by other companies, certain conflicts of interest could arise. If a conflict of interest were to occur, one of the separate accounts might withdraw its investment in a Fund, which might force that Fund to sell portfolio securities at disadvantageous prices, causing its per share value to decrease. Each Fund's Board of Directors or Trustees has agreed to monitor events in order to identify any material irreconcilable conflicts which might arise and to determine what action, if any, should be taken to address such conflict. FUND AVAILABILITY AND SUBSTITUTION The availability of Funds may be subject to regulatory authorization. In addition, the Company may add or withdraw Funds, as permitted by applicable law. Not all Funds may be available in all jurisdictions or under all Contracts. If the shares of any Fund should no longer be available for investment by the Separate Account, or if, in the judgment of the Company, further investments in such shares should become inappropriate under this type of Contract, we may cease to make such Fund shares available for investment under the Contract on a prospective basis. In addition, the Company may substitute shares of another Fund for shares already acquired. The Company reserves the right to substitute shares of another Fund for shares already acquired without a proxy vote. Any elimination, substitution or addition of Funds will be done in accordance with applicable state or federal securities laws. FIXED DOLLAR OPTION In certain states, Purchase Payments may be allocated to the fixed dollar option as described in Appendix A. TRANSFERS AMONG SUBACCOUNTS Generally, you may make transfers among the Subaccounts at any time. The Company reserves the right to limit such transfers to twelve in any calendar year. Transfers are currently not permitted into or out of the fixed dollar option. - -------------------------------------------------------------------------------- 4 CHARGES AND DEDUCTIONS ================================================================================ There are charges and other expenses associated with the Contract that reduce the amount of your Annuity Payments. These charges and expenses are as follows: MORTALITY AND EXPENSE RISK CHARGE The Company makes a daily deduction from each of the Subaccounts for the mortality and expense risk charge. The charge is equal, on an annual basis, to 1.25% of the daily net assets of the Subaccounts and compensates the Company for the assumption of mortality and/or expense risks under the Contract. The mortality risks are those assumed for any promise to make lifetime payments. The expense risk is the risk that the actual expenses for costs incurred under the Contract will exceed the maximum costs that can be charged under the Contract. If the amount deducted for mortality and expense risks is not sufficient to cover the mortality costs and expense shortfalls, the loss is borne by the Company. If the deduction is more than sufficient, the excess may be used to recover distribution expenses relating to the Contracts, and may also be used as a source of profit to the Company. The Company expects to make a profit from the mortality and expense risk charge. ADMINISTRATIVE CHARGE The Company reserves the right to make a deduction from each of the Subaccounts for an administrative charge. Under the Contract, the administrative charge may be an amount equal, on an annual basis, to not more than 0.25% of the daily net assets of the Subaccounts. There is currently no administrative charge assessed under the Contract. Once an administrative charge is established for your Contract, it may not be increased. If an administrative charge is assessed, it will be set at a level which does not exceed the average expected cost of the administrative services to be provided while the Contract is in force. The Company does not expect to make a profit from this charge. WITHDRAWAL CHARGE The withdrawal charge is, in effect, a deferred sales charge. It is imposed upon the surrender (Commutation) or withdrawal (partial Commutation) of the remaining Guaranteed Payments under a Period Certain Annuity at any time before the last Guaranteed Payment is made and while the Annuitant is living. The amount paid is equal to the Commuted Value minus the applicable withdrawal charge. The withdrawal charge is imposed to reimburse the Company for unrecovered acquisition and distribution costs. The Company will monitor the applied deductions for the withdrawal charge to ensure it will never exceed 8.5% of the Purchase Payment. The schedule for the calculation of the withdrawal charge is:
Withdrawal Charge Number of Years from Percentage of Contract Effective Date Commuted Value - ----------------------- -------------- Fewer than 1 5% 1 or more, but fewer than 2 5% 2 or more, but fewer than 3 4% 3 or more, but fewer than 4 4% 4 or more, but fewer than 5 3% 5 or more, but fewer than 6 2% 6 or more, but fewer than 7 1% 7 or more 0%
Reduction or Elimination of the Withdrawal Charge. We may reduce or eliminate the withdrawal charge when sales of the Contract are made to individuals or a group of individuals in such a manner that results in savings of sales expenses. The entitlement to such a reduction in the withdrawal charge will be based on the following criteria: (a) the size and type of group of individuals to whom the Contract is offered; or (b) whether there is a prior or existing relationship with the Company such as being an employee of the Company or one of its affiliates, receiving distributions or making internal transfers from other Contracts issued by the Company or one of its affiliates, or making transfers of amounts held under qualified plans sponsored by the Company or an affiliate. Any reduction or elimination of the withdrawal charge will not be unfairly discriminatory against any person. - -------------------------------------------------------------------------------- 5 FUND EXPENSES Each Fund incurs certain expenses which are paid out of its net assets. These expenses include, among other things, the investment advisory or "management" fee. The expenses of the Funds are set forth in the Fee Table in this Prospectus and described more fully in the accompanying Fund prospectuses. PREMIUM AND OTHER TAXES Several states and municipalities impose a premium tax based on the amount of your Purchase Payment. These taxes currently range from 0% to 4%. The Company will deduct premium taxes from your Purchase Payment at the Contract Effective Date. Under certain circumstances, the Company reserves the right not to deduct premium taxes where the Purchase Payment is provided through an internal transfer from an annuity or other contract issued by the Company (or one of its affiliates) under which the Company previously deducted premium tax. TAXES ================================================================================ INTRODUCTION The Company has prepared the following as a general discussion on federal taxes. This discussion is not intended as tax advice to any individual. Any person concerned about tax implications should consult a tax advisor before investing and before electing any Commutation feature permitted under the Contract. TAXATION OF ANNUITY PAYMENTS Nonqualified Contracts. Section 72 of the Internal Revenue Code ("Code") governs taxation of annuities. In general, under a nonqualified contract, only the portion of the Annuity Payment that represents the amount by which the expected return exceeds the "investment in the contract" will be taxed. After the "investment in the contract" is recovered, the full amount of any additional Annuity Payments is taxable. For variable Annuity Payments, the non-taxable portion of each payment is generally determined by dividing the "investment in the contract" (generally, your Purchase Payment) by the total number of expected Annuity Payments. For fixed Annuity Payments, the non-taxable portion is determined by a ratio your "investment in the contract" bears to the total dollar amount of expected Annuity Payments. Under either a variable or a fixed annuity, once the "investment in the contract" has been fully recovered, the full amount of each additional Annuity Payment is taxable. If Annuity Payments cease as a result of an Annuitant's death before full recovery of the "investment in the contract," you should consult a competent tax advisor regarding deductibility of the unrecovered amount. Qualified Contracts. The taxation of Annuity Payments under a nonqualified contract described above does not apply to "qualified" contracts. Qualified contracts are contracts issued in conjunction with a Code Section 408(b) Individual Retirement Annuity (IRA), a Code Section 403(b) Tax Deferred Annuity, a Code Section 457 deferred compensation plan or a Code Section 401(a) or 401(k) pension or profit sharing plan. Generally, the entire Annuity Payment received is taxable. Any portion of the Annuity Payment attributable to after-tax employee contributions to the plan is not taxable. The amount taxable is generally based on the ratio of the "investment in the Contract" to the expected number of Contract Payments as defined in Code Section 72(d). The "investment in the Contract" generally equals the amount of any non deductible Purchase Payments paid by or on behalf of any individual less any amount received previously which was excludable from gross income. For a qualified Contract the "investment in the Contract" can be zero. Any portion of an Annuity Payment that is an "eligible rollover distribution" and that is properly rolled over to another plan of the same type or to a traditional IRA also is not taxable. An Annuity Payment made in connection with a Section 403(b) Tax Deferred Annuity or a Section 401(a) or 401(k) pension or profit-sharing plan can be an "eligible rollover distribution" only if made under a Period Certain Annuity having a period of less than ten years and only to the extent that the Annuity Payment (1) is not attributable to after-tax contributions or (2) is not a required minimum distribution under Code Section 401(a)(9). If any portion of an eligible roll-over distribution is paid to the employee, the Company is required to withhold 20% of that amount as federal income tax withholding. - -------------------------------------------------------------------------------- 6 TAXATION OF WITHDRAWALS If the Commuted Value of all or any portion of the Guaranteed Payments is withdrawn or distributed as a death benefit, the amount received will be taxed as "an amount not received as an annuity." Nonqualified Contracts. If received under a nonqualified contract, the Commuted Value is generally includable in gross income to the extent that there is income on the contract. Income on the contract means the excess of the Commuted Value of the contract (determined without regard to any withdrawal charge) immediately before the amount is received over the investment in the contract at such time. Qualified Contracts. Generally, any distribution under a qualified contract is fully taxable upon receipt. If the distribution is made in connection with a Section 403(b) Tax Deferred Annuity or a Section 401(a) pension or profit sharing plan, it may not be taxable if attributable to after-tax contributions or if the distribution is an "eligible rollover distribution" (as defined above) that is properly rolled over to another contract or plan of the same type or to a traditional IRA. DISTRIBUTIONS--TAX-DEFERRED ANNUITIES The Code limits the distribution of amounts contributed on or after January 1, 1989 under a salary reduction agreement to a Section 403(b) Tax Deferred Annuity. In general, such distributions can only be made if the participant has attained age 59-1/2, separates from service, dies or becomes disabled (as defined in the Code). TAX PENALTY The Code provides that any amount received under a qualified or nonqualified annuity contract may be subject to a premature distribution penalty tax equal to 10% of the amount that is includable in income. Because some of the exceptions to the 10% penalty discussed below require that the payment or distribution be part of a series of "substantially equal periodic payments," your selection of an increasing annuity or receipt of the Commuted Value may be subject to the 10% penalty unless one of the other exceptions applies. You should consult with a tax advisor to determine how this will affect your tax liability. Nonqualified Contracts. There is an exception to the tax penalty for nonqualified contracts if the payment is made under an immediate annuity contract. An immediate annuity is defined as a contract that (1) is purchased with a single premium, (2) has an annuity starting date no later than one year from the date of purchase, and (3) provides for a series of substantially equal periodic payments to be made no less frequently than annually over the annuity period. However, the IRS has ruled that where an immediate annuity contract is received in exchange for a deferred annuity contract pursuant to a Section 1035 exchange, the immediate annuity contract does not qualify for this exception to the 10% penalty. In addition to the immediate annuity exception, the 10% penalty tax also does not apply to(1) payments made on or after the date the taxpayer becomes age 59-1/2, (2) any payment attributable to the taxpayer becoming disabled (as defined by the Code), (3) any payment made on or after the death of the Contract Holder, or (4) any payment which is part of a series of substantially equal periodic payments made at least annually for the life or life expectancy of the taxpayer or the joint lives or joint life expectancies of the taxpayer and his designated Beneficiary. (Modification of the series of payments prior to the later of age 59-1/2 or 5 years may result in an additional tax in the year of modification equal to the penalty which would have been imposed, plus interest, if the exception had not applied.) Qualified Contracts. The 10% penalty tax may apply to amounts received under a qualified contract, other than a contract issued in conjunction with a Section 457 deferred compensation plan. The 10% penalty tax does not apply to distributions that are (1) made on or after the date the employee attains age 59 1/2, (2) made to a Beneficiary on or after the death of the employee, (3) attributable to the employee's disability (as defined by the Code), (4) made to an employee after separation from service after age 55 (not applicable to an IRA), or (5) part of a series of substantially equal periodic payments made at least annually for the life or life expectancy of the employee or the joint lives or joint life expectancies of the employee and a designated Beneficiary. (Modification of the series of payments prior to the later of age 59-1/2 or 5 years may result in an additional tax in the year of modification equal to the penalty which would have been imposed, plus interest, if the exception had not applied.) In addition, the penalty tax does not apply for the amount of distribution equal to unreimbursed - -------------------------------------------------------------------------------- 7 medical expenses incurred by the employee that qualify for a deduction as specified in the Code. Beginning January 1, 1997, the penalty tax is also waived on distributions made from an IRA to pay health insurance premiums for certain unemployed individuals. Beginning January 1, 1998, the penalty tax is waived if the amounts withdrawn from an IRA are used for a qualified first-time home purchase or for higher education expenses. NONNATURAL OWNERS If a nonqualified contract is owned by a person who is not a natural person, the contract is not treated as an annuity contract for income tax purposes and the "income on the contract" for the taxable year is currently taxable as ordinary income. This rule does not apply to an immediate annuity, which is defined in the same way as for 10% penalty tax purposes. (See "Tax Penalty" above.) Therefore, if you elect an increasing annuity or elect to receive the Commuted Value, you should consult with a tax advisor to determine how this will affect your tax liability. This rule also does not apply to a trust or other entity which holds the contract solely as an agent for a natural person (other than an employer which holds for the benefit of employees). The rule also does not apply to qualified contracts (other than a contract held in connection with a Section 457 deferred compensation plan). A tax-exempt organization should consult with its tax advisor regarding treatment of "income on the contract" for purposes of the unrelated business income tax. WITHDRAWALS--ACCESS TO YOUR MONEY ================================================================================ COMMUTATION If you elect a Period Certain Annuity, you may elect to receive the Commuted Value of all or a portion of the Guaranteed Payments, less any applicable withdrawal charge. Commuted Value means the present value of any remaining Guaranteed Payments which have not yet been paid under the Contract. If a portion of the Guaranteed Payments under a variable Period Certain Annuity is commuted, the remaining Annuity Payments will be reduced pro rata from all of the Subaccounts unless you designate otherwise. Commutations may be subject to a withdrawal charge as described in "Charges and Deductions." COMMUTED VALUE Under the Period Certain Annuity, the Commuted Value is equal to the present value of the remaining Guaranteed Payments calculated using the Assumed Annual Net Return Rate stated in the Contract. All Commuted Values will be determined as of the Valuation Date next following the date on which a written request for Commutation is received in good order by the Company at its Home Office. PERFORMANCE ================================================================================ The Company may illustrate the hypothetical values of Annuity Payments made from each of the Subaccounts over certain time periods based on the historical net asset values of the Funds. These numbers reflect the mortality and expense risk charge, the administrative expense charge (if any), as well as the advisory fees and other expenses of the Funds. The Company may also advertise the "standardized average annual total returns" of the Subaccounts, calculated in a manner prescribed by the SEC, as well as the "non-standardized returns." "Standardized average annual total returns" are computed according to a formula in which a hypothetical investment of $1,000 is applied to the Subaccount and then related to the ending redeemable values over the most recent one, five and ten-year periods (or since the date contributions were first received in the Separate Account, if less than the full period). Standardized returns will reflect the reduction of all recurring charges during each period (e.g., mortality and expense risk charges, administrative expense charge (if any) and any applicable withdrawal charge). "Non-standardized returns" will be calculated in a similar manner, except that non-standardized figures will not reflect the deduction of any applicable withdrawal charge (which would decrease the level of performance shown if reflected in these calculations). - -------------------------------------------------------------------------------- 8 The non-standardized figures may also include monthly, quarterly, year-to-date or three-year periods and may be computed from the inception date of the Fund. The Company may advertise certain ratings, rankings or other information related to the Company, the Subaccounts or the Funds. Further details regarding performance reporting are described in the Separate Account's Statement of Additional Information. DEATH BENEFIT ================================================================================ The following describes the death benefit provision applicable to variable Annuity Payments under the Contract. For information on the death benefit provision applicable to the fixed dollar option under the Contract, please refer to Appendix A. A death benefit may be payable if your Contract is issued under (i) a Single Life Annuity with Guaranteed Payments (Option 2), (ii) a Joint and Full Survivor Annuity with Guaranteed Payments (Option 4), or (iii) a Period Certain Annuity (Option 6). The death benefit is payable upon the death of the Annuitant, or the death of the survivor if there is a Joint Annuitant. If the Annuitant dies, or if the survivor under a Joint Annuity Option dies, any remaining Guaranteed Payments will be paid to the Beneficiary in the form specified in the Contract. Such payments will be paid at least as rapidly as under the method of distribution then in effect. Under Options 2 and 4, the Beneficiary may elect, within six months of such death, to receive the Commuted Value of any remaining Guaranteed Payments. Under Option 6, the Beneficiary may make such election at any time. No withdrawal charge will apply to the Commuted Value of the death benefit. If the Contract Holder who is not the Annuitant dies, Annuity Payments will continue to be paid to the Payee in the form specified in the Contract. If no Payee survives the death of the Contract Holder, Annuity Payments will be made to the Annuitant. Such payments will be paid at least as rapidly as under the method of distribution then in effect. DEATH BENEFIT COMMUTATION The Commuted Value under this death benefit provision will be determined on the next Valuation Date after the Company receives acceptable proof of death and a request for payment in good order at its Home Office. The Commuted Value is equal to the present value of any remaining Guaranteed Payments calculated using the Assumed Annual Net Return Rate stated in the Contract. OTHER INFORMATION ================================================================================ THE COMPANY Aetna Life Insurance and Annuity Company (the "Company") is a stock life insurance company organized in 1976 under the insurance laws of the State of Connecticut. Through a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity Life Insurance Company, an Arkansas life insurance company organized in 1954). The Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc., which is in turn a wholly owned subsidiary of Aetna Retirement Services, Inc., and an indirect wholly owned subsidiary of Aetna Inc. The Company is engaged in the business of issuing life insurance policies and variable annuity contracts in all states of the United States. The Company's principal executive offices are located at 151 Farmington Avenue, Hartford, Connecticut 06156. THE SEPARATE ACCOUNT The Company has established a separate account, Variable Annuity Account B, for the purpose of funding its variable annuity contracts. The Board of Directors of the Company adopted a resolution in 1976 to establish the Separate Account under Connecticut insurance law. The Separate Account is registered as a unit investment trust under the Investment Company Act of 1940, and meets the definition of "separate account" under the federal securities laws. Although the Company holds title to the assets of the Separate Account, such assets are not chargeable with liabilities of any other business conducted by the Company. Income, gains or losses of the Separate - -------------------------------------------------------------------------------- 9 Account are credited to or charged against the assets of the Separate Account without regard to other income, gains or losses of the Company. All obligations arising under the Contracts are obligations of the Company. DISTRIBUTION The Company acts as the Principal Underwriter for the securities sold by this Prospectus, and as the distributor of the Contracts. Compensation will be paid to broker-dealers who sell the Contracts. Broker-dealers will be paid commissions up to an amount currently equal to 7.0% of Purchase Payments or as a combination of a certain percentage amount of Purchase Payments at time of sale and a trail commission as a percentage of assets. Under the latter arrangement, commission payments may exceed 7.0% of Purchase Payments over the life of the Contract. In limited circumstances, we also pay certain of these professionals compensation, overrides or reimbursement for expenses associated with the distribution of the Contract. At times the Company may offer certain distributors an enhanced commission for a limited period of time. In addition, some sales personnel may receive various types of non-cash compensation such as special sales incentives, including trips and educational and/or business seminars. Supervisory and other management personnel of the Company may receive compensation that will vary based on the relative profitability to the Company of the funding options you select. Funding options that invest in Funds advised by the Company or its affiliates are generally more profitable to the Company. We pay these commissions, fees and related distribution expenses out of any deferred sales 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. The names of the broker-dealer and the registered representative responsible for your Contract are set forth on your application. Commissions and sales related expenses are paid by the Company and are not deducted from your Purchase Payment. To the extent that the withdrawal charge is insufficient to cover the actual costs of distribution, the Company may use any of its corporate assets, including any profit from the mortality and expense risk charge, to make up any difference. OWNERSHIP The Contract is owned by the Contract Holder (You). You have all title to the Contract, as well as all rights to amounts held in the Contract during the lifetime of the Annuitant, and the Joint Annuitant (if applicable). Any choices selected under the Contract must be made by you in writing, unless otherwise allowed by the Company. Until we receive amendments to any such choices, we will rely on any previous choices made. Ownership of the Contract may be changed to the extent permitted by law. You should immediately notify the Company, in writing, of any change in ownership. No such ownership change will be binding until such notification is received and recorded by the Company at its Home Office. BENEFICIARY If the Contract provides for any Guaranteed Payments following the death of the Annuitant and the Joint Annuitant (if applicable), you have the right to name a Beneficiary. The Beneficiary is the person entitled to receive any death benefit proceeds. The Company will pay any death benefit proceeds based on the last written Beneficiary designation on file at its Home Office as of the date of death. Changes in Beneficiary Designations. The designated Beneficiary may be changed at any time during the lifetime of the Annuitant and the Joint Annuitant (if applicable). Such change must be submitted to the Company in writing, and except for Contracts issued in New York, will become effective as of the date written notice of the change is received and recorded by the Company. For Contracts issued in New York, the change will become effective as of the date the notice is signed. However, the Company's obligation to pay death benefits shall be fully discharged upon payment to the Beneficiary named in the written notice of Beneficiary designation last received by the Company as of the date of such payment. Some restrictions may apply to Beneficiary changes under qualified contracts. DELAY OR SUSPENSION OF PAYMENTS The Company reserves the right to suspend or postpone the date of payment for any benefit or values (a) on any Valuation Date on which the New York Stock Exchange ("Exchange") is closed (other than customary - -------------------------------------------------------------------------------- 10 weekend and holiday closings) or when trading on the Exchange is restricted; (b) when an emergency exists, as determined by the SEC, so that disposal of securities held in the Subaccounts is not reasonably practicable or it is not reasonably practicable for the Company fairly to determine the value of the Subaccount's assets; or (c) during such other periods as 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. VOTING RIGHTS The Company is the legal owner of the shares of the Funds. However, we believe that when a Fund solicits proxies in conjunction with a vote of shareholders, we are required to obtain from you and other owners instructions as to how to vote those shares. When we receive those instructions, we will vote all of the shares we own in proportion to those instructions. This will also include any shares that the Company owns on its own behalf. Should we determine that we are no longer required to comply with the above, we will vote the shares in our own right. MODIFICATION OF THE CONTRACT The Company reserves the right to modify the Contract to meet the requirements of state or federal laws or regulations. The Company will notify you in writing of any changes. LEGAL MATTERS AND PROCEEDINGS The Company knows of no material legal proceedings pending to which the Separate Account or the Company is 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. FINANCIAL STATEMENTS The consolidated financial statements of the Company and the financial statements of the Separate Account have been included in the Statement of Additional Information. YEAR 2000 As a healthcare and financial services enterprise, Aetna Inc. (referred to collectively with its affiliates and subsidiaries as Aetna), is dependent on computer systems and applications to conduct its business. Aetna has developed and is currently executing a comprehensive risk-based plan designed to make its computer systems, applications and facilities Year 2000 ready. The plan covers four stages including (i) inventory, (ii) assessment, (iii) remediation and (iv) testing and certification. At year end 1997, Aetna, including the Company, had substantially completed the inventory and assessment stages. The remediation of mission-critical systems is currently underway and targeted for completion by December 31, 1998. Testing and certification of all systems and applications are targeted for completion by mid-1999. The costs of these efforts will not affect the Separate Account. The Company, its affiliates and the mutual funds that serve as investment options for the Separate Account also have relationships with investment advisers, broker dealers, transfer agents, custodians or other securities industry participants or other service providers that are not affiliated with Aetna. Aetna, including the Company, is initiating communication with its critical external relationships to determine the extent to which Aetna may be vulnerable to such parties' failure to resolve their own Year 2000 issues. Where practicable Aetna and the Company will assess and attempt to mitigate their risks with respect to the failure of these parties to be Year 2000 ready. There can be no assurance that failure of third parties to complete adequate preparations in a timely manner, and any resulting systems interruptions or other consequences, would not have an adverse effect, directly or indirectly, on the Separate Account, including, without limitation, its operation or the valuation of its assets and units. - -------------------------------------------------------------------------------- 11 CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION ================================================================================ The following items are the contents of the Statement of Additional Information: General Information and History Variable Annuity Account B Offering and Purchase of Contract Performance Data Annuity Payments Sales Material and Advertising Independent Auditors Financial Statements of the Separate Account Financial Statements of the Company - -------------------------------------------------------------------------------- 12 APPENDIX A THE FIXED DOLLAR OPTION ================================================================================ The following summarizes material information concerning the fixed dollar option. Amounts allocated to the fixed dollar option are held in the Company's general account that supports general insurance and annuity obligations. Interests in the fixed dollar option have not been registered with the SEC in reliance upon exemptions under the Securities Act of 1933, as amended. Disclosure in the Prospectus regarding the fixed dollar option may, however, be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of such statements. Disclosure in this Appendix regarding the fixed dollar option has not been reviewed by the SEC. THE FIXED DOLLAR OPTION In addition to allocating your Purchase Payment to the Subaccounts described in the Prospectus, you may choose to allocate all or a portion of your Purchase Payment to the fixed dollar option. If you choose the fixed dollar option, your Annuity Payments will remain fixed as specified in your Contract over the term of the Contract unless you elect an Increasing Annuity. There is no right of Commutation for Annuity Payments supported by the fixed dollar option under any Lifetime Annuity Option. You may purchase a right of Commutation for Annuity Payments supported by the fixed dollar option under a Period Certain Annuity. The right of Commutation is described under "Withdrawals--Access to Your Money." ANNUITY OPTIONS All of the Annuity Options described under "Investment Options" in the Prospectus are available for the fixed dollar option. If you allocate all or a portion of your Purchase Payment to a fixed dollar option, you may also elect one of the following features in connection with the portion of your Annuity Payments that are derived from the fixed dollar option: (a) a Cash Refund feature that offers a death benefit in connection with certain Lifetime Annuity Options. If the Annuitant dies, or the survivor dies if there is a Joint Annuitant, the Beneficiary will receive a lump sum payment equal to the Net Purchase Payment allocated to the fixed dollar option less the total amount of fixed annuity payments paid prior to such death. The Cash Refund feature may be elected only with a Single Life Annuity (Option 1) or a Joint and Full Survivor Annuity (Option 3) that has no reduction in payment to the survivor. (b) an Increasing Annuity under which the Annuity Payments supported by the fixed dollar option will increase by a stated percentage compounded annually. You must elect 1, 2 or 3% as the stated percentage. The feature is not available under Contracts purchased in conjunction with Section 457 deferred compensation plans. Annuity Payments. The amount of each Annuity Payment depends on (1) the Net Purchase Payment you allocate to the fixed dollar option, and (2) the Annuity Option and features chosen. CHARGES AND DEDUCTIONS If you have elected a Period Certain Annuity and have purchased a right of Commutation, a withdrawal charge may apply to any Commuted Value you receive. This charge is, in effect, a deferred sales charge. It is imposed upon any Commutation of a Period Certain Annuity before the last Guaranteed Payment is made, and while the Annuitant is living. The amount paid upon Commutation is equal to the Commuted Value minus the applicable withdrawal charge. This charge is imposed to reimburse the Company for unrecovered acquisition and distribution costs. - ------------------------------------------------------------------------------- 13 The following sets forth the schedule for the calculation of the withdrawal charge.
Withdrawal Charge Number of Years from Percentage of Contract Effective Date Commuted Value - ----------------------- -------------- 1 or more, but fewer than 2 5% 2 or more, but fewer than 3 4% 3 or more, but fewer than 4 4% 4 or more, but fewer than 5 3% 5 or more, but fewer than 6 2% 6 or more, but fewer than 7 1% 7 or more 0%
Reduction or Elimination of the Withdrawal Charge. We may reduce or eliminate the withdrawal charge when sales of the Contract are made to individuals or a group of individuals in such a manner that results in savings of sales expenses. The entitlement to such a reduction in the withdrawal charge will be based on the following criteria: (a) the size and type of group of individuals to whom the Contract is offered; or (b) whether there is a prior or existing relationship with the Company such as being an employee of the Company or one of its affiliates, receiving distributions or making internal transfers from other Contracts issued by the Company or one of its affiliates, or making transfers of amounts held under qualified plans sponsored by the Company or an affiliate. Any reduction or elimination of the withdrawal charge will not be unfairly discriminatory against any person. WITHDRAWALS--ACCESS TO YOUR MONEY Commutation. If you elect a fixed Period Certain Annuity with a right of Commutation, you may elect to receive the Commuted Value of all or a portion of the remaining Guaranteed Payments, less any applicable withdrawal charge. Such Commutations may be elected once each calendar year. No Commutations are allowed from a fixed dollar option in the first Contract year. In subsequent contract years, full or partial Commutations are allowed, provided that under a partial Commutation the remaining Annuity Payments would equal $50 or more. If a portion of the Guaranteed Payments is commuted, the remaining Annuity Payments will be reduced proportionately. Commutations are subject to a withdrawal charge. Commuted Value. Under a fixed Period Certain Annuity, the Commuted Value is equal to the present value of the remaining Guaranteed Payments calculated using the adjusted contract rate. The adjusted contract rate equals: (Rate of Return)+ CY -- IY where: (bullet) Rate of Return is the Fixed Annuity Present Value Interest Rate shown in the Contract; (bullet) CY is the Commutation Yield; and (bullet) IY is the Issue Yield. CY is determined as follows: (1) CY is the average of the yields, as published in the Wall Street Journal on the Friday before the date of Commutation, of the three (or more if the Company deems necessary) noncallable, noninflation adjusted Treasury Notes or Bonds maturing on or closest to the Commutation Duration Date. - ------------------------------------------------------------------------------- 14 (2) The Commutation Duration Date is the date (month and year) obtained when the Commutation Duration is added to the date of Commutation. (3) Commutation Duration equals 1 plus the number of whole years from the date of Commutation until the final Guaranteed Payment is due, divided by 2. Any resulting fraction will be rounded up to the next whole number. IY is determined as follows: (1) IY is the average of the yields, as published in the Wall Street Journal on the Friday before the Contract Effective Date, of the three (or more if the Company deems necessary) noncallable, noninflation adjusted Treasury Notes or Bonds maturing on or closest to the Issue Duration Date. (2) The Issue Duration Date (month and year) is obtained when the Issue Duration is added to the Contract Effective Date. (3) Issue Duration equals 1 plus the number of whole years from issue until the final payment is due, divided by 2. Any resulting fraction will be rounded up to the next whole number. DEATH BENEFIT The death benefit is payable upon the death of the Annuitant, or the death of the survivor if there is a Joint Annuitant, and if there are remaining Guaranteed Payments. Any remaining Guaranteed Payments will be paid to the Beneficiary in the form specified in the Contract. Such payments will be paid at least as rapidly as under the method of distribution then in effect. Within six months of such death, the Beneficiary may elect to receive the Commuted Value of any remaining Guaranteed Payments. However, under a Period Certain Annuity where you have purchased a right of Commutation, the Beneficiary may make such election at any time. No withdrawal charge will apply to the Commuted Value of the death benefit. If a Cash Refund feature is elected, the death benefit is payable in one sum to the Beneficiary. If the Contract Holder who is not the Annuitant dies, Annuity Payments will continue to be paid to the Payee in the form specified in the Contract. If no Payee survives the death of the Contract Holder, Annuity Payments will be made to the Annuitant. Such payments will be paid at least as rapidly as under the method of distribution then in effect. Death Benefit Commutation. The Commuted Value of the death benefit will be determined as of the next Valuation Date following the Company's receipt at its Home Office of proof of death acceptable to the Company and a request for payment in good order. If the Contract is issued as a Period Certain Annuity with a right of Commutation, the Commuted Value will be determined as described under "Withdrawal--Access to Your Money" in this Appendix. If the Contract is issued as a Life Annuity with Guaranteed Payments or a Period Certain where you have not purchased a right of Commutation, the rate used to determined the Commuted Value of the remaining Guaranteed Payments will be the Fixed Annuity Present Value Interest Rate shown in the Contract. - ------------------------------------------------------------------------------- 15 APPENDIX B CONDENSED FINANCIAL INFORMATION (Selected data for Annuity and Accumulation Units outstanding during each period at a 3.50% Assumed Annual Net Return Rate) ================================================================================ The condensed financial information presented below for the period ended December 31, 1997 is derived from information included in the financial statements of the Separate Account, which have been audited by KPMG Peat Marwick LLP, independent auditors. The financial statements and the independent auditors' report thereon for the year ended December 31, 1997 are included in the Statement of Additional Information. The Annuity Unit Values shown below are derived from accumulation unit values and reflect the application of a factor corresponding to the Assumed Annual Net Return Rate of 3.50%. See Valuation of Annuity Unit Values for more information. Only those Subaccounts with Annuity Units outstanding at the end of the period are listed below.
1997 -------- AETNA BALANCED VP, INC. Value at beginning of period $13.448 Value at end of period $15.488 Increase (decrease) in value of annuity unit(1) 15.17%(2) AETNA BOND VP Value at beginning of period $11.087 Value at end of period $11.529 Increase (decrease) in value of annuity unit(1) 3.99%(3) AETNA CROSSROADS VP Value at beginning of period $10.108 Value at end of period $10.242 Increase (decrease) in value of annuity unit(1) 1.32%(4) AETNA GROWTH AND INCOME VP Value at beginning of period $15.431 Value at end of period $18.426 Increase (decrease) in value of annuity unit(1) 19.41%(5) AETNA INDEX PLUS LARGE CAP VP Value at beginning of period $11.263 Value at end of period $12.402 Increase (decrease) in value of annuity unit(1) 10.11%(6) AETNA LEGACY VP Value at beginning of period $10.372 Value at end of period $11.201 Increase (decrease) in value of annuity unit(1) 8.00%(7) AETNA SMALL COMPANY VP Value at beginning of period $12.930 Value at end of period $13.444 Increase (decrease) in value of annuity unit(1) 3.97%(2)
- ------------------------------------------------------------------------------- 16 CONDENSED FINANCIAL INFORMATION (continued) ================================================================================
1997 -------- JANUS ASPEN GROWTH PORTFOLIO Value at beginning of period $10.481 Value at end of period $11.789 Increase (decrease) in value of annuity unit(1) 12.48%(8) JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO Value at beginning of period $10.576 Value at end of period $12.007 Increase (decrease) in value of annuity unit(1) 13.53%(5) PORTFOLIO PARTNERS MFS EMERGING EQUITIES PORTFOLIO Value at beginning of period $10.050 Value at end of period $ 9.894 Increase (decrease) in value of annuity unit(1) (1.55)%(8) PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO Value at beginning of period $12.335 Value at end of period $12.474 Increase (decrease) in value of annuity unit(1) 1.13%(8)
- ------------------ (1) The above figures are calculated by subtracting the beginning Annuity Unit value from the ending Annuity Unit value, and dividing the result by the beginning Annuity Unit value. These figures do not reflect the deferred sales charge or the fixed dollar annual maintenance fee, if any. Inclusion of these charges would reduce the investment results shown. (2) Reflects less than a full year of performance activity. Funds were received in this option during March 1997. (3) Reflects less than a full year of performance activity. Funds were received in this option during December 1997. (4) Reflects less than a full year of performance activity. Funds were received in this option during January 1997. (5) Reflects less than a full year of performance activity. Funds were received in this option during October 1997. (6) Reflects less than a full year of performance activity. Funds were received in this option during February 1997. (7) Reflects less than a full year of performance activity. Funds were received in this option during August 1997. (8) Reflects less than a full year of performance activity. Funds were received in this option during November 1997. - ------------------------------------------------------------------------------- 17 CONDENSED FINANCIAL INFORMATION (Selected data for Annuity and Accumulation Units outstanding during each period at a 5.00% Assumed Annual Net Return Rate) ================================================================================ The condensed financial information presented below for the period ended December 31, 1997 is derived from information included in the financial statements of the Separate Account, which have been audited by KPMG Peat Marwick LLP, independent auditors. The financial statements and the independent auditors' report thereon for the year ended December 31, 1997 are included in the Statement of Additional Information. The Annuity Unit Values shown below are derived from accumulation unit values and reflect the application of a factor corresponding to the Assumed Annual Net Return Rate of 5.00%. See Valuation of Annuity Unit Values for more information. Only those Subaccounts with Annuity Units outstanding at the end of the period are listed below.
1997 ----------- AETNA BALANCED VP, INC. Value at beginning of period $13.209 Value at end of period $14.800 Increase (decrease) in value of annuity unit(1) 12.04%(2) AETNA BOND VP Value at beginning of period $10.990 Value at end of period $11.017 Increase (decrease) in value of annuity unit(1) 0.25%(3) AETNA CROSSROADS VP Value at beginning of period $10.032 Value at end of period $10.223 Increase (decrease) in value of annuity unit(1) 1.90%(4) AETNA GROWTH VP Value at beginning of period $13.538 Value at end of period $13.015 Increase (decrease) in value of annuity unit(1) (3.86)%(4) AETNA GROWTH AND INCOME VP Value at beginning of period $15.123 Value at end of period $17.607 Increase (decrease) in value of annuity unit(1) 16.43%(2) AETNA INDEX PLUS LARGE CAP VP Value at beginning of period $10.848 Value at end of period $12.277 Increase (decrease) in value of annuity unit(1) 13.17%(5) AETNA LEGACY VP Value at beginning of period $10.264 Value at end of period $11.017 Increase (decrease) in value of annuity unit(1) 7.34%(2)
- ------------------------------------------------------------------------------- 18 CONDENSED FINANCIAL INFORMATION (continued) ================================================================================
1997 --------- AETNA SMALL COMPANY VP Value at beginning of period $13.322 Value at end of period $13.308 Increase (decrease) in value of annuity unit(1) (0.10)%(4) FIDELITY VIP HIGH INCOME PORTFOLIO Value at beginning of period $10.058 Value at end of period $10.060 Increase (decrease) in value of annuity unit(1) 0.02%(4) JANUS ASPEN GROWTH PORTFOLIO Value at beginning of period $10.433 Value at end of period $11.580 Increase (decrease) in value of annuity unit(1) 11.00%(6) JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO Value at beginning of period $10.638 Value at end of period $11.794 Increase (decrease) in value of annuity unit(1) 10.87%(2) PORTFOLIO PARTNERS MFS EMERGING EQUITIES PORTFOLIO Value at beginning of period $ 9.885 Value at end of period $ 9.719 Increase (decrease) in value of annuity unit(1) (1.68)%(7) PORTFOLIO PARTNERS MFS VALUE EQUITY PORTFOLIO Value at beginning of period $12.132 Value at end of period $12.253 Increase (decrease) in value of annuity unit(1) 1.00%(7)
- ------------------ (1) The above figures are calculated by subtracting the beginning Annuity Unit value from the ending Annuity Unit value, and dividing the result by the beginning Annuity Unit value. These figures do not reflect the deferred sales charge or the fixed dollar annual maintenance fee, if any. Inclusion of these charges would reduce the investment results shown. (2) Reflects less than a full year of performance activity. Funds were received in this option during January 1997. (3) Reflects less than a full year of performance activity. Funds were received in this option during October 1997. (4) Reflects less than a full year of performance activity. Funds were received in this option during December 1997. (5) Reflects less than a full year of performance activity. Funds were received in this option during May 1997. (6) Reflects less than a full year of performance activity. Funds were received in this option during March 1997. (7) Reflects less than a full year of performance activity. Funds were received in this option during November 1997. - ------------------------------------------------------------------------------- 19 APPENDIX C DESCRIPTION OF UNDERLYING FUNDS ================================================================================ The investment results of the Funds described below are likely to differ significantly and there is no assurance that any of the Funds will achieve their respective investment objectives. Except where otherwise noted, all of the Funds are diversified, as defined in the 1940 Act. Aetna Ascent VP (formerly Aetna Ascent Variable Portfolio) Investment Objective Seeks to provide capital appreciation. The Portfolio is designed for investors who have an investment horizon exceeding 15 years and who have a high level of risk tolerance. Policies Invests assets within specified maximum percentage ranges and adjusts the allocation mix in response to market trends and indicators: (bullet) Equity securities are chosen on the basis of their potential for capital appreciation. (bullet) Fixed income securities may include obligations of the U.S. and foreign governments as well as obligations of corporations and high-yield bonds. (bullet) Money market investments are high quality and present minimal credit risk. The benchmark portfolio is 80 percent equities and 20 percent fixed income under neutral market conditions. Risks Equity securities are subject to a decline in the stock market or in the value of the company, while debt securities may be affected by changes in general interest rates and in the creditworthiness of the issuer. High-yield bonds have additional credit risks, including lack of liquidity, greater likelihood of default and increased sensitivity to difficult economic and corporate developments. Foreign securities involve currency and other special risks not present in domestic securities. Real estate securities may be subject to the same risks associated with direct ownership of real estate. Investment Adviser: Aeltus Investment Management, Inc. Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund, 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 Assets are allocated among common and preferred stocks, bonds, U.S. Government securities and derivatives, and money market instruments. The Fund may also invest in when-issued or delayed-delivery securities. The Fund generally will maintain at least 25 percent of its total assets in fixed income securities. Risks There can be no assurance that the investment adviser will always allocate assets to the best performing sectors. The Fund's performance would suffer if a major proportion of its assets were allocated to stocks in a declining market or, similarly, if a major portion of its assets were allocated to bonds in a time of adverse interest rate movement. High-yield bonds involve additional investment risk. Foreign securities may involve certain additional - ------------------------------------------------------------------------------- 20 risks. Such risks include: currency fluctuations and related currency conversion costs; less liquidity; price or income volatility; less government supervision and regulation of foreign stock exchanges, brokers and listed companies; adverse foreign political and economic developments; different accounting procedures and auditing standards; and less publicly available information about foreign issuers. 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. Policies The Fund will invest at least 65 percent of its total assets in debt securities. It is anticipated that the portfolio's effective average maturity will normally be between three and ten years. The Fund will normally invest at least 70 percent of its assets in one or more of the following: a) debt securities or obligations that are rated at the time of purchase within the four highest categories assigned by Moody's Investors Service, Inc., Standard & Poor's Corporation, or other rating agencies, or, if not rated, that are considered by the investment adviser to be of comparable quality; b) securities of, or guaranteed by, the U.S. Government, its agencies or instrumentalities; c) marketable securities or obligations of, or guaranteed by, foreign governments; d) commercial paper and other short-term investments having a maturity of less than one year that are considered by the investment adviser to be investment grade; and, e) cash or cash equivalents. May invest up to 30 percent of its total assets in high-yield bonds. May invest up to 25 percent of its total assets in foreign debt and/or equity securities. Risks The value of debt securities may be affected by changes in general interest rates. High-yield bonds tend to offer higher yields than investment-grade bonds, but additional risks are associated with them. Foreign securities may involve certain additional risks. Such risks include: currency fluctuations and related currency conversion costs; less liquidity; price or income volatility; less government supervision and regulation of foreign stock exchanges, brokers and listed companies; adverse foreign political and economic developments; different accounting procedures and auditing standards; and less publicly available information about foreign issuers. Investment Adviser: Aeltus Investment Management Inc. Aetna Crossroads VP (formerly Aetna Crossroads Variable Portfolio) Investment Objective Seeks to provide total return (i.e., income and capital appreciation, both realized and unrealized). The Portfolio is designed for investors who have an investment horizon exceeding ten years and who have a moderate level of risk tolerance. Policies Invests assets within specified maximum percentage ranges and adjusts the allocation mix in response to market trends and indicators: (bullet) Equity securities are chosen on the basis of their potential for capital appreciation. (bullet) Fixed income securities may include obligations of the U.S. and foreign governments as well as obligations of corporations and high-yield bonds. (bullet) Money market investments are high quality and present minimal credit risk. The benchmark portfolio is 60 percent equities and 40 percent fixed income under neutral market conditions. - ------------------------------------------------------------------------------- 21 Risks Equity securities are subject to a decline in the stock market or in the value of the company; debt securities may be affected by changes in general interest rates and in the creditworthiness of the issuer. High-yield bonds have additional credit risks. International securities involve currency and other special risks not present in domestic securities. Real estate securities may be subject to the same risks associated with direct ownership of real estate. Investment Adviser: Aeltus Investment Management, Inc. Aetna Growth VP (formerly Aetna Variable Growth Portfolio) 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 Normally invests at least 65 percent of its total assets in common stocks that have significant potential for capital growth. May also invest in convertible and nonconvertible preferred stocks. May buy and sell put and call options, and stock index futures and options. May enter into repurchase agreements and invest up to 25 percent of its total assets in foreign securities. Will not invest more than 15 percent of the total value of its assets in high-yield bonds. Risks Equity securities are subject to a decline in the stock market or in the value of the company and preferred stocks have price risk and some interest rate and credit risk. Foreign investing involves certain additional risks not present in U.S. securities. Such risks may include: currency fluctuations and related currency conversion costs; less liquidity; price or income volatility; less government supervision and regulation of foreign stock exchanges, brokers and listed companies; adverse foreign political and economic developments; different accounting procedures and auditing standards; and less publicly available information about foreign issuers. High-yield bonds may provide a higher return, but have added risk. Derivatives may experience greater price swings and may be less liquid than other securities. 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 The Fund will invest principally in common stocks and securities convertible into common stock that the investment adviser believes have significant potential for capital appreciation and/or investment income. May invest up to 25 percent of its total assets in foreign equity securities. The Fund may invest in nonconvertible preferred stocks, debt securities, rights and warrants; the Fund may maintain a reserve of cash and high-grade, short-term debt securities and the Fund may purchase securities on a when-issued or delayed-delivery basis. Risks Share prices will fluctuate in response to the activities of an individual company or in response to general market and economic conditions. Foreign securities may involve certain additional risks. Such risks include: currency fluctuations and related currency conversion costs; less liquidity; price or income volatility; less government supervision and regulation of foreign stock exchanges, brokers and listed companies; adverse foreign political and - ------------------------------------------------------------------------------- 22 economic developments; different accounting procedures and auditing standards; and less publicly available information about foreign issuers. Investment Adviser: Aeltus Investment Management, Inc. Aetna Index Plus Large Cap VP (formerly Aetna Variable Index Plus Portfolio) Investment Objective Seeks to outperform the total return performance of publicly traded common stocks represented in the Standard & Poor's 500 Composite Stock Price Index (S&P 500). Policies The Portfolio attempts to be fully invested in common stocks and normally invests at least 90 percent of its assets in certain common stocks represented in the S&P 500. Portfolio managers will attempt to outperform the S&P 500 by creating a portfolio that has similar market risk characteristics to the S&P 500, but will use a disciplined quantitative analysis to identify those stocks having the greatest likelihood of either outperforming or underperforming the market. Risks Because the Portfolio invests in common stocks, it is subject to the possibility that common stock prices will decline over short or even extended periods. The U.S. stock market tends to be cyclical, with periods when stock prices generally rise and periods when prices generally decline. There is no assurance that the Portfolio's objectives will be met. Investment Adviser: Aeltus Investment Management, Inc. Aetna International VP Investment Objective Seeks long-term capital growth primarily though investment in a diversified portfolio of common stocks principally traded in countries outside of the United States. The Portfolio will not target any given level of current income. Policies Invests at least 65 percent of its total assets among securities principally traded in three or more countries outside of North America. The Portfolio will invest primarily in equity securities, including securities convertible into stocks. The Portfolio will invest in a broad spectrum of companies and industries. Further, from time to time, the Portfolio may hold up to 10 percent of its total assets in long-term debt securities with an S&P or Moody's rating of AA/Aa or above, or, if unrated, are considered by the investment adviser to be of comparable quality. Additionally, the Portfolio may invest in options, futures, enter into repurchase agreements and engage in currency hedging. Risks Equity securities are subject to a decline in the stock market or in the value of the company. Investments in foreign securities involve certain additional risks. Such risks may include: currency fluctuations and related currency conversion costs; less liquidity; price or income volatility; less government supervision and regulation of foreign stock exchanges, brokers and listed companies; adverse foreign economic and political developments; different accounting procedures and auditing standards; and less publicly available information about foreign issuers. Derivatives may experience greater price swings and may be less liquid than other securities. Investment Adviser: Aeltus Investment Management, Inc. - ------------------------------------------------------------------------------- 23 Aetna Legacy VP (formerly Aetna Legacy Variable Portfolio) Investment Objective Seeks to provide total return consistent with preservation of capital. The Portfolio is designed for investors who have an investment horizon exceeding five years and who have a low level of risk tolerance. Policies Invests assets within specified maximum percentage ranges and adjusts the allocation mix in response to market trends and indicators: (bullet) Equity securities are chosen on the basis of their potential for capital appreciation. (bullet) Fixed income securities may include obligations of the U.S. and foreign governments as well as obligations of corporations and high-yield bonds. (bullet) Money market investments are high-quality and present minimal credit risk. The benchmark portfolio is 40 percent equities and 60 percent fixed income under neutral market conditions. Risks Equity securities are subject to a decline in the stock market or value of the issuer; debt securities may be affected by changes in general interest rates and creditworthiness of the issuer. High-yield bonds have additional credit risks. International securities involve currency and other special risks not present in domestic securities. Real estate securities may be subject to the same risks associated with direct ownership of real estate. 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 The Fund will Invest primarily in: a) money market instruments that have a maturity at the time of purchase, of 397 days or less (762 days or less for U.S. government securities), and b) debt securities with a longer maturity, if the Fund has the absolute right to sell such securities back to the issuer for at least the face amount of the debt obligation within 397 days after the date of purchase. At least 95 percent of total Fund assets are invested in high- quality securities (those receiving the highest credit rating by any two rating agencies or one if only one agency has rated the security). May invest up to 25 percent of its total assets in foreign securities. Risks Yield will fluctuate with interest rates. The Fund is neither insured nor guaranteed by the U.S. government. Foreign securities may involve certain additional risks. Such risks include: currency fluctuations and related currency conversion costs; less liquidity; price or income volatility; less government supervision and regulation of foreign stock exchanges, brokers and listed companies; adverse foreign political and economic developments; different accounting procedures and auditing standards; and less publicly available information about foreign issuers. An investment in the Fund is neither insured nor guaranteed by the U.S. Government. Investment Adviser: Aeltus Investment Management, Inc. - ------------------------------------------------------------------------------- 24 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 Normally invests at least 65 percent of total assets in income-producing equity securities of publicly-traded companies "principally engaged" in the real estate industry, including those companies that, at the time of purchase, derive a significant proportion (at least 50 percent) of their revenues or profits from real estate operations or related services. The Portfolio may invest in convertible securities and preferred stock. Additionally, the Portfolio may invest in options and futures, enter into repurchase agreements, and invest up to 25 percent of its total assets in foreign securities. The Portfolio will not invest more than 15 percent of the total value of its assets in high-yield bonds. Risks There are a number of risk factors to be considered when investing in Real Estate Securities VP. Derivatives may experience greater price swings than other securities and may be less liquid than other securities. Risks involved in futures contracts include, but are not limited to: transactions to close out futures contracts may not be able to be effected at favorable prices; possible reduction in a fund's total return and yield; possible reduction in the value of the futures instrument; and potential losses in excess of the amount invested in the futures contracts themselves. Writing call options involves the risk of not being able to effect closing transactions at favorable prices or to participate in the appreciation of the underlying securities. Purchasing put options involves the risk of losing the entire purchase price of the option. High-yield bonds have additional risks associated with them, including but not limited to: lack of liquidity; an unpredictable secondary market and a higher risk of default. Special consideration to an investment in real estate include those risks associated with the direct ownership of real estate: declines in the value of real estate, risks related to general and local economic conditions, over-building and increased competition, increases in property taxes and operating expenses, changes in zoning laws and other risks particular to this market. The value of securities of companies which service the real estate industry may also be affected by such risks. Investment Adviser: Aeltus Investment Management, Inc. Aetna Small Company VP (formerly Aetna Variable Small Company Portfolio) 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 Normally invests at least 65 percent of its total assets in the common stock of companies with equity market capitalizations at the time of purchase of $1 billion or less. May also invest in convertible and nonconvertible preferred stock. The securities of small capitalization companies may be in an early developmental stage or older companies entering a new stage of growth due to management changes, new technology, products, or markets. Such companies may also be undervalued due to poor economic conditions, market decline, or actual or unanticipated unfavorable developments affecting the companies. May invest in lower-risk derivatives for hedging and other investment purposes. Risks Equity securities are subject to a decline in the stock market or in the value of the company. Although securities of small capitalization companies tend to offer greater potential for growth than securities of larger, more established issuers, there are additional risks associated with them. These include: limited marketability, more abrupt or erratic market movements than securities of larger capitalization companies, and less publicly available information about the issuer. These companies may also be dependent on relatively few products or services, have limited financial - ------------------------------------------------------------------------------- 25 resources and lack of management depth, and may have less of a track record or historical pattern of performance. Derivatives may experience greater price swings and may be less liquid than other securities. Investment Adviser: Aeltus Investment Management, Inc. AIM V.I. Capital Appreciation Fund Investment Objective Seeks capital appreciation through investments in common stocks, with emphasis on medium-sized and smaller emerging growth companies. Policies AIM will be particularly interested in companies that are likely to benefit from new and innovative products, services or processes that should enhance such companies' prospects for future growth in earnings. Any income received from securities held by the Fund will be incidental. The Fund's portfolio is primarily comprised of securities of two bias categories of companies: (1) "core" companies, which AIM considers to have experienced above-average and consistent long-term growth in earnings and to have excellent prospects for outstanding future growth, and (2) "earnings acceleration" companies which AIM believes are currently enjoying a dramatic increase in profits. Risks There is no guarantee that the Fund's objective will be met. The market prices of many of the securities purchased and held by the Fund may fluctuate widely. Investing in equity securities of small-and-medium-sized companies may involve greater risk than associated with investing in more established companies. Equity securities are subject to a decline in the stock market or in the value of the issuer, and preferred stocks have price risk and some credit risk. The Fund may invest in convertible securities, which may be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. The Fund may invest in foreign securities. Investments in securities of foreign issuers or foreign securities involve risks not present in domestic markets, including: currency fluctuations and related currency conversion costs, political instability, expropriation or confiscatory taxation and limited government regulations, accounting and auditing processes; and market due to a lesser trade volume than is generally expected of domestic markets. Investment Adviser: AIM Advisors, Inc. AIM V.I. Growth Fund Investment Objective Seeks growth of capital principally through investment in common stocks of seasoned and better capitalized companies considered by AIM to have strong earnings momentum. Current income will not be an important criterion of investment selection, and any such income should be considered incidental. Policies The Fund's portfolio is primarily comprised of securities of two basic categories: (1) "core" companies, which AIM considers to have experienced above-average and consistent long-term growth in earnings and to have excellent prospects for outstanding future growth, and (2) "earnings acceleration" companies which Fund management believes are currently enjoying a dramatic increase in profits. Risks There is no guarantee that the Fund will achieve its objective. Because the Fund invests in common stocks, it is subject to the possibility that common stock prices will decline over short or even extended periods. The U.S. stock market tends to be cyclical, with periods when prices generally rise, and periods when prices generally decline. The Fund may invest in convertible securities, which may be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. The Fund may invest in foreign securities. Investments in foreign securities involve risks not present in domestic markets, including: currency fluctuations and related - ------------------------------------------------------------------------------- 26 currency conversion costs, political and economical risk due to less stringent government regulations, accounting and auditing processes; and market risk due to a lesser trade volume than is generally expected of domestic markets. Investment Adviser: AIM Advisors, Inc. AIM V.I. Growth and Income Fund Investment Objective Seeks growth of capital, with current income as a secondary objective. Although the amount of the Fund's current income will vary from time to time, it is anticipated that the current income realized by the Fund will generally be greater than that realized by the mutual funds whose sole objective is growth of capital. Policies The Fund seeks to achieve its objective by generally investing at the least 65% if its net assets in stocks of companies believed by management to have the potential for the above-average growth in revenues and earnings. The Fund generally will also invest at least 80% of its assets in securities which pay income to the Fund. Risks There is no guarantee that the Fund will achieve its objective. Equity securities are subject to a decline in the stock market or in the value of the issuer. The U.S. stock market tends to be cyclical, with periods when stock prices generally rise and periods when prices generally decline. The value of debt securities may be affected by changes in general interest rates and in the creditworthiness of the issuer. The Fund may invest in convertible securities, which may be subject to redemption at the option of the issuer at a price established in the convertible security's governing instrument. The Fund may invest in foreign securities. Investments in securities of foreign issuers or in foreign securities involve risks not present in domestic markets, including: currency fluctuation and related currency conversion costs, political and economic risk due to social or political instability, expropriation or confiscatory taxation and limited liquidity; regulatory risk due to less stringent government regulations, accounting and auditing processes; and market risk due to a lesser trade volume than generally expected in domestic markets. Investment Adviser: AIM Advisors, Inc. AIM V.I. Value Fund Investment Objective To achieve long-term growth of capital by investing primarily in equity securities judged by AIM to be undervalued relative to the current or projected earnings of the companies issuing the securities, or relative to the current market values of assets owned by the companies issuing the securities, or relative to the equity market, generally. Policies Income as the secondary objective would be satisfied principally from the income generated by the common stocks, convertible bonds and convertible preferred stocks that make up the Fund's portfolio. The Fund may also acquire preferred stocks and debt instruments having prospects for growth of capital. The primary thrust of AIM's search for undervalued equity securities is in four categories: (1) out of favor cyclical growth companies; (2) established growth companies that are undervalued compared to historical relative valuation parameters; (3) companies where there is early but tangible evidence of improving prospects which are not yet reflected in the price of the company's equity securities; and (4) companies whose equity securities are selling at prices that do not reflect the current market value of its assets and where there is no reason to expect realization of this potential in the form of increased equity values. The Fund may invest up to 15% of its net assets in securities which are illiquid, and may invest up to 25% if its assets in foreign securities. - ------------------------------------------------------------------------------- 27 Risks Investment in equity securities involves certain risks. Equity securities offer no guaranteed return, and prices will fluctuate. During certain market conditions, purchases and sales of futures contracts may not completely offset a decline or rise in the value of the Fund's portfolio. In the futures market, it may not always be possible to execute a buy or sell order at the desired price, or to close out an open position due to market conditions, limits on open positions and/or daily price fluctuations. Unanticipated price movements in a futures contract may result in a loss substantially greater than the Fund's initial investment in the contract. Limitations on the resale of illiquid securities may have an adverse affect on their marketability, which may prevent the Fund from disposing of them promptly at reasonable prices. Investment in the foreign securities carries the following primary risks: Currency risks due to changing currency exchange rates; political and social due to political/social instability and other factors; regulatory risk due to less stringent regulation and government supervision of foreign issuers; and market risks whereby foreign securities may be less liquid and more volatile due to lower trading volume and higher transactions costs. Investment Adviser: AIM Advisors, Inc. Fidelity Investments Variable Insurance Products Fund--High Income Portfolio Investment Objective Seeks to obtain a high level of current income by investing primarily in high-yielding, lower-rated, fixed income securities, while also considering growth of capital. Policies Invests primarily in all types of income-producing debt securities, preferred stocks, and convertible securities. The Portfolio normally invests at least 65 percent of its assets in these securities. If consistent with its investment objectives, the Portfolio may also invest in common stocks, other equity securities, and debt securities that are not currently paying interest but that are expected to do so in the future. The Portfolio manager focuses on assembling a portfolio of income-producing securities that it believes will provide the best tradeoff between risk and return within the range of securities that are eligible investments for the Portfolio. The Portfolio may invest up to 50 percent of its total assets in foreign securities. Risks Yield and share price change daily and are based on changes in interest rates, market conditions, other economic and political news, and on the quality and maturity of the Portfolio's investments. Lower quality debt securities (also known as "junk bonds") are considered to have speculative characteristics and involve greater risk of default or price changes. Foreign securities, foreign currencies and securities issued by U.S. entities with substantial foreign operations may involve additional risks. These include political or economic risks, fluctuations in foreign currencies, withholding or other taxes, operational risks, increased regulatory burdens, and less stringent investor protection and disclosure standards of foreign markets. Investment Adviser: Fidelity Management & Research Company Janus Aspen Series--Growth Portfolio Investment Objective Seeks long-term growth of capital in a manner consistent with the preservation of capital. Policies Invests in common stocks of companies of any size, although it generally invests in larger, more established issuers. Invests primarily in stocks of domestic and foreign companies selected for their growth potential. May at times hold substantial positions in cash equivalents or interest bearing securities. May invest to a lesser degree in other types of securities including preferred stocks, warrants, convertible securities, and debt securities when its portfolio manager perceives an opportunity for capital growth. Using a "bottom up" approach to building the Portfolio, the - ------------------------------------------------------------------------------- 28 portfolio manager seeks to identify individual companies with earnings growth potential that may not be recognized by the market at large. Securities are generally selected without regard to any defined industry sector. Securities are selected solely for their capital growth potential; investment income is not a consideration. Risks Share prices will fluctuate in response to the activities of an individual company or in response to general market and economic conditions. Historically, common stocks have provided greater long-term returns and have entailed greater short-term risks than other investment choices. Smaller or newer issuers are more likely to realize more substantial growth as well as suffer more significant losses than larger or more established issuers. Investments in such companies can be both more volatile and more speculative. Investments in foreign securities, including those of foreign governments, involve greater risks than investing in comparable domestic securities. These risks include currency, political, economic, regulatory and market risk factors. Risk is reduced through diversification. Investment Adviser: Janus Capital Corporation Janus Aspen Series--Worldwide Growth Portfolio Investment Objective Seeks long-term growth of capital in a manner consistent with the preservation of capital. Policies A diversified portfolio that invests primarily in common stocks of foreign and domestic issuers. Invests worldwide in companies and organizations of any size, regardless of country of organization or place of principal business activity. 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 equivalents or interest-bearing securities. May invest to a lesser degree in other types of securities, including preferred stocks, warrants, convertible securities, and debt securities, when the portfolio manager perceives an opportunity for growth. May invest up to 35 percent of net assets in high-yield/high-risk securities (also called "junk bonds"). May invest without limit in foreign equity and debt securities. Risks Stock values may fluctuate in response to the activities of an individual company or in response to general market and economic conditions. Historically, common stocks have provided greater long-term returns and have entailed greater short-term risks than other investment choices. Investment in foreign securities, including those of foreign governments, involve greater risks than investing in comparable domestic securities. These include currency, political, economic, regulatory and market risk factors. 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). Issuers of high-yield securities may not be as strong financially as those issuing bonds with higher credit ratings. They are more vulnerable to real or perceived economic changes, political changes or other adverse developments. Investment Adviser: Janus Capital Corporation Oppenheimer Strategic Bond Fund 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 principally in lower-rated, high-yield domestic debt securities (commonly known as "junk bonds"), U.S. Government securities, and foreign government and corporate debt securities. Under normal circumstances, the Fund's assets will be invested in each of these three sectors. However, Strategic Bond Fund may occasionally invest up to 100 percent of its total assets in any one sector, if, in the manager's judgment, the Fund has the opportunity to - ------------------------------------------------------------------------------- 29 seek a high level of current income without undue risk to principal. Accordingly, the Fund's investments should be considered speculative. Distributable income will fluctuate as the Fund's assets are shifted among the three sectors. Risks The higher yields and income sought by Strategic Bond Fund are generally associated with securities in the lower-rating categories of the established rating services. Such securities are considered speculative and involve greater risk than lower-yielding, higher-rated fixed income securities, while providing higher yields than such securities. Lower-rated securities may be less liquid, and significant losses could be experienced if a substantial number of other holders of such securities decide to sell at the same time. Issuers of lower-rated or unrated securities are generally not as financially secure or creditworthy as issuers of higher-rated securities. Investment Adviser: OppenheimerFunds, Inc. Portfolio Partners MFS Emerging Equities Portfolio Investment Objective Seeks to provide long-term growth of capital. Dividend and interest income from portfolio securities, if any, is incidental to the Portfolio's investment objective. Policies Normally invests at least 80 percent of its assets in common stocks of companies the subadviser believes are in an early phase of their life cycle, but that have the potential to become major enterprises. Such companies would be expected to show earnings growth over time well above the growth rate of the overall economy and inflation and have the products, technologies, management and market and other opportunities usually necessary to become more widely recognized as growth companies. Emerging growth companies can be of any size. The Portfolio may invest in larger or more established companies whose rates of earnings growth are expected to accelerate because of special factors or basic changes in the economic environment. Up to 25 percent of the Portfolio's net assets may be invested in foreign issuers. Risks Share prices will fluctuate in response to the activities of an individual company or in response to general market and economic conditions. Investing in emerging growth companies involves greater risk than is customarily associated with investments in more established companies. Such companies may have limited product lines, markets or financial resources and they may be dependent on one person's management. In addition, there may be less research available on many promising small- and medium-sized emerging growth companies, making it more difficult to find and analyze these companies. The securities of these companies may have limited marketability and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general. Foreign investing involves risks that are different in some respects from investments in the securities of U.S. issuers. Risks include less availability of information about issuers or foreign markets, economic and political volatility, and price, interest rate and currency risk. Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser: Massachusetts Financial Services Company Portfolio Partners MFS Value Equity Portfolio Investment Objectives Seeks capital appreciation. Dividend income, if any, is a consideration incidental to the Portfolio's objective of capital appreciation. Policies While the Portfolio's policy is to invest at least 65 percent of its total assets in common stocks, it may seek appreciation by investing in other types of securities (such as fixed-income, convertible bonds, convertible preferred stocks and - ------------------------------------------------------------------------------- 30 warrants) when relative values make such purchases appear attractive, either as individual issues or as types of securities in certain economic environments. The Portfolio may invest in high-yield fixed-income (below investment grade), but will invest no more than 25 percent of its net assets in these securities. The Portfolio may also invest up to 50 percent (but generally expects to invest not more than 25 percent) of its net assets in foreign securities. Risks Share prices will fluctuate in response to the activities of an individual company or in response to general market and economic conditions. Historically, common stocks have provided greater long-term returns and have entailed greater short-term risks than other investment choices. Lower-rated bonds have speculated characteristics. Changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than in the case of higher-grade securities. Investing in securities of foreign issuers generally involves risks not ordinarily associated with investing in securities of domestic issuers. These include less availability of information about issuers or foreign markets, economic and political volatility, and price, interest rate and currency risk. 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 primarily through a diversified portfolio of marketable foreign equity investments. Policies Invests in companies, wherever organized, that do business primarily outside the United States. The Portfolio intends to diversify investments among several countries and to have represented in its holdings business activities in not less than three different countries. Does not intend to concentrate investments in any particular industry. Invests primarily in equity securities of established companies, listed on foreign exchanges, that the subadviser believes have favorable characteristics. Although the Portfolio will consist primarily of equity securities, it may also invest in fixed-income securities of foreign governments and companies. Risks Share prices will fluctuate in response to the activities of an individual company or in response to general market and economic conditions. Historically, common stocks have provided greater long-term returns and have entailed greater short-term risks than other investment choices. Investing in foreign securities may involve a greater degree of risk than investing in domestic securities. Additional risk factors include the possibility of exchange rate fluctuations, less publicly available information, more volatile markets, less securities regulation and less favorable tax provisions. 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 growth of capital and, secondarily, to increase dividend income by investing primarily in common stocks of well established growth companies. Policies Under normal market conditions the Portfolio invests at least 65 percent of its total assets in common stocks issued by a diversified group of growth companies. The companies in which the Portfolio invests normally (but not always) pay dividends, which are generally expected to rise in future years as earnings increase. Most of its assets will be invested in U.S. common stocks. However, the Portfolio may invest in foreign securities and convertible securities - ------------------------------------------------------------------------------- 31 and warrants, when the subadviser considers such investments consistent with the Portfolio's investment objective and policies. The Portfolio generally seeks to invest in securities of companies that satisfy one or more of several criteria established by the subadviser. For example, the subadviser generally seeks companies with superior growth in earnings and cash flow; the ability to sustain earnings momentum even during economic slowdowns by operating in so-called "fertile fields" (areas where earnings and dividends can outpace inflation and the overall economy); and the capability to expand even during times of slow growth. The subadviser generally favors companies whose profits increase due to economic factors rather than one-time events such as lower taxes. The Portfolio may engage in strategic transactions, which may include the use of derivatives. Risks Share prices will fluctuate in response to the activities of an individual company or in response to general market and economic conditions. Historically, common stocks have provided greater long-term returns and have entailed greater short-term risks than other investment choices. Investments in foreign securities, including those of foreign governments, involve greater risks than investing in comparable domestic securities. These risks include currency, political, economic, regulatory and market risk factors. Risk is reduced through diversification. Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser: T. Rowe Price Associates, Inc. - ------------------------------------------------------------------------------- 32 For Master Applications Only I hereby acknowledge receipt of an Account B Fixed and Variable Single Premium Immediate Annuity prospectus dated October 30, 1998, as well as all current prospectuses pertaining to the variable investment options available under the Contracts. - --- Please send an Account B Statement of Additional Information (Form No. SAI.09515-98-1) dated October 30, 1998. - -------------------------------------------------------------------------------- CONTRACT HOLDER'S SIGNATURE - -------------------------------------------------------------------------------- DATE PROS.09515-98-1 - ------------------------------------------------------------------------------- 33 - -------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT B OF AETNA LIFE INSURANCE AND ANNUITY COMPANY - -------------------------------------------------------------------------------- Statement of Additional Information dated October 30, 1998 A Fixed and Variable Single Premium Immediate Annuity Contract This Statement of Additional Information is not a prospectus and should be read in conjunction with the current prospectus for Variable Annuity Account B (the "Separate Account") dated October 30, 1998. A free prospectus is available upon request from the local Aetna Life Insurance and Annuity Company office or by writing to or calling: Aetna Life Insurance and Annuity Company Attn: ARS Settlements 151 Farmington Avenue Hartford, Connecticut 06156 1-800-238-6273 Read the prospectus before you invest. Terms used in this Statement of Additional Information shall have the same meaning as in the prospectus. TABLE OF CONTENTS
Page General Information and History............................................ 2 Variable Annuity Account B................................................. 2 Offering and Purchase of Contracts......................................... 3 Performance Data........................................................... 3 General.............................................................. 3 Average Annual Total Return Quotations............................... 4 Annuity Payments........................................................... 7 Sales Material and Advertising............................................. 8 Independent Auditors....................................................... 8 Financial Statements of the Separate Account............................... S-1 Financial Statements of Aetna Life Insurance and Annuity Company........... F-1
GENERAL INFORMATION AND HISTORY Aetna Life Insurance and Annuity Company (the "Company") is a stock life insurance company which was organized under the insurance laws of the State of Connecticut in 1976. Through a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity Life Insurance Company organized in 1954). As of December 31, 1997, the Company (ALIAC) had $40.7 billion invested through its products, including $22.3 billion in its separate accounts (of which the Company, or an affiliate oversees the management of $17.6 billion) and $1.3 billion in its mutual funds offered outside of its separate accounts. The Company is ranked among the top 2% of all U.S. life insurance companies based on assets as of December 31, 1996. The Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc., which is in turn a wholly owned subsidiary of Aetna Retirement Services, Inc., and an indirect wholly owned subsidiary of Aetna Inc. The Company is engaged in the business of issuing life insurance policies and annuity contracts in all states of the United States. The Company's 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 also a registered investment adviser under the Investment Advisers Act of 1940, and a registered broker-dealer under the Securities Exchange Act of 1934. The Company provides investment advice to several of the registered management investment companies offered as variable investment options under the Contracts funded by the Separate Account (see "Variable Annuity Account B" below). Other than the mortality and expense risk charge and administrative charge described in the prospectus, all expenses incurred in the operations of the Separate Account are borne by the Company. (See "Charges and Deductions" in the prospectus.) The Company receives reimbursement for certain administrative costs from some advisers of the Funds used as funding options under the Contract. These fees generally range up to 0.25%. 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. VARIABLE ANNUITY ACCOUNT B Variable Annuity Account B (the "Separate Account") 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. Purchase Payments made 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. The Company 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. 2 The Funds currently available under the Contract are as follows: (bullet) Aetna Ascent VP (formerly Aetna Ascent Variable Portfolio) (bullet) Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund, Inc.) (bullet) Aetna Income Shares d/b/a Aetna Bond VP (bullet) Aetna Crossroads VP (formerly Aetna Crossroads Variable Portfolio) (bullet) Aetna Growth VP (formerly Aetna Variable Growth Portfolio) (bullet) Aetna Variable Fund d/b/a Aetna Growth and Income VP (bullet) Aetna Index Plus Large Cap VP (formerly Aetna Variable Index Plus Portfolio) (bullet) Aetna International VP (bullet) Aetna Legacy VP (formerly Aetna Legacy Variable Portfolio) (bullet) Aetna Variable Encore Fund d/b/a Aetna Money Market VP (bullet) Aetna Real Estate Securities VP (bullet) Aetna Small Company VP (formerly Aetna Variable Small Company Portfolio) (bullet) AIM V.I. Capital Appreciation Fund (bullet) AIM V.I. Growth Fund (bullet) AIM V.I. Growth and Income Fund (bullet) AIM V.I. Value Fund (bullet) Fidelity VIP High Income Portfolio (bullet) Janus Aspen Growth Portfolio (bullet) Janus Aspen Worldwide Growth Portfolio (bullet) Oppenheimer Strategic Bond Fund (bullet) Portfolio Partners MFS Emerging Equities Portfolio (bullet) Portfolio Partners MFS Value Equity Portfolio (bullet) Portfolio Partners Scudder International Growth Portfolio (bullet) Portfolio Partners T. Rowe Price Growth Equity Portfolio 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 CONTRACTS The Company is both the depositor and the principal underwriter for the securities sold by the prospectus. The Company offers 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 Contracts are purchased is in the prospectus. PERFORMANCE DATA GENERAL From time to time, the Company may advertise different types of historical performance for the Subaccounts of the Separate Account available under the Contracts. The Company 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 Purchase Payment of $1,000 is applied under a deferred annuity contract to the various Subaccounts available 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 3 Fund under the Separate Account and then adjust them to reflect the deduction of all recurring charges during each period that apply to the Contracts described in this prospectus (e.g., mortality and expense risk charges, administrative expense charges (if any), and the withdrawal charge schedule applicable to commutations under a variable Period Certain Annuity). These charges will be deducted on a pro rata basis in the case of fractional periods. The non-standardized figures will be calculated in a similar manner, except that they will not reflect the deduction of any applicable withdrawal charge (which 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. Investment results of the Subaccounts 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 amount available upon redemption may be more or less than your original cost. AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized The table shown below reflects the average annual standardized and non-standardized total return quotation figures for the periods ended December 31, 1997 for the Subaccounts. 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 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. 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 Company contracts and; (b) after November 26, 1997, based on the performance of the Portfolio Partners portfolio. 4
--------------------------------------------------------------- Date Contributions First STANDARDIZED Received Under the Separate Account - ------------------------------------------------------------------------------------------------------------------------------------ SUBACCOUNT 1 Year 5 Years 10 Years Inception* - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Ascent VP 12.48% 17.63% 08/31/95 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Balanced VP, Inc. 14.91% 12.55% 11.24% 06/30/89 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Bond VP(1) 1.60% 5.17% 7.86% - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Crossroads VP 10.30% 14.47% 08/31/95 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Growth VP 13.04% 05/30/97 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Growth and Income VP(1) 21.85% 15.76% 15.18% - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Index Plus Large Cap VP 25.60% 26.37% 10/31/96 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Legacy VP 7.42% 11.20% 08/31/95 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Money Market VP(1)(2) (1.05%) 3.09% 4.63% - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Small Company VP 14.63% 05/30/97 - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP High Income Portfolio 10.39% 12.53% 06/30/95 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Growth Portfolio 15.15% 18.02% 07/29/94 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Worldwide Growth Portfolio 14.60% 25.14% 04/28/95 - ------------------------------------------------------------------------------------------------------------------------------------ Oppenheimer Strategic Bond Fund 0.14% 05/30/97 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio Partners MFS Emerging Equities Portfolio (6.18%) 11/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Small Cap/Portfolio Partners MFS Emerging Equities(3) 2.47% 9.62% 09/30/93 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio Partners MFS Value Equity Portfolio (3.63%) 11/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ Neuberger & Berman AMT Growth/Portfolio Partners MFS Value Equity(3) 18.53% 11.14% 11.32% 11/30/92 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio Partners Scudder International Growth Portfolio (3.81%) 11/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ Scudder International Portfolio Class A/Portfolio Partners Scudder International Growth(3) 2.25% 11.82% 9.94% 08/31/92 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio Partners T. Rowe Price Growth Equity Portfolio (3.06%) 11/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Growth/Portfolio Partners T. Rowe Price Growth Equity(3) 20.31% 22.03% 02/28/95 - ------------------------------------------------------------------------------------------------------------------------------------
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. (1) These Funds have been available through the Separate Account for more than ten years. (2) The current yield for the Subaccount for the 7-day period ended December 31, 1997 (on an annualized basis) was 4.23%. 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 5% withdrawal charge. (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 "Date Contributions First Received Under Separate Account" refers to the applicable date for the replaced Fund. 5
--------------------------------------------------------------- Fund NON-STANDARDIZED Inception Date - ------------------------------------------------------------------------------------------------------------------------------------ SUBACCOUNT 1 Year 3 Years 5 Years 10 Years Inception** - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Ascent VP 18.40% 20.35% 07/05/95 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Balanced VP, Inc. 20.95% 20.01% 13.01% 11.12% 04/03/89 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Bond VP(1) 6.95% 8.50% 5.60% 7.86% - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Crossroads VP 16.10% 17.02% 07/05/95 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Growth VP 31.34% 31.31% 12/13/96 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Growth and Income VP(1) 28.27% 27.21% 16.23% 15.18% - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Index Plus Large Cap VP 32.22% 32.91% 09/16/96 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Legacy VP 13.07% 13.52% 07/05/95 - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Money Market VP(1)(2) 4.16% 4.31% 3.51% 4.63% - ------------------------------------------------------------------------------------------------------------------------------------ Aetna Small Company VP 32.81% 33.75% 12/27/96 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Capital Appreciation Fund 12.10% 20.39% 17.19% 05/05/93 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Growth Fund 25.31% 24.84% 16.74% 05/05/93 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Growth and Income Fund 24.18% 24.83% 19.62% 05/02/94 - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Value Fund 22.17% 23.15% 18.28% 05/05/93 - ------------------------------------------------------------------------------------------------------------------------------------ Fidelity VIP High Income Portfolio(1) 16.20% 15.97% 12.49% 11.40% - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Growth Portfolio 21.21% 22.15% 16.20% 09/13/93 - ------------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Worldwide Growth Portfolio 20.63% 24.57% 21.38% 09/13/93 - ------------------------------------------------------------------------------------------------------------------------------------ Oppenheimer Strategic Bond Fund 7.35% 10.60% 6.29% 05/03/93 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio Partners MFS Emerging Equities Portfolio (1.25%) 11/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Small Cap/Portfolio Partners MFS Emerging Equities(3) 7.86% 16.50% 10.81% 17.50% 09/21/88 - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio Partners MFS Value Equity Portfolio 1.30% 11/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ Neuberger & Berman AMT Growth/Portfolio Partners MFS Value Equity(3) 24.77% 20.48% 11.59% 13.22% - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio Partners Scudder International Growth Portfolio 1.46% 11/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ Scudder International Portfolio Class A/Portfolio Partners Scudder International Growth(3) 7.63% 10.21% 12.28% 10.40% - ------------------------------------------------------------------------------------------------------------------------------------ Portfolio Partners T. Rowe Price Growth Equity Portfolio 1.91% 11/28/97 - ------------------------------------------------------------------------------------------------------------------------------------ Alger American Growth/Portfolio Partners T. Rowe Price Growth Equity(3) 26.65% 24.05% 18.26% 18.21% 01/09/89 - ------------------------------------------------------------------------------------------------------------------------------------
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, 1997 (on an annualized basis) was 4.23%. 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 5% 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. 6 ANNUITY PAYMENTS Your variable Annuity Payment will fluctuate as the Annuity Unit value(s) fluctuates with the investment experience of the selected Subaccount(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 Annuity Payments will increase thereafter only to the extent that the net investment rate increases by more than 5% on an annual basis. Annuity Payments would decline if the rate failed to increase by 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 net investment rate. A fixed number of Annuity Units is determined in each of the designated Subaccounts on the Contract Effective Date. The number of Annuity Units, which does not change thereafter, is calculated by dividing (a) by (b), where (a) is the amount of the Annuity Payment as if the Annuity Payment was calculated as of the Contract Effective Date, and (b) is the Annuity Unit value for that investment option on the Contract Effective Date. The first payment will be calculated ten Valuation Dates prior to the payment due date which depends upon the payment frequency you have selected. As noted above, Annuity Unit values fluctuate from one Valuation Date to the next; such fluctuations reflect changes in the net investment factor for the applicable Subaccount(s) (with a ten Valuation Date lag which gives the Company time to process Annuity 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 each Subaccount selected. EXAMPLE: Assume that you purchase a Single Premium Immediate Annuity Contract with a $50,000 premium. The payment option that you select has a payment factor of $6.68 per $1,000 of value applied. Also assume that no premium tax is payable. If a payment was determined as of the Contract Effective Date, that payment would be calculated by multiplying $6.68 per $1,000 by 50.000. This would produce an initial payment of $334.00. Assume that the value of the Annuity Unit on the Contract Effective Date is 13.400000. The payment calculated as of the Contract Effective Date is divided by the Annuity Unit value to determine the number of Annuity Units (that is, $334.00/13.400000 = 24.925 Annuity Units). The number of Annuity Units will remain constant over the term of your contract as determined by your annuity option. The value of each payment will be determined on the tenth Valuation Date prior to the payment due date by multiplying the number of Annuity Units by that date's Annuity Unit value. Payments will subsequently fluctuate depending upon the net investment performance that occurs between payment Valuation Dates less a factor that represents the Assumed Annual Net Return Rate. This offsets the Assumed Annual Net Return Rate built into the number of Annuity Units determined above. Annuity Unit values are calculated on a daily basis by multiplying the Annuity Unit Value by the daily net investment factor and by the daily Assumed Annual Net Return Rate. The factor for a 3.5% Assumed Annual Net Return Rate is 0.9999058 and for 5.0%, 0.9998663. The new payment is calculated by multiplying the number of Annuity Units by the new Annuity Unit value. 7 SALES MATERIAL AND ADVERTISING The Company may illustrate the hypothetical values of Annuity Payments made from each of the Subaccounts over certain time periods based on the historical net asset values of the Funds. The Company may also include hypothetical illustrations in its sales literature that explain the mathematical principles of compounded interest, tax deferred accumulation, and the mechanics of variable annuity contracts. The Company may also discuss the difference between variable annuity contracts and savings or investment products, including, but not limited to, personal savings accounts and certificates of deposit. 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 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 categorize funds in terms of the asset classes they represent and use such categories in marketing material for the Contracts. 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, including, but not limited to The Wall Street Journal, Money magazine, USA Today and The VARDS Report. The Company 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, 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 Peat Marwick 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. 8 FINANCIAL STATEMENTS VARIABLE ANNUITY ACCOUNT B Index Statement of Assets and Liabilities........................................ S-2 Statements of Operations and Changes in Net Assets......................... S-6 Notes to Financial Statements.............................................. S-7 Independent Auditors' Report...............................................S-25
S-1 Variable Annuity Account B Statement of Assets and Liabilities - December 31, 1997 ASSETS: Investments, at net asset value: (Note 1) Aetna Variable Fund; 30,411,094 shares (cost $955,207,313) ...................... $1,022,883,150 Aetna Income Shares; 5,674,428 shares (cost $72,136,754) ........................ 72,918,472 Aetna Variable Encore Fund; 9,348,762 shares (cost $123,509,269) ................ 124,939,137 Aetna Investment Advisers Fund, Inc.; 10,156,919 shares (cost $141,710,363) ..... 162,842,121 Aetna GET Fund, Series B; 1,326,295 shares (cost $14,665,182) ................... 20,859,924 Aetna GET Fund, Series C; 866,713 shares (cost $8,784,556) ...................... 10,929,107 Aetna Ascent Variable Portfolio; 1,448,001 shares (cost $19,409,307) ............ 20,443,736 Aetna Crossroads Variable Portfolio; 1,552,948 shares (cost $19,616,465) ........ 20,320,625 Aetna Legacy Variable Portfolio; 1,652,443 shares (cost $19,438,586) ............ 19,994,608 Aetna Variable Portfolio, Inc.: Capital Appreciation Portfolio; 328,354 shares (cost $4,457,675) ............... 3,912,594 Growth Portfolio; 326,907 shares (cost $4,163,981) ............................. 3,218,910 Index Plus Portfolio; 2,014,660 shares (cost $26,897,404) ...................... 28,239,788 Small Company Portfolio; 478,249 shares (cost $6,406,805) ...................... 6,107,129 Alger American Funds: Balanced Portfolio; 525,665 shares (cost $4,964,549) ........................... 5,656,151 Income and Growth Portfolio; 1,287,394 shares (cost $11,439,405) ............... 14,148,460 Leveraged AllCap Portfolio; 616,315 shares (cost $12,739,767) .................. 14,280,009 American Century Investments: Balanced Fund; 563,499 shares (cost $4,180,851) ................................ 4,643,230 International Fund; 855,695 shares (cost $5,491,134) ........................... 5,852,955 Calvert Social Balanced Portfolio; 490,079 shares (cost $912,050) ............... 971,337 Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio; 5,712,922 shares (cost $118,902,067) .................. 138,709,740 Growth Portfolio; 2,167,158 shares (cost $65,817,036) .......................... 80,401,549 High Income Portfolio; 2,598,408 shares (cost $32,563,692) ..................... 35,286,379 Overseas Portfolio; 677,325 shares (cost $12,543,713) .......................... 13,004,643 Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio; 652,031 shares (cost $10,605,372) ..................... 11,743,075 Contrafund Portfolio; 5,407,595 shares (cost $89,625,610) ...................... 107,827,442 Index 500 Portfolio; 673,020 shares (cost $66,103,932) ......................... 76,986,772 Investment Grade Bond Portfolio; 523,741 shares (cost $6,191,022) .............. 6,578,182 Insurance Management Series: American Leaders Fund II; 5,952,606 shares (cost $86,738,072) .................. 116,849,662 Equity Income Fund II; 1,619,705 shares (cost $19,027,165) ..................... 19,938,571 Growth Strategies Fund II; 1,406,137 shares (cost $19,150,654) ................. 22,709,106 High Income Bond Fund II; 4,859,621 shares (cost $49,449,772) .................. 53,212,853 International Equity Fund II; 1,136,596 shares (cost $13,007,527) .............. 13,946,028 Prime Money Fund II; 7,530,487 shares (cost $7,530,487) ........................ 7,530,487 U.S. Government Securities Fund II; 1,252,067 shares (cost 12,683,585) ......... 13,196,784 Utility Fund II; 1,840,648 shares (cost $20,501,843) ........................... 26,302,858 Janus Aspen Series: Aggressive Growth Portfolio; 1,867,831 shares (cost $33,789,408) ............... 38,383,925 Balanced Portfolio; 1,782,815 shares (cost $27,682,920) ........................ 31,145,778 Flexible Income Portfolio; 894,277 shares (cost $10,167,023) ................... 10,534,588 Growth Portfolio; 2,203,400 shares (cost $34,954,619) .......................... 40,718,827 Worldwide Growth Portfolio; 6,953,978 shares (cost $144,443,276) ............... 162,653,541 Lexington Emerging Markets Fund; 318,004 shares (cost $3,542,964) ............... 2,833,416 Lexington Natural Resources Trust Fund; 464,813 shares (cost $6,752,492) ........ 6,930,364
S-2 Variable Annuity Account B Statement of Assets and Liabilities - December 31, 1997 (continued): MFS Funds: Total Return Series; 1,140,943 shares (cost $16,998,729) ............................ $ 18,973,878 Worldwide Government Series; 129,706 shares (cost $1,330,232) ....................... 1,324,295 Oppenheimer Funds: Capital Appreciation Fund; 90,044 shares (cost $3,554,414) .......................... 3,688,200 Global Securities Fund; 125,453 shares (cost $2,681,784) ............................ 2,680,937 Growth & Income Fund; 616,565 shares (cost $12,222,979) ............................. 12,688,907 Strategic Bond Fund; 604,043 shares (cost $3,113,874) ............................... 3,092,701 Portfolio Partners, Inc. (PPI): PPI MFS Emerging Equities Portfolio; 2,221,275 shares (cost $96,046,526) ............ 95,292,694 PPI MFS Research Growth Portfolio; 6,783,433 shares (cost $67,030,057) .............. 65,867,130 PPI MFS Value Equity Portfolio; 515,803 shares (cost $15,207,018) ................... 15,427,681 PPI Scudder International Growth Portfolio; 897,175 shares (cost $12,454,736) ....... 12,650,163 PPI T. Rowe Price Growth Equity Portfolio; 2,067,651 shares (cost $88,372,335) ...... 90,170,258 -------------- NET ASSETS (cost $2,666,918,351) ..................................................... $2,922,442,857 ============== Net assets represented by: Reserves for annuity contracts in accumulation and payment period: (Notes 1 and 5)
Aetna Variable Fund: Annuity contracts in accumulation ........... $892,006,381 Annuity contracts in payment period ......... 130,876,769 Aetna Income Shares: Annuity contracts in accumulation ........... 69,236,488 Annuity contracts in payment period ......... 3,681,984 Aetna Variable Encore Fund: Annuity contracts in accumulation ........... 124,939,137 Aetna Investment Advisers Fund, Inc.: Annuity contracts in accumulation ........... 150,761,384 Annuity contracts in payment period ......... 12,080,737 Aetna GET Fund, Series B: Annuity contracts in accumulation ........... 20,859,924 Aetna GET Fund, Series C: Annuity contracts in accumulation ........... 10,929,107 Aetna Ascent Variable Portfolio: Annuity contracts in accumulation ........... 20,443,736 Aetna Crossroads Variable Portfolio: Annuity contracts in accumulation ........... 20,250,904 Annuity contracts in payment period ......... 69,721 Aetna Legacy Variable Portfolio: Annuity contracts in accumulation ........... 18,710,015 Annuity contracts in payment period ......... 1,284,593 Aetna Variable Portfolio, Inc.: Capital Appreciation Portfolio: Annuity contracts in accumulation ........... 3,912,594 Growth Portfolio: Annuity contracts in accumulation ........... 3,210,344 Annuity contracts in payment period ......... 8,566 Index Plus Portfolio: Annuity contracts in accumulation ........... 28,074,705 Annuity contracts in payment period ......... 165,083
S-3 Variable Annuity Account B Statement of Assets and Liabilities - December 31, 1997 (continued): Small Company Portfolio: Annuity contracts in accumulation .................... $ 6,059,783 Annuity contracts in payment period .................. 47,346 Alger American Funds: Balanced Portfolio: Annuity contracts in accumulation .................... 5,656,151 Income and Growth Portfolio: Annuity contracts in accumulation .................... 14,148,460 Leveraged AllCap Portfolio: Annuity contracts in accumulation .................... 14,280,009 American Century Investments: Balanced Fund: Annuity contracts in accumulation .................... 4,643,230 International Fund: Annuity contracts in accumulation .................... 5,852,955 Calvert Social Balanced Portfolio: Annuity contracts in accumulation .................... 971,337 Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: Annuity contracts in accumulation .................... 138,709,740 Growth Portfolio: Annuity contracts in accumulation .................... 80,401,549 High Income Portfolio: Annuity contracts in accumulation .................... 35,217,837 Annuity contracts in payment period .................. 68,542 Overseas Portfolio: Annuity contracts in accumulation .................... 13,004,643 Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: Annuity contracts in accumulation .................... 11,743,075 Contrafund Portfolio: Annuity contracts in accumulation .................... 107,827,442 Index 500 Portfolio: Annuity contracts in accumulation .................... 76,986,772 Investment Grade Bond Portfolio: Annuity contracts in accumulation .................... 6,578,182 Insurance Management Series: American Leaders Fund II: Annuity contracts in accumulation .................... 116,800,911 Annuity contracts in payment period .................. 48,751 Equity Income Fund II: Annuity contracts in accumulation .................... 19,938,571 Growth Strategies Fund II: Annuity contracts in accumulation .................... 22,709,106 High Income Bond Fund II: Annuity contracts in accumulation .................... 53,212,853 International Equity Fund II: Annuity contracts in accumulation .................... 13,946,028 Prime Money Fund II: Annuity contracts in accumulation .................... 7,530,487
S-4 Variable Annuity Account B Statement of Assets and Liabilities - December 31, 1997 (continued): U.S. Government Securities Fund II: Annuity contracts in accumulation ........... $ 13,196,784 Utility Fund II: Annuity contracts in accumulation ........... 26,302,858 Janus Aspen Series: Aggressive Growth Portfolio: Annuity contracts in accumulation ........... 38,383,925 Balanced Portfolio: Annuity contracts in accumulation ........... 31,145,778 Flexible Income Portfolio: Annuity contracts in accumulation ........... 10,534,588 Growth Portfolio: Annuity contracts in accumulation ........... 40,072,928 Annuity contracts in payment period ......... 645,899 Worldwide Growth Portfolio: Annuity contracts in accumulation ........... 160,658,096 Annuity contracts in payment period ......... 1,995,445 Lexington Emerging Markets Fund: Annuity contracts in accumulation ........... 2,833,416 Lexington Natural Resources Trust Fund: Annuity contracts in accumulation ........... 6,930,364 MFS Funds: Total Return Series: Annuity contracts in accumulation ........... 18,973,878 Worldwide Government Series: Annuity contracts in accumulation ........... 1,324,295 Oppenheimer Funds: Capital Appreciation Fund: Annuity contracts in accumulation ........... 3,688,200 Global Securities Fund: Annuity contracts in accumulation ........... 2,680,937 Growth & Income Fund: Annuity contracts in accumulation ........... 12,688,907 Strategic Bond Fund: Annuity contracts in accumulation ........... 3,092,701 Portfolio Partners, Inc: PPI MFS Emerging Equities Portfolio: Annuity contracts in accumulation ........... 94,796,247 Annuity contracts in payment period ......... 496,447 PPI MFS Research Growth Portfolio: Annuity contracts in accumulation ........... 65,867,130 PPI MFS Value Equity Portfolio: Annuity contracts in accumulation ........... 15,049,606 Annuity contracts in payment period ......... 378,075 PPI Scudder International Growth Portfolio: Annuity contracts in accumulation ........... 12,650,163 PPI T. Rowe Price Growth Equity Portfolio: Annuity contracts in accumulation ........... 90,170,258 -------------- $2,922,442,857 ==============
See Notes to Financial Statements S-5 Variable Annuity Account B Statements of Operations and Changes in Net Assets
Year Ended December 31, 1997 1996 ----- ---- INVESTMENT INCOME: Income: (Notes 1, 3 and 5) Dividends ............................................................. $ 278,833,116 $ 120,367,178 Expenses: (Notes 2 and 5) Valuation period deductions ........................................... (29,243,851) (17,483,870) -------------- -------------- Net investment income .................................................. 249,589,265 102,883,308 -------------- -------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on sales of investments: (Notes 1, 4 and 5) Proceeds from sales ................................................... 1,004,789,371 365,025,974 Cost of investments sold .............................................. 933,728,508 347,598,566 -------------- -------------- Net realized gain .................................................... 71,060,863 17,427,408 -------------- -------------- Net unrealized gain on investments: (Note 5) Beginning of Year ..................................................... 122,191,053 28,746,944 End of Year ........................................................... 255,524,506 122,191,053 -------------- -------------- Net change in unrealized gain ........................................ 133,333,453 93,444,109 -------------- -------------- Net realized and unrealized gain on investments ........................ 204,394,316 110,871,517 -------------- -------------- Net increase in net assets resulting from operations ................... 453,983,581 213,754,825 -------------- -------------- FROM UNIT TRANSACTIONS: Variable annuity contract purchase payments ............................ 571,517,770 538,586,667 Sales and administrative charges deducted by the Company ............... (16,265) (17,370) -------------- -------------- Net variable annuity contract purchase payments ...................... 571,501,505 538,569,297 Transfers from the Company for mortality guarantee adjustments ......... 371,835 690,779 Transfers from the Company's fixed account options ..................... 144,526,667 50,549,121 Redemptions by contract holders ........................................ (82,942,177) (73,738,526) Annuity Payments ....................................................... (16,137,431) (12,108,943) Other .................................................................. 2,327,153 159,467 -------------- -------------- Net increase in net assets from unit transactions (Note 5) ........... 619,647,552 504,121,195 -------------- -------------- Change in net assets ................................................... 1,073,631,133 717,876,020 NET ASSETS: Beginning of Year ...................................................... 1,848,811,724 1,130,935,704 -------------- -------------- End of Year ............................................................ $2,922,442,857 $1,848,811,724 ============== ==============
See Notes to Financial Statements S-6 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 1. Summary of Significant Accounting Policies Variable Annuity Account B (the "Account") is a separate account established by Aetna Life Insurance and Annuity Company (the "Company") 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 preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Although actual results could differ from these estimates, any such differences are expected to be immaterial to the net assets of the Account. a. Valuation of Investments Investments in the following Funds are stated at the closing net asset value per share as determined by each Fund on December 31, 1997: Aetna Variable Fund Insurance Management Series: Aetna Income Shares [bullet] American Leaders Fund II [bullet] Aetna Variable Encore Fund [bullet] Equity Income Fund II Aetna Investment Advisers Fund, Inc. [bullet] Growth Strategies Fund II Aetna GET Fund, Series B [bullet] High Income Bond Fund II Aetna GET Fund, Series C [bullet] International Equity Fund II Aetna Ascent Variable Portfolio [bullet] Prime Money Fund II Aetna Crossroads Variable Portfolio [bullet] U.S. Government Securities Fund II Aetna Legacy Variable Portfolio [bullet] Utility Fund II Aetna Variable Portfolio, Inc.: Janus Aspen Series: [bullet] Capital Appreciation Portfolio [bullet] Aggressive Growth Portfolio [bullet] Growth Portfolio [bullet] Balanced Portfolio [bullet] Index Plus Portfolio [bullet] Flexible Income Portfolio [bullet] Small Company Portfolio [bullet] Growth Portfolio Alger American Funds: [bullet] Worldwide Growth Portfolio [bullet] Balanced Portfolio Lexington Emerging Markets Fund [bullet] Income and Growth Portfolio Lexington Natural Resources Trust Fund [bullet] Leveraged AllCap Portfolio MFS Funds: American Century Investments: [bullet] Total Return Series [bullet] Balanced Fund [bullet] Worldwide Government Series [bullet] International Fund Oppenheimer Funds: Calvert Social Balanced Portfolio [bullet] Capital Appreciation Fund Fidelity Investments Variable Insurance Products Fund: [bullet] Global Securities Fund [bullet] Equity-Income Portfolio [bullet] Growth & Income Fund [bullet] Growth Portfolio [bullet] Strategic Bond Fund [bullet] High Income Portfolio Portfolio Partners, Inc.: [bullet] Overseas Portfolio [bullet] PPI MFS Emerging Equities Portfolio Fidelity Investments Variable Insurance Products Fund II: [bullet] PPI MFS Research Growth Portfolio [bullet] Asset Manager Portfolio [bullet] PPI MFS Value Equity Portfolio [bullet] Contrafund Portfolio [bullet] PPI Scudder International Growth Portfolio [bullet] Index 500 Portfolio [bullet] PPI T. Rowe Price Growth Equity Portfolio [bullet] Investment Grade Bond 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-7 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 (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 Progressive Annuity, a49, 1971 Individual Annuity Mortality, 1971 Group Annuity Mortality, 83a, and 1983 Group Annuity Mortality tables using various assumed interest rates not to exceed seven percent. 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, 1997 and 1996 aggregated $1,874,026,188 and $1,004,789,371; $972,030,476 and $365,025,974, respectively. S-8 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ---------------------------------------------------------------------------------------------------------------------- Aetna Variable Fund: $206,171,606 ($9,508,053) $64,103,032 $51,274,099 $12,828,933 Annuity contracts in accumulation Annuity contracts in payment period - ---------------------------------------------------------------------------------------------------------------------- Aetna Income Shares: 4,333,850 (737,718) 12,717,950 11,951,670 766,280 Annuity contracts in accumulation Annuity contracts in payment period - ---------------------------------------------------------------------------------------------------------------------- Aetna Variable Encore Fund: 4,149,350 (1,373,114) 187,177,845 187,281,193 (103,348) Annuity contracts in accumulation - ---------------------------------------------------------------------------------------------------------------------- Aetna Investment Advisers Fund, Inc.: 20,983,218 (1,660,805) 12,262,658 9,696,803 2,565,855 Annuity contracts in accumulation Annuity contracts in payment period - ---------------------------------------------------------------------------------------------------------------------- Aetna GET Fund, Series B: 3,422,687 (286,592) 1,109,194 713,521 395,673 Annuity contracts in accumulation - ---------------------------------------------------------------------------------------------------------------------- Aetna GET Fund, Series C: 169,021 (119,214) 963,591 833,090 130,501 Annuity contracts in accumulation - ---------------------------------------------------------------------------------------------------------------------- Aetna Ascent Variable Portfolio: 1,293,085 (171,542) 2,422,808 2,093,544 329,264 Annuity contracts in accumulation - ---------------------------------------------------------------------------------------------------------------------- Aetna Crossroads Variable Portfolio: 1,366,067 (170,121) 1,119,794 921,119 198,675 Annuity contracts in accumulation Annuity contracts in payment period - ---------------------------------------------------------------------------------------------------------------------- Aetna Legacy Variable Portfolio: 1,122,530 (176,596) 1,280,095 1,125,823 154,272 Annuity contracts in accumulation Annuity contracts in payment period - ---------------------------------------------------------------------------------------------------------------------- Aetna Variable Portfolio, Inc.: Capital Appreciation Portfolio: 621,617 (11,486) 125,792 110,176 15,616 Annuity contracts in accumulation - ---------------------------------------------------------------------------------------------------------------------- Growth Portfolio: 848,691 (9,678) 592,546 560,620 31,926 Annuity contracts in accumulation Annuity contracts in payment period - ---------------------------------------------------------------------------------------------------------------------- Index Plus Portfolio: 1,110,445 (154,416) 2,229,246 1,790,247 438,999 Annuity contracts in accumulation Annuity contracts in payment period - ---------------------------------------------------------------------------------------------------------------------- Small Company Portfolio: 366,132 (19,387) 261,692 230,152 31,540 Annuity contracts in accumulation Annuity contracts in payment period - ---------------------------------------------------------------------------------------------------------------------- Alger American Funds: Balanced Portfolio: 142,299 (73,798) 1,098,365 1,473,706 (375,341) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------
S-9
- --------------------------------------------------------------------------------------------------------------- Net 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 - --------------------------------------------------------------------------------------------------------------- $59,979,314 $67,675,837 $7,696,523 $71,233,894 $644,728,031 $892,006,381 89,732,216 130,876,769 - --------------------------------------------------------------------------------------------------------------- 379,633 781,718 402,085 (1,964,060) 66,534,546 69,236,488 3,583,489 3,681,984 - --------------------------------------------------------------------------------------------------------------- (540,607) 1,429,868 1,970,475 13,513,776 106,781,998 124,939,137 - --------------------------------------------------------------------------------------------------------------- 15,114,435 21,131,758 6,017,323 7,591,834 119,402,212 150,761,384 7,942,484 12,080,737 - --------------------------------------------------------------------------------------------------------------- 4,487,610 6,194,743 1,707,133 (712,316) 16,333,339 20,859,924 - --------------------------------------------------------------------------------------------------------------- 144,834 2,144,550 1,999,716 (532,193) 9,281,276 10,929,107 - --------------------------------------------------------------------------------------------------------------- 276,453 1,034,430 757,977 12,596,284 5,638,668 20,443,736 - --------------------------------------------------------------------------------------------------------------- 151,493 704,161 552,668 13,077,636 5,295,700 20,250,904 0 69,721 - --------------------------------------------------------------------------------------------------------------- 46,576 556,022 509,446 12,197,969 6,186,987 18,710,015 0 1,284,593 - --------------------------------------------------------------------------------------------------------------- 0 (545,082) (545,082) 3,831,929 0 3,912,594 - --------------------------------------------------------------------------------------------------------------- 0 (945,071) (945,071) 3,293,042 0 3,210,344 0 8,566 - --------------------------------------------------------------------------------------------------------------- (4,046) 1,342,384 1,346,430 23,512,958 1,985,372 28,074,705 0 165,083 - --------------------------------------------------------------------------------------------------------------- 0 (299,676) (299,676) 6,028,520 0 6,059,783 0 47,346 - --------------------------------------------------------------------------------------------------------------- (461,380) 691,602 1,152,982 1,032,718 3,777,291 5,656,151 - ---------------------------------------------------------------------------------------------------------------
S-10 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- -------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Valuation Period Dividends Deductions - ------------------------------------------------------------------------------------------- Alger American Funds (continued): Growth Portfolio: (1) $506,477 ($685,927) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Income and Growth Portfolio: 401,543 (156,768) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Leveraged AllCap Portfolio: 0 (196,601) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- MidCap Growth Portfolio: (1) 350,028 (308,858) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Small Capitalization Portfolio: (2) 2,260,717 (722,118) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- American Century Investments: Balanced Fund: 199,265 (58,943) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Capital Appreciation Fund: (3) 725,963 (365,809) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- International Fund: 176,899 (85,324) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Calvert Social Balanced Portfolio: 67,562 (7,128) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: 7,870,976 (1,400,361) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Growth Portfolio: 2,159,319 (938,752) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- High Income Portfolio: 1,270,071 (337,944) Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------------- Overseas Portfolio: 863,493 (164,196) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: 761,827 (120,783) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Contrafund Portfolio: 1,931,363 (1,125,088) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Index 500 Portfolio: 1,159,193 (771,581) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- Investment Grade Bond Portfolio: 277,920 (79,205) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Proceeds Cost of Net from Investments Realized Sales Sold Gain (Loss) - ----------------------------------------------------------------------------------------------------------- Alger American Funds (continued): Growth Portfolio: (1) $78,591,434 $64,519,617 $14,071,817 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Income and Growth Portfolio: 2,602,037 3,401,714 (799,677) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Leveraged AllCap Portfolio: 7,570,244 6,461,486 1,108,758 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- MidCap Growth Portfolio: (1) 49,795,194 45,404,313 4,390,881 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Small Capitalization Portfolio: (2) 118,175,863 114,437,088 3,738,775 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- American Century Investments: Balanced Fund: 704,536 619,119 85,417 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Capital Appreciation Fund: (3) 47,909,593 51,060,683 (3,151,090) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- International Fund: 4,226,767 3,417,937 808,830 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Calvert Social Balanced Portfolio: 212,241 199,799 12,442 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: 17,887,517 15,251,625 2,635,892 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Growth Portfolio: 10,659,015 9,711,716 947,299 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- High Income Portfolio: 4,857,948 4,277,783 580,165 Annuity contracts in accumulation Annuity contracts in payment period - ----------------------------------------------------------------------------------------------------------- Overseas Portfolio: 5,725,552 5,116,905 608,647 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: 1,009,159 904,890 104,269 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Contrafund Portfolio: 13,933,668 10,543,199 3,390,469 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Index 500 Portfolio: 17,678,295 13,392,232 4,286,063 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------- Investment Grade Bond Portfolio: 1,100,211 1,085,995 14,216 Annuity contracts in accumulation - -----------------------------------------------------------------------------------------------------------
S-11
- ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- $2,349,936 $0 ($2,349,936) ($55,087,434) $43,545,003 $0 - ---------------------------------------------------------------------------------------------------------- (828,912) 2,709,055 3,537,967 4,693,808 6,471,587 14,148,460 - ---------------------------------------------------------------------------------------------------------- 220,810 1,540,243 1,319,433 628,691 11,419,728 14,280,009 - ---------------------------------------------------------------------------------------------------------- 682,424 0 (682,424) (23,592,354) 19,842,727 0 - ---------------------------------------------------------------------------------------------------------- (495,260) 0 495,260 (64,524,063) 58,751,429 0 - ---------------------------------------------------------------------------------------------------------- 145,325 462,379 317,054 1,109,081 2,991,356 4,643,230 - ---------------------------------------------------------------------------------------------------------- (1,588,390) 0 1,588,390 (43,166,616) 44,369,162 0 - ---------------------------------------------------------------------------------------------------------- 375,835 361,821 (14,014) 259,970 4,706,594 5,852,955 - ---------------------------------------------------------------------------------------------------------- (881) 59,286 60,167 241,657 596,637 971,337 - ---------------------------------------------------------------------------------------------------------- 5,773,475 19,807,673 14,034,198 43,088,538 72,480,497 138,709,740 - ---------------------------------------------------------------------------------------------------------- 3,258,300 14,584,513 11,326,213 8,978,986 57,928,484 80,401,549 - ---------------------------------------------------------------------------------------------------------- 814,429 2,722,687 1,908,258 17,156,365 14,709,464 35,217,837 0 68,542 - ---------------------------------------------------------------------------------------------------------- 743,689 460,930 (282,759) 2,276,187 9,703,271 13,004,643 - ---------------------------------------------------------------------------------------------------------- 484,182 1,137,702 653,520 4,412,778 5,931,464 11,743,075 - ---------------------------------------------------------------------------------------------------------- 6,210,754 18,201,832 11,991,078 35,101,002 56,538,618 107,827,442 - ---------------------------------------------------------------------------------------------------------- 2,241,040 10,882,841 8,641,801 36,290,926 27,380,370 76,986,772 - ---------------------------------------------------------------------------------------------------------- 175,829 387,160 211,331 1,392,243 4,761,677 6,578,182 - ----------------------------------------------------------------------------------------------------------
S-12 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1997 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------------ Insurance Management Series: American Leaders Fund II: $2,033,587 ($1,272,645) $2,239,581 $1,354,167 $885,414 Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------------------------------------------------ Equity Income Fund II: 52,763 (108,244) 188,614 167,057 21,557 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ Growth Strategies Fund II: 63,162 (214,573) 650,403 461,919 188,484 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ High Income Bond Fund II: 2,232,254 (576,880) 5,856,816 5,388,542 468,274 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ International Equity Fund II: 8,680 (138,835) 787,960 678,156 109,804 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ Prime Money Fund II: 365,689 (107,783) 7,931,948 7,931,971 (23) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ U.S. Government Securities Fund II: 366,225 (147,271) 3,825,499 3,747,648 77,851 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ Utility Fund II: 838,523 (291,277) 1,512,321 1,157,193 355,128 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ Janus Aspen Series: Aggressive Growth Portfolio: 0 (419,040) 19,586,639 19,136,007 450,632 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ Balanced Portfolio: 786,909 (294,871) 2,053,281 1,687,149 366,132 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ Flexible Income Portfolio: 528,359 (93,943) 1,111,581 1,079,357 32,224 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ Growth Portfolio: 967,832 (429,682) 2,254,366 1,752,378 501,988 Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------------------------------------------------ Short-Term Bond Portfolio: (4) 62,602 (36,643) 13,023,397 12,927,175 96,222 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ Worldwide Growth Portfolio: 2,077,847 (1,645,928) 21,615,276 15,329,845 6,285,431 Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------------------------------------------------ Lexington Emerging Markets Fund: 2,717 (53,043) 4,235,697 4,177,632 58,065 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------ Lexington Natural Resources Trust Fund: 209,099 (85,086) 3,246,699 2,653,024 593,675 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------------
S-13
- -------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------- $8,810,467 $30,111,589 $21,301,122 $32,775,129 $61,127,055 $116,800,911 0 48,751 - -------------------------------------------------------------------------------------------------------- 0 911,406 911,406 19,061,089 0 19,938,571 - -------------------------------------------------------------------------------------------------------- 733,393 3,558,451 2,825,058 12,664,797 7,182,178 22,709,106 - -------------------------------------------------------------------------------------------------------- 1,022,582 3,763,082 2,740,500 21,197,568 27,151,137 53,212,853 - -------------------------------------------------------------------------------------------------------- 307,602 938,501 630,899 7,399,890 5,935,590 13,946,028 - -------------------------------------------------------------------------------------------------------- 0 0 0 (471,714) 7,744,318 7,530,487 - -------------------------------------------------------------------------------------------------------- 73,398 513,199 439,801 4,803,969 7,656,209 13,196,784 - -------------------------------------------------------------------------------------------------------- 1,730,892 5,801,015 4,070,123 4,555,867 16,774,494 26,302,858 - -------------------------------------------------------------------------------------------------------- 534,823 4,594,517 4,059,694 2,750,579 31,542,060 38,383,925 - -------------------------------------------------------------------------------------------------------- 373,883 3,462,858 3,088,975 15,424,389 11,774,244 31,145,778 - -------------------------------------------------------------------------------------------------------- 73,395 367,565 294,170 4,626,561 5,147,217 10,534,588 - -------------------------------------------------------------------------------------------------------- 1,093,423 5,764,208 4,670,785 14,123,750 20,884,154 40,072,928 0 645,899 - -------------------------------------------------------------------------------------------------------- (27,376) 0 27,376 (2,070,168) 1,920,611 0 - -------------------------------------------------------------------------------------------------------- 5,151,123 18,210,266 13,059,143 76,404,357 66,472,691 160,658,096 0 1,995,445 - -------------------------------------------------------------------------------------------------------- (66,591) (709,548) (642,957) 952,674 2,515,960 2,833,416 - -------------------------------------------------------------------------------------------------------- 538,139 177,872 (360,267) 1,821,159 4,751,784 6,930,364 - --------------------------------------------------------------------------------------------------------
S-14 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ----------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ----------------------------------------------------------------------------------------------------------------------- MFS Funds: Emerging Growth Series: (2) $0 ($232,144) $37,594,997 $34,076,137 $3,518,860 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Research Series: (3) 0 (273,185) 37,686,630 34,109,865 3,576,765 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Total Return Series: 0 (154,993) 689,861 564,440 125,421 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Value Series: (5) 0 (19,996) 4,332,717 3,942,044 390,673 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Worldwide Government Series: 15,502 (12,983) 124,845 123,607 1,238 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Neuberger & Berman Advisers Management Trust: Growth Portfolio: (5) 741,183 (92,357) 17,383,777 16,347,694 1,036,083 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Oppenheimer Funds: Capital Appreciation Fund: 0 (13,374) 8,964,190 9,092,515 (128,325) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Global Securities Fund: 0 (12,451) 850,938 802,777 48,161 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Growth & Income Fund: 37,178 (35,759) 188,084 164,087 23,997 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Strategic Bond Fund: 84,234 (10,842) 122,739 121,006 1,733 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Portfolio Partners, Inc.: PPI MFS Emerging Equities Portfolio: 0 (120,211) 43,880,815 44,111,392 (230,577) Annuity contracts in accumulation Annuity contracts in payment period - ----------------------------------------------------------------------------------------------------------------------- PPI MFS Research Growth Portfolio: 0 (82,490) 37,923,531 37,983,794 (60,263) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- PPI MFS Value Equity Portfolio: 0 (16,913) 4,632,658 4,633,034 (376) Annuity contracts in accumulation Annuity contracts in payment period - ----------------------------------------------------------------------------------------------------------------------- PPI Scudder International Growth Portfolio: 0 (12,760) 259,410 255,379 4,031 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- PPI T. Rowe Price Growth Portfolio: 0 (115,952) 33,484,569 33,491,822 (7,253) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------- Scudder Variable Life Investment Fund: International Portfolio: (6) 275,557 (123,791) 16,445,650 14,417,831 2,027,819 Annuity contracts in accumulation - -----------------------------------------------------------------------------------------------------------------------
S-15
- ------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------- ($85,796) $0 $85,796 ($12,370,520) $8,998,008 $0 - ------------------------------------------------------------------------------------------------------- 204,764 0 (204,764) (9,875,328) 6,776,512 0 - ------------------------------------------------------------------------------------------------------- 72,010 1,975,149 1,903,139 12,883,941 4,216,370 18,973,878 - ------------------------------------------------------------------------------------------------------- 935 0 (935) (578,583) 208,841 0 - ------------------------------------------------------------------------------------------------------- 9,304 (5,937) (15,241) 927,866 407,913 1,324,295 - ------------------------------------------------------------------------------------------------------- (6,666) 0 6,666 (9,934,149) 8,242,574 0 - ------------------------------------------------------------------------------------------------------- 0 133,786 133,786 3,696,113 0 3,688,200 - ------------------------------------------------------------------------------------------------------- 0 (846) (846) 2,646,073 0 2,680,937 - ------------------------------------------------------------------------------------------------------- 0 465,927 465,927 12,197,564 0 12,688,907 - ------------------------------------------------------------------------------------------------------- 0 (21,173) (21,173) 3,038,749 0 3,092,701 - ------------------------------------------------------------------------------------------------------- 0 (753,832) (753,832) 96,397,314 0 94,796,247 0 496,447 - ------------------------------------------------------------------------------------------------------- 0 (1,162,926) (1,162,926) 67,172,809 0 65,867,130 - ------------------------------------------------------------------------------------------------------- 0 220,662 220,662 15,224,308 0 15,049,606 0 378,075 - ------------------------------------------------------------------------------------------------------- 0 195,427 195,427 12,463,465 0 12,650,163 - ------------------------------------------------------------------------------------------------------- 0 1,797,922 1,797,922 88,495,541 0 90,170,258 - ------------------------------------------------------------------------------------------------------- 1,510,449 0 (1,510,449) (12,719,263) 12,050,127 0 -------------------------------------------------------------------------------------------------------
S-16 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ----------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ----------------------------------------------------------------------------------------------------------------------- Total Variable Annuity Account B $278,833,116 ($29,243,851) $1,004,789,371 $933,728,508 $71,060,863 =======================================================================================================================
(1) - Effective November 28, 1997, this funds assets were transferred to the PPI T. Rowe Price Growth Equity Portfolio. (2) - Effective November 28, 1997, this funds assets were transferred to the PPI MFS Emerging Equities Portfolio. (3) - Effective November 28, 1997, this funds assets were transferred to PPI MFS Research Growth Fund. (4) - Effective November 28, 1997, this funds assets were transferred to the Aetna Variable Encore Fund. (5) - Effective November 28, 1997, this funds assets were transferred to the PPI MFS Value Equity Portfolio. (6) - Effective November 28, 1997, this funds assets were transferred to the PPI Scudder International Growth Portfolio. S-17
- ----------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------- $122,191,053 $255,524,506 $133,333,453 $619,647,552 $1,848,811,724 $2,922,442,857 =======================================================================================================================
S-18 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ------------------------------------------------------------------------------------ Year Ended December 31, 1996 Valuation Period Dividends Deductions - ------------------------------------------------------------------------------------ Aetna Variable Fund: $77,000,986 ($7,148,689) Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------ Aetna Income Shares: 4,527,825 (813,024) Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------ Aetna Variable Encore Fund: 5,358,925 (1,043,955) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Aetna Investment Advisers Fund, Inc.: 11,247,847 (1,372,478) Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------ Aetna GET Fund, Series B: 1,055,590 (226,340) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Aetna GET Fund, Series C: 46,499 (14,753) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Aetna Ascent Variable Portfolio: 235,037 (27,609) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Aetna Crossroads Variable Portfolio: 257,055 (29,943) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Aetna Legacy Variable Portfolio: 363,749 (38,623) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Aetna Variable Index Plus Portfolio: 10,290 (2,403) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Alger American Funds: Balanced Portfolio: 775,351 (33,904) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Growth Portfolio: 758,872 (394,360) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Income and Growth Portfolio: 2,009,995 (55,929) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Leveraged AllCap Portfolio: 61,186 (116,503) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ MidCap Portfolio: 190,158 (166,087) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Small Capitalization Portfolio: 184,900 (588,663) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ Calvert Responsibly Invested Balanced Portfolio: 44,676 (3,984) Annuity contracts in accumulation - ------------------------------------------------------------------------------------ - -------------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Proceeds Cost of Net from Investments Realized Sales Sold Gain (Loss) - -------------------------------------------------------------------------------------------------- Aetna Variable Fund: $96,146,932 $97,318,697 ($1,171,765) Annuity contracts in accumulation Annuity contracts in payment period - -------------------------------------------------------------------------------------------------- Aetna Income Shares: 19,585,006 18,826,116 758,890 Annuity contracts in accumulation Annuity contracts in payment period - -------------------------------------------------------------------------------------------------- Aetna Variable Encore Fund: 78,888,315 76,637,102 2,251,213 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Aetna Investment Advisers Fund, Inc.: 16,403,009 13,386,571 3,016,438 Annuity contracts in accumulation Annuity contracts in payment period - -------------------------------------------------------------------------------------------------- Aetna GET Fund, Series B: 915,330 681,610 233,720 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Aetna GET Fund, Series C: 361,353 354,510 6,843 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Aetna Ascent Variable Portfolio: 317,740 277,917 39,823 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Aetna Crossroads Variable Portfolio: 362,140 312,870 49,270 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Aetna Legacy Variable Portfolio: 406,948 384,407 22,541 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Aetna Variable Index Plus Portfolio: 139,030 133,438 5,592 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Alger American Funds: Balanced Portfolio: 244,368 332,405 (88,037) Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Growth Portfolio: 6,990,444 6,528,212 462,232 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Income and Growth Portfolio: 390,051 732,537 (342,486) Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Leveraged AllCap Portfolio: 4,991,495 4,605,949 385,546 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- MidCap Portfolio: 3,198,308 3,039,709 158,599 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Small Capitalization Portfolio: 31,506,275 29,929,826 1,576,449 Annuity contracts in accumulation - -------------------------------------------------------------------------------------------------- Calvert Responsibly Invested Balanced Portfolio: 141,022 137,780 3,242 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------
S-19
- --------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------- ($8,051,873) $59,979,314 $68,031,187 $4,966,306 $530,231,821 $644,728,031 62,550,401 89,732,216 - --------------------------------------------------------------------------------------------------------------- 3,224,044 379,633 (2,844,411) (9,600,618) 74,693,652 66,534,546 3,395,721 3,583,489 - --------------------------------------------------------------------------------------------------------------- 2,487,618 (540,607) (3,028,225) 22,111,260 81,132,780 106,781,998 - --------------------------------------------------------------------------------------------------------------- 12,419,220 15,114,435 2,695,215 602,270 104,415,595 119,402,212 6,739,809 7,942,484 - --------------------------------------------------------------------------------------------------------------- 2,566,580 4,487,610 1,921,030 (650,835) 14,000,174 16,333,339 - --------------------------------------------------------------------------------------------------------------- 0 144,834 144,834 9,097,853 0 9,281,276 - --------------------------------------------------------------------------------------------------------------- 5,570 276,453 270,883 4,773,151 347,383 5,638,668 - --------------------------------------------------------------------------------------------------------------- 8,209 151,493 143,284 4,409,627 466,407 5,295,700 - --------------------------------------------------------------------------------------------------------------- 1,609 46,576 44,967 5,470,774 323,579 6,186,987 - --------------------------------------------------------------------------------------------------------------- 0 (4,046) (4,046) 1,975,940 (1) 1,985,372 - --------------------------------------------------------------------------------------------------------------- 1,644 (461,380) (463,024) 2,897,855 689,050 3,777,291 - --------------------------------------------------------------------------------------------------------------- (63,817) 2,349,936 2,413,753 29,514,421 10,790,085 43,545,003 - --------------------------------------------------------------------------------------------------------------- (6,769) (828,912) (822,143) 4,660,630 1,021,520 6,471,587 - --------------------------------------------------------------------------------------------------------------- 32,561 220,810 188,249 8,946,454 1,954,796 11,419,728 - --------------------------------------------------------------------------------------------------------------- 7,193 682,424 675,231 15,727,261 3,257,565 19,842,727 - --------------------------------------------------------------------------------------------------------------- 46,283 (495,260) (541,543) 32,655,969 25,464,317 58,751,429 - --------------------------------------------------------------------------------------------------------------- (13,512) (881) 12,631 193,226 346,846 596,637 - ---------------------------------------------------------------------------------------------------------------
S-20 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ----------------------------------------------------------------------------------------- Year Ended December 31, 1996 Valuation Period Dividends Deductions - ----------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: $940,850 ($608,164) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Growth Portfolio: 1,412,110 (540,670) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- High Income Portfolio: 178,909 (112,363) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Overseas Portfolio: 75,181 (91,010) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: 119,231 (54,259) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Contrafund Portfolio: 146,164 (428,708) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Index 500 Portfolio: 143,406 (203,362) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Investment Grade Bond Portfolio: 45,797 (42,799) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Insurance Management Series: American Leaders Fund II: 857,970 (631,122) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Growth Strategies Fund II: 405 (44,481) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- High Income Bond Fund II: 1,647,290 (260,987) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- International Equity Fund II: 10,567 (51,003) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Prime Money Fund II: 289,134 (87,958) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- U.S. Government Securities Fund II: 367,608 (86,361) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Utility Fund II: 547,259 (186,219) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Janus Aspen Series: Aggressive Growth Portfolio: 243,931 (266,292) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- Balanced Portfolio: 181,099 (68,277) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------ Year Ended December 31, 1996 Proceeds Cost of Net from Investments Realized Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------ Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: $4,030,269 $3,343,817 $686,452 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Growth Portfolio: 2,600,136 2,280,711 319,425 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ High Income Portfolio: 1,318,057 1,318,142 (85) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Overseas Portfolio: 880,668 813,434 67,234 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: 540,553 465,407 75,146 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Contrafund Portfolio: 5,044,449 4,308,117 736,332 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Index 500 Portfolio: 6,086,685 5,356,843 729,842 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Investment Grade Bond Portfolio: 882,619 925,636 (43,017) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Insurance Management Series: American Leaders Fund II: 6,368,961 4,596,688 1,772,273 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Growth Strategies Fund II: 119,084 103,727 15,357 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ High Income Bond Fund II: 5,863,283 5,644,702 218,581 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ International Equity Fund II: 250,169 236,027 14,142 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Prime Money Fund II: 12,400,851 12,398,826 2,025 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ U.S. Government Securities Fund II: 5,011,311 5,085,345 (74,034) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Utility Fund II: 1,034,753 867,262 167,491 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Janus Aspen Series: Aggressive Growth Portfolio: 6,134,481 4,875,603 1,258,878 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------ Balanced Portfolio: 2,812,822 2,536,688 276,134 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------
S-21
- ---------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------- $966,600 $5,773,475 $4,806,875 $51,230,275 $15,424,209 $72,480,497 - ---------------------------------------------------------------------------------------------------- (34,190) 3,258,300 3,292,490 38,219,867 15,225,262 57,928,484 - ---------------------------------------------------------------------------------------------------- 15,029 814,429 799,400 12,636,277 1,207,326 14,709,464 - ---------------------------------------------------------------------------------------------------- 51,434 743,689 692,255 6,948,020 2,011,591 9,703,271 - ---------------------------------------------------------------------------------------------------- 98,360 484,182 385,822 4,043,035 1,362,489 5,931,464 - ---------------------------------------------------------------------------------------------------- 122,841 6,210,754 6,087,913 38,043,675 11,953,242 56,538,618 - ---------------------------------------------------------------------------------------------------- 70,864 2,241,040 2,170,176 22,367,490 2,172,818 27,380,370 - ---------------------------------------------------------------------------------------------------- 11,466 175,829 164,363 3,931,632 705,701 4,761,677 - ---------------------------------------------------------------------------------------------------- 2,916,888 8,810,467 5,893,579 26,548,788 26,685,567 61,127,055 - ---------------------------------------------------------------------------------------------------- 3,614 733,393 729,779 6,301,239 179,879 7,182,178 - ---------------------------------------------------------------------------------------------------- 229,008 1,022,582 793,574 12,876,189 11,876,490 27,151,137 - ---------------------------------------------------------------------------------------------------- 43,172 307,602 264,430 4,073,916 1,623,538 5,935,590 - ---------------------------------------------------------------------------------------------------- (1,182) 0 1,182 1,765,443 5,774,492 7,744,318 - ---------------------------------------------------------------------------------------------------- 75,600 73,398 (2,202) 2,942,870 4,508,328 7,656,209 - ---------------------------------------------------------------------------------------------------- 799,746 1,730,892 931,146 6,514,735 8,800,082 16,774,494 - ---------------------------------------------------------------------------------------------------- 1,164,909 534,823 (630,086) 19,085,222 11,850,407 31,542,060 - ---------------------------------------------------------------------------------------------------- 26,040 373,883 347,843 10,311,561 725,884 11,774,244 - ----------------------------------------------------------------------------------------------------
S-22 Variable Annuity Account B Notes to Financial Statements - December 31, 1997 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ---------------------------------------------------------------------------------- Year Ended December 31, 1996 Valuation Period Dividends Deductions Flexible Income Portfolio: $ 304,512 ($43,754) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Growth Portfolio: 324,844 (141,840) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Short-Term Bond Portfolio: 79,326 (23,159) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Worldwide Growth Portfolio: 642,050 (384,732) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Lexington Emerging Markets Fund: 0 (27,131) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Lexington Natural Resources Trust Fund: 15,653 (38,378) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- MFS Funds: Emerging Growth Series: 73,635 (33,243) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Research Series: 94,710 (22,219) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Total Return Series: 87,973 (13,218) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Value Series: 4,089 (372) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- World Government Series: 0 (1,705) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Neuberger & Berman Advisers Management Trust: Growth Portfolio: 770,877 (98,063) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Scudder Variable Life Investment Fund: International Portfolio: 276,128 (136,107) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- TCI Portfolios, Inc.: Balanced Fund: 67,198 (24,832) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- Growth Fund: 6,228,055 (611,968) Annuity contracts in accumulation - ---------------------------------------------------------------------------------- International Fund: 62,276 (41,867) Annuity contracts in accumulation Total Variable Annuity Account B $120,367,178 ($17,483,870) ================================================================================== - ----------------------------------------------------------------------------------------------- Year Ended December 31, 1996 Proceeds Cost of Net from Investments Realized Sales Sold Gain (Loss) - ----------------------------------------------------------------------------------------------- Flexible Income Portfolio: $1,127,628 $1,090,808 $36,820 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Growth Portfolio: 1,249,735 1,041,911 207,824 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Short-Term Bond Portfolio: 2,910,009 2,872,811 37,198 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Worldwide Growth Portfolio: 4,899,145 3,899,490 999,655 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Lexington Emerging Markets Fund: 1,463,410 1,431,864 31,546 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Lexington Natural Resources Trust Fund: 2,192,808 1,809,743 383,065 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- MFS Funds: Emerging Growth Series: 190,630 186,959 3,671 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Research Series: 253,406 258,774 (5,368) Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Total Return Series: 140,628 132,113 8,515 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Value Series: 496 486 10 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- World Government Series: 19,663 19,513 150 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Neuberger & Berman Advisers Management Trust: Growth Portfolio: 3,864,131 3,857,033 7,098 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Scudder Variable Life Investment Fund: International Portfolio: 4,557,311 4,016,790 540,521 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- TCI Portfolios, Inc.: Balanced Fund: 247,893 231,495 16,398 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- Growth Fund: 19,145,021 17,607,144 1,537,877 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------- International Fund: 397,143 365,001 32,142 Annuity contracts in accumulation Total Variable Annuity Account B $365,025,974 $347,598,566 $17,427,408 ===============================================================================================
S-23
- ---------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------- $29,809 $73,395 $43,586 $3,237,811 $1,568,242 $5,147,217 ---------------------------------------------------------------------------------------------------------------- 84,852 1,093,423 1,008,571 16,916,813 2,567,942 20,884,154 ---------------------------------------------------------------------------------------------------------------- 1,330 (27,376) (28,706) 1,106,654 749,298 1,920,611 ---------------------------------------------------------------------------------------------------------------- 253,639 5,151,123 4,897,484 54,723,321 5,594,913 66,472,691 ---------------------------------------------------------------------------------------------------------------- (4,024) (66,591) (62,567) 2,232,953 341,159 2,515,960 ---------------------------------------------------------------------------------------------------------------- 188,717 538,139 349,422 2,162,813 1,879,209 4,751,784 ---------------------------------------------------------------------------------------------------------------- 0 (85,796) (85,796) 9,039,741 0 8,998,008 ---------------------------------------------------------------------------------------------------------------- 0 204,764 204,764 6,504,625 0 6,776,512 ---------------------------------------------------------------------------------------------------------------- 0 72,010 72,010 4,061,090 0 4,216,370 ---------------------------------------------------------------------------------------------------------------- 0 935 935 204,179 0 208,841 ---------------------------------------------------------------------------------------------------------------- 0 9,304 9,304 400,164 0 407,913 ---------------------------------------------------------------------------------------------------------------- 77,158 (6,666) (83,824) (710,088) 8,356,574 8,242,574 ---------------------------------------------------------------------------------------------------------------- 652,411 1,510,449 858,038 (54,117) 10,565,664 12,050,127 ---------------------------------------------------------------------------------------------------------------- 16,540 145,325 128,785 2,313,929 489,878 2,991,356 ---------------------------------------------------------------------------------------------------------------- 8,206,103 (1,588,390) (9,794,493) (7,301,710) 54,311,401 44,369,162 ---------------------------------------------------------------------------------------------------------------- 15,650 375,835 360,185 3,691,239 602,619 4,706,594 ---------------------------------------------------------------------------------------------------------------- $28,746,944 $122,191,053 $93,444,109 $504,121,195 $1,130,935,704 $1,848,811,724 =========== ============ =========== ============ ============== ==============
S-24 Independent Auditors' Report The Board of Directors of Aetna Life Insurance and Annuity Company and Contract Owners of Variable Annuity Account B: We have audited the accompanying statement of assets and liabilities of Aetna Life Insurance and Annuity Company Variable Annuity Account B (the "Account") as of December 31, 1997, and the related statements of operations and changes in net assets for each of the years in the two-year period then ended and condensed financial information for the year ended December 31, 1997. These financial statements and condensed financial information are the responsibility of the Account's management. Our responsibility is to express an opinion on these financial statements and condensed financial information based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and condensed financial information are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and condensed financial information. Our procedures included confirmation of securities owned as of December 31, 1997, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and condensed financial information referred to above present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company Variable Annuity Account B as of December 31, 1997, the results of its operations and changes in its net assets for each of the years in the two-year period then ended and condensed financial information for the year ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Hartford, Connecticut February 27, 1998 S-25 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY Index to Consolidated Financial Statements ------------------------------------------ Page Independent Auditors' Report F-2 Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 F-3 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4 Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December 31, 1997, 1996 and 1995 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-7 F-1 Independent Auditors' Report The Shareholder and Board of Directors Aetna Life Insurance and Annuity Company: We have audited the accompanying consolidated balance sheets of Aetna Life Insurance and Annuity Company and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholder's equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company and Subsidiary at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Hartford, Connecticut February 3, 1998 F-2 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Income (millions) Years Ended December 31, -------------------------------- 1997 1996 1995 ------- ------- ------- Revenue: Premiums $267.1 $133.6 $212.7 Charges assessed against policyholders 475.0 396.5 318.9 Net investment income 1,080.5 1,045.6 1,004.3 Net realized capital gains 36.0 19.7 41.3 Other income 39.7 45.4 42.0 ------- ------- ------- Total revenue 1,898.3 1,640.8 1,619.2 ------- ------- ------- Benefits and expenses: Current and future benefits 1,127.8 968.6 997.2 Operating expenses 347.4 342.2 310.8 Amortization of deferred policy acquisition costs 128.4 69.8 48.0 Severance and facilities charges -- 61.3 -- ------- ------- ------- Total benefits and expenses 1,603.6 1,441.9 1,356.0 ------- ------- ------- Income before income taxes 294.7 198.9 263.2 Income taxes 89.4 57.8 87.3 ------- ------- ------- Net income $205.3 $141.1 $175.9 ======= ======= ======= See Notes to Consolidated Financial Statements. F-3 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Balance Sheets (millions, except share data)
December 31, December 31, Assets 1997 1996 - ------ ---- ---- Investments: Debt securities available for sale, at fair value (amortized cost: $12,912.2 and $12,539.1) $13,463.8 $12,905.5 Equity securities, available for sale: Nonredeemable preferred stock (cost: $131.7 and $107.6) 147.6 119.0 Investment in affiliated mutual funds (cost: $78.1 and $77.3) 83.0 81.1 Common stock (cost: $0.2 and $0.0) .6 .3 Short-term investments 95.6 34.8 Mortgage loans 12.8 13.0 Policy loans 469.6 399.3 --------- -------- Total investments 14,273.0 13,553.0 Cash and cash equivalents 565.4 459.1 Accrued investment income 163.0 159.0 Premiums due and other receivables 63.7 26.6 Deferred policy acquisition costs 1,654.6 1,515.3 Reinsurance loan to affiliate 397.2 628.3 Other assets 46.8 33.7 Separate accounts assets 22,982.7 15,318.3 --------- -------- Total assets $40,146.4 $31,693.3 ========= ======== Liabilities and Shareholder's Equity Liabilities: Future policy benefits $3,763.7 $3,617.0 Unpaid claims and claim expenses 38.0 28.9 Policyholders' funds left with the Company 11,143.5 10,663.7 --------- -------- Total insurance reserve liabilities 14,945.2 14,309.6 Other liabilities 312.8 354.7 Income taxes: Current 12.4 20.7 Deferred 72.0 80.5 Separate accounts liabilities 22,970.0 15,318.3 --------- -------- Total liabilities 38,312.4 30,083.8 --------- -------- Shareholder's equity: Common stock, par value $50 (100,000 shares authorized; 55,000 shares issued and outstanding) 2.8 2.8 Paid-in capital 418.0 418.0 Accumulated other comprehensive income 92.9 60.5 Retained earnings 1,320.3 1,128.2 --------- -------- Total shareholder's equity 1,834.0 1,609.5 --------- -------- Total liabilities and shareholder's equity $40,146.4 $31,693.3 ========= ========
See Notes to Consolidated Financial Statements. F-4 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Changes in Shareholder's Equity (millions)
Years Ended December 31, --------------------------------- 1997 1996 1995 -------- -------- -------- Shareholder's equity, beginning of year $1,609.5 $1,583.0 $1,088.5 Comprehensive income Net income 205.3 141.1 175.9 Other comprehensive income, net of tax Unrealized gains (losses) on securities ($50.1 million, $(110.8) million and $494.6 million, 32.4 (72.0) 321.5 pretax, respectively) -------- -------- -------- Total comprehensive income 237.7 69.1 497.4 -------- -------- -------- Capital contributions -- 10.4 0.0 Other changes 4.1 (49.5) 0.0 Common stock dividends (17.3) (3.5) (2.9) -------- -------- -------- Shareholder's equity, end of year $1,834.0 $1,609.5 $1,583.0 ======== ======== ========
See Notes to Consolidated Financial Statements. F-5 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Consolidated Statements of Cash Flows (millions)
Years Ended December 31, ------------------------------ 1997 1996 1995 ------ ------ ------ Cash Flows from Operating Activities: Net income $205.3 $141.1 $175.9 Adjustments to reconcile net income to net cash provided by (used for) operating activities: (Increase) decrease in accrued investment income (4.0) 16.5 (33.3) (Increase) decrease in premiums due and other receivables (33.3) 1.6 25.4 Increase in policy loans (70.3) (60.7) (89.9) Increase in deferred policy acquisition costs (139.3) (174.0) (177.0) Decrease in reinsurance loan to affiliate 231.1 27.2 34.8 Net increase in universal life account balances 286.4 243.2 393.4 (Decrease) increase in other insurance reserve liabilities (249.6) (211.5) 79.0 Net (decrease) increase in other liabilities and other assets (41.7) 3.1 13.0 Decrease in income taxes (31.4) (26.7) (4.5) Net accretion of discount on investments (66.4) (68.0) (66.4) Net realized capital gains (36.0) (19.7) (41.3) Other, net -- 1.1 -- -------- -------- -------- Net cash provided by (used for) operating activities 50.8 (126.8) 309.1 -------- -------- -------- Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 5,311.3 5,182.2 4,207.2 Equity securities 103.1 190.5 180.8 Mortgage loans 0.2 8.7 10.7 Limited partnership -- -- 26.6 Investment maturities and collections of: Debt securities available for sale 1,212.7 885.2 583.9 Short-term investments 89.3 35.0 106.1 Cost of investment purchases in: Debt securities available for sale (6,732.8) (6,534.3) (6,034.0) Equity securities (113.3) (118.1) (170.9) Short-term investments (149.9) (54.7) (24.7) Mortgage loans -- -- (21.3) Other, net -- (17.6) -- -------- -------- -------- Net cash used for investing activities (279.4) (423.1) (1,135.6) -------- -------- -------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 1,621.2 1,579.5 1,884.5 Withdrawals of investment contracts (1,256.3) (1,146.2) (1,109.6) Capital contribution to Separate Account (25.0) -- -- Return of capital from Separate Account 12.3 -- -- Capital contribution from HOLDCO -- 10.4 -- Dividends paid to shareholder (17.3) (3.5) (2.9) -------- -------- -------- Net cash provided by financing activities 334.9 440.2 772.0 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 106.3 (109.7) (54.5) Cash and cash equivalents, beginning of year 459.1 568.8 623.3 -------- -------- -------- Cash and cash equivalents, end of year $565.4 $459.1 $568.8 ======== ======== ======== Supplemental cash flow information: Income taxes paid, net $119.6 $85.5 $92.8 ======== ======== ========
See Notes to Consolidated Financial Statements. F-6 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Aetna Life Insurance and Annuity Company and its wholly owned subsidiary (collectively, the "Company") are providers of financial services and life insurance products in the United States. The Company has two business segments: financial services and individual life insurance. Financial services products include annuity contracts that offer a variety of funding and payout options for individual and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, and non-qualified annuity contracts. These contracts may be deferred or immediate ("payout annuities"). Financial services also include investment advisory services and pension plan administrative services. Individual life insurance products include universal life, variable universal life, traditional whole life and term insurance. Basis of Presentation --------------------- The consolidated financial statements include Aetna Life Insurance and Annuity Company and its wholly owned subsidiary, Aetna Insurance Company of America. Aetna Life Insurance and Annuity Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna"). The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Certain reclassifications have been made to 1996 and 1995 financial information to conform to the 1997 presentation. New Accounting Standard ----------------------- As of December 31, 1997 the Company adopted Financial Accounting Standard ("FAS") No. 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income encompasses all changes in shareholder's equity (except those arising from transactions with shareholders) and includes net income and net unrealized capital gains or losses on available-for-sale securities. As this new standard only requires additional information in a financial statement, it does not affect the Company's financial position or results of operations. Future Application of Accounting Standards ------------------------------------------ Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, was issued in June 1996 and provides accounting and reporting standards for transfers of financial assets and extinguishments of liabilities. F-7 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Future Application of Accounting Standards (Continued) FAS No. 125 is effective for 1997 financial statements; however, certain provisions relating to accounting for repurchase agreements and securities lending are not effective until January 1, 1998. Provisions effective in 1997 did not have a material effect on the Company's financial position or results of operations. The Company does not expect adoption of this statement for provisions effective in 1998 to have a material effect on its financial position or results of operations. Accounting by Insurance and Other Enterprises for Insurance-Related Assessments In December 1997, the American Institute of Certified Public Accountants issued Statement of Position 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments, which provides guidance for determining when an insurance or other enterprise should recognize a liability for guaranty-fund and other insurance related assessments and guidance for measuring the liability. This statement is effective for 1999 financial statements with early adoption permitted. The Company does not expect adoption of this statement to have a material effect on its financial position or results of operations. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity of 90 days or less when purchased. Investments Debt and equity securities are classified as available for sale and carried at fair value. These securities are written down (as realized capital losses) for other than temporary declines in value. Unrealized capital gains and losses related to available for sale investments, other than amounts allocable to experience rated contractholders, are reflected in shareholder's equity, net of related taxes. Fair values for debt and equity securities are based on quoted market prices or dealer quotations. Where quoted market prices or dealer quotations are not available, fair values are measured utilizing quoted market prices for similar securities or by using discounted cash flow methods. Cost for mortgage-backed securities is adjusted for unamortized premiums and discounts, which are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. F-8 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Investments (Continued) The company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral, primarily cash, is required at a rate of 102% of the market value of a loaned domestic security and 105% of the market value of a loaned foreign security. The collateral is deposited by the borrower with a lending agent, and retained and invested by the lending agent according to the Company's guidelines to generate additional income. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. At December 31, 1997 and 1996, the Company loaned securities (which are reflected as invested assets) with a market value of approximately $385.1 million and $444.7 million, respectively. Purchases and sales of debt and equity securities are recorded on the trade date. The investment in affiliated mutual funds represents an investment in Aetna managed mutual funds which have been seeded by the Company, and is carried at fair value. Mortgage loans and policy loans are carried at unpaid principal balances, net of impairment reserves. Sales of mortgage loans are recorded on the closing date. Short-term investments, consisting primarily of money market instruments and other debt issues purchased with a maturity of 91 days to one year, are considered available for sale and are carried at fair value, which approximates amortized cost. The Company utilizes futures contracts, swap agreements and warrants for other than trading purposes in order to manage investment returns and price risk and to align maturities, interest rates, and funds availability with its obligations. (Refer to Note 3.) Futures contracts are carried at fair value and require daily cash settlement. Changes in the fair value of futures contracts that qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability. Deferred gains or losses on such futures contracts are amortized over the life of the acquired asset or liability as a yield adjustment or through net realized capital gains or losses upon disposal of an asset. Changes in the fair value of futures contracts that do not qualify as hedges are recorded in net realized capital gains or losses. Hedge designation requires specific asset or liability identification, a probability at inception of high correlation with the position underlying the hedge, and that high correlation be maintained throughout the hedge period. If a hedging instrument ceases to be highly correlated with the position underlying the hedge, hedge accounting ceases at that date and excess gains and losses on the hedging instrument are reflected in net realized capital gains or losses. Interest rate swap agreements which are designated as interest rate risk management instruments at inception are accounted for using the accrual method. Accordingly, the difference between amounts F-9 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Investments (Continued) paid and received on such agreements is reported in net investment income. There is no recognition in the Consolidated Balance Sheets for changes in the fair value of the agreement. Warrants represent the right to purchase specific securities and are accounted for as hedges. Upon exercise, the cost of the warrants are added to the basis of the securities purchased. Deferred Policy Acquisition Costs Certain costs of acquiring insurance business are deferred. These costs, all of which vary with and are primarily related to the production of new and renewal business, consist principally of commissions, certain expenses of underwriting and issuing contracts, and certain agency expenses. For fixed ordinary life contracts, such costs are amortized over expected premium-paying periods (up to 20 years). For universal life and certain annuity contracts, such costs are amortized in proportion to estimated gross profits and adjusted to reflect actual gross profits over the life of the contracts (up to 20 years). Deferred policy acquisition costs are written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses. Insurance Reserve Liabilities Future policy benefits include reserves for universal life, immediate annuities with life contingent payouts and traditional life insurance contracts. Reserves for universal life contracts are equal to cumulative deposits less charges and withdrawals plus credited interest thereon. Reserves for immediate annuities with life contingent payouts and traditional life insurance contracts are computed on the basis of assumed investment yield, mortality, and expenses, including a margin for adverse deviations. Such assumptions generally vary by plan, year of issue and policy duration. Reserve interest rates range from 2.25% to 12.00% for all years presented. Investment yield is based on the Company's experience. Mortality and withdrawal rate assumptions are based on relevant Aetna experience and are periodically reviewed against both industry standards and experience. Policyholders' funds left with the Company include reserves for deferred annuity investment contracts and immediate annuities without life contingent payouts. Reserves on such contracts are equal to cumulative deposits less charges and withdrawals plus credited interest thereon (rates range from 3.50% to 9.50% for all years presented) net of adjustments for investment experience that the Company is entitled to reflect in future credited interest. Reserves on contracts subject to experience rating reflect the rights of contractholders, plan participants and the Company. Unpaid claims for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported. F-10 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 1. Summary of Significant Accounting Policies (Continued) Premiums, Charges Assessed Against Policyholders, Benefits and Expenses For universal life and certain annuity contracts, charges assessed against policyholders' funds for the cost of insurance, surrender charges, actuarial margin and other fees are recorded as revenue in charges assessed against policyholders. Other amounts received for these contracts are reflected as deposits and are not recorded as revenue. Life insurance premiums, other than premiums for universal life and certain annuity contracts, are recorded as premium revenue when due. Related policy benefits are recorded in relation to the associated premiums or gross profit so that profits are recognized over the expected lives of the contracts. When annuity payments with life contingencies begin under contracts that were initially investment contracts, the accumulated balance in the account is treated as a single premium for the purchase of an annuity and reflected as an offsetting amount in both premiums and current and future benefits in the Consolidated Statements of Income. Separate Accounts Assets held under variable universal life and variable annuity contracts are segregated in Separate Accounts and are invested, as designated by the contractholder or participant under a contract, in shares of mutual funds which are managed by the Company, or other selected mutual funds not managed by the Company. Separate Accounts assets and liabilities are carried at fair value except for those relating to a guaranteed interest option. Since the Company bears the investment risk where the contract is held to maturity, the assets of the Separate Account supporting the guaranteed interest option are carried at an amortized cost of $658.6 million for 1997 (fair value $668.7 million) and $515.6 million for 1996 (fair value $523.0 million). Reserves relating to the guaranteed interest option are maintained at fund value and reflect interest credited at rates ranging from 4.10% to 8.00% in both 1997 and in 1996. Separate Accounts assets and liabilities are shown as separate captions in the Consolidated Balance Sheets. Deposits, investment income and net realized and unrealized capital gains and losses of the Separate Accounts are not reflected in the Consolidated Statements of Income (with the exception of realized capital gains and losses on the sale of assets supporting the guaranteed interest option). The Consolidated Statements of Cash Flows do not reflect investment activity of the Separate Accounts. Income Taxes The Company is included in the consolidated federal income tax return of Aetna. The Company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. Deferred income tax expenses/benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. F-11 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments Debt securities available for sale as of December 31, 1997 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ (millions) U.S. government and government agencies and authorities $1,219.7 $74.0 $0.1 $1,293.6 States, municipalities and political subdivisions 0.3 -- -- 0.3 U.S. corporate securities: Financial 2,370.7 84.6 1.3 2,454.0 Food & fiber 195.4 9.3 -- 204.7 Healthcare & consumer products 728.5 27.0 2.6 752.9 Media & broadcast 252.9 14.7 0.1 267.5 Natural resources 143.5 5.5 - 149.0 Transportation & capital goods 528.2 33.2 0.1 561.3 Utilities 521.3 23.5 0.9 543.9 Other corporate securities 96.9 3.2 - 100.1 ---------- -------- -------- ----------- Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4 Foreign Securities: Government 612.5 36.7 23.6 625.6 Utilities 177.5 28.7 -- 206.2 Other 857.9 27.7 42.8 842.8 ---------- -------- -------- ----------- Total foreign securities 1,647.9 93.1 66.4 1,674.6 Residential mortgage-backed securities: Pass-throughs 784.4 71.3 2.0 853.7 Collateralized mortgage obligations 2,280.5 137.4 2.0 2,415.9 ---------- -------- -------- ----------- Total residential mortgage- backed securities 3,064.9 208.7 4.0 3,269.6 Commercial/Multifamily mortgage- backed securities 1,127.8 34.0 0.4 1,161.4 Other asset-backed securities 1,014.2 17.1 0.4 1,030.9 ---------- -------- -------- ----------- Total Debt Securities $12,912.2 $627.9 $76.3 $13,463.8 ========== ======== ======== ===========
F-12 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) Debt securities available for sale as of December 31, 1996 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ (millions) U.S. government and government agencies and authorities $1,072.4 $20.5 $4.5 $1,088.4 States, municipalities and political subdivisions 6.0 1.2 -- 7.2 U.S. corporate securities: Financial 2,143.4 43.1 9.7 2,176.8 Food & fiber 198.2 4.6 1.3 201.5 Healthcare & consumer products 735.9 20.2 6.3 749.8 Media & broadcast 274.9 7.0 2.8 279.1 Natural resources 187.7 4.5 0.4 191.8 Transportation & capital goods 521.9 22.0 1.8 542.1 Utilities 448.8 14.8 2.8 460.8 Other corporate securities 141.5 3.0 -- 144.5 --------- --------- -------- --------- Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4 Foreign Securities: Government 758.6 36.0 5.7 788.9 Utilities 187.8 16.1 -- 203.9 Other 945.5 30.9 6.3 970.1 --------- -------- --------- --------- Total foreign securities 1,891.9 83.0 12.0 1,962.9 Residential mortgage-backed securities: Pass-throughs 792.2 78.3 3.1 867.4 Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0 --------- --------- -------- --------- Total residential mortgage- backed securities 3,020.0 173.2 16.8 3,176.4 Commercial/Multifamily mortgage- backed securities 1,008.7 24.8 5.6 1,027.9 Other asset-backed securities 887.8 10.7 2.2 896.3 --------- -------- --------- -------- Total Debt Securities $12,539.1 $432.6 $66.2 $12,905.5 ========= ======== ========= ========
F-13 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) At December 31, 1997 and 1996, net unrealized appreciation of $551.6 million and $366.4 million, respectively, on available-for-sale debt securities included $429.3 million and $288.5 million, respectively, related to experience rated contracts, which were not reflected in shareholder's equity but in future policy benefits and policyholders' funds left with the Company. The carrying and fair value of debt securities for the year ended December 31, 1997 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
Amortized Fair Cost Value --------- ------ (millions) Due to mature: One year or less $367.3 $367.6 After one year through five years 2,165.1 2,195.4 After five years through ten years 2,367.3 2,407.0 After ten years 2,805.6 3,031.9 Mortgage-backed securities 4,192.7 4,431.0 Other asset-backed securities 1,014.2 1,030.9 --------- --------- Total $12,912.2 $13,463.8 ========= =========
At December 31, 1997 and 1996, debt securities carried at $8.2 million and $7.6 million, respectively, were on deposit as required by regulatory authorities. The Company did not have any investments in a single issuer, other than obligations of the U.S. government, with a carrying value in excess of 10% of the Company's shareholder's equity at December 31, 1997. F-14 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) Included in the Company's debt securities were residential collateralized mortgage obligations ("CMOs") supporting the following:
1997 1996 --------------------- ------------------------ Fair Amortized Fair Amortized Value Cost Value Cost -------- -------- -------- -------- (millions) Total residential CMOs(1) $2,415.9 $2,280.5 $2,309.0 $2,227.8 ======== ======== ======== ======== Percentage of total: Supporting experience rated products 81.6% 84.2% Supporting remaining products 18.4% 15.8% ----- ----- 100.0% 100.0% ===== =====
(1) At December 31, 1997 and 1996, approximately 73% and 71%, respectively, of the Company's residential CMO holdings were backed by government agencies such as GNMA, FNMA, FHLMC. There are various categories of CMOs which are subject to different degrees of risk from changes in interest rates and, for nonagency-backed CMOs, defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the repayment of principal from the underlying mortgages either earlier or later than originally anticipated. At December 31, 1997 and 1996, approximately 4% and 3%, respectively, of the Company's CMO holdings were invested in types of CMOs which are subject to more prepayment and extension risk than traditional CMOs (such as interest- or principal-only strips). F-15 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 2. Investments (Continued) Investments in equity securities available for sale were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- (millions) 1997 Equity Securities $210.0 $21.3 $0.1 $231.2 ====== ===== ==== ====== 1996 Equity Securities $184.9 $16.3 $0.8 $200.4 ====== ===== ==== ======
3. Financial Instruments Estimated Fair Value -------------------- The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 1997 and 1996 were as follows:
1997 1996 -------------------- ----------------- Carrying Fair Carrying Fair Value Value Value Value --------- -------- -------- -------- (millions) Assets: Mortgage loans $ 12.8 $ 12.4 $ 13.0 $ 13.2 Liabilities: Investment contract liabilities: With a fixed maturity $ 1,030.3 $1,005.4 $1,014.1 $1,028.8 Without a fixed maturity 10,113.2 9,587.5 9,649.6 9,427.6
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, such as estimates of timing and amount of future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument. In evaluating the Company's management of interest rate, price and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above. F-16 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 3. Financial Instruments (Continued) Estimated Fair Value (Continued) The following valuation methods and assumptions were used by the Company in estimating the fair value of the above financial instruments: Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates which reflect the rates at which similar loans would be made to similar borrowers. The rates reflect management's assessment of the credit quality and the remaining duration of the loans. Investment contract liabilities (included in policyholders' funds left with the Company): With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently being offered by, or available to, the Company for similar contracts. Without a fixed maturity: Fair value is estimated as the amount payable to the contractholder upon demand. However, the Company has the right under such contracts to delay payment of withdrawals which may ultimately result in paying an amount different than that determined to be payable on demand. Off-Balance-Sheet and Other Financial Instruments (including Derivative Instruments) The Company uses off-balance-sheet and other financial instruments primarily to manage portfolio risks, including interest rate, prepayment/call, credit, price, and liquidity risks. In 1997 and 1996, Treasury futures contracts were used to manage interest rate risk in the Company's bond portfolio; and, in 1996, stock index futures contracts were used to manage price risk in the Company's equity portfolio. In 1996 and 1995, interest rate swaps and forward commitments to enter into interest rate swaps, respectively, were also used to manage interest rate risk in the Company's bond portfolio. Futures Contracts: Futures contracts represent commitments to either purchase or sell securities at a specified future date and at a specified price or yield. Futures contracts trade on organized exchanges and, therefore, have minimal credit risk. Cash settlements are made daily based on changes in the prices of the underlying assets. There were no futures contracts open as of December 31, 1997 and 1996. Interest Rate Swaps: Under interest rate swaps, the Company agrees with other parties to exchange interest amounts calculated by reference to an agreed notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made. A single net payment is usually made by one counterparty at each due date or upon termination of the contract. The Company would be F-17 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 3. Financial Instruments (Continued) Off-Balance-Sheet and Other Financial Instruments (Including Derivative Instruments) (Continued) exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, however, the Company controls its exposure to credit risk through credit approvals, credit limits and regular monitoring procedures. The credit exposure of interest rate swaps is represented by the fair value (market value) of contracts with a positive fair value (market value) at the reporting date. There were no interest rate swap agreements open as of December 31, 1997 and 1996. During 1995, the Company received $0.4 million for writing call options on underlying securities. The Company did not write any call options in 1997 and 1996. Warrants: Warrants are instruments giving the Company the right, but not the obligation to buy a security at a given price during a specified period. As of December 31, 1997 and 1996, the Company had open warrants to purchase equity securities with a fair value of $0.6 million and $0.3 million, respectively. Debt Instruments with Derivative Characteristics: The Company also had investments in certain debt instruments with derivative characteristics, including those whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short or long term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities, included in the debt securities portfolio, as of December 31, 1997 was as follows:
Amortized Fair Cost Value --------- ---- (millions) Residential collateralized mortgage obligations $2,280.5 $2,415.9 Principal-only strips (included above) 59.0 67.0 Interest-only strips (included above) 12.8 24.3 Other structured securities with derivative characteristics (1) 107.4 105.2
(1) Represents non-leveraged instruments whose fair values and credit risk are based on underlying securities, including fixed income securities and interest rate swap agreements. F-18 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 4. Net Investment Income Sources of net investment income were as follows:
1997 1996 1995 ---- ---- ---- (millions) Debt securities $962.8 $945.3 $891.5 Nonredeemable preferred stock 13.7 5.9 4.2 Investment in affiliated mutual funds 4.9 14.3 14.9 Mortgage loans 1.3 2.2 1.4 Policy loans 19.9 18.4 13.7 Reinsurance loan to affiliate 37.5 44.1 46.5 Cash equivalents 44.2 29.4 38.9 Other 10.0 2.1 8.4 -------- -------- -------- Gross investment income 1,094.3 1,061.7 1,019.5 Less investment expenses (13.8) (16.1) (15.2) -------- -------- -------- Net investment income $1,080.5 $1,045.6 $1,004.3 ======== ======== ========
Net investment income includes amounts allocable to experience rated contractholders of $823.1 million, $787.6 million and $744.2 million for the years ended December 31, 1997, 1996 and 1995, respectively. Interest credited to contractholders is included in current and future benefits. 5. Dividend Restrictions and Shareholder's Equity The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO in 1997 and 1996, respectively. The amount of dividends that may be paid to the shareholder in 1998 without prior approval by the Insurance Commissioner of the State of Connecticut is $77.6 million. The Insurance Department of the State of Connecticut (the "Department") recognizes as net income and shareholder's capital and surplus those amounts determined in conformity with statutory accounting practices prescribed or permitted by the Department, which differ in certain respects from generally accepted accounting principles. Statutory net income was $80.5 million, $57.8 million and $70.0 million for the years ended December 31, 1997, 1996 and 1995, respectively. Statutory capital and surplus was $778.7 million and $713.6 million as of December 31, 1997 and 1996, respectively. As of December 31, 1997 the Company does not utilize any statutory accounting practices which are not prescribed by state regulatory authorities that, individually or in the aggregate, materially affect statutory capital and surplus. F-19 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 6. Capital Gains and Losses on Investment Operations Realized capital gains or losses are the difference between the carrying value and sale proceeds of specific investments sold. Net realized capital gains on investments were as follows:
1997 1996 1995 ---- ---- ---- (millions) Debt securities $22.5 $11.1 $32.8 Equity securities 9.9 8.6 8.3 Other 3.6 -- 0.2 ----- ----- ----- Pretax realized capital gains $36.0 $19.7 $41.3 ===== ===== ===== After tax realized capital gains $23.2 $13.0 $25.8 ===== ===== =====
Net realized capital gains of $96.1 million, $53.1 million and $61.1 million for 1997, 1996 and 1995, respectively, allocable to experience rated contracts, were deducted from net realized capital gains and an offsetting amount was reflected in policyholders' funds left with the Company. Net unamortized gains were $138.1 million and $53.3 million at December 31, 1997 and 1996, respectively. Proceeds from the sale of available-for-sale debt securities and the related gross gains and losses were as follows:
1997 1996 1995 ----- ----- ---- (millions) Proceeds on Sales $5,311.3 $5,182.2 $4,207.2 Gross Gains 25.8 24.3 44.6 Gross Losses 3.3 13.2 11.8
F-20 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 6. Capital Gains and Losses on Investment Operations (Continued) Changes in shareholder's equity related to changes in accumulated other comprehensive income (unrealized capital gains and losses on securities) (excluding those related to experience rated contractholders) were as follows:
1997 1996 1995 ---- ---- ---- (millions) Debt securities $44.3 $(100.1) $255.9 Equity securities 5.6 (10.5) 27.3 Limited partnership -- -- 1.8 ----- ------- ------ 49.9 (110.6) 285.0 Increase (decrease) in deferred income taxes (See Note 8) 17.5 (38.6) (36.5) ----- ------- ------ Net changes in accumulated other comprehensive income $32.4 $(72.0) $321.5 ===== ======= ======
Net unrealized capital gains allocable to experience rated contracts of $356.7 million and $72.6 million at December 31, 1997 and $245.2 million and $43.3 million at December 31, 1996 are reflected on the Consolidated Balance Sheets in policyholders' funds left with the Company and future policy benefits, respectively, and are not included in shareholder's equity. Shareholder's equity included the following accumulated other comprehensive income, which are net of amounts allocable to experience rated contractholders, at December 31:
1997 1996 1995 ---- ---- ---- (millions) Debt securities Gross unrealized capital gains $140.6 $101.7 $179.3 Gross unrealized capital losses (18.4) (23.8) (1.3) ----- ----- ----- 122.2 77.9 178.0 Equity securities Gross unrealized capital gains 21.2 16.3 27.2 Gross unrealized capital losses (0.1) (0.8) (1.2) ---- ---- ----- 21.1 15.5 26.0 Deferred income taxes (See Note 8) 50.4 32.9 71.5 ---- ---- ----- Net accumulated other comprehensive income $92.9 $60.5 $132.5 ==== ==== =====
F-21 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 6. Capital Gains and Losses on Investment Operations (Continued) Changes in accumulated other comprehensive income related to changes in unrealized gains (losses) on securities (excluding those related to experience rated contractholders) were as follows:
1997 1996 1995 ---- ---- ---- (millions) Unrealized holding gains (losses) arising during the period (1) $98.8 $(14.8) $390.5 Less: reclassification adjustment for gains and other items included in net income (2) 66.4 57.2 69.0 ----- ------ ------ Net unrealized gains (losses) on securities $32.4 $(72.0) $321.5 ===== ====== ======
(1) Pretax unrealized holding gains (losses) arising during the period were $152.0 million, ($22.8) million and $600.8 million for 1997, 1996 and 1995, respectively. (2) Pretax reclassification adjustments for gains and other items included in net income were $102.4 million, $87.7 million and $107.5 million for 1997, 1996 and 1995, respectively. 7. Severance and Facilities Charges Severance and facilities charges during 1996, as described below, included the following (pretax):
Vacated Asset Leased Corporate (Millions) Severance Write-off Property Other Allocation Total -------------------------- --------- --------- --------- ----- ---------- --------- Financial Services $29.1 $1.0 $1.3 $1.7 $ -- $33.1 Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2 Corporate Allocation -- -- -- -- 14.0 14.0 --------- --------- --------- ----- ---------- --------- Total Company $41.6 $1.4 $1.8 $2.5 $14.0 $61.3 -------------------------- --------- --------- --------- ----- ---------- ---------
In the third quarter of 1996, the Company recorded a $30.7 million after tax ($47.3 million pretax) charge principally related to actions taken or expected to be taken to improve its cost structure relative to its competitors. The severance portion of the charge is based on a plan to eliminate 702 positions (primarily customer service, sales and information technology support staff). The facilities portion of the charge is based on a plan to consolidate sales/service field offices. F-22 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 7. Severance and Facilities Charges (Continued) In addition to the above charge, Aetna recorded a facilities and severance charge in the second quarter of 1996, primarily as a result of actions taken or expected to be taken to reduce the level of corporate expenses and other costs previously absorbed by Aetna's property-casualty operations, which were sold in April 1996. The cost allocated to the Company associated with this charge was $9.1 million after tax ($14.0 million pretax). Activity for 1997 and 1996 within the severance and facilities reserve (pretax, in millions) and the number of positions eliminated related to such actions were as follows:
(Millions) Reserve Positions ----------------------------------- ---------- --------- Balance at December 31, 1995 $ -- -- Severance and facilities charges 47.3 702 Corporate Allocation 14.0 -- Actions taken (1) (13.4) (178) ---------- --------- Balance at December 31, 1996 47.9 524 Actions taken (1) (27.1) (163) ---------- --------- Balance at December 31, 1997 $20.8 361 ========== =========
(1) Includes $15.9 million and $8.0 million in 1997 and 1996, respectively, of severance-related actions and $7.9 million and $4.1 million in 1997 and 1996, respectively, of corporate allocation-related actions. The Company's severance actions are expected to be substantially completed by September 30, 1998. The corporate allocation actions were substantially completed in 1997. F-23 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 8. Income Taxes The Company is included in the consolidated federal income tax return, the Illinois Unitary return and the Connecticut and the New York combined state income tax returns of Aetna. Aetna allocates to each member an amount approximating the tax it would have incurred were it not a member of the consolidated group, and credits the member for the use of its tax saving attributes used in the consolidated federal income tax return. Income taxes for the years ended December 31, consist of:
1997 1996 1995 ---- ---- ---- (millions) Current taxes: Income Taxes: Federal income tax $64.5 $50.9 $82.9 State income tax 3.7 3.7 3.2 Net realized capital gains 45.6 25.3 28.5 ----- ---- ---- 113.8 79.9 114.6 ----- ---- ----- Deferred taxes (benefits): Income taxes: Federal 8.4 (3.5) (14.4) Net realized capital gains (losses) (32.8) (18.6) (12.9) ----- ----- ----- (24.4) (22.1) (27.3) ----- ----- ----- Total $89.4 $57.8 $87.3 ===== ===== =====
Income taxes were different from the amount computed by applying the federal income tax rate to income before income taxes for the following reasons:
1997 1996 1995 ---- ---- ---- (millions) Income before income taxes $294.7 $198.9 $263.2 Tax rate 35% 35% 35% ------- ------- ------- Application of the tax rate 103.1 69.6 92.1 ------- ------- ------- Tax effect of: State income tax, net of federal benefit 2.4 2.4 2.1 Excludable dividends (15.9) (8.7) (9.3) Other, net (0.2) (5.5) 2.4 ------- ------- -------- Income taxes $89.4 $57.8 $87.3 ======= ======= ========
F-24 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 8. Income Taxes (Continued) The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31 are presented below:
1997 1996 ---- ---- (millions) Deferred tax assets: Insurance reserves $415.8 $344.6 Unrealized gains allocable to experience rated contracts 150.1 100.8 Investment losses 6.6 7.5 Postretirement benefits other than pensions 26.3 27.0 Deferred compensation 31.2 25.0 Pension (3.6) 7.6 Restructuring charge 9.5 17.6 Depreciation 3.9 2.6 Other 8.8 9.1 ------- ------- Total gross assets 648.6 541.8 Deferred tax liabilities: Deferred policy acquisition costs 515.6 482.1 Market discount 5.1 6.8 Net unrealized capital gains 200.5 133.7 Other (0.6) (0.3) ------- ------- Total gross liabilities 720.6 622.3 ------- ------- Net deferred tax liability $72.0 $80.5 ======= =======
Net unrealized capital gains and losses are presented in shareholder's equity net of deferred taxes. As of December 31, 1997 and 1996, no valuation allowances were required for unrealized capital gains and losses. The "Policyholders' Surplus Account," which arose under prior tax law, is generally that portion of a life insurance company's statutory income that has not been subject to taxation. As of December 31, 1983, no further additions could be made to the Policyholders' Surplus Account for tax return purposes under the Deficit Reduction Act of 1984. The balance in such account was approximately $17.2 million at December 31, 1997. This amount would be taxed only under certain conditions. No income taxes have been provided on this amount since management believes the conditions under which such taxes would become payable are remote. F-25 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 8. Income Taxes (Continued) The Internal Revenue Service ("Service") has completed examinations of the consolidated federal income tax returns of Aetna through 1990. Discussions are being held with the Service with respect to proposed adjustments. Management believes there are adequate defenses against, or sufficient reserves to provide for, any such adjustments. The Service has commenced its examinations for the years 1991 through 1994. 9. Benefit Plans Employee Pension Plans - The Company, in conjunction with Aetna, has noncontributory defined benefit pension plans covering substantially all employees. The plans provide pension benefits based on years of service and average annual compensation (measured over 60 consecutive months of highest earnings in a 120-month period). Contributions are determined using the Projected Unit Credit Method and, for qualified plans subject to ERISA requirements, are limited to amounts that are tax-deductible. As of December 31, 1997, Aetna's accrued pension cost has been allocated to its subsidiaries, including the Company, under an allocation based on eligible salaries. Data on a separate company basis regarding the proportionate share of the projected benefit obligation and plan assets is not available. The accumulated benefit obligation and plan assets are recorded by Aetna. As of the measurement date (i.e., September 30), the accumulated plan assets exceeded accumulated plan benefits. Allocated pretax charges to operations for the pension plan (based on the Company's total salary cost as a percentage of Aetna's total salary cost) were $2.7 million, $4.3 million and $6.1 million for the years ended December 31, 1997, 1996 and 1995, respectively. Employee Postretirement Benefits - In addition to providing pension benefits, Aetna currently provides certain health care and life insurance benefits for retired employees. A comprehensive medical and dental plan is offered to all full-time employees retiring at age 50 with 15 years of service or at age 65 with 10 years of service. There is a cap on the portion of the cost paid by the Company relating to medical and dental benefits. Retirees are generally required to contribute to the plans based on their years of service with Aetna. The costs to the Company associated with the Aetna postretirement plans for 1997, 1996 and 1995 were $2.7 million, $1.8 million and $1.4 million, respectively. As of December 31, 1996, Aetna transferred to the Company approximately $77.7 million of accrued liabilities, primarily related to the pension and postretirement benefit plans described above, that had been previously recorded by Aetna. The after tax amount of this transfer (approximately $50.5 million) is reported as a reduction in retained earnings. In 1997, other changes in shareholder's equity includes an additional $0.8 million reduction reflecting revisions to the allocation of these accrued liabilities. Agent Pension Plans - The Company, in conjunction with Aetna, has a non-qualified pension plan covering certain agents. The plan provides pension benefits based on annual commission earnings. As of the measurement date (i.e., September 30), the accumulated plan assets exceeded accumulated plan benefits. F-26 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 9. Benefit Plans (Continued) Agent Postretirement Benefits - The Company, in conjunction with Aetna, also provides certain postretirement health care and life insurance benefits for certain agents. The costs to the Company associated with the agents' postretirement plans for 1997, 1996 and 1995 were $0.6 million, $0.7 million and $0.8 million, respectively. Incentive Savings Plan - Substantially all employees are eligible to participate in a savings plan under which designated contributions, which may be invested in common stock of Aetna or certain other investments, are matched, up to 5% of compensation, by Aetna. Pretax charges to operations for the incentive savings plan were $4.4 million, $5.4 million and $4.9 million in 1997, 1996 and 1995, respectively. Stock Plans - Aetna has a stock incentive plan that provides for stock options, deferred contingent common stock or equivalent cash awards or restricted stock to certain key employees. Executive and middle management employees may be granted options to purchase common stock of Aetna at or above the market price on the date of grant. Options generally become 100% vested three years after the grant is made, with one-third of the options vesting each year. Aetna does not recognize compensation expense for stock options granted at or above the market price on the date of grant under its stock incentive plans. In addition, executives may be granted incentive units which are rights to receive common stock or an equivalent value in cash. The incentive units may vest within a range from 0% to 175% at the end of a four year period based on the attainment of performance goals. The costs to the Company associated with the Aetna stock plans for 1997, 1996 and 1995, were $2.9 million, $8.1 million and $6.3 million, respectively. As of December 31, 1996, Aetna transferred to the Company approximately $1.1 million of deferred tax benefits related to stock options. This amount is reported as an increase in retained earnings. In 1997, other changes in shareholder's equity include an additional increase of $2.3 million reflecting revisions to the allocation of the deferred tax benefit. 10. Related Party Transactions The Company is compensated by the Separate Accounts for bearing mortality and expense risks pertaining to variable life and annuity contracts. Under the insurance contracts, the Separate Accounts pay the Company a daily fee which, on an annual basis, ranges, depending on the product, from 0.10% to 1.90% of their average daily net assets. The Company also receives fees from Aetna managed mutual funds for serving as investment adviser. Under the advisory agreements, these funds pay the Company a daily fee which, on an annual basis, ranges, depending on the fund, from 0.25% to 0.85% of their average daily net assets. The Company also receives fees (expressed as a percentage of the average daily net assets) from some of its funds for providing administration services, and from The Aetna Series Fund for providing shareholder services and promoting sales. The amount of compensation and fees received from the Separate Accounts and mutual funds, included in charges assessed against policyholders, amounted to $271.2 million, $186.8 million and $128.1 million in 1997, 1996 and 1995, respectively. The Company may waive advisory fees at its discretion. F-27 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 10. Related Party Transactions (Continued) The Company acts as an investment adviser for its affiliated mutual funds. Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly owned subsidiary of HOLDCO and an affiliate of the Company, has been acting as Subadvisor for affiliated mutual funds and adviser for most of the General Account assets. Fees paid by the Company to Aeltus, included in both charges assessed against policyholders and net investment income, on an annual basis, range from 0.06% to 0.55% of the average daily net assets under management. For the years ended December 31, 1997 and 1996, the Company paid $45.5 million and $16.0 million in such fees. The Company may, from time to time, make reimbursements to an Aetna managed mutual fund for some or all of its operating expenses. Reimbursement arrangements may be terminated at any time without notice. Since 1981, all domestic individual non-participating life insurance of Aetna and its subsidiaries has been issued by the Company. Effective December 31, 1988, the Company entered into a reinsurance agreement with Aetna Life Insurance Company ("Aetna Life") in which substantially all of the non-participating individual life and annuity business written by Aetna Life prior to 1981 was assumed by the Company. A $6.1 million and a $108.0 million commission, paid by the Company to Aetna Life in 1996 and 1988, respectively, was capitalized as deferred policy acquisition costs. In consideration for the assumption of this business, a loan was established relating to the assets held by Aetna Life which support the insurance reserves. Effective January 1, 1997, this agreement has been amended to transition (based on underlying investment rollover in Aetna Life) from a modified coinsurance to a coinsurance arrangement. As a result of this change, reserves will be ceded to the Company from Aetna Life as investment rollover occurs and the loan previously established will be reduced. The Company maintained insurance reserves of $574.5 million ($397.2 million relating to the modified coinsurance agreement and $177.3 million relating to the coinsurance agreement) and $628.3 million as of December 31, 1997 and 1996, respectively, relating to the business assumed. The fair value of the loan relating to assets held by Aetna Life was $412.3 million and $625.3 million as of December 31, 1997 and 1996, respectively, and is based upon the fair value of the underlying assets. Premiums of $176.7 million, $25.3 million and $28.0 million and current and future benefits of $183.9 million, $39.5 million and $43.0 million were assumed in 1997, 1996 and 1995, respectively. Investment income of $37.5 million, $44.1 million and $46.5 million was generated from the reinsurance loan to affiliate in 1997, 1996 and 1995, respectively. On December 16, 1988, the Company assumed $25.0 million of premium revenue from Aetna Life for the purchase and administration of a life contingent single premium variable payout annuity contract. In addition, the Company also is responsible for administering fixed annuity payments that are made to annuitants receiving variable payments. Reserves of $32.5 million and $28.9 million were maintained for this contract as of December 31, 1997 and 1996, respectively. Effective February 1, 1992, the Company increased its retention limit per individual life to $2.0 million and entered into a reinsurance agreement with Aetna Life to reinsure amounts in excess of this F-28 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 10. Related Party Transactions (Continued) limit, up to a maximum of $8.0 million on any new individual life business, on a yearly renewable term basis. Premium amounts related to this agreement were $5.9 million, $5.2 million and $3.2 million for 1997, 1996 and 1995, respectively. Effective October 1, 1997, the Company entered into a reinsurance agreement with Aetna Life to assume amounts in excess of $0.2 million for certain of its participating life insurance, on a yearly renewable term basis. Premium amounts related to this agreement were $0.7 million in 1997. The Company received a capital contribution of $10.4 million in cash from HOLDCO in 1996. The Company received no capital contributions in 1997 or 1995. The Company paid $17.3 million and $3.5 million in cash dividends to HOLDCO in 1997 and 1996, respectively. In 1995, the Company dividended $2.9 million in the form of two of its subsidiaries, Systematized Benefits Administrators, Inc. and Aetna Investment Services, Inc., to Aetna Retirement Services, Inc. (the Company's former parent). Premiums due and other receivables include $37.0 million and $2.8 million due from affiliates in 1997 and 1996, respectively. Other liabilities include $1.2 million and $10.7 million due to affiliates for 1997 and 1996, respectively. As of December 31, 1997, Aetna transferred to the Company $2.5 million based on its decision not to settle state tax liabilities for the years 1996 and 1997. This amount has been reported as an other increase in retained earnings. Substantially all of the administrative and support functions of the Company are provided by Aetna and its affiliates. The financial statements reflect allocated charges for these services based upon measures appropriate for the type and nature of service provided. 11. Reinsurance The Company utilizes indemnity reinsurance agreements to reduce its exposure to large losses in all aspects of its insurance business. Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the Company as direct insurer of the risks reinsured. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of reinsurers. Only those reinsurance recoverables deemed probable of recovery are reflected as assets on the Company's Consolidated Balance Sheets. F-29 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 11. Reinsurance (Continued) The following table includes premium amounts ceded/assumed to/from affiliated companies as discussed in Note 10 above.
Ceded to Assumed Direct Other from Other Net Amount Companies Companies Amount (millions) ------- ------------- ----------- --------- 1997 ---- Premiums: Life Insurance $ 35.7 $15.1 $177.4 $198.0 Accident and Health Insurance 5.6 5.6 -- -- Annuities 67.9 -- 1.2 69.1 ------- ------------- ----------- --------- Total earned premiums $109.2 $20.7 $178.6 $267.1 ======= ============= =========== ========= 1996 ---- Premiums: Life Insurance $ 34.6 $11.2 $25.3 $ 48.7 Accident and Health Insurance 6.3 6.3 -- -- Annuities 84.3 -- 0.6 84.9 ------- ------------- ----------- --------- Total earned premiums $125.2 $17.5 $25.9 $133.6 ======= ============= =========== ========= 1995 ---- Premiums: Life Insurance $ 28.8 $ 8.6 $28.0 $ 48.2 Accident and Health Insurance 7.5 7.5 -- -- Annuities 164.0 -- 0.5 164.5 ------- ------------- ----------- --------- Total earned premiums $200.3 $16.1 $28.5 $212.7 ======= ============= =========== =========
12. Commitments and Contingent Liabilities Commitments Through the normal course of investment operations, the Company commits to either purchase or sell securities or money market instruments at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments. At December 31, 1997, the Company had commitments to purchase investments of $38.7 million. The fair value of the investments at December 31, 1997 approximated $39.0 million. F-30 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.) Notes to Consolidated Financial Statements (Continued) 12. Commitments and Contingent Liabilities (Continued) Litigation The Company is involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations. While the ultimate outcome of litigation against the Company cannot be determined at this time, after consideration of the defenses available to the Company and any related reserves established, it is not expected to result in liability for amounts material to the financial condition of the Company, although it may adversely affect results of operations in future periods. 13. Segment Information (1) The Company's operations are reported through two major business segments: Financial Services and Individual Life Insurance. Summarized financial information for the Company's principal operations was as follows:
1997 1996 1995 --------- --------- --------- (millions) Revenue: Financial Services $1,277.9 $1,195.1 $1,211.3 Individual Life Insurance 620.4 445.7 407.9 --------- --------- --------- Total revenue $1,898.3 $1,640.8 $1,619.2 ========= ========= ========= Income before income taxes: (2) Financial Services $188.2 $129.9 $160.1 Individual Life Insurance 106.5 83.0 103.1 --------- --------- --------- Total income before income taxes $294.7 $212.9 $263.2 ========= ========= ========= Net income: (2) Financial Services $137.5 $94.3 $113.8 Individual Life Insurance 67.8 55.9 62.1 --------- --------- --------- Net income $205.3 $150.2 $175.9 ========= ========= ========= Assets under management: (3) Financial Services (4) $37,609.3 $27,268.1 $22,534.4 Individual Life Insurance 3,096.1 2,830.5 2,590.9 --------- --------- --------- Total assets under management 40,705.4 $30,098.6 $25,125.3 ========= ========= =========
(1) The 1996 results include severance and facilities charges of $30.7 million, after tax. Of this charge $21.5 million related to the Financial Services segment and $9.2 million related to the Individual Life Insurance segment. (2) Excludes any effect of the corporate facilities and severance charge recorded in 1996 which is not directly allocable to the Financial Services and Individual Life Insurance segments. (Refer to Note 7). (3) Excludes net unrealized capital gains (losses) of $551.5 million, $366.4 million and $797.1 million at December 31, 1997, 1996 and 1995, respectively. (4) The December 31, 1997 balance includes the transfer of $4,078.5 million of assets under management that were previously reported by an affiliate. F-31 Form No. SAI.09515-98-1 ALIAC Ed. October 1998 -----END PRIVACY-ENHANCED MESSAGE-----