-----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, TZP9MLfqkTTTVh22u1EFRpjHML/WyL3lv1oEbQWCljYup+vtgWrEulZQVHEdGXQp dYiZkuR3thdyEbWNrocnJQ== 0000950146-99-001796.txt : 19991214 0000950146-99-001796.hdr.sgml : 19991214 ACCESSION NUMBER: 0000950146-99-001796 CONFORMED SUBMISSION TYPE: N-4/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19991213 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: N-4/A SEC ACT: SEC FILE NUMBER: 333-87305 FILM NUMBER: 99773242 FILING VALUES: FORM TYPE: N-4/A SEC ACT: SEC FILE NUMBER: 811-02512 FILM NUMBER: 99773243 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 N-4/A 1 AETNA VARIABLE ANNUITY ACCOUNT B As filed with the Securities and Exchange Registration No. 333-87305 Commission on December 13, 1999 Registration No. 811-2512 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 - -------------------------------------------------------------------------------- Pre-Effective Amendment No. 1 To REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 and Amendment to REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 - -------------------------------------------------------------------------------- Variable Annuity Account B of Aetna Life Insurance and Annuity Company Aetna Life Insurance and Annuity Company 151 Farmington Avenue, TS31, Hartford, Connecticut 06156 Depositor's Telephone Number, including Area Code: (860) 273-4686 Julie E. Rockmore, Counsel Aetna Life Insurance and Annuity Company 151 Farmington Avenue, TS31, Hartford, Connecticut 06156 (Name and Address of Agent for Service) - -------------------------------------------------------------------------------- Approximate date of Proposed Public Offering: As soon as practicable after the effectiveness of this Registration Statement. It is proposed that this Filing will become effective on December 17, 1999. VARIABLE ANNUITY ACCOUNT B CROSS REFERENCE SHEET
FORM N-4 ITEM NO. PART A (PROSPECTUS) LOCATION - PROSPECTUS 1 Cover Page................................... Cover Page 2 Definitions.................................. Not Applicable 3 Synopsis..................................... Contract Overview; Fee Table 4 Condensed Financial Information.............. Condensed Financial Information 5 General Description of Registrant, Depositor, and Portfolio Companies...................... Other Topics - The Company; Variable Annuity Account B; Appendix III - Description of Underlying Funds 6 Deductions and Expenses...................... Fees 7 General Description of Variable Annuity Contracts.................................... Contract Overview 8 Annuity Period............................... The Income Phase 9 Death Benefit................................ Death Benefit 10 Purchases and Contract Value................. Purchase and Rights; Your Account Value 11 Redemptions.................................. Your Right to Cancel; Systematic Distribution Options 12 Taxes........................................ Taxation 13 Legal Proceedings............................ Other Topics - Legal Matters and Proceedings 14 Table of Contents of the Statement of Additional Information....................... Contents of the Statement of Additional Information
FORM N-4 PART B (STATEMENT OF LOCATION - STATEMENT OF ITEM NO. ADDITIONAL INFORMATION) ADDITIONAL INFORMATION 15 Cover Page.................................... Cover page 16 Table of Contents............................. Table of Contents 17 General Information and History............... General Information and History 18 Services...................................... General Information and History; Independent Auditors 19 Purchase of Securities Being Offered.......... Offering and Purchase of Contract 20 Underwriters.................................. Offering and Purchase of Contract 21 Calculation of Performance Data............... Performance Data; Average Annual Total Return Quotations 22 Annuity Payments.............................. Income Phase Payments 23 Financial Statements.......................... Financial Statements
Part C (Other Information) Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to this Registration Statement. Contract Prospectus - December 17, 1999 - -------------------------------------------------------------------------------- The Contract. The contract described in this prospectus is a group or individual deferred variable annuity contract issued by Aetna Life Insurance and Annuity Company (the Company, we, us). It is issued as either a qualified Individual Retirement Annuity (IRA), a qualified Roth IRA, a qualified contract under certain employer sponsored retirement plans, or as a nonqualified deferred annuity contract. Why Reading this Prospectus Is Important. This prospectus contains facts about the contract and its investment options you should know before purchasing. This information will help you decide if the contract is right for you. Please read this prospectus carefully. Table of Contents . . . page 3 Contract Design. The contract described in this prospectus is designed to: o Help you save for retirement security while receiving beneficial tax treatment; o Offer a variety of investment options to help meet long-term financial goals; o Provide a death benefit to the beneficiary you designate; and o Provide payments for life or for a specified period. Purchase Payments/Premium Bonuses. We credit a premium bonus to your account for each eligible purchase payment you make. Purchase payments and any corresponding premium bonuses are allocated to the investment options you select. Over time, the amount of the premium bonus may be more than offset by the fees associated with the bonus. Investment Options. The contract offers variable investment options and fixed interest options. When we establish your account you instruct us to direct account dollars to any of the available options. Variable Investment Options. These options are called subaccounts. The subaccounts are within Variable Annuity Account B (the separate account), a separate account of the Company. Each subaccount invests in one of the mutual funds listed on this page. Earnings on amounts invested in a subaccount will vary depending upon the performance of its underlying fund. You do not invest directly in or hold shares of the funds. The funds in which the subaccounts invest have various risks. Information about the risks of investing in the funds is located in the "Investment Option" section in this prospectus and in each fund prospectus. Read this prospectus in conjunction with the fund prospectuses, and retain the prospectuses for future reference. Fixed Interest Options. o ALIAC Guaranteed Account (the Guaranteed Account) o Fixed Account Except as specifically mentioned, this prospectus describes only the investment options offered through the separate account. However, we describe the fixed interest options in appendices to this prospectus. There is also a separate Guaranteed Account prospectus. Availability of Options. Some variable investment options or fixed interest options may be unavailable through your contract or in your state. Getting Additional Information. You may obtain the December 17, 1999, Statement of Additional Information (SAI) about the separate account by indicating your request on your application or calling us at 1-800-238-6219. You may also obtain an SAI for any of the funds by calling that number. This prospectus, the SAI and other information about the separate account are posted on the Securities and Exchange Commission (SEC) web site, http://www.sec.gov and may also be obtained, free of charge, by contacting the SEC Public Reference Room at 202-942-8090. The SAI table of contents is listed on page 40 of this prospectus. The SAI is incorporated into this prospectus by reference. Additional Disclosure Information. Neither the SEC nor any state securities commission has approved or disapproved the securities offered through this prospectus or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. We do not intend for this prospectus to be an offer to sell or a solicitation of an offer to buy these securities in any state that does not permit their sale. We have not authorized anyone to provide you with information that is different than that contained in this prospectus. The contract is not a deposit with, obligation of or guaranteed or endorsed by any bank, nor is it insured by the FDIC. The contract is subject to investment risk, including the possible loss of the principal amount of your investment. The Funds o Aetna Balanced VP, Inc. o Aetna Income Shares d/b/a Aetna Bond VP o Aetna Growth VP o Aetna Variable Fund d/b/a Aetna Growth and Income VP o Aetna Index Plus Large Cap VP o Aetna International VP o Aetna Variable Encore Fund d/b/a Aetna Money Market VP o Aetna Real Estate Securities VP o Aetna Small Company VP o AIM V.I. Capital Appreciation Fund o AIM V.I. Growth Fund o AIM V.I. Growth and Income Fund o AIM V.I. Value Fund o Fidelity Variable Insurance Products Fund (VIP) Equity-Income Portfolio o Fidelity Variable Insurance Products Fund (VIP) Growth Portfolio o Fidelity Variable Insurance Products Fund (VIP) High Income Portfolio o Fidelity Variable Insurance Products Fund II (VIP II) Contrafund Portfolio o Janus Aspen Aggressive Growth Portfolio o Janus Aspen Balanced Portfolio o Janus Aspen Growth Portfolio o Janus Aspen Worldwide Growth Portfolio o MFS Total Return Series o Oppenheimer Aggressive Growth Fund/VA o Oppenheimer Main Street Growth & Income Fund/VA o Oppenheimer Strategic Bond Fund/VA o Portfolio Partners (PPI) MFS Emerging Equities Portfolio o Portfolio Partners (PPI) MFS Research Growth Portfolio o Portfolio Partners (PPI) MFS Value Equity Portfolio o Portfolio Partners (PPI) Scudder International Growth Portfolio 2 TABLE OF CONTENTS Contract Overview 4 o Contract Design -- Contract Facts -- Questions: Contacting the Company - Sending Forms and Written Requests in Good Order - Sending Additional Purchase Payments - Contract Phases: The Accumulation Phase, The Income Phase Fee Table 7 Condensed Financial Information 13 Investment Options 13 Transfers Among Investment Options 14 Purchase and Rights 15 Premium Bonus 16 Right to Cancel 17 Fees 18 Your Account Value 21 Withdrawals 23 Systematic Distribution Options 24 Death Benefit 25 The Income Phase 27 Taxation 30 Other Topics 37 o The Company -- Variable Annuity Account B -- Contract Distribution -- Payment of Commissions -- Payment Delay or Suspension -- Performance Reporting -- Voting Rights -- Contract Modifications -- Transfer of Ownership: Assignment -- Involuntary Terminations -- Legal Matters and Proceedings -- Year 2000 Readiness Contents of the Statement of Additional Information 40 Appendix I -- ALIAC Guaranteed Account 41 Appendix II -- Fixed Account 43 Appendix III -- Description of Underlying Funds 44 3 Contract Overview - -------------------------------------------------------------------------------- The following is intended as a summary. Please read each section of this prospectus for additional detail. Contract Design The contract described in this prospectus is a group or individual deferred variable annuity contract. It is intended to be a retirement savings vehicle that offers a variety of investment options to help meet long-term financial goals. The term "contract" in this prospectus refers to individual contracts and to certificates issued under group contracts. Contract Facts Premium Bonus. We will credit a premium bonus to your account whenever you make an eligible purchase payment. Your initial purchase payment is always eligible for a premium bonus. Thereafter, any withdrawals you make from the contract reduce dollar-for-dollar the eligibility of subsequent purchase payments for a premium bonus. To determine the eligibility of subsequent purchase payments for a premium bonus, we subtract the sum of your withdrawals from the sum of your purchase payments. The result equals your net cumulative purchase payments. Next, we subtract from the net cumulative purchase payment amount the sum of your previous purchase payments upon which we paid a premium bonus, which results in the amount of the purchase payment eligible for a premium bonus. See "Premium Bonus" for an example of the effect of withdrawals on eligibility for a premium bonus. The amount of your premium bonus is a certain percentage of the eligible purchase payment. The particular percentage is determined according to the following schedule, which is based on three ranges of net cumulative purchase payments. Net Cumulative Purchase Payments Premium Bonus Percentage -------------------------------- ------------------------ $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% The premium bonus is included in your account value and will be allocated among the investment options you have selected in the same proportion as the purchase payment. In certain circumstances, a premium bonus previously credited to your account will not be included when calculating the death benefit or income phase payments. See "Premium Bonus," "Death Benefit - Death Benefit Amount" and "The Income Phase - Premium Bonus." Also, if you exercise your free look privilege and cancel your contract, the amount refunded to you will not include any premium bonus. See "Right to Cancel." Free Look/Right to Cancel. You may cancel your contract within 10 days (some states require more than 10 days) of receipt. See "Right to Cancel." Death Benefit. Your beneficiary may receive a financial benefit in the event of your death prior to the income phase. The amount of the death benefit will depend on the death benefit option selected, and once a death benefit option is selected it may not be changed. Each death benefit option has a different mortality and expense risk charge. See "Fees" and "Death Benefit." Any death benefit during the income phase will depend upon the income phase payment option selected. See "The Income Phase." Withdrawals. During the accumulation phase, you may withdraw all or part of your account value. Certain fees, taxes and early withdrawal penalties may apply. In addition, the Internal Revenue Code of 1986, as amended (Tax Code), restricts full and partial withdrawals in some circumstances. See "Withdrawals." Amounts withdrawn from the Guaranteed Account may be subject to a market value adjustment. See Appendix I. Systematic Distribution Options. These are made available for you to receive periodic withdrawals from your account, while retaining the account in the accumulation phase. See "Systematic Distribution Options." Fees and Expenses. Certain fees and expenses are deducted from the value of your contract. See "Fee Table" and "Fees." - -------------------------------------------------------------------------------- Questions: Contacting the Company. To answer your questions, contact your local representative or write or call our Home Office at: Aetna Financial Services Annuity Services 151 Farmington Avenue Hartford, CT 06156-1258 1-800-238-6219 Sending Forms and Written Requests in Good Order. If you are writing to change your beneficiary, request a withdrawal, or for any other purpose, contact your local representative or the Company to learn what information is required for the request to be in "good order." We can only act upon requests that are received in good order. Sending Additional Purchase Payments. Use one of the following addresses when sending additional purchase payments. If using the U.S. Postal Service: ALIAC Attn: New Business Unit P.O. Box 30670 Hartford, CT 06150-0670 If using express mail: Fleet Bank/ALIAC #30670 Lockbox - CT/EH F03E 99 Founders Plaza, 3rd Floor East Hartford, CT 06108 Express mail packages should not be sent to the P.O. Box Address. - -------------------------------------------------------------------------------- 4 Taxation. You will generally not pay taxes on any earnings from the annuity contract described in this prospectus until they are withdrawn. Tax-qualified retirement arrangements (e.g. IRAs or 403(b) plans) also defer payment of taxes on earnings until they are withdrawn. If you are considering funding a tax-qualified retirement arrangement with an annuity contract, you should know that the annuity contract does not provide any additional tax deferral of earnings beyond the tax deferral provided by the tax-qualified retirement arrangement. However, annuities do provide other features and benefits which may be valuable to you. You should discuss your decision with your financial representative. Taxes will generally be due when you receive a distribution of earnings. Tax penalties may apply in some circumstances. See "Taxation." 5 Contract Phases I. The Accumulation Phase (accumulating dollars under your contract) STEP 1: You provide us with your completed application and initial purchase payment. We establish an account for you and credit that account with your initial purchase payment and premium bonus. STEP 2: You direct us to invest your purchase payment and the premium bonus in one or more of the following investment options: (a) Fixed Interest Options; or (b) Variable Investment Options. (The variable investment options are the subaccounts of Variable Annuity Account B. Each one invests in a specific mutual fund.) STEP 3: Each subaccount you select purchases shares of its assigned fund. ------------ Payments to Your Account ------------ Step 1 - -------------------------------------------------------------------------------- Aetna Life Insurance and Annuity Company - -------------------------------------------------------------------------------- (a) Step 2 (b) ----------- ------------------------------- Fixed Variable Annuity Interest Account B Options Variable Investment Options ----------- ------------------------------- The Subaccounts ------------------------------- A B Etc ------------------------------- Step 3 --------------------- Mutual Mutual Fund A Fund B --------------------- II. The Income Phase (receiving income phase payments from your contract) When you want to begin receiving payments from your contract, you may select from the options available. The contract offers several income phase payment options (see "The Income Phase"). In general, you may: o Receive income phase payments for a specified period of time or for life; o Receive income phase payments monthly, quarterly, semi-annually or annually; o Select an income phase payment option that provides for payments to your beneficiary; or o Select fixed income phase payments or payments that vary based upon the performance of the variable investment options you select. 6 Fee Table - -------------------------------------------------------------------------------- The tables and examples in this section show the fees that may affect your account value during the accumulation phase. See "The Income Phase" for fees that may apply after you begin receiving income phase payments under the contract. Maximum Transaction Fees Early Withdrawal Charge. (As a percentage of purchase payments withdrawn.) - -------------------------------------------------------------------------------- Years From Receipt of Purchase Payment Early Withdrawal Charge -------------------------------------- ----------------------- Less than 3 8% 3 or more but less than 4 7% 4 or more but less than 5 6% 5 or more but less than 6 5% 6 or more but less than 7 4% 7 or more but less than 8 3% 8 or more 0% - -------------------------------------------------------------------------------- Annual Maintenance Fee ................................................$30.00(1) Transfer charge ........................................................$0.00(2) Maximum Fees Deducted from Investments in the Separate Account Amount During the Accumulation Phase. (Daily deductions, equal to the following percentages on an annual basis, from amounts invested in the subaccounts.) Death Benefit Option I Mortality and Expense Risk Charge 1.25% Administrative Expense Charge 0.15% ----- Total Separate Account Expenses 1.40% Death Benefit Option II Mortality and Expense Risk Charge 1.45% Administrative Expense Charge 0.15% ----- Total Separate Account Expenses 1.60% Amount During the Income Phase. (Daily deductions, equal to the following percentages on an annual basis, from amounts invested in the subaccounts.) Mortality and Expense Risk Charge 1.25% Administrative Expense Charge 0.00% - 0.25%(3) ------------- Total Separate Account Expenses 1.25% - 1.50%(3) ------------- - -------------------------------------------------------------------------------- In this Section: o Maximum Transaction Fees o Maximum Fees Deducted from Investments in the Separate Account o Fees Deducted by the Funds o Hypothetical Examples Also see the "Fees" section for: o How, When and Why Fees are Deducted o Reduction, Waiver and/or Elimination of Certain Fees o Premium and Other Taxes In addition to the fees shown in this section, state and municipal premium taxes may apply. - -------------------------------------------------------------------------------- 7 (1)The annual maintenance fee will be waived if your account value is $50,000 or greater on the date this fee is due. (2)During the accumulation phase, we currently allow you 12 free transfers each account year. We reserve the right to charge $10 for each additional transfer. We currently do not impose this charge. See "Transfers" for additional information. (3)We currently do not deduct an administrative expense charge during the income phase; however, we reserve the right to deduct a daily charge of not more than 0.25% per year. See "The Income Phase--Charges Deducted." 8 Fees Deducted by the Funds Using this information. The following table shows the investment advisory fees and other expenses charged annually by each fund. Fund fees are one factor that impacts the value of a fund share. To learn more about additional factors impacting the share value, refer to the fund prospectus. How fees are deducted. The fund fees are not deducted from account values. Instead, they are deducted from the value of the fund shares on a daily basis, which in turn affects the value of each subaccount that purchases fund shares. Except as noted below, the following figures are a percentage of the average net assets of each fund, and are based upon figures for the year ended December 31, 1998. Fund Expense Table
Total Fund Annual Net Fund Annual Investment Expenses Without Total Expenses After Advisory Other Waivers or Waivers and Waivers or Fees(1) Expenses Reductions Reductions Reductions Aetna Balanced VP, Inc.(3) 0.50% 0.09% 0.59% -- 0.59% Aetna Bond VP(3) 0.40% 0.10% 0.50% -- 0.50% Aetna Growth VP(2)(3) 0.60% 0.15% 0.75% 0.00% 0.75% Aetna Growth and Income VP(3) 0.50% 0.08% 0.58% -- 0.58% Aetna Index Plus Large Cap VP(2)(3) 0.35% 0.10% 0.45% 0.00% 0.45% Aetna International VP(2)(3) 0.85% 1.22% 2.07% 0.92% 1.15% Aetna Money Market VP(3) 0.25% 0.09% 0.34% -- 0.34% Aetna Real Estate Securities VP(2)(3) 0.75% 0.73% 1.48% 0.53% 0.95% Aetna Small Company VP(2)(3) 0.75% 0.14% 0.89% 0.00% 0.89% AIM V.I. Capital Appreciation Fund(4) 0.62% 0.05% 0.67% -- 0.67% AIM V.I. Growth Fund(4) 0.64% 0.08% 0.72% -- 0.72% AIM V.I. Growth and Income Fund(4) 0.61% 0.04% 0.65% -- 0.65% AIM V.I. Value Fund(4) 0.61% 0.05% 0.66% -- 0.66% Fidelity VIP Equity-Income Portfolio(5) 0.49% 0.09% 0.58% 0.00% 0.58% Fidelity VIP Growth Portfolio(5) 0.59% 0.09% 0.68% 0.00% 0.68% Fidelity VIP High Income Portfolio(5) 0.58% 0.12% 0.70% 0.00% 0.70% Fidelity VIP II Contrafund Portfolio(5) 0.59% 0.11% 0.70% 0.00% 0.70% Janus Aspen Aggressive Growth Portfolio(6) 0.72% 0.03% 0.75% 0.00% 0.75% Janus Aspen Balanced Portfolio(6) 0.72% 0.02% 0.74% 0.00% 0.74% Janus Aspen Growth Portfolio(6) 0.72% 0.03% 0.75% 0.07% 0.68% Janus Aspen Worldwide Growth Portfolio(6) 0.67% 0.07% 0.74% 0.02% 0.72% MFS Total Return Series(7) 0.75% 0.16% 0.91% 0.00% 0.91% Oppenheimer Aggressive Growth Fund/VA(4) 0.69% 0.02% 0.71% -- 0.71% Oppenheimer Main Street Growth & Income Fund/VA(4) 0.74% 0.05% 0.79% -- 0.79% Oppenheimer Strategic Bond Fund/VA(4) 0.74% 0.06% 0.80% -- 0.80% PPI MFS Emerging Equities Portfolio(8) 0.68% 0.13% 0.81% 0.00% 0.83% PPI MFS Research Growth Portfolio(8) 0.70% 0.15% 0.85% -- 0.85% PPI MFS Value Equity Portfolio(8) 0.65% 0.25% 0.90% -- 0.90% PPI Scudder International Growth Portfolio(8) 0.80% 0.20% 1.00% -- 1.00%
9 Footnotes to the "Fund Expense Table" (1) Certain of the fund advisers reimburse the company for administrative costs incurred in connection with administering the funds as variable funding options under the contract. These reimbursements are generally paid out of the management fees and are not charged to investors. For the AIM Funds, the reimbursements may be paid out of the fund assets in an amount up to 0.25% annually. Any such reimbursements paid from the AIM Funds' assets are included in the "Other Expenses" column. (2) The investment adviser is contractually obligated through December 31, 1999 to waive all or a portion of its investment advisory fee and/or its administrative services fee and/or to reimburse a portion of other expenses in order to ensure that the portfolio's Total Fund Annual Expenses do not exceed the percentage reflected under Net Fund Annual Expenses After Waivers or Reductions. (3) Prior to May 1, 1998, the portfolio's investment adviser provided administrative services to the portfolio and assumed the portfolio's ordinary recurring direct costs under an administrative services agreement. After that date, the portfolio's investment adviser provided administrative services but no longer assumed all of the portfolio's ordinary recurring direct costs under an administrative services agreement. The administrative fee is 0.075% on the first $5 billion in assets and 0.050% on all assets over $5 billion. The "Other Expenses" shown are not based on actual figures for the year ended December 31, 1998, but reflect the fee payable under the new administrative services agreement and estimates the portfolio's ordinary recurring direct costs. (4) Fee waiver/expense reimbursement obligations do not apply to these portfolios. (5) A portion of the brokerage commissions that certain funds pay was used to reduce fund expenses. In addition, certain funds, or the investment adviser on behalf of certain funds, have entered into arrangements with their custodian whereby credits realized as a result of uninvested cash balances were used to reduce custodian expenses. Expenses do not take into account these expense reductions, and are therefore higher than the actual expenses of the series. (6) All expenses are stated both with and without contractual waivers and fee reductions by Janus Capital. Fee reductions for the Aggressive Growth, Balanced, Growth and Worldwide Growth Portfolios reduce the Management fee to the level of the corresponding Janus retail fund. Other waivers, if applicable, are first applied against the Management Fee and then against Other Expenses. Janus Capital has agreed to continue the other waivers and fee reduction until at least the next annual renewal of the advisory agreement. (7) Each series has an expense offset arrangement which reduces the series' custodian fee based upon the amount of cash maintained by the series with its custodian and dividend disbursing agent. Each series may enter into other such arrangements and directed brokerage arrangements, which would also have the effect of reducing the series' expenses. Expenses do not take into account these expense reductions, and are therefore higher than the actual expenses of the series. (8) The investment adviser has agreed to reimburse the portfolios for expenses and/or waive its fees, so that, through at least April 30, 2000, the aggregate of each portfolio's expenses will not exceed the combined investment advisory fees and other expenses shown under the Net Fund Annual Expenses After Waivers or Reductions column above. For the Portfolio Partners MFS Emerging Equities Portfolio, the Total Fund Annual Expenses Without Waivers or Reductions for 1998 were less than the percentage reflected under the Net Annual Fund Expenses After Waivers or Reductions column. Nevertheless, the investment adviser will waive fees and/or reimburse expenses if that portfolio's Total Fund Annual Expenses Without Waivers or Reductions for 1999 exceed the percentage reflected under the Net Fund Annual Expenses After Waivers or Reductions column. 10 Hypothetical Example Account Fees You May Incur Over Time. The following hypothetical examples show the fees and expenses paid over time if you invest $1,000 and a 2% premium bonus in the contract and assume a 5% annual return on the investment. For the purpose of these examples, we deducted total annual fund expenses and the maximum charges under the contract (i.e., a mortality and expense risk charge of 1.45% annually for Death Benefit Option II, an administrative expense charge of 0.15% annually and a maximum annual maintenance fee of $30 (converted to a percentage of assets equal to 0.022%)). The total annual fund expenses used are those shown in the column "Total Annual Expenses Without Waivers or Reductions" in the Fund Expense Table.
- ---------------------------------------- o These examples are purely hypothetical. o They should not be considered a EXAMPLE A EXAMPLE B representation of past or future expenses or expected returns. If you withdraw your entire account If at the end of the periods shown you value at the end of the periods shown, (1) leave your entire account value o Actual expenses and/or returns may you would pay the following expenses, invested or (2) select an income phase be more or less than those shown including any applicable early payment option, you would pay the in these examples. withdrawal charge: following expenses (no early withdrawal - ---------------------------------------- charge is reflected):* 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years ------ ------- ------- -------- ------ ------- ------- -------- Aetna Balanced VP, Inc. $96 $134 $166 $260 $23 $71 $121 $260 Aetna Bond VP $95 $131 $161 $250 $22 $68 $116 $250 Aetna Growth VP $98 $139 $174 $276 $25 $75 $129 $276 Aetna Growth and Income VP $96 $134 $166 $259 $23 $70 $120 $259 Aetna Index Plus Large Cap VP $95 $130 $159 $245 $21 $66 $114 $245 Aetna International VP $111 $179 $240 $402 $38 $115 $195 $402 Aetna Money Market VP $94 $126 $153 $233 $20 $63 $108 $233 Aetna Real Estate Securities VP $105 $161 $211 $348 $32 $98 $166 $348 Aetna Small Company VP $99 $143 $182 $290 $26 $80 $136 $290 AIM V.I. Capital Appreciation Fund $97 $137 $170 $268 $24 $73 $125 $268 AIM V.I. Growth Fund $97 $138 $173 $273 $24 $75 $128 $273 AIM V.I. Growth & Income Fund $97 $136 $169 $266 $23 $72 $124 $266 AIM V.I. Value Fund $97 $136 $170 $267 $24 $73 $125 $267 Fidelity VIP Equity-Income Portfolio $96 $134 $166 $259 $23 $70 $120 $259 Fidelity VIP Growth Portfolio $97 $137 $171 $269 $24 $73 $126 $269 Fidelity VIP High Income Portfolio $97 $138 $172 $271 $24 $74 $127 $271 Fidelity VIP II Contrafund Portfolio $97 $138 $172 $271 $24 $74 $127 $271 Janus Aspen Aggressive Growth Portfolio $98 $139 $174 $276 $25 $75 $129 $276 Janus Aspen Balanced Portfolio $98 $139 $174 $275 $24 $75 $129 $275 Janus Aspen Growth Portfolio $98 $139 $174 $276 $25 $75 $129 $276 Janus Aspen Worldwide Growth Portfolio $98 $139 $174 $275 $24 $75 $129 $275 MFS Total Return Series $99 $144 $183 $292 $26 $80 $137 $292 Oppenheimer Aggressive Growth Fund/VA $97 $138 $172 $272 $24 $74 $127 $272 Oppenheimer Main Street Growth & Income Fund/VA $98 $140 $176 $280 $25 $77 $131 $280 Oppenheimer Strategic Bond Fund/VA $98 $141 $177 $281 $25 $77 $132 $281 PPI MFS Emerging Equities Portfolio $98 $141 $177 $282 $25 $77 $132 $282 PPI MFS Research Growth Portfolio $99 $142 $180 $286 $26 $79 $134 $286 PPI MFS Value Equity Portfolio $99 $144 $182 $291 $26 $80 $137 $291 PPI Scudder International Growth Portfolio $100 $147 $187 $301 $27 $83 $142 $301
11 * This example does not apply during the income phase if you select a nonlifetime income phase payment option with variable payments and take a lump-sum withdrawal after payments start. In this case, the lump sum payment is treated as a withdrawal during the accumulation phase and may be subject to an early withdrawal charge (refer to Example A). 12 Condensed Financial Information - -------------------------------------------------------------------------------- As of the date of this prospectus, we had not begun selling the contract and the subaccounts did not have any assets attributable to the contract. Therefore, no condensed financial information is presented herein. Investment Options - -------------------------------------------------------------------------------- The contract offers variable investment options and fixed interest options. Variable Investment Options. These options are called subaccounts. The subaccounts are within Variable Annuity Account B (the separate account), a separate account of the Company. Each subaccount invests in a specific mutual fund. You do not invest directly in or hold shares of the funds. o Mutual Fund (fund) Descriptions. We provide brief descriptions of the funds in Appendix III. Investment results of the funds are likely to differ significantly and there is no assurance that any of the funds will achieve their respective investment objectives. Shares of the funds will rise and fall in value and you could lose money by investing in the funds. Shares of the funds are not bank deposits and are not guaranteed, endorsed or insured by any financial institution, the Federal Deposit Insurance Corporation or any other government agency. Unless otherwise noted, all funds are diversified as defined under the Investment Company Act of 1940. Refer to the fund prospectuses for additional information. Fund prospectuses may be obtained, free of charge, from our Home Office at the address and phone number listed in "Contract Overview -- Questions: Contacting the Company" or by contacting the SEC Public Reference Room. Fixed Interest Options. If available in your state, the ALIAC Guaranteed Account (the Guaranteed Account) or the Fixed Account. The Guaranteed Account offers certain guaranteed minimum interest rates for a stated period of time. Amounts must remain in the Guaranteed Account for specific periods to receive the quoted interest rates, or a market value adjustment will be applied. The market value adjustment may be positive or negative. The Fixed Account guarantees payment of the minimum interest rate specified in the contract. The Fixed Account is only available in certain states. For a description of these options see Appendices I and II and the Guaranteed Account prospectus. - -------------------------------------------------------------------------------- Selecting Investment Options o Choose options appropriate for you. Your Company representative can help you evaluate which investment options may be appropriate for your financial goals. o Understand the risks associated with the options you choose. Some subaccounts invest in funds that are considered riskier than others. Funds with additional risks are expected to have values that rise and fall more rapidly and to a greater degree than other funds. For example: Funds investing in foreign or international securities are subject to additional risks not associated with domestic investments, and their performance may vary accordingly. Also, funds using derivatives in their investment strategy may be subject to additional risks. o Be informed. Read this prospectus, the fund prospectuses, the Guaranteed Account and Fixed Account appendices and the Guaranteed Account prospectus. - -------------------------------------------------------------------------------- Limits on Availability of Options. Some funds or fixed interest options may be unavailable through your contract or in your state. We may add, withdraw or substitute funds, subject to the conditions in your contract and compliance with regulatory requirements. We may disallow investment in a subaccount if fund shares are unavailable to the separate account or if we judge that further investments in such shares would be inappropriate for the contract. In addition, we may substitute shares of another fund for shares already acquired. We reserve the right to do so without proxy vote. Limits on How Many Investment Options You May Select. Although there is currently no limit, we reserve the right to limit the number of investment options you may select at any one time or during the life of the contract. For purposes of determining any limit, each subaccount and each guaranteed term of the Guaranteed Account, or an investment in the Fixed Account in certain contracts, will be considered an investment option. Limits Imposed by the Underlying Fund. Orders for the purchase of fund shares may be subject to acceptance by the fund. We reserve the right to reject, without prior notice, any allocation of a purchase payment or premium bonus to a subaccount if the subaccount's investment in the corresponding fund is not accepted by the fund for any reason. Additional Risks of Investing in the Funds (Mixed and Shared Funding). "Shared funding" occurs when shares of a fund, which the subaccounts buy for variable annuity contracts, are also bought by other insurance companies for their variable annuity contracts. "Mixed funding" occurs when shares of a fund, which the subaccounts buy for variable annuity contracts, are bought for variable life insurance contracts issued by the Company or other insurance companies. 13 o Shared--bought by more than one company. o Mixed--bought for annuities and life insurance. It is possible that a conflict of interest may arise due to mixed and/or shared funding, which could adversely impact the value of a fund. For example: If a conflict of interest occurred and one of the subaccounts withdrew its investment in a fund, the fund may be forced to sell its securities at disadvantageous prices, causing its share value to decrease. Each fund's Board of Directors or Trustees will monitor events to identify any conflicts which may arise and to determine what action, if any, should be taken to address such conflicts. Transfers Among Investment Options - -------------------------------------------------------------------------------- You may transfer amounts among the available subaccounts. During the accumulation phase, we allow you 12 free transfers each account year. We reserve the right to charge $10 for each additional transfer. We currently do not impose this charge. During the income phase, if approved in your state, transfers are limited to 12 each account year and allowed only if you select variable income phase payments. Transfers from the Guaranteed Account are subject to certain restrictions and may be subject to a market value adjustment. Transfers from the Fixed Account are subject to certain restrictions and transfers into the Fixed Account from any of the other investment options are not allowed. Transfers must be made in accordance with the terms of your contract. Transfer Requests. Requests may be made in writing, by telephone or, where applicable, electronically. Limits on Frequent Transfers. The contract is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the market. Such frequent trading can disrupt management of a fund and raise its expenses. This in turn can have an adverse effect on fund performance. Accordingly, organizations or individuals that use market-timing investment strategies and make frequent transfers should not purchase the contract. We reserve the right to restrict, in our sole discretion and without prior notice, transfers initiated by a market-timing organization or an individual or other party authorized to give transfer instructions on behalf of multiple contract holders. Such restrictions could include: (1) not accepting transfer instructions from an agent acting on behalf of more than one contract holder; and (2) not accepting preauthorized transfer forms from market timers or other entities acting on behalf of more than one contract holder at a time. We further reserve the right to impose, without prior notice, restrictions on transfers that we determine, in our sole discretion, will disadvantage or potentially hurt the rights or interests of other contract holders. Additionally, orders for the purchase of fund shares may be subject to acceptance by the fund. We reserve the right to reject, without prior notice, any transfer request to a subaccount if the subaccount's investment in the corresponding fund is not accepted for any reason. Value of Your Transferred Dollars. The value of amounts transferred into or out of subaccounts will be based upon the subaccount unit values next determined after we receive your transfer request at our Home Office, or, if you are participating in the dollar cost averaging or account rebalancing program, after your scheduled transfer or reallocation. Telephone Transfers: Security Measures. To prevent fraudulent use of telephone transactions, we have established security procedures. These include recording calls on our toll-free telephone lines and requiring use of a personal identification number (PIN) to execute transactions. You are responsible for keeping your PIN and account information confidential. If we fail to follow reasonable security procedures, we may be liable for losses due to unauthorized or fraudulent telephone transactions. We are not liable for losses resulting from telephone instructions we believe to be genuine. If a loss occurs when we rely on such instructions, you will bear the loss. The Dollar Cost Averaging Program. Dollar cost averaging is an investment strategy whereby you purchase fixed dollar amounts of an investment at regular intervals, regardless of price. Under this program a fixed dollar amount is automatically transferred from certain subaccounts, the Guaranteed Account or Fixed Account to any of the other subaccounts. A market value adjustment will not be applied to dollar cost averaging transfers from a guaranteed term of the Guaranteed Account during participation in the dollar cost averaging program. If such participation is discontinued, we will automatically transfer the remaining balance in that guaranteed term to another guaranteed term of the same duration, unless you initiate a transfer into another investment option. In either case, a market value adjustment will apply. See Appendix I for more information about dollar cost averaging from the Guaranteed Account. If dollar cost averaging is stopped with respect to amounts invested in the Fixed Account, the remaining balance will be transferred to the money market subaccount. Dollar cost averaging neither ensures a profit nor guarantees against loss in a declining market. You should consider your financial ability to continue purchases through periods of low price levels. There is no additional charge for this program and transfers made under this program do not count as transfers when determining the number of free transfers that may be made each calendar year. For additional information about this program, contact your local representative or call us at the number listed in "Contract Overview -- Questions: Contacting the Company." In certain states, purchase payments and premium bonuses allocated to the Fixed Account may require participation in the dollar cost averaging program. 14 Dollar cost averaging is not available if you elect to participate in the account rebalancing program. The Account Rebalancing Program. Account rebalancing allows you to reallocate your account value to match the investment allocations you originally selected. Only account values invested in the subaccounts may be rebalanced. We automatically reallocate your account value annually (or more frequently as we allow). Account rebalancing neither ensures a profit nor guarantees against loss in a declining market. There is no additional charge for this program and transfers made under this program do not count as transfers when determining the number of free transfers that may be made each calendar year. You may participate in this program by completing the account rebalancing section of your application, or by contacting us at the address and/or number listed in "Contract Overview -- Questions: Contacting the Company." Account rebalancing is not available if you elect to participate in the dollar cost averaging program. Purchase And Rights - -------------------------------------------------------------------------------- How to Purchase o Individual Contracts. In some states, where group contracts are not available, you may purchase the contract directly from us by completing an application and delivering it and your initial purchase payment to us. Upon our approval we will issue you a contract, set up an account for you under the contract and credit your account with a premium bonus. o Group Contracts. In most states we have distributors, usually broker/dealers or banks, who hold the contract as a group contract (see "Distribution"). You may purchase an interest (or, in other words, participate) in the group contract by contacting a distributor and completing an application and delivering it with your initial purchase payment to that distributor. Upon our approval, we will set up an account for you under the group contract, issue you a certificate showing your rights under the contract and credit your account with a premium bonus. o Joint Contracts (generally spouses). For a nonqualified contract, you may participate in a group contract as a joint contract holder. References to "contract holder" in this prospectus mean both contract holders under joint contracts. Tax law prohibits the purchase of qualified contracts by joint contract holders. Maximum Issue Age. The maximum ages for you and the annuitant (if you are not the annuitant) on the date we establish your account are as follows: Maximum Issue Age ----------------- Death Benefit Option I 85 Death Benefit Option II 75 Your Rights Under the Contract. o Individual Contracts. You have all contract rights. o Group Contracts. The holder of the group contract has title to the contract and, generally, only the right to accept or reject any modifications to the contract. You have all other rights to your account under the contract. o Joint Contracts. Joint contract holders have equal rights under the contract with respect to their account. All rights under the contract must be exercised by both joint contract holders with the exception of transfers among investment options. See the "Death Benefit" section for the rights of the surviving joint contract holder upon the death of a joint contract holder prior to the income phase start date. Purchase Payment Methods. The following purchase payment methods are allowed: o One lump sum; o Periodic payments; or o Transfer or rollover from a pre-existing retirement plan or account. We reserve the right to reject any purchase payments to a prospective or existing account without advance notice. Purchase Payment Amounts. The minimum initial purchase payment amounts are as follows: Non-Qualified: Qualified:* -------------- ----------- Minimum Initial Purchase Payment $15,000 $1,500 *The Tax Code imposes a maximum limit on annual purchase payments which may be excluded from your gross income. Additional purchase payments must be at least $50 (we may change this amount from time to time). A purchase payment of more than $1,000,000 will be allowed only with our consent. The amount of any premium bonus credited to your account is not considered part of the purchase payment. 15 Reduction of Purchase Payment Amounts. In certain circumstances we may reduce the minimum initial or additional purchase payment amount we will accept under a contract. Whether such a reduction is available is based upon consideration of one or more of the following factors: o The size and type of the prospective group, if any, to which the reduction would apply; o The method and frequency of purchase payments to be made under the contract; or o The amount of compensation to be paid to distributors and their registered representative on each purchase payment. Any reduction of the minimum initial or additional purchase payment amount will not be unfairly discriminatory against any person. We will make any such reduction according to our own rules in effect at the time the purchase payment is received. We reserve the right to change these rules from time to time. Acceptance or Rejection of Your Application. We must accept or reject your application within two business days of receipt. If the application is incomplete, we may hold any forms and accompanying purchase payment(s) for five business days. We may hold purchase payments for longer periods, pending acceptance of the application, only with your permission. If the application is rejected, the application and any purchase payments will be returned to you. Allocating Purchase Payments to the Investment Options. We will allocate your purchase payments and any premium bonuses among the investment options you select. Allocations must be in whole percentages and there may be limits on the number of investment options you may select. When selecting investment options, you may find it helpful to review the "Investment Options" section. Premium Bonus - -------------------------------------------------------------------------------- Premium Bonus. We will credit a premium bonus to your account whenever you make an eligible purchase payment. Your initial purchase payment is always eligible for a premium bonus. Thereafter, any withdrawals you make from the contract reduce dollar-for-dollar the eligibility of subsequent purchase payments for a premium bonus. To determine the eligibility of subsequent purchase payments for a premium bonus, we subtract the sum of your withdrawals from the sum of your purchase payments. The result equals your net cumulative purchase payments. Next, we subtract from the net cumulative purchase payment amount the sum of your previous purchase payments upon which we paid a premium bonus, which results in the amount of the purchase payment eligible for a premium bonus. The amount of your premium bonus is a certain percentage of the eligible purchase payment. The particular percentage is determined according to the following schedule, which is based on three ranges of net cumulative purchase payments. Net Cumulative Premium Purchase Payments Bonus Percentage ----------------- ---------------- $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% Example: If you make the following purchase payments and withdrawals under a qualified contract, we will credit premium bonuses to your account, calculated as follows: Purchase Premium Bonus Payment Amount Withdrawal Explanation - ------- ------ ---------- ----------- $10,000 $200 This entire purchase payment is eligible for a 2.00% premium bonus. Therefore, a $200 premium bonus would be credited to your account ($10,000 multiplied by 2.00%). $5,000 This withdrawal will reduce the eligibility of subsequent purchase payments to receive the premium bonus. $3,000 $0 This purchase payment is not eligible for a premium bonus because it is completely offset by the prior $5,000 withdrawal. $4,000 $40 The amount of the purchase payment eligible for the premium bonus is $2,000 (the sum of purchase payments made reduced by prior withdrawals minus the sum of purchase payments upon which a premium bonus has previously been paid). The premium bonus percentage is 2% based upon a $12,000 net cumulative purchase payment amount. Therefore, a $40 premium bonus would be credited to your account ($2,000 multiplied by 2.00%). 16 $5,000 $200 All of this purchase payment is eligible for a premium bonus because the prior withdrawal was completely used to offset the premium bonuses on the prior two purchase payments. The premium bonus percentage is 4% based upon a $17,000 net cumulative purchase payment amount. Accordingly, a $200 premium bonus would be credited to your account ($5,000 multiplied by 4%). This example is intended to illustrate how the premium bonus is calculated; it does not include the effect of any early withdrawal charge, or market value adjustment for amounts invested in the guaranteed account, related to any withdrawals. The premium bonus is included in your account value and will be allocated among the investment options you have selected in the same proportion as the purchase payment. The amount of any premium bonus credited to your account is not considered part of the purchase payment. Rather, it is considered gain under the contract. The amount of the death benefit will not include any premium bonus credited to your account after or within 12 months of the date of death. See "Death Benefit - -- Death Benefit Amount." Likewise, any premium bonus credited to your account within 24 months of electing an income phase payment option will be forfeited and not included in your account value when calculating the payment amount. See "The Income Phase -- Premium Bonus." Also, if you exercise your free look privilege and cancel your contract, the amount refunded to you will not include any premium bonus. See "Right to Cancel." No premium bonus will be credited on amounts reinvested following a full withdrawal. See "Withdrawals -- Reinvesting a Full Withdrawal." We use a portion of the early withdrawal charge and mortality and expense risk charge to help recover the cost of providing the premium bonus under the contract. See "Fees." Under certain circumstances (such as a period of poor market performance) the cost associated with the premium bonus may exceed the sum of the premium bonus and any related earnings. You should consider this possibility before purchasing the contract. Right to Cancel - -------------------------------------------------------------------------------- When and How to Cancel. You may cancel your contract within ten days of receipt (some states allow longer) by returning it to our Home Office along with a written notice of cancellation. Refunds. We will issue you a refund within seven days of our receipt of your contract and written notice of cancellation. Unless your state requires otherwise or unless you purchased an IRA, your refund will equal the purchase payments made plus any earnings or minus any losses attributable to those purchase payments allocated among the subaccounts. In other words, you will bear the entire investment risk for amounts allocated among the subaccounts during this period and the amount refunded could be less than the amount paid. If your state requires or if you purchased an IRA, we will refund all purchase payments made. Any refund will not include any premium bonus credited to your account. If the purchase payments for your canceled contract came from a rollover from another contract issued by us or one of our affiliates where an early withdrawal charge was reduced or eliminated, the purchase payments will be restored to your prior contract. 17 Fees - -------------------------------------------------------------------------------- The following repeats and adds to information provided in the "Fee Table" section. Please review both sections for information on fees. TRANSACTION FEES Early Withdrawal Charge Withdrawals of all or a portion of your account value may be subject to a charge. Amount. A percentage of the purchase payments that you withdraw. Early Withdrawal Charge Schedule - -------------------------------------------------------------------------------- Years From Receipt of Purchase Payment Early Withdrawal Charge ----------------------- Less than 3 8% 3 or more but less than 4 7% 4 or more but less than 5 6% 5 or more but less than 6 5% 6 or more but less than 7 4% 7 or more but less than 8 3% 8 or more 0% - -------------------------------------------------------------------------------- Purpose. This is a deferred sales charge. It reimburses us for some of the sales, administrative and premium bonus expenses associated with the contract. Our remaining sales, administrative and premium bonus expenses will be covered by the mortality and expense risk charge described in this section and, to the extent necessary, our other general assets. - -------------------------------------------------------------------------------- Types of Fees There are four types of fees or deductions that may affect your account. TRANSACTION FEES o Early Withdrawal Charge o Annual Maintenance Fee o Transfer Charge FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT o Mortality and Expense Risk Charge o Administrative Expense Charge FEES DEDUCTED BY THE FUNDS o Investment Advisory Fees o Other Expenses PREMIUM AND OTHER TAXES - -------------------------------------------------------------------------------- 18 First In, First Out. The early withdrawal charge is calculated separately for each purchase payment withdrawn. For purposes of calculating your early withdrawal charge, we consider that your first purchase payment to the account (first in) is the first you withdraw (first out). For example: We calculate the early withdrawal charge based upon the number of years since the purchase payment was received. If your initial purchase payment was made four years ago, we will deduct an early withdrawal charge equal to 6% of the portion of that purchase payment withdrawn. The next time you make a withdrawal we will assess the charge against the portion of the first purchase payment that you did not withdraw and/or your subsequent purchase payments to your account in the order they were received. Earnings (including any premium bonus) may be withdrawn after all purchase payments have been withdrawn. There is no early withdrawal charge for withdrawal of earnings. Free Withdrawals. There is no early withdrawal charge if, during each account year, the amount withdrawn is 10% or less of your account value on the later of the date we established your account or the most recent anniversary of that date. The free withdrawal amount will be adjusted for amounts withdrawn under a systematic distribution option or taken as a required minimum distribution during the account year. Waiver. The early withdrawal charge is waived for purchase payments withdrawn if the withdrawal is: o Used to provide income phase payments to you; o Paid due to the annuitant's death during the accumulation phase in an amount up to the sum of purchase payments made, minus the total of all partial withdrawals and deductions made prior to the annuitant's death; o Paid upon a full withdrawal where your account value is $2,500 or less and no part of the account has been withdrawn during the prior 12 months; o If approved in your state, taken under a qualified contract when the amount withdrawn is equal to the minimum distribution required by the Tax Code for your account calculated using a method permitted under the Tax Code and agreed to by us (including required minimum distributions using the ECO systematic distribution option); or o Paid upon termination of your account by us (see "Other Topics -- Involuntary Terminations"). Annual Maintenance Fee Maximum Amount. $30.00 When/How. Each year during the accumulation phase we deduct this fee from your account value. We deduct it on your account anniversary and at the time of full withdrawal. It is deducted proportionally from each investment option. Purpose. This fee reimburses us for administrative expenses relating to the establishment and maintenance of your account. Elimination. We will not deduct the annual maintenance fee if your account value is $50,000 or more on the date this fee is to be deducted. 19 Transfer Charge Amount. During the accumulation phase, we currently allow you 12 free transfers each account year. We reserve the right to charge $10 for each additional transfer. We currently do not impose this charge. Purpose. This fee reimburses us for administrative expenses associated with transferring your dollars among investment options. FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT Mortality and Expense Risk Charge Maximum Amount. During the accumulation phase the amount of this charge depends on which death benefit option you select. For Death Benefit Option I, this charge, on an annual basis, is equal to 1.25% of your account value invested in the subaccounts. For Death Benefit Option II, this charge, on an annual basis, is equal to 1.45% of your account value invested in the subaccounts. During the income phase, this charge, on an annual basis, is equal to 1.25% of amounts held in the subaccounts. When/How. We deduct this fee daily from the subaccounts corresponding to the funds you select. We do not deduct this fee from any fixed interest option. Purpose. This fee compensates us for the mortality and expense risks we assume under the contract and the expense associated with the premium bonus. o The mortality risk is the risk associated with our promises to pay the death benefit available under the contract and to make lifetime income phase payments based upon annuity rates specified in the contract. o The expense risk is the risk that the actual expenses we incur under the contract will exceed the maximum costs that we can charge. If the amount we deduct for this fee is not enough to cover our mortality and expense risk costs and premium bonus expenses under the contract, we will bear the loss. We may use any excess to recover distribution costs relating to the contract and as a source of profit. We expect to make a profit from this fee. Administrative Expense Charge Maximum Amount. This charge, on an annual basis, is equal to 0.15% of your account value invested in the subaccounts during the accumulation phase. There is currently no administrative expense charge during the income phase; however, we reserve the right to assess an administrative expense charge of up to 0.25% during the income phase. When/How. If imposed, we deduct this fee daily from the subaccounts corresponding to the funds you select. We do not deduct this fee from the fixed interest options. This charge may be assessed during the accumulation phase or the income phase. If we are imposing this fee when you enter the income phase, the fee will apply to you during the entire income phase. Purpose. This fee helps defray our administrative expenses that cannot be covered by the mortality and expense risk charges described above. The charge is not intended to exceed the average expected cost of administering the contract. We do not expect to make a profit from this fee. REDUCTION OR ELIMINATION OF CERTAIN FEES When sales of the contract are made to individuals or a group of individuals in a manner that results in savings of sales or administrative expenses, we may reduce or eliminate the early withdrawal charge, annual maintenance fee, mortality and expense risk charge or administrative expense charge. Our decision to reduce or eliminate any of these charges will be based on one or more of the following: o The size and type of group to whom the contract is issued; o The amount of expected purchase payments; o A prior or existing relationship with the Company, such as being an employee or former employee of the Company or one of our affiliates, receiving distributions or making transfers from other contracts issued by us or one of our affiliates, or transferring amounts held under qualified retirement plans sponsored by us or one of our affiliates; o The type and frequency of administrative and sales services provided; or o The level of annual maintenance fee and early withdrawal charges. The reduction or elimination of any of these charges will not be unfairly discriminatory against any person and will be done according to our rules in effect at the time the contract is issued. We reserve the right to change these rules from time to time. The right to reduce or eliminate any of these charges may be subject to state approval. 20 FEES DEDUCTED BY THE FUNDS Maximum Amount. Each fund's advisory fee and expenses are different. They are set forth in "Fee Table--Fees Deducted by the Funds" and described in more detail in each fund prospectus. When/How. The fund fees are not deducted from your account value. Instead, fund expenses are reflected in the daily value of fund shares, which in turn will affect the daily value of the subaccounts. Purpose. These expenses help to pay the fund investment adviser and operating expenses. PREMIUM AND OTHER TAXES Maximum Amount. Some states and municipalities charge a premium tax on annuities. These taxes currently range from 0% to 4%, depending upon jurisdiction. When/How. We reserve the right to deduct premium taxes from your account value or from purchase payments to the account at any time, but not before there is a tax liability under state law. Our current practice is to deduct premium taxes at the time of a complete withdrawal or the commencement of income phase payments. We will not deduct any municipal premium tax of 1% or less, but we reserve the right to reflect such an expense in our annuity purchase rates. In addition, the Company reserves the right to assess a charge for any federal taxes due against the separate account. See "Taxation." Your Account Value - -------------------------------------------------------------------------------- During the accumulation phase, your account value at any given time equals: o The current dollar value of amounts invested in the subaccounts; plus o The current dollar values of amounts invested in the fixed interest options, including interest earnings to date. Subaccount Accumulation Units. When a fund is selected as an investment option, your account dollars invest in "accumulation units" of the Variable Annuity Account B subaccount dedicated to that fund. The subaccount invests directly in the fund shares. The value of your interests in a subaccount is expressed as the number of accumulation units you hold multiplied by an "Accumulation Unit Value," as described below, for each unit. Accumulation Unit Value (AUV). The value of each accumulation unit in a subaccount is called the accumulation unit value or AUV. The AUV varies daily in relation to the underlying fund's investment performance. The value also reflects deductions for fund fees and expenses, the mortality and expense risk charge, and the administrative charge (if any). We discuss these deductions in more detail in "Fee Table" and "Fees." Valuation. We determine the AUV every business day after the close of the New York Stock Exchange. At that time, we calculate the current AUV by multiplying the AUV last calculated by the "net investment factor" of the subaccount. The net investment factor measures the investment performance of the subaccount from one valuation to the next. Current AUV = Prior AUV x Net Investment Factor Net Investment Factor. The net investment factor for a subaccount between two consecutive valuations equals the sum of 1.0000 plus the net investment rate. Net Investment Rate. The net investment rate is computed according to a formula that is equivalent to the following: o The net assets of the fund held by the subaccount as of the current valuation; minus o The net assets of the fund held by the subaccount at the preceding valuation; plus or minus o Taxes or provisions for taxes, if any, due to subaccount operations (with any federal income tax liability offset by foreign tax credits to the extent allowed); divided by o The total value of the subaccount's units at the preceding valuation; minus o A daily deduction for the mortality and expense risk charge, the administrative expense charge (if any) and any other fees deducted from investments in the separate account. See "Fees." The net investment rate may be either positive or negative. 21 Hypothetical Illustration. As a hypothetical illustration, assume that your initial purchase payment to a qualified contract is $5,000 and you direct us to invest $3,000 in Fund A and $2,000 in Fund B. Also assume that on the day we receive the purchase payment and credit a 2% premium bonus to your account, the applicable AUV's after the next close of business of the New York Stock Exchange are $10 for Subaccount A, and $20 for Subaccount B. Your account is credited with 306 accumulation units of Subaccount A, and 102 accumulation units of Subaccount B. Step 1: You make an initial purchase payment of $5000 and we credit your account with a corresponding 2% ($100) premium bonus. Step 2: A. You direct us to invest $3,000 in Fund A. The portion of the premium bonus related to the amount directed to Fund A is $60 ($3000 multiplied by 2%). The purchase payment and premium bonus purchase 306 accumulation units of Subaccount A ($3,060 divided by the $10 AUV). B. You direct us to invest $2,000 in Fund B. The portion of the premium bonus related to the amount directed to Fund B is $40 ($2000 multiplied by 2%). The purchase payment and premium bonus purchase 102 accumulation units of Subaccount B ($2,040 divided by the $20 AUV). Step 3: The separate account purchases shares of the applicable funds at the then current market value. The fund's subsequent investment performance, expenses and charges, and the daily charges deducted from the subaccount, will cause the AUV to move up or down on a daily basis. --------------------------------------------------- $5,000 contribution --------------------------------------------------- Step 1 --------------------------------------------------- Aetna Life Insurance and Annuity Company --------------------------------------------------- Step 2 --------------------------------------------------- Variable Annuity Account B Subaccount A Subaccount B Etc. 306 102 accumulation accumulation units units --------------------------------------------------- Step 3 ------------------------------------ Fund A Fund B ------------------------------------ 22 Purchase Payments to Your Account. If all or a portion of initial purchase payments are directed to the subaccounts, they and the corresponding premium bonus will purchase subaccount accumulation units at the AUV next computed after our acceptance of the applicable application as described in "Purchase and Rights." Any subsequent purchase payment and premium bonus or transfer directed to the subaccounts will purchase subaccount accumulation units at the AUV next computed following our receipt of the purchase payment or transfer request. The value of subaccounts may vary day to day. Withdrawals - -------------------------------------------------------------------------------- You may withdraw all or a portion of your account value at any time during the accumulation phase. If you participate in the contract through a 403(b) plan, certain restrictions apply. See "Restrictions on Withdrawals From 403(b) Plan Accounts." Steps for Making A Withdrawal o Select the withdrawal amount. 1. Full Withdrawal: You will receive, reduced by any required withholding tax, your account value allocated to the subaccounts, the Guaranteed Account (plus or minus any applicable market value adjustment) and the Fixed Account, minus any applicable early withdrawal charge and annual maintenance fee. 2. Partial Withdrawal (Percentage or Specified Dollar Amount): You will receive, reduced by any required withholding tax, the amount you specify, subject to the value available in your account. However, the amount actually withdrawn from your account will be adjusted by any applicable early withdrawal charge for amounts withdrawn from the subaccounts, the Guaranteed Account and/or the Fixed Account, and any positive or negative market value adjustment for amounts withdrawn from the Guaranteed Account. See Appendices I and II and the Guaranteed Account prospectus for more information. o Select investment options. If you do not specify this, we will withdraw dollars proportionally from each of your investment options. o Properly complete a disbursement form and deliver it to our Home Office. Restrictions on Withdrawals From 403(b) Plan Accounts Under Section 403(b) contracts, the withdrawal of salary reduction contributions and earnings on such contributions is generally prohibited prior to the participant's death, disability, attainment of age 59 1/2 , separation from service or financial hardship. See "Taxation." Calculation of Your Withdrawal. We determine your account value every normal business day after the close of the New York Stock Exchange. We pay withdrawal amounts based upon your account value as of the next valuation after we receive a request for withdrawal in good order at our Home Office. Delivery of Payment. Payments for withdrawal requests will be made in accordance with SEC requirements. Normally, your withdrawal amount will be sent no later than seven calendar days following our receipt of a properly-completed disbursement form in good order. Reinvesting a Full Withdrawal. Within 30 days after a full withdrawal, if allowed by law and the contract, you may elect to reinvest all or a portion of your withdrawal. We must receive reinvested amounts within 60 days of the withdrawal. We reserve the right, however, to accept a reinvestment election received more than 30 days after the withdrawal and accept proceeds received more than 60 days after the withdrawal. We will credit the account for the amount reinvested based upon the subaccount values next computed following our receipt of your request and the amount to be reinvested. No premium bonus will be credited on amounts reinvested. We will credit the amount reinvested proportionally for maintenance fees and early withdrawal charges imposed at the time of withdrawal. We will deduct from the amounts reinvested any maintenance fee which fell due after the withdrawal and before the reinvestment. We will reinvest in the same investment options and proportions in place at the time of withdrawal. If you withdraw amounts from a series of the Aetna GET Fund and then elect to reinvest them, we will reinvest them in a GET Fund series then accepting deposits, if one is available. If one is not available, we will reallocate your GET amounts among the other investment options in which you invested, on a pro rata basis. The reinvestment privilege may be used only once. Special rules apply to reinvestments of amounts withdrawn from the Guaranteed Account (see Appendix I and the Guaranteed Account prospectus). We will not credit your account for market value adjustments that we deducted at the time of your withdrawal. Seek competent advice regarding the tax consequences associated with reinvestment. - -------------------------------------------------------------------------------- Taxes, Fees and Deductions Amounts withdrawn may be subject to one or more of the following: o Early Withdrawal Charge (see "Fees--Early Withdrawal Charge") o Maintenance Fee (see "Fees--Maintenance Fee") o Market Value Adjustment for amounts held in the Guaranteed Account (see Appendix I and the Guaranteed Account prospectus) o Tax Penalty (see "Taxation") o Tax Withholding (see "Taxation") To determine which may apply, refer to the appropriate sections of this prospectus, contact your local representative or call us at the number listed in "Contract Overview -- Questions: Contacting the Company." - -------------------------------------------------------------------------------- 23 Systematic Distribution Options - -------------------------------------------------------------------------------- The following systematic distribution options may be available: o SWO--Systematic Withdrawal Option. SWO is a series of automatic partial withdrawals from your account based upon a payment method you select. Consider this option if you would like a periodic income while retaining investment flexibility for amounts accumulated under the account. o ECO--Estate Conservation Option. ECO offers the same investment flexibility as SWO, but is designed for those who want to receive only the minimum distribution that the Tax Code requires each year. Under ECO, we calculate the minimum distribution amount required by law, generally at age 70 1/2 and pay you that amount once a year. ECO is not available under nonqualified contracts. An early withdrawal charge will not be deducted from and a market value adjustment will not be applied to any part of your account value paid under an ECO. o LEO--Life Expectancy Option. LEO provides for annual payments for a number of years equal to your life expectancy or the life expectancy of you and a designated beneficiary. It is designed to meet the substantially equal periodic payment exception to the 10% premature distribution penalty under Tax Code section 72. See "Taxation." Other Systematic Distribution Options. We may add additional systematic distribution options from time to time. You may obtain additional information relating to any of the systematic distribution options from your local representative or by calling us at the number listed in "Contract Overview -- Contract Questions: Contacting the Company." Eligibility for a Systematic Distribution Option. To determine if you meet the age and account value criteria and to assess terms and conditions that may apply, contact your local representative or the Company at the number listed in "Contract Overview -- Questions: Contacting the Company." Systematic Distribution Option Availability. If allowed by applicable law, we reserve the right to discontinue the availability of one or all of the systematic distribution options for new elections at any time, and/or to change the terms of future elections. Terminating a Systematic Distribution Option. You may revoke a systematic distribution option at any time by submitting a written request to our Home Office. ECO, once revoked, may not, unless allowed under the Tax Code, be elected again. Charges and Taxation. When you elect a systematic distribution option, your account value remains in the accumulation phase and subject to the charges and deductions described in the "Fees" and "Fee Table" sections. Taking a withdrawal under a systematic distribution option may have tax consequences. If you are concerned about tax implications, consult a qualified tax adviser before electing an option. - -------------------------------------------------------------------------------- Features of a Systematic Distribution Option A systematic distribution option allows you to receive regular payments from your contract without moving into the income phase. By remaining in the accumulation phase, you retain certain rights and investment flexibility not available during the income phase. - -------------------------------------------------------------------------------- 24 Death Benefit - -------------------------------------------------------------------------------- During the Accumulation Phase Who Receives the Death Benefit? If you would like certain individuals or entities to receive the death benefit when it becomes payable, you may name them as your beneficiary. However, if you are a joint contract holder and you die, the beneficiary will automatically be the surviving joint contract holder. In this circumstance, any other beneficiary you named will be treated as the primary or contingent beneficiary, as originally named, of the surviving joint contract holder. The surviving joint contract holder may change the beneficiary designation. If you die and no beneficiary exists, the death benefit will be paid in a lump sum to your estate. Designating Your Beneficiary. You may designate a beneficiary on your application or by contacting your local representative or calling us at the number listed in "Contract Overview--Questions: Contacting the Company." When is a Death Benefit Payable? During the accumulation phase a death benefit is payable when the contract holder or the annuitant dies. If there are joint contract holders, the death benefit is payable when either one dies. Death Benefit Amount The amount of the death benefit will depend on which death benefit option you selected when you purchased the contract. Death Benefit Option I. Upon the death of the annuitant, the death benefit (which is calculated on the claim date) will be the greater of: (1) The sum of all purchase payments, plus any premium bonus credited to your account at least 12 months prior to the date of death, adjusted for amounts withdrawn or applied to an income phase payment option; or (2) The account value on the claim date, less any premium bonus credited to your account after or within 12 months of the date of death. Death Benefit Option II. Upon the death of the annuitant, the death benefit (which is calculated on the claim date) will be the greatest of: (1) The sum of all purchase payments made, plus any premium bonus credited to your account at least 12 months prior to the date of death, adjusted for amounts withdrawn or applied to an income phase payment option; or (2) The account value on the claim date, less any premium bonus credited to your account after or within 12 months of the date of death; or (3) The "step-up value" (as described below) on the claim date. Step-up value. The step-up value is equal to highest account value on the date we establish your account or any anniversary of that date prior to the annuitant's 85th birthday or death, whichever is earlier, adjusted for purchase payments made and amounts withdrawn or applied to an income phase payment option since the date of the highest account value and less any premium bonus credited to your account after or within 12 months of the date of death. Adjustment. For purposes of determining the death benefit, the adjustment for purchase payments made will be dollar for dollar. The adjustment for amounts withdrawn or applied to an income phase payment option will be proportionate, reducing the sum of all purchase payments made and the highest account value in the same proportion that the account value was reduced on the date of the withdrawal or application to an income phase payment option. Death Benefit Greater than the Account Value. Notwithstanding which death benefit option is selected, on the claim date, if the amount of the death benefit is greater than the account value, the amount by which the death benefit exceeds the account value will be deposited and allocated to the money market subaccount available under the contract, thereby increasing the account value available to the beneficiary to an amount equal to the death benefit. Prior to the election of a method of payment of the death benefit by the beneficiary, the account value will remain in the account and continue to be affected by the investment performance of the investment option(s) selected. The beneficiary has the right to allocate or transfer any amount to any available investment option (subject to a market value adjustment, as applicable). The amount paid to the beneficiary will equal the adjusted account value on the day the payment is processed. - -------------------------------------------------------------------------------- This section provides information about the death benefit during the accumulation phase. For death benefit information applicable to the income phase see "The Income Phase." Terms to Understand: Account Year/Account Anniversary: A period of 12 months measured from the date we established your account and each anniversary of this date. Account anniversaries are measured from this date. Annuitant: The person(s) on whose life or life expectancy(ies) the income phase payments are based. Beneficiary: The person(s) or entity(ies) entitled to receive a death benefit under the contract. Claim Date: The date proof of death and the beneficiary's right to receive the death benefit are received in good order at our Home Office. Contract Holder (You/Your): The contract holder of an individually owned contract or the certificate holder of a group contract. The contract holder and annuitant may be the same person. - -------------------------------------------------------------------------------- 25 Death Benefit Amounts in Certain Cases If the Contract Holder is the Annuitant and a Spousal Beneficiary Continues the Account. If the spousal beneficiary continues the account at the death of a contract holder who was also the annuitant, the spousal beneficiary becomes the annuitant. The death benefit option in effect at the death of the contract holder will also apply to the spousal beneficiary, and the death benefit payable at the spousal beneficiary's death shall be determined under that death benefit option, except that: (1) In calculating the sum of all purchase payments, plus any premium bonus credited to your account at least 12 months prior to the date of death, adjusted for amounts withdrawn or applied to an income phase payment option, the account value on the claim date following the original contract holder's/annuitant's death shall be treated as the spousal beneficiary's initial purchase payment; and (2) In calculating the step-up value, the step-up value on the claim date following the original contract holder's/annuitant's death shall be treated as the spousal beneficiary's initial step-up value. If the Contract Holder is not the Annuitant. Under nonqualified contracts only, the death benefit described under the death benefit options above will not apply if a contract holder (including a spousal beneficiary who continues the account) who is not the annuitant dies. In these circumstances, the amount paid will be equal to the account value on the date the payment is processed, plus or minus any market value adjustment and minus any premium bonus credited to the account after or within 12 months of the date of death. An early withdrawal charge may apply to any full or partial payment of this death benefit. Because the death benefit in these circumstances equals the account value, plus or minus any market value adjustment and minus any premium bonus credited to the account after or within 12 months of the date of death, a contract holder who is not also the annuitant should seriously consider whether Death Benefit Option II is suitable for their situation. If the spousal beneficiary who is the annuitant continues the account at the death of the contract holder who was not the annuitant, the annuitant will not change. The death benefit option in effect at the death of the contract holder will also apply to the spousal beneficiary, and the death benefit payable at the spousal beneficiary's death shall be determined under that death benefit option. Guaranteed Account. For amounts held in the Guaranteed Account, see Appendix I for a discussion of the calculation of the death benefit. Death Benefit -- Methods of Payment For Qualified Contracts. Under a qualified contract, if the annuitant dies the beneficiary may choose one of the following three methods of payment: o Apply some or all of the account value, plus or minus any market value adjustment, to any of the income phase payment options (subject to the Tax Code distribution rules). See "Taxation -- Minimum Distribution Requirements." o Receive, at any time, a lump sum payment equal to all or a portion of the account value, plus or minus any market value adjustment; or o Elect SWO, ECO or LEO (described in "Systematic Distribution Options"), provided the election would satisfy the Tax Code minimum distribution rules. Payments from a Systematic Distribution Option. If the annuitant was receiving payments under a systematic distribution option and died before the Tax Code's required beginning date for minimum distributions, payments under the systematic distribution option will stop. The beneficiary, or contract holder on behalf of the beneficiary, may elect a systematic distribution option provided the election is permitted under the Tax Code minimum distribution rules. If the annuitant dies after the required beginning date for minimum distributions, payments will continue as permitted under the Tax Code minimum distribution rules, unless the option is revoked. Distribution Requirements. Subject to Tax Code limitations, a beneficiary may be able to defer distribution of the death benefit. Death benefit payments must satisfy the distribution rules in Tax Code Section 401(a)(9). See "Taxation." For Nonqualified Contracts. (1) If you die and the beneficiary is your surviving spouse, or if you are a non-natural person and the annuitant dies and the beneficiary is the annuitant's surviving spouse, then the beneficiary becomes the successor contract holder. As the successor contract holder, the beneficiary may exercise all rights under the account and has the following options: (a) Continue the contract in the accumulation phase; (b) Elect to apply some or all of the account value, plus or minus any market value adjustment, to any of the income phase payment options; or (c) Receive at any time a lump-sum payment equal to all or a portion of the account value, plus or minus any market value adjustment. If you die and are not the annuitant, an early withdrawal charge will apply if a lump sum is elected. In this circumstance, the Tax Code does not require distributions under the contract until the successor contract holder's death. 26 (2) If you die and the beneficiary is not your surviving spouse, he or she may elect option 1(b) or option 1(c) above (subject to the Tax Code distribution rules). See "Taxation - Minimum Distribution Requirements." (3) If you are a natural person but not the annuitant and the annuitant dies, the beneficiary may elect option 1(b) or 1(c) above. If the beneficiary does not elect option 1(b) within 60 days from the date of death, the gain, if any, will be included in the beneficiary's income in the year the annuitant dies. Payments from a Systematic Distribution Option. If the contract holder or annuitant dies and payments were being made under a SWO, payments will stop. A beneficiary, however, may elect to continue the SWO. Taxation. Your beneficiary may be subject to tax penalties if he or she does not begin receiving death benefit payments within a time frame required by the Tax Code. See "Taxation." The Income Phase - -------------------------------------------------------------------------------- During the income phase you stop contributing dollars to your account and start receiving payments from your accumulated account value. Initiating Income Phase Payments. At least 30 days prior to the date you want to start receiving income phase payments, you must notify us in writing of all of the following: o Payment start date; o Income phase payment option (see the income phase payment options table in this section); o Payment frequency (i.e., monthly, quarterly, semi-annually or annually); o Choice of fixed, variable or a combination of both fixed and variable payments; and o Selection of an assumed net investment rate (only if variable payments are elected). Your account will continue in the accumulation phase until you properly initiate income phase payments. Once an income phase payment option is selected, it may not be changed. - -------------------------------------------------------------------------------- We may have used the following terms in prior prospectuses: Annuity Phase -- Income Phase Annuity Option -- Income Phase Payment Option Annuity Payment -- Income Phase Payment - -------------------------------------------------------------------------------- What Affects Payment Amounts? Some of the factors that may affect the amount of your income phase payments include your age, your gender, your account value, the income phase payment option selected, number of guaranteed payments (if any) selected, whether you select fixed, variable or a combination of both fixed and variable payments and, for variable payments, the assumed net investment rate selected. Fixed Payments. Amounts funding fixed income phase payments will be held in the Company's general account. The amount of fixed payments does not vary over time. Variable Payments. Amounts funding your variable income phase payments will be held in the subaccount(s) you select. Not all subaccounts available during the accumulation phase may be available during the income phase. Payment amounts will vary depending upon the performance of the subaccounts you select. For variable payments, an assumed net investment rate must be selected. Assumed Net Investment Rate. If you select variable income phase payments, you must also select an assumed net investment rate of either 5% or 3 1/2%. If you select a 5% rate, your first payment will be higher, but subsequent payments will increase only if the investment performance of the subaccounts you selected is greater than 5% annually, after deduction of fees. Payment amounts will decline if the investment performance is less than 5%, after deduction of fees. If you select a 3 1/2% rate, your first income phase payment will be lower and subsequent payments will increase more rapidly or decline more slowly depending upon changes in the net investment performance of the subaccounts you selected. For more information about selecting an assumed net investment rate, call us for a copy of the SAI. See "Contract Overview -- Questions: Contacting the Company." Premium Bonus. Any premium bonus credited to your account within 24 months of electing an income phase payment option will not be included in your account value when calculating the amount of your income phase payments. Minimum Payment Amounts. The income phase payment option you select must result in: o A first income phase payment of at least $50; or o Total yearly income phase payments of at least $250. If your account value is too low to meet these minimum payment amounts, you will receive one lump sum payment. Unless prohibited by law, we reserve the right to increase the minimum payment amount based upon increases reflected in the Consumer Price Index-Urban (CPI-U), since July 1, 1993. Restrictions on Start Dates and the Duration of Payments. Income phase payments may not begin during the first account year, or, 27 unless we consent, later than the later of: - - (a) The first day of the month following the annuitant's 85th birthday; or - - (b) The tenth anniversary of the last purchase payment made to your account. - - For qualified contracts only, income phase payments may not extend beyond: - - (a) The life of the annuitant; - - (b) The joint lives of the annuitant and beneficiary; - - (c) A guaranteed period greater than the annuitant's life expectancy; or - - (d) A guaranteed period greater than the joint life expectancies of the annuitant and beneficiary. When income phase payments start, the age of the annuitant plus the number of years for which payments are guaranteed must not exceed 95. See "Taxation" for further discussion of rules relating to income phase payments. Charges Deducted. We make a daily deduction for mortality and expense risks from amounts held in the subaccounts. Therefore, if you choose variable income phase payments and a nonlifetime income phase payment option, we still make this deduction from the subaccounts you select, even though we no longer assume any mortality risks. We may also deduct a daily administrative charge from amounts held in the subaccounts. See "Fees." Death Benefit during the Income Phase. The death benefits that may be available to a beneficiary are outlined in the income phase payment option table below. If a lump-sum payment is due as a death benefit, we will make payment within seven calendar days after we receive proof of death acceptable to us and the request for the payment in good order at our Home Office. If continuing income phase payments are elected, the beneficiary may not elect to receive a lump sum at a future date unless the income phase payment option specifically allows a withdrawal right. We will calculate the value of any death benefit at the next valuation after we receive proof of death and a request for payment. Such value will be reduced by any payments made after the date of death. Beneficiary Rights. A beneficiary's right to elect an income phase payment option or receive a lump sum payment may have been restricted by the contract holder. If so, such rights or options will not be available to the beneficiary. Taxation. To avoid certain tax penalties, you or your beneficiary must meet the distribution rules imposed by the Tax Code. Additionally, when selecting an income phase payment option, the Tax Code requires that your expected payments will not exceed certain amounts. See "Taxation" for additional information. Income Phase Payment Options The following table lists the income phase payment options and accompanying death benefits available during the income phase. We may offer additional income phase payment options under the contract from time to time. Once income phase payments begin, the income phase payment option selected may not be changed. Terms to understand: Annuitant: The person(s) on whose life expectancy(ies) the income phase payments are based. Beneficiary: The person(s) or entity(ies) entitled to receive a death benefit. 28 Lifetime Income Phase Payment Options - -------------------------------------------------------------------------------- Life Income Length of Payments: For as long as the annuitant lives. It is possible that only one payment will be made should the annuitant die prior to the second payment's due date. Death Benefit--None: All payments end upon the annuitant's death. - -------------------------------------------------------------------------------- Life Income -- Length of Payments: For as long as the Guaranteed Payments annuitant lives, with payments guaranteed for your choice of 5-30 years or as otherwise specified in the contract. Death Benefit--Payment to the Beneficiary: If the annuitant dies before we have made all the guaranteed payments, we will continue to pay the beneficiary the remaining payments. Unless prohibited by a prior election of the contract holder, the beneficiary may elect to receive a lump-sum payment equal to the present value of the remaining guaranteed payments. - -------------------------------------------------------------------------------- Life Income -- Two Lives Length of Payments: For as long as either annuitant lives. It is possible that only one payment will be made should both annuitants die before the second payment's due date. Continuing Payments: (a) When you select this option you choose for 100%, 66 2/3% or 50% of the payment to continue to the surviving annuitant after the first death; or (b) 100% of the payment to continue to the annuitant on the second annuitant's death, and 50% of the payment will continue to the second annuitant on the annuitant's death. Death Benefit--None: All payments end upon the death of both annuitants. - -------------------------------------------------------------------------------- Life Income -- Two Lives -- Length of Payments: For as long as either Guaranteed Payments annuitant lives, with payments guaranteed from 5-30 years or as otherwise specified in the contract. Continuing Payments: 100% of the payment to continue after the first death. Death Benefit--Payment to the Beneficiary: If both annuitants die before the guaranteed payments have all been paid, we will continue to pay the beneficiary the remaining payments. Unless prohibited by a prior election of the contract holder, the beneficiary may elect to receive a lump-sum payment equal to the present value of the remaining guaranteed payments. - -------------------------------------------------------------------------------- Life Income -- Cash Refund Length of Payments: For as long as the Option (limited availability -- annuitant lives. fixed payment only) Death Benefit--Payment to the Beneficiary: Following the annuitant's death, we will pay a lump sum payment equal to the amount originally applied to the income phase payment option (less any premium tax) and less the total amount of income payments paid. - -------------------------------------------------------------------------------- Life Income -- Two Lives -- Length of Payments: For as long as either Cash Refund Option (limited annuitant lives. availability -- fixed payment Continuing Payments: 100% of the payment to only) continue after the first death. Death Benefit--Payment to the Beneficiary: When both annuitants die, we will pay a lump sum payment equal to the amount applied to the income phase payment option (less any premium tax) and less the total amount of income payments paid. - -------------------------------------------------------------------------------- Nonlifetime Income Phase Payment Option - -------------------------------------------------------------------------------- Nonlifetime -- Guaranteed Length of Payments: You may select payments Payments for 10 to 30 years. In certain cases a lump-sum payment may be requested at any time (see below). Death Benefit--Payment to the Beneficiary: If the annuitant dies before we make all the guaranteed payments, we will continue to pay the beneficiary the remaining payments. Unless prohibited by a prior election of the contract holder, the beneficiary may elect to receive a lump-sum payment equal to the present value of the remaining guaranteed payments. We will not impose any early withdrawal charge. - -------------------------------------------------------------------------------- Lump-sum Payment. If the "Nonlifetime--Guaranteed Payments" option is elected with variable payments, you may request at any time that all or a portion of the present value of the remaining payments be paid in one lump-sum. Any such lump sum payment will be treated as if it is a withdrawal during the accumulation phase and may be subject to an early withdrawal charge. See "Fees -- Early Withdrawal Charge." Lump-sum payments will be sent within seven calendar days after we receive the request for payment in good order at the Home Office. - -------------------------------------------------------------------------------- Calculation of Lump-sum Payments. If a lump-sum payment is available under the income phase payment options above, the rate used to calculate the present value of the remaining guaranteed payments is the same rate we used to calculate the income phase payments (i.e., the actual fixed rate used for fixed payments or the 3 1/2% or 5% assumed net investment rate used for variable payments). 29 Taxation - -------------------------------------------------------------------------------- 30 INTRODUCTION This section discusses our understanding of current federal income tax laws affecting the contract. You should keep the following in mind when reading it: o Your tax position (or the tax position of the beneficiary, as applicable) determines federal taxation of amounts held or paid out under the contract; o Tax laws change. It is possible that a change in the future could affect contracts issued in the past; o This section addresses federal income tax rules and does not discuss federal estate and gift tax implications, state and local taxes or any other tax provisions; o We do not make any guarantee about the tax treatment of the contract or transaction involving the contract; and o Contract holder means the contract holder of an individually owned contract or the certificate holder of a group contract. We do not intend this information to be tax advice. For advice about the effect of federal income taxes or any other taxes on amounts held or paid out under the contract, consult a tax adviser. Taxation of Gains Prior to Distribution. You will generally not pay taxes on any earnings from the annuity contract described in this prospectus until they are withdrawn. Tax-qualified retirement arrangements under Tax Code sections 408(a), 408(b), 408A and 403(b) also defer payment of taxes on earnings until they are withdrawn. If you are considering funding one of these tax-qualified retirement arrangements with an annuity contract, you should know that the annuity contract does not provide any additional tax deferral of earnings beyond the tax deferral provided by the tax-qualified retirement arrangement. However, annuities do provide other features and benefits which may be valuable to you. You should discuss your decision with your financial representative. Additionally, although earnings under the contract are generally not taxed until withdrawn, the IRS has stated in published rulings that a variable contract owner will be considered the owner of separate account assets if the owner possesses incidents of investment control over the assets. In these circumstances, income and gains from the separate account assets would be includible in the variable contract owner's gross income. The Treasury announced that it will issue guidance regarding the extent to which owners could direct their investments among subaccounts without being treated as owners of the underlying assets of the separate account. It is possible that the Treasury's position, when announced, may adversely affect the tax treatment of existing contracts. The Company reserves the right to modify the Contract as necessary to attempt to prevent a contract holder from being considered the federal tax owner of a pro rata share of the assets of the separate account. CONTRACT TYPE The contract is designed to be used as a nonqualified deferred annuity, including contracts offered to a custodian for an Individual Retirement Account as described in Tax Code section 408(a), and with certain qualified retirement arrangements under Tax Code sections 403(b), 408(b) or 408A . The Contract is not available as a SIMPLE IRA under Tax Code Section 408(p). Tax Rules. The tax rules vary according to whether the contract is a nonqualified contract or used with a retirement arrangement. If used with a retirement arrangement, you need to know the Tax Code section under which your arrangement qualifies. Contact your plan sponsor, local representative or the Company to learn which Tax Code section applies to your arrangement. The Contract. Contract holders are responsible for determining that contributions, distributions and other transactions satisfy applicable laws. Legal counsel and a tax adviser should be consulted regarding the suitability of the contract. If the contract is purchased in conjunction with a retirement plan, the plan is not a part of the contract and we are not bound by the plan's terms or conditions. - -------------------------------------------------------------------------------- In this Section INTRODUCTION CONTRACT TYPE WITHDRAWALS AND OTHER DISTRIBUTIONS o Taxation of Distributions o 10% Penalty Tax o Withholding for Federal Income Tax Liability MINIMUM DISTRIBUTION REQUIREMENTS o 50% Excise Tax o Minimum Distribution of Death Benefit Proceeds (Except Nonqualified Contracts) o Minimum Distribution of Death Benefit Proceeds (Nonqualified Contracts) RULES SPECIFIC TO CERTAIN PLANS o 403(b) Plans o 408(b) and 408A IRAs TAXATION OF NONQUALIFIED CONTRACTS TAXATION OF THE COMPANY When consulting a tax adviser, be certain that he or she has expertise in the Tax Code sections applicable to your tax concerns. - -------------------------------------------------------------------------------- 31 WITHDRAWALS AND OTHER DISTRIBUTIONS Certain tax rules apply to distributions from the contract. A distribution is any amount taken from the contract including withdrawals, income phase payments, rollovers, exchanges and death benefit proceeds. We report the taxable portion of all distributions to the IRS. Taxation of Distributions Nonqualified Contracts. A full withdrawal of a nonqualified contract is taxable to the extent that the amount received exceeds the investment in the contract. A partial withdrawal is taxable to the extent that the account value immediately before the withdrawal exceeds the investment in the contract. In other words, a partial withdrawal is treated first as a withdrawal of taxable earnings. For income phase payments, a portion of each payment which represents the investment in the contract is not taxable. An exclusion ratio is calculated to determine the nontaxable portion. For fixed income phase payments, in general, there is no tax on the portion of each payment which represents the same ratio that the investment in the contract bears to the total dollar amount of the expected payments as defined in Tax Code section 72(d). The entire income phase payment will be taxable once the recipient has recovered the investment in the contract. For variable income phase payments, an equation is used to establish a specific dollar amount of each payment that is not taxed. The dollar amount is determined by dividing the investment in the contract by the total number of expected periodic payments. The entire income phase payment will be taxable once the recipient has recovered the investment in the contract. All deferred nonqualified annuity contracts that are issued by the Company (or its affiliates) to the same contract holder during any calendar year are treated as one annuity contract for purposes of determining the amount includible in gross income under Tax Code section 72(e). In addition, the Treasury Department has specific authority to issue regulations that prevent the avoidance of Tax Code section 72(e) through the serial purchase of annuity contracts or otherwise. 403(b) Plans. All distributions from these plans are taxed as received unless either of the following is true: o The distribution is rolled over to another plan of the same type or to a traditional IRA in accordance with the Tax Code; or o You made after-tax contributions to the plan. In this case, depending upon the type of distribution, the amount will be taxed according to the rules detailed in the Tax Code. 408(b) IRA. All distributions from a traditional IRA are taxed as received unless either one of the following is true: o The distribution is rolled over to another traditional IRA or, if the IRA contains only amounts previously rolled over from a 401(a), 401(k), or 403(b) plan, to another plan of the same type; or o You made after-tax contributions to the plan. In this case, the distribution will be taxed according to rules detailed in the Tax Code. 408A Roth IRA. A qualified distribution from a Roth IRA is not taxed when it is received. A qualified distribution is a distribution: o Made after the five-taxable year period beginning with the first taxable year for which a contribution was made; or o Made after you attain age 59 1/2, die, become permanently and totally disabled, or for a qualified first-time home purchase. If a distribution is not qualified, the accumulated earnings are taxable. A partial distribution will first be treated as a return of contributions which is not taxable. Taxation of Death Benefit Proceeds. In general, payments received by your beneficiary after your death are taxed in the same manner as if you had received those payments. 10% Penalty Tax Under certain circumstances, the Tax Code may impose a 10% penalty tax on the taxable portion of any distribution from a nonqualified contract or from a contract used with a 403(b), 408(b) or 408A arrangement. Nonqualified Contract. The 10% penalty tax applies to the taxable portion of a distribution from a nonqualified annuity unless one or more of the following have occurred: (a) The taxpayer has attained age 59-1/2; (b) The taxpayer has become totally and permanently disabled; (c) The contract holder has died; (d) The distribution is made in substantially equal periodic payments (at least annually) over the life or life expectancy of the taxpayer or the joint lives or joint life expectancies of the taxpayer and beneficiary; or (e) The distribution is allocable to investment in the contract before August 14, 1982. 403(b) Plan. The 10% penalty tax applies to the taxable portion of a distribution from a 403(b) plan, unless one or more of the 32 following have occurred: (a) You have attained age 59 1/2; (b) You have become totally and permanently disabled; (c) You have died; (d) You have separated from service with the plan sponsor at or after age 55; (e) The distribution is rolled over into another plan of the same type or to an IRA in accordance with the Tax Code; (f) The distribution is made in substantially equal periodic payments (at least annually) over your life or life expectancy or the joint lives or joint life expectancies of your and your beneficiary. Also, you must have separated from service with the plan sponsor; or (g) The distribution is equal to unreimbursed medical expenses that qualify for deduction as specified in the Tax Code. IRA. In general, except for (d), the exceptions for 403(b) plans also apply to distributions from an IRA, including a distribution from a Roth IRA that is not a qualified distribution or a rollover to a Roth IRA that is not a qualified rollover contribution. The penalty tax is also waived on a distribution made from an IRA to pay for health insurance premiums for certain unemployed individuals or used for qualified first-time home purchase or for higher education expenses. Withholding for Federal Income Tax Liability Any distributions under the contract are generally subject to withholding. Federal income tax liability rates vary according to the type of distribution and the recipient's tax status. Nonqualified Contract. Generally, you or a beneficiary may elect not to have tax withheld from distributions. 403(b) Plans. Generally, distributions from these plans are subject to a mandatory 20% federal income tax withholding. However, you or a beneficiary may elect not to have tax withheld from certain distributions. 408(b) and 408A IRAs. Generally, you or a beneficiary may elect not to have tax withheld from distributions. Non-resident Aliens. If you or your beneficiary is a non-resident alien, then any withholding is governed by Tax Code section 1441 based upon the individual's citizenship, the country of domicile and treaty status. MINIMUM DISTRIBUTION REQUIREMENTS To avoid certain tax penalties, you and any beneficiary must meet the minimum distribution requirements imposed by the Tax Code. The requirements do not apply to either nonqualified contracts or Roth IRA contracts, except with regard to death benefits. These rules may dictate one or more of the following: o Start date for distributions; o The time period in which all amounts in your account(s) must be distributed; or o Distribution amounts. Start Date. Generally, you must begin receiving distributions by April 1 of the calendar year following the calendar year in which you attain age 70-1/2 or retire, whichever occurs later, unless: o You are a 5% owner or the contract is an IRA, in which case such distributions must begin by April 1 of the calendar year following the calendar year in which you attain age 70-1/2; or o Under 403(b) plans, if the Company maintains separate records of amounts held as of December 31, 1986. In this case, distribution of these amounts generally must begin by the end of the calendar year in which you attain age 75 or retire, if later. However, if you take any distributions in excess of the minimum required amount, then special rules require that some or all of the December 31, 1986 balance be distributed earlier. Time Period. We must pay out distributions from the contract over one of the following time periods: o Over your life or the joint lives of you and your beneficiary; or o Over a period not greater than your life expectancy or the joint life expectancies of you and your beneficiary. 50% Excise Tax If you fail to receive the minimum required distribution for any tax year, a 50% excise tax is imposed on the required amount that was not distributed. Minimum Distribution of Death Benefit Proceeds (Except Nonqualified Contracts) The following applies to 403(b), 408(b) and 408A plans. Different distribution requirements apply if your death occurs: o After you begin receiving minimum distributions under the contract; or o Before you begin receiving such distribution. 33 If your death occurs after you begin receiving minimum distributions under the contract, distributions must be made at least as rapidly as under the method in effect at the time of your death. Tax Code section 401(a)(9) provides specific rules for calculating the minimum required distributions at your death. The rules differ, dependent upon: 34 o Whether your minimum required distribution was calculated each year based upon your single life expectancy or the joint life expectancies of you and your beneficiary; or o Whether life expectancy was recalculated. The rules are complex and any beneficiary should consult with a tax adviser before electing the method of calculation to satisfy the minimum distribution requirements. If your death occurs before you begin receiving minimum distributions under the contract, your entire balance must be distributed by December 31 of the calendar year containing the fifth anniversary of the date of your death. For example: If you die September 1, 1999, your entire balance must be distributed to the beneficiary by December 31, 2004. However, if the distribution begins by December 31 of the calendar year following the calendar year of your death, then payments may be made in either of the following timeframes: o Over the life of the beneficiary; or o Over a period not extending beyond the life expectancy of the beneficiary. Start Dates for Spousal Beneficiaries. If the beneficiary is your spouse, the distribution must begin on or before the later of the following: o December 31 of the calendar year following the calendar year of your death; or o December 31 of the calendar year in which you would have attained age 70-1/2. Special Rule for IRA Spousal Beneficiaries. In lieu of taking a distribution under these rules, a spousal beneficiary may elect to treat the account as his or her own IRA and defer taking a distribution until his or her age 70-1/2. The surviving spouse is deemed to have made such an election if the surviving spouse makes a rollover to or from the account or fails to take a distribution within the required time period. Minimum Distribution of Death Benefit Proceeds (Nonqualified Contracts) Death of the Contract Holder. The following requirements apply to nonqualified contracts at the death of the contract holder. Different distribution requirements apply if you are the contract holder and your death occurs: o After you begin receiving income phase payments under the contract; or o Before you begin receiving such distributions. If your death occurs after you begin receiving income phase payments, distribution must be made at least as rapidly as under the method in effect at the time of your death. If your death occurs before you begin receiving income phase payments, your entire balance must be distributed within five years after the date of your death. For example: If you die on September 1, 1999, your entire balance must be distributed by August 31, 2004. However, if the distribution begins within one year of your death, then payments may be made in one of the following time-frames: o Over the life of the beneficiary; or o Over a period not extending beyond the life expectancy of the beneficiary. Spousal Beneficiaries. If the beneficiary is your spouse, the account may be continued with the surviving spouse as the new contract holder. Death of Annuitant. If the contract holder is a non-natural person and the annuitant dies, the same rules apply as outlined above for death of a contract holder. If the contract holder is a natural person but not the annuitant and the annuitant dies, the beneficiary must elect an income phase payment option within 60 days of the date of death, or any gain under the contract will be includible in the beneficiary's income in the year the annuitant dies. RULES SPECIFIC TO CERTAIN PLANS 403(b) Plans Under Tax Code section 403(b), contributions made by public school systems or nonprofit healthcare organizations and other Tax Code section 501(c)(3) tax exempt organizations to purchase annuity contracts for their employees are generally excludable from the gross income of the employee. Assignment or Transfer of Contracts. Adverse tax consequences to the plan and/or to you may result if your beneficial interest in the contract is assigned or transferred to any person except to an alternate payee under a qualified domestic relations order in accordance with Tax Code section 414(p) or to the Company as collateral for a loan. 35 Exclusions from Gross Income. In order to be excludable from gross income, total annual contributions made by you and your employer to a 403(b) plan cannot exceed the lesser of the following limits set by the Tax Code: o The first limit, under Tax Code section 415, is generally the lesser of 25% of your compensation or $30,000. Compensation means your compensation from the employer sponsoring the plan and, for years beginning after December 31, 1997, includes any elective deferrals under Tax Code section 402(g) and any amounts not includible in gross income under Tax Code sections 125 or 457; o The second limit, which is the exclusion allowance under Tax Code section 403(b), is usually calculated according to a formula that takes into account your length of employment, any pretax contributions you and your employer have already made under the plan, and any pretax contributions to certain other retirement plans; or o An additional limit specifically limits your salary reduction contributions to generally no more than $10,000 annually (subject to indexing). Your own limit may be higher or lower, depending upon certain conditions. The first two limits apply to your contributions as well as to any contributions made by your employer on your behalf. Purchase payments to your account(s) will be excluded from your gross income only if the plan meets certain nondiscrimination requirements. Restrictions on Distributions. Tax Code section 403(b)(11) restricts the distribution under Tax Code section 403(b) contracts of: (1) Salary reduction contributions made after December 31, 1988; (2) Earnings on those contributions; and (3) Earnings during such period on amounts held as of December 31, 1988. Distribution of those amounts may only occur upon your death, attainment of age 59-1/2, separation from service, disability, or financial hardship. Income attributable to salary reduction contributions and credited on or after January 1, 1989 may not be distributed in the case of hardship. 408(b) and 408A IRAs Tax Code section 408(b) permits eligible individuals to contribute to a traditional IRA on a pre-tax (deductible) basis. Employers may establish Simplified Employee Pension (SEP) plans and contribute to a traditional IRA owned by the employee. Tax Code section 408A permits eligible individuals to contribute to a Roth IRA on an after-tax (nondeductible) basis. Assignment or transfer of contracts. Adverse tax consequences may result if you assign or transfer your interest in the contract to persons other than your spouse incident to a divorce. Eligibility. Eligibility to contribute to a traditional IRA on a pre-tax basis or to establish a Roth IRA or to roll over or transfer from a traditional IRA to a Roth IRA depends upon your adjusted gross income. Rollovers and Transfers. Rollovers and direct transfers are permitted from a 401, 403(a) or a 403(b) arrangement to a traditional IRA. Distributions from these arrangements are not permitted to be transferred or rolled over to a Roth IRA. A Roth IRA can accept transfers/rollovers only from a traditional IRA, subject to ordinary income tax, or from another Roth IRA. TAXATION OF NONQUALIFIED CONTRACTS In General. Tax Code section 72 governs taxation of annuities in general. A contract holder under a nonqualified contract who is a natural person generally is not taxed on increases in the account value until distribution occurs by withdrawing all or part of such account value. The taxable portion of a distribution is taxable as ordinary income. Non-Natural Holders of a Nonqualified Contract. If the contract holder is not a natural person, a nonqualified contract generally is not treated as an annuity for income tax purposes and the income on the contract for the taxable year is currently taxable as ordinary income. Income on the contract is any increase over the year in the surrender value, adjusted for purchase payments made during the year, amounts previously distributed and amounts previously included in income. There are some exceptions to the rule and a non-natural person should consult with its tax adviser prior to purchasing this contract. A non-natural person exempt from federal income taxes should consult with its tax adviser regarding treatment of income on the contract for purposes of the unrelated business income tax. When the contract holder is not a natural person, a change in annuitant is treated as the death of the contract holder. Diversification. Tax Code section 817(h) requires that in a nonqualified contract the investments of the funds be "adequately diversified" in accordance with Treasury Regulations in order for the contract to qualify as an annuity contract under federal tax law. The Separate Account, through the funds, intends to comply with the diversification requirements prescribed by the Treasury in Reg. Sec. 1.817-5, which affects how the funds' assets may be invested. 36 Transfers, Assignments or Exchanges of a Nonqualified Contract. A transfer of ownership of a nonqualified contract, the designation of an annuitant, payee or other beneficiary who is not also the contract holder, the selection of certain annuity dates, or the exchange of a contract may result in certain tax consequences. The assignment, pledge, or agreement to assign or pledge any portion of the account value generally will be treated as a distribution. Anyone contemplating any such designation, transfer, assignment, selection, or exchange should contact a tax adviser regarding the potential tax effects of such a transaction. TAXATION OF THE COMPANY We are taxed as a life insurance company under the Tax Code. Variable Annuity Separate Account B is not a separate entity from us. Therefore, it is not taxed separately as a "regulated investment company", but is taxed as part of the Company. We automatically apply investment income and capital gains attributable to the separate account to increase reserves under the contract. Because of this, under existing federal tax law we believe that any such income and gains will not be taxed to the extent that such income and gains are applied to increase reserves under the contract. In addition, any foreign tax credits attributable to the separate account will be first used to reduce any income taxes imposed on the separate account before being used by the Company. In summary, we do not expect that we will incur any federal income tax liability attributable to the separate account and we do not intend to make any provision for such taxes. However, changes in federal tax laws and/or their interpretation may result in our being taxed on income or gains attributable to the separate account. In this case, we may impose a charge against the separate account (with respect to some or all of the contracts) to set aside provisions to pay such taxes. We may deduct this amount from the separate account, including from your account value invested in the subaccounts. Other Topics - -------------------------------------------------------------------------------- The Company Aetna Life Insurance and Annuity Company (the Company, we, us) issues the contract described in this prospectus and is responsible for providing each contract's insurance and annuity benefits. We are a stock life insurance company organized under the insurance laws of the State of Connecticut in 1976 and an indirect wholly-owned subsidiary of Aetna Inc. Through a merger our operations include the business of Aetna Variable Annuity Life Insurance Company (formerly known as Participating Annuity Life Insurance Company, an Arkansas life insurance company organized in 1954). We are engaged in the business of issuing life insurance and annuities. Our principal executive offices are located at: 151 Farmington Avenue Hartford, Connecticut 06156 Variable Annuity Account B We established Variable Annuity Account B (the separate account) in 1976 as a segregated asset account to fund our variable annuity contracts. The separate account is registered as a unit investment trust under the Investment Company Act of 1940 (the "40 Act"). It also meets the definition of "separate account" under the federal securities laws. The separate account is divided into subaccounts. These subaccounts invest directly in shares of a pre-assigned fund. Although we hold title to the assets of the separate account, such assets are not chargeable with the liabilities of any other business that we conduct. Income, gains or losses of the separate account are credited to or charged against the assets of the separate account without regard to other income, gains or losses of the Company. All obligations arising under the contract are obligations of the Company. Contract Distribution We serve as the principal underwriter for the securities sold by this prospectus. We are registered as a broker-dealer with the SEC and a member of the National Association of Securities Dealers, Inc. (NASD). As principal underwriter, we will enter into arrangements with one or more registered broker-dealers, including at least one affiliate of the Company, to offer and sell the contract described in this prospectus. We may also enter into these arrangements with banks that may be acting as broker-dealers without separate registration under the Securities Exchange Act of 1934 pursuant to legal and regulatory exceptions. In this prospectus, we refer to the registered broker-dealers and the banks described above as "distributors." We and one or more of our affiliates may also sell the contract directly. All individuals offering and selling the contract must be registered representatives of a broker-dealer, or employees of a bank exempt from registration under the Securities Exchange Act of 1934, and must be licensed as insurance agents to sell variable annuity contracts. Occasionally, we may enter into arrangements with independent entities to help find broker-dealers or banks interested in distributing the contract or to provide training, marketing and other sales-related functions, or administrative services. We will reimburse such entities for expenses related to and may pay fees to such entities in return for these services. We may offer customers of certain broker-dealers special guaranteed rates in connection with the Guaranteed Account offered through the contract, and may negotiate different commissions for these broker-dealers. 37 We may also contract with independent third party broker-dealers who will act as wholesalers by assisting us in selecting broker-dealers or banks interested in acting as distributors. These wholesalers may also provide training, marketing and other sales related functions and the distributors and may provide certain administrative services in connection with the contract. We may pay such wholesalers compensation based upon purchase payments to contracts purchased through distributors that they select. We may also designate third parties to provide services in connection with the contract such as reviewing applications for completeness and compliance with insurance requirements and providing the distributors with approved marketing material, prospectuses or other supplies. These parties will also receive payments for their services based upon purchase payments, to the extent such payments are allowed by applicable securities laws. We will pay all costs and expenses related to these services. Payment of Commissions. We pay distributors and their registered representatives who sell the contract commissions and service fees. Distributors will be paid commissions up to an amount currently equal to 7% of purchase payments or as a combination of a certain percentage 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% of purchase payments over the life of the contract. Some sales personnel may receive various types of non-cash compensation as special sales incentives, including trips and educational and/or business seminars. However, any such compensation will be paid in accordance with NASD rules. In addition, we may provide additional compensation to the Company's supervisory and other management personnel if the overall amount of investments in funds advised by the Company or its affiliates increases over time. We pay these commissions, fees and related distribution expenses out of any early withdrawal charges assessed or out of our general assets, including investment income and any profit from investment advisory fees and mortality and expense risk charges. No additional deductions or charges are imposed for commissions and related expenses. Payment Delay or Suspension We reserve the right to suspend or postpone the date of any payment of benefits or values under any one of the following circumstances: o On any valuation date when the New York Stock Exchange is closed (except customary weekend and holiday closings) or when trading on the New York Stock Exchange is restricted; o When an emergency exists as determined by the SEC so that disposal of the securities held in the subaccounts is not reasonably practicable or it is not reasonably practicable to fairly determine the value of the subaccount's assets; or o During any other periods the SEC may by order permit for the protection of investors. The conditions under which restricted trading or an emergency exists shall be determined by the rules and regulations of the SEC. Performance Reporting We may advertise different types of historical performance for the subaccounts including: o Standardized average annual total returns; and o Non-standardized average annual total returns. Standardized Average Annual Total Returns. We calculate standardized average annual total returns according to a formula prescribed by the SEC. This shows the percentage return applicable to $1,000 invested in the subaccounts over the most recent one, five and 10-year periods. If the investment option was not available for the full period, we give a history from the date money was first received in that option under the separate account. Standardized average annual total returns reflect deduction of all recurring charges during each period (i.e., mortality and expense risk charges, annual maintenance fees, administrative expense charges, if any, and any applicable early withdrawal charges) and currently do not include any premium bonus. To the extent permitted by applicable law, we may include the premium bonus in standardized average annual total returns in the future. Non-Standardized Average Annual Total Returns. We calculate non-standardized average annual total returns in a similar manner as that stated above, except we will not include the deduction of any applicable early withdrawal charge. Some non-standardized returns may also exclude the effect of a maintenance fee. If we reflected these charges in the calculation, they would decrease the level of performance reflected by the calculation. Non-standardized returns may also include performance from the fund's inception date, if that date is earlier than the one we use for standardized returns. Non-standardized calculations do not include the premium bonus. We may also advertise certain ratings, rankings or other information related to the Company, the subaccounts or the funds. For further details regarding performance reporting and advertising, you may request an SAI by calling us at the number listed in "Contract Overview -- Questions: Contacting the Company." Voting Rights Each of the subaccounts holds shares in a fund and each is entitled to vote at regular and special meetings of that fund. Under our current view of applicable law, we will vote the shares for each subaccount as instructed by persons having a voting interest in the separate account. If you are a contract holder under a group contract, you have a fully vested interest in the contract and may instruct the group contract holder how to direct the Company to cast a certain number of votes. We will vote shares for which instructions have 38 not been received in the same proportion as those for which we received instructions. Each person who has a voting interest in the separate account will receive periodic reports relating to the funds in which he or she has an interest, as well as any proxy materials and a form on which to give voting instructions. Voting instructions will be solicited by a written communication at least 14 days before the meeting. The number of votes (including fractional votes) you are entitled to direct will be determined as of the record date set by any fund you invest in through the subaccounts. o During the accumulation phase the number of votes is equal to the portion of your account value invested in the fund, divided by the net asset value of one share of that fund. o During the income phase the number of votes is equal to the portion of reserves set aside for the contract's share of the fund, divided by the net asset value of one share of that fund. Contract Modifications We may change the contract as required by federal or state law or as otherwise permitted in the contract. In addition, we may, upon 30 days' written notice to the group contract holder, make other changes to a group contract that would apply only to individuals who become participants under that contract after the effective date of such changes. If a group contract holder does not agree to a change, we reserve the right to refuse to establish new accounts under the contract. Certain changes will require the approval of appropriate state or federal regulatory authorities. Transfer of Ownership: Assignment We will accept assignments or transfers of ownership of a nonqualified contract or a qualified contract where such assignments or transfers are not prohibited, with proper notification. The date of any assignment or transfer of ownership will be the date we receive the notification at our Home Office. An assignment or transfer of ownership may have tax consequences and you should consult with a tax adviser before assigning or transferring ownership of the contract. An assignment of a contract will only be binding on the Company if it is made in writing and sent to the Company at our Home Office. We will use reasonable procedures to confirm that the assignment is authentic, including verification of signature. If we fail to follow our own procedures, we will be liable for any losses to you directly resulting from such failure. Otherwise, we are not responsible for the validity of any assignment. The rights of the contract holder and the interest of the annuitant and any beneficiary will be subject to the rights of any assignee we have on our records. Involuntary Terminations We reserve the right to terminate any account with a value of $2,500 or less immediately following a partial withdrawal. However, an IRA may only be closed out when purchase payments to the contract have not been received for a 24-month period and the paid-up annuity benefit at maturity would be less than $20 per month. If such right is exercised, you will be given 90 days' advance written notice. No early withdrawal charge will be deducted for involuntary terminations. We do not intend to exercise this right in cases where the account value is reduced to $2,500 or less solely due to investment performance. Legal Matters and Proceedings We are aware of no material legal proceedings pending which involve the separate account or the Company as a party or which would materially affect the separate account. The validity of the securities offered by this prospectus has been passed upon by Counsel to the Company. Year 2000 Readiness As a healthcare and financial services enterprise, Aetna Inc. (referred to collectively with its affiliates and subsidiaries as "Aetna"), is dependent on information technology ("IT") systems and other systems and facilities, such as telephones, building access control systems and heating and ventilation equipment ("embedded systems") to conduct its business. The Company also has business relationships with financial institutions, financial intermediaries, public utilities and other critical vendors, as well as regulators and customers, who are themselves reliant on IT and embedded systems to conduct their businesses. In 1997, the Company's ultimate parent, Aetna, organized a multi-disciplinary Year 2000 Project Team, including outside consultants. The Year 2000 Project Team and Aetna's businesses and subsidiaries, including the Company, have developed and are currently executing a comprehensive plan designed to make their mission-critical IT systems and embedded systems Year 2000 ready. Outside consultants have reviewed Aetna's overall process, plan and progress to date. Aetna's plan for IT systems consists of five phases: (i) assessment, (ii) remediation, (iii) testing, (iv) implementation and (v) Year 2000 approval. At year end 1997, Aetna including the Company, had substantially completed the assessment phase for all of its IT systems. Aetna completed the remediation, testing and approval of substantially all of its IT systems and those of its subsidiaries, including all of the IT systems of the Company by June 30, 1999. The costs of these efforts will not affect the separate account. The Company also faces the risk that one or more of its critical suppliers ("external relationships") will not be able to interact with the Company due to the third party's inability to resolve its own Year 2000 issues, including those associated with its own external relationships. The Company, its affiliates and the mutual funds that serve as investment options for the separate account also have 39 relationships with investment advisers, broker dealers, transfer agents, custodians or other securities industry participants or other service providers that are not affiliated with Aetna. The Company has completed its inventory of external relationships and risk rated each external relationship based upon the potential business impact, available alternatives and cost of substitution. In the case of mission-critical suppliers such as certain banks, telecommunications providers and other utilities, mutual fund companies, IT vendors and financial market data providers, either Aetna or the Company is engaged in discussions with the third parties and is attempting to obtain detailed information as to those parties' Year 2000 plans and state of readiness. A significant portion of the Company's critical external relationships have informed the Company that they are not aware of any Year 2000 related reason that they will not be able to perform their obligations to the Company in all material respects. Contents of the Statement of Additional Information - -------------------------------------------------------------------------------- The Statement of Additional Information (SAI) contains more specific information on the separate account and the contract, as well as the financial statements of the separate account and the Company. The following is a list of the contents of the SAI. General Information and History Variable Annuity Account B Offering and Purchase of Contract Performance Data General Average Annual Total Return Quotations Income Phase Payments Sales Material and Advertising Independent Auditors Financial Statements of the Separate Account Financial Statements of Aetna Life Insurance and Annuity Company You may request an SAI by calling the Company at the number listed in "Contract Overview -- Questions: Contacting the Company." 40 Appendix I ALIAC Guaranteed Account - -------------------------------------------------------------------------------- The ALIAC Guaranteed Account (the Guaranteed Account) is a fixed interest option available during the accumulation phase under the contract. This appendix is only a summary of certain facts about the Guaranteed Account. Please read the Guaranteed Account prospectus carefully before investing in this option. In General. Amounts invested in the Guaranteed Account earn specified interest rates if left in the Guaranteed Account for specified periods of time. If you withdraw or transfer those amounts before the specified periods elapse, we may apply a market value adjustment (described below) which may be positive or negative. When deciding to invest in the Guaranteed Account, contact your representative or the Company to learn: o The interest rate(s) we will apply to amounts invested in the Guaranteed Account. We change the rate(s) periodically. Be certain you know the rate we guarantee on the day your account dollars are invested in the Guaranteed Account. Guaranteed interest rates will never be less than an annual effective rate of 3%. o The period of time your account dollars need to remain in the Guaranteed Account in order to earn the rate(s). You are required to leave your account dollars in the Guaranteed Account for a specified period of time in order to earn the guaranteed interest rate(s). Deposit Period. During a deposit period, we offer a specific interest rate for dollars invested for a certain guaranteed term. For a specific interest rate and guaranteed term to apply, account dollars must be invested in the Guaranteed Account during the deposit period for which that rate and term are offered. Interest Rates. We guarantee different interest rates, depending upon when account dollars are invested in the Guaranteed Account. For guaranteed terms one year or longer, we may apply more than one specified interest rate. The interest rate we guarantee is an annual effective yield. That means the rate reflects a full year's interest. We credit interest daily at a rate that will provide the guaranteed annual effective yield over one year. Guaranteed interest rates will never be less than an annual effective rate of 3%. Guaranteed Terms. The guaranteed term is the period of time account dollars must be left in the Guaranteed Account in order to earn the guaranteed interest rate. For guaranteed terms one year or longer, we may offer different rates for specified time periods within a guaranteed term. We offer different guaranteed terms at different times. We also may offer more than one guaranteed term of the same duration with different interest rates. Check with your representative or the Company to learn what terms are being offered. The Company also reserves the right to limit the number of guaranteed terms or the availability of certain guaranteed terms. Fees and Other Deductions. If all or a portion of your account value in the Guaranteed Account is withdrawn or transferred, you may incur one or more of the following: o Market Value Adjustment (MVA) -- as described in this appendix and in the Guaranteed Account prospectus; o Tax penalties and/or tax withholding -- see "Taxation"; o Early withdrawal charge--see "Fees"; or o Maintenance fee--see "Fees". We do not make deductions from amounts in the Guaranteed Account to cover mortality and expense risks. Rather, we consider these risks when determining the interest rate to be credited. Market Value Adjustment (MVA). If your account value is withdrawn or transferred from the Guaranteed Account before the guaranteed term is completed, an MVA may apply. The MVA reflects investment value changes caused by changes in interest rates occurring since the date of deposit. The MVA may be positive or negative. If interest rates at the time of withdrawal or transfer have increased since the date of deposit, the value of the investment decreases and the MVA will be negative. This could result in your receiving less than the amount you paid into the Guaranteed Account. If interest rates at the time of withdrawal or transfer have decreased since the date of deposit, the value of the investment increases and the MVA will be positive. MVA Waiver. For withdrawals or transfers from a guaranteed term before the guaranteed term matures, the MVA may be waived for: o Transfers due to participation in the dollar cost averaging program; o Withdrawals taken due to your election of SWO or ECO (described in "Systematic Distribution Options"), if available; and o Withdrawals for minimum distributions required by the Tax Code and for which the early withdrawal charge is waived. Death Benefit. When a death benefit is paid under the contract within six months of the date of death, only a positive aggregate MVA amount, if any, is applied to the account value attributable to amounts withdrawn from the Guaranteed Account. This provision does not apply upon the death of a spousal beneficiary or joint contract holder who continued the account after the first death. If a death benefit is paid more than six months from the date of death, a positive or negative aggregate MVA amount, as applicable, will be 41 applied. Partial Withdrawals. For partial withdrawals during the accumulation phase, amounts to be withdrawn from the Guaranteed Account will be withdrawn proportionally from each group of deposits having the same length of time until the maturity date ("Guaranteed Term Group"). Within a Guaranteed Term Group, the amount will be withdrawn first from the oldest deposit period, then from the next oldest, and so on until the amount requested is satisfied. Guaranteed Terms Maturity. As a guaranteed term matures, assets accumulating under the Guaranteed Account may be (a) transferred to a new guaranteed term, (b) transferred to other available investment options, or (c) withdrawn. Amounts withdrawn may be subject to an early withdrawal charge, taxation and, if you are under age 59-1/2, tax penalties may apply. If no direction is received from you at our Home Office by the maturity date of a guaranteed term, the amount from the maturing guaranteed term will be transferred to a new guaranteed term of a similar length. If the same guaranteed term is no longer available, the next shortest guaranteed term available in the current deposit period will be used. If no shorter guaranteed term is available, the next longer guaranteed term will be used. If you do not provide instructions concerning the maturity value of a maturing guaranteed term, the maturity value transfer provision applies. This provision allows transfers or withdrawals without an MVA if the transfer or withdrawal occurs during the calendar month immediately following a guaranteed term maturity date. This waiver of the MVA only applies to the first transaction regardless of the amount involved in the transaction. Under the Guaranteed Account, each guaranteed term is counted as one funding option. If a guaranteed term matures, and is renewed for the same term, it will not count as an additional investment option for purposes of any limitation on the number of investment options. Subsequent Purchase Payments. Purchase payments received after your initial purchase payment to the Guaranteed Account will be allocated in the same proportions as the last allocation, unless you properly instruct us to do otherwise. If the same guaranteed term(s) are not available, the next shortest term will be used. If no shorter guaranteed term is available, the next longer guaranteed term will be used. Dollar Cost Averaging. The Company may offer more than one guaranteed term of the same duration and credit one with a higher rate contingent upon use only with the dollar cost averaging program. If amounts are applied to a guaranteed term which is credited with a higher rate using dollar cost averaging and the dollar cost averaging is discontinued, the amounts will be transferred to another guaranteed term of the same duration and an MVA will apply. Transfer of Account Dollars. Generally, account dollars invested in the Guaranteed Account may be transferred among guaranteed terms offered through the Guaranteed Account, and/or to other investment options offered through the contract. However, transfers may not be made during the deposit period in which your account dollars are invested in the Guaranteed Account or for 90 days after the close of that deposit period. We will apply an MVA to transfers made before the end of a guaranteed term. The 90 day wait does not apply to (1) amounts transferred on the maturity date or under the maturity value transfer provision; (2) amounts transferred from the Guaranteed Account before the maturity date due to the election of an income phase payment option; (3) amounts distributed under the ECO or SWO (See "Systematic Distribution Options"); and (4) amounts transferred from an available guaranteed term in connection with the dollar cost averaging program. Transfers after the 90-day period are permitted from guaranteed term(s) to other guaranteed term(s) available during a deposit period or to other available investment options. Transfers of the Guaranteed Account values on or within one calendar month of a term's maturity date are not counted as one of the 12 free transfers of accumulated values in the account. Reinvesting Amounts Withdrawn from the Guaranteed Account. If amounts are withdrawn and then reinvested in the Guaranteed Account, we apply the reinvested amount to the current deposit period. This means the guaranteed annual interest rate and guaranteed terms available on the date of reinvestment will apply. We reinvest amounts proportionately in the same way as they were allocated before withdrawal. Your account value will not be credited for any negative MVA that was deducted at the time of withdrawal. The Income Phase. The Guaranteed Account cannot be used as an investment option during the income phase. However, you may notify us at least 30 days in advance to elect a fixed or variable income phase payment option and to transfer your Guaranteed Account dollars to the general account or any of the subaccounts available during the income phase. Transfers made due to the election of a lifetime income phase payment option will be subject to only a positive aggregate MVA. Distribution. The Company is the principal underwriter of the contract. The Company is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 as a broker-dealer, and is a member of the National Association of Securities Dealers, Inc. From time to time, the Company may offer customers of certain broker-dealers special guaranteed rates in connection with the Guaranteed Account offered through the contracts, and may negotiate different commissions for these broker-dealers. 42 Appendix II Fixed Account - -------------------------------------------------------------------------------- General Disclosure. The Fixed Account is an investment option available during the accumulation phase under the contract. o Amounts allocated to the Fixed Account are held in the Company's general account which supports insurance and annuity obligations. o Interests in the Fixed Account have not been registered with the SEC in reliance on exemptions under the Securities Act of 1933, as amended. o Disclosure in this prospectus regarding the Fixed Account may be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of the statements. o Disclosure in this appendix regarding the Fixed Account has not been reviewed by the SEC. o Additional information about this option may be found in the contract. Interest Rates. o The Fixed Account guarantees that amounts allocated to this option will earn the minimum interest rate specified in the contract. We may credit a higher interest rate from time to time, but the rate we credit will never fall below the guaranteed minimum specified in the contract. Amounts applied to the Fixed Account will earn the interest rate in effect at the time money is applied. Amounts in the Fixed Account will reflect a compound interest rate as credited by us. The rate we quote is an annual effective yield. o Our determination of interest rates reflects the investment income earned on invested assets and the amortization of any capital gains and/or losses realized on the sale of invested assets. Under this option, we assume the risk of investment gain or loss by guaranteeing the amounts you allocate to this option and promising a minimum interest rate and income phase payment. Dollar Cost Averaging. Amounts you invest in the Fixed Account must be transferred into the other investment options available under the contract over a period not to exceed 12 months. If you discontinue dollar cost averaging, the remaining balance amounts in the Fixed Account will be transferred into the money market subaccount available under the contract, unless you direct us to transfer the balance into other available options. Withdrawals. Under certain emergency conditions, we may defer payment of any withdrawal for a period of up to 6 months or as provided by federal law. Charges. We do not make deductions from amounts in the Fixed Account to cover mortality and expense risks. We consider these risks when determining the credited rate. If you make a withdrawal from amounts in the Fixed Account, an early withdrawal charge may apply. See "Fees." Transfers. During the accumulation phase, you may transfer account dollars from the Fixed Account to any other available investment option. We may vary the dollar amount that you are allowed to transfer, but it will never be less than 10% of your account value held in the Fixed Account. By notifying the Home Office at least 30 days before income phase payments begin, you may elect to have amounts transferred to one or more of the subaccounts available during the income phase to provide variable payments. 43 Appendix III Description of Underlying Funds - -------------------------------------------------------------------------------- The investment results of the mutual funds (funds) are likely to differ significantly and there is no assurance that any of the funds will achieve their respective investment objectives. Shares of the funds will rise and fall in value and you could lose money by investing in the funds. Shares of the funds are not bank deposits and are not guaranteed, endorsed or insured by any financial institution, the Federal Deposit Insurance Corporation or any other government agency. Except as noted, all funds are diversified, as defined under the Investment Company Act of 1940. Aetna Balanced VP, Inc. Investment Objective Seeks to maximize investment return, consistent with reasonable safety of principal by investing in a diversified portfolio of one or more of the following asset classes: stocks, bonds, and cash equivalents, based on the investment adviser's judgment of which of those sectors or mix thereof offers the best investment prospects. Policies Under normal market conditions, allocates assets among the following asset classes: 1) equities such as common and preferred stocks; and 2) debt such as bonds, mortgage-related and other asset-backed securities, and U.S. Government securities. Typically maintains approximately 60% of total assets in equities and 40% of total assets in debt (including money market instruments), although those percentages may vary from time to time. Risks Principal risks are those generally attributable to stock and bond investing. The success of the fund's strategy depends on the investment adviser's skill in allocating fund assets between equities and debt and in choosing investments within those categories. Risks attributable to stock investing include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Stocks of smaller companies tend to be less liquid and more volatile than stocks of larger companies and can be particularly sensitive to expected changes in interest rates, borrowing costs and earnings. Fixed-income investments are subject to the risk that interest rates will rise, which generally causes bond prices to fall. Also, economic and market conditions may cause issuers to default or go bankrupt. Values of high-yield bonds are even more sensitive to economic and market conditions than other bonds. Prices of mortgage-related securities, in addition to being sensitive to changes in interest rates, also are sensitive to changes in the prepayment patterns on the underlying instruments. Investment Adviser: Aeltus Investment Management, Inc. Aetna Income Shares d/b/a Aetna Bond VP Investment Objective Seeks to maximize total return, consistent with reasonable risk, through investments in a diversified portfolio consisting primarily of debt securities. It is anticipated that capital appreciation and investment income will both be major factors in achieving total return. Policies Under normal market conditions, invests at least 65% of total assets in high-grade corporate bonds, mortgage-related and other asset-backed securities, and securities issued or guaranteed by the U.S. government, its agencies and instrumentalities. High-grade securities are rated at least A by Standard & Poor's Corporation (S&P) or Moody's Investors Service, Inc. (Moody's), or if unrated, considered by the investment adviser to be of comparable quality. May also invest up to 15% of total assets in high-yield bonds, and up to 25% of total assets in foreign debt securities. Risks Principal risks are those generally attributable to debt investing, including increases in interest rates and loss of principal. Generally, when interest rates rise, bond prices fall. Bonds with longer maturities tend to be more sensitive to changes in interest rates. For all bonds there is a risk that the issuer will default. High-yield bonds generally are more susceptible to the risk of default than higher rated bonds. Prices of mortgage-related securities, in addition to being sensitive to changes in interest rates, also are sensitive to changes in the prepayment patterns on the underlying instruments. Foreign securities have additional risks. Some foreign securities tend to be less liquid and more volatile than their U.S. counterparts. In addition, accounting standards and market regulations tend to be less standardized. These risks are usually higher for securities of companies in emerging markets. Securities of foreign companies may be denominated in foreign currency. Exchange rate fluctuations may reduce or eliminate gains or create losses. 44 Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Fund d/b/a Aetna Growth and Income VP Investment Objective Seeks to maximize total return through investments in a diversified portfolio of common stocks and securities convertible into common stock. It is anticipated that capital appreciation and investment income will both be major factors in achieving total return. Policies Under normal market conditions, invests at least 65% of total assets in common stocks that the investment adviser believes have significant potential for capital or income growth. Tends to emphasize stocks of larger companies. Also invests assets across other asset classes (including stocks of small and medium-sized companies, international stock, real estate securities and fixed income securities). Risks Principal risks are those generally attributable to stock investing. These risks include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. The success of the fund's strategy also depends significantly on the investment adviser's skill in allocating assets and in choosing investments within each asset class. Growth-oriented stocks typically sell at relatively high valuations as compared to other types of stocks. If a growth stock does not exhibit the level of growth expected, its price may drop sharply. Historically, growth-oriented stocks have been more volatile than value-oriented stocks. Although the investment adviser emphasizes large cap stocks, the fund is more diversified across asset classes than most other funds with a similar investment objective. Therefore, it may not perform as well as those funds when large cap stocks are in favor. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Encore Fund d/b/a Aetna Money Market VP Investment Objective Seeks to provide high current return, consistent with preservation of capital and liquidity, through investment in high-quality money market instruments. Policies Invests only in a diversified portfolio of high-quality fixed income securities denominated in U.S. dollars, with short remaining maturities. These securities include U.S. Government securities, such as U.S. Treasury bills and securities issued or sponsored by U.S. government agencies. They also may include corporate debt securities, finance company commercial paper, asset-backed securities and certain obligations of U.S. and foreign banks, each of which must be highly rated by independent rating agencies or, if unrated, considered by the investment adviser to be of comparable quality. Maintains a dollar-weighted average portfolio maturity of 90 days or less. Risks It is possible to lose money by investing in the fund. There is no guaranty the fund will achieve its investment objective. Shares of the fund are not bank deposits and are not guaranteed, endorsed or insured by any financial institution, the FDIC or any other government agency. A weak economy, strong equity markets and changes by the Federal Reserve in its monetary policies all could affect short-term interest rates and therefore the value and yield of the fund's shares. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.--Aetna Growth VP Investment Objective Seeks growth of capital through investment in a diversified portfolio of common stocks and securities convertible into common stocks believed to offer growth potential. Policies Under normal market conditions, invests at least 65% of total assets in common stocks. Tends to emphasize stocks of larger companies, although may invest in companies of any size. Focuses on companies that the investment adviser believes have strong, sustainable and improving earnings growth, and established market positions in a particular industry. Risks Principal risks are those generally attributable to stock investing. They include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Growth-oriented stocks typically sell at relatively high valuations as compared to other types of stocks. If a growth stock does not exhibit the consistent level of growth expected, its price may drop sharply. Historically, growth-oriented stocks have been more volatile than value-oriented stocks. 45 Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.--Aetna Index Plus Large Cap VP Investment Objective Seeks to outperform the total return performance of the Standard & Poor's 500 Composite Index (S&P 500), while maintaining a market level of risk. Policies Invests at least 80% of net assets in stocks included in the S&P 500 (other than Aetna Inc. common stock). The investment adviser attempts to achieve the objective by overweighting those stocks in the S&P 500 that the investment adviser believes will outperform the index, and underweighting (or avoiding altogether) those stocks that the investment adviser believes will underperform the index. In determining stock weightings, the portfolio manager uses quantitative computer models to evaluate various criteria, such as the financial strength of each company and its potential for strong, sustained earnings growth. Although the fund will not hold all the stocks in the S&P 500, the investment adviser expects that there will be a close correlation between the performance of the fund and that of the S&P 500 in both rising and falling markets. Risks Principal risks are those generally attributable to stock investing. These risks include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. The success of the fund's strategy depends significantly on the investment adviser's skill in determining which securities to overweight, underweight or avoid altogether. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.--Aetna International VP Investment Objective Seeks long-term capital growth primarily through investment in a diversified portfolio of common stocks principally traded in countries outside of the United States. The fund will not target any given level of current income. Policies Under normal market conditions, invests at least 65% of total assets in securities principally traded in three or more countries outside of North America. These securities may include common stocks as well as securities convertible into common stocks. Invests primarily in established foreign securities markets, although may invest in emerging markets as well. Employs currency hedging strategies to protect from adverse effects on the U.S. dollar. Risks Principal risks are those generally attributable to stock investing. These risks include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Stocks of foreign companies present additional risks for U.S. investors, including the following: stocks of foreign companies tend to be less liquid and more volatile than their U.S. counterparts; accounting standards and market regulations tend to be less standardized in certain foreign countries; and economic and political climates tend to be less stable. Stocks of foreign companies may be denominated in foreign currency. Exchange rate fluctuations may reduce or eliminate gains or create losses. A hedging strategy adds to the fund's expenses and may not perform as expected. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.--Aetna Real Estate Securities VP Investment Objective Seeks maximum total return primarily through investment in a diversified portfolio of equity securities issued by real estate companies, the majority of which are real estate investment trusts (REITs). Policies Under normal market conditions, invests at least 65% of total assets in stocks, convertible securities and preferred stocks of companies principally engaged in the real estate industry. These companies may invest in, among other things, shopping malls, healthcare facilities, office parks and apartment communities, or may provide real estate management and development services. Risks Concentrating in stocks of real estate-related companies presents certain risks that are more closely associated with investing in real estate directly than with investing in the stock market generally. Those risks include: periodic declines in the value of real estate, generally, or in the rents and other income generated by real estate; periodic over-building, which creates gluts in the market, as well as changes in laws (such as zoning laws) that impair the property rights of real estate owners; adverse developments in the real estate industry, which may have a greater impact on this fund than a fund that is more broadly diversified. Performance also may be adversely affected by sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative stock market 46 performance. Although the fund is subject to the risks generally attributable to stock investing, because the fund has concentrated its assets in one industry it may be subject to more abrupt swings in value than would a fund that does not concentrate its assets in one industry. Investment Adviser: Aeltus Investment Management, Inc. Aetna Variable Portfolios, Inc.--Aetna Small Company VP Investment Objective Seeks growth of capital primarily through investment in a diversified portfolio of common stocks and securities convertible into common stocks of companies with smaller market capitalizations. Policies Under normal market conditions, invests at least 65% of total assets in common stocks of small-capitalization companies, defined as: the 2,000 smallest of the 3,000 largest U.S. companies (as measured by market capitalization); all companies not included above that are included in the Standard & Poor's SmallCap 600 Index or the Russell 2000 Index; and companies with market capitalizations lower than any companies included in the first two categories. For purposes of the 65% policy, the largest company in this group in which the fund intends to invest currently has a market capitalization of approximately $1.5 billion. Risks Principal risks are those generally attributable to stock investing. These risks include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. Stocks of smaller companies carry higher risks than stocks of larger companies. This is because smaller companies may lack the management experience, financial resources, product diversification, and competitive strengths of larger companies. In many instances, the frequency and volume of trading in these stocks is substantially less than is typical of stocks of larger companies. As a result, the stocks of smaller companies may be subject to wider price fluctuations or may be less liquid. When selling a large quantity of a particular stock, the fund may have to sell at a discount from quoted prices or may have to make a series of small sales over an extended period of time due to the more limited trading volume of smaller company stocks. Stocks of smaller companies can be particularly sensitive to expected changes in interest rates, borrowing costs and earnings. Investment Adviser: Aeltus Investment Management, Inc. AIM V.I. Capital Appreciation Fund Investment Objective Seeks growth of capital through investment in common stocks, with emphasis on medium- and small-sized growth companies. Policies The portfolio managers focus on companies they believe are likely to benefit from new or innovative products, services or processes as well as those that have experienced above-average, long-term growth in earnings and have excellent prospects for future growth. The portfolio managers consider whether to sell a particular security when any of those factors materially changes. The fund may also invest up to 20% of its total assets in foreign securities. In anticipation of or in response to adverse market conditions or for cash management purposes, the fund may hold all or a portion of its assets in cash, money market instruments, bonds or other debt securities. As a result, the fund may not achieve its investment objective. Risks The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. This is especially true with respect to common stocks of smaller companies, whose prices may go up and down more than common stocks of larger, more-established companies. Also, since common stocks of smaller companies may not be traded as often as common stocks of larger, more-established companies, it may be difficult or impossible for the fund to sell securities at a desirable price. Investment Adviser: AIM Advisors, Inc. AIM V.I. Growth Fund Investment Objective Seeks growth of capital primarily by investing in seasoned and better capitalized companies considered to have strong earnings momentum. 47 Policies The portfolio managers focus on companies that have experienced above-average growth in earnings and have excellent prospects for future growth. The portfolio managers consider whether to sell a particular security when any of those factors materially changes. The fund may also invest up to 20% of its total assets in foreign securities. In anticipation of or in response to adverse market conditions or for cash management purposes, the fund may hold all or a portion of its assets in cash, money market instruments, bonds or other debt securities. As a result, the fund may not achieve its investment objective. Risks The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. Investment Adviser: AIM Advisors, Inc. AIM V.I. Growth and Income Fund Investment Objective Seeks growth of capital with a secondary objective of current income. Policies The fund seeks to meet these objectives by investing at least 65% of its net assets in income-producing securities, including dividend-paying common stocks and convertible securities. The portfolio managers purchase securities of established companies that have long-term above-average growth in earnings and dividends, and growth companies that they believe have the potential for above-average growth in earnings and dividends. The portfolio managers consider whether to sell a particular security when they believe the security no longer has that potential or the capacity to generate income. The fund may also invest up to 20% of its total assets in foreign securities. The fund may engage in active and frequent trading of portfolio securities to achieve its investment objectives. If the fund does trade in this way, it may incur increased transaction costs and brokerage commissions, both of which can lower the actual return on your investment. In anticipation of or in response to adverse market conditions or for cash management purposes, the fund may hold all or a portion of its assets in cash, money market instruments, bonds or other debt securities. As a result, the fund may not achieve its investment objective. Risks The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. The values of the convertible securities in which the fund may invest also will be affected by market interest rates, the risk that the issuer may default on interest or principal payments and the value of the underlying common stock into which these securities may be converted. Specifically, since these types of convertible securities pay fixed interest and dividends, their values may fall if market interest rates rise and rise if market interest rates fall. Additionally, an issuer may have the right to buy back certain of the convertible securities at a time and at a price that is unfavorable to the fund. Investment Adviser: AIM Advisors, Inc. AIM V.I. Value Fund Investment Objective Seeks to achieve long-term growth of capital by investing primarily in equity securities judged by the fund's investment advisor to be undervalued relative to the investment advisor's appraisal of the current or projected earnings of the companies issuing the securities, or relative to current market values of assets owned by the companies issuing the securities or relative to the equity market generally. Income is a secondary objective. 48 Policies The fund also may invest in preferred stocks and debt instruments that have prospects for growth of capital. The fund may also invest up to 25% of its total assets in foreign securities. The portfolio managers focus on undervalued equity securities of (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 that 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 their assets and where there is reason to expect realization of this potential in the form of increased equity values. The portfolio managers consider whether to sell a particular security when they believe the company no longer fits into any of the above categories. In anticipation of or in response to adverse market conditions or for cash management purposes, the fund may hold all or a portion of its assets in cash, money market instruments, bonds or other debt securities. As a result, the fund may not achieve its investment objective. Risks The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity. If the seller of a repurchase agreement in which the fund invests defaults on its obligation or declares bankruptcy, the fund may experience delays in selling the securities underlying the repurchase agreement. As a result, the fund may incur losses arising from decline in the value of those securities, reduced levels of income and expenses of enforcing its rights. Investment Adviser: AIM Advisors, Inc. Fidelity Variable Insurance Products Fund--Equity Income Portfolio Investment Objective Seeks reasonable income. Also considers the potential for capital appreciation. Seeks a yield which exceeds the composite yield on the securities comprising the S&P 500. Policies Normally invests at least 65% of total assets in income-producing equity securities. May also invest in other types of equity securities and debt securities, including lower-quality debt securities. May invest in securities of both foreign and domestic issuers. Emphasis on above-average income-producing equity securities tends to lead to investments in large cap "value" stocks. In making investment decisions, the investment adviser relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. May use various techniques, such as buying and selling futures contracts, to increase or decrease exposure to changing security prices, or other factors that affect security values. Risks The value of equity securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall when interest rates rise. Securities with longer maturities and mortgage securities can be more sensitive to interest rate changes. Foreign investments, especially those in emerging markets, can be more volatile and potentially less liquid than U.S. investments due to increased risks of adverse issuer, political, regulatory, market or economic developments. Lower-quality debt securities (those of less than investment-grade quality) can be more volatile due to increased sensitivity to adverse issuer, political, regulatory, market or economic developments. Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. "Value" stocks can react differently to issuer, political, market and economic developments than the market as a whole and other types of stocks. "Value" stocks may not ever realize their full value. Investment Adviser: Fidelity Management & Research Company Fidelity Variable Insurance Products Fund--Growth Portfolio Investment Objective Seeks capital appreciation. Policies Normally invests primarily in common stocks of companies the investment adviser believes have above-average growth potential. Companies with high growth potential tend to be companies with higher than average price/earning (P/E) ratios and are often called "growth" stocks. May invest in securities of both foreign and domestic issuers. In making investment decisions, the investment adviser relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. May use various techniques, such as buying and selling futures contracts, to increase or decrease exposure to changing security prices, or other factors that affect security values. 49 Risks The value of equity securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Foreign investments, especially those in emerging markets, can be more volatile and potentially less liquid than U.S. investments due to increased risks of adverse issuer, political, regulatory, market or economic developments. "Growth" stocks tend to be sensitive to changes in their earnings and more volatile than other types of stocks. Investment Adviser: Fidelity Management & Research Company Fidelity Variable Insurance Products Fund--High Income Portfolio Investment Objective Seeks a high level of current income while also considering growth of capital. Policies Normally invests at least 65% of total assets in income-producing debt securities, preferred stocks and convertible securities, with an emphasis on lower-quality debt securities. May also invest in non-income producing securities, including defaulted securities and common stocks. Currently intends to limit common stocks to 10% of total assets. May invest in securities of both foreign and domestic issuers. In making investment decisions, the investment adviser relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. May use various techniques, such as buying and selling futures contracts, to increase or decrease exposure to changing security prices, interest rates or other factors that affect security values. Risks Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall when interest rates rise. Securities with longer maturities and mortgage securities can be more sensitive to interest rate changes. The value of equity securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Foreign investments, especially those in emerging markets, can be more volatile and potentially less liquid than U.S. investments due to increased risks of adverse issuer, political, regulatory, market or economic developments. Lower-quality debt securities (those of less than investment-grade quality) can be more volatile due to increased sensitivity to adverse issuer, political, regulatory, market or economic developments. Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. Investment Adviser: Fidelity Management & Research Company Fidelity Variable Insurance Products Fund II--Contrafund Portfolio Investment Objective Seeks long-term capital appreciation. Policies Normally invests primarily in common stocks of companies whose value the investment adviser believes is not fully recognized by the public. May invest in securities of both foreign and domestic issuers. May tend to buy "growth" stocks or "value" stocks, or a combination of both types. In making investment decisions, the investment adviser relies on fundamental analysis of each issuer and its potential for success in light of its current financial condition, its industry position, and economic and market conditions. May use various techniques, such as buying and selling futures contracts, to increase or decrease exposure to changing security prices, interest rates or other factors that affect security values. Risks The value of equity securities fluctuates in response to issuer, political, market and economic developments. In the short term, equity prices can fluctuate dramatically in response to these developments. Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall when interest rates rise. Securities with longer maturities and mortgage securities can be more sensitive to interest rate changes. Foreign investments, especially those in emerging markets, can be more volatile and potentially less liquid than U.S. investments due to increased risks of adverse issuer, political, regulatory, market or economic developments. "Growth" stocks tend to be sensitive to changes in their earnings and more volatile than other types of stocks. "Value" stocks can react differently to issuer, political, market and economic developments than the market as a whole and other types of stocks. "Value" stocks may not ever realize their full value. Investment Adviser: Fidelity Management & Research Company Janus Aspen Series--Aggressive Growth Portfolio Investment Objective Seeks long-term growth of capital. 50 Policies A nondiversified portfolio that invests primarily in common stocks selected for their growth potential and normally invests at least 50 percent of its equity assets in medium-sized companies. Medium-sized companies are those whose market capitalizations at the time of investment fall within the range of companies in the Standard and Poor's (S&P) MidCap 400 Index. The market capitalizations within the Index will vary, but as of December 31, 1998, they ranged from approximately $142 million to $73 billion. May at times hold substantial positions in cash or similar investments. Risks Because the Portfolio may invest substantially all of its assets in common stocks, the main risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or in response to general market and/or economic conditions. In addition, a nondiversified portfolio has the ability to take larger positions in a smaller number of issuers. Because the appreciation or depreciation of a single stock may have a greater impact on the net asset value of a nondiversified portfolio, its share price can be expected to fluctuate more than a diversified portfolio. Performance may also be affected by risks specific to certain types of investments, such as foreign securities, derivative investments, non-investment grade debt securities (high-yield/high-risk securities or "junk" bonds) or companies with relatively small market capitalizations. Smaller or newer companies may suffer more significant losses as well as realize more substantial growth than larger or more established issuers. Investments in such companies tend to be more volatile and somewhat more speculative. Issues associated with investing in foreign securities include currency risk, political and economic risk, regulatory risk, market risk and transaction costs. High-yield/high-risk securities are generally more dependent on the ability of the issuer to meet interest and principal payments (i.e., credit risk). They are more vulnerable to real or perceived economic changes, political changes or other adverse developments specific to the issuer. Investment Adviser: Janus Capital Corporation Janus Aspen Series--Balanced Portfolio Investment Objective Seeks long-term capital growth, consistent with preservation of capital and balanced by current income. Policies Normally invests 40-60 percent of its assets in securities selected primarily for their growth potential and 40-60 percent of its assets in securities selected primarily for their income potential. Will normally invest at least 25 percent of its assets in fixed-income securities. Assets may shift between the growth and income components of the Portfolio based on the portfolio manager's analysis of relevant market, financial and economic conditions. May at times hold substantial positions in cash or similar investments. Risks Because the Portfolio may invest a significant portion of its assets in common stocks, the main risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or in response to general market and/or economic conditions. The income component of the Portfolio's holdings includes fixed-income securities which generally will decrease in value when interest rates rise. Another risk associated with fixed-income securities is the risk that an issuer of a bond will be unable to make principal and interest payments when due (i.e. credit risk). Performance may also be affected by risks specific to certain types of investments, such as foreign securities, derivative investments, non-investment grade debt securities (high-yield/high-risk securities or "junk" bonds) or companies with relatively small market capitalizations. Smaller or newer companies may suffer more significant losses as well as realize more substantial growth than larger or more established issuers. Investments in such companies tend to be more volatile and somewhat more speculative. Issues associated with investing in foreign securities include currency risk, political and economic risk, regulatory risk, market risk and transaction costs. High-yield/high-risk securities are generally more susceptible to credit risk. They are more vulnerable to real or perceived economic changes, political changes or other adverse developments specific to the issuer. Investment Adviser: Janus Capital Corporation Janus Aspen Series--Growth Portfolio Investment Objective Seeks long-term growth of capital in a manner consistent with the preservation of capital. Policies Generally invests primarily in common stocks of larger, more established companies selected for their growth potential, although it can invest in companies of any size. May at times hold substantial positions in cash or similar investments. Risks Because the Portfolio may invest substantially all of its assets in common stocks, the main risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or in response to general market and/or economic conditions. Performance may also be affected by risks specific to certain types of investments, such as foreign securities, derivative investments, 51 non-investment grade debt securities (high-yield/high-risk securities or "junk" bonds) or companies with relatively small market capitalizations. Smaller or newer companies may suffer more significant losses as well as realize more substantial growth than larger or more established issuers. Investments in such companies tend to be more volatile and somewhat more speculative. Issues associated with investing in foreign securities include currency risk, political and economic risk, regulatory risk, market risk and transaction costs. High-yield/high-risk securities are generally more dependent on the ability of the issuer to meet interest and principal payments (i.e., credit risk). They are more vulnerable to real or perceived economic changes, political changes or other adverse developments specific to the issuer. Investment Adviser: Janus Capital Corporation Janus Aspen Series--Worldwide Growth Portfolio Investment Objective Seeks long-term growth of capital in a manner consistent with the preservation of capital. Policies Invests primarily in common stocks of companies of any size throughout the world. Normally invests in issuers from at least five different countries, including the United States. May at times invest in fewer than five countries or even in a single country. May hold substantial positions in cash or similar investments. Risks Because the Portfolio may invest substantially all of its assets in common stocks, the main risk is that the value of the stocks it holds might decrease in response to the activities of an individual company or in response to general market and/or economic conditions. Performance may also be affected by risks specific to certain types of investments, such as foreign securities, derivative investments, non-investment grade debt securities (high-yield/high-risk securities or "junk" bonds) or companies with relatively small market capitalizations. Smaller or newer companies may suffer more significant losses as well as realize more substantial growth than larger or more established issuers. Investments in such companies tend to be more volatile and somewhat more speculative. Issues associated with investing in foreign securities include currency risk, political and economic risk, regulatory risk, market risk and transaction costs. High-yield/high-risk securities are generally more dependent on the ability of the issuer to meet interest and principal payments (i.e., credit risk). They are more vulnerable to real or perceived economic changes, political changes or other adverse developments specific to the issuer. Investment Adviser: Janus Capital Corporation MFS Total Return Series Investment Objective Seeks primarily to provide above-average income (compared to a portfolio invested entirely in equity securities) consistent with the prudent employment of capital. Its secondary objective is to provide a reasonable opportunity for growth of capital and income. Policies Under normal market conditions, invests at least 40%, but no more than 75%, of net assets in common stocks and related securities (referred to as equity securities); bonds, warrants or rights convertible into stock; and depositary receipts for those securities. Invests at least 25% of net assets in non-convertible fixed income securities. May vary the percentage of assets invested in any one type of security (within the limits described above). Generally, seeks to purchase equity securities that the investment adviser believes are undervalued in the market relative to their long-term potential focusing on companies with relatively large market capitalization (i.e., market capitalizations of $5 billion or more). Fixed income securities include U.S. government securities, mortgage-backed and asset-backed securities, and corporate bonds. Risks In allocating investments, the series could miss attractive investment opportunities by underweighting markets where there are significant returns, and could lose value by overweighting markets where there are significant declines. The value of securities held by the series may decline due to changing economic, political or market conditions, or disappointing earnings results. If anticipated events do not occur or are delayed, or if investor perceptions about undervalued securities do not improve, the market price of these securities may not rise or may fall. Fixed income securities are subject to interest rate risk (the risk that when interest rates rise, the prices of fixed income securities will generally fall) and credit risk (the risk that the issuer of a fixed income security will not be able to pay principal and interest when due). Securities with longer maturities are affected more by interest rate risk. Fixed income securities traded in the over-the-counter market may be harder to purchase or sell at a fair price. The inability to purchase or sell these fixed income securities at a fair price could have a negative impact on the series' performance. 52 Investment Adviser: Massachusetts Financial Services Company Oppenheimer Aggressive Growth Fund/VA Investment Objective Seeks to achieve long-term capital appreciation by investing in "growth-type" companies. Policies Invests mainly in equity securities, such as common stocks, preferred stocks and convertible securities, of issuers in the U.S. and foreign countries. The fund can invest in any country, including countries with developed or emerging markets, but currently emphasizes investments in developed markets. As a fundamental policy, the fund will normally invest in at least four countries (including the United States). The fund emphasizes investments in securities of "growth-type" companies. The fund may also invest in cyclical industries and in "special situations" that the fund's investment manager believes present opportunities for capital growth. "Special situations" are anticipated acquisitions, mergers or other unusual developments which, in the opinion of the manager, will increase the value of an issuer's securities, regardless of general business conditions or market movements. Risks The fund's investments in stocks are subject to changes in their value from a number of factors. They include changes in general stock market movements, or the change in value of particular stocks because of an event affecting the issuer. The fund expects to have substantial amounts of its investments in foreign securities. Therefore, it will be subject to the risks that economic, political or other events can have on the values of securities of issuers in particular foreign countries. Changes in interest rates can also affect stock prices. Investing in securities with high growth potential, which are often newer companies having a market capitalization of $200 million or less, involves substantially greater risks of loss and price fluctuations than larger cap issuers. Small-cap stock investments also pose certain risks because their stocks may be less liquid than those of larger issuers. Investment Adviser: OppenheimerFunds, Inc. Oppenheimer Main Street Growth & Income Fund/VA Investment Objective Seeks a high total return (which includes growth in the value of its shares as well as current income) from equity and debt securities. Policies Invests in equity securities, such as common stocks, preferred stocks and convertible securities and in debt securities, of issuers in the U.S. and foreign countries. Although the fund can invest in securities of issues of all market capitalization ranges, it may focus from time to time on small to medium capitalization issuers (having a market capitalization of less than $5 billion). The fund can also use hedging instruments and certain derivative investments to try to manage investment risks. Risks The fund's investments in stocks and bonds are subject to changes in their value from a number of factors. They include changes in general stock and bond market movements, or the change in value of particular stocks or bonds because of an event affecting the issuer. High-yield, lower-grade bonds are subject to greater credit risks than investment-grade securities. The fund can have significant amounts of its assets invested in foreign securities. Therefore, it will be subject to the risks of economic, political or other events that can affect the values of securities of issuers in particular foreign countries. Changes in interest rates can also affect stock and bond prices. Investment Adviser: OppenheimerFunds, Inc. Oppenheimer Strategic Bond Fund/VA Investment Objective Seeks a high level of current income principally derived from interest on debt securities and seeks to enhance such income by writing covered call options on debt securities. Policies Invests mainly in debt securities of issuers in three market sectors: foreign governments and companies, U.S. government securities and lower-rated high-yield securities of U.S. companies. Under normal market conditions, the fund invests in each of those three market sectors. However, the fund is not obligated to do so, and the amount of its assets in each of the three sectors will vary over time. The fund can invest up to 100% of its assets in any one sector at any time, if the manager believes that in doing so the fund can achieve its objective without undue risk. The fund's foreign investments can include debt securities of issuers in developed markets as well as emerging markets, which have special risks. The fund can also use hedging instruments and certain derivative investments to try to enhance income or try to manage investment risks. 53 Risks The fund's investments in debt securities are subject to changes in their value from a number of factors. They include changes in general bond market movements in the U.S. and abroad, or the change in value of particular bonds because of an event affecting the issuer. The fund can focus significant amounts of its investments in foreign debt securities. Therefore, it will be subject to the risks that economic, political or other events can have on the values of securities of issuers in particular foreign countries. These risks are heightened in the case of emerging market debt securities. Changes in interest rates can also affect securities prices. Investment Adviser: OppenheimerFunds, Inc. Portfolio Partners (PPI) MFS Emerging Equities Portfolio Investment Objective Seeks long-term growth of capital. Policies Invests, under normal market conditions, at least 80% of total assets in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts, of emerging growth companies. Emerging growth companies are companies believed to be either early in their life cycle but which have the potential to become major enterprises, or major enterprises whose rates of earnings growth are expected to accelerate. Investments may include securities traded in the over-the-counter markets. May also invest in foreign securities and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of foreign currency at a future date. Risks Investment in the portfolio is subject to the following risks: o Market and Company Risk: The value of the securities in which the portfolio invests may decline due to changing economic, political or market conditions, or due to the financial condition of the company which issued the security. o Emerging Growth Risk: The portfolio's performance is particularly sensitive to changes in the value of emerging growth companies. Investments in emerging growth companies may be subject to more abrupt or erratic market movements and may involve greater risks than investments in other companies. o Over the Counter Risk: Equity securities that are traded over the counter may be more volatile than exchange listed securities, and the portfolio may experience difficulty in purchasing or selling these securities at a fair price. o Foreign Markets Risk: Investment in foreign securities involves risks related to political, social and economic developments abroad. These risks result from differences between the regulations to which U.S. and foreign issuers and markets are subject. o Currency Risk: The portfolio's exposure to foreign currencies may cause the value of the portfolio to decline if the U.S. dollar strengthens against these currencies or if foreign governments intervene in the currency markets. Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser: Massachusetts Financial Services Company Portfolio Partners (PPI) MFS Research Growth Portfolio Investment Objective Seeks long-term growth of capital and future income. Policies Invests primarily (at least 65% of total assets) in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts. Focuses on companies believed to have favorable prospects for long-term growth, attractive valuations based on current and expected earnings or cash flow, dominant or growing market share and superior management. May invest in companies of any size. Investments may also include securities traded on securities exchanges or in the over-the-counter markets. May invest in foreign securities and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of foreign currency at a future date. Risks Investment in the portfolio is subject to the following risks: o Market and Company Risk: The value of the securities in which the portfolio invests may decline due to changing economic, political or market conditions, or due to the financial condition of the company which issued the security. In addition, securities of growth companies may be more volatile because such companies usually invest a high portion of their earnings in their businesses 54 and may lack the dividends of value companies, which can cushion the security prices in a declining market. o Over-the-Counter Risk: Equity securities that are traded over-the-counter may be more volatile than exchange-listed stocks, and the portfolio may experience difficulty in purchasing or selling these securities at a fair price. o Foreign Markets Risk: Investment in foreign securities involves additional risks relating to political, social and economic developments abroad. Other risks from these investments result from the differences between the regulations to which U.S. and foreign issuers and markets are subject. o Currency Risk: The portfolio's exposure to foreign currencies may cause the value of the portfolio to decline if the U.S. dollar strengthens against these currencies or if foreign governments intervene in the currency markets. Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser: Massachusetts Financial Services Company Portfolio Partners (PPI) MFS Value Equity Portfolio Investment Objectives Seeks capital appreciation Policies Invests primarily (at least 65% of total assets) in common stocks and related securities, such as preferred stock, convertible securities and depositary receipts. Focuses on companies believed to have favorable growth prospects and attractive valuations based on current and expected earnings or cash flow. Investments may include securities traded in the over-the-counter markets. May invest in foreign securities (including emerging market securities) and may have exposure to foreign currencies through its investment in these securities, its direct holdings of foreign currencies or through its use of foreign currency exchange contracts for the purchase or sale of a fixed quantity of a foreign currency at a future date. Also may invest in debt securities issued by both U.S. and foreign companies, including non-investment grade debt securities. Risks Investment in the portfolio is subject to the following risks: o Market and Company Risk: The value of the securities in which the portfolio invests may decline due to changing economic, political or market conditions, or due to the financial condition of the company which issued the security. In addition, securities of growth companies may be more volatile because such companies usually invest a high portion of their earnings in their businesses and may lack the dividends of value companies, which can cushion the security prices in a declining market. o Over the Counter Risk: Equity securities that are traded over the counter may be more volatile than exchange listed securities, and the portfolio may experience difficulty in purchasing or selling these securities at a fair price. o Foreign Markets Risk: The portfolio's investment in foreign securities involves additional risks relating to political, social and economic developments abroad. Other risks from these investments result from the differences between the regulations to which U.S. and foreign issuers and markets are subject. o Emerging Markets Risk: Emerging markets are generally defined as countries in the initial stages of their industrialization cycles with low per capita income. Investments in emerging markets securities involve all of the risks of investment in foreign securities, and also have additional risks. o Currency Risk: The portfolio's exposure to foreign currencies may cause the value of the portfolio to decline in the event that the U.S. dollar strengthens against these currencies, or in the event that foreign governments intervene in the currency markets. o Interest Rate Risk: The portfolio's investment in debt securities involves risks relating to interest rate movement. If interest rates go up, the value of debt securities held by the portfolio will decline. o Credit Risk: The portfolio's investment in non-investment grade debt securities involves credit risk because issuers of non-investment grade securities are more likely to have difficulty making timely payments of interest or principal. Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser: Massachusetts Financial Services Company Portfolio Partners (PPI) Scudder International Growth Portfolio Investment Objective Seeks long-term growth of capital. Policies Invests primarily (at least 65% of total assets) in the equity securities of foreign companies believed to have high growth potential. Normally invests in securities of at least three different countries other than the U.S. Focuses on issuers located primarily in Europe, Latin America, and the emerging markets of the Pacific Basin and Japan, but also may invest in select issues from elsewhere outside the U.S. Will invest in securities in both developed and developing markets. Seeks to invest in those companies believed to be best 55 able to capitalize on the growth and changes taking place within and between various regions of the world. Typically, these are companies with leading or rapidly developing business franchises, strong financial positions, and high quality management capable of defining and implementing strategies to take advantage of local, regional or global markets. Also may invest in debt securities issued by both U.S. and foreign companies, including non-investment grade debt securities. Risks Investment in the portfolio is subject to the following risks: o Market and Company Risk: The value of the securities in which the portfolio invests may decline due to changing economic, political or market conditions, or due to the financial condition of the company which issued the security. In addition, securities of growth companies may be more volatile because such companies usually invest a high portion of their earnings in their businesses and may lack the dividends of value companies, which can cushion the security prices in a declining market. o Foreign Markets Risk: The portfolio's investment in foreign securities involves additional risks relating to political, social and economic developments abroad. Other risks from these investments result from the differences between the regulations to which U.S. and foreign issuers and markets are subject. o Currency Risk: The portfolio's exposure to foreign currencies may cause the value of the portfolio to decline in the event that the U.S. dollar strengthens against these currencies, or in the event that foreign governments intervene in the currency markets. o Emerging Growth Risk: The portfolio's performance is particularly sensitive to changes in the value of emerging growth companies. Investments in emerging growth companies may be subject to more abrupt or erratic market movements and may involve greater risks than investments in other companies. o Interest Rate Risk: The portfolio's investment in debt securities involves risks relating to interest rate movement. If interest rates go up, the value of debt securities held by the portfolio will decline. o Credit Risk: The portfolio's investment in non-investment grade debt securities involves credit risk because issuers of non-investment grade securities are more likely to have difficulty making timely payments of interest or principal. Investment Adviser: Aetna Life Insurance and Annuity Company; Subadviser: Scudder Kemper Investments, Inc. 56 - -------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT B OF AETNA LIFE INSURANCE AND ANNUITY COMPANY - -------------------------------------------------------------------------------- Statement of Additional Information dated December 17, 1999 AETNA PREMIUM BONUS ANNUITY 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 December 17, 1999. A free prospectus is available upon request from the local Aetna Life Insurance and Annuity Company office or by writing to or calling: Aetna Financial Services Annuity Services 151 Farmington Avenue Hartford, Connecticut 06156-1258 1-800-238-6219 Read the prospectus before you invest. Unless otherwise indicated, terms used in this Statement of Additional Information shall have the same meaning as in the prospectus. TABLE OF CONTENTS Page General Information and History.......................................... 2 Variable Annuity Account B............................................... 2 Offering and Purchase of Contract........................................ 3 Performance Data......................................................... 3 General............................................................. 3 Average Annual Total Return Quotations.............................. 3 Income Phase Payments.................................................... 6 Sales Material and Advertising........................................... 6 Independent Auditors..................................................... 7 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, we, us, our) issues the contract described in the prospectus and is responsible for providing each contract's insurance and annuity benefits. We are a stock life insurance company which was organized under the insurance laws of the State of Connecticut in 1976 and an indirect wholly-owned subsidiary of Aetna Inc. Through a merger, our assets include the business of Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity Life Insurance Company organized in 1954). Our Home Office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. As of December 31, 1998, the Company and its subsidiary life company had $43 billion invested through its products, including $29 billion in its separate accounts (of which the Company or an affiliate oversees the management of $21 billion). The Company is ranked among the top 2% of all U.S. life insurance companies rated by A.M. Best Company based on assets as of December 31, 1997. In addition to serving as the principal underwriter and the depositor for the separate account, the Company is a registered investment adviser under the Investment Advisers Act of 1940 and a registered broker-dealer under the Securities Exchange Act of 1934. We provide 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 expense charge described in the prospectus, all expenses incurred in the operations of the separate account are borne by the Company. See "Fees" in the prospectus. We receive reimbursement for certain administrative costs from some advisers of the funds used as funding options under the contract. These fees generally range up to 0.425%. The assets of the separate account are held by the Company. The separate account has no custodian. However, the funds in whose shares the assets of the separate account are invested each have custodians, as discussed in their respective prospectuses. From this point forward, the term "contract" refers only to those offered through the prospectus. VARIABLE ANNUITY ACCOUNT B Variable Annuity Account B 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 to accounts under the contract may be allocated to one or more of the subaccounts. Each subaccount invests in the shares of only one of the funds listed below. We may make additions to, deletions from or substitutions of available investment options as permitted by law and subject to the conditions of the contract. The availability of the funds is subject to applicable regulatory authorization. Not all funds are available in all jurisdictions. The funds currently available under the contract are as follows:
Aetna Balanced VP, Inc. Fidelity Variable Insurance Products Fund (VIP ) High Income Aetna Income Shares d/b/a Aetna Bond VP Portfolio Aetna Growth VP Fidelity Variable Insurance Products Fund II (VIP II) Aetna Variable Fund d/b/a Aetna Growth and Income VP Contrafund Portfolio Aetna Index Plus Large Cap VP Janus Aspen Aggressive Growth Portfolio Aetna International VP Janus Aspen Balanced Portfolio Aetna Variable Encore Fund d/b/a Aetna Money Market VP Janus Aspen Growth Portfolio Aetna Real Estate Securities VP Janus Aspen Worldwide Growth Portfolio Aetna Small Company VP MFS Total Return Series AIM V.I. Capital Appreciation Fund Oppenheimer Aggressive Growth Fund/VA AIM V.I. Growth Fund Oppenheimer Main Street Growth & Income Fund/VA AIM V.I. Growth and Income Fund Oppenheimer Strategic Bond Fund/VA AIM V.I. Value Fund Portfolio Partners (PPI) MFS Emerging Equities Portfolio Fidelity Variable Insurance Products Fund (VIP) Equity-Income Portfolio Partners (PPI) MFS Research Growth Portfolio Portfolio Portfolio Partners (PPI) MFS Value Equity Portfolio Fidelity Variable Insurance Products Fund (VIP) Growth Portfolio Portfolio Partners (PPI) Scudder International Growth 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. 2 OFFERING AND PURCHASE OF CONTRACT The Company is both the depositor and the principal underwriter for the securities sold under the prospectus. We offer the contract 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 contract is continuous. A description of the manner in which the contract is purchased can be found in the prospectus under the sections entitled "Purchase and Rights" and "Your Account Value." PERFORMANCE DATA GENERAL From time to time, we may advertise different types of historical performance for the subaccounts of the separate account available under the contract. We may advertise the "standardized average annual total returns," calculated in a manner prescribed by the Securities and Exchange Commission (the "standardized return"), as well as "non-standardized returns," both of which are described below. The standardized and non-standardized total return figures are computed according to a formula in which a hypothetical initial purchase payment of $1,000 is applied to the various subaccounts under the contract, and then related to the ending redeemable values over one, five and ten year periods (or fractional periods thereof). The redeemable value is then divided by the initial investment and this quotient is taken to the Nth root (N represents the number of years in the period) and 1 is subtracted from the result which is then expressed as a percentage, carried to at least the nearest hundredth of a percent. The standardized figures use the actual returns of the fund since the date contributions were first received in the fund under the separate account, adjusted to reflect the deduction of the maximum recurring charges under the contract during each period (i.e., 1.45% mortality and expense risk charge for Death Benefit Option II, $30 annual maintenance fee, 0.15% administrative charge, and early withdrawal charge of 8% of purchase payments grading down to 0% after 8 years) and currently do not include any premium bonus. These charges will be deducted on a pro rata basis in the case of fractional periods. The maintenance fee is converted to a percentage of assets based on the average account size under the contract described in the prospectus. The non-standardized figures will be calculated in a similar manner, except that they will not reflect the deduction of any applicable early withdrawal charge and, in some advertisements, will also exclude the effect of the annual maintenance fee. The deduction of the early withdrawal charge and the annual maintenance fee would decrease the level of performance shown if reflected in these calculations. The non-standardized figures may also include monthly, quarterly, year-to-date and three-year periods, and may include returns calculated from the fund's inception date and/or the date contributions were first received in the fund under the separate account. The non-standardized returns shown in the tables below reflect the deduction of the maximum recurring charges under the contract except the early withdrawal charge. Standardized and non-standardized calculations do not currently include the premium bonus, but to the extent permitted by applicable law, we may include the premium bonus in the standardized and non-standardized average annual total returns in the future. Investment results of the funds will fluctuate over time, and any presentation of the subaccounts' total return quotations for any prior period should not be considered as a representation of how the subaccounts will perform in any future period. Additionally, the account value upon redemption may be more or less than your original cost. AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized The tables below reflect the average annual standardized and non-standardized total return quotation figures for the periods ended December 31, 1998 for the subaccounts under the contract. The standardized returns assume the maximum charges under the contract as described under "General" above. The non-standardized returns assume the same charges but do not include the early withdrawal charge. We may also advertise returns based on lower charges that apply to contracts under Death Benefit Option I. For the subaccounts funded by the Portfolio Partners portfolios, two sets of performance returns are shown for each subaccount: one showing performance based solely on the performance of the Portfolio Partners portfolio from November 28, 1997, the date the Portfolio commenced operations; and one quotation based on (a) performance through November 26, 1997 of the fund it replaced under many contracts and (b) after November 26, 1997, based on the performance of the Portfolio Partners portfolio. For those subaccounts where results are not available for the full calendar period indicated, performance for such partial periods is shown in the column labeled "Since Inception". For standardized performance, the "Since Inception" column shows the average annual return since the date contributions were first received in the fund under the separate account. For non-standardized performance, the "Since Inception" column shows the average annual total return since the fund's inception date. 3
--------------------------------------------------------------- Date Contributions First Received STANDARDIZED Under the Separate Account - ----------------------------------------------------------------------------------------------------------------------------------- Since 1 Year 5 Year 10 Year Inception* SUBACCOUNT - ----------------------------------------------------------------------------------------------------------------------------------- Aetna Balanced VP, Inc. 7.98% 13.56% 11.29% 06/30/1989 - ----------------------------------------------------------------------------------------------------------------------------------- Aetna Bond VP(1) (0.75%) 4.20% 7.52% - ----------------------------------------------------------------------------------------------------------------------------------- Aetna Growth VP 28.56% 31.30% 05/30/1997 - ----------------------------------------------------------------------------------------------------------------------------------- Aetna Growth and Income VP(1) 5.55% 17.05% 14.75% - ----------------------------------------------------------------------------------------------------------------------------------- Aetna Index Plus Large Cap VP 22.53% 28.36% 10/31/1996 - ----------------------------------------------------------------------------------------------------------------------------------- Aetna International VP (11.71%) 05/05/1998 - ----------------------------------------------------------------------------------------------------------------------------------- Aetna Money Market VP(1)(2) (3.41%) 2.82% 4.05% - ----------------------------------------------------------------------------------------------------------------------------------- Aetna Real Estate Securities VP (19.35%) 05/06/1998 - ----------------------------------------------------------------------------------------------------------------------------------- Aetna Small Company VP (7.73%) 7.83% 05/30/1997 - ----------------------------------------------------------------------------------------------------------------------------------- AIM V.I. Capital Appreciation Fund 18.81% 10/02/1998 - ----------------------------------------------------------------------------------------------------------------------------------- AIM V.I. Growth Fund 21.84% 10/02/1998 - ----------------------------------------------------------------------------------------------------------------------------------- AIM V.I. Growth and Income Fund 19.65% 10/02/1998 - ----------------------------------------------------------------------------------------------------------------------------------- AIM V.I. Value Fund 20.39% 10/02/1998 - ----------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Equity-Income Portfolio 2.71% 19.23% 12/30/1994 - ----------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Growth Portfolio 30.35% 25.25% 12/30/1994 - ----------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP High Income Portfolio (13.12%) 6.46% 06/30/1995 - ----------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP II Contrafund Portfolio 20.92% 22.08% 06/30/1995 - ----------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Aggressive Growth Portfolio 25.16% 16.24% 10/31/1994 - ----------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Balanced Portfolio 25.19% 21.42% 01/31/1995 - ----------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Growth Portfolio 26.55% 21.62% 07/29/1994 - ----------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Worldwide Growth Portfolio 19.87% 25.90% 04/28/1995 - ----------------------------------------------------------------------------------------------------------------------------------- MFS Total Return Series 3.41% 12.73% 05/31/1996 - ----------------------------------------------------------------------------------------------------------------------------------- Oppenheimer Aggressive Growth Fund/VA 3.44% 8.67% 05/30/1997 - ----------------------------------------------------------------------------------------------------------------------------------- Oppenheimer Main Street Growth & Income Fund/VA (4.16%) 9.18% 05/30/1997 - ----------------------------------------------------------------------------------------------------------------------------------- Oppenheimer Strategic Bond Fund/VA (5.95%) (0.41%) 05/30/1997 =================================================================================================================================== PPI MFS Emerging Equities Portfolio 20.61% 17.27% 11/28/1997 - ----------------------------------------------------------------------------------------------------------------------------------- Alger American Small Cap/PPI MFS Emerging Equities(3) 20.61% 12.94% 12.70% 09/30/1993 =================================================================================================================================== PPI MFS Research Growth Portfolio 13.99% 10.59% 11/28/1997 - ----------------------------------------------------------------------------------------------------------------------------------- American Century VP Capital Appreciation/PPI MFS Research Growth(3) 13.99% 5.73% 7.61% 08/31/1992 =================================================================================================================================== PPI MFS Value Equity Portfolio 17.70% 17.73% 11/28/1997 - ----------------------------------------------------------------------------------------------------------------------------------- Neuberger Berman AMT Growth/PPI MFS Value Equity(3) 17.70% 14.61% 13.18% 11/30/1992 =================================================================================================================================== PPI Scudder International Growth Portfolio 10.12% 10.55% 11/28/1997 - ----------------------------------------------------------------------------------------------------------------------------------- Scudder International Portfolio Class A/PPI Scudder International Growth(3) 10.12% 8.03% 10.78% 08/31/1992 - -----------------------------------------------------------------------------------------------------------------------------------
Please refer to the discussion preceding the table for an explanation of the charges included and methodology used in calculating 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 seven-day period ended December 31, 1998 (on an annualized basis) was 3.62%. Current yield more closely reflects current earnings than does total return. The current yield reflects the deduction of all charges under the contract that are deducted from the total return quotations shown above except the maximum 8% early 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 the Separate Account" refers to the applicable date for the replaced fund. 4
------------------------------------------------------------------- Fund NON-STANDARDIZED Inception Date - -------------------------------------------------------------------------------------------------------------------------------- Since 1 Year 3 Years 5 Years 10 Years Inception** SUBACCOUNT - -------------------------------------------------------------------------------------------------------------------------------- Aetna Balanced VP, Inc. 15.06% 16.25% 14.04% 11.16% 04/03/1989 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Bond VP(1) 6.40% 4.94% 4.93% 7.52% - -------------------------------------------------------------------------------------------------------------------------------- Aetna Growth VP 35.47% 33.20% 12/13/1996 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Growth and Income VP(1) 12.65% 20.80% 17.46% 14.75% - -------------------------------------------------------------------------------------------------------------------------------- Aetna Index Plus Large Cap VP 29.49% 31.18% 09/16/1996 - -------------------------------------------------------------------------------------------------------------------------------- Aetna International VP 17.01% 19.60% 12/22/1997 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Money Market VP(1)(2) 3.76% 3.73% 3.59% 4.05% - -------------------------------------------------------------------------------------------------------------------------------- Aetna Real Estate Securities VP (14.25%) (10.76%) 12/15/1997 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Small Company VP (0.53%) 15.33% 12/27/1996 - -------------------------------------------------------------------------------------------------------------------------------- AIM V.I. Capital Appreciation Fund 17.40% 14.91% 15.37% 16.88% 05/05/1993 - -------------------------------------------------------------------------------------------------------------------------------- AIM V.I. Growth Fund 32.00% 24.19% 19.51% 18.95% 05/05/1993 - -------------------------------------------------------------------------------------------------------------------------------- AIM V.I. Growth and Income Fund 25.66% 22.43% 20.55% 05/02/1994 - -------------------------------------------------------------------------------------------------------------------------------- AIM V.I. Value Fund 30.31% 21.54% 19.77% 19.97% 05/05/1993 - -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Equity-Income Portfolio(1) 9.83% 15.89% 16.87% 13.78% - -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Growth Portfolio(1) 37.26% 23.46% 19.79% 17.50% - -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP High Income Portfolio(1) (5.87%) 6.93% 7.05% 9.30% - -------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP II Contrafund Portfolio 27.90% 23.05% 26.59% 01/03/1995 - -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Aggressive Growth Portfolio 32.11% 15.86% 17.43% 19.97% 09/13/1993 - -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Balanced Portfolio 32.13% 21.97% 17.20% 17.58% 09/13/1993 - -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Growth Portfolio 33.49% 23.39% 19.47% 18.94% 09/13/1993 - -------------------------------------------------------------------------------------------------------------------------------- Janus Aspen Worldwide Growth Portfolio 26.86% 24.63% 19.37% 22.04% 09/13/1993 - -------------------------------------------------------------------------------------------------------------------------------- MFS Total Return Series 10.53% 14.07% 16.83% 01/03/1995 - -------------------------------------------------------------------------------------------------------------------------------- Oppenheimer Aggressive Growth Fund/VA(1) 10.56% 12.84% 11.25% 14.13% - -------------------------------------------------------------------------------------------------------------------------------- Oppenheimer Main Street Growth & Income Fund/VA 3.02% 20.52% 24.95% 07/06/1995 - -------------------------------------------------------------------------------------------------------------------------------- Oppenheimer Strategic Bond Fund/VA 1.24% 6.09% 5.11% 5.07% 05/03/1993 ================================================================================================================================ PPI MFS Emerging Equities Portfolio 27.59% 23.57% 11/28/1997 - -------------------------------------------------------------------------------------------------------------------------------- Alger American Small Cap/PPI MFS Emerging Equities(3) 27.59% 12.01% 13.43% 19.07% ================================================================================================================================ PPI MFS Research Growth Portfolio 21.03% 16.97% 11/28/1997 - -------------------------------------------------------------------------------------------------------------------------------- American Century VP Capital Appreciation/PPI MFS Research Growth(3) 21.03% 2.84% 6.41% 9.47% ================================================================================================================================ PPI MFS Value Equity Portfolio 24.70% 23.87% 11/28/1997 - -------------------------------------------------------------------------------------------------------------------------------- Neuberger Berman AMT Growth/PPI MFS Value Equity(3) 24.70% 18.51% 15.07% 12.88% ================================================================================================================================ PPI Scudder International Growth Portfolio 17.18% 17.17% 11/28/1997 - -------------------------------------------------------------------------------------------------------------------------------- Scudder International Portfolio Class A/PPI Scudder International Growth(3) 17.18% 12.37% 8.64% 10.22% - --------------------------------------------------------------------------------------------------------------------------------
Please refer to the discussion preceding the table for an explanation of the charges included and methodology used in calculating 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 seven-day period ended December 31, 1998 (on an annualized basis) was 3.62%. Current yield more closely reflects current earnings than does total return. The current yield reflects the deduction of all charges under the contract that are deducted from the total return quotations shown above. As in the table above, the maximum 8% early withdrawal charge is not reflected. (3) The fund first listed was replaced with the applicable Portfolio Partners portfolio after the close of business on November 26, 1997. The performance shown is based on the performance of the replaced fund until November 26, 1997, and the performance of the applicable Portfolio Partners portfolio after that date. The replaced fund may not have been available under all contracts. The "Fund Inception Date" refers to the applicable date for the replaced fund. If no date is shown, the replaced fund has been in operation for more than ten years. 5 INCOME PHASE PAYMENTS When you begin receiving payments under the contract during the income phase (see "The Income Phase" in the prospectus), the value of your account is determined using the accumulation unit values as of the tenth valuation before the first income phase payment is due. Such value (less any applicable premium tax) is applied to provide income phase payments to you in accordance with the income phase payment option and investment options elected. The annuity option tables found in the contract show, for each option, the amount of the first income phase payment for each $1,000 of value applied. Thereafter, variable income phase payments fluctuate as the annuity unit value(s) fluctuates with the investment experience of the selected investment option(s). The first income phase 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 income phase payment, but payments will increase thereafter only to the extent that the investment performance of the subaccounts you selected is greater than 5% annually, after deduction of fees. Income phase payments would decline if the performance was less than 5%. Use of the 3.5% assumed rate causes a lower first income phase payment, but subsequent payments would increase more rapidly or decline more slowly as changes occur in the performance of the subaccounts selected. When the income phase begins, the annuitant is credited with a fixed number of annuity units (which does not change thereafter) in each of the designated investment options. This number is calculated by dividing (a) by (b), where (a) is the amount of the first income phase payment based on a particular investment option, and (b) is the then current annuity unit value for that investment option. As noted, annuity unit values fluctuate from one valuation to the next (see "Your Account Value" in the prospectus); such fluctuations reflect changes in the net investment factor for the appropriate subaccount(s) (with a ten valuation lag which gives the Company time to process income phase payments) and a mathematical adjustment which offsets the assumed net investment rate of 3.5% or 5% per annum. The operation of all these factors can be illustrated by the following hypothetical example. These procedures will be performed separately for the investment options selected during the income phase. EXAMPLE: Assume that, at the date income phase payments are to begin, there are 3,000 accumulation units credited under a particular contract and that the value of an accumulation unit for the tenth valuation prior to retirement was $13.650000. This produces a total value of $40,950. Assume also that no premium tax is payable and that the annuity table in the contract provides, for the income phase payment option elected, a first monthly variable payment of $6.68 per $1000 of value applied; the annuitant's first monthly income phase payment would thus be $40.950 multiplied by $6.68, or $273.55. Assume then that the value of an annuity unit upon the valuation on which the first income phase payment was due was $13.400000. When this value is divided into the first monthly payment, the number of annuity units is determined to be 20.414. The value of this number of annuity units will be paid in each subsequent month. If the net investment factor with respect to the appropriate subaccount is 1.0015000 as of the tenth valuation preceding the due date of the second monthly income phase payment, multiplying this factor by .9999058* (to neutralize the assumed net investment rate of 3.5% per annum built into the number of annuity units determined above) produces a result of 1.0014057. This is then multiplied by the annuity unit value for the prior valuation (assume such value to be $13.504376) to produce an annuity unit value of $13.523359 for the valuation occurring when the second payment is due. The second monthly payment is then determined by multiplying the number of annuity units by the current annuity unit value, or times $13.523359, which produces a payment of $276.07. *If an assumed net investment rate of 5% is elected, the appropriate factor to neutralize such assumed rate would be .9998663. SALES MATERIAL AND ADVERTISING We may include hypothetical illustrations in our sales literature that explain the mathematical principles of dollar cost averaging, compounded interest, tax deferred accumulation, and the mechanics of variable annuity contracts. We may also discuss the difference between variable annuity contracts and other types of savings or investment products such as personal savings accounts and certificates of deposit. 6 We may distribute sales literature that compares the percentage change in accumulation unit values for any of the subaccounts to established market indices such as the Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average or to the percentage change in values of other management investment companies that have investment objectives similar to the subaccount being compared. We may publish in advertisements and reports, the ratings and other information assigned to us by one or more independent rating organizations such as A.M. Best Company, Duff & Phelps, Standard & Poor's Corporation and Moody's Investors Service, Inc. The purpose of the ratings is to reflect our financial strength and/or claims-paying ability. We may also quote ranking services such as Morningstar's Variable Annuity/Life Performance Report and Lipper's Variable Insurance Products Performance Analysis Service (VIPPAS), which rank variable annuity or life subaccounts or their underlying funds by performance and/or investment objective. We may categorize the underlying funds in terms of the asset classes they represent and use such categories in marketing materials for the contract. We may illustrate in advertisements the performance of the underlying funds, if accompanied by performance which also shows the performance of such funds reduced by applicable charges under the separate account. We may also show in advertisements the portfolio holdings of the underlying funds, updated at various intervals. From time to time, we will quote articles from newspapers and magazines or other publications or reports such as The Wall Street Journal, Money magazine, USA Today and The VARDS Report. We may provide in advertising, sales literature, periodic publications or other materials information on various topics of interest to current and prospective contract holders. These topics may include the relationship between sectors of the economy and the economy as a whole and its effect on various securities markets, investment strategies and techniques (such as value investing, market timing, dollar cost averaging, asset allocation, constant ratio transfer and account rebalancing), the advantages and disadvantages of investing in tax-deferred and taxable investments, customer profiles and hypothetical purchase and investment scenarios, financial management and tax and retirement planning, and investment alternatives to certificates of deposit and other financial instruments, including comparison between the contract and the characteristics of and market for such financial instruments. INDEPENDENT AUDITORS KPMG LLP, CityPlace II, Hartford, Connecticut 06103-4103, are the independent auditors for the separate account and for the Company. The services provided to the separate account include primarily the examination of the separate account's financial statements and the review of filings made with the SEC. 7 FINANCIAL STATEMENTS OF THE SEPARATE ACCOUNT VARIABLE ANNUITY ACCOUNT B Index Statement of Assets and Liabilities ................................... S-2 Statements of Operations and Changes in Net Assets .................... S-7 Condensed Financial Information ....................................... S-8 Notes to Financial Statements ......................................... S-16 Independent Auditors' Report .......................................... S-36 S-1 Variable Annuity Account B Statement of Assets and Liabilities - December 31, 1998 ASSETS: Investments, at net asset value: (Note 1)
Net Shares Cost Assets ------ ---- ------ Aetna Ascent VP: 1,775,905 $ 25,102,742 $ 24,898,190 Aetna Balanced VP: 12,391,167 181,255,533 194,913,051 Aetna Bond VP: 6,915,310 90,585,384 90,313,945 Aetna Crossroads VP: 2,222,763 29,151,210 29,607,202 Aetna Get Fund, Series B: 1,328,751 16,114,148 19,399,768 Aetna Get Fund, Series C: 641,495 6,843,405 9,276,019 Aetna Get Fund, Series D: 8,945,182 89,971,949 89,907,126 Aetna Growth and Income VP: 34,864,532 1,125,170,574 1,110,783,981 Aetna Growth VP: 2,192,686 25,612,305 29,667,044 Aetna High Yield VP: 25,485 269,013 230,386 Aetna Index Plus Large Cap VP: 4,950,434 77,533,729 87,078,142 Aetna Index Plus Mid Cap VP: 30,799 350,678 375,745 Aetna Index Plus Small Cap VP: 98,357 961,535 969,800 Aetna International VP: 132,091 1,535,380 1,530,933 Aetna Legacy VP: 2,841,936 34,924,355 35,154,748 Aetna Money Market VP: 11,204,743 148,567,676 150,002,380 Aetna Real Estate Securities VP: 115,069 1,060,043 981,537 Aetna Small Company VP: 1,445,875 17,304,318 18,492,740 Aetna Value Opportunity VP: 1,296,961 16,956,181 18,689,212 AIM V.I. Funds: Capital Appreciation Fund: 11,857 279,072 298,792 Growth and Income Fund: 9,329 203,793 221,558 Growth Fund: 11,970 284,519 296,860 Value Fund: 26,818 681,416 703,970 Alger American Funds: Balanced Portfolio: 476,550 4,602,622 6,185,618 Income & Growth Portfolio: 1,178,638 11,247,924 15,463,737 Leveraged AllCap Portfolio: 486,301 10,438,458 16,971,895 American Century Investments: Balanced Fund: 567,422 4,244,446 4,732,298 International Fund: 760,004 5,048,080 5,791,227 Calvert Social Balanced Portfolio: 916,276 1,943,153 1,958,082 Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: 6,927,959 153,249,176 176,108,721 Growth Portfolio: 3,087,069 104,576,368 138,516,768 High Income Portfolio: 4,321,896 54,257,145 49,831,459 Overseas Portfolio: 892,112 17,216,864 17,886,843 Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: 1,124,160 18,781,312 20,414,738 Contrafund Portfolio: 6,668,348 127,772,939 162,974,413 Index 500 Portfolio: 1,003,440 116,197,819 141,735,838 Investment Grade Bond Portfolio: 439,478 5,217,593 5,695,641 Insurance Management Series: American Leaders Fund II: 6,201,568 97,218,342 134,450,002 Equity Income Fund II: 2,025,727 24,690,902 28,664,036 Growth Strategies Fund II: 1,532,692 22,205,952 27,450,515 High Income Bond Fund II: 4,568,474 47,172,964 49,887,731 International Equity Fund II: 1,138,497 13,701,931 17,521,464 Prime Money Fund II: 8,067,320 8,065,097 8,067,320
S-2 Variable Annuity Account B Statement of Assets and Liabilities - December 31, 1998 (continued):
Net Shares Cost Assets ------ ---- ------ U.S. Government Securities II: 1,439,895 $ 15,041,447 $ 16,054,824 Utility Fund II: 1,986,746 23,284,347 30,337,604 Janus Aspen Series: Aggressive Growth Portfolio: 2,079,332 49,261,924 57,368,774 Balanced Portfolio: 3,210,155 56,987,418 72,228,489 Flexible Income Portfolio: 1,710,899 20,378,246 20,633,439 Growth Portfolio: 2,958,516 57,362,313 69,643,462 Worldwide Growth Portfolio: 8,512,439 210,385,419 247,626,862 Lexington Emerging Markets Fund: 266,212 2,706,082 1,509,423 Lexington Natural Resources Trust Fund: 358,558 5,221,161 3,954,893 MFS Funds: Total Return Series: 2,104,731 34,302,993 38,137,728 Worldwide Government Series: 185,123 1,911,846 2,014,138 Oppenheimer Funds: Aggressive Growth Fund: 265,843 10,674,495 11,917,723 Global Securities Fund: 346,765 6,867,095 7,653,101 Growth & Income Fund: 1,718,418 35,629,032 35,193,209 Strategic Bond Fund: 2,558,320 13,050,936 13,098,600 Portfolio Partners, Inc. (PPI): PPI MFS Emerging Equities Portfolio: 2,382,266 112,648,846 132,072,829 PPI MFS Research Growth Portfolio: 7,421,331 77,594,206 88,610,687 PPI MFS Value Equity Portfolio: 738,878 24,196,477 27,966,529 PPI Scudder International Growth Portfolio: 1,049,896 16,732,753 17,596,256 PPI T. Rowe Price Growth Equity Portfolio: 2,148,768 93,956,758 118,848,377 -------------- -------------- NET ASSETS $3,606,761,839 $3,956,568,422 ============== ==============
Net assets represented by: Reserves for annuity contracts in accumulation and payment period: (Notes 1 and 5)
Aetna Ascent VP: Annuity contracts in accumulation ........... $ 24,898,190 Aetna Balanced VP: Annuity contracts in accumulation ........... 176,154,146 Annuity contracts in payment period ......... 18,758,905 Aetna Bond VP: Annuity contracts in accumulation ........... 85,100,187 Annuity contracts in payment period ......... 5,213,758 Aetna Crossroads VP: Annuity contracts in accumulation ........... 28,289,880 Annuity contracts in payment period ......... 1,317,322 Aetna Get Fund, Series B: Annuity contracts in accumulation ........... 19,399,768 Aetna Get Fund, Series C: Annuity contracts in accumulation ........... 9,276,019 Aetna Get Fund, Series D: Annuity contracts in accumulation ........... 89,907,126 Aetna Growth and Income VP: Annuity contracts in accumulation ........... 955,586,320 Annuity contracts in payment period ......... 155,197,661 Aetna Growth VP: Annuity contracts in accumulation ........... 28,467,187 Annuity contracts in payment period ......... 1,199,857
S-3 Variable Annuity Account B Statement of Assets and Liabilities - December 31, 1998 (continued):
Aetna High Yield VP: Annuity contracts in accumulation ........... $ 230,386 Aetna Index Plus Large Cap VP: Annuity contracts in accumulation ........... 85,248,495 Annuity contracts in payment period ......... 1,829,647 Aetna Index Plus Mid Cap VP: Annuity contracts in accumulation ........... 375,745 Aetna Index Plus Small Cap VP: Annuity contracts in accumulation ........... 969,800 Aetna International VP: Annuity contracts in accumulation ........... 1,528,847 Annuity contracts in payment period ......... 2,086 Aetna Legacy VP: Annuity contracts in accumulation ........... 32,331,905 Annuity contracts in payment period ......... 2,822,843 Aetna Money Market VP: Annuity contracts in accumulation ........... 149,772,871 Annuity contracts in payment period ......... 229,509 Aetna Real Estate Securities VP: Annuity contracts in accumulation ........... 965,259 Annuity contracts in payment period ......... 16,278 Aetna Small Company VP: Annuity contracts in accumulation ........... 18,295,242 Annuity contracts in payment period ......... 197,498 Aetna Value Opportunity VP: Annuity contracts in accumulation ........... 18,689,212 AIM V.I. Funds: Capital Appreciation Fund: Annuity contracts in accumulation ........... 298,792 Growth and Income Fund: Annuity contracts in accumulation ........... 221,558 Growth Fund: Annuity contracts in accumulation ........... 296,860 Value Fund: Annuity contracts in accumulation ........... 703,970 Alger American Funds: Balanced Portfolio: Annuity contracts in accumulation ........... 6,185,618 Income & Growth Portfolio: Annuity contracts in accumulation ........... 15,463,737 Leveraged AllCap Portfolio: Annuity contracts in accumulation ........... 16,971,895 American Century Investments: Balanced Fund: Annuity contracts in accumulation ........... 4,732,298 International Fund: Annuity contracts in accumulation ........... 5,791,227 Calvert Social Balanced Portfolio: Annuity contracts in accumulation ........... 1,958,082
S-4 Variable Annuity Account B Statement of Assets and Liabilities - December 31, 1998 (continued):
Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: Annuity contracts in accumulation .................... $ 176,108,721 Growth Portfolio: Annuity contracts in accumulation .................... 138,516,768 High Income Portfolio: Annuity contracts in accumulation .................... 49,328,098 Annuity contracts in payment period .................. 503,361 Overseas Portfolio: Annuity contracts in accumulation .................... 17,886,843 Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: Annuity contracts in accumulation .................... 20,414,738 Contrafund Portfolio: Annuity contracts in accumulation .................... 162,974,413 Index 500 Portfolio: Annuity contracts in accumulation .................... 141,735,838 Investment Grade Bond Portfolio: Annuity contracts in accumulation .................... 5,695,641 Insurance Management Series: American Leaders Fund II: Annuity contracts in accumulation .................... 134,398,144 Annuity contracts in payment period .................. 51,858 Equity Income Fund II: Annuity contracts in accumulation .................... 28,656,460 Annuity contracts in payment period .................. 7,576 Growth Strategies Fund II: Annuity contracts in accumulation .................... 27,450,515 High Income Bond Fund II: Annuity contracts in accumulation .................... 49,887,731 International Equity Fund II: Annuity contracts in accumulation .................... 17,521,464 Prime Money Fund II: Annuity contracts in accumulation .................... 8,067,320 U.S. Government Securities II: Annuity contracts in accumulation .................... 16,054,824 Utility Fund II: Annuity contracts in accumulation .................... 30,329,937 Annuity contracts in payment period .................. 7,667 Janus Aspen Series: Aggressive Growth Portfolio: Annuity contracts in accumulation .................... 57,368,774 Balanced Portfolio: Annuity contracts in accumulation .................... 72,228,489 Flexible Income Portfolio: Annuity contracts in accumulation .................... 20,633,439 Growth Portfolio: Annuity contracts in accumulation .................... 68,058,273 Annuity contracts in payment period .................. 1,585,189 Worldwide Growth Portfolio: Annuity contracts in accumulation .................... 243,902,115 Annuity contracts in payment period .................. 3,724,747
S-5 Variable Annuity Account B Statement of Assets and Liabilities - December 31, 1998 (continued):
Lexington Emerging Markets Fund: Annuity contracts in accumulation ........... $ 1,509,423 Lexington Natural Resources Trust Fund: Annuity contracts in accumulation ........... 3,954,893 MFS Funds: Total Return Series: Annuity contracts in accumulation ........... 38,137,728 Worldwide Government Series: Annuity contracts in accumulation ........... 2,014,138 Oppenheimer Funds: Aggressive Growth Fund: Annuity contracts in accumulation ........... 11,917,723 Global Securities Fund: Annuity contracts in accumulation ........... 7,653,101 Growth & Income Fund: Annuity contracts in accumulation ........... 35,193,209 Strategic Bond Fund: Annuity contracts in accumulation ........... 12,897,019 Annuity contracts in payment period ......... 201,581 Portfolio Partners, Inc (PPI): PPI MFS Emerging Equities Portfolio: Annuity contracts in accumulation ........... 131,150,274 Annuity contracts in payment period ......... 922,555 PPI MFS Research Growth Portfolio: Annuity contracts in accumulation ........... 88,610,687 PPI MFS Value Equity Portfolio: Annuity contracts in accumulation ........... 27,062,849 Annuity contracts in payment period ......... 903,680 PPI Scudder International Growth Portfolio: Annuity contracts in accumulation ........... 17,577,310 Annuity contracts in payment period ......... 18,946 PPI T. Rowe Price Growth Equity Portfolio: Annuity contracts in accumulation ........... 118,791,854 Annuity contracts in payment period ......... 56,523 -------------- $3,956,568,422 ==============
See Notes to Financial Statements S-6 Variable Annuity Account B Statements of Operations and Changes in Net Assets
Year Ended December 31, 1998 1997 ---- ---- INVESTMENT INCOME: Income: (Notes 1, 3 and 5) Dividends ............................................................. $ 325,794,651 $ 278,833,116 Expenses: (Notes 2 and 5) Valuation period deductions ........................................... (42,285,760) (29,243,851) -------------- -------------- Net investment income .................................................. 283,508,891 249,589,265 -------------- -------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on sales of investments: (Notes 1, 4 and 5) Proceeds from sales ................................................... 1,555,519,398 1,004,789,371 Cost of investments sold .............................................. 1,412,108,865 933,728,508 -------------- -------------- Net realized gain .................................................... 143,410,533 71,060,863 -------------- -------------- Net unrealized gain on investments: (Note 5) Beginning of year ..................................................... 255,524,506 122,191,053 End of year ........................................................... 349,806,583 255,524,506 -------------- -------------- Net change in unrealized gain ........................................ 94,282,077 133,333,453 -------------- -------------- Net realized and unrealized gain on investments ........................ 237,692,610 204,394,316 -------------- -------------- Net increase in net assets resulting from operations ................... 521,201,501 453,983,581 -------------- -------------- FROM UNIT TRANSACTIONS: Variable annuity contract purchase payments ............................ 489,286,251 571,501,505 Transfers from the Company for mortality guarantee adjustments ......... (906,373) 371,835 Transfers from the Company's fixed account options ..................... 212,914,994 144,526,667 Redemptions by contract holders ........................................ (167,845,102) (82,942,177) Annuity payments ....................................................... (22,421,712) (16,137,431) Other .................................................................. 1,896,006 2,327,153 -------------- -------------- Net increase in net assets from unit transactions (Note 5) ........... 512,924,064 619,647,552 -------------- -------------- Change in net assets ................................................... 1,034,125,565 1,073,631,133 NET ASSETS: Beginning of year ...................................................... 2,922,442,857 1,848,811,724 -------------- -------------- End of year ............................................................ $3,956,568,422 $2,922,442,857 ============== ==============
See Notes to Financial Statements S-7 Variable Annuity Account B Condensed Financial Information - Year Ended December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------- Value Per Unit Increase (Decrease) Units -------- in Value of Outstanding Reserves Beginning End of Accumulation at End at End of Year Year Unit of Year of Year - -------------------------------------------------------------------------------------------------------------------------------- Aetna Ascent VP: Non-Qualified V $ 15.392 $ 15.855 3.01% 274,115.2 $ 4,346,011 Non-Qualified V (0.75) 15.535 16.082 3.52% 104,608.3 1,682,346 Non-Qualified VII 15.333 15.769 2.84% 1,027,839.2 16,207,554 Non-Qualified VIII 14.947 14.012 (6.26%) (4) 160,746.0 2,252,334 Non-Qualified IX 15.364 15.786 2.75% 1,717.5 27,113 Non-Qualified X 15.422 15.942 3.37% 24,014.0 382,832 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Balanced VP: Non-Qualified V 18.989 21.929 15.48% 2,929,719.6 64,245,891 Non-Qualified V (0.75) 19.166 22.244 16.06% 1,798,424.8 40,003,913 Non-Qualified VI 15.962 18.445 15.56% 43,363.3 799,818 Non-Qualified VII 18.653 21.507 15.30% 2,533,501.2 54,487,004 Non-Qualified VIII 14.392 15.212 5.70% (4) 363,744.6 5,533,430 Non-Qualified IX 18.954 21.834 15.19% 30,063.5 656,418 Non-Qualified X 19.016 22.015 15.77% 452,763.7 9,967,686 Non-Qualified XI 15.985 18.517 15.84% 6,799.7 125,910 Non-Qualified XIII 9.555 10.337 8.18% (10) 5,234.6 54,109 Non-Qualified XIV 9.276 10.323 11.29% (8) 17,680.9 182,516 Non-Qualified XV 9.581 10.316 7.67% (10) 9,446.8 97,451 Annuity contracts in payment period 18,758,905 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Bond VP: Non-Qualified V 13.361 14.270 6.80% 1,129,588.7 16,119,085 Non-Qualified V (0.75) 13.486 14.475 7.33% 2,012,308.2 29,127,850 Non-Qualified VI 12.204 13.041 6.86% 51,406.2 670,396 Non-Qualified VII 13.128 13.998 6.63% 1,948,372.8 27,273,239 Non-Qualified VIII 11.367 11.910 4.78% (4) 387,994.7 4,620,903 Non-Qualified IX 13.337 14.208 6.53% 18,429.1 261,845 Non-Qualified X 13.373 14.304 6.96% 452,992.2 6,479,375 Non-Qualified XI 12.214 13.072 7.02% 1,301.4 17,012 Non-Qualified XIII 10.157 10.319 1.59% (9) 16,581.5 171,096 Non-Qualified XIV 10.119 10.305 1.84% (9) 30,948.7 318,914 Non-Qualified XV 10.188 10.298 1.08% (10) 3,930.2 40,472 Annuity contracts in payment period 5,213,758 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Crossroads VP: Non-Qualified V 14.432 15.095 4.59% 218,648.6 3,300,593 Non-Qualified V (0.75) 14.566 15.312 5.12% 119,245.6 1,825,908 Non-Qualified VII 14.377 15.013 4.42% 1,316,579.2 19,766,357 Non-Qualified VIII 14.044 13.588 (3.25%) (4) 237,468.1 3,226,692 Non-Qualified IX 14.406 15.030 4.33% 457.5 6,876 Non-Qualified X 14.461 15.179 4.97% 10,768.7 163,454 Annuity contracts in payment period 1,317,322 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Get Fund, Series B: Non-Qualified V 20.717 24.373 17.65% 737,172.7 17,966,894 Non-Qualified X 20.717 24.373 17.65% 58,790.1 1,432,874 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Get Fund, Series C: Non-Qualified V 12.636 15.904 25.86% 92,330.0 1,468,418 Non-Qualified V (0.75) 12.718 16.087 26.49% 468,819.8 7,541,894 Non-Qualified IX 12.613 15.835 25.55% 9,144.7 144,810 Non-Qualified X 12.636 15.904 25.86% 7,601.7 120,897 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Get Fund, Series D: Non-Qualified V 9.997 10.062 0.65% (9) 1,577,071.0 15,867,744 Non-Qualified V (0.75) 9.997 10.073 0.76% (9) 614,759.8 6,192,546 Non-Qualified VII 9.997 10.058 0.61% (9) 3,322,479.7 33,416,640 Non-Qualified VIII 9.998 10.067 0.69% (9) 1,277,188.8 12,857,641 Non-Qualified X 10.023 10.062 0.39% (10) 65,946.9 663,527 Non-Qualified XIII 10.004 10.072 0.68% (9) 931,827.7 9,385,656 Non-Qualified XIV 10.000 10.066 0.66% (9) 884,851.1 8,907,146 Non-Qualified XV 10.009 10.063 0.54% (9) 259,978.3 2,616,226 - --------------------------------------------------------------------------------------------------------------------------------
S-8 Variable Annuity Account B Condensed Financial Information - Year Ended December 31, 1998 (continued):
- -------------------------------------------------------------------------------------------------------------------------------- Value Per Unit Increase (Decrease) Units -------- in Value of Outstanding Reserves Beginning End of Accumulation at End at End of Year Year Unit of Year of Year - -------------------------------------------------------------------------------------------------------------------------------- Aetna Growth and Income VP: Non-Qualified 1964 $ 236.446 $ 267.347 13.07% 958.7 $ 256,298 Non-Qualified V 22.028 24.907 13.07% 9,491,618.9 236,409,291 Non-Qualified V (0.75) 22.233 25.265 13.64% 12,975,484.3 327,821,341 Non-Qualified VI 20.614 23.322 13.14% 1,842,162.9 42,963,821 Non-Qualified VII 22.004 24.839 12.88% 8,999,335.5 223,538,139 Non-Qualified VIII 16.554 16.604 0.30% (4) 1,327,156.5 22,036,585 Non-Qualified IX 21.988 24.800 12.79% 148,050.5 3,671,604 Non-Qualified X 22.060 25.005 13.35% 3,821,349.4 95,552,990 Non-Qualified XI 20.644 23.414 13.42% 46,205.4 1,081,861 Non-Qualified XIII 7.862 9.886 25.74% (9) 125,488.2 1,240,545 Non-Qualified XIV 7.672 9.872 28.68% (9) 55,706.9 549,962 Non-Qualified XV 8.961 9.866 10.10% (10) 47,019.7 463,883 Annuity contracts in payment period 155,197,661 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Growth VP: Non-Qualified V 13.173 17.912 35.98% 140,521.9 2,516,985 Non-Qualified V (0.75) 13.239 18.067 36.47% (1) 428,697.2 7,745,376 Non-Qualified VII 13.158 17.862 35.75% 738,448.8 13,190,361 Non-Qualified VIII 15.809 17.909 13.28% (4) 266,761.0 4,777,514 Non-Qualified IX 15.727 17.834 13.40% (4) 2,088.8 37,253 Non-Qualified XIII 8.387 10.489 25.06% (9) 8,459.9 88,734 Non-Qualified XIV 8.359 10.475 25.31% (9) 8,297.4 86,912 Non-Qualified XV 8.899 10.468 17.63% (10) 2,297.8 24,052 Annuity contracts in payment period 1,199,857 - -------------------------------------------------------------------------------------------------------------------------------- Aetna High Yield VP: Non-Qualified V 9.954 9.212 (7.45%) (4) 604.9 5,573 Non-Qualified V (0.75) 9.941 9.244 (7.01%) (5) 24,320.0 224,813 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Index Plus Large Cap VP: Non-Qualified V 14.444 18.772 29.96% 527,155.0 9,895,905 Non-Qualified V (0.75) 14.538 18.989 30.62% 1,060,363.0 20,135,153 Non-Qualified VII 14.414 18.704 29.76% 2,252,763.4 42,134,590 Non-Qualified VIII 16.421 18.449 12.35% (4) 609,863.4 11,251,627 Non-Qualified IX 14.418 18.691 29.64% 23,366.8 436,755 Non-Qualified XIII 8.469 10.716 26.53% (9) 31,054.3 332,779 Non-Qualified XIV 8.964 10.702 19.39% (8) 94,255.0 1,008,675 Non-Qualified XV 9.134 10.694 17.08% (9) 4,956.9 53,011 Annuity contracts in payment period 1,829,647 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Index Plus Mid Cap VP: Non-Qualified V 10.107 10.891 7.76% (4) 17,010.7 185,258 Non-Qualified V (0.75) 9.950 10.928 9.83% (6) 16,206.7 177,112 Non-Qualified IX 8.579 10.872 26.73% (9) 1,230.2 13,375 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Index Plus Small Cap VP: Non-Qualified V 9.996 8.815 (11.81%) (4) 55,563.7 489,810 Non-Qualified V (0.75) 9.407 8.846 (5.96%) (5) 53,459.5 472,892 Non-Qualified IX 7.685 8.800 14.51% (8) 806.6 7,098 - -------------------------------------------------------------------------------------------------------------------------------- Aetna International VP: Non-Qualified V 10.149 9.765 (3.78%) (4) 35,872.2 350,278 Non-Qualified V (0.75) 10.288 9.798 (4.76%) (5) 28,999.8 284,152 Non-Qualified VII 10.169 9.754 (4.08%) (5) 45,143.4 440,322 Non-Qualified VIII 10.100 9.764 (3.33%) (4) 41,046.6 400,784 Non-Qualified XIII 8.583 9.149 6.59% (10) 587.0 5,371 Non-Qualified XIV 8.497 9.137 7.53% (10) 4,529.2 41,383 Non-Qualified XV 8.663 9.131 5.40% (11) 718.1 6,557 Annuity contracts in payment period 2,086 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Legacy VP: Non-Qualified V 13.317 14.064 5.61% 197,741.5 2,781,008 Non-Qualified V (0.75) 13.441 14.266 6.14% 120,311.5 1,716,341 Non-Qualified VII 13.267 13.989 5.44% 1,551,324.4 21,701,727 Non-Qualified VIII 13.073 13.037 (0.28%) (4) 467,027.3 6,088,503
S-9 Variable Annuity Account B Condensed Financial Information - Year Ended December 31, 1998 (continued):
- -------------------------------------------------------------------------------------------------------------------------------- Value Per Unit Increase (Decrease) Units -------- in Value of Outstanding Reserves Beginning End of Accumulation at End at End of Year Year Unit of Year of Year - -------------------------------------------------------------------------------------------------------------------------------- Aetna Legacy VP (continued): Non-Qualified IX $13.292 $14.003 5.35% 1,187.8 $ 16,633 Non-Qualified X 13.343 14.141 5.98% 1,958.3 27,693 Annuity contracts in payment period 2,822,843 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Money Market VP: Non-Qualified V 11.930 12.425 4.15% 1,146,661.0 14,247,696 Non-Qualified V (0.75) 12.041 12.604 4.68% 2,102,275.4 26,496,757 Non-Qualified VI 11.642 12.132 4.21% 67,991.9 824,888 Non-Qualified VII 11.850 12.322 3.98% 6,973,165.3 85,923,420 Non-Qualified VIII 10.847 11.141 2.71% (4) 1,221,158.5 13,605,259 Non-Qualified IX 11.908 12.372 3.90% 32,766.7 405,379 Non-Qualified X 11.930 12.425 4.15% 505,775.1 6,284,447 Non-Qualified XI 11.642 12.132 4.21% 49.6 602 Non-Qualified XIII 10.122 10.199 0.76% (9) 103,625.5 1,056,910 Non-Qualified XIV 10.086 10.186 0.99% (8) 44,014.2 448,309 Non-Qualified XV 10.120 10.179 0.58% (10) 47,079.4 479,204 Annuity contracts in payment period 229,509 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Real Estate Securities VP: Non-Qualified V 10.095 8.873 (12.11%) (4) 17,925.8 159,052 Non-Qualified V (0.75) 9.678 8.903 (8.01%) (5) 23,760.3 211,549 Non-Qualified VII 10.043 8.863 (11.75%) (4) 40,811.5 361,711 Non-Qualified VIII 10.033 8.872 (11.57%) (4) 13,789.3 122,343 Non-Qualified XIII 8.690 8.903 2.45% (10) 10,325.4 91,925 Non-Qualified XIV 8.833 8.891 0.66% (10) 2,081.8 18,509 Non-Qualified XV 8.648 8.885 2.74% (10) 19.2 170 Annuity contracts in payment period 16,278 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Small Company VP: Non-Qualified V 13.654 13.633 (0.15%) 91,991.6 1,254,115 Non-Qualified V (0.75) 13.704 13.751 0.34% 90,091.7 1,238,889 Non-Qualified VII 13.638 13.595 (0.32%) 873,315.8 11,872,953 Non-Qualified VIII 15.596 13.631 (12.60%) (4) 272,561.7 3,715,319 Non-Qualified IX 13.320 13.574 1.91% (1) 797.4 10,824 Non-Qualified XIII 8.799 9.357 6.34% (10) 13,537.9 126,679 Non-Qualified XIV 7.219 9.345 29.45% (9) 7,786.6 72,764 Non-Qualified XV 8.739 9.338 6.85% (11) 396.1 3,699 Annuity contracts in payment period 197,498 - -------------------------------------------------------------------------------------------------------------------------------- Aetna Value Opportunity VP: Non-Qualified V 13.261 16.030 20.88% 60,870.3 975,730 Non-Qualified V (0.75) 12.632 16.169 28.00% (1) 91,721.6 1,483,031 Non-Qualified VII 13.246 15.985 20.68% 841,077.5 13,444,950 Non-Qualified VIII 15.274 16.028 4.94% (4) 173,741.4 2,784,641 Non-Qualified IX 14.467 15.960 10.32% (3) 53.9 860 - -------------------------------------------------------------------------------------------------------------------------------- AIM V.I. Funds: Capital Appreciation Fund: Non-Qualified XIII 7.522 10.245 36.20% (9) 10,912.8 111,802 Non-Qualified XIV 7.914 10.231 29.28% (9) 17,420.4 178,233 Non-Qualified XV 9.078 10.224 12.62% (10) 856.5 8,757 - -------------------------------------------------------------------------------------------------------------------------------- Growth and Income Fund: Non-Qualified XIII 7.948 10.663 34.16% (9) 3,665.9 39,090 Non-Qualified XIV 8.179 10.649 30.20% (9) 9,967.9 106,146 Non-Qualified XV 8.830 10.641 20.51% (9) 7,172.1 76,322 - -------------------------------------------------------------------------------------------------------------------------------- Growth Fund: Non-Qualified XIII 7.856 10.779 37.21% (9) 11,162.9 120,321 Non-Qualified XIV 8.120 10.764 32.56% (9) 14,904.3 160,430 Non-Qualified XV 9.702 10.757 10.87% (11) 1,497.6 16,109 - -------------------------------------------------------------------------------------------------------------------------------- Value Fund: Non-Qualified XIII 7.820 10.616 35.75% (9) 27,667.7 293,713 Non-Qualified XIV 8.093 10.601 30.99% (9) 29,485.9 312,592 Non-Qualified XV 9.664 10.594 9.62% (11) 9,218.7 97,665 - --------------------------------------------------------------------------------------------------------------------------------
S-10 Variable Annuity Account B Condensed Financial Information - Year Ended December 31, 1998 (continued):
- ---------------------------------------------------------------------------------------------------------------------------- Value Per Unit Increase (Decrease) Units -------- in Value of Outstanding Reserves Beginning End of Accumulation at End at End of Year Year Unit of Year of Year - ---------------------------------------------------------------------------------------------------------------------------- Alger American Funds: Balanced Portfolio: Non-Qualified VII $16.153 $20.946 29.67% 295,306.5 $ 6,185,618 - ---------------------------------------------------------------------------------------------------------------------------- Income & Growth Portfolio: Non-Qualified VII 16.902 22.064 30.54% 700,861.1 15,463,737 - ---------------------------------------------------------------------------------------------------------------------------- Leveraged AllCap Portfolio: Non-Qualified VII 15.988 24.881 55.62% 682,007.2 16,968,827 Non-Qualified VIII 13.551 18.206 34.35% (4) 168.5 3,068 - ---------------------------------------------------------------------------------------------------------------------------- American Century Investments: Balanced Fund: Non-Qualified VII 15.312 17.479 14.15% 270,740.7 4,732,298 - ---------------------------------------------------------------------------------------------------------------------------- International Fund: Non-Qualified VII 13.782 16.139 17.10% 358,674.4 5,788,553 Non-Qualified VIII 15.241 14.599 (4.21%) (4) 183.2 2,674 - ---------------------------------------------------------------------------------------------------------------------------- Calvert Social Balanced Portfolio: Non-Qualified V 17.779 20.415 14.83% 8,742.2 178,470 Non-Qualified V (0.75) 17.944 20.708 15.40% 35,543.7 736,032 Non-Qualified VII 9.976 11.437 14.65% 34,437.7 393,873 Non-Qualified VIII 10.882 11.456 5.27% (4) 56,713.4 649,707 - ---------------------------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: Non-Qualified V 15.784 17.400 10.24% 298,921.1 5,201,225 Non-Qualified V (0.75) 15.930 17.650 10.80% 630,681.6 11,131,403 Non-Qualified VII 18.963 20.872 10.07% 6,923,691.7 144,511,703 Non-Qualified VIII 15.151 14.942 (1.38%) (4) 919,970.0 13,746,143 Non-Qualified IX 15.755 17.325 9.97% 6,719.9 116,422 Non-Qualified X 15.784 17.400 10.24% 13,539.3 235,583 Non-Qualified XIII 8.459 9.911 17.17% (9) 48,259.6 478,287 Non-Qualified XIV 8.314 9.897 19.04% (9) 59,608.6 589,966 Non-Qualified XV 9.412 9.891 5.09% (11) 9,907.3 97,989 - ---------------------------------------------------------------------------------------------------------------------------- Growth Portfolio: Non-Qualified V 13.904 19.155 37.77% 324,557.7 6,216,774 Non-Qualified V (0.75) 14.034 19.430 38.45% 595,859.4 11,577,298 Non-Qualified VII 19.157 26.348 37.54% 4,154,249.8 109,456,984 Non-Qualified VIII 14.533 17.420 19.87% (4) 600,814.2 10,466,173 Non-Qualified IX 13.879 19.072 37.42% 17,622.0 336,085 Non-Qualified X 13.904 19.155 37.77% 24,195.4 463,454 - ---------------------------------------------------------------------------------------------------------------------------- High Income Portfolio: Non-Qualified VII 13.959 13.168 (5.67%) 3,196,920.6 42,096,053 Non-Qualified VIII 13.167 11.798 (10.40%) (4) 530,361.7 6,257,364 Non-Qualified XIII 8.626 8.949 3.74% (10) 40,909.1 366,076 Non-Qualified XIV 8.411 8.936 6.24% (10) 19,660.9 175,698 Non-Qualified XV 8.987 8.930 (0.63%) (11) 48,475.9 432,907 Annuity contracts in payment period 503,361 - ---------------------------------------------------------------------------------------------------------------------------- Overseas Portfolio: Non-Qualified V 12.381 13.786 11.35% 54,225.5 747,571 Non-Qualified V (0.75) 12.496 13.984 11.91% 141,714.4 1,981,774 Non-Qualified VII 13.682 15.210 11.17% 929,309.5 14,135,208 Non-Qualified VIII 13.796 12.879 (6.65%) (4) 77,430.9 997,217 Non-Qualified IX 12.358 13.727 11.08% 1,826.6 25,073 - ---------------------------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: Non-Qualified VII 15.679 17.786 13.44% 1,019,122.4 18,126,177 Non-Qualified VIII 13.995 14.783 5.63% (4) 154,808.5 2,288,561 - ---------------------------------------------------------------------------------------------------------------------------- Contrafund Portfolio: Non-Qualified V 15.374 19.735 28.37% 488,102.2 9,632,520 Non-Qualified V (0.75) 15.517 20.018 29.01% 779,941.7 15,612,818 Non-Qualified VII 17.066 21.872 28.16% 5,718,965.7 125,086,950
S-11 Variable Annuity Account B Condensed Financial Information - Year Ended December 31, 1998 (continued):
- ------------------------------------------------------------------------------------------------------------------------- Value Per Unit Increase (Decrease) Units -------- in Value of Outstanding Reserves Beginning End of Accumulation at End at End of Year Year Unit of Year of Year - ------------------------------------------------------------------------------------------------------------------------- Contrafund Portfolio (continued): Non-Qualified VIII $15.503 $17.492 12.83% (4) 637,258.2 $ 11,146,870 Non-Qualified IX 15.346 19.649 28.04% 20,906.9 410,809 Non-Qualified X 15.374 19.735 28.37% 14,618.4 288,488 Non-Qualified XIII 8.083 10.535 30.34% (9) 42,196.2 444,543 Non-Qualified XIV 8.746 10.521 20.29% (8) 29,543.1 310,821 Non-Qualified XV 8.946 10.514 17.53% (10) 3,861.0 40,594 - ------------------------------------------------------------------------------------------------------------------------- Index 500 Portfolio: Non-Qualified VII 17.961 22.727 26.54% 5,533,320.3 125,753,551 Non-Qualified VIII 17.227 18.925 9.86% (4) 844,489.5 15,982,287 - ------------------------------------------------------------------------------------------------------------------------- Investment Grade Bond Portfolio: Non-Qualified VII 11.597 12.446 7.32% 457,640.6 5,695,641 - ------------------------------------------------------------------------------------------------------------------------- Insurance Management Series: American Leaders Fund II: Non-Qualified VII 20.287 23.528 15.98% 5,705,447.4 134,238,634 Non-Qualified VIII 16.597 16.869 1.64% (5) 9,455.9 159,510 Annuity contracts in payment period 51,858 - ------------------------------------------------------------------------------------------------------------------------- Equity Income Fund II: Non-Qualified VII 12.305 14.013 13.88% 2,043,618.6 28,656,460 Annuity contracts in payment period 7,576 - ------------------------------------------------------------------------------------------------------------------------- Growth Strategies Fund II: Non-Qualified VII 15.777 18.269 15.80% 1,502,535.0 27,450,515 - ------------------------------------------------------------------------------------------------------------------------- High Income Bond Fund II: Non-Qualified VII 14.724 14.910 1.26% 3,345,668.5 49,883,928 Non-Qualified VIII 12.832 12.629 (1.58%) (4) 301.1 3,803 - ------------------------------------------------------------------------------------------------------------------------- International Equity Fund II: Non-Qualified VII 11.888 14.719 23.81% 1,190,289.9 17,519,674 Non-Qualified VIII 13.748 13.523 (1.64%) (7) 132.3 1,790 - ------------------------------------------------------------------------------------------------------------------------- Prime Money Fund II: Non-Qualified VII 11.119 11.503 3.45% 701,312.8 8,067,320 - ------------------------------------------------------------------------------------------------------------------------- U.S. Government Securities Fund II: Non-Qualified VII 11.883 12.614 6.15% 1,272,804.3 16,054,824 - ------------------------------------------------------------------------------------------------------------------------- Utility Fund II: Non-Qualified VII 16.611 18.663 12.35% 1,625,061.9 30,328,887 Non-Qualified VIII 13.786 15.472 12.23% (7) 67.9 1,050 Annuity contracts in payment period 7,667 - ------------------------------------------------------------------------------------------------------------------------- Janus Aspen Series: Aggressive Growth Portfolio: Non-Qualified V 15.410 20.433 32.60% 512,154.4 10,464,741 Non-Qualified V (0.75) 15.554 20.726 33.25% 459,709.5 9,528,051 Non-Qualified VII 15.418 20.410 32.38% 1,622,088.6 33,106,814 Non-Qualified VIII 12.108 14.162 16.96% (4) 216,957.5 3,072,646 Non-Qualified IX 15.382 20.345 32.26% 12,305.4 250,348 Non-Qualified X 15.410 20.433 32.60% 24,372.9 498,007 Non-Qualified XIII 7.183 11.042 53.72% (9) 18,317.8 202,268 Non-Qualified XIV 6.858 11.027 60.79% (9) 21,356.2 235,501 Non-Qualified XV 9.497 11.020 16.04% (11) 943.6 10,398 - ------------------------------------------------------------------------------------------------------------------------- Balanced Portfolio: Non-Qualified V 14.990 19.880 32.62% 334,507.8 6,649,987 Non-Qualified V (0.75) 15.130 20.165 33.28% 241,070.0 4,861,245 Non-Qualified VII 16.692 22.101 32.40% 2,277,803.6 50,341,553 Non-Qualified VIII 15.156 17.569 15.92% (4) 480,187.2 8,436,522 Non-Qualified IX 14.963 19.794 32.29% 7,705.0 152,514 Non-Qualified X 14.990 19.880 32.62% 6,712.2 133,439 Non-Qualified XIII 9.175 10.945 19.29% (9) 114,602.5 1,254,291 Non-Qualified XIV 8.301 10.930 31.67% (9) 27,397.4 299,452 Non-Qualified XV 9.275 10.923 17.77% (8 9,108.3 99,486 - -------------------------------------------------------------------------------------------------------------------------
S-12 Variable Annuity Account B Condensed Financial Information - Year Ended December 31, 1998 (continued):
- ----------------------------------------------------------------------------------------------------------------------------- Value Per Unit Increase (Decrease) Units -------- in Value of Outstanding Reserves Beginning End of Accumulation at End at End of Year Year Unit of Year of Year - ----------------------------------------------------------------------------------------------------------------------------- Flexible Income Portfolio: Non-Qualified V $14.393 $15.509 7.75% 85,516.5 $ 1,326,243 Non-Qualified V (0.75) 14.527 15.731 8.29% 199,466.7 3,137,882 Non-Qualified VII 14.320 15.405 7.58% 855,509.7 13,179,344 Non-Qualified VIII 12.363 12.873 4.13% (4) 221,988.1 2,857,737 Non-Qualified IX 14.367 15.442 7.48% 3,382.6 52,233 Non-Qualified X 14.630 15.509 6.01% (2) 5,158.4 80,000 - ----------------------------------------------------------------------------------------------------------------------------- Growth Portfolio: Non-Qualified V 15.414 20.651 33.98% 217,309.5 4,487,701 Non-Qualified V (0.75) 15.558 20.948 34.64% 244,106.5 5,113,454 Non-Qualified VII 18.340 24.532 33.76% 2,097,548.1 51,456,280 Non-Qualified VIII 15.094 17.461 15.68% (4) 281,233.5 4,910,658 Non-Qualified IX 15.386 20.562 33.64% 4,444.5 91,388 Non-Qualified X 15.414 20.651 33.98% 1,027.9 21,226 Non-Qualified XIII 7.907 10.938 38.33% (9) 138,459.2 1,514,405 Non-Qualified XIV 7.596 10.923 43.80% (9) 35,759.3 390,592 Non-Qualified XV 9.157 10.915 19.20% (10) 6,648.3 72,569 Annuity contracts in payment period 1,585,189 - ----------------------------------------------------------------------------------------------------------------------------- Worldwide Growth Portfolio: Non-Qualified V 16.745 21.320 27.32% 1,069,704.4 22,805,969 Non-Qualified V (0.75) 16.901 21.626 27.96% 1,346,456.7 29,118,282 Non-Qualified VII 18.910 24.039 27.12% 7,196,142.1 172,985,648 Non-Qualified VIII 16.509 17.358 5.14% (4) 941,812.3 16,347,812 Non-Qualified IX 16.714 21.228 27.01% 28,229.7 599,257 Non-Qualified X 16.745 21.320 27.32% 45,970.7 980,091 Non-Qualified XIII 7.245 9.576 32.17% (9) 63,712.4 610,124 Non-Qualified XIV 8.027 9.563 19.14% (8) 39,601.7 378,723 Non-Qualified XV 8.519 9.557 12.18% (10) 7,974.3 76,209 Annuity contracts in payment period 3,724,747 - ----------------------------------------------------------------------------------------------------------------------------- Lexington Emerging Markets Fund: Non-Qualified VII 8.572 6.068 (29.21%) 247,857.1 1,509,423 - ----------------------------------------------------------------------------------------------------------------------------- Lexington Natural Resources Trust Fund: Non-Qualified V 13.896 11.030 (20.62%) 89,735.0 989,787 Non-Qualified V (0.75) 14.025 11.189 (20.22%) 92,175.0 1,031,313 Non-Qualified VII 13.794 10.932 (20.75%) 174,370.9 1,906,192 Non-Qualified IX 13.870 10.982 (20.82%) 752.5 8,264 Non-Qualified X 13.896 11.030 (20.62%) 1,753.1 19,337 - ----------------------------------------------------------------------------------------------------------------------------- MFS Funds: Total Return Series: Non-Qualified VII 13.030 14.432 10.76% 2,203,926.5 31,807,542 Non-Qualified VIII 14.096 14.491 2.80% (4) 400,395.8 5,802,076 Non-Qualified XIII 9.712 10.171 4.73% (10) 11,625.0 118,235 Non-Qualified XIV 9.772 10.157 3.94% (10) 12,838.2 130,398 Non-Qualified XV 9.737 10.150 4.24% (10) 27,534.1 279,477 - ----------------------------------------------------------------------------------------------------------------------------- Worldwide Government Series: Non-Qualified VII 10.207 10.860 6.40% 156,298.4 1,697,332 Non-Qualified VIII 10.312 10.904 5.74% (4) 29,054.9 316,806 - ----------------------------------------------------------------------------------------------------------------------------- Oppenheimer Funds: Aggressive Growth Fund: Non-Qualified VII 12.204 13.520 10.78% 659,693.3 8,919,034 Non-Qualified VIII 14.076 13.556 (3.69%) (4) 211,732.4 2,870,164 Non-Qualified XIII 7.289 9.362 28.44% (9) 730.2 6,837 Non-Qualified XIV 6.300 9.350 48.41% (9) 12,608.6 117,886 Non-Qualified XV 8.309 9.343 12.44% (11) 406.9 3,802 - ----------------------------------------------------------------------------------------------------------------------------- Global Securities Fund: Non-Qualified V 10.027 10.018 (0.09%) (4) 3,998.3 40,057 Non-Qualified V (0.75) 10.004 10.053 0.49% (6) 9,360.1 94,099 Non-Qualified VII 11.539 12.982 12.51% 465,279.3 6,040,369 Non-Qualified VIII 13.007 13.016 0.07% (4) 113,574.5 1,478,339 Non-Qualified IX 9.378 10.001 6.64% (11) 23.7 237 - -----------------------------------------------------------------------------------------------------------------------------
S-13 Variable Annuity Account B Condensed Financial Information - Year Ended December 31, 1998 (continued):
- ------------------------------------------------------------------------------------------------------------------------------ Value Per Unit Increase (Decrease) Units -------- in Value of Outstanding Reserves Beginning End of Accumulation at End at End of Year Year Unit of Year of Year - ------------------------------------------------------------------------------------------------------------------------------ Growth & Income Fund: Non-Qualified VII $ 12.785 $ 13.199 3.24% 2,014,343.2 $26,587,287 Non-Qualified VIII 14.890 13.234 (11.12%) (4) 602,061.1 7,967,561 Non-Qualified XIII 6.913 9.080 31.35% (9) 27,241.3 247,342 Non-Qualified XIV 6.647 9.067 36.41% (9) 41,656.3 377,715 Non-Qualified XV 8.449 9.061 7.24% (10) 1,468.2 13,304 - ------------------------------------------------------------------------------------------------------------------------------ Strategic Bond Fund: Non-Qualified V 9.952 9.895 (0.57%) (4) 3,006.1 29,745 Non-Qualified V (0.75) 10.098 9.929 (1.67%) (6) 625.2 6,208 Non-Qualified VII 10.764 10.921 1.46% 890,900.1 9,729,448 Non-Qualified VIII 11.084 10.950 (1.21%) (4) 254,861.2 2,790,663 Non-Qualified IX 9.889 9.878 (0.11%) (11) 67.2 664 Non-Qualified XIII 9.550 9.823 2.86% (10) 21,480.1 211,003 Non-Qualified XIV 9.566 9.810 2.55% (9) 13,169.1 129,188 Non-Qualified XV 9.768 9.803 0.36% (11) 10.2 100 Annuity contracts in payment period 201,581 - ------------------------------------------------------------------------------------------------------------------------------ Portfolio Partners, Inc. (PPI): PPI MFS Emerging Equities Portfolio: Non-Qualified V 15.219 19.489 28.06% 695,812.6 13,560,945 Non-Qualified V (0.75) 15.361 19.769 28.70% 562,096.7 11,112,279 Non-Qualified VII 14.707 18.803 27.85% 5,270,772.3 99,108,417 Non-Qualified VIII 12.011 12.761 6.24% (4) 509,943.9 6,507,181 Non-Qualified IX 15.192 19.405 27.73% 13,060.2 253,436 Non-Qualified X 15.219 19.489 28.06% 11,330.3 220,821 Non-Qualified XIII 7.999 10.371 29.65% (9) 11,390.8 118,131 Non-Qualified XIV 6.702 10.357 54.54% (9) 13,509.1 139,910 Non-Qualified XV 8.599 10.350 20.36% (10) 12,479.0 129,154 Annuity contracts in payment period 922,555 - ------------------------------------------------------------------------------------------------------------------------------ PPI MFS Research Growth Portfolio: Non-Qualified V 12.744 15.481 21.48% 605,270.9 9,370,125 Non-Qualified V (0.75) 12.863 15.703 22.08% 428,785.0 6,733,360 Non-Qualified VI 10.761 13.080 21.55% 8,187.8 107,093 Non-Qualified VII 12.641 15.331 21.28% 4,136,850.6 63,421,168 Non-Qualified VIII 10.102 10.532 4.26% (4) 554,094.8 5,835,838 Non-Qualified IX 12.721 15.414 21.17% 21,363.0 329,290 Non-Qualified X 12.744 15.481 21.48% 148,963.1 2,306,080 Non-Qualified XI 11.698 13.080 11.81% (10) 2,353.6 30,784 Non-Qualified XIII 8.805 10.113 14.86% (10) 4,603.7 46,556 Non-Qualified XIV 9.089 10.099 11.11% (10) 36,362.5 367,223 Non-Qualified XV 8.886 10.092 13.57% (10) 6,259.4 63,170 - ------------------------------------------------------------------------------------------------------------------------------ PPI MFS Value Equity Portfolio: Non-Qualified V 21.343 26.713 25.16% 303,746.3 8,114,121 Non-Qualified V (0.75) 21.541 27.097 25.79% 167,064.5 4,526,964 Non-Qualified VII 10.152 12.686 24.96% 881,252.1 11,179,905 Non-Qualified VIII 12.147 12.708 4.62% (4) 214,289.8 2,723,123 Non-Qualified IX 21.304 26.598 24.85% 1,925.9 51,224 Non-Qualified X 21.343 26.713 25.16% 9,947.4 265,731 Non-Qualified XIII 9.507 10.193 7.22% (10) 10,086.1 102,811 Non-Qualified XIV 9.302 10.180 9.44% (10) 9,561.3 97,330 Non-Qualified XV 9.421 10.173 7.98% (11) 161.2 1,640 Annuity contracts in payment period 903,680 - ------------------------------------------------------------------------------------------------------------------------------ PPI Scudder International Growth Portfolio: Non-Qualified V 17.903 21.057 17.62% 360,392.4 7,588,700 Non-Qualified V (0.75) 18.070 21.359 18.20% 257,953.3 5,509,651 Non-Qualified VII 9.912 11.640 17.43% 199,291.3 2,319,696 Non-Qualified VIII 11.775 11.659 (0.99%) (4) 107,008.6 1,247,585 Non-Qualified IX 17.870 20.966 17.33% 5,411.2 113,451 Non-Qualified X 17.903 21.057 17.62% 5,244.9 110,442 Non-Qualified XIII 8.553 9.248 8.13% (10) 46,182.0 427,101 Non-Qualified XIV 8.395 9.236 10.02% (9) 25,859.7 238,833
S-14 Variable Annuity Account B Condensed Financial Information - Year Ended December 31, 1998 (continued):
- ------------------------------------------------------------------------------------------------------------------------- Value Per Unit Increase (Decrease) Units -------- in Value of Outstanding Reserves Beginning End of Accumulation at End at End of Year Year Unit of Year of Year - ------------------------------------------------------------------------------------------------------------------------- PPI Scudder International Growth Portfolio (continued): Non-Qualified XV $ 8.841 $ 9.229 4.39% (10) 2,367.5 $ 21,851 Annuity contracts in payment period 18,946 - ------------------------------------------------------------------------------------------------------------------------- PPI T. Rowe Price Growth Equity Portfolio: Non-Qualified V 14.400 18.146 26.01% 287,914.4 5,224,616 Non-Qualified V (0.75) 14.534 18.407 26.65% 335,509.9 6,175,728 Non-Qualified VII 18.343 23.078 25.81% 4,440,082.5 102,469,170 Non-Qualified VIII 15.327 16.682 8.84% (4) 272,321.4 4,542,742 Non-Qualified IX 14.374 18.068 25.70% 16,259.0 293,769 Non-Qualified X 14.400 18.146 26.01% 4,729.8 85,829 Annuity contracts in payment period 56,523 - -------------------------------------------------------------------------------------------------------------------------
Non-Qualified 1964 Individual contracts issued from December 1, 1964 to March 14, 1967. Non-Qualified V Group Aetna Plus contracts issued in connection with Deferred Compensation Plans issued since August 28, 1992. Non-Qualified VI Certain existing contracts that were converted to ACES, an administrative system (previously valued under Non-Qualified I). Non-Qualified VII Certain individual and group contracts issued as non-qualified deferred annuity contracts or Individual Retirement Annuity contracts issued since May 4, 1994. Non-Qualified VIII Certain individual Retirement Annuity contracts issued since May 1, 1998. Non-Qualified IX Group Aetna Plus contracts issued in connection with Deferred Compensation Plans having contract modifications effective April 7, 1997. Non-Qualified X Group Aetna Plus contracts issued in connection with Deferred Compensation Plans having contract modifications effective May 29, 1997. Non-Qualified XI Certain contracts previously valued under Non-Qualified VI having contract modifications effective May 29, 1997. Non-Qualified XIII Certain individual Retirement Annuity contracts issued since October 1, 1998. Non-Qualified XIV Certain individual Retirement Annuity contracts issued since September 1, 1998. Non-Qualified XV Certain individual Retirement Annuity contracts issued since September 1, 1998.
Notes to Condensed Financial Information: (1) - Reflects less than a full year of performance activity. Funds were first received in this option during January 1998. (2) - Reflects less than a full year of performance activity. Funds were first received in this option during February 1998. (3) - Reflects less than a full year of performance activity. Funds were first received in this option during March 1998. (4) - Reflects less than a full year of performance activity. Funds were first received in this option during May 1998. (5) - Reflects less than a full year of performance activity. Funds were first received in this option during June 1998. (6) - Reflects less than a full year of performance activity. Funds were first received in this option during July 1998. (7) - Reflects less than a full year of performance activity. Funds were first received in this option during August 1998. (8) - Reflects less than a full year of performance activity. Funds were first received in this option during September 1998. (9) - Reflects less than a full year of performance activity. Funds were first received in this option during October 1998. (10) - Reflects less than a full year of performance activity. Funds were first received in this option during November 1998. (11) - Reflects less than a full year of performance activity. Funds were first received in this option during December 1998. See Notes to Financial Statements S-15 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 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, 1998:
Aetna Ascent VP Fidelity Investments Variable Insurance Aetna Balanced VP Products Fund II: Aetna Bond VP o Asset Manager Portfolio Aetna Crossroads VP o Contrafund Portfolio Aetna GET Fund, Series B o Index 500 Portfolio Aetna GET Fund, Series C o Investment Grade Bond Portfolio Aetna GET Fund, Series D Insurance Management Series: Aetna Growth and Income VP o American Leaders Fund II Aetna Growth VP o Equity Income Fund II Aetna High Yield VP o Growth Strategies Fund II Aetna Index Plus Large Cap VP o High Income Bond Fund II Aetna Index Plus Mid Cap VP o International Equity Fund II Aetna Index Plus Small Cap VP o Prime Money Fund II Aetna International VP o U.S. Government Securities Fund II Aetna Legacy VP o Utility Fund II Aetna Money Market VP Janus Aspen Series: Aetna Real Estate Securities VP o Aggressive Growth Portfolio Aetna Small Company VP o Balanced Portfolio Aetna Value Opportunity VP o Flexible Income Portfolio AIM V.I. Funds: o Growth Portfolio o Capital Appreciation Fund o Worldwide Growth Portfolio o Growth and Income Fund Lexington Emerging Markets Fund o Growth Fund Lexington Natural Resources Trust Fund o Value Fund MFS Funds: Alger American Funds: o Total Return Series o Balanced Portfolio o Worldwide Government Series o Income & Growth Portfolio Oppenheimer Funds: o Leveraged AllCap Portfolio o Aggressive Growth Fund American Century Investments: o Global Securities Fund o Balanced Fund o Growth & Income Fund o International Fund o Strategic Bond Fund Calvert Social Balanced Portfolio Portfolio Partners, Inc. (PPI): Fidelity Investments Variable Insurance o PPI MFS Emerging Equities Portfolio Products Fund: o PPI MFS Research Growth Portfolio o Equity-Income Portfolio o PPI MFS Value Equity Portfolio o Growth Portfolio o PPI Scudder International Growth Portfolio o High Income Portfolio o PPI T. Rowe Price Growth Equity Portfolio o Overseas Portfolio
S-16 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (continued): b. Other Investment transactions are accounted for on a trade date basis and dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by specific identification. c. Federal Income Taxes The 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, 1998 and December 31, 1997 aggregated $2,351,952,353 and $1,555,519,398; $1,874,026,188 and $1,004,789,371, respectively. S-17 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets
- --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - --------------------------------------------------------------------------------------------------------------------------------- Aetna Ascent VP: (1) $1,192,999 ($314,522) $6,202,187 $5,330,213 $871,974 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Aetna Balanced VP: (2) 31,081,246 (2,098,681) 22,863,897 18,450,097 4,413,800 Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Bond VP: (3) 5,276,463 (891,202) 45,551,245 43,538,269 2,012,976 Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Crossroads VP: (4) 1,150,096 (357,408) 3,956,923 3,518,415 438,508 Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Get Fund, Series B: 5,018,284 (317,102) 5,046,075 3,579,372 1,466,703 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Aetna Get Fund, Series C: 1,099,683 (125,657) 4,593,631 3,264,351 1,329,280 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Aetna Get Fund, Series D: 375,948 (91,506) 9,290 9,230 60 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Aetna Growth and Income VP: (5) 194,648,930 (11,627,716) 149,305,243 120,221,169 29,084,074 Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Growth VP: (6) 57,222 (185,058) 12,683,460 13,031,327 (347,867) Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna High Yield VP: (7) 22,406 (865) 33,710 33,668 42 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Aetna Index Plus Large Cap VP: (8) 3,829,668 (635,743) 17,517,599 14,396,635 3,120,964 Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Index Plus Mid Cap VP: (9) 18,437 (1,287) 73,979 81,147 (7,168) Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Aetna Index Plus Small Cap VP: (10) 38,562 (2,372) 124,787 157,822 (33,035) Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Aetna International VP: (11) 78,439 (5,821) 5,370,639 5,420,699 (50,060) Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Legacy VP: (12) 1,516,017 (403,303) 5,625,929 5,116,001 509,928 Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Money Market VP: (13) 6,326,910 (1,717,493) 386,526,442 385,568,048 958,394 Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Real Estate Securities VP: (14) 49,524 (4,403) 197,598 223,098 (25,500) Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Small Company VP: (15) 162,321 (180,527) 17,373,472 19,128,504 (1,755,032) Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Aetna Value Opportunity VP: (16) 205,253 (172,485) 6,514,348 6,609,710 (95,362) Annuity contracts in accumulation - ---------------------------------------------------------------------------------------------------------------------------------
S-18
- ----------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------- $1,034,430 ($204,552) ($1,238,982) $3,942,985 $ 20,443,736 $ 24,898,190 - ----------------------------------------------------------------------------------------------------------------- 21,131,758 13,657,518 (7,474,240) 6,148,805 150,761,384 176,154,146 12,080,737 18,758,905 - ----------------------------------------------------------------------------------------------------------------- 781,718 (271,440) (1,053,158) 12,050,394 69,236,488 85,100,187 3,681,984 5,213,758 - ----------------------------------------------------------------------------------------------------------------- 704,161 455,992 (248,169) 8,303,550 20,250,904 28,289,880 69,721 1,317,322 - ----------------------------------------------------------------------------------------------------------------- 6,194,743 3,285,620 (2,909,123) (4,718,918) 20,859,924 19,399,768 - ----------------------------------------------------------------------------------------------------------------- 2,144,550 2,432,614 288,064 (4,244,458) 10,929,107 9,276,019 - ----------------------------------------------------------------------------------------------------------------- 0 (64,824) (64,824) 89,687,448 0 89,907,126 - ----------------------------------------------------------------------------------------------------------------- 67,675,837 (14,386,593) (82,062,430) (42,142,027) 892,006,381 955,586,320 130,876,769 155,197,661 - ----------------------------------------------------------------------------------------------------------------- (945,071) 4,054,739 4,999,810 21,924,027 3,210,344 28,467,187 8,566 1,199,857 - ----------------------------------------------------------------------------------------------------------------- 0 (38,627) (38,627) 247,430 0 230,386 - ----------------------------------------------------------------------------------------------------------------- 1,342,384 9,544,413 8,202,029 44,321,436 28,074,705 85,248,495 165,083 1,829,647 - ----------------------------------------------------------------------------------------------------------------- 0 25,068 25,068 340,695 0 375,745 - ----------------------------------------------------------------------------------------------------------------- 0 8,264 8,264 958,381 0 969,800 - ----------------------------------------------------------------------------------------------------------------- 0 (4,447) (4,447) 1,512,822 0 1,528,847 0 2,086 - ----------------------------------------------------------------------------------------------------------------- 556,022 230,393 (325,629) 13,863,127 18,710,015 32,331,905 1,284,593 2,822,843 - ----------------------------------------------------------------------------------------------------------------- 1,429,868 1,434,703 4,835 19,490,597 124,939,137 149,772,871 0 229,509 - ----------------------------------------------------------------------------------------------------------------- 0 (78,505) (78,505) 1,040,421 0 965,259 0 16,278 - ----------------------------------------------------------------------------------------------------------------- (299,676) 1,188,423 1,488,099 12,670,750 6,059,783 18,295,242 47,346 197,498 - ----------------------------------------------------------------------------------------------------------------- (545,082) 1,733,031 2,278,113 12,561,099 3,912,594 18,689,212 - -----------------------------------------------------------------------------------------------------------------
S-19 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (continued): 5. Supplemental Information of Statements of Operations and Changes in Net Assets (continued):
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1998 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ AIM V.I. Funds: Capital Appreciation Fund: $4,806 ($202) $14,985 $12,643 $2,342 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Growth and Income Fund: 2,713 (267) 23,669 19,935 3,734 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Growth Fund: 9,742 (211) 23,394 19,680 3,714 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Value Fund: 25,024 (535) 56,171 51,027 5,144 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Alger American Funds: Balanced Portfolio: 486,973 (82,216) 1,110,574 897,864 212,710 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Income & Growth Portfolio: 1,467,662 (206,029) 3,272,978 2,151,013 1,121,965 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Leveraged AllCap Portfolio: 631,832 (203,365) 4,222,156 3,043,959 1,178,197 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- American Century Investments: Balanced Fund: 593,854 (65,789) 611,313 550,274 61,039 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- International Fund: 390,912 (86,065) 1,137,750 894,619 243,131 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Calvert Social Balanced Portfolio: 142,097 (14,682) 869,863 750,607 119,256 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: 8,906,937 (2,144,267) 25,370,915 20,727,569 4,643,346 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Growth Portfolio: 11,278,163 (1,400,091) 22,592,809 17,208,859 5,383,950 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- High Income Portfolio: 4,692,207 (673,883) 14,109,054 14,587,749 (478,695) Annuity contracts in accumulation Annuity contracts in payment period - ----------------------------------------------------------------------------------------------------------------------------------- Overseas Portfolio: 1,031,834 (210,954) 48,431,460 47,643,577 787,883 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: 1,595,388 (233,627) 3,024,858 2,760,267 264,591 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Contrafund Portfolio: 6,614,609 (1,728,721) 42,738,053 30,874,729 11,863,324 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Index 500 Portfolio: 3,204,277 (1,496,826) 30,685,587 22,118,189 8,567,398 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- Investment Grade Bond Portfolio: 342,576 (87,927) 1,725,694 1,635,019 90,675 Annuity contracts in accumulation - -----------------------------------------------------------------------------------------------------------------------------------
S-20
- ------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------- $0 $19,720 $19,720 $272,126 $0 $298,792 - ------------------------------------------------------------------------------------------------------------- 0 17,765 17,765 197,613 0 221,558 - ------------------------------------------------------------------------------------------------------------- 0 12,342 12,342 271,273 0 296,860 - ------------------------------------------------------------------------------------------------------------- 0 22,553 22,553 651,784 0 703,970 - ------------------------------------------------------------------------------------------------------------- 691,602 1,582,996 891,394 (979,394) 5,656,151 6,185,618 - ------------------------------------------------------------------------------------------------------------- 2,709,055 4,215,812 1,506,757 (2,575,078) 14,148,460 15,463,737 - ------------------------------------------------------------------------------------------------------------- 1,540,243 6,533,437 4,993,194 (3,907,972) 14,280,009 16,971,895 - ------------------------------------------------------------------------------------------------------------- 462,379 487,853 25,474 (525,510) 4,643,230 4,732,298 - ------------------------------------------------------------------------------------------------------------- 361,821 743,148 381,327 (991,033) 5,852,955 5,791,227 - ------------------------------------------------------------------------------------------------------------- 59,286 14,930 (44,356) 784,430 971,337 1,958,082 - ------------------------------------------------------------------------------------------------------------- 19,807,673 22,859,546 3,051,873 22,941,092 138,709,740 176,108,721 - ------------------------------------------------------------------------------------------------------------- 14,584,513 33,940,400 19,355,887 23,497,310 80,401,549 138,516,768 - ------------------------------------------------------------------------------------------------------------- 2,722,687 (4,425,686) (7,148,373) 18,153,824 35,217,837 49,328,098 68,542 503,361 - ------------------------------------------------------------------------------------------------------------- 460,930 669,980 209,050 3,064,387 13,004,643 17,886,843 - ------------------------------------------------------------------------------------------------------------- 1,137,702 1,633,427 495,725 6,549,586 11,743,075 20,414,738 - ------------------------------------------------------------------------------------------------------------- 18,201,832 35,201,475 16,999,643 21,398,116 107,827,442 162,974,413 - ------------------------------------------------------------------------------------------------------------- 10,882,841 25,538,020 14,655,179 39,819,038 76,986,772 141,735,838 - ------------------------------------------------------------------------------------------------------------- 387,160 478,048 90,888 (1,318,753) 6,578,182 5,695,641 - -------------------------------------------------------------------------------------------------------------
S-21 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1998 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------ Insurance Management Series: American Leaders Fund II: $7,998,351 ($1,792,801) $11,978,535 $7,178,957 $4,799,578 Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------------------------------------------ Equity Income Fund II: 129,452 (351,981) 2,362,630 1,928,603 434,027 Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------------------------------------------ Growth Strategies Fund II: 1,440,579 (346,704) 2,791,762 2,071,376 720,386 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ High Income Bond Fund II: 1,568,969 (734,892) 9,316,278 8,463,432 852,846 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ International Equity Fund II: 19,289 (235,997) 1,956,908 1,482,907 474,001 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Prime Money Fund II: 373,803 (110,555) 7,641,997 7,641,997 0 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ U.S. Government Securities Fund II: 228,386 (196,668) 3,851,945 3,576,274 275,671 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Utility Fund II: 1,743,305 (392,083) 2,677,845 1,942,231 735,614 Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------------------------------------------ Janus Aspen Series: Aggressive Growth Portfolio: 0 (548,576) 107,425,514 96,362,874 11,062,640 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Balanced Portfolio: 2,261,301 (641,284) 6,017,873 4,527,218 1,490,655 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Flexible Income Portfolio: 1,033,461 (191,305) 3,727,543 3,410,925 316,618 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Growth Portfolio: 3,293,173 (683,049) 26,018,237 18,985,226 7,033,011 Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------------------------------------------ Worldwide Growth Portfolio: 8,111,689 (2,748,458) 78,479,604 56,933,615 21,545,989 Annuity contracts in accumulation Annuity contracts in payment period - ------------------------------------------------------------------------------------------------------------------------ Lexington Emerging Markets Fund: 161,811 (28,458) 724,351 1,074,950 (350,599) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Lexington Natural Resources Trust Fund: 340,539 (62,444) 2,112,416 2,109,389 3,027 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ MFS Funds: Total Return Series: 778,001 (405,501) 3,009,737 2,396,400 613,337 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Worldwide Government Series: 17,379 (22,917) 739,420 740,555 (1,135) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Oppenheimer Funds: Aggressive Growth Fund: 152,035 (112,671) 86,439,393 86,664,887 (225,494) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Global Securities Fund: 387,530 (69,872) 10,919,054 11,293,037 (373,983) Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------ Growth & Income Fund: 1,054,695 (356,726) 4,266,733 4,140,441 126,292 Annuity contracts in accumulation - ------------------------------------------------------------------------------------------------------------------------
S-22
- ------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------- $30,111,589 $37,231,660 $7,120,071 ($524,859) $16,800,911 $134,398,144 48,751 51,858 - ------------------------------------------------------------------------------------------------------------- 911,406 3,973,133 3,061,727 5,452,240 19,938,571 28,656,460 0 7,576 - ------------------------------------------------------------------------------------------------------------- 3,558,451 5,244,563 1,686,112 1,241,036 22,709,106 27,450,515 - ------------------------------------------------------------------------------------------------------------- 3,763,082 2,714,767 (1,048,315) (3,963,730) 53,212,853 49,887,731 - ------------------------------------------------------------------------------------------------------------- 938,501 3,819,534 2,881,033 437,110 13,946,028 17,521,464 - ------------------------------------------------------------------------------------------------------------- 0 2,223 2,223 271,362 7,530,487 8,067,320 - ------------------------------------------------------------------------------------------------------------- 513,199 1,013,377 500,178 2,050,473 13,196,784 16,054,824 - ------------------------------------------------------------------------------------------------------------- 5,801,015 7,053,257 1,252,242 695,668 26,302,858 30,329,937 0 7,667 - ------------------------------------------------------------------------------------------------------------- 4,594,517 8,106,849 3,512,332 4,958,453 38,383,925 57,368,774 - ------------------------------------------------------------------------------------------------------------- 3,462,858 15,241,071 11,778,213 26,193,826 31,145,778 72,228,489 - ------------------------------------------------------------------------------------------------------------- 367,565 255,193 (112,372) 9,052,449 10,534,588 20,633,439 - ------------------------------------------------------------------------------------------------------------- 5,764,208 12,281,148 6,516,940 12,764,560 40,072,928 68,058,273 645,899 1,585,189 - ------------------------------------------------------------------------------------------------------------- 18,210,266 37,241,442 19,031,176 39,032,925 160,658,096 243,902,115 1,995,445 3,724,747 - ------------------------------------------------------------------------------------------------------------- (709,548) (1,196,659) (487,111) (619,636) 2,833,416 1,509,423 ------------------------------------------------------------------------------------------------------------ 177,872 (1,266,269) (1,444,141) (1,812,452) 6,930,364 3,954,893 - ------------------------------------------------------------------------------------------------------------- 1,975,149 3,834,735 1,859,586 16,318,427 18,973,878 38,137,728 - ------------------------------------------------------------------------------------------------------------- (5,937) 102,292 108,229 588,288 1,324,295 2,014,138 - ------------------------------------------------------------------------------------------------------------- 133,786 1,243,228 1,109,442 7,306,211 3,688,200 11,917,723 - ------------------------------------------------------------------------------------------------------------- (846) 786,005 786,851 4,241,638 2,680,937 7,653,101 - ------------------------------------------------------------------------------------------------------------- 465,927 (435,824) (901,751) 22,581,792 12,688,907 35,193,209 - -------------------------------------------------------------------------------------------------------------
S-23 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (continued): 5. Supplemental Information to Statements of Operations and Changes in Net Assets (continued):
- ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ----------------------------------------------------------------------------------------------------------------------------------- Strategic Bond Fund: $150,955 ($113,793) $1,981,154 $2,006,416 ($25,262) Annuity contracts in accumulation Annuity contracts in payment period - ----------------------------------------------------------------------------------------------------------------------------------- Portfolio Partners, Inc. (PPI): PPI MFS Emerging Equities Portfolio: 321,152 (1,493,640) 87,290,554 78,385,480 8,905,074 Annuity contracts in accumulation Annuity contracts in payment period - ----------------------------------------------------------------------------------------------------------------------------------- PPI MFS Research Growth Portfolio: 18,247 (1,021,049) 37,548,653 34,203,994 3,344,659 Annuity contracts in accumulation - ----------------------------------------------------------------------------------------------------------------------------------- PPI MFS Value Equity Portfolio: 34,159 (276,002) 13,051,497 11,621,475 1,430,022 Annuity contracts in accumulation Annuity contracts in payment period - ----------------------------------------------------------------------------------------------------------------------------------- PPI Scudder International Growth Portfolio: 29,626 (167,735) 136,940,032 134,230,073 2,709,959 Annuity contracts in accumulation Annuity contracts in payment period - ----------------------------------------------------------------------------------------------------------------------------------- PPI T. Rowe Price Growth Equity Portfolio: 576,750 (1,411,791) 16,657,996 15,110,779 1,547,217 Annuity contracts in accumulation Annuity contracts in payment period - ----------------------------------------------------------------------------------------------------------------------------------- Total Variable Annuity Account B $325,794,651 ($42,285,760) $1,555,519,398 $1,412,108,865 $143,410,533 ===================================================================================================================================
(1) - Effective May 1, 1998, Aetna Ascent Variable Portfolio's name changed to Aetna Ascent VP. (2) - Effective May 1, 1998, Aetna Investment Advisors Fund's name changed to Aetna Balanced VP. (3) - Effective May 1, 1998, Aetna Income Shares' name changed to Aetna Bond VP. (4) - Effective May 1, 1998, Aetna Crossroads Variable Portfolio's name changed to Aetna Crossroads VP. (5) - Effective May 1, 1998, Aetna Variable Fund's name changed to Aetna Growth and Income VP. (6) - Effective May 1, 1998, Aetna Variable Growth Portfolio's name changed to Aetna Growth VP. (7) - Effective May 1, 1998, Aetna High Yield Portfolio's name changed to Aetna High Yield VP. (8) - Effective May 1, 1998, Aetna Variable Index Plus Portfolio's name changed to Aetna Index Plus Large Cap VP. (9) - Effective May 1, 1998, Aetna Index Plus Mid Cap Portfolio's name changed to Aetna Index Plus Mid Cap VP. (10) -Effective May 1, 1998, Aetna Index Plus Small Cap Portfolio's name changed to Aetna Index Plus Small Cap VP. (11) -Effective May 1, 1998, Aetna International Portfolio's name changed to Aetna International VP. (12) -Effective May 1, 1998, Aetna Legacy Variable Portfolio's name changed to Aetna Legacy VP. (13) -Effective May 1, 1998, Aetna Variable Encore Fund's name changed to Aetna Money Market VP. (14) -Effective May 1, 1998, Aetna Real Estate Securities Portfolio's name changed to Aetna Real Estate Securities VP. (15) -Effective May 1, 1998, Aetna Variable Small Company Portfolio's name changed to Aetna Small Company VP. (16) -Effective May 1, 1998, Aetna Variable Capital Appreciation Portfolio's name changed to Aetna Value Opportunity VP. S-24
- ---------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------- ($21,173) $47,663 $68,836 $9,925,163 $3,092,701 $12,897,019 0 201,581 - ---------------------------------------------------------------------------------------------------------------- (753,832) 19,423,983 20,177,815 8,869,734 94,796,247 131,150,274 496,447 922,555 - ---------------------------------------------------------------------------------------------------------------- (1,162,926) 11,016,482 12,179,408 8,222,292 65,867,130 88,610,687 - ---------------------------------------------------------------------------------------------------------------- 220,662 3,770,053 3,549,391 7,801,278 15,049,606 27,062,849 378,075 903,680 - ---------------------------------------------------------------------------------------------------------------- 195,427 863,502 668,075 1,706,168 12,650,163 17,577,310 0 18,946 - ---------------------------------------------------------------------------------------------------------------- 1,797,922 24,891,619 23,093,697 4,872,245 90,170,258 118,791,854 0 56,523 - ---------------------------------------------------------------------------------------------------------------- $255,524,506 $349,806,583 $94,282,077 $512,924,064 $2,922,442,857 $3,956,568,422 ================================================================================================================
S-25 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (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) - ------------------------------------------------------------------------------------------------------------------------ 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-26
- -------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------- $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-27 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (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) - --------------------------------------------------------------------------------------------------------------------------------- Alger American Funds (continued): Growth Portfolio: (1) $506,477 ($685,927) $ 78,591,434 $ 64,519,617 $ 14,071,817 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Income and Growth Portfolio: 401,543 (156,768) 2,602,037 3,401,714 (799,677) Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Leveraged AllCap Portfolio: 0 (196,601) 7,570,244 6,461,486 1,108,758 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- MidCap Growth Portfolio: (1) 350,028 (308,858) 49,795,194 45,404,313 4,390,881 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Small Capitalization Portfolio: (2) 2,260,717 (722,118) 118,175,863 114,437,088 3,738,775 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- American Century Investments: Balanced Fund: 199,265 (58,943) 704,536 619,119 85,417 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Capital Appreciation Fund: (3) 725,963 (365,809) 47,909,593 51,060,683 (3,151,090) Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- International Fund: 176,899 (85,324) 4,226,767 3,417,937 808,830 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Calvert Social Balanced Portfolio: 67,562 (7,128) 212,241 199,799 12,442 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio: 7,870,976 (1,400,361) 17,887,517 15,251,625 2,635,892 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Growth Portfolio: 2,159,319 (938,752) 10,659,015 9,711,716 947,299 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- High Income Portfolio: 1,270,071 (337,944) 4,857,948 4,277,783 580,165 Annuity contracts in accumulation Annuity contracts in payment period - --------------------------------------------------------------------------------------------------------------------------------- Overseas Portfolio: 863,493 (164,196) 5,725,552 5,116,905 608,647 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio: 761,827 (120,783) 1,009,159 904,890 104,269 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Contrafund Portfolio: 1,931,363 (1,125,088) 13,933,668 10,543,199 3,390,469 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Index 500 Portfolio: 1,159,193 (771,581) 17,678,295 13,392,232 4,286,063 Annuity contracts in accumulation - --------------------------------------------------------------------------------------------------------------------------------- Investment Grade Bond Portfolio: 277,920 (79,205) 1,100,211 1,085,995 14,216 Annuity contracts in accumulation - ---------------------------------------------------------------------------------------------------------------------------------
S-28
- ------------------------------------------------------------------------------------------------------------ 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-29 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (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-30
- ----------------------------------------------------------------------------------------------------------- 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-31 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (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: 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-32
- ---------------------------------------------------------------------------------------------------------- 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-33 Variable Annuity Account B Notes to Financial Statements - December 31, 1998 (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-34
- --------------------------------------------------------------------------------------------------------------------- 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-35 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, 1998, and the related statements of operations and changes in net assets for each of the years in the two-year period then ended and condensed financial information for the year ended December 31, 1998. These financial statements and condensed financial information are the responsibility of the Account's management. Our responsibility is to express an opinion on these financial statements and condensed financial information based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and condensed financial information are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and condensed financial information. Our procedures included confirmation of securities owned as of December 31, 1998, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and condensed financial information referred to above present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company Variable Annuity Account B as of December 31, 1998, the results of its operations and changes in its net assets for each of the years in the two-year period then ended and condensed financial information for the year ended December 31, 1998, in conformity with generally accepted accounting principles. /s/KPMG LLP Hartford, Connecticut February 26, 1999 S-36 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, 1998, 1997 and 1996 F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4 Consolidated Statements of Changes in Shareholder's Equity For the Years Ended December 31, 1998, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7
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, 1998 and 1997, and the related consolidated statements of income, changes in shareholder's equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company and Subsidiary at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Hartford, Connecticut February 3, 1999 F-2 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, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Revenue: Premiums $ 79.4 $ 69.1 $ 84.9 Charges assessed against policyholders 324.3 262.0 197.0 Net investment income 877.6 878.8 852.6 Net realized capital gains 10.4 29.7 17.0 Other income 29.6 38.3 43.6 ---------- ---------- ---------- Total revenue 1,321.3 1,277.9 1,195.1 ---------- ---------- ---------- Benefits and expenses: Current and future benefits 714.4 720.4 728.3 Operating expenses 313.2 286.5 275.8 Amortization of deferred policy acquisition costs 106.7 82.8 28.0 Severance and facilities charges -- -- 47.1 ---------- ---------- ---------- Total benefits and expenses 1,134.3 1,089.7 1,079.2 ---------- ---------- ---------- Income from continuing operations before income taxes 187.0 188.2 115.9 Income taxes 47.4 50.7 30.7 ---------- ---------- ---------- Income from continuing operations 139.6 137.5 85.2 Discontinued Operations, net of tax Income from operations 61.8 67.8 55.9 Gain on sale 59.0 -- -- ---------- ---------- ---------- Net income $ 260.4 $ 205.3 $ 141.1 ========== ========== ==========
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, 1998 1997 ------------ ------------ Assets Investments: Debt securities available for sale, at fair value, (amortized cost: $11,570.3 and $12,912.2) $12,067.2 $13,463.8 Equity securities, at fair value, Nonredeemable preferred stock (cost: $202.6 and $131.7) 203.3 147.6 Investment in affiliated mutual funds (cost: $96.8 and$78.1) 100.1 83.0 Common stock (cost: $1.0 and $0.2) 2.0 .6 Short-term investments 47.9 95.6 Mortgage loans 12.7 12.8 Policy loans 292.2 469.6 ------------ ------------ Total investments 12,725.4 14,273.0 Cash and cash equivalents 608.4 565.4 Short-term investments under securities loan agreement 277.3 -- Accrued investment income 151.6 163.0 Premiums due and other receivables 46.7 51.9 Reinsurance recoverable 2,959.8 11.8 Deferred policy acquisition costs 864.0 1,654.6 Reinsurance loan to affiliate -- 397.2 Deferred tax asset 120.6 -- Other assets 66.6 46.8 Separate accounts assets 29,458.4 22,982.7 ------------ ------------ Total assets $47,278.8 $40,146.4 ============ ============ Liabilities and Shareholder's Equity Liabilities: Future policy benefits $ 3,815.9 $ 3,763.7 Unpaid claims and claim expenses 18.8 38.0 Policyholders' funds left with the Company 11,305.6 11,143.5 ------------ ------------ Total insurance reserve liabilities 15,140.3 14,945.2 Payables under securities loan agreement 277.3 -- Other liabilities 793.2 312.8 Income taxes: Current 279.8 12.4 Deferred -- 72.0 Separate accounts liabilities 29,430.2 22,970.0 ------------ ------------ Total liabilities 45,920.8 38,312.4 ------------ ------------ Shareholder's equity: Common stock, par value $50 (100,000 shares authorized; 55,000 shares issued and outstanding) 2.8 2.8 Paid-in capital 427.3 418.0 Accumulated other comprehensive income 104.8 92.9 Retained earnings 823.1 1,320.3 ------------ ------------ Total shareholder's equity 1,358.0 1,834.0 ------------ ------------ Total liabilities and shareholder's equity $47,278.8 $40,146.4 ============ ============
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, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Shareholder's equity, beginning of year $1,834.0 $1,609.5 $1,583.0 Comprehensive income Net income 260.4 205.3 141.1 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities ($18.2 million, $49.9 million and $(110.6) million, pretax, respectively) 11.9 32.4 (72.0) ---------- ---------- ---------- Total comprehensive income 272.3 237.7 69.1 ---------- ---------- ---------- Capital contributions 9.3 -- 10.4 Other changes 1.4 4.1 (49.5) Common stock dividends (759.0) (17.3) (3.5) ---------- ---------- ---------- Shareholder's equity, end of year $1,358.0 $1,834.0 $1,609.5 ========== ========== ==========
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, --------------------------------------- 1998 1997 1996 --------- --------- --------- Cash Flows from Operating Activities: Net income $ 260.4 $ 205.3 $ 141.1 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Net accretion of discount on investments (29.5) (66.4) (68.0) Gain on sale of discontinued operations (88.3) -- -- --------- --------- --------- Cash flows provided by operating activities and net realized capital gains before changes in assets and liabilities 142.6 138.9 73.1 Net realized capital gains (11.1) (36.0) (19.7) --------- --------- --------- Cash flows provided by operating activities before changes in assets and liabilities 131.5 102.9 53.4 Changes in assets and liabilities: Decrease (increase) in accrued investment income 11.4 (4.0) 16.5 (Increase) decrease in premiums due and other receivables (16.3) (33.3) 1.6 Decrease (increase) in policy loans 177.4 (70.3) (60.7) Increase in deferred policy acquisition costs (117.3) (139.3) (174.0) Decrease in reinsurance loan to affiliate 397.2 231.1 27.2 Net increase in universal life account balances 122.9 157.1 146.6 Decrease in other insurance reserve liabilities (41.8) (120.3) (114.9) Net (decrease) increase in other liabilities and other assets (50.8) (41.7) 3.1 Increase (decrease) in income taxes 100.4 (31.4) (26.7) Other, net -- -- 1.1 --------- --------- --------- Net cash provided by (used for) operating activities 714.6 50.8 (126.8) --------- --------- --------- Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 6,790.2 5,311.3 5,182.2 Equity securities 150.1 103.1 190.5 Mortgage loans 0.3 0.2 8.7 Life business 966.5 -- -- Investment maturities and collections of: Debt securities available for sale 1,290.3 1,212.7 885.2 Short-term investments 129.9 89.3 35.0 Cost of investment purchases in: Debt securities available for sale (6,701.4) (6,732.8) (6,534.3) Equity securities (125.7) (113.3) (118.1) Other investments (2,725.9) -- -- Short-term investments (81.9) (149.9) (54.7) Other, net -- -- (17.6) --------- --------- --------- Net cash used for investing activities (307.6) (279.4) (423.1) --------- --------- --------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 1,571.1 1,621.2 1,579.5 Withdrawals of investment contracts (1,393.1) (1,256.3) (1,146.2) Capital contribution to Separate Account -- (25.0) -- Return of capital from Separate Account 1.7 12.3 -- Capital contribution from HOLDCO 9.3 -- 10.4 Dividends paid to shareholder (553.0) (17.3) (3.5) --------- --------- --------- Net cash (used for) provided by financing activities (364.0) 334.9 440.2 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 43.0 106.3 (109.7) Cash and cash equivalents, beginning of year 565.4 459.1 568.8 --------- --------- --------- Cash and cash equivalents, end of year $ 608.4 $ 565.4 $ 459.1 ========= ========= ========= Supplemental cash flow information: Income taxes paid, net $ 48.4 $ 119.6 $ 85.5 ========= ========== ==========
See Notes to Consolidated Financial Statements F-6 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Aetna Life Insurance and Annuity Company and its wholly owned subsidiary (collectively, the "Company") are providers of financial services in the United States. Prior to the sale of the domestic individual life insurance business on October 1, 1998, the Company had two business segments: financial services and individual life insurance. On October 1, 1998, the Company sold its domestic individual life insurance operations to Lincoln National Corporation ("Lincoln") and accordingly they are now classified as Discontinued Operations. (Refer to note 2) Financial services products include annuity contracts that offer a variety of funding and payout options for individual and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, and non-qualified annuity contracts. These contracts may be deferred or immediate ("payout annuities"). Financial services also include investment advisory services and pension plan administrative services. Discontinued Operations include universal life, variable universal life, traditional whole life and term insurance. Basis of Presentation --------------------- The consolidated financial statements include Aetna Life Insurance and Annuity Company and its wholly owned subsidiary, Aetna Insurance Company of America. Aetna Life Insurance and Annuity Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARS"), whose ultimate parent is Aetna Inc. ("Aetna"). The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. Certain reclassifications have been made to 1997 and 1996 financial information to conform to the 1998 presentation. New Accounting Standards ------------------------ Disclosures about Segments of an Enterprise and Related Information As of December 31, 1998, the Company adopted Financial Accounting Standard ("FAS") No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement establishes standards for the reporting of information relating to operating segments. This statement supersedes FAS No. 14, Financial Reporting for Segments of a Business Enterprise, which requires reporting segment information by industry and geographic area (industry approach). Under FAS No. 131, operating segments are defined as components of a company for which separate financial information is available and is used by management to allocate resources and assess performance (management approach). The adoption of this statement did not change the composition or the results of operations of any of the operating segments of the Company, which are consistent with the management approach. F-7 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Accounting for the Costs of Computer Software Developed and Obtained for Internal Use On January 1, 1998, the Company adopted Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, issued by the American Institute of Certified Public Accountants ("AICPA"). This statement requires that certain costs incurred in developing internal use computer software (in process at, and subsequent to the adoption date) be capitalized, and provides guidance for determining whether computer software is considered to be for internal use. The Company amortizes these costs over a period of 3 to 5 years. Previously, the Company expensed the cost of internal-use computer software as incurred. The adoption of this statement resulted in a net after-tax increase to the results of operations of $6.5 million for the year ended December 31, 1998. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities In June 1996, the Financial Accounting Standards Board ("FASB") issued FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that provides accounting and reporting standards for transfers of financial assets and extinguishments of liabilities. FAS No. 125 was effective for 1997 financial statements; however, certain provisions relating to accounting for repurchase agreements and securities lending were not effective until January 1, 1998. The adoption of those provisions effective in 1998 did not have a material effect on the Company's financial position or results of operations. Future Application of Accounting Standards ------------------------------------------ Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which provides guidance on how to account for all insurance and reinsurance contracts that do not transfer insurance risk, except for long-duration life and health insurance contracts. This statement is effective for the Company's financial statements beginning January 1, 2000, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this statement and the potential effect on its financial position and results of operations. Accounting for Derivative Instruments and Hedging Activities In June 1998, the FASB issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard requires companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at fair value. The manner in which companies are to record gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. This standard is effective for the Company's financial statements beginning January 1, 2000, with early adoption permitted. The Company is currently evaluating the impact of adoption of this statement and the potential effect on its financial position and results of operations. F-8 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Accounting by Insurance and Other Enterprises for Insurance-Related Assessments In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments, which provides guidance for determining when an insurance or other enterprise should recognize a liability for guaranty-fund and other insurance-related assessments and guidance for measuring the liability. This statement is effective for 1999 financial statements with early adoption permitted. The Company does not expect adoption of this statement to have a material effect on its financial position or results of operations. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates. Cash and Cash Equivalents ------------------------- Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity of 90 days or less when purchased. Investments ----------- Debt and equity securities are classified as available for sale and carried at fair value. These securities are written down (as realized capital losses) for other than temporary declines in value. Unrealized capital gains and losses related to available-for-sale investments, other than amounts allocable to experience-rated contractholders, are reflected in shareholder's equity, net of related taxes. Fair values for debt and equity securities are based on quoted market prices or dealer quotations. Where quoted market prices or dealer quotations are not available, fair values are measured utilizing quoted market prices for similar securities or by using discounted cash flow methods. Cost for mortgage-backed securities is adjusted for unamortized premiums and discounts, which are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. The Company does not accrue interest on problem debt securities when management believes the collection of interest is unlikely. The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral, primarily cash, is required at a rate of 102% of the market value of a loaned domestic security and 105% of the market value of a loaned foreign security. The collateral is deposited by the borrower with a lending agent, and retained and invested by the lending agent according to the Company's guidelines to generate additional income. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. F-9 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) At December 31, 1998 and 1997, the Company loaned securities (which are reflected as invested assets) with a fair value of approximately $277.3 million and $385.1 million, respectively. Purchases and sales of debt and equity securities are recorded on the trade date. The investment in affiliated mutual funds represents an investment in Aetna managed mutual funds which have been seeded by the Company, and is carried at fair value. Mortgage loans and policy loans are carried at unpaid principal balances, net of impairment reserves. Sales of mortgage loans are recorded on the closing date. Short-term investments, consisting primarily of money market instruments and other debt issues purchased with an original maturity of 91 days to one year, are considered available for sale and are carried at fair value, which approximates amortized cost. The Company utilizes futures contracts for other than trading purposes in order to hedge interest rate risk (i.e. market risk, refer to Note 4.) Futures contracts are carried at fair value and require daily cash settlement. Changes in the fair value of futures contracts allocable to experience rated contracts are deducted from capital gains and losses with an offsetting amount reported in future policy benefits. Changes in the fair value of futures contracts allocable to non-experienced-rated contracts that qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability. Deferred gains or losses on such futures contracts are amortized over the life of the acquired asset or liability as a yield adjustment or through net realized capital gains or losses upon disposal of an asset. Changes in the fair value of futures contracts that do not qualify as hedges are recorded in net realized capital gains or losses. Hedge designation requires specific asset or liability identification, a probability at inception of high correlation with the position underlying the hedge, and that high correlation be maintained throughout the hedge period. If a hedging instrument ceases to be highly correlated with the position underlying the hedge, hedge accounting ceases at that date and excess gains or losses on the hedging instrument are reflected in net realized capital gains or losses. Included in common stock are warrants which represent the right to purchase specific securities. Upon exercise, the cost of the warrants is added to the basis of the securities purchased. Deferred Policy Acquisition Costs --------------------------------- Certain costs of acquiring insurance business are deferred. These costs, all of which vary with and are primarily related to the production of new and renewal business, consist principally of commissions, certain expenses of underwriting and issuing contracts, and certain agency expenses. For fixed ordinary life contracts (prior to the sale of the domestic individual life insurance business to Lincoln on October 1, 1998, refer to Note 2), such costs are amortized over expected premium-paying periods (up to 20 years). For universal life (prior to the sale of the domestic individual life insurance business to Lincoln on October 1, 1998, refer to Note 2), and certain annuity contracts, F-10 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) such costs are amortized in proportion to estimated gross profits and adjusted to reflect actual gross profits over the life of the contracts (up to 50 years for universal life and up to 20 years for certain annuity contracts). Deferred policy acquisition costs are written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses. Insurance Reserve Liabilities ----------------------------- Future policy benefits include reserves for universal life, immediate annuities with life contingent payouts and traditional life insurance contracts. Prior to the sale of the domestic individual life insurance business on October 1, 1998, (refer to note 2), reserves for universal life products were equal to cumulative deposits less withdrawals and charges plus credited interest thereon, plus (less) net realized capital gains (losses) (which were reflected through credited interest rates). These reserves also included unrealized capital gains (losses) related to FAS No. 115. As a result of the sale and transfer of assets supporting the business, reserves for universal life products will no longer include net realized capital gains (losses) and unrealized gains (losses) related to FAS No. 115 for the years ended December 31, 1998 and beyond. Reserves for immediate annuities with life contingent payouts and traditional life insurance contracts are for immediate annuities with life contingent-payouts and traditional life insurance contracts are computed on the basis of assumed investment yield, mortality, and expenses, including a margin for adverse deviations. Such assumptions generally vary by plan, year of issue and policy duration. Reserve interest rates range from 1.50% to 11.25% for all years presented. Investment yield is based on the Company's experience. Mortality and withdrawal rate assumptions are based on relevant Aetna experience and are periodically reviewed against both industry standards and experience. Because the sale of the domestic individual life insurance business was substantially in the form of an indemnity reinsurance agreement, the Company reported an addition to its reinsurance recoverable approximating the Company's total individual life reserves at the sale date. Policyholders' funds left with the Company include reserves for deferred annuity investment contracts and immediate annuities without life contingent payouts. Reserves on such contracts are equal to cumulative deposits less charges and withdrawals plus credited interest thereon (rates range from 3.00% to 8.10% for all years presented) net of adjustments for investment experience that the Company is entitled to reflect in future credited interest. These reserves also include unrealized gains/losses related to FAS No. 115. Reserves on contracts subject to experience rating reflect the rights of contractholders, plan participants and the Company. Unpaid claims for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported. F-11 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Premiums, Charges Assessed Against Policyholders, Benefits and Expenses ----------------------------------------------------------------------- For universal life (prior to the sale of the domestic individual life insurance business to Lincoln on October 1, 1998, refer to Note 2) and certain annuity contracts, charges assessed against policyholders' funds for the cost of insurance, surrender charges, actuarial margin and other fees are recorded as revenue in charges assessed against policyholders. Other amounts received for these contracts are reflected as deposits and are not recorded as revenue. Life insurance premiums, other than premiums for universal life (prior to the sale of the domestic individual life insurance business to Lincoln on October 1, 1998, refer to Note 2) and certain annuity contracts, are recorded as premium revenue when due. Related policy benefits are recorded in relation to the associated premiums or gross profit so that profits are recognized over the expected lives of the contracts. When annuity payments with life contingencies begin under contracts that were initially investment contracts, the accumulated balance in the account is treated as a single premium for the purchase of an annuity and reflected as an offsetting amount in both premiums and current and future benefits in the Consolidated Statements of Income. Separate Accounts ----------------- Assets held under variable universal life and variable annuity contracts are segregated in Separate Accounts and are invested, as designated by the contractholder or participant under a contract (who bears the investment risk subject, in some cases, to minimum guaranteed rates) in shares of mutual funds which are managed by an affiliate of the Company, or other selected mutual funds not managed by the Company. As of December 31, 1998, Separate Accounts assets are carried at fair value. At December 31, 1998, unrealized gains of $10.0 million, after taxes, on assets supporting a guaranteed interest option are reflected in shareholder's equity. At December 31, 1997, Separate Account assets supporting the guaranteed interest option were carried at an amortized cost of $658.6 million (fair value $668.7 million). Separate Accounts liabilities are carried at fair value, except for those relating to the guaranteed interest option. Reserves relating to the guaranteed interest option are maintained at fund value and reflect interest credited at rates ranging from 3.00% to 8.10% in 1998 and 4.10% to 8.10% in 1997. Separate Accounts assets and liabilities are shown as separate captions in the Consolidated Balance Sheets. Deposits, investment income and net realized and unrealized capital gains and losses of the Separate Accounts are not reflected in the Consolidated Financial Statements (with the exception of realized and unrealized capital gains and losses on the assets supporting the guaranteed interest option). The Consolidated Statements of Cash Flows do not reflect investment activity of the Separate Accounts. F-12 Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) Reinsurance ----------- The Company utilizes indemnity reinsurance agreements to reduce its exposure to large losses in all aspects of its insurance business. Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the Company as direct insurer of the risks reinsured. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of reinsurers. Only those reinsurance recoverables deemed probable of recovery are reflected as assets on the Company's Consolidated Balance Sheets. The majority of the reinsurance recoverable on the Consolidated Balance Sheets at December 31, 1998 is related to the reinsurance recoverable from Lincoln arising from the sale of the domestic life insurance business. (Refer to Note 2) Income Taxes ------------ The Company is included in the consolidated federal income tax return of Aetna. The Company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. Deferred income tax expenses/benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. 2. Discontinued Operations-Individual Life Insurance On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1 billion in cash. The transaction was generally in the form of an indemnity reinsurance arrangement, under which Lincoln contractually assumed from the Company certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders. Insurance reserves ceded as of December 31, 1998 were $2.9 billion. Deferred policy acquisition costs related to the life policies of $907.9 million were written off against the gain on the sale. Certain invested assets related to and supporting the life policies were sold to consummate the life sale, and the Company recorded a reinsurance recoverable from Lincoln. The transaction resulted in an after-tax gain on the sale of approximately $117 million, of which $58 million will be deferred and amortized over approximately 15 years (as profits in the book of business sold emerge). The remaining portion of the gain was recognized immediately in net income and was largely attributed to the sale of the domestic life insurance business for access to the agency sales force and brokerage distribution channel. The unamortized portion of the gain is presented in other liabilities on the Consolidated Balance Sheets. The operating results of the domestic individual life insurance business are presented as Discontinued Operations. All prior year income statement data has been restated to reflect the presentation as Discontinued Operations. Revenues for the individual life segment were $652.2 million, $620.4 million and $445.7 million for 1998, 1997 and 1996, respectively. Premiums ceded and reinsurance recoveries made in 1998 totaled $153.4 million and $57.7 million, respectively. F-13 Notes to Consolidated Financial Statements (continued) 3. Investments Debt securities available for sale as of December 31, 1998 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair 1998 (Millions) Cost Gains Losses Value -------------------------------------------------------------------------------------------------------------- U.S. government and government agencies and authorities $ 718.9 $ 60.4 $ 0.2 $ 779.1 States, municipalities and political subdivisions 0.3 -- -- 0.3 U.S. corporate securities: Utilities 615.2 29.8 4.1 640.9 Financial 2,259.2 94.6 5.6 2,348.2 Transportation/capital goods 580.8 33.0 1.1 612.7 Health care/consumer products 1,328.2 69.8 4.8 1,393.2 Natural resources 254.5 6.9 2.3 259.1 Other corporate securities 261.7 5.8 7.4 260.1 -------------------------------------------------------------------------------------------------------------- Total U.S. corporate securities 5,299.6 239.9 25.3 5,514.2 -------------------------------------------------------------------------------------------------------------- Foreign securities: Government, including political subdivisions 507.6 30.4 32.9 505.1 Utilities 147.0 32.4 -- 179.4 Other 511.2 14.9 1.8 524.3 -------------------------------------------------------------------------------------------------------------- Total foreign securities 1,165.8 77.7 34.7 1,208.8 -------------------------------------------------------------------------------------------------------------- Residential mortgage-backed securities: Pass-throughs 671.9 38.4 2.9 707.4 Collateralized mortgage obligations 1,879.6 119.7 10.4 1,988.9 -------------------------------------------------------------------------------------------------------------- Total residential mortgage-backed securities 2,551.5 158.1 13.3 2,696.3 -------------------------------------------------------------------------------------------------------------- Commercial/Multifamily mortgage-backed securities 1,114.9 30.9 9.8 1,136.0 Other asset-backed securities 719.3 13.8 0.6 732.5 -------------------------------------------------------------------------------------------------------------- Total debt securities $11,570.3 $580.8 $83.9 $12,067.2 ==============================================================================================================
F-14 Notes to Consolidated Financial Statements (continued) 3. Investments (continued) Debt securities available for sale as of December 31, 1997 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair 1997 (Millions) Cost Gains Losses Value -------------------------------------------------------------------------------------------------------------- U.S. government and government agencies and authorities $ 1,219.7 $ 74.0 $ 0.1 $ 1,293.6 States, municipalities and political subdivisions 0.3 -- -- 0.3 U.S. corporate securities: Utilities 521.3 23.5 0.9 543.9 Financial 2,370.7 84.6 1.3 2,454.0 Transportation & capital goods 528.2 33.2 0.1 561.3 Healthcare & consumer products 728.5 27.0 2.6 752.9 Natural resources 143.5 5.5 -- 149.0 Other corporate securities 545.2 27.2 0.1 572.3 -------------------------------------------------------------------------------------------------------------- Total U.S. corporate securities 4,837.4 201.0 5.0 5,033.4 -------------------------------------------------------------------------------------------------------------- Foreign securities: Government, including political subdivisions 612.5 36.7 23.6 625.6 Utilities 177.5 28.7 -- 206.2 Other 857.9 27.7 42.8 842.8 -------------------------------------------------------------------------------------------------------------- Total foreign securities 1,647.9 93.1 66.4 1,674.6 -------------------------------------------------------------------------------------------------------------- Residential mortgage-backed securities: Pass-throughs 784.4 71.3 2.0 853.7 Collateralized mortgage obligations 2,280.5 137.4 2.0 2,415.9 -------------------------------------------------------------------------------------------------------------- Total residential mortgage-backed securities 3,064.9 208.7 4.0 3,269.6 -------------------------------------------------------------------------------------------------------------- Commercial/Multifamily mortgage-backed securities 1,127.8 34.0 0.4 1,161.4 Other asset-backed securities 1,014.2 17.1 0.4 1,030.9 -------------------------------------------------------------------------------------------------------------- Total debt securities $12,912.2 $627.9 $76.3 $13,463.8 ==============================================================================================================
F-15 Notes to Consolidated Financial Statements (continued) 3. Investments (continued) At December 31, 1998 and 1997, net unrealized appreciation of $496.9 million and $551.6 million, respectively, on available-for-sale debt securities included $355.8 million and $429.3 million, respectively, related to experience-rated contracts, which were not reflected in shareholder's equity but in insurance reserves. The amortized cost and fair value of debt securities for the year ended December 31, 1998 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
Amortized Fair (Millions) Cost Value --------------------------------------------------------------- Due to mature: One year or less $ 553.5 $ 554.6 After one year through five years 2,619.7 2,692.4 After five years through ten years 1,754.0 1,801.7 After ten years 2,257.4 2,453.7 Mortgage-backed securities 3,666.4 3,832.3 Other asset-backed securities 719.3 732.5 --------------------------------------------------------------- Total $11,570.3 $12,067.2 ===============================================================
At December 31, 1998 and 1997, debt securities carried at $8.8 million and $8.2 million, respectively, were on deposit as required by regulatory authorities. The Company did not have any investments in a single issuer, other than obligations of the U.S. government, with a carrying value in excess of 10% of the Company's shareholder's equity at December 31, 1998. Included in the Company's debt securities were residential collateralized mortgage obligations ("CMOs") supporting the following:
1998 1997 ----------------------- ----------------------- Fair Amortized Fair Amortized (Millions) Value Cost Value Cost - ------------------------------------------------------------------------------------------------------- Total residential CMOs (1) $ 1,988.9 $1,879.6 $ 2,415.9 $2,280.5 ======================================================================================================= Percentage of total: Supporting experience rated products 81.7% 81.6% Supporting remaining products 18.3% 18.4% - ------------------------------------------------------------------------------------------------------- 100.0% 100.0% =======================================================================================================
(1) At December 31, 1998 and 1997, approximately 66% and 73%, respectively, of the Company's residential CMO holdings were backed by government agencies such as GNMA, FNMA, FHLMC. F-16 Notes to Consolidated Financial Statements (continued) 3. Investments (continued) There are various categories of CMOs which are subject to different degrees of risk from changes in interest rates and, for nonagency-backed CMOs, defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the repayment of principal from the underlying mortgages either earlier or later than originally anticipated. At December 31, 1998 and 1997, approximately 2% and 4%, respectively, of the Company's CMO holdings were invested in types of CMOs which are subject to more prepayment and extension risk than traditional CMOs (such as interest- or principal-only strips). Investments in equity securities available for sale as of December 31 were as follows:
(Millions) 1998 1997 ------------------------------------------------------- Amortized Cost $300.4 $210.0 Gross unrealized gains 13.1 21.3 Gross unrealized losses 8.1 .1 ------------------------------------------------------- Fair Value $305.4 $231.2 =======================================================
4. Financial Instruments Estimated Fair Value -------------------- The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 1998 and 1997 were as follows:
1998 1997 --------------------- ----------------------- Carrying Fair Carrying Fair (Millions) Value Value Value Value - ---------------------------------------------------------------------------------------- Assets: Mortgage loans $ 12.7 $ 12.3 $ 12.8 $ 12.4 Liabilities: Investment contract liabilities: With a fixed maturity $ 1,063.9 $ 984.3 $ 1,030.3 $1,005.4 Without a fixed maturity 10,241.7 9,686.2 10,113.2 9,587.5 - -----------------------------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, such as estimates of timing and amount of future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument. In evaluating the Company's management of interest rate, price and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above. F-17 Notes to Consolidated Financial Statements (continued) 4. Financial Instruments (continued) The following valuation methods and assumptions were used by the Company in estimating the fair value of the above financial instruments: Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates which reflect the rates at which similar loans would be made to similar borrowers. The rates reflect management's assessment of the credit quality and the remaining duration of the loans. Investment contract liabilities (included in Policyholders' funds left with the Company): With a fixed maturity: Fair value is estimated by discounting cash flows at interest rates currently being offered by, or available to, the Company for similar contracts. Without a fixed maturity: Fair value is estimated as the amount payable to the contractholder upon demand. However, the Company has the right under such contracts to delay payment of withdrawals which may ultimately result in paying an amount different than that determined to be payable on demand. Off-Balance-Sheet and Other Financial Instruments ------------------------------------------------- Futures Contracts: Futures contracts are used to manage interest rate risk in the Company's bond portfolio. Futures contracts represent commitments to either purchase or sell securities at a specified future date and at a specified price or yield. Futures contracts trade on organized exchanges and, therefore, have minimal credit risk. Cash settlements are made daily based on changes in the prices of the underlying assets. The notional amounts, carrying values and estimated fair values of the Company's open treasury futures as of December 31, 1998 were $250.9 million, $.1 million, and $.1 million, respectively. Warrants: Included in common stocks are warrants which are instruments giving the Company the right, but not the obligation to buy a security at a given price during a specified period. The carrying values and estimated fair values of the Company's warrants to purchase equity securities as of December 31, 1998 were $1.5 million, respectively. The carrying values and estimated fair values as of December 31, 1997 were $.6 million, respectively. F-18 Notes to Consolidated Financial Statements (continued) 4. Financial Instruments (continued) Debt Instruments with Derivative Characteristics: The Company also had investments in certain debt instruments with derivative characteristics, including those whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short- or long-term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The amortized cost and fair value of these securities, included in the debt securities portfolio, as of December 31, 1998 was as follows:
Amortized Fair (Millions) Cost Value ----------------------------------------------------------------------------- Residential collateralized mortgage obligations $1,879.6 $1,988.9 Principal-only strips (included above) 20.2 24.0 Interest-only strips (included above) 17.3 18.0 Other structured securities with derivative characteristics (1) 87.3 80.6 -----------------------------------------------------------------------------
(1) Represents non-leveraged instruments whose fair values and credit risk are based on underlying securities, including fixed income securities and interest rate swap agreements. 5. Net Investment Income Sources of net investment income were as follows:
1998 1997 1996 ---------------------------------------------------------------------------- Debt securities $ 798.8 $ 814.6 $ 805.3 Nonredeemable preferred stock 18.4 12.9 5.8 Investment in affiliated mutual funds 6.6 3.8 10.8 Mortgage loans 0.6 0.3 0.6 Policy loans 7.2 5.7 6.4 Reinsurance loan to affiliate 2.3 5.5 9.3 Cash equivalents 44.6 38.8 27.1 Other 16.7 9.5 1.8 ----------------------------------------------------------------------------- Gross investment income 895.2 891.1 867.1 Less: investment expenses (17.6) (12.3) (14.5) ----------------------------------------------------------------------------- Net investment income $ 877.6 $ 878.8 $ 852.6 =============================================================================
Net investment income includes amounts allocable to experience rated contractholders of $655.6 million, $673.8 million and $649.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. Interest credited to contractholders is included in current and future benefits. F-19 Notes to Consolidated Financial Statements (continued) 6. Dividend Restrictions and Shareholder's Equity The Company paid $553.0 million and $17.3 million in cash dividends to HOLDCO in 1998 and 1997, respectively. Additionally, at December 31, 1998, the Company accrued $206.0 million in dividends. Of the $759.0 million dividends paid and accrued in 1998, $756.0 million (all of which was approved by the Insurance Commissioner of the State of Connecticut) was attributable to proceeds from the sale of the domestic individual life insurance business. In January 1999, the accrued dividends of $206.0 million were paid by the Company to HOLDCO. Further dividends to be paid by the Company to HOLDCO during 1999 will need to be approved by the Insurance Department of the State of Connecticut (the "Department") prior to payment. The Department recognizes as net income and shareholder's capital and surplus those amounts determined in conformity with statutory accounting practices prescribed or permitted by the Department, which differ in certain respects from generally accepted accounting principles. Statutory net income was $148.1 million, $80.5 million and $57.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. Statutory capital and surplus was $773.0 million and $778.7 million as of December 31, 1998 and 1997, respectively. As of December 31, 1998, the Company does not utilize any statutory accounting practices which are not prescribed by state regulatory authorities that, individually or in the aggregate, materially affect statutory capital and surplus. 7. Capital Gains and Losses on Investment Operations Realized capital gains or losses are the difference between the carrying value and sale proceeds of specific investments sold. Net realized capital gains on investments were as follows:
(Millions) 1998 1997 1996 ---------------------------------------------------------------------------- Debt securities $ 7.4 $21.1 $ 9.5 Equity securities 3.0 8.6 7.5 ---------------------------------------------------------------------------- Pretax realized capital gains $10.4 $29.7 $17.0 ============================================================================ After-tax realized capital gains $ 7.3 $19.2 $11.1 ============================================================================
Net realized capital gains of $15.0 million, $83.7 million and $52.5 million for 1998, 1997 and 1996, respectively, allocable to experience rated contracts, were deducted from net realized capital gains and an offsetting amount was reflected in Policyholders' funds left with the Company. Net unamortized gains were $118.6 million and $120.1 million at December 31, 1998 and 1997, respectively. F-20 Notes to Consolidated Financial Statements (continued) 7. Capital Gains and Losses on Investment Operations (continued) Proceeds from the sale of available-for-sale debt securities and the related gross gains and losses were as follows:
(Millions) 1998 1997 1996 ---------------------------------------------------------------------------- Proceeds on sales $6,790.2 $5,311.3 $5,182.2 Gross gains 98.8 23.8 22.1 Gross losses 91.4 2.7 12.6 ----------------------------------------------------------------------------
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:
(Millions) 1998 1997 1996 ----------------------------------------------------------------------------------- Debt securities $ 18.9 $44.3 $(100.1) Equity securities (16.1) 5.6 (10.5) Other 15.4 -- -- ----------------------------------------------------------------------------------- Subtotal 18.2 49.9 (110.6) Increase (decrease) in deferred income taxes (Refer to note 8) 6.3 17.5 (38.6) ----------------------------------------------------------------------------------- Net changes in accumulated other comprehensive income $ 11.9 $32.4 $ (72.0) ===================================================================================
Net unrealized capital gains allocable to experience-rated contracts of $355.8 million at December 31, 1998 are reflected on the Consolidated Balance Sheets in Policyholders' funds left with the Company and are not included in shareholder's equity. At December 31, 1997, net unrealized capital gains of $356.7 million and $72.6 million at December 31, 1997 are reflected on the Consolidated Balance Sheets in policyholders' funds left with the Company and future policy benefits, respectively, and are not included in shareholder's equity. F-21 Notes to Consolidated Financial Statements (continued) 7. Capital Gains and Losses on Investment Operations (continued) Shareholder's equity included the following accumulated other comprehensive income, which are net of amounts allocable to experience-rated contractholders, at December 31:
(Millions) 1998 1997 1996 ---------------------------------------------------------------------------------- Debt securities: Gross unrealized capital gains $157.3 $140.6 $101.7 Gross unrealized capital losses (16.2) (18.4) (23.8) ---------------------------------------------------------------------------------- 141.1 122.2 77.9 ---------------------------------------------------------------------------------- Equity securities: Gross unrealized capital gains 13.1 21.2 16.3 Gross unrealized capital losses (8.1) (0.1) (0.8) ---------------------------------------------------------------------------------- 5.0 21.1 15.5 ---------------------------------------------------------------------------------- Other: Gross unrealized capital gains 17.1 -- -- Gross unrealized capital losses (1.7) -- -- ---------------------------------------------------------------------------------- 15.4 -- -- ---------------------------------------------------------------------------------- Deferred income taxes (Refer to note 8) 56.7 50.4 32.9 ---------------------------------------------------------------------------------- Net accumulated other comprehensive income $104.8 $ 92.9 $ 60.5 ==================================================================================
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:
(Millions) 1998 1997 1996 ---------------------------------------------------------------------------------- Unrealized holding gains (losses) arising during the year (1) $38.3 $98.8 $(14.8) Less: reclassification adjustment for gains and other items included in net income (2) 26.4 66.4 57.2 ----------------------------------------------------------------------------------- Net unrealized gains (losses) on securities $11.9 $32.4 $(72.0) ===================================================================================
(1) Pretax unrealized holding gains (losses) arising during the year were $58.8 million, $152.3 million and ($22.9) million for 1998, 1997 and 1996, respectively. (2) Pretax reclassification adjustments for gains and other items included in net income were $40.6 million, $102.4 million and $87.7 million for 1998, 1997 and 1996, respectively. F-22 Notes to Consolidated Financial Statements (continued) 8. Income Taxes The Company is included in the consolidated federal income tax return, the combined returns of Connecticut and New York, and the Illinois unitary state income tax returns of Aetna. Aetna allocates to each member an amount approximating the tax it would have incurred were it not a member of the consolidated group, and credits the member for the use of its tax saving attributes in the consolidated federal income tax return. Income taxes from continuing operations consist of the following:
(Millions) 1998 1997 1996 ------------------------------------------------------------------------------- Current taxes (benefits): Federal $ 246.4 $ 28.7 $ 30.0 State 1.3 2.0 2.3 Net realized capital gains 16.8 39.1 24.4 ------------------------------------------------------------------------------ 264.5 69.8 56.7 ------------------------------------------------------------------------------ Deferred taxes (benefits): Federal (203.2) 9.4 (7.6) Net realized capital (losses) (13.9) (28.5) (18.4) ------------------------------------------------------------------------------ (217.1) (19.1) (26.0) ------------------------------------------------------------------------------ Total $ 47.4 $ 50.7 $ 30.7 ==============================================================================
Income taxes were different from the amount computed by applying the federal income tax rate to income from continuing operations before income taxes for the following reasons:
(Millions) 1998 1997 1996 ------------------------------------------------------------------------------ Income from continuing operations before income taxes $187.0 $188.2 $115.9 Tax rate 35% 35% 35% ------------------------------------------------------------------------------ Application of the tax rate 65.5 65.9 40.6 Tax effect of: State income tax, net of federal benefit 0.9 1.3 1.5 Excludable dividends (17.1) (15.6) (10.8) Other, net (1.9) (0.9) (0.6) ------------------------------------------------------------------------------ Income taxes $ 47.4 $ 50.7 $ 30.7 ==============================================================================
F-23 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:
(Millions) 1998 1997 ------------------------------------------------------------------------ Deferred tax assets: Insurance reserves $ 324.1 $415.8 Unrealized gains allocable to experience rated contracts 124.5 150.1 Investment (gains) losses (0.3) 6.6 Postretirement benefits other than pensions 26.0 26.3 Deferred compensation 38.6 31.2 Restructuring charge 2.9 9.5 Depreciation 1.7 3.9 Sale of individual life 48.9 - Other 16.0 8.8 ------------------------------------------------------------------------ Total gross assets 582.4 652.2 ------------------------------------------------------------------------ Deferred tax liabilities: Deferred policy acquisition costs 272.7 515.6 Market discount 4.5 5.1 Net unrealized capital gains 181.2 200.5 Pension 3.9 3.6 Other (0.5) (0.6) ------------------------------------------------------------------------ Total gross liabilities 461.8 724.2 ------------------------------------------------------------------------ Net deferred tax (asset) liability $(120.6) $ 72.0 ========================================================================
Net unrealized capital gains and losses are presented in shareholder's equity net of deferred taxes. As of December 31, 1998 and 1997, no valuation allowances were required for unrealized capital gains and losses. Management believes that it is more likely than not that the Company will realize the benefit of the net deferred tax asset. The Company expects sufficient taxable income in the future to realize the net deferred tax asset because of the Company's long-term history of having taxable income, which is projected to continue. The "Policyholders' Surplus Account," which arose under prior tax law, is generally that portion of a life insurance company's statutory income that has not been subject to taxation. As of December 31, 1983, no further additions could be made to the Policyholders' Surplus Account for tax return purposes under the Deficit Reduction Act of 1984. The balance in such account was approximately $17.2 million at December 31, 1998. This amount would be taxed only under certain conditions. F-24 Notes to Consolidated Financial Statements (continued) 8. Income Taxes (Continued) No income taxes have been provided on this amount since management believes under current tax law the conditions under which such taxes would become payable are remote. The Internal Revenue Service (the "Service") has completed examinations of the consolidated federal income tax returns of Aetna through 1990. Discussions are being held with the Service with respect to proposed adjustments. Management believes there are adequate defenses against, or sufficient reserves to provide for, any such adjustments. The Service has commenced its examinations for the years 1991 through 1994. 9. Benefit Plans Aetna has noncontributory defined benefit pension plans covering substantially all employees. Aetna's accrued pension cost has been allocated to its subsidiaries, including the Company, under an allocation based on eligible salaries. Data on a separate company basis regarding the proportionate share of the projected benefit obligation and plan assets is not available. The accumulated benefit obligation and plan assets are recorded by Aetna. As of the measurement date (i.e., September 30), the accumulated plan assets exceeded accumulated plan benefits. Allocated pretax charges to operations for the pension plan (based on the Company's total salary cost as a percentage of Aetna's total salary cost) were $0.8 million, $2.7 million and $4.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. In addition to providing pension benefits, Aetna currently provides certain health care and life insurance benefits for retired employees. A comprehensive medical and dental plan is offered to all full-time employees retiring at age 50 with 15 years of service or at age 65 with 10 years of service. There is a cap on the portion of the cost paid by the Company relating to medical and dental benefits. Retirees are generally required to contribute to the plans based on their years of service with Aetna. The costs to the Company associated with the Aetna postretirement plans for 1998, 1997 and 1996 were $0.9 million, $2.7 million and $1.8 million, respectively. As of December 31, 1996, Aetna transferred to the Company approximately $77.7 million of accrued liabilities, primarily related to the pension and postretirement benefit plans described above, that had been previously recorded by Aetna. The after-tax amount of this transfer (approximately $50.5 million) is reported as a reduction in retained earnings. The Company, in conjunction with Aetna, has a non-qualified pension plan covering certain agents. The plan provides pension benefits based on annual commission earnings. As of the measurement date (i.e., September 30), the accumulated plan assets exceeded accumulated plan benefits. The Company, in conjunction with Aetna, also provides certain postretirement health care and life insurance benefits for certain agents. The costs to the Company associated with the agents' postretirement plans for 1998, 1997 and 1996 were $1.4 million, $0.6 million and $0.7 million, respectively. Effective January 1, 1999, the Company, in conjunction with Aetna, changed the formula for providing pension benefits from the existing final average pay formula to a cash balance formula, F-25 Notes to Consolidated Financial Statements (continued) 9. Benefit Plans (continued) which will credit employees annually with an amount equal to a percentage of eligible pay based on age and years of service as well as an interest credit based on individual account balances. The formula also provides for a transition period until December 1, 2006, which allows certain employees to receive vested benefits at the higher of the final average pay or cash balance formula. The changing of this formula will not have a material effect on the Company's results of operations, liquidity or financial condition. Incentive Savings Plan--Substantially all employees are eligible to participate in a savings plan under which designated contributions, which may be invested in common stock of Aetna or certain other investments, are matched, up to 5% of compensation, by Aetna. Pretax charges to operations for the incentive savings plan were $4.7 million, $4.4 million and $5.4 million in 1998, 1997 and 1996, respectively. Stock Plans--Aetna has a stock incentive plan that provides for stock options, deferred contingent common stock or equivalent cash awards or restricted stock to certain key employees. Executive and middle management employees may be granted options to purchase common stock of Aetna at or above the market price on the date of grant. Options generally become 100% vested three years after the grant is made, with one-third of the options vesting each year. Aetna does not recognize compensation expense for stock options granted at or above the market price on the date of grant under its stock incentive plans. In addition, executives may be granted incentive units which are rights to receive common stock or an equivalent value in cash. The incentive units may vest within a range from 0% to 175% at the end of a four year period based on the attainment of performance goals. The costs to the Company associated with the Aetna stock plans for 1998, 1997 and 1996, were $4.1 million, $2.9 million and $8.1 million, respectively. As of December 31, 1996, Aetna transferred to the Company approximately $1.1 million of deferred tax benefits related to stock options. This amount is reported as an increase in retained earnings. In 1998, other changes in shareholder's equity include an additional increase of $0.7 million reflecting revisions to the allocation of the deferred tax benefit. 10. Related Party Transactions Investment Advisory and Other Fees ---------------------------------- In February 1998 and May 1998, Aeltus Investment Management Inc. ("Aeltus"), an affiliate of the Company, assumed investment advisory services for Aetna managed mutual funds and variable funds (collectively, the Funds), respectively. In connection with that assumption of duties, Aeltus entered into participation agreements with the Company. Participation fees paid to the Company, from Aeltus, included in charges assessed against policyholders amounted to $26.9 million for 1998. Prior to assuming investment advisory services, Aeltus served as subadvisor to the Funds. Since August 1996, Aeltus has served as advisor for most of the Company's General Account assets. Fees paid by the Company to Aeltus, included in both charges assessed against policyholders and net investment income, on an annual basis, range from 0.06% to 0.55% of the average daily net assets under management. For the years ended December 31, 1998, 1997 and 1996, the Company paid $21.7 million, $45.5 million and $16.0 million, respectively, in such fees. Prior to February 1998 and May 1998, the Company served as investment advisor to the Funds. Under the advisory agreements, the funds paid the Company a daily fee which, on an annual basis, ranged, F-26 Notes to Consolidated Financial Statements (continued) 10. Related Party Transactions (continued) depending on the fund, from 0.25% to 0.85% of their average daily net assets. The Company is also compensated by the Separate Accounts (variable funds) for bearing mortality and expense risks pertaining to variable life and annuity contracts. Under the insurance and annuity contracts, the Separate Accounts pay the Company a daily fee which, on an annual basis is, depending on the product, up to 2.15% of their average daily net assets. The amount of compensation and fees received from the Funds and Separate Accounts, included in charges assessed against policyholders, amounted to $287.0 million, $271.2 million and $186.6 million in 1998, 1997 and 1996, respectively. Reinsurance Transactions ------------------------ Since 1981, all domestic individual non-participating life insurance of Aetna and its subsidiaries has been issued by the Company. Effective December 31, 1988, the Company entered into a reinsurance agreement with Aetna Life Insurance Company ("Aetna Life") in which substantially all of the non-participating individual life and annuity business written by Aetna Life prior to 1981 was assumed by the Company. A $6.1 million and a $108.0 million commission, paid by the Company to Aetna Life in 1996 and 1988, respectively, was capitalized as deferred policy acquisition costs. In consideration for the assumption of this business, a loan was established relating to the assets held by Aetna Life which support the insurance reserves. Effective January 1, 1997, this agreement was amended to transition (based on underlying investment rollover in Aetna Life) from a modified coinsurance to a coinsurance arrangement. As a result of this change, reserves were ceded to the Company from Aetna Life as investment rollover occurred and the loan previously established was reduced. The Company maintained insurance reserves of $574.5 million ($397.2 million relating to the modified coinsurance agreement and $177.3 million relating to the coinsurance agreement) as of December 31, 1997 relating to the business assumed. The fair value of the loan relating to assets held by Aetna Life was $412.3 million as of December 31, 1997 and was based upon the fair value of the underlying assets. Effective October 1, 1998, this agreement was fully transitioned to a coinsurance arrangement and this business along with the Company's direct domestic individual non-participating life insurance business was sold to Lincoln. (Refer to note 2). The operating results of the domestic individual life business are presented as Discontinued Operations. Premiums of $336.3 million, $176.7 million and $25.3 million and current and future benefits of $341.1 million, $183.9 million and $39.5 million, were assumed in 1998, 1997 and 1996, respectively. Investment income of $17.0 million, $37.5 million and $44.1 million was generated from the reinsurance loan to affiliate for the years ended December 31, 1998, 1997 and 1996, respectively. Prior to the sale of the domestic individual life insurance business to Lincoln on October 1, 1998, the Company's retention limit per individual life was $2.0 million and amounts in excess of this limit, up to a maximum of $8.0 million on any new individual life business was reinsured with Aetna Life on a yearly renewable term basis. Premium amounts related to this agreement were $2.0 million, $5.9 million and $5.2 million for 1998, 1997 and 1996, respectively. This agreement was terminated effective October 1, 1998. Effective October 1, 1997, the Company entered into a reinsurance agreement with Aetna Life to assume amounts in excess of $0.2 million for certain of its participating life insurance, on a yearly F-27 Notes to Consolidated Financial Statements (continued) 10. Related Party Transactions (continued) renewable term basis. Premium amounts related to this agreement were $4.4 million and $0.7 million in 1998 and 1997, respectively. The business assumed under this agreement was retroceded to Lincoln effective October 1, 1998. On December 16, 1988, the Company assumed $25.0 million of premium revenue from Aetna Life for the purchase and administration of a life contingent single premium variable payout annuity contract. In addition, the Company is also responsible for administering fixed annuity payments that are made to annuitants receiving variable payments. Reserves of $87.8 million and $32.5 million were maintained for this contract as of December 31, 1998 and 1997, respectively. Capital Transactions -------------------- The Company received a capital contribution of $9.3 million and $10.4 million in cash from HOLDCO in 1998 and 1996, respectively. The Company received no capital contributions in 1997. The Company paid $553.0 million, $17.3 million and 3.5 million in cash dividends to HOLDCO in 1998, 1997 and 1996, respectively. Additionally, in 1998, the Company accrued $206.0 million in dividends. (Refer to Note 6) Other ----- Premiums due and other receivables include $1.6 million and $37.0 million due from affiliates in 1998 and 1997, respectively. Other liabilities include $2.2 million and $1.2 million due to affiliates for 1998 and 1997, respectively. As of December 31, 1998, Aetna transferred to the Company $0.7 million based on its decision not to settle state tax liabilities for the years 1998 and 1997. The amount transferred as of December 31, 1997 was $2.5 million. This amount has been reported as an other change in retained earnings. Substantially all of the administrative and support functions of the Company are provided by Aetna and its affiliates. The financial statements reflect allocated charges for these services based upon measures appropriate for the type and nature of service provided. 11. Reinsurance On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1 billion in cash. The transaction is generally in the form of an indemnity reinsurance arrangement, under which Lincoln contractually assumed from the Company certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders. (Refer to note 2) Effective January 1, 1998, 90% of the mortality risk on substantially all individual universal life product business written from June 1, 1991 through October 31, 1997 was reinsured externally. Beginning November 1, 1997, 90% of new business written on these products was reinsured externally. Effective October 1, 1998 this agreement was assigned from the third party reinsurer to Lincoln. F-28 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 (Millions) Amount Companies Companies Amount ------------------------------------------------------------------------------------ 1998 ---- Premiums: Discontinued Operations $166.8 $165.4 $340.6 $342.0 Accident and Health Insurance 16.3 16.3 -- -- Annuities 80.8 2.9 1.5 79.4 ------------------------------------------------------------------------------------ Total earned premiums $263.9 $184.6 $342.1 $421.4 ==================================================================================== 1997 ---- Premiums: Discontinued Operations $ 35.7 $ 15.1 $177.4 $198.0 Accident and Health Insurance 5.6 5.6 -- -- Annuities 67.9 -- 1.2 69.1 ------------------------------------------------------------------------------------ Total earned premiums $109.2 $ 20.7 $178.6 $267.1 ==================================================================================== 1996 ---- Premiums: Discontinued Operations $ 34.6 $ 11.2 $ 25.3 $ 48.7 Accident and Health Insurance 6.3 6.3 -- -- Annuities 84.3 -- 0.6 84.9 ------------------------------------------------------------------------------------ Total earned premiums $125.2 $ 17.5 $ 25.9 $133.6 ====================================================================================
F-29 Notes to Consolidated Financial Statements (continued) 12. Segment Information Prior to October 1, 1998, the Company's operations were reported through two major business segments: Financial Services and Individual Life Insurance (now Discontinued Operations). Summarized financial information for the Company's principal operations was as follows:
(4) (4) Financial Discontinued 1998 (Millions) Services Operations Other Total ---------------------------------------------------------------------------------------------------- Revenue from external customers $ 433.3 -- -- $ 433.3 Net investment income 877.6 -- -- 877.6 ---------------------------------------------------------------------------------------------------- Total revenue excluding realized capital gains $ 1,310.9 -- -- $ 1,310.9 ==================================================================================================== Amortization of deferred policy acquisition costs $ 106.7 -- -- $ 106.7 ---------------------------------------------------------------------------------------------------- Income taxes $ 57.7 $ (10.3) $ 47.4 ---------------------------------------------------------------------------------------------------- Operating earnings (1) $ 151.5 -- -- $ 151.5 Unusual items (2) -- -- $ (19.2) (19.2) Realized capital gains, net of tax 7.3 -- -- 7.3 ---------------------------------------------------------------------------------------------------- Income from continuing operations $ 158.8 -- $ (19.2) $ 139.6 Discontinued operations, net of tax: Income from operations -- $ 61.8 -- 61.8 Gain on sale -- 59.0 -- 59.0 ---------------------------------------------------------------------------------------------------- Net income $ 158.8 $ 120.8 $ (19.2) $ 260.4 ==================================================================================================== Segment assets $43,458.6 $3,820.2 -- $47,278.8 ---------------------------------------------------------------------------------------------------- Expenditures for long-lived assets (3) -- -- $ 5.3 $ 5.3 ----------------------------------------------------------------------------------------------------
(1) Operating earnings are comprised of net income excluding net realized capital gains and any unusual items. (2) Unusual items excluded from operating earnings include an after-tax severance benefit of $1.6 million and after-tax Year 2000 costs of $20.8 million. (3) Expenditures of long-lived assets represents additions to property and equipment not allocable to business segments. (4) Financial Services products include annuity contracts and Discontinued Operations include life insurance products. (Refer to Note 1) F-30 Notes to Consolidated Financial Statements (continued) 12. Segment Information (Continued)
(3) (3) Financial Discontinued 1997 (Millions) Services Operations Other Total ---------------------------------------------------------------------------------------------- Revenue from external customers $ 369.4 -- -- $ 369.4 Net investment income 878.8 -- -- 878.8 ---------------------------------------------------------------------------------------------- Total revenue excluding realized capital gains $ 1,248.2 -- -- $ 1,248.2 ============================================================================================== Amortization of deferred policy acquisition costs $ 82.8 -- -- $ 82.8 ---------------------------------------------------------------------------------------------- Income taxes $ 50.7 -- -- $ 50.7 ---------------------------------------------------------------------------------------------- Operating earnings (1) $ 118.3 -- -- $ 118.3 Realized capital gains, net of tax 19.2 -- -- 19.2 ---------------------------------------------------------------------------------------------- Income from continuing operations $ 137.5 -- -- $ 137.5 Discontinued Operations, net of tax: Income from operations -- $ 67.8 -- 67.8 ---------------------------------------------------------------------------------------------- Net Income $ 137.5 $ 67.8 -- $ 205.3 ============================================================================================== Segment assets $36,638.8 $3,507.6 -- $40,146.4 ---------------------------------------------------------------------------------------------- Expenditures for long-lived assets (2) -- -- $9.6 $ 9.6 ----------------------------------------------------------------------------------------------
(1) Operating earnings are comprised of net income excluding net realized capital gains and any unusual items. (2) Expenditures for long-lived assets represents additions to property and equipment not allocable to business segments. (3) Financial Services products include annuity contracts and Discontinued Operations include life insurance products. (Refer to Note 1) F-31 Notes to Consolidated Financial Statements (continued) 12. Segment Information (Continued)
(3) (3) Financial Discontinued 1996 (Millions) Services Operations Other Total ----------------------------------------------------------------------------------------------------- Revenue from external customers $ 325.5 -- -- $ 325.5 Net investment income 852.6 -- -- 852.6 ----------------------------------------------------------------------------------------------------- Total revenue excluding realized capital gains $1,178.1 -- -- $1,178.1 ===================================================================================================== Amortization of deferred policy acquisition costs $ 28.0 -- -- $ 28.0 ----------------------------------------------------------------------------------------------------- Income taxes $ 35.6 -- $ (4.9) $ 30.7 ----------------------------------------------------------------------------------------------------- Operating earnings (losses) (1) $ 83.2 -- -- $ 83.2 Unusual items (2) -- -- (9.1) (9.1) Realized capital gains, net of tax: 11.1 -- -- 11.1 ----------------------------------------------------------------------------------------------------- Income from continuing operations $ 94.3 $ (9.1) $ 85.2 Discontinued operations, net of tax Income from operations -- $55.9 -- 55.9 ----------------------------------------------------------------------------------------------------- Net income (loss) $ 94.3 $55.9 $ (9.1) $ 141.1 =====================================================================================================
(1) Operating earnings are comprised of net income excluding net realized capital gains and any unusual items. (2) Unusual items excluded from operating earnings represent $9.1 million after-tax corporate facilities and severance charges not directly allocable to the business segments. (3) Financial Services products include annuity contracts and Discontinued Operations include life insurance products. (Refer to Note 1) 13. Commitments and Contingent Liabilities Commitments ----------- Through the normal course of investment operations, the Company commits to either purchase or sell securities or money market instruments at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments. At December 31, 1998 and 1997, the Company had commitments to purchase investments of $68.7 million and $38.7 million, respectively. The fair value of the investments at December 31, 1998 and 1997 approximated $68.9 million and $39.0 million, respectively. Litigation ---------- The Company is involved in numerous lawsuits arising, for the most part, in the ordinary course of its business operations. While the ultimate outcome of litigation against the Company cannot be determined at this time, after consideration of the defenses available to the Company and any related reserves established, it is not expected to result in liability for amounts material to the financial condition of the Company, although it may adversely affect results of operations in future periods. F-32 Form No. SAI. 87305-99 ALIAC Ed. December 1999 VARIABLE ANNUITY ACCOUNT B PART C - OTHER INFORMATION Item 24. Financial Statements and Exhibits (a) Financial Statements: (1) Included in Part A: Condensed Financial Information (2) Included in Part B: Financial Statements of Variable Annuity Account B: - Statement of Assets and Liabilities as of December 31, 1998 - Statements of Operations and Changes in Net Assets for the years ended December 31, 1998 and 1997 - Condensed Financial Information for the year ended December 31, 1998 - Notes to Financial Statements - Independent Auditors' Report Financial Statements of the Depositor: - Independent Auditors' Report - Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 - Consolidated Balance Sheets as of December 31, 1998 and 1997 - Consolidated Statements of Changes in Shareholder's Equity for the years ended December 31, 1998, 1997 and 1996 - Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 - Notes to Consolidated Financial Statements (b) Exhibits (1) Resolution of the Board of Directors of Aetna Life Insurance and Annuity Company establishing Variable Annuity Account B(1) (2) Not applicable (3.1) Broker-Dealer Agreement(2) (3.2) Alternative Form of Wholesaling Agreement and Related Selling Agreement(3) (4.1) Variable Annuity Contract (GM-VA-99(PB)) (4.2) Variable Annuity Contract Certificate (GMC-VA-99(PB)) (4.3) Endorsement EM-ROTH-99(PB) (4.4) Endorsement EM-IRA-99(PB) (4.5) Endorsement EM-TDA-99(PB) (4.6) Endorsement EGET-00 (5) Not applicable (6.1) Certificate of Incorporation of Aetna Life Insurance and Annuity Company(4) (6.2) Amendment of Certificate of Incorporation of Aetna Life Insurance and Annuity Company(5) (6.3) By-Laws as amended September 17, 1997 of Aetna Life Insurance and Annuity Company(6) (7) Not applicable (8.1) Fund Participation Agreement between Aetna Life Insurance and Annuity Company and AIM dated June 30, 1998(7) (8.2) Service Agreement between Aetna Life Insurance and Annuity Company and AIM effective June 30, 1998(7) (8.3) Fund Participation Agreement by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series, and Aeltus Investment Management, Inc. dated as of May 1, 1998(2) (8.4) Amendment dated November 9, 1998 to Fund Participation Agreement by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series, and Aeltus Investment Management, Inc. dated as of May 1, 1998(8) (8.5) Service Agreement between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, and Aetna Variable Portfolios, Inc. on behalf of each of its series dated as of May 1, 1998(2) (8.6) Amendment dated November 4, 1998 to Service Agreement between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series and Aetna Variable Portfolios, Inc. on behalf of each of its series dated as of May 1, 1998(8) (8.7) Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996(5) (8.8) Fifth Amendment dated as of May 1, 1997 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996(9) (8.9) Sixth Amendment dated November 6, 1997 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996 and May 1, 1997(10) (8.10) Seventh Amendment dated as of May 1, 1998 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997 and November 6, 1997(2) (8.11) Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996(5) (8.12) Fifth Amendment, dated as of May 1, 1997, to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996(9) (8.13) Sixth Amendment dated as of January 20, 1998 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996 and May 1, 1997(11) (8.14) Seventh Amendment dated as of May 1, 1998 to the Fund Participation Agreement between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997 and January 20, 1998(2) (8.15) Service Agreement between Aetna Life Insurance and Annuity Company and Fidelity Investments Institutional Operations Company dated as of November 1, 1995(12) (8.16) Amendment dated January 1, 1997 to Service Agreement between Aetna Life Insurance and Annuity Company and Fidelity Investments Institutional Operations Company dated as of November 1, 1995(9) (8.17) Service Contract between Fidelity Distributors Corporation and Aetna Life Insurance and Annuity Company dated May 2, 1997(8) (8.18) Fund Participation Agreement among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation dated December 8, 1997(13) (8.19) Amendment dated October 12, 1998 to Fund Participation Agreement among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation dated December 8, 1997(8) (8.20) Service Agreement between Janus Capital Corporation and Aetna Life Insurance and Annuity Company dated December 8, 1997(13) (8.21) Fund Participation Agreement among MFS Variable Insurance Trust, Aetna Life Insurance and Annuity Company and Massachusetts Financial Services Company dated April 30, 1996, and amended on September 3, 1996, March 14, 1997 and November 28, 1997(2) (8.22) Fourth Amendment dated May 1, 1998 to the Fund Participation Agreement by and among MFS Variable Insurance Trust, Aetna Life Insurance and Annuity Company and Massachusetts Financial Services Company dated April 30, 1996, and amended on September 3, 1996, March 14, 1997 and November 28, 1997(7) (8.23) Fifth Amendment to Fund Participation Agreement by and among MFS Variable Insurance Trust, Aetna Life Insurance and Annuity Company and Massachusetts Financial Services Company dated April 30, 1996, and amended on September 3, 1996, March 14, 1997 and November 28, 1997(14) (8.24) Fund Participation Agreement dated May 1, 1999 between Aetna Life Insurance and Annuity Company, Mitchell Hutchins Series Trust, and Mitchell Hutchins Asset Management, Inc.(15) (8.25) Service Agreement dated May 1, 1999 between Mitchell Hutchins Asset Management, Inc. and Aetna Life Insurance and Annuity Company(15) (8.26) Fund Participation Agreement dated March 11, 1997 between Aetna Life Insurance and Annuity Company and Oppenheimer Variable Annuity Account Funds and Oppenheimer Funds, Inc.(16) (8.27) Service Agreement effective as of March 11, 1997 between Oppenheimer Funds, Inc. and Aetna Life Insurance and Annuity Company(16) (9) Opinion and Consent of Counsel (10) Consent of Independent Auditors (11) Not applicable (12) Not applicable (13) Schedule for Computation of Performance Data (14.1) Powers of Attorney(17) (14.2) Authorization for Signatures(3) 1. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75986), as filed on April 22, 1996. 2. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998. 3. Incorporated by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-4 (File No. 33-75986), as filed on April 12, 1996. 4. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-60477), as filed on April 15, 1996. 5. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75964), as filed on February 11, 1997. 6. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-91846), as filed on October 30, 1997. 7. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 333-56297), as filed on August 4, 1998. 8. Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form N-4 (File No. 333-56297), as filed on December 14, 1998. 9. Incorporated by reference to Post-Effective Amendment No. 30 to Registration Statement on Form N-4 (File No. 33-34370), as filed on September 29, 1997. 10. Incorporated by reference to Post-Effective Amendment No. 16 to Registration Statement on Form N-4 (File No. 33-75964), as filed on February 9, 1998. 11. Incorporated by Reference to Post-Effective Amendment No. 7 to Registration Statement on Form S-6 (File No. 33-75248), as filed on February 24, 1998. 12. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-88720), as filed on June 28, 1996. 13. Incorporated by reference to Post-Effective Amendment No. 10 to Registration Statement on Form N-4 (File No. 33-75992), as filed on December 31, 1997. 14. Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form N-4 (File No. 333-56297), as filed on February 16, 1999. 15. Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 25, 1999. 16. Incorporated by reference to Post-Effective Amendment No. 27 to Registration Statement on Form N-4 (File No. 33-34370), as filed on April 16, 1997. 17. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-87305), as filed on September 17, 1999. Item 25. Directors and Officers of the Depositor Name and Principal Business Address* Positions and Offices with Depositor - ----------------- ------------------------------------ Thomas J. McInerney Director and President Catherine H. Smith Director, Chief Financial Officer and Senior Vice President Shaun P. Mathews Director and Senior Vice President Deborah Koltenuk Vice President, Corporate Controller, and Assistant Treasurer Therese M. Squillacote Vice President and Chief Compliance Officer Kirk P. Wickman Senior Vice President, General Counsel and Corporate Secretary * The principal business address of all directors and officers listed is 151 Farmington Avenue, Hartford, Connecticut 06156. Item 26. Persons Controlled by or Under Common Control with the Depositor or Registrant Incorporated herein by reference to Item 26 of Registration Statement on Form N-4 (File No. 333-56297) as filed on November 23, 1999. Item 27. Number of Contract Owners As of October 31, 1999, there were 92,783 individual holders of interests in variable annuity contracts funded through Variable Annuity Account B. Item 28. Indemnification Section 21 of Public Act No. 97-246 of the Connecticut General Assembly (the "Act") provides that a corporation may provide indemnification of or advance expenses to a director, officer, employee or agent only as permitted by Sections 33-770 to 33-778, inclusive, of the Connecticut General Statutes, as amended by Sections 12 to 20, inclusive, of this Act. Reference is hereby made to Section 33-771(e) of the Connecticut General Statutes ("CGS") regarding indemnification of directors and Section 33-776(d) of CGS regarding indemnification of officers, employees and agents of Connecticut corporations. These statutes provide in general that Connecticut corporations incorporated prior to January 1, 1997 shall, except to the extent that their certificate of incorporation expressly provides otherwise, indemnify their directors, officers, employees and agents against "liability" (defined as the obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding) when (1) a determination is made pursuant to Section 33-775 that the party seeking indemnification has met the standard of conduct set forth in Section 33-771 or (2) a court has determined that indemnification is appropriate pursuant to Section 33-774. Under Section 33-775, the determination of and the authorization for indemnification are made (a) by the disinterested directors, as defined in Section 33-770(3); (b) by special counsel; (c) by the shareholders; or (d) in the case of indemnification of an officer, agent or employee of the corporation, by the general counsel of the corporation or such other officer(s) as the board of directors may specify. Also, Section 33-772 provides that a corporation shall indemnify an individual who was wholly successful on the merits or otherwise against reasonable expenses incurred by him in connection with a proceeding to which he was a party because he was a director of the corporation. In the case of a proceeding by or in the right of the corporation or with respect to conduct for which the director, officer, agent or employee was adjudged liable on the basis that he received a financial benefit to which he was not entitled, indemnification is limited to reasonable expenses incurred in connection with the proceeding against the corporation to which the individual was named a party. The statute does specifically authorize a corporation to procure indemnification insurance on behalf of an individual who was a director, officer, employer or agent of the corporation. Consistent with the statute, Aetna Inc. has procured insurance from Lloyd's of London and several major United States excess insurers for its directors and officers and the directors and officers of its subsidiaries, including the Depositor. Item 29. Principal Underwriter (a) In addition to serving as the principal underwriter and depositor for the Registrant, Aetna Life Insurance and Annuity Company (Aetna) also acts as the principal underwriter, only, for Aetna Variable Encore Fund, Aetna Variable Fund, Aetna Generation Portfolios, Inc., Aetna Income Shares, Aetna Balanced VP, Inc. (formerly Aetna Investment Advisers Fund, Inc.), Aetna GET Fund, and Aetna Variable Portfolios, Inc. and as the principal underwriter and investment adviser for Portfolio Partners, Inc. (all management investment companies registered under the Investment Company Act of 1940 (1940 Act)). Additionally, Aetna acts as the principal underwriter and depositor for Variable Life Account B of Aetna, Variable Annuity Account C of Aetna and Variable Annuity Account G of Aetna (separate accounts of Aetna registered as unit investment trusts under the 1940 Act). Aetna is also the principal underwriter for Variable Annuity Account I of Aetna Insurance Company of America (AICA) (a separate account of AICA registered as a unit investment trust under the 1940 Act). (b) See Item 25 regarding the Depositor. (c) Compensation as of December 31, 1998:
(1) (2) (3) (4) (5) Name of Net Underwriting Compensation Principal Discounts and on Redemption Brokerage Underwriter Commissions or Annuitization Commissions Compensation* - ----------- ----------- ---------------- ----------- ------------- Aetna Life $684,000 $42,930,000 Insurance and Annuity Company
* Compensation shown in column 5 includes deductions for mortality and expense risk guarantees and contract charges assessed to cover costs incurred in the sales and administration of the contracts issued under Variable Annuity Account B. Item 30. Location of Accounts and Records All accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the rules under it relating to the securities described in and issued under this Registration Statement are located at the home office of the Depositor as follows: Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, Connecticut 06156 Item 31. Management Services Not applicable Item 32. Undertakings Registrant hereby undertakes: (a) to file a post-effective amendment to this registration statement on Form N-4 as frequently as is necessary to ensure that the audited financial statements in the registration statement are never more than sixteen months old for as long as payments under the variable annuity contracts may be accepted; (b) to include as part of any application to purchase a contract offered by a prospectus which is part of this registration statement on Form N-4, a space that an applicant can check to request a Statement of Additional Information; and (c) to deliver any Statement of Additional Information and any financial statements required to be made available under this Form N-4 promptly upon written or oral request. (d) The Company hereby represents that it is relying upon and complies with the provisions of Paragraphs (1) through (4) of the SEC Staff's No-Action Letter dated November 28, 1988 with respect to language concerning withdrawal restrictions applicable to plans established pursuant to Section 403(b) of the Internal Revenue Code. See American Counsel of Life Insurance; SEC No-Action Letter, [1988 WL 235221, *13 (S.E.C.)]. (e) Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (f) Aetna Life Insurance and Annuity Company represents that the fees and charges deducted under the contracts covered by this registration statement, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the insurance company. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, Variable Annuity Account B of Aetna Life Insurance and Annuity Company, has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement on Form N-4 (File No. 333-87305) to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Hartford, State of Connecticut, on the 13th day of December, 1999. VARIABLE ANNUITY ACCOUNT B OF AETNA LIFE INSURANCE AND ANNUITY COMPANY (Registrant) By: AETNA LIFE INSURANCE AND ANNUITY COMPANY (Depositor) By: Thomas J. McInerney* --------------------------------------- Thomas J. McInerney President As required by the Securities Act of 1933, this Pre-Effective Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- Thomas J. McInerney* Director and President ) - ------------------------------- (principal executive officer) ) Thomas J. McInerney ) ) December Catherine H. Smith* Director and Chief Financial Officer ) 13, 1999 - ------------------------------- ) Catherine H. Smith ) ) Shaun P. Mathews* Director ) - ------------------------------- ) Shaun P. Mathews ) ) Deborah Koltenuk* Vice President, Corporate Controller, and ) - ------------------------------- Assistant Treasurer Deborah Koltenuk
By: /s/ J. Neil McMurdie -------------------------------------------------------------- J. Neil McMurdie *Attorney-in-fact VARIABLE ANNUITY ACCOUNT B EXHIBIT INDEX Exhibit No. Exhibit - ----------- ------- 99-B.4.1 Variable Annuity Contract (GM-VA-99(PB)) ------------ 99-B.4.2 Variable Annuity Certificate (GMC-VA-99(PB)) ------------ 99-B.4.3 Endorsement EM-Roth-99(PB) ------------ 99-B.4.4 Endorsement EM-IRA-99(PB) ------------ 99-B.4.5 Endorsement EM-TDA-99(PB) ------------ 99-B.4.6 Endorsement EGET-00 ------------ 99-B.9 Opinion and Consent of Counsel ------------ 99-B.10 Consent of Independent Auditors ------------ 99-B.13 Schedule for Computation of Performance Data ------------ EX-99.B.4.1 2 VARIABLE ANNUITY CONTRACT (GM-VA-99(PB)) EXHIBIT 99-B.4.1 ============================================================= Aetna Life Insurance and Annuity Company Home Office: 151 Farmington Avenue Hartford, Connecticut 06156 (800) 238-6219 You may call the toll free number shown above to request information about this Contract. Aetna Life Insurance and Annuity Company, a stock company, herein called Aetna, agrees to pay the benefits stated in this Contract. Specifications - -------------------------------------------------------------------------------- Plan SPECIMEN - -------------------------------------------------------------------------------- Type of Plan SPECIMEN - -------------------------------------------------------------------------------- Contract Holder SPECIMEN - -------------------------------------------------------------------------------- Contract No. SPECIMEN - -------------------------------------------------------------------------------- Contract Effective Date SPECIMEN - -------------------------------------------------------------------------------- This Contract is delivered in [STATE] and is subject to the laws of that jurisdiction. The variable features of the Group Contract are described in parts III, IV and V. Right to Cancel ================================================================================ The Contract Holder may cancel this Contract within 10 days by returning it to the agent from whom it was purchased, or to Aetna at the address shown above. Within seven days of receiving the Contract at its home office, Aetna will return the amount of Certificate Holder Purchase Payment(s) received, plus any increase, or minus any decrease, on the amount, if any, allocated to the Separate Account Subaccount(s). This page and the pages that follow constitute the entire Contract. Signed at the home office on the Contract Effective Date. /s/ Thomas J. McInerney /s/ Kirk P. Wickman President Secretary Group Variable, Fixed, or Combination Annuity Contract Nonparticipating ALL PAYMENTS AND VALUES PROVIDED BY THE GROUP CONTRACT, WHEN BASED ON INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. AMOUNTS ALLOCATED TO THE GUARANTEED ACCOUNT, IF WITHDRAWN BEFORE THE GUARANTEED TERM MATURITY DATE, MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT. THE MARKET VALUE ADJUSTMENT MAY RESULT IN AN INCREASE OR A DECREASE IN THE ACCOUNT VALUE. THE MARKET VALUE ADJUSTMENT FORMULA DOES NOT APPLY TO A GUARANTEED TERM AT THE TIME OF ITS MATURITY. GM-VA-99(PB) Specifications - -------------------------------------------------------------------------------- Guaranteed There is a minimum guaranteed rate for Purchase Payment(s) held Rate in the Guaranteed Account. (See Schedule - Accumulation Period.) - -------------------------------------------------------------------------------- Deductions from There will be deductions for mortality and expense risk, the Separate administrative and if applicable other fees. Account - -------------------------------------------------------------------------------- Deduction from Purchase Payment(s) may be subject to a deduction for premium Purchase taxes. (See Section III - Purchase Payment.) Payment(s) - -------------------------------------------------------------------------------- Deferred Sales There may be a charge deducted upon withdrawal. (See Schedule - Charge Accumulation Period.) The Contract is a legal contract and constitutes the entire legal relationship between Aetna and the Contract Holder. READ THIS CONTRACT CAREFULLY. THE CONTRACT SETS FORTH, IN DETAIL, ALL OF THE RIGHTS AND OBLIGATIONS OF BOTH YOU AND AETNA UNDER THE CONTRACT. THEREFORE, IT IS IMPORTANT THAT YOU READ THIS CONTRACT CAREFULLY. Page 2 Schedule - Accumulation Period Death Benefit Option ================================================================================ Death Benefit Option I selected. (See Section IV - Death Benefit Options.) Separate Account ================================================================================ Separate Account Variable Annuity Account B Charges to Separate Account A daily charge is deducted from any portion of the Account Value allocated to the Separate Account. The deduction is the daily equivalent of the annual effective percentage shown in the following chart: Administrative Charge 0.15% Mortality and Expense Risk Charge 1.25% ----- Total Separate Account Charges 1.40% Guaranteed Account ================================================================================ Minimum Guaranteed Rate 3.0% (effective annual rate of return) Separate Account and Guaranteed Account ================================================================================ Transfers An unlimited number of Transfers are allowed during the Accumulation Period. Aetna allows 12 free Transfers in any Account Year. Aetna reserves the right to charge $10 for each subsequent Transfer. Maintenance Fee The annual Maintenance Fee is $30. If the Account Value is $50,000 or more on the date the Maintenance Fee is to be deducted, the Maintenance Fee is $0. Page 3 Schedule - Accumulation Period (continued) Separate Account and Guaranteed Account ================================================================================ Deferred Sales Charge For each withdrawal, the Deferred Sales Charge will be determined as follows: Deferred Sales Charge Length of Time from Receipt of (as percentage of Purchase Payment (Years) Purchase Payment) ------------------------------------------------------------------ Less than 3 years 8% 3 or more but less than 4 years 7% 4 or more but less than 5 years 6% 5 or more but less than 6 years 5% 6 or more but less than 7 years 4% 7 or more but less than 8 3% 8 years or more 0% Premium Bonus Net Premium Cumulative Purchase Payments Bonus Percentage ------------------------------------------------------------------ $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% See Section I Definitions - "Premium Bonus" for determining eligibility to receive a Premium Bonus after the initial Purchase Payment. Initial Purchase Payment Required $15,000 ($1,500 qualified plan). Aetna reserves the right to lower that amount. Maximum Issue Age of Owner and Annuitant 85 See Section I - DEFINITIONS for explanations. Page 4 Schedule - Annuity Period Separate Account - Variable Annuity Payments ================================================================================ Charges to Separate Account A daily charge is deducted at an annual effective rate of 1.25% for mortality and expense risks. The administrative charge is established upon election of an Annuity Payout Option. This charge will not exceed 0.25%. Assumed Interest Rate (AIR) If variable Annuity Payments are chosen, an AIR of 5.0% may be elected. If 5.0% is not elected, Aetna will use an AIR of 3.5%. The AIR factor for 3.5% per year is 0.9999058. The AIR factor for 5.0% per year is 0.9998663. If the portion of a variable Annuity Payment for any Subaccount is not to decrease, the annuity return factor under the Separate Account for that Subaccount must be: (a) 4.75% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence if an AIR of 3.5% is chosen; or (b) 6.25% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence, if an AIR of 5% is chosen. Transfers When variable Annuity Payments have been elected, 12 Transfers are allowed each Account Year among the Subaccounts available during the Annuity Period. Aetna reserves the right to allow more than 12 Transfers in an Account Year. General Account - Fixed Annuity Payments ================================================================================ Minimum Guaranteed Interest Rate 3.0% (effective annual rate of return) See Section I - DEFINITIONS for explanations. Page 5 Schedule - Accumulation Period Death Benefit Option ================================================================================ Death Benefit Option I selected. (See Section IV - Death Benefit Options.) Separate Account ================================================================================ Separate Account Variable Annuity Account B Charges to Separate Account A daily charge is deducted from any portion of the Account Value allocated to the Separate Account. The deduction is the daily equivalent of the annual effective percentage shown in the following chart: Administrative Charge 0.15% Mortality and Expense Risk Charge 1.25% ----- Total Separate Account Charges 1.40% Guaranteed Account ================================================================================ Minimum Guaranteed Rate 3.0% (effective annual rate of return) Separate Account and Guaranteed Account ================================================================================ Transfers An unlimited number of Transfers are allowed during the Accumulation Period. Aetna allows 12 free Transfers in any Account Year. Thereafter, Aetna reserves the right to charge $10 for each subsequent Transfer. Maintenance Fee The annual Maintenance Fee is $30. If the Account Value is $50,000 or more on the date the Maintenance Fee is to be deducted, the Maintenance Fee is $0. Page 3 Schedule - Accumulation Period (continued) Separate Account and Guaranteed Account ================================================================================ Deferred Sales Charge For each withdrawal, the Deferred Sales Charge will be determined as follows: Deferred Sales Charge Length of Time from Receipt of (as percentage of Purchase Payment (Years) Purchase Payment) -------------------------------------------------------------------- Less than 2 years 7% 2 or more but less than 3 years 5% 3 or more but less than 4 years 4% 4 or more but less than 5 years 3% 5 years or more 0% Premium Bonus Net Premium Cumulative Purchase Payments Bonus Percentage -------------------------------------------------------------------- $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% See Section I - Definitions - "Premium Bonus" to determine eligibility to receive a Premium Bonus after the initial Purchase Payment. Initial Purchase Payment Required $15,000 ($1,500 qualified plan). Aetna reserves the right to lower that amount. Maximum Issue Age of Owner and Annuitant 85 See Section I - DEFINITIONS for explanations. Page 4 Schedule - Annuity Period Separate Account - Variable Annuity Payments ================================================================================ Charges to Separate Account A daily charge is deducted at an annual effective rate of 1.25% for mortality and expense risks. The administrative charge is established upon election of an Annuity Payout Option. This charge will not exceed 0.25%. Assumed Interest Rate (AIR) If variable Annuity Payments are chosen, an AIR of 5.0% may be elected. If 5.0% is not elected, Aetna will use an AIR of 3.5%. The AIR factor for 3.5% per year is 0.9999058. The AIR factor for 5.0% per year is 0.9998663. If the portion of a variable Annuity Payment for any Subaccount is not to decrease, the annuity return factor under the Separate Account for that Subaccount must be: (a) 4.75% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence if an AIR of 3.5% is chosen; or (b) 6.25% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence, if an AIR of 5% is chosen. Transfers When variable Annuity Payments have been elected, 12 Transfers are allowed each Account Year among the Subaccounts available during the Annuity Period. Aetna reserves the right to allow more than 12 Transfers in an Account Year. General Account - Fixed Annuity Payments ================================================================================ Minimum Guaranteed Interest Rate 3.0% (effective annual rate of return) See Section I - DEFINITIONS for explanations. Page 5 Schedule - Accumulation Period Death Benefit Option ================================================================================ Death Benefit Option II selected. (See Section IV - Death Benefit Options.) Separate Account ================================================================================ Separate Account Variable Annuity Account B Charges to Separate Account A daily charge is deducted from any portion of the Account Value allocated to the Separate Account. The deduction is the daily equivalent of the annual effective percentage shown in the following chart: Administrative Charge 0.15% Mortality and Expense Risk Charge 1.45% ----- Total Separate Account Charges 1.60% Guaranteed Account ================================================================================ Minimum Guaranteed Rate 3.0% (effective annual rate of return) Separate Account and Guaranteed Account ================================================================================ Transfers An unlimited number of Transfers are allowed during the Accumulation Period. Aetna allows 12 free Transfers in any Account Year. Aetna reserves the right to charge $10 for each subsequent Transfer. Maintenance Fee The annual Maintenance Fee is $30. If the Account Value is $50,000 or more on the date the Maintenance Fee is to be deducted, the Maintenance Fee is $0. Page 3 Schedule - Accumulation Period (continued) Separate Account and Guaranteed Account ================================================================================ Deferred Sales Charge For each withdrawal, the Deferred Sales Charge will be determined as follows: Deferred Sales Charge Length of Time from Receipt of (as percentage of Purchase Payment (Years) Purchase Payment) -------------------------------------------------------------------- Less than 3 years 8% 3 or more but less than 4 years 7% 4 or more but less than 5 years 6% 5 or more but less than 6 years 5% 6 or more but less than 7 years 4% 7 or more but less than 8 3% 8 years or more 0% Premium Bonus Net Premium Cumulative Purchase Payments Bonus Percentage -------------------------------------------------------------------- $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% See Section I - Definitions - "Premium Bonus" to determine eligibility to receive a Premium Bonus after the initial Purchase Payment. Initial Purchase Payment Required $15,000 ($1,500 qualified plan). Aetna reserves the right to lower that amount. Maximum Issue Age of Owner and Annuitant 75 See Section I - DEFINITIONS for explanations. Page 4 Schedule - Annuity Period Separate Account - Variable Annuity Payments ================================================================================ Charges to Separate Account A daily charge is deducted at an annual effective rate of 1.25% for mortality and expense risks. The administrative charge is established upon election of an Annuity Payout Option. This charge will not exceed 0.25%. Assumed Interest Rate (AIR) If variable Annuity Payments are chosen, an AIR of 5.0% may be elected. If 5.0% is not elected, Aetna will use an AIR of 3.5%. The AIR factor for 3.5% per year is 0.9999058. The AIR factor for 5.0% per year is 0.9998663. If the portion of a variable Annuity Payment for any Subaccount is not to decrease, the annuity return factor under the Separate Account for that Subaccount must be: (a) 4.75% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence if an AIR of 3.5% is chosen; or (b) 6.25% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence, if an AIR of 5% is chosen. Transfers When variable Annuity Payments have been elected, 12 Transfers are allowed each Account Year among the Subaccounts available during the Annuity Period. Aetna reserves the right to allow more than 12 Transfers in an Account Year. General Account - Fixed Annuity Payments ================================================================================ Minimum Guaranteed Interest Rate 3.0% (effective annual rate of return) See Section I - DEFINITIONS for explanations. Page 5 Schedule - Accumulation Period Death Benefit Option ================================================================================ Death Benefit Option II selected. (See Section IV - Death Benefit Options.) Separate Account ================================================================================ Separate Account Variable Annuity Account B Charges to Separate Account A daily charge is deducted from any portion of the Account Value allocated to the Separate Account. The deduction is the daily equivalent of the annual effective percentage shown in the following chart: Administrative Charge 0.15% Mortality and Expense Risk Charge 1.45% ----- Total Separate Account Charges 1.60% Guaranteed Account ================================================================================ Minimum Guaranteed Rate 3.0% (effective annual rate of return) Separate Account and Guaranteed Account ================================================================================ Transfers An unlimited number of Transfers are allowed during the Accumulation Period. Aetna allows 12 free Transfers in any Account Year. Thereafter, Aetna reserves the right to charge $10 for each subsequent Transfer. Maintenance Fee The annual Maintenance Fee is $30. If the Account Value is $50,000 or more on the date the Maintenance Fee is to be deducted, the Maintenance Fee is $0. Page 3 Schedule - Accumulation Period (continued) Separate Account and Guaranteed Account ================================================================================ Deferred Sales Charge For each withdrawal, the Deferred Sales Charge will be determined as follows: Deferred Sales Charge Length of Time from Receipt of (as percentage of Purchase Payment (Years) Purchase Payment) -------------------------------------------------------------------- Less than 2 years 7% 2 or more but less than 3 years 5% 3 or more but less than 4 years 4% 4 or more but less than 5 years 3% 5 years or more 0% Premium Bonus Net Premium Cumulative Purchase Payments Bonus Percentage -------------------------------------------------------------------- $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% See Section I - Definitions - "Premium Bonus" to determine eligibility to receive a Premium Bonus after the initial Purchase Payment. Initial Purchase Payment Required $15,000 ($1,500 qualified plan). Aetna reserves the right to lower that amount. Maximum Issue Age of Owner and Annuitant 75 See Section I - DEFINITIONS for explanations. Page 4 Schedule - Annuity Period Separate Account - Variable Annuity Payments ================================================================================ Charges to Separate Account A daily charge is deducted at an annual effective rate of 1.25% for mortality and expense risks. The administrative charge is established upon election of an Annuity Payout Option. This charge will not exceed 0.25%. Assumed Interest Rate (AIR) If variable Annuity Payments are chosen, an AIR of 5.0% may be elected. If 5.0% is not elected, Aetna will use an AIR of 3.5%. The AIR factor for 3.5% per year is 0.9999058. The AIR factor for 5.0% per year is 0.9998663. If the portion of a variable Annuity Payment for any Subaccount is not to decrease, the annuity return factor under the Separate Account for that Subaccount must be: (a) 4.75% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence if an AIR of 3.5% is chosen; or (b) 6.25% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence, if an AIR of 5% is chosen. Transfers When variable Annuity Payments have been elected, 12 Transfers are allowed each Account Year among the Subaccounts available during the Annuity Period. Aetna reserves the right to allow more than 12 Transfers in an Account Year. General Account - Fixed Annuity Payments ================================================================================ Minimum Guaranteed Interest Rate 3.0% (effective annual rate of return) See Section I - DEFINITIONS for explanations. Page 5 Table of Contents I. DEFINITIONS PAGE 1.01 Account ............................................ 8 1.02 Account Effective Date ............................. 8 1.03 Account Value ...................................... 8 1.04 Account Year ....................................... 8 1.05 Accumulation Period ................................ 8 1.06 Adjusted Account Value ............................. 8 1.07 Annuitant .......................................... 8 1.08 Annuity Payments ................................... 8 1.09 Annuity Payout Options ............................. 8 1.10 Annuity Period ..................................... 8 1.11 Beneficiary ........................................ 9 1.12 Certificate Holder ................................. 9 1.13 Claim Date ......................................... 9 1.14 Code ............................................... 9 1.15 Contract ........................................... 9 1.16 Contract Holder .................................... 9 1.17 Deferred Sales Charge .............................. 9 1.18 Deposit Period ..................................... 9 1.19 Dollar Cost Averaging .............................. 9 1.20 Fund(s) ............................................ 10 1.21 General Account .................................... 10 1.22 Guaranteed Account ................................. 10 1.23 Guaranteed Rates - Guaranteed Account .............. 10 1.24 Guaranteed Term .................................... 10 1.25 Guaranteed Term(s) Groups .......................... 10 1.26 Maintenance Fee .................................... 10 1.27 Market Value Adjustment (MVA) ...................... 11 1.28 Matured Term Value ................................. 11 1.29 Maturity Date ...................................... 11 1.30 Maturity Value Transfer ............................ 11 1.31 Net Cumulative Purchase Payment .................... 11 1.32 Premium Bonus ...................................... 11 1.33 Purchase Payment(s) ................................ 11 1.34 Reinvestment ....................................... 11 1.35 Separate Account ................................... 12 1.36 Subaccount(s) ...................................... 12 1.37 Systematic Distribution Option ..................... 12 1.38 Transfers .......................................... 12 1.39 Withdrawal Value ................................... 12 1.40 Valuation Date ..................................... 12 II. GENERAL PROVISIONS 2.01 Change of Contract ................................. 12 2.02 Change of Fund(s) .................................. 13 2.03 Nonparticipating Contract .......................... 13 2.04 Payments and Elections ............................. 13 2.05 State Laws ......................................... 13 2.06 Control of Contract ................................ 13 2.07 Designation of Beneficiary ......................... 14 2.08 Misstatements and Adjustments ...................... 14 2.09 Incontestability ................................... 14 2.10 Grace Period ....................................... 14 2.11 Individual Certificates ............................ 14 Page 6 III. PURCHASE PAYMENT, ACCOUNT VALUE, AND WITHDRAWAL PROVISIONS PAGE 3.01 Purchase Payment ........................................ 14 3.02 Premium Bonus ........................................... 15 3.03 Certificate Holder's Account ............................ 15 3.04 Accumulation Units - Separate Account ................... 15 3.05 Accumulation Unit Value - Separate Account .............. 15 3.06 Net Investment Factor(s) - Separate Account ............. 15 3.07 Market Value Adjustment (MVA) ........................... 16 3.08 Transfer of Account Value from the Subaccount(s) or Guaranteed Account During the Accumulation Period ....... 17 3.09 Notice to the Certificate Holder ........................ 17 3.10 Loans ................................................... 17 3.11 Systematic Distribution Options ......................... 17 3.12 Liquidation of Withdrawal Value ......................... 18 3.13 Deferred Sales Charge ................................... 18 3.14 Payment of Withdrawal Value ............................. 18 3.15 Payment of Adjusted Account Value ....................... 19 3.16 Reinstatement ........................................... 19 IV DEATH BENEFIT 4.01 Death Benefit Options ................................... 19 4.02 Death Benefit Option I .................................. 19 4.03 Death Benefit Option II ................................. 20 4.04 Options Available to Beneficiary ........................ 21 V. ANNUITY PAYOUT PROVISIONS 5.01 Annuity Payout Options .................................. 22 5.02 Annuity Payment Choices ................................. 23 5.03 Terms of Annuity Payout Options ......................... 23 5.04 Death of Annuitant/Beneficiary .......................... 24 5.05 Annuity Units - Separate Account ........................ 25 5.06 Annuity Unit Value - Separate Account ................... 25 5.07 Annuity Net Return Factor(s) - Separate Account ......... 25 Page 7 I. DEFINITIONS ================================================================================ 1.01 Account: A record that identifies contract values accumulated on each Certificate Holder's behalf. 1.02 Account Effective Date: The date on which an Account is established on a Certificate Holder's behalf. 1.03 Account Value: As of the most recent Valuation Date, the Account Value is equal to the total of the Purchase Payment(s) made to the Account; (a) Plus any Premium Bonus amount; (b) Plus or minus the investment experience for the amount, if any, allocated to one or more of the Subaccounts; (c) Plus interest added to the amount, if any, allocated to the Guaranteed Account; (d) Plus any additional amount deposited to the Account (see Section IV - Death Benefit); (e) Less the amount of any Maintenance Fee deducted; (f) Less any additional fee(s), charges, or taxes, if applicable, deducted; (g) Less any amount(s) withdrawn; and (h) Less amount(s) applied to an Annuity Payout Option. 1.04 Account Year: A period of twelve months measured from the Account Effective Date or an anniversary of such Account Effective Date. 1.05 Accumulation Period: The period during which the Purchase Payment(s) and Premium Bonus are applied to an Account to provide future Annuity Payment(s). 1.06 Adjusted Account Value: The Account Value plus or minus the aggregate Market Value Adjustment (MVA), if applicable, for the amount(s) allocated to the Guaranteed Account (see Section III - Market Value Adjustment). 1.07 Annuitant: The person on whose death, during the Accumulation Period, a death benefit becomes payable and on whose life or life expectancy the Annuity Payments are based under the Contract. 1.08 Annuity Payment(s): A series of payments for life, a definite period or a combination of the two. The Annuity Payments may be variable or fixed in amount or a combination of both. 1.09 Annuity Payout Options: The Certificate Holder may choose to receive Annuity Payments under one of the following options: (a) For the life of one or two persons; (b) For a stated period; or (c) For some combination of (a) and (b). 1.10 Annuity Period: The period during which Annuity Payments are made. Page 8 1.11 Beneficiary: The individual(s) or entity(ies) entitled to receive any death benefit due under the Contract. Any designated Beneficiary has the right to name another Beneficiary. If the Account is owned by joint Certificate Holders, the survivor will be deemed the designated Beneficiary and any other Beneficiary on record will then be treated as the primary or contingent Beneficiary, as originally designated, unless and until changed by the new designated Beneficiary. 1.12 Certificate Holder: A person who purchases an interest in the Contract as evidenced by a certificate. Aetna reserves the right to limit ownership to natural persons. If more than one Certificate Holder owns an Account, each Certificate Holder will be a joint Certificate Holder. Joint Certificate Holders have joint ownership rights and both must authorize exercising any ownership rights unless Aetna allows otherwise. 1.13 Claim Date: The date when proof of death and the Beneficiary's entitlement to the death benefit are received in good order at Aetna's home office. This is also the date that the excess of the death benefit over the Account Value, if any, is allocated to the money market fund available through the Separate Account. 1.14 Code: The Internal Revenue Code of 1986, as it may be amended from time to time. 1.15 Contract: The agreement between Aetna and the Contract Holder. 1.16 Contract Holder: The entity to which the Contract is issued. 1.17 Deferred Sales Charge: The charge that is applied to a Purchase Payment(s)upon withdrawal. This charge may be waived under certain circumstances or after a certain length of time (see Section III - Deferred Sales Charge). 1.18 Deposit Period: A day, a calendar week, a calendar month, a calendar quarter, or any other period of time specified by Aetna during which a Purchase Payment(s), Transfer(s) and/or Reinvestment(s) may be allocated to one or more Guaranteed Account Guaranteed Terms. Aetna reserves the right to shorten or to extend the Deposit Period. During a Deposit Period, Aetna may offer any number of Guaranteed Terms and more than one Guaranteed Term of the same duration may be offered. 1.19 Dollar Cost Averaging: A program that permits the Certificate Holder to systematically transfer amounts from one of the available Subaccounts, or an available Guaranteed Account Guaranteed Term, to one or more of the Subaccounts. If the Certificate Holder elects a Guaranteed Account Guaranteed Term available for Dollar Cost Averaging, no MVA applies to amounts transferred under Dollar Cost Averaging. If Dollar Cost Averaging from a Guaranteed Account Guaranteed Term is discontinued before the end of the Dollar Cost Averaging period elected, Aetna will automatically transfer the balance to a Guaranteed Term of the same duration and an MVA will apply. The Certificate Holder may initiate a Transfer to another investment option and an MVA will apply. If a Guaranteed Term of the same duration is not available, Aetna will transfer the amount to the Guaranteed Term with the next shortest duration. If no shorter Guaranteed Term is available, the next longer Guaranteed Term will be used. Aetna reserves the right to establish and change terms and conditions governing Dollar Cost Averaging. Page 9 1.20 Fund(s): The open-end registered management investment companies whose shares are purchased by the Separate Account to fund the benefits provided by the Contract. The Funds, and the number of Funds, available during the Accumulation Period may be different from those available during the Annuity Period. Aetna reserves the right to limit the number of Funds available at any one time and to limit the number of investment options the Certificate Holder may select during the Accumulation Period and/or during the Annuity Period. 1.21 General Account: The account holding the assets of Aetna, other than those assets held in Aetna's separate accounts. 1.22 Guaranteed Account: A nonunitized separate account, established by Aetna under Connecticut Law that holds assets for Guaranteed Terms. There are no discrete units for this account. The Certificate Holder does not participate in any gain or loss resulting from the performance of the investments held in the account. Income, gains or losses realized or unrealized, are gains or losses of Aetna. Aetna liabilities, except for liabilities under the contract and reserves required by federal and state law, may not be charged against the nonunitized separate account. 1.23 Guaranteed Rates - Guaranteed Account: Aetna will declare the interest rate(s) applicable to a specific Guaranteed Term at the start of the Deposit Period for that Guaranteed Term. The rate(s) are guaranteed by Aetna for the period beginning with the first day of the Deposit Period and ending on the Maturity Date. Guaranteed Rates are credited beginning with the date of allocation. The Guaranteed Rates are annual effective yields. That is, interest is credited daily at a rate that will produce the Guaranteed Rate over the period of a year. No Guaranteed Rate will ever be less than the minimum Guaranteed Rate shown on the Schedule - Accumulation Period. For Guaranteed Terms of one year or less, one Guaranteed Rate is credited for the full Guaranteed Term. For longer Guaranteed Terms, an initial Guaranteed Rate is credited from the date of deposit to the end of a specified period within the Guaranteed Term. There may be different Guaranteed Rate(s) declared for subsequent specified time intervals throughout the Guaranteed Term. Aetna may offer more than one Guaranteed Term of the same duration and credit one with a higher rate contingent upon use only with Dollar Cost Averaging. 1.24 Guaranteed Term: The period of time specified by Aetna for which a specific Guaranteed Rate(s) is offered on amounts invested during a specific Deposit Period. Guaranteed Terms are made available subject to Aetna's terms and conditions, including, but not limited to, Aetna's right to restrict allocations to new Purchase Payments (such as by prohibiting Transfers into a particular Guaranteed Term from any other Guaranteed Term or from any of the Subaccounts, or by prohibiting Reinvestment of a Matured Term Value to a particular Guaranteed Term). More than one Guaranteed Term of the same duration may be offered within the Contract. 1.25 Guaranteed Term(s) Groups: All Guaranteed Account Guaranteed Term(s) of the same duration (from the close of the Deposit Period until the designated Maturity Date). 1.26 Maintenance Fee: The Maintenance Fee (see Schedule - Accumulation Period) will be deducted during the Accumulation Period from the Account Value on each anniversary of the Account Effective Date and upon withdrawal of the entire Account Value. Page 10 1.27 Market Value Adjustment (MVA): An adjustment that may apply to an amount withdrawn or transferred from a Guaranteed Account Guaranteed Term prior to the end of that Guaranteed Term. The adjustment reflects the change in the value of the investment due to changes in interest rates since the date of deposit and is computed using the formula given. The adjustment is expressed as a percentage of each dollar being withdrawn (see Section III- Market Value Adjustment). 1.28 Matured Term Value: The amount due on a Guaranteed Account Guaranteed Term's Maturity Date. 1.29 Maturity Date: The last day of a Guaranteed Account Guaranteed Term. 1.30 Maturity Value Transfer: During the calendar month following a Guaranteed Account Maturity Date, the Certificate Holder may notify Aetna's home office in writing to Transfer or withdraw all or part of the Matured Term Value, plus accrued interest at the new Guaranteed Rate, from the Guaranteed Account without an MVA. This provision only applies to the first such written request received from the Certificate Holder during this period for any Matured Term Value. 1.31 Net Cumulative Purchase Payment: The sum of the Purchase Payments minus any amounts withdrawn. 1.32 Premium Bonus: A percentage of an applicable Purchase Payment (as shown on the Schedule-Accumulation Period) that is credited to a Certificate Holder's Account by Aetna. This amount is in addition to the Purchase Payment. The amount of Purchase Payment eligible for such Premium Bonus is equal to the Net Cumulative Purchase Payment amount minus the sum of Purchase Payments upon which a Premium Bonus has previously been paid. 1.33 Purchase Payment(s): The Purchase Payment(s) less premium taxes, if applicable, accepted by Aetna at its home office. Aetna reserves the right to refuse to accept any Purchase Payment at any time for any reason. No advance notice will be given to the Contract Holder or Certificate Holder. 1.34 Reinvestment: Aetna will mail a notice to the Certificate Holder at least 18 calendar days before a Guaranteed Term's Maturity Date. This notice will contain the Terms available during current Deposit Periods with their Guaranteed Rate(s), and projected Matured Term Value. If no specific direction is given by the Certificate Holder prior to the Maturity Date, each Matured Term Value will be reinvested in the current Deposit Period for a Guaranteed Term of the same duration. If a Guaranteed Term of the same duration is unavailable, each Matured Term Value will automatically be reinvested in the current Deposit Period for the next shortest Guaranteed Term available. If no shorter Guaranteed Term is available, the next longer Guaranteed Term will be used. Aetna will mail a confirmation statement to the Certificate Holder the next business day after the Maturity Date. This notice will state the Guaranteed Term and Guaranteed Rate(s) which will apply to the reinvested Matured Term Value. Page 11 1.35 Separate Account: A separate account that buys and holds shares of the Fund(s). Income, gains or losses, realized or unrealized, are credited or charged to the Separate Account without regard to other income, gains or losses of Aetna. Aetna owns the assets held in the Separate Account and is not a trustee as to such amounts. The Separate Account generally is not guaranteed and is held at market value. The assets of the Separate Account, to the extent of reserves and other contract liabilities of the Separate Account, shall not be charged with other Aetna liabilities. 1.36 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. 1.37 Systematic Distribution Option: An option elected by the Certificate Holder during the Accumulation Period which establishes a schedule of withdrawals to be made automatically from the Certificate Holder's Account. 1.38 Transfers: The movement of invested amounts among the available Subaccount(s) and/or any Guaranteed Account Guaranteed Term made available, subject to terms and conditions established by Aetna, during the Accumulation Period or the Annuity Period. 1.39 Withdrawal Value: The amount payable by Aetna upon the withdrawal of any portion of the Account Value. 1.40 Valuation Date: The date and time for which a Subaccount calculates its net asset value, usually from 4:00 p.m. Eastern time each day the New York Stock Exchange is open, to 4:00 p.m. the next such business day. II. GENERAL PROVISIONS ================================================================================ 2.01 Change of Contract: Only an authorized officer of Aetna may change the terms of the Contract. Aetna will notify the Contract Holder in writing at least 30 days before the effective date of any change. Any change will not affect the amount or terms of any Annuity Payout Option which begins before the change. Aetna may make any change that affects the Market Value Adjustment (see Section III- Market Value Adjustment) with at least 30 days advance written notice to the Contract Holder and the Certificate Holder. Any such change shall become effective for any new Guaranteed Term and will apply to all present and future Accounts. Any change that affects any of the following under the Contract will not apply to Accounts in existence before the effective date of the change: (a) Account Value (b) Guaranteed Rates - Guaranteed Account (c) Purchase Payment (d) Withdrawal Value (e) Transfers (f) Net Investment Factor(s) - Separate Account (see Section III) (g) Minimum Guaranteed Interest Rates (h) Annuity Unit Value - Separate Account (see Section V) (i) Annuity Payout Options (see Section V). Page 12 Any change that affects the Annuity Payout Options and the tables for the Annuity Payout Options may be made: (a) No earlier than 12 months after the Account Effective Date; and (b) No earlier than 12 months after the effective date of any prior change. Any Account established on or after the effective date of any change will be subject to the change. If the Contract Holder does not agree to any change under this provision, no new Accounts may be established under the Contract. The Contract may also be changed as deemed necessary by Aetna to comply with federal or state law. 2.02 Change of Fund(s): The assets of the Separate Account are segregated by Fund. If the shares of any Fund are no longer available for investment by the Separate Account or if, in our judgment, further investment in such shares should become inappropriate in view of the purpose of the Contract, Aetna may cease to make such Fund shares available for investment under the Contract prospectively, or Aetna may substitute shares of another Fund for shares already acquired. Aetna may also, from time to time, add additional Funds. Any elimination, substitution or addition of Funds will be done in accordance with applicable state and federal securities laws. Aetna reserves the right to substitute shares of another Fund for shares already acquired without a proxy vote. 2.03 Nonparticipating Contract: The Contract Holder, Certificate Holders or Beneficiaries will not have a right to share in the earnings of Aetna. 2.04 Payments and Elections: While the Certificate Holder is living, Aetna will pay the Certificate Holder any Annuity Payments as and when due. After the Certificate Holder's death, or at the death of the first Certificate Holder if the Account is owned jointly, any Annuity Payments required to be made will be paid in accordance with Section III - Death of Annuitant/Beneficiary. Aetna will determine other payments and/or elections as of the end of the Valuation Date in which the request is received at its home office. Such payments will be made within seven calendar days of receipt at its home office of a written claim for payment which is in good order, except as provided in Section III - Payment of Withdrawal Value. 2.05 State Laws: The Contract and Certificate comply with the laws of the state in which they are delivered. Any withdrawal, death benefit amount, or Annuity Payments are equal to or greater than the minimum required by such laws. Annuity tables for legal reserve valuation shall be as required by state law. Such tables may be different from annuity tables used to determine Annuity Payments. 2.06 Control of Contract: The Contract is between the Contract Holder and Aetna. The Contract Holder has title to the Contract. Contract Holder rights are limited to accepting or rejecting Contract modifications. The Certificate Holder has all other rights to amounts held in his or her Account. Each Certificate Holder shall own all amounts held in his or her Account. Each Certificate Holder may make any choices allowed by the Contract for his or her Account. Choices made under the Contract must be in writing. If the Account is owned jointly, both joint Certificate Holders must authorize any Certificate Holder change in writing. Until receipt of such choices at Aetna's home office, Aetna may rely on any previous choices made. The Contract is not subject to the claims of any creditors of the Contract Holder or the Certificate Holder, except to the extent permitted by law. Page 13 The Certificate Holder may assign or transfer his or her rights under the Contract. Aetna reserves the right not to accept assignment or transfer to a nonnatural person. Any assignment or transfer made under the Contract must be submitted to Aetna's home office in writing and will not be effective until accepted by Aetna. 2.07 Designation of Beneficiary: Each Certificate Holder shall name his or her Beneficiary and when designating the Beneficiary may elect to specify in writing the form of payment to the Beneficiary. Aetna will honor the specified form of payment to the extent permitted under section 72(s) of the Code. If the Account is owned jointly, both joint Certificate Holders must agree in writing to the Beneficiary designated. The Beneficiary may be changed at any time unless an irrevocable Beneficiary is designated. Changes to a Beneficiary must be submitted to Aetna's home office in writing and will not be effective until accepted by Aetna. We will accept a change of Beneficiary designation after the date of death and treat such Beneficiary designation as in effect as of the date of death provided no portion of the death benefit has been paid. If the Account is owned jointly, at the death of one joint Certificate Holder, the survivor will be deemed the designated Beneficiary; any other Beneficiary on record will then be treated as a primary or a contingent Beneficiary, as originally designated unless and until changed by the new designated Beneficiary. If a designated Beneficiary defers taking payment of a death benefit, the designated Beneficiary has the right to name another Beneficiary. 2.08 Misstatements and Adjustments: If Aetna finds the age of any Annuitant to be misstated, the correct facts will be used to adjust payments. 2.09 Incontestability: After two years, the Contract will be incontestable. 2.10 Grace Period: The Contract will remain in effect even if Purchase Payments are not continued except as provided in the Payment of Adjusted Account Value provision (see Section III - Payment of Adjusted Account Value). 2.11 Individual Certificates: Aetna shall issue a certificate to each Certificate Holder. The certificate will summarize certain provisions of the Contract. Certificates are for information only and are not a part of the Contract. III. PURCHASE PAYMENT, ACCOUNT VALUE, AND WITHDRAWAL PROVISIONS ================================================================================ 3.01 Purchase Payment: This amount is the actual Purchase Payment, less any premium taxes. Aetna reserves the right to pay premium taxes when due and deduct the amount from the Account Value when we pay the tax or at a later date. Each Purchase Payment will be allocated, as directed by the Certificate Holder, among: (a) Guaranteed Account Guaranteed Terms made available, subject to terms and conditions established by Aetna; and/or (b) The Subaccount(s) offered through the Separate Account. For each Purchase Payment, the Certificate Holder shall tell Aetna the percentage of each Purchase Payment to allocate to any available Guaranteed Account Guaranteed Term and/or each Subaccount. Unless different allocation instructions are received for any additional Purchase Payment, the allocation will be the same as for the initial Purchase Payment. If the same Guaranteed Term is no longer available, the Purchase Payment will be allocated to the next shortest Guaranteed Term available in the current Deposit Period. If no shorter Guaranteed Term is available, the next longer Guaranteed Term will be used. Page 14 3.02 Premium Bonus: A Premium Bonus of a certain percentage based on Net Cumulative Purchase Payment(s) will be allocated to the Account. The applicable percentage is shown on the Schedule - Accumulation Period. The eligibility for a Premium Bonus is determined in accordance with Section I - Definitions "Premium Bonus". The Premium Bonus will not be included in the Account Value and will be forfeited under the following circumstances: (a) If the Certificate Holder exercises the right to cancel; or (b) If the Certificate Holder applies the Adjusted Account Value (minus any premium tax, if applicable) to any Annuity Payout Option to the extent that a Premium Bonus has been allocated within 24 months; or (c) If the Certificate Holder dies, to the extent that a Premium Bonus has been allocated after or within 12 months of the date of death. The Premium Bonus will be applied pro-rata to each Fund or Guaranteed Term in the same ratio as the Purchase Payment is allocated unless otherwise specified. 3.03 Certificate Holder's Account: Aetna will maintain an Account for each Certificate Holder. Aetna will declare from time to time the acceptability and the minimum amount for initial and additional Purchase Payments. 3.04 Accumulation Units - Separate Account: The portion of the Purchase Payment(s) applied to each Subaccount under the Separate Account will determine the number of accumulation units for that Subaccount. This number is equal to the portion of the Purchase Payment(s) applied to each Subaccount divided by the accumulation unit value (see Section III - Accumulation Unit Value Separate Account) for the Valuation Date in which the Purchase Payment is received in good order at Aetna's home office. 3.05 Accumulation Unit Value - Separate Account: An accumulation unit value is computed by multiplying the net investment factor for the current Valuation Date by the accumulation unit value for the previous Valuation Date. The dollar value of accumulation units, Separate Account assets, and variable Annuity Payments may go up or down due to investment gain or loss. 3.06 Net Investment Factor(s) - Separate Account: The net investment factor is used to measure the investment performance of a Subaccount from one Valuation Date to the next. The net investment factor for a Subaccount for any Valuation Date is equal to the sum of 1.0000 plus the net investment rate. The net investment rate equals: (a) The net assets of the Subaccount on the current Valuation Date; minus (b) The net assets of the Subaccount on the preceding Valuation Date; plus or minus (c) Taxes or provisions for taxes, if any, attributable to the operation of the Subaccount; divided by (d) The total value of the Subaccount's accumulation and annuity units on the preceding Valuation Date; minus (e) A daily charge for mortality and expense risks, administrative charges and any other fees deducted from investments in the Separate Account. The net investment rate may be either positive or negative. Page 15 3.07 Market Value Adjustment (MVA): An MVA will apply to any withdrawal from the Guaranteed Account before the end of a Guaranteed Term when the withdrawal is: (a) A Transfer (including a Transfer from a Guaranteed Account Guaranteed Term if Dollar Cost Averaging is discontinued); except for Transfers under Dollar Cost Averaging, or as specified in Section I - Maturity Value Transfer; (b) A full or partial withdrawal (excluding a free withdrawal, see Section III - Deferred Sales Charge), except for a payment made: (1) Under a Systematic Distribution Option to the extent that it does not exceed 10% of the Account Value in an Account Year (an MVA will apply to any amount that exceeds 10% unless such amount is required to meet the minimum distribution requirements); or (2) Under a qualified Contract, when the amount withdrawn is equal to the required minimum distribution for the Account calculated using a method permitted under the Code and agreed to by Aetna; or (c) Due to an election of Annuity Payout Option 1. Only a positive MVA will apply upon election of Annuity Payout Option 2 or 3 (see Section V - Annuity Payout Options). Full and partial withdrawals and Transfers made within six months after the date of the Annuitant's death will be the greater of: (a) The aggregate MVA amount which is the sum of all market value adjusted amounts resulting from a withdrawal(s). This total may be greater or less than the Account Value of those amounts; or (b) The applicable portion of the Account Value in the Guaranteed Account. After the six-month period, the withdrawal or Transfer will be the aggregate MVA amount, which may be greater or less than the Account Value of those amounts. Market value adjusted amounts will be equal to the amount withdrawn multiplied by the following ratio: (1 + i)^(x/365) ------- (1 + j)^(x/365) Where: i is the Deposit Period yield j is the current yield x is the number of days remaining in the Guaranteed Term, computed from Wednesday of the week of withdrawal. The Deposit Period yield will be determined as follows: (a) At the close of the last business day of each week of the Deposit Period, a yield will be computed as the average of the yields on that day of U.S. Treasury Notes which mature in the last three months of the Guaranteed Term. (b) The Deposit Period yield is the average of those yields for the Deposit Period. If withdrawal is made before the close of the Deposit Period, it is the average of those yields on each week preceding withdrawal. The current yield is the average of the yields on the last business day of the week preceding withdrawal on the same U.S. Treasury Notes included in the Deposit Period yield. In the event that no U.S. Treasury Notes which mature in the last three months of the Guaranteed Term exist, Aetna reserves the right to use the U.S. Treasury Notes that mature in the following quarter. Page 16 3.08 Transfer of Account Value from the Subaccount(s) or Guaranteed Account During the Accumulation Period: Before an Annuity Payout Option is elected, all or any portion of the Adjusted Account Value of the Certificate Holder's Account may be transferred from any Subaccount or Guaranteed Term of the Guaranteed Account: (a) To any other Subaccount; or (b) To any Guaranteed Term of the Guaranteed Account made available in the current Deposit Period, subject to terms and conditions specified by Aetna. Transfer requests can be submitted as a percentage or as a dollar amount. Aetna may establish a minimum transfer amount. Within a Guaranteed Term Group, the amount to be withdrawn or transferred will be withdrawn first from the oldest Deposit Period, then from the next oldest, and so on until the amount requested is satisfied. The Certificate Holder may make an unlimited number of Transfers during the Accumulation Period. The number of free Transfers allowed by Aetna is shown on the Schedule - Accumulation Period. Additional Transfers may be subject to a Transfer fee as shown on the Schedule - Accumulation Period. Amounts transferred from the Guaranteed Account under the Dollar Cost Averaging program, or amounts transferred as a Matured Term Value on or within one calendar month of a Maturity Date are not subject to any Transfer fee and do not count against the annual number of free Transfers. Amounts allocated to Guaranteed Account Guaranteed Terms may not be transferred to the Subaccounts or to another Guaranteed Term during a Deposit Period or for 90 days after the close of a Deposit Period except for: (a) Matured Term Value(s) during the calendar month following the Maturity Date; (b) Amounts applied to an Annuity Payout Option; (c) Amounts transferred under the Dollar Cost Averaging program; (d) Amounts distributed under a Systematic Distribution Option; and (e) Amounts transferred by Aetna if Dollar Cost Averaging is discontinued. 3.09 Notice to the Certificate Holder: The Certificate Holder will receive quarterly statements from Aetna of: (a) The value of any amounts held in: (1) The Guaranteed Account; and (2) The Subaccount(s) under the Separate Account; (b) The number of any accumulation units; and (c) The accumulation unit value. Such number or values will be as of a specific date no more than 60 days before the date of the notice. 3.10 Loans: Loans are not available under the Contract. 3.11 Systematic Distribution Options: Aetna may, from time to time, make one or more Systematic Distribution Options available during the Accumulation Period. When a Systematic Distribution Option is elected, Aetna will make automatic payments from the Certificate Holder's Account. Any Systematic Distribution Option will be subject to the following criteria: (a) Any Systematic Distribution Option will be made available on the basis of objective criteria consistently applied; Page 17 (b) The availability of any Systematic Distribution Option may be limited by terms and conditions applicable to the election of such Systematic Distribution Option; and (c) Aetna may discontinue the availability of a Systematic Distribution Option at any time. Except to the extent required to comply with applicable law, discontinuance of a Systematic Distribution Option will apply only to future elections and will not affect Systematic Distribution Options in effect at the time an option is discontinued. 3.12 Liquidation of Withdrawal Value: All or any portion of the Account Value may be withdrawn at any time. Withdrawal requests may be submitted as a percentage of the Account Value or as a specific dollar amount. Purchase Payment amounts are withdrawn first, and then the excess value, if any. Partial withdrawal amounts are withdrawn on a pro rata basis from the Subaccount(s) and/or the Guaranteed Term(s) Groups of the Guaranteed Account in which the Account Value is invested. Within a Guaranteed Term Group, the amount to be withdrawn or transferred will be withdrawn first from the oldest Deposit Period, then from the next oldest, and so on until the amount requested is satisfied. After deduction of the Maintenance Fee, if applicable, the withdrawn amount shall be reduced by a Deferred Sales Charge, if applicable. An MVA may apply to amounts withdrawn from the Guaranteed Account. 3.13 Deferred Sales Charge: The Deferred Sales Charge only applies to the Purchase Payment(s) portion withdrawn and varies according to the elapsed time since deposit (see Schedule - Accumulation Period). Purchase Payment amounts are withdrawn in the same order they were applied. No Deferred Sales Charge is deducted from any portion of the Purchase Payment which is paid: (a) To a Beneficiary due to the Annuitant's death before Annuity Payments start, up to a maximum of the aggregate Purchase Payment(s) minus the total of all partial surrenders and deductions made prior to the Annuitant's date of death; (b) For an Annuity Payout Option (see Section V - Annuity Payout Provisions); (c) For a full withdrawal of the Account where the Account Value is $2,500 or less and no withdrawals have been taken from the Account within the prior 12 months; (d) By Aetna under Section III - Payment of Adjusted Account Value; (e) Under a qualified Contract when the amount withdrawn is equal to the minimum distribution required by the Code for the Account, either paid under a Systematic Distribution Option or calculated by the Certificate Holder using a method permitted under the Code and agreed to by Aetna; (f) As a withdrawal of up to 10% of the Account Value on the Account anniversary in any Account Year less any amounts taken as a Systematic Distribution Option or as a required minimum distribution as described in (e) above. Aetna reserves the right to increase the percentage of the free withdrawal amount. The free withdrawal amount includes any Premium Bonus amount applied. 3.14 Payment of Withdrawal Value: Under certain emergency conditions, Aetna may defer payment: (a) For a period of up to six months (unless not allowed by state law); or (b) As provided by federal law. Page 18 3.15 Payment of Adjusted Account Value: Upon 90 days written notice to the Certificate Holder, Aetna will terminate any Account if the Account Value becomes less than $2,500 immediately following any partial withdrawal. Aetna does not intend to exercise this right in cases where an Account is reduced to $2,500 or less solely due to investment performance. A Deferred Sales Charge will not be deducted from the Adjusted Account Value, however, any Premium Bonus applied within 12 months of the termination will be deducted from the Account Value. 3.16 Reinstatement: The Certificate Holder may reinstate the proceeds of a full withdrawal, subject to terms and conditions established by Aetna. IV. DEATH BENEFIT ================================================================================ 4.01 Death Benefit Options: If the Certificate Holder or Annuitant dies before an Annuity Payout Option starts, the Beneficiary is entitled to a death benefit. If the Account is owned jointly, the death benefit applies at the death of the first joint Certificate Holder to die (see Section IV - Options Available to Beneficiary). The death benefit option selected is reflected on the Schedule-Accumulation Period. 4.02 Death Benefit Option I: The amount of the death benefit is determined as follows: (a) Death of the Annuitant. The death benefit calculated as of the Claim Date is the greater of: (1) The sum of all Purchase Payment(s) made, adjusted for amount(s) withdrawn or applied to an Annuity Payout Option; or (2) The Account Value on the Claim Date, less any Premium Bonus allocated to the Account after or within 12 months of the date of death. On the Claim Date, if the amount of the death benefit is greater than the Account Value, the amount by which the death benefit exceeds the Account Value will be deposited and allocated to the money market fund available through the Separate Account.This increases the Account Value available to the Beneficiary to an amount equal to the death benefit. The amount paid to the Beneficiary will equal the Adjusted Account Value on the date the payment request is processed. This amount may be greater or less than the amount of the death benefit on the Claim Date. The Beneficiary may elect a death benefit payment option as permitted in Section IV - Options Available to Beneficiary. (b) Death of the Certificate Holder if the Certificate Holder is not the Annuitant. On the Claim Date, the amount of the death benefit equals the Account Value less any Premium Bonus allocated to the Account after or within 12 months of the date of death. The amount paid to the Beneficiary will equal the Adjusted Account Value on the date the payment request is processed. A Deferred Sales Charge may apply to any full or partial payment of the death benefit. The Beneficiary may elect a death benefit payment option as permitted in Section IV - Options Available to Beneficiary. Page 19 (c) Death of a spouse who becomes a successor Certificate Holder/Annuitant. The amount of the death benefit paid to the Beneficiary at the death of a successor Certificate Holder/Annuitant is the greater of the values as described in (a) above except that in calculating (a)(1), the Account Value on the Claim Date for the prior Certificate Holder's death is treated as the initial Purchase Payment. 4.03 Death Benefit Option II: The amount of the death benefit is determined as follows: (a) Death of the Annuitant. The death benefit calculated as of the Claim Date is the greatest of: (1) The sum of all Purchase Payment(s) made, adjusted for amount(s) withdrawn or applied to an Annuity Payout Option; or (2) The Account Value on the Claim Date, less any Premium Bonus allocated to the Account after or within 12 months of the date of death; or (3) The "Step-up Value" on the Claim Date less any Premium Bonus allocated to the Account after or within 12 months of the date of death. On the Account Effective Date, the Step-up Value is equal to the Account Value. Thereafter, on each anniversary of the Account Effective Date until the anniversary immediately preceding the Annuitant's 85th birthday or death, whichever is earlier, the Step-up Value is equal to the greater of: (a) The Step-up Value most recently calculated, adjusted for Purchase Payment(s) made, any Premium Bonus allocated and amount(s) withdrawn or applied to an Annuity Payout Option during the prior Account Year; or (b) The Account Value on that anniversary of the Account Effective Date. On each anniversary of the Account Effective Date after the Annuitant's 85th birthday, the Step-up Value shall equal the Step-up Value on the anniversary immediately preceding the Annuitant's 85th birthday, adjusted for Purchase Payment(s) made, Premium Bonus allocated and amounts withdrawn or applied to an Annuity Payout Option since that anniversary. On the Claim Date, the Step-up Value shall equal the Step-up Value on the anniversary of the Account Effective Date immediately preceding the date of death, adjusted for Purchase Payment(s) made and amount(s) withdrawn or applied to an Annuity Payout Option since that anniversary, less any Premium Bonus allocated to the Account after or within 12 months of the date of death. On the Claim Date, if the amount of the death benefit is greater than the Account Value, the amount by which the death benefit exceeds the Account Value will be deposited and allocated to the money market fund available through the Separate Account. This increases the Account Value available to the Beneficiary to an amount equal to the death benefit. The amount paid to the Beneficiary will equal the Adjusted Account Value on the date the payment request is processed. This amount may be greater or less than the amount of the death benefit on the Claim Date. The Beneficiary may elect a death benefit payment option as permitted in Section IV - Options Available to the Beneficiary. (b) Death of the Certificate Holder if the Certificate Holder is not the Annuitant. On the Claim Date, the amount of the death benefit equals the Account Value less any Premium Bonus allocated to the Account after or within 12 months of the date of death. Page 20 The amount paid to the Beneficiary will equal the Adjusted Account Value on the date the payment request is processed. A Deferred Sales Charge may apply to any full or partial payment of the death benefit. The Beneficiary may elect a death benefit payment option as permitted in Section IV - Options Available to the Beneficiary. (c) Death of a spouse who becomes a successor Certificate Holder/ Annuitant. The amount of the death benefit paid to the Beneficiary at the death of a successor Certificate Holder/Annuitant is the greater of the values as described in (a) above except that in calculating (a)(1), the Account Value on the Claim Date for the prior Certificate Holder's death is treated as the initial Purchase Payment. 4.04 Options Available to Beneficiary: Prior to any election, or until amounts must be otherwise distributed under this section, the Account Value will be retained in the Account. The Beneficiary has the right to allocate or reallocate any amount to any of the available investment options (subject to an MVA, if applicable). If the Certificate Holder has specified the form of payment to the Beneficiary, the death benefit will be paid as elected by the Certificate Holder in the Beneficiary designation, to the extent permitted by section 72(s) of the Code. If the Certificate Holder has not specified a form of payment, the Beneficiary may elect one of the following options. (a) When the Certificate Holder is the Annuitant or when the Certificate Holder is a nonnatural person, and the Annuitant dies: (1) If the Beneficiary is the surviving spouse, the spousal Beneficiary will be the successor Certificate Holder and may exercise all Certificate Holder rights under the Contract and continue in the Accumulation Period, or may elect (i) or (ii) below. Under the Code, distributions from the Account are not required until the spousal Beneficiary's death. The spousal Beneficiary may elect to: (i) Apply some or all of the Adjusted Account Value to an Annuity Payout Option (see Section V); or (ii) Receive, at any time, a lump sum payment equal to the Adjusted Account Value. (2) If the Beneficiary is other than the surviving spouse, then options (i) or (ii) above apply. Any portion of the Adjusted Account Value not applied to an Annuity Payout Option within one year of the death must be distributed within five years of the date of death. (3) If no Beneficiary exists, a lump sum payment equal to the Adjusted Account Value must be made to the Annuitant's estate within five years of the date of death. (4) If the Beneficiary is an entity, a lump sum payment equal to the Adjusted Account Value must be made within five years of the date of death, unless otherwise permitted by IRS regulation or ruling. (b) When the Certificate Holder is not the Annuitant and the Certificate Holder dies: (1) If the Beneficiary is the Certificate Holder's surviving spouse, the spousal Beneficiary will be the successor Certificate Holder and may exercise all Certificate Holder rights under the Contract and continue in the Accumulation Period, or may elect (i) or (ii) below. Under the Code, distributions from the Account are not required until the spousal Beneficiary's death. The spousal Beneficiary may elect to: (i) Apply some or all of the Adjusted Account Value to an Annuity Payout Option (see Section V); or (ii) Receive, at any time, a lump sum payment equal to the Withdrawal Value. (2) If the Beneficiary is other than the Certificate Holder's surviving spouse, then options (i) or (ii) under (1) above apply. Any portion of the death benefit not applied to an Annuity Payout Option within one year of the Certificate Holder's death must be distributed within five years of the date of death. Page 21 (3) If no Beneficiary exists, a lump sum payment equal to the Withdrawal Value must be made to the Certificate Holder's estate within five years of the date of death. (4) If the Beneficiary is an entity, a lump sum payment equal to the Withdrawal Value must be made within five years of the date of death, unless otherwise permitted by IRS regulation or ruling. (c) When the Certificate Holder is a natural person and not the Annuitant and the Annuitant dies, the Beneficiary (or the Certificate Holder if no Beneficiary exists) may elect to: (1) Apply all or some of the Adjusted Account Value to an Annuity Payout Option within 60 days of the date of death; or (2) Receive a lump sum payment equal to the Adjusted Account Value. V. Annuity Payout Provisions ================================================================================ 5.01 Annuity Payout Options: Annuity Payout Option 1 - Payments for a specified period: Payments are made for the number of years specified by the Certificate Holder. The number of years must be at least ten and not more than 30. Annuity Payout Option 2 - Life income based on the life of one Annuitant: When this option is elected, the Certificate Holder must choose one of the following: (a) Payments cease at the death of the Annuitant; (b) Payments are guaranteed for a specified period from five to 30 years; (c) Cash refund: when the Annuitant dies, the Beneficiary will receive a lump sum payment equal to the amount applied to the Annuity Payout Option (less any premium tax, if applicable) less the total amount of Annuity Payments made prior to such death. This cash refund feature is only available if the total amount applied to the Annuity Payout Option is allocated to a fixed Annuity Payments. Annuity Payout Option 3 - Life income based on the lives of two Annuitants: Payments are made for the lives of two Annuitants, one of whom is designated the primary Annuitant and the other the secondary Annuitant, and cease when both Annuitants have died. When this option is elected, the Certificate Holder must also choose one of the following: (a) 100% of the payment to continue after the first death; (b) 66 2/3% of the payment to continue after the first death; (c) 50% of the payment to continue after the first death; (d) 100% of the payment to continue after the first death and payments are guaranteed for a period of five to 30 years; (e) 100% of the payment to continue at the death of the secondary Annuitant and 50% of the payment to continue at the death of the primary Annuitant; or (f) 100% of the payment continues after the first death with a cash refund feature. When the primary Annuitant and secondary Annuitant die, the Beneficiary will receive a lump sum payment equal to the amount applied to the Annuity Payout Option (less any premium tax) less the total amount of Annuity Payments paid prior to such death. This cash refund feature is only available if the total amount applied to the Annuity Payout Option is allocated to fixed Annuity Payments. Page 22 If fixed Annuity Payments are chosen under Annuity Payout Option 1, 2 (a) or (b), or 3 (a) or (d), the Certificate Holder may elect, at the time the Annuity Payout Option is selected, an annual increase of one, two or three percent compounded annually. As allowed under applicable state law, Aetna reserves the right to offer additional Annuity Payout Options. 5.02 Annuity Payment Choices: The Certificate Holder may tell Aetna to apply the Adjusted Account Value (minus any premium tax, if applicable,) to any Annuity Payout Option The first Annuity Payment may not be earlier than one calendar year after the initial Purchase Payment nor later than the later of: (a) The first day of the month following the Annuitant's 85th birthday; or (b) The tenth anniversary of the last Purchase Payment. In lieu of the election of an Annuity Payout Option, the Certificate Holder may tell Aetna to make a lump sum payment. When an Annuity Payout Option is chosen, Aetna must also be told if payments are to be made other than monthly and whether to pay: (a) Fixed Annuity Payments using the General Account; (b) Variable Annuity Payments using any of the Subaccount(s) available under the contract for the Annuity Period; or (c) A combination of (a) and (b). If fixed Annuity Payments are chosen, the payment rate for the option chosen, shown on the tables immediately following, reflects at least the minimum guaranteed interest rate (see Schedule - Annuity Period), but may reflect a higher interest rate. If variable Annuity Payments are chosen, the initial Annuity Payment for the option elected reflects the Assumed Interest Rate (AIR) elected (see Schedule - Annuity Period). The Certificate Holder must allocate specified amounts among the Subaccounts available during the Annuity Period. Aetna reserves the right to limit the number of Subaccounts available at one time and to limit the number of Subaccounts the Certificate Holder may select during the Annuity Period. Subject to terms and conditions established by Aetna, the Certificate Holder may transfer all or any portion of the amount allocated to a Subaccount to another Subaccount. The number of Transfers allowed each year is shown on Schedule - Annuity Period. Transfer requests must be submitted as a percentage of the allocation among the Subaccounts. Aetna reserves the right to establish a minimum transfer amount. Transfers will be effective as of the Valuation Date in which Aetna receives a transfer request in good order at its home office. 5.03 Terms of Annuity Payout Options: (a) When payments start, the age of the Annuitant plus the number of years for which payments are guaranteed must not exceed 95. (b) An Annuity Payout Option may not be elected if the first payment would be less than $50 or if the total payments in a year would be less than $250 (less if required by state law). Aetna reserves the right to increase the minimum first Annuity Payment amount and the minimum annual Annuity Payment amount based upon increases reflected in the Consumer Price Index-Urban, (CPI-U) since July 1, 1993. (c) If fixed Annuity Payments are chosen Aetna will use the applicable current rate, based upon actual ages if it will provide higher fixed Annuity Payments. Page 23 (d) For purposes of calculating the first payment of variable or guaranteed fixed Annuity Payments based on guaranteed rates, the primary Annuitant's and secondary Annuitant's adjusted age will be used. The primary Annuitant's and secondary Annuitant's adjusted age is his or her age as of the birthday closest to the Annuity Payments commencement date reduced by one year for commencement dates occurring during the period of time from July 1, 1993 through December 31, 1999. The primary Annuitant's and secondary Annuitant's age will be reduced by two years for commencement dates occurring during the period of time from January 1, 2000 through December 31, 2009. The primary Annuitant's and secondary Annuitant's age will be reduced by one additional year for Annuity commencement dates occurring in each succeeding decade. The attached payment rates for Annuity Payout Options 2 and 3 are based on mortality from 1983 Table a. (e) Assumed Interest Rate (AIR) is the interest rate used to determine the amount of the first payment under variable Annuity Payments as shown on Schedule - Annuity Period. The Separate Account must earn this rate plus enough to cover the mortality and expense risks charges (which may include profit), administrative charges and any other Separate Account fees if future variable Annuity Payments are to remain level, (see Schedule - Annuity Period). (f) Once elected, Annuity Payments cannot be commuted to a lump sum except for variable Annuity Payments under Annuity Payout Option 1. If such a lump sum is requested after the start of payments, it will be treated as a withdrawal and will be subject to any applicable Deferred Sales Charge (see Section I - Deferred Sales Charge). 5.04 Death of Annuitant/Beneficiary: (a) Certificate Holder is the Annuitant: When the Certificate Holder is the Annuitant and the Annuitant dies under Annuity Payout Option 1 or 2(b), or both the primary Annuitant and the secondary Annuitant die under Annuity Payout Option 3(d), any remaining payments will continue to the Beneficiary, or if elected by the Beneficiary and not prohibited by the Certificate Holder in the Beneficiary designation, the present value of any remaining payments will be paid in one sum to the Beneficiary. If Annuity Payout Option 3 has been elected and the Certificate Holder dies, the remaining payments will continue to the successor payee. If no successor payee has been designated, the Beneficiary will be treated as the successor payee. If the Account has joint Certificate Holders, the surviving joint Certificate Holder will be deemed the successor payee. (b) Certificate Holder is not the Annuitant: When the Certificate Holder is not the Annuitant and the Certificate Holder dies, any remaining payments will continue to the successor payee. If no successor payee has been designated, the Beneficiary will be treated as the successor payee. If the Account has joint Certificate Holders, the surviving joint Certificate Holder will be deemed the successor payee. If the Annuitant dies under Annuity Payout Option 1 or 2(b), or both the primary Annuitant and secondary Annuitant die under Annuity Payout Option 3(d), any remaining payments will continue to the Beneficiary, or if elected by the Beneficiary and not prohibited by the Certificate Holder in the Beneficiary designation, the present value of any remaining payments will be paid in one sum to the Beneficiary. If Annuity Payout Option 3 has been elected and the Annuitant dies, the remaining payments will continue to the Certificate Holder. (c) No Beneficiary Named/Surviving: If there is no Beneficiary, the present value of any remaining payments will be paid in one sum to the Certificate Holder, or if the Certificate Holder is not living, then to the Certificate Holder's estate. (d) If the Beneficiary or the successor payee dies while receiving Annuity Payments, any remaining payments will continue to the successor Beneficiary/payee or upon election by the successor Beneficiary/payee, the present value of any remaining payments will be paid in one sum to the successor Beneficiary/payee. If no successor Beneficiary/payee has been designated, the present value of any remaining payments will be paid in one sum to the Beneficiary's/payee's estate. Page 24 (e) The present value will be determined as of the Valuation Date in which proof of death acceptable to Aetna and a request for payment is received at Aetna's home office. 5.05 Annuity Units - Separate Account: The number of annuity units is based on the amount of the first of the variable Annuity Payments which is equal to: (a) The portion of the Account Value applied to pay a variable Annuity Payments (minus any applicable premium tax); divided by (b) 1,000; multiplied by (c) The payment rate on the tables immediately following, for the option chosen. Such amount, or portion, of the variable Annuity Payments will be divided by the appropriate annuity unit value (see Section V - Annuity Unit Value - Separate Account) on the tenth Valuation Date before the due date of the first payment to determine the number of annuity units. The number of annuity units remains fixed. Each future payment is equal to the sum of the products of each annuity unit value multiplied by the appropriate number of annuity units. The annuity unit value on the tenth Valuation Date prior to the due date of the payment is used. 5.06 Annuity Unit Value - Separate Account: For any Valuation Date, an annuity unit value is equal to: (a) The value for the previous Valuation Date; multiplied by (b) The annuity net return factor(s) (see Section V - Net Return Factor(s) - Separate Account) for the Valuation Date; multiplied by (c) A factor to reflect the AIR (see Schedule - Annuity Period). The annuity unit value and the amount of Annuity Payments may go up or down due to investment gain or loss. 5.07 Net Return Factor(s) - Separate Account: The net return factor(s) are used to compute all variable Annuity Payments for any Subaccount. The net return factor for each Subaccount is equal to 1.0000000 plus the net return rate. The net return rate is equal to: (a) The value of the shares of the Subaccount at the end of a Valuation Date; minus (b) The value of the shares of the Subaccount at the start of the Valuation Date; plus or minus (c) Taxes (or reserves for taxes) on the Separate Account (if any); divided by (d) The total value of the annuity units at the start of the Valuation Date; minus (e) A daily charge for mortality and expense risks, which may include profit, a daily administrative charge and any other fees deducted from investments in the Separate Account. A net return rate may be more or less than 0%. The value of a share of the Subaccount is equal to the net assets of the Subaccount divided by the number of shares outstanding. Annuity Payments shall not be changed due to changes in the mortality or expense results or administrative charges. Page 25 OPTION 1: Payments for a Specified Period - -------------------------------------------------------------------------------- Monthly Amount for Each $1,000* Rates for a Fixed Annuity with a 3% Guaranteed Interest Rate - -------------------------------------------------------------------------------- Years Payment Years Payment - -------------------------------------------------------------------------------- 10 $9.61 21 $5.32 11 8.86 22 5.15 12 8.24 23 4.99 13 7.71 24 4.84 14 7.26 25 4.71 15 6.87 26 4.59 16 6.53 27 4.47 17 6.23 28 4.37 18 5.96 29 4.27 19 5.73 30 4.18 20 5.51 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- First Monthly Amount for Each $1,000* Rates for a Variable Annuity with a 3.5% AIR - -------------------------------------------------------------------------------- Years Payment Years Payment - -------------------------------------------------------------------------------- 10 $9.83 21 $5.56 11 9.09 22 5.24 12 8.46 23 5.24 13 7.94 24 5.09 14 7.49 25 4.96 15 7.10 26 4.84 16 6.76 27 4.73 17 6.47 28 4.63 18 6.20 29 4.53 19 5.97 30 4.45 20 5.75 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- First Monthly Amount for Each $1,000* Rates for a Variable Annuity with a 5% AIR - -------------------------------------------------------------------------------- Years Payment Years Payment - -------------------------------------------------------------------------------- 10 $10.51 21 $6.33 11 9.77 22 6.17 12 9.16 23 6.02 13 8.64 24 5.88 14 8.20 25 5.76 15 7.82 26 5.65 16 7.49 27 5.54 17 7.20 28 5.45 18 6.94 29 5.36 19 6.71 30 5.28 20 6.51 - -------------------------------------------------------------------------------- * Net of any applicable premium tax deduction Page 26 Option 2: Life Income Based on the Life of One Annuitant
- ------------------------------------------------------------------------------------------------------------------------------------ Monthly Payment Amount for Each $1,000* Rates for a Fixed Annuity with 3% Guaranteed Interest Rate Option 2(b): Option 2(b): Option 2(b): Option 2(b): Adjusted Option 2(a): payments payments payments payments Age of payments for guaranteed guaranteed guaranteed guaranteed Option 2(c): Annuitant life 5 years 10 years 15 years 20 years Cash Refund Male Female Male Female Male Female Male Female Male Female Male Female 50 $4.27 $3.90 $4.26 $3.90 $4.22 $3.89 $4.17 $3.86 $4.08 $3.82 $4.04 $3.78 51 4.34 3.97 4.33 3.96 4.30 3.95 4.23 3.92 4.14 3.88 4.10 3.84 52 4.43 4.03 4.41 4.03 4.37 4.01 4.30 3.98 4.20 3.93 4.16 3.89 53 4.51 4.10 4.50 4.10 4.45 4.08 4.37 4.04 4.26 3.99 4.23 3.95 54 4.60 4.18 4.59 4.17 4.54 4.15 4.45 4.11 4.32 4.04 4.29 4.01 55 4.70 4.25 4.68 4.25 4.62 4.22 4.53 4.18 4.39 4.11 4.37 4.07 56 4.80 4.34 4.78 4.33 4.72 4.30 4.61 4.25 4.45 4.17 4.44 4.13 57 4.91 4.42 4.89 4.41 4.82 4.38 4.69 4.32 4.51 4.23 4.52 4.20 58 5.03 4.52 5.00 4.51 4.92 4.47 4.78 4.40 4.58 4.30 4.61 4.28 59 5.15 4.61 5.12 4.60 5.03 4.56 4.87 4.48 4.65 4.37 4.69 4.35 60 5.28 4.72 5.25 4.70 5.14 4.66 4.96 4.57 4.71 4.44 4.78 4.43 61 5.43 4.83 5.39 4.81 5.27 4.76 5.06 4.66 4.78 4.51 4.88 4.52 62 5.58 4.95 5.53 4.93 5.39 4.87 5.16 4.75 4.84 4.58 4.98 4.60 63 5.74 5.08 5.69 5.05 5.53 4.98 5.26 4.85 4.90 4.65 5.09 4.70 64 5.91 5.21 5.85 5.18 5.66 5.10 5.36 4.95 4.96 4.72 5.20 4.80 65 6.10 5.36 6.03 5.32 5.81 5.22 5.46 5.05 5.02 4.79 5.31 4.90 66 6.30 5.51 6.21 5.47 5.96 5.36 5.56 5.16 5.08 4.86 5.44 5.01 67 6.51 5.67 6.41 5.63 6.12 5.50 5.66 5.26 5.13 4.93 5.56 5.12 68 6.73 5.85 6.62 5.80 6.28 5.65 5.77 5.37 5.18 5.00 5.70 5.24 69 6.97 6.04 6.84 5.98 6.44 5.80 5.86 5.49 5.23 5.06 5.84 5.37 70 7.23 6.25 7.07 6.18 6.61 5.97 5.96 5.60 5.27 5.12 5.98 5.51 71 7.51 6.47 7.32 6.39 6.79 6.14 6.05 5.71 5.31 5.18 6.14 5.65 72 7.80 6.71 7.58 6.62 6.96 6.32 6.14 5.83 5.34 5.23 6.30 5.80 73 8.12 6.98 7.85 6.86 7.14 6.50 6.23 5.94 5.37 5.28 6.47 5.96 74 8.46 7.26 8.14 7.12 7.32 6.69 6.31 6.04 5.40 5.32 6.65 6.13 75 8.82 7.57 8.45 7.40 7.50 6.89 6.38 6.14 5.42 5.35 6.83 6.31 - ------------------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 27 Option 2: Life Income Based on the Life of One Annuitant
- ------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 3.5% AIR - ------------------------------------------------------------------------------------------------------------------- Option 2(b): Option 2(b): Option 2(b): Option 2(b): Adjusted Option 2(a): payments payments payments payments Age of payments for guaranteed guaranteed guaranteed guaranteed Annuitant life 5 years 10 years 15 years 20 years --------------------------------------------------------------------------------------------------- Male Female Male Female Male Female Male Female Male Female - ------------------------------------------------------------------------------------------------------------------- 50 $4.56 $4.20 $4.55 $4.19 $4.51 $4.18 $4.45 $4.15 $4.36 $4.11 51 4.64 4.26 4.62 4.25 4.58 4.24 4.51 4.21 4.42 4.16 52 4.72 4.32 4.70 4.32 4.66 4.30 4.58 4.26 4.48 4.21 53 4.80 4.39 4.79 4.38 4.74 4.36 4.65 4.32 4.53 4.27 54 4.89 4.46 4.87 4.46 4.82 4.43 4.73 4.39 4.59 4.32 55 4.99 4.54 4.97 4.53 4.91 4.50 4.80 4.46 4.65 4.38 56 5.09 4.62 5.07 4.61 5.00 4.58 4.88 4.53 4.72 4.44 57 5.20 4.71 5.17 4.70 5.10 4.66 4.96 4.60 4.78 4.50 58 5.32 4.80 5.29 4.79 5.20 4.75 5.05 4.68 4.84 4.57 59 5.44 4.90 5.41 4.88 5.31 4.84 5.14 4.76 4.91 4.63 60 5.57 5.00 5.53 4.99 5.42 4.93 5.23 4.84 4.97 4.70 61 5.71 5.11 5.67 5.09 5.54 5.03 5.32 4.93 5.03 4.77 62 5.86 5.23 5.81 5.21 5.66 5.14 5.42 5.02 5.09 4.84 63 6.02 5.36 5.97 5.33 5.79 5.25 5.51 5.11 5.16 4.91 64 6.20 5.49 6.13 5.46 5.93 5.37 5.61 5.21 5.21 4.98 65 6.38 5.64 6.31 5.60 6.07 5.49 5.71 5.31 5.27 5.05 66 6.58 5.79 6.49 5.75 6.22 5.63 5.81 5.41 5.32 5.12 67 6.79 5.95 6.69 5.91 6.38 5.76 5.91 5.52 5.38 5.18 68 7.02 6.13 6.89 6.08 6.53 5.91 6.01 5.63 5.42 5.25 69 7.26 6.32 7.11 6.26 6.70 6.06 6.11 5.74 5.47 5.31 70 7.52 6.53 7.35 6.45 6.86 6.23 6.20 5.85 5.51 5.37 71 7.80 6.75 7.59 6.66 7.03 6.39 6.29 5.96 5.54 5.42 72 8.09 6.99 7.85 6.89 7.21 6.57 6.38 6.07 5.57 5.47 73 8.41 7.26 8.12 7.13 7.38 6.75 6.46 6.17 5.60 5.51 74 8.75 7.54 8.41 7.39 7.55 6.94 6.53 6.28 5.63 5.55 75 9.12 7.85 8.71 7.66 7.73 7.13 6.61 6.38 5.65 5.59 - -------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 28 Option 2: Life Income Based on the Life of One Annuitant
- ------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 5% AIR - ------------------------------------------------------------------------------------------------------------------- Option 2(b): Option 2(b): Option 2(b): Option 2(b): Adjusted Option 2(a): payments payments payments payments Age of payments for guaranteed guaranteed guaranteed guaranteed Annuitant life 5 years 10 years 15 years 20 years --------------------------------------------------------------------------------------------------- Male Female Male Female Male Female Male Female Male Female - ------------------------------------------------------------------------------------------------------------------- 50 $5.48 $5.12 $5.46 $5.11 $5.41 $5.09 $5.34 $5.06 $5.24 $5.01 51 5.55 5.17 5.53 5.17 5.48 5.14 5.40 5.11 5.29 5.05 52 5.63 5.23 5.61 5.23 5.55 5.20 5.46 5.16 5.34 5.10 53 5.71 5.30 5.69 5.29 5.62 5.26 5.53 5.22 5.40 5.15 54 5.80 5.37 5.77 5.36 5.70 5.33 5.60 5.27 5.45 5.20 55 5.89 5.44 5.86 5.43 5.79 5.39 5.67 5.34 5.51 5.25 56 5.99 5.52 5.96 5.51 5.87 5.47 5.74 5.40 5.56 5.31 57 6.10 5.60 6.06 5.59 5.97 5.54 5.82 5.47 5.62 5.37 58 6.21 5.69 6.17 5.67 6.06 5.62 5.90 5.54 5.68 5.42 59 6.33 5.79 6.29 5.77 6.17 5.71 5.98 5.61 5.74 5.48 60 6.46 5.89 6.41 5.87 6.28 5.80 6.06 5.69 5.79 5.55 61 6.60 6.00 6.55 5.97 6.39 5.90 6.15 5.77 5.85 5.61 62 6.75 6.11 6.69 6.08 6.51 6.00 6.24 5.86 5.91 5.67 63 6.91 6.23 6.84 6.20 6.64 6.10 6.33 5.95 5.96 5.73 64 7.09 6.37 7.00 6.33 6.77 6.22 6.42 6.04 6.02 5.80 65 7.27 6.51 7.18 6.46 6.91 6.34 6.52 6.13 6.07 5.86 66 7.47 6.66 7.36 6.61 7.05 6.46 6.61 6.23 6.12 5.92 67 7.68 6.82 7.55 6.76 7.20 6.60 6.70 6.33 6.16 5.99 68 7.91 7.00 7.76 6.93 7.35 6.74 6.80 6.43 6.21 6.04 69 8.15 7.19 7.98 7.11 7.51 6.89 6.89 6.54 6.25 6.10 70 8.41 7.39 8.21 7.30 7.67 7.04 6.97 6.64 6.28 6.15 71 8.69 7.62 8.45 7.51 7.83 7.21 7.06 6.74 6.32 6.20 72 8.99 7.86 8.70 7.73 8.00 7.38 7.14 6.85 6.35 6.25 73 9.31 8.12 8.97 7.97 8.16 7.55 7.21 6.95 6.37 6.29 74 9.65 8.41 9.26 8.23 8.33 7.73 7.29 7.04 6.39 6.33 75 10.02 8.72 9.55 8.50 8.50 7.92 7.35 7.14 6.41 6.36 - -------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 29 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------------------ Monthly Payment Amount for Each $1,000* Rates for a Fixed Annuity with 3% Guaranteed Interest Rate Primary Annuitant is Female and Secondary Annuitant is Male - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted Ages - ---------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) Option 3(f) - ------------------------------------------------------------------------------------------------------------------------------------ 55 50 $3.75 $4.07 $4.26 $3.75 $3.98 $3.72 55 55 3.88 4.25 4.47 3.87 4.06 3.85 55 60 3.99 4.44 4.71 3.98 4.12 3.94 60 55 4.06 4.47 4.71 4.06 4.37 4.02 60 60 4.24 4.71 4.99 4.23 4.47 4.17 60 65 4.38 4.97 5.32 4.38 4.54 4.29 65 60 4.49 5.01 5.32 4.48 4.89 4.39 65 65 4.72 5.33 5.70 4.71 5.02 4.59 65 70 4.93 5.68 6.15 4.91 5.14 4.74 70 65 5.07 5.75 6.17 5.05 5.60 4.87 70 70 5.40 6.21 6.70 5.36 5.79 5.13 70 75 5.69 6.68 7.32 5.62 5.96 5.29 75 70 5.89 6.82 7.40 5.81 6.63 5.48 75 75 6.37 7.45 8.15 6.23 6.92 5.78 75 80 6.78 8.11 8.99 6.54 7.15 5.93 - ------------------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 30 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 3.5% AIR Primary Annuitant Is Female and Secondary Annuitant Is Male - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $4.03 $4.36 $4.55 $4.03 $4.27 55 55 4.16 4.54 4.76 4.15 4.34 55 60 4.27 4.73 5.00 4.26 4.40 60 55 4.34 4.76 5.00 4.34 4.65 60 60 4.51 4.99 5.27 4.50 4.74 60 65 4.66 5.25 5.61 4.65 4.82 65 60 4.76 5.29 5.60 4.75 5.16 65 65 4.99 5.61 5.99 4.98 5.30 65 70 5.19 5.97 6.44 5.17 5.41 70 65 5.34 6.03 6.46 5.31 5.88 70 70 5.67 6.49 6.99 5.62 6.07 70 75 5.95 6.96 7.61 5.87 6.23 75 70 6.16 7.10 7.68 6.07 6.90 75 75 6.64 7.73 8.43 6.48 7.19 75 80 7.04 8.39 9.29 6.79 7.42 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 31 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 5% AIR Primary Annuitant is Female and Secondary Annuitant is Male - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $4.93 $5.27 $5.46 $4.93 $5.17 55 55 5.04 5.44 5.66 5.04 5.23 55 60 5.15 5.63 5.91 5.14 5.29 60 55 5.21 5.65 5.89 5.21 5.53 60 60 5.37 5.87 6.16 5.37 5.62 60 65 5.52 6.14 6.51 5.51 5.70 65 60 5.61 6.16 6.49 5.60 6.03 65 65 5.83 6.49 6.87 5.82 6.15 65 70 6.04 6.84 7.34 6.00 6.27 70 65 6.17 6.90 7.33 6.13 6.73 70 70 6.49 7.35 7.87 6.44 6.91 70 75 6.77 7.84 8.51 6.68 7.07 75 70 6.97 7.96 8.56 6.87 7.75 75 75 7.45 8.60 9.33 7.27 8.04 75 80 7.86 9.28 10.20 7.57 8.27 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 32 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------------------ Monthly Payment Amount for Each $1,000* Rates for a Fixed Annuity with 3% Guaranteed Interest Rate Primary Annuitant is Male and Secondary Annuitant is Female - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted Ages - ---------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) Option 3(f) - ------------------------------------------------------------------------------------------------------------------------------------ 55 50 $3.69 $4.05 $4.27 $3.69 $4.13 $3.67 55 55 3.88 4.25 4.47 3.87 4.25 3.85 55 60 4.06 4.47 4.71 4.06 4.36 4.02 60 55 3.99 4.44 4.71 3.98 4.55 3.94 60 60 4.24 4.71 4.99 4.23 4.70 4.17 60 65 4.49 5.01 5.32 4.48 4.85 4.39 65 60 4.38 4.97 5.32 4.38 5.10 4.29 65 65 4.72 5.33 5.70 4.71 5.32 4.59 65 70 5.07 5.75 6.17 5.05 5.54 4.87 70 65 4.93 5.68 6.15 4.91 5.86 4.74 70 70 5.40 6.21 6.70 5.36 6.18 5.13 70 75 5.89 6.82 7.40 5.81 6.49 5.48 75 70 5.69 6.68 7.32 5.62 6.92 5.29 75 75 6.37 7.45 8.15 6.23 7.40 5.78 75 80 7.07 8.34 9.16 6.78 7.85 6.17 - ------------------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 33 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 3.5% AIR Primary Annuitant is Male and Secondary Annuitant is Female - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $3.97 $4.35 $4.56 $3.97 $4.42 55 55 4.16 4.54 4.76 4.15 4.54 55 60 4.34 4.76 5.00 4.34 4.64 60 55 4.27 4.73 5.00 4.26 4.83 60 60 4.51 4.99 5.27 4.50 4.98 60 65 4.76 5.29 5.60 4.75 5.13 65 60 4.66 5.25 5.61 4.65 5.39 65 65 4.99 5.61 5.99 4.98 5.60 65 70 5.34 6.03 6.46 5.31 5.81 70 65 5.19 5.97 6.44 5.17 6.14 70 70 5.67 6.49 6.99 5.62 6.47 70 75 6.16 7.10 7.68 6.07 6.77 75 70 5.95 6.96 7.61 5.87 7.20 75 75 6.64 7.73 8.43 6.48 7.68 75 80 7.33 8.62 9.45 7.02 8.13 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 34 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 5% AIR Primary Annuitant Is Male and Secondary Annuitant is Female - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $4.88 $5.26 $5.48 $4.88 $5.34 55 55 5.04 5.44 5.66 5.04 5.43 55 60 5.21 5.65 5.89 5.21 5.53 60 55 5.15 5.63 5.91 5.14 5.73 60 60 5.37 5.87 6.16 5.37 5.86 60 65 5.61 6.16 6.49 5.60 6.01 65 60 5.52 6.14 6.51 5.51 6.28 65 65 5.83 6.49 6.87 5.82 6.47 65 70 6.17 6.90 7.33 6.13 6.67 70 65 6.04 6.84 7.34 6.00 7.03 70 70 6.49 7.35 7.87 6.44 7.33 70 75 6.97 7.96 8.56 6.87 7.62 75 70 6.77 7.84 8.51 6.68 8.08 75 75 7.45 8.60 9.33 7.27 8.55 75 80 8.14 9.49 10.35 7.80 8.98 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 35 ================================================================================ Aetna Life Insurance and Annuity Company Home Office: 151 Farmington Avenue Hartford, Connecticut 06156 (800) 238-6219 Group Variable, Fixed, or Combination Annuity Contract Nonparticipating ================================================================================ ALL PAYMENTS AND VALUES PROVIDED BY THE GROUP CONTRACT, WHEN BASED ON INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. AMOUNTS ALLOCATED TO THE GUARANTEED ACCOUNT, IF WITHDRAWN BEFORE THE GUARANTEED TERM MATURITY DATE, MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT. THE MARKET VALUE ADJUSTMENT MAY RESULT IN AN INCREASE OR A DECREASE IN THE ACCOUNT VALUE. THE MARKET VALUE ADJUSTMENT FORMULA DOES NOT APPLY TO A GUARANTEED TERM AT THE TIME OF ITS MATURITY. GM-VA-99(PB) EX-99.B.4.2 3 VARIABLE ANNUITY CERTIFICATE (GMC-VA-99(PB)) EXHIBIT 99-B.4.2 ======================================================== Aetna Life Insurance and Annuity Company Home Office: 151 Farmington Avenue Hartford, Connecticut 06156 (800) 238-6219 You may call the toll free number shown above to request information about this Certificate. Aetna Life Insurance and Annuity Company, a stock company, herein called Aetna, agrees to pay the benefits stated in this Certificate. ================================================================================ Certificate of Group To the Certificate Holder: Annuity Coverage Aetna certifies that coverage is in force for you under the stated Group Annuity Contract and Account numbers. All data shown here is taken from Aetna records and is based upon information furnished by you. This Certificate is a summary of the Group Annuity Contract provisions. It replaces any and all prior certificates or endorsements issued to you under the stated Contract and Account numbers. This Certificate is for information only and is not part of the Contract. The variable features of the Group Contract are described in parts III, IV and V. ================================================================================ Right to Cancel You may cancel your Account within 10 days by returning the Certificate to the agent from whom it was purchased or to Aetna at the address shown above. Within seven days of receiving this Certificate at its home office, Aetna will return the amount of Purchase Payment(s) received, plus any increase, or minus any decrease, on the amount, if any, of Purchase Payment(s) allocated to the Separate Account Subaccount(s). /s/ Thomas J. McInerney /s/ Kirk P. Wickman President Secretary - -------------------------------------------------------------------------------- Contract Holder Group Annuity Contract No. SPECIMEN SPECIMEN - -------------------------------------------------------------------------------- Certificate Holder Account No. SPECIMEN SPECIMEN SPECIMEN Account Effective Date SPECIMEN - -------------------------------------------------------------------------------- Annuitant Name Type of Plan SPECIMEN SPECIMEN ALL PAYMENTS AND VALUES PROVIDED BY THE GROUP CONTRACT, WHEN BASED ON INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. AMOUNTS ALLOCATED TO THE GUARANTEED ACCOUNT, IF WITHDRAWN BEFORE THE GUARANTEED TERM MATURITY DATE, MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT. THE MARKET VALUE ADJUSTMENT MAY RESULT IN AN INCREASE OR A DECREASE IN THE ACCOUNT VALUE. THE MARKET VALUE ADJUSTMENT FORMULA DOES NOT APPLY TO A GUARANTEED TERM AT THE TIME OF ITS MATURITY. GMC-VA-99(PB) Specifications - -------------------------------------------------------------------------------- Guaranteed There is a minimum guaranteed rate for Purchase Rate Payment(s) held in the Guaranteed Account. (See Schedule - Accumulation Period.) - -------------------------------------------------------------------------------- Deductions from There will be deductions for mortality and expense the Separate risk, administrative and if applicable other fees. Account - -------------------------------------------------------------------------------- Deduction from Purchase Payment(s) may be subject to a deduction for Purchase premium taxes. (See Section III - Purchase Payment.) Payment(s) - -------------------------------------------------------------------------------- Deferred Sales There may be a charge deducted upon withdrawal. (See Charge Schedule - Accumulation Period.) The Contract is a legal contract and constitutes the entire legal relationship between Aetna and the Contract Holder. READ THIS CERTIFICATE CAREFULLY. THE CERTIFICATE SETS FORTH, IN DETAIL, ALL OF THE RIGHTS AND OBLIGATIONS OF BOTH YOU AND AETNA UNDER THE CONTRACT. THEREFORE, IT IS IMPORTANT THAT YOU READ THIS CERTIFICATE CAREFULLY. Page 2 Schedule - Accumulation Period Death Benefit Option ================================================================================ Death Benefit Option I selected. (See Section IV - Death Benefit Options.) Separate Account ================================================================================ Separate Account Variable Annuity Account B Charges to Separate Account A daily charge is deducted from any portion of the Account Value allocated to the Separate Account. The deduction is the daily equivalent of the annual effective percentage shown in the following chart: Administrative Charge 0.15% Mortality and Expense Risk Charge 1.25% ----- Total Separate Account Charges 1.40% Guaranteed Account ================================================================================ Minimum Guaranteed Rate 3.0% (effective annual rate of return) Separate Account and Guaranteed Account ================================================================================ Transfers An unlimited number of Transfers are allowed during the Accumulation Period. Aetna allows 12 free Transfers in any Account Year. Aetna reserves the right to charge $10 for each subsequent Transfer. Maintenance Fee The annual Maintenance Fee is $30. If the Account Value is $50,000 or more on the date the Maintenance Fee is to be deducted, the Maintenance Fee is $0. Page 3 Schedule - Accumulation Period (continued) Separate Account and Guaranteed Account ================================================================================ Deferred Sales Charge For each withdrawal, the Deferred Sales Charge will be determined as follows: Deferred Sales Charge Length of Time from Receipt of (as percentage of Purchase Payment (Years) Purchase Payment) -------------------------------------------------------------------- Less than 3 years 8% 3 or more but less than 4 years 7% 4 or more but less than 5 years 6% 5 or more but less than 6 years 5% 6 or more but less than 7 years 4% 7 or more but less than 8 3% 8 years or more 0% Premium Bonus Net Premium Cumulative Purchase Payments Bonus Percentage -------------------------------------------------------------------- $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% See Section I Definitions - "Premium Bonus" for determining eligibility to receive a Premium Bonus after the initial Purchase Payment. Initial Purchase Payment Required $15,000 ($1,500 qualified plan). Aetna reserves the right to lower that amount. Maximum Issue Age of Owner and Annuitant 85 See Section I - DEFINITIONS for explanations. Page 4 Schedule - Annuity Period Separate Account - Variable Annuity Payments ================================================================================ Charges to Separate Account A daily charge is deducted at an annual effective rate of 1.25% for mortality and expense risks. The administrative charge is established upon election of an Annuity Payout Option. This charge will not exceed 0.25%. Assumed Interest Rate (AIR) If variable Annuity Payments are chosen, an AIR of 5.0% may be elected. If 5.0% is not elected, Aetna will use an AIR of 3.5%. The AIR factor for 3.5% per year is 0.9999058. The AIR factor for 5.0% per year is 0.9998663. If the portion of a variable Annuity Payment for any Subaccount is not to decrease, the annuity return factor under the Separate Account for that Subaccount must be: (a) 4.75% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence if an AIR of 3.5% is chosen; or (b) 6.25% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence, if an AIR of 5% is chosen. Transfers When variable Annuity Payments have been elected, 12 Transfers are allowed each Account Year among the Subaccounts available during the Annuity Period. Aetna reserves the right to allow more than 12 Transfers in an Account Year. General Account - Fixed Annuity Payments ================================================================================ Minimum Guaranteed Interest Rate 3.0% (effective annual rate of return) See Section I - DEFINITIONS for explanations. Page 5 Schedule - Accumulation Period Death Benefit Option ================================================================================ Death Benefit Option I selected. (See Section IV - Death Benefit Options.) Separate Account ================================================================================ Separate Account Variable Annuity Account B Charges to Separate Account A daily charge is deducted from any portion of the Account Value allocated to the Separate Account. The deduction is the daily equivalent of the annual effective percentage shown in the following chart: Administrative Charge 0.15% Mortality and Expense Risk Charge 1.25% ----- Total Separate Account Charges 1.40% Guaranteed Account ================================================================================ Minimum Guaranteed Rate 3.0% (effective annual rate of return) Separate Account and Guaranteed Account ================================================================================ Transfers An unlimited number of Transfers are allowed during the Accumulation Period. Aetna allows 12 free Transfers in any Account Year. Thereafter, Aetna reserves the right to charge $10 for each subsequent Transfer. Maintenance Fee The annual Maintenance Fee is $30. If the Account Value is $50,000 or more on the date the Maintenance Fee is to be deducted, the Maintenance Fee is $0. Page 3 Schedule - Accumulation Period (continued) Separate Account and Guaranteed Account ================================================================================ Deferred Sales Charge For each withdrawal, the Deferred Sales Charge will be determined as follows: Deferred Sales Charge Length of Time from Receipt of (as percentage of Purchase Payment (Years) Purchase Payment) -------------------------------------------------------------------- Less than 2 years 7% 2 or more but less than 3 years 5% 3 or more but less than 4 years 4% 4 or more but less than 5 years 3% 5 years or more 0% Premium Bonus Net Premium Cumulative Purchase Payments Bonus Percentage -------------------------------------------------------------------- $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% See Section I - Definitions - "Premium Bonus" to determine eligibility to receive a Premium Bonus after the initial Purchase Payment. Initial Purchase Payment Required $15,000 ($1,500 qualified plan). Aetna reserves the right to lower that amount. Maximum Issue Age of Owner and Annuitant 85 See Section I - DEFINITIONS for explanations. Page 4 Schedule - Annuity Period Separate Account - Variable Annuity Payments ================================================================================ Charges to Separate Account A daily charge is deducted at an annual effective rate of 1.25% for mortality and expense risks. The administrative charge is established upon election of an Annuity Payout Option. This charge will not exceed 0.25%. Assumed Interest Rate (AIR) If variable Annuity Payments are chosen, an AIR of 5.0% may be elected. If 5.0% is not elected, Aetna will use an AIR of 3.5%. The AIR factor for 3.5% per year is 0.9999058. The AIR factor for 5.0% per year is 0.9998663. If the portion of a variable Annuity Payment for any Subaccount is not to decrease, the annuity return factor under the Separate Account for that Subaccount must be: (a) 4.75% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence if an AIR of 3.5% is chosen; or (b) 6.25% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence, if an AIR of 5% is chosen. Transfers When variable Annuity Payments have been elected, 12 Transfers are allowed each Account Year among the Subaccounts available during the Annuity Period. Aetna reserves the right to allow more than 12 Transfers in an Account Year. General Account - Fixed Annuity Payments ================================================================================ Minimum Guaranteed Interest Rate 3.0% (effective annual rate of return) See Section I - DEFINITIONS for explanations. Page 5 Schedule - Accumulation Period Death Benefit Option ================================================================================ Death Benefit Option II selected. (See Section IV - Death Benefit Options.) Separate Account ================================================================================ Separate Account Variable Annuity Account B Charges to Separate Account A daily charge is deducted from any portion of the Account Value allocated to the Separate Account. The deduction is the daily equivalent of the annual effective percentage shown in the following chart: Administrative Charge 0.15% Mortality and Expense Risk Charge 1.45% ----- Total Separate Account Charges 1.60% Guaranteed Account ================================================================================ Minimum Guaranteed Rate 3.0% (effective annual rate of return) Separate Account and Guaranteed Account ================================================================================ Transfers An unlimited number of Transfers are allowed during the Accumulation Period. Aetna allows 12 free Transfers in any Account Year. Aetna reserves the right to charge $10 for each subsequent Transfer. Maintenance Fee The annual Maintenance Fee is $30. If the Account Value is $50,000 or more on the date the Maintenance Fee is to be deducted, the Maintenance Fee is $0. Page 3 Schedule - Accumulation Period (continued) Separate Account and Guaranteed Account ================================================================================ Deferred Sales Charge For each withdrawal, the Deferred Sales Charge will be determined as follows: Deferred Sales Charge Length of Time from Receipt of (as percentage of Purchase Payment (Years) Purchase Payment) -------------------------------------------------------------------- Less than 3 years 8% 3 or more but less than 4 years 7% 4 or more but less than 5 years 6% 5 or more but less than 6 years 5% 6 or more but less than 7 years 4% 7 or more but less than 8 3% 8 years or more 0% Premium Bonus Net Premium Cumulative Purchase Payments Bonus Percentage -------------------------------------------------------------------- $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% See Section I - Definitions - "Premium Bonus" to determine eligibility to receive a Premium Bonus after the initial Purchase Payment. Initial Purchase Payment Required $15,000 ($1,500 qualified plan). Aetna reserves the right to lower that amount. Maximum Issue Age of Owner and Annuitant 75 See Section I - DEFINITIONS for explanations. Page 4 Schedule - Annuity Period Separate Account - Variable Annuity Payments ================================================================================ Charges to Separate Account A daily charge is deducted at an annual effective rate of 1.25% for mortality and expense risks. The administrative charge is established upon election of an Annuity Payout Option. This charge will not exceed 0.25%. Assumed Interest Rate (AIR) If variable Annuity Payments are chosen, an AIR of 5.0% may be elected. If 5.0% is not elected, Aetna will use an AIR of 3.5%. The AIR factor for 3.5% per year is 0.9999058. The AIR factor for 5.0% per year is 0.9998663. If the portion of a variable Annuity Payment for any Subaccount is not to decrease, the annuity return factor under the Separate Account for that Subaccount must be: (a) 4.75% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence if an AIR of 3.5% is chosen; or (b) 6.25% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence, if an AIR of 5% is chosen. Transfers When variable Annuity Payments have been elected, 12 Transfers are allowed each Account Year among the Subaccounts available during the Annuity Period. Aetna reserves the right to allow more than 12 Transfers in an Account Year. General Account - Fixed Annuity Payments ================================================================================ Minimum Guaranteed Interest Rate 3.0% (effective annual rate of return) See Section I - DEFINITIONS for explanations. Page 5 Schedule - Accumulation Period Death Benefit Option ================================================================================ Death Benefit Option II selected. (See Section IV - Death Benefit Options.) Separate Account ================================================================================ Separate Account Variable Annuity Account B Charges to Separate Account A daily charge is deducted from any portion of the Account Value allocated to the Separate Account. The deduction is the daily equivalent of the annual effective percentage shown in the following chart: Administrative Charge 0.15% Mortality and Expense Risk Charge 1.45% ----- Total Separate Account Charges 1.60% Guaranteed Account ================================================================================ Minimum Guaranteed Rate 3.0% (effective annual rate of return) Separate Account and Guaranteed Account ================================================================================ Transfers An unlimited number of Transfers are allowed during the Accumulation Period. Aetna allows 12 free Transfers in any Account Year. Thereafter, Aetna reserves the right to charge $10 for each subsequent Transfer. Maintenance Fee The annual Maintenance Fee is $30. If the Account Value is $50,000 or more on the date the Maintenance Fee is to be deducted, the Maintenance Fee is $0. Page 3 Schedule - Accumulation Period (continued) Separate Account and Guaranteed Account ================================================================================ Deferred Sales Charge For each withdrawal, the Deferred Sales Charge will be determined as follows: Deferred Sales Charge Length of Time from Receipt of (as percentage of Purchase Payment (Years) Purchase Payment) -------------------------------------------------------------------- Less than 2 years 7% 2 or more but less than 3 years 5% 3 or more but less than 4 years 4% 4 or more but less than 5 years 3% 5 years or more 0% Premium Bonus Net Premium Cumulative Purchase Payments Bonus Percentage -------------------------------------------------------------------- $1,500 to $14,999 2.00% $15,000 to $2,499,999 4.00% $2,500,000 or more 5.00% See Section I - Definitions - "Premium Bonus" to determine eligibility to receive a Premium Bonus after the initial Purchase Payment. Initial Purchase Payment Required $15,000 ($1,500 qualified plan). Aetna reserves the right to lower that amount. Maximum Issue Age of Owner and Annuitant 75 See Section I - DEFINITIONS for explanations. Page 4 Schedule - Annuity Period Separate Account - Variable Annuity Payments ================================================================================ Charges to Separate Account A daily charge is deducted at an annual effective rate of 1.25% for mortality and expense risks. The administrative charge is established upon election of an Annuity Payout Option. This charge will not exceed 0.25%. Assumed Interest Rate (AIR) If variable Annuity Payments are chosen, an AIR of 5.0% may be elected. If 5.0% is not elected, Aetna will use an AIR of 3.5%. The AIR factor for 3.5% per year is 0.9999058. The AIR factor for 5.0% per year is 0.9998663. If the portion of a variable Annuity Payment for any Subaccount is not to decrease, the annuity return factor under the Separate Account for that Subaccount must be: (a) 4.75% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence if an AIR of 3.5% is chosen; or (b) 6.25% on an annual basis plus an annual return of up to 0.25% to offset the administrative charge set at the time Annuity Payments commence, if an AIR of 5% is chosen. Transfers When variable Annuity Payments have been elected, 12 Transfers are allowed each Account Year among the Subaccounts available during the Annuity Period. Aetna reserves the right to allow more than 12 Transfers in an Account Year. General Account - Fixed Annuity Payments ================================================================================ Minimum Guaranteed Interest Rate 3.0% (effective annual rate of return) See Section I - DEFINITIONS for explanations. Page 5 Table of Contents I. DEFINITIONS PAGE 1.01 Account ............................................... 8 1.02 Account Effective Date ................................ 8 1.03 Account Value ......................................... 8 1.04 Account Year .......................................... 8 1.05 Accumulation Period ................................... 8 1.06 Adjusted Account Value ................................ 8 1.07 Annuitant ............................................. 8 1.08 Annuity Payments ...................................... 8 1.09 Annuity Payout Options ................................ 8 1.10 Annuity Period ........................................ 8 1.11 Beneficiary ........................................... 9 1.12 Certificate Holder .................................... 9 1.13 Claim Date ............................................ 9 1.14 Code .................................................. 9 1.15 Contract .............................................. 9 1.16 Contract Holder ....................................... 9 1.17 Deferred Sales Charge ................................. 9 1.18 Deposit Period ........................................ 9 1.19 Dollar Cost Averaging ................................. 9 1.20 Fund(s) ............................................... 10 1.21 General Account ....................................... 10 1.22 Guaranteed Account .................................... 10 1.23 Guaranteed Rates - Guaranteed Account ................. 10 1.24 Guaranteed Term ....................................... 10 1.25 Guaranteed Term(s) Groups ............................. 10 1.26 Maintenance Fee ....................................... 10 1.27 Market Value Adjustment (MVA) ......................... 11 1.28 Matured Term Value .................................... 11 1.29 Maturity Date ......................................... 11 1.30 Maturity Value Transfer ............................... 11 1.31 Net Cumulative Purchase Payment ....................... 11 1.32 Premium Bonus ......................................... 11 1.33 Purchase Payment(s) ................................... 11 1.34 Reinvestment .......................................... 11 1.35 Separate Account ...................................... 12 1.36 Subaccount(s) ......................................... 12 1.37 Systematic Distribution Option ........................ 12 1.38 Transfers ............................................. 12 1.39 Withdrawal Value ...................................... 12 1.40 Valuation Date ........................................ 12 II. GENERAL PROVISIONS 2.01 Change of Contract .................................... 12 2.02 Change of Fund(s) ..................................... 13 2.03 Nonparticipating Contract ............................. 13 2.04 Payments and Elections ................................ 13 2.05 State Laws ............................................ 13 2.06 Control of Contract ................................... 13 2.07 Designation of Beneficiary ............................ 14 2.08 Misstatements and Adjustments ......................... 14 2.09 Incontestability ...................................... 14 2.10 Grace Period .......................................... 14 2.11 Individual Certificates ............................... 14 Page 6 III. PURCHASE PAYMENT, ACCOUNT VALUE, AND WITHDRAWAL PROVISIONS PAGE 3.01 Purchase Payment ...................................... 14 3.02 Premium Bonus ......................................... 15 3.03 Certificate Holder's Account .......................... 15 3.04 Accumulation Units - Separate Account ................. 15 3.05 Accumulation Unit Value - Separate Account ............ 15 3.06 Net Investment Factor(s) - Separate Account ........... 15 3.07 Market Value Adjustment (MVA) ......................... 16 3.08 Transfer of Account Value from the Subaccount(s) or Guaranteed Account During the Accumulation Period ..... 17 3.09 Notice to the Certificate Holder ...................... 17 3.10 Loans ................................................. 17 3.11 Systematic Distribution Options ....................... 17 3.12 Liquidation of Withdrawal Value ....................... 18 3.13 Deferred Sales Charge ................................. 18 3.14 Payment of Withdrawal Value ........................... 18 3.15 Payment of Adjusted Account Value ..................... 19 3.16 Reinstatement ......................................... 19 IV DEATH BENEFIT 4.01 Death Benefit Options ................................. 19 4.02 Death Benefit Option I ................................ 19 4.03 Death Benefit Option II ............................... 20 4.04 Options Available to Beneficiary ...................... 21 V. ANNUITY PAYOUT PROVISIONS 5.01 Annuity Payout Options ................................ 22 5.02 Annuity Payment Choices ............................... 23 5.03 Terms of Annuity Payout Options ....................... 23 5.04 Death of Annuitant/Beneficiary ........................ 24 5.05 Annuity Units - Separate Account ...................... 25 5.06 Annuity Unit Value - Separate Account ................. 25 5.07 Annuity Net Return Factor(s) - Separate Account ....... 25 Page 7 I. DEFINITIONS ================================================================================ 1.01 Account: A record that identifies contract values accumulated on each Certificate Holder's behalf. 1.02 Account Effective Date: The date on which an Account is established on a Certificate Holder's behalf. 1.03 Account Value: As of the most recent Valuation Date, the Account Value is equal to the total of the Purchase Payment(s) made to the Account; (a) Plus any Premium Bonus amount; (b) Plus or minus the investment experience for the amount, if any, allocated to one or more of the Subaccounts; (c) Plus interest added to the amount, if any, allocated to the Guaranteed Account; (d) Plus any additional amount deposited to the Account (see Section IV - Death Benefit); (e) Less the amount of any Maintenance Fee deducted; (f) Less any additional fee(s), charges, or taxes, if applicable, deducted; (g) Less any amount(s) withdrawn; and (h) Less amount(s) applied to an Annuity Payout Option. 1.04 Account Year: A period of twelve months measured from the Account Effective Date or an anniversary of such Account Effective Date. 1.05 Accumulation Period: The period during which the Purchase Payment(s) and Premium Bonus are applied to an Account to provide future Annuity Payment(s). 1.06 Adjusted Account Value: The Account Value plus or minus the aggregate Market Value Adjustment (MVA), if applicable, for the amount(s) allocated to the Guaranteed Account (see Section III - Market Value Adjustment). 1.07 Annuitant: The person on whose death, during the Accumulation Period, a death benefit becomes payable and on whose life or life expectancy the Annuity Payments are based under the Contract. 1.08 Annuity Payment(s): A series of payments for life, a definite period or a combination of the two. The Annuity Payments may be variable or fixed in amount or a combination of both. 1.09 Annuity Payout Options: The Certificate Holder may choose to receive Annuity Payments under one of the following options: (a) For the life of one or two persons; (b) For a stated period; or (c) For some combination of (a) and (b). 1.10 Annuity Period: The period during which Annuity Payments are made. Page 8 1.11 Beneficiary: The individual(s) or entity(ies) entitled to receive any death benefit due under the Contract. Any designated Beneficiary has the right to name another Beneficiary. If the Account is owned by joint Certificate Holders, the survivor will be deemed the designated Beneficiary and any other Beneficiary on record will then be treated as the primary or contingent Beneficiary, as originally designated, unless and until changed by the new designated Beneficiary. 1.12 Certificate Holder: A person who purchases an interest in the Contract as evidenced by a certificate. Aetna reserves the right to limit ownership to natural persons. If more than one Certificate Holder owns an Account, each Certificate Holder will be a joint Certificate Holder. Joint Certificate Holders have joint ownership rights and both must authorize exercising any ownership rights unless Aetna allows otherwise. 1.13 Claim Date: The date when proof of death and the Beneficiary's entitlement to the death benefit are received in good order at Aetna's home office. This is also the date that the excess of the death benefit over the Account Value, if any, is allocated to the money market fund available through the Separate Account. 1.14 Code: The Internal Revenue Code of 1986, as it may be amended from time to time. 1.15 Contract: The agreement between Aetna and the Contract Holder. 1.16 Contract Holder: The entity to which the Contract is issued. 1.17 Deferred Sales Charge: The charge that is applied to a Purchase Payment(s)upon withdrawal. This charge may be waived under certain circumstances or after a certain length of time (see Section III - Deferred Sales Charge). 1.18 Deposit Period: A day, a calendar week, a calendar month, a calendar quarter, or any other period of time specified by Aetna during which a Purchase Payment(s), Transfer(s) and/or Reinvestment(s) may be allocated to one or more Guaranteed Account Guaranteed Terms. Aetna reserves the right to shorten or to extend the Deposit Period. During a Deposit Period, Aetna may offer any number of Guaranteed Terms and more than one Guaranteed Term of the same duration may be offered. 1.19 Dollar Cost Averaging: A program that permits the Certificate Holder to systematically transfer amounts from one of the available Subaccounts, or an available Guaranteed Account Guaranteed Term, to one or more of the Subaccounts. If the Certificate Holder elects a Guaranteed Account Guaranteed Term available for Dollar Cost Averaging, no MVA applies to amounts transferred under Dollar Cost Averaging. If Dollar Cost Averaging from a Guaranteed Account Guaranteed Term is discontinued before the end of the Dollar Cost Averaging period elected, Aetna will automatically transfer the balance to a Guaranteed Term of the same duration and an MVA will apply. The Certificate Holder may initiate a Transfer to another investment option and an MVA will apply. If a Guaranteed Term of the same duration is not available, Aetna will transfer the amount to the Guaranteed Term with the next shortest duration. If no shorter Guaranteed Term is available, the next longer Guaranteed Term will be used. Aetna reserves the right to establish and change terms and conditions governing Dollar Cost Averaging. Page 9 1.20 Fund(s): The open-end registered management investment companies whose shares are purchased by the Separate Account to fund the benefits provided by the Contract. The Funds, and the number of Funds, available during the Accumulation Period may be different from those available during the Annuity Period. Aetna reserves the right to limit the number of Funds available at any one time and to limit the number of investment options the Certificate Holder may select during the Accumulation Period and/or during the Annuity Period. 1.21 General Account: The account holding the assets of Aetna, other than those assets held in Aetna's separate accounts. 1.22 Guaranteed Account: A nonunitized separate account, established by Aetna under Connecticut Law that holds assets for Guaranteed Terms. There are no discrete units for this account. The Certificate Holder does not participate in any gain or loss resulting from the performance of the investments held in the account. Income, gains or losses realized or unrealized, are gains or losses of Aetna. Aetna liabilities, except for liabilities under the contract and reserves required by federal and state law, may not be charged against the nonunitized separate account. 1.23 Guaranteed Rates - Guaranteed Account: Aetna will declare the interest rate(s) applicable to a specific Guaranteed Term at the start of the Deposit Period for that Guaranteed Term. The rate(s) are guaranteed by Aetna for the period beginning with the first day of the Deposit Period and ending on the Maturity Date. Guaranteed Rates are credited beginning with the date of allocation. The Guaranteed Rates are annual effective yields. That is, interest is credited daily at a rate that will produce the Guaranteed Rate over the period of a year. No Guaranteed Rate will ever be less than the minimum Guaranteed Rate shown on the Schedule - Accumulation Period. For Guaranteed Terms of one year or less, one Guaranteed Rate is credited for the full Guaranteed Term. For longer Guaranteed Terms, an initial Guaranteed Rate is credited from the date of deposit to the end of a specified period within the Guaranteed Term. There may be different Guaranteed Rate(s) declared for subsequent specified time intervals throughout the Guaranteed Term. Aetna may offer more than one Guaranteed Term of the same duration and credit one with a higher rate contingent upon use only with Dollar Cost Averaging. 1.24 Guaranteed Term: The period of time specified by Aetna for which a specific Guaranteed Rate(s) is offered on amounts invested during a specific Deposit Period. Guaranteed Terms are made available subject to Aetna's terms and conditions, including, but not limited to, Aetna's right to restrict allocations to new Purchase Payments (such as by prohibiting Transfers into a particular Guaranteed Term from any other Guaranteed Term or from any of the Subaccounts, or by prohibiting Reinvestment of a Matured Term Value to a particular Guaranteed Term). More than one Guaranteed Term of the same duration may be offered within the Contract. 1.25 Guaranteed Term(s) Groups: All Guaranteed Account Guaranteed Term(s) of the same duration (from the close of the Deposit Period until the designated Maturity Date). 1.26 Maintenance Fee: The Maintenance Fee (see Schedule - Accumulation Period) will be deducted during the Accumulation Period from the Account Value on each anniversary of the Account Effective Date and upon withdrawal of the entire Account Value. Page 10 1.27 Market Value Adjustment (MVA): An adjustment that may apply to an amount withdrawn or transferred from a Guaranteed Account Guaranteed Term prior to the end of that Guaranteed Term. The adjustment reflects the change in the value of the investment due to changes in interest rates since the date of deposit and is computed using the formula given. The adjustment is expressed as a percentage of each dollar being withdrawn (see Section III- Market Value Adjustment). 1.28 Matured Term Value: The amount due on a Guaranteed Account Guaranteed Term's Maturity Date. 1.29 Maturity Date: The last day of a Guaranteed Account Guaranteed Term. 1.30 Maturity Value Transfer: During the calendar month following a Guaranteed Account Maturity Date, the Certificate Holder may notify Aetna's home office in writing to Transfer or withdraw all or part of the Matured Term Value, plus accrued interest at the new Guaranteed Rate, from the Guaranteed Account without an MVA. This provision only applies to the first such written request received from the Certificate Holder during this period for any Matured Term Value. 1.31 Net Cumulative Purchase Payment: The sum of the Purchase Payments minus any amounts withdrawn. 1.32 Premium Bonus: A percentage of an applicable Purchase Payment (as shown on the Schedule-Accumulation Period) that is credited to a Certificate Holder's Account by Aetna. This amount is in addition to the Purchase Payment. The amount of Purchase Payment eligible for such Premium Bonus is equal to the Net Cumulative Purchase Payment amount minus the sum of Purchase Payments upon which a Premium Bonus has previously been paid. 1.33 Purchase Payment(s): The Purchase Payment(s) less premium taxes, if applicable, accepted by Aetna at its home office. Aetna reserves the right to refuse to accept any Purchase Payment at any time for any reason. No advance notice will be given to the Contract Holder or Certificate Holder. 1.34 Reinvestment: Aetna will mail a notice to the Certificate Holder at least 18 calendar days before a Guaranteed Term's Maturity Date. This notice will contain the Terms available during current Deposit Periods with their Guaranteed Rate(s), and projected Matured Term Value. If no specific direction is given by the Certificate Holder prior to the Maturity Date, each Matured Term Value will be reinvested in the current Deposit Period for a Guaranteed Term of the same duration. If a Guaranteed Term of the same duration is unavailable, each Matured Term Value will automatically be reinvested in the current Deposit Period for the next shortest Guaranteed Term available. If no shorter Guaranteed Term is available, the next longer Guaranteed Term will be used. Aetna will mail a confirmation statement to the Certificate Holder the next business day after the Maturity Date. This notice will state the Guaranteed Term and Guaranteed Rate(s) which will apply to the reinvested Matured Term Value. Page 11 1.35 Separate Account: A separate account that buys and holds shares of the Fund(s). Income, gains or losses, realized or unrealized, are credited or charged to the Separate Account without regard to other income, gains or losses of Aetna. Aetna owns the assets held in the Separate Account and is not a trustee as to such amounts. The Separate Account generally is not guaranteed and is held at market value. The assets of the Separate Account, to the extent of reserves and other contract liabilities of the Separate Account, shall not be charged with other Aetna liabilities. 1.36 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. 1.37 Systematic Distribution Option: An option elected by the Certificate Holder during the Accumulation Period which establishes a schedule of withdrawals to be made automatically from the Certificate Holder's Account. 1.38 Transfers: The movement of invested amounts among the available Subaccount(s) and/or any Guaranteed Account Guaranteed Term made available, subject to terms and conditions established by Aetna, during the Accumulation Period or the Annuity Period. 1.39 Withdrawal Value: The amount payable by Aetna upon the withdrawal of any portion of the Account Value. 1.40 Valuation Date: The date and time for which a Subaccount calculates its net asset value, usually from 4:00 p.m. Eastern time each day the New York Stock Exchange is open, to 4:00 p.m. the next such business day. II. GENERAL PROVISIONS ================================================================================ 2.01 Change of Contract: Only an authorized officer of Aetna may change the terms of the Contract. Aetna will notify the Contract Holder in writing at least 30 days before the effective date of any change. Any change will not affect the amount or terms of any Annuity Payout Option which begins before the change. Aetna may make any change that affects the Market Value Adjustment (see Section III- Market Value Adjustment) with at least 30 days advance written notice to the Contract Holder and the Certificate Holder. Any such change shall become effective for any new Guaranteed Term and will apply to all present and future Accounts. Any change that affects any of the following under the Contract will not apply to Accounts in existence before the effective date of the change: (a) Account Value (b) Guaranteed Rates - Guaranteed Account (c) Purchase Payment (d) Withdrawal Value (e) Transfers (f) Net Investment Factor(s) - Separate Account (see Section III) (g) Minimum Guaranteed Interest Rates (h) Annuity Unit Value - Separate Account (see Section V) (i) Annuity Payout Options (see Section V). Page 12 Any change that affects the Annuity Payout Options and the tables for the Annuity Payout Options may be made: (a) No earlier than 12 months after the Account Effective Date; and (b) No earlier than 12 months after the effective date of any prior change. Any Account established on or after the effective date of any change will be subject to the change. If the Contract Holder does not agree to any change under this provision, no new Accounts may be established under the Contract. The Contract may also be changed as deemed necessary by Aetna to comply with federal or state law. 2.02 Change of Fund(s): The assets of the Separate Account are segregated by Fund. If the shares of any Fund are no longer available for investment by the Separate Account or if, in our judgment, further investment in such shares should become inappropriate in view of the purpose of the Contract, Aetna may cease to make such Fund shares available for investment under the Contract prospectively, or Aetna may substitute shares of another Fund for shares already acquired. Aetna may also, from time to time, add additional Funds. Any elimination, substitution or addition of Funds will be done in accordance with applicable state and federal securities laws. Aetna reserves the right to substitute shares of another Fund for shares already acquired without a proxy vote. 2.03 Nonparticipating Contract: The Contract Holder, Certificate Holders or Beneficiaries will not have a right to share in the earnings of Aetna. 2.04 Payments and Elections: While the Certificate Holder is living, Aetna will pay the Certificate Holder any Annuity Payments as and when due. After the Certificate Holder's death, or at the death of the first Certificate Holder if the Account is owned jointly, any Annuity Payments required to be made will be paid in accordance with Section III - Death of Annuitant/Beneficiary. Aetna will determine other payments and/or elections as of the end of the Valuation Date in which the request is received at its home office. Such payments will be made within seven calendar days of receipt at its home office of a written claim for payment which is in good order, except as provided in Section III - Payment of Withdrawal Value. 2.05 State Laws: The Contract and Certificate comply with the laws of the state in which they are delivered. Any withdrawal, death benefit amount, or Annuity Payments are equal to or greater than the minimum required by such laws. Annuity tables for legal reserve valuation shall be as required by state law. Such tables may be different from annuity tables used to determine Annuity Payments. 2.06 Control of Contract: The Contract is between the Contract Holder and Aetna. The Contract Holder has title to the Contract. Contract Holder rights are limited to accepting or rejecting Contract modifications. The Certificate Holder has all other rights to amounts held in his or her Account. Each Certificate Holder shall own all amounts held in his or her Account. Each Certificate Holder may make any choices allowed by the Contract for his or her Account. Choices made under the Contract must be in writing. If the Account is owned jointly, both joint Certificate Holders must authorize any Certificate Holder change in writing. Until receipt of such choices at Aetna's home office, Aetna may rely on any previous choices made. The Contract is not subject to the claims of any creditors of the Contract Holder or the Certificate Holder, except to the extent permitted by law. Page 13 The Certificate Holder may assign or transfer his or her rights under the Contract. Aetna reserves the right not to accept assignment or transfer to a nonnatural person. Any assignment or transfer made under the Contract must be submitted to Aetna's home office in writing and will not be effective until accepted by Aetna. 2.07 Designation of Beneficiary: Each Certificate Holder shall name his or her Beneficiary and when designating the Beneficiary may elect to specify in writing the form of payment to the Beneficiary. Aetna will honor the specified form of payment to the extent permitted under section 72(s) of the Code. If the Account is owned jointly, both joint Certificate Holders must agree in writing to the Beneficiary designated. The Beneficiary may be changed at any time unless an irrevocable Beneficiary is designated. Changes to a Beneficiary must be submitted to Aetna's home office in writing and will not be effective until accepted by Aetna. We will accept a change of Beneficiary designation after the date of death and treat such Beneficiary designation as in effect as of the date of death provided no portion of the death benefit has been paid. If the Account is owned jointly, at the death of one joint Certificate Holder, the survivor will be deemed the designated Beneficiary; any other Beneficiary on record will then be treated as a primary or a contingent Beneficiary, as originally designated unless and until changed by the new designated Beneficiary. If a designated Beneficiary defers taking payment of a death benefit, the designated Beneficiary has the right to name another Beneficiary. 2.08 Misstatements and Adjustments: If Aetna finds the age of any Annuitant to be misstated, the correct facts will be used to adjust payments. 2.09 Incontestability: After two years, the Contract will be incontestable. 2.10 Grace Period: The Contract will remain in effect even if Purchase Payments are not continued except as provided in the Payment of Adjusted Account Value provision (see Section III - Payment of Adjusted Account Value). 2.11 Individual Certificates: Aetna shall issue a certificate to each Certificate Holder. The certificate will summarize certain provisions of the Contract. Certificates are for information only and are not a part of the Contract. III. PURCHASE PAYMENT, ACCOUNT VALUE, AND WITHDRAWAL PROVISIONS ================================================================================ 3.01 Purchase Payment: This amount is the actual Purchase Payment, less any premium taxes. Aetna reserves the right to pay premium taxes when due and deduct the amount from the Account Value when we pay the tax or at a later date. Each Purchase Payment will be allocated, as directed by the Certificate Holder, among: (a) Guaranteed Account Guaranteed Terms made available, subject to terms and conditions established by Aetna; and/or (b) The Subaccount(s) offered through the Separate Account. For each Purchase Payment, the Certificate Holder shall tell Aetna the percentage of each Purchase Payment to allocate to any available Guaranteed Account Guaranteed Term and/or each Subaccount. Unless different allocation instructions are received for any additional Purchase Payment, the allocation will be the same as for the initial Purchase Payment. If the same Guaranteed Term is no longer available, the Purchase Payment will be allocated to the next shortest Guaranteed Term available in the current Deposit Period. If no shorter Guaranteed Term is available, the next longer Guaranteed Term will be used. Page 14 3.02 Premium Bonus: A Premium Bonus of a certain percentage based on Net Cumulative Purchase Payment(s) will be allocated to the Account. The applicable percentage is shown on the Schedule - Accumulation Period. The eligibility for a Premium Bonus is determined in accordance with Section I - Definitions "Premium Bonus". The Premium Bonus will not be included in the Account Value and will be forfeited under the following circumstances: (a) If the Certificate Holder exercises the right to cancel; or (b) If the Certificate Holder applies the Adjusted Account Value (minus any premium tax, if applicable) to any Annuity Payout Option to the extent that a Premium Bonus has been allocated within 24 months; or (c) If the Certificate Holder dies, to the extent that a Premium Bonus has been allocated after or within 12 months of the date of death. The Premium Bonus will be applied pro-rata to each Fund or Guaranteed Term in the same ratio as the Purchase Payment is allocated unless otherwise specified. 3.03 Certificate Holder's Account: Aetna will maintain an Account for each Certificate Holder. Aetna will declare from time to time the acceptability and the minimum amount for initial and additional Purchase Payments. 3.04 Accumulation Units - Separate Account: The portion of the Purchase Payment(s) applied to each Subaccount under the Separate Account will determine the number of accumulation units for that Subaccount. This number is equal to the portion of the Purchase Payment(s) applied to each Subaccount divided by the accumulation unit value (see Section III - Accumulation Unit Value Separate Account) for the Valuation Date in which the Purchase Payment is received in good order at Aetna's home office. 3.05 Accumulation Unit Value - Separate Account: An accumulation unit value is computed by multiplying the net investment factor for the current Valuation Date by the accumulation unit value for the previous Valuation Date. The dollar value of accumulation units, Separate Account assets, and variable Annuity Payments may go up or down due to investment gain or loss. 3.06 Net Investment Factor(s) - Separate Account: The net investment factor is used to measure the investment performance of a Subaccount from one Valuation Date to the next. The net investment factor for a Subaccount for any Valuation Date is equal to the sum of 1.0000 plus the net investment rate. The net investment rate equals: (a) The net assets of the Subaccount on the current Valuation Date; minus (b) The net assets of the Subaccount on the preceding Valuation Date; plus or minus (c) Taxes or provisions for taxes, if any, attributable to the operation of the Subaccount; divided by (d) The total value of the Subaccount's accumulation and annuity units on the preceding Valuation Date; minus (e) A daily charge for mortality and expense risks, administrative charges and any other fees deducted from investments in the Separate Account. The net investment rate may be either positive or negative. Page 15 3.07 Market Value Adjustment (MVA): An MVA will apply to any withdrawal from the Guaranteed Account before the end of a Guaranteed Term when the withdrawal is: (a) A Transfer (including a Transfer from a Guaranteed Account Guaranteed Term if Dollar Cost Averaging is discontinued); except for Transfers under Dollar Cost Averaging, or as specified in Section I - Maturity Value Transfer; (b) A full or partial withdrawal (excluding a free withdrawal, see Section III - Deferred Sales Charge), except for a payment made: (1) Under a Systematic Distribution Option to the extent that it does not exceed 10% of the Account Value in an Account Year (an MVA will apply to any amount that exceeds 10% unless such amount is required to meet the minimum distribution requirements); or (2) Under a qualified Contract, when the amount withdrawn is equal to the required minimum distribution for the Account calculated using a method permitted under the Code and agreed to by Aetna; or (c) Due to an election of Annuity Payout Option 1. Only a positive MVA will apply upon election of Annuity Payout Option 2 or 3 (see Section V - Annuity Payout Options). Full and partial withdrawals and Transfers made within six months after the date of the Annuitant's death will be the greater of: (a) The aggregate MVA amount which is the sum of all market value adjusted amounts resulting from a withdrawal(s). This total may be greater or less than the Account Value of those amounts; or (b) The applicable portion of the Account Value in the Guaranteed Account. After the six-month period, the withdrawal or Transfer will be the aggregate MVA amount, which may be greater or less than the Account Value of those amounts. Market value adjusted amounts will be equal to the amount withdrawn multiplied by the following ratio: (1 + i)^(x/365) ------- (1 + j)^(x/365) Where: i is the Deposit Period yield j is the current yield x is the number of days remaining in the Guaranteed Term, computed from Wednesday of the week of withdrawal. The Deposit Period yield will be determined as follows: (a) At the close of the last business day of each week of the Deposit Period, a yield will be computed as the average of the yields on that day of U.S. Treasury Notes which mature in the last three months of the Guaranteed Term. (b) The Deposit Period yield is the average of those yields for the Deposit Period. If withdrawal is made before the close of the Deposit Period, it is the average of those yields on each week preceding withdrawal. The current yield is the average of the yields on the last business day of the week preceding withdrawal on the same U.S. Treasury Notes included in the Deposit Period yield. In the event that no U.S. Treasury Notes which mature in the last three months of the Guaranteed Term exist, Aetna reserves the right to use the U.S. Treasury Notes that mature in the following quarter. Page 16 3.08 Transfer of Account Value from the Subaccount(s) or Guaranteed Account During the Accumulation Period: Before an Annuity Payout Option is elected, all or any portion of the Adjusted Account Value of the Certificate Holder's Account may be transferred from any Subaccount or Guaranteed Term of the Guaranteed Account: (a) To any other Subaccount; or (b) To any Guaranteed Term of the Guaranteed Account made available in the current Deposit Period, subject to terms and conditions specified by Aetna. Transfer requests can be submitted as a percentage or as a dollar amount. Aetna may establish a minimum transfer amount. Within a Guaranteed Term Group, the amount to be withdrawn or transferred will be withdrawn first from the oldest Deposit Period, then from the next oldest, and so on until the amount requested is satisfied. The Certificate Holder may make an unlimited number of Transfers during the Accumulation Period. The number of free Transfers allowed by Aetna is shown on the Schedule - Accumulation Period. Additional Transfers may be subject to a Transfer fee as shown on the Schedule - Accumulation Period. Amounts transferred from the Guaranteed Account under the Dollar Cost Averaging program, or amounts transferred as a Matured Term Value on or within one calendar month of a Maturity Date are not subject to any Transfer fee and do not count against the annual number of free Transfers. Amounts allocated to Guaranteed Account Guaranteed Terms may not be transferred to the Subaccounts or to another Guaranteed Term during a Deposit Period or for 90 days after the close of a Deposit Period except for: (a) Matured Term Value(s) during the calendar month following the Maturity Date; (b) Amounts applied to an Annuity Payout Option; (c) Amounts transferred under the Dollar Cost Averaging program; (d) Amounts distributed under a Systematic Distribution Option; and (e) Amounts transferred by Aetna if Dollar Cost Averaging is discontinued. 3.09 Notice to the Certificate Holder: The Certificate Holder will receive quarterly statements from Aetna of: (a) The value of any amounts held in: (1) The Guaranteed Account; and (2) The Subaccount(s) under the Separate Account; (b) The number of any accumulation units; and (c) The accumulation unit value. Such number or values will be as of a specific date no more than 60 days before the date of the notice. 3.10 Loans: Loans are not available under the Contract. 3.11 Systematic Distribution Options: Aetna may, from time to time, make one or more Systematic Distribution Options available during the Accumulation Period. When a Systematic Distribution Option is elected, Aetna will make automatic payments from the Certificate Holder's Account. Any Systematic Distribution Option will be subject to the following criteria: (a) Any Systematic Distribution Option will be made available on the basis of objective criteria consistently applied; Page 17 (b) The availability of any Systematic Distribution Option may be limited by terms and conditions applicable to the election of such Systematic Distribution Option; and (c) Aetna may discontinue the availability of a Systematic Distribution Option at any time. Except to the extent required to comply with applicable law, discontinuance of a Systematic Distribution Option will apply only to future elections and will not affect Systematic Distribution Options in effect at the time an option is discontinued. 3.12 Liquidation of Withdrawal Value: All or any portion of the Account Value may be withdrawn at any time. Withdrawal requests may be submitted as a percentage of the Account Value or as a specific dollar amount. Purchase Payment amounts are withdrawn first, and then the excess value, if any. Partial withdrawal amounts are withdrawn on a pro rata basis from the Subaccount(s) and/or the Guaranteed Term(s) Groups of the Guaranteed Account in which the Account Value is invested. Within a Guaranteed Term Group, the amount to be withdrawn or transferred will be withdrawn first from the oldest Deposit Period, then from the next oldest, and so on until the amount requested is satisfied. After deduction of the Maintenance Fee, if applicable, the withdrawn amount shall be reduced by a Deferred Sales Charge, if applicable. An MVA may apply to amounts withdrawn from the Guaranteed Account. 3.13 Deferred Sales Charge: The Deferred Sales Charge only applies to the Purchase Payment(s) portion withdrawn and varies according to the elapsed time since deposit (see Schedule - Accumulation Period). Purchase Payment amounts are withdrawn in the same order they were applied. No Deferred Sales Charge is deducted from any portion of the Purchase Payment which is paid: (a) To a Beneficiary due to the Annuitant's death before Annuity Payments start, up to a maximum of the aggregate Purchase Payment(s) minus the total of all partial surrenders and deductions made prior to the Annuitant's date of death; (b) For an Annuity Payout Option (see Section V - Annuity Payout Provisions); (c) For a full withdrawal of the Account where the Account Value is $2,500 or less and no withdrawals have been taken from the Account within the prior 12 months; (d) By Aetna under Section III - Payment of Adjusted Account Value; (e) Under a qualified Contract when the amount withdrawn is equal to the minimum distribution required by the Code for the Account, either paid under a Systematic Distribution Option or calculated by the Certificate Holder using a method permitted under the Code and agreed to by Aetna; (f) As a withdrawal of up to 10% of the Account Value on the Account anniversary in any Account Year less any amounts taken as a Systematic Distribution Option or as a required minimum distribution as described in (e) above. Aetna reserves the right to increase the percentage of the free withdrawal amount. The free withdrawal amount includes any Premium Bonus amount applied. 3.14 Payment of Withdrawal Value: Under certain emergency conditions, Aetna may defer payment: (a) For a period of up to six months (unless not allowed by state law); or (b) As provided by federal law. Page 18 3.15 Payment of Adjusted Account Value: Upon 90 days written notice to the Certificate Holder, Aetna will terminate any Account if the Account Value becomes less than $2,500 immediately following any partial withdrawal. Aetna does not intend to exercise this right in cases where an Account is reduced to $2,500 or less solely due to investment performance. A Deferred Sales Charge will not be deducted from the Adjusted Account Value, however, any Premium Bonus applied within 12 months of the termination will be deducted from the Account Value. 3.16 Reinstatement: The Certificate Holder may reinstate the proceeds of a full withdrawal, subject to terms and conditions established by Aetna. IV. DEATH BENEFIT ================================================================================ 4.01 Death Benefit Options: If the Certificate Holder or Annuitant dies before an Annuity Payout Option starts, the Beneficiary is entitled to a death benefit. If the Account is owned jointly, the death benefit applies at the death of the first joint Certificate Holder to die (see Section IV - Options Available to Beneficiary). The death benefit option selected is reflected on the Schedule-Accumulation Period. 4.02 Death Benefit Option I: The amount of the death benefit is determined as follows: (a) Death of the Annuitant. The death benefit calculated as of the Claim Date is the greater of: (1) The sum of all Purchase Payment(s) made, adjusted for amount(s) withdrawn or applied to an Annuity Payout Option; or (2) The Account Value on the Claim Date, less any Premium Bonus allocated to the Account after or within 12 months of the date of death. On the Claim Date, if the amount of the death benefit is greater than the Account Value, the amount by which the death benefit exceeds the Account Value will be deposited and allocated to the money market fund available through the Separate Account.This increases the Account Value available to the Beneficiary to an amount equal to the death benefit. The amount paid to the Beneficiary will equal the Adjusted Account Value on the date the payment request is processed. This amount may be greater or less than the amount of the death benefit on the Claim Date. The Beneficiary may elect a death benefit payment option as permitted in Section IV - Options Available to Beneficiary. (b) Death of the Certificate Holder if the Certificate Holder is not the Annuitant. On the Claim Date, the amount of the death benefit equals the Account Value less any Premium Bonus allocated to the Account after or within 12 months of the date of death. The amount paid to the Beneficiary will equal the Adjusted Account Value on the date the payment request is processed. A Deferred Sales Charge may apply to any full or partial payment of the death benefit. The Beneficiary may elect a death benefit payment option as permitted in Section IV - Options Available to Beneficiary. Page 19 (c) Death of a spouse who becomes a successor Certificate Holder/Annuitant. The amount of the death benefit paid to the Beneficiary at the death of a successor Certificate Holder/Annuitant is the greater of the values as described in (a) above except that in calculating (a)(1), the Account Value on the Claim Date for the prior Certificate Holder's death is treated as the initial Purchase Payment. 4.03 Death Benefit Option II: The amount of the death benefit is determined as follows: (a) Death of the Annuitant. The death benefit calculated as of the Claim Date is the greatest of: (1) The sum of all Purchase Payment(s) made, adjusted for amount(s) withdrawn or applied to an Annuity Payout Option; or (2) The Account Value on the Claim Date, less any Premium Bonus allocated to the Account after or within 12 months of the date of death; or (3) The "Step-up Value" on the Claim Date less any Premium Bonus allocated to the Account after or within 12 months of the date of death. On the Account Effective Date, the Step-up Value is equal to the Account Value. Thereafter, on each anniversary of the Account Effective Date until the anniversary immediately preceding the Annuitant's 85th birthday or death, whichever is earlier, the Step-up Value is equal to the greater of: (a) The Step-up Value most recently calculated, adjusted for Purchase Payment(s) made, any Premium Bonus allocated and amount(s) withdrawn or applied to an Annuity Payout Option during the prior Account Year; or (b) The Account Value on that anniversary of the Account Effective Date. On each anniversary of the Account Effective Date after the Annuitant's 85th birthday, the Step-up Value shall equal the Step-up Value on the anniversary immediately preceding the Annuitant's 85th birthday, adjusted for Purchase Payment(s) made, Premium Bonus allocated and amounts withdrawn or applied to an Annuity Payout Option since that anniversary. On the Claim Date, the Step-up Value shall equal the Step-up Value on the anniversary of the Account Effective Date immediately preceding the date of death, adjusted for Purchase Payment(s) made and amount(s) withdrawn or applied to an Annuity Payout Option since that anniversary, less any Premium Bonus allocated to the Account after or within 12 months of the date of death. On the Claim Date, if the amount of the death benefit is greater than the Account Value, the amount by which the death benefit exceeds the Account Value will be deposited and allocated to the money market fund available through the Separate Account. This increases the Account Value available to the Beneficiary to an amount equal to the death benefit. The amount paid to the Beneficiary will equal the Adjusted Account Value on the date the payment request is processed. This amount may be greater or less than the amount of the death benefit on the Claim Date. The Beneficiary may elect a death benefit payment option as permitted in Section IV - Options Available to the Beneficiary. (b) Death of the Certificate Holder if the Certificate Holder is not the Annuitant. On the Claim Date, the amount of the death benefit equals the Account Value less any Premium Bonus allocated to the Account after or within 12 months of the date of death. Page 20 The amount paid to the Beneficiary will equal the Adjusted Account Value on the date the payment request is processed. A Deferred Sales Charge may apply to any full or partial payment of the death benefit. The Beneficiary may elect a death benefit payment option as permitted in Section IV - Options Available to the Beneficiary. (c) Death of a spouse who becomes a successor Certificate Holder/ Annuitant. The amount of the death benefit paid to the Beneficiary at the death of a successor Certificate Holder/Annuitant is the greater of the values as described in (a) above except that in calculating (a)(1), the Account Value on the Claim Date for the prior Certificate Holder's death is treated as the initial Purchase Payment. 4.04 Options Available to Beneficiary: Prior to any election, or until amounts must be otherwise distributed under this section, the Account Value will be retained in the Account. The Beneficiary has the right to allocate or reallocate any amount to any of the available investment options (subject to an MVA, if applicable). If the Certificate Holder has specified the form of payment to the Beneficiary, the death benefit will be paid as elected by the Certificate Holder in the Beneficiary designation, to the extent permitted by section 72(s) of the Code. If the Certificate Holder has not specified a form of payment, the Beneficiary may elect one of the following options. (a) When the Certificate Holder is the Annuitant or when the Certificate Holder is a nonnatural person, and the Annuitant dies: (1) If the Beneficiary is the surviving spouse, the spousal Beneficiary will be the successor Certificate Holder and may exercise all Certificate Holder rights under the Contract and continue in the Accumulation Period, or may elect (i) or (ii) below. Under the Code, distributions from the Account are not required until the spousal Beneficiary's death. The spousal Beneficiary may elect to: (i) Apply some or all of the Adjusted Account Value to an Annuity Payout Option (see Section V); or (ii) Receive, at any time, a lump sum payment equal to the Adjusted Account Value. (2) If the Beneficiary is other than the surviving spouse, then options (i) or (ii) above apply. Any portion of the Adjusted Account Value not applied to an Annuity Payout Option within one year of the death must be distributed within five years of the date of death. (3) If no Beneficiary exists, a lump sum payment equal to the Adjusted Account Value must be made to the Annuitant's estate within five years of the date of death. (4) If the Beneficiary is an entity, a lump sum payment equal to the Adjusted Account Value must be made within five years of the date of death, unless otherwise permitted by IRS regulation or ruling. (b) When the Certificate Holder is not the Annuitant and the Certificate Holder dies: (1) If the Beneficiary is the Certificate Holder's surviving spouse, the spousal Beneficiary will be the successor Certificate Holder and may exercise all Certificate Holder rights under the Contract and continue in the Accumulation Period, or may elect (i) or (ii) below. Under the Code, distributions from the Account are not required until the spousal Beneficiary's death. The spousal Beneficiary may elect to: (i) Apply some or all of the Adjusted Account Value to an Annuity Payout Option (see Section V); or (ii) Receive, at any time, a lump sum payment equal to the Withdrawal Value. (2) If the Beneficiary is other than the Certificate Holder's surviving spouse, then options (i) or (ii) under (1) above apply. Any portion of the death benefit not applied to an Annuity Payout Option within one year of the Certificate Holder's death must be distributed within five years of the date of death. Page 21 (3) If no Beneficiary exists, a lump sum payment equal to the Withdrawal Value must be made to the Certificate Holder's estate within five years of the date of death. (4) If the Beneficiary is an entity, a lump sum payment equal to the Withdrawal Value must be made within five years of the date of death, unless otherwise permitted by IRS regulation or ruling. (c) When the Certificate Holder is a natural person and not the Annuitant and the Annuitant dies, the Beneficiary (or the Certificate Holder if no Beneficiary exists) may elect to: (1) Apply all or some of the Adjusted Account Value to an Annuity Payout Option within 60 days of the date of death; or (2) Receive a lump sum payment equal to the Adjusted Account Value. V. Annuity Payout Provisions ================================================================================ 5.01 Annuity Payout Options: Annuity Payout Option 1 - Payments for a specified period: Payments are made for the number of years specified by the Certificate Holder. The number of years must be at least ten and not more than 30. Annuity Payout Option 2 - Life income based on the life of one Annuitant: When this option is elected, the Certificate Holder must choose one of the following: (a) Payments cease at the death of the Annuitant; (b) Payments are guaranteed for a specified period from five to 30 years; (c) Cash refund: when the Annuitant dies, the Beneficiary will receive a lump sum payment equal to the amount applied to the Annuity Payout Option (less any premium tax, if applicable) less the total amount of Annuity Payments made prior to such death. This cash refund feature is only available if the total amount applied to the Annuity Payout Option is allocated to a fixed Annuity Payments. Annuity Payout Option 3 - Life income based on the lives of two Annuitants: Payments are made for the lives of two Annuitants, one of whom is designated the primary Annuitant and the other the secondary Annuitant, and cease when both Annuitants have died. When this option is elected, the Certificate Holder must also choose one of the following: (a) 100% of the payment to continue after the first death; (b) 66 2/3% of the payment to continue after the first death; (c) 50% of the payment to continue after the first death; (d) 100% of the payment to continue after the first death and payments are guaranteed for a period of five to 30 years; (e) 100% of the payment to continue at the death of the secondary Annuitant and 50% of the payment to continue at the death of the primary Annuitant; or (f) 100% of the payment continues after the first death with a cash refund feature. When the primary Annuitant and secondary Annuitant die, the Beneficiary will receive a lump sum payment equal to the amount applied to the Annuity Payout Option (less any premium tax) less the total amount of Annuity Payments paid prior to such death. This cash refund feature is only available if the total amount applied to the Annuity Payout Option is allocated to fixed Annuity Payments. Page 22 If fixed Annuity Payments are chosen under Annuity Payout Option 1, 2 (a) or (b), or 3 (a) or (d), the Certificate Holder may elect, at the time the Annuity Payout Option is selected, an annual increase of one, two or three percent compounded annually. As allowed under applicable state law, Aetna reserves the right to offer additional Annuity Payout Options. 5.02 Annuity Payment Choices: The Certificate Holder may tell Aetna to apply the Adjusted Account Value (minus any premium tax, if applicable,) to any Annuity Payout Option . The first Annuity Payment may not be earlier than one calendar year after the initial Purchase Payment nor later than the later of: (a) The first day of the month following the Annuitant's 85th birthday; or (b) The tenth anniversary of the last Purchase Payment. In lieu of the election of an Annuity Payout Option, the Certificate Holder may tell Aetna to make a lump sum payment. When an Annuity Payout Option is chosen, Aetna must also be told if payments are to be made other than monthly and whether to pay: (a) Fixed Annuity Payments using the General Account; (b) Variable Annuity Payments using any of the Subaccount(s) available under the contract for the Annuity Period; or (c) A combination of (a) and (b). If fixed Annuity Payments are chosen, the payment rate for the option chosen, shown on the tables immediately following, reflects at least the minimum guaranteed interest rate (see Schedule - Annuity Period), but may reflect a higher interest rate. If variable Annuity Payments are chosen, the initial Annuity Payment for the option elected reflects the Assumed Interest Rate (AIR) elected (see Schedule - Annuity Period). The Certificate Holder must allocate specified amounts among the Subaccounts available during the Annuity Period. Aetna reserves the right to limit the number of Subaccounts available at one time and to limit the number of Subaccounts the Certificate Holder may select during the Annuity Period. Subject to terms and conditions established by Aetna, the Certificate Holder may transfer all or any portion of the amount allocated to a Subaccount to another Subaccount. The number of Transfers allowed each year is shown on Schedule - Annuity Period. Transfer requests must be submitted as a percentage of the allocation among the Subaccounts. Aetna reserves the right to establish a minimum transfer amount. Transfers will be effective as of the Valuation Date in which Aetna receives a transfer request in good order at its home office. 5.03 Terms of Annuity Payout Options: (a) When payments start, the age of the Annuitant plus the number of years for which payments are guaranteed must not exceed 95. (b) An Annuity Payout Option may not be elected if the first payment would be less than $50 or if the total payments in a year would be less than $250 (less if required by state law). Aetna reserves the right to increase the minimum first Annuity Payment amount and the minimum annual Annuity Payment amount based upon increases reflected in the Consumer Price Index-Urban, (CPI-U) since July 1, 1993. (c) If fixed Annuity Payments are chosen Aetna will use the applicable current rate, based upon actual ages if it will provide higher fixed Annuity Payments. Page 23 (d) For purposes of calculating the first payment of variable or guaranteed fixed Annuity Payments based on guaranteed rates, the primary Annuitant's and secondary Annuitant's adjusted age will be used. The primary Annuitant's and secondary Annuitant's adjusted age is his or her age as of the birthday closest to the Annuity Payments commencement date reduced by one year for commencement dates occurring during the period of time from July 1, 1993 through December 31, 1999. The primary Annuitant's and secondary Annuitant's age will be reduced by two years for commencement dates occurring during the period of time from January 1, 2000 through December 31, 2009. The primary Annuitant's and secondary Annuitant's age will be reduced by one additional year for Annuity commencement dates occurring in each succeeding decade. The attached payment rates for Annuity Payout Options 2 and 3 are based on mortality from 1983 Table a. (e) Assumed Interest Rate (AIR) is the interest rate used to determine the amount of the first payment under variable Annuity Payments as shown on Schedule - Annuity Period. The Separate Account must earn this rate plus enough to cover the mortality and expense risks charges (which may include profit), administrative charges and any other Separate Account fees if future variable Annuity Payments are to remain level, (see Schedule - Annuity Period). (f) Once elected, Annuity Payments cannot be commuted to a lump sum except for variable Annuity Payments under Annuity Payout Option 1. If such a lump sum is requested after the start of payments, it will be treated as a withdrawal and will be subject to any applicable Deferred Sales Charge (see Section I - Deferred Sales Charge). 5.04 Death of Annuitant/Beneficiary: (a) Certificate Holder is the Annuitant: When the Certificate Holder is the Annuitant and the Annuitant dies under Annuity Payout Option 1 or 2(b), or both the primary Annuitant and the secondary Annuitant die under Annuity Payout Option 3(d), any remaining payments will continue to the Beneficiary, or if elected by the Beneficiary and not prohibited by the Certificate Holder in the Beneficiary designation, the present value of any remaining payments will be paid in one sum to the Beneficiary. If Annuity Payout Option 3 has been elected and the Certificate Holder dies, the remaining payments will continue to the successor payee. If no successor payee has been designated, the Beneficiary will be treated as the successor payee. If the Account has joint Certificate Holders, the surviving joint Certificate Holder will be deemed the successor payee. (b) Certificate Holder is not the Annuitant: When the Certificate Holder is not the Annuitant and the Certificate Holder dies, any remaining payments will continue to the successor payee. If no successor payee has been designated, the Beneficiary will be treated as the successor payee. If the Account has joint Certificate Holders, the surviving joint Certificate Holder will be deemed the successor payee. If the Annuitant dies under Annuity Payout Option 1 or 2(b), or both the primary Annuitant and secondary Annuitant die under Annuity Payout Option 3(d), any remaining payments will continue to the Beneficiary, or if elected by the Beneficiary and not prohibited by the Certificate Holder in the Beneficiary designation, the present value of any remaining payments will be paid in one sum to the Beneficiary. If Annuity Payout Option 3 has been elected and the Annuitant dies, the remaining payments will continue to the Certificate Holder. (c) No Beneficiary Named/Surviving: If there is no Beneficiary, the present value of any remaining payments will be paid in one sum to the Certificate Holder, or if the Certificate Holder is not living, then to the Certificate Holder's estate. (d) If the Beneficiary or the successor payee dies while receiving Annuity Payments, any remaining payments will continue to the successor Beneficiary/payee or upon election by the successor Beneficiary/payee, the present value of any remaining payments will be paid in one sum to the successor Beneficiary/payee. If no successor Beneficiary/payee has been designated, the present value of any remaining payments will be paid in one sum to the Beneficiary's/payee's estate. Page 24 (e) The present value will be determined as of the Valuation Date in which proof of death acceptable to Aetna and a request for payment is received at Aetna's home office. 5.05 Annuity Units - Separate Account: The number of annuity units is based on the amount of the first of the variable Annuity Payments which is equal to: (a) The portion of the Account Value applied to pay a variable Annuity Payments (minus any applicable premium tax); divided by (b) 1,000; multiplied by (c) The payment rate on the tables immediately following, for the option chosen. Such amount, or portion, of the variable Annuity Payments will be divided by the appropriate annuity unit value (see Section V - Annuity Unit Value - Separate Account) on the tenth Valuation Date before the due date of the first payment to determine the number of annuity units. The number of annuity units remains fixed. Each future payment is equal to the sum of the products of each annuity unit value multiplied by the appropriate number of annuity units. The annuity unit value on the tenth Valuation Date prior to the due date of the payment is used. 5.06 Annuity Unit Value - Separate Account: For any Valuation Date, an annuity unit value is equal to: (a) The value for the previous Valuation Date; multiplied by (b) The annuity net return factor(s) (see Section V - Net Return Factor(s) - Separate Account) for the Valuation Date; multiplied by (c) A factor to reflect the AIR (see Schedule - Annuity Period). The annuity unit value and the amount of Annuity Payments may go up or down due to investment gain or loss. 5.07 Net Return Factor(s) - Separate Account: The net return factor(s) are used to compute all variable Annuity Payments for any Subaccount. The net return factor for each Subaccount is equal to 1.0000000 plus the net return rate. The net return rate is equal to: (a) The value of the shares of the Subaccount at the end of a Valuation Date; minus (b) The value of the shares of the Subaccount at the start of the Valuation Date; plus or minus (c) Taxes (or reserves for taxes) on the Separate Account (if any); divided by (d) The total value of the annuity units at the start of the Valuation Date; minus (e) A daily charge for mortality and expense risks, which may include profit, a daily administrative charge and any other fees deducted from investments in the Separate Account. A net return rate may be more or less than 0%. The value of a share of the Subaccount is equal to the net assets of the Subaccount divided by the number of shares outstanding. Annuity Payments shall not be changed due to changes in the mortality or expense results or administrative charges. Page 25 OPTION 1: Payments for a Specified Period - -------------------------------------------------------------------------------- Monthly Amount for Each $1,000* Rates for a Fixed Annuity with a 3% Guaranteed Interest Rate - -------------------------------------------------------------------------------- Years Payment Years Payment - -------------------------------------------------------------------------------- 10 $9.61 21 $5.32 11 8.86 22 5.15 12 8.24 23 4.99 13 7.71 24 4.84 14 7.26 25 4.71 15 6.87 26 4.59 16 6.53 27 4.47 17 6.23 28 4.37 18 5.96 29 4.27 19 5.73 30 4.18 20 5.51 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- First Monthly Amount for Each $1,000* Rates for a Variable Annuity with a 3.5% AIR - -------------------------------------------------------------------------------- Years Payment Years Payment - -------------------------------------------------------------------------------- 10 $9.83 21 $5.56 11 9.09 22 5.24 12 8.46 23 5.24 13 7.94 24 5.09 14 7.49 25 4.96 15 7.10 26 4.84 16 6.76 27 4.73 17 6.47 28 4.63 18 6.20 29 4.53 19 5.97 30 4.45 20 5.75 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- First Monthly Amount for Each $1,000* Rates for a Variable Annuity with a 5% AIR - -------------------------------------------------------------------------------- Years Payment Years Payment - -------------------------------------------------------------------------------- 10 $10.51 21 $6.33 11 9.77 22 6.17 12 9.16 23 6.02 13 8.64 24 5.88 14 8.20 25 5.76 15 7.82 26 5.65 16 7.49 27 5.54 17 7.20 28 5.45 18 6.94 29 5.36 19 6.71 30 5.28 20 6.51 - -------------------------------------------------------------------------------- * Net of any applicable premium tax deduction Page 26 Option 2: Life Income Based on the Life of One Annuitant
- ------------------------------------------------------------------------------------------------------------------------------------ Monthly Payment Amount for Each $1,000* Rates for a Fixed Annuity with 3% Guaranteed Interest Rate Option 2(b): Option 2(b): Option 2(b): Option 2(b): Adjusted Option 2(a): payments payments payments payments Age of payments for guaranteed guaranteed guaranteed guaranteed Option 2(c): Annuitant life 5 years 10 years 15 years 20 years Cash Refund Male Female Male Female Male Female Male Female Male Female Male Female 50 $4.27 $3.90 $4.26 $3.90 $4.22 $3.89 $4.17 $3.86 $4.08 $3.82 $4.04 $3.78 51 4.34 3.97 4.33 3.96 4.30 3.95 4.23 3.92 4.14 3.88 4.10 3.84 52 4.43 4.03 4.41 4.03 4.37 4.01 4.30 3.98 4.20 3.93 4.16 3.89 53 4.51 4.10 4.50 4.10 4.45 4.08 4.37 4.04 4.26 3.99 4.23 3.95 54 4.60 4.18 4.59 4.17 4.54 4.15 4.45 4.11 4.32 4.04 4.29 4.01 55 4.70 4.25 4.68 4.25 4.62 4.22 4.53 4.18 4.39 4.11 4.37 4.07 56 4.80 4.34 4.78 4.33 4.72 4.30 4.61 4.25 4.45 4.17 4.44 4.13 57 4.91 4.42 4.89 4.41 4.82 4.38 4.69 4.32 4.51 4.23 4.52 4.20 58 5.03 4.52 5.00 4.51 4.92 4.47 4.78 4.40 4.58 4.30 4.61 4.28 59 5.15 4.61 5.12 4.60 5.03 4.56 4.87 4.48 4.65 4.37 4.69 4.35 60 5.28 4.72 5.25 4.70 5.14 4.66 4.96 4.57 4.71 4.44 4.78 4.43 61 5.43 4.83 5.39 4.81 5.27 4.76 5.06 4.66 4.78 4.51 4.88 4.52 62 5.58 4.95 5.53 4.93 5.39 4.87 5.16 4.75 4.84 4.58 4.98 4.60 63 5.74 5.08 5.69 5.05 5.53 4.98 5.26 4.85 4.90 4.65 5.09 4.70 64 5.91 5.21 5.85 5.18 5.66 5.10 5.36 4.95 4.96 4.72 5.20 4.80 65 6.10 5.36 6.03 5.32 5.81 5.22 5.46 5.05 5.02 4.79 5.31 4.90 66 6.30 5.51 6.21 5.47 5.96 5.36 5.56 5.16 5.08 4.86 5.44 5.01 67 6.51 5.67 6.41 5.63 6.12 5.50 5.66 5.26 5.13 4.93 5.56 5.12 68 6.73 5.85 6.62 5.80 6.28 5.65 5.77 5.37 5.18 5.00 5.70 5.24 69 6.97 6.04 6.84 5.98 6.44 5.80 5.86 5.49 5.23 5.06 5.84 5.37 70 7.23 6.25 7.07 6.18 6.61 5.97 5.96 5.60 5.27 5.12 5.98 5.51 71 7.51 6.47 7.32 6.39 6.79 6.14 6.05 5.71 5.31 5.18 6.14 5.65 72 7.80 6.71 7.58 6.62 6.96 6.32 6.14 5.83 5.34 5.23 6.30 5.80 73 8.12 6.98 7.85 6.86 7.14 6.50 6.23 5.94 5.37 5.28 6.47 5.96 74 8.46 7.26 8.14 7.12 7.32 6.69 6.31 6.04 5.40 5.32 6.65 6.13 75 8.82 7.57 8.45 7.40 7.50 6.89 6.38 6.14 5.42 5.35 6.83 6.31 - ------------------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 27 Option 2: Life Income Based on the Life of One Annuitant
- -------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 3.5% AIR - -------------------------------------------------------------------------------------------------------------------- Option 2(b): Option 2(b): Option 2(b): Option 2(b): Adjusted Option 2(a): payments payments payments payments Age of payments for guaranteed guaranteed guaranteed guaranteed Annuitant life 5 years 10 years 15 years 20 years --------------------------------------------------------------------------------------------------- Male Female Male Female Male Female Male Female Male Female - -------------------------------------------------------------------------------------------------------------------- 50 $4.56 $4.20 $4.55 $4.19 $4.51 $4.18 $4.45 $4.15 $4.36 $4.11 51 4.64 4.26 4.62 4.25 4.58 4.24 4.51 4.21 4.42 4.16 52 4.72 4.32 4.70 4.32 4.66 4.30 4.58 4.26 4.48 4.21 53 4.80 4.39 4.79 4.38 4.74 4.36 4.65 4.32 4.53 4.27 54 4.89 4.46 4.87 4.46 4.82 4.43 4.73 4.39 4.59 4.32 55 4.99 4.54 4.97 4.53 4.91 4.50 4.80 4.46 4.65 4.38 56 5.09 4.62 5.07 4.61 5.00 4.58 4.88 4.53 4.72 4.44 57 5.20 4.71 5.17 4.70 5.10 4.66 4.96 4.60 4.78 4.50 58 5.32 4.80 5.29 4.79 5.20 4.75 5.05 4.68 4.84 4.57 59 5.44 4.90 5.41 4.88 5.31 4.84 5.14 4.76 4.91 4.63 60 5.57 5.00 5.53 4.99 5.42 4.93 5.23 4.84 4.97 4.70 61 5.71 5.11 5.67 5.09 5.54 5.03 5.32 4.93 5.03 4.77 62 5.86 5.23 5.81 5.21 5.66 5.14 5.42 5.02 5.09 4.84 63 6.02 5.36 5.97 5.33 5.79 5.25 5.51 5.11 5.16 4.91 64 6.20 5.49 6.13 5.46 5.93 5.37 5.61 5.21 5.21 4.98 65 6.38 5.64 6.31 5.60 6.07 5.49 5.71 5.31 5.27 5.05 66 6.58 5.79 6.49 5.75 6.22 5.63 5.81 5.41 5.32 5.12 67 6.79 5.95 6.69 5.91 6.38 5.76 5.91 5.52 5.38 5.18 68 7.02 6.13 6.89 6.08 6.53 5.91 6.01 5.63 5.42 5.25 69 7.26 6.32 7.11 6.26 6.70 6.06 6.11 5.74 5.47 5.31 70 7.52 6.53 7.35 6.45 6.86 6.23 6.20 5.85 5.51 5.37 71 7.80 6.75 7.59 6.66 7.03 6.39 6.29 5.96 5.54 5.42 72 8.09 6.99 7.85 6.89 7.21 6.57 6.38 6.07 5.57 5.47 73 8.41 7.26 8.12 7.13 7.38 6.75 6.46 6.17 5.60 5.51 74 8.75 7.54 8.41 7.39 7.55 6.94 6.53 6.28 5.63 5.55 75 9.12 7.85 8.71 7.66 7.73 7.13 6.61 6.38 5.65 5.59 - --------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 28 Option 2: Life Income Based on the Life of One Annuitant
- -------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 5% AIR - -------------------------------------------------------------------------------------------------------------------- Option 2(b): Option 2(b): Option 2(b): Option 2(b): Adjusted Option 2(a): payments payments payments payments Age of payments for guaranteed guaranteed guaranteed guaranteed Annuitant life 5 years 10 years 15 years 20 years --------------------------------------------------------------------------------------------------- Male Female Male Female Male Female Male Female Male Female - -------------------------------------------------------------------------------------------------------------------- 50 $5.48 $5.12 $5.46 $5.11 $5.41 $5.09 $5.34 $5.06 $5.24 $5.01 51 5.55 5.17 5.53 5.17 5.48 5.14 5.40 5.11 5.29 5.05 52 5.63 5.23 5.61 5.23 5.55 5.20 5.46 5.16 5.34 5.10 53 5.71 5.30 5.69 5.29 5.62 5.26 5.53 5.22 5.40 5.15 54 5.80 5.37 5.77 5.36 5.70 5.33 5.60 5.27 5.45 5.20 55 5.89 5.44 5.86 5.43 5.79 5.39 5.67 5.34 5.51 5.25 56 5.99 5.52 5.96 5.51 5.87 5.47 5.74 5.40 5.56 5.31 57 6.10 5.60 6.06 5.59 5.97 5.54 5.82 5.47 5.62 5.37 58 6.21 5.69 6.17 5.67 6.06 5.62 5.90 5.54 5.68 5.42 59 6.33 5.79 6.29 5.77 6.17 5.71 5.98 5.61 5.74 5.48 60 6.46 5.89 6.41 5.87 6.28 5.80 6.06 5.69 5.79 5.55 61 6.60 6.00 6.55 5.97 6.39 5.90 6.15 5.77 5.85 5.61 62 6.75 6.11 6.69 6.08 6.51 6.00 6.24 5.86 5.91 5.67 63 6.91 6.23 6.84 6.20 6.64 6.10 6.33 5.95 5.96 5.73 64 7.09 6.37 7.00 6.33 6.77 6.22 6.42 6.04 6.02 5.80 65 7.27 6.51 7.18 6.46 6.91 6.34 6.52 6.13 6.07 5.86 66 7.47 6.66 7.36 6.61 7.05 6.46 6.61 6.23 6.12 5.92 67 7.68 6.82 7.55 6.76 7.20 6.60 6.70 6.33 6.16 5.99 68 7.91 7.00 7.76 6.93 7.35 6.74 6.80 6.43 6.21 6.04 69 8.15 7.19 7.98 7.11 7.51 6.89 6.89 6.54 6.25 6.10 70 8.41 7.39 8.21 7.30 7.67 7.04 6.97 6.64 6.28 6.15 71 8.69 7.62 8.45 7.51 7.83 7.21 7.06 6.74 6.32 6.20 72 8.99 7.86 8.70 7.73 8.00 7.38 7.14 6.85 6.35 6.25 73 9.31 8.12 8.97 7.97 8.16 7.55 7.21 6.95 6.37 6.29 74 9.65 8.41 9.26 8.23 8.33 7.73 7.29 7.04 6.39 6.33 75 10.02 8.72 9.55 8.50 8.50 7.92 7.35 7.14 6.41 6.36 - --------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 29 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------------------ Monthly Payment Amount for Each $1,000* Rates for a Fixed Annuity with 3% Guaranteed Interest Rate Primary Annuitant is Female and Secondary Annuitant is Male - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted Ages - ---------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) Option 3(f) - ------------------------------------------------------------------------------------------------------------------------------------ 55 50 $3.75 $4.07 $4.26 $3.75 $3.98 $3.72 55 55 3.88 4.25 4.47 3.87 4.06 3.85 55 60 3.99 4.44 4.71 3.98 4.12 3.94 60 55 4.06 4.47 4.71 4.06 4.37 4.02 60 60 4.24 4.71 4.99 4.23 4.47 4.17 60 65 4.38 4.97 5.32 4.38 4.54 4.29 65 60 4.49 5.01 5.32 4.48 4.89 4.39 65 65 4.72 5.33 5.70 4.71 5.02 4.59 65 70 4.93 5.68 6.15 4.91 5.14 4.74 70 65 5.07 5.75 6.17 5.05 5.60 4.87 70 70 5.40 6.21 6.70 5.36 5.79 5.13 70 75 5.69 6.68 7.32 5.62 5.96 5.29 75 70 5.89 6.82 7.40 5.81 6.63 5.48 75 75 6.37 7.45 8.15 6.23 6.92 5.78 75 80 6.78 8.11 8.99 6.54 7.15 5.93 - ------------------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 30 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 3.5% AIR Primary Annuitant Is Female and Secondary Annuitant Is Male - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $4.03 $4.36 $4.55 $4.03 $4.27 55 55 4.16 4.54 4.76 4.15 4.34 55 60 4.27 4.73 5.00 4.26 4.40 60 55 4.34 4.76 5.00 4.34 4.65 60 60 4.51 4.99 5.27 4.50 4.74 60 65 4.66 5.25 5.61 4.65 4.82 65 60 4.76 5.29 5.60 4.75 5.16 65 65 4.99 5.61 5.99 4.98 5.30 65 70 5.19 5.97 6.44 5.17 5.41 70 65 5.34 6.03 6.46 5.31 5.88 70 70 5.67 6.49 6.99 5.62 6.07 70 75 5.95 6.96 7.61 5.87 6.23 75 70 6.16 7.10 7.68 6.07 6.90 75 75 6.64 7.73 8.43 6.48 7.19 75 80 7.04 8.39 9.29 6.79 7.42 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 31 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 5% AIR Primary Annuitant is Female and Secondary Annuitant is Male - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $4.93 $5.27 $5.46 $4.93 $5.17 55 55 5.04 5.44 5.66 5.04 5.23 55 60 5.15 5.63 5.91 5.14 5.29 60 55 5.21 5.65 5.89 5.21 5.53 60 60 5.37 5.87 6.16 5.37 5.62 60 65 5.52 6.14 6.51 5.51 5.70 65 60 5.61 6.16 6.49 5.60 6.03 65 65 5.83 6.49 6.87 5.82 6.15 65 70 6.04 6.84 7.34 6.00 6.27 70 65 6.17 6.90 7.33 6.13 6.73 70 70 6.49 7.35 7.87 6.44 6.91 70 75 6.77 7.84 8.51 6.68 7.07 75 70 6.97 7.96 8.56 6.87 7.75 75 75 7.45 8.60 9.33 7.27 8.04 75 80 7.86 9.28 10.20 7.57 8.27 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 32 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------------------ Monthly Payment Amount for Each $1,000* Rates for a Fixed Annuity with 3% Guaranteed Interest Rate Primary Annuitant is Male and Secondary Annuitant is Female - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted Ages - ---------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) Option 3(f) - ------------------------------------------------------------------------------------------------------------------------------------ 55 50 $3.69 $4.05 $4.27 $3.69 $4.13 $3.67 55 55 3.88 4.25 4.47 3.87 4.25 3.85 55 60 4.06 4.47 4.71 4.06 4.36 4.02 60 55 3.99 4.44 4.71 3.98 4.55 3.94 60 60 4.24 4.71 4.99 4.23 4.70 4.17 60 65 4.49 5.01 5.32 4.48 4.85 4.39 65 60 4.38 4.97 5.32 4.38 5.10 4.29 65 65 4.72 5.33 5.70 4.71 5.32 4.59 65 70 5.07 5.75 6.17 5.05 5.54 4.87 70 65 4.93 5.68 6.15 4.91 5.86 4.74 70 70 5.40 6.21 6.70 5.36 6.18 5.13 70 75 5.89 6.82 7.40 5.81 6.49 5.48 75 70 5.69 6.68 7.32 5.62 6.92 5.29 75 75 6.37 7.45 8.15 6.23 7.40 5.78 75 80 7.07 8.34 9.16 6.78 7.85 6.17 - ------------------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 33 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 3.5% AIR Primary Annuitant is Male and Secondary Annuitant is Female - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $3.97 $4.35 $4.56 $3.97 $4.42 55 55 4.16 4.54 4.76 4.15 4.54 55 60 4.34 4.76 5.00 4.34 4.64 60 55 4.27 4.73 5.00 4.26 4.83 60 60 4.51 4.99 5.27 4.50 4.98 60 65 4.76 5.29 5.60 4.75 5.13 65 60 4.66 5.25 5.61 4.65 5.39 65 65 4.99 5.61 5.99 4.98 5.60 65 70 5.34 6.03 6.46 5.31 5.81 70 65 5.19 5.97 6.44 5.17 6.14 70 70 5.67 6.49 6.99 5.62 6.47 70 75 6.16 7.10 7.68 6.07 6.77 75 70 5.95 6.96 7.61 5.87 7.20 75 75 6.64 7.73 8.43 6.48 7.68 75 80 7.33 8.62 9.45 7.02 8.13 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 34 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity with 5% AIR Primary Annuitant Is Male and Secondary Annuitant is Female - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed Primary Secondary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $4.88 $5.26 $5.48 $4.88 $5.34 55 55 5.04 5.44 5.66 5.04 5.43 55 60 5.21 5.65 5.89 5.21 5.53 60 55 5.15 5.63 5.91 5.14 5.73 60 60 5.37 5.87 6.16 5.37 5.86 60 65 5.61 6.16 6.49 5.60 6.01 65 60 5.52 6.14 6.51 5.51 6.28 65 65 5.83 6.49 6.87 5.82 6.47 65 70 6.17 6.90 7.33 6.13 6.67 70 65 6.04 6.84 7.34 6.00 7.03 70 70 6.49 7.35 7.87 6.44 7.33 70 75 6.97 7.96 8.56 6.87 7.62 75 70 6.77 7.84 8.51 6.68 8.08 75 75 7.45 8.60 9.33 7.27 8.55 75 80 8.14 9.49 10.35 7.80 8.98 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction Page 35 - -------------------------------------------------------------------------------- Aetna Life Insurance and Annuity Company Home Office: 151 Farmington Avenue Hartford, Connecticut 06156 (800) 238-6219 Group Variable, Fixed, or Combination Annuity Certificate Nonparticipating - -------------------------------------------------------------------------------- ALL PAYMENTS AND VALUES PROVIDED BY THE GROUP CONTRACT, WHEN BASED ON INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT. AMOUNTS ALLOCATED TO THE GUARANTEED ACCOUNT, IF WITHDRAWN BEFORE THE GUARANTEED TERM MATURITY DATE, MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT. THE MARKET VALUE ADJUSTMENT MAY RESULT IN AN INCREASE OR A DECREASE IN THE ACCOUNT VALUE. THE MARKET VALUE ADJUSTMENT FORMULA DOES NOT APPLY TO A GUARANTEED TERM AT THE TIME OF ITS MATURITY. GMC-VA-99(PB) EX-99.B.4.3 4 ENDORSEMENT EM-ROTH-99(PB) EXHIBIT 99-B.4.3 Aetna Life Insurance and Annuity Company ENDORSEMENT The Contract and Certificate, if applicable, are hereby endorsed to meet the qualification requirements for a Roth Individual Retirement Annuity under Internal Revenue Code ("Code") Section 408A. The following provisions apply and, in the case of a conflict with any provision in the Contract, this endorsement controls. Holder. If this Endorsement is issued with an Individual Contract then "Holder" will mean "Contract Holder". If this Endorsement is issued with a Group Contract then "Holder" will mean "Certificate Holder". The Holder and the Annuitant must be the same person. Joint Holders are not permitted. Nontransferable/Nonforfeitable. The Contract is nontransferable. The Holder may not sell, assign, transfer, pledge or use as collateral for a loan or as security for the performance of an obligation or for any other purpose, his or her interest in the Contract to any person other than the issuer of the Contract or to a spouse incident to a divorce under the provisions of Code Section 408(d)(6). The Holder's entire interest in the Contract is nonforfeitable. Exclusive Benefit. The Account is established for the exclusive benefit of the Holder or his or her Beneficiary(ies). Contributions. All contributions must be in cash. Except in the case of a qualified rollover contribution as defined in Code Section 408A(e), the total contributions shall not exceed $2,000 for any taxable year. Aetna reserves the right to not accept a rollover contribution to an existing Contract. Distributions. The distribution rules of Code Section 401(a)(9)(A) do not apply. Any periodic payments will be paid only to the Holder. Section IV - Options Available to Beneficiary is deleted in its entirety. The death benefit amount is determined in accordance with the provisions of Section IV - Death Benefit and Section III - Market Value Adjustment. At the death of the Holder: (a) If the Holder dies on or after the date distribution of his or her interest has begun, the remaining portion of such interest, if any, will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Holder's death. (b) If the Holder dies before distribution of his or her interest begins, the death benefit payable to the Beneficiary will be distributed no later than December 31 of the calendar year which contains the fifth anniversary of the date of the Holder's death, except to the extent that an election is made to receive a distribution in accordance with (i) or (ii) below. (i) Distributions to the Beneficiary may be made in installments over the life of the Beneficiary or over a period not extending beyond the life expectancy of the Beneficiary, commencing no later than December 31 of the calendar year immediately following the calendar year in which the Holder died. (ii) If the Beneficiary is the Holder's surviving spouse, and distributions are to be made in accordance with (i) above, distributions must begin on or before the later of December 31 of the calendar year immediately following the calendar year in which the Holder died or December 31 of the calendar year in which the Holder would have attained age 70 1/2. If the Holder dies before Annuity Payments begin, a spousal Beneficiary may elect an Annuity Payout Option, a Systematic Distribution Option, a lump sum payment or to treat the Account as his or her own IRA. The election to treat the Account as his or her own IRA will be deemed to have been made if such surviving spouse makes a rollover to or from such Account, or fails to elect to receive a distribution in accordance with (b) above. Life expectancy is computed by use of the expected return multiples in Table V and VI of Section 1.72-9 of the Income Tax Regulations. Life expectancies for distributions under an Annuity option may not be recalculated. EM-ROTH-99(PB) Annual Reports. Aetna will furnish annual calendar year reports concerning the status of the Holder's Account. Termination of Account. Upon 90 days written notice to the Holder, Aetna may terminate the Holder's Account if no Purchase Payment(s) have been received for two full consecutive Account Years and the paid-up Annuity Payments at maturity would be less than $20 per month. Right to Cancel. The Holder may cancel the Contract or Certificate within 10 days of receiving it by returning it to Aetna or to the person from whom it was purchased. Within seven days from the cancellation request, Aetna will return all the Holder's Purchase Payment(s). If the source of the Purchase Payment(s) was a rollover from a contract issued by Aetna or one of its affiliates in which the deferred sales charge was waived or reduced, then the Purchase Payment(s) will be restored to the predecessor contract. Section III - Deferred Sales Charge is amended to add the following item (I). "(I) As a Purchase Payment for a Roth Individual Retirement Annuity, issued by Aetna or one of its affiliates, that gives credit for time spent in the predecessor contract in applying the deferred sales charge. The first paragraph of Section III - Deferred Sales Charge is deleted and replaced with the following: "The Deferred Sales Charge only applies to the Purchase Payment(s) portion surrendered (see Schedule - Accumulation Period)". Endorsed and made a part of the Contract and Certificate, if applicable, as of the Account Effective Date. /s/ Thomas J. McInerney President Aetna Life Insurance and Annuity Company EM-ROTH-99(PB) EX-99.B.4.4 5 ENDORSEMENT EM-IRA-99(PB) EXHIBIT 99-B.4.4 Aetna Life Insurance and Annuity Company ENDORSEMENT The Contract and Certificate, if applicable, are hereby endorsed to meet the qualification requirements for a Individual Retirement Annuity under Internal Revenue Code ("Code") Section 408(b). The following provisions apply and, in the case of a conflict with any provision in the Contract, this endorsement controls. Holder. If this Endorsement is issued with an Individual Contract then "Holder" will mean "Contract Holder". If this Endorsement is issued with a Group Contract then "Holder" will mean "Certificate Holder". The Holder and the Annuitant must be the same person. Joint Holders are not permitted. Nontransferable/Nonforfeitable. The Contract is nontransferable. The Holder may not sell, assign, transfer, pledge or use as collateral for a loan or as security for the performance of an obligation or for any other purpose, his or her interest in the Contract to any person other than the issuer of the Contract or to a spouse incident to a divorce under the provisions of Code Section 408(d)(6). The Holder's entire interest in the Contract is nonforfeitable. Exclusive Benefit. The Account is established for the exclusive benefit of the Holder or his or her Beneficiary(ies). Contributions. All contributions must be in cash. Except in the case of a qualified rollover contribution as permitted by Code Section 402(c), 403(a)(4), 403(b)(8), or 408(d)(3) or a contribution made in accordance with the terms of a Simplified Employee Pension (SEP) as described in Code Section 408(k), the total contributions shall not exceed $2,000 for any taxable year. Distributions. All distributions will be made in accordance with the requirements of Code Section 401(a)(9). Any periodic payments will be paid only to the Holder. Required Beginning Date. No later than the April 1 following the calendar year in which the Holder attains age 70 1/2, the Holder may elect to receive the entire interest in a lump sum, or may elect to begin periodic payments under a systematic distribution option which must be distributed over: (a) The life of the Holder, or the lives of the Holder and his or her designated Beneficiary, or (b) A period certain not extending beyond the life expectancy of the Holder or the joint and last survivor expectancy of the Holder and his or her designated Beneficiary. Periodic payments must be made at intervals of no longer than one year. In addition, payments made as an annuity must be either nonincreasing or they may increase only as provided in Section 1.401(a)(9)-1 of the Proposed Income Tax Regulations. Life expectancy is computed by use of the expected return multiples in Tables V and VI of section 1.72-9 of the Income Tax Regulations. Life expectancy for distributions under an Annuity Payout Option may not be recalculated. Payment of Death Benefit. Section IV - Options Available to Beneficiary is deleted in its entirety. If the Holder has specified a form of payment to the Beneficiary, the death benefit will be paid as elected by the Holder in the Beneficiary designation, to the extent permitted by code Section 401(a)(9). If the Holder has not specified a form of payment, the Beneficiary may elect payment of the death benefit amount as provided in this Section. The death benefit amount is determined in accordance with the provisions of Section IV - Death Benefit and Section III - Market Value Adjustment. At the death of the Holder: (a) If the Holder dies on or after the date distribution of his or her interest has begun, the remaining portion of such interest, if any, will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Certificate Holder's death. (b) If the Holder dies before distribution of his or her interest begins, the death benefit payable to the Beneficiary will be distributed no later than December 31 of the calendar year which contains the fifth anniversary of the date of the Holder's death, except to the extent that an election is made to receive a distribution in accordance with (i) or (ii) below. EM-IRA-99(PB) (i) Distributions to the Beneficiary may be made in installments over the life of the Beneficiary or over a period not extending beyond the life expectancy of the Beneficiary, commencing no later than December 31 of the calendar year immediately following the calendar year in which the Holder died. (ii) If the Beneficiary is the Holder's surviving spouse, and distributions are to be made in accordance with (i) above, distributions must begin on or before the later of December 31 of the calendar year immediately following the calendar year in which the Holder died or December 31 of the calendar year in which the Holder would have attained age 70 1/2. If the Holder dies before Annuity Payments begin, a spousal Beneficiary may elect an Annuity Payout Option, a Systematic Distribution Option, a lump sum payment or to treat the Account as his or her own IRA. The election to treat the Account as his or her own IRA will be deemed to have been made if such surviving spouse makes a rollover to or from such Account, or fails to elect to receive a distribution in accordance with (b) above. Life expectancy is computed by use of the expected return multiples in Tables V and VI of Section 1.72-9 of the Income Tax Regulations. Life expectancies for distributions under an Annuity Payout Option may not be recalculated. Distributions under this section are considered to have begun if distributions are made on account of the Holder reaching the required beginning date or if prior to the required beginning date distributions irrevocably commence over a period permitted and in an Annuity Payout Option acceptable under Section 1.401(a)(9) of the Proposed Income Tax Regulations. Annual Reports. Aetna will furnish annual calendar year reports concerning the status of the Holder's Account. Termination of Account. Upon 90 days written notice to the Holder, Aetna may terminate the Holder's Account if no Purchase Payment(s) have been received for two full consecutive Account years and the paid-up Annuity Payments at maturity would be less than $20 per month. Right to Cancel. The Holder may cancel the Certificate or Contract, a s applicable, within 10 days of receiving it by returning it to Aetna or to the person from whom it was purchased. Within seven days from the cancellation request, Aetna will return all the Certificate Holder's Purchase Payment(s). If the source of the Purchase Payment(s) was a rollover from a contract issued by Aetna or one of its affiliates in which the deferred sales charge was waived or reduced, then the Purchase Payment(s) will be restored to the predecessor contract. The first paragraph of Section III - Deferred Sales Charge is amended to add the following item(I) "(I)As a Purchase Payment for a Roth Individual Retirement Annuity, issued by Aetna or one of its affiliates, that gives credit for time spent in the predecessor contract in applying the deferred sales charge." Endorsed and made a part of the Contract and Certificate, if applicable, as of the Account Effective Date. /s/ Thomas J. McInerney President Aetna Life Insurance and Annuity Company EM-IRA-99(PB) EX-99.B.4.5 6 ENDORSEMENT EM-TDA-99(PB) EXHIBIT 99-B.4.5 Aetna Life Insurance and Annuity Company ENDORSEMENT The Contract and Certificate, if applicable, are endorsed in order to meet the qualification requirements of Section 403(b) of the Internal Revenue Code ("Code") and, if applicable, the Employee Retirement Income Security Act (ERISA). The following provisions apply and, in the case of a conflict with any provision in the Contract, this endorsement controls. Nontransferable. The Contract is nontransferable in accordance with Code Section 401(g). The Contract or any Account may not be sold, assigned, transferred or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose, except pursuant to a qualified domestic relations order as described in Code Section 414(p). Holder. If this Endorsement is issued with an Individual Contract then "Holder" will mean "Contract Holder". If this Endorsement is issued with a Group Contract then "Holder" will mean "Certificate Holder". The Holder must be the Participant under a Code Section 403(b) Tax Deferred Annuity program. Participant. The Participant is the participant under the Code Section 403(b) Tax Deferred Annuity program on whose behalf the Account is maintained. Annuitant. The Annuitant is the Participant. Beneficiary. The Participant shall name a Beneficiary. If the 403(b) program is subject to ERISA and the Participant is married, the spouse must be named as Beneficiary of 50% of the Account Value. However, if the Participant has attained age 35, an alternate Beneficiary may be named for this portion of the Account provided the Holder furnishes to Aetna a waiver and spousal consent satisfying the requirements of ERISA Section 205. Any Beneficiary may be named for the balance of the Account without the consent of the spouse. Contributions. The Contract will only accept amounts rolled over or transferred from (1) another contract qualified under Code Section 403(b), or (2) from an Individual Retirement Account or Annuity qualified under Code Sections 408(a) or 408(b) that contains only amounts previously rolled over from a 403(b) Tax Deferred Annuity. Withdrawal Restrictions. In accordance with Code Section 403(b)(11), withdrawals attributable to Purchase Payments made pursuant to a salary reduction agreement may be made only after the Participant attains age 59 1/2, separates from service, dies, becomes totally and permanently disabled (as defined in Code Section 72(m)(7)) or in the case of hardship (as defined in Treasury Regulations). In the case of hardship, only Purchase Payments, and not the earnings, may be withdrawn. These restrictions do not apply to amounts held in a 403(b) Tax Deferred Annuity program as of December 31, 1988. The Contract will not accept transfers from a Code Section 403(b)(7) custodial account. Distributions. All distributions from the Account must satisfy the minimum distribution rules set forth in Code Section 401(a)(9). Any periodic payments will be paid only to the Holder. Required Beginning Date. Distributions must generally begin no later than April 1 following the year the Participant attains age 70 1/2 or retires, if later. The entire value of the Account must be distributed, or distribution must be made over the life of the Participant, the joint lives of the Participant and Beneficiary or over a period that does not extend beyond the life expectancy of the Participant or the joint life expectancies of the Participant and Beneficiary. If Aetna maintains separate records of the value as of December 31, 1986, this value is not required to be taken before December 31 of the year the Participant attains age 75, or retires if later. If the Certificate Holder takes any distribution other than the minimum distribution required under Code Section 401(a)(9), Aetna will reduce the December 31, 1986 value by the excess amount taken. EM-TDA-99(PB) Payment of Death Benefit. Section IV - Options Available to Beneficiary is deleted in its entirety. If the Participant has specified a form of payment to the Beneficiary, the death benefit will be paid as elected by the Participant in the Beneficiary designation, to the extent permitted by Code Section 401(a)(9). If the Participant has not specified a form of payment, the Beneficiary must elect payment of the death benefit amount, determined under Section IV - Death Benefit Options and Section III Market Value Adjustment, in accordance with the minimum distribution requirements of Code Section 401(a)(9). The Beneficiary may elect a lump sum payment, or periodic payments under a Systematic Distribution Option or any of the Annuity Payout Options provided the election satisfies the Code minimum distribution rules. The Beneficiary may make any investment choices permitted under the Contract while the Contract remains in the Accumulation Period. Death Before Distributions Begin. If the Participant dies before distributions begin in accordance with the provisions of Code Section 401(a)(9), the entire value of the Account must be distributed by December 31 of the calendar year containing the fifth anniversary of the date of the Participant's death. Alternatively, if the Participant has a designated Beneficiary, payments may be made over the life of the Beneficiary or over a period not extending beyond the life expectancy of the Beneficiary provided distribution to a non-spouse Beneficiary begins by December 31 of the calendar year following the calendar year of the Participant's death. For a spousal Beneficiary, such payments must begin by the later of December 31 of the calendar year following the calendar year of the Participant's death or December 31 of the calendar year in which the Participant would have attained age 70 1/2. Death After Distributions Begin. If the Participant dies after distributions begin in accordance with the provisions of Code Section 401(a)(9), payments to the Beneficiary must be made at least as rapidly as the method of distribution in effect at the time of the Participant's death. If the minimum distribution requirements have been met by partial withdrawals based on the Participant's life expectancy or the joint life expectancies of the Participant and Beneficiary, death benefit payments to the Beneficiary must also satisfy any additional requirements of Code Section 401(a)(9). Spousal Consent. If the Account is subject to ERISA and the Participant does not die before payments begin, distribution to a married Participant must be in the form of a "Qualified Joint and Survivor Annuity" unless the Holder furnishes to Aetna a waiver and spousal consent satisfying the requirements of ERISA Section 205. A "Qualified Joint and Survivor Annuity" is an Annuity Payout Option payable for the joint lives of the Participant and spouse with at least 50% of the payment to continue to the surviving spouse after the Participant's death. If the Account is subject to ERISA, the Annuitant dies before the payments begin and the Beneficiary is not the current spouse, Aetna will pay 50% of the death benefit to the current spouse in the form of a "Qualified Preretirement Survivor Annuity" unless (1) a waiver and spousal consent, satisfying the requirements of ERISA Section 205, is furnished to Aetna, or (2) a prior spouse is entitled to all or a portion of the death benefit under a qualified domestic relations order as described in Code Section 414(p). A "Qualified Preretirement Survivor Annuity" is an annuity payable for the life of the surviving spouse which can be purchased by 50% of the Account's Adjusted Current Value. Annuity Purchase Rates. The gender-based annuity purchase rates following Section V do not apply. The tables provided in Addendum B should be used with this endorsement. Endorsed and made a part of the Contract and the Certificate, if applicable, as of the Account Effective Date or when the endorsement is approved, whichever is later. /s/ Thomas J. McInerney President Aetna Life Insurance and Annuity Company 2 OPTION 1: Payments for a Specified Period - -------------------------------------------------------------------------------- Monthly Amount for Each $1,000* Rates for a Fixed Annuity Payment with a 3% Guaranteed Interest Rate - -------------------------------------------------------------------------------- Years Payment Years Payment - -------------------------------------------------------------------------------- 10 $9.61 21 $5.32 11 8.86 22 5.15 12 8.24 23 4.99 13 7.71 24 4.84 14 7.26 25 4.71 15 6.87 26 4.59 16 6.53 27 4.47 17 6.23 28 4.37 18 5.96 29 4.27 19 5.73 30 4.18 20 5.51 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- First Monthly Amount for Each $1,000* Rates for a Variable Annuity Payment with a 3.5% Assumed Interest Rate - -------------------------------------------------------------------------------- Years Payment Years Payment - -------------------------------------------------------------------------------- 10 $9.83 21 $5.56 11 9.09 22 5.39 12 8.46 23 5.24 13 7.94 24 5.09 14 7.49 25 4.96 15 7.10 26 4.84 16 6.76 27 4.73 17 6.47 28 4.63 18 6.20 29 4.53 19 5.97 30 4.45 20 5.75 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- First Monthly Amount for Each $1,000* Rates for a Variable Annuity Payment with a 5% Assumed Interest Rate - -------------------------------------------------------------------------------- Years Payment Years Payment - -------------------------------------------------------------------------------- 10 10.51 21 6.33 11 9.77 22 6.17 12 9.16 23 6.02 13 8.64 24 5.88 14 8.20 25 5.76 15 7.82 26 5.65 16 7.49 27 5.54 17 7.20 28 5.45 18 6.94 29 5.36 19 6.71 30 5.28 20 6.51 - -------------------------------------------------------------------------------- * Net of any applicable premium tax deduction 3 Option 2: Life Income Based on the Life of One Annuitant
- ------------------------------------------------------------------------------------------------------------------------------------ Monthly Payment Amount for Each $1,000* Rates for a Fixed Annuity Payment with 3% Guaranteed Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ Option 2(b): Option 2(b): Option 2(b): Option 2(b): Adjusted Option 2(a): payments payments payments payments Age of payments for guaranteed guaranteed guaranteed guaranteed Option 2(c): Annuitant life 5 years 10 years 15 years 20 years Cash Refund - ------------------------------------------------------------------------------------------------------------------------------------ 50 $4.05 $4.05 $4.03 $3.99 $3.93 $3.89 51 4.12 4.11 4.09 4.05 3.99 3.94 52 4.19 4.19 4.16 4.11 4.04 4.00 53 4.27 4.26 4.23 4.18 4.10 4.06 54 4.35 4.34 4.31 4.25 4.16 4.12 55 4.44 4.42 4.39 4.32 4.22 4.19 56 4.53 4.51 4.47 4.40 4.29 4.26 57 4.62 4.61 4.56 4.48 4.35 4.33 58 4.72 4.71 4.65 4.56 4.42 4.41 59 4.83 4.81 4.75 4.64 4.49 4.49 60 4.95 4.93 4.86 4.73 4.55 4.57 61 5.07 5.05 4.97 4.83 4.62 4.66 62 5.20 5.17 5.08 4.92 4.69 4.76 63 5.34 5.31 5.20 5.02 4.76 4.85 64 5.49 5.45 5.33 5.12 4.83 4.96 65 5.65 5.61 5.47 5.22 4.89 5.06 66 5.82 5.77 5.61 5.33 4.96 5.18 67 6.01 5.94 5.75 5.44 5.02 5.30 68 6.20 6.13 5.91 5.54 5.08 5.42 69 6.41 6.33 6.07 5.65 5.14 5.56 70 6.64 6.54 6.23 5.76 5.19 5.70 71 6.88 6.76 6.41 5.86 5.24 5.84 72 7.14 7.00 6.59 5.97 5.28 6.00 73 7.43 7.26 6.77 6.06 5.32 6.16 74 7.73 7.53 6.96 6.16 5.35 6.33 75 8.06 7.82 7.14 6.25 5.38 6.51 - ------------------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction 4 Option 2: Life Income Based on the Life of One Annuitant
- ------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity Payment with 3.5% Assumed Interest Rate - ------------------------------------------------------------------------------------------------------------------- Option 2(b): Option 2(b): Option 2(b): Option 2(b): Adjusted Option 2(a): payments payments payments payments Age of payments for guaranteed guaranteed guaranteed guaranteed Annuitant life 5 years 10 years 15 years 20 years - ------------------------------------------------------------------------------------------------------------------- 50 $4.34 $4.34 $4.31 $4.27 $4.22 51 4.41 4.40 4.38 4.33 4.27 52 4.48 4.47 4.45 4.40 4.32 53 4.56 4.55 4.52 4.46 4.38 54 4.64 4.63 4.59 4.53 4.44 55 4.72 4.71 4.67 4.60 4.50 56 4.81 4.80 4.75 4.67 4.56 57 4.91 4.89 4.84 4.75 4.62 58 5.01 4.99 4.93 4.83 4.69 59 5.12 5.10 5.03 4.92 4.75 60 5.23 5.21 5.13 5.00 4.82 61 5.36 5.33 5.24 5.09 4.88 62 5.49 5.45 5.35 5.19 4.95 63 5.63 5.59 5.47 5.28 5.02 64 5.78 5.73 5.60 5.38 5.08 65 5.94 5.89 5.73 5.48 5.15 66 6.11 6.05 5.87 5.58 5.21 67 6.29 6.22 6.02 5.69 5.27 68 6.49 6.41 6.17 5.79 5.33 69 6.70 6.60 6.33 5.90 5.38 70 6.92 6.81 6.49 6.00 5.43 71 7.17 7.04 6.66 6.10 5.48 72 7.43 7.27 6.84 6.20 5.52 73 7.71 7.53 7.02 6.30 5.55 74 8.02 7.80 7.20 6.39 5.59 75 8.35 8.08 7.38 6.48 5.62 - -------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction 5 Option 2: Life Income Based on the Life of One Annuitant
- ------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity Payment with 5% Assumed Interest Rate - ------------------------------------------------------------------------------------------------------------------- Option 2(b): Option 2(b): Option 2(b): Option 2(b): Adjusted Option 2(a): payments payments payments payments Age of payments for guaranteed guaranteed guaranteed guaranteed Annuitant life 5 years 10 years 15 years 20 years - ------------------------------------------------------------------------------------------------------------------- 50 $5.26 $5.25 $5.22 $5.17 $5.11 51 5.33 5.32 5.28 5.23 5.15 52 5.40 5.38 5.34 5.29 5.20 53 5.47 5.45 5.41 5.35 5.26 54 5.54 5.53 5.48 5.41 5.31 55 5.63 5.61 5.56 5.47 5.36 56 5.71 5.69 5.63 5.54 5.42 57 5.80 5.78 5.72 5.61 5.47 58 5.90 5.88 5.81 5.69 5.53 59 6.01 5.98 5.90 5.77 5.59 60 6.12 6.09 6.00 5.85 5.65 61 6.24 6.21 6.10 5.93 5.71 62 6.37 6.33 6.21 6.02 5.77 63 6.51 6.46 6.33 6.11 5.83 64 6.66 6.60 6.45 6.20 5.89 65 6.82 6.75 6.57 6.30 5.95 66 6.99 6.91 6.71 6.39 6.01 67 7.17 7.08 6.85 6.49 6.06 68 7.36 7.27 6.99 6.59 6.12 69 7.57 7.46 7.15 6.69 6.17 70 7.80 7.67 7.30 6.78 6.21 71 8.05 7.89 7.47 6.88 6.25 72 8.31 8.13 7.64 6.97 6.29 73 8.59 8.38 7.81 7.06 6.33 74 8.90 8.64 7.99 7.15 6.36 75 9.23 8.93 8.16 7.23 6.38 - -------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction 6 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------------------ First Monthly Payment Amount for Each $1,000* Rates for a Fixed Annuity Payment with 3.0% Guaranteed Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted Ages - --------------------------- payments Second- guaranteed Primary ary 10 years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) Option 3(f) - ------------------------------------------------------------------------------------------------------------------------------------ 55 50 $3.69 $4.05 $4.27 $3.69 $4.03 $3.67 55 55 3.88 4.26 4.47 3.87 4.14 3.85 55 60 3.99 4.44 4.71 3.98 4.20 3.94 60 55 3.99 4.44 4.71 3.98 4.42 3.94 60 60 4.24 4.71 4.99 4.23 4.57 4.17 60 65 4.38 4.97 5.32 4.38 4.65 4.29 65 60 4.38 4.97 5.32 4.38 4.93 4.29 65 65 4.72 5.33 5.70 4.71 5.14 4.59 65 70 4.93 5.68 6.15 4.91 5.27 4.74 70 65 4.93 5.68 6.15 4.91 5.66 4.74 70 70 5.40 6.21 6.70 5.36 5.96 5.13 70 75 5.69 6.68 7.32 5.62 6.13 5.29 75 70 5.69 6.68 7.32 5.62 6.67 5.29 75 75 6.37 7.45 8.15 6.23 7.12 5.78 75 80 6.78 8.11 8.99 6.54 7.36 5.93 - ------------------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction 7 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity Payment with 3.5% Assumed Interest Rate - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed 10 Primary Secondary years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $3.97 $4.35 $4.56 $3.97 $4.31 55 55 4.16 4.54 4.76 4.15 4.42 55 60 4.27 4.73 5.00 4.26 4.48 60 55 4.27 4.73 5.00 4.26 4.70 60 60 4.51 4.99 5.27 4.50 4.84 60 65 4.66 5.25 5.61 4.65 4.93 65 60 4.66 5.25 5.61 4.65 5.22 65 65 4.99 5.61 5.99 4.98 5.42 65 70 5.19 5.97 6.44 5.17 5.54 70 65 5.19 5.97 6.44 5.17 5.93 70 70 5.67 6.49 6.99 5.62 6.23 70 75 5.95 6.96 7.61 5.87 6.40 75 70 5.95 6.96 7.61 5.87 6.95 75 75 6.64 7.73 8.43 6.48 7.40 75 80 7.04 8.39 9.29 6.79 7.64 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction 8 Option 3: Life Income Based on the Lives of Two Annuitants
- ------------------------------------------------------------------------------------------------------------------------- First Monthly Payment Amount for Each $1,000* Rates for a Variable Annuity Payment with 5% Assumed Interest Rate - ------------------------------------------------------------------------------------------------------------------------- Adjusted Ages - ---------------------------------- payments guaranteed 10 Primary Secondary years Annuitant Annuitant Option 3(a) Option 3(b) Option 3(c) Option 3(d) Option 3(e) - ------------------------------------------------------------------------------------------------------------------------- 55 50 $4.88 $5.26 $5.48 $4.88 $5.23 55 55 5.04 5.44 5.66 5.04 5.32 55 60 5.15 5.63 5.91 5.14 5.38 60 55 5.15 5.63 5.91 5.14 5.59 60 60 5.37 5.87 6.16 5.37 5.72 60 65 5.52 6.14 6.51 5.51 5.80 65 60 5.52 6.14 6.51 5.51 6.10 65 65 5.83 6.49 6.87 5.82 6.29 65 70 6.04 6.84 7.34 6.00 6.41 70 65 6.04 6.84 7.34 6.00 6.81 70 70 6.49 7.35 7.87 6.44 7.08 70 75 6.77 7.84 8.51 6.68 7.25 75 70 6.77 7.84 8.51 6.68 7.81 75 75 7.45 8.60 9.33 7.27 8.25 75 80 7.86 9.28 10.20 7.57 8.49 - -------------------------------------------------------------------------------------------------------------------------
* Net of any applicable premium tax deduction 9 EM-TDA-99(PB) EX-99.B.4.6 7 ENDORSEMENT EGET-00 EXHIBIT 99-B.4.6 ENDORSEMENT Aetna Life Insurance and Annuity Company Notwithstanding any provision of the Contract or Certificate to the contrary, the Contract or Certificate is endorsed to add the following: Aetna GET Fund ("GET Fund") Each series of the GET Fund is a separate Fund. Aetna GET Fund Guarantee Aetna guarantees that the accumulation unit value for each series of the GET Fund on its GET Maturity Date will not be less than the accumulation unit value at the close of business on the last day of its Offering Period. If necessary, Aetna will transfer funds from its General Account to the Separate Account to offset any shortfall in the accumulation unit value on the GET Maturity Date. This Aetna GET Fund Guarantee does not apply to withdrawals or transfers before the GET Maturity Date. If the Accumulation Units of a series of the GET Fund are adjusted at any time during a Guarantee Period, the Aetna GET Fund Guarantee will be restated. The restated Aetna GET Fund Guarantee will be calculated so that is equivalent to the original Aetna GET Fund Guarantee for that series. Aetna GET Fund Guarantee Charge There is a daily charge during the Guarantee Period for the Aetna GET Fund Guarantee. For each series this charge is determined prior to the beginning of the Offering Period. The current daily charge for the Aetna GET Fund Guarantee will equal an annual rate of 0.75%. The Aetna GET Fund Guarantee Charge is deducted daily from the Account Value allocated to the Separate Account and is reflected in Net Investment Factor. Aetna GET Fund Offering Period ("Offering Period") Each series of the GET Fund has a specified Offering Period. The Offering Period is usually one to three months and is the period during which amounts may be transferred or deposited into a series of the GET Fund. Aetna reserves the right to extend an Offering Period or accept transfers or deposits into a series of the GET Fund after the Offering Period. Aetna reserves the right to set a minimum amount which may be transferred or deposited into a series of the GET Fund. Aetna also reserves the right to set a minimum total asset amount required at the end of an Offering Period to continue to offer a series of the GET Fund. If the minimum is not met or if the GET Fund's Board of Trustees determines not to operate the GET Fund in accordance with its investment objectives and strategies due to unfavorable market conditions, Aetna reserves the right not to begin the Guarantee Period. If Aetna exercises its right not to begin a Guarantee Period, Aetna will send written notice to all who made transfers or deposits into that series of the GET Fund. The notice will be mailed no later than 15 calendar days after the end of the Offering Period. Those who made transfers or deposits into that series of the GET Fund will then have 45 calendar days from the end of the Offering Period to redirect amounts in the terminated GET Fund series to one or more of the investment options available under the Contract. If no election is made by the end of this 45-day period, at the next Valuation Date Aetna will transfer the amount in the terminated series of the GET Fund to the money market Subaccount available under the Contract. Aetna reserves the right to set a maximum total asset amount for a series of the GET Fund. If the maximum is met, Aetna reserves the right to set a date on which it will stop accepting transfers or deposits into that series of the GET Fund. Aetna GET Fund Guarantee Period ("Guarantee Period") Each series of the GET Fund has a specified Guarantee Period. The Guarantee Period is the period during which the Aetna GET Fund Guarantee applies. The Guarantee Period ends on the GET Maturity Date. EGET-00 Aetna GET Fund Maturity Date ("GET Maturity Date") The date on which a Guarantee Period ends and units of the series of the GET Fund are liquidated. Prior to a GET Maturity Date, Aetna will send written notice of the GET Maturity Date to all who have amounts invested in that series. Those who are then invested in the series must inform Aetna of the investment option(s) into which they want their value of the GET Fund series transferred. If no election is made, on the GET Maturity Date Aetna will transfer the value to the series of the GET Fund then accepting transfers and deposits. If there is no series of the GET Fund then accepting transfers and deposits, Aetna will transfer the value to the investment option(s) designated by Aetna in the written notice. Aetna GET Fund Transfer or Withdrawal A transfer or withdrawal from a series of the GET Fund before its GET Maturity Date will be based on the GET Fund accumulation unit value on the Valuation Date following the date Aetna receives the transfer or withdrawal request in good order at its home office. Aetna GET Fund Reinvestment If a Contract or Certificate is surrendered and thereafter reinstated (if available under the Contract or Certificate), amounts attributable to the GET Fund will be reinstated to a series of the GET Fund, if any, that is then in its Offering Period. If no GET Fund Offering Period is available, amounts will be reallocated among the other available investment options in which the Contract or Certificate Holder is invested, on a pro rata basis. Endorsed and made a part of the Contract or Certificate, whichever is applicable, as of the Effective Date. /s/ Thomas J. McInerney President Aetna Life Insurance and Annuity Company EGET-00 EX-99.B.9 8 OPINION & CONSENT OF COUNSEL Exhibit 99-B.9 [Aetna Letterhead] [Aetna Logo] 151 Farmington Avenue Hartford, CT 06156 Julie E. Rockmore Counsel Law Department, TS31 December 13, 1999 Aetna Financial Services (860) 273-4686 Fax: (860) 273-0385 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Attention: Filing Desk Re: Aetna Life Insurance and Annuity Company and its Variable Annuity Account B Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 File Nos.: 333-87305 and 811-02512 Gentlemen: The undersigned serves as counsel to Aetna Life Insurance and Annuity Company, a Connecticut life insurance company (the "Company"). It is my understanding that the Company, as depositor, has registered an indefinite amount of securities (the "Securities") under the Securities Act of 1933 (the "Securities Act") as provided in Rule 24f-2 under the Investment Company Act of 1940 (the "Investment Company Act"). In connection with this opinion, I or those for whom I have supervisory responsibility, have reviewed the N-4 Registration Statement, as amended to the date hereof, and this Pre-Effective Amendment No. 1. I have also examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, trust records and other instruments I have deemed necessary or appropriate for the purpose of rendering this opinion. For purposes of such examination, I have assumed the genuineness of all signatures on original documents and the conformity to the original of all copies. I am admitted to practice law in Connecticut, and do not purport to be an expert on the laws of any other state. My opinion herein as to any other law is based upon a limited inquiry thereof which I have deemed appropriate under the circumstances. Based upon the foregoing, and, assuming the Securities are sold in accordance with the provisions of the prospectus, I am of the opinion that the Securities being registered will be legally issued and will represent binding obligations of the Company. I consent to the filing of this opinion as an exhibit to the Registration Statement. Sincerely, /s/ Julie E. Rockmore Julie E. Rockmore Counsel EX-99.B.10 9 OPINION & CONSENT OF COUNSEL Exhibit 99-B.10 Consent of Independent Auditors The Board of Directors of Aetna Life Insurance and Annuity Company and Contractholders of Aetna Variable Annuity Account B: We consent to the use of our report dated February 26, 1999, relating to the financial statements of the Aetna Variable Annuity Account B and our report dated February 3, 1999, relating to the consolidated financial statements of Aetna Life Insurance and Annuity Company, which are included in this registration Statement on form N-4 (File No. 333-87305) and to the reference to our firm under the heading "Independent Auditors" in the statement of additional information. /s/ KPMG LLP Hartford, Connecticut December 13, 1999 EX-99.B.13 10 SCHEDULE FOR COMPUTATION OF PERFORMANCE DATA EXHIBIT 99-B.13 SCHEDULE FOR COMPUTATION OF TOTAL RETURN CALCULATIONS TOTAL RETURN CALCULATION (STANDARDIZED) The standardized rate represents fund performance for the most recent 1-year, 5-year and 10-year periods. The "1-year rate" represents fund performance for the period January 1, 1998 through December 31, 1998; the "5-year rate" is for the period January 1, 1994 through December 31, 1998; the "10-year rate" is for the period January 1, 1988 through December 31, 1998. "Since inception" figures assume the redemption on December 31, 1977 of values attributable to a $1,000 payment made on the date contributions were first received in the fund under the separate account. The formula used in the computation of the total return calculation is as follows: Formula P(1 + T) (n) = ERV P = a hypothetical initial payment of $1,000 T = average annual total return N = number of years ERV = ending redeemable value at the end of 1, 5, or 10 year periods (or a fractional portion thereof) of a hypothetical $1,000 payment made at the beginning of the 1, 5, or 10 year periods The Total Returns reflect the deduction of all recurring charges during each period (.e.g., mortality and expense risk charges, maintenance fees, administrative charges (if applicable) and deferred sales charges). TOTAL RETURN CALCULATION (NON-STANDARDIZED) The non-standardized rate represents fund performance for the most recent 1-year, 3-year, 5-year and 10-year periods. The "1-year rate" represents fund performance for the period January 1, 1998 through December 31, 1998; the "3-year rate" is for the period January 1, 1995 through December 31, 1998; the "5-year rate" is for the period January 1, 1994 through December 31, 1998; and the "10-year rate" is for the period January 1, 1988 through December 31, 1998. The non-standardized figures will be calculated in a manner similar to the one discussed above for the standardized figures, except that non-standardized figures will not reflect the deduction of any applicable deferred sales charge (which would decrease the level of performance shown if reflected in these calculations), and the "since inception" figures assume the redemption on December 31, 1997 of values attributable to a $1,000 payment made on the inception dates of the funds. For an illustration of the Computation of the Total Return Quotations, both Standardized and Non-Standardized, see attached.
- ---------------------------------------------------------------------------------------------------------- One Year Product % Separate w/out DSC - Fund Name Account As of Date SA Inc Date - ---------------------------------------------------------------------------------------------------------- Aetna Balanced VP, Inc. B 12/31/1998 15.06% Aetna Bond VP B 12/31/1998 6.40% Aetna Growth and Income VP B 12/31/1998 12.65% Aetna Growth VP B 12/31/1998 35.47% Aetna Index Plus Large Cap VP B 12/31/1998 29.49% Aetna International VP B 12/31/1998 Aetna Money Market VP B 12/31/1998 3.76% Aetna Real Estate Securities VP B 12/31/1998 Aetna Small Company VP B 12/31/1998 (0.53%) AIM V.I. Capital Appreciation Fund B 12/31/1998 AIM V.I. Growth and Income Fund B 12/31/1998 AIM V.I. Growth Fund B 12/31/1998 AIM V.I. Value Fund B 12/31/1998 Fidelity VIP Equity-Income Portfolio B 12/31/1998 9.83% Fidelity VIP Growth Portfolio B 12/31/1998 37.26% Fidelity VIP High Income Portfolio B 12/31/1998 (5.87%) Fidelity VIP II Contrafund Portfolio B 12/31/1998 27.90% Janus Aspen Series Aggressive Growth Portfolio B 12/31/1998 32.11% Janus Aspen Series Balanced Portfolio B 12/31/1998 32.13% Janus Aspen Series Growth Portfolio B 12/31/1998 33.49% Janus Aspen Series Worldwide Growth Portfolio B 12/31/1998 26.86% MFS(R)Total Return Series B 12/31/1998 10.53% Oppenheimer Aggressive Growth Fund/VA B 12/31/1998 10.56% Oppenheimer Main Street Growth and Income Fund/VA B 12/31/1998 3.02% Oppenheimer Strategic Bond Fund/VA B 12/31/1998 1.24% PPI MFS Emerging Equities / Alger Amer Small Cap (3) B 12/31/1998 27.59% PPI MFS Emerging Equities Portfolio B 12/31/1998 27.59% PPI MFS Research Growth / Amer Century VP Cap Apprec (4) B 12/31/1998 21.03% PPI MFS Research Growth Portfolio B 12/31/1998 21.03% PPI MFS Value Equity / Neuberger Berman AMT Growth (5) B 12/31/1998 24.70% PPI MFS Value Equity Portfolio B 12/31/1998 24.70% PPI Scudder International / Scudder VLIF International (6) B 12/31/1998 17.18% PPI Scudder International Growth Portfolio B 12/31/1998 17.18%
- ------------------------------------------------------------------------------------------------------------------------- Three Inception Year Five Year Ten Year Inception One Year Five Year Ten Year Year Product Product Product Product Product Product Product Product Separate % w/out % w/out % w/out % w/out % w/ DSC % w/ DSC % w/ DSC % w/ DSC Account DSC - SA DSC - SA DSC - SA DSC - SA - SA Inc - SA Inc - SA Inc - SA Inc Inception Inc Date Inc Date Inc Date Inc Date Date Date Date Date Date - ------------------------------------------------------------------------------------------------------------------------- 16.25% 14.04% 11.29% 7.98% 13.56% 11.29% 06/30/1989 4.94% 4.93% 7.52% (0.75%) 4.20% 7.52% 05/31/1978 20.80% 17.46% 14.75% 5.55% 17.05% 14.75% 05/01/1975 34.87% 28.56% 31.30% 05/30/1997 30.61% 22.53% 28.36% 10/31/1996 (4.03%) (11.71%) 05/05/1998 3.73% 3.59% 4.05% (3.41%) 2.82% 4.05% 09/30/1975 (12.33%) (19.35%) 05/06/1998 12.02% (7.73%) 7.83% 05/30/1997 29.15% 18.81% 10/02/1998 30.06% 19.65% 10/02/1998 32.44% 21.84% 10/02/1998 30.86% 20.39% 10/02/1998 15.89% 19.93% 2.71% 19.23% 12/30/1994 23.46% 25.81% 30.35% 25.25% 12/30/1994 6.93% 7.92% (13.12%) 6.46% 06/30/1995 23.05% 23.03% 20.92% 22.08% 06/30/1995 15.86% 16.96% 25.16% 16.24% 10/31/1994 21.97% 22.20% 25.19% 21.42% 01/31/1995 23.39% 22.14% 26.55% 21.62% 07/29/1994 24.63% 26.68% 19.87% 25.90% 04/28/1995 14.89% 3.41% 12.73% 05/31/1996 12.84% 3.44% 8.67% 05/30/1997 13.33% (4.16%) 9.18% 05/30/1997 4.04% (5.95%) (0.41%) 05/30/1997 12.01% 13.43% 13.16% 20.61% 12.94% 12.70% 09/30/1993 23.57% 20.61% 17.27% 11/28/1997 2.84% 6.41% 7.97% 13.99% 5.73% 7.61% 08/31/1992 16.98% 13.99% 10.59% 11/28/1997 18.51% 15.07% 13.46% 17.70% 14.61% 13.18% 11/30/1992 24.03% 17.70% 17.73% 11/28/1997 12.37% 8.64% 11.07% 10.12% 8.03% 10.78% 08/31/1992 16.94% 10.12% 10.55% 11/28/1997
- ----------------------------------------------------------------------------------------------------------------- Separate Fund Sep One Three Five Ten Fund Account Inception Acct Free DSC Year Year Year Year Inception Inception Date Charge Out Method DSC DSC DSC DSC DSC DSC - ----------------------------------------------------------------------------------------------------------------- 04/03/1989 160 10.00% C 8.00% 7.00% 5.00% 0.00% 0.00% 0% 05/15/1973 160 10.00% C 8.00% 7.00% 5.00% 0.00% 05/01/1975 160 10.00% C 8.00% 7.00% 5.00% 0.00% 12/13/1996 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8.00% 8% 09/16/1996 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8.00% 8% 12/22/1997 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8.00% 8% 08/01/1975 160 10.00% C 8.00% 7.00% 5.00% 0.00% 12/15/1997 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8.00% 8% 12/27/1996 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8.00% 8% 05/05/1993 160 10.00% C 8.00% 7.00% 5.00% 0.00% 5.00% 8% 05/02/1994 160 10.00% C 8.00% 7.00% 5.00% 0.00% 6.00% 8% 05/05/1993 160 10.00% C 8.00% 7.00% 5.00% 0.00% 5.00% 8% 05/05/1993 160 10.00% C 8.00% 7.00% 5.00% 0.00% 5.00% 8% 10/09/1986 160 10.00% C 8.00% 7.00% 5.00% 0.00% 6% 10/09/1986 160 10.00% C 8.00% 7.00% 5.00% 0.00% 6% 09/19/1985 160 10.00% C 8.00% 7.00% 5.00% 0.00% 7% 01/03/1995 160 10.00% C 8.00% 7.00% 5.00% 0.00% 7.00% 7% 09/13/1993 160 10.00% C 8.00% 7.00% 5.00% 0.00% 5.00% 6% 09/13/1993 160 10.00% C 8.00% 7.00% 5.00% 0.00% 5.00% 7% 09/13/1993 160 10.00% C 8.00% 7.00% 5.00% 0.00% 5.00% 6% 09/13/1993 160 10.00% C 8.00% 7.00% 5.00% 0.00% 5.00% 7% 01/03/1995 160 10.00% C 8.00% 7.00% 5.00% 0.00% 7.00% 8% 08/15/1986 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8% 07/05/1995 160 10.00% C 8.00% 7.00% 5.00% 0.00% 7.00% 8% 05/03/1993 160 10.00% C 8.00% 7.00% 5.00% 0.00% 5.00% 8% 09/21/1988 160 10.00% C 8.00% 7.00% 5.00% 0.00% 5% 11/28/1997 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8.00% 8% 11/20/1987 160 10.00% C 8.00% 7.00% 5.00% 0.00% 4% 11/28/1997 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8.00% 8% 09/10/1984 160 10.00% C 8.00% 7.00% 5.00% 0.00% 4% 11/28/1997 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8.00% 8% 05/01/1987 160 10.00% C 8.00% 7.00% 5.00% 0.00% 4% 11/28/1997 160 10.00% C 8.00% 7.00% 5.00% 0.00% 8.00% 8%
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