-----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, Ou10duX88510PNEVpQ7us3pre522UIPBKr19D/l+1Yp3JtkauvJQRDSY/b3G8sr1 oblNxwsIUFjspRYzuVIQMQ== 0000950146-99-001821.txt : 19991221 0000950146-99-001821.hdr.sgml : 19991221 ACCESSION NUMBER: 0000950146-99-001821 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19991220 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: 485APOS SEC ACT: SEC FILE NUMBER: 333-87305 FILM NUMBER: 99777405 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 811-02512 FILM NUMBER: 99777406 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 485APOS 1 FORM N-4 As filed with the Securities and Exchange Registration No. 333-87305 Commission on December 20, 1999 Registration No. 811-2512 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-4 - -------------------------------------------------------------------------------- POST-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) - -------------------------------------------------------------------------------- It is proposed that this filing will become effective: X 60 days after filing pursuant to paragraph (a)(1) of Rule 485 - -------- - -------- on _______________________ pursuant to paragraph (a)(1) of Rule 485 VARIABLE ANNUITY ACCOUNT B CROSS REFERENCE SHEET
FORM N-4 PART A (PROSPECTUS) LOCATION - PROSPECTUS DATED ITEM NO. DECEMBER 17, 1999 AND AS AMENDED BY SUPPLEMENT DATED FEBRUARY 14, 2000 1 Cover Page........................................... Cover Page 2 Definitions.......................................... Not Applicable 3 Synopsis............................................. Contract Overview; Fee Table, and as amended 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, and as amended 6 Deductions and Expenses.............................. Fees, and as amended 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 Contents of the Statement of Additional Additional Information............................... Information
FORM N-4 PART B (STATEMENT OF LOCATION - STATEMENT OF ITEM NO. ADDITIONAL INFORMATION) ADDITIONAL INFORMATION DATED FEBRUARY 14, 2000 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. PARTS A AND B The Prospectus dated December 17, 1999 is incorporated in Part A of this Post-Effective Amendment No. 1 by reference to Registrant's filing under Rule 497(c), as filed on December 20, 1999 (File No. 333-87305). A Prospectus Supplement dated February 18, 2000 to the Prospectus, is included in Part A of this Post-Effective Amendment No. 1. A Statement of Additional Information dated February 18, 2000 is included in Part B of this Post-Effective Amendment No. 1. VARIABLE ANNUITY ACCOUNT B Aetna Life Insurance and Annuity Company Supplement Dated February 18, 2000 to December 17, 1999 Prospectus GENERAL DESCRIPTION OF GET I Series I of the Aetna GET Fund (GET I) is an investment option that may be available during the accumulation phase of the contract. Aetna Life Insurance and Annuity Company (the Company, we, our) makes a guarantee, as described below, when you direct money into GET I. Aeltus Investment Management, Inc. serves as investment adviser to GET I. We will offer GET I shares only during its offering period, which is scheduled to run from March 15, 2000 through the close of business on June 14, 2000. GET I may not be available under your contract, your plan or in your state. Please read the GET I prospectus for a more complete description of GET I, including its charges and expenses. INVESTMENT OBJECTIVE OF GET I GET I seeks to achieve maximum total return, without compromising a minimum targeted return, by participating in favorable equity market performance during the guarantee period. GET I's guarantee period runs from June 15, 2000 through June 14, 2005. During the offering period, all GET I assets will be invested in short-term instruments, and during the guarantee period will be invested in a combination of fixed income and equity securities. THE GET FUND GUARANTEE The guarantee period for GET I will end on June 14, 2005 which is GET I's maturity date. The Company guarantees that the value of an accumulation unit of the GET I subaccount under the contract on the maturity date (as valued after the close of business on June 14, 2005) will not be less than its value as determined after the close of business on the last day of the offering period. If the value on the maturity date is lower than it was on the last day of the offering period, we will transfer funds from our general account to the GET I subaccount to make up the difference. This means that if you remain invested in GET I until the maturity date, at the maturity date you will receive no less than the value of your separate account investment directed to GET I as of the last day of the offering period, less any maintenance fees or any amounts you transfer or withdraw from the GET I subaccount. The value of dividends and distributions made by GET I throughout the guarantee period is taken into account in determining whether, for purposes of the guarantee, the value of your GET I investment on the maturity date is no less than its value as of the last day of the offering period. The guarantee does not promise that you will earn the fund's minimum targeted return referred to in the investment objective. If you withdraw or transfer funds from GET I before the maturity date, we will process the transactions at the actual unit value next determined after we receive your order. The guarantee will not apply to these amounts or to amounts deducted as a maintenance fee, if applicable. MATURITY DATE Before the maturity date, we will send a notice to each contract holder who has amounts in GET I. This notice will remind you that the maturity date is approaching and that you must choose other investment options for your GET I amounts. If you do not make a choice, on the maturity date we will transfer your GET I amounts to another available series of the GET Fund that is accepting deposits. If no GET Fund series is available, we will transfer your GET I amounts to the fund or funds designated by the Company. SUBJECT TO COMPLETION OR AMENDMENT Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus supplement shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. RH.GETI87305-00 December 1999 The following information supplements the "Fee Table" contained in the prospectus: MAXIMUM FEES DEDUCTED FROM INVESTMENTS IN THE SEPARATE ACCOUNT In addition to the amounts currently listed under the heading "Fee Table" in the prospectus, we will make a daily deduction of a GET I Guarantee Charge, equal on an annual basis to the percentage shown below, from the amounts allocated to the GET I investment option: GET I Guarantee Charge (deducted daily during the Guarantee Period) ..... 0.50% Maximum Total Separate Account Expenses .................................. 2.10%(1)
(1) The total separate account expenses that apply to your contract may be lower. Please refer to the "Fee Table" section of your prospectus. The following information supplements the "Fund Expense Table" contained in the prospectus: Aetna GET Fund Series I Annual Expenses (As a percentage of the average net assets)
Investment Total Fund Annual Expenses Advisory Fees(2) Other Expenses(3) (after expense reimbursement)(4) ----------------- ----------------- -------------------------------- Aetna GET Fund Series I 0.60% 0.15% 0.75%
For more information regarding expenses paid out of assets of the fund, see the GET I prospectus. - ----------------------- (2) The Investment Advisory Fee will be 0.25% during the offering period and 0.60% during the guarantee period. (3) "Other Expenses" include an annual fund administrative fee of 0.075% of the average daily net assets of GET I and any additional direct fund expenses. (4) The investment adviser is contractually obligated through GET I's maturity date to waive all or a portion of its investment advisory fee and/or its administrative fee and/or to reimburse a portion of the fund's other expenses in order to ensure that GET I's Total Fund Annual Expenses do not exceed 0.75% of the fund's average daily net assets. It is not expected that GET I's actual expenses without this waiver or reimbursement will exceed this amount. The following information supplements the "Hypothetical Examples" contained in the prospectus. HYPOTHETICAL EXAMPLES--AETNA GET FUND SERIES I 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 2.00% premium bonus in the GET I investment option under the contract (until GET I's maturity date) and assume a 5% annual return on the investment.(5)
|-------------------------------| Example A Example B | > THESE EXAMPLES ARE PURELY | | HYPOTHETICAL. | If you withdraw your entire If at the end of the periods | > THEY SHOULD NOT BE | account value at the end of shown you (1) leave your | CONSIDERED A REPRESENTATION | the periods shown, you would entire account value invested | OF PAST OR FUTURE EXPENSES | pay the following expenses, or (2) select an income phase | OR EXPECTED RETURNS. | including any applicable early payment option, you would | > ACTUAL EXPENSES AND/OR | withdrawal charge: pay the following expenses | RETURNS MAY BE MORE OR LESS | (no early withdrawal charge is | THAN THOSE SHOWN BELOW. | reflected): |-------------------------------| 1 Year 3 Years 5 Years 1 Year 3 Years 5 Years ------ ------- ------- ------ ------- ------- Aetna GET Fund Series I $ $ $ $ $ $
- ----------------------- (5) The examples shown above reflect an annual mortality and expense risk charge of 1.45%, an annual contract administrative expense charge of 0.15%, an annual GET I guarantee charge of 0.50%, a $30 annual maintenance fee that has been converted to a percentage of assets equal to 0.022%, and all charges and expenses of the GET I Fund. Example A reflects an early withdrawal charge of 8% of the purchase payments at the end of year 1, 7% at the end of year 3, and 5% at the end of year 5. (The expenses that you would pay under your contract may be lower. Please refer to the "Fee Table" section of your prospectus.) The following information supplements "Appendix III--Description of Underlying Funds" contained in the prospectus: Aetna GET Fund (Series I) INVESTMENT OBJECTIVE Seeks to achieve maximum total return without compromising a minimum targeted return (Targeted Return) by participating in favorable equity market performance during the guarantee period, from June 15, 2000 through June 14, 2005, the maturity date. POLICIES Prior to June 15, 2000, assets are invested entirely in short-term instruments. After that date, assets are allocated between equities and fixed income securities. Equities consist primarily of common stocks. Fixed income securities consist primarily of short- to intermediate-duration U.S. Government securities and may also consist of mortgage backed securities and corporate obligations. The investment adviser uses a proprietary computer model to determine the percentage of assets to allocate between the fixed and the equity components. As the value of the equity component declines, more assets are allocated to the fixed component. RISKS The principal risks of investing in Series I are those generally attributable to stock and bond investing. The success of Series I's strategy depends on the investment adviser's skill in allocating assets between the equity and fixed components and in selecting investments within each component. Because Series I invests in both stocks and bonds, it may underperform stock funds when stocks are in favor and underperform bond funds when bonds are in favor. The risks associated with investing in stocks include sudden and unpredictable drops in the value of the market as a whole and periods of lackluster or negative performance. The principal risk associated with investing in bonds is that interest rates may rise, which generally causes bond prices to fall. If at the inception of, or any time during, the guarantee period interest rates are low, Series I assets may be largely invested in the fixed component in order to increase the likelihood of achieving the Targeted Return at the maturity date. The effect of low interest rates on Series I would likely be more pronounced at the beginning of the guarantee period as the initial allocation of assets would include more fixed income securities. In addition, if during the guarantee period the equity markets experienced a major decline, Series I assets may become largely invested in the fixed component in order to increase the likelihood of achieving the Targeted Return at the maturity date. Use of the fixed component reduces Series I's ability to participate as fully in upward equity market movements, and therefore represents some loss of opportunity, or opportunity cost, compared to a portfolio that is fully invested in equities. Investment Adviser: Aeltus Investment Management, Inc. RH.GETI87305-00 December 1999 - -------------------------------------------------------------------------------- VARIABLE ANNUITY ACCOUNT B OF AETNA LIFE INSURANCE AND ANNUITY COMPANY - -------------------------------------------------------------------------------- Statement of Additional Information dated February 18, 2000 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 and amended by supplement dated February 18, 2000. 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 September 30, 1999, the Company and its subsidiary life company had $__ billion invested through its products, including $__ billion in its separate accounts (of which the Company or an affiliate oversees the management of $__ 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 September 30, 1999 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. [Performance tables to be filed by amendment.] 3 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. 4 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. 5 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 [Financial statements for period ended September 30, 1999 to be filed by amendement.] 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
[Financial statements for period ended September 30, 1999 to be filed by amendment.] 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. 87305-99-1 ALIAC Ed. February 1999 VARIABLE ANNUITY ACCOUNT B PART C - OTHER INFORMATION ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS - ------------------------------------------ (a) Financial Statements: (1) Incorporated by reference 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 - Unaudited Statement of Assets and Liabilities as of September 30, 1999* - Unaudited Statements of Operations for the nine-month period ended September 30, 1999* - Unaudited Statement of Changes in Net Assets for the nine-month period ended September 30, 1999* 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 - Unaudited Consolidated Balance Sheets as of September 30, 1999* - Unaudited Consolidated Statements of Income for the nine-month period ended September 30, 1999* - Unaudited Consolidated Statements of changes in Shareholder's Equity for the nine-month period ended September 30, 1999* - Unaudited Consolidated Statements of Cash Flows for the nine-month period ended September 30, 1999*
*To be filed by amendment. (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) (4.2) Variable Annuity Contract Certificate (GMC-VA-99(PB))(4) (4.3) Endorsement EM-ROTH-99(PB) to Contract GM-VA-99(PB) and Certificate GMC-VA-99(PB)(4) (4.4) Endorsement EM-IRA-99(PB) to Contract GM-VA-99(PB) and Certificate GMC-VA-99(PB)(4) (4.5) Endorsement EM-TDA-99(PB) to Contract GM-VA-99 and Certificate GMC-VA-99(PB)(4) (4.6) Endorsement EGET-00 to Contract GM-VA-99 and Certificate GMC-VA-99(PB)(4) (5) Not applicable (6.1) Certificate of Incorporation of Aetna Life Insurance and Annuity Company(5) (6.2) Amendment of Certificate of Incorporation of Aetna Life Insurance and Annuity Company(6) (6.3) By-laws as Amended September 17, 1997 of Aetna Life Insurance and Annuity Company(7) (7) Not Applicable (8.1) Fund Participation Agreement between Aetna Life Insurance and Annuity Company and AIM Dated June 30, 1998(8) (8.2) Service Agreement between Aetna Life Insurance and Annuity Company and AIM Effective June 30, 1998(8) (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(9) (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(9) (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(6) (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(10) (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(11) (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(6) (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(10) (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(12)
(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(13) (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(10) (8.17) Service Contract between Fidelity Distributors Corporation and Aetna Life Insurance and Annuity Company dated May 2, 1997(9) (8.18) Fund Participation Agreement among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation dated December 8, 1997(14) (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(9) (8.20) Service Agreement between Janus Capital Corporation and Aetna Life Insurance and Annuity Company dated December 8, 1997(14) (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(8) (8.23) Fifth Amendment dated May 1, 1998 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(15) (8.24) Fifth Amendment dated July 1, 1999 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, November 28, 1997 and May 1, 1998(16) (8.25) Fund Participation Agreement dated May 1, 1999 between Aetna Life Insurance and Annuity Company, Mitchell Hutchins Series Trust, and Mitchell Hutchins Asset Management, Inc.(17)
(8.26) Service Agreement dated May 1, 1999 between Mitchell Hutchins Asset Management, Inc. and Aetna Life Insurance and Annuity Company(17) (8.27) Fund Participation Agreement dated March 11, 1997 between Aetna Life Insurance and Annuity Company and Oppenheimer Variable Annuity Account Funds and Oppenheimer Funds, Inc.(18) (8.28) Service Agreement effective as of March 11, 1997 between Oppenheimer Funds, Inc. and Aetna Life Insurance and Annuity Company(18) (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) (14.1) Powers of Attorney(19) (14.2) Authorization for Signatures(3)
*To be filed by amendment 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 Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 333-87305), as filed on December 13, 1999. 5. 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. 6. 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. 7. 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. 8. 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. 9. 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. 10. 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. 11. 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. 12. 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. 13. 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. 14. 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. 15. 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. 16. Incorporated by reference to Post Effective Amendment No. 11 to Registration Statement on Form N-4 (File No. 333-56297), as filed on November 23, 1999. 17. 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. 18. 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. 19. 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 Shaun P. Mathews Director and Senior Vice President Catherine H. Smith Director, Chief Financial Officer 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 November 30, 1999, there were 94,363 individuals holding 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 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 Life Account C 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 Aetna 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 will comply 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 Post-Effective Amendment to its 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 day 20th 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 Post-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 ) ) Catherine H. Smith* Director and Chief Financial Officer ) December - ------------------------------------- ) Catherine H. Smith ) 20, 1999 ) 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.9 Opinion and Consent of Counsel * 99-B.10 Consent of Independent Auditors ------------
*To be filed by amendment EX-99.B.10 2 CONSENT OF INDEPENDENT AUDITORS 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 references to our firm under the headings "Independent Auditors" in the Statement of Additional Information and "Condensed Financial Information" in the Prospectus. /s/ KPMG LLP Hartford, Connecticut December 16, 1999 -----END PRIVACY-ENHANCED MESSAGE-----