-----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, MJCOxlIKvxl5s3eksiXjxwUeJrY2ObkpHujeZaYOO0LuV5oFTyW1IP1hMd+PuAo5 uMPHIlxRjprWSxDGyrI5Wg== 0000912057-96-008672.txt : 19960510 0000912057-96-008672.hdr.sgml : 19960510 ACCESSION NUMBER: 0000912057-96-008672 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960509 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIABLE ANNUITY ACCT C OF AETNA LIFE INSURANCE & ANNUITY CO CENTRAL INDEX KEY: 0000103007 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 002-52449 FILM NUMBER: 96558338 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032734808 MAIL ADDRESS: STREET 1: C/O AETNA LIFE & CASUALTY STREET 2: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 FORMER COMPANY: FORMER CONFORMED NAME: VARIABLE ANNUITY ACCOUNT C OF AETNA VARIABLE ANNUITY LIFE IN DATE OF NAME CHANGE: 19791108 497 1 497 VARIABLE ANNUITY ACCOUNT C Tax-Deferred Annuity Plans (Section 403(b)) Public Employee Deferred Compensation Plans (Section 457) Defined Contribution Plans (Section 401(a)) Prospectus Dated: May 1, 1996 [LOGO] Aetna Life Insurance and Annuity Company 52449-2 PROSPECTUS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This Prospectus describes deferred variable annuity contracts ("Contracts") issued by Aetna Life Insurance and Annuity Company (the "Company"). The Contracts are available through participation (1) in plans adopted by public school systems and certain tax-exempt (Section 501(c)(3)) organizations under Section 403(b) of the Code; (2) in deferred compensation plans adopted by state and local governments for their employees or independent contractors, or both, under Section 457 of the Internal Revenue Code of 1986, as amended, and (3) under defined contribution plans under Section 401(a) of the Code. (See "Purchase.") Only interests in group contracts are currently offered for sale; however, "Contracts" shall also apply to individual Contracts which were issued by the Company in the past to Participants under certain Section 403(b) Plans. The Contracts provide that contributions may be allocated to one or more of the Credited Interest Options or to one or more of the Subaccounts of Variable Annuity Account C, a separate account of the Company. The Subaccounts invest directly in shares of the following Funds: - Aetna Variable Fund - Aetna Income Shares - Aetna Variable Encore Fund - Aetna Investment Advisers Fund, Inc. - TCI Growth (a Twentieth Century fund) The Credited Interest Options currently available under the Contract are the Guaranteed Accumulation Account and the Fixed Account. (On June 30, 1995, the Fixed Plus Account replaced the Fixed Account as the Credited Interest Option for Contracts issued to Participants under the State of Mississippi Deferred Compensation Plan. See Appendix III. The Guaranteed Accumulation Account will continue to be available.) Except as specifically mentioned, this Prospectus describes only investments through the Separate Account. A brief description of each of the Credited Interest Options is contained in Appendices to this Prospectus. Additional information concerning the Guaranteed Accumulation Account is contained in a separate prospectus. The availability of the Funds and the Credited Interest Options is subject to applicable regulatory authorization. Not all Funds or Credited Interest Options may be available in all jurisdictions, under all Contracts or in all Plans. Please check with your employer to determine option availability. (See "Investment Options.") This Prospectus provides investors with the information that they should know about the Separate Account before investing in the Contract. Additional information about the Separate Account is contained in a Statement of Additional Information ("SAI") which is available at no charge. The SAI has been filed with the Securities and Exchange Commission and is incorporated herein by reference. The Table of Contents for the SAI is printed on page 17 of this Prospectus. An SAI may be obtained by indicating the request on the enrollment forms or on the prospectus receipt contained in this Prospectus, or by calling the number listed under the "Inquiries" section of the Prospectus Summary. THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF THE FUNDS AND THE GUARANTEED ACCUMULATION ACCOUNT. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS, ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION ARE DATED MAY 1, 1996. TABLE OF CONTENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DEFINITIONS.......................................................................... DEFINITIONS - 1 PROSPECTUS SUMMARY................................................................... SUMMARY - 1 FEE TABLE............................................................................ FEE TABLE - 1 CONDENSED FINANCIAL INFORMATION...................................................... AUV HISTORY - 1 THE COMPANY.......................................................................... 1 VARIABLE ANNUITY ACCOUNT C........................................................... 1 INVESTMENT OPTIONS................................................................... 1 The Funds........................................................................ 1 Credited Interest Options........................................................ 2 PURCHASE............................................................................. 2 Contract Availability............................................................ 2 Purchasing Interests in the Contract............................................. 3 Purchase Payments................................................................ 3 Transfer Credits................................................................. 3 Right to Cancel.................................................................. 4 CHARGES AND DEDUCTIONS............................................................... 4 Daily Deductions from the Separate Account....................................... 4 Mortality and Expense Risk Charge............................................ 4 Administrative Expense Charge................................................ 4 Maintenance Fee.................................................................. 4 Deferred Sales Charge............................................................ 5 Fund Expenses.................................................................... 6 Premium and Other Taxes.......................................................... 6 CONTRACT VALUATION................................................................... 6 Account Value.................................................................... 6 Accumulation Units............................................................... 7 Net Investment Factor............................................................ 7 TRANSFERS............................................................................ 7 WITHDRAWALS.......................................................................... 7 Reinvestment Privilege........................................................... 8 CONTRACT LOANS....................................................................... 8 ADDITIONAL WITHDRAWAL OPTIONS........................................................ 9 DEATH BENEFIT DURING ACCUMULATION PERIOD............................................. 9 ANNUITY PERIOD....................................................................... 10 Annuity Period Elections......................................................... 10 Annuity Options.................................................................. 10 Annuity Payments................................................................. 11 Charges Deducted During the Annuity Period....................................... 11 Death Benefit Payable During the Annuity Period.................................. 11 TAX STATUS........................................................................... 12 Introduction..................................................................... 12
Taxation of the Company.......................................................... 12 Contracts Used with Certain Retirement Plans..................................... 12 MISCELLANEOUS........................................................................ 15 Distribution..................................................................... 15 Delay or Suspension of Payments.................................................. 15 Performance Reporting............................................................ 16 Voting Rights.................................................................... 16 Modification of the Contract..................................................... 16 Transfer of Ownership; Assignment................................................ 16 Legal Matters and Proceedings.................................................... 16 CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.................................. 17 APPENDIX I--GUARANTEED ACCUMULATION ACCOUNT.......................................... 18 APPENDIX II--THE FIXED ACCOUNT....................................................... 19 APPENDIX III--THE FIXED PLUS ACCOUNT (State of Mississippi Deferred Compensation Plan only)............................. 20
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. THE COMPANY DOES NOT AUTHORIZE ANY PERSON TO GIVE INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING CONTAINED IN THIS PROSPECTUS EXCEPT AS OTHERWISE CONTAINED HEREIN. DEFINITIONS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following terms are defined as they are used in this Prospectus: ACCOUNT: A record which identifies contract values accumulated on behalf of each Participant during the Accumulation Period. One or more Accounts may be established for each Participant. ACCOUNT VALUE: The total dollar value of amounts held in an Account as of each Valuation Date during the Accumulation Period. ACCOUNT YEAR: A period of twelve months measured from the date on which an Account is established (the effective date) or from an anniversary of such effective date. ACCUMULATION PERIOD: The period during which Purchase Payment(s) credited to an Account are invested to fund future annuity payments. ACCUMULATION UNIT: A measure of the value of each Subaccount before Annuity payments begin. ANNUITANT: The person on whose life or life expectancy the Annuity payments are based. ANNUITY: A series of payments for life, a definite period or a combination of the two. ANNUITY DATE: The date on which annuity payments begin. ANNUITY PERIOD: The period during which Annuity payments are made. ANNUITY UNIT: A measure of the value of each Subaccount selected during the Annuity Period. CODE: Internal Revenue Code of 1986, as amended. COMPANY (WE, US): Aetna Life Insurance and Annuity Company. CONTRACT: The group and individual deferred, variable annuity contracts described in this Prospectus. CONTRACT HOLDER: The person or entity to whom the Contract is issued. The Contract Holder under a group Contract is usually the employer; the Contract Holder under an individual Contract under a Section 403(b) Plan is the Participant. CREDITED INTEREST OPTIONS: The fixed interest options under the Contract. The Credited Interest Options currently consist of the Guaranteed Accumulation Account and the Fixed Account, each of which is described in an Appendix to this Prospectus. The Fixed Plus Account is available only to Participants in the State of Mississippi Deferred Compensation Plan. (See Appendix III.) Amounts allocated to the Credited Interest Options are included in the Account Value. ERISA: Employee Retirement Income Security Act of 1974, as amended. FUND(S): An open-end registered management investment company whose shares are purchased by the Separate Account to fund the benefits provided by the Contract. HOME OFFICE: The Company's principal executive offices located at 151 Farmington Avenue, Hartford, Connecticut 06156. PARTICIPANT (YOU): A person participating in a Plan maintained by an eligible organization. PLAN(S): Tax-deferred annuity plans established under Section 403(b) of the Code for employees of public school systems and certain tax-exempt organizations (Section 501(c)(3) organizations), deferred compensation plans adopted by state and local governments for their employees or independent contractors, or both, under Section 457 of the Code and defined contribution plans established under Section 401(a) of the Code. - -------------------------------------------------------------------------------- DEFINITIONS - 1 PLAN ACCOUNT: The record established for a Contract Holder of the Net Purchase Payment(s) accumulated under a Contract where individual Accounts are not maintained. PURCHASE PAYMENT(S): The gross payment(s) made to the Company under a Contract. PURCHASE PAYMENT PERIODS: For "Installment Purchase Payment Accounts," the period of time for completion of the agreed upon annual number and amount of Purchase Payments. For example, if it is determined that the Purchase Payment Period will consist of 12 payments per year and only 11 payments are made, the Purchase Payment Period is not completed until the twelfth Purchase Payment is made. SEPARATE ACCOUNT: Variable Annuity Account C, a separate account established by the Company for the purpose of funding variable annuity contracts issued by the Company. SUBACCOUNT(S): The portion of the assets of the Separate Account that is allocated to a particular Fund. Each Subaccount invests in the shares of only one corresponding Fund. VALUATION DATE: The date and time at which the value of the Subaccount is calculated. Currently, this calculation occurs at the close of business of the New York Stock Exchange on any normal business day, Monday through Friday, that the New York Stock Exchange is open. - -------------------------------------------------------------------------------- DEFINITIONS - 2 PROSPECTUS SUMMARY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONTRACTS OFFERED The Contracts described in this Prospectus are group and individual deferred variable annuity contracts issued by Aetna Life Insurance and Annuity Company (the "Company"). The purpose of the Contract is to accumulate values and to provide benefits upon retirement. The Contracts are available for (1) public school systems and certain tax exempt (Section 501(c)(3)) organizations for their employees under Section 403(b) of the Code ("403(b) Plans"); (2) deferred compensation plans adopted by state and local governments for their employees or independent contractors or both under Section 457 of the Code ("457 Plans"); and (3) qualified defined contribution plans under Section 401(a) of the Code ("401 Plans"). CONTRACT PURCHASE The group Contract may be purchased by eligible organizations on behalf of a group made up of their employees. Eligible employees may participate in the Contract by completing the enrollment forms and submitting them to the Company. Purchase Payments can be applied to the Contract either through a lump-sum transfer from a pre-existing plan or through periodic salary reductions. Individual Contracts are no longer offered for sale, but were issued to Participants under some Section 403(b) Plans prior to May 1, 1996. (See "Purchase.") FREE LOOK PERIOD Participation under the Contract may be cancelled within 10 days after you receive the Contract or other document evidencing your interest in the Contract (or longer if required by state law) by returning it to the Company along with a written notice of cancellation. Unless state law requires otherwise, the amount you will receive upon cancellation will reflect the investment performance of the Subaccounts into which your Purchase Payments were deposited. In some cases this may be more or less than the amount of your Purchase Payments. (See "Purchase--Right to Cancel.") INVESTMENT OPTIONS The Company has established Variable Annuity Account C, a registered unit investment trust, for the purpose of funding the variable portion of the Contracts. The Separate Account is divided into subaccounts which invest directly in shares of the Funds described herein. The Contract allows investment in any or all of the Subaccounts, as well as in the Credited Interest Options described below. For a complete list of the Funds available under the Contracts, and a description of the investment objectives of each of the Funds and their investment advisers, see "Investment Options-- The Funds" in this Prospectus, as well as the prospectuses for each of the Funds. The Contract also provides for investment in Credited Interest Options which allow you to earn fixed rates of interest. The fixed options available under the Contract are the Guaranteed Accumulation Account ("GAA") and the Fixed Account. The Fixed Plus Account is available only to Participants in the State of Mississippi Deferred Compensation Plan. (See the Appendices to this Prospectus.) CHARGES AND DEDUCTIONS Certain charges are associated with these Contracts. These charges include daily deductions from the Separate Account (the mortality and expense risk charges and any administrative expense charge), as well as any annual maintenance fee and premium and other taxes. The Funds also incur certain fees and expenses which are deducted directly from the Funds. A deferred sales charge may apply upon a full or partial withdrawal of the Account Value. (See the Fee Table and "Charges and Deductions.") TRANSFERS Prior to the Annuity Date, and subject to certain limitations, Account Values may be transferred among the Subaccounts and the Credited Interest Options without charge. Transfers can be requested in writing or by telephone in accordance with the Company's transfer procedures. (See the Appendices for a full description of the restrictions applicable to transfers from the Credited Interest Options.) - -------------------------------------------------------------------------------- SUMMARY - 1 WITHDRAWALS The Contract Holder may withdraw all or a part of the Account Value prior to the Annuity Date by properly completing a disbursement form and sending it to the Company. Certain charges may be assessed upon withdrawal. The withdrawal may also be subject to income tax and a federal tax penalty. The Code restricts full and partial withdrawals under Section 403(b) Plans in some circumstances. (See "Withdrawals.") The Contract also offers certain Additional Withdrawal Options during the Accumulation Period to persons meeting certain criteria. Additional Withdrawal Options are not available in all states and may not be suitable in every situation. (See "Additional Withdrawal Options.") LOANS Participants under Section 403(b) Plans may request a loan from their Account Value at any time during the Accumulation Period. Loans are not available from Contracts issued under Section 457 and 401(a) Plans. (See "Contract Loans.") DEATH BENEFIT A death benefit is payable if the Participant dies before the Annuity Date. Death benefit proceeds will be paid in an amount equal to the Account Value. Until the election of a method of payment, the Account Value will remain invested under the Contract. The beneficiary may elect to receive the proceeds in a lump sum or under any of the payment options available under the Contract. However, the Code requires that distributions begin within a certain time period. (See "Death Benefit During Accumulation Period.") After Annuity Payments have commenced, a death benefit may be payable to the beneficiary depending upon the terms of the Contract and the Annuity Option selected. (See "Death Benefit Payable During the Annuity Period.") THE ANNUITY PERIOD On the Annuity Date, you may elect to begin receiving Annuity Payments which may be made on either a fixed, variable or combination fixed and variable basis. If a variable payout is selected, the payments will vary with the investment performance of the Subaccount(s) selected. The Company reserves the right to limit the number of Subaccounts that may be available during the Annuity Period. (See "Annuity Period.") TAXES For 457 Plans, contributions and earnings are not generally taxed until distributed or made available under the employer's plan. For Section 403(b) and 401(a) Plans, contributions and earnings are not generally taxed until you or your beneficiary(ies) actually receive a distribution from the Contract, and a 10% federal tax penalty and a 20% withholding for income tax may be imposed on certain withdrawals. (See "Tax Status.") INQUIRIES Questions, inquiries or requests for additional information can be directed to your agent or local representative, or you may contact the Company as follows: - Write to: Aetna Life Insurance and Annuity Company 151 Farmington Avenue Hartford, Connecticut 06156-1277 Attention: Customer Service - Call Customer Service: 1-800-525-4225 (for automated transfers or changes in the allocation of Account Values, call: 1-800-262-3862)
- -------------------------------------------------------------------------------- SUMMARY - 2 FEE TABLE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This Fee Table describes the various charges and expenses associated with the Contract during the Accumulation Period. For amounts deducted during the Annuity Period, see "Charges Deducted During the Annuity Period." No sales charge is paid upon purchase of the Contract. All costs that are borne directly or indirectly under the Subaccounts and Funds are shown below. Some expenses may vary as explained under "Charges and Deductions." Charges shown do not include premium taxes that may be applicable. For more information regarding fees and expenses paid out of the assets of a particular Fund, see the Fund's prospectus. DIRECT CHARGES. These charges are deducted directly from the Account Value. They include: DEFERRED SALES CHARGE. The deferred sales charge is deducted as a percentage of the amount withdrawn. The total amount deducted for the deferred sales charge will not exceed 8.5% of the total Purchase Payments applied to the Account. The amount of the deferred sales charge is calculated as follows:
INSTALLMENT PURCHASE PAYMENT ACCOUNTS: SINGLE PURCHASE PAYMENT ACCOUNTS: PURCHASE PAYMENT DEFERRED SALES ACCOUNT YEARS DEFERRED SALES PERIODS COMPLETED CHARGE DEDUCTION COMPLETED CHARGE DEDUCTION - ------------------------------ ---------------- ------------------------------ ---------------- Less than 5 5% Less than 5 5% 5 or more but less than 7 4% 5 or more but less than 6 4% 7 or more but less than 9 3% 6 or more but less than 7 3% 9 or more but less than 10 2% 7 or more but less than 8 2% More than 10 0% 8 or more but less than 9 1% 9 or more 0%
ANNUAL CONTRACT MAINTENANCE FEE -- Installment Purchase Payment Account................... $ 20.00 -- Single Purchase Payment Account........................... $ 0.00 The maintenance fee will generally be deducted annually from each Account during the Accumulation Period. The amount of the maintenance fee may be reduced or eliminated for group contracts. The amount shown is the MAXIMUM maintenance fee that can be deducted under the Contract.
INDIRECT CHARGES. Each Subaccount pays these expenses out of its assets. The charges are reflected in the Subaccount's daily Accumulation Unit Value and are not charged directly to an Account. They include: MORTALITY AND EXPENSE RISK CHARGE.......................................................... 1.25% ADMINISTRATIVE EXPENSE CHARGE. We currently do not impose an Administrative Expense Charge. However, we reserve the right to deduct a daily charge from the Subaccounts, equivalent on an annual basis to not more than 0.25%..................................................... 0.00% ----- TOTAL SEPARATE ACCOUNT CHARGES........................................................... 1.25%
- -------------------------------------------------------------------------------- FEE TABLE - 1 ANNUAL EXPENSES OF THE FUNDS The following table illustrates the advisory fees and other expenses applicable to the Funds. Except as noted, these figures are a percentage of each Fund's average net assets and are based on figures for the year ended December 31, 1995. A Fund's "Other Expenses" include operating costs of the Fund. These expenses are reflected in the Fund's net asset value and are not deducted from the Account Value under the Contract.
INVESTMENT ADVISORY FEES(1) OTHER EXPENSES TOTAL FUND (AFTER EXPENSE (AFTER EXPENSE ANNUAL REIMBURSEMENT) REIMBURSEMENT) EXPENSES -------------- -------------- ----------- Aetna Variable Fund(2) 0.25% 0.06% 0.31% Aetna Income Shares(2) 0.25% 0.08% 0.33% Aetna Variable Encore Fund(2) 0.25% 0.10% 0.35% Aetna Investment Advisers Fund, Inc.(2) 0.25% 0.08% 0.33% TCI Growth(3) 1.00% 0.00% 1.00%
- -------------------------- (1)Certain of the unaffiliated Fund advisers reimburse the Company for administrative costs incurred in connection with administering the Funds as variable funding options under the Contract. These reimbursements are paid out of the investment advisory fees and are not charged to investors. (2)As of May 1, 1996, the Company will provide administrative services to the Fund and will assume the Fund's ordinary recurring direct costs under an Administrative Services Agreement. The "Other Expenses" shown are not based on figures for the year ended December 31, 1995, but reflect the fee payable under this Agreement. (3)The Portfolio's investment adviser pays all expenses of the Portfolio except brokerage commissions, taxes, interest, fees and expenses of the non-interested directors (including counsel fees) and extraordinary expenses. These expenses have historically represented a very small percentage (less than 0.01%) of total net assets in a fiscal year. HYPOTHETICAL ILLUSTRATION (EXAMPLE) THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW. The following Examples illustrate the expenses that would have been paid assuming a $1,000 investment in the Contract and a 5% return on assets. For the purposes of these Examples, the maximum maintenance fee of $20.00 that can be deducted under the Contract has been converted to a percentage of assets equal to 0.097%.
EXAMPLE A EXAMPLE B ------------------------------------- ------------------------------------- IF YOU WITHDRAW YOUR ENTIRE ACCOUNT IF YOU DO NOT WITHDRAW YOUR ACCOUNT VALUE AT THE END OF THE PERIODS VALUE, OR IF YOU ANNUITIZE AT THE END SHOWN, YOU WOULD PAY THE FOLLOWING OF THE PERIODS SHOWN, YOU WOULD PAY EXPENSES, INCLUDING ANY APPLICABLE THE FOLLOWING EXPENSES (NO DEFERRED DEFERRED SALES CHARGE: SALES CHARGE IS REFLECTED):* 1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- ------ ------- ------- -------- Aetna Variable Fund $69 $107 $149 $196 $17 $ 52 $ 90 $196 Aetna Income Shares $69 $108 $150 $198 $17 $ 53 $ 91 $198 Aetna Variable Encore Fund $69 $109 $151 $201 $17 $ 53 $ 92 $201 Aetna Investment Advisers Fund, Inc. $69 $108 $150 $198 $17 $ 53 $ 91 $198 TCI Growth $75 $127 $182 $268 $24 $ 73 $125 $268
- ------------------------------ * This Example would not apply if a nonlifetime variable annuity option is selected, and a lump sum settlement is requested within three years after annuity payments start since the lump sum payment will be treated as a withdrawal during the Accumulation Period and will be subject to any deferred sales charge that would then apply. (Refer to Example A.) - -------------------------------------------------------------------------------- FEE TABLE - 2 CONDENSED FINANCIAL INFORMATION (SELECTED DATA FOR ACCUMULATION UNITS OUTSTANDING THROUGHOUT EACH PERIOD) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE CONDENSED FINANCIAL INFORMATION PRESENTED BELOW FOR EACH OF THE YEARS IN THE TEN-YEAR PERIOD ENDED DECEMBER 31, 1995 (AS APPLICABLE), IS DERIVED FROM THE FINANCIAL STATEMENTS OF THE SEPARATE ACCOUNT, WHICH FINANCIAL STATEMENTS HAVE BEEN AUDITED BY KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS. THE FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE INDEPENDENT AUDITORS' REPORT THEREON, ARE INCLUDED IN THE STATEMENT OF ADDITIONAL INFORMATION.
1995 1994 1993 1992 1991 1990 ---------- ---------- ---------- ---------- ---------- ---------- AETNA VARIABLE FUND Value at beginning of period $105.558 $107.925 $102.383 $97.165 $77.845 $76,311 Value at end of period $137.869 $105.558 $107.925 $102.383 $97.165 $77.845 Increase (decrease) in value of accumulation unit(1) 30.61% (2.19)% 5.41% 5.37% 24.82% 2.01% Number of accumulation units outstanding at end of period 6,364,000 13,966,072 21,148,863 24,201,565 20,948,226 18,362,906 AETNA INCOME SHARES Value at beginning of period $40.173 $42.283 $39.038 $36.789 $31.192 $28.943 Value at end of period $46.913 $40.173 $42.283 $39.038 $36.789 $31.192 Increase (decrease) in value of accumulation unit(1) 16.78% (4.99)% 8.31% 6.11% 17.94% 7.77% Number of accumulation units outstanding at end of period 2,377,622 5,108,720 8,210,666 8,507,292 7,844,412 6,984,793 AETNA VARIABLE ENCORE FUND Value at beginning of period $36.271 $35.282 $34.619 $33.812 $32.138 $30.012 Value at end of period $37.988 $36.271 $35.282 $34.619 $33.812 $32.138 Increase (decrease) in value of accumulation unit(1) 4.73% 2.80% 1.92% 2.39% 5.21% 7.08% Number of accumulation units outstanding at end of period 1,826,260 3,679,802 5,086,515 7,534,662 8,430,082 10,220,110 AETNA INVESTMENT ADVISERS FUND, INC. Value at beginning of period $14.270 $14.519 $13.379 $12.736 $10.896 $10.437 Value at end of period $17.954 $14.270 $14.519 $13.379 $12.736 $10.896 Increase (decrease) in value of accumulation unit(1) 25.82% (1.71)% 8.52% 5.05% 16.89% 4.40% Number of accumulation units outstanding at end of period 9,193,181 21,990,186 30,784,750 34,802,433 22,898,099 17,078,985 TCI GROWTH Value at beginning of period $10.213 $10.463 $10.000(3) Value at end of period $13.224 $10.213 $10.463 Increase (decrease) in value of accumulation unit(1) 29.47% (2.39)% 4.63% Number of accumulation units outstanding at end of period 4,184,701 12,096,731 12,272,152 1989 1988 1987 1986 ---------- ---------- ---------- ---------- AETNA VARIABLE FUND Value at beginning of period $59.871 $52.885 $50.760 $43.205 Value at end of period $76.311 $59.871 $52.885 $50.760 Increase (decrease) in value of accumulation unit(1) 27.46% 13.21% 4.19% 17.49% Number of accumulation units outstanding at end of period 17,142,820 16,455,396 16,497,406 16,578,251 AETNA INCOME SHARES Value at beginning of period $25.574 $24.061 $23.308 $20.703 Value at end of period $28.943 $25.574 $24.061 $23.308 Increase (decrease) in value of accumulation unit(1) 13.17% 6.29% 3.23% 12.58% Number of accumulation units outstanding at end of period 6,202,834 5,955,293 5,372,271 6,188,470 AETNA VARIABLE ENCORE FUND Value at beginning of period $27.783 $26.171 $24.812 $23.504 Value at end of period $30.012 $27.783 $26.171 $24.812 Increase (decrease) in value of accumulation unit(1) 8.02% 6.16% 5.48% 5.57% Number of accumulation units outstanding at end of period 8,286,033 8,154,644 7,326,151 6,692,947 AETNA INVESTMENT ADVISERS FUND, INC. Value at beginning of period $10.000(2) Value at end of period $10.437 Increase (decrease) in value of accumulation unit(1) 4.37% Number of accumulation units outstanding at end of period 9,535,986 TCI GROWTH Value at beginning of period Value at end of period Increase (decrease) in value of accumulation unit(1) Number of accumulation units outstanding at end of period
(1) The above figures are calculated by subtracting the beginning Accumulation Unit value from the ending Accumulation Unit value during a calendar year, and dividing the result by the beginning Accumulation Unit value. These figures do not reflect the deferred sales charge or the fixed dollar annual maintenance fee, if any. Inclusion of these charges would reduce the investment results shown. (2) The initial Accumulation Unit value was established at $10.000 on June 23, 1989, the date on which the Fund commenced operations. (3) The initial Accumulation Unit value was established at $10.000 on February 1, 1993, the date on which the Portfolio became available under the Contract. - -------------------------------------------------------------------------------- AUV HISTORY - 1 THE COMPANY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Aetna Life Insurance and Annuity Company (the "Company") is the issuer of the Contract, and as such, it is responsible for providing the insurance and annuity benefits under the Contract. The Company is a stock life insurance company organized under the insurance laws of the State of Connecticut in 1976. Through a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity Life Insurance Company, an Arkansas life insurance company organized in 1954). The Company is engaged in the business of issuing life insurance policies and variable annuity contracts in all states of the United States. The Company's principal executive offices are located at 151 Farmington Avenue, Hartford, Connecticut 06156. The Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc., which is in turn a wholly owned subsidiary of Aetna Retirement Services, Inc., and an indirect wholly owned subsidiary of Aetna Life and Casualty Company. VARIABLE ANNUITY ACCOUNT C - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Company established Variable Annuity Account C (the "Separate Account") in 1976 as a segregated asset account for the purpose of funding its variable annuity contracts. The Separate Account is registered as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act"), and meets the definition of "separate account" under the federal securities laws. The Separate Account is divided into "subaccounts" which do not invest directly in stocks, bonds or other investments. Instead, each Subaccount buys and sells shares of a corresponding Fund. Although the Company holds title to the assets of the Separate Account, such assets are not chargeable with liabilities of any other business conducted by the Company. Income, gains or losses of the Separate Account are credited to or charged against the assets of the Separate Account without regard to other income, gains or losses of the Company. All obligations arising under the Contracts are general corporate obligations of the Company. INVESTMENT OPTIONS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE FUNDS Purchase Payments may be allocated to one or more of the Subaccounts as designated on the enrollment form. In turn, the Subaccounts invest in the corresponding Funds at net asset value. Under group Contracts, the Contract Holder may decide to offer only a select number of Funds under its Plan, or it may decide to substitute shares of one Fund for shares of another Fund currently held by the Separate Account. The availability of Funds may be subject to regulatory authorization. In addition, the Company may add or withdraw Funds, as permitted by applicable law. Not all Funds may be available in all jurisdictions, under all Contracts, or in all Plans. The investment results of the Funds described below are likely to differ significantly and there is no assurance that any of the Funds will achieve their respective investment objectives. Except where otherwise noted, all of the Funds are diversified, as defined in the 1940 Act. - -AETNA VARIABLE FUND seeks to maximize total return through investments in a diversified portfolio of common stocks and securities convertible into common stock.(1) - -AETNA INCOME SHARES seeks to maximize total return, consistent with reasonable risk, through investments in a diversified portfolio consisting primarily of debt securities.(1) - -AETNA VARIABLE ENCORE FUND seeks to provide high current return, consistent with preservation of capital and liquidity, through investment in high-quality money market instruments. An investment in the Fund is neither insured nor guaranteed by the U.S. Government.(1) - -------------------------------------------------------------------------------- 1 - -AETNA INVESTMENT ADVISERS FUND, INC. is a managed fund which seeks to maximize investment return consistent with reasonable safety of principal by investing in one or more of the following asset classes: stocks, bonds and cash equivalents based on the Company's judgment of which of those sectors or mix thereof offers the best investment prospects.(1) - -TCI PORTFOLIOS, INC.--TCI GROWTH (a Twentieth Century fund) seeks capital growth. The Fund seeks to achieve its objective by investing in common stocks (including securities convertible into common stocks) and other securities that meet certain fundamental and technical standards of selection and, in the opinion of the Fund's investment manager, have better than average potential for appreciation.(2) Investment Advisers for each of the Funds: (1) Aetna Life Insurance and Annuity Company (2) Investors Research Corporation RISKS ASSOCIATED WITH INVESTMENT IN THE FUNDS. Some of the Funds may use instruments known as derivatives as part of their investment strategies. The use of certain derivatives may involve high risk of volatility to a Fund, and the use of leverage in connection with such derivatives can also increase risk of losses. Some of the Funds may also invest in foreign or international securities which involve greater risks than U.S. investments. More comprehensive information, including a discussion of potential risks, is found in the respective Fund prospectuses which accompany this Prospectus. You should read the Fund prospectuses and consider carefully, and on a continuing basis, which Fund or combination of Funds is best suited to your long-term investment objectives. CONFLICTS OF INTEREST (MIXED AND SHARED FUNDING). Shares of the Funds are sold to each of the Subaccounts for funding the variable annuity contracts issued by the Company. Shares of the Funds may also be sold to other insurance companies for the same purpose. This is referred to as "shared funding." Shares of the Funds may also be used for funding variable life insurance contracts issued by the Company or by third parties. This is referred to as "mixed funding." Because the Funds available under the Contract are sold to fund variable annuity contracts and variable life insurance policies issued by us or by other companies, certain conflicts of interest could arise. If a conflict of interest were to occur, one of the separate accounts might withdraw its investment in a Fund, which might force that Fund to sell portfolio securities at disadvantageous prices, causing its per share value to decrease. Each Fund's Board of Directors or Trustees has agreed to monitor events in order to identify any material irreconcilable conflicts which might arise and to determine what action, if any, should be taken to address such conflict. CREDITED INTEREST OPTIONS Purchase Payments may be allocated to one or more of the Credited Interest Options available under the Contract, as described below. The Contract Holder may elect not to offer all Credited Interest Options under its Plan. - - The Guaranteed Accumulation Account (GAA) is a credited interest option through which we guarantee stipulated rates of interest for stated periods of time. Amounts must remain in the GAA for the full guaranteed term to received the quoted interest rates, or a market value adjustment (which may be positive or negative) will be applied. (See Appendix I.) - - The Fixed Account is a part of the Company's general account. The Fixed Account guarantees a minimum interest rate, as specified in the Contract. The Company may credit higher interest rates from time to time. Transfers from the Fixed Account are limited. (See Appendix II.) PURCHASE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONTRACT AVAILABILITY The Contracts are designed to fund Plans adopted by (1) public school systems and certain tax-exempt (Section 501(c)(3)) organizations for their employees under Section 403(b) of the Code; (2) deferred compensation plans adopted by state and local governments for their employees or independent contractors or both under Section 457; and (3) qualified defined contribution plans under Section 401(a) of the Code. The Contract Holder must notify the Company as to whether Title I of ERISA including the Retirement Equity Act of 1984, applies to the Plan. - -------------------------------------------------------------------------------- 2 Only interests in group contracts are currently offered for sale; however, individual contracts were available in the past for use in connection with certain Section 403(b) plans, and this prospectus also describes those individual Contracts. Eligible participants in the Plan seeking to invest and accumulate money for retirement can purchase individual interests in group Contracts. The group Contract is generally owned by the employer or association, and individual accounts are established for each Participant. An individual Contract is owned by the Participant. In both cases, a Participant's interest in the Contract is known as his or her "Account." For Contracts issued to 457 Plans, the Contract Holder has all right, title and interest in amounts held under the Contract. The Contract will be part of the employer's general assets, subject to the claims of its general creditors. For group Contracts issued to 403(b) Plans, the Contract is issued to the employer as the Contract Holder. However, Participants have rights and interest in amounts held under the Contract. For individual Contracts, Participants have all rights under the Contract. For Contracts issued to 401(a) Plans, Participants have such rights under the Contract as are set forth under the Plan. Benefits available to you are governed exclusively by the provisions of the Plan. Some of the options and elections under the Contract may not be available to you under the provisions of the Plan. Generally, for 403(b) Plans, elections may be made by you; for 457 Plans, elections must be made by the Contract Holder. There are times when employers and employees enter into an agreement whereby, as a condition of employee participation in a 403(b) Plan, the employees agree that the employer will have sole responsibility for all Contract transactions. While we are not a party to any 403(b) Plans adopted by various employers, we recognize each such agreement between the employer and employees and, in those situations, require employer authorization for all Contract transactions. PURCHASING INTERESTS IN THE CONTRACT Eligible organizations may acquire a group Contract by submitting the appropriate forms to the Company. Once we approve the forms, a group Contract is issued to the employer or association as the group Contract Holder. Participants may purchase interests in a group Contract by submitting an enrollment form to the Company. The Company must accept or reject the enrollment forms within two business days of receipt. If the enrollment forms are incomplete, the Company may hold any forms and accompanying Purchase Payments for five days. Purchase Payments may be held for longer periods, pending acceptance of the enrollment forms only with the consent of the Participant, or under limited circumstances, with the consent of the group Contract Holder. If we agree to hold Purchase Payments for longer than the five business days based on the consent of the group Contract Holder, they will be deposited in the Aetna Variable Encore Fund Subaccount until the forms are completed. PURCHASE PAYMENTS Generally, two types of Purchase Payments may be made under the Contract, and depending upon which type of payment is made, different Accounts may be established for each payment type. Continuing, periodic payments will be placed in "Installment Purchase Payment Accounts." Lump-sum transfers of amounts accumulated under a pre-existing plan may be placed in "Single Purchase Payment Accounts" in accordance with the Company's procedures and minimums in effect at the time of purchase. The Code imposes a maximum limit on annual Purchase Payments which may be excluded from a Participant's gross income. (See "Tax Status.") For 457 Plan Participants, installment Purchase Payments must be at least $50 per month ($600 annually) per Participant, and may not be less than $25 per payment. ALLOCATION OF PURCHASE PAYMENTS. Purchase Payments will initially be allocated to the Subaccounts or Credited Interest Options as specified by the Participant on the enrollment forms. Changes in such allocation may be made in writing or by telephone transfer. Allocations must be in whole percentages. (See "Transfers.") TRANSFER CREDITS The Company may provide a transfer credit on "transferred assets," subject to certain conditions and state approvals. Transferred assets are the value of contributions made on your behalf under this Plan or a prior plan before such amounts are applied to this Contract. The transfer credit will equal a percentage of the transferred assets applied to the Contract that remain - -------------------------------------------------------------------------------- 3 in the Contract after a specified period of time. Once a transfer credit is applied to your Contract, all provisions of the Contract apply. This benefit is provided on a nondiscriminatory basis. If a transfer credit is due under the Contract, you will be provided with additional information specific to the Contract. RIGHT TO CANCEL Participation under the Contract may be cancelled without penalty by returning it (or other document evidencing your interest) to the Company with a written notice of your intent to cancel. In most states, you have ten days to exercise this right; some states allow you a longer free-look period. When we receive your request for cancellation, we will return your Account Value, unless the laws of the state in which the Contract was issued require that we return the initial Purchase Payment (if greater than the Account Value). In states that do not require a return of Purchase Payments, you bear the entire investment risk for amounts allocated among the Subaccounts during the free look period. Account Values will be determined as of the Valuation Date on which we receive your request for cancellation at our Home Office. CHARGES AND DEDUCTIONS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DAILY DEDUCTIONS FROM THE SEPARATE ACCOUNT MORTALITY AND EXPENSE RISK CHARGE. The Company makes a daily deduction from each of the Subaccounts for the mortality and expense risk charge. The Charge is equal, on an annual basis, to 1.25% of the daily net assets of the Subaccounts and compensates the Company for the assumption of the mortality and expense risks under the Contract. The mortality risks are those assumed for our promise to make lifetime payments according to annuity rates specified in the Contract. The expense risk is the risk that the actual expenses for costs incurred under the Contract will exceed the maximum costs that can be charged under the Contract. If the amount deducted for mortality and expense risks is not sufficient to cover the mortality costs and expense shortfalls, the loss is borne by the Company. If the deduction is more than sufficient, the excess may be used to recover distribution expenses relating to the Contracts and as a source of profit to the Company. The Company expects to make a profit from the mortality and expense risk charge. ADMINISTRATIVE EXPENSE CHARGE. The Company reserves the right to make a deduction from each of the Subaccounts for an administrative expense charge. The administrative expense charge compensates the Company for administrative expenses that exceed revenues from the maintenance fee described below. The charge is set at a level which does not exceed the average expected cost of the administrative services to be provided while the Contract is in force. The Company does not expect to make a profit from this charge. Under the Contract, the amount of the administrative expense charge may be of an amount equal, on an annual basis, to a maximum of 0.25% of the daily net assets of the Subaccounts. There is currently no administrative expense charge during the Accumulation Period or the Annuity Period. Once an Annuity Option is elected, the charge will be established and will be effective during the entire Annuity Period. MAINTENANCE FEE During the Accumulation Period, the Company will deduct an annual maintenance fee from each Installment Purchase Payment Account on its anniversary date. The maintenance fee is to reimburse the Company for some of its administrative expenses relating to the establishment and maintenance of the Accounts. The maintenance fee, to the extent permitted by state law, is also deducted upon termination of an individual or Plan Account. The annual maintenance fee on each Account or Plan Account is $15 for those Plans where annual aggregate Purchase Payments are expected to be in excess of $100,000 and the sponsoring employer has agreed to accommodate group meetings on its premises for soliciting potential Participants. For Plans not meeting these criteria, the annual maintenance fee is $20. The maintenance fee will be deducted on a pro rata basis from each Subaccount in which you have an interest. If the Account Value is withdrawn, the full maintenance fee will be deducted at the time of withdrawal. If a university establishes a Section 403(b) Plan and both employer and employee salary reduction contributions are made, two individual Accounts will be established for each Participant. However, only one maintenance fee will be imposed provided average annual Purchase payments are $5,000 per Participant and annual Purchase payments for the Plan are $500,000 or more. - -------------------------------------------------------------------------------- 4 There is no maintenance fee deducted from a separate individual Account established under an installment Purchase Payment Contract for a lump-sum payment of $10,000 or more made to the Contract on your behalf. No annual maintenance fee is deducted from a Plan Account established by a 403(b) Contract Holder under an unallocated Contract. REDUCTION OR ELIMINATION OF THE MAINTENANCE FEE. Under group Contracts, the annual maintenance fee may be reduced or eliminated under various conditions as agreed to by us and by the Contract Holder in writing. Any reduction or elimination of the annual maintenance fee will reflect differences in administrative costs and services after taking into consideration factors such as the following: - - the size, characteristics, and nature of the group to which a Contract is issued; - - the level of our anticipated expenses in administering the Contract, such as billing for Purchase Payments, producing periodic reports, providing for the direct payment of contract charges rather than having them deducted from Account Values, and any other factors pertaining to the level and expense of administrative services which will be provided under the Contract. Any reduction or elimination of maintenance fees will not be unfairly discriminatory against any person. We will make any reduction in annual maintenance fees according to our own rules in effect at the time an application for a Contract is approved. We reserve the right to change these rules from time to time. DEFERRED SALES CHARGE Withdrawals of all or a portion of the Account Value may be subject to a deferred sales charge. The deferred sales charge is a percentage of amount withdrawn from the Subaccounts, the Fixed Account or the Guaranteed Accumulation Account. For Installment Purchase Payment Accounts, the deferred sales charge is based on the number of completed Purchase Payment Periods. For Single Purchase Payment Accounts, it is based on the number of Contract Years that have elapsed since the Contract effective date. The amount of the deferred sales charge is determined in accordance with the schedule set forth in the following tables:
INSTALLMENT PURCHASE PAYMENT ACCOUNTS: DEFERRED SALES PURCHASE PAYMENT CHARGE PERIODS COMPLETED DEDUCTION - -------------------- --------------- Less than 5 5% 5 or more but less than 7 4% 7 or more but less than 9 3% 9 or more but less than 10 2% More than 10 0%
SINGLE PURCHASE PAYMENT ACCOUNTS: DEFERRED SALES ACCOUNT YEARS CHARGE COMPLETED DEDUCTION - -------------------- --------------- Less than 5 5% 5 or more but less than 6 4% 6 or more but less than 7 3% 7 or more but less than 8 2% 8 or more but less than 9 1% 9 or more 0%
A deferred sales charge will not be deducted from any portion of the Account Value if the withdrawal is: - - applied to provide Annuity benefits; - - taken on or after the tenth anniversary of the effective date of the Account; - - paid due to your death before Annuity payments begin; - - made due to the election of an Additional Withdrawal Option (see "Additional Withdrawal Options"); - - paid where the Account Value is $2,500 or less and no amount has been withdrawn, taken as a loan, or used to purchase Annuity benefits during the prior 12 months. This provision is not available under Plan Accounts (where individual Accounts are not maintained by us) or applicable to the withdrawal of all individual Accounts under one Contract established with us; - - taken from an installment Purchase Payment Account by a Participant who is at least age 59 1/2 and who has completed nine Purchase Payment Periods; or - - taken due to an unforeseeable emergency provisions as described in the Code (457 Plans only). The deduction for the deferred sales charge will not exceed 8.5% of the total Purchase Payments actually made to the Account. The Company does not anticipate that the deferred sales charge will cover all sales and - -------------------------------------------------------------------------------- 5 administrative expenses which it incurs in connection with the Contract. The difference will be covered by the general assets of the Company which are attributable, in part, to mortality and expense risk charges under the Contract described above. FREE WITHDRAWALS. For Participants between the ages of 59 1/2 and 70 1/2 under Section 403(b) Plans, up to 10% of the current Account Value may be withdrawn during each calendar year without imposition of a deferred sales charge. The free withdrawal applies only to the first partial withdrawal in each calendar year. The 10% amount will be based on the Account Value calculated on the Valuation Date next following our receipt of your request for withdrawal. Any outstanding contract loans are excluded from the Account Value when calculating the 10% free withdrawal amount. This provision does not apply to a full withdrawal of the Account, or to partial withdrawals due to a default on a contract loan (see "Contract Loans"). This provision may not be exercised if an Additional Withdrawal Option is elected. (See "Additional Withdrawal Options.") REDUCTION OR ELIMINATION OF THE DEFERRED SALES CHARGE. For a particular plan, we may reduce, waive or eliminate the deferred sales charge. Any reduction, waiver or elimination of such charges will reflect differences or expected differences in the amounts of unrecovered distribution costs or services of the types that the charge is intended to defray. When considering whether to reduce or eliminate such charges or to grant such a waiver, we will take into account factors which may include the following: - - the number of participants under the Plan; - - the expected level of assets or cash flow under the Plan; - - the level of agent involvement in sales activities; - - the level of our sales-related expenses; - - the specific distribution provisions under the Plan; - - the Plan's purchase of one or more other variable annuity contracts from us and the features of those contracts; - - the level of employer involvement in determining eligibility for distributions under the Contract; and - - our assessment of financial risk to the Company relating to surrenders. Any reduction, waiver or elimination of deferred sales charges will not be unfairly discriminatory against any person. We may also negotiate provisions regarding the deferred sales charge with respect to Contracts issued to certain employer groups or associations which have negotiated on behalf of its employees. All variations in, or elimination of, provisions regarding the deferred sales charge resulting from such negotiations will be offered uniformly to all employees within the group. For specific information on fees applicable to your Account, please call the number listed under the "Inquiries" section. We will make any reduction in deferred sales charge according to our own rules in effect at the time an application for a Contract is approved. We reserve the right to change these rules from time to time. FUND EXPENSES Each Fund incurs certain expenses which are paid out of its net assets. These expenses include, among other things, the investment advisory or "management" fee. The expenses of the Funds are set forth in the Fee Table in this Prospectus and described more fully in the accompanying Fund prospectuses. PREMIUM AND OTHER TAXES Several states and municipalities impose a premium tax on Annuities. These taxes currently range from 0% to 4%. The Company reserves the right to deduct premium tax against Purchase Payments or Account Values at any time, but no earlier than when we have a tax liability under state law. The Company's current practice is to deduct for premium taxes at the time of complete withdrawal or annuitization. In addition to the premium tax, the Company reserves the right to assess a charge for any state or federal taxes due against the Contract or the Separate Account assets. (See "Tax Status.") CONTRACT VALUATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ACCOUNT VALUE Until the Annuity Date, the Account Value is the total dollar value of amounts held in the Account as of any Valuation Date. The Account Value at any given time is based on the value of the units held in each Subaccount, plus the value of amounts held in any of the Credited Interest Options. - -------------------------------------------------------------------------------- 6 ACCUMULATION UNITS The value of your interests in a Subaccount is expressed as the number of "Accumulation Units" that you hold multiplied by an "Accumulation Unit Value" (or "AUV") for each unit. The AUV on any Valuation Date is determined by multiplying the value on the immediately preceding Valuation Date by the net investment factor of that Subaccount for the period between the immediately preceding Valuation Date and the current Valuation date. (See "Net Investment Factor" below.) The Accumulation Unit Value will be affected by the investment performance, expenses and charges of the applicable Fund and is reduced each day by a percentage that accounts for the daily assessment of mortality and expense risk charges and the administrative expense charge (if any). Initial Purchase Payments will be credited to your Account as described under "Purchasing Interests in the Contract." Each subsequent Purchase Payment (or amount transferred) will be credited to your Account at the AUV computed on the next Valuation Date following our receipt of your payment or transfer request. The value of an Accumulation Unit may increase or decrease. NET INVESTMENT FACTOR The net investment factor is used to measure the investment performance of a Subaccount from one Valuation Date to the next. The net investment factor for a Subaccount for any valuation period is equal to the sum of 1.0000 plus the net investment rate. The net investment rate equals: (a) the net assets of the Fund held by the Subaccount on the current Valuation Date, minus (b) the net assets of the Fund held by the Subaccount on the preceding Valuation Date, plus or minus (c) taxes or provisions for taxes, if any, attributable to the operation of the Subaccount; (d) divided by the total value of the Subaccount's Accumulation and Annuity Units on the preceding Valuation Date; (e) minus a daily charge at the annual effective rate of 1.25% for mortality and expense risks and up to 0.25% as an administrative expense charge (currently 0%). The net investment rate may be either positive or negative. TRANSFERS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- At any time prior to the Annuity Date, you can transfer amounts held under your Contract from one Subaccount to another. Transfers between the Credited Interest Options and the Subaccounts are subject to certain restrictions. (See Appendices I, II and III.) A request for transfer can be made either in writing or by telephone. The telephone transfer privilege is available automatically; no special election is necessary. All transfers must be in accordance with the terms of the Contract and your Plan, as applicable. The Company currently allows unlimited transfers of accumulated amounts to available investment options without charge. The transfer amount may not be less than $500. Any transfer will be based on the Accumulation Unit Value next determined after the Company receives a valid transfer request at its Home Office. Transfers are currently not available during the Annuity Period; however, they may be available under some Annuity Options beginning later in 1996. (See "Annuity Period-- Annuity Options.") WITHDRAWALS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- For Section 457 Plans, the Contract Holder may withdraw all or a portion of the individual Account Value or a Plan Account Value during the Accumulation Period by properly completing a disbursement form and sending it to our Home Office. For Section 403(b) Plans, if permitted by the Plan, you may request to withdraw all or a portion of your Account Value, subject to the withdrawal restrictions for Section 403(b) Plans described below. If you are married and are participating in an ERISA 403(b) Plan, your spouse must consent in writing to the withdrawal request. Withdrawals under Section 401(a) Plans are governed by the terms of the Plan as interpreted by the Contract Holder and communicated to the Company. Payments for withdrawal requests will be - -------------------------------------------------------------------------------- 7 made in accordance with SEC requirements, but normally not later than seven calendar days following our receipt of a disbursement form. Withdrawals may be requested in one of the following forms: - -FULL WITHDRAWAL OF THE CONTRACT: The amount paid will be the value of the Plan Account or all Accounts minus any applicable deferred sales charge and maintenance fee due. Only the group Contract Holder may request a full withdrawal of the Contract. - -FULL WITHDRAWAL OF AN ACCOUNT: The amount paid upon a full withdrawal will be the Account Value allocated to the Subaccounts, the Guaranteed Accumulation Account (plus or minus a market value adjustment) (see Appendix I), and the Fixed Account, minus any applicable deferred sales charge and maintenance fee due. - -PARTIAL WITHDRAWALS (Percentage): The amount paid will be the percentage of the Account Value requested minus any applicable deferred sales charge. - -PARTIAL WITHDRAWAL (Specified Dollar Amount): The amount paid will be the dollar amount requested. However, the amount withdrawn from the Account will equal the amount requested plus any applicable deferred sales charge. For information about withdrawals from the Fixed Plus Account (if available) see Appendix III. For any partial withdrawal, amounts will be withdrawn proportionately from each Subaccount or Credited Interest Option in which the Account is invested, unless you request otherwise in writing. All amounts paid will be based on Account Values as of the next Valuation Date after we receive a request for withdrawal at our Home Office, or on such later date as the disbursement form may specify. Under Section 403(b) Plans and Section 401(a) Plans, a 20% federal income tax may be withheld from amounts paid directly to you. (See "Tax Status-- Contracts Used with Certain Retirement Plans.") WITHDRAWAL RESTRICTIONS FROM 403(B) PLANS. Under Section 403(b) Contracts, a withdrawal of salary reduction contributions and earnings on such contributions is generally prohibited prior to the Participant's death, disability, attainment of age 59 1/2, separation from service or financial hardship. (See "Tax Status.") REINVESTMENT PRIVILEGE The Contract Holder or, if permitted by the Plan, you, may elect to reinvest all or a portion of the proceeds received from a full withdrawal of your Account or Plan Account within 30 days after such withdrawal has been made. Accumulation Units will be credited to the Account for the amount reinvested, as well as any applicable maintenance fee and any appropriate portion of any deferred sales charge imposed at the time of withdrawal. Any maintenance fee which falls due after the withdrawal and before the reinvestment will be deducted from the amounts reinvested. Reinvested amounts will be reallocated to the applicable investment options in the same proportion as they were allocated at the time of withdrawal. Accumulation Units will be credited to your Account based on the Accumulation Unit Value next computed following our receipt of your request along with the amount to be reinvested. See Appendix I for a discussion of amounts withdrawn from GAA and then reinvested. The reinvestment privilege may be used only once. If you are contemplating reinvestment, you should seek competent advice regarding the tax consequences associated with such a transaction. CONTRACT LOANS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- During the Accumulation Period, Participants in 403(b) Plans may request a loan from their Account Value. Loans can only be taken from those Account Values held in the Subaccounts or from those Credited Interest Options that allow loans. (See Appendices I, II and III.) A loan may be obtained by reviewing and reading the terms of the loan agreement, properly completing a loan request form and submitting it to the Company's Home Office. Loans are not available under Contracts issued to Section 457 or 401(a) Plans. Additionally, loans are not available from values held in TCI Growth, although the entire Account Value is used to determine the maximum loan that may be made. - -------------------------------------------------------------------------------- 8 ADDITIONAL WITHDRAWAL OPTIONS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Company offers certain withdrawal options under the Contract that are not considered annuity options ("Additional Withdrawal Options"). To exercise these options, your Account Value must meet the minimum dollar amounts and age criteria applicable to that option and Plan. The Additional Withdrawal Options currently available under the Contract include the following: - - SWO--SYSTEMATIC WITHDRAWAL OPTION. SWO is a series of partial withdrawals from your Account based on a payment method you select. It is designed for those who want a periodic income while retaining investment flexibility for amounts accumulated under a Contract. (This option may not be elected if you have an outstanding contract loan.) - - ECO--ESTATE CONSERVATION OPTION. ECO offers the same investment flexibility as SWO but is designed for those who want to receive only the minimum distribution that the Code requires each year. Under ECO, the Company calculates the minimum distribution amount required by law at age 70 1/2 (or retirement, if later, for governmental or church plans), and pays you that amount once a year. (See "Tax Status.") Other Additional Withdrawal Options may be added from time to time. Additional information relating to any of the Additional Withdrawal Options may be obtained from your local representative or from the Company at its Home Office. If you select one of the Additional Withdrawal Options, you will retain all of the rights and flexibility permitted under the Contract during the Accumulation Period. Your Account Value will continue to be subject to the charges and deductions described in this Prospectus. Once an Additional Withdrawal Option is elected Participants under a 403(b) Plan and Contract Holders under 457 Plans may revoke it any time by submitting a written request to our Home Office. Once an option is revoked, it may not be elected again, nor may any other Additional Withdrawal Options be elected unless permitted by the Code. The Company reserves the right to discontinue the availability of one or all of these Additional Withdrawal Options at any time, and/or to change the terms of future elections. DEATH BENEFIT DURING ACCUMULATION PERIOD - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Contract provides that a death benefit is payable to the beneficiary named in the Contract. For Section 457 Plans and 401 Plans, the Contract Holder is the beneficiary under the Contract, but may direct that we make such payment to the beneficiary under the Plan upon the death of the Participant before the Annuity Date. The amount of the death benefit will be equal to the Account Value. Death benefit proceeds may be paid to the beneficiary: - - in a lump sum; - - in accordance with any of the Annuity Options available under the Contract; or - - under any Additional Withdrawal Options available under the Contract (if the beneficiary is your spouse). The beneficiary may instead elect one of the following two options; however, the Code limits how long the death benefit proceeds may be left in these options (see below): - - to leave the Account Value invested in the Contract; or - - to leave the Account Value on deposit in the Company's general account, and to receive monthly, quarterly, semi-annual or annual interest payments at the interest rate then being credited on such deposits. The balance on deposit can be withdrawn at any time or applied to an Annuity Option. When paying the beneficiary, we will determine the Account Value on the Valuation Date following the date on which we receive proof of death acceptable to the Company. Interest, if any, will be paid from the date of - -------------------------------------------------------------------------------- 9 death at a rate no less than required by law. We will mail payment to the beneficiary within seven days after we receive proof of death. The Code requires that distribution of death proceeds begin within a certain period of time. Generally, either payments must begin by December 31 of the year following the year of your death, or the entire value of your benefits must be distributed by December 31 of the fifth year following the year of your death. If your beneficiary is your spouse, he or she is not required to begin distributions until the year you would have attained age 70 1/2. In no event may payments extend beyond the life expectancy of the beneficiary or any period certain greater than the beneficiary's life expectancy. If no elections are made, no distributions will be made. Failure to commence distributions within the above time periods can result in tax penalties. Regardless of the method of payment, death benefit proceeds will generally be taxed to the beneficiary in the same manner as if you had received those payments. (See "Tax Status.") ANNUITY PERIOD - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ANNUITY PERIOD ELECTIONS The Code generally requires that minimum annual distributions of the Account Value must begin by April 1st of the calendar year following the calendar year in which a Participant attains age 70 1/2 or retires, if later, for government or church plans. In addition, distributions must be in a form and amount sufficient to satisfy the Code requirements. These requirements may be satisfied by the election of certain Annuity Options or Additional Withdrawal Options. (See "Tax Status.") At least 30 days prior to the Annuity Date, the Participant under a Section 403(b) Plan, or the Contract Holder under a Section 457 or Section 401(a) Plan, must notify us in writing of the following: - - the date on which annuity payments should start; - - the Annuity Option under which payments should be calculated and paid; - - whether the payments are to be made monthly, quarterly, semi-annually or annually; and - - the investment option(s) used to provide annuity payments (i.e., a fixed annuity using the general account or any of the Subaccounts available at the time of annuitization). As of the date of this Prospectus, Aetna Variable Fund, Aetna Income Shares and Aetna Investment Advisers Fund, Inc. are the only Subaccounts available; however, additional Subaccounts may become available under some Annuity Options in the future. (See "Annuity Options" below.) Annuity Payments will not begin until an Annuity Option is elected. Until a date and option are elected, the Account will continue in the Accumulation Period. If your Plan is subject to ERISA, you must also submit the appropriate joint and survivor annuity waiver and spousal consent form(s) to us. Once Annuity Payments begin, the Annuity Option may not be changed, nor may transfers currently be made among the investment option(s) selected. (See "Annuity Options" below for more information about transfers during the Annuity Period.) ANNUITY OPTIONS The Annuity Options currently available are as follows. LIFETIME ANNUITY OPTIONS: - -OPTION 1--Life Annuity--An annuity with payments ending on the Annuitant's death. - -OPTION 2--Life Annuity with Guaranteed Payments-- An annuity with payments guaranteed for 5, 10, 15 or 20 years or such other periods as the Company may offer at the time of annuitization. - -OPTION 3--Life Income based Upon Lives of Two Payees--An annuity will be paid during the lives of the Annuitant and a second Annuitant, with 100%, 66 2/3% or 50% of the payment to continue after the first death, or 100% of the payment to continue at the death of the second Annuitant and 50% of the payment to continue at the death of the Annuitant. - -OPTION 4--Life Income based Upon the Lives of Two Payees--An annuity with payments for a minimum of 120 months, with 100% of the payment to continue after the first death. If Option 1 or 3 is elected, it is possible that only one Annuity Payment will be made if the Annuitant under Option 1, or the surviving Annuitant under Option 3, - -------------------------------------------------------------------------------- 10 should die prior to the due date of the second Annuity Payment. Once lifetime Annuity payments begin, the Annuitant cannot elect to receive a lump-sum settlement. NONLIFETIME ANNUITY OPTIONS: - -OPTION 1--Payments for a Specified Period--payments will continue for a specified period of time, as provided for under the Contract. Under the nonlifetime option, a fixed or variable annuity may be elected and the number of years that may be selected are determined by the investment options used prior to annuitization. For amounts held in the Subaccounts, the Guaranteed Accumulation Account or the Fixed Account, payments may be made for 3-30 years. For amounts held in the Fixed Plus Account (if available under the Contract), payments may be made for 5-30 years. If this option is elected on a variable basis, the Annuitant may request at any time during the payment period that the present value of all or any portion of the remaining variable payments be paid in one sum. However, any lump-sum elected before three years of payments have been completed will be treated as a withdrawal during the Accumulation Period and any applicable deferred sales charge will be assessed. (See "Charges and Deductions--Deferred Sales Charge.") The nonlifetime option is not available on a variable basis under a Contract which provides for immediate Annuity benefits. We may also offer additional Annuity Options under your Contract from time to time. The Company expects to offer additional Annuity Options and enhanced versions of the Annuity Options listed above at some time during 1996. These additional Annuity Options and enhanced versions of the existing options will have additional Subaccounts available and will allow transfers between Subaccounts during the Annuity Period. (Additional Subaccounts and transfer capability are expected during the second half of 1996.) Such additional or enhanced options will be made available by an endorsement to the Contract, which will include the guaranteed annuity payout rates and other terms applicable to such options. (Depending on which guaranteed payout rates apply to the existing options, the guaranteed payout rates for the new and enhanced options will be the same or lower.) Please refer to the Contract or call the number listed in the "Inquiries" section of the Prospectus Summary, to determine which options are available and the terms of such options. ANNUITY PAYMENTS DATE PAYOUTS START. When payments start, the age of the Annuitant plus the number of years for which payments are guaranteed must not exceed 95. Annuity payments may not extend beyond (a) the life of the Annuitant, (b) the joint lives of the Annuitant and beneficiary, (c) a period certain greater than the Annuitant's life expectancy, or (d) a period certain greater than the joint life expectancies of the Annuitant and beneficiary. AMOUNT OF EACH ANNUITY PAYMENT. The amount of each payment depends on the size of your Account Value, how you allocate it between fixed and variable payouts, and the annuity option chosen. No election may be made that would result in a first Annuity Payment of less that $20 or total yearly Annuity payments of less than $100. If the value of the Individual or Plan Account is insufficient to elect an option for the minimum amount specified, a lump-sum payment must be elected. If Annuity Payments are to be made on a variable basis, the first and subsequent payments will vary depending on the assumed net investment rate selected (3 1/2% or 5% per annum). Selection of a 5% rate causes a higher first payment, but Annuity Payments will increase thereafter only to the extent that the net investment rate exceeds 5% on an annualized basis. Annuity Payments would decline if the rate were below 5%. Use of the 3 1/2% assumed rate causes a lower first payment, but subsequent payments would increase more rapidly or decline more slowly as changes occur in the net investment rate. (See the Statement of Additional Information for further discussion on the impact of selecting an assumed net investment rate.) CHARGES DEDUCTED DURING THE ANNUITY PERIOD We make a daily deduction for mortality and expense risks from any amounts held on a variable basis. Therefore, electing the nonlifetime option on a variable basis will result in a deduction being made even though we assume no mortality risk. We may also deduct a daily administrative charge from amounts held under the variable options. (See "Charges and Deductions.") DEATH BENEFIT PAYABLE DURING THE ANNUITY PERIOD If an Annuitant dies after Annuity Payments have begun, any death benefit payable will depend on the terms of the Contract and the Annuity Option selected. If - -------------------------------------------------------------------------------- 11 Option 1 or Option 3 was elected, Annuity payments will cease on the death of the Annuitant under Option 1 or the death of the surviving Annuitant under Option 3. If Lifetime Option 2 or Option 4 was elected and the death of the Annuitant under Option 2, or the surviving Annuitant under Option 4, occurs prior to the end of the guaranteed minimum payment period, we will pay to the beneficiary in a lump sum, unless otherwise requested, the present value of the guaranteed annuity payments remaining. If the nonlifetime option was elected, and the Annuitant dies before all payments are made, the value of any remaining payments may be paid in a lump-sum to the beneficiary (unless otherwise requested), and no deferred sales charge will be imposed. If the Annuitant dies after Annuity payments have begun and if there is a death benefit payable under the Annuity option elected, the remaining value must be distributed to the beneficiary at least as rapidly as under the original method of distribution. Any lump-sum payment paid under the applicable lifetime or nonlifetime Annuity options will be made within seven calendar days after proof of death acceptable to us, and a request for payment are received at our Home Office. The value of any death benefit proceeds will be determined as of the next Valuation Date after we receive acceptable proof of death and a request for payment. Under Options 2 and 4, such value will be reduced by any payments made after the date of death. TAX STATUS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INTRODUCTION The following provides a general discussion and is not intended as tax advice. This discussion reflects the Company's understanding of current federal income tax law. Such laws may change in the future, and it is possible that any change could be retroactive (i.e., effective prior to the date of the change). The Company makes no guarantee regarding the tax treatment of any contract or transaction involving a Contract. The ultimate effect of federal income taxes on the amounts held under a Contract, on Annuity Payments, and on the economic benefit to the Contract Holder, Participant or beneficiary may depend upon the tax status of the individual concerned. Any person concerned about these tax implications should consult a competent tax adviser before initiating any transaction. TAXATION OF THE COMPANY The Company is taxed as a life insurance company under the Code. Since the Separate Account is not an entity separate from the Company, it will not be taxed separately as a "regulated investment company" under the Code. Investment income and realized capital gains are automatically applied to increase reserves under the Contracts. Under existing federal income tax law, the Company believes that the Separate Account's investment income and realized net capital gains will not be taxed to the extent that such income and gains are applied to increase the reserves under the Contracts. Accordingly, the Company does not anticipate that it will incur any federal income tax liability attributable to the Separate Account and, therefore, the Company does not intend to make provisions for any such taxes. However, if changes in the federal tax laws or interpretation thereof result in the Company being taxed on income or gains attributable to the Separate Account, then the Company may impose a charge against the Separate Account (with respect to some or all Contracts) in order to set aside provisions to pay such taxes. CONTRACTS USED WITH CERTAIN RETIREMENT PLANS IN GENERAL. The Contract is designed for use with Section 403(b), 457 and 401(a) plans. The tax rules applicable to participants and beneficiaries in retirement plans vary according to the type of plan and the terms and conditions of the plan. The Company makes no attempt to provide more than general information about use of the Contracts with the various types of retirement plans. Participants as well as beneficiaries are cautioned that the rights of any person to any benefits under the Contracts may be subject to the terms and conditions of the plans themselves, in addition to the terms and conditions of the Contracts issued in connection with such plans. Some retirement plans are subject to limitations on distribution and other requirements that are not incorporated in the Contracts. Purchasers are responsible for determining that contributions, distributions and other transactions with - -------------------------------------------------------------------------------- 12 respect to the Contracts satisfy applicable laws, and should consult their legal counsel and tax adviser regarding the suitability of the Contract. MINIMUM DISTRIBUTION REQUIREMENTS. The Code has required distribution rules for Section 403(b), 401(a) and 457 Plans. Under 403(b) Plans, distributions of amounts held as of December 31, 1986 must generally begin by the end of the calendar year in which you attain age 75 (or retire, if later, for governmental or church plans). However, special rules may require that some or all of that balance be distributed earlier if any distributions are taken in excess of the minimum required amount. Distributions under 401(a) Plans, 457 Plans and distributions attributable to contributions made under Section 403(b) Plans on or after January 1, 1987 (including any earnings on the entire Account Value on or after that date), must generally begin by April 1 of the calendar year following the calendar year in which the participant attains age 70 1/2. For governmental or church plans, distributions must commence by April 1 of the calendar year following the year in which the participant attains age 70 1/2 or retires, whichever occurs later. In general, annuity payments must be distributed over your life or the joint lives of you and your beneficiary, or over a period not greater than your life expectancy or the joint life expectancies of you and your beneficiary. Also, under a Section 457 Plan, any distribution payable over a period of more than one year must be made in substantially nonincreasing amounts. If you die after the required minimum distribution has commenced, distributions to your beneficiary must be made at least as rapidly as under the method of distribution in effect at the time of your death. However, if the minimum required distribution is calculated each year based on your single life expectancy or the joint life expectancies of you and your beneficiary, the regulations for Code Section 401(a)(9) provide specific rules for calculating the minimum required distributions at your death. For example, if you have elected ECO with the calculation based on your single life expectancy, and the life expectancy is recalculated each year, your recalculated life expectancy becomes zero in the calendar year following your death and the entire remaining interest must be distributed to your beneficiary by December 31 of the year following your death. However, a spousal beneficiary, other than under a Section 457 Plan, has certain rollover rights which can only be exercised in the year of your death. The rules are complex and you should consult your tax adviser before electing the method of calculation to satisfy the minimum required distribution requirements. If you die before the required minimum distribution has commenced, your entire interest must be distributed by December 31 of the calendar year containing the fifth anniversary of the date of your death. Alternatively, payments may be made over the life of the beneficiary or over a period not extending beyond the life expectancy of the beneficiary, not to exceed 15 years for a nonspousal beneficiary under a Section 457 Plan, provided the distribution begins by December 31 of the calendar year following the calendar year of your death, or December 31 of the calendar year in which you would have attained age 70 1/2. If you fail to receive the minimum required distribution for any tax year, a 50% excise tax is imposed on the required amount that was not distributed. TAXATION OF DISTRIBUTIONS. Under Section 403(b) Plans and Section 401(a) Plans, all distributions will be taxed as they are received unless you made a rollover contribution of the distribution to another plan of the same type or to an individual retirement annuity/account ("IRA") in accordance with the Code, or unless you have made after-tax contributions to the plan, which are not taxed upon distribution. The Code has specific rules that apply, depending on the type of distribution received, if after-tax contributions were made. In general, payments received by your beneficiaries after your death are taxed in the same manner as if you had received those payments, except that a limited death benefit exclusion may apply. Pension and annuity distributions under Section 403(b) Plans and Section 401(a) Plans generally are subject to withholding for the recipient's federal income tax liability at rates that vary according to the type of distribution and the recipient's tax status. Recipients may be provided the opportunity to elect not to have tax withheld from distributions; however, certain distributions from annuities are subject to mandatory federal income tax withholding. We will report to the IRS the taxable portion of all distributions. The Code imposes a 10% penalty tax on the taxable portion of any distribution made under a Section 403(b) Plan or a Section 401(a) Plan unless made when (a) you have attained age 59 1/2, (b) you have become disabled, (c) you have died, (d) you have separated from service with - -------------------------------------------------------------------------------- 13 the plan sponsor at or after age 55, (e) the distribution amount is rolled over into another plan of the same type in accordance with the terms of the Code, or (f) the distribution amount is made in substantially equal periodic payments (at least annually) over your life or life expectancy or the joint lives or joint life expectancies of you and your plan beneficiary, provided you have separated from service with the plan sponsor. In addition, the penalty tax does not apply for the amount of a distribution equal to unreimbursed medical expenses incurred by you that qualify for deduction as specified in the Code. The Code may impose other penalty taxes in other circumstances. Under Section 457 Plans, contributions and earnings are generally taxed when they are distributed or made available under the employers' plan. See "Section 457 Plans" below. SECTION 457 PLANS. Code Section 457 provides for certain deferred compensation plans. These plans may be offered with respect to service for state governments, local governments, political subdivisions, agencies, instrumentalities and certain affiliates of such entities and tax-exempt organizations. These plans are subject to various restrictions on contributions and distributions. The plans may permit participants to specify the form of investment for their deferred compensation account. In general, all investments are owned by the sponsoring employer and are subject to the claims of the general creditors of the employer. Depending on the terms of the particular plan, the employer may be entitled to draw on deferred amounts for purposes unrelated to its Section 457 plan obligations. In general, all amounts received under a Section 457 plan are taxable and are subject to federal income tax withholding as wages. This includes payments for death benefits and periodic and nonperiodic distributions. If we make payments directly to a participant or beneficiary on behalf of the employer as owner, we will withhold federal taxes (and state taxes, if applicable) and will report it to the IRS as taxable income. SECTION 403(B) PLANS. Under Section 403(b), contributions made by public school systems and Section 501(c)(3) tax exempt organizations to purchase annuity contracts for their employees are generally excludable from the gross income of the employee. In order to be excludable from taxable income, total annual contributions made by you and your employer cannot exceed either of two limits set by the Code. The first limit, under Section 415, is generally the lesser of 25% of your includible compensation or $30,000. The second limit, which is the exclusion allowance under Section 403(b), is usually calculated according to a formula that takes into account your length of employment and any pretax contributions to certain other retirement plans. These two limits apply to your contributions as well as to any contributions made by your employer on your behalf. There is an additional limit that specifically limits your salary reduction contributions to generally no more than $9,500 annually (subject to indexing); your own limit may be higher or lower, depending on certain conditions. In addition Purchase Payments will be excluded from a Participant's gross income only if the Plan meets certain non-discrimination requirements. Section 403(b)(11) restricts the distribution under Section 403(b) contracts of: (1) salary reduction contributions made after December 31, 1988; (2) earnings on those contributions; and (3) earnings during such period on amounts held as of December 31, 1988. Distribution of those amounts may only occur upon death of the employee, attainment of age 59 1/2, separation from service, disability, or financial hardship. In addition, income attributable to salary reduction contributions may not be distributed in the case of hardship. If, pursuant to Revenue ruling 90-24, the Company agrees to accept, under any of the Contracts covered by this Prospectus, amounts transferred from a Code Section 403(b)(7) custodial account, such amounts will be subject to the withdrawal restrictions set forth in Code Section 403(b)(7)(A)(ii). Generally, no amounts accumulated under the Contract will be taxable prior to the time of actual distribution. However, the IRS has stated in published rulings that a variable contract owner, including participants under Section 403(b) Plans, will be considered the owner of separate account assets if the owner possesses incidents of investment control over the assets. In these circumstances, income and gains from the separate account assets would be currently includible in the variable contract owner's gross income. The Treasury announced that guidance would be issued in the future regarding the extent to which owners could direct their investments among Subaccounts without being treated as owners of the underlying assets of the Separate Account. It is possible that the Treasury's position, when announced, may adversely affect the tax treatment of existing contracts. The Company therefore reserves the - -------------------------------------------------------------------------------- 14 right to modify the Contract as necessary to attempt to prevent the owner from being considered the federal tax owner of the assets of the Separate Account. SECTION 401(A) PLANS. Section 401(a) permits corporate employers to establish various types of retirement plans for employees, and permits self- employed individuals to establish various types of retirement plans for themselves and for their employees. These retirement plans may permit the purchase of the Contracts to accumulate retirement savings under the plans. Adverse tax consequences to the plan, to the participant or to both may result if this Contract is assigned or transferred to any individual except to a participant as a means to provide benefit payments. The Code imposes a maximum limit on annual Purchase Payments that may be excluded from a Participant's gross income. Such limit must be calculated under the Plan by the employer in accordance with Section 415 of the Code. This limit is generally the lesser of 25% of your compensation or $30,000. In addition, Purchase Payments will be excluded from a Participant's gross income only if the 401(a) Plan meets certain nondiscrimination requirements. MISCELLANEOUS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DISTRIBUTION The Company will serve as the principal underwriter for the securities sold by this Prospectus. The Company is registered as a broker-dealer with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. (NASD). As principal underwriter, the Company will contract with one or more registered broker-dealers ("Distributors"), including at least one affiliate of the Company, to offer and sell the Contracts. All persons offering and selling the Contracts must be registered representatives of the Distributors and must also be licensed as insurance agents to sell variable annuity contracts. These registered representatives may also provide services to Participants in connection with establishing their Accounts under the Contract. PAYMENT OF COMMISSIONS. Persons offering and selling the Contracts may receive commissions in connection with the sale of the Contracts. The maximum percentage amount that the Company will ever pay as commission with respect to any given Purchase Payment is with respect to those made during the first year of Purchase Payments under an Account. The percentage amount will range from 1% to 7% of those Purchase Payments. The Company may also pay renewal commissions on Purchase Payments made after the first year and, under group Contracts, asset-based service fees. The average of all payments made by the Company is estimated to equal approximately 3% of the total Purchase Payments made over the life of an average Contract. The Company may also reimburse the Distributor for certain expenses. The name of the Distributor and the registered representative responsible for your Account are set forth in your enrollment materials. Commissions and sales related expenses are paid by the Company and are not deducted from Purchase Payments. See "Charges and Deductions--Deferred Sales Charge." THIRD PARTY COMPENSATION ARRANGEMENTS. Occasionally, we may pay commissions and fees to Distributors which are affiliated or associated with the Contract Holder or the Participants. We may also enter into agreements with some entities associated with the Contract Holder or Participants in which we would agree to pay the entity for certain services in connection with administering the Contracts. In both these circumstances there may be an understanding that the Distributor or entity would endorse the Company as a provider of the Contract. You will be notified if you are purchasing a Contract that is subject to these arrangements. DELAY OR SUSPENSION OF PAYMENTS The Company reserves the right to suspend or postpone the date of payment for any benefit or values (a) on any Valuation Date on which the New York Stock Exchange ("Exchange") is closed (other than customary weekend and holiday closings) or when trading on the Exchange is restricted; (b) when an emergency exists, as determined by the SEC, so that disposal of securities held in the Subaccounts is not reasonably practicable or is not reasonably practicable for the value of the Subaccount's assets; or (c) during such other periods as the SEC may by order permit for the protection of investors. The conditions under which restricted trading or an emergency exists shall be determined by the rules and regulations of the SEC. - -------------------------------------------------------------------------------- 15 PERFORMANCE REPORTING From time to time, the Company may advertise different types of historical performance for the Subaccounts of the Separate Account. The Company may advertise the "standardized average annual total returns" of the Subaccounts, calculated in a manner prescribed by the SEC, as well as the "non-standardized returns." "Standardized average annual total returns" are computed according to a formula in which a hypothetical investment of $1,000 is applied to the Subaccount and then related to the ending redeemable values over the most recent one, five and ten-year periods (or since inception, if less than ten years). Standardized returns will reflect the reduction of all recurring charges during each period (e.g., mortality and expense risk charges, annual maintenance fees, administrative expense charge (if any) and any applicable deferred sales charge). "Non-standardized returns" will be calculated in a similar manner, except that non-standardized figures will not reflect the deduction of any applicable deferred sales charge (which would decrease the level of performance shown if reflected in these calculations). The non-standardized figures may also include monthly, quarterly, year-to-date and three-year periods. The Company may also advertise certain ratings, rankings or other information related to the Company, the Subaccounts or the Funds. Further details regarding performance reporting and advertising are described in the Statement of Additional Information. VOTING RIGHTS Each Contract Holder may direct us in the voting of shares at meetings of shareholders of the appropriate Fund. The number of votes to which each Contract Holder may give direction will be determined as of the record date. The number of votes each Contract Holder is entitled to direct with respect to a particular Fund during the Accumulation Period is equal to the portion of the current value of the Contract attributable to that Fund divided by the net asset value of one share of that Fund. During the Annuity Period, the number of votes is equal to the valuation reserve applicable to the portion of the Contract attributable to that Fund, divided by the net asset value of one share of that Fund. In determining the number of votes, fractional votes will be recognized. Where the value of the Contract or valuation reserve relates to more than one Fund, the calculation of votes will be performed separately for each Fund. Unless otherwise provided by the Plan, Participants of 403(b) Plans have a fully vested (100%) interest in the benefits provided under the Contract. Therefore, such Participants may instruct the Contract Holder how to direct us to cast the votes for the portion of the Contract value or valuation reserve attributable to their individual accounts. Currently, for group contracts used with Section 403(b) plans, the Company obtains participant voting instructions directly from the participants, subject to receipt of authorization from the Company. Votes attributable to those Participants who do not instruct the Contract Holder will be cast by us in the same proportion as votes for which instructions have been received by the Contract Holder. Votes attributable to Contract Holders who do not direct us will be cast in the same proportion as the votes for which we have received directions. Contract Holders, or Participants entitled to instruct the casting of votes, will receive a notice of each meeting of shareholders, together with any proxy solicitation materials, and a statement of the number of votes attributable to their participation under the Contract and stating the right to instruct the Contract Holder how such votes shall be cast. MODIFICATION OF THE CONTRACT The Company may change the Contract as required by federal or state law. In addition, the Company may, upon 30 days written notice to the Contract Holder, make other changes to group Contracts that would apply only to individuals who become Participants under that Contract after the effective date of such changes. If the Contract Holder does not agree to a change, no new Participants will be covered under the Contract. Certain changes will require the approval of appropriate state or federal regulatory authorities. TRANSFER OF OWNERSHIP; ASSIGNMENT Unless contrary to applicable law, assignment of the Contract or a Plan or Individual Account is prohibited. LEGAL MATTERS AND PROCEEDINGS The Company knows of no material legal proceedings pending to which the Separate Account or the Company is a party or which would materially affect the Separate Account. The validity of the securities offered by this Prospectus has been passed upon by Susan E. Bryant, Esq., Counsel to the Company. - -------------------------------------------------------------------------------- 16 CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Statement of Additional Information contains more specific information on the Separate Account and the Contract, as well as the financial statements of the Separate Account and the Company. A list of the contents of the SAI is set forth below: General Information and History Variable Annuity Account C Offering and Purchase of Contracts Performance Data General Average Annual Total Return Quotations Annuity Payments Sales Material and Advertising Independent Auditors Financial Statements of the Separate Account Financial Statements of the Company
- -------------------------------------------------------------------------------- 17 APPENDIX I GUARANTEED ACCUMULATION ACCOUNT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE GUARANTEED ACCUMULATION ACCOUNT ("GAA") IS A CREDITED INTEREST OPTION AVAILABLE DURING THE ACCUMULATION PERIOD UNDER THE CONTRACTS DISCUSSED IN THIS PROSPECTUS. AMOUNTS ALLOCATED TO THE LONG-TERM CLASSIFICATIONS OF GAA ARE HELD IN A NONINSULATED, NONUNITIZED SEPARATE ACCOUNT. AMOUNTS ALLOCATED TO THE SHORT-TERM CLASSIFICATIONS OF GAA ARE HELD IN THE COMPANY'S GENERAL ACCOUNT. THIS APPENDIX IS A SUMMARY OF GAA AND IS NOT INTENDED TO REPLACE THE GAA PROSPECTUS. YOU AND THE CONTRACT HOLDER SHOULD READ THE ACCOMPANYING GAA PROSPECTUS CAREFULLY BEFORE INVESTING. GAA is a credited interest option in which we guarantee stipulated rates of interest for stated periods of time on amounts directed to GAA, as specified in the Contract. The interest rate stipulated is an annual effective yield; that is, it reflects a full year's interest. Interest is credited daily at a rate that will provide the guaranteed annual effective yield for one year. We make no deductions from the credited interest rate for mortality and expense risks; these risks are considered in determining the credited rate. During a specified period of time (the "deposit period"), amounts may be applied to any or all available Guaranteed Terms within the Short-Term and Long-Term classifications. Short-Term GAA has Guaranteed Terms from one to three years, and Long-Term GAA has Guaranteed Terms from three to ten years. Purchase Payments must remain in GAA for the full Guaranteed Term to receive the quoted interest rates. Withdrawals or transfers from a Guaranteed Term before the end of that Guaranteed Term may be subject to a market value adjustment ("MVA"). An MVA reflects the change in the value of the investments due to changes in interest rates since the date of deposit. When interest rates increase after the date of deposit, the value of the investment decreases and the MVA is negative. Conversely, when interest rates decrease after the date of deposit, the value of the investment increases, and the MVA is positive. It is possible that a negative MVA could result in the Participant receiving an amount which is less than the amount paid into GAA. By notifying us at least 30 days prior to the Annuity Date, you may elect a variable annuity and have amounts that have been accumulating under GAA transferred to one or more of the Subaccounts available during the Annuity Period. GAA cannot be used as an investment option during the Annuity Period. TRANSFERS AND WITHDRAWALS As a Guaranteed Term matures, assets accumulating under GAA may be (a) transferred to a new Guaranteed Term, (b) transferred to other available investment options, or (c) withdrawn. Transfers to other Guaranteed Terms or to any other Subaccount or credited interest option available under the Contract are not permitted during the deposit period or the 90 days after the close of the deposit period. We will apply an MVA to transfers made before the end of a Guaranteed Term, unless such transfer is due to the maturity of the Guaranteed Term. Additionally, amounts withdrawn may be subject to a deferred sales charge, federal tax penalties or mandatory income tax withholding and a maintenance fee. CONTRACT LOANS Loans may not be made against amounts held in GAA, although such value is included in determining the Account Value against which a loan may be made. REINVESTMENT PRIVILEGE If amounts are withdrawn from GAA and reinvested, they will be applied to the current deposit period. Amounts are proportionately reinvested to the classifications in the same manner as they were allocated before the withdrawal. Any negative MVA amount applied to a withdrawal is not included in the reinvestment. - -------------------------------------------------------------------------------- 18 APPENDIX II FIXED ACCOUNT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE FOLLOWING SUMMARIZES MATERIAL INFORMATION CONCERNING THE FIXED ACCOUNT. AMOUNTS ALLOCATED TO THE FIXED ACCOUNT ARE HELD IN THE COMPANY'S GENERAL ACCOUNT THAT SUPPORTS GENERAL INSURANCE AND ANNUITY OBLIGATIONS. INTERESTS IN THE FIXED ACCOUNT HAVE NOT BEEN REGISTERED WITH THE SEC IN RELIANCE ON EXEMPTIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED. DISCLOSURE IN THE PROSPECTUS REGARDING THE FIXED ACCOUNT, MAY, HOWEVER, BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF SUCH STATEMENTS. DISCLOSURE IN THIS APPENDIX REGARDING THE FIXED ACCOUNT HAS NOT BEEN REVIEWED BY THE SEC. This option guarantees that amounts allocated to this option will earn the minimum interest rate specified in the Contract. We may credit a higher interest rate from time to time. The Company's determination of interest rates reflects the investment income earned on invested assets and the amortization of any capital gains and/or losses realized on the sale of invested assets. Under this option, we assume the risk of investment gain or loss by guaranteeing Purchase Payment values and promising a minimum interest rate and Annuity payment. We, under certain emergency conditions, may defer payment of a Fixed Account withdrawal value (a) for a period of up to 6 months or (b) as provided by federal law. In addition, if allowed by state law, we may pay any Fixed Account withdrawal value in equal payments, with interest, over a period not to exceed 60 months, when; (a) the Fixed Account withdrawal value for the Contract or for the total of all individual Accounts under the Contract exceeds $250,000 on the day before the withdrawal; and (b) the sum of the current Fixed Account withdrawal and the total of all Fixed Account withdrawals from the Contract or any Individual Account under the Contract within the past 12 calendar months exceeds 20% of the amount in the Fixed Account on the day before the current withdrawal. Interest, as used above, will not be more than two percentage points below any rate determined prospectively by the Board of Directors for this class of Contract. In no event will the interest rate be less than the minimum stated in the Contract. Amounts applied to the Fixed Account will earn the interest rate in effect when actually applied to the Fixed Account. MORTALITY AND EXPENSE RISK CHARGES The Fixed Account will reflect a compound interest rate credited by us. The interest rate quoted is an annual effective yield. We make no deductions from the credited interest rate for mortality and expense risks; these risks are considered in determining the credited rate. TRANSFERS AMONG INVESTMENT OPTIONS Transfers from the Fixed Account to any other available investment options are allowed in each calendar year during the Accumulation Period. The amount which may be transferred may vary at our discretion; however, it will never be less than 10% of the amount held under the Fixed Account. By notifying us at our Home Office at least 30 days before Annuity payments begin, the Contract Holder or, if permitted by the Plan, you may elect to have amounts which have been accumulating under the Fixed Account transferred to one or more of the Subaccounts available during the Annuity Period to provide variable Annuity Payments. CONTRACT LOANS (403(B) PLANS ONLY) Loans may be made from Account Values held in the Fixed Account. - -------------------------------------------------------------------------------- 19 APPENDIX III FIXED PLUS ACCOUNT APPLICABLE TO STATE OF MISSISSIPPI DEFERRED COMPENSATION PLAN ONLY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THIS INFORMATION IS BEING PROVIDED TO DESCRIBE THE FIXED PLUS ACCOUNT, A CREDITED INTEREST OPTION AVAILABLE FOR THE ACCUMULATION OF VALUES UNDER THE AETNA LIFE INSURANCE AND ANNUITY COMPANY (COMPANY) ANNUITY CONTRACTS ISSUED BY THE STATE OF MISSISSIPPI FOR ITS DEFERRED COMPENSATION PLAN. ADDITIONAL INFORMATION MAY BE FOUND IN THE CONTRACT. AMOUNTS ALLOCATED TO THE FIXED PLUS ACCOUNT ARE HELD IN THE COMPANY'S GENERAL ACCOUNT THAT SUPPORTS INSURANCE AND ANNUITY OBLIGATIONS. INTERESTS IN THE FIXED PLUS ACCOUNT HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE ON EXEMPTIONS UNDER THE SECURITITES ACT OF 1933, AS AMENDED. THE FIXED PLUS ACCOUNT PROVIDES A PORTFOLIO RATE OF RETURN WITH A GUARANTEE OF PRINCIPAL AND INTEREST. IT HAS REPLACED THE FIXED ACCOUNT UNDER THE CONTRACT. THE FIXED PLUS ACCOUNT This option guarantees that amounts allocated to this option will earn the minimum interest rate specified in the Contract. The Company may credit a higher interest rate. The Company's determination of interest rates reflects the investment income earned on invested assets and the amortization of any capital gains and/or losses realized on the sale of invested assets. Under this option, the Company assumes the risk of investment gain or loss by guaranteeing net contribution values and promising a minimum interest rate and annuity payments. The Fixed Plus Account reflects a compounded credited interest rate. The interest rate quoted is an annual effective yield. Amounts applied to the Fixed Plus Account will earn the interest rate in effect when actually applied. There are no deductions made from the credited interest rate for mortality and expense risks; these risks are considered in determining the credited rate. For a period of time not to exceed two years, or until full reimbursement is obtained if less than two years, the interest rate credited on the Fixed Plus Account will be reduced by an amount equal to approximately .001% to reimburse the State for costs associated with the evaluation of the Plan. Beginning on the tenth anniversary of your Account, the Company will credit amounts held in the Fixed Plus Account with an interest rate that is at least 0.25% higher than the then declared interest rate for the Fixed Plus Account for Accounts that have not reached their tenth anniversary. The Company reserves the right to limit contributions and/or transfers to the Fixed Plus Account. FIXED PLUS ACCOUNT WITHDRAWALS The amount eligible for a partial withdrawal is 20% of the amount held in the Fixed Plus Account on the date the Company's Home Office receives a written request, reduced by any Fixed Plus Account withdrawals, transfers or annuitizations made in the prior 12 months. In calculating the 20% limit, the Company reserves the right to include payments made due to the election of the Estate Conservation Option or the Systematic Withdrawal Option. The 20% limit is waived if the partial withdrawal is due to annuitization, death, separation from service (when the conditions specified under (d) below are met), or hardship (when the conditions specified under (e) below are met). For these waivers to apply, any such partial withdrawal must also be made pro rata from all options under the Account. If a full withdrawal of a Participant's entire Account is requested, the Company will pay any amounts held in the Fixed Plus Account, with interest, in five annual payments of: - One-fifth of the Fixed Plus Account value on the date the request is received, reduced by any Fixed Plus Account withdrawals, transfers or annuitizations made in the prior 12 months; - One-fourth of the remaining Fixed Plus Account value 12 months later; - -------------------------------------------------------------------------------- 20 - One-third of the remaining Fixed Plus Account value 12 months later; - One-half of the remaining Fixed Plus Account value 12 months later; - The balance of the Fixed Plus Account value 12 month later. Once a request for a full withdrawal from an Account is received, no further withdrawals or transfers will be permitted from the Fixed Plus Account. A full withdrawal from the Fixed Plus Account may be canceled at any time before the end of the five-payment period. The Company will waive the Fixed Plus Account full withdrawal provision if a full withdrawal is made due to: (a) the Participant's death, before annuity payments begin; (b) the election of an Annuity Option; (c) if the Fixed Plus Account value if $3,500 or less (and no withdrawals, transfers or annuitizations have been made from the Account within the prior 12 months); (d) the Participant's separation from service with the State of Mississippi, if the following conditions are met: (1) the separation from service is certified by the employer; (2) the amount is paid directly to the Participant, or is paid to the employer for purposes of annuitization under the State of Mississippi Deferred Compensation Plan; and (3) the amount paid for all withdrawals due to separation from service for all Participants under the annuity contract during the previous 12 month period does not exceed 20% of the average value of all Accounts during that same period. (e) hardship due to an unforeseeable emergency, as defined by the Internal Revenue Code for 457 deferred compensation plans, if the following conditions are met: (1) the hardship is certified by the employer; (2) the amount is paid directly to the participant; and (3) the amount paid for all withdrawals due to hardship for all Participants under the Contract during the previous 12 month period does not exceed 10% of the average values of all Accounts during the same period. TRANSFERS AMONG INVESTMENT OPTIONS The amount eligible for transfer from the Fixed Plus Account is 20% of the amount held in the Fixed Plus Account on the day our Home Office receives a written request, reduced by any Fixed Plus Account withdrawals, transfers or annuitizations made in the prior 12 months. In calculating the 20% limit, we reserve the right to include payments made due to the election of the Estate Conservation Option or the Systematic Withdrawal Option. The Company will waive the 20% transfer limit when the value in the Fixed Plus Account is $1,000 or less. By notifying the Company at our Home Office at least 30 days before annuity payments begin, you may elect to have amounts which have been accumulating under the Fixed Plus Account transferred to the Aetna Variable Fund to provide variable annuity payments. SYSTEMATIC WITHDRAWAL OPTION SWO may not be elected if you have requested a Fixed Plus Account transfer or withdrawal within the prior 12 month period. - -------------------------------------------------------------------------------- 21 Insurance products offered by: Aetna Life Insurance and Annuity Company Securities offered through: Aetna Investment Services, Inc. 151 Farmington Avenue Hartford, CT 06156 1-800-525-4225 Visit our home page on the Internet http://www.aetna.com [LOGO] Aetna Retirement Services, Inc. Printed on recycled paper 52449-2 VARIABLE ANNUITY ACCOUNT C OF AETNA LIFE INSURANCE AND ANNUITY COMPANY STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1996 Group and Individual Variable Annuity Contracts Available under Section 403(b), 457 and 401(a) This Statement of Additional Information is not a prospectus and should be read in conjunction with the current prospectus for Variable Annuity Account C (the "Separate Account") dated May 1, 1996. A free prospectus is available upon request from the local Aetna Life Insurance and Annuity Company office or by writing to or calling: Aetna Life Insurance and Annuity Company Customer Service 151 Farmington Avenue Hartford, Connecticut 06156 1-800-525-4225 Read the prospectus before you invest. Terms used in this Statement of Additional Information shall have the same meaning as in the Prospectus. TABLE OF CONTENTS PAGE ---- General Information and History. . . . . . . . . . . . . . . . 1 Variable Annuity Account C . . . . . . . . . . . . . . . . . . 1 Offering and Purchase of Contracts . . . . . . . . . . . . . . 2 Performance Data . . . . . . . . . . . . . . . . . . . . . . . 2 General . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Average Annual Total Return Quotations. . . . . . . . . . . 3 Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . 4 Sales Material and Advertising . . . . . . . . . . . . . . . . 5 Independent Auditors . . . . . . . . . . . . . . . . . . . . . 5 Financial Statements of the Separate Account . . . . . . . . . S-1 Financial Statements of Aetna Life Insurance and Annuity Company . . . . . . . . . . . . . . . . . . . . . F-1 GENERAL INFORMATION AND HISTORY Aetna Life Insurance and Annuity Company (the Company) is a stock life insurance company which was organized under the insurance laws of the State of Connecticut in 1976. Through a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity Life Insurance Company organized in 1954). As of December 31, 1995, the Company had assets of $27.1 billion (subject to $25.5 billion of customer and other liabilities, $1.6 billion of shareholder equity) which includes $11 billion in assets held in the Company's separate accounts. The Company had $22 billion in assets under management, including $8 billion in its mutual funds. As of December 31, 1994, it ranked among the top 2% of all U.S. life insurance companies by size. The Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc., which is in turn a wholly owned subsidiary of Aetna Retirement Services, Inc., and an indirect wholly owned subsidiary of Aetna Life and Casualty Company. The Company is engaged in the business of issuing life insurance policies and annuity contracts in all states of the United States. The Company's Home Office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. In addition to serving as the principal underwriter and the depositor for the Separate Account, the Company is also a registered investment adviser under the Investment Advisers Act of 1940, and a registered broker-dealer under the Securities Exchange Act of 1934. The Company provides investment advice to several of the registered management investment companies offered as variable investment options under the Contracts funded by the Separate Account (see "Variable Annuity Account C" below). Other than the mortality and expense risk charges and administrative expense charge described in the prospectus, all expenses incurred in the operations of the Separate Account are borne by the Company. See "Charges and Deductions" in the prospectus. The Company receives reimbursement for certain administrative costs from some unaffiliated sponsors of the Funds used as funding options under the Contract. These fees generally range up to 0.25%. The assets of the Separate Account are held by the Company. The Separate Account has no custodian. However, the Funds in whose shares the assets of the Separate Account are invested each have custodians, as discussed in their respective prospectuses. VARIABLE ANNUITY ACCOUNT C Variable Annuity Account C (the "Separate Account") is a separate account established by the Company for the purpose of funding variable annuity contracts issued by the Company. The Separate Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940, as amended. The assets of each of the Subaccounts of the Separate Account will be invested exclusively in shares of the mutual funds described in the Prospectus. Purchase Payments made under the Contract may be allocated to one or more of the Subaccounts. The Company may make additions to or deletions from available investment options as permitted by law. The availability of the Funds is subject to applicable regulatory authorization. Not all Funds are available in all jurisdictions, under all Contracts, or under all Plans. The Funds currently available under the Contract are as follows: Aetna Variable Fund Aetna Income Shares Aetna Variable Encore Fund Aetna Investment Advisers Fund, Inc. TCI Growth 1 Complete descriptions of each of the Funds, including their investment objectives, policies, risks and fees and expenses, are contained in the prospectuses and statements of additional information for each of the Funds. OFFERING AND PURCHASE OF CONTRACTS The Company is both the Depositor and the principal underwriter for the securities sold by the prospectus. The Company offers the Contracts through life insurance agents licensed to sell variable annuities who are registered representatives of the Company or of other registered broker-dealers who have sales agreements with the Company. The offering of the Contracts is continuous. A description of the manner in which Contracts are purchased may be found in the prospectus under the sections titled "Purchase" and "Contract Valuation." PERFORMANCE DATA GENERAL From time to time, the Company may advertise different types of historical performance for the Subaccounts of the Separate Account available under the Contracts issued by the Company in connection with Plans described in the Prospectus. The Company may advertise the "standardized average annual total returns," calculated in a manner prescribed by the Securities and Exchange Commission (the "standardized return"), as well as "non-standardized returns," both of which are described below. The standardized and non-standardized total return figures are computed according to a formula in which a hypothetical initial Purchase Payment of $1,000 is applied 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 standardized figures reflect the deduction of all recurring charges during each period (e.g., mortality and expense risk charge, maintenance fees, administrative expense charge, and deferred sales charge). 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 Contracts 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 deferred sales charge (which would decrease the level of performance shown if reflected in these calculations). The non-standardized figures may also include monthly, quarterly, year-to-date and three-year periods. If a Fund was in existence prior to the date it became available under the Contract, standardized and non-standardized total returns may include periods prior to such date. These figures are calculated by adjusting the actual returns of the Fund to reflect the charges that would have been assessed under the Contract had that Fund been available under the Contract during that period. Investment results of the Subaccounts will fluctuate over time, and any presentation of the Subaccounts' total return quotations for any prior period should not be considered as a representation of how the 2 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 shown below represent each type of Account provided for in this Statement of Additional Information. The first table reflects the average annual standardized and nonstandardized total return quotation figures for the periods ended December 31, 1995 for the Subaccounts under Single Purchase Payment Accounts. The second and third tables reflect the average annual standardized and nonstandardized total return quotation figures for the periods ended December 31, 1995 for the Subaccounts under Installment Purchase Payment Accounts with a $15 and $20 annual maintenance fee, respectively. For those Subaccounts where results are not available for the full calendar period indicated, the percentage shown is an average annual return since inception (denoted with an *).
SINGLE PAYMENT ACCOUNT FUND ($30 MAINTENANCE FEE) STANDARDIZED NON-STANDARDIZED INCEPTION DATE - ----------------------------------------------------------------------------------------------------------------------------- SUBACCOUNT 1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years - ----------------------------------------------------------------------------------------------------------------------------- Aetna Variable Fund 24.08% 11.20% 12.30% 30.61% 10.43% 12.11% 12.30% 04/30/75 Aetna Income Shares 10.94% 7.62% 8.52% 16.78% 6.32% 8.51% 8.52% 06/01/78 Aetna Variable Encore Fund (0.50)% 2.56% 4.92% 4.74% 3.14% 3.40% 4.92% 09/01/75 Aetna Investment Advisers Fund, Inc. 19.37% 9.60% 8.88%* 25.65% 10.30% 10.50% 9.39%* 06/23/89 TCI Growth 23.00% 12.63% 11.36%* 29.47% 11.42% 13.55% 11.50%* 11/20/87
Please refer to the discussion preceding the Tables for an explanation of the charges included in the Standardized and Non-Standardized figures. These figures represent historical performance and should not be considered a projection of future performance.
INSTALLMENT PURCHASE PAYMENT ($15 MAINTENANCE FEE) STANDARDIZED NON-STANDARDIZED INCEPTION DATE - ----------------------------------------------------------------------------------------------------------------------------- SUBACCOUNT 1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years - ----------------------------------------------------------------------------------------------------------------------------- Aetna Variable Fund 24.01% 10.89% 12.23% 30.54% 10.36% 12.04% 12.23% 04/30/75 Aetna Income Shares 10.87% 7.33% 8.45% 16.71% 6.24% 8.43% 8.45% 06/01/78 Aetna Variable Encore Fund (0.57)% 2.27% 4.85% 4.66% 3.07% 3.33% 4.85% 09/01/75 Aetna Investment Advisers Fund, Inc. 19.30% 9.30% 8.46%* 25.58% 10.23% 10.43% 9.31%* 06/23/89 TCI Growth 22.93% 12.32% 10.72%* 29.40% 11.35% 13.48% 11.42%* 11/20/87
Please refer to the discussion preceding the Tables for an explanation of the charges included in the Standardized and Non-Standardized figures. These figures represent historical performance and should not be considered a projection of future performance. 3
INSTALLMENT PURCHASE PAYMENT ACCOUNT FUND ($20 MAINTENANCE FEE) STANDARDIZED NON-STANDARDIZED INCEPTION DATE - ----------------------------------------------------------------------------------------------------------------------------- SUBACCOUNT 1 Year 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years - ----------------------------------------------------------------------------------------------------------------------------- Aetna Variable Fund 23.98% 10.87% 12.21% 30.51% 10.33% 12.01% 12.21% 04/30/75 Aetna Income Shares 10.84% 7.30% 8.43% 16.68% 6.22% 8.41% 8.43% 06/01/78 Aetna Variable Encore Fund (0.60)% 2.25% 4.82% 4.64% 3.05% 3.30% 4.82% 09/01/75 Aetna Investment Advisers Fund, Inc. 19.27% 9.28% 8.43%* 25.56% 10.20% 10.41% 9.29%* 06/23/89 TCI Growth 22.90% 12.30% 10.70%* 29.38% 11.32% 13.45% 11.40%* 11/20/87
Please refer to the discussion preceding the Tables for an explanation of the charges included in the Standardized and Non-Standardized figures. These figures represent historical performance and should not be considered a projection of future performance. ANNUITY PAYMENTS When Annuity payments are to begin, the value of the Account is determined using Accumulation Unit values as of the tenth Valuation Date before the first Annuity payment is due. Such value (less any applicable premium tax) is applied to provide an Annuity in accordance with the Annuity and investment options elected. The Annuity option tables found in the Contract show, for each form of Annuity, the amount of the first Annuity payment for each $1,000 of value applied. Thereafter, variable Annuity payments fluctuate as the Annuity Unit value(s) fluctuates with the investment experience of the selected investment option(s). The first payment and subsequent payments also vary depending on the assumed net investment rate selected (3.5% or 5% per annum). Selection of a 5% rate causes a higher first payment, but Annuity payments will increase thereafter only to the extent that the net investment rate increases by more than 5% on an annual basis. Annuity payments would decline if the rate failed to increase by 5%. Use of the 3.5% assumed rate causes a lower first payment, but subsequent payments would increase more rapidly or decline more slowly as changes occur in the net investment rate. When the Annuity Period 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 Annuity 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 Date to the next; such fluctuations reflect changes in the net investment factor for the appropriate Subaccount(s) (with a ten Valuation Date lag which gives the Company time to process Annuity payments) and a mathematical adjustment which offsets the assumed net investment rate of 3.5% or 5% per annum. The operation of all these factors can be illustrated by the following hypothetical example. These procedures will be performed separately for the investment options selected during the Annuity Period. EXAMPLE: Assume that, at the date Annuity payments are to begin, there are 3,000 Accumulation Units credited under a particular Account and that the value of an Accumulation Unit for the tenth Valuation Date 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 option elected, a first monthly variable Annuity payment of $6.68 per $1000 of value applied; the Annuitant's first monthly payment would thus be 40.950 multiplied by $6.68, or $273.55. 4 Assume then that the value of an Annuity Unit for the Valuation Date on which the first payment was due was $13.400000. When this value is divided into the first monthly payment, the number of Annuity Units is determined to be 20.414. The value of this number of Annuity Units will be paid in each subsequent month. If the net investment factor with respect to the appropriate Subaccount is 1.0015000 as of the tenth Valuation Date preceding the due date of the second monthly payment, multiplying this factor by .9999058* (to neutralize the assumed net investment rate of 3.5% per annum built into the number of Annuity Units determined above) produces a result of 1.0014057. This is then multiplied by the Annuity Unit value for the prior Valuation Date (assume such value to be $13.504376) to produce an Annuity Unit value of $13.523359 for the Valuation Date on which the second payment is due. The second monthly payment is then determined by multiplying the number of Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359, which produces a payment of $276.07. *If an assumed net investment rate of 5% is elected, the appropriate factor to neutralize such assumed rate would be .9998663. SALES MATERIAL AND ADVERTISING The Company may include hypothetical illustrations in its sales literature that explain the mathematical principles of dollar cost averaging, compounded interest, tax deferred accumulation, and the mechanics of variable annuity contracts. The Company may also discuss the difference between variable annuity contracts and other types of savings or investment products, including, but not limited to, personal savings accounts and certificates of deposit. We may distribute sales literature that compares the percentage change in Accumulation Unit values for any of the Subaccounts to established market indices such as the Standard & Poor's 500 Stock Index and the Dow Jones Industrial Average or to the percentage change in values of other management investment companies that have investment objectives similar to the Subaccount being compared. We may publish in advertisements and reports, the ratings and other information assigned to us by one or more independent rating organizations such as A.M. Best Company, Duff & Phelps, Standard & Poor's Corporation and Moody's Investors Services, 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. From time to time, we will quote articles from newspapers and magazines or other publications or reports, including, but not limited to The Wall Street Journal, Money magazine, USA Today and The VARDS Report. The Company may provide in advertising, sales literature, periodic publications or other materials information on various topics of interest to current and prospective Contract Holders or Participants. 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, 5 customer profiles and hypothetical purchase and investment scenarios, financial management and tax and retirement planning, and investment alternatives to certificates of deposit and other financial instruments, including comparison between the Contracts and the characteristics of and market for such financial instruments. INDEPENDENT AUDITORS KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103, are the independent auditors for the Separate Account and for the Company. The services provided to the Separate Account include primarily the examination of the Separate Account's financial statements and the review of filings made with the SEC. 6 FINANCIAL STATEMENTS VARIABLE ANNUITY ACCOUNT C INDEX Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . S-2 Statement of Assets and Liabilities. . . . . . . . . . . . . . . . . . S-3 Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . S-8 Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . S-9 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . S-10 Consolidated Financial Information . . . . . . . . . . . . . . . . . . S-12 S-1 INDEPENDENT AUDITORS' REPORT The Board of Directors of Aetna Life Insurance and Annuity Company and Contract Owners of Variable Annuity Account C: We have audited the accompanying statement of assets and liabilities of Aetna Life Insurance and Annuity Company Variable Annuity Account C (the "Account") as of December 31, 1995, and the related statement of operations for the year then ended, statements of 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, 1995. 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. Our procedures included confirmation of securities owned as of December 31, 1995, 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 the Aetna Life Insurance and Annuity Company Variable Annuity Account C as of December 31, 1995, the results of its operations for the year then ended, 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, 1995 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Hartford, Connecticut February 16, 1996 S-2 VARIABLE ANNUITY ACCOUNT C STATEMENT OF ASSETS AND LIABILITIES - December 31, 1995
ASSETS: Investments, at net asset value: (Note 1) Aetna Variable Fund; 135,944,293 shares at $29.06 per share (cost $3,682,373,523).................... $3,949,941,096 Aetna Income Shares; 29,688,857 shares at $13.00 per share (cost $382,776,733)....................... 386,007,595 Aetna Variable Encore Fund; 17,318,377 shares at $13.30 per share (cost $221,087,268) ............... 230,291,686 Aetna Investment Advisers Fund, Inc.; 49,855,715 shares at $14.50 per share (cost $600,395,092) ............................................................................... 723,017,695 Aetna GET Fund, Series B; 5,897,397 shares at $12.40 per share (cost $59,712,454).................... 73,136,258 Aetna Ascent Variable Portfolio; 454,714 shares at $10.80 per share (cost $4,803,331)................ 4,908,736 Aetna Crossroads Variable Portfolio; 341,591 shares at $10.74 per share (cost $3,599,790)............ 3,668,757 Aetna Legacy Variable Portfolio; 180,468 shares at $10.64 per share (cost $1,883,466)................ 1,919,680 Alger American Funds: Alger American Growth Portfolio; 1,234,082 shares at $31.16 per share (cost $38,739,937)....................................................................................... 38,454,000 Alger American Small Capitalization Portfolio; 6,121,453 shares at $39.41 per share (cost $203,207,523)................................................................................ 241,246,447 Calvert Responsibly Invested Balanced Portfolio; 16,846,014 shares at $1.70 per share (cost $26,512,853)................................................................................ 28,688,761 Fidelity Investments Variable Insurance Products Funds: Equity-Income Portfolio; 1,973,219 shares at $19.27 per share (cost $35,264,252)................... 38,023,939 Growth Portfolio; 949,237 shares at $29.20 per share (cost $27,212,340)............................ 27,717,728 Overseas Portfolio; 218,122 shares at $17.05 per share (cost $3,555,791)........................... 3,718,987 Fidelity Investments Variable Insurance Products Funds II - Asset Manager Portfolio; 910,080 shares at $15.79 per share (cost $12,839,173)..................... 14,370,158 Contrafund Portfolio; 2,202,984 shares at $13.78 per share (cost $30,071,951) ..................... 30,357,117 Index 500 Portfolio; 45,055 shares at $75.71 per share (cost $3,187,279) .......................... 3,411,144 Franklin Government Securities Trust; 1,651,095 shares at $13.35 per share (cost $21,210,874) .............................................................................. 22,042,115 Janus Aspen Series - Aggressive Growth Portfolio; 5,116,845 shares at $17.08 per share (cost $74,304,318)............... 87,395,716 Balanced Portfolio; 115,516 shares at $13.03 per share (cost $1,444,640)........................... 1,505,170 Flexible Income Portfolio; 347,266 shares at $11.11 per share (cost $3,690,542).................... 3,858,123 Growth Portfolio; 376,690 shares at $13.45 per share (cost $4,920,509)............................. 5,066,487 Short-Term Bond Portfolio; 54,258 shares at $10.03 per share (cost $544,564)....................... 544,210 Worldwide Growth Portfolio; 1,048,130 shares at $15.31 per share (cost $15,260,366)................ 16,046,863 Lexington Emerging Markets Fund, Inc.; 329,323 shares at $9.38 per share (cost $3,135,164) .......... 3,089,046 Lexington Natural Resources Trust; 1,257,565 shares at $11.30 per share (cost $12,932,744) .......... 14,210,484 Neuberger & Berman Advisers Management Trust - Growth Portfolio; 3,460,773 shares at $25.86 per share (cost $77,838,858)............................................................ 89,495,579 Scudder Variable Life Investment Fund - International Portfolio; 13,936,090 shares at $11.82 per share (cost $151,941,144).................................. ........................ 164,724,583 TCI Portfolios, Inc. - TCI Growth; 35,261,982 shares at $12.06 per share (cost $333,587,996) ........ 425,259,499 NET ASSETS ............................................................................................ 6,632,117,659 -------------- --------------
S-3 Net assets represented by:
Accumulation Unit Units Value Reserves for annuity contracts in accumulation and payment period: AETNA VARIABLE FUND: Qualified I ..................................................... 549,055.7 $180.879 $99,312,649 Qualified III ................................................... 6,364,000.3 137.869 877,395,210 Qualified IV .................................................... 269.0 83.646 22,498 Qualified V ..................................................... 121,691.2 14.113 1,717,411 Qualified VI .................................................... 188,964,022.4 14.077 2,660,123,261 Qualified VII ................................................... 9,779,134.6 13.247 129,544,460 Qualified VIII .................................................. 20,835.7 13.074 272,413 Qualified IX .................................................... 21,417.9 12.935 277,043 Qualified X (1.15)............................................... 273,578.4 14.108 3,859,670 Qualified X (1.25)............................................... 2,370,233.5 14.077 33,366,740 Reserves for annuity contracts in payment period (Note 1)........ 144,049,741 AETNA INCOME SHARES: Qualified I ..................................................... 72,902.0 47.405 3,455,895 Qualified III ................................................... 2,377,621.8 46.913 111,541,104 Qualified V ..................................................... 20,427.2 12.283 250,918 Qualified VI .................................................... 21,379,975.5 12.098 258,665,226 Qualified VII ................................................... 185,030.5 11.176 2,067,926 Qualified VIII .................................................. 1,090.6 11.143 12,153 Qualified IX .................................................... 3,580.8 11.203 40,116 Qualified X (1.15)............................................... 50,261.1 12.125 609,409 Qualified X (1.25)............................................... 354,993.3 12.098 4,294,879 Reserves for annuity contracts in payment period (Note 1) ....... 5,069,969 AETNA VARIABLE ENCORE FUND: Qualified I ..................................................... 150,480.4 38.485 5,791,253 Qualified III ................................................... 1,836,260.4 37.988 69,756,054 Qualified V ..................................................... 19,202.4 11.003 211,293 Qualified VI .................................................... 12,999,680.2 11.026 143,337,034 Qualified VII ................................................... 324,091.0 10.936 3,544,190 Qualified VIII .................................................. 656.2 10.620 6,969 Qualified IX .................................................... 3,050.3 10.857 33,118 Qualified X (1.15)............................................... 145,629.4 11.051 1,609,306 Qualified X (1.25)............................................... 544,382.5 11.026 6,002,469 AETNA INVESTMENT ADVISERS FUND, INC.: Qualified I ..................................................... 393,612.5 18.024 7,094,461 Qualified III ................................................... 9,193,181.4 17.954 165,052,015 Qualified V ..................................................... 19,038.2 13.693 260,683 Qualified VI .................................................... 38,152,394.6 13.673 521,663,491 Qualified VII ................................................... 335,791.4 13.135 4,410,596 Qualified VIII .................................................. 1,055.3 12.695 13,397 Qualified IX .................................................... 3,961.7 12.613 49,969 Qualified X (1.15)............................................... 138,270.8 13.703 1,894,705 Qualified X (1.25)............................................... 940,932.7 13.673 12,865,516 Reserves for annuity contracts in payment period (Note 1) ....... 9,712,862 AETNA GET FUND, SERIES B: Qualified III .................................................. 63,245.0 12.850 812,688 S-4 Accumulation Unit Units Value Qualified VI..................................................... 5,279,157.0 12.850 67,836,249 Qualified X (1.25)............................................... 349,212.6 12.850 4,487,321 AETNA ASCENT VARIABLE PORTFOLIO: Qualified III.................................................... 8.4 10.673 90 Qualified V...................................................... 202.1 10.666 2,156 Qualified VI..................................................... 393,052.6 10.673 4,195,040 Qualified VIII................................................... 7.7 10.673 82 Qualified X (1.15)............................................... 15,054.8 10.982 165,326 Qualified X (1.25)............................................... 49,748.1 10.976 546,042 AETNA CROSSROADS VARIABLE PORTFOLIO: Qualified V...................................................... 243.2 10.605 2,579 Qualified VI..................................................... 294,673.3 10.612 3,126,954 Qualified VIII................................................... 43.8 10.611 464 Qualified X (1.15)............................................... 2,393.5 10.868 26,012 Qualified X (1.25)............................................... 47,204.4 10.862 512,748 AETNA LEGACY VARIABLE PORTFOLIO: Qualified VI..................................................... 143,636.5 10.580 1,519,662 Qualified X (1.15)............................................... 17,106.0 10.631 181,853 Qualified X (1.25)............................................... 20,531.2 10.626 218,165 ALGER AMERICAN FUNDS: ALGER AMERICAN GROWTH PORTFOLIO: Qualified III ................................................... 530,262.6 11.715 6,211,911 Qualified V...................................................... 7,965.7 10.365 82,564 Qualified VI..................................................... 2,832,439.7 10.157 28,770,111 Qualified VIII................................................... 38.3 10.371 397 Qualified X (1.15)............................................... 12,858.7 11.385 146,392 Qualified X (1.25)............................................... 284,978.1 11.379 3,242,625 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO: Qualified III ................................................... 1,714,187.0 13.558 23,241,019 Qualified V ..................................................... 31,527.5 13.463 424,453 Qualified VI .................................................... 15,036,764.7 13.450 202,245,073 Qualified VIII .................................................. 3,845.1 14.093 54,189 Qualified X (1.15)............................................... 54,683.5 13.481 737,179 Qualified X (1.25)............................................... 1,081,374.8 13.450 14,544,534 CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO: Qualified III ................................................... 856,360.5 17.951 15,372,772 Qualified V ..................................................... 14,656.3 13.870 203,278 Qualified VI .................................................... 966,097.9 13.527 13,068,322 Qualified VIII .................................................. 3,611.6 12.291 44,389 FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS: EQUITY-INCOME PORTFOLIO: Qualified III ................................................... 628,581.6 11.617 7,301,978 Qualified V ..................................................... 1,107.9 11.047 12,239 Qualified VI .................................................... 1,660,304.1 11.092 18,415,763 Qualified VIII .................................................. 638.7 11.054 7,060 Qualified X (1.15)............................................... 118,679.1 13.902 1,649,878 Qualified X (1.25)............................................... 766,359.8 13.880 10,637,021 GROWTH PORTFOLIO: Qualified III ................................................... 762.1 10.198 7,772 Qualified V ..................................................... 2,540.5 10.183 25,871 Qualified VI .................................................... 1,833,793.9 10.066 18,458,844 S-5 Accumulation Unit Units Value Qualified VIII .................................................. 158.7 10.190 1,617 Qualified X (1.15)............................................... 45,764.6 14.023 641,737 Qualified X (1.25)............................................... 612,991.7 14.000 8,581,887 OVERSEAS PORTFOLIO: Qualified III ................................................... 1,301.8 10.197 13,274 Qualified V ..................................................... 190.8 9.954 1,899 Qualified VI .................................................... 196,089.8 9.961 1,953,206 Qualified X (1.15)............................................... 4,284.4 10.278 44,037 Qualified X (1.25)............................................... 166,303.2 10.262 1,706,571 FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS II: ASSET MANAGER PORTFOLIO: Qualified III.................................................... 1,316,915.5 10.912 14,370,158 CONTRAFUND PORTFOLIO: Qualified III ................................................... 525,476.0 11.763 6,181,326 Qualified V ..................................................... 6,415.4 10.461 67,111 Qualified VI .................................................... 2,116,732.0 10.397 22,007,519 Qualified VIII .................................................. 173.7 10.467 1,818 Qualified X (1.15)............................................... 5,452.8 10.689 63,737 Qualified X (1.25)............................................... 174,259.3 10.681 2,035,606 INDEX 500 PORTFOLIO: Qualified III ................................................... 290,546.8 11.740 3,411,144 FRANKLIN GOVERNMENT SECURITIES TRUST: Qualified III ................................................... 809,413.7 16.495 13,351,329 Qualified V ..................................................... 16,226.2 11.946 193,844 Qualified VI .................................................... 717,760.0 11.762 8,442,415 Qualified VIII .................................................. 4,916.9 11.090 54,527 JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO: Qualified III ................................................... 1,280,952.5 15.323 19,627,517 Qualified V.. ................................................... 15,482.4 13.296 205,852 Qualified VI. ................................................... 4,887,059.8 13.322 65,105,449 Qualified VIII .................................................. 1,021.7 13.321 13,610 Qualified X (1.15)............................................... 22,049.9 12.869 283,760 Qualified X (1.25)............................................... 167,919.9 12.861 2,159,528 BALANCED PORTFOLIO: Qualified III ................................................... 161.4 10.853 1,751 Qualified V ..................................................... 160.2 10.843 1,737 Qualified VI .................................................... 93,303.8 10.850 1,012,385 Qualified X (1.15)............................................... 9,382.9 11.265 105,697 Qualified X (1.25)............................................... 34,071.6 11.259 383,600 FLEXIBLE INCOME PORTFOLIO: Qualified III ................................................... 3,344.5 12.124 40,550 Qualified V ..................................................... 745.1 12.054 8,981 Qualified VI .................................................... 315,361.3 12.077 3,808,592 GROWTH PORTFOLIO: Qualified III ................................................... 109,716.5 11.859 1,301,115 Qualified V. .................................................... 166.2 10.872 1,807 Qualified VI. ................................................... 259,195.5 10.870 2,817,612 Qualified X (1.15)............................................... 3,238.4 11.633 37,671 Qualified X (1.25)............................................... 78,126.0 11.626 908,282 S-6 Accumulation Unit Units Value SHORT-TERM BOND PORTFOLIO: Qualified III ................................................... 18,472.9 10.393 191,983 Qualified V ..................................................... 23.8 10.316 245 Qualified VI .................................................... 32,695.8 10.323 337,528 Qualified X (1.25)............................................... 1,405.3 10.285 14,454 WORLDWIDE GROWTH PORTFOLIO: Qualified III ................................................... 314,652.7 12.158 3,825,607 Qualified V ..................................................... 11,127.9 10.952 121,875 Qualified VI .................................................... 1,036,039.6 10.877 11,268,519 Qualified VIII .................................................. 13.7 10.846 149 Qualified X (1.15)............................................... 2,616.9 12.223 31,987 Qualified X (1.25)............................................... 65,384.2 12.216 798,726 LEXINGTON EMERGING MARKETS FUND: Qualified III ................................................... 371,155.8 8.323 3,089,046 LEXINGTON NATURAL RESOURCES TRUST: Qualified III ................................................... 530,562.2 10.862 5,763,092 Qualified V ..................................................... 8,347.9 12.095 100,969 Qualified VI .................................................... 711,891.9 11.720 8,346,423 NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST: GROWTH PORTFOLIO: Qualified III ................................................... 2,359,089.9 17.430 41,119,982 Qualified V ..................................................... 35,940.7 14.359 516,068 Qualified VI .................................................... 3,331,217.5 14.345 47,786,169 Qualified VIII .................................................. 5,947.6 12.334 73,360 SCUDDER VARIABLE LIFE INVESTMENT FUND: INTERNATIONAL PORTFOLIO: Qualified III ................................................... 3,823,292.2 14.515 55,495,694 Qualified V ..................................................... 38,067.4 13.799 525,305 Qualified VI .................................................... 7,323,208.0 13.923 101,958,550 Qualified VIII .................................................. 12,189.3 11.733 143,011 Qualified X (1.15)............................................... 41,921.0 13.952 584,886 Qualified X (1.25)............................................... 432,183.0 13.923 6,017,137 TCI PORTFOLIOS, INC.: TCI GROWTH: Qualified III *.................................................. 1,784,551.6 14.464 25,811,741 Qualified III .................................................. 4,184,701.2 13.224 55,336,455 Qualified V ..................................................... 24,825.6 15.176 376,753 Qualified VI .................................................... 21,986,645.3 15.253 335,360,124 Qualified VII ................................................... 63,035.5 12.840 809,380 Qualified VIII .................................................. 8,144.3 12.868 104,799 Qualified IX .................................................... 1,241.8 12.581 15,623 Qualified X (1.15)............................................... 13,306.7 15.285 203,397 Qualified X (1.25)............................................... 474,744.3 15.253 7,241,227 $6,632,117,659 -------------- --------------
*Applies only to participants of the Opportunity Plus program and Multiple Options Contracts. See Notes to Financial Statements. S-7 VARIABLE ANNUITY ACCOUNT C STATEMENT OF OPERATIONS - Year Ended December 31, 1995
INVESTMENT INCOME: Dividends: (Notes 1 and 3) Aetna Variable Fund............................................................ $648,150,765 Aetna Income Shares............................................................ 23,872,308 Aetna Variable Encore Fund .................................................... 172,751 Aetna Investment Advisers Fund, Inc............................................ 47,274,300 Aetna GET Fund, Series B ...................................................... 1,878,972 Aetna Ascent Variable Portfolio ............................................... 110,626 Aetna Crossroads Variable Portfolio ........................................... 61,834 Aetna Legacy Variable Portfolio ............................................... 33,640 Calvert Responsibly Invested Balanced Portfolio .............................. 2,556,825 Fidelity Investments Variable Insurance Products Fund - Equity Income Portfolio 423,626 Fidelity Investments Variable Insurance Products Fund - Growth Portfolio ...... 10,256 Fidelity Investments Variable Insurance Products Fund - Overseas Portfolio .... 5,145 Fidelity Investments Variable Insurance Products Fund II - Asset Manager Portfolio 259,914 Fidelity Investments Variable Insurance Products Fund II - Contrafund Portfolio 379,043 Franklin Government Securities Trust .......................................... 1,061,449 Janus Aspen Series - Aggressive Growth Portfolio............................... 982,586 Janus Aspen Series - Balanced Portfolio........................................ 11,553 Janus Aspen Series - Flexible Income Portfolio................................. 151,761 Janus Aspen Series - Growth Portfolio.......................................... 91,472 Janus Aspen Series - Short-Term Bond Portfolio................................. 11,707 Janus Aspen Series - Worldwide Growth Portfolio................................ 50,858 Lexington Emerging Markets Fund................................................ 29,990 Lexington Natural Resources Trust.............................................. 59,767 Neuberger & Berman Advisers Management Trust - Growth Portfolio ............... 1,779,523 Scudder Variable Life Investment Fund - International Portfolio............... 670,720 TCI Portfolios, Inc. - TCI Growth.............................................. 339,221 -------------- Total investment income ..................................................... 730,430,612 Valuation period deductions (Note 2)............................................. (71,090,542) -------------- Net investment income............................................................ 659,340,070 -------------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on sales of investments: (Notes 1 and 4) Proceeds from sales ........................................................... $570,154,582 Cost of investments sold ...................................................... 409,480,615 ------------ Net realized gain ........................................................... 160,673,967 Net unrealized gain on investments: Beginning of year ............................................................. 73,479,233 End of year ................................................................... 594,083,184 ------------ Net unrealized gain ......................................................... 520,603,951 -------------- Net realized and unrealized gain on investments ................................. 681,277,918 -------------- Net increase in net assets resulting from operations ............................ $1,340,617,988 -------------- --------------
See Notes to Financial Statements. S-8 VARIABLE ANNUITY ACCOUNT C STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31, 1995 1994 ---- ---- FROM OPERATIONS: Net investment income .......................................... $ 659,340,070 $ 476,196,420 Net realized and unrealized gain (loss) on investments .......... 681,277,918 (581,812,453) Net increase (decrease) in net assets resulting from operations 1,340,617,988 (105,616,033) FROM UNIT TRANSACTIONS: Variable annuity contract purchase payments ..................... 771,594,245 711,565,372 Sales and administrative charges deducted by the Company ........ (98,694) (137,737) Net variable annuity contract purchase payments ............... 771,495,551 711,427,635 Transfers from the Company for mortality guarantee adjustments .. 3,678,430 1,880,350 Transfers to the Company's fixed account options ................ (44,377,350) (56,920,532) Transfers to other variable annuity accounts ........... 0 (23,284,415) Redemptions by contract holders ................................. (287,945,984) (269,542,942) Annuity payments ................................................ (14,807,537) (11,189,149) Other ........................................................... 1,144,770 1,452,959 Net increase in net assets from unit transactions ............. 429,187,880 353,823,906 Change in net assets ............................................ 1,769,805,868 248,207,873 NET ASSETS: Beginning of year ............................................... 4,862,311,791 4,614,103,918 End of year...................................................... $6,632,117,659 $4,862,311,791 -------------- -------------- -------------- --------------
See Notes to Financial Statements. S-9 VARIABLE ANNUITY ACCOUNT C NOTES TO FINANCIAL STATEMENTS - December 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Variable Annuity Account C ("Account") is registered under the Investment Company Act of 1940 as a unit investment trust. The Account is sold exclusively for use with annuity contracts that are qualified under the Internal Revenue Code of 1986, as amended. The accompanying financial statements of the Account have been prepared in accordance with generally accepted accounting principles. 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, 1995: Aetna Variable Fund Aetna Income Shares Aetna Variable Encore Fund Aetna Investment Advisers Fund, Inc. Aetna GET Fund, Series B Aetna Ascent Variable Portfolio Aetna Crossroads Variable Portfolio Aetna Legacy Variable Portfolio Alger American Fund: - Alger American Growth Portfolio - Alger American Small Capitalization Portfolio Calvert Responsibly Invested Balanced Portfolio Fidelity Investments Variable Insurance Products Fund: - Equity-Income Portfolio - Growth Portfolio - Overseas Portfolio Fidelity Investments Variable Insurance Products Fund II: - Asset Manager Portfolio - Contrafund Portfolio - Index 500 Portfolio Franklin Government Securities Trust Janus Aspen Series: - Aggressive Growth Portfolio - Balanced Portfolio - Flexible Income Portfolio - Growth Portfolio - Short-Term Bond Portfolio - Worldwide Growth Portfolio Lexington Emerging Markets Fund Lexington Natural Resources Trust Neuberger & Berman Advisers Management Trust: - Growth Portfolio Scudder Variable Life Investment Fund: - International Portfolio TCI Portfolios, Inc.: - TCI Growth 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 Variable Annuity Account C form a part of, and are taxed with, the total operations of Aetna Life Insurance and Annuity Company ("Company") which is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended. d. ANNUITY RESERVES Annuity reserves are computed for currently payable contracts according to the Progressive Annuity, Individual Annuity Mortality, and Group Annuity Mortality tables using various assumed interest rates not to exceed seven percent. Mortality experience is monitored by the Company. S-10 VARIABLE ANNUITY ACCOUNT C NOTES TO FINANCIAL STATEMENTS - December 31, 1995 (continued) Charges to annuity reserves for mortality and expense risk 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 and accumulated net realized gain on investments is included in net unrealized gain in the Statement of Operations. 4. PURCHASES AND SALES OF INVESTMENTS The cost of purchases and proceeds from sales of investments other than short-term investments for the year ended December 31, 1995 aggregated $1,658,682,532 and $570,154,582, respectively. 5. ESTIMATES 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. S-11 VARIABLE ANNUITY ACCOUNT C CONDENSED FINANCIAL INFORMATION CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------------------------------- Increase Value at Value at in Value of Beginning End of Accumulation of Year Year Unit - ------------------------------------------------------------------------------------------------------------------------- AETNA VARIABLE FUND: Qualified I ............................................................. $138.406 $180.879 30.69% Qualified III ........................................................... 105.558 137.869 30.61% Qualified IV ............................................................ 63.884 83.646 30.93% Qualified V ............................................................. 10.823 14.113 30.40% Qualified VI ............................................................ 10.778 14.077 30.61% Qualified VII ........................................................... 10.136 13.247 30.69% Qualified VIII .......................................................... 10.011 13.074 30.60% Qualified IX ............................................................ 9.879 12.935 30.93% Qualified X (1.15) ...................................................... 10.791 14.108 30.74% Qualified X (1.25) ...................................................... 10.778 14.077 30.61% - ------------------------------------------------------------------------------------------------------------------------- AETNA INCOME SHARES: Qualified I ............................................................. $ 40.570 $ 47.405 16.85% Qualified III ........................................................... 40.173 46.913 16.78% Qualified V ............................................................. 10.536 12.283 16.59% Qualified VI ............................................................ 10.360 12.098 16.78% Qualified VII ........................................................... 9.565 11.176 16.85% Qualified VIII .......................................................... 9.543 11.143 16.77% Qualified IX ............................................................ 9.570 11.203 17.07% Qualified X (1.15) ...................................................... 10.373 12.125 16.89% Qualified X (1.25) ...................................................... 10.360 12.098 16.78% - ------------------------------------------------------------------------------------------------------------------------- AETNA VARIABLE ENCORE FUND: Qualified I ............................................................. $ 36.723 $ 38.485 4.80% Qualified III ........................................................... 36.271 37.988 4.73% Qualified V ............................................................. 10.523 11.003 4.57% Qualified VI ............................................................ 10.528 11.026 4.73% Qualified VII ........................................................... 10.435 10.936 4.80% Qualified VIII .......................................................... 10.141 10.620 4.73% Qualified IX ............................................................ 10.341 10.857 5.00% Qualified X (1.15) ...................................................... 10.541 11.051 4.84% Qualified X (1.25) ...................................................... 10.528 11.026 4.73% - ------------------------------------------------------------------------------------------------------------------------- AETNA INVESTMENT ADVISERS FUND, INC.: Qualified I ............................................................. $ 14.317 $ 18.024 25.89% Qualified III ........................................................... 14.270 17.954 25.82% Qualified V ............................................................. 10.900 13.693 25.62% Qualified VI ............................................................ 10.868 13.673 25.81% Qualified VII ........................................................... 10.434 13.135 25.89% Qualified VIII .......................................................... 10.091 12.695 25.81% Qualified IX ............................................................ 10.000 12.613 26.13% Qualified X (1.15) ...................................................... 10.880 13.703 25.95% Qualified X (1.25) ...................................................... 10.868 13.673 25.81% - -------------------------------------------------------------------------------------------------------------------------
S-12 VARIABLE ANNUITY ACCOUNT C CONDENSED FINANCIAL INFORMATION CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995 (continued)
- ------------------------------------------------------------------------------------------------------------------------- Increase Value at Value at in Value of Beginning End of Accumulation of Year Year Unit - ------------------------------------------------------------------------------------------------------------------------- AETNA GET FUND, SERIES B: Qualified III ........................................................... $ 10.160 $ 12.850 26.48% Qualified VI ............................................................ 10.160 12.850 26.48% Qualified X (1.25) ...................................................... 10.160 12.850 26.48% - ------------------------------------------------------------------------------------------------------------------------- AETNA ASCENT VARIABLE PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 10.673 6.73% (4) Qualified V ............................................................. 10.000 10.666 6.66% (5) Qualified VI ............................................................ 10.000 10.673 6.73% (5) Qualified VIII .......................................................... 10.000 10.673 6.73% (5) Qualified X (1.15) ...................................................... 10.000 10.982 9.82% (3) Qualified X (1.25) ...................................................... 10.000 10.976 9.76% (3) - ------------------------------------------------------------------------------------------------------------------------- AETNA CROSSROADS VARIABLE PORTFOLIO: Qualified V ............................................................. $ 10.000 $ 10.605 6.05% (5) Qualified VI ............................................................ 10.000 10.612 6.12% (5) Qualified VIII .......................................................... 10.000 10.611 6.11% (5) Qualified X (1.15) ...................................................... 10.000 10.868 8.68% (3) Qualified X (1.25) ...................................................... 10.000 10.862 8.62% (3) - ------------------------------------------------------------------------------------------------------------------------- AETNA LEGACY VARIABLE PORTFOLIO: Qualified VI ............................................................ $ 10.000 $ 10.580 5.80% (5) Qualified X (1.15) ...................................................... 10.000 10.631 6.31% (4) Qualified X (1.25) ...................................................... 10.000 10.626 6.26% (4) - ------------------------------------------------------------------------------------------------------------------------- ALGER AMERICAN FUNDS: ALGER AMERICAN GROWTH PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 11.715 17.15% (4) Qualified V ............................................................. 10.000 10.365 3.65% (5) Qualified VI ............................................................ 10.000 10.157 1.57% (5) Qualified VIII .......................................................... 10.000 10.371 3.71% (5) Qualified X (1.15) ...................................................... 10.000 11.385 13.85% (3) Qualified X (1.25) ...................................................... 10.000 11.379 13.79% (3) - ------------------------------------------------------------------------------------------------------------------------- ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO: Qualified III ........................................................... $ 9.513 $ 13.558 42.52% Qualified V ............................................................. 9.461 13.463 42.29% Qualified VI ............................................................ 9.437 13.450 42.52% Qualified VIII .......................................................... 9.889 14.093 42.51% Qualified X (1.15) ...................................................... 9.450 13.481 42.66% Qualified X (1.25) ...................................................... 9.437 13.450 42.52% - ------------------------------------------------------------------------------------------------------------------------- CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO: Qualified III ........................................................... $ 13.990 $ 17.951 28.31% Qualified V ............................................................. 10.839 13.870 27.96% Qualified VI ............................................................ 10.554 13.527 28.17% Qualified VIII .......................................................... 9.590 12.291 28.16% - -------------------------------------------------------------------------------------------------------------------------
S-13 VARIABLE ANNUITY ACCOUNT C CONDENSED FINANCIAL INFORMATION CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995 (continued)
- ------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) Value at Value at in Value of Beginning End of Accumulation of Year Year Unit - ------------------------------------------------------------------------------------------------------------------------- FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS: EQUITY - INCOME PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 11.617 16.17% (2) Qualified V ............................................................. 10.000 11.047 10.47% (5) Qualified VI ............................................................ 10.000 11.092 10.92% (5) Qualified VIII .......................................................... 10.000 11.054 10.54% (5) Qualified X (1.15) ...................................................... 10.409 13.902 33.55% Qualified X (1.25) ...................................................... 10.403 13.880 33.42% - ------------------------------------------------------------------------------------------------------------------------- GROWTH PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 10.198 1.98% (4) Qualified V ............................................................. 10.000 10.183 1.83% (5) Qualified VI ............................................................ 10.000 10.066 0.66% (5) Qualified VIII .......................................................... 10.000 10.190 1.90% (5) Qualified X (1.15) ...................................................... 10.479 14.023 33.82% Qualified X (1.25) ...................................................... 10.472 14.000 33.69% - ------------------------------------------------------------------------------------------------------------------------- OVERSEAS PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 10.197 1.97% (4) Qualified V ............................................................. 10.000 9.954 (0.46%) (5) Qualified VI ............................................................ 10.000 9.961 (0.39%) (5) Qualified X (1.15) ...................................................... 9.480 10.278 8.43% Qualified X (1.25) ...................................................... 9.474 10.262 8.32% - ------------------------------------------------------------------------------------------------------------------------- FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS II: ASSET MANAGER PORTFOLIO: Qualified III ........................................................... $ 9.447 $ 10.912 15.51% - ------------------------------------------------------------------------------------------------------------------------- CONTRAFUND PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 11.763 17.63% (2) Qualified V ............................................................. 10.000 10.461 4.61% (5) Qualified VI ............................................................ 10.000 10.397 3.97% (5) Qualified VIII .......................................................... 10.000 10.467 4.67% (5) Qualified X (1.15) ...................................................... 10.000 10.689 6.89% (2) Qualified X (1.25) ...................................................... 10.000 10.681 6.81% (2) - ------------------------------------------------------------------------------------------------------------------------- INDEX 500 PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 11.740 17.40% (2) - ------------------------------------------------------------------------------------------------------------------------- FRANKLIN GOVERNMENT SECURITIES TRUST: Qualified III ........................................................... $ 14.190 $ 16.495 16.24% Qualified V ............................................................. 10.294 11.946 16.06% Qualified VI ............................................................ 10.119 11.762 16.24% Qualified VIII .......................................................... 9.541 11.090 16.23% - ------------------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO: Qualified III ........................................................... $ 12.169 $ 15.323 25.91% Qualified V ............................................................. 10.577 13.296 25.71% - -------------------------------------------------------------------------------------------------------------------------
S-14 VARIABLE ANNUITY ACCOUNT C CONDENSED FINANCIAL INFORMATION CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995 (continued)
- ------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) Value at Value at in Value of Beginning End of Accumulation of Year Year Unit - ------------------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO (continued): Qualified VI ............................................................ $ 10.581 $ 13.322 25.91% Qualified VIII .......................................................... 10.581 13.321 25.90% Qualified X (1.15) ...................................................... 10.000 12.869 28.69% (2) Qualified X (1.25) ...................................................... 10.000 12.861 28.61% (2) - ------------------------------------------------------------------------------------------------------------------------- BALANCED PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 10.853 8.53% (4) Qualified V ............................................................. 10.000 10.843 8.43% (5) Qualified VI ............................................................ 10.000 10.850 8.50% (5) Qualified X (1.15) ...................................................... 10.000 11.265 12.65% (3) Qualified X (1.25) ...................................................... 10.000 11.259 12.59% (3) - ------------------------------------------------------------------------------------------------------------------------- FLEXIBLE INCOME PORTFOLIO: Qualified III ........................................................... $ 9.911 $ 12.124 22.33% Qualified V ............................................................. 10.000 12.054 20.54% (1) Qualified VI ............................................................ 9.873 12.077 22.33% - ------------------------------------------------------------------------------------------------------------------------- GROWTH PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 11.859 18.59% (4) Qualified V ............................................................. 10.000 10.872 8.72% (5) Qualified VI ............................................................ 10.000 10.870 8.70% (5) Qualified X (1.15) ...................................................... 10.000 11.633 16.33% (3) Qualified X (1.25) ...................................................... 10.000 11.626 16.26% (3) - ------------------------------------------------------------------------------------------------------------------------- SHORT TERM BOND PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 10.393 3.93% (4) Qualified V ............................................................. 10.000 10.316 3.16% (5) Qualified VI ............................................................ 10.000 10.323 3.23% (5) Qualified X (1.25) ...................................................... 10.000 10.285 2.85% (4) - ------------------------------------------------------------------------------------------------------------------------- WORLDWIDE GROWTH PORTFOLIO: Qualified III ........................................................... $ 10.000 $ 12.158 21.58% (4) Qualified V ............................................................. 10.000 10.952 9.52% (4) Qualified VI ............................................................ 10.000 10.877 8.77% (5) Qualified VIII .......................................................... 10.000 10.846 8.46% (5) Qualified X (1.15) ...................................................... 10.000 12.223 22.23% (2) Qualified X (1.25) ...................................................... 10.000 12.216 22.16% (2) - ------------------------------------------------------------------------------------------------------------------------- LEXINGTON EMERGING MARKETS FUND: Qualified III ........................................................... $ 8.772 $ 8.323 (5.12%) - ------------------------------------------------------------------------------------------------------------------------- LEXINGTON NATURAL RESOURCES TRUST: Qualified III ........................................................... $ 9.412 $ 10.862 15.41% Qualified V ............................................................. 10.496 12.095 15.24% Qualified VI ............................................................ 10.154 11.720 15.42% - -------------------------------------------------------------------------------------------------------------------------
S-15 VARIABLE ANNUITY ACCOUNT C CONDENSED FINANCIAL INFORMATION CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995 (continued)
- -------------------------------------------------------------------------------------------------------------------------- Increase Value at Value at in Value of Beginning End of Accumulation of Year Year Unit - -------------------------------------------------------------------------------------------------------------------------- NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST - GROWTH PORTFOLIO: Qualified III ........................................................... $ 13.398 $ 17.430 30.09% Qualified V ............................................................. 11.055 14.359 29.89% Qualified VI ............................................................ 11.026 14.345 30.10% Qualified VIII .......................................................... 9.482 12.334 30.09% - -------------------------------------------------------------------------------------------------------------------------- SCUDDER VARIABLE LIFE INVESTMENT FUND - INTERNATIONAL PORTFOLIO: Qualified III ........................................................... $ 13.227 $ 14.515 9.74% Qualified V ............................................................. 12.595 13.799 9.56% Qualified VI ............................................................ 12.687 13.923 9.74% Qualified VIII .......................................................... 10.692 11.733 9.73% Qualified X (1.15) ...................................................... 12.701 13.952 9.85% Qualified X (1.25) ...................................................... 12.687 13.923 9.74% - -------------------------------------------------------------------------------------------------------------------------- TCI PORTFOLIOS, INC.: TCI GROWTH: Qualified III* .......................................................... $ 11.172 $ 14.464 29.47% Qualified III ........................................................... 10.213 13.224 29.47% Qualified V ............................................................. 11.740 15.176 29.27% Qualified VI ............................................................ 11.781 15.253 29.47% Qualified VII ........................................................... 9.911 12.840 29.55% Qualified VIII .......................................................... 9.939 12.868 29.46% Qualified IX ............................................................ 9.693 12.581 29.80% Qualified X (1.15) ...................................................... 11.794 15.285 29.60% Qualified X (1.25) ...................................................... 11.781 15.253 29.47% - --------------------------------------------------------------------------------------------------------------------------
*Applies only to participants of the Opportunity Plus program and Multiple Options Contracts. QUALIFIED I Individual contracts issued prior to May 1, 1975 in connection with "Qualified Corporate Retirement Plans" established pursuant to Section 401 of the Internal Revenue Code ("Code"); "Tax-Deferred Annuity Plans" established by the public school systems and tax-exempt organizations pursuant to Section 403(b) of the Code, and certain Individual Retirement Annuity Plans established by or on behalf of individuals pursuant to section 408(b) of the Code; Individual contracts issued prior to November 1, 1975 in connection with "H.R. 10 Plans" established by persons entitled to the benefits of the Self-Employed Individuals Tax Retirement Act of 1962, as amended; allocated group contracts issued prior to May 1, 1975 in connection with Qualified Corporate Retirement Plans; and group contracts issued prior to October 1, 1978 in connection with Tax-Deferred Annuity Plans. QUALIFIED III Individual contracts issued in connection with Tax-Deferred Annuity Plans and Individual Retirement Annuity Plans since May 1, 1975, H.R. 10 Plans since November 1, 1975; group contracts issued since October 1, 1978 in connection with Tax-Deferred Annuity S-16 VARIABLE ANNUITY ACCOUNT C CONDENSED FINANCIAL INFORMATION CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995 (continued) - -------------------------------------------------------------------------------- QUALIFIED III (continued): Plans and group contracts issued since May 1, 1979 in connection with "Deferred Compensation Plans" adopted by state and local governments and H.R. 10 Plans. QUALIFIED IV Certain large group contracts (Jumbo) issued in connection with Tax-Deferred Annuity Plans and Deferred Compensation Plans issued since January 1, 1979. QUALIFIED V Group AetnaPlus contracts issued since August 28, 1992 in connection with "Optional Retirement Plans" established pursuant to Section 403(b) or 401(a) of the Internal Revenue Code. QUALIFIED VI Group AetnaPlus contracts issued in connection with Tax-Deferred Annuity Plans and Retirement Plus Plans since August 28, 1992. QUALIFIED VII Certain existing contracts that were converted to ACES, the new administrative system (Previously valued under Qualified I). QUALIFIED VIII "Group Aetna Plus" contracts issued in connection with Tax-Deferred Annuity Plans and "Deferred Compensation Plans" adopted by state and local governments since June 30, 1993. QUALIFIED IX Certain large group contracts (Jumbo) that were converted to ACES, the new administrative system (previously valued under Qualified VI). QUALIFIED X Individual Retirement Annuity and Simplified Employee Pension Plans issued or converted to ACES, the new administrative system. 1 - Reflects less than a full year of performance activity. The initial Accumulation Unit Value was established at $10.000 during March 1995 when the fund became available under the contract or the applicable daily asset charge was first utilized. 2 - Reflects less than a full year of performance activity. The initial Accumulation Unit Value was established at $10.000 during May 1995 when the fund became available under the contract or the applicable daily asset charge was first utilized. 3 - Reflects less than a full year of performance activity. The initial Accumulation Unit Value was established at $10.000 during June 1995 when the fund became available under the contract or the applicable daily asset charge was first utilized. 4 - Reflects less than a full year of performance activity. The initial Accumulation Unit Value was established at $10.000 during July 1995 when the fund became available under the contract or the applicable daily asset charge was first utilized. 5 - Reflects less than a full year of performance activity. The initial Accumulation Unit Value was established at $10.000 during August 1995 when the fund became available under the contract or the applicable daily asset charge was first utilized. S-17 CONSOLIDATED FINANCIAL STATEMENTS AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES Index
PAGE --- Independent Auditors' Report..................................... F-2 Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993.............................. F-3 Consolidated Balance Sheets as of December 31, 1995 and 1994... F-4 Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December 31, 1995, 1994 and 1993.............................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.............................. F-6 Notes to Consolidated Financial Statements....................... F-7
F-1 INDEPENDENT AUDITORS' REPORT The Shareholder and Board of Directors Aetna Life Insurance and Annuity Company: We have audited the accompanying consolidated balance sheets of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1995 and 1994, 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, 1995. 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 statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company and Subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1993 the Company changed its methods of accounting for certain investments in debt and equity securities. KPMG Peat Marwick LLP Hartford, Connecticut February 6, 1996 F-2 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Consolidated Statements of Income (millions)
YEARS ENDED DECEMBER 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Revenue: Premiums............................................. $ 130.8 $ 124.2 $ 82.1 Charges assessed against policyholders............... 318.9 279.0 251.5 Net investment income................................ 1,004.3 917.2 911.9 Net realized capital gains........................... 41.3 1.5 9.5 Other income......................................... 42.0 10.3 9.5 -------- -------- -------- Total revenue...................................... 1,537.3 1,332.2 1,264.5 -------- -------- -------- Benefits and expenses: Current and future benefits.......................... 915.3 854.1 818.4 Operating expenses................................... 318.7 235.2 207.2 Amortization of deferred policy acquisition costs.... 43.3 26.4 19.8 -------- -------- -------- Total benefits and expenses........................ 1,277.3 1,115.7 1,045.4 -------- -------- -------- Income before federal income taxes..................... 260.0 216.5 219.1 Federal income taxes................................. 84.1 71.2 76.2 -------- -------- -------- Net income............................................. $ 175.9 $ 145.3 $ 142.9 -------- -------- -------- -------- -------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Consolidated Balance Sheets (millions)
DECEMBER 31, -------------------- 1995 1994 --------- --------- ASSETS - ------------------------------------------------------- Investments: Debt securities, available for sale: (amortized cost: $11,923.7 and $10,577.8)........... $12,720.8 $10,191.4 Equity securities, available for sale: Non-redeemable preferred stock (cost: $51.3 and $43.3)............................................ 57.6 47.2 Investment in affiliated mutual funds (cost: $173.4 and $187.1)....................................... 191.8 181.9 Common stock (cost: $6.9 at December 31, 1995)..... 8.2 -- Short-term investments............................... 15.1 98.0 Mortgage loans....................................... 21.2 9.9 Policy loans......................................... 338.6 248.7 Limited partnership.................................. -- 24.4 --------- --------- Total investments................................ 13,353.3 10,801.5 Cash and cash equivalents.............................. 568.8 623.3 Accrued investment income.............................. 175.5 142.2 Premiums due and other receivables..................... 37.3 75.8 Deferred policy acquisition costs...................... 1,341.3 1,164.3 Reinsurance loan to affiliate.......................... 655.5 690.3 Other assets........................................... 26.2 15.9 Separate Accounts assets............................... 10,987.0 7,420.8 --------- --------- Total assets..................................... $27,144.9 $20,934.1 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDER'S EQUITY - ------------------------------------------------------- Liabilities: Future policy benefits............................... $ 3,594.6 $ 2,912.7 Unpaid claims and claim expenses..................... 27.2 23.8 Policyholders' funds left with the Company........... 10,500.1 8,949.3 --------- --------- Total insurance reserve liabilities.............. 14,121.9 11,885.8 Other liabilities.................................... 259.2 302.1 Federal income taxes: Current............................................ 24.2 3.4 Deferred........................................... 169.6 233.5 Separate Accounts liabilities........................ 10,987.0 7,420.8 --------- --------- Total liabilities................................ 25,561.9 19,845.6 --------- --------- --------- --------- 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...................................... 407.6 407.6 Net unrealized capital gains (losses)................ 132.5 (189.0) Retained earnings.................................... 1,040.1 867.1 --------- --------- Total shareholder's equity....................... 1,583.0 1,088.5 --------- --------- Total liabilities and shareholder's equity..... $27,144.9 $20,934.1 --------- --------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Consolidated Statements of Changes in Shareholder's Equity (millions)
YEARS ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 --------- --------- --------- Shareholder's equity, beginning of year................ $ 1,088.5 $ 1,246.7 $ 990.1 Net change in unrealized capital gains (losses)........ 321.5 (303.5) 113.7 Net income............................................. 175.9 145.3 142.9 Common stock dividends declared........................ (2.9) -- -- --------- --------- --------- Shareholder's equity, end of year...................... $ 1,583.0 $ 1,088.5 $ 1,246.7 --------- --------- --------- --------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Consolidated Statements of Cash Flows (millions)
YEARS ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Cash Flows from Operating Activities: Net income........................................... $ 175.9 $ 145.3 $ 142.9 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued investment income.............. (33.3) (17.5) (11.1) Decrease (increase) in premiums due and other receivables....................................... 25.4 1.3 (5.6) Increase in policy loans........................... (89.9) (46.0) (36.4) Increase in deferred policy acquisition costs...... (177.0) (105.9) (60.5) Decrease in reinsurance loan to affiliate.......... 34.8 27.8 31.8 Net increase in universal life account balances.... 393.4 164.7 126.4 Increase in other insurance reserve liabilities.... 79.0 75.1 86.1 Net increase in other liabilities and other assets............................................ 15.0 53.9 7.0 Decrease in federal income taxes................... (6.5) (11.7) (3.7) Net accretion of discount on bonds................. (66.4) (77.9) (88.1) Net realized capital gains......................... (41.3) (1.5) (9.5) Other, net......................................... -- (1.0) 0.2 ---------- ---------- ---------- Net cash provided by operating activities........ 309.1 206.6 179.5 ---------- ---------- ---------- Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale................. 4,207.2 3,593.8 473.9 Equity securities.................................. 180.8 93.1 89.6 Mortgage loans..................................... 10.7 -- -- Limited partnership................................ 26.6 -- -- Investment maturities and collections of: Debt securities available for sale................. 583.9 1,289.2 2,133.3 Short-term investments............................. 106.1 30.4 19.7 Cost of investment purchases in: Debt securities.................................... (6,034.0) (5,621.4) (3,669.2) Equity securities.................................. (170.9) (162.5) (157.5) Short-term investments............................. (24.7) (106.1) (41.3) Mortgage loans..................................... (21.3) -- -- Limited partnership................................ -- (25.0) -- ---------- ---------- ---------- Net cash used for investing activities........... (1,135.6) (908.5) (1,151.5) ---------- ---------- ---------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts........................................... 1,884.5 1,737.8 2,117.8 Withdrawals of investment contracts.................. (1,109.6) (948.7) (1,000.3) Dividends paid to shareholder........................ (2.9) -- -- ---------- ---------- ---------- Net cash provided by financing activities........ 772.0 789.1 1,117.5 ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents... (54.5) 87.2 145.5 Cash and cash equivalents, beginning of year........... 623.3 536.1 390.6 ---------- ---------- ---------- Cash and cash equivalents, end of year................. $ 568.8 $ 623.3 $ 536.1 ---------- ---------- ---------- ---------- ---------- ---------- Supplemental cash flow information: Income taxes paid, net............................... $ 90.2 $ 82.6 $ 79.9 ---------- ---------- ---------- ---------- ---------- ----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements December 31, 1995, 1994, and 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries (collectively, the "Company") is a provider of financial services and life insurance products in the United States. The Company has two business segments, financial services and life insurance. The financial services products include individual and group annuity contracts which offer a variety of funding and distribution options for personal and employer-sponsored retirement plans that qualify under Internal Revenue Code Sections 401, 403, 408 and 457, and individual and group non-qualified annuity contracts. These contracts may be immediate or deferred and are offered primarily to individuals, pension plans, small businesses and employer-sponsored groups in the health care, government, education (collectively "not-for-profit" organizations) and corporate markets. Financial services also include pension plan administrative services. The life insurance products include universal life, variable universal life, interest sensitive whole life and term insurance. These products are offered primarily to individuals, small businesses, employer sponsored groups and executives of Fortune 2000 companies. BASIS OF PRESENTATION The consolidated financial statements include Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries, Aetna Insurance Company of America and Aetna Private Capital, Inc. Aetna Life Insurance and Annuity Company is a wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is a wholly owned subsidiary of Aetna Life and Casualty Company ("Aetna"). Two subsidiaries, Systematized Benefits Administrators, Inc. ("SBA"), and Aetna Investment Services, Inc. ("AISI"), which were previously reported in the consolidated financial statements were distributed in the form of dividends to ARSI in December of 1995. The impact to the Company's financial statements of distributing these dividends was immaterial. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. Intercompany transactions have been eliminated. Certain reclassifications have been made to 1994 and 1993 financial information to conform to the 1995 presentation. ACCOUNTING CHANGES Accounting for Certain Investments in Debt and Equity Securities On December 31, 1993, the Company adopted Financial Accounting Standard ("FAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, which requires the classification of debt securities into three categories: "held to maturity", which are carried at amortized cost; "available for sale", which are carried at fair value with changes in fair value recognized as a component of shareholder's equity; and "trading", which are carried at fair value with immediate recognition in income of changes in fair value. Initial adoption of this standard resulted in a net increase of $106.8 million, net of taxes of $57.5 million, to net unrealized gains in shareholder's equity. These amounts exclude gains and losses allocable to experience-rated (including universal life) contractholders. Adoption of FAS No. 115 did not have a material effect on deferred policy acquisition costs. F-7 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 EQUIVALENT Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity of ninety days or less when purchased. INVESTMENTS Debt Securities At December 31, 1995 and 1994, all of the Company's debt securities are classified as available for sale and carried at fair value. These securities are written down (as realized losses) for other than temporary decline in value. Unrealized gains and losses related to these securities, after deducting amounts allocable to experience-rated contractholders and related taxes, are reflected in shareholder's equity. Fair values for debt 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. Purchases and sales of debt securities are recorded on the trade date. Equity Securities Equity securities are classified as available for sale and carried at fair value based on quoted market prices or dealer quotations. Equity securities are written down (as realized losses) for other than temporary declines in value. Unrealized gains and losses related to such securities are reflected in shareholder's equity. Purchases and sales are recorded on the trade date. The investment in affiliated mutual funds represents an investment in the Aetna Series Fund, Inc., a retail mutual fund which has been seeded by the Company, and is carried at fair value. Mortgage Loans and Policy Loans Mortgage loans and policy loans are carried at unpaid principal balances net of valuation reserves, which approximates fair value, and are generally secured. Purchases and sales of mortgage loans are recorded on the closing date. F-8 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Limited Partnership The Company's limited partnership investment was carried at the amount invested plus the Company's share of undistributed operating results and unrealized gains (losses), which approximates fair value. The Company disposed of the limited partnership during 1995. Short-Term Investments Short-term investments, consisting primarily of money market instruments and other debt issues purchased with an original maturity of over ninety days and less than one year, are considered available for sale and are carried at fair value, which approximates amortized cost. DEFERRED POLICY ACQUISITION COSTS Certain costs of acquiring insurance business have been deferred. These costs, all of which vary with and are primarily related to the production of new business, consist principally of commissions, certain expenses of underwriting and issuing contracts and certain agency expenses. For fixed ordinary life contracts, such costs are amortized over expected premium-paying periods. For universal life and certain annuity contracts, such costs are amortized in proportion to estimated gross profits and adjusted to reflect actual gross profits. These costs are amortized over twenty years for annuity pension contracts, and over the contract period for universal life 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 would not be adequate to cover related losses and expenses. INSURANCE RESERVE LIABILITIES The Company's liabilities include reserves related to fixed ordinary life, fixed universal life and fixed annuity contracts. Reserves for future policy benefits for fixed ordinary life contracts are computed on the basis of assumed investment yield, assumed mortality, withdrawals and expenses, including a margin for adverse deviation, which generally vary by plan, year of issue and policy duration. Reserve interest rates range from 2.25% to 10.00%. Assumed 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. Reserves for fixed universal life (included in Future Policy Benefits) and fixed deferred annuity contracts (included in Policyholders' Funds Left With the Company) are equal to the fund value. The fund value is equal to cumulative deposits less charges plus credited interest thereon, without reduction for possible future penalties assessed on premature withdrawal. For guaranteed interest options, the interest credited ranged from 4.00% to 6.38% in 1995 and 4.00% to 5.85% in 1994. For all other fixed options, the interest credited ranged from 5.00% to 7.00% in 1995 and 5.00% to 7.50% in 1994. Reserves for fixed annuity contracts in the annuity period and for future amounts due under settlement options are computed actuarially using the 1971 Individual Annuity Mortality Table, the 1983 Individual Annuity Mortality Table, the F-9 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1983 Group Annuity Mortality Table and, in some cases, mortality improvement according to scales G and H, at assumed interest rates ranging from 3.5% to 9.5%. Reserves relating to contracts with life contingencies are included in Future Policy Benefits. For other contracts, the reserves are reflected in Policyholders' Funds Left With the Company. Unpaid claims for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported. PREMIUMS, CHARGES ASSESSED AGAINST POLICYHOLDERS, BENEFITS AND EXPENSES Premiums are recorded as revenue when due for fixed ordinary life contracts. Charges assessed against policyholders' funds for cost of insurance, surrender charges, actuarial margin and other fees are recorded as revenue for universal life and certain annuity contracts. Policy benefits and expenses are recorded in relation to the associated premiums or gross profit so as to result in recognition of profits over the expected lives of the contracts. SEPARATE ACCOUNTS Assets held under variable universal life, variable life and variable annuity contracts are segregated in Separate Accounts and are invested, as designated by the contractholder or participant under a contract, in shares of Aetna Variable Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna GET Fund, or The Aetna Series Fund Inc., which are managed by the Company or other selected mutual funds not managed by the Company. Separate Accounts assets and liabilities are carried at fair value except for those relating to a guaranteed interest option which is offered through a Separate Account. The assets of the Separate Account supporting the guaranteed interest option are carried at an amortized cost of $322.2 million for 1995 (fair value $343.9 million) and $149.7 million for 1994 (fair value $146.3 million), since the Company bears the investment risk where the contract is held to maturity. Reserves relating to the guaranteed interest option are maintained at fund value and reflect interest credited at rates ranging from 4.5% to 8.38% in both 1995 and 1994. 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 (losses) of the Separate Accounts are not reflected in the Consolidated Statements of Income (with the exception of realized capital gains (losses) on the sale of assets supporting the guaranteed interest option). The Consolidated Statements of Cash Flows do not reflect investment activity of the Separate Accounts. FEDERAL 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 benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. F-10 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 2. INVESTMENTS Investments in debt securities available for sale as of December 31, 1995 were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (MILLIONS) U.S. Treasury securities and obligations of U.S. government agencies and corporations... $ 539.5 $ 47.5 $ -- $ 587.0 Obligations of states and political subdivisions................................ 41.4 12.4 -- 53.8 U.S. Corporate securities: Financial.................................. 2,764.4 110.3 2.1 2,872.6 Utilities.................................. 454.4 27.8 1.0 481.2 Other...................................... 2,177.7 159.5 1.2 2,336.0 --------- ---------- ----- --------- Total U.S. Corporate securities............ 5,396.5 297.6 4.3 5,689.8 Foreign securities: Government................................. 316.4 26.1 2.0 340.5 Financial.................................. 534.2 45.4 3.5 576.1 Utilities.................................. 236.3 32.9 -- 269.2 Other...................................... 215.7 15.1 -- 230.8 --------- ---------- ----- --------- Total Foreign securities................... 1,302.6 119.5 5.5 1,416.6 Residential mortgage-backed securities: Residential pass-throughs.................. 556.7 99.2 1.8 654.1 Residential CMOs........................... 2,383.9 167.6 2.2 2,549.3 --------- ---------- ----- --------- Total Residential mortgage-backed securities................................ 2,940.6 266.8 4.0 3,203.4 Commercial/Multifamily mortgage-backed securities.................................. 741.9 32.3 0.2 774.0 --------- ---------- ----- --------- Total Mortgage-backed securities........... 3,682.5 299.1 4.2 3,977.4 Other asset-backed securities................ 961.2 35.5 0.5 996.2 --------- ---------- ----- --------- Total debt securities available for sale..... $11,923.7 $811.6 $14.5 $12,720.8 --------- ---------- ----- --------- --------- ---------- ----- ---------
F-11 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 2. INVESTMENTS (CONTINUED) Investments in debt securities available for sale as of December 31, 1994 were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (MILLIONS) U.S. Treasury securities and obligations of U.S. government agencies and corporations... $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9 Obligations of states and political subdivisions................................ 37.9 1.2 -- 39.1 U.S. Corporate securities: Financial.................................. 2,216.9 3.8 109.4 2,111.3 Utilities.................................. 100.1 -- 7.9 92.2 Other...................................... 1,344.3 6.0 67.9 1,282.4 --------- ---------- ---------- --------- Total U.S. Corporate securities............ 3,661.3 9.8 185.2 3,485.9 Foreign securities: Government................................. 434.4 1.2 33.9 401.7 Financial.................................. 368.2 1.1 23.0 346.3 Utilities.................................. 204.4 2.5 9.5 197.4 Other...................................... 46.3 0.8 1.5 45.6 --------- ---------- ---------- --------- Total Foreign securities................... 1,053.3 5.6 67.9 991.0 Residential mortgage-backed securities: Residential pass-throughs.................. 627.1 81.5 5.0 703.6 Residential CMOs........................... 2,671.0 32.9 139.4 2,564.5 --------- ---------- ---------- --------- Total Residential mortgage-backed securities.................................. 3,298.1 114.4 144.4 3,268.1 Commercial/Multifamily mortgage-backed securities.................................. 435.0 0.2 21.3 413.9 --------- ---------- ---------- --------- Total Mortgage-backed securities............. 3,733.1 114.6 165.7 3,682.0 Other asset-backed securities................ 696.1 0.2 16.8 679.5 --------- ---------- ---------- --------- Total debt securities available for sale..... $10,577.8 $133.4 $519.8 $10,191.4 --------- ---------- ---------- --------- --------- ---------- ---------- ---------
At December 31, 1995 and 1994, net unrealized appreciation (depreciation) of $797.1 million and $(386.4) million, respectively, on available for sale debt securities included $619.1 million and $(308.6) million, respectively, related to experience-rated contractholders, which were not included in shareholder's equity. F-12 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 2. INVESTMENTS (CONTINUED) The amortized cost and fair value of debt securities for the year ended December 31, 1995 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
AMORTIZED FAIR COST VALUE --------- --------- (MILLIONS) Due to mature: One year or less..................................... $ 348.8 $ 351.1 After one year through five years.................... 2,100.2 2,159.5 After five years through ten years................... 2,516.0 2,663.4 After ten years...................................... 2,315.0 2,573.2 Mortgage-backed securities........................... 3,682.5 3,977.4 Other asset-backed securities........................ 961.2 996.2 --------- --------- Total................................................ $11,923.7 $12,720.8 --------- --------- --------- ---------
The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Cash collateral, which is in excess of the market value of the loaned securities, is deposited by the borrower with a lending agent, and retained and invested by the lending agent to generate additional income for the Company. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value fluctuates. At December 31, 1995, the Company had loaned securities (which are reflected as invested assets on the Consolidated Balance Sheets) with a market value of approximately $264.5 million. At December 31, 1995 and 1994, debt securities carried at $7.4 million and $7.0 million, respectively, were on deposit as required by regulatory authorities. The valuation reserve for mortgage loans was $3.1 million at December 31, 1994. There was no valuation reserve for mortgage loans at December 31, 1995. The carrying value of non-income producing investments was $0.1 million and $0.2 million at December 31, 1995 and 1994, respectively. F-13 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 2. INVESTMENTS (CONTINUED) 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, 1995 are as follows:
AMORTIZED DEBT SECURITIES COST FAIR VALUE ---------- ---------- (MILLIONS) General Electric Corporation........................... $ 314.9 $ 329.3 General Motors Corporation............................. 273.9 284.5 Associates Corporation of North America................ 230.2 239.1 Society National Bank.................................. 203.5 222.3 Ciesco, L.P............................................ 194.9 194.9 Countrywide Funding.................................... 171.2 172.7 Baxter International................................... 168.9 168.9 Time Warner............................................ 158.6 166.1 Ford Motor Company..................................... 156.7 162.6
The portfolio of debt securities at December 31, 1995 and 1994 included $662.5 million and $318.3 million, respectively, (5% and 3%, respectively, of the debt securities) of investments that are considered "below investment grade". "Below investment grade" securities are defined to be securities that carry a rating below BBB-/Baa3, by Standard & Poors/ Moody's Investor Services, respectively. The increase in below investment grade securities is the result of a change in investment strategy, which has reduced the Company's holdings in residential mortgage-back securities and increased the Company's holdings in corporate securities. Residential mortgage-back securities are subject to higher prepayment risk and lower credit risk, while corporate securities earning a comparable yield are subject to higher credit risk and lower prepayment risk. We expect the percentage of below investment grade securities will increase in 1996, but we expect that the overall average quality of the portfolio of debt securities will remain at AA-. Of these below investment grade assets, $14.5 million and $31.8 million, at December 31, 1995 and 1994, respectively, were investments that were purchased at investment grade, but whose ratings have since been downgraded. Included in residential mortgage-back securities are collateralized mortgage obligations ("CMOs") with carrying values of $2.5 billion and $2.6 billion at December 31, 1995 and 1994, respectively. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates whereby the CMOs would be subject to repayments of principal earlier or later than originally anticipated. At December 31, 1995 and 1994, approximately 79% and 85%, respectively, of the Company's CMO holdings consisted of sequential and planned amortization class debt securities which are subject to less prepayment and extension risk than other CMO instruments. At December 31, 1995 and 1994, approximately 81% and 82%, respectively, of the Company's CMO holdings were collateralized by residential mortgage loans, on which the timely payment of principal and interest was backed by specified government agencies (e.g., GNMA, FNMA, FHLMC). If due to declining interest rates, principal was to be repaid earlier than originally anticipated, the Company could be affected by a decrease in investment income due to the reinvestment of these funds at a lower interest rate. Such prepayments may result in a duration mismatch between assets and liabilities which could be corrected as cash from prepayments could be reinvested at an appropriate duration to adjust the mismatch. F-14 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 2. INVESTMENTS (CONTINUED) Conversely, if due to increasing interest rates, principal was to be repaid slower than originally anticipated, the Company could be affected by a decrease in cash flow which reduces the ability to reinvest expected principal repayments at higher interest rates. Such slower payments may result in a duration mismatch between assets and liabilities which could be corrected as available cash flow could be reinvested at an appropriate duration to adjust the mismatch. At December 31, 1995 and 1994, approximately 3% and 4%, respectively, of the Company's CMO holdings consisted of interest-only strips ("IOs") or principal-only strips ("POs"). IOs receive payments of interest and POs receive payments of principal on the underlying pool of mortgages. The risk inherent in holding POs is extension risk related to dramatic increases in interest rates whereby the future payments due on POs could be repaid much slower than originally anticipated. The extension risks inherent in holding POs was mitigated somewhat by offsetting positions in IOs. During dramatic increases in interest rates, IOs would generate more future payments than originally anticipated. The risk inherent in holding IOs is prepayment risk related to dramatic decreases in interest rates whereby future IO cash flows could be much less than originally anticipated and in some cases could be less than the original cost of the IO. The risks inherent in IOs are mitigated somewhat by holding offsetting positions in POs. During dramatic decreases in interest rates POs would generate future cash flows much quicker than originally anticipated. Investments in available for sale equity securities were as follows:
GROSS GROSS UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ------ ---------- ---------- ---------- (MILLIONS) 1995 Equity Securities................ $231.6 $ 27.2 $ 1.2 $ 257.6 ------ ----- --- ---------- 1994 Equity Securities................ $230.5 $ 6.5 $ 7.9 $ 229.1 ------ ----- --- ----------
3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS Realized capital gains or losses are the difference between proceeds received from investments sold or prepaid, and amortized cost. Net realized capital gains as reflected in the Consolidated Statements of Income are after deductions for net realized capital gains (losses) allocated to experience-rated contracts of $61.1 million, $(29.1) million and $(54.8) million for the years ended December 31, 1995, 1994, and 1993, respectively. Net realized capital gains (losses) allocated to experience-rated contracts are deferred and subsequently reflected in credited rates on an amortized basis. Net unamortized gains (losses), reflected as a component of Policyholders' Funds Left With the Company, were $7.3 million and $(50.7) million at the end of December 31, 1995 and 1994, respectively. Changes to the mortgage loan valuation reserve and writedowns on debt securities are included in net realized capital gains (losses) and amounted to $3.1 million, $1.1 million and $(98.5) million, of which $2.2 million, $0.8 million and $(91.5) million were allocable to experience-rated contractholders, for the years ended December 31, 1995, 1994 and 1993, respectively. The 1993 losses were primarily related to writedowns of interest-only mortgage-backed securities to their fair value. F-15 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED) Net realized capital gains (losses) on investments, net of amounts allocated to experience-rated contracts, were as follows:
1995 1994 1993 ----- ----- ------ (MILLIONS) Debt securities........................................ $32.8 $ 1.0 $ 9.6 Equity securities...................................... 8.3 0.2 0.1 Mortgage loans......................................... 0.2 0.3 (0.2) ----- ----- ------ Pretax realized capital gains.......................... $41.3 $ 1.5 $ 9.5 ----- ----- ------ After-tax realized capital gains....................... $25.8 $ 1.0 $ 6.2 ----- ----- ------
Gross gains of $44.6 million, $26.6 million and $33.3 million and gross losses of $11.8 million, $25.6 million and $23.7 million were realized from the sales of investments in debt securities in 1995, 1994 and 1993, respectively. Changes in unrealized capital gains (losses), excluding changes in unrealized capital gains (losses) related to experience-rated contracts, for the years ended December 31, were as follows:
1995 1994 1993 ------ -------- ------ (MILLIONS) Debt securities........................................ $255.9 $ (242.1) $164.3 Equity securities...................................... 27.3 (13.3) 10.6 Limited partnership.................................... 1.8 (1.8) -- ------ -------- ------ 285.0 (257.2) 174.9 Deferred federal income taxes (See Note 6)............. (36.5) 46.3 61.2 ------ -------- ------ Net change in unrealized capital gains (losses)........ $321.5 $ (303.5) $113.7 ------ -------- ------ ------ -------- ------
Net unrealized capital gains (losses) allocable to experience-rated contracts of $515.0 million and $104.1 million at December 31, 1995 and $(260.9) million and $(47.7) million at December 31, 1994 are reflected on the Consolidated Balance Sheet in Policyholders' Funds Left With the Company and Future Policy Benefits, respectively, and are not included in shareholder's equity. F-16 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED) Shareholder's equity included the following unrealized capital gains (losses), which are net of amounts allocable to experience-rated contractholders, at December 31:
1995 1994 1993 ------ ------- ------- (MILLIONS) Debt securities Gross unrealized capital gains....................... $179.3 $ 27.4 $ 164.3 Gross unrealized capital losses...................... (1.3) (105.2) -- ------ ------- ------- 178.0 (77.8) 164.3 Equity securities Gross unrealized capital gains....................... 27.2 6.5 12.0 Gross unrealized capital losses...................... (1.2) (7.9) (0.1) ------ ------- ------- 26.0 (1.4) 11.9 Limited Partnership Gross unrealized capital gains....................... -- -- -- Gross unrealized capital losses...................... -- (1.8) -- ------ ------- ------- Deferred federal income taxes (See Note 6)............. 71.5 108.0 61.7 ------ ------- ------- Net unrealized capital gains (losses).................. $132.5 $(189.0) $ 114.5 ------ ------- ------- ------ ------- -------
4. NET INVESTMENT INCOME Sources of net investment income were as follows:
1995 1994 1993 -------- ------ ------ (MILLIONS) Debt securities........................................ $ 891.5 $823.9 $828.0 Preferred stock........................................ 4.2 3.9 2.3 Investment in affiliated mutual funds.................. 14.9 5.2 2.9 Mortgage loans......................................... 1.4 1.4 1.5 Policy loans........................................... 13.7 11.5 10.8 Reinsurance loan to affiliate.......................... 46.5 51.5 53.3 Cash equivalents....................................... 38.9 29.5 16.8 Other.................................................. 8.4 6.7 7.7 -------- ------ ------ Gross investment income................................ 1,019.5 933.6 923.3 Less investment expenses............................... (15.2) (16.4) (11.4) -------- ------ ------ Net investment income.................................. $1,004.3 $917.2 $911.9 -------- ------ ------ -------- ------ ------
Net investment income includes amounts allocable to experience-rated contractholders of $744.2 million, $677.1 million and $661.3 million for the years ended December 31, 1995, 1994 and 1993, respectively. Interest credited to contractholders is included in Current and Future Benefits. F-17 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY The Company distributed $2.9 million in the form of dividends of two of its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995. The amount of dividends that may be paid to the shareholder in 1996 without prior approval by the Insurance Commissioner of the State of Connecticut is $70.0 million. The Insurance Department of the State of Connecticut (the "Department") recognizes as net income and shareholder's equity 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 $70.0 million, $64.9 million and $77.6 million for the years ended December 31, 1995, 1994 and 1993, respectively. Statutory shareholder's equity was $670.7 million and $615.0 million as of December 31, 1995 and 1994, respectively. At December 31, 1995 and December 31, 1994, the Company does not utilize any statutory accounting practices which are not prescribed by insurance regulators that, individually or in the aggregate, materially affect statutory shareholder's equity. 6. FEDERAL INCOME TAXES The Company is included in the consolidated federal income tax return of Aetna. Aetna allocates to each member an amount approximating the tax it would have incurred were it not a member of the consolidated group, and credits the member for the use of its tax saving attributes in the consolidated return. In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was enacted which resulted in an increase in the federal corporate tax rate from 34% to 35% retroactive to January 1, 1993. The enactment of OBRA resulted in an increase in the deferred tax liability of $3.4 million at date of enactment, which is included in the 1993 deferred tax expense. Components of income tax expense (benefits) were as follows:
1995 1994 1993 ----- ----- ------- (MILLIONS) Current taxes (benefits): Income from operations............................... $82.9 $78.7 $ 87.1 Net realized capital gains........................... 28.5 (33.2) 18.1 ----- ----- ------- 111.4 45.5 105.2 ----- ----- ------- Deferred taxes (benefits): Income from operations............................... (14.4) (8.0) (14.2) Net realized capital gains........................... (12.9) 33.7 (14.8) ----- ----- ------- (27.3) 25.7 (29.0) ----- ----- ------- Total................................................ $84.1 $71.2 $ 76.2 ----- ----- ------- ----- ----- -------
F-18 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 6. FEDERAL INCOME TAXES (CONTINUED) Income tax expense was different from the amount computed by applying the federal income tax rate to income before federal income taxes for the following reasons:
1995 1994 1993 ------ ------ ------ (MILLIONS) Income before federal income taxes..................... $260.0 $216.5 $219.1 Tax rate............................................... 35% 35% 35% ------ ------ ------ Application of the tax rate............................ 91.0 75.8 76.7 ------ ------ ------ Tax effect of: Excludable dividends................................. (9.3) (8.6) (8.7) Tax reserve adjustments.............................. 3.9 2.9 4.7 Reinsurance transaction.............................. (0.5) 1.9 (0.2) Tax rate change on deferred liabilities.............. -- -- 3.7 Other, net........................................... (1.0) (0.8) -- ------ ------ ------ Income tax expense................................... $ 84.1 $ 71.2 $ 76.2 ------ ------ ------ ------ ------ ------
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31 are presented below:
1995 1994 ------ ------ (MILLIONS) Deferred tax assets: Insurance reserves................................... $290.4 $211.5 Net unrealized capital losses........................ -- 136.3 Unrealized gains allocable to experience-rated contracts........................................... 216.7 -- Investment losses not currently deductible........... 7.3 15.5 Postretirement benefits other than pensions.......... 7.7 8.4 Other................................................ 32.0 28.3 ------ ------ Total gross assets..................................... 554.1 400.0 Less valuation allowance............................... -- 136.3 ------ ------ Deferred tax assets, net of valuation.................. 554.1 263.7 Deferred tax liabilities: Deferred policy acquisition costs.................... 433.0 385.2 Unrealized losses allocable to experience-rated contracts........................................... -- 108.0 Market discount...................................... 4.4 3.6 Net unrealized capital gains......................... 288.2 -- Other................................................ (1.9) 0.4 ------ ------ Total gross liabilities................................ 723.7 497.2 ------ ------ Net deferred tax liability............................. $169.6 $233.5 ------ ------ ------ ------
F-19 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 6. FEDERAL INCOME TAXES (CONTINUED) Net unrealized capital gains and losses are presented in shareholder's equity net of deferred taxes. At December 31, 1994, $81.0 million of net unrealized capital losses were reflected in shareholder's equity without deferred tax benefits. As of December 31, 1995, no valuation allowance was required for unrealized capital gains and losses. The reversal of the valuation allowance had no impact on net income in 1995. 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, 1995. This amount would be taxed only under certain conditions. No income taxes have been provided on this amount since management believes the conditions under which such taxes would become payable are remote. The Internal Revenue Service ("Service") has completed examinations of the consolidated federal income tax returns of Aetna through 1986. Discussions are being held with the Service with respect to proposed adjustments. However, management believes there are adequate defenses against, or sufficient reserves to provide for, such challenges. The Service has commenced its examinations for the years 1987 through 1990. 7. BENEFIT PLANS Employee Pension Plans--The Company, in conjunction with Aetna, has non-contributory defined benefit pension plans covering substantially all employees. The plans provide pension benefits based on years of service and average annual compensation (measured over sixty consecutive months of highest earnings in a 120 month period). Contributions are determined using the Projected Unit Credit Method and, for qualified plans subject to ERISA requirements, are limited to the amounts that are currently deductible for tax reporting purposes. The accumulated benefit obligation and plan assets are recorded by Aetna. The accumulated plan assets exceed accumulated plan benefits. There has been no funding to the plan for the years 1993 through 1995, and therefore, no expense has been recorded by the Company. Agent Pension Plans--The Company, in conjunction with Aetna, has a non-qualified pension plan covering certain agents. The plan provides pension benefits based on annual commission earnings. The accumulated plan assets exceed accumulated plan benefits. There has been no funding to the plan for the years 1993 through 1995, and therefore, no expense has been recorded by the Company. Employee Postretirement Benefits--In addition to providing pension benefits, Aetna also provides certain postretirement health care and life insurance benefits, subject to certain caps, for retired employees. Medical and dental benefits are offered to all full-time employees retiring at age 50 with at least 15 years of service or at age 65 with at least 10 years of service. Retirees are required to contribute to the plans based on their years of service with Aetna. The cost to the Company associated with the Aetna postretirement plans for 1995, 1994 and 1993 were $1.4 million, $1.0 million and $0.8 million, respectively. Agent Postretirement Benefits--The Company, in conjunction with Aetna, also provides certain postemployment health care and life insurance benefits for certain agents. F-20 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 7. BENEFIT PLANS (CONTINUED) The cost to the Company associated to the agents' postretirement plans for 1995, 1994 and 1993 were $0.8 million, $0.7 million and $0.6 million, respectively. Incentive Savings Plan--Substantially all employees are eligible to participate in a savings plan under which designated contributions, which may be invested in common stock of Aetna or certain other investments, are matched, up to 5% of compensation, by Aetna. Pretax charges to operations for the incentive savings plan were $4.9 million, $3.3 million and $3.1 million in 1995, 1994 and 1993, respectively. Stock Plans--Aetna has a stock incentive plan that provides for stock options and deferred contingent common stock or cash awards to certain key employees. Aetna also has a stock option plan under which executive and middle management employees of Aetna may be granted options to purchase common stock of Aetna at the market price on the date of grant or, in connection with certain business combinations, may be granted options to purchase common stock on different terms. The cost to the Company associated with the Aetna stock plans for 1995, 1994 and 1993, was $6.3 million, $1.7 million and $0.4 million, respectively. 8. RELATED PARTY TRANSACTIONS The Company is compensated by the Separate Accounts for bearing mortality and expense risks pertaining to variable life and annuity contracts. Under the insurance contracts, the Separate Accounts pay the Company a daily fee which, on an annual basis, ranges, depending on the product, from .25% to 1.80% of their average daily net assets. The Company also receives fees from the variable life and annuity mutual funds and The Aetna Series Fund for serving as investment adviser. Under the advisory agreements, the Funds pay the Company a daily fee which, on an annual basis, ranges, depending on the fund, from .25% to 1.00% of their average daily net assets. The advisory agreements also call for the variable funds to pay their own administrative expenses and for The Aetna Series Fund to pay certain administrative expenses. The Company also receives fees (expressed as a percentage of the average daily net assets) from The Aetna Series Fund for providing administration, shareholder services and promoting sales. The amount of compensation and fees received from the Separate Accounts and Funds, included in Charges Assessed Against Policyholders, amounted to $128.1 million, $104.6 million and $93.6 million in 1995, 1994 and 1993, respectively. The Company may waive advisory fees at its discretion. The Company may, from time to time, make reimbursements to a Fund for some or all of its operating expenses. Reimbursement arrangements may be terminated at any time without notice. Since 1981, all domestic individual non-participating life insurance of Aetna and its subsidiaries has been issued by the Company. Effective December 31, 1988, the Company entered into a reinsurance agreement with Aetna Life Insurance Company ("Aetna Life") in which substantially all of the non-participating individual life and annuity business written by Aetna Life prior to 1981 was assumed by the Company. A $108.0 million commission, paid by the Company to Aetna Life in 1988, was capitalized as deferred policy acquisition costs. The Company maintained insurance reserves of $655.5 million and $690.3 million as of December 31, 1995 and 1994, respectively, relating to the business assumed. 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. The loan is being reduced in accordance with the decrease in the reserves. The fair value of this loan was $663.5 million and $630.3 million as of December 31, 1995 and 1994, respectively, and is based upon the fair value of the underlying assets. Premiums of $28.0 million, $32.8 million and $33.3 million and current and future benefits of $43.0 million, $43.8 million and $55.4 million were assumed in 1995, 1994 and 1993, respectively. F-21 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 8. RELATED PARTY TRANSACTIONS (CONTINUED) Investment income of $46.5 million, $51.5 million and $53.3 million was generated from the reinsurance loan to affiliate in 1995, 1994 and 1993, respectively. Net income of approximately $18.4 million, $25.1 million and $13.6 million resulted from this agreement in 1995, 1994 and 1993, respectively. On December 16, 1988, the Company assumed $25.0 million of premium revenue from Aetna Life for the purchase and administration of a life contingent single premium variable payout annuity contract. In addition, the Company also is responsible for administering fixed annuity payments that are made to annuitants receiving variable payments. Reserves of $28.0 million and $24.2 million were maintained for this contract as of December 31, 1995 and 1994, respectively. Effective February 1, 1992, the Company increased its retention limit per individual life to $2.0 million and entered into a reinsurance agreement with Aetna Life to reinsure amounts in excess of this limit, up to a maximum of $8.0 million on any new individual life business, on a yearly renewable term basis. Premium amounts related to this agreement were $3.2 million, $1.3 million and $0.6 million for 1995, 1994 and 1993, respectively. The Company received no capital contributions in 1995, 1994 or 1993. The Company distributed $2.9 million in the form of dividends of two of its subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995. Premiums due and other receivables include $5.7 million and $27.6 million due from affiliates in 1995 and 1994, respectively. Other liabilities include $12.4 million and $27.9 million due to affiliates for 1995 and 1994, respectively. 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. 9. REINSURANCE The Company utilizes indemnity reinsurance agreements to reduce its exposure to large losses in all aspects of its insurance business. Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the Company as direct insurer of the risks reinsured. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of reinsurers. Only those reinsurance recoverables deemed probable of recovery are reflected as assets on the Company's Consolidated Balance Sheets. F-22 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 9. REINSURANCE (CONTINUED) The following table includes premium amounts ceded/assumed to/from affiliated companies as discussed in Note 8 above.
CEDED TO ASSUMED DIRECT OTHER FROM OTHER NET AMOUNT COMPANIES COMPANIES AMOUNT --------- ------------- ------------- --------- (MILLIONS) 1995 Premiums: Life Insurance....................................... $ 28.8 $ 8.6 $ 28.0 $ 48.2 Accident and Health Insurance........................ 7.5 7.5 -- -- Annuities............................................ 82.1 -- 0.5 82.6 --------- ----- ----- --------- Total earned premiums................................ $ 118.4 $ 16.1 $ 28.5 $ 130.8 --------- ----- ----- --------- --------- ----- ----- --------- 1994 Premiums: Life Insurance....................................... $ 27.3 $ 6.0 $ 32.8 $ 54.1 Accident and Health Insurance........................ 9.3 9.3 -- -- Annuities............................................ 69.9 -- 0.2 70.1 --------- ----- ----- --------- Total earned premiums................................ $ 106.5 $ 15.3 $ 33.0 $ 124.2 --------- ----- ----- --------- --------- ----- ----- --------- 1993 Premiums: Life Insurance....................................... $ 22.4 $ 5.6 $ 33.3 $ 50.1 Accident and Health Insurance........................ 12.9 12.9 -- -- Annuities............................................ 31.3 -- 0.7 32.0 --------- ----- ----- --------- Total earned premiums................................ $ 66.6 $ 18.5 $ 34.0 $ 82.1 --------- ----- ----- --------- --------- ----- ----- ---------
F-23 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 10. FINANCIAL INSTRUMENTS ESTIMATED FAIR VALUE The carrying values and estimated fair values of the Company's financial instruments at December 31, 1995 and 1994 were as follows:
1995 1994 -------------------- -------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE --------- --------- --------- --------- (MILLIONS) Assets: Cash and cash equivalents................................. $ 568.8 $ 568.8 $ 623.3 $ 623.3 Short-term investments.................................... 15.1 15.1 98.0 98.0 Debt securities........................................... 12,720.8 12,720.8 10,191.4 10,191.4 Equity securities......................................... 257.6 257.6 229.1 229.1 Limited partnership....................................... -- -- 24.4 24.4 Mortgage loans............................................ 21.2 21.9 9.9 9.9 Liabilities: Investment contract liabilities: With a fixed maturity................................... 989.1 1,001.2 826.7 833.5 Without a fixed maturity................................ 9,511.0 9,298.4 8,122.6 7,918.2
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 expected 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 and liquidity risk, the fair values of all assets and liabilities should be taken into consideration, not only those above. The following valuation methods and assumptions were used by the Company in estimating the fair value of the above financial instruments: SHORT-TERM INSTRUMENTS: Fair values are based on quoted market prices or dealer quotations. Where quoted market prices are not available, the carrying amounts reported in the Consolidated Balance Sheets approximates fair value. Short-term instruments have a maturity date of one year or less and include cash and cash equivalents, and short-term investments. DEBT AND EQUITY SECURITIES: Fair values are based on quoted market prices or dealer quotations. Where quoted market prices or dealer quotations are not available, fair value is estimated by using quoted market prices for similar securities or discounted cash flow methods. F-24 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 10. FINANCIAL INSTRUMENTS (CONTINUED) MORTGAGE LOANS: Fair value is 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. The fair value estimate of mortgage loans of lower quality, including problem and restructured loans, is based on the estimated fair value of the underlying collateral. 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 FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL INSTRUMENTS) During 1995, the Company received $0.4 million for writing call options on underlying securities. As of December 31, 1995 there were no option contracts outstanding. At December 31, 1995, the Company had a forward swap agreement with a notional amount of $100.0 million and a fair value of $0.1 million. The Company did not have transactions in derivative instruments in 1994. The Company also holds investments in certain debt and equity securities with derivative characteristics (i.e., including the fact that their market value is at least partially determined by, among other things, levels of or changes in interest rates, prepayment rates, equity markets or credit ratings/spreads). The amortized cost and fair value of these securities, included in the $13.4 billion investment portfolio, as of December 31, 1995 was as follows:
AMORTIZED FAIR (MILLIONS) COST VALUE ----------- ----------- Collateralized mortgage obligations......................... $ 2,383.9 $ 2,549.3 Principal-only strips (included above)...................... 38.7 50.0 Interest-only strips (included above)....................... 10.7 20.7 Structured Notes (1)........................................ 95.0 100.3
(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. 11. 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 F-25 AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly owned subsidiary of Aetna Retirement Services, Inc.) Notes to Consolidated Financial Statements (continued) December 31, 1995, 1994, and 1993 11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) the value of the securities underlying the commitments. At December 31, 1995, the Company had commitments to purchase investments of $31.4 million. The fair value of the investments at December 31, 1995 approximated $31.5 million. There were no outstanding forward commitments at December 31, 1994. LITIGATION There were no material legal proceedings pending against the Company as of December 31, 1995 or December 31, 1994 which were beyond the ordinary course of business. The Company is involved in lawsuits arising, for the most part, in the ordinary course of its business operations as an insurer. 12. SEGMENT INFORMATION The Company's operations are reported through two major business segments: Life Insurance and Financial Services. Summarized financial information for the Company's principal operations was as follows:
(MILLIONS) 1995 1994 1993 ----------- ----------- ----------- Revenue: Financial services........................................ $ 1,129.4 $ 946.1 $ 892.8 Life insurance............................................ 407.9 386.1 371.7 ----------- ----------- ----------- Total revenue............................................. $ 1,537.3 $ 1,332.2 $ 1,264.5 ----------- ----------- ----------- Income before federal income taxes: Financial services........................................ $ 158.0 $ 119.7 $ 121.1 Life insurance............................................ 102.0 96.8 98.0 ----------- ----------- ----------- Total income before federal income taxes.................. $ 260.0 $ 216.5 $ 219.1 ----------- ----------- ----------- Net income: Financial services........................................ $ 113.8 $ 85.5 $ 86.8 Life insurance............................................ 62.1 59.8 56.1 ----------- ----------- ----------- Net income.................................................. $ 175.9 $ 145.3 $ 142.9 ----------- ----------- ----------- Assets under management, at fair value: Financial services........................................ $ 23,224.3 $ 17,785.2 $ 16,600.5 Life insurance............................................ 2,698.1 2,171.7 2,175.5 ----------- ----------- ----------- Total assets under management............................. $ 25,922.4 $ 19,956.9 $ 18,776.0 ----------- ----------- ----------- ----------- ----------- -----------
F-26 STATEMENT OF ADDITIONAL INFORMATION VARIABLE ANNUITY ACCOUNT C VARIABLE ANNUITY CONTRACTS ISSUED BY AETNA LIFE INSURANCE AND ANNUITY COMPANY Form No. 52449(S)-2 ALIAC Ed. May 1996 -----END PRIVACY-ENHANCED MESSAGE-----