As filed with the Securities and Exchange Registration No. 33-64277
Commission on June 21, 1996 Registration No. 811-4536
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- -------------------------------------------------------------------------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
- -------------------------------------------------------------------------------
Variable Life Account B of Aetna Life Insurance and Annuity Company
(Exact Name of Trust)
Aetna Life Insurance and Annuity Company
(Name of Depositor)
151 Farmington Avenue, RE4C, Hartford, Connecticut 06l56
(Complete Address of Depositor's Principal Executive Offices)
- -------------------------------------------------------------------------------
Susan E. Bryant, Counsel
Aetna Life Insurance and Annuity Company
151 Farmington Avenue, RE4C, Hartford, Connecticut 06l56
(Name and Complete Address of Agent for Service)
- -------------------------------------------------------------------------------
It is proposed that this filing will become effective as soon as practicable.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of securities under the Securities Act of 1933.
Registrant filed a Rule 24f-2 Notice for the fiscal year ended December 31, 1995
on February 29, 1996.
The Registrant hereby amends this Registration Statement on such dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may determine.
The Registrant represents that with respect to the calculation of the maximum
sales load, it elects to be governed by Section 6e-3(T)(b)(13)(i)(A).
VARIABLE LIFE ACCOUNT B
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY
Pre-Effective Amendment No. 2 to
Registration Statement on Form S-6
Cross Reference Sheet
N-8B-2
Item No. Part 1 (Prospectus)
1 Cover Page; The Separate Account; The Company
2 Cover Page; The Separate Account; The Company
3 Not Applicable
4 Distribution of the Policy
5 The Separate Account; The Company
6 The Separate Account; The Company
7 Not Applicable
8 Not Applicable
9 Additional Information - Legal Matters
10 The Separate Account; Policy Rights; Policy Choices; Additional Information
11 Allocation of Premiums - Fund Additions, Deletions or Substitutions
12 Allocation of Premiums - The Funds
13 Charges & Fees
14 Policy Values; Additional Information; Miscellaneous Policy Provisions
15 Allocation of Premiums; Policy Choices; Policy Values
16 The Separate Account; Allocation of Premiums - The Funds; Policy Values
17 Policy Rights
18 The Separate Account
19 Additional Information - Reports to Policy Owners
20 Not Applicable
21 Policy Rights - Policy Loans
22 Not Applicable
23 Directors & Officers
24 Not Applicable
25 The Company
26 Not Applicable
27 The Company
28 Directors & Officers
29 The Company
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 Additional Information - State Regulation
36 Not Applicable
37 Not Applicable
38 Additional Information - Distribution of the Policy
39 The Company
40 Not Applicable
41 The Company
42 Not Applicable
43 Not Applicable
44 Policy Values
45 Not Applicable
46 The Separate Account; Policy Values
47 The Separate Account
48 Not Applicable
49 Not Applicable
50 The Separate Account
51 Cover Page; Policy Choices
52 Allocation of Premiums - Fund Additions, Deletions or Substitutions
53 Tax Matters
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Independent Auditors
Variable Life Account B
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
800-334-7586
Prospectus Dated
The Flexible Premium Variable Life Insurance Policy on the Lives of Two Insureds
This Prospectus describes AetnaVest Estate Protector, a flexible premium
variable life insurance policy on the lives of two Insureds (the "Policy")
issued and underwritten by Aetna Life Insurance and Annuity Company (the
"Company"). The Policy is intended to provide life insurance and pay a benefit,
as described in this Prospectus, upon surrender, maturity or Second Death. The
Policy is designed to allow flexible premium payments, Policy Loans, Partial
Surrenders, a choice of two Death Benefit Options and account values that may be
invested on either a fixed or variable or a combination of fixed and variable
basis. Net Premiums may be allocated to Variable Life Account B, the Fixed
Account, or both Accounts. The Variable Options support the benefits provided by
the variable portion of the Policy. The Fund Account Value in each Variable
Option is not guaranteed and will vary with the investment performance of the
associated Fund. Net Premiums allocated to the Fixed Account will accumulate at
rates of interest We determine. Such rates will not be less than 4% a year. Net
Premiums allocated to Variable Life Account B must be allocated to one or more
of the Variable Options We make available. Sufficient premiums must be paid to
continue the Policy in force or to qualify for a Guaranteed Death Benefit.
Premium reminder notices will be sent for Planned Premiums and for premiums
required to continue the Policy in force. The Policy may be reinstated.
The Policy has a free look period during which You may return the Policy or
rescind an increase in the Specified Amount. (See Right of Policy Examination)
This Prospectus also describes the Variable Options used to fund the Policy
through Variable Life Account B (the "Separate Account"). The Variable Options
are: Aetna Variable Fund; Aetna Income Shares; Aetna Variable Encore Fund; Aetna
Investment Advisers Fund, Inc.; Aetna Ascent Variable Portfolio; Aetna
Crossroads Variable Portfolio; Aetna Legacy Variable Portfolio; Alger American
Small Capitalization Portfolio; Fidelity VIP Equity-Income Portfolio; Fidelity
VIP II -- Contrafund Portfolio; Janus Aspen Series -- Aggressive Growth
Portfolio, Growth Portfolio, Balanced Portfolio, Worldwide Growth Portfolio and
Short-Term Bond Portfolio; Scudder Variable Life Investment Fund --
International Portfolio Class A Shares; TCI Portfolios, Inc. -- TCI Growth
(collectively, the "Funds"). Unless specifically mentioned, this Prospectus only
describes the Variable Options.
Replacing existing insurance or supplementing an existing flexible premium
variable life insurance policy with the Policy may not be to your advantage.
SUBJECT TO COMPLETION
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC"). THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
-------------------------------------------
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS. BOTH THIS PROSPECTUS AND THE UNDERLYING FUND 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 COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Table of Contents
Definitions.........................................................Definitions
Policy Summary................................................................1
The Separate Account..........................................................2
Charges & Fees................................................................2
Charges & Fees Assessed Against Premium............................2
Charges & Fees Assessed Against the Total Account Value............2
Charges & Fees Assessed Against the Separate Account...............4
Charges Assessed Against the Underlying Funds......................4
Charges Deducted Upon Surrender....................................4
Allocation of Premiums........................................................5
The Funds..........................................................5
Fund Investment Advisers...........................................7
Mixed and Shared Funding; Conflicts of Interest....................8
Fund Additions, Deletions or Substitutions.........................8
Fixed Account......................................................8
Policy Choices...............................................................10
Premium Payments..................................................10
Guaranteed Death Benefit..........................................11
No Lapse Coverage Provision.......................................11
Death Benefit Options.............................................12
Transfers and Allocations to Funding Options......................12
Telephone Transfers...............................................12
Automated Transfers (Dollar Cost Averaging).......................13
Policy Values................................................................13
Total Account Value...............................................13
Accumulation Unit Value...........................................14
Maturity Value....................................................14
Surrender Value...................................................14
Policy Rights................................................................14
Full Surrenders...................................................14
Partial Surrenders................................................14
Paid Up Nonforfeiture Option......................................15
Grace Period......................................................16
Reinstatement of a Lapsed Policy..................................16
Coverage Beyond Maturity..........................................16
Right to Defer Payment............................................16
Policy Loans......................................................17
Policy Changes....................................................17
Right of Policy Examination.......................................19
Supplemental Benefits.............................................19
Death Benefit................................................................19
Policy Settlement............................................................20
Settlement Options................................................20
Pension Plans................................................................21
The Company..................................................................21
Directors & Officers.........................................................21
Additional Information.......................................................24
Reports to Policyowners...........................................24
Right to Instruct Voting of Fund Shares...........................24
Disregard of Voting Instructions..................................25
State Regulation..................................................25
Legal Matters.....................................................25
The Registration Statement........................................25
Distribution of the Policy........................................25
Independent Auditors..............................................26
Tax Matters..................................................................26
General...........................................................26
Federal Tax Status of the Company.................................26
Life Insurance Qualification......................................27
General Rules.....................................................27
Modified Endowment Contracts......................................27
Diversification Standards.........................................28
Investor Control..................................................28
Other Tax Considerations..........................................29
Miscellaneous Policy Provisions..............................................29
The Policy........................................................29
Payment of Benefits...............................................29
Suicide and Incontestability......................................29
Protection of Proceeds............................................30
Nonparticipation..................................................30
Changes in Owner and Beneficiary; Assignment......................31
Misstatement as to Age and/or Sex.................................31
Performance Reporting and Advertising.............................31
Illustrations of Death Benefit, Total Account Values
and Surrender Values............................................31
Financial Statements of the Separate Account.................................S-1
Financial Statements of the Company..........................................F-1
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH SUCH
OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THE PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE
PROTECTION. LIFE INSURANCE IS A LONG-TERM INVESTMENT. POLICYOWNERS SHOULD
CONSIDER THEIR NEED FOR INSURANCE COVERAGE AND THE POLICY'S LONG-TERM INVESTMENT
POTENTIAL. NO CLAIM IS MADE THAT THE POLICY IS ANY WAY SIMILAR OR COMPARABLE TO
AN INVESTMENT IN A MUTUAL FUND.
Definitions
Accumulation Unit: A unit used to measure the value of the Policyowner's
interest in each applicable Variable Option. An Accumulation Unit is used to
calculate the value of the variable portion of the Policy before the election of
a Settlement Option.
Additional Premiums: Any premiums paid in addition to Planned Premiums.
Amount at Risk: The Death Benefit divided by 1.0032737, minus the Total Account
Value on that date before computing the monthly deductions for the Cost of
Insurance for this Policy.
Annuitant: A person who receives annuity payments.
Annuity: A series of payments for life or for a definite period.
Attained Age: Issue Age of the Insured increased by the number of Policy Years
elapsed.
Basic Monthly Premium: The amount of premium to assure that the Policy remains
in force for a period of at least 5 Policy Years beginning on the Issue Date or
the Issue Date of an Increase or until the younger Insured's Attained Age 80
even if the Surrender Value is insufficient to satisfy the current Monthly
Deduction.
Company: Aetna Life Insurance and Annuity Company.
Cost of Insurance: A charge related to the Company's expected mortality cost for
Your basic insurance coverage under the Policy, not including any supplemental
benefit provision that You may elect through a Policy rider. It is equal to the
Amount at Risk multiplied by a monthly Cost of Insurance rate.
Death Benefit: The amount described in the Policy Choices section which is
payable on the date of the Second Death, subject to all provisions contained in
the Policy.
Death Benefit Options: Either of the two methods for determining the Death
Benefit.
Fixed Account: A non-variable funding option available on the Policy that
guarantees a minimum interest rate of 4% per year.
Fixed Account Value: The non-loaned portion of the Policy's Total Account Value
attributable to the non-variable portion of the Policy. The Fixed Account Value
is part of the general assets of the Company.
Full Surrender: A Policy right whereby You may terminate the Policy in exchange
for payment of its Full Surrender Value.
Full Surrender Value: Equals the Total Account Value on the date of surrender
less any Surrender Charge, less the Loan Account Value and less any accrued
interest.
Fund(s): One or more of the underlying variable funding options available under
the Policy (as described in this Prospectus). Each of the Funds is an open-end
management investment company (mutual fund) whose shares are purchased by the
Separate Account to fund the benefits provided by the policy.
Grace Period: The 61-day period beginning on the Monthly Deduction Day on which
the Policy's Surrender Value is insufficient to cover the current Monthly
Deduction. The Policy will lapse without value at the end of the 61-day period
unless a sufficient payment is received by the Company.
Guaranteed Death Benefit: A provision of the Policy which assures that the
Policy will stay in force, even if the Total Account Value is insufficient to
cover the current Monthly Deductions. The Guaranteed Death Benefit is available
to the younger Insured's Attained Age 80 or to the younger Insured's Attained
Age 100.
Guaranteed Death Benefit to the Younger Insured's Age 100 Premium: The amount of
premium that must be paid to assure that the Policy remains in force until the
younger Insured's Attained Age 100.
Guideline Annual Premium: An amount of annual payment necessary to provide
future benefits under the Policy determined pursuant to federal securities laws.
Home Office: The Company's principal executive offices at 151 Farmington Avenue,
Hartford, Connecticut 06156.
Insureds: The two persons on whose lives the Policy is issued.
Issue Age: The age of each Insured on his/her birthday nearest to the Policy's
Issue Date.
Issue Date: The effective date on which coverage begins under the Policy.
Loan Account Value: The sum of all unpaid Policy Loans. The amount necessary to
repay Policy Loans in full is the Loan Account Value plus any accrued interest.
Loan Value: Is 90% of the sum of the Fixed Account Value and the Separate
Account Value.
Maturity Date: The Policy Anniversary on which the younger Insured reaches
Attained Age 100.
Maturity Value: The Total Account Value on the Maturity Date, less the amount
necessary to repay any Policy Loans in full, including interest.
Monthly Deduction: A charge assessed against the Total Account Value which
includes the Cost of Insurance, a monthly administrative charge and any charges
for supplemental benefit riders. Monthly Deductions begin on the Issue Date and
occur on each Monthly Deduction Day thereafter.
Monthly Deduction Day: The first Monthly Deduction Day is the Issue Date.
Monthly Deduction Days occur each month thereafter on the same day as the Issue
Date.
Net Premium: The Net Premium is equal to the amount of the premium paid less the
deduction for Premium Load.
Net Single Premium: The amount required to purchase a guaranteed benefit
assuming the Policy's Total Account Value is allocated to the Fixed Account,
using the Insureds' Attained Ages and premium classes. The Net Single Premium is
determined using guaranteed interest of 4% per year and guaranteed maximum Cost
of Insurance rates.
Partial Surrenders: The amount You can receive in cash by surrendering a part of
the Policy.
Planned Premiums: Premiums We agree to bill.
Policy: The life insurance contract described in this Prospectus, under which
flexible premium payments are permitted and the Death Benefit may and Total
Account Values will vary with the investment performance of the Fund(s).
Policy Loan: The amount received by borrowing from the Total Account Value.
Policyowner: The person or persons having rights to the benefits under the
Policy; referred to as "You".
Policy Year/Policy Anniversary: The first Policy Year is the 12 month period
beginning on the Issue Date. Your Policy Anniversary is equal to the Issue Date
plus 1 Year, 2 Years, etc.
Premium Loads: A charge assessed against the premium to cover certain expenses
associated with start-up and maintenance costs of the Policy.
Second Death: Death of the Surviving Insured.
SEC: Securities and Exchange Commission.
Separate Account: A separate account established by Aetna Life Insurance and
Annuity Company for the purpose of funding the Policy: Variable Life Account B.
Separate Account Value: The portion of the Policy's Total Account Value
attributable to the variable portion of the Policy.
Settlement Option(s): The method by which payment may be made to a beneficiary
due from a Death Benefit or upon the Full Surrender of the Policy.
Specified Amount: The amount chosen by the Policyowner at application and used
in determining the Death Benefit. It may be increased or decreased as described
in this Prospectus.
Surrender Charge: An amount retained by the Company upon the Full or Partial
Surrender of the Policy.
Surrender Value: The amount You can receive in cash by surrendering the Policy.
Surviving Insured: The Insured living after the first death.
Total Account Value: The sum of the Fixed Account Value, the Separate Account
Value and the Loan Account Value.
Valuation Date: Generally, a day on which the Total Account Value is determined.
A Valuation Date is any day on which the New York Stock Exchange is open for
trading. The Total Account Value will be determined as of the close of trading
on the New York Stock Exchange.
Valuation Period: The period of time commencing, usually at 4:00 p.m. Eastern
Time on each Valuation Date and ending at 4:00 p.m. Eastern Time on the next
Valuation Date.
Variable Account Value: The Accumulation Unit Value for a Variable Option
multiplied by the number of Accumulation Units for that Variable Option credited
to the Policy.
Variable Option: One or more of the variable funding options available under the
Policy (as described in this Prospectus).
We, Our, Us, Company: Aetna Life Insurance and Annuity Company, its successors,
or assigns.
Written Request: A request in writing, in a form satisfactory to Us and received
by Us at the Home Office.
Policy Summary
The Policy described in this Prospectus is a flexible premium variable life
insurance policy issued on the lives of two Insureds. The Policy is intended to
provide life insurance and pay a benefit (subject to adjustment under the
Policy's Age and/or Sex, Suicide and Incontestability, and Grace Period
provisions) upon surrender, maturity or Second Death. The Policy is designed to
allow flexible premium payments, Policy Loans, Partial Surrenders, a choice of
two Death Benefit Options and account values that may be either fixed or
variable or a combination of fixed and variable.
Charges and fees will be assessed against premium payments, the Total Account
Value, the Separate Account, the underlying Funds and upon surrender. These
charges and fees are described within this Prospectus.
You must purchase Your variable life insurance policy from a registered
representative. The Policy, the initial application on the Insureds, any
subsequent applications and any riders constitute the entire contract.
At the time of application, You must choose a Death Benefit Option, decide on
the amount of premium We agree to bill and determine how to allocate Net
Premiums. You may elect to supplement the benefits afforded by the Policy
through the addition of riders We make available.
The proceeds payable upon the Second Death is based on the Death Benefit Option
chosen. Under Option 1 the Death Benefit would be the greater of the Specified
Amount or a percentage of the Total Account Value. Under Option 2, the Death
Benefit would be the greater of the Specified Amount plus the Total Account
Value on the date of death or a percentage of the Total Account Value.
Although the Policy is designed to allow flexible premiums, sufficient premiums
must be paid to continue the Policy in force to the Maturity Date or to qualify
for a Guaranteed Death Benefit. Premium reminder notices will be sent for
Planned Premiums and for premiums required to continue the Policy. Should Your
Policy lapse, it may be reinstated.
Net Premiums may be allocated to the Separate Account, the Fixed Account or both
Accounts. Net Premiums allocated to the Separate Account must be allocated to
one or more Variable Options and allocations must be in whole percentages. The
variable portion of the Policy is supported by the Variable Options you choose
and will vary with the investment performance of the associated Fund. Net
Premiums allocated to the Fixed Account will accumulate at rates of interest We
determine. Such rates will not be less than 4% a year.
1
The Separate Account
The Separate Account established for the purpose of providing Variable Options
to fund the Policy is Variable Life Account B. Amounts allocated to the Separate
Account are invested in the Funds. Each of the Funds is an open-end management
investment company (mutual fund) whose shares are purchased by the Separate
Account to fund the benefits provided by the Policy. The Funds currently
available under the Separate Account, including their investment objectives and
their investment advisers, are described in this Prospectus. Complete
descriptions of the Funds' investment objectives and restrictions and other
material information relating to an investment in the Funds are contained in the
prospectuses for each of the Funds which accompany this Prospectus.
Variable Life Account B was established pursuant to a June 18, 1986, resolution
of the Board of Directors of the Company. Under Connecticut Insurance Law, the
income, gains or losses of the Separate Account is credited without regard to
the other income, gains or losses of the Company. These assets are held for the
Company's variable life insurance policies. Any and all distributions made by
the Funds with respect to shares held by the Separate Account will be reinvested
in additional shares at net asset value. The assets maintained in the Separate
Account will not be charged with any liabilities arising out of any other
business conducted by the Company. The Company is, however, responsible for
meeting the obligations of the Policy to the Policyowner.
No stock certificates are issued to the Separate Account for shares of the Funds
held in the Separate Account. Ownership of Fund shares is documented on the
books and records of the Funds and of the Company for the Separate Account.
The Separate Account is registered with the SEC as a unit investment trust under
the Investment Company Act of 1940 and meets the definition of separate account
under the federal securities laws. Such registration does not involve any
approval or disapproval by the Commission of the Separate Account or the
Company's management or investment practices or policies. The Company does not
guarantee the Separate Account's investment performance.
Charges & Fees
Charges & Fees Assessed Against Premium
Premium Load
Before a premium is allocated to the Policy's Total Account Value, a percentage
of the premium is deducted to cover certain expenses associated with start-up
and maintenance costs of the Policy. These expenses include a 9% sales load, a
2.1% state premium tax charge and a 1.25% federal income tax charge. The state
premium tax charge reimburses the Company for taxes it pays to states and
municipalities in which the Policy is sold. The amount of tax assessed by a
state or municipality may be more or less than the charge. The federal income
tax charge reimburses the Company for its increased federal tax liability under
the Federal Tax Laws. The Company has determined that these tax charges are
reasonable in relation to its increased tax liability, but reserves the right to
increase these tax charges due to changes in the Tax Laws that increase the
Company's tax liability. The total Premium Load is equal to 12.35% of each
premium payment.
Charges & Fees Assessed Against the Total Account Value
Charges and fees assessed against the Total Account Value will be deducted from
the Separate Account Value and the Fixed Account Value in the same proportion
that these values bear to the sum of the Fixed Account Value and the Separate
Account Value on the date of the deduction. This is accomplished by
2
liquidating Accumulation Units and withdrawing the value of the liquidated
Accumulation Units from each Variable Option in the same proportion as their
respective values have to the sum of Your Fixed Account and Separate Account
Values. (See Accumulation Units)
Transfers within Accounts
You may transfer all or part of each Fund to any other Fund or to the Fixed
Account Value at any time. We reserve the right to charge an administrative fee
of $25 for each transfer over 12 transfers per year.
Monthly Deductions
The Monthly Deduction includes the Cost of Insurance, a Policy fee, a monthly
administrative expense charge and any charges for Supplementary Benefits.
Monthly Deductions begin on the Issue Date, even if the Issue Date is earlier
than the date the application is signed, and occur on each Monthly Deduction Day
thereafter. If the Policy's issuance is delayed due to underwriting
requirements, the charges will not be assessed until the underwriting is
complete and the application for the Policy is approved. (See Premium Payments)
Cost of Insurance
The Cost of Insurance charge is related to the Company's expected mortality cost
for Your basic insurance coverage under the Policy, not including any
supplemental benefit provisions that You may elect through a Policy rider. The
Cost of Insurance charge is equal to the Amount at Risk multiplied by a monthly
Cost of Insurance rate. The Cost of Insurance rate is variable and is based on
both Insureds' issue ages, sex (where permitted by law), number of Policy Years
elapsed and premium class. Because the Total Account Value and, under certain
circumstances, the Death Benefit of the Policy may vary from month to month, the
Cost of Insurance charge may also vary on each Monthly Deduction Day. In
addition, You should note that the Cost of Insurance charge is related to the
difference between the Death Benefit payable under the Policy and the Total
Account Value of the Policy. An increase in the Total Account Value or a
decrease in the Death Benefit may result in a smaller Cost of Insurance charge
while a decrease in the Total Account Value or an increase in the Death Benefit
may result in a larger cost of insurance charge.
The Cost of Insurance rate for standard risks will not exceed those based on the
1980 Commissioners Standard Ordinary Mortality Tables (1980 Tables). Substandard
risks will have monthly deductions based on Cost of Insurance rates which may be
higher than those set forth in the 1980 Tables. A table of guaranteed maximum
Cost of Insurance rates per $1,000 of the Amount at Risk will be included in
each Policy. The Monthly Cost of Insurance rates may be adjusted by Us from time
to time. Adjustments will be on a class basis and will be based on Our estimates
for future factors such as mortality, investment income, expenses, and the
length of time Policies stay in force. Any adjustments will be made on a
nondiscriminatory basis.
Policy Fee and Monthly Administrative Expense Charge
The Monthly Deduction amount also includes a Policy fee of $69 a month during
the first Policy Year and $9 a month during subsequent Policy Years (We reserve
the right to charge $74 a month during the first Policy Year and $14 a month
during subsequent Policy Years) and an administrative expense charge of $0.01 a
month per $1,000 of Specified Amount for 20 Policy Years from the Issue Date of
the Policy or increase. (We reserve the right to charge $0.03 a month per $1,000
of Specified Amount for all Policy Years). These charges are for items such as
underwriting and issuance, premium billing and collection, policy value
calculation, confirmations and periodic reports. The monthly Policy fee and
administrative expense charge is not expected to exceed our actual costs.
Charges for Supplemental Benefits
If You elect any supplemental benefits through adding riders to the Policy, a
supplemental benefits charge will be included in the Monthly Deduction amount.
The amount of the charge will vary depending upon the actual supplemental
benefits selected and is described on each applicable Policy rider.
3
Charges & Fees Assessed Against the Separate Account
Mortality and Expense Risk Charge
A mortality and expense risk charge will be deducted from the Separate Account
Value to compensate the Company for the aggregate mortality and expense risks
assumed in connection with the Policy. The mortality risk assumed by the Company
is that Insureds, as a group, may live for a shorter period of time than
estimated and that the Company will, therefore, pay a Death Benefit before
collecting a sufficient Cost of Insurance charge. The expense risk assumed is
that expenses incurred in issuing and administering the Policies and operating
the Separate Account will be greater than the administrative charges estimated
for such expenses.
The mortality and expense risk charge will be deducted daily and currently
equals an annual rate of 0.85% of the average daily net assets of the Separate
Account. The Company reserves the right to increase or decrease the mortality
and expense risk charge if it believes that circumstances have changed so that
current charges are no longer appropriate. However, in no event will the charge
exceed 0.90% of average daily net assets on an annual basis. If the mortality
and expense risk charge in effect at any time after the later of Policy Year 10
or the Younger Insured's Attained Age 65 is less than 0.90%, the amount of this
daily charge at that time will be reduced to 0.00% although the Company reserves
the right to increase the charge thereafter to 0.90%.
The Separate Account is not subject to any taxes. However, if taxes are assessed
against the Separate Account, We reserve the right to assess taxes against the
Separate Account Value.
Charges Assessed Against the Underlying Funds
The following table illustrates the investment advisory fees, other expenses and
total expenses paid by each of the Funds as a percentage of average net assets
based on figures for the year ended December 31, 1995:
Investment
Advisory Fees(1) Other Expenses Total Fund
(after expense (after expense Annual
reimbursement) reimbursement) Expenses
------------- ------------- ---------------
Aetna Variable Fund (2)(3) 0.25% 0.06% 0.31%
Aetna Income Shares (2)(3) 0.25% 0.08% 0.33%
Aetna Variable Encore Fund (3) 0.25% 0.10% 0.35%
Aetna Investment Advisers Fund, Inc. (2)(3) 0.25% 0.08% 0.33%
Aetna Ascent Variable Portfolio (2)(3) 0.50% 0.15% 0.65%
Aetna Crossroads Variable Portfolio (2)(3) 0.50% 0.15% 0.65%
Aetna Legacy Variable Portfolio (2)(3) 0.50% 0.15% 0.65%
Alger American Small Cap Portfolio 0.85% 0.07% 0.92%
Fidelity VIP II Contrafund Portfolio (4) 0.61% 0.11% 0.72%
Fidelity VIP Equity-Income Portfolio 0.51% 0.10% 0.61%
Janus Aspen Aggressive Growth Portfolio (5) 0.75% 0.11% 0.86%
Janus Aspen Balanced Portfolio (5) 0.82% 0.55% 1.37%
Janus Aspen Growth Portfolio (5) 0.65% 0.13% 0.78%
Janus Aspen Short-Term Bond Portfolio (5) 0.00% 0.70% 0.70%
Janus Aspen Worldwide Growth Portfolio (5) 0.68% 0.22% 0.90%
Scudder International Portfolio Class A Shares 0.88% 0.20% 1.08%
TCI Growth (6) 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 Policy. These reimbursements are paid
out of the investment advisory fees and are not charged to investors.
(2) As of August 1, 1996, the investment advisory fees and, consequently, the
Total Fund Annual Expenses for these Funds will change as follows: Aetna
Variable Fund--0.50% and 0.56%, respectively; Aetna Income Shares--0.40%
and 0.48%, respectively; Aetna Investment Advisers Fund, Inc.--0.50% and
0.58%, respectively; Aetna Ascent, Crossroads and Legacy Variable
Portfolios--0.60% and 0.75%, respectively.
3) As of May 1, 1996, the Company provides administrative services to the
Fund and assumes 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.
(4) A portion of the brokerage commissions the Fund paid was used to reduce its
expenses. Without this reduction, total operating expenses would have been
0.73% for the Contrafund Portfolio.
(5) The information for each Portfolio is net of fee waivers or reductions from
Janus Capital. Fee reductions for the Aggressive Growth, Balanced, Growth
and Worldwide Growth Portfolios reduce the management fee to the level of
the corresponding Janus retail fund. Other waivers, if applicable, are
first applied against the management fee and then against other expenses.
Without such waivers or reductions, the Management Fee, Other Expenses and
Total Portfolio Operating Expenses would have been 0.82%, 0.11% and 0.93%
for Aggressive Growth Portfolio; 1.00%, 0.55% and 1.55% for Balanced
Portfolio; 0.85%, 0.13% and 0.98% for Growth Portfolio; 0.65%, 0.72% and
1.37% for Short-Term Bond Portfolio; and 0.87%, 0.22% and 1.09% for
Worldwide Growth Portfolio, respectively. Janus Capital may modify or
terminate the waivers or reductions at any time upon 90 days' notice to the
Portfolio's Board of Trustees.
(6) The Portfolio's investment adviser pays all expenses of the Portfolio
except brokerage commissions, taxes, interest, fees, expenses of the
non-interested person 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.
For further details on each Fund's expenses, please refer to that Fund's
prospectus.
Charges Deducted Upon Surrender
If, during the first 20 Policy Years, the Policy is totally surrendered or
lapses, or a Partial Surrender reduces the Specified Amount, a Surrender Charge
will be deducted from the Total Account Value. This charge is imposed in part to
recoup distribution expenses and in part to recover certain first year
administrative costs. The maximum Surrender Charges are included in each Policy
and are in compliance with each state's nonforfeiture law.
4
The maximum Surrender Charge, as specified in the Policy, is based on the
Specified Amount. It also depends on the Issue Age, risk classification and, in
most states, sex of the Insureds.
If You increase the Specified Amount, a new Surrender Charge will be applicable,
in addition to the then existing Surrender Charge. This charge will be effective
on the Issue Date for the increase and remain in effect for twenty years. In
general, the additional Surrender Charge will be calculated assuming that all
premium payments received after the increase are proportionately allocated as
payments on the initial Specified Amount and on the incremental increase in the
Specified Amount. Supplemental Policy Specifications will be sent to You once
the change is complete and will reflect the maximum additional Surrender Charge
in the Table of Maximum Surrender Charges.
Any decrease in the Specified Amount will not reduce the original or any
additional Surrender Charge.
Any Surrender Charge imposed is based upon the premium actually paid under the
Policy and will comply with SEC rules for maximum sales loads. This will vary
with the Issue Ages, premium class, sex (where allowed), Specified Amount of
insurance and the existence of certain supplementary benefits. For the
illustration contained in this Prospectus, using a Planned Premium of $2,688,
the Surrender Charge would be, at all times, limited to the lesser of (a) or (b)
where (a) is $4,914 (180% of the Guideline Annual Premium for the Policy) minus
9% of premium previously paid and (b) is 41% of premium previously paid. At all
times during the first 2 Policy Years, the Surrender Charge is additionally
limited to 20% of premium paid up to $2,730 (the Guideline Annual Premium for
the Policy), plus 1% of premium up to $5,460 (200% of the Guideline Annual
Premium for the Policy). The Guideline Annual Premium for Your Policy will be
set forth in the Policy Specifications.
The illustration contained in this Prospectus shows Surrender Charges that have
been limited based on the illustrated premium.
Surrender Charges on Full and Partial Surrenders
All applicable surrender Charges are imposed on Full surrenders.
A proportional percentage of all Surrender Charges is imposed on Partial
Surrenders. The proportional percentage is the amount of the net Partial
Surrender divided by the sum of the Separate Account Value and the Fixed Account
Value less full Surrender Charges. When a Partial Surrender is made, any
applicable remaining Surrender Charges will be reduced in the same proportion. A
transaction charge of $25 will be made against the Separate Account for each
Partial Surrender. (See Partial Surrenders)
Allocation of Premiums
You may allocate all or a part of Your Net Premiums to the Funds currently
available through the Separate Account in connection with the Policy and/or You
may allocate all or a part of Your Net Premiums to the Fixed Account.
The Funds
The Separate Account currently invests in shares of the Funds listed below. Net
Premiums applied to the Separate Account will be invested in the Funds in
accordance with the selection made by the Policyowner. Funds may be added or
withdrawn as permitted by applicable law. Shares of the Funds are not sold
directly to the general public. Each of the Funds is available only through the
purchase of variable annuities or variable life insurance policies. (See Mixed
and Shared Funding)
5
The investment results of the Funds, whose investment objectives are described
below, are likely to differ significantly. There is no assurance that any of the
Funds will achieve their respective investment objectives. Investment in some of
the Funds involves special risks, which are described in their respective
prospectuses. You should read the prospectuses for the Funds and consider
carefully, and on a continuing basis, which Fund or combination of Funds is best
suited to Your long-term investment objectives. Except where otherwise noted,
all of the Funds are diversified, as defined in the Investment Company Act of
1940.
(bullet) Aetna Variable Fund seeks to maximize total return through investments
in a diversified portfolio of common stocks and securities convertible
into common stocks.(1)
(bullet) Aetna Income Shares seeks to maximize total return, consistent with
reasonable risk, through investments in a diversified portfolio
consisting primarily of debt securities.(1)
(bullet) 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
this Fund is neither insured nor guaranteed by the U.S. Government.
(1)
(bullet) Aetna Investment Advisers Fund, Inc. 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)
(bullet) Aetna Generation Portfolios, Inc. - Aetna Ascent Variable Portfolio
seeks to provide capital appreciation by allocating its investments
among equities and fixed income securities. Aetna Ascent is managed
for investors who generally have an investment horizon exceeding 15
years, and who have a high level of risk tolerance. See the Fund's
prospectus for a discussion of the risks involved.(1)
(bullet) Aetna Generation Portfolios, Inc. - Aetna Crossroads Variable
Portfolio seeks to provide total return (i.e., income and capital
appreciation, both realized and unrealized) by allocating its
investments among equities and fixed income securities. Aetna
Crossroads is managed for investors who generally have an investment
horizon exceeding 10 years and who have a moderate level of risk
tolerance. (1)
(bullet) Aetna Generation Portfolios, Inc. - Aetna Legacy Variable Portfolio
seeks to provide total return consistent with preservation of capital
by allocating its investments among equities and fixed income
securities. Aetna Legacy is managed for investors who generally have
an investment horizon exceeding five years and who have a low level of
risk tolerance.(1)
(bullet) Alger American Fund -- Alger American Small Capitalization Portfolio
seeks long-term capital appreciation. Except during temporary
defensive periods, the Portfolio invests at least 65% of its total
assets in equity securities of companies that, at the time of purchase
of such securities, have total market capitalization within the range
of companies included in the Russell 2000 Growth Index, updated
quarterly. The Russell 2000 Growth Index is designed to track the
performance of small capitalization companies. At March 31, 1996, the
range of market capitalization of these companies was $20 million to
$3.0 billion.(2)
(bullet) Fidelity Investments' Variable Insurance Products Fund - Equity-Income
Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the
Fund will also consider the potential for capital appreciation.(3)
(bullet) Fidelity Investments' Variable Insurance Products Fund II - Contrafund
Portfolio seeks
6
maximum total return over the long term by investing its assets mainly
in equity securities of companies that are undervalued or
out-of-favor.(3)
(bullet) Janus Aspen Series--Aggressive Growth Portfolio is a non-diversified
portfolio that seeks long-term growth of capital. The Portfolio
pursues its investment objective by normally investing at least 50% of
its equity assets in securities issued by medium sized companies.
Medium-sized companies are those whose market capitalizations fall
within the range of companies in the S&P MidCap 400 Index, which as of
December 29, 1995 included companies with capitalizations between
approximately $118 million and $7.5 billion, but which is expected to
change on a regular basis.(4)
(bullet) Janus Aspen Series--Growth Portfolio seeks long-term growth of capital
consistent with the preservation of capital. The Portfolio pursues its
investment objective by investing in common stocks of a large number
of issuers of any size.(4)
(bullet) Janus Aspen Series--Worldwide Growth Portfolio seeks long-term growth
of capital consistent with the preservation of capital. The Portfolio
pursues its investment objective primarily through investments in
common stocks of foreign and domestic issuers.(4)
(bullet) Janus Aspen Series--Balanced Portfolio seeks long-term capital growth
consistent with preservation of capital and balanced by current
income. The Portfolio pursues its investment objective by investing
40%-60% of its assets in securities selected primarily for their
growth potential and 40%-60% of its assets in securities selected
primarily for their income potential.(4)
(bullet) Janus Aspen Series--Short Term Bond Portfolio seeks as high a level of
current income as is consistent with preservation of capital. The
Portfolio pursues its investment objective by investing primarily in
short- and intermediate-term fixed income securities.(4)
(bullet) Scudder Variable Life Investment Fund - International Portfolio Class
A Shares seeks long term growth of capital primarily through
diversified holdings of marketable foreign equity investments.(5)
(bullet) 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 TCI Growth's
management, have better than average potential for appreciation.(6)
Investment Advisers of the Funds:
(1) Aetna Life Insurance and Annuity Company (adviser);
effective August 1, 1996, Aeltus Investment Managment,
Inc. ("Aeltus") will become the Funds' sub-adviser.*
(2) Fred Alger Management, Inc.
(3) Fidelity Management & Research Company
(4) Janus Capital Corporation
(5) Scudder, Stevens & Clark, Inc.
(6) Investors Research Corporation
*The proposal relating to the approval of Aeltus as a sub-adviser for Aetna
Variable Encore Fund will be submitted to shareholders at a meeting to be held
on July 19, 1996. If approved, such proposal would also be effective on
August 1, 1996.
Some of the above Funds may use instruments known as derivatives as part of
their investment strategies, as described in their respective prospectuses. The
use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of leverage
in con-
7
nection with derivatives can also increase risk of losses. See the prospectus
for the Fund for a discussion of the risks associated with an investment in
those Funds. You should refer to the accompanying prospectuses of the Funds for
more complete information about their investment policies and restrictions.
Mixed and Shared Funding; Conflicts of Interest
Shares of the Funds are available to insurance company separate accounts which
fund variable annuity contracts and variable life insurance policies, including
the Policy described in this Prospectus. Because Fund shares are offered to
separate accounts of both affiliated and unaffiliated insurance companies, it is
conceivable that, in the future, it may not be advantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
these Funds simultaneously, since the interests of such Policyowners or
contractholders may differ. Although neither the Company nor the Funds currently
foresees any such disadvantages either to variable life insurance or to variable
annuity Policyowners, each Fund's Board of Trustees/Directors has agreed to
monitor events in order to identify any material irreconcilable conflicts which
may possibly arise and to determine what action, if any, should be taken in
response thereto. If such a conflict were to occur, one of the separate accounts
might withdraw its investment in a Fund. This might force that Fund to sell
portfolio securities at disadvantageous prices.
Fund Additions, Deletions or Substitutions
The Company reserves the right, subject to compliance with appropriate state and
federal laws, to add additional Fund(s) or cease to make Fund shares available
under the Policy prospectively. The Company may substitute shares of one Fund
for shares of another Fund if, among other things, (a) it is determined that a
Fund no longer suits the purpose of the Policy due to a change in its investment
objectives or restrictions; (b) the shares of a Fund are no longer available for
investment; or (c) in the Company's view, it has become inappropriate to
continue investing in the shares of the Fund. Substitution may be made with
respect to both existing investments and the investment of any future premium
payments. However, no substitution of securities will be made without prior
notice to Policyowners, and without prior approval of the SEC or such other
regulatory authorities as may be necessary, all to the extent required and
permitted by the Investment Company Act of 1940 or other applicable law.
Fixed Account
Interests in the Fixed Account have not been registered with the SEC in reliance
upon exemptions under the Securities Act of 1933, as amended. However,
disclosure in this Prospectus regarding the Fixed Account may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of the statements. Disclosure in this
Prospectus relating to the Fixed Account has not been reviewed by the SEC.
The Fixed Account is a fixed funding option available under the Policy. The
Company guarantees a minimum interest rate on amounts in the Fixed Account and
assumes the risk of investment gain or loss. The investment gain or loss of the
Separate Account or any of the Funds does not affect the Fixed Account Value.
The Fixed Account is secured by the general assets of the Company. The general
assets of the Company include all assets of the Company other than those held in
separate accounts sponsored by the Company or its affiliates. The Company will
invest the assets of the Fixed Account in those assets chosen by the Company, as
allowed by applicable law. Investment income of such Fixed Account assets will
be allocated by the Company between itself and those policies participating in
the Fixed Account.
The Company guarantees that, at any time, the Fixed Account Value will not be
less than the amount of the Net Premiums allocated to the Fixed Account, plus
interest at an annual rate of not less than 4%, less the
8
amount of any Partial Surrenders, Policy Loans or Monthly Deductions. If the
interest rate credited is greater than 4%, additional guaranteed excess interest
of .85% will be credited to the Fixed Account Value beginning in Policy Year 11
or, if later, at the younger Insured's Attained Age 65.
9
Policy Choices
Premium Payments
The Policy is a flexible premium life insurance policy in that the Policyowner
has the right to decide when to make premium payments and in what amounts. Your
Policy provides various premium levels at which You may make payments. They are
the Planned Premium, Basic Monthly Premium and the Guaranteed Death Benefit to
the Younger Insured's Attained Age 100 Premium. The amount of each of Your
premium levels will be shown in Your Policy. Alternatively, You make any other
premium payments You wish as Additional Premiums. (See Guaranteed Death Benefit)
Payment of the Basic Monthly Premium, Guaranteed Death Benefit to the Younger
Insured's Age 100 Premium, Planned Premiums, or Additional Premiums in any
amount will not, except as noted below, guarantee that Your policy will remain
in force. Conversely, failure to pay Basic Monthly Premiums, Planned Premiums or
Additional Premiums will not necessarily cause Your Policy to lapse. Not paying
Your applicable Guaranteed Death Benefit premium will, however, cause the
Guaranteed Death Benefit to terminate and may cause the No Lapse Coverage not to
be applicable. (See Guaranteed Death Benefit and No Lapse Coverage)
Planned Premiums are those premiums You request and We agree to bill on an
annual, semiannual or quarterly basis. Pre-authorized automatic monthly check
payments may also be arranged. Planned Premium due dates are measured from the
Issue Date. The Planned Premium is also due on the Issue Date. You may request
as Your Planned Premium for Your Policy the Basic Monthly Premium or the
Guaranteed Death Benefit to the Younger Insured's Attained Age 100 Premium.
Currently, there is no minimum Planned Premium.
You may increase Your Planned Premium at any time by submitting a Written
Request to us or by paying Additional Premium. We may require evidence of
insurability if the Additional Premium or the new Planned Premium during the
current Policy Year would increase the difference between the Death Benefit and
the Total Account Value. If satisfactory evidence of insurability is requested
and not provided, We will refund the increase in premium without interest and
without participation of such amounts in the Funds.
Premiums paid in excess of the Planned Premium or an increase in Your Planned
Premium may cause the Policy to be classified as a "Modified Endowment Contract"
for federal income tax purposes. (See Tax Matters)
At the time You apply for a Policy, if You have paid at least the amount equal
to Your Basic Monthly Premium prior to the Issue Date and have answered
favorably certain questions relating to each Insured's health, a temporary
insurance agreement (where approved for use) in the amount applied for will be
provided.
Under limited circumstances, We may backdate a Policy, upon request, by
assigning an Issue Date earlier than the date the application is signed but no
earlier than six months prior to state approval of the Policy. Backdating may be
desirable, for example, so that You can purchase a particular Policy Specified
Amount for lower Cost of Insurance Rates based on a younger insurance age. For a
backdated Policy, You must pay the premium for the period between the Issue Date
and the date the application is received at the Home Office. Backdating of Your
Policy will not affect the date on which Your premium payments are credited to
the Separate Account and You are credited with Accumulation Units. You cannot be
credited with Accumulation Units until Your Net Premium is actually deposited in
the Separate Account. (See Accumulation Units)
The initial premium equal to at least your Basic Monthly Premium should be made
by check or money order and made payable to the Company and given to the agent
with Your application. After the first premium payment, all premiums must be
sent directly to our Home Office and will be deemed received when actually
received at the Home Office. All Your premium payments, including Your first
premium payment, will be allocated as You have directed, effective
10
the Valuation Period when each payment is actually received in the Home Office.
(See Right of Policy Examination)
You may reallocate Your future premium payments at any time by Your request to
us. Allocations must be changed in whole percentages. The change will be
effective as of the date of the next premium payment after You notify Us. We
will send You confirmation of the change. (See Transfers and Allocations to
Funding Options)
Guaranteed Death Benefit
The Guaranteed Death Benefit provision assures that, the Policy will not lapse
if certain premiums are paid when due. As long as there are no outstanding
Policy Loans, have been no Partial Surrenders and all the Guaranteed Death
Benefit premiums due since the Issue Date are paid on or before each Monthly
Deduction Day, the Policy will not lapse even if the Surrender Value is
insufficient to satisfy the current Monthly Deductions. If on a Monthly
Deduction Day, all or part of the applicable Guaranteed Death Benefit premiums
have not been paid, You will have 61 days from the Monthly Deduction Day to pay
the amount of the applicable Guaranteed Death Benefit premiums due. Failure to
do so will cause the corresponding Guaranteed Death benefit to terminate. The
Guaranteed Death Benefit is available to the younger Insured's Attained Age 80
or to the younger Insured's Attained Age 100.
The Guaranteed Death Benefit to the Younger Insured's Attained Age 80 assures
that Your Policy will not lapse prior to the later of the younger Insured's
Attained Age 80 or 10 Policy Years from the Issue Date. The premium for this
Guaranteed Death Benefit is the Basic Monthly Premium.
The Guaranteed Death Benefit to the Younger Insured's Attained Age 100 assures
that Your Policy will not lapse prior to the younger Insured's Attained Age 100.
The premium for this Guaranteed Death Benefit is the Guaranteed Death Benefit to
the Younger Insured's Age 100 Premium.
If the Guaranteed Death Benefit to the Younger Insured's Attained Age 100 has
terminated because sufficient payments have not been made, We will determine if
the condition for the Guaranteed Death Benefit to the Younger Insured's Attained
Age 80 has been satisfied. If satisfied, the Guaranteed Death Benefit Provision
to the Younger Insured's Age 100 will terminate and the conditions set forth in
the Guaranteed Death Benefit to the Younger Insured's Age 80 provision will be
applicable.
The Guaranteed Death Benefit may not be available in all circumstances and is
only available in those states where it is approved. Once terminated, the
Guaranteed Death Benefit to the Younger Insured's Attained Age 80 and the
Guaranteed Death Benefit to the Younger Insured's Attained Age 100 provisions
cannot be reinstated.
No Lapse Coverage Provision
The Policy will not terminate within the 5-year period after its Issue Date or
the Issue Date of any increase if sufficient premiums have been paid. The Policy
will not terminate if on any Monthly Deduction Day within that period the sum of
premiums paid within that period equals or exceeds (a) the sum of the Basic
Monthly Premiums for each Policy Month from the start of the period, including
the current month; plus (b) any Partial Surrenders; plus (c) any increase in the
Loan Account Value since the start of the period.
If on any Monthly Deduction Day within the 5-year period the sum of premiums
paid is less than the sum of items (a), (b) and (c) above and the Total Account
Value is less than the Monthly Deduction the Policy will enter the Grace Period.
Additional premiums payments must be paid to prevent the termination of the
Policy. (See Grace Period)
After the 5-year period expires, on each Monthly Deduction Day, the Surrender
Value must be greater than
11
the Monthly Deduction to prevent activation of the Grace Period provision of the
Policy, unless a Guaranteed Death Benefit is in force. (See Guaranteed Death
Benefit and Grace Period)
Death Benefit Options
At the time of purchase, You must choose between the two available Death Benefit
Options. The amount payable upon the Second Death is based upon one of the
following Death Benefit Options You choose.
Under Option 1 the Death Benefit will be the greater of: (a) the Specified
Amount or (b) a percentage of the Total Account Value. This Percentage is 1
divided by the Net Single Premium per dollar of Specified Amount.
Under Option 2 the Death Benefit will be the greater of: (a) the Specified
Amount plus the Total Account Value on the date of death or (b) a percentage of
the Total Account Value. This percentage is 1 divided by the Net Single Premium
per dollar of Specified Amount. Option 2 provides a varying Death Benefit which
increases or decreases over time, depending upon the amount of premium paid and
the investment performance of the Fund(s) You choose.
Under both Option 1 and Option 2, the Death Benefit may be affected by Partial
Surrenders. The Death Benefit payable under either Option will be reduced by the
amount necessary to repay the Loan Account Value in full and, if the Policy is
within the Grace Period, any payment required to keep the Policy in force. (See
Partial Surrenders)
Transfers and Allocations to Funding Options
At any time prior to the Maturity Date, You may transfer all or part of each
Fund Account Value to any other Fund or to the Fixed Account Value at any time.
Funds may be transferred between the Funds or from the Funds to the Fixed
Account. We reserve the right to charge an administrative fee of $25 for more
than 12 transfers per year.
We reserve the right to limit the total number of Funds You may elect to 15 over
the lifetime of the Policy.
Within the forty-five days following the Policy Anniversary, You may request a
transfer of a portion of the Fixed Account Value to one or more of the Funds.
This type of transfer is allowed only once within this forty-five day period,
and We must receive Your request at the Home Office within the forty-five day
period. The transfer will be effective on the Valuation Date that Your request
is received by the Home Office. The amount of such transfer cannot exceed 25% of
the Fixed Account Value.
Accumulation Units for each Variable Option will be added to or subtracted from
Your Separate Account Value, based on each Variable Option's Accumulation Unit
Value at the end of the Valuation Period when request for such transfer is
received by Us. A dollar amount will be added to or subtracted from the Fixed
Account Value according to the terms of Your request for transfer. You should
carefully consider current market conditions and each Fund's investment policies
and related risks before allocating money to the Funds. (See Premium Payments
and Accumulation Units)
Telephone Transfers
You may request a transfer of Account Values either in writing or by telephone.
In order to make telephone transfers, a written telephone transfer authorization
form must be completed by the Policyowner and returned to the Company at its
Home Office. Once the form is processed, the Policyowner may request a transfer
by telephoning the Company at 1-800-334-7586. All transfers must be in
accordance with the terms of the Policy.
Transfer instructions are currently accepted on each Valuation Date. Once
instructions have been accepted, they may not be rescinded; however, new
telephone instructions may be given on the following day. If the transfer
instructions are not in good order, the Company will not execute the transfer
and You will be notified.
12
We will use reasonable procedures, such as requiring identifying information
from callers, recording telephone instructions, and providing written
confirmation of transactions, in order to confirm that telephone instructions
are genuine. Any telephone instructions which We reasonably believe to be
genuine will be Your responsibility, including losses arising from any errors in
the communication of instructions. As a result of this procedure, the
Policyowner will bear the risk of loss. If the Company does not use reasonable
procedures, as described above, it may be liable for losses due to unauthorized
instructions.
Automated Transfers (Dollar Cost Averaging)
Dollar Cost Averaging describes a system of investing a uniform sum of money at
regular intervals over an extended period of time. Dollar Cost Averaging is
based on the economic fact that buying a security with a constant sum of money
at fixed intervals results in acquiring more of the item when prices are low and
less of it when prices are high.
You may establish automated transfers of Fund Account Values on a monthly or
quarterly basis from the Aetna Variable Encore Fund to any other Fund through
Written Request or other method acceptable to the Company. Dollar Cost Averaging
is not permitted to or from the Fixed Account. You must have a minimum of $5,000
allocated to the Aetna Variable Encore Fund in order to enroll in the Dollar
Cost Averaging program. The minimum automated transfer amount is $50 per month.
You may start or stop participation in the Dollar Cost Averaging program at any
time, but You must give the Company at least 30 days' notice to change any
automated transfer instructions that are currently in place. The Company
reserves the right to suspend or modify automated transfer privileges at any
time.
Before participating in the Dollar Cost Averaging program, You should consider
the risks involved in switching between investments available under the Policy.
Dollar Cost Averaging requires regular investments regardless of fluctuating
price levels, and does not guarantee profits or prevent losses. Therefore, You
should carefully consider market conditions and each Fund's investment policies
and related risks before electing to participate in the Dollar Cost Averaging
Program.
Policy Values
Total Account Value
Once Your Policy has been issued, each Net Premium allocated to a Variable
Option of the Separate Account is credited in the form of Accumulation Units of
the Variable Option based on that Variable Option's Accumulation Unit Value.
Each Net Premium will be credited to Your Policy at the Accumulation Unit
Value(s) determined for the Valuation Period in which it is received and
accepted by Us at Our Home Office following the Issue Date of the Policy. The
number of Accumulation Units credited is determined by dividing the Net Premium
by the value of an Accumulation Unit computed after the premium is received and
accepted by Us. Since each Variable Option has a unique Accumulation Unit Value,
if You have elected a combination of Variable Options You will have Accumulation
Units credited to Your Separate Account Value for each Variable Option.
The Total Account Value of Your Policy is determined by: (a) multiplying the
total number of Accumulation Units credited to the Policy for each applicable
Variable Option by its appropriate current Accumulation Unit Value; (b) if You
have elected a combination of Variable Options, totaling the resulting value;
and (c) adding any values attributable to the Fixed Account and any values
attributable to the Loan Account Value.
The number of Accumulation Units credited to a Policy will not be changed by any
subsequent change in the
13
value of an Accumulation Unit. The number is increased by subsequent
contributions to or transfers into a Variable Option, and decreased by charges
and withdrawals from that Variable Option.
The Fixed Account Value reflects amounts allocated to the general account
through payment of premiums or transfers from the Separate Account. Amounts
allocated to the Fixed Account Value are guaranteed; however there is no
assurance that the Separate Account Value of the Policy will equal or exceed the
Net Premiums paid and allocated to the Separate Account.
You will be advised at least annually as to the number of Accumulation Units
which remain credited to the Policy, the current Accumulation Unit Values, the
Separate Account Value, the Fixed Account Value, and the Total Account Value.
Accumulation Unit Value
The value of an Accumulation Unit for any Valuation Period is determined by
multiplying the value of an Accumulation Unit for the immediately preceding
Valuation Period by the net investment factor for the current period for the
appropriate Variable Option. The net investment factor equals the net investment
rate plus 1.0. The net investment rate is determined separately for each
Variable Option as follows:
The net investment rate equals (a) the net assets of the Variable Option held in
Variable Life Account B at the end of a Valuation Period; minus (b) the net
assets of the Variable Option held in Variable Life Account B at the beginning
of that Valuation Period, adjusted by any taxes or provisions for taxes
attributable to the operation of Variable Life Account B; divided by (c) the
value of the Variable Option's Accumulation Units held in Variable Life Account
B at the beginning of the Valuation Period; minus (d) a daily charge for
mortality and expense risk expenses.
Maturity Value
The Maturity Value of the Policy is the Total Account Value less the Loan
Account Value less any unpaid accrued interest.
Surrender Value
The Surrender Value of the Policy is the amount You can receive in cash by
surrendering the Policy. All or part of the Surrender Value may be applied to
one or more of the Settlement Options described in this Prospectus or in any
manner to which We agree and that We make available. (See Charges Deducted Upon
Surrender)
Policy Rights
Full Surrenders
By Written Request, You may surrender the Policy for its Full Surrender Value at
any time before the Maturity Date while one or both Insureds is alive. All
insurance coverage under the Policy will end on the date of the Full Surrender.
The Full Surrender Value will equal (a) the Total Account Value on the date of
surrender; less (b) the Surrender Charge; less (c) the Loan Account Value plus
any accrued interest. We will require return of the Policy. (See Right to Defer
Payment, Policy Settlement and Payment of Benefits)
Partial Surrenders
By Written Request, You may, at any time after the expiration of the Right of
Policy Examination, partially surrender the Policy.
14
A Partial Surrender Charge will be deducted from the amount of the Total Account
Value which is surrendered. The minimum amount of any Partial Surrender after
any Partial Surrender charge is applied is $500. We may also charge an
administrative fee of $25.
The Partial Surrender charge will be in proportion to the Surrender Charge that
would apply to a Full Surrender. The proportion will be computed as the amount
of the net Partial Surrender divided by the sum of the Fixed Account Value and
the Separate Account Value less the Full Surrender Charge. When the Partial
Surrender is made, any future Surrender Charge will be reduced in the same
proportion.
The Partial Surrender Charge, and the net amount surrendered will reduce the
Policy's values as described in the Charges Deducted Upon Surrender section.
If the Death Benefit Option for the Policy is Option 1, a Partial Surrender will
reduce the Total Account Value, Death Benefit, and Specified Amount. The
Specified Amount and Total Account Value will be reduced by equal amounts.
However, We will not allow a Partial Surrender if the Specified Amount will be
reduced below the minimum Specified Amount of $250,000.
If the Death Benefit Option for the Policy is Option 2, a Partial Surrender will
reduce the Total Account Value and the Death Benefit. The Specified Amount will
not be reduced.
If the Death Benefit for the Policy is determined as the Total Account Value
divided by the Net Single Premium, the Partial Surrender may not reduce the
Specified Amount.
A reduction in the Specified Amount will cause a reduction in the required
premiums for the Guaranteed Death Benefit. The future premium required to
maintain the Guaranteed Death Benefit will be based on the new Specified Amount.
If, at the time of a Partial Surrender, Your Total Account Value is attributable
to the Separate Account and the Fixed Account, the Surrender Charge, the
transaction charge and the amount paid to You upon the Partial Surrender will be
deducted from the Separate Account Value and the Fixed Account Value in the same
proportion as these values bear to the sum of the Fixed Account Value and the
Separate Account Value on the date of the deduction. This is accomplished by
liquidating Accumulation Units and withdrawing the value of the liquidated
Accumulation Units from each Variable Option in the same proportion as their
respective values have to the sum of Your Fixed Account and Separate Account
Values. (See Right to Defer Payment, Policy Changes and Payment of Benefits)
Paid-Up Nonforfeiture Option
By Written Request, You may elect, at any time before the Maturity Date, to
continue the Policy as paid-up life insurance.
The Surrender Value will be applied as a Net Single Premium to determine the
Specified Amount of the paid-up insurance. The cost of the paid-up insurance
will be based on the guaranteed maximum Cost of Insurance Rates in the Policy
and an interest rate of 4.0% compounded annually. However, the Specified Amount
of the paid-up insurance cannot exceed the Death Benefit under the Policy as of
the effective date of the paid-up insurance. Any excess Surrender Value will be
refunded to You.
Full and Partial Surrenders and Policy Loans, as described in this Prospectus,
will be allowed if the Policy is continued in force as paid up insurance.
Proceeds payable under this option upon death or maturity will equal the
Specified Amount less debt of the paid up insurance. (See Tax Matters)
15
Grace Period
If the Surrender Value is insufficient to satisfy a Monthly Deduction on the
Monthly Deduction Day, We will allow You 61 days of grace for payment of an
amount sufficient to continue coverage. We may require payment of the amount
necessary to keep the Policy in force for the current month plus two additional
months.
Written notice will be mailed to Your last known address, according to Our
records, not less than 61 days before termination of the Policy. This notice
will also be mailed to the last known address of any assignee of record.
During the days of grace the Policy will stay in force. If the Second Death
occurs during the days of grace, We will deduct an amount required to keep the
Policy in force from the Death Benefit.
If payment is not made within 61 days after the Monthly Deduction Day, the
Policy will terminate without value at the end of the Grace Period. The
termination will be effective on the Monthly Deduction Day for the first unpaid
Monthly Deduction.
Reinstatement of a Lapsed Policy
If the Policy terminates as provided in its Grace Period benefit, it may be
reinstated. To reinstate the Policy, the following conditions must be met:
(bullet) The Policy has not been fully surrendered.
(bullet) You must apply for reinstatement within 5 years after the date of
termination and before the Maturity Date.
(bullet) We must receive evidence of insurability, satisfactory to Us, on each
Insured.
(bullet) We must receive a premium payment sufficient to keep the Policy in
force for the current month plus two additional months.
Supplemental Benefits will be reinstated only with Our consent. (See Grace
Period and Premium Payments)
Coverage Beyond Maturity
You may elect to continue coverage beyond the Maturity Date provided the Policy
is in force on the Maturity Date. If elected, on the Maturity Date the Separate
Account Value of the Policy will be transferred to the Fixed Account where it
will continue to earn interest as described in the Policy. Monthly Deduction
Amounts will continue to be deducted, with a Cost of Insurance rate equal to
zero. Only payments required to keep the policy in force will be accepted beyond
the Maturity Date.
The Policy may be subject to certain adverse tax consequences when continued
beyond the Maturity Date.
All other rights and benefits as described in the Policy will be available
before the Second Death.
Coverage Beyond Maturity is not permitted in New York.
Right to Defer Payment
Payments of any Separate Account Value will be made within 7 days after Our
receipt of Your Written Request. However, the Company reserves the right to
suspend or postpone the date of any payment of any benefit or values for any
Valuation Period (1) when the New York Stock Exchange is closed (except holidays
or weekends); (2) when trading on the Exchange is restricted; (3) when an
emergency exists as determined by the SEC so that disposal of the securities
held in the Funds is not reasonably practicable or it is not
16
reasonably practicable to determine the value of the Funds' net assets; or (4)
during any other period when the SEC, by order, so permits for the protection of
security holders. For payment from the Separate Account in such instances, We
may defer payment of Full Surrender and Partial Surrender Values, any Death
Benefit in excess of the current Specified Amount, and any portion of the Loan
Value.
Payment of any Fixed Account Value may be deferred for up to six months, except
when used to pay amounts due Us.
Policy Loans
We will grant loans at any time after the expiration of the Right of Policy
Examination and before the Maturity Date. The amount of the loan will not be
more than the Loan Value. Unless otherwise required by state law, the Loan Value
for this Policy is 90% of the sum of the Fixed Account Value and the Separate
Account Value.
The amount of the loan will be transferred out of the Fixed Account and Separate
Account Values as described in the Policy Values section. The loan amount
increases the Loan Account Value. The loan may be repaid in full or in part at
any time prior to the Maturity Date as long as this Policy is in force and one
or both Insureds is alive. The amount necessary to repay all loans in full is
the Loan Account Value plus any accrued interest. Loan repayments will be
allocated to the Fixed Account Value and the Separate Account Value in the same
proportion in which the loan was taken. The Loan Account Value will be reduced
by payments You identify as loan repayments. All other payments will be
considered premium payments.
The amount of interest earned on the Loan Account Value and the amount of
interest charged to You on a loan depends on whether the loan is considered
preferred. A preferred loan is a loan beginning in the 11th Policy Year or upon
the younger Insured's Attained Age 65, whichever is later, and on each Policy
Anniversary thereafter, that is taken from the Separate Account Value. The
interest rate charged on the preferred loan and the interest rate credited to
the Loan Account Value is 4%.
For all other loans, the loan interest rate charged is 8%. The Loan Account
Value will earn interest at the guaranteed rate of 4%; however, We may credit
interest in excess of this rate.
Interest is due and payable on the next Policy Anniversary, the date this Policy
ends or upon full repayment of the Loan Account Value. Any interest not paid
when due will be added to the Loan Account Value on the Policy Anniversary and
will itself bear interest on the same terms.
An outstanding loan amount will decrease the Surrender Value available under the
Policy. For example, if a Policy has a Surrender Value of $10,000, You may take
a loan of 90% or $9,000, leaving a new Surrender Value of $1,000. If a loan is
not repaid, it will permanently decrease the Surrender Value which could cause
the Policy to lapse. In addition, the Death Benefit will be decreased because of
an outstanding Policy Loan. Furthermore, even if the loan is repaid, the amount
of the Death Benefit and the Policy's Surrender Value may be permanently
affected since the Loan Account Value is not credited with the investment
experience of the Funds.
Policy Changes
You may make changes to Your Policy, as described below, by submitting a Written
Request to Our Home Office. Supplemental Policy Specifications and/or a notice
confirming the change will be sent to You once the change is completed.
Increase in Specified Amount
Increases will be allowed at any time while this Policy is in force while both
Insureds are alive subject to the following conditions. The increase may be
rescinded by You within 45 days of the subsequent application or within 10 days
of receipt of the supplemental Policy Specifications and/or notice of the right
to rescind the
17
increase, whichever is latest.
(bullet) Satisfactory evidence of insurability on both Insureds will be
required.
(bullet) The Issue Date for any increase will be shown in the supplemental
Policy Specifications.
(bullet) The Surrender Value immediately after an increase must be at least
three times the sum of (a) the most recent Monthly Deduction from the
Total Account Value and (b) the Specified Amount of the increase
multiplied by the applicable Cost of Insurance Rate divided by 1000.
(bullet) An increase in the Specified Amount will increase the Surrender Charge.
(bullet) The 5-year period as described in the No Lapse Coverage provision will
restart on the Issue Date of the increase.
(bullet) The Basic Monthly Premium and the premium required to satisfy the
Guaranteed Death Benefit to the Younger Insured's Age 100 will be
adjusted when the Specified Amount is increased.
Decrease in Specified Amount
You may decrease the Specified Amount of this Policy after the 5th Policy Year,
however:
(bullet) We will not allow a decrease in the Specified Amount if the Specified
Amount would be reduced below the minimum Specified Amount of $250,000.
(bullet) For a decrease in the Specified Amount, the Issue Date will be the
Monthly Deduction Day on or next following the date on which Your
Written Request is received.
(bullet) The decrease will reduce any past increases in the reverse order in
which they occurred.
(bullet) The Basic Monthly Premium and the premium required to satisfy the
Guaranteed Death Benefit to the Younger Insured's Age 100 will be based
on the new Specified Amount.
(bullet) There will be no change in the Surrender Charge.
Change in Death Benefit Option
Any change in the Death Benefit Option is subject to the following conditions:
(bullet) We will not allow a change in the Death Benefit Option if the Specified
Amount will be reduced below the minimum Specified Amount of $250,000.
(bullet) The change will take effect on the Monthly Deduction Day on or next
following the date on which Your Written Request is received.
(bullet) There will be no change in the Surrender Charge.
(bullet) Evidence of insurability may be required.
(bullet) Changes from Option 1 to 2 will be allowed at any time while this
Policy is in force. The Specified Amount will be reduced to equal the
Specified Amount less the Total Account Value at the time of the
change.
(bullet) Changes from Option 2 to 1 will be allowed at any time while this
policy is in force. The new Specified
18
Amount will be increased to equal the Specified Amount plus the Total
Account Value as of the date of the change.
(See Surrender Charge and Right of Policy Examination)
Right of Policy Examination
The Policy has a free look period during which You may examine the Policy. If
for any reason You are dissatisfied, it may be returned to Aetna or its
representative within 45 days of Application, within 10 days of receipt of the
Policy or 10 days after Aetna mails notice of right to cancel, whichever is
latest. Return the Policy to Aetna, Individual Life Insurance, at 151 Farmington
Avenue, Hartford, Connecticut 06156. Upon its return, the Policy will be deemed
void from its beginning. The amount refunded will be (a) the difference between
payments made and amounts allocated to Variable Life Account B plus (b) the
value of amount allocated to Variable Life Account B on the date the returned
contract is received by Aetna plus (c) any charges made under this Policy's
terms on the amounts allocated to Variable Life Account B or (d) where required
by State law, the entire payment made.
The Right of Policy Examination also applies to Increases in the Specified
Amount. The increase may, for any reason, be rescinded by You within 45 days of
the Subsequent Application, or within 10 days of receipt of the Supplemental
Policy Specifications and/or notice of the right to rescind the increase,
whichever is latest.
Supplemental Benefits
The supplemental benefits currently available as riders to the Policy include
the following:
(bullet) Disability Benefit Rider -- provides for a credit of the benefit amount
described in the Policy in the event of the total disability of the
covered Insured.
(bullet) Split Option Amendment Rider -- allows You, upon election, to exchange
the Policy for two individual policies, one on each Insured named in
the Policy, subject to the terms of the rider.
(bullet) Four Year Term Rider -- provides non-participating term insurance for
the first four Policy Years. The benefit amount described in the Policy
increases the Policy's Death Benefit.
Other riders for supplemental benefits may become available under the Policy
from time to time. The charges for each of these riders are illustrated in Your
Policy.
Death Benefit
The Death Benefit under the Policy will be paid in a lump sum unless You or the
beneficiary have elected that it be paid under one or more of the Settlement
Options.
Payment of the Death Benefit may be delayed if the Policy is being contested.
You may elect a Settlement Option for the beneficiary and deem it irrevocable.
You may revoke or change a prior election. The beneficiary may make or change an
election within 90 days of the Second Death, unless You have made an irrevocable
election. The beneficiary who has elected Settlement Option 1 may elect another
option after the Second Death.
All or part of the Death Benefit may be applied under one of the Settlement
Options, or such options as We may choose to make available in the future.
19
If the Policy is assigned as collateral security, We will pay any amount due the
assignee in a lump sum. Any excess Death Benefit due will be paid as elected.
(See Right to Defer Payment and Policy Settlement)
Policy Settlement
Proceeds in the form of Settlement Options are payable by the Company upon the
death of the Surviving Insured or upon Full Surrender or upon maturity and may
be paid in a lump sum, in whole or in part, under any of the Settlement Options
available under the Policy.
A Written Request may be made to elect, change or revoke a Settlement Option
before payments begin under any Settlement Option. This request will take effect
upon its filing at our Home Office. If no Settlement Option has been elected by
You when the Death Benefit becomes payable to the beneficiary, that beneficiary
may make the election.
The first variable Settlement Option payment will be as of the tenth Valuation
Period following Our receipt of the properly-completed election form.
Settlement Options are funded by Variable Annuity Account B, a separate account
of the Company established in 1976 in accordance with the insurance laws of the
State of Connecticut. Variable Annuity Account B was formed for the purpose of
segregating assets attributable to the variable portion of the variable annuity
contracts and variable life settlement options from the Company's other assets.
Variable Annuity Account B is registered as a unit investment trust under the
Investment Company Act of 1940, and meets the definition of separate account
under the federal securities laws. A Variable Annuity Account B prospectus will
be provided in connection with selecting a Settlement Option.
Settlement Options
The following Settlement Options are available under the Policy:
(bullet) Option 1 - Payment of interest on the sum left with Us.
(bullet) Option 2 - Payments for a stated number of years, but no more than
thirty.
(bullet) Option 3 - Payments for the lifetime of the Annuitant. If also chosen,
We will guarantee payments for 60, 120, 180, or 240 months.
(bullet) Option 4 - Life Income Based Upon the Lives of Two Payees - an annuity
will be paid during the joint lifetimes of two Annuitants. Payments
will continue until both Annuitants have died. When this option is
chosen, a choice must be made of:
(a) 100% of the payment to continue after the first death;
(b) 66-2/3% of the payment to continue after the first death;
(c) 50% of the payment to continue after the first death;
(d) Payments for a minimum of 120 months, with 100% of the payment to
continue after the first death; or
(e) 100% of the payment to continue to the survivor if the survivor is
the original payee, and 50%
20
of the payment to continue to the survivor if the survivor is the
second payee.
In most states, no election may be made that would result in a first payment of
less than $25 or that would result in total yearly payments of less than $120.
If the value of the Policy is insufficient to elect an option for the minimum
amount specified, a lump-sum payment must be elected.
Calculation of Settlement Option Values
The value of the Settlement Options will be calculated as set forth in the
Policy.
Pension Plans
AetnaVest Estate Protector is not designed to be used in a pension or
profit-sharing plan as an investment vehicle or to provide life insurance
protection. Therefore, an AetnaVest Estate Protector Policy will not be issued
to such a plan. Transfer of ownership of an AetnaVest Estate Protector Policy to
a tax-qualified pension or profit-sharing plan after the Policy has been issued
is not recommended, because the Policy terms may be in conflict with federal law
governing these plans.
The Company
The Aetna Life Insurance and Annuity 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 organized in
1954). The Company is engaged in the business of issuing life insurance policies
and annuity contracts in all states of the United States.
The Company is registered as a broker-dealer under the Securities Exchange Act
of 1934 and is a member of the National Association of Securities Dealers. As
such it serves as the principal underwriter for the securities offered hereunder
and also acts as the principal underwriter for Variable Annuity Accounts B, C
and G (separate accounts of the Company registered as unit investment trusts),
and Variable Annuity Account I (a separate account of Aetna Insurance Company of
America registered as a unit investment trust). Additionally, the Company is
registered as an investment adviser under the Investment Advisers Act of 1940
and, as such, is the investment adviser for Aetna Variable Fund, Aetna Income
Shares, Aetna Variable Encore Fund, Aetna Investment Advisers Fund, Inc., Series
B of Aetna GET Fund, Aetna Series Fund, Inc. and Aetna Generation Portfolios,
Inc. The Company is also the depositor of Variable Annuity Accounts B, C and G.
Directors & Officers
Name and Address* Position with Company Principal Occupation During Past 5 Years
- ---------------- --------------------- ----------------------------------------
Daniel P. Kearney Director, President and Chairman, President (since December 1993),
Executive Committee (Principal Aetna Life Insurance and Annuity
Executive Officer) Company; Executive Vice President (since December 1993),
and Group Executive, Financial Division (February
1991-December 1993), Aetna Life and Casualty Company.
21
Christopher J. Burns Director and Senior Vice President Senior Vice President, Sales & Service (since February
1996), and Senior Vice President, Life (March
1991-February 1996), Aetna Life Insurance and Annuity
Company.
Laura R. Estes Director and Senior Vice President Senior Vice President, Manage/ Design Products and
Services (since February 1996), and Senior Vice
President, Pensions (March 1991-February 1996), Aetna
Life Insurance and Annuity Company.
Timothy A. Holt Director, Senior Vice President and Senior Vice President, Strategy & Finance, and Chief
Chief Financial Officer Financial Officer (since February 1996), Aetna Life
Insurance and Annuity Company; Vice President, Portfolio
Management/Investment Group (August 1992-February 1996),
Aetna Life and Casualty Company; Treasurer (February 1990-
July 1991), Aeltus Investment Management, Inc.
Gail P. Johnson Director and Vice President Vice President, Service and Retain Customers (since
February 1996); Vice President, Defined Benefit Services
(September 1994-February 1996); Vice President, Plan
Services, Pensions and Financial Services (December
1992-September 1994); Managing Director, Business
Strategy (July 1991-December 1992); Assistant Vice
President, Portfolio Management, Financial Division
(June 1987-July 1991); - Aetna Life Insurance and
Annuity Company.
John Y. Kim Director and Senior Vice President President (since December 1995), Aeltus Investment
Management, Inc.; Chief Investment Officer (since May
1994), Aetna Life and Casualty Company; Managing
Director (September 1993-April 1994), Mitchell Hutchins
Institutional Investors (New York, New York); Vice
President and Senior Portfolio Manager (October
1991-August 1993), and Vice President, Investor
Relations (1990-1992), Aetna Life and Casualty Company.
22
Shaun P. Mathews Director and Vice President Vice President, Products Group (since February 1996);
Senior Vice President, Strategic Markets and Products
(February 1993-February 1996); and Senior Vice
President, Mutual Funds (March 1991-February 1993) -
Aetna Life Insurance and Annuity Company.
Glen Salow Director and Vice President Vice President, Information Technology (since February
1996), Vice President, Information Technology,
Investments and Financial Services (February
1995-February 1996); Vice President, Investment Systems
(1992-1995), AIT - Aetna Life Insurance and Annuity
Company; Senior Vice President (December 1986-August
1992), Lehman Brothers.
Creed R. Terry Director and Vice President Vice President, Select and Manage Markets (since
February 1996), Market Strategist (August 1995-February
1996) - Aetna Life Insurance and Annuity Company;
President (1991-1995), Chemical Technology Corporation
(a subsidiary of Chemical Bank).
Zoe Baird Senior Vice President and Senior Vice President and General
General Counsel Counsel (since April 1992), Vice President and General
Counsel (July 1990-April 1992), Aetna Life and Casualty
Company.
Susan E. Schechter Counsel and Corporate Secretary Counsel (since November 1993), Aetna Life and Casualty
Company; Associate Attorney (September 1986-October
1993), Steptoe & Johnson.
23
Eugene M. Trovato Vice President and Treasurer Vice President and Treasurer,
Corporate Controller Corporate Controller (since February 1996), Vice
President and Controller (February 1995-February 1996),
Aetna Life Insurance and Annuity Company; Vice President,
Financial Reporting (December 1991-February 1995), Assistant
Vice President, Financial Reporting (June 1989-December 1991),
Aetna Life and Casualty Company.
Diane B. Horn Vice President and Chief Vice President and Chief Compliance Officer
Compliance Officer (since February 1996), and Senior Compliance
Officer (August 1993-February 1996), Aetna
Life Insurance and Annuity Company; Director
of Compliance (May 1991-July 1993), Kemper
Life Insurance Company.
*The address of all Directors and Officers listed is 151 Farmington Avenue,
Hartford, Connecticut. These individuals may also be directors and/or officers
of other affiliates of the Company.
Directors, officers and employees of the Company are covered by a blanket
fidelity bond in the amount of $60 million issued by Aetna Casualty and Surety
Company.
Additional Information
Reports to Policyowners
The Company will maintain all records relating to the Separate Account. At least
once in each Policy Year, the Company will send You a statement containing the
following information:
(1) A statement of changes (including a statement of monthly deductions and
investment results and any interest earnings for the report period) in the
Total Account Value and Surrender Value since the prior report or since the
Issue Date, if there has been no prior report;
(2) Surrender Value, Death Benefit, and any Loan Account Value as of the Policy
Anniversary; and
(3) a projection of the Total Account Value, Loan Account Value and Surrender
Value as of the succeeding Policy Anniversary.
If any portion of Your Total Account Value is allocated to the Separate Account,
You will receive such additional periodic reports as may be required by the SEC.
Some state laws require additional reports; these requirements vary from state
to state.
Right to Instruct Voting of Fund Shares
In accordance with our view of present applicable law, We will vote the shares
of each of the Funds held in the Separate Account in accordance with
instructions received from Policyowners having a voting interest in the Funds.
Policyowners having such an interest will receive periodic reports relating to
the Fund, proxy material and a form for giving voting instructions. The number
of shares which You have a right to vote will be determined as of a record date
established by the Fund. The number of votes that You are entitled to direct
24
with respect to a Fund will be determined by dividing the portion of Your Total
Account Value attributable to that Fund by the net asset value of one share in
the Fund. Voting instructions will be solicited by written communication at
least 14 days before such meeting.
The votes will be cast at meetings of the shareholders of the Fund and will be
based on instructions received from Policyowners. However, if the Investment
Company Act of 1940 or any regulations thereunder should be amended or if the
present interpretation thereof should change, and as a result We determine that
We are permitted to vote the shares of the Fund in our own right, We may elect
to do so.
Fund shares for which no timely instructions are received and Fund shares which
are not otherwise attributable to Policyowners will be voted by Us in the same
proportion as the voting instructions which are received for all Policies
participating in each Fund through the Separate Account.
Disregard of Voting Instructions
When required by state insurance regulatory authorities, We may disregard voting
instructions if the instructions require that the shares be voted so as to cause
a change in the sub-classification or investment objectives of a Fund or to
approve or disapprove an investment advisory contract for a Fund. In addition,
We may disregard voting instructions initiated by a Policyowner in favor of
changes in the investment policy or the investment adviser of the Fund if We
reasonably disapprove of such changes.
A change would be disapproved only if the proposed change is contrary to state
law or prohibited by state regulatory authorities or if We determine that the
change would have an adverse effect on the Separate Account if the proposed
investment policy for a Fund would result in overly speculative or unsound
investments. In the event that We do disregard voting instructions, a summary of
that action and the reasons for such action will be included in the next annual
report to Policyowners.
State Regulation
With the exception of Guam, Puerto Rico and the Virgin Islands, the Policy will
be offered for sale in all jurisdictions where the Company is authorized to do
business and where the Policy has been approved by the appropriate Insurance
Department or regulatory authorities.
The Company is subject to regulation and supervision by the Insurance Department
of the State of Connecticut, which periodically examines its affairs. The
Company is also subject to the insurance laws and regulations of all
jurisdictions where it is authorized to do business. We are required to submit
annual statements of our operations, including financial statements, to the
insurance departments of the various jurisdictions in which We do business, for
the purposes of determining solvency and compliance with local insurance laws
and regulations.
Legal Matters
The Company knows of no material legal proceedings pending to which either the
Separate Account or the Company is a party or which would materially affect the
Separate Account. The legal validity of the securities described in the
prospectus has been passed on by Susan E. Bryant, Counsel.
The Registration Statement
A Registration Statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this Prospectus. This Prospectus
does not include all of the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The omitted information may be obtained at the SEC's
principal office in Washington, D.C., upon payment of the SEC's prescribed fees.
Distribution of the Policy
25
The Company will serve as underwriter of the securities offered hereunder as
defined by the federal securities laws. The Company is registered as a
broker-dealer with the SEC and is a member of the National Association of
Securities Dealers, Inc. The Company will contract with one or more registered
broker-dealers, including broker-dealers affiliated with it ("Distributors"), to
offer and sell the Policies. The Company may also offer and sell policies
directly. All persons selling the Policies will be registered representatives of
the Distributors, and will also be licensed as insurance agents to sell variable
life insurance.
The Company may also contract with independent third party broker-dealers who
will act as wholesalers by assisting the Company in finding broker-dealers to
offer and sell the Policies. These parties may also provide training, marketing
and other sales related functions for the Company and other broker-dealers and
may provide certain administrative services to the Company in connection with
the Policies. The Company may pay such parties compensation based on premium
payments for the Policies purchased through broker-dealers selected by the
wholesaler.
Salespersons and their supervising broker-dealers will be compensated for sales
of the Policy on a commission and service fee basis. The maximum sales
commission to be paid for policy distribution is 40% of the first year premium
up to the Guaranteed Death Benefit to the younger Insured's Attained Age 100
Premium. In the event of an increase in Specified Amount, the maximum sales
commission will be 40% of the succeeding year's premium up to the Guaranteed
Death Benefit to the younger Insured's Attained Age 100 Premium attributable to
the increase. The maximum sales commission on all other premiums is 3% for
Policy Years 2 through 10 and 1.5% after Policy Year 11. In addition, certain
production, persistency and managerial bonuses as well as expense allowances may
be paid.
Independent Auditors
KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut, 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.
Tax Matters
General
The following is a discussion of the federal income tax considerations relating
to the Policy. This discussion is based on the Company's understanding of
federal income tax laws as they now exist and are currently interpreted by the
Internal Revenue Service ("IRS"). These laws are complex, and tax results may
vary among individuals. A person or persons contemplating the purchase of or the
exercise of elections under the Policy described in this Prospectus should seek
competent tax advice.
Federal Tax Status of the Company
The Company is taxed as a life insurance company in accordance with the Internal
Revenue Code of 1986, as amended ("Code"). For federal income tax purposes, the
operations of each Separate Account form a part of the Company's total
operations and are not taxed separately, although operations of each Separate
Account are treated separately for accounting and financial statement purposes.
Both investment income and realized capital gains of the Separate Account (i.e.,
income, capital gains and dividends distributed to the Separate Account by the
Funds) are reinvested without tax since the Code does not impose a tax on the
Separate Account for these amounts. The Company reserves the right, however, to
26
make a deduction for such taxes should they be imposed with respect to such
items in the future.
Life Insurance Qualification
Section 7702 of the Code includes a definition of life insurance for tax
purposes. The Secretary of the Treasury has been granted authority to prescribe
regulations to carry out the purposes of this section, and proposed regulations
governing mortality charges were issued in 1991. The Company believes that the
Policy meets the statutory definition of life insurance. As such, and assuming
the diversification standards of Section 817(h) (discussed below) are satisfied,
then except in limited circumstances (a) death benefits paid under the Policy
should generally be excluded from the gross income of the beneficiary for
federal income tax purposes under Section 101(a)(1) of the Code, and (b) a
Policyowner should not generally be taxed on the cash value under a Policy,
including increments thereof, prior to actual receipt. The principal exceptions
to these rules are corporations that are subject to the alternative minimum tax,
and thus may be subject to tax on increments in the Policy's Total Account
Value, and Policyowners who acquire a Policy in a "transfer for value" and thus
can become subject to tax on the portion of the Death Benefit which exceeds the
total of their cost of acquisition and subsequent premium payments.
The Company intends to comply with any future final regulations issued under
Sections 7702 and 817(h) of the Code, and therefore reserves the right to make
such changes as it deems necessary to ensure such compliance. Any such changes
will apply uniformly to affected Policyowners and will be made only after
advance written notice.
General Rules
Upon the surrender or cancellation of any Policy, whether or not it is a
Modified Endowment Contract, the Policyowner will be taxed on the Surrender
Value only to the extent that it exceeds the gross premiums paid less prior
untaxed withdrawals. The amount of any unpaid Policy Loans will, upon surrender,
be added to the Surrender Value and will be treated for this purpose as if it
had been received.
Assuming the Policy is not a Modified Endowment Contract, the proceeds of any
Partial Surrenders are generally not taxable unless the total amount received
due to such surrenders exceeds total premiums paid less prior untaxed Partial
Surrender amounts. However, Partial Surrenders made within the first 15 Policy
Years may be taxable in certain limited instances where the Surrender Value plus
any unpaid Policy debt exceeds the total premiums paid less the untaxed portion
of any prior Partial Surrenders. This result may occur even if the total amount
of any Partial Surrenders does not exceed total premiums paid to that date.
Loans received under the Policy will ordinarily be considered indebtedness of
the Policyowner, and assuming the Policy is not considered a Modified Endowment
Contract, Policy Loans will not be treated as current distributions subject to
tax. Generally, amounts of loan interest paid by individuals will be considered
nondeductible "personal interest."
Modified Endowment Contracts
A class of contracts known as "Modified Endowment Contracts" has been created
under Section 7702A of the Code. The tax rules applicable to loan proceeds and
proceeds of a Partial Surrender of any Policy that is considered to be a
Modified Endowment Contract will differ from the general rules noted above.
A contract will be considered a Modified Endowment Contract if it fails the
"7-pay test." A Policy fails the 7-pay test if, at any time in the first seven
Policy Years, the amount paid into the Policy exceeds the amount that would have
been paid had the Policy provided for the payment of seven (7) level annual
premiums. In the event of a distribution under the Policy, the Company will
notify the Policyowner if the Policy is a Modified
27
Endowment Contract.
Each Policy is subject to retesting under the 7-pay test during the first seven
Policy Years and at any time a material change takes effect. A material change,
for these purposes, includes the exchange of a life insurance policy for another
life insurance policy or the conversion of a term life insurance policy into a
whole life or universal life insurance policy. In addition, an increase in the
future benefits provided constitutes a material change unless the increase is
attributable to (1) the payment of premiums necessary to fund the lowest Death
Benefit payable in the first seven Policy Years or (2) the crediting of interest
or other earnings with respect to such premiums. A reduction in death benefits
during the first seven Policy Years may also cause a Policy to be considered a
Modified Endowment Contract.
If the Policy is considered to be a Modified Endowment Contract, the proceeds of
any Partial Surrenders and any Policy Loans will be currently taxable to the
extent that the Policy's Total Account Value immediately before payment exceeds
gross premiums paid (increased by the amount of loans previously taxed and
reduced by untaxed amounts previously received). These rules may also apply to
Policy Loans or Partial Surrender proceeds received during the two-year period
prior to the time that a Policy becomes a Modified Endowment Contract. If the
Policy becomes a Modified Endowment Contract, it may be aggregated with other
Modified Endowment Contracts purchased by You from the Company (and its
affiliates) during any one calendar year for purposes of determining the taxable
portion of withdrawals from the Policy.
A penalty tax equal to 10% of the amount includable in income will apply to the
taxable portion of the proceeds of any Policy Surrender or Policy Loan received
by any Policyowner of a Modified Endowment Contract who is not an individual.
The penalty tax will also apply where taxable Policy Loans are received by an
individual who has not reached the age of 59 1/2. Taxable policy distributions
made to an individual who has not reached the age of 59 1/2 will also be subject
to the penalty tax unless those distributions are attributable to the individual
becoming disabled, or are part of a series of equal periodic payments made not
less frequently than annually for the life or life expectancy of such individual
(i.e., an annuity).
Diversification Standards
Section 817(h) of the code provides that separate account investments (or the
investments of a mutual fund, the shares of which are owned by separate accounts
of insurance companies) underlying the Policy must be "adequately diversified"
in accordance with Treasury regulations in order for the Policy to qualify as
life insurance. The Treasury Department has issued regulations prescribing the
diversification requirements in connection with variable contracts. The Separate
Account, through the Funds, intends to comply with these requirements.
Investor Control
In certain circumstances, owners of variable contracts may be considered the
owners for federal income tax purposes of the assets of the separate account
used to support their contracts. In those circumstances, income and gains from
separate account assets would be includable in the variable contractowner's
gross income. In several rulings published prior to the enactment of Section
817(h), the IRS stated that a variable contractowner will be considered the
owner of separate account assets if the contractowner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations under Section 817(h) concerning diversification,
that those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor (i.e., You), rather than the insurance company, to be treated
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular Funds without
being treated as owners of the underlying assets." As of the date of this
Prospectus, no such guidance has been issued.
28
The ownership rights under the Policy are similar to, but different in certain
respects from those described by the IRS in pre-Section 817(h) rulings in which
it was determined that Policyowners were not owners of separate account assets.
For example, a Policyowner has additional flexibility in allocating premium
payments and account values. While the Company does not believe that these
differences would result in a Policyowner being treated as the owner of a pro
rata portion of the assets of the Separate Account, there is no regulation or
ruling of the IRS that confirms this conclusion. In addition, the Company does
not know what standards will be set forth, if any, in the regulations or rulings
which the Treasury Department has stated it expects to issue. The Company
therefore reserves the right to modify the Policy as necessary to attempt to
prevent a Policyowner from being considered the owner of a pro rata share of the
assets of the Separate Account.
Other Tax Considerations
Business-owned life insurance may be subject to certain additional rules.
Section 264(a)(1) of the Code generally prohibits employers from deducting
premiums on policies covering officers, employees or other financially
interested parties. Additions to the Policy's Total Account Value may also be
subject to tax under the corporation alternative minimum tax provisions. In
addition, Section 264(a)(4) of the Code limits the Policyowner's deduction for
interest on loans taken against life insurance covering the lives of officers,
employees, or other financially interested in the Policyowner's trade or
business. Under current tax law, interest may generally be deducted on an
aggregate total of $50,000 of loans per covered life with respect to all life
insurance policies covering each officer, employee or others who may have a
financial interest in the Policyowner's trade or business.
Depending on the circumstances, the exchange of a policy, a change in the
Policy's Death Benefit Option, a Policy Loan, a Full or Partial Surrender, a
change in Ownership or an assignment of the Policy may have federal income tax
consequences. In addition, federal, state and local transfer, estate,
inheritance and other tax consequences of policy ownership, premium payments and
receipt of policy proceeds depend on the circumstances of each Policyowner or
beneficiary.
Miscellaneous Policy Provisions
The Policy
The Policy which You receive, the application You make when You purchase the
Policy, any applications for any changes approved by Us and any riders
constitute the whole contract. Copies of all applications are attached to and
made a part of the Policy.
Application forms are completed by the applicants and forwarded to the Company
for acceptance. Upon acceptance the Policy is prepared, executed by duly
authorized officers of the Company, and forwarded to You.
We reserve the right to make a change in the Policy; however, we will not change
any terms of the Policy beneficial to You. Only the President, Executive Vice
President or the Corporate Secretary may agree to a change in the Policy, and
then only in writing.
Payment of Benefits
All benefits are payable at Our Home Office. We may require submission of the
Policy before We grant Policy Loans, make changes or pay benefits.
Suicide and Incontestability
Suicide Exclusion
29
In most states, if one or both Insureds die by suicide, while sane or insane,
within 2 years from the Issue Date of this Policy, this Policy will end and We
will pay:
1. the difference between payments made and amounts allocated to the
Separate Account; plus
2. the Separate Account Value; plus
3. any charges made under this Policy's terms on the Separate Account
Value; less
4. the sum of:
(a) the Loan Account Value transferred from the Fixed Account Value;
plus
(b) the interest due on the Loan Account Value; plus
(c) the value of any Partial Surrenders transferred from the Fixed
Account Value; plus
(d) any interest earned on the Loan Account Value transferred to the
Separate Account Value.
In most states, if one or both Insureds die by suicide while sane or insane,
within 2 years from the Issue Date of any increase in coverage, We will pay only
the Monthly Deductions for the increase in coverage.
In most states, if one or both Insureds die by suicide while sane or insane,
more than 2 years from the Issue Date of this Policy but within 2 years from the
Issue Date of any increase in coverage, We will pay:
1. the Proceeds on death for any coverage in effect more than 2 years from
the Issue Date of this Policy; plus
2. the Monthly Deductions for the increase in coverage.
All amounts will be calculated as of the date of the suicide.
Incontestability
In most states, with respect to statements made in the initial application or
any Subsequent Application for each Insured: We will not contest this Policy
after it has been in force during the lifetime of each Insured for 2 years from
its Issue Date.
In most states, with respect to statements made in any subsequent application
for one or both Insureds: We will not contest coverage relating to subsequent
applications after coverage has been in force during the lifetime of each
Insured for 2 years from the Issue Date of such coverage or from the effective
date of any reinstatement.
If this Policy is contested, Your rights or the Beneficiary's rights may be
affected.
Protection of Proceeds
To the extent provided by law, the proceeds of the Policy are subject neither to
claims by a beneficiary's creditors nor to any legal process against any
beneficiary.
Nonparticipation
The Policy is not entitled to share in the divisible surplus of the Company. No
dividends are payable.
30
Changes in Owner and Beneficiary; Assignment
Unless otherwise stated in the Policy, You may change the Policyowner and the
beneficiary, or both, at any time while the Policy is in force. A request for
such change must be made in writing and sent to the Company at the Home Office.
After We have agreed, in writing, to the change, it will take effect as of the
date on which Your Written Request was signed.
The Policy may also be assigned. No assignment of a Policy will be binding on Us
unless made in writing and sent to Us at our Home Office. The Company will use
reasonable procedures to confirm that the assignment is authentic, including
verification of signature. If the Company fails to follow its procedures, it
would be liable for any losses to You directly resulting from the failure.
Otherwise, We are not responsible for the validity of any assignment. The rights
of the Policyowner and the interest of the beneficiary will be subject to the
rights of any assignee of record.
Misstatement as to Age and/or Sex
If the age and/or the sex of one or both Insureds is misstated, the amount of
the Death Benefit will be adjusted to reflect the coverage that would have been
purchased by the most recent pre-Maturity Date Monthly Deduction at the correct
age and/or sex.
Performance Reporting and Advertising
From time to time, the Company may report different types of historical
performance for the Variable Options of the Separate Account available under the
Policy. The Company may report the average annualized total returns of the Funds
over various time periods. Such returns will reflect an annual reduction for
investment management fees and fund expenses, but not deductions at the separate
account or policy level for mortality and expense risk charges and policy
expenses, which, if included, would reduce performance. The Company will
accompany the returns of the Funds with at least one of the following: (i)
returns of the variable options for the same periods as shown for the Funds,
which will include, in addition to deduction for investment management fees and
Fund expenses, deductions under the Separate Account for the mortality and
expense risk charge of 0.85% (0.90% guaranteed), but not other charges under the
policy; or (ii) an illustration of Total Account Value and Surrender Values as
of the performance reporting date for hypothetical Insureds of a given age, sex,
underwriting classification, premium level and policy amount. Such illustrations
will assume for each Variable Option that 100% of each Net Premium was allocated
to that option. The illustrations of the Surrender Value will assume that all
Fund charges, the mortality and expense risk charge and all other Policy charges
are deducted, including Premium Loads, Cost of Insurance charges, administrative
charges, Policy fees and Surrender Charges. The illustrations of the Total
Account Value will assume that all such charges except the Surrender Charge are
deducted.
We may also distribute sales literature that compares the percentage change in
the net asset values of the Funds or in Accumulation Unit Values for any of the
Variable Options 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 mutual funds or variable options that have investment objectives
similar to the Fund or Variable Option being compared.
Illustrations of Death Benefit, Total Account Values and Surrender Values
The following pages provide a hypothetical illustration of how the Death
Benefit, Total Account Values, and Surrender Values of a Policy can change over
time for a Policy issued to two opposite gender 45-year old Insureds if the
investment return on the assets held in each Fund were a uniform, gross, annual
rate of 0%, 6%, and 12%, respectively, and are based upon a number of
assumptions.
There are two pages of values. One page illustrates the assumption that the
Guaranteed Maximum Cost of Insurance rates and other charges at guaranteed rates
are charged in all years. The other page illustrates the assumption that the
current scale of Cost of Insurance rates and other charges at guaranteed rates
are charged in all years. The Cost of Insurance rates vary by age and sex (where
permitted by state law).
31
The values shown in these illustrations vary according to assumptions used for
charges and gross rates of investment returns. The actual investment returns
experienced by the Policy and the charges deducted may be higher or lower than
those illustrated. The charges reflected on the first page consist of the
maximum allowable charges under the Policy, including 0.90% for mortality and
expense risks in all Policy Years, 12.35% for Premium Loads, and 0.768% for
expenses of the Funds. The charges reflected on the second page consist of the
current charges imposed under the Policy, including 0.85% for mortality and
expense risks in Policy Years 1 through 20 only, 12.35% for Premium Loads, and
0.768% for Fund expenses. The charge for Fund expenses reflected in the
illustrations assumes that Total Account Values have been allocated equally
among all funds and represent a fixed average of the investment advisory fees
and other expenses charged by each of the Funds as of August 1, 1996.
After deduction of these amounts, the illustrated gross annual investment rates
of return of 0%, 6% and 12% correspond to approximate net annual rates of
- -1.618%, 4.382% and 10.382%, respectively, during the first 20 Policy Years, and
- -0.768%, 5.232% and 11.232%, respectively, thereafter on a current basis. On a
guaranteed basis, the illustrated gross annual investment rates of return of 0%,
6% and 12% correspond to approximate net annual rates of -1.668%, 4.332% and
10.332%, respectively.
The Death Benefit, Total Account Values, and Surrender Values would be different
from those shown if the gross annual investment rates of return averaged 0%, 6%,
and 12% over a period of years, but fluctuated above and below those averages
for individual Policy Years. The illustrations also assume that premiums are
paid as indicated, no Policy Loans are made, no increases or decreases in
Specified Amount are requested, no Death Benefit Option changes, and no Partial
Surrenders are made.
The hypothetical values shown in the tables do not reflect any Separate Account
charges for federal income taxes, since We are not currently making such
charges. However, such charges may be made in the future, and in that event, the
gross annual investment rate of return would have to exceed 0%, 6%, or 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit, Total Account Values, and Surrender Values illustrated.
Upon request, We will provide a comparable personalized illustration based upon
the age, sex (if necessary), and underwriting classification of the proposed
Insureds, including the Specified Amount and premium requested, the proposed
frequency of premium payments and any available riders requested. A fee of $25
may be charged for each such illustration. The hypothetical gross annual
investment return assumed in such an illustration will not exceed 12%.
32
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ON THE LIVES OF TWO INSUREDS
FEMALE AND MALE ISSUE AGE 45 SELECT NONSMOKER RISK
$2,688 ANNUAL GUARANTEED DEATH BENEFIT
TO THE YOUNGER INSURED'S AGE 100 PREMIUM
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
Premiums
Accumulated Death Benefit
at Gross Annual Investment
5% Return of
Interest --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12%
----------- ---------- -------- -------- ----------
1 2688 250000 250000 250000
2 5510 250000 250000 250000
3 8474 250000 250000 250000
4 11586 250000 250000 250000
5 14853 250000 250000 250000
6 18284 250000 250000 250000
7 21886 250000 250000 250000
8 25668 250000 250000 250000
9 29639 250000 250000 250000
10 33809 250000 250000 250000
15 58003 250000 250000 250000
20 88881 250000 250000 271699
25 128290 250000 250000 389975
30 178588 250000 250000 544401
20 (Age 65) 88881 250000 250000 271699
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------ ------------------------------
Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
----------- -------- -------- --------- -------- -------- ---------
1 1345 1455 1565 781 891 1001
2 3376 3704 4045 2777 3105 3446
3 5366 6043 6775 2060 2737 3469
4 7315 8476 9779 3369 4530 5833
5 9223 11005 13083 5519 7301 9379
6 11087 13632 16717 7625 10170 13255
7 12907 16359 20714 9687 13139 17494
8 14681 19189 25107 11703 16211 22129
9 16405 22121 29936 13669 19385 27200
10 18077 25158 35241 15583 22664 32747
15 25513 41905 70718 24228 40620 69433
20 30737 61036 127500 30737 61036 127500
25 31538 81211 216316 31538 81211 216316
30 22917 99351 350502 22917 99351 350502
20 (Age 65) 30737 61036 127500 30737 61036 127500
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk and administrative expense charges.
If premiums are paid more frequently than annually, the Death Benefit could
be, and the Account Values and Surrender Values would be, less than those
illustrated.
These investment results are illustrative only and should not be considered a
representation of past or future investment results.
Actual investment results may be more or less than those shown and will
depend on a number of factors including the Policyowner's allocations, and
the Fund's rates of return. The Total Account Value and Surrender Value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6%, and 12% over a period of years, but fluctuated above
or below those averages for individual Policy Years. No representations can
be made that these rates of return will definitely be achieved for any one
year or sustained over a period of time.
33
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ON THE LIVES OF TWO INSUREDS
FEMALE AND MALE ISSUE AGE 45 SELECT NONSMOKER RISK
$2,688 ANNUAL GUARANTEED DEATH BENEFIT
TO THE YOUNGER INSURED'S AGE 100 PREMIUM
FACE AMOUNT $250,000
DEATH BENEFIT OPTION 1
Premiums
Accumulated Death Benefit
at Gross Annual Investment
5% Return of
Interest --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12%
----------- ---------- -------- -------- ----------
1 2688 250000 250000 250000
2 5510 250000 250000 250000
3 8474 250000 250000 250000
4 11586 250000 250000 250000
5 14853 250000 250000 250000
6 18284 250000 250000 250000
7 21886 250000 250000 250000
8 25668 250000 250000 250000
9 29639 250000 250000 250000
10 33809 250000 250000 250000
15 58003 250000 250000 250000
20 88881 250000 250000 289636
25 128290 250000 250000 432608
30 178588 250000 250000 627690
20 (Age 65) 88881 250000 250000 289636
Total Account Value Cash Surrender Value
Annual Investment Return of Annual Investment Return of
------------------------------ ------------------------------
Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
----------- -------- -------- --------- -------- -------- ---------
1 1465 1579 1693 901 1015 1129
2 3615 3958 4315 3016 3359 3716
3 5723 6434 7202 2417 3128 3896
4 7789 9011 10382 3843 5065 6436
5 9812 11691 13881 6108 7987 10177
6 11792 14478 17733 8330 11016 14271
7 13726 17374 21971 10506 14154 18751
8 15613 20380 26633 12635 17402 23655
9 17450 23499 31761 14714 20763 29025
10 19234 26731 37400 16740 24237 34906
15 27219 44629 75205 25934 43344 73920
20 32982 65270 135917 32982 65270 135917
25 36007 91301 239964 36007 91301 239964
30 29695 118957 404126 29695 118957 404126
20 (Age 65) 32982 65270 135917 32982 65270 135917
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk and administrative expense charges.
If premiums are paid more frequently than annually, the Death Benefit could
be, and the Account Values and Surrender Values would be, less than those
illustrated.
These investment results are illustrative only and should not be considered a
representation of past or future investment results.
Actual investment results may be more or less than those shown and will
depend on a number of factors including the Policyowner's allocations, and
the Fund's rates of return. The Total Account Value and Surrender Value for a
Policy would be different from those shown if the actual investment rates of
return averaged 0%, 6%, and 12% over a period of years, but fluctuated above
or below those averages for individual Policy Years. No representations can
be made that these rates of return will definitely be achieved for any one
year or sustained over a period of time.
34
FINANCIAL STATEMENTS
VARIABLE LIFE ACCOUNT B
Index
Statement of Assets and Liabilities--March 31, 1996
(Unaudited) S-2
Statement of Operations--Three Month Period Ended
March 31, 1996 (Unaudited) S-5
Statements of Changes in Net Assets--Three Months Ended
March 31, 1996 (Unaudited) and Year Ended December 31,
1995 S-6
Notes to Financial Statements (Unaudited) S-7
Independent Auditors' Report S-9
Statement of Assets and Liabilities--December 31, 1995 S-10
Statement of Operations--Year Ended December 31, 1995 S-13
Statements of Changes in Net Assets--Years Ended
December 31, 1995 and 1994 S-14
Notes to Financial Statements S-15
S-1
Variable Life Account B
Statement of Assets and Liabilities--March 31, 1996 (Unaudited)
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 2,467,158 shares at $30.77 per share
(cost $71,754,094) $ 75,925,713
Aetna Income Shares; 924,931 shares at $12.80 per share
(cost $11,848,313) 11,842,332
Aetna Variable Encore Fund; 407,333 shares at $13.47 per
share (cost $5,308,191) 5,487,776
Aetna Investment Advisers Fund, Inc.; 817,516 shares at
$14.87 per share (cost $10,896,769) 12,155,981
Alger American Fund--Alger American Small Capitalization
Portfolio; 172,781 shares at $40.87 per share (cost
$6,331,268) 7,061,577
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 86,791 shares at $19.20 per
share (cost $1,651,470) 1,666,395
Growth Portfolio; 50,994 shares at $28.61 per share (cost
$1,514,593) 1,458,950
Overseas Portfolio; 34,096 shares at $17.26 per share
(cost $559,505) 588,494
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 130,336 shares at $15.21 per
share (cost $1,969,788) 1,982,408
Contrafund Portfolio; 113,588 shares at $14.26 per share
(cost $1,562,790) 1,619,768
Janus Aspen Series:
Aggressive Growth Portfolio; 230,297 shares at $18.70 per
share (cost $3,607,738) 4,306,556
Balanced Portfolio; 159,805 shares at $13.55 per share
(cost $2,084,064) 2,165,357
Growth Portfolio; 219,229 shares at $14.58 per share
(cost $2,795,446) 3,196,358
Short-Term Bond Portfolio; 35,353 shares at $10.00 per
share (cost $349,724) 353,526
Worldwide Growth Portfolio; 145,028 shares at $16.62 per
share (cost $2,048,610) 2,410,364
Scudder Variable Life Investment Fund--International
Portfolio; 638,445 shares at $12.09 per share (cost
$7,135,942) 7,718,801
TCI Portfolios, Inc.--TCI Growth; 518,429 shares at $12.04
per share (cost $5,285,516) 6,241,887
------------
NET ASSETS $146,182,243
============
Net assets represented by:
Accumulation
Unit
Policyholders' account values: Units Value
----------- -----------
Aetna Variable Fund:
AetnaVest 1,595,062.3 $29.954 $47,777,753
AetnaVest II 774,062.0 16.726 12,947,337
AetnaVest Plus 998,417.0 14.053 14,030,849
Corporate Specialty Market 92,142.8 12.695 1,169,774
Aetna Income Shares:
AetnaVest 293,192.0 20.928 6,136,014
AetnaVest II 87,325.2 14.071 1,228,739
AetnaVest Plus 115,930.9 11.267 1,306,250
Corporate Specialty Market 291,606.5 10.875 3,171,329
S-2
Aetna Variable Encore Fund:
AetnaVest 200,179.5 $16.060 $3,214,875
AetnaVest II 10,560.9 11.739 123,976
AetnaVest Plus 88,112.2 11.033 972,120
Corporate Specialty Market 111,493.2 10.555 1,176,805
Aetna Investment Advisers Fund,
Inc.:
AetnaVest 114,756.9 15.740 1,806,290
AetnaVest II 229,085.2 15.915 3,646,002
AetnaVest Plus 384,450.3 13.347 5,131,406
Corporate Specialty Market 135,310.5 11.620 1,572,283
Alger American Fund--Alger
American Small Capitalization
Portfolio:
AetnaVest 67,956.4 16.098 1,093,995
AetnaVest II 45,569.5 16.100 733,667
AetnaVest Plus 182,354.1 16.091 2,934,300
Corporate Specialty Market 173,686.5 13.240 2,299,615
Fidelity Investments Variable
Insurance Products Fund:
Equity-Income Portfolio:
Corporate Specialty Market 144,783.0 11.510 1,666,395
Growth Portfolio:
Corporate Specialty Market 140,028.4 10.419 1,458,950
Overseas Portfolio:
Corporate Specialty Market 56,713.0 10.377 588,494
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market 182,159.0 10.883 1,982,408
Contrafund Portfolio:
Corporate Specialty Market 150,594.8 10.756 1,619,768
Janus Aspen Series:
Aggressive Growth Portfolio:
AetnaVest 44,341.1 16.507 731,925
AetnaVest II 32,308.6 16.507 533,308
AetnaVest Plus 133,290.2 16.507 2,200,190
Corporate Specialty Market 67,915.0 12.385 841,133
Balanced Portfolio:
AetnaVest 6,564.3 12.595 82,678
AetnaVest II 2,834.5 12.693 35,980
AetnaVest Plus 51,133.8 12.589 643,741
Corporate Specialty Market 127,076.1 11.040 1,402,958
S-3
Growth Portfolio:
AetnaVest 26,102.4 $13.737 $ 358,569
AetnaVest II 38,815.5 13.725 532,724
AetnaVest Plus 74,124.0 11.279 836,024
Corporate Specialty Market 107,189.1 13.705 1,469,041
Short-Term Bond Portfolio:
AetnaVest 1,296.7 10.907 14,143
AetnaVest II 20,289.0 10.895 221,049
AetnaVest Plus 10,739.7 10.866 116,692
Corporate Specialty Market 162.4 10.114 1,642
Worldwide Growth Portfolio:
AetnaVest 35,204.8 13.871 488,314
AetnaVest II 26,623.3 13.874 369,385
AetnaVest Plus 91,702.5 13.857 1,270,741
Corporate Specialty Market 24,710.9 11.409 281,924
Scudder Variable Life
Investment Fund--
International Portfolio:
AetnaVest 136,306.8 13.360 1,821,019
AetnaVest II 75,216.9 13.277 998,681
AetnaVest Plus 318,410.2 13.203 4,204,079
Corporate Specialty Market 62,821.5 11.063 695,022
TCI Portfolios, Inc.--TCI
Growth:
AetnaVest 94,052.6 13.193 1,240,859
AetnaVest II 34,581.5 13.252 458,286
AetnaVest Plus 302,971.3 13.072 3,960,295
Corporate Specialty Market 48,720.2 11.955 582,447
------------
$146,182,243
============
See Notes to Financial Statements.
S-4
Variable Life Account B
Statement of Operations--Three Month Period Ended March 31, 1996 (Unaudited)
INVESTMENT INCOME:
Dividends: (Notes 1 and 3)
Fidelity Investments Variable Insurance
Products Fund--
Equity-Income Portfolio $ 19,619
Fidelity Investments Variable Insurance
Products Fund--
Growth Portfolio 85,627
Fidelity Investments Variable Insurance
Products Fund--
Overseas Portfolio 14,172
Fidelity Investments Variable Insurance
Products Fund II--
Asset Manager Portfolio 62,788
Fidelity Investments Variable Insurance
Products Fund II--
Contrafund Portfolio 10,199
Scudder Variable Life Investment
Fund--International Portfolio 166,996
----------
Total investment income 359,401
Valuation period deductions (Note 2) (216,034)
----------
Net investment income 143,367
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on sales of investments:
(Notes 1 and 4)
Proceeds from sales $3,428,998
Cost of investments sold 3,005,963
----------
Net realized gain 423,035
Net unrealized gain on investments:
Beginning of period 4,391,574
End of period 9,478,418
----------
Net unrealized gain 5,086,844
----------
Net realized and unrealized gain on
investments 5,509,879
----------
Net increase in net assets resulting from
operations $5,653,246
==========
See Notes to Financial Statements.
S-5
Statements of Changes in Net Assets--(Unaudited)
Three Months
Ended Year Ended
March 31, 1996 December 31,
(Unaudited) 1995
----------------------------------- --------------- ----------------
FROM OPERATIONS:
Net investment income $ 143,367 $ 11,815,436
Net realized and unrealized gain on
investments 5,509,879 11,633,204
--------------- ----------------
Net increase in net assets
resulting from operations 5,653,246 23,448,640
--------------- ----------------
FROM UNIT TRANSACTIONS:
Variable life premium payments 21,128,211 44,310,537
Sales charges deducted by the
Company (632,971) (1,381,985)
Premiums allocated to the fixed
account (1,644,459) (3,260,098)
--------------- ----------------
Net premiums allocated to the
variable account 18,850,781 39,668,454
Transfers from the Company for
monthly deductions (3,306,575) (11,297,188)
Redemptions by policyholders (1,152,122) (3,238,332)
Transfers on account for policy
loans (422,131) (2,076,373)
Other 43,265 41,863
--------------- ----------------
Net increase in net assets from
unit transactions 14,013,218 23,098,424
--------------- ----------------
Change in net assets 19,666,464 46,547,064
NET ASSETS:
Beginning of period 126,515,779 79,968,715
--------------- ----------------
End of period $146,182,243 $126,515,779
=============== ================
See Notes to Financial Statements.
S-6
Notes to Financial Statements--March 31, 1996 (Unaudited)
1. Summary of Significant Accounting Policies
Variable Life Account B ("Account") is registered under the Investment
Company Act of 1940 as a unit investment trust. The Account is sold
exclusively for use with life insurance product contracts as defined
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 March 31, 1996
Aetna Variable Fund
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Alger American Fund--Alger American Small Capitalization Portfolio
Fidelity Investments Variable Insurance Products Fund--
(bullet) Equity-Income Portfolio
(bullet) Growth Portfolio
(bullet) Overseas Portfolio
Fidelity Investments Variable Insurance Products Fund II--
(bullet) Asset Manager Portfolio
(bullet) Contrafund Portfolio
Janus Aspen Series--
(bullet) Aggressive Growth Portfolio
(bullet) Balanced Portfolio
(bullet) Growth Portfolio
(bullet) Short-Term Bond Portfolio
(bullet) Worldwide 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 the Account 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.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made
in accordance with the terms of the policies and are paid to the Company.
S-7
Notes to Financial Statements--March 31, 1996 (Unaudited) (continued)
3. Dividend Distributions
On an annual basis the Funds distribute substantially all of their
taxable income and realized capital gains to their shareholders.
Distributions paid 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 on investments 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 three month period ended March 31, 1996
aggregated $17,583,396 and $3,428,998, 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-8
Independent Auditors' Report
The Board of Directors of Aetna Life Insurance and Annuity Company and
Policyholders of Variable Life Account B:
We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Life Account B (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 Life
Account B 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-9
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1995
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 2,442,148 shares at $29.06 per share
(cost $70,892,640) $ 70,958,031
Aetna Income Shares; 773,062 shares at $13.00 per share
(cost $9,861,889) 10,051,167
Aetna Variable Encore Fund; 415,129 shares at $13.30 per
share (cost $5,381,253) 5,520,188
Aetna Investment Advisers Fund, Inc.; 639,193 shares at
$14.50 per share (cost $8,238,116) 9,269,700
Alger American Fund--Alger American Small Capitalization
Portfolio; 133,920 shares at $39.41 per share (cost
$4,681,829) 5,277,779
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 21,701 shares at $19.27 per
share (cost $389,974) 418,176
Growth Portfolio; 41,047 shares at $29.20 per share
(cost $1,234,770) 1,198,559
Overseas Portfolio; 34,006 shares at $17.05 per share
(cost $557,879) 579,802
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 60,778 shares at $15.79 per
share (cost $912,255) 959,690
Contrafund Portfolio; 79,021 shares at $13.78 per share
(cost $1,078,657) 1,088,910
Janus Aspen Series:
Aggressive Growth Portfolio; 205,922 shares at $17.08
per share (cost $3,140,545) 3,517,151
Balanced Portfolio; 46,943 shares at $13.03 per share
(cost $551,081) 611,670
Growth Portfolio; 187,250 shares at $13.45 per share
(cost $2,321,668) 2,518,516
Short-Term Bond Portfolio; 34,655 shares at $10.03 per
share (cost $341,510) 347,588
Worldwide Growth Portfolio; 93,270 shares at $15.31 per
share (cost $1,200,440) 1,427,963
Scudder Variable Life Investment Fund--International
Portfolio; 566,120 shares at $11.82 per share (cost
$6,260,081) 6,691,544
TCI Portfolios, Inc.--TCI Growth; 504,092 shares at
$12.06 per share (cost $5,079,618) 6,079,345
------------
NET ASSETS $126,515,779
============
Net assets represented by:
Accumulation
Unit
Policyholders' account values: Units Value
----------- -----------
Aetna Variable Fund:
AetnaVest 1,615,316.3 $28.351 $45,795,395
AetnaVest II 767,277.4 15.831 12,147,120
AetnaVest Plus 900,446.3 13.301 11,976,945
Corporate Specialty Market 86,433.0 12.016 1,038,571
Aetna Income Shares:
AetnaVest 291,207.2 21.305 6,204,271
AetnaVest II 82,916.4 14.324 1,187,723
AetnaVest Plus 108,102.3 11.470 1,239,985
Corporate Specialty Market 128,186.3 11.071 1,419,188
S-10
Aetna Variable Encore Fund:
AetnaVest 216,354.9 $15.891 $3,438,075
AetnaVest II 17,280.3 11.616 200,721
AetnaVest Plus 69,086.7 10.917 754,192
Corporate Specialty Market 107,929.6 10.444 1,127,200
Aetna Investment Advisers
Fund, Inc.:
AetnaVest 114,498.0 15.390 1,762,081
AetnaVest II 223,977.3 15.561 3,485,324
AetnaVest Plus 278,606.2 13.050 3,635,852
Corporate Specialty Market 34,014.8 11.361 386,443
Alger American Fund--Alger
American Small
Capitalization Portfolio:
AetnaVest 66,765.4 15.562 1,039,005
AetnaVest II 39,259.9 15.563 611,019
AetnaVest Plus 135,063.0 15.555 2,100,905
Corporate Specialty Market 119,296.0 12.799 1,526,850
Fidelity Investments Variable
Insurance Products Funds:
Equity-Income Portfolio:
Corporate Specialty Market 37,815.1 11.058 418,176
Growth Portfolio:
Corporate Specialty Market 120,931.6 9.911 1,198,559
Overseas Portfolio:
Corporate Specialty Market 57,811.4 10.029 579,802
Fidelity Investments Variable
Insurance Products Funds II:
Asset Manager Portfolio:
Corporate Specialty Market 90,569.7 10.596 959,690
Contrafund Portfolio:
Corporate Specialty Market 105,491.7 10.322 1,088,910
Janus Aspen Series:
Aggressive Growth Portfolio:
AetnaVest 44,764.1 15.114 676,573
AetnaVest II 30,158.9 15.114 455,826
AetnaVest Plus 114,021.3 15.114 1,723,348
Corporate Specialty Market 58,323.5 11.340 661,404
Balanced Portfolio:
AetnaVest 6,403.1 12.142 77,745
AetnaVest II 4,014.0 12.237 49,117
AetnaVest Plus 38,817.0 12.136 471,097
Corporate Specialty Market 1,288.2 10.643 13,711
S-11
Growth Portfolio:
AetnaVest 21,515.4 $12.704 $ 273,328
AetnaVest II 37,270.8 12.692 473,053
AetnaVest Plus 79,675.5 12.674 1,009,837
Corporate Specialty Market 73,083.9 10.430 762,298
Short-Term Bond Portfolio:
AetnaVest 887.8 10.967 9,736
AetnaVest II 23,124.1 10.955 253,322
AetnaVest Plus 7,737.1 10.925 84,530
Worldwide Growth Portfolio:
AetnaVest 27,375.5 12.809 350,657
AetnaVest II 23,865.7 12.813 305,784
AetnaVest Plus 60,290.6 12.797 771,522
Scudder Variable Life
Investment Fund--
International Portfolio:
AetnaVest 135,108.9 12.798 1,729,105
AetnaVest II 73,569.7 12.719 935,731
AetnaVest Plus 280,624.9 12.648 3,549,365
Corporate Specialty Market 45,040.2 10.598 477,343
TCI Portfolios, Inc.--
TCI Growth:
AetnaVest 99,512.9 13.248 1,318,352
AetnaVest II 32,444.9 13.307 431,757
AetnaVest Plus 284,645.5 13.126 3,736,206
Corporate Specialty Market 49,400.2 12.005 593,030
------------
$126,515,779
============
See Notes to Financial Statements.
S-12
Variable Life Account B
Statement of Operations--Year Ended December 31, 1995
INVESTMENT INCOME:
Dividend distributions: (Notes 1 and 3)
Aetna Variable Fund $11,632,771
Aetna Income Shares 602,737
Aetna Variable Encore Fund 3,963
Aetna Investment Advisers Fund, Inc 582,871
Fidelity Investments Variable Insurance
Products Fund--Equity-Income Portfolio 3,272
Fidelity Investments Variable Insurance
Products Fund II--Contrafund Portfolio 14,059
Janus Aspen Series--Aggressive Growth
Portfolio 32,796
Janus Aspen Series--Balanced Portfolio 7,676
Janus Aspen Series--Growth Portfolio 49,596
Janus Aspen Series--Short-Term Bond
Portfolio 17,025
Janus Aspen Series--Worldwide Growth
Portfolio 5,411
Scudder Variable Life Investment
Fund--International Portfolio 9,378
TCI Portfolios, Inc.--TCI Growth 3,682
------------
Total investment income 12,965,237
Valuation period deductions (Note 2) (1,149,801)
------------
Net investment income 11,815,436
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments:
(Notes 1 and 4)
Proceeds from sales $28,828,178
Cost of investments sold 25,993,679
-----------
Net realized gain 2,834,499
Net unrealized gain (loss) on investments:
Beginning of year (4,407,131)
End of year 4,391,574
-----------
Net unrealized gain 8,798,705
------------
Net realized and unrealized gain on
investments 11,633,204
------------
Net increase in net assets resulting from
operations $23,448,640
============
See Notes to Financial Statements.
S-13
Statements of Changes in Net Assets
Year Ended December 31,
1995 1994
------------ ------------
FROM OPERATIONS:
Net investment income $ 11,815,436 $ 8,175,684
Net realized and unrealized gain (loss) on
investments 11,633,204 (9,665,883)
------------ ------------
Net increase (decrease) in net assets
resulting from operations 23,448,640 (1,490,199)
------------ ------------
FROM UNIT TRANSACTIONS:
Variable life premium payments 44,310,537 28,389,827
Sales charges deducted by the Company (1,381,985) (913,534)
Premiums allocated to the fixed account (3,260,098) (2,052,433)
------------ ------------
Net premiums allocated to the variable
account 39,668,454 25,423,860
Transfers from the Company for monthly
deductions (11,297,188) (8,879,679)
Redemptions by policyholders (3,238,332) (3,575,365)
Transfers on account of policy loans (2,076,373) (785,448)
Other 41,863 (318,777)
------------ ------------
Net increase in net assets from unit
transactions 23,098,424 11,864,591
------------ ------------
Change in net assets 46,547,064 10,374,392
NET ASSETS:
Beginning of year 79,968,715 69,594,323
------------ ------------
End of year $126,515,779 $79,968,715
============ ============
See Notes to Financial Statements.
S-14
Notes to Financial Statements--December 31, 1995
1. Summary of Significant Accounting Policies
Variable Life Account B ("Account") is registered under the Investment
Company Act of 1940 as a unit investment trust. The Account is sold
exclusively for use with life insurance product contracts as defined
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.
Alger American Fund--Alger American Small Capitalization Portfolio
Fidelity Investments Variable Insurance Products
Fund--
(bullet) Equity-Income Portfolio
(bullet) Growth Portfolio
(bullet) Overseas Portfolio
Fidelity Investments Variable Insurance Products Fund II--
(bullet) Asset Manager Portfolio
(bullet) Contrafund Portfolio
Janus Aspen Series--
(bullet) Aggressive Growth Portfolio
(bullet) Balanced Portfolio
(bullet) Growth Portfolio
(bullet) Short-Term Bond Portfolio
(bullet) Worldwide 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 the Account 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.
2. Valuation Period Deductions
Deductions by the Account for mortality and expense risk charges are made
in accordance with the terms of the policies and are paid to the Company.
S-15
Notes to Financial Statements--December 31, 1995 (continued)
3. Dividend Distributions
On an annual basis the Funds distribute substantially all of their
taxable income and realized capital gains to their shareholders.
Distributions paid 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 on investments 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
$71,231,087 and $28,828,178, 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-16
Variable Life Account B
Condensed Financial Information
Change in Value of Accumulation Unit--January 1, 1995 to December 31, 1995
Increase
(Decrease)
Value at Value at in Value of
Beginning End Accumulation
of Period of Period Unit
--------- --------- ------------
Aetna Variable Fund:
AetnaVest $21.654 $28.351 30.93%
AetnaVest II 12.092 15.831 30.93%
AetnaVest Plus 10.159 13.301 30.93%
Corporate Speciality Market 10.000 12.016 20.16% (2)
Aetna Income Shares:
AetnaVest $18.200 $21.305 17.06%
AetnaVest II 12.236 14.324 17.06%
AetnaVest Plus 9.798 11.470 17.06%
Corporate Speciality Market 10.000 11.071 10.71% (2)
Aetna Variable Encore Fund:
AetnaVest $15.135 $15.891 4.99%
AetnaVest II 11.063 11.616 4.99%
AetnaVest Plus 10.398 10.917 4.99%
Corporate Speciality Market 10.000 10.444 4.44% (1)
Aetna Investment Advisers Fund, Inc.:
AetnaVest $12.202 $15.390 26.13%
AetnaVest II 12.338 15.561 26.13%
AetnaVest Plus 10.347 13.050 26.13%
Corporate Speciality Market 10.000 11.361 13.61% (3)
Alger American Fund--Alger American
Small Capitalization Portfolio:
AetnaVest $10.890 $15.562 42.90%
AetnaVest II 10.893 15.563 42.88%
AetnaVest Plus 10.886 15.555 42.89%
Corporate Speciality Market 10.000 12.799 27.99% (2)
Fidelity Investments Variable
Insurance Products Funds:
Equity-Income Portfolio:
Corporate Speciality Market $10.000 $11.058 10.58% (4)
Growth Portfolio:
Corporate Speciality Market $10.000 $ 9.911 (0.89%) (4)
Overseas Portfolio:
Corporate Speciality Market $10.000 $10.029 0.29% (4)
Fidelity Investments Variable
Insurance Products Funds II:
Asset Manager Portfolio:
Corporate Speciality Market $10.000 $10.596 5.96% (4)
Contrafund Portfolio:
Corporate Speciality Market $10.000 $10.322 3.22% (4)
S-17
Janus Aspen Series:
Aggressive Growth Portfolio:
AetnaVest $11.976 $15.114 26.21%
AetnaVest II 11.976 15.114 26.21%
AetnaVest Plus 11.975 15.114 26.22%
Corporate Speciality Market 10.000 11.340 13.40% (5)
Balanced Portfolio:
AetnaVest $ 9.837 $12.142 23.43%
AetnaVest II 9.894 12.237 23.67%
AetnaVest Plus 9.823 12.136 23.54%
Corporate Speciality Market 10.000 10.643 6.43% (6)
Growth Portfolio:
AetnaVest $ 9.848 $12.704 28.99%
AetnaVest II 9.848 12.692 28.88%
AetnaVest Plus 9.834 12.674 28.88%
Corporate Speciality Market 10.000 10.430 4.30% (6)
Short-Term Bond Portfolio:
AetnaVest $10.113 $10.967 8.45%
AetnaVest II 10.102 10.955 8.44%
AetnaVest Plus 10.074 10.925 8.45%
Worldwide Growth Portfolio:
AetnaVest $10.165 $12.809 26.01%
AetnaVest II 10.168 12.813 26.01%
AetnaVest Plus 10.155 12.797 26.01%
Scudder Variable Life Investment
Fund--International Portfolio:
AetnaVest $11.633 $12.798 10.01%
AetnaVest II 11.562 12.719 10.01%
AetnaVest Plus 11.497 12.648 10.01%
Corporate Speciality Market 10.000 10.598 5.98% (2)
TCI Portfolios, Inc.--TCI Growth:
AetnaVest $10.216 $13.248 29.68%
AetnaVest II 10.253 13.307 29.80%
AetnaVest Plus 10.113 13.126 29.80%
Corporate Speciality Market 10.000 12.005 20.05% (2)
1--Available for investment less than 1 year, contract commenced operations
February 1995.
2--Available for investment less than 1 year, contract commenced operations
May 1995.
3--Available for investment less than 1 year, contract commenced operations
June 1995.
4--Available for investment less than 1 year, contract commenced operations
July 1995.
5--Available for investment less than 1 year, contract commenced operations
August 1995.
6--Available for investment less than 1 year, contract commenced operations
October 1995.
S-18
CONSOLIDATED FINANCIAL STATEMENTS
Aetna Life Insurance and Annuity Company and Subsidiaries
Index
Page
Consolidated Financial Statements (Unaudited):
Consolidated Statements of Income for the three months ended
March 31, 1996 and 1995 (Unaudited) F-2
Consolidated Balance Sheets as of March 31, 1996 (Unaudited) and
December 31, 1995 F-3
Consolidated Statements of Changes in Shareholder's Equity for the
three months ended
March 31, 1996 and 1995 (Unaudited) F-4
Consolidated Statements of Cash Flows for the three months eneded
March 31, 1996 and 1995 (Unaudited) F-5
Condensed Notes to Consolidated Financial Statements (Unaudited) F-7
Independent Auditors' Report F-8
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31,
1995, 1994, and 1993 F-9
Consolidated Balance Sheets as of December 31, 1995 and 1994 F-10
Consolidated Statements of Changes in Shareholder's Equity for the
Years Ended December 31, 1995, 1994 and 1993 F-11
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 F-12
Notes to Consolidated Financial Statements F-14
F-1
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Income
(millions)
(Unaudited)
3 Months Ended
March 31,
--------------
1996 1995
----- ------
Revenue:
Premiums $ 14.1 $ 32.2
Charges assessed against policyholders 92.0 74.9
Net investment income 257.6 235.8
Net realized capital gains 14.9 5.1
Other income 12.2 12.7
----- ------
Total revenue 390.8 360.7
----- ------
Benefits and expenses:
Current and future benefits 217.0 215.1
Operating expenses 87.8 74.0
Amortization of deferred policy acquisition
costs 17.5 12.5
----- ------
Total benefits and expenses 322.3 301.6
----- ------
Income before federal income taxes 68.5 59.1
Federal income taxes 20.0 18.8
----- ------
Net income $ 48.5 $ 40.3
===== ======
F-2
Consolidated Balance Sheets
(millions, except share data)
(Unaudited)
March 31, December 31,
Assets 1996 1995
-------------------------------------------------- --------- ------------
Investments:
Debt securities, available for sale:
(amortized cost: $12,030.4 and $11,923.7) $12,332.2 $12,720.8
Equity securities, available for sale:
Non-redeemable preferred stock
(cost: $54.3 and $51.3) 59.1 57.6
Investment in affiliated mutual funds
(cost: $160.3 and $173.4) 182.0 191.8
Common stock (cost: $6.9) -- 8.2
Short-term investments 24.6 15.1
Mortgage loans 21.1 21.2
Policy loans 344.6 338.6
--------- ------------
Total investments 12,963.6 13,353.3
Cash and cash equivalents 554.6 568.8
Accrued investment income 186.4 175.5
Premiums due and other receivables 27.7 37.3
Deferred policy acquisition costs 1,375.6 1,341.3
Reinsurance loan to affiliate 646.0 655.5
Other assets 21.4 26.2
Separate Accounts assets 12,072.9 10,987.0
--------- ------------
Total assets $27,848.2 $27,144.9
========= ============
Liabilities and Shareholder's Equity
--------------------------------------------------
Liabilities:
Future policy benefits $ 3,545.1 $ 3,594.6
Unpaid claims and claim expenses 25.9 27.2
Policyholders' funds left with the Company 10,298.9 10,500.1
--------- ------------
Total insurance reserve liabilities 13,869.9 14,121.9
Other liabilities 188.6 259.2
Federal income taxes:
Current 35.7 24.2
Deferred 125.5 169.6
Separate Accounts liabilities 12,072.9 10,987.0
--------- ------------
Total liabilities 26,292.6 25,561.9
--------- ------------
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 56.6 132.5
Retained earnings 1,088.6 1,040.1
--------- ------------
Total shareholder's equity 1,555.6 1,583.0
--------- ------------
Total liabilities and shareholder's equity $27,848.2 $27,144.9
========= ============
See Condensed notes to Consolidated Financial Statements.
F-3
Consolidated Statements of Changes in Shareholder's Equity
(millions)
(Unaudited)
3 Months Ended March 31,
------------------------
1996 1995
---------- -----------
Shareholder's equity, beginning of period $1,583.0 $1,088.5
Net change in unrealized capital gains and
losses (75.9) 156.7
Net income 48.5 40.3
---------- -----------
Shareholder's equity, end of period $1,555.6 $1,285.5
========== ===========
F-4
Consolidated Statements of Cash Flows
(millions)
(Unaudited)
3 Months Ended March 31,
------------------------
1996 1995
---------- -----------
Cash Flows from Operating Activities:
Net income $ 48.5 $ 40.3
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Increase in accrued investment income (10.9) (6.3)
Decrease in premiums due and other receivables 0.5 10.9
Increase in policy loans (6.0) (26.0)
Increase in deferred policy acquisition costs (34.3) (31.7)
Decrease in reinsurance loan to affiliate 9.5 14.6
Net increase in universal life account balances 53.0 44.5
(Decrease) increase in other insurance reserve
liabilities (52.4) 20.5
Net (decrease) increase in other liabilities and
other assets (81.8) 113.3
Increase in federal income taxes 8.3 16.3
Net accretion of discount on debt securities (16.9) (15.5)
Net realized capital gains (14.9) (5.1)
Other, net -- 1.5
---------- -----------
Net cash (used for) provided by operating
activities (97.4) 177.3
---------- -----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 1,634.8 965.3
Equity securities 48.7 66.7
Investment maturities and collections of:
Debt securities available for sale 255.4 104.3
Short-term investments 10.0 30.0
Cost of investment purchases in:
Debt securities available for sale (1,918.0) (1,427.6)
Equity securities (26.1) (98.1)
Short-term investments (19.5) (0.5)
---------- -----------
Net cash used for investing activities (14.7) (359.9)
---------- -----------
F-5
Consolidated Statements of Cash Flows (continued)
(millions)
(Unaudited)
3 Months Ended March 31,
------------------------
1996 1995
---------- -----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment
contracts 429.9 497.7
Withdrawals of investment contracts (332.0) (278.3)
---------- -----------
Net cash provided by financing activities 97.9 219.4
---------- -----------
Net (decrease) increase in cash and cash
equivalents (14.2) 36.8
Cash and cash equivalents, beginning of period 568.8 623.3
---------- -----------
Cash and cash equivalents, end of period $ 554.6 $ 660.1
========== ===========
Supplemental cash flow information:
Income taxes paid, net $ 11.7 $ 2.5
========== ===========
F-6
Condensed Notes to Consolidated Financial Statements
(Unaudited)
1. 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. (collectively, the
"Company"). 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").
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1995 financial information to conform
to 1996 presentation. These interim statements necessarily rely heavily
on estimates, including assumptions as to annualized tax rates. In the
opinion of management, all adjustments necessary for a fair statement of
results for the interim periods have been made. All such adjustments are
of a normal, recurring nature.
F-7
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-8
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
======= ======= ========
F-9
Consolidated Balance Sheets
(millions)
December 31,
----------------------
Assets 1995 1994
-------------------------------------------------- --------- ----------
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
========= ==========
F-10
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
======== ======== ========
F-11
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)
--------- --------- ----------
F-12
Consolidated Statements of Cash Flows (continued)
(millions)
Years Ended December 31,
---------------------------------
1995 1994 1993
--------- -------- ----------
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
========= ======== ==========
F-13
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.
F-14
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from reported results
using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 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.
F-15
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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.
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
F-16
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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 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.
F-17
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
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.
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-18
Notes to Consolidated Financial Statements (Continued)
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.
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.
F-19
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
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.
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 Fair
Debt Securities Cost 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
F-20
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
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.
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
F-21
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
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 Fair
Cost Gains Losses 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.
Net realized capital gains (losses) on investments, net of amounts
allocated to experience-rated contracts, were as follows:
F-22
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations (Continued)
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.
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
F-23
Notes to Consolidated Financial Statements (Continued)
3. Capital Gains and Losses on Investment Operations (Continued)
1995 1994 1993
------ -------- ------
(millions)
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) --
------ -------- ------
-- (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.
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.
F-24
Notes to Consolidated Financial Statements (Continued)
5. Dividend Restrictions and Shareholder's Equity (Continued)
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
====== ====== =======
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:
F-25
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
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
------ -------
Deferred tax assets: (millions)
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
====== =======
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.
F-26
Notes to Consolidated Financial Statements (Continued)
6. Federal Income Taxes (Continued)
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.
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.
F-27
Notes to Consolidated Financial Statements (Continued)
7. Benefit Plans (Continued)
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
F-28
Notes to Consolidated Financial Statements (Continued)
8. Related Party Transactions (Continued)
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.
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-29
Notes to Consolidated Financial Statements (Continued)
9. Reinsurance (Continued)
The following table includes premium amounts ceded/assumed to/from
affiliated companies as discussed in Note 8 above.
Assumed
Ceded to from
Direct Other 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
======= ========= ========= =======
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:
F-30
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
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.
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.
F-31
Notes to Consolidated Financial Statements (Continued)
10. Financial Instruments (Continued)
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 the
value of the securities underlying the commitments. At December 31,
1995, the Company had commitments to purchase investments of $31.4
F-32
Notes to Consolidated Financial Statements (Continued)
11. Commitments and Contingent Liabilities (Continued)
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
---------------------------------- -------- -------- ---------
(Millions) 1995 1994 1993
---------------------------------- -------- -------- ---------
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-33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
UNDERTAKING PURSUANT TO RULE 484
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
REPRESENTATIONS, DESCRIPTION AND UNDERTAKINGS
PURSUANT TO PARAGRAPH (B)(13)(iii)(F) OF RULE 6e-3(T)
UNDER THE INVESTMENT COMPANY ACT OF 1940
REGISTRANT MAKES THE FOLLOWING REPRESENTATIONS:
(1) Section 6e-3T(b)(13)(iii)(F) is being relied upon.
(2) The level of the mortality and expense risk charge is within the range
of industry practice for comparable flexible contracts.
(3) The proceeds from expected sales loads will be sufficient to cover the
expected costs of distributing the flexible contracts.
The methodology used to support the representation made in paragraph (2) above
is based on an analysis of selected variable life insurance policies declared
effective by the Commission, which contain similar guarantees and are sold in
similar markets. Registrant undertakes to keep and make available to the
Commission upon request the documents used to support the representation in
paragraph (2) above.
CONTENTS OF PRE-EFFECTIVE AMENDMENT NO. 2 TO
REGISTRATION STATEMENT
This Pre-Effective Amendment No. 2 to Registration Statement No. 33-64277
comprises the following papers and documents:
The facing sheet.
A cross-reference sheet
One Prospectus for the AetnaVest Estate Protector Variable Life
Insurance Policy consisting of 89 pages
The undertaking to file reports
The undertaking pursuant to Rule 484
Representations pursuant to Rule 6e-3(T)
The signatures
Written consents of the following persons:
A. Consent of Independent Auditors
B. Consent of Counsel
The following Exhibits:
1. Exhibits required by paragraph A of instructions to exhibits
for Form N-8B-2:
(1) Resolution establishing Variable Life Account B(1)
(2) Not Applicable
(3)(i) Master General Agent Agreement(1)
(3)(ii) Life Insurance General Agent Agreement(1)
(3)(iii) Broker Agreement(1)
(3)(iv) Life Insurance Broker-Dealer Agreement(1)
(3)(v) Restated and Amended Third Party Administration
and Transfer Agent Agreement(2)
(4) Not Applicable
(5)(i) Form of Policy(3)
(5)(ii) Form of Disability Benefit Rider(3)
(5)(iii) Form of Four Year Term Rider(3)
(5)(iv) Form of Split Option Amendment Rider(3)
(6) Certificate of Incorporation and By-laws of Aetna
Life Insurance and Annuity Company, Depositor(4)
(7) Not Applicable
(8)(i) Fund Participation Agreement (Amended and
Restated) between Aetna Life Insurance and Annuity
Company, Alger American Fund and
Fred Alger Management, Inc., dated as of
March 31, 1996(5)
(8)(ii) Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Variable Insurance
Products Fund and Fidelity
Distributors Corporation dated February 1, 1994
and amended March 1, 1996(5)
(8)(iii) Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Variable Insurance
Products Fund II and Fidelity Distributors
Corporation dated February 1, 1994 and amended
March 1, 1996(5)
(8)(iv) Fund Participation Agreement between Aetna Life
Insurance and Annuity Company and Janus Aspen
Series dated April 19, 1994 and amended
March 1, 1996(5)
(8)(v) Fund Participation Agreement between Aetna Life
Insurance and Annuity Company and Scudder Variable
Life Investment Fund dated
April 27, 1992 and amended February 19, 1993 and
August 13, 1993(5)
(8)(vi) Fund Participation Agreement between Aetna Life
Insurance and Annuity Company, Investors Research
Corporation and TCI
Portfolios, Inc., dated July 29, 1992 and amended
December 22, 1992 and June 1, 1994(5)
(9) Not Applicable
(10)(i) Form of Application(6)
(10)(ii) Supplement to Form of Application(3)
(11) Issuance, Transfer and Redemption Procedures(8)
2. Opinion and Consent of Counsel
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Actuarial Opinion and Consent(3)
7. Copy of Power of Attorney(7)
8. Consent of Independent Auditors
1. Incorporated by reference to Post-Effective Amendment No. 2 to
Registration Statement on Form S-6 (File No. 33-76004), as filed
electronically on February 16, 1996.
2. Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-6 (File No. 33-75248), as filed on April
25, 1995.
3. Incorporated by reference to Registration Statement on Form S-6 (File No.
33-64277), as filed electronically on November 15, 1995.
4. Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-60477), as filed
electronically on April 15, 1996.
5. Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75986), as filed
electronically on April 12, 1996.
6. Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form S-6 (File No. 33-2339), as filed on April
25, 1995.
7. Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 33-75974), as filed
electronically on April 9, 1996.
8. Incorporated by reference to Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-6 (File No. 33-64277), as filed
electronically on June 3, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant, Variable Life Account B of Aetna Life Insurance and Annuity
Company, has duly caused this Pre-Effective Amendment No. 2 to its Registration
Statement on Form S-6 (File No. 33-64277) to be signed on its behalf by the
undersigned, thereunto duly authorized, and the seal of the Depositor to be
hereunto affixed and attested, all in the City of Hartford, and State of
Connecticut, on this 21st day of June, 1996.
VARIABLE LIFE ACCOUNT B OF
AETNA LIFE INSURANCE AND
ANNUITY COMPANY
(Registrant)
(SEAL)
ATTEST:_/s/ Susan E. Schechter By: AETNA LIFE INSURANCE AND
---------------------- ANNUITY COMPANY
Susan E. Schechter (Depositor)
Corporate Secretary
By: Daniel P. Kearney*
----------------------------
Daniel P. Kearney
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 to the Registration Statement No. 33-64277 has
been signed below by the following persons in the capacities indicated and on
the dates indicated.
Signature Title Date
Daniel P. Kearney* Director and President )
- --------------------- )
Daniel P. Kearney (Principal Executive Officer) )
)
)
Christopher J. Burns* Director ) June 21,
- --------------------- ) 1996
Christopher J. Burns )
)
Laura R. Estes* Director )
- --------------------- )
Laura R. Estes )
)
Timothy A. Holt* Director and Chief )
- --------------------- Financial Officer )
Timothy A. Holt )
Gail P. Johnson* Director )
- ------------------------------------------------ )
Gail P. Johnson )
)
John Y. Kim* Director )
- ------------------------------------------------ )
John Y. Kim )
)
Shaun P. Mathews* Director )
- ------------------------------------------------ )
Shaun P. Mathews )
)
Glen Salow* Director )
- ------------------------------------------------ )
Glen Salow )
)
Creed R. Terry* Director )
- ------------------------------------------------ )
Creed R. Terry )
)
Eugene M Trovato* Vice President )
- ------------------------------------------------ and Treasurer, )
Eugene M. Trovato Corporate )
Controller )
By: /s/ Julie E. Rockmore
---------------------
Julie E. Rockmore
*Attorney-in-Fact
VARIABLE LIFE ACCOUNT B
EXHIBIT INDEX
Exhibit No. Exhibit Page
99-1.1 Resolution of the Board of Directors of Aetna
Life Insurance and Annuity Company
establishing Variable Life Account B *
99-1.3(i) Master General Agent Agreement *
99-1.3(ii) Life Insurance General Agent Agreement *
99-1.3(iii) Broker-Dealer Agreement *
99-1.3(iv) Life Insurance Broker-Dealer Agreement *
99-1.3(v) Restated and Amended Third Party
Administration and Transfer Agent Agreement *
99-1.5(i) Form of Policy *
99-1.5(ii) Form of Disability Benefit Rider *
99-1.5(iii) Form of Four Year Term Rider *
99-1.5(iv) Form of Split Option Amendment Rider *
99-1.6 Certification of Incorporation and By-Laws of
Depositor *
99-1.8(i) Fund Participation Agreement (Amended and
Restated) between Aetna Life Insurance and
Annuity Company, Alger American Fund and
Fred Alger Management, Inc. dated as of
March 31, 1996 *
99-1.8(ii) Fund Participation Agreement between Aetna
Life Insurance and Annuity Company, Variable
Insurance Products Fund and Fidelity
Distributors Corporation dated February 1,
1994 and amended March 1, 1996 *
99-1.8(iii) Fund Participation Agreement between Aetna
Life Insurance and Annuity Company, Variable
Insurance Products Fund II and Fidelity
Distributors Corporation dated February 1,
1994 and amended March 1, 1996 *
*Incorporated by reference
Exhibit No. Exhibit Page
99-1.8(iv) Fund Participation Agreement between Aetna
Life Insurance and Annuity Company and Janus
Aspen Series dated April 19, 1994 and
amended March 1, 1996 *
99-1.8(v) Fund Participation Agreement between Aetna
Life Insurance and Annuity Company and
Scudder Variable Life Investment Fund dated
April 27, 1992 and amended February 19, 1993
and August 13, 1993 *
99-1.8(vi) Fund Participation Agreement between Aetna
Life Insurance and Annuity Company, Investors
Research Corporation and TCI Portfolios, Inc.
dated July 29, 1992 and amended December 22,
1992 and June 1, 1994 *
99-1.10(i) Form of Application *
99-1.10(ii) Supplement to Form of Application *
99-1.11 Issuance, Transfer and Redemption Procedures *
99-2 Opinion and Consent of Counsel ---------
99-6 Copy of Power of Attorney *
99-7 Actuarial Opinion and Consent *
99-8 Consent of Independent Auditors ---------
*Incorporated by reference