Variable Life Account B
Aetna Life Insurance and Annuity Company
151 Farmington Avenue
Hartford, Connecticut 06156
800-334-7586
Prospectus Dated January 16, 1998
Flexible Premium Variable Life Insurance Policy on the Lives of Two Insureds
The Policy offered in connection with this Prospectus is the AetnaVest Estate
Protector II Policy, 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, and/or the Fixed Account, or both
Accounts. The Variable Options of Variable Life Account B 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 the 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:
[bullet] Aetna Variable Fund [bullet] Janus Aspen Balanced Portfolio
[bullet] Aetna Income Shares [bullet] Janus Aspen Growth Portfolio
[bullet] Aetna Investment Advisers Fund, Inc. [bullet] Janus Aspen Worldwide Growth Portfolio
[bullet] Aetna Variable Encore Fund [bullet] Oppenheimer Global Securities Fund
[bullet] Aetna Ascent Variable Portfolio [bullet] Oppenheimer Strategic Bond Fund
[bullet] Aetna Crossroads Variable Portfolio [bullet] Portfolio Partners, Inc. MFS Emerging Equities Portfolio
[bullet] Aetna Legacy Variable Portfolio [bullet] Portfolio Partners, Inc. MFS Research Growth Portfolio
[bullet] Aetna Variable Index Plus Portfolio [bullet] Portfolio Partners, Inc. MFS Value Equity Portfolio
[bullet] Fidelity VIP Equity-Income Portfolio [bullet] Portfolio Partners, Inc. Scudder International Growth Portfolio
[bullet] Fidelity VIP II Contrafund Portfolio [bullet] Portfolio Partners, Inc. T. Rowe Price Growth Equity Portfolio
[bullet] Janus Aspen Aggressive Growth Portfolio
Unless specifically mentioned, this Prospectus only describes the Variable
Options.
Not all Funds may be available under all Policies or in all jurisdictions. The
Statement of Additional Information ("SAI") for any of the Funds may be
obtained by calling (800) 334-7586.
Replacing existing insurance or supplementing an existing flexible premium
variable life insurance policy with the Policy may not be to your advantage.
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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.
THIS PROSPECTUS AND OTHER INFORMATION ABOUT VARIABLE LIFE ACCOUNT B REQUIRED TO
BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION CAN BE FOUND IN THE SEC'S
WEB SITE AT http://www.sec.gov.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE 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 ................................................... iv
Policy Summary ................................................ 1
The Separate Account .......................................... 1
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 ......... 3
Charges Assessed Against the Underlying Funds ............... 4
Charges Deducted Upon Surrender .............................. 5
Allocation of Premiums ....................................... 6
The Funds ................................................... 6
Investment Advisers of the Funds ........................... 8
Mixed and Shared Funding; Conflicts of Interest ............ 8
Fund Additions, Deletions or Substitutions .................. 8
Fixed Account ................................................ 8
Policy Choices ................................................ 9
Premium Payments ............................................. 9
Guaranteed Death Benefit .................................... 10
No Lapse Coverage .......................................... 10
Death Benefit Options ....................................... 11
Transfers and Allocations to Funding Options ............... 11
Telephone Transfers .......................................... 11
Automated Transfers (Dollar Cost Averaging) .................. 12
Policy Values ................................................ 12
Total Account Value .......................................... 12
Accumulation Unit Value .................................... 13
Maturity Value ............................................. 13
Surrender Value ............................................. 13
Policy Rights ................................................ 13
Full Surrenders ............................................. 13
Partial Surrenders .......................................... 14
Paid-Up Nonforfeiture Option ................................. 14
Grace Period ................................................ 14
Reinstatement of a Lapsed Policy ........................... 15
Coverage Beyond Maturity .................................... 15
Right to Defer Payment ....................................... 15
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Policy Loans ............................................................ 15
Policy Changes ......................................................... 16
Right of Policy Examination ............................................. 17
Supplemental Benefits ................................................... 17
Death Benefit ............................................................ 18
Policy Settlement ......................................................... 18
Settlement Options ...................................................... 19
The Company ............................................................... 19
Directors & Officers ...................................................... 20
Additional Information ................................................... 22
Reports to Policyowners ................................................ 22
Right to Instruct Voting of Fund Shares ................................. 22
Disregard of Voting Instructions ....................................... 22
State Regulation ......................................................... 23
Legal Matters ............................................................ 23
The Registration Statement ............................................. 23
Distribution of the Policy ............................................. 23
Independent Auditors ................................................... 24
Year 2000 ................................................................ 24
Tax Matters ............................................................... 24
General .................................................................. 24
Federal Tax Status of the Company ....................................... 24
Life Insurance Qualification ............................................. 24
General Rules ............................................................ 25
Modified Endowment Contracts ............................................. 25
Diversification Standards ................................................ 26
Investor Control ......................................................... 26
Other Tax Considerations ................................................ 27
Miscellaneous Policy Provisions .......................................... 27
The Policy ............................................................... 27
Payment of Benefits ...................................................... 27
Suicide and Incontestability ............................................. 27
Protection of Proceeds ................................................... 28
Nonparticipation ......................................................... 28
Changes in Owner and Beneficiary; Assignment ........................... 28
Misstatement as to Age and/or Sex ....................................... 28
Performance Reporting and Advertising .................................... 29
Illustrations of Death Benefit, Total Account Values and Surrender Values 29
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.
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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 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.
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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 100.
Guaranteed Death Benefit 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.
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.
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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: The date and time at which the Accumulation Unit Value of a
variable investment option is calculated. Currently, this calculation occurs
after the close of business of the New York Stock Exchange on any normal
business day, Monday through Friday, that the New York Stock Exchange is open.
Valuation Period: The period of time from when the Company determines the
Accumulation Unit Value of a variable investment option until the next time it
determines such unit value. Currently, the calculation occurs after
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the close of business of the New York Stock Exchange on any normal business
day, Monday through Friday, that the New York Stock Exchange is open.
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.
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Policy Summary
The Policy offered in connection with 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 are 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.
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 are delivered with 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
1
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 current sales
load of 4.65% up to the Guaranteed Death Benefit Premium and 1.65% of the
excess (never to exceed 6.65% of all premiums), a current 2.1% state premium
tax charge and a current 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 state and federal tax charges are
reasonable in relation to its tax liability, but subject to state law, reserves
the right to increase these tax charges due to changes in the state or federal
tax laws that increase the Company's tax liability. The total current Premium
Load is equal to 8.00% up to the Guaranteed Death Benefit Premium and 5% of the
excess.
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 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 and limit the number of
Funds you may elect over the lifetime of the Policy to 17.
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
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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 current Policy fee of $32.50 a
month during the first Policy Year and $7.50 a month during subsequent Policy
Years (We reserve the right to charge $39.00 a month during the first Policy
Year and $14 a month during subsequent Policy Years). The Monthly Deduction
amount also includes a current administrative expense charge of $0.08 a month
per $1,000 of Specified Amount up to a maximum of $400 for Policy Years 1
through 5 and $0.05 a month per $1,000 of Specified Amount up to a maximum of
$250 for Policy Years 6 through 10. Separate and identical administrative
expense charges, durations and maximums apply to any increase in Specified
Amount, but the charges and maximums are based on the number of years from the
date of increase. We reserve the right to charge $0.08 a month per $1,000 of
Specified Amount up to maximums of $400 for the basic administrative expense
charge and $400 for increases regardless of the numbers of Policy Years or
years from date of increase. These charges are for items such as underwriting
and issuance, premium billing and collection, policy value calculation,
confirmations and periodic reports.
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.
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.
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The mortality and expense risk charge will be deducted daily and currently
equals an annual rate of 0.65% of the average daily net assets of the Separate
Account during Policy Years 1 through 10 or, if later, until the younger
Insured's Attained Age 65, 0.25% beginning in Policy Year 11 or, if later, at
the younger Insured's Attained Age 65, and 0.00% beginning in Policy Year 21
or, if later, at the younger Insured's Attained Age 75. 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.
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, 1996, unless otherwise noted:
Investment
Advisory Fees(1) Other Expenses Total Fund
(after expense (after expense Annual
reimbursement) reimbursement) Expenses
Aetna Variable Fund(2) 0.50% 0.06% 0.56%
Aetna Income Shares(2) 0.40% 0.08% 0.48%
Aetna Variable Encore Fund(2) 0.25% 0.10% 0.35%
Aetna Investment Advisers Fund, Inc.(2) 0.50% 0.08% 0.58%
Aetna Ascent Variable Portfolio(2) 0.60% 0.15% 0.75%
Aetna Crossroads Variable Portfolio(2) 0.60% 0.15% 0.75%
Aetna Legacy Variable Portfolio(2) 0.60% 0.15% 0.75%
Aetna Variable Index Plus Portfolio(2) 0.35% 0.15% 0.50%
Fidelity VIP Equity-Income Portfolio(3) 0.51% 0.07% 0.58%
Fidelity VIP II Contrafund Portfolio(3) 0.61% 0.13% 0.74%
Janus Aspen Aggressive Growth Portfolio(4) 0.72% 0.04% 0.76%
Janus Aspen Balanced Portfolio(4) 0.79% 0.15% 0.94%
Janus Aspen Growth Portfolio(4) 0.65% 0.04% 0.69%
Janus Aspen Worldwide Growth Portfolio(4) 0.66% 0.14% 0.80%
Oppenheimer Global Securities Fund 0.73% 0.08% 0.81%
Oppenheimer Strategic Bond Fund 0.75% 0.10% 0.85%
Portfolio Partners, Inc. MFS Emerging Equities Portfolio(5) 0.70%(6) 0.13% 0.83%
Portfolio Partners, Inc. MFS Research Growth Portfolio(5) 0.70%(6) 0.15% 0.85%
Portfolio Partners, Inc. MFS Value Equity Portfolio(5) 0.65% 0.25% 0.90%
Portfolio Partners, Inc. Scudder International Growth Portfolio(5) 0.80% 0.20% 1.00%
Portfolio Partners, Inc. T. Rowe Price Growth Equity Portfolio(5) 0.60% 0.15% 0.75%
(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) The Company provides administrative services to the Fund and assumes the
Fund's ordinary recurring direct costs under an Administrative Services
Agreement. The new Administrative Services Agreement became effective on
May 1, 1996 for Aetna Variable Fund, Aetna Income Shares, Aetna Variable
Encore Fund, Aetna Investment Advisers Fund, Inc., Aetna Ascent Variable
Portfolio, Aetna Crossroads Variable Portfolio, and Aetna Legacy Variable
Portfolio. Therefore, for these Funds the "Other Expenses" shown are not
based on actual figures for the year ended December 31, 1996, but reflect
the fee payable under that Agreement. The Administrative Services
Agreement was in effect for Aetna Variable Index Plus Portfolio since its
inception.
Effective August 1, 1996, Investment Advisory Fees were increased for Aetna
Variable Fund, Aetna Income Shares, Aetna Investment Advisers Fund, Inc.,
Aetna Ascent Variable Portfolio, Aetna Crossroads Variable Portfolio, and
Aetna Legacy Variable Portfolio. The Advisory Fees shown above are not based
on actual figures for the year ended December 31, 1996, but reflect the
increased Investment Advisory Fees.
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(3) A portion of the brokerage commissions that certain funds pay was used to
reduce expenses. In addition, certain funds have entered into arrangements
with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses would
have been 0.56% for Equity Income Portfolio and 0.71% for Contrafund
Portfolio.
(4) The fees and expenses shown above are based on gross expenses of the Shares
before expense offset arrangements for the fiscal year ended December 31,
1996. 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 Fund Annual Expenses would have been 0.79%, 0.04%
and 0.63% for Aggressive Growth Portfolio; 0.92%, 0.15% and 1.07% for
Balanced Portfolio; 0.79%, 0.04% and 0.83% for Growth Portfolio; and
0.77%, 0.14% and 0.91% for Worldwide Growth Portfolio, respectively. Janus
Capital may modify or terminate the waivers or reductions at any time upon
at least 30 days' notice to the Portfolio's Board of Trustees.
(5) Each Portfolio's aggregate expenses are limited to the advisory and
administrative fees disclosed above through April 30, 1999. Without these
limitations, the aggregate expenses for the current portfolio are estimated
to be as follows: .87% for the MFS Emerging Equities Portfolio; .92% for the
MFS Research Growth Portfolio; .90% for the MFS Value Equity Portfolio;
1.00% for the Scudder International Growth Portfolio; and .79% for the T.
Rowe Price Growth Equity Portfolio.
(6) The advisory fee is .70% of the first $500 million in assets and .65% on
the excess.
For further details on each Fund's expenses please refer to that Fund's
prospectus. Additional copies of each Fund's prospectus and the Statement of
Additional Information for each Fund may be obtained free of charge by calling
(800)-334-7586.
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.
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. 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.
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 may be made against the Separate
Account for each Partial Surrender. (See Partial Surrenders)
5
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. We reserve the right to limit the
total number of Funds You may elect to 17 over the lifetime of the Policy.
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)
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. is a manged Fund which seeks to
maximize investment return consistent with reasonable safety of
principal by investing in one or more of the following asset classes:
stocks, bonds and cash equivalents based on the Company's judgment of
which of those sectors or mix thereof offers the best investment
prospects.(1)
[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] Aetna Variable Portfolios, Inc.--Aetna Variable Index Plus Portfolio
seeks to outperform the total return performance of publicly traded
common stocks represented by the S&P 500.(1)
6
[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.(2)
[bullet] Fidelity Investments' Variable Insurance Products Fund II--Contrafund
Portfolio seeks maximum total return over the long term by investing
its assets mainly in equity securities of companies that are
undervalued or out-of-favor.(2)
[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 30, 1996 included companies with capitalizations between
approximately $192 million and $6.5 billion, but which is expected to
change on a regular basis.(3)
[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, under
normal circumstances, 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.(3)
[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.(3)
[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.(3)
[bullet] Oppenheimer Global Securities Fund seeks long-term capital
appreciation by investing a substantial portion of its assets in
securities of foreign issuers, "growth-type" companies, cyclical
industries and special situations which are considered to have
appreciation possibilities. Current income is not an objective. These
securities may be considered to be speculative.(4)
[bullet] Oppenheimer Strategic Bond Fund seeks a high level of current income
principally derived from interest on debt securities and seeks to
enhance such income by writing covered call options on debt
securities. The Fund intends to invest principally in: (i) foreign
government and corporate debt securities, (ii) U.S. Government
securities, and (iii) lower-rated high yield domestic debt securities,
commonly known as "junk bonds", which are subject to a greater risk of
loss of principal and nonpayment of interest than higher-rated
securities. These securities may be considered to be speculative.(4)
[bullet] Portfolio Partners, Inc.--MFS Emerging Equities Portfolio seeks
long-term growth of capital by investing primarily in common stocks
issued by companies that its subadviser believes are early in their
life cycle but which have the potential to become major enterprises
(emerging growth companies).(5)
[bullet] Portfolio Partners, Inc.--MFS Research Growth Portfolio seeks long-term
growth of capital and future income by investing primarily in common
stocks or securities convertible into common stocks issued by
companies that the subadviser believes to possess better-than-average
prospects for long-term growth, and, to a lesser extent, in
income-producing securities including bonds and preferred stock.(5)
[bullet] Portfolio Partners, Inc.--MFS Value Equity Portfolio seeks capital
appreciation by investing primarily in common stocks.(5)
[bullet] Portfolio Partners, Inc.--Scudder International Growth Portfolio seeks
long-term growth of capital primarily through a diversified portfolio
of marketable foreign equity securities.(6)
7
[bullet] Portfolio Partners, Inc.--T. Rowe Price Growth Equity Portfolio seeks
long-term growth of capital and, secondarily, seeks to increase
dividend income by investing primarily in common stocks issued by a
diversified group of well-established growth companies.(7)
Investment Advisers for each of the Funds:
(1) Aetna Life Insurance and Annuity Company (adviser); Aeltus Investment
Management, Inc. (sub-adviser)
(2) Fidelity Management & Research Company
(3) Janus Capital Corporation
(4) OppenheimerFunds, Inc.
(5) Aetna Life Insurance and Annuity Company (adviser); Massachusetts
Financial Services Company ("MFS") (sub-adviser)
(6) Aetna Life Insurance and Annuity Company (adviser); Scudder, Stevens &
Clark, Inc. (sub-adviser)
(7) Aetna Life Insurance and Annuity Company (adviser); T. Rowe Price
Associates, Inc. (sub-adviser)
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 connection 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
8
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 amount of any Partial
Surrenders, Policy Loans or Monthly Deductions.
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
Premium. The amount of each of Your premium levels will be shown in Your
Policy. Alternatively, You may make any other premium payments You wish as
Additional Premiums. (See Guaranteed Death Benefit)
Payment of the Basic Monthly Premium, Guaranteed Death Benefit 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 Guaranteed Death
Benefit Premium will, however, cause the Guaranteed Death Benefit to terminate.
Also, not paying the Basic Monthly Premium will 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 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)
9
Section 7702 of the Code includes a definition of life insurance for tax
purposes. These rules place limits on the relationship between the death
benefit and the account value. If necessary, we will increase your death
benefit in order to maintain compliance with Section 7702. An increase in death
benefit may be a "material change" and may trigger a test to determine whether
the Policy has become a "Modified Endowment Contract" (See--Tax Matters--
Modified Endowment Contracts). An increase in death benefit will also trigger
an increase in Cost of Insurance charges.
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 and subject to certain maximums)
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, and amounts allocated
to the Funds will be credited to your Policy at the Accumulation Unit Value
computed on the Valuation Date following receipt of your premium at 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
100. The Guaranteed Death Benefit 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 Premium.
The Guaranteed Death Benefit may not be available in all circumstances and is
only available in those states where it is approved. The Guaranteed Death
Benefit to the Younger Insured's Attained Age 100 is not available to contracts
issued in the Commonwealth of Massachusetts. Once terminated, the Guaranteed
Death Benefit provision cannot be reinstated.
No Lapse Coverage
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
10
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 the Monthly Deduction to prevent activation of the
Grace Period provision of the Policy, unless the Guaranteed Death Benefit is in
force. (See Guaranteed Death Benefit and Grace Period)
The No Lapse Coverage provision is available to contracts issued in the
Commonwealth of Massachusetts.
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.
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. However, if the Fixed Account Value is less than or
equal to $500, the transfer amount may equal the full 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 computed on the next Valuation Date following our receipt of your request
for transfer. 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 800-334-7586. All transfers
must be in accordance with the terms of the Policy.
11
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.
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 or to the
Fixed Account through Written Request or other method acceptable to the
Company. 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. There is no additional
charge for the program. 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) computed on the next Valuation Date following our receipt of the
premium 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)
12
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 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 is determined on the Valuation Date. A
Valuation Period is the time from one Valuation Date to the next Valuation
Date. 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)
13
Partial Surrenders
By Written Request, You may, at any time after the expiration of the Right of
Policy Examination, partially surrender the Policy. 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 $500,000.
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)
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.
14
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:
- -- The Policy has not been fully surrendered.
- -- You must apply for reinstatement within 5 years after the date of
termination and before the Maturity Date.
- -- We must receive evidence of insurability, satisfactory to Us, on each
Insured.
- -- 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
Prior to the younger Insured's Attained Age 100, 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 no proceeds will be paid and
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
(extra benefit riders terminate at the younger Insured's Attained Age 100).
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 rights and benefits as described in the Policy will be available before the
Second Death, and Proceeds will be payable on the Second Death.
Coverage beyond the Maturity Date may not be available in all states.
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 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 less the Surrender Charge applicable at the time of the
loan.
15
The amount of the loan will be transferred out of the Fixed Account and
Separate Account Values in proportion to the value of the Fixed Account and
each Variable Option. 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 is 4.5%, 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 10 days of receipt of the supplemental Policy
Specifications or notice of the right to rescind the increase, whichever is
later.
- -- Satisfactory evidence of insurability on both Insureds will be required.
- -- The Issue Date for any increase will be shown in the supplemental Policy
Specifications.
- -- The minimum increase is $10,000.
- -- 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.
- -- An increase in the Specified Amount will increase the Surrender Charge.
- -- The 5-year period as described in the No Lapse Coverage provision will
restart on the Issue Date of the increase.
- -- The Basic Monthly Premium and the Guaranteed Death Benefit Premium will be
adjusted when the Specified Amount is increased.
16
Decrease in Specified Amount
You may decrease the Specified Amount of this Policy after the 5th Policy Year,
however:
- -- We will not allow a decrease in the Specified Amount if the Specified Amount
would be reduced below the minimum Specified Amount of $500,000.
- -- 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.
- -- The decrease will reduce any past increases in the reverse order in which
they occurred.
- -- The Basic Monthly Premium and Guaranteed Death Benefit Premium will be based
on the new Specified Amount.
- -- 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:
- -- If the change decreases the Specified Amount below the minimum of $500,000,
We will increase the Specified Amount to $500,000.
- -- The change will take effect on the Monthly Deduction Day on or next
following the date on which Your Written Request is received.
- -- There will be no change in the Surrender Charge.
- -- Evidence of insurability may be required.
- -- 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. In certain
circumstances, the change may result in loss of the assurance that the
Guaranteed Death Benefit Premium will keep the Policy in force to the
younger Insured's Attained Age 100.
- -- Changes from Option 2 to 1 will be allowed at any time while this policy is
in force. The new Specified 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 10 days of receipt of the Policy or within a different
period if required by State law. 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 10 days of
receipt of the Supplemental Policy Specifications or within a different period
if required by state law.
Supplemental Benefits
The supplemental benefits currently available as riders to the Policy include
the following (may not be available in all states):
[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.
17
[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.
The exercise of the option provided by this Rider may have tax consequences.
You should consult a competent tax advisor if you are considering purchasing
this rider or exercising its option.
[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.
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
18
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:
Option 1 -- Payment of interest on the sum left with Us.
Option 2 -- Payments for a stated number of years, but no more than thirty.
Option 3 -- Payments for the lifetime of the Annuitant. If also chosen, We will
guarantee payments for 60, 120, 180, or 240 months.
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) 662/3% 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% 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.
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 a wholly owned subsidiary of Aetna Retirement Holdings Inc., which is in
turn a wholly owned subsidiary of Aetna Retirement Services, Inc. and an
indirect wholly owned subsidiary of Aetna Inc.
The Company is 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., Aetna GET Fund, Aetna Series Fund, Inc., Aetna
Generation Portfolios, Inc., Aetna Variable Portfolios, Inc., and Portfolio
Partners, Inc. The Company is also the depositor of Variable Annuity Accounts
B, C and G.
19
Directors & Officers
Name and Address* Position with Company Business Experience During Past 5 Years
- ---------------------- ------------------------------------- -----------------------------------------------------
Thomas J. McInerney Director, President and Chairman, President (since September 1997), Aetna Life
Executive Committee (Principal Insurance and Annuity Company; President (since
Executive Officer) September 1997), Aetna Insurance Company of
America; President (since September 1997), Aetna
Retirement Holdings, Inc.; President (since August
1997), Aetna Retirement Services, Inc.; Executive
Vice President (since August 1997), Aetna Inc.;
Vice President, Strategy (March 1997 - August
1997), Aetna Inc.; Vice President, Strategy,
Finance, & Administration (July 1995 - April 1996),
Aetna Inc.; Vice President, Guaranteed Products
(November 1992 - July 1995), Aetna Inc.
Christopher J. Burns Director and Senior Vice President President and Chief Executive and Operating
Officer (since November 1996), Aetna Investment
Services Inc.; Senior Vice President, Sales &
Service (February 1996 - September 1997), Senior
Vice President, Sales & Financial Planning (since
September 1997), and Senior Vice President, Life
(March 1991 - February 1996), Aetna Life
Insurance and Annuity Company.
J. Scott Fox Director and Senior Vice President Managing Director, Chief Operating Officer, Chief
Financial Officer (since October 1997), Aeltus
Investment Management, Inc.; Senior Vice
President, Operations (since March 1997), Aetna
Life Insurance and Annuity Company; Managing
Director, Chief Operating Officer, Chief Financial
Officer, Treasurer (April 1994 - March 1997),
Aeltus Investment Management, Inc.; Managing
Director and Treasurer (March 1987 - September
1993), Equitable Capital Management Corporation.
Timothy A. Holt Director, Senior Vice President and Senior Vice President, Business Strategy &
Chief Financial Officer Finance, and Chief 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.
20
Name and Address* Position with Company Business Experience During Past 5 Years
- ---------------------- ------------------------------------ -----------------------------------------------------
John Y. Kim Director and Senior Vice President President (since December 1995), Aeltus
Investment Management, Inc.; Chief Investment
Officer (since May 1994), Aetna Services, Inc.
(formerly 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), Aetna
Services, Inc. (formerly Aetna Life and Casualty
Company).
Shaun P. Mathews Director and Senior Vice President Senior Vice President, Product Management (since
September 1997), Vice President, Products Group
(since February 1996 to September 1997), 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.
Thomas P. Waldron Director Vice President, Human Resources (since 1995),
Aetna Inc.; Senior Vice President, Human
Resources (1990 to 1995), Nielson Marketing
Research, Chicago, Illinois.
Kirk P. Wickman Vice President, General Counsel Vice President, General Counsel and Corporate
and Corporate Secretary Secretary (since November 1996), Aetna Life
Insurance and Annuity Company; Vice President
and Counsel (June 1992 - November 1996), Aetna
Life Insurance Company.
Deborah Koltenuk Vice President and Treasurer, Vice President, Investment Planning and Financial
Corporate Controller Reporting (April 1996 to July 1996), Aetna Life
Insurance Company; Vice President and Treasurer,
Corporate Controller (since March 1996), Aetna
Retirement Holdings, Inc.; Vice President,
Investment Planning and Financial Reporting
(October 1994 to April 1996), The Aetna Casualty
and Surety Company and The Standard Fire and
Insurance Company; Assistant Vice President,
Finance and Administration (June 1994 to October
1994), Aetna Life Insurance Company; Controller
(September 1993 to June 1994), Aetna Information
Technology; Assistant Vice President (December
1990 to September 1993), Aetna Life and Casualty
Company.
Frederick D. Kelsven Vice President and Chief Vice President, Chief Compliance Officer (since
Compliance Officer February 1997), Aetna Life Assignment Company;
Vice President & Chief Compliance Officer (since
November 1996), Aetna Investment Services, Inc.;
Director of Compliance (January 1985 to
September 1996), Nationwide 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.
21
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
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.
22
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 Counsel for the Company.
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
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. In addition, some sales personnel may receive various types of
non-cash compensation as special sales incentives, including trips and
educational and/or business seminars. Supervisory and other management
personnel of the Company may receive compensation that will vary based on the
relative profitability to the Company of the funding options you select.
Funding options that invest in Funds advised by the Company or its affiliates
are generally more profitable to the Company.
Salespersons and their supervising broker-dealers will be compensated for sales
of the Policy on a commission and service fee basis. Commissions will equal 50%
of the sum of the first-year premiums up to a premium amount ("target premium")
established by the Company and 3% for that part of the sum that is greater than
the target premium. We may also pay commissions of 3% of any additional premiums
paid during Policy Years 2 through 10, or may pay an equivalent amount based on
Total Account Value. In the event of an increase in Specified Amount, the
commission will equal 47% of the target premium for the additional Specified
Amount in the year of an increase and 3% for premiums paid until the tenth year
from the increase or an equivalent amount based on Total Account Value. In
addition, certain production, persistency and managerial bonuses, as well as
expense allowances, may be paid.
23
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.
Year 2000
Aetna, Inc. (referred to collectively with its subsidiaries and affiliates as
"Aetna"), has developed and is currently executing a plan to make its computer
systems and applications accommodate date-sensitive information relating to the
Year 2000. The plan covers four stages including (i) inventory, (ii) assessment,
(iii) remediation and (iv) testing and certification. Aetna is currently in the
assessment or remediation stages of its plan for the systems and applications
related to the Separate Account, including those relating to the Company, and
Aeltus Investment Management, Inc., the subadviser to most Aetna affiliated
mutual funds. Testing and certification of these systems is targeted for
completion by mid 1999. The costs of these efforts will not affect the Separate
Account.
The Company, its affiliates and the mutual funds that serve as investment
options for the Separate Account also have relationships with investment
advisers, broker dealers, transfer agents, custodians or other securities
industry participants or other service providers that are not affiliated with
Aetna. Aetna is currently examining its relationships with third parties as part
of its Year 2000 plan. While the Company believes that United States securities
industry participants generally are preparing their computer systems and
applications to accommodate Year 2000 date-sensitive information, preparation by
third parties is outside the Company's control. There can be no assurance that
failure of third parties to complete adequate preparations in a timely manner,
and any resulting systems interruptions or other consequences, would not have an
adverse effect, directly or indirectly, on the Separate Account, including,
without limitation, its operation or the valuation of its assets and units.
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 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. These rules place limits on the relationship between the death
benefit and the account value. If necessary, we will increase your death
benefit in order to maintain compliance with Section 7702. An increase in death
benefit may be a "material change" and may
24
trigger a test to determine whether the Policy has become a "Modified Endowment
Contract" (See--Tax Matters-- Modified Endowment Contracts). An increase in
death benefit will also trigger an increase in Cost of Insurance charges. The
Secretary of the Treasury has been granted authority to prescribe regulations to
carry out the purposes of Section 7702, 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 Endowment Contract.
Each Policy is subject to testing under the 7-pay test during the first seven
Policy Years and for the seven Policy Years following the 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
25
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, or after the seventh year where
the reduced death benefit is lower than the lowest death benefit provided during
the first seven 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, any Policy Loans and most assignments 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.
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.
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
26
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 where the employer is a beneficiary under the Policy.
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
others 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 only with respect to life insurance policies
covering each officer, employee or others who may have a financial interest in
the Policyowner's trade or business, and are considered key persons.
Generally, a key person means an officer or a 20 percent owner. However, the
number of key persons will be limited to the greater of (a) 5 individuals, or
(b) the lesser of 5 percent of the total officers and employees of the tax
payor or 20 individuals. Deductible interest for these contracts will be capped
based on applicable Moody's Corporate Bond Rate.
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. Any person concerned about these tax implications should
consult a competent tax adviser before initiating any transaction.
Misc. 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
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
27
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.
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. 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.
28
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 current mortality
and expense risk charge, 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 hypothetical illustrations 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 65-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. The first page illustrates the assumption that
the Guaranteed Maximum Cost of Insurance rates and other charges at guaranteed
rates are charged in all years. The second page illustrates the assumption that
the current scale of Cost of Insurance rates and other charges at current rates
are charged in all years. The Cost of Insurance rates vary by age and sex
(where permitted by state law).
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 and 10.00% for Premium Loads (assuming no
change in state premiums and federal tax laws); the first page also reflects
0.72% for expenses of the Funds based on the allocation described below. The
charges reflected on the second page consist of the current charges imposed
under the Policy, including 0.65% for mortality and expense risks in Policy
Years 1 through 10, 0.25% for mortality and expense risks in Policy Years 11
through 20, 0.00% for mortality and expense risks in Policy Years 21 and later,
and 8% for Premium Loads; the second page also reflects 0.72% for Fund expenses
based on the allocation described below. 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 December 31, 1996,
or, for Funds first offered after December 31, 1996, for the current period.
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
- -1.37%, 4.63%, and 10.63%, respectively, during the first 10 Policy
29
Years, -.97%, 5.03%, and 11.03%, respectively, during Policy Years 11 through
20, and -0.72%, 5.28%, and 11.28%, 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 -1.62%, 4.38%,
and 10.38%, 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%.
30
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ON THE LIVES OF TWO INSUREDS
FEMALE AND MALE ISSUE AGE 65 PREFERRED NONSMOKER RISK
$30,330 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED CHARGES
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value*
at Return of Annual Investment Return of Annual Investment Return of
5% Interest ----------------------------------- --------------------------------- --------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------ ------------ ----------- ----------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
1 31,847 1,000,000 1,000,000 1,000,000 25,164 26,747 28,331 0 0 0
2 65,285 1,000,000 1,000,000 1,000,000 49,592 54,329 59,258 4,482 9,219 14,148
3 100,396 1,000,000 1,000,000 1,000,000 72,882 82,362 92,626 29,802 39,282 49,546
4 137,262 1,000,000 1,000,000 1,000,000 94,933 110,757 128,591 53,923 69,747 87,581
5 175,972 1,000,000 1,000,000 1,000,000 115,636 139,416 167,333 76,736 100,516 128,433
6 216,617 1,000,000 1,000,000 1,000,000 134,844 168,211 209,043 98,104 131,471 172,303
7 259,294 1,000,000 1,000,000 1,000,000 152,369 196,978 253,925 117,819 162,428 219,375
8 304,106 1,000,000 1,000,000 1,000,000 167,947 225,491 302,191 135,627 193,171 269,871
9 351,157 1,000,000 1,000,000 1,000,000 181,240 253,463 354,088 151,170 223,393 324,018
10 400,562 1,000,000 1,000,000 1,000,000 191,849 280,576 409,950 164,069 252,796 382,170
15 687,202 1,000,000 1,000,000 1,071,859 188,192 392,201 774,259 172,422 376,431 758,489
20 1,053,035 1,000,000 1,000,000 1,640,877 5,010 418,826 1,307,140 5,010 418,826 1,307,140
25 1,519,941 1,000,000 1,000,000 2,370,026 0 163,864 2,019,090 0 163,864 2,019,090
30 2,115,845 1,000,000 1,000,000 3,300,419 0 0 2,980,501 0 0 2,980,501
Assumes no Policy loan has been made. Guaranteed cost of insurance rates
assumed. Maximum mortality and expense risk and administrative expense charges
assumed.
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.
*The Cash Surrender Values reflect the application of the maximum Surrender
Charge under the Contract and allowed in most states. The Surrender Charge may
be limited to a lower amount in certain states.
31
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
ON THE LIVES OF TWO INSUREDS
FEMALE AND MALE ISSUE AGE 65 PREFERRED NONSMOKER RISK
$30,330 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT CHARGES
Premiums Death Benefit
Accumulated Gross Annual Investment Total Account Value Cash Surrender Value*
at Return of Annual Investment Return of Annual Investment Return of
5% Interest ----------------------------------- ---------------------------------- ---------------------------------
Year Per Year Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12%
- ------ ------------ ----------- ----------- ----------- ---------- ----------- ----------- ---------- ----------- ----------
1 31,847 1,000,000 1,000,000 1,000,000 25,906 27,528 29,150 0 0 0
2 65,285 1,000,000 1,000,000 1,000,000 51,129 55,995 61,057 6,569 11,435 16,497
3 100,396 1,000,000 1,000,000 1,000,000 75,266 85,024 95,587 32,716 42,474 53,037
4 137,262 1,000,000 1,000,000 1,000,000 98,215 114,536 132,927 57,705 74,026 92,417
5 175,972 1,000,000 1,000,000 1,000,000 119,863 144,443 173,290 81,443 106,023 134,870
6 216,617 1,000,000 1,000,000 1,000,000 140,886 175,459 217,743 104,596 139,169 181,453
7 259,294 1,000,000 1,000,000 1,000,000 161,682 208,031 267,126 127,552 173,901 232,996
8 304,106 1,000,000 1,000,000 1,000,000 182,256 242,242 321,994 150,326 210,312 290,064
9 351,157 1,000,000 1,000,000 1,000,000 202,610 278,181 382,968 172,910 248,481 353,268
10 400,562 1,000,000 1,000,000 1,000,000 222,749 315,939 450,736 195,309 288,499 423,296
15 687,202 1,000,000 1,000,000 1,300,390 329,021 548,527 939,338 313,441 532,947 923,758
20 1,053,035 1,000,000 1,060,847 2,195,572 415,881 845,082 1,749,017 415,881 845,082 1,749,017
25 1,519,941 1,000,000 1,434,272 3,627,674 463,174 1,221,896 3,090,515 463,174 1,221,896 3,090,515
30 2,115,845 1,000,000 1,860,756 5,831,637 437,283 1,680,388 5,266,361 437,283 1,680,388 5,266,361
Assumes no Policy loan has been made. Current cost of insurance rates assumed.
Current mortality and expense risk and administrative expense charges assumed.
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.
*The Cash Surrender Values reflect the application of the maximum Surrender
Charge under the Contract and allowed in most states. The Surrender Charge may
be limited to a lower amount in certain states.
32
VARIABLE LIFE ACCOUNT B
FINANCIAL STATEMENTS
Index
Statement of Assets and Liabilities as of September 30, 1997 (unaudited) ............... S-2
Statements of Operations and Changes in Net Assets for the nine months
ended September 30, 1997 and September 30, 1996 (unaudited) ........................ S-4
Condensed Financial Information for the nine months ended September 30, 1997 (unaudited) S-5
Notes to Financial Statements -- September 30, 1997 (unaudited) ......................... S-8
Statement of Assets and Liabilities -- December 31, 1996 .............................. S-12
Statements of Operations and Changes in Net Assets for the years ended
December 31, 1996 and 1995 ......................................................... S-14
Condensed Financial Information for the year ended December 31, 1996 .................. S-15
Notes to Financial Statements -- December 31, 1996 .................................... S-18
Independent Auditor's Report ........................................................... S-22
S-1
Variable Life Account B
Statement of Assets and Liabilities--September 30, 1997 (Unaudited)
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 3,196,319 shares (cost $99,508,839) ........................ $131,027,138
Aetna Income Shares; 1,442,314 shares (cost $18,506,001) ........................ 18,856,596
Aetna Variable Encore Fund; 1,141,899 shares (cost $15,002,124) .................. 15,053,505
Aetna Investment Advisers Fund, Inc.; 1,269,183 shares (cost $18,194,063) ......... 20,942,265
Aetna Ascent Variable Portfolio; 105,799 shares (cost $1,377,537) ............... 1,597,706
Aetna Crossroads Variable Portfolio; 33,041 shares (cost $412,360) ............... 461,347
Aetna Legacy Variable Portfolio; 47,758 shares (cost $574,815) .................. 603,725
Aetna Variable Index Plus Portfolio; 61,593 shares (cost $852,252) ............... 875,204
Alger American Small Capitalization Portfolio; 443,588 shares (cost $19,897,819) 20,697,798
American Century VP Capital Appreciation Fund; 649,356 shares (cost $6,600,874) ... 7,220,836
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 552,358 shares (cost $11,584,391) ..................... 13,146,117
Growth Portfolio; 134,592 shares (cost $4,465,705) .............................. 5,033,748
Overseas Portfolio; 46,329 shares (cost $848,995) .............................. 953,003
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 119,521 shares (cost $1,854,784) ........................ 2,107,161
Contrafund Portfolio; 872,975 shares (cost $15,798,493) ........................ 17,634,099
Janus Aspen Series:
Aggressive Growth Portfolio; 500,689 shares (cost $9,126,974) .................. 10,103,908
Balanced Portfolio; 373,464 shares (cost $5,583,127) ........................... 6,434,792
Growth Portfolio; 545,924 shares (cost $8,679,709) .............................. 10,225,157
Short-Term Bond Portfolio; 150,415 shares (cost $1,514,462) ..................... 1,537,242
Worldwide Growth Portfolio; 876,969 shares (cost $18,447,152) .................. 21,319,109
Scudder Variable Life Investment Fund--
International Portfolio; 943,907 shares (cost $12,021,744) ..................... 14,120,843
-------------
NET ASSETS (cost $270,852,220) ................................................... $319,951,299
=============
Net assets represented by:
Policyholders' account values: (Notes 1 and 5)
Aetna Variable Fund:
Policyholders' account values ................................................... $131,027,138
Aetna Income Shares:
Policyholders' account values ................................................... 18,856,596
Aetna Variable Encore Fund:
Policyholders' account values ................................................... 15,053,505
Aetna Investment Advisers Fund, Inc.:
Policyholders' account values ................................................... 20,942,265
Aetna Ascent Variable Portfolio:
Policyholders' account values ................................................... 1,597,706
See Notes to Financial Statements
S-2
Variable Life Account B
Statement of Assets and Liabilities--September 30, 1997 (unaudited &
continued):
Aetna Crossroads Variable Portfolio:
Policyholders' account values .............................. $ 461,347
Aetna Legacy Variable Portfolio:
Policyholders' account values .............................. 603,725
Aetna Variable Index Plus Portfolio:
Policyholders' account values .............................. 875,204
Alger American Small Capitalization Portfolio:
Policyholders' account values .............................. 20,697,798
American Century VP Capital Appreciation Fund:
Policyholders' account values .............................. 7,220,836
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Policyholders' account values .............................. 13,146,117
Growth Portfolio:
Policyholders' account values .............................. 5,033,748
Overseas Portfolio:
Policyholders' account values .............................. 953,003
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Policyholders' account values .............................. 2,107,161
Contrafund Portfolio:
Policyholders' account values .............................. 17,634,099
Janus Aspen Series:
Aggressive Growth Portfolio:
Policyholders' account values .............................. 10,103,908
Balanced Portfolio:
Policyholders' account values .............................. 6,434,792
Growth Portfolio:
Policyholders' account values .............................. 10,225,157
Short-Term Bond Portfolio:
Policyholders' account values .............................. 1,537,242
Worldwide Growth Portfolio:
Policyholders' account values .............................. 21,319,109
Scudder Variable Life Investment Fund--International Portfolio:
Policyholders' account values .............................. 14,120,843
-------------
$319,951,299
=============
See Notes to Financial Statements
S-3
Variable Life Account B
Statements of Operations and Changes in Net Assets
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
(Unaudited) (Unaudited)
-------------------- -------------------
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ......................................................... $ 11,181,934 $ 3,885,187
Expenses: (Notes 2 and 5)
Valuation Period Deductions ....................................... (1,872,259) (1,080,847)
------------- -------------
Net investment income ............................................. 9,309,675 2,804,340
------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ............................................. 139,757,147 20,651,970
Cost of investments sold .......................................... 128,709,226 18,373,466
------------- -------------
Net realized gain (loss) ....................................... 11,047,921 2,278,504
Net unrealized gain (loss) on investments: (Note 5) ...............
Beginning of period ............................................. 14,132,669 4,391,574
End of period ................................................... 49,099,079 15,114,855
------------- -------------
Net change in unrealized gain (loss) ........................... 34,966,410 10,723,281
------------- -------------
Net realized and unrealized gain (loss) on investments ............ 46,014,331 13,001,785
------------- -------------
Net increase (decrease) in net assets resulting from operations ... 55,324,006 15,806,125
------------- -------------
FROM UNIT TRANSACTIONS:
Variable life premium payments .................................... 84,887,351 79,490,652
Sales and administrative charges deducted by the Company ......... (2,894,734) (2,425,262)
Premiums allocated to the fixed account ........................... (2,076,993) (2,340,043)
------------- -------------
Net premiums allocated to the variable account .................. 79,915,624 74,725,347
Transfers to the Company for monthly deductions .................. (15,533,434) (11,102,414)
Redemptions by contract holders .................................... (20,908,061) (2,903,147)
Transfers on account of policy loans .............................. (2,096,102) (3,395,109)
Other ............................................................ 75,383 (10,234)
------------- -------------
Net increase in net assets from unit transactions (Note 5) ...... 41,453,410 57,314,443
------------- -------------
Change in net assets ............................................. 96,777,416 73,120,568
NET ASSETS:
Beginning of period ................................................ 223,173,883 126,515,779
------------- -------------
End of period ...................................................... $ 319,951,299 $ 199,636,347
============= =============
See Notes to Financial Statements
S-4
Variable Life Account B
Condensed Financial Information--Nine Months Ended September 30, 1997
(Unaudited)
Value Increase
Per Unit (Decrease)
in Value of Reserves
Beginning End of Accumulation at End
of Period Period Unit of Period
----------- --------- ------------------ ------------
Aetna Variable Fund:
Aetna Vest ........................ $34.932 $45.812 31.15% $65,467,133
Aetna Vest II ..................... 19.507 25.577 31.12% 20,668,426
Aetna Vest Plus .................. 16.389 21.489 31.12% 35,633,026
Aetna Vest Estate Protector ...... 11.675 15.326 31.27% 886,387
Corporate Specialty Market ...... 14.805 19.413 31.12% 8,372,166
Aetna Income Shares:
Aetna Vest ........................ $21.850 $23.082 5.64% 5,989,256
Aetna Vest II ..................... 14.691 15.519 5.64% 975,075
Aetna Vest Plus .................. 11.764 12.427 5.64% 2,046,769
Aetna Vest Estate Protector ...... 10.452 11.054 5.76% 214,179
Corporate Specialty Market ...... 11.354 11.995 5.64% 9,631,317
Aetna Variable Encore Fund:
Aetna Vest ........................ $16.577 $17.118 3.27% 2,564,616
Aetna Vest II ..................... 12.117 12.513 3.27% 158,376
Aetna Vest Plus .................. 11.388 11.760 3.27% 5,977,410
Aetna Vest Estate Protector ...... 10.333 10.683 3.38% 169,449
Corporate Specialty Market ...... 10.895 11.251 3.27% 6,183,654
Aetna Investment Advisers Fund, Inc.:
Aetna Vest ........................ $17.547 $20.914 19.19% 2,262,647
Aetna Vest II ..................... 17.742 21.143 19.16% 4,931,529
Aetna Vest Plus .................. 14.880 17.731 19.16% 7,889,770
Aetna Vest Estate Protector ...... 11.340 13.314 17.41% (1) 126,662
Corporate Specialty Market ...... 12.954 15.436 19.16% 5,731,657
Aetna Ascent Variable Portfolio:
Aetna Vest ........................ $11.828 $14.221 20.23% 296,098
Aetna Vest II ..................... 11.828 14.212 20.16% 138,916
Aetna Vest Plus .................. 11.828 14.212 20.16% 1,119,184
Aetna Vest Estate Protector ...... 11.886 14.245 19.85% (2) 43,508
Aetna Crossroads Variable Portfolio:
Aetna Vest ........................ $11.474 $13.446 17.19% 68,703
Aetna Vest II ..................... 11.544 13.438 16.41% (1) 29,300
Aetna Vest Plus .................. 11.474 13.438 17.12% 361,206
Aetna Vest Estate Protector ...... 11.487 13.468 17.25% 2,138
Aetna Legacy Variable Portfolio:
Aetna Vest II ..................... $11.263 $12.576 11.66% (2) 11,119
Aetna Vest Plus .................. 11.118 12.576 13.11% 561,269
Aetna Vest Estate Protector ...... 11.344 12.604 11.11% (3) 31,337
Aetna Variable Index Plus Portfolio:
Aetna Vest ........................ $12.017 $12.762 6.20% (4) 94,956
Aetna Vest II ..................... 11.345 12.762 12.49% (4) 76,612
Aetna Vest Plus .................. 11.172 12.762 14.23% (3) 409,202
Aetna Vest Estate Protector ...... 12.371 12.778 3.29% (5) 77,859
Corporate Specialty Market ...... 12.785 12.762 (0.18%)(6) 216,575
S-5
Variable Life Account B
Condensed Financial Information--Nine Months Ended September 30, 1997
(unaudited & continued)
Increase
Value Per Unit (Decrease)
in Value of Reserves
Beginning End of Accumulation at End
of Period Period Unit of Period
----------- --------- -------------- -----------
Alger American Small
Capitalization Portfolio:
Aetna Vest ........................ $16.051 $18.926 17.92% 1,479,421
Aetna Vest II ..................... 16.052 18.928 17.92% 664,375
Aetna Vest Plus .................. 16.043 18.918 17.92% 10,299,964
Aetna Vest Estate Protector ...... 9.982 11.783 18.05% 553,593
Corporate Specialty Market ...... 13.201 15.566 17.92% 7,700,445
American Century VP Capital
Appreciation Fund:
Aetna Vest ........................ $12.534 $13.826 10.31% 881,640
Aetna Vest II ..................... 12.590 13.888 10.31% 294,690
Aetna Vest Plus .................. 12.419 13.698 10.31% 4,592,275
Aetna Vest Estate Protector ...... 9.511 10.503 10.43% 100,399
Corporate Specialty Market ...... 11.358 12.528 10.31% 1,351,832
Fidelity Investments Variable
Insurance Products Fund:
Equity-Income Portfolio:
Aetna Vest ........................ $10.871 $13.549 24.64% 169,511
Aetna Vest II ..................... 10.871 13.549 24.64% 67,118
Aetna Vest Plus .................. 10.871 13.549 24.64% 4,134,876
Aetna Vest Estate Protector ...... 10.883 13.580 24.78% 585,334
Corporate Specialty Market ...... 12.512 15.594 24.64% 8,189,278
Fidelity Investments Variable
Insurance Products Fund:
Growth Portfolio:
Corporate Specialty Market ...... $11.255 $13.906 23.55% 5,033,748
Overseas Portfolio:
Corporate Specialty Market ...... $11.241 $13.335 18.62% 953,003
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market ...... $12.022 $14.093 17.23% 2,107,161
Contrafund Portfolio:
Aetna Vest ........................ $11.525 $14.386 24.82% 481,708
Aetna Vest II ..................... 11.525 14.386 24.82% 106,699
Aetna Vest Plus .................. 11.525 14.386 24.82% 3,455,189
Aetna Vest Estate Protector ...... 11.538 14.419 24.96% 520,560
Corporate Specialty Market ...... 12.396 15.474 24.83% 13,069,943
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest ........................ $16.153 $17.738 9.81% 905,943
Aetna Vest II ..................... 16.153 17.738 9.81% 531,805
Aetna Vest Plus .................. 16.153 17.738 9.81% 5,523,172
Aetna Vest Estate Protector ...... 9.797 10.770 9.93% 627,618
Corporate Specialty Market ...... 12.120 13.309 9.81% 2,515,370
S-6
Variable Life Account B
Condensed Financial Information--Nine Months Ended September 30, 1997
(unaudited & continued):
Increase
Value Per Unit (Decrease)
in Value of Reserves
Beginning End of Accumulation at End
of Period Period Unit of Period
----------- --------- ----------------- -----------
Balanced Portfolio:
Aetna Vest ........................ $13.966 $16.550 18.50% 126,696
Aetna Vest II ..................... 14.075 16.679 18.50% 166,787
Aetna Vest Plus .................. 13.960 16.542 18.50% 3,046,452
Aetna Vest Estate Protector ...... 11.101 13.169 18.63% 110,546
Corporate Specialty Market ...... 12.242 14.507 18.50% 2,984,311
Growth Portfolio:
Aetna Vest ........................ $14.898 $18.346 23.14% 684,594
Aetna Vest II ..................... 14.884 18.326 23.14% 1,143,611
Aetna Vest Plus .................. 14.863 18.303 23.14% 6,587,329
Aetna Vest Estate Protector ...... 10.857 13.385 23.28% 492,886
Corporate Specialty Market ...... 12.232 15.063 23.14% 1,316,737
Short-Term Bond Portfolio:
Aetna Vest ........................ $11.289 $11.772 4.27% 7,426
Aetna Vest II ..................... 11.277 11.759 4.27% 1,534
Aetna Vest Plus .................. 11.247 11.727 4.27% 529,601
Aetna Vest Estate Protector ...... 10.389 10.818 4.13% (1) 9,958
Corporate Specialty Market ...... 10.468 10.916 4.27% 988,724
Worldwide Growth Portfolio:
Aetna Vest ........................ $16.364 $20.576 25.74% 2,234,729
Aetna Vest II ..................... 16.368 20.582 25.74% 1,184,713
Aetna Vest Plus .................. 16.348 20.556 25.74% 10,139,649
Aetna Vest Estate Protector ...... 11.811 14.868 25.88% 648,134
Corporate Specialty Market ...... 13.459 16.924 25.74% 7,111,884
Scudder Variable Life Investment
Fund--International Portfolio:
Aetna Vest ........................ $14.543 $16.692 14.78% 2,307,215
Aetna Vest II ..................... 14.453 16.589 14.78% 746,333
Aetna Vest Plus .................. 14.373 16.496 14.78% 6,951,136
Aetna Vest Estate Protector ...... 10.898 12.522 14.90% 201,188
Corporate Specialty Market ...... 12.043 13.823 14.78% 3,914,970
Notes to Condensed Financial Information:
(1)--Reflects less than a full year of performance activity. Funds were
first received in this option during January 1997.
(2)--Reflects less than a full year of performance activity. Funds were
first received in this option during February 1997.
(3)--Reflects less than a full year of performance activity. Funds were
first received in this option during May 1997.
(4)--Reflects less than a full year of performance activity. Funds were
first received in this option during June 1997.
(5)--Reflects less than a full year of performance activity. Funds were
first received in this option during July 1997.
(6)--Reflects less than a full year of performance activity. Funds were
first received in this option during August 1997.
S-7
Variable Life Account B
Notes to Financial Statements--September 30, 1997 (Unaudited):
1. Summary of Significant Accounting Policies
Variable Life Account B ("Account") is a separate account established by
Aetna Life Insurance and Annuity Company and is registered under the
Investment Company Act of 1940 as a unit investment trust. The Account is
sold exclusively for use with variable life insurance product contracts as
defined under the Internal Revenue Code of 1986, as amended.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Although actual results
could differ from these estimates, any such differences are expected to be
immaterial to the net assets of the Account.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset
value per share as determined by each fund on September 30, 1997:
Aetna Variable Fund Janus Aspen Series:
Aetna Income Shares [bullet] Aggressive Growth Portfolio
Aetna Variable Encore Fund [bullet] Balanced Portfolio
Aetna Investment Advisers Fund, Inc. [bullet] Growth Portfolio
Aetna Ascent Variable Portfolio [bullet] Short-Term Bond Portfolio
Aetna Crossroads Variable Portfolio [bullet] Worldwide Growth Portfolio
Aetna Legacy Variable Portfolio Scudder Variable Life Investment
Aetna Variable Index Plus Portfolio Fund--International Portfolio
Alger American Small
Capitalization Portfolio
American Century VP Capital
Appreciation Fund
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
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-8
Variable Life Account B
Notes to Financial Statements--September 30, 1997 (unaudited & continued):
3. Dividend Income
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 (distributions in excess of net investment income) and accumulated
net realized gain (loss) on investments is included in net unrealized gain
(loss) on investments in the Statements of Operations and Changes in Net
Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the nine month periods ended September 30, 1997
and September 30, 1996 aggregated $190,520,232 and $139,757,147 and
$80,774,933 and $20,651,970, respectively.
S-9
Variable Life Account B
Notes to Financial Statements--September 30, 1997 (unaudited & continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets--Nine Months Ended September 30, 1997
Valuation Proceeds Cost of Net
Period from Invesments Realized
Dividends Deductions Sales Sold Gain (Loss)
------------- ---------------- -------------- -------------- ------------
Aetna Variable Fund:
PolicyHolders' account values ...... $ 4,806,166 $ (759,765) $ 7,628,880 $ 5,575,341 $ 2,053,539
Aetna Income Shares:
PolicyHolders' account values ...... 371,054 (97,068) 1,779,972 1,823,228 (43,256)
Aetna Variable Encore Fund:
PolicyHolders' account values ...... 372,968 (100,707) 43,104,359 42,850,706 253,653
Aetna Investment Advisers Fund, Inc.:
PolicyHolders' account values ...... 1,720,435 (127,224) 1,636,280 1,316,961 319,319
Aetna Ascent Variable Portfolio:
PolicyHolders' account values ...... 13,550 (7,125) 779,440 770,289 9,151
Aetna Crossroads Variable Portfolio:
PolicyHolders' account values ...... 4,060 (1,903) 181,294 178,792 2,502
Aetna Legacy Variable Portfolio:
PolicyHolders' account values ...... 7,636 (2,023) 216,181 198,502 17,679
Aetna Variable Index Plus Portfolio:
PolicyHolders' account values ...... 0 (1,350) 2,893 2,642 251
Alger American Small Capitalization
Portfolio:
PolicyHolders' account values ...... 576,583 (97,515) 27,120,190 25,868,551 1,251,639
American Century VP Capital
Appreciation Fund:
PolicyHolders' account values ...... 132,455 (45,867) 3,235,827 3,442,376 (206,549)
Fidelity Investments Variable Insurance
Products Fund:
Equity-Income Portfolio:
PolicyHolders' account values ...... 1,485,715 (123,125) 11,734,663 9,571,434 2,163,229
Growth Portfolio:
PolicyHolders' account values ...... 192,233 (39,162) 6,082,672 5,284,973 797,699
Overseas Portfolio:
PolicyHolders' account values ...... 46,706 (4,712) 46,070 41,030 5,040
Fidelity Investments Variable Insurance
Products Fund II:
Asset Manager Portfolio:
PolicyHolders' account values ...... 175,953 (12,238) 96,650 91,251 5,399
Contrafund Portfolio:
PolicyHolders' account values ...... 235,708 (63,309) 4,141,445 3,321,787 819,658
Janus Aspen Series:
Aggressive Growth Portfolio:
PolicyHolders' account values ...... 0 (67,528) 15,604,169 15,153,080 451,089
Balanced Portfolio:
PolicyHolders' account values ...... 123,266 (34,252) 982,085 824,394 157,691
Growth Portfolio:
PolicyHolders' account values ...... 277,232 (61,963) 3,109,251 2,424,122 685,129
Short-Term Bond Portfolio:
PolicyHolders' account values ...... 101,542 (28,323) 3,489,096 3,386,095 103,001
Worldwide Growth Portfolio:
PolicyHolders' account values ...... 274,427 (109,951) 5,994,187 4,447,419 1,546,768
Scudder Variable Life Investment Fund--
International Portfolio:
PolicyHolders' account values ...... 264,245 (87,149) 2,791,543 2,136,253 655,290
------------ ------------ ------------- ------------- -----------
Total Variable Life Account B ...... $11,181,934 $ (1,872,259) $139,757,147 $128,709,226 $11,047,921
============ ============ ============= ============= ===========
S-10
Net Increase
Net Unrealized Net (Decrease) In
Gain (Loss) Change in Net Assets Net Assets
Beginning End Unrealized from Unit Beginning End
of Period of Period Gain (Loss) Transactions of Period of Period
- ------------- ------------- ------------- -------------- -------------- -------------
$ 7,294,643 $31,518,299 $24,223,656 $ 7,831,916 $ 92,871,626 $131,027,138
(190,180) 350,595 540,775 4,905,304 13,179,787 18,856,596
106,394 51,381 (55,013) 5,490,419 9,092,185 15,053,505
1,383,931 2,748,202 1,364,271 1,873,923 15,791,541 20,942,265
15,645 220,169 204,524 832,228 545,378 1,597,706
(191) 48,987 49,178 283,818 123,692 461,347
20 28,909 28,889 537,581 13,963 603,725
0 22,952 22,952 853,351 0 875,204
172,057 799,979 627,922 5,253,086 13,086,083 20,697,798
(146,911) 619,963 766,874 91,398 6,482,525 7,220,836
1,096,283 1,561,726 465,443 (4,155,358) 13,310,213 13,146,117
294,867 568,043 273,176 (1,242,727) 5,052,529 5,033,748
37,941 104,008 66,067 307,575 532,327 953,003
134,978 252,377 117,399 410,462 1,410,186 2,107,161
730,883 1,835,606 1,104,723 8,625,629 6,911,690 17,634,099
249,074 976,934 727,860 (670,440) 9,662,927 10,103,908
243,163 851,665 608,502 2,005,240 3,574,345 6,434,792
566,478 1,545,448 978,970 1,171,142 7,174,647 10,225,157
26,773 22,780 (3,993) (2,462,833) 3,827,848 1,537,242
872,277 2,871,957 1,999,680 7,693,049 9,915,136 21,319,109
1,244,544 2,099,099 854,555 1,818,647 10,615,255 14,120,843
----------- ------------ ----------- ------------ ------------- -------------
$14,132,669 $49,099,079 $34,966,410 $41,453,410 $223,173,883 $319,951,299
=========== ============ =========== ============ ============= =============
S-11
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1996
ASSETS:
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 2,867,163 shares (cost $85,576,983) ........................ $ 92,871,626
Aetna Income Shares; 1,044,098 shares (cost $13,369,967) ........................ 13,179,787
Aetna Variable Encore Fund; 689,138 shares (cost $8,985,791) ..................... 9,092,185
Aetna Investment Advisers Fund, Inc.; 1,044,556 shares (cost $14,407,610)......... 15,791,541
Aetna Ascent Variable Portfolio; 43,217 shares (cost $529,733) .................. 545,378
Aetna Crossroads Variable Portfolio; 10,326 shares (cost $123,882) ............... 123,692
Aetna Legacy Variable Portfolio; 1,241 shares (cost $13,943) ..................... 13,963
Alger American Small Capitalization Portfolio; 319,875 shares (cost $12,914,026) 13,086,083
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio; 632,915 shares (cost $12,213,929) ..................... 13,310,213
Growth Portfolio; 162,252 shares (cost $4,757,662) .............................. 5,052,529
Overseas Portfolio; 28,255 shares (cost $494,386) .............................. 532,327
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio; 83,295 shares (cost $1,275,209) ........................ 1,410,186
Contrafund Portfolio; 417,373 shares (cost $6,180,807)........................... 6,911,690
Janus Aspen Series:
Aggressive Growth Portfolio; 529,766 shares (cost $9,413,853) .................. 9,662,927
Balanced Portfolio; 242,000 shares (cost $3,331,182) ........................... 3,574,345
Growth Portfolio; 462,582 shares (cost $6,608,169) .............................. 7,174,647
Short-Term Bond Portfolio; 383,937 shares (cost $3,801,075) ..................... 3,827,848
Worldwide Growth Portfolio; 510,038 shares (cost $9,042,860)..................... 9,915,136
Scudder Variable Life Investment Fund--
International Portfolio; 801,151 shares (cost $9,370,711)........................ 10,615,255
TCI Portfolios, Inc.--Growth Fund; 633,059 shares (cost $6,629,436)............... 6,482,525
-------------
NET ASSETS (cost $209,041,214) ................................................... $223,173,883
=============
Net assets represented by:
Policyholders' account values: (Notes 1 and 5)
Aetna Variable Fund:
Policyholders' account values ................................................... $ 92,871,626
Aetna Income Shares:
Policyholders' account values ................................................... 13,179,787
Aetna Variable Encore Fund:
Policyholders' account values ................................................... 9,092,185
Aetna Investment Advisers Fund, Inc.:
Policyholders' account values ................................................... 15,791,541
Aetna Ascent Variable Portfolio:
Policyholders' account values ................................................... 545,378
Aetna Crossroads Variable Portfolio:
Policyholders' account values ................................................... 123,692
See Notes to Financial Statements
S-12
Variable Life Account B
Statement of Assets and Liabilities--December 31, 1996 (continued):
Aetna Legacy Variable Portfolio:
Policyholders' account values .............................. $ 13,963
Alger American Small Capitalization Portfolio:
Policyholders' account values .............................. 13,086,083
Fidelity Investments Variable Insurance Products Fund:
Equity-Income Portfolio:
Policyholders' account values .............................. 13,310,213
Growth Portfolio:
Policyholders' account values .............................. 5,052,529
Overseas Portfolio:
Policyholders' account values .............................. 532,327
Fidelity Investments Variable Insurance Products Fund II:
Asset Manager Portfolio:
Policyholders' account values .............................. 1,410,186
Contrafund Portfolio:
Policyholders' account values .............................. 6,911,690
Janus Aspen Series:
Aggressive Growth Portfolio:
Policyholders' account values .............................. 9,662,927
Balanced Portfolio:
Policyholders' account values .............................. 3,574,345
Growth Portfolio:
Policyholders' account values .............................. 7,174,647
Short-Term Bond Portfolio:
Policyholders' account values .............................. 3,827,848
Worldwide Growth Portfolio:
Policyholders' account values .............................. 9,915,136
Scudder Variable Life Investment Fund--International Portfolio:
Policyholders' account values .............................. 10,615,255
TCI Portfolios, Inc.--Growth Fund:
Policyholders' account values .............................. 6,482,525
-------------
$223,173,883
=============
See Notes to Financial Statements
S-13
Variable Life Account B
Statements of Operations and Changes in Net Assets
Year ended December 31,
---------------------------------
1996 1995
--------------- ---------------
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
Dividends ...................................................... $ 13,813,478 $ 12,965,237
Expenses: (Notes 2 and 5)
Valuation Period Deductions .................................... (1,905,137) (1,149,801)
------------- -------------
Net investment income ............................................. 11,908,341 11,815,436
------------- -------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
Proceeds from sales ............................................. 29,656,908 28,828,178
Cost of investments sold ....................................... 26,434,292 25,993,679
------------- -------------
Net realized gain ............................................. 3,222,616 2,834,499
------------- -------------
Net unrealized gain (loss) on investments: (Note 5)
Beginning of year ................................................ 4,391,574 (4,407,131)
End of year ...................................................... 14,132,669 4,391,574
------------- -------------
Net change in unrealized gain ................................. 9,741,095 8,798,705
------------- -------------
Net realized and unrealized gain on investments .................. 12,963,711 11,633,204
------------- -------------
Net increase in net assets resulting from operations ............ 24,872,052 23,448,640
------------- -------------
FROM UNIT TRANSACTIONS:
Variable life premium payments .................................... 101,416,302 44,310,537
Sales and administrative charges deducted by the Company ......... (3,032,151) (1,381,985)
Premiums allocated to the fixed account ........................... (3,127,437) (3,260,098)
------------- -------------
Net premiums allocated to the variable account .................. 95,256,714 39,668,454
Transfers to the Company for monthly deductions .................. (15,491,673) (11,297,188)
Redemptions by contract holders ................................. (4,154,465) (3,238,332)
Transfers on account of policy loans .............................. (3,783,533) (2,076,373)
Other ............................................................ (40,991) 41,863
------------- -------------
Net increase in net assets from unit transactions (Note 5) ...... 71,786,052 23,098,424
------------- -------------
Change in net assets ............................................. 96,658,104 46,547,064
NET ASSETS:
Beginning of year ................................................ 126,515,779 79,968,715
------------- -------------
End of year ...................................................... $223,173,883 $126,515,779
============= =============
See Notes to Financial Statements
S-14
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1996
Value
Per Unit Increase (Decrease) Units
in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
----------- --------- --------------------- ------------- -------------------------
Aetna Variable Fund:
Aetna Vest ........................ $28.351 $34.932 23.21% 1,517,474.5 $53,008,643
Aetna Vest II ..................... 15.831 19.507 23.21% 794,275.5 15,493,624
Aetna Vest Plus .................. 13.301 16.389 23.21% 1,323,444.4 21,689,765
Aetna Vest Estate Protector ...... 10.000 11.675 16.75%(2) 11,748.7 137,170
Corporate Specialty Market ......... 12.016 14.805 23.21% 171,723.7 2,542,424
Aetna Income Shares:
Aetna Vest ........................ $21.305 $21.850 2.56% 279,436.3 $ 6,105,721
Aetna Vest II ..................... 14.324 14.691 2.56% 67,932.7 997,974
Aetna Vest Plus .................. 11.470 11.764 2.56% 132,814.7 1,562,403
Aetna Vest Estate Protector ...... 10.000 10.452 4.52%(2) 17.0 177
Corporate Specialty Market ......... 11.071 11.354 2.56% 397,512.3 4,513,512
Aetna Variable Encore Fund:
Aetna Vest ........................ $15.891 $16.577 4.32% 165,067.7 $ 2,736,269
Aetna Vest II ..................... 11.616 12.117 4.32% 17,257.4 209,105
Aetna Vest Plus .................. 10.917 11.388 4.32% 277,635.4 3,161,633
Aetna Vest Estate Protector ...... 10.000 10.333 3.33%(2) 55,176.3 570,162
Corporate Specialty Market ......... 10.444 10.895 4.32% 221,672.3 2,415,016
Aetna Investment Advisers Fund, Inc.:
Aetna Vest ........................ $15.390 $17.547 14.02% 106,202.5 $ 1,863,538
Aetna Vest II ..................... 15.561 17.742 14.02% 228,951.9 4,062,177
Aetna Vest Plus .................. 13.050 14.880 14.02% 393,635.7 5,857,138
Corporate Specialty Market ......... 11.361 12.954 14.02% 309,462.5 4,008,688
Aetna Ascent Variable Portfolio:
Aetna Vest ........................ $10.000 $11.828 18.28%(2) 3,460.3 $ 40,930
Aetna Vest II ..................... 10.000 11.828 18.28%(2) 2,054.0 24,295
Aetna Vest Plus .................. 10.000 11.828 18.28%(2) 40,593.4 480,153
Aetna Crossroads Variable Portfolio:
Aetna Vest ........................ $10.000 $11.474 14.74%(2) 99.8 $ 1,145
Aetna Vest Plus .................. 10.000 11.474 14.74%(2) 10,665.0 122,368
Aetna Vest Estate Protector ...... 10.000 11.487 14.87%(2) 15.6 179
Aetna Legacy Variable Portfolio:
Aetna Vest Plus .................. $10.000 $11.118 11.18%(2) 1,255.9 $ 13,963
Alger American Small
Capitalization Portfolio:
Aetna Vest ........................ $15.562 $16.051 3.14% 77,047.6 $ 1,236,667
Aetna Vest II ..................... 15.563 16.052 3.14% 52,282.1 839,239
Aetna Vest Plus .................. 15.555 16.043 3.14% 381,746.1 6,124,522
Aetna Vest Estate Protector ...... 10.000 9.982 (0.18%)(2) 21,147.3 211,085
Corporate Specialty Market ......... 12.799 13.201 3.14% 354,114.8 4,674,570
S-15
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1996 (continued):
Value
Per Unit Increase (Decrease) Units
in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
----------- --------- --------------------- ------------- -----------------------
Fidelity Investments Variable
Insurance Products Fund:
Equity-Income Portfolio:
Aetna Vest ........................ $10.000 $10.871 8.71%(2) 6,532.8 $ 71,015
Aetna Vest II ..................... 10.000 10.871 8.71%(2) 2,200.1 23,916
Aetna Vest Plus .................. 10.000 10.871 8.71%(2) 118,798.4 1,291,404
Aetna Vest Estate Protector ...... 10.000 10.883 8.83%(2) 10,991.4 119,619
Corporate Specialty Market ...... 11.058 12.512 13.14% 943,466.6 11,804,259
Growth Portfolio:
Corporate Specialty Market ...... $ 9.911 $11.255 13.56% 448,921.8 $ 5,052,529
Overseas Portfolio:
Corporate Specialty Market ...... $10.029 $11.241 12.09% 47,354.8 $ 532,327
Fidelity Investments Variable
Insurance Products Fund II:
Asset Manager Portfolio:
Corporate Specialty Market ...... $10.596 $12.022 13.46% 117,298.4 $ 1,410,186
Contrafund Portfolio:
Aetna Vest ........................ $10.000 $11.525 15.25%(2) 17,996.4 $ 207,415
Aetna Vest II ..................... 10.000 11.525 15.25%(2) 3,659.1 42,173
Aetna Vest Plus .................. 10.000 11.525 15.25%(2) 80,966.3 933,168
Aetna Vest Estate Protector ...... 10.000 11.538 15.38%(2) 10,537.3 121,585
Corporate Specialty Market ...... 10.322 12.396 20.10% 452,333.3 5,607,349
Janus Aspen Series:
Aggressive Growth Portfolio:
Aetna Vest ........................ $15.114 $16.153 6.87% 55,921.6 $ 903,288
Aetna Vest II ..................... 15.114 16.153 6.87% 35,775.8 577,877
Aetna Vest Plus .................. 15.114 16.153 6.87% 221,641.2 3,580,130
Aetna Vest Estate Protector ...... 10.000 9.797 (2.03%)(2) 15,306.0 149,948
Corporate Specialty Market ...... 11.340 12.120 6.87% 367,315.7 4,451,684
Balanced Portfolio:
Aetna Vest ........................ $12.142 $13.966 15.02% 6,502.2 $ 90,808
Aetna Vest II ..................... 12.237 14.075 15.02% 4,206.4 59,204
Aetna Vest Plus .................. 12.136 13.960 15.02% 124,211.8 1,733,938
Aetna Vest Estate Protector ...... 10.000 11.101 11.01%(2) 3,134.9 34,800
Corporate Specialty Market ...... 10.643 12.242 15.02% 135,240.2 1,655,595
Growth Portfolio:
Aetna Vest ........................ $12.704 $14.898 17.27% 30,969.1 $ 461,370
Aetna Vest II ..................... 12.692 14.884 17.27% 65,830.7 979,838
Aetna Vest Plus .................. 12.674 14.863 17.27% 234,144.3 3,480,132
Aetna Vest Estate Protector ...... 10.000 10.857 8.57%(2) 1,608.1 17,459
Corporate Specialty Market ...... 10.430 12.232 17.27% 182,790.8 2,235,848
S-16
Variable Life Account B
Condensed Financial Information--Year Ended December 31, 1996 (continued):
Value
Per Unit Increase (Decrease) Units
in Value of Outstanding Reserves
Beginning End of Accumulation at End at End
of Year Year Unit of Year of Year
----------- --------- --------------------- ------------- ---------------------
Short-Term Bond Portfolio:
Aetna Vest ........................ $10.967 $11.289 2.94% 595.3 $ 6,721
Aetna Vest II ..................... 10.955 11.277 2.94% 751.0 8,469
Aetna Vest Plus .................. 10.925 11.247 2.94% 17,621.2 198,177
Corporate Specialty Market ...... 10.094 10.468 3.71%(1) 345,277.1 3,614,481
Worldwide Growth Portfolio:
Aetna Vest ........................ $12.809 $16.364 27.75% 75,637.0 $ 1,237,686
Aetna Vest II ..................... 12.813 16.368 27.75% 50,270.3 822,823
Aetna Vest Plus .................. 12.797 16.348 27.75% 279,744.3 4,573,155
Aetna Vest Estate Protector ...... 10.000 11.811 18.11%(2) 10,429.7 123,180
Corporate Specialty Market ...... 10.964 13.459 22.76%(3) 234,655.4 3,158,292
Scudder Variable Life Investment
Fund--International Portfolio:
Aetna Vest ........................ $12.798 $14.543 13.63% 164,419.0 $ 2,391,112
Aetna Vest II ..................... 12.719 14.453 13.63% 48,351.0 698,823
Aetna Vest Plus .................. 12.648 14.373 13.63% 360,050.5 5,174,856
Aetna Vest Estate Protector ...... 10.000 10.898 8.98%(2) 4,363.0 47,548
Corporate Specialty Market ...... 10.598 12.043 13.63% 191,221.6 2,302,916
TCI Portfolios, Inc.--Growth Fund:
Aetna Vest ........................ $13.248 $12.534 (5.39%) 84,078.3 $ 1,053,865
Aetna Vest II ..................... 13.307 12.590 (5.39%) 29,273.6 368,568
Aetna Vest Plus .................. 13.126 12.419 (5.39%) 361,778.0 4,492,803
Aetna Vest Estate Protector ...... 10.000 9.511 (4.89%)(2) 29.2 278
Corporate Specialty Market ...... 12.005 11.358 (5.39%) 49,922.3 567,011
Notes to Condensed Financial Information:
(1)--Reflects less than a full year of performance activity. Funds were first
received in this option during February 1996.
(2)--Available for investment less than 1 year, contract commenced operations
during March 1996.
(3)--Reflects less than a full year of performance activity. Funds were first
received in this option during March 1996.
See Notes to Financial Statements
S-17
Variable Life Account B
Notes to Financial Statements--December 31, 1996
1. Summary of Significant Accounting Policies
Variable Life Account B ("Account") is a separate account established by
Aetna Life Insurance and Annuity Company and is registered under the
Investment Company Act of 1940 as a unit investment trust. The Account is
sold exclusively for use with variable life insurance product contracts as
defined under the Internal Revenue Code of 1986, as amended.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Although actual results
could differ from these estimates, any such differences are expected to be
immaterial to the net assets of the Account.
a. Valuation of Investments
Investments in the following Funds are stated at the closing net asset
value per share as determined by each fund on December 31, 1996:
Aetna Variable Fund Janus Aspen Series:
Aetna Income Shares [bullet] Aggressive Growth Portfolio
Aetna Variable Encore Fund [bullet] Balanced Portfolio
Aetna Investment Advisers Fund, Inc. [bullet] Growth Portfolio
Aetna Ascent Variable Portfolio [bullet] Short-Term Bond Portfolio
Aetna Crossroads Variable Portfolio [bullet] Worldwide Growth Portfolio
Aetna Legacy Variable Portfolio Scudder Variable Life Investment
Alger American Small Fund--International Portfolio
Capitalization Portfolio TCI Portfolios, Inc.--Growth Fund
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
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-18
Variable Life Account B
Notes to Financial Statements--December 31, 1996 (continued):
3. Dividend Income
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 (distributions in excess of net investment income) and accumulated
net realized gain (loss) on investments is included in net unrealized gain
(loss) on investments in the Statements of Operations and Changes in Net
Assets.
4. Purchases and Sales of Investments
The cost of purchases and proceeds from sales of investments other than
short-term investments for the years ended December 31, 1996 and December
31, 1995 aggregated $113,349,117 and $29,656,908 and $71,231,087 and
$28,828,178, respectively.
S-19
Variable Life Account B
Notes to Financial Statements--December 31, 1996 (continued):
5. Supplemental Information to Statements of Operations and Changes in Net
Assets--Year Ended December 31, 1996
Valuation Proceeds Cost of Net
Period from Invesments Realized
Dividends Deductions Sales Sold Gain (Loss)
------------- ---------------- ------------- ------------- ------------
Aetna Variable Fund:
PolicyHolder's account values ......... $ 9,712,578 ($ 991,737) $ 5,373,083 $ 4,466,494 $ 906,589
Aetna Income Shares:
PolicyHolder's account values ......... 810,294 (121,325) 1,564,483 1,544,041 20,442
Aetna Variable Encore Fund:
PolicyHolder's account values ......... 477,308 (71,555) 9,490,775 9,560,169 (69,394)
Aetna Investment Advisers Fund, Inc.:
PolicyHolder's account values ......... 1,201,085 (127,990) 1,717,127 1,435,761 281,366
Aetna Ascent Variable Portfolio:
PolicyHolder's account values ......... 18,222 (1,210) 127,981 124,671 3,310
Aetna Crossroads Variable Portfolio:
PolicyHolder's account values ......... 2,462 (91) 1,317 1,263 54
Aetna Legacy Variable Portfolio:
PolicyHolder's account values ......... 671 (36) 503 486 17
Alger American Small Capitalization
Portfolio:
PolicyHolder's account values ......... 33,925 (93,143) 2,003,029 1,400,608 602,421
Fidelity Investments Variable Insurance
Products Fund:
Equity-Income Portfolio:
PolicyHolder's account values ......... 19,619 (57,181) 625,427 574,716 50,711
Growth Portfolio:
PolicyHolder's account values ......... 85,627 (30,149) 243,345 245,938 (2,593)
Overseas Portfolio:
PolicyHolder's account values ......... 14,172 (4,004) 478,644 450,003 28,641
Fidelity Investments Variable Insurance
Products Fund II:
Asset Manager Portfolio:
PolicyHolder's account values ......... 62,788 (13,383) 981,022 966,124 14,898
Contrafund Portfolio:
PolicyHolder's account values ......... 10,199 (36,829) 353,531 314,886 38,645
Janus Aspen Series:
Aggressive Growth Portfolio:
PolicyHolder's account values ......... 79,809 (68,571) 1,171,119 858,482 312,637
Balanced Portfolio:
PolicyHolder's account values ......... 70,301 (23,444) 452,062 367,517 84,545
Growth Portfolio:
PolicyHolder's account values ......... 140,964 (46,593) 808,709 590,651 218,058
Short-Term Bond Portfolio:
PolicyHolder's account values ......... 84,482 (17,596) 424,360 415,377 8,983
Worldwide Growth Portfolio:
PolicyHolder's account values ......... 105,214 (49,874) 1,127,422 777,300 350,122
Scudder Variable Life Investment Fund -
International Portfolio:
PolicyHolder's account values ......... 173,534 (85,922) 1,752,475 1,537,715 214,760
TCI Portfolios, Inc.--Growth Fund:
PolicyHolder's account values ......... 710,224 (64,504) 960,494 802,090 158,404
------------ ------------ ------------ ------------ ----------
Total Variable Life Account B ......... $13,813,478 ($1,905,137) $29,656,908 $26,434,292 $3,222,616
=========== ============ =========== =========== ==========
S-20
Net Increase
Net Unrealized Net (Decrease) In
Gain (Loss) Change in Net Assets Net Assets
Beginning End Unrealized from Unit Beginning End
of Year of Year Gain (Loss) Transactions of Year of Year
- ------------ ------------- -------------- -------------- -------------- -------------
$ 65,391 $ 7,294,643 $ 7,229,252 $ 5,056,913 $ 70,958,031 $ 92,871,626
189,278 (190,180) (379,458) 2,798,667 10,051,167 13,179,787
138,935 106,394 (32,541) 3,268,179 5,520,188 9,092,185
1,031,584 1,383,931 352,347 4,815,033 9,269,700 15,791,541
0 15,645 15,645 509,411 0 545,378
0 (191) (191) 121,458 0 123,692
0 20 20 13,291 0 13,963
595,950 172,057 (423,893) 7,688,994 5,277,779 13,086,083
28,202 1,096,283 1,068,081 11,810,807 418,176 13,310,213
(36,211) 294,867 331,078 3,470,007 1,198,559 5,052,529
21,923 37,941 16,018 (102,302) 579,802 532,327
47,435 134,978 87,543 298,650 959,690 1,410,186
10,253 730,883 720,630 5,090,135 1,088,910 6,911,690
376,606 249,074 (127,532) 5,949,433 3,517,151 9,662,927
60,589 243,163 182,574 2,648,699 611,670 3,574,345
196,848 566,478 369,630 3,974,072 2,518,516 7,174,647
6,078 26,773 20,695 3,383,696 347,588 3,827,848
227,523 872,277 644,754 7,436,957 1,427,963 9,915,136
431,463 1,244,544 813,081 2,808,258 6,691,544 10,615,255
999,727 (146,911) (1,146,638) 745,694 6,079,345 6,482,525
---------- ----------- ------------ ----------- ------------- -------------
$4,391,574 $14,132,669 $ 9,741,095 $71,786,052 $126,515,779 $223,173,883
========== =========== ============ =========== ============= =============
S-21
Independent Auditor's 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, 1996, and the related statements of operations and changes in net
assets for each of the years in the two-year period then ended, and condensed
financial information for the year ended December 31, 1996. These financial
statements and condensed financial information are the responsibility of the
Account's management. Our responsibility is to express an opinion on these
fiancial statements and condensed financial informaiton 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, 1996, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Aetna Life Insurance and Annuity Company Variable Life Account B as
of December 31, 1996, the results of its operations and the 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, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 14, 1997
S-22
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Consolidated Statements of Income for the three and nine months ended September 30, 1997
and 1996 (unaudited) ................................................................. F-2
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 F-3
Consolidated Statements of Changes in Shareholder's Equity for the nine months ended
September 30, 1997 and 1996 (unaudited) ............................................. F-4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and
1996 (unaudited) ...................................................................... F-5
Condensed Notes to Consolidated Financial Statements as of September 30, 1997 (unaudited) F-7
Independent Auditors' Report ............................................................ F-10
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 F-11
Consolidated Balance Sheets as of December 31, 1996 and 1995 ........................... F-12
Consolidated Statements of Changes in Shareholder's Equity for the Years Ended December
31, 1996, 1995 and 1994 .............................................................. F-13
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and F-14
1994
Notes to Consolidated Financial Statements ............................................. F-16
F-1
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
3 Months Ended 9 Months Ended
September 30, September 30,
----------------- ------------------
(unaudited) (unaudited)
1997 1996 1997 1996
-------- -------- ---------- ---------
Revenue:
Premiums $ 68.2 $ 35.5 $ 200.1 $ 99.9
Charges assessed against policyholders 127.7 99.1 350.2 289.3
Net investment income 269.5 259.7 804.9 771.8
Net realized capital gains 8.8 0.1 17.9 17.2
Other income 9.6 9.4 28.8 34.6
------- ------- --------- ---------
Total revenue 483.8 403.8 1,401.9 1,212.8
Benefits and expenses:
Current and future benefits 286.5 245.6 853.4 719.1
Operating expenses 84.5 84.6 247.3 261.3
Amortization of deferred policy acquisition costs 40.1 17.9 92.4 46.6
Severance and facilities charges -- 47.3 -- 61.3
------- ------- --------- ---------
Total benefits and expenses 411.1 395.4 1,193.1 1,088.3
Income before income taxes 72.7 8.4 208.8 124.5
Income taxes 21.3 1.4 63.9 34.3
------- ------- --------- ---------
Net income $ 51.4 $ 7.0 $ 144.9 $ 90.2
======= ======= ========= =========
See Condensed Notes to Consolidated Financial Statements.
F-2
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)
September 30, December 31,
1997 1996
--------------- -------------
Assets (unaudited)
- ----------------------------------------------------------------- ---------------
Investments:
Debt securities available for sale, at fair value
(amortized cost:$12,736.4 and $12,539.1) $13,257.1 $12,905.5
Equity securities, available for sale:
Nonredeemable preferred stock (cost: $143.4 and $107.6) 166.5 119.0
Investment in affiliated mutual funds (cost: $42.0 and $77.3) 55.1 81.1
Common stock .8 .3
Short-term investments 111.8 34.8
Mortgage loans 12.9 13.0
Policy loans 453.7 399.3
---------- ----------
Total investments 14,057.9 13,553.0
Cash and cash equivalents 614.2 459.1
Accrued investment income 183.0 159.0
Premiums due and other receivables 37.3 26.6
Deferred policy acquisition costs 1,620.6 1,515.3
Reinsurance loan to affiliate 474.4 628.3
Other assets 40.1 33.7
Separate accounts assets 21,494.5 15,318.3
---------- ----------
Total assets $38,522.0 $31,693.3
========== ==========
Liabilities and Shareholder's Equity
- ----------------------------------------------------------------
Liabilities:
Future policy benefits $ 3,757.8 $ 3,617.0
Unpaid claims and claim expenses 28.0 28.9
Policyholders' funds left with the Company 11,074.5 10,663.7
---------- ----------
Total insurance reserve liabilities 14,860.3 14,309.6
Other liabilities 295.2 354.7
Income taxes:
Current 37.1 20.7
Deferred 74.8 80.5
Separate accounts liabilities 21,468.6 15,318.3
---------- ----------
Total liabilities 36,736.0 30,083.8
========== ==========
Shareholder's equity:
Common stock, par value $50 (100,000 shares authorized; 55,000
shares issued and outstanding) 2.8 2.8
Paid-in capital 418.0 418.0
Net unrealized capital gains 96.7 60.5
Retained earnings 1,268.5 1,128.2
---------- ----------
Total shareholder's equity 1,786.0 1,609.5
---------- ----------
Total liabilities and shareholder's equity $38,522.0 $31,693.3
========== ==========
See Condensed Notes to Consolidated Financial Statements.
F-3
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
9 Months Ended September 30,
----------------------------
(unaudited)
1997 1996
---------- -------------
Shareholder's equity, beginning of year $1,609.5 $ 1,583.0
Net change in unrealized capital gains (losses) 36.2 (93.4)
Net income 144.9 90.2
Common stock dividends (8.3) (1.5)
Other changes 3.7 --
-------- ----------
Shareholder's equity, end of period $1,786.0 $ 1,578.3
======== ==========
See Condensed Notes to Consolidated Financial Statements.
F-4
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
9 Months Ended September 30,
----------------------------
(unaudited)
1997 1996
------------ -------------
Cash Flows from Operating Activities:
Net income $ 144.9 $ 90.2
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Increase in accrued investment income (24.0) (13.0)
Increase in premiums due and other receivables (8.8) (2.3)
Increase in policy loans (54.4) (29.5)
Increase in deferred policy acquisition costs (105.3) (127.2)
Decrease in reinsurance loan to affiliate 153.9 22.1
Net increase in universal life account balances 224.1 172.5
Decrease in other insurance reserve liabilities (165.5) (125.2)
Net (decrease) increase in other liabilities and other assets (122.4) 126.8
Decrease in income taxes (3.9) (23.5)
Net accretion of discount on investments (51.9) (51.1)
Net realized capital gains (17.9) (17.2)
---------- ----------
Net cash (used for) provided by operating activities (31.2) 22.6
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 3,828.5 3,830.6
Equity securities 61.3 114.5
Mortgage loans 0.1 8.6
Investment maturities and collections of:
Debt securities available for sale 966.8 681.8
Short-term investments 43.2 21.5
Cost of investment purchases in:
Debt securities available for sale (4,811.0) (4,996.5)
Equity securities (53.6) (63.7)
Short-term investments (120.1) (35.5)
Other, net -- (9.1)
---------- ----------
Net cash used for investing activities (84.8) (447.8)
---------- ----------
See Condensed Notes to Consolidated Financial Statements.
F-5
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows (Continued)
(millions)
9 Months Ended September 30,
----------------------------
(unaudited)
1997 1996
----------- --------------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts $1,230.2 $ 1,140.6
Withdrawals of investment contracts (925.8) (860.7)
Dividends paid to shareholder (8.3) (1.5)
Capital contribution to Separate Account (25.0) --
-------- ----------
Net cash provided by financing activities 271.1 278.4
-------- ----------
Net increase (decrease) in cash and cash equivalents 155.1 (146.8)
Cash and cash equivalents, beginning of period 459.1 568.8
-------- ----------
Cash and cash equivalents, end of period $ 614.2 $ 422.0
-------- ----------
Supplemental cash flow information:
Income taxes paid, net $ 68.7 $ 61.4
======== ==========
See Condensed Notes to Consolidated Financial Statements.
F-6
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements
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
Holdings, Inc. ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna
Retirement Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna").
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and are unaudited. Certain
reclassifications have been made to 1996 financial information to conform to
the 1997 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. The accompanying condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related
notes as presented in the Company's 1996 Annual Report on Form 10-K. Certain
financial information that is normally included in annual financial statements
prepared in accordance with generally accepted accounting principles, but that
is not required for interim reporting purposes, has been condensed or omitted.
2. Future Application of Accounting Standards
Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued in
June 1996 and provides accounting and reporting standards for transfers of
financial assets and extinguishments of liabilities.
FAS No. 125 is effective for 1997 financial statements; however, certain
provisions relating to accounting for repurchase agreements and securities
lending are not effective until January 1, 1998. Provisions effective in 1997
did not have a material effect on the Company's financial position or results
of operations. The Company does not expect adoption of this statement for
provisions effective in 1998 to have a material effect on its financial
position or results of operations.
FAS No. 130, Reporting Comprehensive Income, was issued in June 1997 and
establishes standards for the reporting and presentation of comprehensive
income and its components in a full set of financial statements. Comprehensive
income encompasses all changes in shareholder's equity (except those arising
from transactions with owners) and includes net income, net unrealized capital
gains or losses on available for sale securities. As this new standard only
requires additional information in a financial statement, it will not affect
the Company's financial position or results of operations. FAS No. 130 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. The Company is currently evaluating the presentation
alternatives permitted by the statement.
F-7
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
2. Future Application of Accounting Standards (Continued)
FAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, was issued in June 1997 and establishes standards for the
reporting of information relating to operating segments in annual financial
statements, as well as disclosure of selected information in interim financial
reports. This statement supersedes FAS No. 14, Financial Reporting for Segments
of a Business Enterprise, which requires reporting segment information by
industry and geographic area (industry approach). Under FAS No. 131, operating
segments are defined as components of a company for which separate financial
information is available and is used by management to allocate resources and
assess performance (management approach). This statement is effective for
year-end 1998 financial statements. Interim financial information will be
required beginning in 1999 (with comparative 1998 information). The Company
does not anticipate that this standard will significantly impact the
composition of its current operating segments, which are consistent with the
management approach.
3. Financial Instruments
The Company engages in hedging activities to manage interest rate and price
risks. Such hedging activities have principally consisted of using off-balance
sheet instruments such as futures and forward contracts and interest rate swap
agreements. There were no such contracts or agreements open as of September 30,
1997.
4. Severance and Facilities Charges
In the second quarter of 1996, the Company was allocated severance and
facilities reserves from Aetna to reflect actions taken or to be taken to
reduce the level of corporate expenses and other costs previously absorbed by
Aetna's property-casualty operations.
In the third quarter of 1996, the Company established severance and facilities
reserves in the Financial Services and Individual Life Insurance segments to
reflect actions taken or to be taken in order to make its businesses more
competitive.
Activity for the nine months ended September 30, 1997 within the severance and
facilities reserves (pretax, in millions) and positions eliminated related to
such actions were as follows:
Reserve Positions
---------- ----------
Balance at December 31, 1996 ...... $ 47.9 524
Actions taken (1) .................. (19.5) (129)
-------- -----
Balance at September 30, 1997 ...... $ 28.4 395
======== =====
(1) Includes $9.9 million of severance-related actions and $7.0 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed by
March 31, 1998. The corporate allocation actions and vacating of certain leased
office space are expected to be substantially completed in 1997.
F-8
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Notes to Consolidated Financial Statements (Continued)
5. Related Party Transactions
Effective December 31, 1988, the Company entered into a reinsurance agreement
with Aetna Life Insurance Company ("Aetna Life") in which substantially all of
the nonparticipating individual life and annuity business written by Aetna Life
prior to 1981 was assumed by the Company. Effective January 1, 1997, this
agreement has been amended to transition (based on underlying investment
rollover in Aetna Life) from a modified coinsurance to a coinsurance
arrangement. As a result of this change, reserves will be ceded to the Company
from Aetna Life as investment rollover occurs and the loan previously
established will be reduced.
6. Litigation
The Company is involved in numerous lawsuits arising, for the most part, in the
ordinary course of its business operations. While the ultimate outcome of
litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, it is not expected to result in liability for amounts material to
the financial condition of the Company, although it may adversely affect
results of operations in future periods.
7. Dividends
On June 27, 1997 and August 15, 1997, the Company paid a $5.3 million and $3.0
million, respectively, dividend to HOLDCO. The additional amount of dividends
that may be paid by the Company to HOLDCO in 1997 without prior approval by the
Insurance Commissioner of the State of Connecticut is $62.8 million.
F-9
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, 1996 and
1995, 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, 1996. 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, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
February 4, 1997
F-10
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Income
(millions)
Years Ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- ---------
Revenue:
Premiums $ 133.6 $ 212.7 $ 191.6
Charges assessed against policyholders 396.5 318.9 279.0
Net investment income 1,045.6 1,004.3 917.2
Net realized capital gains 19.7 41.3 1.5
Other income 45.4 42.0 10.3
--------- --------- ---------
Total revenue 1,640.8 1,619.2 1,399.6
Benefits and expenses:
Current and future benefits 968.6 997.2 921.5
Operating expenses 342.2 310.8 225.7
Amortization of deferred policy acquisition costs 69.8 48.0 31.5
Severance and facilities charges 61.3 -- --
--------- --------- ---------
Total benefits and expenses 1,441.9 1,356.0 1,178.7
--------- --------- ---------
Income before income taxes 198.9 263.2 220.9
Income taxes 57.8 87.3 75.6
--------- --------- ---------
Net income $ 141.1 $ 175.9 $ 145.3
========= ========= =========
See Notes to Consolidated Financial Statements.
F-11
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Balance Sheets
(millions, except share data)--
December 31,
-------------------------
Assets 1996 1995
- ------------------------------------------------------------------ ----------- -----------
Investments:
Debt securities, available for sale:
(amortized cost: $12,539.1 and $11,923.7) $12,905.5 $12,720.8
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $107.6 and $51.3) 119.0 57.6
Investment in affiliated mutual funds (cost: $77.3 and $173.4) 81.1 191.8
Common stock (cost: $0.0 and $6.9) 0.3 8.2
Short-term investments 34.8 15.1
Mortgage loans 13.0 21.2
Policy loans 399.3 338.6
---------- -----------
Total investments 13,553.0 13,353.3
Cash and cash equivalents 459.1 568.8
Accrued investment income 159.0 175.5
Premiums due and other receivables 26.6 37.3
Deferred policy acquisition costs 1,515.3 1,341.3
Reinsurance loan to affiliate 628.3 655.5
Other assets 33.7 26.2
Separate Accounts assets 15,318.3 10,987.0
---------- -----------
Total assets $31,693.3 $27,144.9
========== ===========
Liabilities and Shareholder's Equity
- -----------------------------------------------------------------
Liabilities:
Future policy benefits $ 3,617.0 $ 3,594.6
Unpaid claims and claim expenses 28.9 27.2
Policyholders' funds left with the Company 10,663.7 10,500.1
---------- -----------
Total insurance reserve liabilities 14,309.6 14,121.9
Other liabilities 354.7 257.2
Income taxes:
Current 20.7 26.2
Deferred 80.5 169.6
Separate Accounts liabilities 15,318.3 10,987.0
---------- -----------
Total liabilities 30,083.8 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 418.0 407.6
Net unrealized capital gains 60.5 132.5
Retained earnings 1,128.2 1,040.1
---------- -----------
Total shareholder's equity 1,609.5 1,583.0
---------- -----------
Total liabilities and shareholder's equity $31,693.3 $27,144.9
========== ===========
See Notes to Consolidated Financial Statements.
F-12
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)
Years Ended December 31,
------------------------------------------
1996 1995 1994
---------- ------------- -------------
Shareholder's equity, beginning of year $1,583.0 $ 1,088.5 $ 1,246.7
Capital contributions 10.4 -- --
Net change in unrealized capital gains (losses) (72.0) 321.5 (303.5)
Net income 141.1 175.9 145.3
Other changes (49.5) -- --
Common stock dividends declared (3.5) (2.9) --
-------- ---------- ----------
Shareholder's equity, end of year $1,609.5 $ 1,583.0 $ 1,088.5
======== ========== ==========
See Notes to Consolidated Financial Statements.
F-13
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows
(millions)
Years Ended December 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Cash Flows from Operating Activities:
Net income $ 141.1 $ 175.9 $ 145.3
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Decrease (increase) in accrued investment income 16.5 (33.3) (17.5)
Decrease in premiums due and other receivables 1.6 25.4 1.3
Increase in policy loans (60.7) (89.9) (46.0)
Increase in deferred policy acquisition costs (174.0) (177.0) (105.9)
Decrease in reinsurance loan to affiliate 27.2 34.8 27.8
Net increase in universal life account balances 243.2 393.4 164.7
(Decrease) increase in other insurance reserve liabilities (211.5) 79.0 75.1
Net increase in other liabilities and other assets 3.1 13.0 52.5
Decrease in income taxes (26.7) (4.5) (10.3)
Net accretion of discount on investments (68.0) (66.4) (77.9)
Net realized capital gains (19.7) (41.3) (1.5)
Other, net 1.1 -- (1.0)
---------- ---------- ----------
Net cash (used for) provided by operating activities (126.8) 309.1 206.6
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 5,182.2 4,207.2 3,593.8
Equity securities 190.5 180.8 93.1
Mortgage loans 8.7 10.7 --
Limited partnership -- 26.6 --
Investment maturities and collections of:
Debt securities available for sale 885.2 583.9 1,289.2
Short-term investments 35.0 106.1 30.4
Cost of investment purchases in:
Debt securities available for sale (6,534.3) (6,034.0) (5,621.4)
Equity securities (118.1) (170.9) (162.5)
Short-term investments (54.7) (24.7) (106.1)
Mortgage loans -- (21.3) --
Limited partnership -- -- (25.0)
Other, net (17.6) -- --
---------- ---------- ----------
Net cash used for investing activities (423.1) (1,135.6) (908.5)
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
F-14
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Consolidated Statements of Cash Flows (Continued)
(millions)
Years Ended December 31,
--------------------------------------------
1996 1995 1994
------------- ------------- ------------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,579.5 1,884.5 1,737.8
Withdrawals of investment contracts (1,146.2) (1,109.6) (948.7)
Additional capital contributions 10.4 -- --
Dividends paid to shareholder (3.5) (2.9) --
---------- ---------- ---------
Net cash provided by financing activities 440.2 772.0 789.1
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (109.7) (54.5) 87.2
Cash and cash equivalents, beginning of year 568.8 623.3 536.1
---------- ---------- ---------
Cash and cash equivalents, end of year $ 459.1 $ 568.8 $ 623.3
========== ========== =========
Supplemental cash flow information:
Income taxes paid, net $ 85.5 $ 92.8 $ 85.9
========== ========== =========
See Notes to Consolidated Financial Statements.
F-15
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Aetna Life Insurance and Annuity Company and its wholly owned 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 individual life insurance.
Financial services products include annuity contracts that offer a variety of
funding and payout options for individual and employer-sponsored retirement
plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, and
non-qualified annuity contracts. These contracts may be deferred or immediate
("payout annuities"). Financial services also include investment advisory
services, financial planning and pension plan administrative services.
Individual life insurance products include universal life, variable universal
life, traditional whole life and term insurance.
Basis of Presentation
The consolidated financial statements include Aetna Life Insurance and Annuity
Company and its wholly owned 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 Holdings, Inc. ("HOLDCO"). HOLDCO
is a wholly owned subsidiary of Aetna Retirement Services, Inc., whose ultimate
parent is Aetna Inc. ("Aetna").
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. Certain reclassifications have been
made to 1995 and 1994 financial information to conform to the 1996
presentation.
Future Application of Accounting Standards
Financial Accounting Standard ("FAS") No. 125 , Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, was issued in
June 1996. This statement provides accounting and reporting standards for
transfers of financial assets and extinguishments of liabilities. Transactions
covered by this statement would include securitizations, sales of partial
interests in assets, repurchase agreements and securities lending. This
statement requires that after a transfer of financial assets, an entity would
recognize any assets it controls and liabilities it has incurred. An entity
would not recognize assets when control has been surrendered or liabilities
have been satisfied. Portions of this statement are effective for each of 1997
and 1998 financial statements and early adoption is not permitted. The Company
does not expect adoption of this statement to have a material effect on its
financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from reported results using those estimates.
F-16
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
Investments
All of the Company's debt and equity securities are classified as available for
sale and carried at fair value. These securities are written down (as realized
capital losses) for other than temporary declines in value. Unrealized capital
gains and losses related to available for sale investments, other than amounts
allocable to experience rated contractholders, are reflected in shareholder's
equity, net of related taxes.
Fair values for debt and equity securities are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair values are measured utilizing quoted market prices for similar
securities or by using discounted cash flow methods. Cost for mortgage-backed
securities is adjusted for unamortized premiums and discounts, which are
amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments.
Purchases and sales of debt and equity securities are recorded on the trade
date.
The investment in affiliated mutual funds primarily represents an investment in
the Aetna Series Fund, Inc., a retail mutual fund which has been seeded by the
Company, and is carried at fair value.
Mortgage loans and policy loans are carried at unpaid principal balances, net
of impairment reserves. Sales of mortgage loans are recorded on the closing
date.
Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with a maturity of 91 days to one year, are
considered available for sale and are carried at fair value, which approximates
amortized cost.
Futures contracts are carried at fair value and require daily cash settlement.
Changes in the fair value of futures contracts that qualify as hedges are
deferred and recognized as an adjustment to the hedged asset or liability.
Deferred gains or losses on such futures contracts are amortized over the life
of the acquired asset or liability as a yield adjustment or through net
realized capital gains or losses upon disposal of an asset. Changes in the fair
value of futures contracts that do not qualify as hedges are recorded in net
realized capital gains or losses. Hedge designation requires specific asset or
liability identification, a probability at inception of high correlation with
the position underlying the hedge, and that high correlation be maintained
throughout the hedge period. If a hedging instrument ceases to be highly
correlated with the position underlying the hedge, hedge accounting ceases at
that date and excess gains and losses on the hedging instrument are reflected
in net realized capital gains or losses.
F-17
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
Swap agreements which are designated as interest rate risk management
instruments at inception are accounted for using the accrual method.
Accordingly, the difference between amounts paid and received on such
agreements is reported in net investment income. There is no recognition in the
Consolidated Balance Sheets for changes in the fair value of the agreement.
Deferred Policy Acquisition Costs
Certain costs of acquiring insurance business are deferred. These costs, all of
which vary with and are primarily related to the production of new and renewal
business, consist principally of commissions, certain expenses of underwriting
and issuing contracts, and certain agency expenses. For fixed ordinary life
contracts, such costs are amortized over expected premium-paying periods (up to
20 years). For universal life and certain annuity contracts, such costs are
amortized in proportion to estimated gross profits and adjusted to reflect
actual gross profits over the life of the contracts (up to 20 years).
Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross profits
are not adequate to cover related losses and expenses.
Insurance Reserve Liabilities
Future Policy Benefits include reserves for universal life, immediate annuities
with life contingent payouts and traditional life insurance contracts. Reserves
for universal life contracts are equal to cumulative deposits less charges and
withdrawals plus credited interest thereon. Reserves for immediate annuities
with life contingent payouts and traditional life insurance contracts are
computed on the basis of assumed investment yield, mortality, and expenses,
including a margin for adverse deviations. Such assumptions generally vary by
plan, year of issue and policy duration. Reserve interest rates range from
2.25% to 12.00%. Investment yield is based on the Company's experience.
Mortality and withdrawal rate assumptions are based on relevant Aetna
experience and are periodically reviewed against both industry standards and
experience.
Policyholders' Funds Left With the Company include reserves for deferred
annuity investment contracts and immediate annuities without life contingent
payouts. Reserves on such contracts are equal to cumulative deposits less
charges and withdrawals plus credited interest thereon (rates range from 4.00%
to 7.00%), net of adjustments for investment experience that the Company is
entitled to reflect in future credited interest. Reserves on contracts subject
to experience rating reflect the rights of contractholders, plan participants
and the Company.
Unpaid claims for all lines of insurance include benefits for reported losses
and estimates of benefits for losses incurred but not reported.
Premiums, Charges Assessed Against Policyholders, Benefits and Expenses
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender charges, actuarial
margin and other fees are recorded as revenue in
F-18
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
1. Summary of Significant Accounting Policies (Continued)
charges assessed against policyholders. Other amounts received for these
contracts are reflected as deposits and are not recorded as revenue. Life
insurance premiums, other than premiums for universal life and certain annuity
contracts, are recorded as premium revenue when due. Related policy benefits
are recorded in relation to the associated premiums or gross profit so that
profits are recognized over the expected lives of the contracts. When annuity
payments begin under contracts with life contingent payouts that were initially
investment contracts, the accumulated balance in the account is treated as a
single premium for the purchase of an annuity, reflected as an offsetting
amount in both premiums and current and future benefits in the Consolidated
Statements of Income.
Separate Accounts
Assets held under variable universal life and variable annuity contracts are
segregated in Separate Accounts and are invested, as designated by the
contractholder or participant under a contract, in shares of Aetna Variable
Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment
Advisers Fund, Inc., Aetna GET Fund, the Aetna Series Fund Inc., or the Aetna
Generation Funds (collectively, "Funds"), which are managed by the Company, or
other selected mutual funds not managed by the Company.
Separate Accounts assets and liabilities are carried at fair value except for
those relating to a guaranteed interest option. Since the Company bears the
investment risk where the contract is held to maturity, the assets of the
Separate Account supporting the guaranteed interest option are carried at an
amortized cost of $515.6 million for 1996 (fair value $523.0 million) and
$322.2 million for 1995 (fair value $343.9 million). Reserves relating to the
guaranteed interest option are maintained at fund value and reflect interest
credited at rates ranging from 4.10% to 8.00% in 1996 and 4.50% to 8.38% in
1995.
Separate Accounts assets and liabilities are shown as separate captions in the
Consolidated Balance Sheets. Deposits, investment income and net realized and
unrealized capital gains and losses of the Separate Accounts are not reflected
in the Consolidated Statements of Income (with the exception of realized
capital gains and losses on the sale of assets supporting the guaranteed
interest option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
Income Taxes
The Company is included in the consolidated federal income tax return of Aetna.
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. Deferred income tax
expenses/benefits result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
F-19
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments
Debt securities available for sale as of December 31, 1996 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(millions)
U.S. government and government agencies and
authorities $ 1,072.4 $ 20.5 $ 4.5 $ 1,088.4
States, municipalities and political subdivisions 6.0 1.2 -- 7.2
U.S. corporate securities:
Financial 2,143.4 43.1 9.7 2,176.8
Food & fiber 198.2 4.6 1.3 201.5
Healthcare & consumer products 735.9 20.2 6.3 749.8
Media & broadcast 274.9 7.0 2.8 279.1
Natural resources 187.7 4.5 0.4 191.8
Transportation & capital goods 521.9 22.0 1.8 542.1
Utilities 448.8 14.8 2.8 460.8
Other 141.5 3.0 -- 144.5
---------- ------- ------ ----------
Total U.S. corporate securities 4,652.3 119.2 25.1 4,746.4
Foreign Securities:
Government 758.6 36.0 5.7 788.9
Utilities 187.8 16.1 -- 203.9
Other 945.5 30.9 6.3 970.1
---------- ------- ------ ----------
Total foreign securities 1,891.9 83.0 12.0 1,962.9
Residential mortgage-backed securities:
Pass-throughs 792.2 78.3 3.1 867.4
Collateralized mortgage obligations 2,227.8 94.9 13.7 2,309.0
---------- ------- ------ ----------
Total residential mortgage-backed securities 3,020.0 173.2 16.8 3,176.4
Commercial/Multifamily mortgage-backed securities 1,008.7 24.8 5.6 1,027.9
Other asset-backed securities 887.8 10.7 2.2 896.3
---------- ------- ------ ----------
Total Debt Securities $12,539.1 $432.6 $66.2 $12,905.5
========== ======= ====== ==========
F-20
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
Debt securities available for sale as of December 31, 1995 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ -----------
(millions)
U.S. government and government agencies and
authorities $ 539.5 $ 47.5 $ -- $ 587.0
States, municipalities and political subdivisions 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial 2,764.4 110.3 2.1 2,872.6
Food & fiber 310.8 20.8 0.6 331.0
Healthcare & consumer products 766.0 59.2 0.2 825.0
Media & broadcast 191.7 10.0 -- 201.7
Natural resources 186.9 12.6 0.2 199.3
Transportation & capital goods 602.4 46.7 0.2 648.9
Utilities 454.4 27.8 1.0 481.2
Other 119.9 10.2 -- 130.1
---------- ------- ------ -----------
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
Utilities 236.3 32.9 269.2
Other 749.9 60.5 3.5 806.9
---------- ------- ------ -----------
Total foreign securities 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Pass-throughs 556.7 99.2 1.8 654.1
Collateralized mortgage obligations 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
Other asset-backed securities 961.2 35.5 0.5 996.2
---------- ------- ------ -----------
Total Debt Securities $11,923.7 $811.6 $14.5 $ 12,720.8
========== ======= ====== ===========
At December 31, 1996 and 1995, net unrealized appreciation of $366.4 million
and $797.1 million, respectively, on available for sale debt securities
included $288.5 million and $619.1 million, respectively, related to experience
rated contracts, which were not reflected in shareholder's equity but in Future
Policy Benefits and Policyholders' Funds Left With the Company.
F-21
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
The amortized cost and fair value of debt securities for the year ended
December 31, 1996 are shown below by contractual maturity. Actual maturities
may differ from contractual maturities because securities may be restructured,
called, or prepaid.
Amortized Fair
Cost Value
----------- ----------
(millions)
Due to mature:
One year or less ........................ $ 424.4 $ 425.7
After one year through five years ...... 2,162.4 2,194.2
After five years through ten years ...... 2,467.4 2,509.6
After ten years ........................ 2,568.4 2,675.4
Mortgage-backed securities ............... 4,028.7 4,204.3
Other asset-backed securities ............ 887.8 896.3
---------- ----------
Total ................................. $12,539.1 $12,905.5
========== ==========
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time.
Collateral, primarily cash, 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, 1996 and 1995, the Company had loaned securities
(which are reflected as invested assets) with a market value of approximately
$444.7 million and $264.5 million, respectively.
At December 31, 1996 and 1995, debt securities carried at $7.6 million and $7.4
million, respectively, were on deposit as required by regulatory authorities.
The carrying value of non-income producing investments was $0.9 million and
$0.1 million at December 31, 1996 and 1995, respectively.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10% of
the Company's shareholder's equity at December 31, 1996.
Included in the Company's total debt securities were residential collateralized
mortgage obligations ("CMOs") supporting the following:
F-22
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
2. Investments (Continued)
1996 1995
-------------------------- ------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
------------ ----------- ----------- ----------
(millions)
Total residential CMOs (1) $2,309.0 $2,227.8 $2,549.4 $2,383.9
=========== ========= =========== =========
Percentage of total:
Supporting experience rated products 84.2% 85.3%
Supporting remaining products 15.8% 14.7%
----------- -----------
100.0% 100.0%
=========== ===========
(1) At December 31, 1996 and 1995, approximately 71% and 81%, respectively, of
the Company's residential CMO holdings were backed by government agencies
such as GNMA, FNMA, FHLMC.
There are various categories of CMOs which are subject to different degrees of
risk from changes in interest rates and, for nonagency-backed CMOs, defaults.
The principal risks inherent in holding CMOs are prepayment and extension risks
related to dramatic decreases and increases in interest rates resulting in the
repayment of principal from the underlying mortgages either earlier or later
than originally anticipated.
At December 31, 1996 and 1995, approximately 68% and 79%, respectively, of the
Company's CMO holdings were in planned amortization class ("PAC") and
sequential structure tranches, which are subject to less prepayment and
extension risk than other types of CMO instruments. At December 31, 1996 and
1995, approximately 3% of the Company's CMO holdings were in the interest-only
("IOs") and principal-only ("POs") tranches, which are subject to more
prepayment and extension risks than other types of CMO instruments. Remaining
CMO holdings are in other tranches that have prepayment and extension risks
which fall between the degree of risk associated with PACs and sequentials, and
IOs and POs.
Investments in available for sale equity securities were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ --------
(millions)
1996
- -----------------
Equity Securities $184.9 $16.3 $0.8 $ 200.4
------- ------ ----- --------
1995
- -----------------
Equity Securities $231.6 $27.2 $1.2 $ 257.6
------- ------ ----- --------
F-23
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments
Estimated Fair Value
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 1996 and 1995 were as follows:
1996 1995
------------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------- ----------- ---------- ----------
(millions)
Assets:
Mortgage loans $ 13.0 $ 13.2 $ 21.2 $ 21.9
Liabilities:
Investment contract liabilities:
With a fixed maturity $ 1,014.1 $ 1,028.8 $ 989.1 $1,001.2
Without a fixed maturity 9,649.6 9,427.6 9,511.0 9,298.4
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument, nor do
they consider the tax impact of the realization of unrealized gains or losses.
In many cases, the fair value estimates cannot be substantiated by comparison
to independent markets, nor can the disclosed value be realized in immediate
settlement of the instrument. In evaluating the Company's management of
interest rate, price and liquidity risks, the fair values of all assets and
liabilities should be taken into consideration, not only those presented above.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Mortgage loans: Fair values are estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans.
Investment contract liabilities (included in Policyholders' Funds Left With the
Company):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
Without a fixed maturity: Fair value is estimated as the amount payable to the
contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in paying
an amount different than that determined to be payable on demand.
Off-Balance-Sheet and Other Financial Instruments (including Derivative
Financial Instruments)
The Company uses off-balance-sheet and other financial instruments primarily to
manage portfolio risks, including interest rate, prepayment/call, credit,
price, and liquidity risks. In 1996, Treasury
F-24
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
3. Financial Instruments (Continued)
futures contracts were used to manage interest rate risk in the Company's bond
portfolio and stock index futures contracts were used to manage price risk in
the Company's equity portfolio. In 1996 and 1995, interest rate swaps and
forward commitments to enter into interest rate swaps, respectively, were also
used to manage interest rate risk in the Company's bond portfolio.
Futures Contracts:
Futures contracts represent commitments to either purchase or sell underlying
assets at a specified future date. Futures contracts trade on organized
exchanges and, therefore, have minimal credit risk. Cash settlements are made
daily based on changes in the prices of the underlying assets. There were no
futures contracts open as of December 31, 1996 and 1995.
Interest Rate Swaps:
Under interest rate swaps, the Company agrees with other parties to exchange
interest amounts calculated by reference to an agreed notional principal
amount. Generally, no cash is exchanged at the outset of the contract and no
principal payments are made. A single net payment is usually made by one
counterparty at each due date or upon termination of the contract. The Company
would be exposed to credit-related losses in the event of nonperformance by
counterparties to financial instruments, however, the Company controls its
exposure to credit risk through credit approvals, credit limits and regular
monitoring procedures. The credit exposure of interest rate swaps is
represented by the fair value (market value) of contracts with a positive fair
value (market value) at the reporting date. There were no interest rate swap
agreements open as of December 31, 1996. At December 31, 1995, the Company had
an open forward swap agreement with a notional amount of $100.0 million and a
fair value of $0.1 million.
During 1995, the Company received $0.4 million for writing call options on
underlying securities. The Company did not write any call options in 1996. As
of December 31, 1996 and 1995, there were no option contracts outstanding.
The Company also had investments in certain debt instruments with derivative
characteristics, including those whose market value is at least partially
determined by, among other things, levels of or changes in domestic and/or
foreign interest rates (short or long term), exchange rates, prepayment rates,
equity markets or credit ratings/spreads. The amortized cost and fair value of
these securities, included in the debt securities portfolio, as of December 31,
1996 was as follows:
Amortized Fair
Cost Value
----------- ----------
(millions)
Residential collateralized mortgage obligations ..................... $ 2,227.8 $2,309.0
Principal-only strips (included above) .............................. 44.5 53.3
Interest-only strips (included above) .............................. 10.3 22.8
Other structured securities with derivative characteristics (1) ...... 126.3 129.2
(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.
F-25
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
4. Net Investment Income
Sources of net investment income were as follows:
1996 1995 1994
------------ ------------ -----------
(millions)
Debt securities $ 945.3 $ 891.5 $ 823.9
Preferred stock 5.9 4.2 3.9
Investment in affiliated mutual funds 14.3 14.9 5.2
Mortgage loans 2.2 1.4 1.4
Policy loans 18.4 13.7 11.5
Reinsurance loan to affiliate 44.1 46.5 51.5
Cash equivalents 29.4 38.9 29.5
Other 2.1 8.4 6.7
--------- --------- --------
Gross investment income 1,061.7 1,019.5 933.6
Less investment expenses (16.1) (15.2) (16.4)
--------- --------- --------
Net investment income $ 1,045.6 $ 1,004.3 $ 917.2
========= ========= ========
Net investment income includes amounts allocable to experience rated
contractholders of $787.6 million, $744.2 million and $677.1 million for the
years ended December 31, 1996, 1995 and 1994, respectively. Interest credited
to contractholders is included in Current and Future Benefits.
5. Dividend Restrictions and Shareholder's Equity
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995, the
Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services, Inc.,
to Aetna Retirement Services, Inc. (the Company's former parent).
The amount of dividends that may be paid to the shareholder in 1997 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$71.1 million.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's capital and surplus those amounts
determined in conformity with statutory accounting practices prescribed or
permitted by the Department, which differ in certain respects from generally
accepted accounting principles. Statutory net income was $57.8 million, $70.0
million and $64.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Statutory capital and surplus was $713.6 million and $670.7
million as of December 31, 1996 and 1995, respectively.
As of December 31, 1996 the Company does not utilize any statutory accounting
practices which are not prescribed by state regulatory authorities that,
individually or in the aggregate, materially affect statutory capital and
surplus.
Realized capital gains or losses are the difference between the carrying value
and sale proceeds of specific investments sold.
F-26
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
Net realized capital gains on investments were as follows:
1996 1995 1994
-------- -------- ------
(millions)
Debt securities $ 11.1 $ 32.8 $ 1.0
Equity securities 8.6 8.3 0.2
Mortgage loans -- 0.2 0.3
------- ------- ------
Pretax realized capital gains $ 19.7 $ 41.3 $ 1.5
------- ------- ------
After tax realized capital gains $ 13.0 $ 25.8 $ 1.0
======= ======= ======
Net realized capital gains of $53.1 million and $61.1 million for 1996 and
1995, respectively, and net realized capital losses of $29.1 million for 1994,
allocable to experience rated contracts, were deducted from net realized
capital gains (losses) and an offsetting amount was reflected in policy-holder
funds' left with the Company. Net unamortized gains were $53.3 million and $7.3
million at December 31, 1996 and 1995, respectively.
Changes to the mortgage loan valuation reserve and writedowns on debt
securities for other than temporary declines in value are included in net
realized capital gains (losses) and amounted to $(3.3) million, $3.1 million
and $1.1 million, of which $(3.2) million, $2.2 million and $0.8 million were
allocable to experience rated contractholders, for the years ended December 31,
1996, 1995 and 1994, respectively. There was no valuation reserve for mortgage
loans at December 31, 1996 or at December 31, 1995.
Proceeds from the sale of available for sale debt securities and the related
gross gains and losses were as follows:
1996 1995 1994
----------- ----------- ----------
(millions)
Proceeds on Sales $ 5,182.2 $ 4,207.2 $3,593.8
Gross gains 24.3 44.6 26.6
Gross losses 13.2 11.8 25.6
Changes in shareholder's equity related to changes in unrealized capital gains
(losses), (excluding those related to experience rated contractholders), were
as follows:
F-27
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
6. Capital Gains and Losses on Investment Operations (Continued)
1996 1995 1994
----------------- ----------- ------------
(millions)
Debt securities $ (100.1) $ 255.9 $ (242.1)
Equity securities (10.5) 27.3 (13.3)
Limited partnership -- 1.8 (1.8)
---------- -------- ---------
(110.6) 285.0 (257.2)
Deferred income taxes (See Note 8) (38.6) (36.5) 46.3
---------- -------- ---------
Net change in unrealized capital gains (losses) $ (72.0) $ 321.5 $ (303.5)
========== ======== =========
Net unrealized capital gains allocable to experience rated contracts of $245.2
million and $43.3 million at December 31, 1996 and $515.0 million and $104.1
million at December 31, 1995 are reflected on the Consolidated Balance Sheets
in Policyholders' Funds Left With the Company and Future Policy Benefits,
respectively, and are not included in shareholder's equity.
Shareholder's equity included the following unrealized capital gains (losses),
which are net of amounts allocable to experience rated contractholders, at
December 31:
1996 1995 1994
----------- ----------- -----------
(millions)
Debt securities
Gross unrealized capital gains $ 101.7 $ 179.3 $ 27.4
Gross unrealized capital losses (23.8) (1.3) (105.2)
-------- -------- ---------
77.9 178.0 (77.8)
Equity securities
Gross unrealized capital gains 16.3 27.2 6.5
Gross unrealized capital losses (0.8) (1.2) (7.9)
-------- -------- ---------
15.5 26.0 (1.4)
Limited Partnership -- -- --
Gross unrealized capital gains -- -- --
Gross unrealized capital losses -- -- (1.8)
-------- -------- ---------
-- -- (1.8)
Deferred income taxes (See Note 8) 32.9 71.5 108.0
-------- -------- ---------
Net unrealized capital gains (losses) $ 60.5 $ 132.5 $ (189.0)
======== ======== =========
F-28
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
7. Severance and Facilities Charges
Severance and facilities charges during 1996, as described below, included the
following (pretax):
Vacated
Asset Leased Corporate
(Millions) Severance Write-Off Property Other Allocation Total
- --------------------------- ----------- ----------- ---------- ------- ------------ -------
Financial Services $ 29.1 $ 1.0 $ 1.3 $ 1.7 $ -- $ 33.1
Individual Life Insurance 12.5 0.4 0.5 0.8 -- 14.2
Corporate Allocation -- -- -- -- 14.0 14.0
------- ------ ------ ------ ------ -------
Total Company $ 41.6 $ 1.4 $ 1.8 $ 2.5 $14.0 $ 61.3
- -------------------------- ------- ------ ------ ------ ------ -------
In the third quarter of 1996, the Company recorded a $30.7 million after tax
($47.3 million pretax) charge principally related to actions taken or expected
to be taken to improve its cost structure relative to its competitors. The
severance portion of the charge is based on a plan to eliminate 702 positions
(primarily customer service, sales and information technology support staff).
The facilities portion of the charge is based on a plan to consolidate
sales/service field offices.
In addition to the above charge, Aetna recorded a facilities and severance
charge in the second quarter of 1996, primarily as a result of actions taken or
expected to be taken to reduce the level of corporate expenses and other costs
previously absorbed by Aetna's property-casualty operations. The cost allocated
to the Company associated with this charge was $9.1 million after tax ($14.0
million pretax).
The activity during 1996 within the severance and facilities reserve (pretax,
in millions) and the number of positions eliminated related to such actions
were as follows:
Reserve Positions
- --------------------------------- --------- ----------
Beginning of year $ -- --
Severance and facilities charges 47.3 702
Corporate Allocation 14.0 --
Actions taken (1) (13.4) (178)
------- -----
End of year $ 47.9 524
- --------------------------------- ------- -----
(1) Includes $8.0 million of severance-related actions and $4.1 million of
corporate allocation-related actions.
The Company's severance actions are expected to be substantially completed by
March 31, 1998. The corporate allocation actions and the vacating of the leased
office space are expected to be substantially completed in 1997.
8. Income Taxes
The Company is included in the consolidated federal income tax return and
combined Connecticut and New York state income tax returns of Aetna. Aetna
allocates to each member an amount approximating the
F-29
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
tax it would have incurred were it not a member of the consolidated group, and
credits the member for the use of its tax saving attributes used in the
consolidated returns.
Income taxes for the years ended December 31, consist of:
1996 1995 1994
------- ------- ------
(millions)
Current taxes (benefits):
Income Taxes:
Federal $ 50.9 $ 82.9 $ 78.7
State 3.7 3.2 4.4
Net realized capital gains (losses) 25.3 28.5 (33.2)
------ ------ ------
79.9 114.6 49.9
------ ------ ------
Deferred taxes (benefits):
Income Taxes:
Federal ( 3.5) (14.4) ( 8.0)
Net realized capital gains (losses) (18.6) (12.9) 33.7
------ ------ ------
(22.1) (27.3) 25.7
------ ------ ------
Total $ 57.8 $ 87.3 $ 75.6
====== ====== ======
Income taxes were different from the amount computed by applying the federal
income tax rate to income before income taxes for the following reasons:
1996 1995 1994
------- ------- -------
(millions)
Income before income taxes $198.9 $263.2 $220.9
Tax rate 35% 35% 35%
------ ------ ------
Application of the tax rate 69.6 92.1 77.3
------ ------ ------
Tax effect of:
State income tax, net of federal benefit 2.4 2.1 2.9
Excludable dividends (8.7) (9.3) (8.6)
Other, net (5.5) 2.4 4.0
------ ------ ------
Income taxes $ 57.8 $ 87.3 $ 75.6
====== ====== ======
F-30
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
8. Income Taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 are presented below:
1996 1995
------- -----
(millions)
Deferred tax assets:
Insurance reserves $344.6 $290.4
Unrealized gains allocable to experience rated contracts 100.8 216.7
Investment losses 7.5 7.3
Postretirement benefits other than pensions 27.0 7.7
Deferred compensation 25.0 18.9
Pension 7.6 5.7
Other 29.3 9.2
------ ------
Total gross assets 541.8 555.9
Deferred tax liabilities:
Deferred policy acquisition costs 482.1 433.0
Market discount 6.8 4.4
Net unrealized capital gains 133.7 288.2
Other (0.3) (0.1)
------ ------
Total gross liabilities 622.3 725.5
------ ------
Net deferred tax liability $ 80.5 $169.6
====== ======
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. Valuation allowances are provided when it is not
considered more likely than not that deferred tax assets will be realized. As
of December 31, 1996 and 1995, no valuation allowances were required for
unrealized capital gains and losses.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that has
not been subject to taxation. As of December 31, 1983, no further additions
could be made to the Policyholders' Surplus Account for tax return purposes
under the Deficit Reduction Act of 1984. The balance in such account was
approximately $17.2 million at December 31, 1996. 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 1990. Discussions are
being held with the Service with respect to proposed adjustments. Management
believes there are adequate defenses against, or sufficient reserves to provide
for, any such adjustments. The Service has commenced its examinations for the
years 1991 through 1994.
F-31
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans
Employee Pension Plans--The Company, in conjunction with Aetna, has
noncontributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over 60 consecutive months of highest
earnings in a 120-month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to the amounts that are tax-deductible. As of
December 31, 1996, Aetna's accrued pension cost has been allocated to its
subsidiaries, including the Company, under an allocation based on eligible
salaries. Data on a separate company basis regarding the proportionate share of
the projected benefit obligation and plan assets is not available. The
accumulated benefit obligation and plan assets are recorded by Aetna. As of the
measurement date (i.e., September 30), the accumulated plan assets exceeded
accumulated plan benefits. Allocated pretax charges to operations for the
pension plan (based on the Company's total salary cost as a percentage of
Aetna's total salary cost) were $4.3 million, $6.1 million and $5.5 million for
the years ended December 31, 1996, 1995 and 1994, respectively.
Employee Postretirement Benefits--In addition to providing pension benefits,
Aetna currently provides certain health care and life insurance benefits,
subject to certain caps, for retired employees. A comprehensive medical and
dental plan is offered to all full-time employees retiring at age 50 with 15
years of service or at age 65 with 10 years of service. Retirees are generally
required to contribute to the plans based on their years of service with Aetna.
The costs to the Company associated with the Aetna postretirement plans for
1996, 1995 and 1994 were $1.8 million, $1.4 million and $1.0 million,
respectively.
As of December 31, 1996, Aetna transferred to the Company approximately $77.7
million of accrued liabilities, primarily related to the pension and
postretirement benefit plans described above, that had been previously recorded
by Aetna. The after tax amount of this transfer (approximately $50.5 million)
is reported as a reduction in retained earnings.
Agent Pension Plans--The Company, in conjunction with Aetna, has a
non-qualified pension plan covering certain agents. The plan provides pension
benefits based on annual commission earnings. As of the measurement date (i.e.,
September 30), the accumulated plan assets exceeded accumulated plan benefits.
Agent Postretirement Benefits--The Company, in conjunction with Aetna, also
provides certain postretirement health care and life insurance benefits for
certain agents. The costs to the Company associated with the agents'
postretirement plans for 1996, 1995 and 1994 were $0.7 million, $0.8 million
and $0.7 million, respectively.
Incentive Savings Plan--Substantially all employees are eligible to participate
in a savings plan under which designated contributions, which may be invested
in common stock of Aetna or certain other investments, are matched, up to 5% of
compensation, by Aetna. Pretax charges to operations for the incentive savings
plan were $5.4 million, $4.9 million and $3.3 million in 1996, 1995 and 1994,
respectively.
F-32
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
9. Benefit Plans (Continued)
Stock Plans--Aetna has a stock incentive plan that provides for stock options,
deferred contingent common stock or equivalent cash awards or restricted stock
to certain key employees. Executive and middle management employees may be
granted options to purchase common stock of Aetna at or above the market price
on the date of grant. Options generally become 100% vested three years after
the grant is made, with one-third of the options vesting each year. Aetna does
not recognize compensation expense for stock options granted at or above the
market price on the date of grant under its stock incentive plans. In addition,
executives may be granted incentive units which are rights to receive common
stock or an equivalent value in cash. The incentive units may vest within a
range from 0% to 175% at the end of a four year period based on the attainment
of performance goals. The costs to the Company associated with the Aetna stock
plans for 1996, 1995 and 1994, were $8.1 million, $6.3 million and $1.7
million, respectively. As of December 31, 1996, Aetna transferred to the
Company approximately $1.1 million of deferred tax benefits related to stock
options. This amount is reported as an increase in retained earnings.
10. Related Party Transactions
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable life and annuity contracts. Under the
insurance contracts, the Separate Accounts pay the Company a daily fee which,
on an annual basis, ranges, depending on the product, from .10% to 1.90% 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 .85% of their average daily net assets. The Company also receives fees
(expressed as a percentage of the average daily net assets) from the variable
life and annuity mutual funds and The Aetna Series Fund for providing
administration services, and from The Aetna Series Fund for providing
shareholder services and promoting sales. The amount of compensation and fees
received from the Separate Accounts and Funds, included in Charges Assessed
Against Policyholders, amounted to $185.4 million, $128.1 million and $104.6
million in 1996, 1995 and 1994, respectively. The Company may waive advisory
fees at its discretion.
The Company acts as an investment adviser for its affiliated mutual funds.
Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
owned subsidiary of HOLDCO and an affiliate of the Company, has been acting as
Subadvisor of all affiliated mutual funds and of most of the General Account
assets. Fees paid by the Company to Aeltus, included in both Charges Assessed
Against Policyholders and Net Investment Income, on an annual basis, range from
.06% to .55% of the average daily net assets under management. For the year
ended December 31, 1996, the Company paid $16.0 million in such fees.
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.
F-33
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
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. An additional $6.1 million commission, paid by the Company to Aetna Life
in 1996, was capitalized as deferred policy acquisition costs. The Company
maintained insurance reserves of $628.3 million and $655.5 million as of
December 31, 1996 and 1995, respectively, relating to the business assumed. In
consideration for the assumption of this business, a loan was established
relating to the assets held by Aetna Life which support the insurance reserves.
The loan is being reduced in accordance with the decrease in the reserves. The
fair value of this loan was $625.3 million and $663.5 million as of December
31, 1996 and 1995, respectively, and is based upon the fair value of the
underlying assets. Premiums of $25.3 million, $28.0 million and $32.8 million
and current and future benefits of $39.5 million, $43.0 million and $43.8
million were assumed in 1996, 1995 and 1994, respectively.
Investment income of $44.1 million, $46.5 million and $51.5 million was
generated from the reinsurance loan to affiliate in 1996, 1995 and 1994,
respectively. Net income of approximately $8.1 million, $18.4 million and $25.1
million resulted from this agreement in 1996, 1995 and 1994, 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 $28.9 million and $28.0
million were maintained for this contract as of December 31, 1996 and 1995,
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 $5.2 million, $3.2 million and
$1.3 million for 1996, 1995 and 1994, respectively.
The Company received a capital contribution of $10.4 million in cash from
HOLDCO in 1996. The Company received no capital contributions in 1995 or 1994.
The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995, the
Company dividended $2.9 million in the form of two of its subsidiaries,
Systematized Benefits Administrators, Inc. and Aetna Investment Services, Inc.,
to Aetna Retirement Services, Inc. (the Company's former parent).
Premiums due and other receivables include $2.8 million and $5.7 million due
from affiliates in 1996 and 1995, respectively. Other liabilities include $10.7
million and $12.4 million due to affiliates for 1996 and 1995, respectively.
F-34
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
10. Related Party Transactions (Continued)
Substantially all of the administrative and support functions of the Company
are provided by Aetna and its affiliates. The financial statements reflect
allocated charges for these services based upon measures appropriate for the
type and nature of service provided.
11. Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its exposure to
large losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
the primary liability of the Company as direct insurer of the risks reinsured.
The Company evaluates the financial strength of potential reinsurers and
continually monitors the financial condition of reinsurers. Only those
reinsurance recoverables deemed probable of recovery are reflected as assets on
the Company's Consolidated Balance Sheets.
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 10 above.
Ceded to Assumed
Direct Other from Other Net
Amount Companies Companies Amount
--------- ----------- ------------ --------
(millions)
1996
- ----
Premiums:
Life Insurance $ 34.6 $ 11.2 $ 25.3 $ 48.7
Accident and Health Insurance 6.3 6.3 -- --
Annuities 84.3 -- 0.6 84.9
-------- ------- ------- --------
Total earned premiums $ 125.2 $ 17.5 $ 25.9 $ 133.6
======== ======= ======= ========
1995
- ----
Premiums:
Life Insurance $ 28.8 $ 8.6 $ 28.0 $ 48.2
Accident and Health Insurance 7.5 7.5 -- --
Annuities 164.0 -- 0.5 164.5
-------- ------- ------- --------
Total earned premiums $ 200.3 $ 16.1 $ 28.5 $ 212.7
======== ======= ======= ========
1994
- ----
Premiums:
Life Insurance $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health Insurance 9.3 9.3 -- --
Annuities 137.3 -- 0.2 137.5
-------- ------- ------- --------
Total earned premiums $ 173.9 $ 15.3 $ 33.0 $ 191.6
======== ======= ======= ========
F-35
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
12. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of counterparties
to honor these commitments may result in either higher or lower replacement
cost. Also, there is likely to be a change in the value of the securities
underlying the commitments. At December 31, 1996, the Company had commitments
to purchase investments of $17.9 million. The fair value of the investments at
December 31, 1996 approximated $18.3 million.
Litigation
The Company is involved in numerous lawsuits arising, for the most part, in the
ordinary course of its business operations. While the ultimate outcome of
litigation against the Company cannot be determined at this time, after
consideration of the defenses available to the Company and any related reserves
established, it is not expected to result in liability for amounts material to
the financial condition of the Company, although it may adversely affect
results of operations in future periods.
13. Segment Information (1)
The Company's operations are reported through two major business segments:
Financial Services and Individual Life Insurance.
Summarized financial information for the Company's principal operations was as
follows:
(Millions) 1996 1995 1994
- ------------------------------------ ----------- ----------- ----------
Revenue:
Financial Services $ 1,195.1 $ 1,211.3 $1,013.5
Individual Life Insurance 445.7 407.9 386.1
---------- ---------- ----------
Total revenue $ 1,640.8 $ 1,619.2 $1,399.6
- ----------------------------------- ---------- ---------- ----------
Income before income taxes: (2)
Financial Services $ 129.9 $ 160.1 $ 122.5
Individual Life Insurance 83.0 103.1 98.4
---------- ---------- ----------
Total income before income taxes $ 212.9 $ 263.2 $ 220.9
- ----------------------------------- ---------- ---------- ----------
Net income: (2)
Financial Services $ 94.3 $ 113.8 $ 85.5
Individual Life Insurance 55.9 62.1 59.8
---------- ---------- ----------
Net income $ 150.2 $ 175.9 $ 145.3
- ----------------------------------- ---------- ---------- ----------
F-36
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)
Notes to Consolidated Financial Statements (Continued)
13. Segment Information (1) (Continued)
Assets under management: (3)
Financial Services $ 27,268.1 $ 22,534.4 $18,122.9
Individual Life Insurance 2,830.5 2,590.9 2,220.5
- -------------------------------- ----------- ----------- -----------
Total assets under management $ 30,098.6 $ 25,125.3 $20,343.4
- -------------------------------- ----------- ----------- -----------
(1) The 1996 results include severance and facilities charges of $30.7
million, after tax. Of this charge $21.5 million related to the Financial
Services segment and $9.2 million related to the Individual Life Insurance
segment.
(2) Excludes any effect of the corporate facilities and severance charge
recorded in 1996 which is not directly allocable to the Financial Services and
Individual Life Insurance segments. (Refer to Note 7).
(3) Excludes net unrealized capital gains (losses) of $366.4 million, $797.1
million and $(386.4) million at December 31, 1996, 1995 and 1994, respectively.
F-37