-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VjkVKtLYnmoEjuGRH/Kra5RZwptLI8qUDrxdYka/le5DfVksoyJU7avuekqxj43o YjNAdgRX+4Q+vmOT6Usm1A== 0000949377-02-000222.txt : 20020426 0000949377-02-000222.hdr.sgml : 20020426 ACCESSION NUMBER: 0000949377-02-000222 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20020426 EFFECTIVENESS DATE: 20020426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIABLE LIFE ACCOUNT B OF ING LIFE INSURANCE & ANNUITY CO CENTRAL INDEX KEY: 0000785986 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-76018 FILM NUMBER: 02623442 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032732193 FORMER COMPANY: FORMER CONFORMED NAME: VARIABLE LIFE ACCOUNT B OF AETNA LIFE INSURANCE & ANNUITY CO DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIABLE LIFE ACCOUNT B OF ING LIFE INSURANCE & ANNUITY CO CENTRAL INDEX KEY: 0000785986 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-04536 FILM NUMBER: 02623443 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032732193 FORMER COMPANY: FORMER CONFORMED NAME: VARIABLE LIFE ACCOUNT B OF AETNA LIFE INSURANCE & ANNUITY CO DATE OF NAME CHANGE: 19920703 485BPOS 1 avplus53426-485b.txt REGISTRATION AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 2002 1933 ACT REGISTRATION NO. 33-76018 1940 ACT REGISTRATION NO. 811-04536 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM S-6 POST-EFFECTIVE AMENDMENT NO. 15 TO REGISTRATION STATEMENT FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 ---------------------- VARIABLE LIFE ACCOUNT B OF ING LIFE INSURANCE AND ANNUITY COMPANY (FORMERLY VARIABLE LIFE ACCOUNT B OF AETNA LIFE INSURANCE AND ANNUITY COMPANY) ---------------------- ING LIFE INSURANCE AND ANNUITY COMPANY (FORMERLY AETNA LIFE INSURANCE AND ANNUITY COMPANY) 151 FARMINGTON AVENUE, TS31, HARTFORD, CONNECTICUT 06156 DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 273-1672 ---------------------- J. NEIL MCMURDIE, COUNSEL COPY TO ING LIFE INSURANCE AND ANNUITY COMPANY KIMBERLY J. SMITH, CHIEF COUNSEL 151 FARMINGTON AVENUE, TS31, ING AMERICAS, RETAIL PRODUCTS GROUP HARTFORD, CONNECTICUT 06156 1475 DUNWOODY DRIVE, (NAME AND COMPLETE ADDRESS WEST CHESTER, PENNSYLVANIA 19380 OF AGENT FOR SERVICE) JEREMY SACHS, ESQUIRE THE LINCOLN NATIONAL LIFE INSURANCE COMPANY 350 CHURCH STREET--MLW1 HARTFORD, CT 06103-1106 ---------------------- APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: Continuous. INDEFINITE NUMBER OF UNITS OF INTEREST IN VARIABLE LIFE INSURANCE CONTRACTS (Title of Securities Being Registered) ---------------------- An indefinite amount of the securities being offered by the Registration Statement has been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940. The Form 24f-2 for Registrant, for the fiscal year ending December 31, 2001 was filed February 26, 2002. ---------------------- It is proposed that this filing will become effective: [ ] immediately upon filing pursuant to paragraph (b) of Rule 485 [X] on May 1, 2002 pursuant to paragraph (b) of Rule 485 [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment ================================================================================ VARIABLE LIFE ACCOUNT B OF ING LIFE INSURANCE AND ANNUITY COMPANY CROSS REFERENCE SHEET
FORM N-8B-2 ----------- ITEM NO. PART I PROSPECTUS -------- ----------------- 1 Cover Page; The Separate Account; The General Account; The Company 2 Cover Page; The Separate Account; The General Account; The Company 3 Not Applicable 4 Cover Page; The Company; The Separate Account; The General Account; Additional Information-- Distribution of the Policies 5 The Separate Account; The General Account; The Company 6 The Separate Account; The General Account; The Company 7 Not Applicable 8 Financial Statements 9 Additional Information--Legal Matters and Proceedings 10 Policy Summary; The Separate Account; Charges and Fees; Policy Choices; Policy Values; Policy Rights; Additional Information; Miscellaneous Policy Provisions 11 Policy Summary; Allocation of Premiums; Policy Choices 12 Not Applicable 13 Policy Summary; Charges and Fees; Policy Choices; Term Insurance Rider; Additional Information--Distribution of the Policies 14 Policy Values; Miscellaneous Policy Provisions 15 Policy Summary; Allocation of Premiums--The Funds; Policy Choices; Policy Values 16 Policy Summary; Allocation of Premiums--The Funds; Policy Values 17 Policy Rights 18 Allocation of Premiums; Policy Choices; Policy Rights 19 Reports to Policy Owners; Rights to Instruct Voting of Fund Shares; Additional Information--Records of Accounts 20 Not Applicable 21 Policy Rights--Policy Loans 22 Not Applicable 23 Directors and Officers 24 Miscellaneous Policy Provisions 25 The Company 26 Policy Summary; Charges and Fees 27 The Company 28 The Company; Directors and Officers 29 The Company 30 Not Applicable 31 Not Applicable 32 Not Applicable 33 Not Applicable
FORM N-8B-2 ----------- ITEM NO. PART I PROSPECTUS -------- ----------------- 34 Not Applicable 35 The Company; Additional Information 36 Not Applicable 37 Not Applicable 38 Additional Information 39 The Company 40 Policy Summary; Charges and Fees 41 The Company 42 The Company, Directors and Officers 43 Financial Statements 44 Policy Values--Accumulation Unit Value; Financial Statements 45 Not Applicable 46 The Separate Account; Policy Values; Illustrations of Death Benefit 47 Policy Summary; The Separate Accounts; Allocation of Premiums; Policy Choices; Policy Values 48 Not Applicable 49 Not Applicable 50 Not Applicable 51 Not Applicable 52 The Separate Account; Allocation of Premiums 53 Tax Matters 54 Not Applicable 55 Not Applicable 56 Not Applicable 57 Not Applicable 58 Not Applicable 59 Financial Statements
AETNAVEST PLUS ING Life Insurance and Annuity Company Administrative Office: Home Office: Personal Service Center, MVLI 151 Farmington Avenue 350 Church Street VARIABLE LIFE ACCOUNT B Hartford, Connecticut 06156 Hartford, CT 06103-1106 PROSPECTUS Telephone: (800) 334-7586 Telephone: (800) 334-7586 DATED: MAY 1, 2002
- -------------------------------------------------------------------------------- FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES - -------------------------------------------------------------------------------- This prospectus describes AetnaVest Plus, a flexible premium variable life insurance contract (the "Policy" or "Policies"), offered by ING Life Insurance and Annuity Company (formerly known as Aetna Life Insurance and Annuity Company) (the "Company", "we", "us"). In October 1998, the Company and life insurance affiliates of Lincoln Financial Group ("Lincoln") entered into a transaction whereby nearly all of the Company's variable life insurance business was reinsured by the Lincoln affiliates. The Policies feature: - flexible premium payments; - a choice of one of two death benefit options; and - a choice of underlying investment options. You may allocate net premiums to subaccounts which invest in the mutual funds listed below. Each Fund has its own investment objective. Not all Funds may be available under all Policies or in all jurisdictions. You should review each Fund's prospectus before making your decision. o ING VP ASCENT PORTFOLIO (CLASS R SHARES)* o ING VP BALANCED PORTFOLIO, INC. (CLASS R SHARES)* o ING VP BOND PORTFOLIO (CLASS R SHARES)* o ING VP CROSSROADS PORTFOLIO (CLASS R SHARES)* o ING VP GROWTH AND INCOME PORTFOLIO (CLASS R SHARES)* o ING VP INDEX PLUS LARGECAP PORTFOLIO (CLASS R SHARES)* o ING VP LEGACY PORTFOLIO (CLASS R SHARES)* o ING VP MONEY MARKET PORTFOLIO (CLASS R SHARES)* o ING MFS CAPITAL OPPORTUNITIES PORTFOLIO (INITIAL CLASS)* o ING MFS EMERGING EQUITIES PORTFOLIO (INITIAL CLASS)* o ING MFS RESEARCH PORTFOLIO (INITIAL CLASS)* o ING SCUDDER INTERNATIONAL GROWTH PORTFOLIO (INITIAL CLASS)* o ING T. ROWE PRICE GROWTH EQUITY PORTFOLIO (INITIAL CLASS)* o FIDELITY(R) VIP EQUITY-INCOME PORTFOLIO (INITIAL CLASS) o FIDELITY(R) VIP CONTRAFUND(R) PORTFOLIO (INITIAL CLASS) o JANUS ASPEN AGGRESSIVE GROWTH PORTFOLIO (INSTITUTIONAL SHARES) o JANUS ASPEN BALANCED PORTFOLIO (INSTITUTIONAL SHARES) o JANUS ASPEN GROWTH PORTFOLIO (INSTITUTIONAL SHARES) o JANUS ASPEN WORLDWIDE GROWTH PORTFOLIO (INSTITUTIONAL SHARES) o OPPENHEIMER GLOBAL SECURITIES FUND/VA o OPPENHEIMER STRATEGIC BOND FUND/VA *Effective May 1, 2002 this Fund changed its name to the name listed above. See "The Funds" in this prospectus for a complete list of former and current Fund names. Net premiums allocated to the Fixed Account earn fixed rates of interest. We determine the rates periodically, but we guarantee that they will never be less than 4.5% a year. THIS PROSPECTUS AND OTHER INFORMATION ABOUT VARIABLE LIFE ACCOUNT B FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION") CAN BE FOUND IN THE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. YOU CAN GET COPIES OF THIS INFORMATION BY VISITING THE COMMISSION'S PUBLIC REFERENCE ROOM OR WRITING THE COMMISSION'S PUBLIC REFERENCE ROOM, 450 FIFTH STREET, N.W., WASHINGTON, D.C. 20549-6009 AND PAYING A DUPLICATING FEE. INFORMATION ON THE OPERATION OF THE COMMISSION'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING 1-202-942-8090 OR 1-800-SEC-0330, E-MAILING PUBLICINFO@SEC.GOV OR WRITING TO THE ADDRESS ABOVE. THE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A CRIMINAL OFFENSE TO STATE OTHERWISE. TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES WITH IT. YOU SHOULD READ THE PROSPECTUS AND THE ATTACHED PROSPECTUS FOR ANY AVAILABLE FUND IF YOU ARE CONSIDERING BUYING A POLICY OR EXERCISING ELECTIONS UNDER A POLICY. YOU SHOULD ALSO KEEP THEM FOR FUTURE REFERENCE. YOU CAN OBTAIN ANY FUND'S STATEMENT OF ADDITIONAL INFORMATION (SAI), WHICH PROVIDES MORE INFORMATION ABOUT A FUND, BY CALLING (800) 334-7586. TABLE OF CONTENTS Policy Summary ................................. 1 Replacements ................................ 1 Initial Choices to be Made .................. 1 Level or Varying Death Benefit .............. 1 Amount of Premium Payment ................... 2 Selection of Funding Vehicles ............... 2 Guaranteed Death Benefit Provision .......... 3 No-Lapse Coverage Provision ................. 3 Charges and Fees ............................ 3 Policy Loans ................................ 4 Changes in Specified Amount ................. 4 Factors to Consider Before Purchasing a Policy 4 The Company .................................... 5 The Separate Account ........................... 5 The General Account ............................ 6 Allocation of Premiums ......................... 6 The Funds ................................... 7 Mixed and Shared Funding .................... 11 Fixed Account ............................... 11 Charges and Fees ............................... 12 Premium Charge .............................. 12 Charges and Fees Assessed Against the Total Account Value ............................. 12 Charges and Fees Assessed Against the Separate Account .......................... 12 Charges Assessed Against the Underlying Funds ..................................... 13 Surrender Charge ............................ 15 Surrender Charges on Full and Partial Surrenders ........................ 15 Policy Choices ................................. 16 Death Benefit ............................... 16 Guaranteed Death Benefit Provision .......... 16 Premium Payments ............................ 17 Initial Allocations to Funding Options ...... 18 Transfers Between Funding Options ........... 18 Limits on Frequent Transfers ................ 18 Telephone Transfers ......................... 19 Automated Transfers (Dollar Cost Averaging) ................................ 19 Policy Values .................................. 20 Total Account Value ......................... 20 Accumulation Unit Value ..................... 21 Maturity Value .............................. 21 Cash Surrender Value ........................ 21 Policy Rights .................................. 21 Full Surrenders.............................. 21 Partial Surrenders .......................... 21 Avoiding Loss of Coverage ................... 22 No-Lapse Coverage Provision ................. 22 Reinstatement of a Lapsed Policy ............ 22 Policy Loans: Preferred and Nonpreferred .... 23 Policy Changes .............................. 24 Increases ................................. 24 Decreases ................................. 24 Death Benefit Option Change ............... 24 Right to Examine the Policy ................. 25 Payment of Death Benefit ....................... 25 Policy Settlement .............................. 25 Settlement Options .......................... 26 Calculation of Settlement Payments on a Variable Basis ............................ 27 Special Plans .................................. 28 Directors and Officers ......................... 29 Additional Information ......................... 30 Reports to Policy Owners .................... 30 Right to Instruct Voting of Fund Shares ..... 30 Disregard of Voting Instructions ............ 31 State Regulation ............................ 31 Legal Matters and Proceedings ............... 31 The Registration Statement .................. 31 Distribution of the Policies ................ 32 Records and Accounts ........................ 32 Independent Auditors ........................ 32 Tax Matters .................................... 32 General ..................................... 32 Federal Tax Status of the Company ........... 33 Life Insurance Qualification ................ 33 General Rules ............................... 33 Modified Endowment Contracts ................ 34 Diversification Standards ................... 35 Investor Control ............................ 35 Other Tax Considerations .................... 35 Withholding ................................. 36 Miscellaneous Policy Provisions ................ 36 The Policy .................................. 36 Payment of Benefits ......................... 36 Age and Sex ................................. 37 Incontestability ............................ 37 Suicide ..................................... 37 Coverage Beyond Maturity .................... 37 Protection of Proceeds ...................... 37 Nonparticipation ............................ 37 Illustrations of Death Benefit, Total Account Values and Cash Surrender Values ............ 38 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 where prohibited. No dealer, salesman or other person is authorized to give any information or make any representation in connection with this offering other than those contained in this prospectus, or other sales material authorized by the Company and if given or made, such other information or representations must not be relied upon. The purpose of the policy is to provide insurance protection. Life insurance is a long-term investment. Owners should consider their need for insurance coverage and the policy's long-term investment potential. We do not claim that the policy is in any way similar or comparable to an investment in a mutual fund. POLICY SUMMARY This section is an overview of key policy features for AetnaVest Plus. (Regulations in your state may vary the provisions of your own Policy.) Your Policy is a flexible premium variable life insurance policy, under which flexible premium payments are permitted and the death benefit and policy values may vary with the investment performance of the funding option(s) selected. Its value may change on a: 1) fixed basis; 2) variable basis; or a 3) combination of both fixed and variable basis. Review your personal financial objectives and discuss them with a qualified financial counselor before you buy a variable life insurance policy. This Policy may, or may not, be appropriate for your individual financial goals. The value of the Policy and, under one option, the death benefit amount depend on the investment results of the funding options you select. Review this prospectus and the Funds prospectus to achieve a clear understanding of any Fund you are considering. At all times, your Policy must qualify as life insurance under the Internal Revenue Code of 1986, as amended (the "Code") to receive favorable tax treatment under Federal law. If these requirements are met, you may benefit from favorable federal tax treatment. The Company reserves the right to return your premium payment if it results in your Policy's failing to meet federal tax law requirements. REPLACEMENTS It may not be advantageous to replace existing insurance or an annuity contract or supplement an existing flexible premium variable life insurance policy with this Policy. This prospectus and prospectuses of the Funds should be read carefully to understand the Policy being offered. INITIAL CHOICES TO BE MADE The policy owner (the "owner" or "you") is the person named in the "policy specifications" who has all of the Policy ownership rights. If no owner is named, the insured (the person whose life is insured under the Policy) will be the owner of the Policy. You, as the owner, have four important choices to make when the Policy is first purchased. You need to choose: 1) either the level or varying death benefit option; 2) the amount of premium you want to pay; 3) the amount of your net premium payment to be placed in each of the funding options you select. The net premium payment is the balance of your premium payment that remains after certain charges are deducted from it; 4) if you want the guaranteed death benefit provision, and to what age (see "Guaranteed Death Benefit Provision.") LEVEL OR VARYING DEATH BENEFIT The death benefit is the amount the Company pays to the beneficiary(ies) when the insured dies. Before we pay the beneficiary(ies), any outstanding loan account balances or outstanding amounts due are subtracted from the death benefit. We calculate the death benefit payable, as of the date the Insured died. If you choose the level death benefit option, the death benefit will be the greater of: 1) the "specified amount" in effect for the Policy at the time of the Insured's death (The initial specified amount may be found on the Policy's specification page); or 1 2) the applicable percentage of the "total account value" (The total account value is the total of the balances in the fixed account and the separate account minus any outstanding loan account amounts). If you choose the varying death benefit option, the death benefit will be the greater of: 1) the specified amount plus the total account value; or 2) the applicable percentage of the total account value. See "Policy Choices." If you have borrowed against your Policy or surrendered a portion of your Policy, the loan account balance and any surrendered amount will reduce your initial death benefit. See "Policy Choices." You may borrow within described limits against the Policy. You may surrender the Policy in full or withdraw part of its value. A surrender charge is applied if the Policy is surrendered totally. Depending on the amount of premium you pay, there may be little, or no, cash value in your Policy to borrow or surrender in the early years. AMOUNT OF PREMIUM PAYMENT When you first buy your Policy, you must decide how much premium to pay. Premium payments may be changed within certain limits. See "Policy Choices--Premium Payments." If your Policy lapses because your monthly deduction is larger than the "cash surrender value" (total account value minus the surrender charge and the amount necessary to repay any loans), you may reinstate your Policy. See "Policy Rights--Reinstatement of a Lapsed Policy." You may use the value of the Policy to pay the premiums due and continue the Policy in force if sufficient values are available for premium payments. Be careful; if the investment options you choose do not do as well as you expect, there may not be enough value to continue the Policy in force without more premium payments. Charges against policy values for the cost of insurance increase as the insured gets older. See "Charges and Fees". When you first receive your Policy you will have 10 days to look it over (more in some states). This is called the right-to-examine time period. Use this time to review your Policy and make sure it meets your needs. During this time period, your initial premium payment will be allocated to the funding options you initially select. If you then decide you do not want your Policy, you will receive a refund. See "Policy Rights-Right to Examine the Policy." SELECTION OF FUNDING VEHICLES This prospectus focuses on the separate account investment information that makes up the variable part of the Policy. If you put money into the variable funding options, you take all the investment risk on that money. This means that if the Fund(s) you select go up in value, the value of your Policy, net of charges and expenses, also goes up. If those Funds lose value, so does your Policy. See "Allocation of Premiums." You must choose the sub-accounts in which you want to place each net premium payment. Each sub-account invests in shares of a certain Fund. A sub-account is not guaranteed and will increase or decrease in value according to the particular Fund's investment performance. You may also choose to place your net premium payment or part of it into the fixed account. Net premium payments put into the fixed account become part of the Company's general account, do not share the investment experience of the separate account and have a guaranteed minimum interest rate of 4.5% per year. For additional information on the fixed account, see "Allocation of Premiums-Fixed Account." 2 GUARANTEED DEATH BENEFIT PROVISION You may elect to have a guaranteed death benefit provision to age 80 or age 100. This means that your Policy will remain in force even though the cash value is not enough to pay the current monthly deductions as long as the guaranteed death benefit premium test is met. Each year the Company will determine that the sum of premiums to that point in time is sufficient to support the guaranteed death benefit provision. Your total premiums paid to date minus the partial surrenders must be equal to the required monthly guaranteed death benefit premium times the number of months that have passed since the original policy issue date. See "Policy Choices--Guaranteed Death Benefit Provision." NO LAPSE COVERAGE PROVISION Your Policy will not terminate during the first five years after the initial issue date or the issue date of any increase in the specified amount if: 1) the sum of the basic premiums for each Policy month from the issue date, along with that month's basic premium; plus 2) any partial surrenders; plus 3) any increase in the loan account value within that same five years, equals or is more than the sum of premiums paid. CHARGES AND FEES We deduct charges in connection with the Policy to compensate us for providing the Policy's insurance benefit, administering the Policy, assuming certain risks under the Policy and for sales-related expenses we incur. We may profit from any of these charges, including the mortality and expense risk and cost of insurance charges, and may use the profit for any purpose, including covering shortfalls from other charges. A deduction, currently 3.5%, of each premium payment will be made. Monthly deductions are made for administrative expenses ($20 per month for the first policy year and $7 per month afterwards) and the cost of insurance along with any riders that are placed on your Policy. Daily deductions are subtracted from the separate account for mortality and expense risk. At this time the charge is at an annual rate of .70%. We reserve the right to change this charge but it will never exceed .90% annually. Currently, we deduct from the separate account a daily administrative charge for the administration and maintenance of the Policy. This charge is at an annual rate of .30%. It will never exceed .50% annually. Each Fund has its own management fees and other expenses which are also deducted daily. Investment results for the Funds you choose will be affected by the fund management fees and other expenses. The table in section "Charges and Fees--Charges Assessed Against the Underlying Funds," shows you the fees and other expenses currently in effect for each Fund. At any time, you may make transfers between funding options without charge. Within 45 days after each policy anniversary, you may also transfer to the separate account $500 or, if greater, 25% of the fixed account value. The Company may increase this limit in the future. If you surrender your Policy, in full or in part, within the first 15 policy years, a surrender charge will be deducted from the amount paid to you. The initial surrender charge is based on the specified amount and depends on the Insured's age, risk class and, in most states, the sex of the insured. This surrender charge will remain the same for policy years 1-5. For policy years 6 through 15 this charge reduces on a monthly basis to zero. 3 For partial surrenders, the surrender charge is imposed in proportion to the total of the account value less full surrender charges. A charge of the lesser of $25 or 2% of the net surrender payment will be made against the total account value. If you surrender your Policy within the first 15 years after an increase in the specified amount, a surrender charge will also be imposed which will be 70% of what the surrender charge would be on a new policy with that specified amount. This charge will also apply for the same time frame as stated previously. If the specified amount is decreased within the first 15 policy years, the surrender charge will remain the same. See the "Charges and Fees" section appearing later in this prospectus. POLICY LOANS If you decide to borrow against your Policy, interest will be charged to the loan account. Currently, the interest rate on loans accrues at an annual rate of 5.5%, or, if greater, the monthly average of the composite yield on corporate bonds as published by Moody's Investors Service, Inc. for the calendar month ending two months before the policy anniversary month. There are two types of policy loans: nonpreferred (those taken within the first ten policy years); and preferred (those taken in the eleventh policy year and beyond). Annual interest is credited on the loan account value at the same rate interest is charged, for preferred loans, and at 2% per year less for nonpreferred loans. See "Policy Rights--Policy Loans: Preferred and Nonpreferred. CHANGES IN SPECIFIED AMOUNT Within certain limits, you may decrease or, with satisfactory evidence of insurability, increase the specified amount. A request to increase the specified amount may be made beginning with the second policy year. A request to decrease the specified amount may be made beginning with the sixth policy year. Currently, the minimum specified amount is $100,000. Such changes will affect other aspects of your Policy. See page 20. FACTORS TO CONSIDER BEFORE PURCHASING A POLICY The decision to purchase a Policy should be discussed with your agent/registered representative. Make sure you understand the funding vehicles your Policy provides, its other features and benefits, its risks and the fees and expenses you will incur. Consider the following matters, among others: 1) Life Insurance Coverage - Life insurance is not a short-term investment and should be purchased only if you need life insurance coverage. You should evaluate your need for life insurance coverage before purchasing a Policy. 2) Investment Risk - The value of the available variable funding options may fluctuate with the markets and interest rates. You should evaluate the Policy's long-term investment potential and risks before purchasing a Policy. 3) Fees and Expenses - A Policy's fees and expenses reflect costs associated with its features and benefits. Before purchasing a Policy, compare the value that these various features and benefits have to you, given your particular circumstances, with the fees and expenses for those features and benefits. 4) Exchanges - Replacing your existing life insurance policy(ies) with this Policy may not be beneficial to you. Before purchasing a Policy, determine whether your existing policy(ies) will be subject to fees or penalties upon surrender or cancellation. Also compare the fees, charges, coverage provisions and limitations, if any, of your existing policy(ies) with those of this Policy. 5) Sales Compensation - We pay compensation to firms for sales of the policy. 4 THE COMPANY ING Life Insurance and Annuity Company is a stock life insurance company organized under the insurance laws of the State of Connecticut in 1976 and an indirect wholly-owned subsidiary of ING Groep N.V., a global financial institution active in the fields of insurance, banking and asset management. Through a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity Life Insurance Company, an Arkansas life insurance company organized in 1954). Prior to May 1, 2002, the Company was known as Aetna Life Insurance and Annuity Company. The Company is engaged in the business of issuing life insurance policies and variable annuity contracts. The Company is registered as an investment adviser under the Investment Advisers Act of 1940 and, as such, is the investment adviser for ING Partners, Inc. (prior to May 1, 2002 known as Portfolio Partners, Inc.). In addition to serving as the depositor for the registrant, the Company is also the depositor of Variable Life Account C and Variable Annuity Accounts B, C and G (separate accounts of the Company registered as unit investment trusts). The Company's subsidiary, ING Financial Advisers, LLC (IFA)(prior to May 1, 2002, known as Aetna Investment Services, LLC), serves as the principal underwriter for the Policies and also acts as the principal underwriter for Variable Life Account B, Variable Life Account C and Variable Annuity Accounts B, C and G and Variable Annuity Account I (a separate account of ING Insurance Company of America registered as a unit investment trust). IFA, a Delaware limited liability company, is registered as a broker-dealer with the Commission. IFA is also a member of the National Association of Securities Dealers, Inc. (NASD) and the Securities Investor Protection Corporation. IFA's principal office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. The Lincoln National Life Insurance Company ("Lincoln") and its affiliates perform certain administrative functions relating to the Policies, and maintain books and records necessary to operate and administer the Policies. Lincoln will process requests once they receive all letters, forms or other necessary documents completed to their satisfaction, and may require a signature guarantee or some other form of authenticity. The effective date of payments, forms and requests is usually determined by the day and time received; items received before 4:00 PM Eastern Time on any business day will usually be effective on that day, items received after that time will usually be effective the next business day. Lincoln has assigned full-time staff devoted to the development of business continuity plans in conjunction with a national vendor. In addition, they have a site available in which to recover critical business functions in the event of a disaster, and will conduct tests of their capabilities and plans. In accordance with money laundering laws and federal economic sanction policy, Lincoln, on behalf of the Company, may be required in a given instance to reject a premium payment and/or freeze a policy owner's account. This includes refusing to honor requests for transfers, withdrawals, surrenders, loans, assignments, beneficiary changes or death benefit payments. Once frozen, monies would be moved from the separate account to a segregated interest-bearing account maintained for the policy owner, and held in that account until instructions are received from the appropriate Regulator. THE SEPARATE ACCOUNT Variable Life Account B is the separate account providing variable options to fund the Policy. 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 briefly in this prospectus. Complete descriptions of the Funds' investment 5 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 are credited without regard to the other income, gains or losses of the Company. These assets are held for the Company's variable life insurance policies. Any and all distributions made by the Funds with respect to shares held by the separate account will be reinvested in additional shares at net asset value. The assets maintained in the separate account will not be charged with any liabilities arising out of any other business conducted by the Company. The Company is, however, responsible for meeting the obligations of the Policy to the policy owner. 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 Commission as a unit investment trust under the Investment Company Act of 1940 ("1940 Act") 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. THE GENERAL ACCOUNT The general account is the Company's general asset account, in which assets attributable to the non-variable portion of the Policies are held. Both the fixed account value and the loan account value are held in the general account. ALLOCATION OF PREMIUMS You may allocate your net premiums to one or more of the subaccounts currently available through the separate account in connection with this Policy or to the fixed account (part of the Company's general account). Each subaccount invests in a Fund. Not all Funds are available under all Policies or in all jurisdictions. We reserve the right to reject, without notice, any amounts allocated to a sub-account if the sub-account investment in the corresponding Fund is not accepted by the Fund for any reason. In addition, the Company may add, withdraw or substitute Funds, subject to the conditions in the Policy and in compliance with regulatory requirements. Substitute Funds may have different fees and charges than the Funds being replaced. We reserve the right to limit the total number of Funds you may elect to 17 over the lifetime of the Policy. The investment results of the Funds are likely to differ significantly and there is no assurance that any of the Funds will achieve their respective investment objectives. Shares of the Funds will rise and fall in value and you could lose money by investing in the Funds. Shares of the Funds are not bank deposits and are not guaranteed, endorsed or insured by any financial institution, the Federal Deposit Insurance Corporation or any other government agency. Except as noted, all Funds are diversified, as defined under the 1940 Act. Please refer to the Fund prospectuses for additional information. Fund prospectuses may be obtained free of charge, from our Administrative Office at the address and phone number listed on the cover of this Prospectus, by accessing the SEC's web site or by contacting the SEC Public Reference Room. Certain Funds offered under the Policies have names, investment objectives and policies similar to other funds managed by the Fund's investment adviser. The investment results of a Fund may be higher or lower than those of other Funds managed by the same adviser. There is no assurance and no representation is made that the investment results of any Fund will be comparable to those of another Fund managed by the same investment adviser. 6 THE FUNDS
---------------------------------------- ------------------------------- ------------------------------------- FUND NAME INVESTMENT ADVISER/ SUBADVISER INVESTMENT OBJECTIVE ---------------------------------------- ------------------------------- ------------------------------------- ING GENERATION PORTFOLIOS, INC. - ING ING Investments, LLC Seeks to provide capital VP ASCENT PORTFOLIO appreciation. Managed for investors (formerly Aetna Generation Portfolios, Subadviser: Aeltus Investment seeking capital appreciation who Inc. - Aetna Ascent VP) Management, Inc. (Aeltus) generally have an investment (CLASS R SHARES) horizon exceeding 15 years and who have a high level of risk tolerance. ---------------------------------------- ------------------------------- ------------------------------------- ING VP BALANCED PORTFOLIO, INC. ING Investments, LLC Seeks to maximize investment (formerly Aetna Balanced VP, Inc.) return, consistent with reasonable (CLASS R SHARES) Subadviser: Aeltus Investment safety of principal, by investing Management, Inc. (Aeltus) in a diversified portfolio of one or more of the following asset classes: stocks, bonds and cash equivalents, based on the judgement of the Fund's management, of which of these sectors or mix thereof offers the best investment prospects. ---------------------------------------- ------------------------------- ------------------------------------- ING VP BOND PORTFOLIO (formerly ING Investments, LLC Seeks to maximize total return as is Aetna Income Shares d/b/a Aetna consistent with reasonable risk, Bond VP) Subadviser: Aeltus Investment through investment in a diversified (CLASS R SHARES) Management, Inc. (Aeltus) portfolio consisting of debt securities. ---------------------------------------- ------------------------------- ------------------------------------- ING GENERATION PORTFOLIOS, INC. - ING ING Investments, LLC Seeks to provide total return VP CROSSROADS PORTFOLIO (formerly (i.e., income and capital Aetna Generation Portfolios, Inc. - Subadviser: Aeltus Investment appreciation, both realized and Aetna Crossroads VP) Management, Inc. (Aeltus) unrealized). Managed for investors (CLASS R SHARES) seeking a balance between income and capital appreciation who generally have an investment horizon exceeding ten years and who have a moderate level of risk tolerance. ---------------------------------------- ------------------------------- ------------------------------------- ING VARIABLE FUNDS - ING VP GROWTH AND ING Investments, LLC Seeks to maximize total return INCOME PORTFOLIO (formerly Aetna through investments in a diversified Variable Fund d/b/a Aetna Subadviser: Aeltus Investment portfolio of common stocks and Growth and Income VP) Management, Inc. (Aeltus) securities convertible into common (CLASS R SHARES) stock. ---------------------------------------- ------------------------------- ------------------------------------- ING VARIABLE PORTFOLIOS, INC. - ING VP ING Investments, LLC Seeks to outperform the total INDEX PLUS LARGECAP PORTFOLIO return performance of the Standard (formerly Aetna Variable Portfolios, Subadviser: Aeltus Investment & Poor's 500 Composite Index (S&P Inc. - Aetna Index Plus Large Cap Management, Inc. (Aeltus) 500), while maintaining a market VP) level of risk. Invests at least 80% (CLASS R SHARES) of net assets in stocks included in the S&P 500. ---------------------------------------- ------------------------------- -------------------------------------
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---------------------------------------- ------------------------------- ------------------------------------- FUND NAME INVESTMENT ADVISER/ SUBADVISER INVESTMENT OBJECTIVE ---------------------------------------- ------------------------------- ------------------------------------- ING GENERATION PORTFOLIOS, INC. - ING ING Investments, LLC Seeks to provide total return VP LEGACY PORTFOLIO (formerly Aetna consistent with preservation of Generation Portfolios, Inc. - Aetna Subadviser: Aeltus Investment capital. Managed for investors Legacy VP) Management, Inc. (Aeltus) primarily seeking total return (CLASS R SHARES) consistent with capital preservation who generally have an investment horizon exceeding five years and who have a low level of risk tolerance. ---------------------------------------- ------------------------------- ------------------------------------- ING VP MONEY MARKET PORTFOLIO ING Investments, LLC Seeks to provide high current (formerly Aetna Variable Encore Fund return, consistent with d/b/a Aetna Money Market VP) Subadviser: Aeltus Investment preservation of capital and (CLASS R SHARES) Management, Inc. (Aeltus) liquidity, through investment in high-quality money market instruments. ---------------------------------------- ------------------------------- ------------------------------------- ING PARTNERS, INC. - ING MFS CAPITAL ING Life Insurance and Seeks capital appreciation. Invests OPPORTUNITIES PORTFOLIO (formerly Annuity Company (formerly primarily (at least 65% of net Portfolio Partners, Inc. (PPI) MFS Aetna Life Insurance and assets) in common stocks and Capital Opportunities Portfolio) Annuity Company) related securities, such as (INITIAL CLASS) preferred stocks, convertible Subadviser: Massachusetts securities and depositary receipts. Financial Services Company ---------------------------------------- ------------------------------- ------------------------------------- ING PARTNERS, INC. - ING MFS EMERGING ING Life Insurance and Seeks long-term growth of capital. EQUITIES PORTFOLIO (formerly Annuity Company (formerly Invests primarily (at least 80% of Portfolio Partners, Inc. (PPI) MFS Aetna Life Insurance and net assets under normal Emerging Equities Portfolio) Annuity Company) circumstances) in common stocks and (INITIAL CLASS) related securities, such as Subadviser: Massachusetts preferred stocks, convertible Financial Services Company securities and depositary receipts, of emerging growth companies. ---------------------------------------- ------------------------------- ------------------------------------- ING PARTNERS, INC. - ING MFS RESEARCH ING Life Insurance and Seeks long-term growth of capital PORTFOLIO (formerly Portfolio Annuity Company (formerly and future income. Invests Partners, Inc. (PPI) MFS Research Aetna Life Insurance and primarily (at least 80% of total Growth Portfolio) Annuity Company) assets) in common stocks and (INITIAL CLASS) related securities, such as Subadviser: Massachusetts preferred stocks, convertible Financial Services Company securities and depositary receipts. ---------------------------------------- ------------------------------- ------------------------------------- ING PARTNERS, INC. - ING SCUDDER ING Life Insurance and Seeks long-term growth of capital. INTERNATIONAL GROWTH PORTFOLIO Annuity Company (formerly Invests primarily (at least 65% of (formerly Portfolio Partners, Inc. Aetna Life Insurance and total assets) in the equity (PPI) Scudder International Growth Annuity Company) securities of foreign companies Portfolio) that the subadviser believes have (INITIAL CLASS) Subadviser: Zurich Scudder high growth potential. Investments, Inc. (Scudder) ---------------------------------------- ------------------------------- -------------------------------------
8
---------------------------------------- ------------------------------- ------------------------------------- FUND NAME INVESTMENT ADVISER/ SUBADVISER INVESTMENT OBJECTIVE ---------------------------------------- ------------------------------- ------------------------------------- ING PARTNERS, INC. - ING T. ROWE PRICE ING Life Insurance and Seeks long-term capital growth, and GROWTH EQUITY PORTFOLIO (formerly Annuity Company (formerly secondarily, increasing dividend Portfolio Partners, Inc. (PPI) T. Aetna Life Insurance and income. Invests primarily (at least Rowe Price Growth Equity Portfolio) Annuity Company) 80% of net assets under normal (INITIAL CLASS) circumstances) in the common stocks Subadviser: T. Rowe Price of a diversified group of growth Associates, Inc. companies. Investments in foreign securities are limited to 30% of total assets. ---------------------------------------- ------------------------------- ------------------------------------- FIDELITY(R) VARIABLE INSURANCE PRODUCTS Fidelity Management & Seeks long-term capital - FIDELITY VIP CONTRAFUND(R) PORTFOLIO Research Company appreciation. Invests primarily in (INITIAL CLASS) common stocks of companies whose Subadvisers: Fidelity value the Portfolio's investment Management & Research (U.K.) adviser believes is not fully Inc.; Fidelity Management & recognized by the public. Research (Far East) Inc.; Fidelity Investments Japan Limited; FMR Co., Inc. ---------------------------------------- ------------------------------- ------------------------------------- FIDELITY(R) VARIABLE INSURANCE PRODUCTS Fidelity Management & Seeks reasonable income. Also - FIDELITY VIP EQUITY-INCOME Research Company considers the potential for capital PORTFOLIO appreciation. Seeks to achieve a (INITIAL CLASS) Subadviser: FMR Co., Inc. yield which exceeds the composite yield on the securities comprising the Standard & Poor's 500 Index (S&P 500). ---------------------------------------- ------------------------------- ------------------------------------- JANUS ASPEN SERIES - AGGRESSIVE GROWTH Janus Capital A nondiversified Portfolio that PORTFOLIO seeks long-term growth of capital. (INSTITUTIONAL SHARES) Invests primarily in common stocks selected for their growth potential and normally invests at least 50% of its equity assets in medium-sized companies. ---------------------------------------- ------------------------------- ------------------------------------- JANUS ASPEN SERIES - BALANCED Janus Capital Seeks long-term capital growth, PORTFOLIO consistent with preservation of (INSTITUTIONAL SHARES) capital and balanced by current income. Normally invests 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. The portfolio will normally invest at least 25% of its assets in fixed-income securities. ---------------------------------------- ------------------------------- -------------------------------------
9
---------------------------------------- ------------------------------- ------------------------------------- FUND NAME INVESTMENT ADVISER/ SUBADVISER INVESTMENT OBJECTIVE ---------------------------------------- ------------------------------- ------------------------------------- JANUS ASPEN SERIES - GROWTH PORTFOLIO Janus Capital Seeks long-term growth of capital (INSTITUTIONAL SHARES) in a manner consistent with the preservation of capital. Invests primarily in common stocks selected for their growth potential Although it can invest in companies of any size, it generally invests in larger, more established companies. ---------------------------------------- ------------------------------- ------------------------------------- JANUS ASPEN SERIES - WORLDWIDE GROWTH Janus Capital Seeks long-term growth of capital PORTFOLIO in a manner consistent with the (INSTITUTIONAL SHARES) preservation of capital. Invests primarily in common stocks of companies of any size located throughout the world. Normally invests in issuers from at least five different countries, including the United States. May at times invest in fewer than five countries or even in a single country. ---------------------------------------- ------------------------------- ------------------------------------- OPPENHEIMER VARIABLE ACCOUNT FUNDS - OppenheimerFunds, Inc. Seeks long-term capital appreciation OPPENHEIMER GLOBAL SECURITIES FUND/VA by investing a substantial portion of assets in securities of foreign issuers, "growth-type" companies, cyclical industries and special situations that are considered to have appreciation possibilities. Invests mainly in common stocks and can also buy other equity securities, including preferred stocks and convertible securities in the U.S. and foreign countries. ---------------------------------------- ------------------------------- ------------------------------------- OPPENHEIMER VARIABLE ACCOUNT FUNDS - OppenheimerFunds, Inc. Seeks a high level of current OPPENHEIMER STRATEGIC BOND FUND/VA income principally derived from interest on debt securities. Invests mainly in debt securities of issuers in three market sectors: foreign governments and companies, U.S. Government securities, and lower-grade high-yield securities of U.S. and foreign companies. ---------------------------------------- ------------------------------- -------------------------------------
The investment adviser for each of the Funds deducts a daily charge as a percent of the net assets in each Fund as an asset management charge which will in turn affect the daily value of each subaccount. The charge reflects asset management fees of the investment adviser (management fees) and other expenses incurred by the Funds. Future Fund expenses will vary. 10 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 current prospectuses of the Funds for a discussion of the risks associated with an investment in those Funds. More comprehensive information, including a discussion of potential risks, and more complete information about their investment policies and restrictions is found in the current prospectus for each Fund which is distributed with and accompanies this prospectus. You should read the Fund prospectuses and consider carefully, and on a continuing basis, which Fund or combination of Funds is best suited to your long-term investment objectives. Additional prospectuses and Statements of Additional Information for each of the Funds can be obtained from the Company's Administrative Office at the address and telephone number listed on the cover of this prospectus. MIXED AND SHARED FUNDING Shares of the Funds are available to insurance company separate accounts which fund both 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 policyholders, 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. If such a conflict occurs, one of the separate accounts might withdraw its investment in a Fund. This might force that Fund to sell portfolio securities at disadvantageous prices. FIXED ACCOUNT The fixed account is a fixed funding option available under the Policy that guarantees principal and a minimum interest rate of 4.5% per year. The Company 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, which include all assets 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. Amounts held in the fixed account are guaranteed and will be credited with interest at rates of not less than 4.5% per year. Credited interest rates reflect the Company's return on fixed account invested assets and the amortization of any realized gains and/or losses which the Company may incur on these assets. Interests in the fixed account have not been registered with the Commission in reliance upon exemptions under the Securities Act of 1933, as amended. However, disclosure in this prospectus regarding the fixed account may be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of the statements. Disclosure in this prospectus relating to the fixed account has not been reviewed by the Commission. 11 CHARGES & FEES We may profit from any of these charges. The profit from any charges, including mortality and expense risk and cost of insurance charges, may be used for any purpose, including covering shortfalls from other charges. PREMIUM CHARGE A deduction, called the premium charge, currently 3.5% of each premium payment and guaranteed to be no higher than 6%, will be made to cover average applicable state premium taxes (ranging up to 4%) as well as administrative expenses and federal income tax liabilities. CHARGES AND FEES ASSESSED AGAINST THE TOTAL ACCOUNT VALUE A monthly deduction is made from the total account value. The monthly deduction includes the cost of insurance attributable to the basic insurance coverage and any charges for supplemental riders or benefits. The cost of insurance depends on the attained age, risk class of the insured, the specified amount of the Policy and in most states, sex of the insured. The attained age is the issue age of the insured increased by the number of elapsed policy years. Once a Policy is issued, the monthly deductions will be charged as of the issue date, even if the issue date is earlier than the date the application is signed (see "Premium Payments"). The issue date is the effective date of initial coverage. Coverage is conditional on payment of the first premium, if required, and issue of the Policy as provided in the application. The date of issue and the effective date for any change in coverage will be the date of coverage change that is found in your supplemental policy specifications. If the Policy's issuance is delayed due to underwriting requirements, the charges will not be assessed until the underwriting is complete and the application for the Policy is approved. Cost of insurance charges will be in amounts based on the specified amount of the Policy issued, even if the temporary insurance coverage received during the underwriting period is for a lesser amount. If we decline an application, we will refund the full premium payment made. The monthly deduction also includes a monthly administrative expense charge of $20 during the first policy year and $7 during subsequent policy years. This charge is for items such as premium billing and collection, policy value calculation, confirmations and periodic reports and will not exceed our costs. The monthly deduction is deducted proportionately from each funding option, if more than one is used. This is accomplished by liquidating accumulation units and withdrawing the value of the liquidated accumulation units from each funding option in the same proportion as their respective values have to your fixed account and separate account values. The monthly deduction is made as of the same day each month, beginning with the issue date. This day is called the monthly deduction day. If the Policy's cash surrender value is not sufficient to cover the current monthly deduction, you will be notified by the Company, and a 61-day period called the grace period will begin. The Policy will lapse without value at the end of the 61-day period, unless a sufficient payment described in the notification letter is received by the Company. CHARGES AND FEES ASSESSED AGAINST THE SEPARATE ACCOUNT The Company deducts a daily charge from the assets of Variable Life Account B for mortality and expense risk assumed by it in connection with the Policy. This charge is currently equal to an annual rate of 0.70% of the average daily net assets of the separate account attributable to the Policies. The mortality and expense risk charge is assessed to compensate the Company for assuming certain mortality and expense risks under the Policies. 12 The Company reserves the right to increase the mortality and expense risk charge if it believes that circumstances have changed so that current charges are no longer adequate. In no event will the charge exceed 0.90% of average daily net assets on an annual basis. The mortality risk assumed is that insureds, as a group, may live for a shorter period of time than estimated and, therefore, the cost of insurance charges specified in the Policy will be insufficient to meet actual claims. The expense risk assumed is that other expenses incurred in issuing and administering the Policies and operating the separate account will be greater than the charges assessed for such expenses. The Company also deducts a daily administrative charge equivalent on an annual basis to 0.30% of the average daily net assets of Variable Life Account B attributable to the Policies to compensate the Company for expenses associated with the administration and maintenance of the Policy. These types of expenses are described above in connection with the monthly administrative charge. The daily administrative charge and the monthly administrative charge work together to cover the Company's administrative expenses. In later years of the Policy, the revenue collected from the daily asset-based charge grows with the total account value to cover increased expenses from account-based transactional expenses. The charge is guaranteed not to exceed 0.50% of the average daily net assets of the separate account attributable to the Policies on an annual basis. CHARGES ASSESSED AGAINST THE UNDERLYING FUNDS The following table illustrates the investment advisory (management) fees, other expenses and total expenses of the Funds as a percentage of average net assets based on figures for the year ended December 31, 2001 unless otherwise indicated. Expenses of the Funds are not fixed or specified under the terms of the Policies, and actual expenses may vary. 13 FUND EXPENSE TABLE(1)
- ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- TOTAL FEES AND TOTAL NET MANAGEMENT FUND EXPENSES FUND (ADVISORY) OTHER ANNUAL WAIVED OR ANNUAL FUND NAME FEES EXPENSES EXPENSES REIMBURSED EXPENSES - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING VP Ascent Portfolio (Class R Shares)(2) 0.60% 0.14% 0.74% -- 0.74% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING VP Balanced Portfolio, Inc. (Class R Shares) (2) 0.50% 0.09% 0.59% -- 0.59% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING VP Bond Portfolio (Class R Shares) (2) 0.40% 0.10% 0.50% -- 0.50% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING VP Crossroads Portfolio (Class R Shares) (2) 0.60% 0.14% 0.74% 0.04% 0.70% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING VP Growth and Income Portfolio (Class R Shares) (2) 0.50% 0.09% 0.59% -- 0.59% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING VP Index Plus LargeCap Portfolio (Class R Shares) (2) 0.35% 0.10% 0.45% -- 0.45% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING VP Legacy Portfolio (Class R Shares) (2) 0.60% 0.16% 0.76% 0.11% 0.65% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING VP Money Market Portfolio (Class R Shares) (2) 0.25% 0.09% 0.34% -- 0.34% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING MFS Capital Opportunities Portfolio (Initial Class) 0.65% 0.25% 0.90% -- 0.90% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING MFS Emerging Equities Portfolio (Initial Class) 0.68% 0.13% 0.81% -- 0.81% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING MFS Research Portfolio (Initial Class) 0.70% 0.15% 0.85% -- 0.85% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING Scudder International Growth Portfolio (Initial 0.80% 0.20% 1.00% -- 1.00% Class) - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- ING T. Rowe Price Growth Equity Portfolio (Initial Class) 0.60% 0.15% 0.75% -- 0.75% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- Fidelity(R) VIP Contrafund(R) Portfolio (Initial 0.58% 0.10% 0.68% -- 0.68% Class) (3) - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- Fidelity(R) VIP Equity-Income Portfolio (Initial 0.48% 0.10% 0.58% -- 0.58% Class) (3) - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- Janus Aspen Aggressive Growth Portfolio (Institutional Shares) (4) 0.65% 0.02% 0.67% -- 0.67% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- Janus Aspen Balanced Portfolio (Institutional Shares) (4) 0.65% 0.01% 0.66% -- 0.66% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- Janus Aspen Growth Portfolio (Institutional Shares) (4) 0.65% 0.01% 0.66% -- 0.66% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- Janus Aspen Worldwide Growth Portfolio (Institutional Shares) (4) 0.65% 0.04% 0.69% -- 0.69% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- Oppenheimer Global Securities Fund/VA 0.64% 0.06% 0.70% -- 0.70% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ---------- Oppenheimer Strategic Bond Fund/VA (5) 0.74% 0.05% 0.79% -- 0.79% - ---------------------------------------------------------- ------------ ---------- ----------- ------------ ----------
(1) The Company may receive compensation from each of the Funds or the Funds' affiliates based on an annual percentage of the average net assets held in that Fund by the Company. The percentage paid may vary from one Fund company to another. The Company may also receive additional compensation from certain Funds for administrative, recordkeeping or other services provided by the Company to the Funds or the Funds' affiliates. These additional payments are made by the Funds or the Funds' affiliates to the Company and do not increase, directly or indirectly, the fees and expenses shown above. (2) ING Investments, LLC, the investment adviser to each Portfolio, has entered into written expense limitation agreements with each Portfolio (except Balanced, Growth and Income, Bond and Money Market) under which it will limit expenses of the Portfolios, excluding interest, brokerage and extraordinary expenses, subject to possible reimbursement to ING Investments, LLC within three years. The amount of each Portfolio's expenses waived or reimbursed during the last fiscal year by the Portfolio's investment adviser is shown under the heading "Fees and Expenses Waived or Reimbursed" in the table above. For each Portfolio, the expense limits will continue through at least December 31, 2002. (3) Actual annual class operating expenses were lower because a portion of the brokerage commissions that the fund paid was used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's custodian expenses. These offsets may be discontinued at any time. (4) All expenses are shown without the effect of any expense offset arrangement. 14 (5) OppenheimerFunds, Inc., will reduce the management fee by 0.10% as long as the fund's trailing 12-month performance at the end of the quarter is in the fifth Lipper peer-group quintile; and by 0.05% as long as it is in the fourth quintile. The waiver is voluntary and may be terminated by the Manager at any time. For further details on each Fund's expenses, please refer to that Fund's prospectus. SURRENDER CHARGE If you surrender your Policy (in whole or in part) a surrender charge may apply, as described below. This charge is retained by the Company and is imposed in part as a deferred sales charge and in part to enable the Company to recover certain first year administrative costs. The maximum portion of the surrender charge applied to reimburse the Company for sales and promotional expense is 30% of the first year's basic premium.(Any surrenders may result in tax implications. See "Tax Matters.") The initial surrender charge, as specified in your Policy, is based on the specified amount. It also depends on the Insured's age, risk class and in most states, sex of the insured (except for group arrangements described under "Special Plans"). Once determined, the surrender charge will remain the same for five years following the issue date. Thereafter, it declines monthly so that beginning sixteen years after the issue date (assuming no increases in the specified amount) the surrender charge will be zero. 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 determined based on the insured's attained age, risk class, and in most states, sex of the insured. The surrender charge applicable to the increase will be 70% of the surrender charge on a new policy whose specified amount equals the amount of the increase, and will cover administrative expenses. The additional surrender charge will also remain constant for five years from the start of the policy year in which the increase occurs, and will decrease to zero by the beginning of the sixteenth year. If you decrease the specified amount while the surrender charge applies, the surrender charge will remain the same. Based on its actuarial determination, the Company does not anticipate that the surrender charge will cover all sales and administrative expenses which the Company will incur in connection with the Policy. Any such shortfall, including but not limited to payment of sales and distribution expenses, would be charged to and paid by the Company. SURRENDER CHARGES ON FULL AND PARTIAL SURRENDERS FULL SURRENDER: All applicable surrender charges are imposed. PARTIAL SURRENDER: A proportional percentage of all surrender charges is imposed. The proportional percentage is the amount of the net partial surrender divided by the sum of the fixed account value and the separate 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 or 2% of the amount of the net surrender payment, whichever is less, will be made against the total account value. (See "Partial Surrenders.") 15 Note: The surrender charge will vary between 41% and 100% of one year's basic annual premium, depending on the insured's age, risk class and in most states, sex of the insured. POLICY CHOICES When you buy a Policy, you make four important choices: 1) Which one of the two death benefit options you would like; 2) Whether you want the guaranteed death benefit provision, and to what age; 3) The amount of premium you intend to pay; and 4) The way your premiums will be allocated to the Funds and/or the fixed account. Each of these choices is described in detail below. DEATH BENEFIT At the time of purchase, you must choose between the two available death benefit options. The amount payable under either option will be determined as of the date of the Insured's death. Under OPTION 1, the death benefit will be the greater of the specified amount (a minimum of $100,000 on the date of this Prospectus), or the applicable percentage of the total account value. The percentage is 250% through age 40 and decreases yearly to 100% at age 100. Option 1 generally provides a level death benefit. Under OPTION 2, the death benefit will be the greater of the specified amount (a minimum of $100,000 on the date of this Prospectus), plus the total account value, or the applicable percentage (described above) of the total account value. Option 2 provides a varying death benefit which increases or decreases over time, depending on the amount of premium paid and the investment performance of the underlying funding options you choose. Under both option 1 and option 2, the death benefit may be affected by partial surrenders. The death benefit for both options will be reduced by the amount necessary to repay any loans in full. GUARANTEED DEATH BENEFIT PROVISION The guaranteed death benefit provision assures that, as long as the guaranteed death benefit premium test as described below is met, the Policy will stay in force even if the cash value is insufficient to cover the current monthly deductions. The guaranteed death benefit premium is a specified amount of premium required to keep the Policy in force to either age 80 or age 100. The guaranteed death benefit provision must be selected on the application. It may not be available to all risk classes and is only available in those states where it has been approved. (Note: not available in New York.) The guaranteed death benefit provision is available to age 80 or to age 100. We will test annually to determine if the sum of all premiums paid to date is sufficient to support the guaranteed death benefit provision. In order for the guaranteed death benefit provision to be in effect, the sum of all premiums paid less partial surrenders must be greater than or equal to the required monthly guaranteed death benefit premium times the number of months elapsed since the Policy's issue date. However, if these premiums are not sufficient, the policy owner will be notified and given two months (61 days in New Jersey) to pay the amount needed. If the guaranteed death benefit provision to age 100 had been in place, and the amount needed is not received within the two-month period; the guaranteed death benefit provision to age 80 will be substituted, if there is enough premium; if not the guaranteed death benefit provision to age 100 16 will terminate. If the guaranteed death benefit provision to age 80 had been in place and the amount needed is not received within the two-month period (61 days in New Jersey), the guaranteed death benefit provision will terminate. If a guaranteed death benefit provision is terminated it may not be reinstated. Increases, decreases, partial surrenders, and option changes may affect the guaranteed death benefit premium. These events and loans may also affect the Policy's ability to remain in force even if the cumulative annual guaranteed death benefit provision test has been met. PREMIUM PAYMENTS During the first five policy years, payment of the basic premium assures that the Policy will remain in force for that five year period, as long as there are no surrenders or loans taken during that time. The basic premium is stated in the Policy. If basic premiums are not paid, or there are surrenders or loans taken during the first five policy years, the Policy will lapse if the cash surrender value is less than the next monthly deduction. Basic premiums are current if premiums paid, minus loans and minus partial surrenders, are greater than or equal to the basic premium (expressed as a monthly amount) multiplied by the number of months the Policy has been in force. After the first five policy years, your Policy will not lapse as long as the Policy's cash surrender value is sufficient to cover the next monthly deduction. Planned premiums are those premiums you choose to pay on a scheduled basis. We will bill you annually, semiannually, or quarterly, or at any other agreed-upon frequency. Pre-authorized automatic monthly check payments may also be arranged. Additional premiums are any premiums you pay in addition to planned premiums. Payment of basic premiums, planned premiums, or additional premiums in any amount will not, except as noted above, guarantee that your Policy will remain in force. Failure to pay planned premiums or additional premiums will not necessarily cause your Policy to lapse. Not paying your planned premiums can, however, cause the guaranteed death benefit provision to terminate. (See "Guaranteed Death Benefit Provision.") You may increase your planned premium at any time by submitting a written notice to us or by paying additional premiums, except that: o 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 underlying funding options. o In no event may the total of all premiums paid exceed the then-current maximum premium limitations established by federal law for a Policy to qualify as life insurance. (See "Tax Matters.") If, at any time, a premium is paid which would result in total premiums exceeding such maximum premium limitation, we will only accept that portion of the premium which will make total premiums equal the maximum. Any part of the premium in excess of that amount will be returned or applied as otherwise agreed and no further premiums will be accepted until allowed by the then-current maximum premium limitations prescribed by law. 17 o If you make a sufficient premium payment when you apply for a Policy, and have answered favorably certain questions relating to the Insured's health, a "temporary insurance agreement" in the amount applied for (subject to stated maximum) will be provided. o After the first premium payment, all premiums must be sent directly to our Administrative Office and will be deemed received when actually received at the Administrative Office. Your premium payments will be allocated as you have directed, and amounts allocated to the Funds will be credited to your Policy at the accumulation unit value as of the next valuation period after each payment is received in the Administrative Office. o You may reallocate your future premium payments at any time free of charge. Any reallocation will apply to premium payments made after you have received written verification from us. We may backdate a Policy, upon request and under limited circumstances, 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 minimum premium payable for the period between the issue date and the date the initial premium is invested in the separate account. 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 "Policy Values--Total Account Value.") INITIAL ALLOCATIONS TO FUNDING OPTIONS At purchase, you must decide how to allocate your net premiums among the Funds and/or the fixed account. Net premiums must be allocated in whole percentages. TRANSFERS BETWEEN FUNDING OPTIONS Up until the maturity date, you may transfer policy values from one Fund to another at any time, or from Variable Life Account B to the fixed account. And, within the 45 days after each policy anniversary, you may also transfer a portion of the fixed account value to one or more Funds before the maturity date. This type of transfer is allowed only once in the 45-day period after the policy anniversary and will be effective as of the next valuation period after your request is received in good order at the Administrative Office. The amount of such transfer cannot exceed the greater of (a) 25% of the fixed account value, or (b) $500. If the fixed account value is less than or equal to $500, you may transfer all or a portion of the fixed account value. We may increase this limit from time to time. Any transfer among the Funds or to the fixed account will result in the crediting and cancellation of accumulation units based on the accumulation unit values determined for the valuation period in which a written request is received at our Administrative Office. (See "Accumulation Unit Value.") You should carefully consider current market conditions and each Fund's investment policies and related risks before allocating money to the Funds. Order for the purchase of Fund shares may be subject to acceptance by the Fund. We reserve the right to reject, without prior notice, any transfer request to a subaccount if the subaccount's investment in the corresponding Fund is not accepted by the Fund for any reason. LIMITS ON FREQUENT TRANSFERS The Policy is not designed to serve as a vehicle for frequent trading in response to short-term fluctuations in the market. Such frequent trading can disrupt management of a Fund and raise its expenses. This in turn can have an adverse effect on Fund performance. Accordingly, organizations and individuals who use market-timing investment strategies and make frequent transfers should not purchase the Policy. 18 We reserve the right to restrict, in our sole discretion and without prior notice, transfers initiated by a market-timing organization or individual or other party authorized to give transfer instructions on behalf of multiple policy owners. Such restrictions could include: (1) Not accepting transfer instructions from an agent acting on behalf of more than one policy owner; and (2) Not accepting preauthorized transfer forms from market-timers or other entities acting on behalf of more than one policy owner at a time. We further reserve the right to impose, without prior notice, restrictions on any transfers that we determine, in our sole discretion, will disadvantage or potentially hurt the rights or interests of other policy owners. TELEPHONE TRANSFERS You may request a transfer of account values either in writing or by telephone. You may also send your request by facsimile to the Administrative Office. In order to make telephone transfers, a written telephone transfer authorization form must be completed by the policy owner and returned to the Administrative Office. Once the form is processed, the policy owner may request a transfer by telephoning the Administrative Office. All transfers must be in accordance with the terms of the Policy. Transfer instructions are currently accepted for each valuation period. Once instructions have been accepted and processed, 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 policy owner 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. Please note that the telephone and/or facsimile may not always be available. Any telephone or facsimile, whether it is ours, yours, your service provider's or your agent's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent our processing of your request. Although we have taken precautions to help our systems handle heavy use, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should send your request in writing to our Administrative Office. AUTOMATED TRANSFERS (DOLLAR COST AVERAGING) Dollar cost averaging describes a program 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 ING VP Money Market Portfolio to any other investment option through written request or other method acceptable to the Company. You must have a minimum of $5,000 allocated to the ING VP Money Market Portfolio 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 19 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 The total account value is the sum of the fixed account value, the separate account value and the loan account value. Once your Policy has been issued, each net premium (the premium paid less the premium load) allocated to a variable funding option of the separate account is credited in the form of accumulation units of the funding option. An "accumulation unit" is the measure of the net investment result of each variable funding option, based on that funding option's accumulation unit value (AUV). Accumulation units are valued once daily as of the close of trading, normally 4:00 PM, New York time, on each day that the New York Stock Exchange (NYSE) is open and trading is unrestricted ("valuation date"). On any day other than a valuation date, the accumulation units will not change. A "valuation period" is the period starting at the close of trading on the NYSE on a valuation date, and ending at the close of trading on the next valuation date. Each net premium will be credited to your Policy at the AUV determined for the valuation period in which it is received and accepted by us at our Administrative 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 next computed after we receive the premium. Shares in the Funds are purchased by the separate account at the net asset value determined by the Fund for the valuation period in which the net premium is received by the Company. Since each Fund has a unique AUV, a policy owner who has elected a combination of funding options will have accumulation units credited to each funding 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 Fund by its appropriate current AUV; (b) if you have elected a combination of Funds, totaling the resulting values; and (c) adding any fixed account and loan account values. 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 that funding option, and decreased by charges and withdrawals from that funding option. The fixed account value reflects amounts allocated to the general account through payment of premiums or transfers from the separate account. The fixed account value is 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. The loan account value is the sum of all unpaid loans, preferred and nonpreferred. You will be advised at least annually as to the number of accumulation units which remain credited to the Policy, the current AUV, the separate account value, the fixed account value, and the total account value. 20 ACCUMULATION UNIT VALUE The value of an accumulation unit for any valuation period is determined by multiplying the value of an accumulation unit for the immediately preceding valuation period by the net investment factor for the current period for the appropriate Fund. The net investment factor equals the net investment rate plus 1.0000000. The net investment rate is determined separately for each Fund. It is computed according to a formula that is equivalent to the following: (a) the net assets of the Fund held in Variable Life Account B at the end of a valuation period, minus (b) the net assets of the Fund held in Variable Life Account B at the beginning of that valuation period, plus or minus (c) taxes or provisions for taxes, if any, attributable to the operation of Variable Life Account B (with any federal tax liability offset by foreign tax credits to the extent allowed), divided by (d) the value of the accumulation units held by Variable Life Account B at the beginning of the valuation period, minus (e) a daily charge for mortality and expense risk, and administrative expenses. (See "Charges and Fees Assessed against the Separate Account.") In certain circumstances, and when permitted by law, it may be prudent for the Company to use a different standard industry method for this calculation. We will achieve substantially the same result using either method. MATURITY VALUE The maturity value of your Policy depends on whether or not the guaranteed death benefit provision is in effect. If it is, the maturity value is the greater of the total account value and the specified amount on the maturity date, less the amount necessary to repay all loans in full. If it is not, the maturity value is the total account value on the maturity date, less the amount necessary to repay all loans in full. CASH SURRENDER VALUE The cash surrender value of your Policy is the amount you can receive in cash by surrendering the Policy. This equals the total account value minus the applicable surrender charge and the amount necessary to repay any loans in full. In early policy years, or if there has been a substantial reduction in the specified amount, there may be little or no cash surrender value available. All or part of the cash surrender value may be applied to one or more of the settlement options. (See "Surrender Charge.") POLICY RIGHTS FULL SURRENDERS You may surrender your Policy for the full cash surrender value. If you surrender your Policy in its early years, there may be little or no cash surrender value. PARTIAL SURRENDERS A partial surrender may be made at any time after the first policy year. The amount of a partial surrender may not exceed the cash surrender value on the date the request is received and may not be less than $500. Partial surrenders may only be made prior to election of a settlement option. 21 For an option 1 Policy (see "Death Benefit"), 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 and will reduce any past increases in the reverse order in which they occurred. For an option 2 Policy (see "Death Benefit"), a partial surrender will reduce the total account value and the death benefit, but it will not reduce the specified amount. Payment of any amount due from the separate account values on a full or partial surrender will be made within seven calendar days after we receive your written request at our Administrative Office in form satisfactory to us. Payment may be postponed when the New York Stock Exchange has been closed and for such other periods as the Commission may require. Payment from the fixed account values may be deferred up to 6 months, except when used to pay premiums to the Company. The specified amount remaining in force after a partial surrender may not be less than $100,000. Any request for a partial surrender that would reduce the specified amount below this amount will not be granted. In addition, if, following the partial surrender and the corresponding decrease in the specified amount, the Policy would not comply with the maximum premium limitations required by federal tax law, the decrease may be limited to the extent necessary to meet the federal tax law requirements. If, at the time of a partial surrender, your total account value is attributable to more than one funding option, the surrender charge, transaction charge and the amount paid to you upon the surrender will be taken proportionately from the accumulation unit values in each funding option. AVOIDING LOSS OF COVERAGE Take note: The following explanations of the No-Lapse Coverage Provision and the Reinstatement of a Lapsed Policy should be read together with the Guaranteed Death Benefit Provision, discussed earlier under Policy Choices. These three provisions, and the interrelationship between them, determine whether you keep or lose your insurance. If you have any questions about how they operate and how each provision affects the others, please contact the Administrative Office. NO-LAPSE COVERAGE PROVISION This Policy will not terminate during the five-year period after its issue date or the issue date of any increase if, on each monthly deduction day within that period, the sum of premiums paid equals or exceeds: 1) the sum of the basic premiums for each Policy month from the issue date, including the current month; plus 2) any partial surrenders; plus 3) any increase in loan account value since the Policy's issue date or the issue date of any increase. If, on each monthly deduction day within the five-year period, the sum of premiums paid is less than the sum of the items 1, 2, and 3 above, and the cash surrender value is insufficient to cover the current monthly deduction, the grace period provision will apply. After the five-year period expires, and depending on the investment performance of the Funds, the total account value may be insufficient to keep this Policy in force, and payment of an additional premium may be necessary, unless the guaranteed death benefit provision has been elected. REINSTATEMENT OF A LAPSED POLICY A lapse occurs if your monthly deduction is greater than the cash surrender value and no payment to cover the deduction is made within the 61 days of our notifying you. This may happen after the first five policy years, or during the first five policy years if your basic premiums are not current. The cash surrender value may be 22 insufficient because it has been exhausted by earlier deductions, due to poor investment performance, partial surrenders, indebtedness for policy loans, reductions in specified amount or some combination of these factors. You can apply for reinstatement within five years after the date of termination and before the maturity date. To reinstate your Policy we will require satisfactory evidence of insurability and an amount sufficient to pay for the current monthly deduction plus two additional monthly deductions. If the Policy is reinstated within five years of this policy's issue date or while the no-lapse coverage provision (see "No-Lapse Coverage Provision") would be in effect if this Policy had not lapsed, all values including the loan account value will be reinstated to the point they were on the date of lapse. However, the guaranteed death benefit provision will not be reinstated. If the Policy is reinstated after the no-lapse coverage provision (see "No-Lapse Coverage Provision") has expired, this Policy will be reinstated on the monthly deduction day following our approval. This Policy's total account value at reinstatement will be the net premium paid less the monthly deduction due that day. Any loan account value will not be reinstated, and the guaranteed death benefit will not be reinstated. If the Policy's cash surrender value less any loan account value plus accrued interest is not sufficient to cover the full surrender charge at the time of lapse, the remaining portion of the surrender charge will also be reinstated at the time of Policy reinstatement. POLICY LOANS: PREFERRED AND NONPREFERRED Unless otherwise required by state law, the maximum loan amount is 90% of the cash surrender value at the time of a loan. Loans taken during the first ten policy years are considered nonpreferred loans. Beginning in the eleventh policy year, up to 10% of the maximum loan amount available at the beginning of a policy year can be taken as a preferred loan during that policy year. Amounts borrowed that are in excess of the maximum loan amount available for a preferred loan will be considered a nonpreferred loan. An amount equal to what you receive for a loan, together with any interest added to the loan for due and unpaid interest, as described below, will be added to the loan account value. If you are using more than one underlying funding option, the amount of the loan will be withdrawn in proportion to the value of each funding option. Interest on loans will accrue at an annual rate which will be the greater of: 1) The monthly average (i.e., the composite yield on corporate bonds as published by Moody's Investors Service, Inc.) for the calendar month which ends two months before the month in which the Policy Anniversary occurs, or 2) 5.5%. Increases or decreases to the current interest rate will occur only when the new policy year's annual interest rate is greater or lower than the prior policy year's annual interest rate by at least 0.5%. We will notify you of the current interest rate charged for a loan at the time a loan is made. If your Policy has a loan outstanding, we will notify you of any change in the interest rate before the new rate becomes effective. Interest is payable by you once a year on each anniversary of the loan, or earlier upon surrender, payment of proceeds, or maturity of a Policy. Any interest you do not pay when due becomes part of the loan and bears interest. 23 An amount equal to what you receive for a loan, together with any interest accrued but not paid, will be added to the loan account value. We will credit interest on the loan account value. The loan account value for nonpreferred loans will be credited interest, during any policy year, at an annual rate that is the interest rate charged on the loan minus 2%. However, in no case will the credited interest rate be less than 4.5% annually. The loan account value on preferred loans will be credited interest at a rate equal to the interest rate charged. In no case will the credited interest rate be less than 5.5% annually. If a policy loan is requested, the amount to be borrowed will be withdrawn by the Company from the funding options and fixed account value in proportion to the value of the Policy attributable to each funding option and the fixed account. Repayments on the loan will be allocated among the funding options in the same proportion the loan was taken from the funding options. The loan account value will be reduced by the amount of any loan repayment. The amount necessary to repay all loans in full is the loan account value plus any interest accrued since the last policy anniversary. Such interest is payable in order to discharge any policy indebtedness. POLICY CHANGES You may make changes to your Policy, as described below, by submitting a written request to our Administrative Office in a form satisfactory to us. INCREASES: Beginning in the second policy year, you may increase the specified amount of your Policy subject to the following conditions: o Satisfactory evidence of insurability may be required. o The cash surrender value at the time of 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 amount of the increase, divided by 1000, times the applicable cost of insurance rate. o An increase in the specified amount will increase the surrender charge. o The basic monthly premium will be increased when the specified amount is increased. The Policy will not terminate within five years of the issue date of the increase if the conditions of this provision and the no-lapse coverage provision are met. o Increases through the fifth year are limited to four times the initial specified amount. o Increases in the specified amount will increase the guaranteed death benefit provision amount and will affect the guaranteed death benefit premium. DECREASES: Beginning in the sixth policy year decreases will be allowed, however: o No decrease may reduce the specified amount to less than the minimum for this type of policy. (See Death Benefit.) o Any decrease will cause a decrease in the guaranteed death benefit provision. DEATH BENEFIT OPTION CHANGE: A death benefit option change will be allowed, subject to the following conditions: o The change will take effect on the monthly deduction day on or next following the date on which the Administrative Office receives your written request. o There will be no change in the surrender charge, and evidence of insurability may be required. o We will not allow a change in the death benefit option if the specified amount will be reduced below the minimum specified amount. 24 o Changes from option 1 to option 2 are allowed beginning in the sixth policy year. The new specified amount will equal the specified amount less the total account value at the time of the change.* o Changes from option 2 to option 1 are allowed after the first policy year. The new specified amount will equal the specified amount plus the total account value as of the time of the change.* *Changes in the death benefit option also affect the guaranteed death benefit provision amount and the guaranteed death benefit premium. RIGHT TO EXAMINE THE POLICY The Policy has a period during which you may examine the Policy. If for any reason you are dissatisfied, it may be returned to our Administrative Office for a refund. It must be returned within ten days (state variations may apply) after you receive the Policy and the written notice of withdrawal right, or within 45 days after you sign the application for the Policy, whichever occurs latest. If you return (cancel) the Policy, we will pay a refund of: (1) the difference between payments made and amounts allocated to the separate account, plus (2) the value of the amount allocated to the separate account as of the date the returned Policy is received by us, plus (3) any fees imposed on the amounts allocated to the separate account. If state law does not permit such a refund, then the refund will equal premiums paid, without interest. Refunds will usually occur within seven days of notice of cancellation, although a refund of premiums paid by check may be delayed until the check clears your bank. PAYMENT OF DEATH BENEFIT The death benefit is the amount payable to the beneficiary upon the death of the insured. Any outstanding loan amounts or overdue deductions are withheld from the death benefit prior to payment. The death benefit under the Policy will be paid in a lump sum within seven days after we receive due proof of the insured's death (a certified copy of the death certificate) at our Administrative Office, unless you or the beneficiary have elected that it be paid under one or more of the settlement options. (See "Settlement Options.") Payment of the death benefit may be delayed if the Policy is being contested. While the Insured is living, 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 death of the insured, unless you have made an irrevocable election. A beneficiary who has elected settlement option 1 may elect another option within two years after the insured's death. All or a part of the death benefit may be applied under one or more 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 one lump sum. Any excess death benefit due will be paid as elected. POLICY SETTLEMENT There are several ways in which a beneficiary may receive annuity payments from a death benefit. These are called settlement options. If the owner surrenders the Policy, settlement options are available for the amount of the policy cash surrender value. 25 Proceeds in the form of settlement options are payable by the Company upon the insured's death, upon maturity of the policy, or upon election of one of the following settlement options or any we make available (after any applicable surrender charges have been deducted). A written request may be made to elect, change, or revoke a settlement option before payments begin under any settlement option. This request must be in form satisfactory to us, and will take effect upon its filing at our Administrative Office. If no settlement option has been elected by the policy owner 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 Options 2, 3 and 4 are in the form of an annuity, which is a series of payments for life or a definite period of time. The person receiving the payments is called the annuitant. OPTION 1 -- Payment of interest on the sum left with us; OPTION 2 -- Payments for a stated number of years, at least three 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 -- Payments during the joint lifetimes of two annuitants. At the death of either, payments will continue to the survivor. When this option is chosen, a choice must be made of: a) 100% of the payment to continue to the survivor; b) 66 2/3% of the payment to continue to the survivor; c) 50% of the payment to continue to the survivor; d) Payments for a minimum of 120 months, with 100% of the payment to continue to the survivor; e) 100% of the payment to continue to the survivor if the survivor is the annuitant, and 50% of the payment to continue to the survivor if the survivor is the second annuitant. 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. Proceeds applied under option 1 will be held by us in the general account. Proceeds in the general account will be used to make payments on a fixed-dollar basis. We will add interest to such proceeds at an annual rate of not less than 3%. We may add interest daily at any higher rate. Under option 1, the annuitant may later tell the Company to (a) pay to him or her a portion or all of the sum held by the Company; or (b) apply a portion or all of the sum held by the Company to another settlement option. Proceeds applied under options 2, 3 and 4 will be held (a) in the general account; or (b) in Variable Annuity Account B, invested in one or more of the available investment options, or (c) a mix of (a) and (b). Proceeds held in Variable Annuity Account B will be used to make payments on a variable basis. 26 If payments are to be funded on a variable basis (by the Funds), the first and subsequent payments will vary depending on the assumed net investment rate. This rate will be 3 1/2% per year, unless a 5% annual rate is chosen. The assumed net investment rate is chosen by the payee. Selection of a 5% rate causes a higher first payment, but subsequent payments will increase only to the extent the actual net investment rate exceeds 5% on an annualized basis, and they will decline if the rate is less than 5%. Use of the 3 1/2% assumed net investment rate causes a lower first payment, but subsequent payments will increase more rapidly or decline more slowly as changes occur in the actual net investment rate. The investment performance of the underlying funding option(s) must equal such assumed rate, plus enough to cover the mortality and expense risk and administrative fee charges, if future payments on a variable basis are to remain level. If payments on a variable basis are not to decrease, gross return on the assets of the underlying funding option must be: a) 4.75% on an annual basis, plus an annual return of up to .25% needed to offset the administrative charge in effect at the time settlement option payments start, if an assumed net investment rate of 3 1/2% is chosen; or b) 6.25% on an annual basis, plus an annual return of up to .25% needed to offset the administrative charge in effect at the time settlement option payments start, if an assumed net investment rate of 5% is chosen. Option 2, 3 or 4 may be chosen on a fixed-dollar basis. However, if the guaranteed payments are less than the payments which would be made from the purchase of the Company's current single premium immediate annuity, the larger payment will be made instead. As to funds held under option 1, the annuitant may elect to make a withdrawal or to change options. Under option 2, if payments are made on a variable basis, the current value may be withdrawn at any time. Amounts held in the fixed account may not be withdrawn under option 2. No withdrawals or changes of option may be made under options 3 and 4. When an annuitant dies while receiving payments under option 2, 3 or 4, the present value of any remaining guaranteed payments will either be paid in one sum to the annuitant's beneficiary, or upon election by that beneficiary, any remaining guaranteed payments will continue to that beneficiary. If no beneficiary exists, the present value of any remaining guaranteed payments will be paid in one sum to the annuitant's estate. If the annuitant dies while receiving payments under option 1, the current value of the option will be paid in one sum to the beneficiary, or to the annuitant's estate. If the annuitant's beneficiary dies (and there is no contingent beneficiary), while receiving payments, the current value of the account (option 1), or the present value of any remaining guaranteed payments will be paid in one sum to the estate of that beneficiary. The interest rate used to determine the first payment will be used to calculate the present value. CALCULATION OF SETTLEMENT PAYMENTS ON A VARIABLE BASIS When you have chosen payment on a variable basis, the first payment is calculated as follows: a) the portion of the proceeds applied to make payments on the variable basis; divided by b) 1,000; times c) the payment rate per $1000 of proceeds for the option chosen as shown in the policy. Such amount, or portion, of the variable payment will be divided by the settlement option unit value (described below), as of the tenth valuation period before the due date of the first payment, to determine the number of 27 settlement option units. Each future payment is equal to the number of settlement option units, times the settlement option unit value as of the tenth valuation period prior to the due date of the payment. For any valuation period, the Fund(s) settlement option unit value is equal to: a) The settlement option unit value for the previous valuation period; times b) The net return factor (as defined below) for the valuation period; times c) A factor to reflect the assumed net investment rate. The factor for 3.5% per year is 0.9999058; for 5% per year, it is 0.9998663. The net return factor equals: 1) The net assets of the applicable fund held in Variable Annuity Account B at the end of a valuation period; minus 2) The net assets of the applicable fund held in Variable Annuity Account B at the beginning of that valuation period; plus or minus 3) Taxes or provision for taxes, if any, attributable to the operations of Variable Annuity Account B; divided by 4) The value of settlement option units and other accumulation units held in Variable Annuity Account B at the beginning of the valuation period; minus 5) A daily charge at an annual rate of 1.25% of your account value invested in the subaccount for annuity mortality and expense risk and the then-current daily administrative expense charge. The number of settlement option units remains fixed. However, the dollar value of the settlement option unit values and the payment may increase or decrease due to investment gain or loss. Payments will not be affected by changes in the mortality or expense results or administrative expense charges. SPECIAL PLANS Where allowed by law, the Company may reduce or eliminate certain charges for Policies issued under special circumstances that result in lower expenses to the Company (i.e., group arrangements with a sponsoring employer). The amount of any reduction, the charges to be reduced, and the criteria for applying a reduction will reflect the reduced sales effort, costs and differing mortality experience appropriate to the circumstances giving rise to the reduction. The charges will be reduced in accordance with the Company's practice in effect when the Policies are issued. Reductions will not be unfairly discriminatory against any person, including the purchasers to whom the reduction applies and all other owners of the Policies. The Company offers Policies on a unisex and simplified underwriting basis to certain group or sponsored arrangements. A "group arrangement" includes a program under which an employer purchases individual Policies covering a group of individuals on a group basis. A "sponsored arrangement" includes a program under which an employer permits group solicitation of its employees for the purchase of the Policies on an individual basis. Under both arrangements, the employer pays all or part of the premium. The benefits and values of these Policies do not vary based on the sex of the insured in order to be used by employers in employee benefit plans where sex discrimination is prohibited by federal or state laws. The Company recommends that any employer proposing to offer the Policies to employees under either arrangement consult its attorney before doing so. 28 DIRECTORS AND OFFICERS
- ---------------------------- --------------------------- -------------------------------------------------------- NAME AND ADDRESS POSITION WITH COMPANY BUSINESS EXPERIENCE DURING PAST 5 YEARS ---------------- --------------------- --------------------------------------- - ---------------------------- --------------------------- -------------------------------------------------------- Wayne R. Huneke* Director and Chief Has held several directorships and various executive Financial Officer officer positions with various affiliated companies within the ING organization, including positions as Director, Chief Financial Officer, President, Senior Executive Vice President, Senior Vice President, Vice President, and Treasurer. - ---------------------------- --------------------------- -------------------------------------------------------- P. Randall Lowery* Director Has held several directorships and various executive officer positions with various affiliated companies within the ING organization, including positions as Director, General Manager and Chief Actuary, Executive Vice President, and Senior Vice President. - ---------------------------- --------------------------- -------------------------------------------------------- Thomas J. McInerney** Director and President Has held several directorships and various executive and Chief Executive officer positions with various affiliated companies Officer within the ING organization, including positions as Director, President, and Chief Executive Officer. - ---------------------------- --------------------------- -------------------------------------------------------- Mark A. Tullis* Director Since 1999 has held several directorships and various executive officer positions with various affiliated companies within the ING organization, including positions as Director, General Manager and Chief of Staff, President and Treasurer. Executive Vice President of Primerica from 1994 to 1999. - ---------------------------- --------------------------- -------------------------------------------------------- David S. Pendergrass* Vice President and Has held various executive officer positions with Treasurer various affiliated companies within the ING organization, including positions as Vice President and Treasurer. - ---------------------------- --------------------------- -------------------------------------------------------- David Wheat* Chief Accounting Officer Chief Accounting Officer of various affiliated companies within the ING organization since 2001. Partner of Ernst & Young LLP from 1993 to 2001 and Office Managing Partner of Ernst & Young LLP from 1995-1999. - ---------------------------- --------------------------- -------------------------------------------------------- Paula Cludray-Engelke*** Secretary Has held various officer positions with various affiliated companies within the ING organization, including positions as Secretary, Assistant Secretary, Director of Individual Compliance, Director of Contracts Compliance and Special Benefits. - ---------------------------- --------------------------- --------------------------------------------------------
29 Directors, officers and employees of the Company are covered by a blanket fidelity bond in an amount in excess of $60 million issued by Lloyds of London. *The address of these Directors and Officers is 5780 Powers Ferry Road, NW, Atlanta, Georgia 30327-4390. These individuals may also be directors and/or officers of other affiliates of the Company. **The address of this Director and Officer is 151 Farmington Avenue, Hartford, Connecticut. This individual may also be a director and/or officer of other affiliates of the Company. ***The address of this Director and this officer is 20 Washington Avenue South, Minneapolis, Minnesota 55401. These individuals may also be a director and/or an officer of other affiliates of the Company. ADDITIONAL INFORMATION REPORTS TO POLICY OWNERS Within 30 days after each policy anniversary and before proceeds are applied to a settlement option, we or our designee, will send you a report containing the following information: 1) A statement of changes in the total account value and cash surrender value since the prior report or since the issue date, if there has been no prior report. This includes a statement of monthly deductions and investment results and any interest earnings for the report period; 2) Cash surrender value, death benefit, and any loan account value as of the policy anniversary; 3) A projection of the total account value, loan account value and cash surrender value as of the succeeding policy anniversary. If you have policy values funded in either separate account you will receive such additional periodic reports as may be required by the Commission. 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 each separate account. The votes will be cast at meetings of the shareholders of the Fund and will be based on instructions received from policy owners. However, if the 1940 Act or any regulations thereunder should be amended or if the present interpretation 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. To determine how many votes each policy owner is entitled to direct with respect to a Fund, first we will calculate the dollar amount of your account value attributable to that Fund. Second, we will divide that amount by $100.00. The result is the number of votes you may direct. During the settlement option period, the number of votes is determined by dividing the valuation reserve attributable in the Fund, if any, by the net asset value of one share of the Fund. Fractional votes will be counted. Where the value of the total account value or the valuation reserve relates to more than one Fund, the calculation of votes will be performed separately for each Fund. The number of shares which a person has a right to vote will be determined as of a date to be chosen by the Fund, but not more than 90 days before the meeting of the Fund. Voting instructions will be solicited by written communication at least 14 days before such meeting. Fund shares for which no timely instructions are received, and Fund shares which are not otherwise attributable to policy owners, will be voted by us in the same proportion as the voting instructions which are received for all 30 Policies participating in each Fund through Variable Life Account B. Policy owners having a voting interest will receive periodic reports relating to the Fund, proxy material and a form for giving voting instructions. DISREGARD OF VOTING INSTRUCTIONS We may, when required by state insurance regulatory authorities, 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 in favor of changes initiated by a policy owner 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 we determined that the change would have an adverse effect on the separate accounts in that the proposed investment policy for a Fund may result in overly speculative or unsound investments. In the event 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 policy owners. STATE REGULATION We are subject to regulation and supervision by the Insurance Department of the State of Connecticut, which periodically examines our affairs. We are also subject to the insurance laws and regulations of all jurisdictions where we are authorized to do business. The Policies have been approved by the Insurance Department of the State of Connecticut and in other jurisdictions. 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 AND PROCEEDINGS We are aware of no material legal proceedings pending which involve the separate account as a party or which would materially affect the separate account. The validity of the securities offered by this prospectus has been passed upon by Counsel to the Company. In recent years, a number of companies have been named as defendants in class action lawsuits relating to life insurance sales practices. The Company is a defendant in one such lawsuit, a purported class action which was filed against the Company in the United States District Court for the Middle District of Florida on June 30, 2000, by Helen Reese, Richard Reese, Villere Bergeron, and Alan Eckert (the "Reese Complaint"). The Reese Complaint claims that the Company engaged in unlawful sales practices in marketing life insurance policies. The Company has moved to dismiss the Reese Complaint for failure to state a claim upon which relief can be granted. Certain discovery is under way. The Company intends to defend this action vigorously. The Company also is a party to other litigation and arbitration proceedings in the ordinary course of its business, none of which is expected to have a material adverse effect on the Company. THE REGISTRATION STATEMENT A Registration Statement under the Securities Act of 1933 has been filed with the Commission relating to the offering described in this prospectus. This prospectus does not include all the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the Commission. The omitted information may be obtained at the Commission's principal office in Washington, DC, upon payment of the Commission's prescribed fees. 31 The Policies are offered for sale in all jurisdictions where we are authorized to do business except Guam, Puerto Rico, and the Virgin Islands. DISTRIBUTION OF THE POLICIES IFA serves as principal underwriter of the securities offered hereunder as defined by the federal securities laws. IFA is registered as a broker-dealer with the Commission and is a member of the National Association of Securities Dealers, Inc. ("NASD"). IFA will contract with one or more registered broker-dealers including broker-dealers affiliated with it ("distributors") to offer and sell the Policies. IFA 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 maximum commission payable to salespersons and their supervising broker-dealers for policy distribution is 55% of the guaranteed death benefit premium to age 80, or, in the event of an increase in the specified amount, 55% of the guaranteed death benefit premium to age 80, attributable to the increase. In lieu of premium-based commission, equivalent amounts may be paid based on total account value. In particular circumstances, certain of these professionals may also be paid for their administrative expenses. 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. IFA may also contract with independent third party broker-dealers who will act as wholesalers by assisting IFA in finding broker-dealers to offer and sell the Policies. These parties may also provide training, marketing and other sales related functions for IFA and other broker-dealers and may provide certain administrative services to the Company in connection with the Policies. Such parties may receive compensation based on premium payments for the Policies purchased through broker-dealers selected by the wholesaler. RECORDS AND ACCOUNTS All records and accounts relating to the separate accounts and the Funds will be maintained by the Company or its designee. All reports required to be made and information required to be given will be provided by the Company or its designee. Lincoln and its affiliates perform certain administrative functions relating to the Policies, and maintain books and records necessary to operate and administer Policies. INDEPENDENT AUDITORS Ernst & Young LLP, 2300 National City Center, 110 West Berry Street, Ft. Wayne, Indiana 46802 were the independent auditors for Variable Life Account B for the years ended December 31, 1999, 2000 and 2001. KPMG LLP, One Financial Plaza, 755 Main Street, Hartford, Connecticut 06103 were the independent auditors for the Company for the year ended December 31, 2000. Ernst & Young LLP, 225 Asylum Street, Hartford, Connecticut 06103 are the independent auditors for the Company for the year ended December 31, 2001. The independent auditors provide services to the Company and Variable Life Account B that include primarily the audit of the Company's and Variable Life Account B's financial statements as described in their reports, included in this Registration Statement. 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. This section addresses federal income tax rules 32 only, and does not discuss federal estate, gift and generation-skipping tax implications, state and local taxes or any other tax provisions. We do not make any guarantee about the tax treatment of the Policy or transactions involving the Policies. FEDERAL TAX STATUS OF THE COMPANY The Company is taxed as a life insurance company under the Code. The separate account is a not a separate entity from the Company. Therefore, the separate account is not taxed separately as a "regulated investment company", but is taxed as part of the Company. Investment income and realized capital gains attributable to the separate account are automatically applied to increase reserves under the policy. Because of this, under existing federal income tax law we believe that any such income and gains will not be taxed to the extent that such income and gains are applied to increase reserves under the policy. In addition, any foreign tax credits attributable to the separate account will first be used to reduce any income taxes imposed on the separate account before being used by the Company. In summary, we do not expect that we will incur any federal income tax liability attributable to the separate account and we do not intend to make provisions for any such taxes. However, if changes in the federal tax laws or their interpretation result in our being taxed on income or gains attributable to the separate account, then we may impose a charge against the separate account (with respect to the policy) to set aside provisions to pay such taxes. LIFE INSURANCE QUALIFICATION Section 7702 of the Code includes a definition of life insurance for tax purposes. These rules generally place limits on the amount of premiums payable under the contract and the level of cash surrender value. In no event may the total of all premiums paid exceed the then-current maximum premium limitations established by federal law for a Policy to qualify as life insurance. If, at any time, a premium is paid which would result in total premiums exceeding such maximum premium limitation, we will only accept that portion of the premium which will make total premiums equal the maximum. Any part of the premium in excess of that amount will be returned or applied as otherwise agreed and no further premiums will be accepted until allowed by the then-current maximum premium limitations prescribed by law. 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 policy owner 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 policy owners 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 policy owners 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 (see "Modified Endowment Contracts" below), the policy owner 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 33 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 in connection with reductions in death benefits may be taxable in limited circumstances 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 policy owner, 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 policy owner 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 at any time a material change takes effect. A material change, for these purposes, includes the exchange of a life insurance policy for another life insurance policy or the conversion of a term life insurance policy into a whole life or universal life insurance policy. In addition, an increase in the future benefits provided constitutes a material change unless the increase is attributable to (1) the payment of premiums necessary to fund the lowest death benefit payable in the first seven policy years or (2) the crediting of interest or other earnings with respect to such premiums. A reduction in death benefits during the first seven policy years may also cause a Policy to be considered a modified endowment contract. If the Policy is considered to be a modified endowment contract, the proceeds of any partial surrenders, 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 policy owner of a modified endowment contract who is not an individual. The penalty tax will also apply where taxable policy loans are received by an individual who has not reached the age of 59 1/2. Taxable policy distributions made to an individual who has not reached the age of 59 1/2 will also be subject to the penalty tax unless those distributions are attributable to the individual becoming 34 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. Our failure to comply with these regulations would disqualify your Policy as a life insurance policy under Section 7702 of the Code. If this were to occur, you would be subject to federal income tax on all income previously credited to the Policy and for subsequent periods. 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 currently 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 policy owners were not owners of separate account assets. For example, a policy owner has additional flexibility in allocating premium payments and account values. While the Company does not believe that these differences would result in a policy owner being treated as the owner of a pro rata portion of the assets of the separate account, there is no regulation or ruling of the IRS that confirms this conclusion. In addition, the Company does not know what standards will be set forth, if any, in the regulations or rulings which the Treasury Department has stated it expects to issue. The Company therefore reserves the right to modify the Policy as necessary to attempt to prevent a policy owner 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 policy owner's deduction for interest on loans taken against life insurance covering the lives of officers, employees, or other financially interested in the policy owner'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 policy owner's trade or business and are considered key persons. 35 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 taxpayer or 20 individuals. Deductible interest for these contracts will be capped based on applicable Moody's corporate bond rates. Section 264(f) of the Code denies a deduction for a portion of a policy owner's otherwise deductible interest that is allocable to unborrowed policy cash values. The nondeductible interest amount is the amount that bears the same ratio to such interest as the company's average unborrowed cash value of life insurance and annuity policies issued after June 8, 1997 bears to the sum of the average unborrowed cash values of policies plus the average adjusted tax basis of other assets owned by the company. This provision does not apply to policies in which the insured is a 20 percent owner, officer, director or employee of the business, including policies jointly covering such individual and his or her spouse. The rule also will not apply where the policy owner is a natural person, unless a trade or business is directly or indirectly the beneficiary of the policy. 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 policy owner or beneficiary. The U.S. Congress frequently considers legislation that, if enacted, could change the tax treatment of life insurance policies. In addition, the Treasury Department may amend existing regulations, issue regulations on the qualification of life insurance and modified endowment contracts or adopt new interpretations of existing law. State and local tax law or, if you are not a U.S. citizen and resident, foreign tax law, may also affect the tax consequences to you, the insured person or your designated beneficiary, and are subject to change. Any changes in federal, state, local or foreign tax law or interpretation could have a retroactive effect. We suggest you consult with a qualified tax adviser. WITHHOLDING Generally, unless you provide us with a written election to the contrary before we make the distribution, we are required to withhold income tax from any portion of a distribution we make to you that is includable in your income. If you do not wish us to withhold tax from the payment, or if enough is not withheld, you may have to pay later. You may also have to pay penalties if your withholding and estimated tax payments are insufficient. MISCELLANEOUS POLICY PROVISIONS THE POLICY The Policy which you receive and the application you make when you purchase the Policy are the whole contract. A copy of the application is attached to the Policy when it is issued to you. An application for changes, once approved by us, will become part of the Policy. Application forms are completed by the applicant and forwarded to the Company for acceptance. Upon acceptance, the Policy is prepared, executed by duly authorized officers of the Company, and forwarded to the policy owner. PAYMENT OF BENEFITS All benefits are payable at our Administrative Office. We may require submission of the Policy before we grant loans, make changes or pay benefits. 36 AGE AND SEX If age or sex is misstated on the application, the amount payable on death will be that which would have been purchased by the most recent monthly deduction at the correct age and sex. (If the application is taken in a state or under an agreement where unisex rates are used, the insured's sex is inapplicable.) INCONTESTABILITY We will not contest coverage under the Policy after the Policy has been in force during the lifetime of the insured for a period of two years from the policy issue date. Our right to contest coverage is not affected by the guaranteed death benefit provision. For coverage which takes effect on a later date (e.g., an increase in coverage), we will not contest such coverage after it has been in force during the lifetime of the insured more than two years from its effective date. SUICIDE In most states, if the insured commits suicide within two years from the issue date, the only benefit paid will be the sum of: a) premiums paid less amounts allocated to the separate account; and b) the separate account value on the date of suicide, plus the portion of the monthly deduction from the separate account value, minus c) the amount necessary to repay any loans in full and any interest earned on the loan account value transferred to the separate account value, and any surrenders from the fixed account. If the insured commits suicide within two years from the effective date of any increase in coverage, we will pay as a benefit only the monthly deduction for the increase, in lieu of the face amount of the increase. All amounts described in (a) and (c) above will be calculated as of the date of death. COVERAGE BEYOND MATURITY The Policy is considered matured on the issue date anniversary on which the Insured reaches attained age 100. This is the maturity date. You may, by written request, in the 30 days before the maturity date of this Policy, elect to continue coverage beyond the maturity date. At age 100, the separate account value will be transferred to the fixed account. If coverage beyond maturity is elected, we will continue to credit interest to the total account value of this Policy. Monthly deductions will be calculated with a cost of insurance rate equal to zero (this provision is not available in New York). At this time, uncertainties exist regarding the tax treatment of the Policy should it continue beyond the maturity date. You should therefore consult with your tax advisor prior to making this election. (See "Tax Matters.") 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. 37 ILLUSTRATIONS OF DEATH BENEFIT, TOTAL ACCOUNT VALUES AND CASH SURRENDER VALUES The tables on the following pages illustrate how the death benefit, total account values, and cash surrender values of a Policy change with the investment experience of the variable funding options. The tables show how the death benefit, total account values, and cash surrender values of a Policy issued to an insured of a given age and a given premium would vary over time if the investment return on the assets held in each Fund were a uniform, gross, annual rate of 0%, 6%, and 12%, respectively. Actual returns will fluctuate over time and likely will be both positive and negative. The hypothetical gross investment rate of return may indeed average 0%, 6% or 12% over a period of years, however, it may fluctuate above and below those averages throughout the years shown. In that case, the actual account values, cash surrender values, and death benefit proceeds could be substantially less than those shown, and may, under certain circumstances, result in the lapse of the Policy unless more premiums are paid. Tables I through IV illustrate Policies issued to males, age 45, in the preferred nonsmoker rate class and Policies issued on a unisex basis according to the special plans section of this prospectus for both males and females, age 45, in the preferred nonsmoker rate class. Tables V through VIII illustrate Policies issued on a unisex basis, age 45, in the preferred nonsmoker rate class for contracts issued in states where unisex rates are required. The death benefit, total account values, and cash surrender values would be different from those shown if the gross annual investment rates of return averaged 0%, 6%, and 12%, respectively, over a period of years, but fluctuated above and below those averages for individual policy years. The second column of each table shows the accumulated values of the premiums paid at an assumed interest rate of 5%. The third through fifth columns illustrate the death benefit of a Policy over the designated period. The sixth through eighth columns illustrate the total account values, while the ninth through the eleventh columns illustrate the cash surrender values of each Policy over the designated period. Tables I, II, V and VI assume that the maximum cost of insurance rates allowable under the Policy are charged in all policy years. These tables also assume that the maximum allowable mortality and expense risk charge of 0.90% on an annual basis, the maximum allowable administrative expense charge of 0.50% on an annual basis, and the maximum allowable premium load of 6% are assessed in each policy year. Tables III, IV, VII and VIII assume that the current scale of cost of insurance rates applies during all policy years. These tables also assume that the current mortality and expense risk charge of 0.70% on an annual basis, the current administrative expense charge of 0.30% on an annual basis, and the current premium load of 3.5% are assessed. The amounts shown for death benefit, cash surrender values, and total account values reflect the fact that the net investment return is lower than the gross return on the assets held in each Fund as a result of expenses paid by each Fund and other charges levied by the separate account. 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 -1.67%, 4.23%, and 10.14%, respectively 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 -2.06%, 3.82%, and 9.70%, respectively. The investment advisory fees and other Fund expenses vary by Fund from .34% to 1.00%. An arithmetic average of .68% has been used for the illustrations. 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 cash surrender values illustrated. The tables illustrate the policy values that would result based upon the hypothetical investment rates of return if premiums were paid as indicated, if all net premiums are allocated to Variable Life Account B and if no policy loans have been made. The tables are also based on the assumptions that the policy owner has not requested an increase or decrease in the specified amount of the Policy, and no partial surrenders have been made. 38 Upon request, we will provide an illustration based upon the proposed insured's age, sex of insured (if necessary), and underwriting classification, the specified amount or premium requested, the proposed frequency of premium payments and any available riders requested. A fee of $25 is charged for each such illustration. The hypothetical gross annual investment return assumed in such an illustration will not exceed 12%. 39 AETNAVEST PLUS POLICY TABLE I FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) MALE ISSUE AGE 45 - UNISEX FOR SPECIAL PLAN POLICIES GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED $6,720.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80 PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
PREMIUMS DEATH BENEFIT ACCUMULATED GROSS ANNUAL INVESTMENT TOTAL ACCOUNT VALUE CASH SURRENDER VALUE AT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF POLICY 5% INTEREST --------------------------- ----------------------------- ----------------------------- YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% - ----- ---------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 7,056 500,000 500,000 500,000 4,330 4,649 4,969 658 977 1,297 2 14,465 500,000 500,000 500,000 8,608 9,521 10,474 4,936 5,849 6,802 3 22,244 500,000 500,000 500,000 12,673 14,459 16,400 9,001 10,787 12,728 4 30,412 500,000 500,000 500,000 16,521 19,458 22,784 12,849 15,786 19,112 5 38,989 500,000 500,000 500,000 20,140 24,506 29,657 16,468 20,834 25,985 6 47,994 500,000 500,000 500,000 23,526 29,599 37,066 20,191 26,264 33,731 7 57,450 500,000 500,000 500,000 26,653 34,709 45,039 23,685 31,741 42,071 8 67,379 500,000 500,000 500,000 29,495 39,807 53,609 26,894 37,206 51,008 9 77,803 500,000 500,000 500,000 32,032 44,873 62,823 29,798 42,639 60,589 10 88,750 500,000 500,000 500,000 34,229 49,869 72,716 32,362 48,002 70,849 15 152,258 500,000 500,000 500,000 39,253 72,764 134,722 39,222 72,733 134,691 20 233,313 500,000 500,000 500,000 30,414 87,804 226,667 30,414 87,804 226,667 25 336,762 500,000 500,000 500,000 0 83,205 372,174 0 83,205 372,174 30 468,793 500,000 500,000 665,910 0 33,112 622,346 0 33,112 622,346 20 (Age 65) 233,313 500,000 500,000 500,000 30,414 87,804 226,667 30,414 87,804 226,667
(1)Assumes no policy loan has been made. Guaranteed cost of insurance rates assumed. Maximum mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the death benefits, total account values, and cash surrender values would be less than those illustrated. The investment results are illustrative only and should not be considered a representation of past or future investments results. Actual investment results may be more or less than those shown and will depend on a number of factors including the policy owner's allocations, and the Fund's rate of return. Actual values could be substantially less than those shown, and may, under certain circumstances, result in the lapse of the Policy unless more premiums are paid. The total account value and cash value for a Policy would be different from those shown in 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. 40 AETNAVEST PLUS POLICY TABLE II FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE ISSUE AGE 45 - UNISEX FOR SPECIAL PLAN POLICIES GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED $4,080.00 ANNUAL BASIC PREMIUM PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
PREMIUMS DEATH BENEFIT ACCUMULATED GROSS ANNUAL INVESTMENT TOTAL ACCOUNT VALUE CASH SURRENDER VALUE AT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF POLICY 5% INTEREST --------------------------- ----------------------------- ---------------------------- YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% - ----- ---------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 4,284 500,000 500,000 500,000 1,892 2,062 2,232 0 0 0 2 8,782 500,000 500,000 500,000 3,773 4,234 4,717 101 562 1,045 3 13,505 500,000 500,000 500,000 5,481 6,355 7,310 1,809 2,683 3,638 4 18,465 500,000 500,000 500,000 7,009 8,411 10,010 3,337 4,739 6,338 5 23,672 500,000 500,000 500,000 8,342 10,383 12,812 4,670 6,711 9,140 6 29,139 500,000 500,000 500,000 9,475 12,258 15,717 6,140 8,923 12,382 7 34,880 500,000 500,000 500,000 10,377 13,999 18,704 7,409 11,031 15,736 8 40,908 500,000 500,000 500,000 11,020 15,566 21,749 8,419 12,965 19,148 9 47,238 500,000 500,000 500,000 11,379 16,923 24,830 9,145 14,689 22,596 10 53,884 500,000 500,000 500,000 11,415 18,019 27,910 9,548 16,152 26,043 15 92,443 500,000 500,000 500,000 5,695 17,882 42,127 5,664 17,851 42,096 20 141,655 0 500,000 500,000 0 1,196 48,466 0 1,196 48,466 25 204,463 0 0 500,000 0 0 28,221 0 0 28,221 30 284,624 0 0 0 0 0 0 0 0 0 141,655 0 500,000 500,000 0 1,196 48,466 0 1,196 48,466
(1)Assumes no policy loan has been made. Guaranteed cost of insurance rates assumed. Maximum mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the death benefits, total account values, and cash surrender values would be less than those illustrated. The investment results are illustrative only and should not be considered a representation of past or future investments results. Actual investment results may be more or less than those shown and will depend on a number of factors including the policy owner's allocations, and the Fund's rate of return. Actual values could be substantially less than those shown, and may, under certain circumstances, result in the lapse of the Policy unless more premiums are paid. The total account value and cash value for a Policy would be different from those shown in 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. 41 AETNAVEST PLUS POLICY TABLE III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE ISSUE AGE 45 - UNISEX FOR SPECIAL PLAN POLICIES CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED $6,720.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80 PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
PREMIUMS DEATH BENEFIT ACCUMULATED GROSS ANNUAL INVESTMENT TOTAL ACCOUNT VALUE CASH SURRENDER VALUE AT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF POLICY 5% INTEREST --------------------------- ----------------------------- ----------------------------- YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% - ----- ---------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 7,056 500,000 500,000 500,000 4,908 5,249 5,592 1,236 1,577 1,920 2 14,465 500,000 500,000 500,000 9,817 10,813 11,852 6,145 7,141 8,180 3 22,244 500,000 500,000 500,000 14,566 16,540 18,683 10,894 12,868 15,011 4 30,412 500,000 500,000 500,000 19,133 22,413 26,117 15,461 18,741 22,445 5 38,989 500,000 500,000 500,000 23,493 28,410 34,193 19,821 24,738 30,521 6 47,994 500,000 500,000 500,000 27,620 34,511 42,953 24,285 31,176 39,618 7 57,450 500,000 500,000 500,000 31,532 40,735 52,490 28,564 37,767 49,522 8 67,379 500,000 500,000 500,000 35,242 47,101 62,899 32,641 44,500 60,298 9 77,803 500,000 500,000 500,000 38,761 53,628 74,291 36,527 51,394 72,057 10 88,750 500,000 500,000 500,000 42,082 60,314 86,768 40,215 58,447 84,901 15 152,258 500,000 500,000 500,000 56,072 96,853 170,736 56,041 96,822 170,705 20 233,313 500,000 500,000 500,000 63,773 137,946 307,759 63,773 137,846 307,759 25 336,762 500,000 500,000 623,257 62,486 182,965 537,290 62,486 182,965 537,290 30 468,793 500,000 500,000 976,054 45,557 230,664 912,200 45,557 230,664 912,200 233,313 500,000 500,000 500,000 63,773 137,846 307,759 63,773 137,846 307,759
(1)Assumes no policy loan has been made. Current cost of insurance rates assumed. Current mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the death benefits, total account values, and cash surrender values would be less than those illustrated. The investment results are illustrative only and should not be considered a representation of past or future investments results. Actual investment results may be more or less than those shown and will depend on a number of factors including the policy owner's allocations, and the Fund's rate of return. Actual values could be substantially less than those shown, and may, under certain circumstances, result in the lapse of the Policy unless more premiums are paid. The total account value and cash value for a Policy would be different from those shown in 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. 42 AETNAVEST PLUS POLICY TABLE IV FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE ISSUE AGE 45 - UNISEX FOR SPECIAL PLAN POLICIES CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED $4,080.00 ANNUAL BASIC PREMIUM PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
PREMIUMS DEATH BENEFIT ACCUMULATED GROSS ANNUAL INVESTMENT TOTAL ACCOUNT VALUE CASH SURRENDER VALUE AT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF POLICY 5% INTEREST --------------------------- ----------------------------- ---------------------------- YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% - ----- ---------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 4,284 500,000 500,000 500,000 2,397 2,585 2,774 0 0 0 2 8,782 500,000 500,000 500,000 4,830 5,361 5,918 1,158 1,689 2,246 3 13,505 500,000 500,000 500,000 7,137 8,171 9,298 3,465 4,499 5,626 4 18,465 500,000 500,000 500,000 9,293 10,989 12,912 5,621 7,317 9,240 5 23,672 500,000 500,000 500,000 11,271 13,785 16,755 7,599 10,113 13,083 6 29,139 500,000 500,000 500,000 13,044 16,528 20,821 9,709 13,193 17,486 7 34,880 500,000 500,000 500,000 14,626 19,229 25,149 11,658 16,261 22,181 8 40,908 500,000 500,000 500,000 16,028 21,895 29,778 13,427 19,294 27,177 9 47,238 500,000 500,000 500,000 17,262 24,535 34,752 15,028 22,301 32,518 10 53,884 500,000 500,000 500,000 18,318 27,137 40,099 16,451 25,270 38,232 15 92,443 500,000 500,000 500,000 21,221 39,820 74,494 21,190 39,789 74,463 20 141,655 500,000 500,000 500,000 17,881 49,343 125,708 17,881 49,343 125,708 25 204,463 500,000 500,000 500,000 4,924 51,280 204,115 4,924 51,280 204,115 30 284,624 0 500,000 500,000 0 35,390 329,721 0 35,390 329,721 20 (Age 65) 141,655 500,000 500,000 500,000 17,881 49,343 125,708 17,881 49,343 125,708
(1)Assumes no policy loan has been made. Current cost of insurance rates assumed. Current mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the death benefits, total account values, and cash surrender values would be less than those illustrated. The investment results are illustrative only and should not be considered a representation of past or future investments results. Actual investment results may be more or less than those shown and will depend on a number of factors including the policy owner's allocations, and the Fund's rate of return. Actual values could be substantially less than those shown, and may, under certain circumstances, result in the lapse of the Policy unless more premiums are paid. The total account value and cash value for a Policy would be different from those shown in 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. 43 AETNAVEST PLUS POLICY TABLE V FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY UNISEX ISSUE AGE 45 GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED $6,360.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80 PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
PREMIUMS DEATH BENEFIT ACCUMULATED GROSS ANNUAL INVESTMENT TOTAL ACCOUNT VALUE CASH SURRENDER VALUE AT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF POLICY 5% INTEREST --------------------------- ----------------------------- ---------------------------- YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% - ----- ---------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 6,678 500,000 500,000 500,000 4,027 4,327 4,627 517 817 1,117 2 13,690 500,000 500,000 500,000 8,017 8,872 9,765 4,507 5,362 6,255 3 21,052 500,000 500,000 500,000 11,807 13,478 15,295 8,297 9,968 11,785 4 28,783 500,000 500,000 500,000 15,385 18,131 21,241 11,875 14,621 17,731 5 36,900 500,000 500,000 500,000 18,751 22,831 27,645 15,241 19,321 24,135 6 45,423 500,000 500,000 500,000 21,897 27,568 34,543 18,709 24,380 31,355 7 54,372 500,000 500,000 500,000 24,795 32,314 41,958 21,958 29,479 39,121 8 63,769 500,000 500,000 500,000 27,430 37,049 49,929 24,944 34,563 47,443 9 73,635 500,000 500,000 500,000 29,774 41,747 58,488 27,639 39,612 56,353 10 83,995 500,000 500,000 500,000 31,798 46,372 67,672 30,014 44,588 65,888 15 144,102 500,000 500,000 500,000 36,466 67,599 125,184 36,437 67,570 125,155 20 220,814 500,000 500,000 500,000 28,590 81,704 210,143 28,590 81,704 210,143 25 318,722 500,000 500,000 500,000 0 77,632 342,572 0 77,632 342,572 30 443,679 500,000 500,000 610,767 0 32,479 570,811 0 32,479 570,811 20 (Age 65) 220,814 500,000 500,000 500,000 28,590 81,704 210,143 28,590 81,704 210,143
(1)Assumes no policy loan has been made. Guaranteed cost of insurance rates assumed. Maximum mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the death benefits, total account values, and cash surrender values would be less than those illustrated. The investment results are illustrative only and should not be considered a representation of past or future investments results. Actual investment results may be more or less than those shown and will depend on a number of factors including the policy owner's allocations, and the Fund's rate of return. Actual values could be substantially less than those shown, and may, under certain circumstances, result in the lapse of the Policy unless more premiums are paid. The total account value and cash value for a Policy would be different from those shown in 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. 44 AETNAVEST PLUS POLICY TABLE VI FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY UNISEX ISSUE AGE 45 GUARANTEED INSURANCE COSTS AND MAXIMUM CHARGES ASSUMED $3,900.00 ANNUAL BASIC PREMIUM PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
PREMIUMS DEATH BENEFIT ACCUMULATED GROSS ANNUAL INVESTMENT TOTAL ACCOUNT VALUE CASH SURRENDER VALUE AT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF POLICY 5% INTEREST --------------------------- ----------------------------- ----------------------------- YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% - ----- ---------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 4,095 500,000 500,000 500,000 1,755 1,916 2,077 0 0 0 2 8,395 500,000 500,000 500,000 3,512 3,946 4,401 2 436 891 3 12,909 500,000 500,000 500,000 5,107 5,927 6,826 1,597 2,417 3,316 4 17,650 500,000 500,000 500,000 6,523 7,840 9,341 3,013 4,330 5,831 5 22,627 500,000 500,000 500,000 7,761 9,675 11,953 4,251 6,125 8,443 6 27,854 500,000 500,000 500,000 8,809 11,417 14,659 5,621 8,229 11,471 7 33,342 500,000 500,000 500,000 9,637 13,027 17,433 6,800 10,190 14,596 8 39,104 500,000 500,000 500,000 10,225 14,476 20,262 7,739 11,990 17,776 9 45,154 500,000 500,000 500,000 10,545 15,725 23,118 8,410 13,590 20,983 10 51,506 500,000 500,000 500,000 10,560 16,726 25,968 8,776 14,942 24,184 15 88,364 500,000 500,000 500,000 5,287 16,619 39,189 5,258 16,590 39,160 20 135,405 0 500,000 500,000 0 1,636 45,487 0 1,636 45,487 25 195,442 0 0 500,000 0 0 27,786 0 0 27,786 30 272,067 0 0 0 0 0 0 0 0 0 20 (Age 65) 135,405 0 500,000 500,000 0 1,636 45,487 0 1,636 45,487
(1)Assumes no policy loan has been made. Guaranteed cost of insurance rates assumed. Maximum mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the death benefits, total account values, and cash surrender values would be less than those illustrated. The investment results are illustrative only and should not be considered a representation of past or future investments results. Actual investment results may be more or less than those shown and will depend on a number of factors including the policy owner's allocations, and the Fund's rate of return. Actual values could be substantially less than those shown, and may, under certain circumstances, result in the lapse of the Policy unless more premiums are paid. The total account value and cash value for a Policy would be different from those shown in 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. 45 AETNAVEST PLUS POLICY TABLE VII FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY UNISEX ISSUE AGE 45 CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED $3,900.00 ANNUAL GUARANTEED DEATH BENEFIT PREMIUM TO AGE 80 PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
PREMIUMS DEATH BENEFIT ACCUMULATED GROSS ANNUAL INVESTMENT TOTAL ACCOUNT VALUE CASH SURRENDER VALUE AT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF POLICY 5% INTEREST --------------------------- ----------------------------- ---------------------------- YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% - ----- ---------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 6,678 500,000 500,000 500,000 4,595 4,917 5,239 1,085 1,407 1,729 2 13,690 500,000 500,000 500,000 9,197 10,134 11,112 5,687 6,624 7,602 3 21,052 500,000 500,000 500,000 13,657 15,512 17,525 10,147 12,002 14,015 4 28,783 500,000 500,000 500,000 17,950 21,030 24,510 14,440 17,520 21,000 5 36,900 500,000 500,000 500,000 22,060 26,679 32,111 18,550 23,169 28,601 6 45,423 500,000 500,000 500,000 25,960 32,433 40,364 22,772 29,245 37,176 7 54,372 500,000 500,000 500,000 29,669 38,116 49,358 26,832 35,478 46,521 8 63,769 500,000 500,000 500,000 33,192 44,337 59,179 30,706 41,851 56,693 9 73,635 500,000 500,000 500,000 36,547 50,520 69,936 34,412 48,385 67,801 10 83,995 500,000 500,000 500,000 39,724 56,864 81,723 37,940 55,080 79,939 15 144,102 500,000 500,000 500,000 53,186 91,561 160,988 53,157 91,532 160,959 20 220,814 500,000 500,000 500,000 60,833 130,533 289,984 60,833 130,533 289,984 25 318,722 500,000 500,000 586,508 59,804 173,035 505,610 59,804 173,035 505,610 30 443,679 500,000 500,000 919,322 44,010 217,283 859,180 44,010 217,283 859,180 20 (Age 65) 220,814 500,000 500,000 500,000 60,833 130,533 289,984 60,833 130,533 289,984
(1) Assumes no policy loan has been made. Current cost of insurance rates assumed. Current mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the death benefits, total account values, and cash surrender values would be less than those illustrated. The investment results are illustrative only and should not be considered a representation of past or future investments results. Actual investment results may be more or less than those shown and will depend on a number of factors including the policy owner's allocations, and the Fund's rate of return. Actual values could be substantially less than those shown, and may, under certain circumstances, result in the lapse of the Policy unless more premiums are paid. The total account value and cash value for a Policy would be different from those shown in 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. 46 AETNAVEST PLUS POLICY TABLE VIII FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY UNISEX ISSUE AGE 45 CURRENT INSURANCE COSTS AND CURRENT CHARGES ASSUMED $3,900.00 ANNUAL BASIC PREMIUM PREFERRED NONSMOKER RISK FACE AMOUNT $500,000 DEATH BENEFIT OPTION 1
PREMIUMS DEATH BENEFIT ACCUMULATED GROSS ANNUAL INVESTMENT TOTAL ACCOUNT VALUE CASH SURRENDER VALUE AT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF POLICY 5% INTEREST --------------------------- ----------------------------- ---------------------------- YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% - ----- ---------- -------- -------- --------- -------- -------- --------- -------- -------- --------- 1 4,095 500,000 500,000 500,000 2,256 2,434 2,614 0 0 0 2 8,395 500,000 500,000 500,000 4,551 5,055 5,582 1,041 1,545 2,072 3 12,909 500,000 500,000 500,000 6,735 7,715 8,782 3,225 4,205 5,272 4 17,650 500,000 500,000 500,000 8,782 10,388 12,209 5,272 6,878 8,699 5 22,627 500,000 500,000 500,000 10,676 13,056 15,868 7,166 9,546 12,358 6 27,854 500,000 500,000 500,000 12,384 15,685 19,751 9,196 12,497 16,563 7 33,342 500,000 500,000 500,000 13,926 18,289 23,900 11,089 15,452 21,063 8 39,104 500,000 500,000 500,000 15,304 20,870 28,346 12,818 18,384 25,860 9 45,154 500,000 500,000 500,000 16,535 23,443 33,138 14,401 21,308 31,003 10 51,506 500,000 500,000 500,000 17,610 25,994 38,302 15,826 24,210 36,518 15 88,364 500,000 500,000 500,000 20,807 38,589 71,619 20,778 38,560 71,590 20 135,405 500,000 500,000 500,000 18,298 48,560 121,458 18,298 48,560 121,458 25 195,442 500,000 500,000 500,000 6,608 51,502 197,511 6,608 51,502 197,511 30 272,067 0 500,000 500,000 0 38,076 318,683 0 38,076 318,683 20 (Age 65) 135,405 500,000 500,000 500,000 18,298 48,560 121,458 18,298 48,560 121,458
(1) Assumes no policy loan has been made. Current cost of insurance rates assumed. Current mortality and expense risk charges, administrative charges, and premium load assumed. If premiums are paid more frequently than annually, the death benefits, total account values, and cash surrender values would be less than those illustrated. The investment results are illustrative only and should not be considered a representation of past or future investments results. Actual investment results may be more or less than those shown and will depend on a number of factors including the policy owner's allocations, and the Fund's rate of return. Actual values could be substantially less than those shown, and may, under certain circumstances, result in the lapse of the Policy unless more premiums are paid. The total account value and cash value for a Policy would be different from those shown in 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. 47 FINANCIAL STATEMENTS VARIABLE LIFE ACCOUNT B INDEX PAGE ---- Statement of Assets and Liabilities...................................... S-2 Statements of Operations and Changes in Net Assets....................... S-3 Notes to Financial Statements............................................ S-4 Independent Auditors' Report............................................. S-22 S-1 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B STATEMENT OF ASSETS AND LIABILITIES--December 31, 2001 ASSETS Investments, at net asset value:
MORTALITY & CONTRACT EXPENSE CONTRACT PURCHASES CHARGES REDEMPTIONS DUE FROM PAYABLE TO DUE TO AETNA AETNA AETNA LIFE INSURANCE LIFE INSURANCE LIFE INSURANCE AND ANNUITY AND ANNUITY AND ANNUITY NET SHARES COST INVESTMENTS COMPANY TOTAL ASSETS COMPANY COMPANY ASSETS ---------------------------------------------------------------------------------------------------- Aetna Ascent VP 226,777 $ 3,244,897 $ 2,891,410 $ - $ 2,891,410 $ 213 $ 2,115 $ 2,889,082 Aetna Balanced VP, Inc. 1,830,131 27,093,557 22,126,288 - 22,126,288 1,790 68,640 22,055,858 Aetna Bond VP 1,674,307 21,504,742 21,682,280 - 21,682,280 1,734 28,784 21,651,762 Aetna Crossroads VP 107,041 1,444,841 1,317,674 - 1,317,674 88 3,025 1,314,561 Aetna Growth and Income VP 5,685,940 174,821,287 111,103,274 - 111,103,274 8,975 46,649 111,047,650 Aetna Growth VP 1,240 13,034 11,957 - 11,957 9 718 11,230 Aetna Index Plus Large Cap VP 1,079,679 15,743,220 14,964,356 - 14,964,356 1,162 289,241 14,673,953 Aetna Legacy VP 129,506 1,625,236 1,552,782 20 1,552,802 95 - 1,552,707 Aetna Money Market VP 2,995,622 39,849,896 39,922,051 4,365,713 44,287,764 3,205 - 44,284,559 Aetna Small Company VP 33,054 568,565 551,341 - 551,341 45 - 551,296 Aetna Value Opportunity VP 44,397 674,601 588,259 - 588,259 49 39,845 548,365 Fidelity Investments Variable Insurance Products Fund: Equity-Income Portfolio 1,238,174 27,740,493 28,168,453 3,689,228 31,857,681 2,235 - 31,855,446 Growth Portfolio 343,726 16,395,410 11,552,636 - 11,552,636 962 212,646 11,339,028 High Income Portfolio 64,029 608,143 410,426 - 410,426 34 39,374 371,018 Overseas Portfolio 154,781 3,221,168 2,148,355 - 2,148,355 177 80,673 2,067,505 Fidelity Investments Variable Insurance Products Fund II: Asset Manager Portfolio 52,554 815,532 762,558 - 762,558 63 241,120 521,375 Contrafund Portfolio 1,017,906 19,369,389 20,490,438 - 20,490,438 1,630 153,830 20,334,978 Janus Aspen Series: Aggressive Growth Portfolio 1,322,903 28,787,676 29,077,414 - 29,077,414 2,354 8,147,751 20,927,309 Balanced Portfolio 917,168 22,967,106 20,700,478 - 20,700,478 1,615 251,207 20,447,656 Flexible Income Portfolio 84,647 986,247 986,983 - 986,983 81 225 986,677 Growth Portfolio 1,074,048 27,704,839 21,352,065 - 21,352,065 1,701 316,823 21,033,541 Worldwide Growth Portfolio 1,482,818 40,227,224 42,319,636 - 42,319,636 3,360 1,053,262 41,263,014 MFS Variable Insurance Trust: Total Return Series 9,904 184,678 184,311 - 184,311 35 39,232 145,044 World Government Series 20,345 206,083 205,283 - 205,283 - - 205,283 Oppenheimer Funds: Aggressive Growth Fund 13,518 960,081 550,467 - 550,467 46 121,162 429,259 Global Securities Fund 92,238 2,049,590 2,106,705 - 2,106,705 138 84,503 2,022,064 Growth & Income Fund 2,184 39,613 41,468 - 41,468 8 39,633 1,827 Strategic Bond Fund 368,243 1,721,332 1,701,285 101,780 1,803,065 146 - 1,802,919 Portfolio Partners Inc. (PPI): PPI MFS Emerging Equities Portfolio 477,520 17,805,006 19,449,402 - 19,449,402 1,594 482,967 18,964,841 PPI MFS Research Growth Portfolio 1,581,481 13,788,129 12,809,993 - 12,809,993 1,040 99,622 12,709,331 PPI MFS Capital Opportunities Portfolio 104,832 4,273,689 2,843,041 - 2,843,041 202 39,727 2,803,112 PPI Scudder International Growth Portfolio 1,223,510 12,040,791 12,271,808 - 12,271,808 985 149,995 12,120,828 PPI T. Rowe Price Growth Equity Portfolio 65,351 3,637,266 2,961,689 - 2,961,689 204 33,786 2,927,699
AFFILIATED NON-AFFILIATED ------------------------------- Investments at Cost $286,583,876 $245,529,485 Investments at Market 216,711,672 233,094,894 See accompanying notes to financial statements. S-2 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 2001 2000 1999 ---- ---- ---- INVESTMENT INCOME: Income: (Notes 1, 3 and 5) Dividends...................................................... $ 21,533,937 $ 58,789,163 $ 48,867,068 Expenses: (Notes 2 and 5) Valuation period deductions.................................... (4,585,896) (6,075,769) (5,991,275) ------------- ------------- ----------- Net Investment Income............................................. 16,948,041 52,713,394 42,875,793 ------------- ------------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on sales of investments: (Notes 1, 4 and 5) Proceeds from sales............................................ 1,362,123,210 1,230,914,303 874,382,151 Cost of investments sold....................................... 1,469,444,067 1,215,994,773 793,957,391 ------------- ------------- ----------- Net realized gain (loss).................................... (107,320,857) 14,919,530 80,424,760 Net unrealized gain (loss) on investments: (Note 5) Beginning of year.............................................. (84,972,923) 56,758,198 29,609,254 End of year.................................................... (82,306,795) (84,972,923) 56,758,198 ------------- ------------- ----------- Net change in unrealized gain (loss)........................ 2,666,128 (141,731,121) 27,148,944 ------------- ------------- ----------- Net realized and unrealized gain (loss) on investments............ (104,654,729) (126,811,591) 107,573,704 ------------- ------------- ----------- Net increase (decrease) in net assets resulting from operations... (87,706,688) (74,098,197) 150,449,497 ------------- ------------- ----------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS: Variable life premium payments.................................... 61,860,147 79,636,531 135,305,924 Transfers to the Company for monthly deductions................... (30,938,179) (29,995,274) (32,799,767) Redemptions by policyholders...................................... (41,085,276) (63,976,557) (162,896,593) Transfers on account of policy loans.............................. (2,428,998) (5,246,469) (4,913,122) Other............................................................. 604,200 500,403 779,888 ------------- ------------- ----------- Net decrease in net assets resulting from unit transactions (Note 5).......................................... (11,988,106) (19,081,366) (64,523,670) ------------- ------------- ----------- Net changes in net assets......................................... (99,694,794) (93,179,563) 85,925,827 NET ASSETS: Beginning of period............................................... 545,555,571 638,735,134 552,809,307 ------------- ------------- ----------- End of period..................................................... $445,860,777 $545,555,571 $638,735,134 ============= ============= ===========
See accompanying notes to financial statements. S-3 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES & ACCOUNT INFORMATION Variable Life Account B (the "Account") is a separate account established by Aetna Life Insurance and Annuity Company (the "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 Account consists of seven products which are listed below. o Aetna Vest o Aetna Vest II o Aetna Vest Plus o Aetna Vest Estate Protector o Aetna Vest Estate Protector II o Corporate Specialty Market o Corporate Specialty Market II Effective October 1, 1998, Aetna Life Insurance Company and the Company contracted the administrative servicing obligations of its individual variable life business to The Lincoln National Life Insurance Company (Lincoln Life) and Lincoln Life & Annuity Company of New York (LNY). Although the Company is responsible for all policy terms and conditions, Lincoln Life and LNY are responsible for servicing the individual life contracts, including the payment of benefits, oversight of investment management and contract administration. The assets of the Account are owned by the Company. The portion of the Account's assets supporting the variable life policies may not be used to satisfy liabilities arising out of any other business of the Company. During 2000, Aetna Life Insurance Company and the Company moved the NYSUT Individual Life block of business from the Account at a market value of $253,767. The NYSUT Individual Life block of business is not a part of the business administered by Lincoln Life and LNY and is no longer part of the Account. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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, 2001:
Aetna Ascent VP Janus Aspen Series: Aetna Balanced VP, Inc. o Aggressive Growth Portfolio Aetna Bond VP o Balanced Portfolio Aetna Crossroads VP o Flexible Income Portfolio Aetna Growth and Income VP o Growth Portfolio Aetna Growth VP o Worldwide Growth Portfolio Aetna Index Plus Large Cap VP MFS Variable Insurance Trust: Aetna Legacy VP o Total Return Series Aetna Money Market VP o World Government Series Aetna Small Company VP Oppenheimer Funds: Aetna Value Opportunity VP o Aggressive Growth Fund Fidelity Investments Variable o Global Securities Fund Insurance Products Fund: o Growth & Income Fund o Equity-Income Portfolio o Strategic Bond Fund o Growth Portfolio Portfolio Partners Inc. (PPI): o High Income Portfolio o PPI MFS Emerging Equities Portfolio o Overseas Portfolio o PPI MFS Research Growth Portfolio Fidelity Investments Variable o PPI MFS Capital Opportunities Portfolio Insurance Products Fund II: o PPI Scudder International Growth Portfolio o Asset Manager Portfolio o PPI T. Rowe Price Growth Equity Portfolio o Contrafund Portfolio
S-4 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS (CONTINUED) B. OTHER Investment transactions are accounted for on a trade date basis and dividend income is recorded on the ex-dividend date. The cost of investments sold is determined by specific identification. During 1999 the Aetna Growth VP Fund became available as an investment option for the Variable Account contract owners. Accordingly, the statements of operations and changes in net assets for this subaccount are for the period from January, 1999 (commencement of operations) to December 31, 1999. Also, during 1999 the Janus Aspen Series Flexible Income Portfolio became available as an investment option for the Variable Account contract owners. Accordingly, the statements of operations and changes in net assets for this subaccount are for the period from February, 1999 (commencement of operations) to December 31, 1999. Also, during 1999 the MFS Total Return Series became available as an investment option for the Variable Account contract owners. Accordingly, the statements of operations and changes in net assets for this subaccount are for the period from March, 1999 (commencement of operations) to December 31, 1999. Also, during 1999 the Oppenheimer Aggressive Growth Fund became available as an investment option for the Variable Account contract owners. Accordingly, the statements of operations and changes in net assets for this subaccount are for the period from December, 1999 (commencement of operations) to December 31, 1999. C. FEDERAL INCOME TAXES The operations of the Account form a part of, and are taxed with, the total operations of the Company which is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended. The Account will not be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code, as amended. Under current federal income tax law, no federal income taxes are payable with respect to the Account's net investment income and the net realized gain on investments. 2. MORTALITY & EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES The Company charges each variable sub-account for mortality and expense risk. The amount charged is deducted daily at rates per year specified in each policy. The Company deducts a premium load from each premium payment to cover administration expenses, state taxes, and Federal income tax liabilities. The percentage deducted from each premium payment is specified in each policy. The Company charges monthly administrative fees for items such as underwriting and issuance, premium billing and collection, policy value calculation, confirmations and periodic reports. The amount of the monthly administrative fees are specified in each policy. The Company charges a monthly deduction for the cost of insurance and any charges for supplemental riders. 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 the insured's issue age, sex (where permitted by law), number of policy years elapsed and premium class. Under certain circumstances, the Company reserves the right to charge a transfer fee between sub-accounts. The amount of the transfer fee is specified in each policy. The Company, upon full surrender of a policy, may charge a surrender charge. This charge is in part a deferred sales charge and in part a recovery of certain first year administrative costs. The amount of the surrender charge, if any, will depend on the specified amount, insured's age, risk class and sex (where permitted by law). The maximum surrender charges are included in each policy and are in compliance with each state's nonforfeiture law. 3. DIVIDEND INCOME On an annual basis, the underlying mutual funds in which the Account invests 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 underlying mutual funds. The Account's proportionate share of each underlying mutual fund's undistributed 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 of the Account. 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, 2001, 2000 and 1999 aggregated $1,371,028,936 and $1,362,123,210, $1,264,546,331 and $1,230,914,303, and $852,734,274 and $874,382,151, respectively. S-5 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 5. SUPPLEMENTAL INFORMATION TO STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS YEAR ENDED DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------ Dividends Dividends From Net From Realized Valuation Proceeds Cost of Net Investment Gains on Period from Investments Realized Income Investments Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ AETNA ASCENT VP $ 50,470 $-- $(28,869) $435,554 $473,774 $(38,220) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BALANCED VP, INC. 493,909 886,429 (224,391) 4,482,566 5,748,739 (1,266,173) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BOND VP 969,828 167,787 (192,922) 2,622,485 2,677,142 (54,657) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA CROSSROADS VP 35,454 -- (12,811) 197,807 203,667 (5,860) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH AND INCOME VP 786,966 1,739 (1,175,592) 13,790,750 23,650,823 (9,860,073) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH VP 9 1,648 (136) 38,439 47,206 (8,767) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA INDEX PLUS LARGE CAP VP 139,208 491,914 (140,517) 23,235,655 28,420,825 (5,185,170) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA LEGACY VP 57,298 11,542 (13,679) 173,641 182,121 (8,480) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA MONEY MARKET VP 2,286,790 -- (407,332) 393,608,480 394,217,161 (608,681) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA SMALL COMPANY VP 2,129 10,419 (3,268) 470,810 398,692 72,118 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA VALUE OPPORTUNITY VP 1,848 26,087 (4,623) 31,916 35,623 (3,707) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO 506,956 1,424,304 (292,530) 180,810,544 183,741,981 (2,931,437) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 9,309 875,026 (122,889) 1,539,540 1,877,700 (338,160) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ HIGH INCOME PORTFOLIO 57,445 -- (4,511) 97,725 148,584 (50,859) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ OVERSEAS PORTFOLIO 137,978 218,093 (25,413) 327,747 383,287 (55,540) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO 25,465 9,549 (7,160) 176,815 199,499 (22,684) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ CONTRAFUND PORTFOLIO 165,335 583,534 (194,619) 22,043,642 27,635,255 (5,591,613) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO -- -- (255,807) 127,505,830 148,438,810 (20,932,980) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ BALANCED PORTFOLIO 538,630 -- (192,338) 5,359,565 4,859,204 500,361 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ FLEXIBLE INCOME PORTFOLIO 51,716 -- (8,039) 118,336 114,546 3,790 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 16,532 48,639 (237,768) 17,061,174 23,768,542 (6,707,368) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ WORLDWIDE GROWTH PORTFOLIO 227,122 -- (446,713) 131,252,806 152,590,597 (21,337,791) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ MFS VARIABLE INSURANCE TRUST: TOTAL RETURN SERIES 873 1,286 (496) 6,595 6,581 14 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ WORLD GOVERNMENT SERIES -- 80 (162) 148 149 (1) Policyholders' account values ====================================================================================================================================
S-6
- ------------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Gain (Loss) Net Net Increase Net Assets ----------- Change in (Decrease) in ---------- Beginning End Unrealized Net Assets Resulting Beginning End of Period of Period Gain (Loss) From Unit Transactions of Period of Period - ------------------------------------------------------------------------------------------------------------------------------------ AETNA ASCENT VP $41,538 $(353,487) $(395,025) $34,136 Policyholders' account values $3,266,590 $2,889,082 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BALANCED VP, INC. (3,759,717) (4,967,269) (1,207,552) (1,506,312) Policyholders' account values 24,879,948 22,055,858 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BOND VP (374,858) 177,538 552,396 934,852 Policyholders' account values 19,274,478 21,651,762 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA CROSSROADS VP 857 (127,167) (128,024) (13,349) Policyholders' account values 1,439,151 1,314,561 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH AND INCOME VP (46,669,802) (63,718,013) (17,048,211) (5,206,532) Policyholders' account values 143,549,353 111,047,650 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH VP (842) (1,077) (235) 2,855 Policyholders' account values 15,856 11,230 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA INDEX PLUS LARGE CAP VP (3,147,647) (778,864) 2,368,783 (614,966) Policyholders' account values 17,614,701 14,673,953 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA LEGACY VP 28,782 (72,454) (101,236) 288,272 Policyholders' account values 1,318,990 1,552,707 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA MONEY MARKET VP 135,021 72,155 (62,866) (4,051,250) Policyholders' account values 47,127,898 44,284,559 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA SMALL COMPANY VP 47,979 (17,224) (65,203) (134,374) Policyholders' account values 669,475 551,296 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA VALUE OPPORTUNITY VP (3,007) (86,342) (83,335) 470,621 Policyholders' account values 141,474 548,365 - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO 1,193,887 427,960 (765,927) 2,851,928 Policyholders' account values 31,062,152 31,855,446 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO (1,823,911) (4,842,774) (3,018,863) 354,325 Policyholders' account values 13,580,280 11,339,028 - ------------------------------------------------------------------------------------------------------------------------------------ HIGH INCOME PORTFOLIO (135,426) (197,717) (62,291) (49,075) Policyholders' account values 480,309 371,018 - ------------------------------------------------------------------------------------------------------------------------------------ OVERSEAS PORTFOLIO (146,717) (1,072,813) (926,096) (231,465) Policyholders' account values 2,949,948 2,067,505 - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO (20,041) (52,974) (32,933) (43,984) Policyholders' account values 593,122 521,375 - ------------------------------------------------------------------------------------------------------------------------------------ CONTRAFUND PORTFOLIO (1,025,983) 1,121,049 2,147,032 (126,609) Policyholders' account values 23,351,918 20,334,978 - ------------------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO (6,289,529) 289,738 6,579,267 (152,815) Policyholders' account values 35,689,644 20,927,309 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCED PORTFOLIO (292,637) (2,266,628) (1,973,991) (1,620,363) Policyholders' account values 23,195,357 20,447,656 - ------------------------------------------------------------------------------------------------------------------------------------ FLEXIBLE INCOME PORTFOLIO (465) 736 1,201 498,477 Policyholders' account values 439,532 986,677 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO (5,819,191) (6,352,774) (533,583) (1,361,156) Policyholders' account values 29,808,245 21,033,541 - ------------------------------------------------------------------------------------------------------------------------------------ WORLDWIDE GROWTH PORTFOLIO (7,395,172) 2,092,412 9,487,584 54,143 Policyholders' account values 53,278,669 41,263,014 - ------------------------------------------------------------------------------------------------------------------------------------ MFS VARIABLE INSURANCE TRUST: TOTAL RETURN SERIES 1,741 (367) (2,108) 114,334 Policyholders' account values 31,141 145,044 - ------------------------------------------------------------------------------------------------------------------------------------ WORLD GOVERNMENT SERIES (14) (800) (786) 204,070 Policyholders' account values 2,082 205,283 ====================================================================================================================================
S-7 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 5. SUPPLEMENTAL INFORMATION TO STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED) YEAR ENDED DECEMBER 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------ Dividends Dividends From Net From Realized Valuation Proceeds Cost of Net Investment Gains on Period from Investments Realized Income Investments Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER FUNDS: AGGRESSIVE GROWTH FUND $6,177 $96,381 $(6,053) $140,512 $244,649 $(104,137) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GLOBAL SECURITIES FUND 13,886 257,441 (21,477) 59,663,503 60,297,615 (634,112) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH & INCOME FUND 867 -- (798) 413,700 482,566 (68,866) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ STRATEGIC BOND FUND 40,407 58,674 (14,129) 705,444 734,210 (28,766) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PORTFOLIO PARTNERS INC. (PPI): PPI MFS EMERGING EQUITIES PORTFOLIO -- 1,411,570 (205,820) 57,904,069 73,935,159 (16,031,090) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS RESEARCH GROWTH PORTFOLIO -- 2,945,061 (133,359) 16,974,509 24,297,008 (7,322,499) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS CAPITAL OPPORTUNITIES PORTFOLIO(2) -- 568,104 (26,829) 992,712 1,663,699 (670,987) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI SCUDDER INTERNATIONAL GROWTH PORTFOLIO 53,100 4,261,277 (158,820) 298,933,187 306,775,980 (7,842,793) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI T. ROWE PRICE GROWTH EQUITY PORTFOLIO 4,182 497,464 (26,026) 1,007,004 1,192,673 (185,669) Policyholders' account values ====================================================================================================================================
S-8
- ------------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Gain (Loss) Net Net Increase Net Assets ----------- Change in (Decrease) in ---------- Beginning End Unrealized Net Assets Resulting Beginning End of Period of Period Gain (Loss) From Unit Transactions of Period of Period - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER FUNDS: AGGRESSIVE GROWTH FUND $(156,083) $(409,614) $(253,531) $(82,330) Policyholders' account values $772,752 $429,259 - ------------------------------------------------------------------------------------------------------------------------------------ GLOBAL SECURITIES FUND (60,032) 57,115 117,147 307,475 Policyholders' account values 1,981,704 2,022,064 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH & INCOME FUND (45,735) 1,855 47,590 (367,659) Policyholders' account values 390,693 1,827 - ------------------------------------------------------------------------------------------------------------------------------------ STRATEGIC BOND FUND (31,589) (20,047) 11,542 167,977 Policyholders' account values 1,567,214 1,802,919 - ------------------------------------------------------------------------------------------------------------------------------------ PORTFOLIO PARTNERS INC. (PPI): PPI MFS EMERGING EQUITIES PORTFOLIO (7,029,114) 1,644,396 8,673,510 (465,064) Policyholders' account values 25,581,735 18,964,841 - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS RESEARCH GROWTH PORTFOLIO (1,948,065) (978,136) 969,929 (76,619) Policyholders' account values 16,326,818 12,709,331 - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS CAPITAL OPPORTUNITIES PORTFOLIO(2) (634,737) (1,430,648) (795,911) 229,340 Policyholders' account values 3,499,395 2,803,112 - ------------------------------------------------------------------------------------------------------------------------------------ PPI SCUDDER INTERNATIONAL GROWTH PORTFOLIO 405,005 231,017 (173,988) (2,649,182) Policyholders' account values 18,631,234 12,120,828 - ------------------------------------------------------------------------------------------------------------------------------------ PPI T. ROWE PRICE GROWTH EQUITY PORTFOLIO (17,419) (675,577) (658,158) 252,193 Policyholders' account values 3,043,713 2,927,699 ====================================================================================================================================
S-9 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 5. SUPPLEMENTAL INFORMATION TO STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2000 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ AETNA ASCENT VP $38,638 $(31,515) $308,641 $301,084 $7,557 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BALANCED VP, INC. 3,570,806 (259,568) 7,301,676 6,960,899 340,777 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BOND VP 983,072 (171,073) 5,252,405 5,596,388 (343,983) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA CROSSROADS VP 38,142 (19,442) 1,218,124 1,185,844 32,280 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH AND INCOME VP 17,869,945 (1,573,702) 18,811,348 21,010,033 (2,198,685) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH VP 329 (292) 41,686 36,146 5,540 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA INDEX PLUS LARGE CAP VP 2,277,415 (184,673) 14,577,799 13,668,631 909,168 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA LEGACY VP 24,973 (11,331) 97,697 93,785 3,912 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA MONEY MARKET VP 1,631,888 (390,772) 441,757,611 440,882,757 874,854 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA SMALL COMPANY VP 49,216 (8,264) 178,524 141,624 36,900 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA VALUE OPPORTUNITY VP 21,138 (1,380) 10,431 10,015 416 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO 2,541,019 (272,156) 19,439,956 19,578,131 (138,175) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 2,239,168 (179,466) 8,321,253 6,379,106 1,942,147 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ HIGH INCOME PORTFOLIO 61,259 (7,746) 619,734 737,807 (118,073) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ OVERSEAS PORTFOLIO 444,626 (36,753) 1,013,300 833,771 179,529 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO 182,521 (8,879) 1,612,451 1,650,038 (37,587) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ CONTRAFUND PORTFOLIO 3,736,611 (248,336) 12,549,865 10,761,449 1,788,416 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO 6,697,490 (581,012) 191,812,733 201,087,299 (9,274,566) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ BALANCED PORTFOLIO 2,703,458 (227,375) 3,320,459 2,430,791 889,668 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ FLEXIBLE INCOME PORTFOLIO 29,269 (4,563) 172,032 172,802 (770) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 3,207,380 (374,413) 22,061,661 17,472,933 4,588,728 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ WORLDWIDE GROWTH PORTFOLIO 5,654,399 (664,457) 126,946,450 115,442,024 11,504,426 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ MFS VARIABLE INSURANCE TRUST: TOTAL RETURN SERIES 149 (111) 42,562 40,916 1,646 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ WORLD GOVERNMENT SERIES (1) 96 (18) -- -- -- Policyholders' account values ====================================================================================================================================
S-10
- ------------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Gain (Loss) Net Net Increase Net Assets ----------- Change in (Decrease) in ---------- Beginning End Unrealized Net Assets Resulting Beginning End of Period of Period Gain (Loss) From Unit Transactions of Period of Period - ------------------------------------------------------------------------------------------------------------------------------------ AETNA ASCENT VP $114,462 $41,538 $(72,924) $188,758 Policyholders' account values $3,136,076 $3,266,590 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BALANCED VP, INC. 250,405 (3,759,717) (4,010,122) (3,423,656) Policyholders' account values 28,661,711 24,879,948 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BOND VP (1,358,696) (374,858) 983,838 (1,475,064) Policyholders' account values 19,297,688 19,274,478 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA CROSSROADS VP 60,167 857 (59,310) (947,809) Policyholders' account values 2,395,290 1,439,151 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH AND INCOME VP (13,274,660) (46,669,802) (33,395,142) (9,405,679) Policyholders' account values 172,252,616 143,549,353 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH VP 5,782 (842) (6,624) (41,164) Policyholders' account values 58,067 15,856 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA INDEX PLUS LARGE CAP VP 1,857,549 (3,147,647) (5,005,196) (930,084) Policyholders' account values 20,548,071 17,614,701 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA LEGACY VP (269) 28,782 29,051 156,791 Policyholders' account values 1,115,594 1,318,990 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA MONEY MARKET VP 190,948 135,021 (55,927) 6,624,483 Policyholders' account values 38,443,372 47,127,898 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA SMALL COMPANY VP 108,664 47,979 (60,685) 18,260 Policyholders' account values 634,048 669,475 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA VALUE OPPORTUNITY VP 5,078 (3,007) (8,085) (5,735) Policyholders' account values 135,120 141,474 - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO 1,398,142 1,193,887 (204,255) (2,587,060) Policyholders' account values 31,722,779 31,062,152 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 3,850,177 (1,823,911) (5,674,088) (5,107,791) Policyholders' account values 20,360,310 13,580,280 - ------------------------------------------------------------------------------------------------------------------------------------ HIGH INCOME PORTFOLIO (13,223) (135,426) (122,203) (411,796) Policyholders' account values 1,078,868 480,309 - ------------------------------------------------------------------------------------------------------------------------------------ OVERSEAS PORTFOLIO 1,225,453 (146,717) (1,372,170) (801,518) Policyholders' account values 4,536,234 2,949,948 - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO 130,759 (20,041) (150,800) (1,125,479) Policyholders' account values 1,733,346 593,122 - ------------------------------------------------------------------------------------------------------------------------------------ CONTRAFUND PORTFOLIO 6,072,796 (1,025,983) (7,098,779) (3,880,980) Policyholders' account values 29,054,986 23,351,918 - ------------------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO 12,041,322 (6,289,529) (18,330,851) (282,893) Policyholders' account values 57,461,476 35,689,644 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCED PORTFOLIO 3,868,165 (292,637) (4,160,802) 1,637,081 Policyholders' account values 22,353,327 23,195,357 - ------------------------------------------------------------------------------------------------------------------------------------ FLEXIBLE INCOME PORTFOLIO (1,205) (465) 740 346,589 Policyholders' account values 68,267 439,532 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 7,864,910 (5,819,191) (13,684,101) 1,827,670 Policyholders' account values 34,242,981 29,808,245 - ------------------------------------------------------------------------------------------------------------------------------------ WORLDWIDE GROWTH PORTFOLIO 19,350,824 (7,395,172) (26,745,996) (2,456,323) Policyholders' account values 65,986,620 53,278,669 - ------------------------------------------------------------------------------------------------------------------------------------ MFS VARIABLE INSURANCE TRUST: TOTAL RETURN SERIES 125 1,741 1,616 16,497 Policyholders' account values 11,344 31,141 - ------------------------------------------------------------------------------------------------------------------------------------ WORLD GOVERNMENT SERIES (1) (16) (14) 2 18 Policyholders' account values 1,984 2,082 ====================================================================================================================================
S-11 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 5. SUPPLEMENTAL INFORMATION TO STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2000 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER FUNDS: AGGRESSIVE GROWTH FUND $32,650 $(9,415) $61,285 $53,307 $7,978 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GLOBAL SECURITIES FUND 136,309 (13,082) 1,323,221 1,301,050 22,171 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH & INCOME FUND 23,432 (3,481) 38,671 39,781 (1,110) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ STRATEGIC BOND FUND 112,010 (12,281) 270,997 275,975 (4,978) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PORTFOLIO PARTNERS INC. (PPI): PPI MFS EMERGING EQUITIES PORTFOLIO 357,259 (324,037) 33,692,167 30,432,934 3,259,233 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS RESEARCH GROWTH PORTFOLIO 1,236,576 (163,429) 19,127,532 16,513,502 2,614,030 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS CAPITAL OPPORTUNITIES PORTFOLIO(2) 552,071 (35,643) 1,766,224 1,594,451 171,773 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI SCUDDER INTERNATIONAL GROWTH PORTFOLIO 2,101,751 (232,551) 296,612,296 298,934,817 (2,322,521) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI T. ROWE PRICE GROWTH EQUITY PORTFOLIO 234,098 (24,553) 553,512 374,683 178,829 Policyholders' account values ====================================================================================================================================
(1) - Reflects seed money. No funds have been received for this option. (2) - Effective May 1, 2000, PPI MFS Value Equity Portfolio's name changed to PPI MFS Capital Opportunities Portfolio. S-12
- ------------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Gain (Loss) Net Net Increase Net Assets ----------- Change in (Decrease) in ---------- Beginning End Unrealized Net Assets Resulting Beginning End of Period of Period Gain (Loss) From Unit Transactions of Period of Period - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER FUNDS: AGGRESSIVE GROWTH FUND $9,807 $(156,083) $(165,890) $169,226 Policyholders' account values $738,203 $772,752 - ------------------------------------------------------------------------------------------------------------------------------------ GLOBAL SECURITIES FUND 128,388 (60,032) (188,420) 1,379,407 Policyholders' account values 645,319 1,981,704 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH & INCOME FUND 9,124 (45,735) (54,859) 114,050 Policyholders' account values 312,661 390,693 - ------------------------------------------------------------------------------------------------------------------------------------ STRATEGIC BOND FUND 38,400 (31,589) (69,989) 229,358 Policyholders' account values 1,313,094 1,567,214 - ------------------------------------------------------------------------------------------------------------------------------------ PORTFOLIO PARTNERS INC. (PPI): PPI MFS EMERGING EQUITIES PORTFOLIO 6,611,843 (7,029,114) (13,640,957) 1,188,524 Policyholders' account values 34,741,713 25,581,735 - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS RESEARCH GROWTH PORTFOLIO 2,586,254 (1,948,065) (4,534,319) 1,272,516 Policyholders' account values 15,901,444 16,326,818 - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS CAPITAL OPPORTUNITIES PORTFOLIO(2) 477,099 (634,737) (1,111,836) 994,300 Policyholders' account values 2,928,730 3,499,395 - ------------------------------------------------------------------------------------------------------------------------------------ PPI SCUDDER INTERNATIONAL GROWTH PORTFOLIO 2,712,777 405,005 (2,307,772) (3,066,207) Policyholders' account values 24,458,534 18,631,234 - ------------------------------------------------------------------------------------------------------------------------------------ PPI T. ROWE PRICE GROWTH EQUITY PORTFOLIO 436,847 (17,419) (454,266) 704,344 Policyholders' account values 2,405,261 3,043,713 ====================================================================================================================================
S-13 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 5. SUPPLEMENTAL INFORMATION TO STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1999 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ AETNA ASCENT VP $207,334 $(27,423) $797,996 $774,178 $23,818 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BALANCED VP, INC. 4,927,154 (362,224) 24,237,521 25,666,801 (1,429,280) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BOND VP 1,443,656 (280,638) 18,417,017 18,670,143 (253,126) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA CROSSROADS VP 150,412 (21,636) 728,894 729,509 (615) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH AND INCOME VP 30,198,699 (1,580,938) 32,617,948 29,355,401 3,262,547 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH VP(1) 3,015 (34,261) 5,715,725 5,103,503 612,222 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA INDEX PLUS LARGE CAP VP 881,321 (196,915) 14,299,931 11,770,545 2,529,386 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA LEGACY VP 62,497 (9,474) 227,116 226,972 144 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA MONEY MARKET VP 1,696,087 (398,471) 240,430,804 240,018,029 412,775 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA SMALL COMPANY VP 8,993 (28,237) 4,384,995 3,960,970 424,025 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ AETNA VALUE OPPORTUNITY VP 6,310 (991) 96,462 76,961 19,501 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO 1,764,504 (369,449) 17,136,392 15,738,454 1,397,938 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 2,197,635 (205,229) 16,307,193 12,435,135 3,872,058 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ HIGH INCOME PORTFOLIO 62,986 (7,432) 326,086 352,715 (26,629) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ OVERSEAS PORTFOLIO 125,931 (32,249) 1,315,907 1,200,968 114,939 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO 232,267 (29,020) 2,871,385 2,692,023 179,362 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ CONTRAFUND PORTFOLIO 1,565,873 (381,504) 26,236,688 20,796,590 5,440,098 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO 1,087,970 (302,514) 130,280,210 109,911,278 20,368,932 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ BALANCED PORTFOLIO 550,807 (265,810) 17,853,236 12,910,893 4,942,343 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ FLEXIBLE INCOME PORTFOLIO (2) 5,337 (658) 122,746 124,997 (2,251) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 202,497 (257,076) 21,130,544 15,320,528 5,810,016 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ WORLDWIDE GROWTH PORTFOLIO 96,897 (512,954) 56,371,577 42,528,486 13,843,091 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ MFS VARIABLE INSURANCE TRUST: TOTAL RETURN SERIES (3) 26 (6) 1,588 1,601 (13) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ WORLD GOVERNMENT SERIES (4) -- (1) -- -- -- Policyholders' account values ====================================================================================================================================
S-14
- ------------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Gain (Loss) Net Net Increase Net Assets ----------- Change in (Decrease) in ---------- Beginning End Unrealized Net Assets Resulting Beginning End of Period of Period Gain (Loss) From Unit Transactions of Period of Period - ------------------------------------------------------------------------------------------------------------------------------------ AETNA ASCENT VP $(53,438) $114,462 $167,900 $(13,121) Policyholders' account values $2,777,568 $3,136,076 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BALANCED VP, INC. (88,169) 250,405 338,574 (8,902,224) Policyholders' account values 34,089,711 28,661,711 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BOND VP (21,056) (1,358,696) (1,337,640) (10,250,586) Policyholders' account values 29,976,022 19,297,688 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA CROSSROADS VP (13,664) 60,167 73,831 137,429 Policyholders' account values 2,055,869 2,395,290 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH AND INCOME VP 6,059,944) (13,274,660) (7,214,716) (9,143,942) Policyholders' account values 156,730,966 172,252,616 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH VP(1) -- 5,782 5,782 (528,691) Policyholders' account values -- 58,067 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA INDEX PLUS LARGE CAP VP 1,027,911 1,857,549 829,638 3,159,014 Policyholders' account values 13,345,627 20,548,071 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA LEGACY VP (9,107) (269) 8,838 45,676 Policyholders' account values 1,007,913 1,115,594 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA MONEY MARKET VP 267,256 190,948 (76,308) 143,868 Policyholders' account values 36,665,421 38,443,372 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA SMALL COMPANY VP (23,492) 108,664 132,156 (890,290) Policyholders' account values 987,401 634,048 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA VALUE OPPORTUNITY VP 12,485 5,078 (7,407) 61,807 Policyholders' account values 55,900 135,120 - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO 2,106,941 1,398,142 (708,799) (7,091,968) Policyholders' account values 36,730,553 31,722,779 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 3,937,336 3,850,177 (87,159) (4,688,720) Policyholders' account values 19,271,725 20,360,310 - ------------------------------------------------------------------------------------------------------------------------------------ HIGH INCOME PORTFOLIO (22,754) (13,223) 9,531 804,059 Policyholders' account values 236,353 1,078,868 - ------------------------------------------------------------------------------------------------------------------------------------ OVERSEAS PORTFOLIO 190,775 1,225,453 1,034,678 178,105 Policyholders' account values 3,114,830 4,536,234 - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO 266,952 130,759 (136,193) (1,643,684) Policyholders' account values 3,130,614 1,733,346 - ------------------------------------------------------------------------------------------------------------------------------------ CONTRAFUND PORTFOLIO 5,961,343 6,072,796 111,453 (16,110,899) Policyholders' account values 38,429,965 29,054,986 - ------------------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO 3,818,015 12,041,322 8,223,307 4,654,782 Policyholders' account values 23,428,999 57,461,476 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCED PORTFOLIO 3,434,432 3,868,165 433,733 (4,727,822) Policyholders' account values 21,420,076 22,353,327 - ------------------------------------------------------------------------------------------------------------------------------------ FLEXIBLE INCOME PORTFOLIO (2) -- (1,205) (1,205) 67,044 Policyholders' account values --- 68,267 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO 3,730,121 7,864,910 4,134,789 950,511 Policyholders' account values 23,402,244 34,242,981 - ------------------------------------------------------------------------------------------------------------------------------------ WORLDWIDE GROWTH PORTFOLIO 5,492,542 19,350,824 13,858,282 (4,853,866) Policyholders' account values 43,555,170 65,986,620 - ------------------------------------------------------------------------------------------------------------------------------------ MFS VARIABLE INSURANCE TRUST: TOTAL RETURN SERIES (3) -- 125 125 11,212 Policyholders' account values -- 11,344 - ------------------------------------------------------------------------------------------------------------------------------------ WORLD GOVERNMENT SERIES (4) -- (16) (16) 2,001 Policyholders' account values -- 1,984 ====================================================================================================================================
S-15 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 5. SUPPLEMENTAL INFORMATION TO STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1999 Valuation Proceeds Cost of Net Period from Investments Realized Dividends Deductions Sales Sold Gain (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER FUNDS: AGGRESSIVE GROWTH FUND (5) $-- $(45) $22 $20 $2 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GLOBAL SECURITIES FUND 12,736 (3,636) 751,030 654,790 96,240 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH & INCOME FUND 1,424 (2,052) 710,579 654,333 56,246 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ STRATEGIC BOND FUND 40,196 (11,335) 1,349,254 1,342,562 6,692 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PORTFOLIO PARTNERS INC. (PPI): PPI MFS EMERGING EQUITIES PORTFOLIO 329,059 (312,763) 92,317,033 82,923,450 9,393,583 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS RESEARCH GROWTH PORTFOLIO 26,665 (127,616) 11,385,569 10,005,001 1,380,568 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS VALUE EQUITY PORTFOLIO 39,629 (11,919) 1,177,567 900,465 277,102 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI SCUDDER INTERNATIONAL GROWTH PORTFOLIO 885,006 (199,531) 134,290,559 126,685,605 7,604,954 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI T. ROWE PRICE GROWTH EQUITY PORTFOLIO 54,145 (17,268) 492,577 424,485 68,092 Policyholders' account values ====================================================================================================================================
(1) - Reflects less than a full year of activity. Funds were first received in this option during January 1999. (2) - Reflects less than a full year of activity. Funds were first received in this option during February 1999. (3) - Reflects less than a full year of activity. Funds were first received in this option during March 1999. (4) - Reflects seed money. No funds have been received for this option. (5) - Reflects less than a full year of activity. Funds were first received in this option during December 1999. S-16
- ------------------------------------------------------------------------------------------------------------------------------------ Net Unrealized Gain (Loss) Net Net Increase Net Assets ----------- Change in (Decrease) in ---------- Beginning End Unrealized Net Assets Resulting Beginning End of Period of Period Gain (Loss) From Unit Transactions of Period of Period - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER FUNDS: AGGRESSIVE GROWTH FUND (5) $-- $9,807 $9,807 $728,439 Policyholders' account values $-- $738,203 - ------------------------------------------------------------------------------------------------------------------------------------ GLOBAL SECURITIES FUND 19,272 128,388 109,116 113,811 Policyholders' account values 317,052 645,319 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH & INCOME FUND 11,048 9,124 (1,924) 183,796 Policyholders' account values 75,171 312,661 - ------------------------------------------------------------------------------------------------------------------------------------ STRATEGIC BOND FUND 16,740 38,400 21,660 544,409 Policyholders' account values 711,472 1,313,094 - ------------------------------------------------------------------------------------------------------------------------------------ PORTFOLIO PARTNERS INC. (PPI): PPI MFS EMERGING EQUITIES 3,702,269 6,611,843 2,909,574 (8,310,862) PORTFOLIO 30,733,122 34,741,713 Policyholders' account values - ----------------------------------------------------------------------------------------------------------------------------------- PPI MFS RESEARCH GROWTH PORTFOLIO 974,898 2,586,254 1,611,356 1,275,501 11,734,970 15,901,444 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS VALUE EQUITY PORTFOLIO 82,622 477,099 394,477 1,424,018 805,423 2,928,730 Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI SCUDDER INTERNATIONAL GROWTH 16,662,810 24,458,534 PORTFOLIO 698,227 2,712,777 2,014,550 (2,509,255) Policyholders' account values - ------------------------------------------------------------------------------------------------------------------------------------ PPI T. ROWE PRICE GROWTH EQUITY 149,693 436,847 287,154 656,778 PORTFOLIO Policyholders' account values 1,356,360 2,405,261 ====================================================================================================================================
S-17 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 6. CONDENSED FINANCIAL INFORMATION -- Year Ended December 31, 2001 A summary of the unit values, units outstanding, net assets and total return and investment income ratios for variable life contracts as of and for the year ended December 31, 2001 follows. The fee rates below represent annualized contract expenses of the separate account, consisting primarily of mortality and expense charges and do not include contract charges deducted directly from policy account values.
Value Per Unit Units Policyholders' -------- Outstanding Account Values Investment Beginning End of at End at End Income of Period Period Total Return(2) of Period of Period Ratio (3) - ------------------------------------------------------------------------------------------------------------------------------------ AETNA ASCENT VP: 1.68% Aetna Vest (.85% Fee Rate) $16.232 $14.237 (12.29%) 6,039.2 $ 85,980 Aetna Vest II (1.00% Fee Rate) 16.143 14.137 (12.42%) 3,735.4 52,809 Aetna Vest Plus (1.00% Fee Rate) 16.143 14.137 (12.42%) 161,939.5 2,289,435 Aetna Vest Estate Protector (.85% Fee Rate) 16.258 14.260 (12.29%) 23,842.8 340,000 Aetna Vest Estate Protector II (.65% Fee Rate) 11.254 9.891 (12.12%) 12,219.2 120,858 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BALANCED VP, INC.: 2.16% Aetna Vest (.95% Fee Rate) 27.328 25.930 (5.12%) 73,969.0 1,918,019 Aetna Vest II (1.00% Fee Rate) 27.582 26.158 (5.16%) 158,228.2 4,138,890 Aetna Vest Plus (1.00% Fee Rate) 23.131 21.937 (5.16%) 494,455.4 10,846,852 Aetna Vest Estate Protector (.85% Fee Rate) 17.454 16.578 (5.02%) 30,377.6 503,597 Aetna Vest Estate Protector II (.65% Fee Rate) 12.525 11.920 (4.83%) 68,825.1 820,428 Corporate Specialty Market (1.00% Fee Rate) 20.137 19.099 (5.16%) 200,383.7 3,827,106 Corporate Specialty Market II (.70% Fee Rate) 12.509 11.895 (4.91%) 81.2(1) 966 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA BOND VP: 4.92% Aetna Vest (1.00% Fee Rate) 26.757 28.808 7.66% 209,698.5 6,040,967 Aetna Vest II (1.00% Fee Rate) 17.990 19.369 7.66% 43,196.6 836,656 Aetna Vest Plus (1.00% Fee Rate) 14.406 15.510 7.66% 345,380.5 5,356,747 Aetna Vest Estate Protector (.85% Fee Rate) 12.877 13.884 7.82% 66,364.9 921,437 Aetna Vest Estate Protector II (.65% Fee Rate) 11.405 12.322 8.04% 81,797.5 1,007,868 Corporate Specialty Market (1.00% Fee Rate) 13.904 14.970 7.66% 500,136.1 7,487,019 Corporate Specialty Market II (.70% Fee Rate) 11.385 12.246 7.56% 87.2(1) 1,068 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA CROSSROADS VP: 2.65% Aetna Vest (.85% Fee Rate) 15.276 14.088 (7.78%) 2,426.2 34,179 Aetna Vest II (1.00% Fee Rate) 15.192 13.989 (7.92%) 4,659.0 65,176 Aetna Vest Plus (1.00% Fee Rate) 15.192 13.989 (7.92%) 75,629.2 1,058,029 Aetna Vest Estate Protector (.85% Fee Rate) 15.301 14.110 (7.78%) 656.5 9,264 Aetna Vest Estate Protector II (.65% Fee Rate) 11.191 10.340 (7.60%) 14,304.7 147,913 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH AND INCOME VP: 0.65% Aetna Vest (.95% Fee Rate) 52.273 42.251 (19.17%) 955,000.5 40,349,341 Aetna Vest II (1.00% Fee Rate) 29.137 23.538 (19.21%) 620,713.8 14,610,550 Aetna Vest Plus (1.00% Fee Rate) 24.480 19.776 (19.21%) 1,950,315.4 38,569,814 Aetna Vest Estate Protector (.85% Fee Rate) 17.544 14.194 (19.09%) 127,634.5 1,811,707 Aetna Vest Estate Protector II (.65% Fee Rate) 11.316 9.174 (18.93%) 190,137.3 1,744,272 Corporate Specialty Market (1.00% Fee Rate) 22.115 17.867 (19.21%) 777,927.3 13,899,049 Corporate Specialty Market II (.70% Fee Rate) 11.300 9.156 (18.97%) 6,871.6 62,917 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA GROWTH VP: 0.07% Corporate Specialty Market (1.00% Fee Rate) 15.351 11.083 (27.80%) 947.7 10,544 Corporate Specialty Market II (.70% Fee Rate) 15.061 10.906 (27.59%) 62.9(1) 686 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA INDEX PLUS LARGE CAP VP: 0.91% Aetna Vest (1.00% Fee Rate) 18.812 16.088 (14.48%) 88,236.1 1,419,557 Aetna Vest II (1.00% Fee Rate) 18.812 16.088 (14.48%) 28,450.1 457,710 Aetna Vest Plus (1.00% Fee Rate) 18.812 16.088 (14.48%) 443,738.4 7,138,938 Aetna Vest Estate Protector (.85% Fee Rate) 18.927 16.211 (14.35%) 79,108.7 1,282,408 Aetna Vest Estate Protector II (.65% Fee Rate) 13.780 11.826 (14.18%) 222,599.5 2,632,372 Corporate Specialty Market (1.00% Fee Rate) 18.812 16.087 (14.49%) 95,040.8 1,528,882 Corporate Specialty Market II (.70% Fee Rate) 13.760 11.803 (14.22%) 18,138.8 214,086 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA LEGACY VP: 3.87% Aetna Vest (.85% Fee Rate) 14.763 14.289 (3.21%) 953.6 13,626 Aetna Vest II (1.00% Fee Rate) 14.682 14.191 (3.34%) 973.2 13,811 Aetna Vest Plus (1.00% Fee Rate) 14.682 14.192 (3.34%) 81,404.2 1,155,290
S-18 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 6. CONDENSED FINANCIAL INFORMATION -- Year Ended December 31, 2001 (continued)
Value Per Unit Units Policyholders' -------- Outstanding Account Values Investment Beginning End of at End at End Income of Period Period Total Return(2) of Period of Period Ratio (3) - ------------------------------------------------------------------------------------------------------------------------------------ AETNA LEGACY VP: (continued): Aetna Vest Estate Protector (.85% Fee Rate) $14.788 $14.315 (3.20%) 4,345.9 $ 62,210 Aetna Vest Estate Protector II (.65% Fee Rate) 11.500 11.154 (3.00%) 27,592.2 307,770 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA MONEY MARKET VP: 5.48% Aetna Vest (1.00% Fee Rate) 19.803 20.378 2.90% 124,544.4 2,537,919 Aetna Vest II (1.00% Fee Rate) 14.475 14.895 2.90% 45,544.3 678,392 Aetna Vest Plus (1.00% Fee Rate) 13.604 13.999 2.90% 1,239,984.9 17,358,195 Aetna Vest Estate Protector (.85% Fee Rate) 12.419 12.799 3.06% 56,148.6 718,619 Aetna Vest Estate Protector II (.65% Fee Rate) 11.489 11.864 3.26% 217,989.8 2,586,281 Corporate Specialty Market (1.00% Fee Rate) 13.015 13.393 2.90% 1,509,812.3 20,220,377 Corporate Specialty Market II (.70% Fee Rate) 11.473 11.841 3.21% 15,604.4 184,776 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA SMALL COMPANY VP: 0.65% Corporate Specialty Market (1.00% Fee Rate) 13.805 14.214 2.96% 38,700.8 550,101 Corporate Specialty Market II (.70% Fee Rate) 13.167 13.603 3.30% 87.8(1) 1,195 - ------------------------------------------------------------------------------------------------------------------------------------ AETNA VALUE OPPORTUNITY VP: 0.40% Corporate Specialty Market (1.00% Fee Rate) 15.841 14.175 (10.52%) 38,614.8 547,388 Corporate Specialty Market II (.70% Fee Rate) 14.946 13.414 (10.25%) 72.8(1) 977 - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO: 1.70% Aetna Vest (1.00% Fee Rate) 17.218 16.202 (5.90%) 30,681.0 497,101 Aetna Vest II (1.00% Fee Rate) 17.218 16.202 (5.90%) 9,698.0 157,130 Aetna Vest Plus (1.00% Fee Rate) 17.218 16.202 (5.90%) 1,029,326.9 16,677,431 Aetna Vest Estate Protector (.85% Fee Rate) 17.342 16.343 (5.76%) 151,319.3 2,472,977 Aetna Vest Estate Protector II (.65% Fee Rate) 12.213 11.532 (5.57%) 161,019.2 1,856,945 Corporate Specialty Market (1.00% Fee Rate) 19.818 18.646 (5.91%) 546,650.5 10,192,896 Corporate Specialty Market II (.70% Fee Rate) 12.195 11.511 (5.62%) 83.9(1) 966 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO: 0.08% Corporate Specialty Market (1.00% Fee Rate) 22.788 18.580 (18.47%) 610,226.7 11,338,260 Corporate Specialty Market II (.70% Fee Rate) 15.852 12.961 (18.23%) 59.3(1) 768 - ------------------------------------------------------------------------------------------------------------------------------------ HIGH INCOME PORTFOLIO: 12.73% Corporate Specialty Market (1.00% Fee Rate) 7.883 6.885 (12.66%) 53,789.1 370,335 Corporate Specialty Market II (.70% Fee Rate) 7.623 6.684 (12.31%) 102.2(1) 683 - ------------------------------------------------------------------------------------------------------------------------------------ OVERSEAS PORTFOLIO: 5.43% Corporate Specialty Market (1.00% Fee Rate) 15.671 12.231 (21.95%) 168,983.1 2,066,823 Corporate Specialty Market II (.70% Fee Rate) 12.134 9.501 (21.70%) 71.8(1) 682 - ------------------------------------------------------------------------------------------------------------------------------------ FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND: ASSET MANAGER PORTFOLIO: 3.56% Corporate Specialty Market (1.00% Fee Rate) 17.112 16.246 (5.06%) 32,034.4 520,443 Corporate Specialty Market II (.70% Fee Rate) 11.657 11.100 (4.78%) 83.9(1) 932 - ------------------------------------------------------------------------------------------------------------------------------------ CONTRAFUND PORTFOLIO: 0.81% Aetna Vest (1.00% Fee Rate) 20.731 18.012 (13.12%) 67,091.3 1,208,419 Aetna Vest II (1.00% Fee Rate) 20.731 18.012 (13.12%) 28,511.0 513,528 Aetna Vest Plus (1.00% Fee Rate) 20.731 18.011 (13.12%) 639,015.6 11,509,624 Aetna Vest Estate Protector (.85% Fee Rate) 20.879 18.168 (12.99%) 75,484.5 1,371,373 Aetna Vest Estate Protector II (.65% Fee Rate) 14.221 12.399 (12.81%) 162,349.8 2,012,912 Corporate Specialty Market (1.00% Fee Rate) 22.298 19.375 (13.11%) 179,451.4 3,476,859 Corporate Specialty Market II (.70% Fee Rate) 14.200 12.375 (12.86%) 19,577.4 242,263 - ------------------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN SERIES: AGGRESSIVE GROWTH PORTFOLIO: - Aetna Vest (1.00% Fee Rate) 36.088 21.634 (40.05%) 87,697.9 1,897,225 Aetna Vest II (1.00% Fee Rate) 36.088 21.634 (40.05%) 38,470.7 832,257 Aetna Vest Plus (1.00% Fee Rate) 36.088 21.633 (40.05%) 555,480.1 12,016,992 Aetna Vest Estate Protector (.85% Fee Rate) 22.019 13.220 (39.96%) 94,945.7 1,255,146 Aetna Vest Estate Protector II (.65% Fee Rate) 19.507 11.735 (39.84%) 106,343.7 1,247,933
S-19 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 6. CONDENSED FINANCIAL INFORMATION -- Year Ended December 31, 2001 (continued)
Value Per Unit Units Policyholders' -------- Outstanding Account Values Investment Beginning End of at End at End Income of Period Period Total Return(2) of Period of Period Ratio (3) - ------------------------------------------------------------------------------------------------------------------------------------ JANUS ASPEN SERIES: (continued): Corporate Specialty Market (1.00% Fee Rate) $27.079 $16.240 (40.03%) 218,248.1 $ 3,544,448 Corporate Specialty Market II (.70% Fee Rate) 19.480 11.713 (39.87%) 11,381.3 133,308 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCED PORTFOLIO: 2.65% Aetna Vest (1.00% Fee Rate) 27.254 25.724 (5.61%) 28,382.0 730,103 Aetna Vest II (1.00% Fee Rate) 27.467 25.925 (5.61%) 25,456.6 659,962 Aetna Vest Plus (1.00% Fee Rate) 27.242 25.713 (5.61%) 510,123.0 13,116,561 Aetna Vest Estate Protector (.85% Fee Rate) 21.794 20.601 (5.47%) 48,619.1 1,001,607 Aetna Vest Estate Protector II (.65% Fee Rate) 15.434 14.619 (5.28%) 149,526.3 2,185,875 Corporate Specialty Market (1.00% Fee Rate) 23.890 22.543 (5.64%) 96,406.7 2,173,336 Corporate Specialty Market II (.70% Fee Rate) 15.412 14.590 (5.33%) 39,766.8 580,212 - ------------------------------------------------------------------------------------------------------------------------------------ FLEXIBLE INCOME PORTFOLIO: 6.43% Corporate Specialty Market (1.00% Fee Rate) 11.591 12.364 6.67% 79,709.8 985,546 Corporate Specialty Market II (.70% Fee Rate) 11.266 12.054 6.99% 93.8(1) 1,131 - ------------------------------------------------------------------------------------------------------------------------------------ GROWTH PORTFOLIO: 0.07% Aetna Vest (1.00% Fee Rate) 29.324 21.851 (25.48%) 50,329.1 1,099,750 Aetna Vest II (1.00% Fee Rate) 29.298 21.831 (25.48%) 60,631.4 1,323,662 Aetna Vest Plus (1.00% Fee Rate) 29.256 21.800 (25.48%) 641,172.6 13,977,881 Aetna Vest Estate Protector (.85% Fee Rate) 21.500 16.045 (25.37%) 92,797.4 1,488,914 Aetna Vest Estate Protector II (.65% Fee Rate) 15.258 11.410 (25.22%) 169,315.9 1,931,819 Corporate Specialty Market (1.00% Fee Rate) 24.077 17.941 (25.48%) 67,484.3 1,210,763 Corporate Specialty Market II (.70% Fee Rate) 15.236 11.812 (22.48%) 63.7(1) 752 - ------------------------------------------------------------------------------------------------------------------------------------ WORLDWIDE GROWTH PORTFOLIO: 0.49% Aetna Vest (1.00% Fee Rate) 34.337 26.368 (23.21%) 110,944.1 2,925,377 Aetna Vest II (1.00% Fee Rate) 34.346 26.375 (23.21%) 47,371.9 1,249,421 Aetna Vest Plus (1.00% Fee Rate) 34.303 26.342 (23.21%) 879,764.2 23,174,798 Aetna Vest Estate Protector (.85% Fee Rate) 24.932 19.174 (23.09%) 120,125.3 2,303,329 Aetna Vest Estate Protector II (.65% Fee Rate) 16.450 12.677 (22.94%) 216,951.2 2,750,256 Corporate Specialty Market (1.00% Fee Rate) 28.243 21.688 (23.21%) 395,234.0 8,571,957 Corporate Specialty Market II (.70% Fee Rate) 16.427 12.652 (22.98%) 22,752.6 287,876 - ------------------------------------------------------------------------------------------------------------------------------------ MFS VARIABLE INSURANCE TRUST: TOTAL RETURN SERIES 1.75% Corporate Specialty Market (1.00% Fee Rate) 13.230 13.131 (0.75%) 10,957.7 143,895 Corporate Specialty Market II (.70% Fee Rate) 12.867 12.812 (0.43%) 89.7(1) 1,149 - ------------------------------------------------------------------------------------------------------------------------------------ WORLD GOVERNMENT SERIES - Corporate Specialty Market (1.00% Fee Rate) 10.582 10.980 3.76% 18,595.1(1) 204,208 Corporate Specialty Market II (.70% Fee Rate) 10.700 11.139 4.10% 96.5(1) 1,075 - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER AGGRESSIVE GROWTH FUND: 1.02% Corporate Specialty Market (1.00% Fee Rate) 17.206 11.709 (31.95%) 36,602.5 428,576 Corporate Specialty Market II (.70% Fee Rate) 17.151 11.712 (31.71%) 58.3(1) 683 - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER GLOBAL SECURITIES FUND: 0.62% Aetna Vest (1.00% Fee Rate) 17.678 15.395 (12.91%) 11,723.9 180,487 Aetna Vest II (1.00% Fee Rate) 17.677 15.395 (12.91%) 8,314.9 128,005 Aetna Vest Plus (1.00% Fee Rate) 17.677 15.395 (12.91%) 73,350.0 1,129,259 Aetna Vest Estate Protector (.85% Fee Rate) 17.753 15.484 (12.78%) 9,459.2 146,463 Aetna Vest Estate Protector II (.65% Fee Rate) 18.219 15.922 (12.61%) 14,568.3 231,954 Corporate Specialty Market (1.00% Fee Rate) 18.697 16.287 (12.89%) 12,580.8 204,901 Corporate Specialty Market II (.70% Fee Rate) 18.303 15.984 (12.67%) 62.2(1) 995 - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER GROWTH & INCOME FUND: 1.08% Corporate Specialty Market (1.00% Fee Rate) 11.480 10.215 (11.02%) 89.5(1) 921 Corporate Specialty Market II (.70% Fee Rate) 10.900 9.727 (10.76%) 93.2(1) 906 - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER STRATEGIC BOND FUND: 2.45% Aetna Vest (1.00% Fee Rate) 10.372 10.767 3.80% 4,401.0 47,384 Aetna Vest II (1.00% Fee Rate) 10.372 10.766 3.81% 526.2 5,665 Aetna Vest Plus (1.00% Fee Rate) 10.372 10.767 3.80% 73,888.8 795,558
S-20 AETNA LIFE INSURANCE AND ANNUITY COMPANY VARIABLE LIFE ACCOUNT B NOTES TO FINANCIAL STATEMENTS -- December 31, 2001 (continued) 6. CONDENSED FINANCIAL INFORMATION -- Year Ended December 31, 2001 (continued)
Value Per Unit Units Policyholders' -------- Outstanding Account Values Investment Beginning End of at End at End Income of Period Period Total Return(2) of Period of Period Ratio (3) - ------------------------------------------------------------------------------------------------------------------------------------ OPPENHEIMER STRATEGIC BOND FUND: (continued): Aetna Vest Estate Protector (.85% Fee Rate) $10.417 $10.829 3.96% 21,063.9 $ 228,103 Aetna Vest Estate Protector II (.65% Fee Rate) 10.454 10.890 4.17% 42,688.6 464,887 Corporate Specialty Market (1.00% Fee Rate) 10.649 11.054 3.81% 95.5(1) 1,056 Corporate Specialty Market II (.70% Fee Rate) 10.459 10.889 4.12% 23,901.8 260,266 - ------------------------------------------------------------------------------------------------------------------------------------ PORTFOLIO PARTNERS INC. (PPI): - PPI MFS EMERGING EQUITIES PORTFOLIO: Aetna Vest (1.00% Fee Rate) 23.469 17.378 (25.95%) 48,144.7 836,649 Aetna Vest II (1.00% Fee Rate) 23.471 17.379 (25.95%) 21,983.6 382,062 Aetna Vest Plus (1.00% Fee Rate) 23.458 17.370 (25.95%) 579,577.8 10,067,265 Aetna Vest Estate Protector (.85% Fee Rate) 14.683 10.888 (25.84%) 85,688.1 933,005 Aetna Vest Estate Protector II (.65% Fee Rate) 12.278 9.123 (25.69%) 45,730.8 417,212 Corporate Specialty Market (1.00% Fee Rate) 19.302 14.294 (25.94%) 442,701.0 6,328,043 Corporate Specialty Market II (.70% Fee Rate) 12.264 9.112 (25.70%) 66.4(1) 605 - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS RESEARCH GROWTH PORTFOLIO: - Aetna Vest (1.00% Fee Rate) 17.030 13.339 (21.67%) 44,756.5 597,023 Aetna Vest II (1.00% Fee Rate) 17.106 13.399 (21.67%) 23,702.6 317,594 Aetna Vest Plus (1.00% Fee Rate) 16.873 13.216 (21.67%) 462,560.9 6,113,361 Aetna Vest Estate Protector (.85% Fee Rate) 13.001 10.199 (21.55%) 30,439.5 310,437 Aetna Vest Estate Protector II (.65% Fee Rate) 13.470 10.588 (21.40%) 58,801.5 622,574 Corporate Specialty Market (1.00% Fee Rate) 15.432 12.089 (21.66%) 392,729.9 4,747,552 Corporate Specialty Market II (.70% Fee Rate) 13.454 10.569 (21.44%) 74.7(1) 790 - ------------------------------------------------------------------------------------------------------------------------------------ PPI MFS CAPITAL OPPORTUNITIES PORTFOLIO: - Aetna Vest (1.00% Fee Rate) 15.686 11.686 (25.50%) 13,743.2 160,598 Aetna Vest II (1.00% Fee Rate) 15.686 11.685 (25.50%) 3,395.1 39,673 Aetna Vest Plus (1.00% Fee Rate) 15.686 11.686 (25.50%) 137,267.9 1,604,084 Aetna Vest Estate Protector (.85% Fee Rate) 15.753 11.753 (25.39%) 17,894.5 210,316 Aetna Vest Estate Protector II (.65% Fee Rate) 16.200 12.111 (25.24%) 64,977.7 786,914 Corporate Specialty Market (1.00% Fee Rate) 17.139 12.773 (25.47%) 59.6 761 Corporate Specialty Market II (.70% Fee Rate) 16.379 12.239 (25.28%) 62.6(1) 766 - ------------------------------------------------------------------------------------------------------------------------------------ PPI SCUDDER INTERNATIONAL GROWTH PORTFOLIO: 0.32% Aetna Vest (1.00% Fee Rate) 23.100 16.712 (27.66%) 87,754.0 1,466,520 Aetna Vest II (1.00% Fee Rate) 22.958 16.609 (27.66%) 27,722.5 460,435 Aetna Vest Plus (1.00% Fee Rate) 22.830 16.516 (27.66%) 441,850.6 7,297,737 Aetna Vest Estate Protector (.85% Fee Rate) 17.415 12.618 (27.55%) 39,701.0 500,928 Aetna Vest Estate Protector II (.65% Fee Rate) 14.079 10.221 (27.40%) 47,148.7 481,908 Corporate Specialty Market (1.00% Fee Rate) 19.130 13.844 (27.63%) 138,141.7 1,912,400 Corporate Specialty Market II (.70% Fee Rate) 14.059 10.203 (27.43%) 88.2(1) 900 - ------------------------------------------------------------------------------------------------------------------------------------ PPI T. ROWE PRICE GROWTH EQUITY PORTFOLIO: 0.14% Aetna Vest (1.00% Fee Rate) 13.830 12.294 (11.11%) 9,874.4 121,395 Aetna Vest II (1.00% Fee Rate) 13.829 12.293 (11.11%) 6,259.6 76,950 Aetna Vest Plus (1.00% Fee Rate) 13.830 12.294 (11.11%) 144,122.9 1,771,874 Aetna Vest Estate Protector (.85% Fee Rate) 13.889 12.365 (10.98%) 9,525.0 117,778 Aetna Vest Estate Protector II (.65% Fee Rate) 14.289 12.747 (10.80%) 65,737.6 837,928 Corporate Specialty Market (1.00% Fee Rate) 15.046 13.373 (11.12%) 63.1(1) 844 Corporate Specialty Market II (.70% Fee Rate) 14.432 12.861 (10.89%) 72.3(1) 930 - ------------------------------------------------------------------------------------------------------------------------------------
(1) - Reflects seed money. No funds have been received for this option. (2) - These amounts represent the total return, including changes in the value of the underlying subaccount, and reflect deductions for all items included in the fee rate. The total return does not include contract charges deducted directly from policy account values. (3) - These amounts represent the dividends, excluding distributions of capital gains, (see note 5), received by the subaccount from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest. S-21 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors of The Lincoln National Life Insurance Company and Contract Owners of Aetna Life Insurance and Annuity Company 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") (comprised of the following subaccounts: Aetna Ascent VP, Aetna Balanced VP, Inc., Aetna Bond VP, Aetna Crossroads VP, Aetna Growth and Income VP, Aetna Growth VP, Aetna Index Plus Large Cap VP, Aetna Legacy VP, Aetna Money Market VP, Aetna Small Company VP, Aetna Value Opportunity VP, Fidelity Investments Variable Insurance Products Fund ("Fidelity VIP") Equity-Income Portfolio, Fidelity VIP Growth Portfolio, Fidelity VIP High Income Portfolio, Fidelity VIP Overseas Portfolio, Fidelity VIP II Asset Manager Portfolio, Fidelity VIP II Contrafund Portfolio, Janus Aspen Series Aggressive Growth Portfolio, Janus Aspen Series Balanced Portfolio, Janus Aspen Series Flexible Income Portfolio, Janus Aspen Series Growth Portfolio, Janus Aspen Series Worldwide Growth Portfolio, MFS Variable Insurance Trust ("MFS VIT") Total Return Series, MFS VIT World Government Series, Oppenheimer Funds Aggressive Growth Fund, Oppenheimer Funds Global Securities Fund, Oppenheimer Funds Growth & Income Fund, Oppenheimer Funds Strategic Bond Fund, Portfolio Partners Inc. ("PPI") MFS Emerging Equities Portfolio, PPI MFS Research Growth Portfolio, PPI MFS Capital Opportunities Portfolio, PPI Scudder International Growth Portfolio, and PPI T. Rowe Price Growth Equity Portfolio) as of December 31, 2001 and the related statements of operations and changes in net assets for each of the respective three years or periods in the period then ended. These financial statements are the responsibility of the Variable Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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. Our procedures included confirmation of investments owned as of December 31, 2001, 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 referred to above present fairly, in all material respects, the financial position of each of the respective subaccounts constituting the Aetna Life Insurance and Annuity Company Variable Life Account B as of December 31, 2001 and the results of their operations and changes in their net assets for each of the respective three years or periods in the period then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Fort Wayne, Indiana March 1, 2002 S-22 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (FORMERLY KNOWN AS AETNA LIFE INSURANCE AND ANNUITY COMPANY, A WHOLLY-OWNED SUBSIDIARY OF AETNA RETIREMENT HOLDINGS, INC.) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Auditors.................... F-2 Consolidated Financial Statements: Consolidated Statements of Income for the Year-ended December 31, 2001, One Month Ended December 31, 2000, the Eleven Months Ended November 30, 2000 and for the Year-ended December 31, 1999............... F-4 Consolidated Balance Sheets as of December 31, 2001 and 2000................. F-5 Consolidated Statements of Changes in Shareholder's Equity for the Year-ended December 31, 2001, One Month Ended December 31, 2000, the Eleven Months Ended November 30, 2000 and for the Year-ended December 31, 1999.......................... F-6 Consolidated Statements of Cash Flows for the Year-ended December 31, 2001, One Month Ended December 31, 2000, the Eleven Months Ended November 30, 2000 and for the Year-ended December 31, 1999............... F-7 Notes to Consolidated Financial Statements.... F-8
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors ING Life Insurance and Annuity Company We have audited the accompanying consolidated balance sheet of ING Life Insurance and Annuity Company and Subsidiaries (formerly Aetna Life Insurance and Annuity Company and Subsidiaries and hereafter referred to as the Company) as of December 31, 2001, and the related consolidated statements of income, changes in shareholder's equity, and cash flows for the then year ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ING Life Insurance and Annuity Company and Subsidiaries at December 31, 2001, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. As discussed in Note 1, the Company adopted Financial Accounting Standards (FAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and FAS No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. /s/ Ernst & Young LLP Hartford, Connecticut January 31, 2002 F-2 REPORT OF INDEPENDENT AUDITORS The Shareholder and Board of Directors ING Life Insurance and Annuity Company: We have audited the accompanying consolidated balance sheet of ING Life Insurance and Annuity Company and Subsidiaries, formerly known as Aetna Life Insurance and Annuity Company and Subsidiaries, as of December 31, 2000, and the related consolidated statements of income, changes in shareholder's equity and cash flows for the period from December 1, 2000 to December 31, 2000 ("Successor Company"), and for the period from January 1, 2000 to November 30, 2000 and the year ended December 31, 1999 ("Preacquisition Company"). These consolidated financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 Successor Company's consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aetna Life Insurance and Annuity Company and Subsidiaries at December 31, 2000, and the results of their operations and their cash flows for the period from December 1, 2000 to December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Preacquisition Company's consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the period from January 1, 2000 to November 30, 2000, and the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective November 30, 2000, ING America Insurance Holdings Inc. acquired all of the outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's indirect parent and sole shareholder in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. /s/ KPMG LLP Hartford, Connecticut March 27, 2001 F-3 ITEM 1. FINANCIAL STATEMENTS ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (Formerly known as Aetna Life Insurance and Annuity Company, a wholly-owned subsidiary of Aetna Retirement Holdings, Inc.) CONSOLIDATED STATEMENTS OF INCOME (millions)
Preacquisition ---------------------------- One month Eleven months Year-ended ended ended Year-ended December 31, December 31, November 30, December 31, 2001 2000 2000 1999 ------------- ------------- ------------- ------------- Revenue: Premiums $ 114.2 $ 16.5 $ 137.7 $ 107.5 Charges assessed against policyholders 381.3 36.4 424.6 388.3 Net investment income 888.4 78.6 833.8 886.3 Net realized capital (losses) gains (21.0) 1.8 (37.2) (21.5) Other income 172.1 13.4 148.7 129.7 -------- ------ -------- -------- Total revenue 1,535.0 146.7 1,507.6 1,490.3 Benefits and expenses: Current and future benefits 729.6 68.9 726.7 746.2 Operating expenses: Salaries and related benefits 181.0 29.9 187.5 153.0 Restructing charge 29.2 -- -- -- Other 234.0 19.2 227.1 213.7 Amortization of deferred policy acquisition costs and value of business acquired 112.0 10.2 116.7 104.9 Amortization of goodwill 61.9 -- -- -- -------- ------ -------- -------- Total benefits and expenses 1,347.7 128.2 1,258.0 1,217.8 Income from continuing operations before income taxes 187.3 18.5 249.6 272.5 Income taxes 87.4 5.9 78.1 90.6 -------- ------ -------- -------- Income from continuing operations 99.9 12.6 171.5 181.9 Discontinued operations, net of tax: Income from operations -- -- 5.7 5.7 -------- ------ -------- -------- Net income $ 99.9 $ 12.6 $ 177.2 $ 187.6 ======== ====== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 ITEM 1. FINANCIAL STATEMENTS (continued) ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (Formerly known as Aetna Life Insurance and Annuity Company, a wholly-owned subsidiary of Aetna Retirement Holdings, Inc.) CONSOLIDATED BALANCE SHEETS (millions, except share data)
December 31, December 31, 2001 2000 --------------- --------------- ASSETS Investments: Debt securities available for sale, at fair value (amortized cost: $13,249.2 and $11,120.0) $13,539.9 $11,244.7 Equity securities, at fair value: Nonredeemable preferred stock (cost: $27.0 and $109.0) 24.6 100.7 Investment in affiliated mutual funds (cost: $22.9 and $9.6) 25.0 12.7 Common stock (cost: $2.3 and $2.2) 0.7 3.5 Short-term investments 31.7 109.4 Mortgage loans 241.3 4.6 Policy loans 329.0 339.3 Other investments 18.2 13.4 Securities pledged to creditors (amortized cost: $466.9 and $126.8) 467.2 129.0 --------- --------- Total investments 14,677.6 11,957.3 Cash and cash equivalents 82.0 796.3 Short-term investments under securities loan agreement 488.8 131.8 Accrued investment income 160.9 147.2 Premiums due and other receivables 21.5 82.9 Reciprocal loan with affiliate 191.1 -- Reinsurance recoverable 2,990.7 3,005.8 Current income taxes -- 40.6 Deferred policy acquisition costs 121.3 12.3 Value of business acquired 1,601.8 1,780.9 Goodwill 2,412.1 2,297.4 Other assets 194.3 154.7 Separate Accounts assets 32,663.1 36,745.8 --------- --------- Total assets $55,605.2 $57,153.0 ========= ========= LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits $ 3,996.8 $ 3,977.7 Unpaid claims and claim expenses 28.8 29.6 Policyholders' funds left with the Company 12,135.8 11,125.6 --------- --------- Total insurance reserve liabilities 16,161.4 15,132.9 Payables under securities loan agreement 488.8 131.8 Current income taxes 59.2 -- Deferred income taxes 153.7 248.0 Other liabilities 1,624.7 549.9 Separate Accounts liabilities 32,663.1 36,745.8 --------- --------- Total liabilities 51,150.9 52,808.4 --------- --------- Shareholder's equity: Common stock, par value $50 (100,000 shares authorized; 55,000 shares issued and outstanding) 2.8 2.8 Paid-in capital 4,292.4 4,303.8 Accumulated other comprehensive gain 46.6 25.4 Retained earnings 112.5 12.6 --------- --------- Total shareholder's equity 4,454.3 4,344.6 --------- --------- Total liabilities and shareholder's equity $55,605.2 $57,153.0 ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 ITEM 1. FINANCIAL STATEMENTS (continued) ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (Formerly known as Aetna Life Insurance and Annuity Company, a wholly-owned subsidiary of Aetna Retirement Holdings, Inc.) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (millions)
Preacquisition ---------------------------- One month Eleven month Year-ended ended ended Year-ended December 31, December 31, November 30, December 31, 2001 2000 2000 1999 ------------- ------------- ------------- ------------- Shareholder's equity, beginning of period $4,344.6 $4,313.4 $1,385.7 $1,394.5 Comprehensive income: Net income 99.9 12.6 177.2 187.6 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities ($32.5, $28.7, $79.4 and ($230.2) pretax) (1) 21.2 18.6 51.6 (149.6) -------- -------- -------- -------- Total comprehensive income 121.1 31.2 228.8 38.0 -------- -------- -------- -------- Capital contributions: Cash -- -- 73.5 -- Assets -- -- 56.0 -- -------- -------- -------- -------- Total capital contributions -- -- 129.5 -- -------- -------- -------- -------- Return of capital (11.3) -- -- -- Other changes (0.1) -- 0.8 2.9 Common stock dividends -- -- (10.1) (49.7) Adjustment for purchase accounting -- -- 2,578.7 -- -------- -------- -------- -------- Shareholder's equity, end of period $4,454.3 $4,344.6 $4,313.4 $1,385.7 ======== ======== ======== ========
(1) Net of reclassification adjustments. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 ITEM 1. FINANCIAL STATEMENTS (continued) ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (Formerly known as Aetna Life Insurance and Annuity Company, a wholly-owned subsidiary of Aetna Retirement Holdings, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (millions)
Preacquisition ------------------------------ One month Eleven months Year-ended ended ended Year-ended December 31, December 31, November 30, December 31, 2001 2000 2000 1999 --------------- --------------- ------------- --------------- Cash Flows from Operating Activities: Net income $ 99.9 $ 12.6 $ 177.2 $ 187.6 Adjustments to reconcile net income to net cash (used for) provided by operating activities: Net accretion of discount on investments (1.2) (2.7) (32.6) (26.5) Amortization of deferred gain on sale -- -- (5.7) (5.7) Net realized capital losses (gains) 21.0 (1.8) 37.2 21.5 Changes in assets and liabilities: (Increase) decrease in accrued investment income (13.7) 6.6 (3.1) 0.9 (Increase) decrease in premiums due and other receivables (95.6) 31.1 (23.7) 23.3 Decrease (increase) in policy loans 10.3 0.1 (25.4) (21.8) Increase in deferred policy acquisition costs (121.3) (12.2) (136.6) (153.3) Decrease in value of business acquired 13.9 -- -- -- Goodwill amortization 61.8 -- -- -- Net increase (decrease) in universal life account balances 17.6 (3.8) 23.8 55.7 (Decrease) increase in other insurance reserve liabilities (136.3) (5.3) 85.6 (28.6) (Decrease) increase in other liabilities and other assets (67.9) 103.9 (75.2) (42.5) Increase (decrease) in income taxes 89.5 (14.3) 23.1 (259.8) --------- ------- --------- --------- Net cash (used for) provided by operating activities (122.0) 114.2 44.6 (249.2) --------- ------- --------- --------- Cash Flows from Investing Activities: Proceeds from sales of: Debt securities available for sale 14,216.7 233.0 10,083.2 5,890.1 Equity securities 4.4 1.5 118.4 111.2 Mortgage loans 5.2 0.1 2.1 6.1 Investment maturities and collections of: Debt securities available for sale 1,121.8 53.7 573.1 1,216.5 Short-term investments 7,087.3 0.4 59.9 80.6 Cost of investment purchases in: Debt securities available for sale (16,489.8) (230.7) (10,505.5) (7,099.7) Equity securities (50.0) (27.8) (17.6) (13.0) Mortgages debt securities (242.0) -- -- -- Short-term investments (6,991.1) (10.0) (113.1) (106.0) (Increase) decrease in property and equipment 7.4 1.9 5.4 (5.7) Other, net (4.7) 0.3 (4.0) 3.7 --------- ------- --------- --------- Net cash (used for) provided by investing activities (1,334.8) 22.4 201.9 83.8 --------- ------- --------- --------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 1,941.5 164.2 1,529.7 2,040.2 Withdrawals of investment contracts (1,082.7) (156.3) (1,832.6) (1,680.8) Capital contribution from HOLDCO -- -- 73.5 -- Return of capital (11.3) -- -- -- Dividends paid to Shareholder -- -- (10.1) (255.7) Other, net (105.0) (73.6) 22.0 126.7 --------- ------- --------- --------- Net cash provided by (used for) financing activities 742.5 (65.7) (217.5) 230.4 --------- ------- --------- --------- Net (decrease) increase in cash and cash equivalents (714.3) 70.9 29.0 65.0 Effect of exchange rate changes on cash and cash equivalents -- -- 2.0 -- Cash and cash equivalents, beginning of period 796.3 725.4 694.4 629.4 --------- ------- --------- --------- Cash and cash equivalents, end of period $ 82.0 $ 796.3 $ 725.4 $ 694.4 ========= ======= ========= ========= Supplemental cash flow information: Income taxes (received) paid, net $ (12.3) $ 20.3 $ 39.9 $ 316.9 ========= ======= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ING Life Insurance and Annuity Company ("ILIAC"), formerly known as Aetna Life Insurance and Annuity Company ("ALIAC") and its wholly owned subsidiaries (collectively, the "Company") are providers of financial products and services and investment management services in the United States. The Company has three business segments: Worksite Products, Individual Products and Investment Management Services. On October 1, 1998, the Company sold its individual life insurance business to Lincoln National Corporation ("Lincoln") and accordingly, it is now classified as Discontinued Operations (refer to Note 3). On December 13, 2000, ING America Insurance Holdings, Inc. ("ING AIH"), an indirect wholly owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna Financial Services business, of which the Company is a part, and the Aetna International business, for approximately $7.7 billion. The purchase price was comprised of approximately $5.0 billion in cash and the assumption of $2.7 billion of outstanding debt and other net liabilities. In connection with the acquisition, Aetna Inc. was renamed Lion Connecticut Holdings Inc. ("Lion"). At the time of the sale, Lion entered into certain transition services agreements with a former related party, Aetna U.S. Healthcare, which was renamed Aetna Inc. ("former Aetna"). For accounting purposes, the acquisition was recorded as of November 30, 2000 using the purchase method. The effects of this transaction, including the recognition of goodwill, were pushed down and reflected on the financial statements of certain ARSI (a subsidiary of Lion) subsidiaries, including the Company. The Balance Sheet changes related to accounting for this purchase were entirely non-cash in nature and accordingly have been excluded from the pre-acquisition Consolidated Statement of Cash Flow for the eleven months ended November 30, 2000. The purchase price was allocated to assets and liabilities based on their respective fair values. This revaluation resulted in a net increase to assets, excluding the effects of goodwill, of $592.0 million and a net increase to liabilities of $310.6 million. Additionally, the Company established goodwill of $2.3 billion. Goodwill was being amortized over a period of 40 years. The allocation of the purchase price to assets and liabilities has been subjected to further refinement throughout 2001 as additional information has become available to more precisely estimate the fair values of the Company's respective assets and liabilities at the purchase date. The refinements to the Company's purchase price allocations are as follows: The Company completed a full review relative to the assumptions and profit streams utilized in the development of value of business acquired ("VOBA") and determined that certain refinements were necessary. Such refinements resulted in a reduction of VOBA; The Company completed the review of the fixed assets that existed at or prior to the acquisition and determined that an additional write down was necessary; The Company completed the review of severance actions related to individuals who were employed before or at the acquisition date and determined that an additional severance accrual was necessary; F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The Company completed its valuation of certain benefit plan liabilities and, as a result, reduced those benefit plan liabilities; The Company adjusted its reserve for policyholders' funds left with the company in order to conform its accounting policies with those of ING; The Company, after giving further consideration to certain exposures in the general market place, determined that a reduction of its investment portfolio carrying value was warranted; The Company determined that the establishment of a liability for certain noncancellable operating leases that existed prior to or at the acquisition date but are no longer providing a benefit to the Company's operations, was warranted; and The Company determined that the contractual lease payment of one of its operating leases was more than the current market rate, and established a corresponding unfavorable lease liability. The net impact of the refinements in purchase price allocations, as described above, resulted in a net decrease to assets, excluding the effects of goodwill, of $236.4 million, a net decrease to liabilities of $59.8 million and a net increase to the Company's goodwill of $176.6 million. Unaudited proforma consolidated income from continuing operations and net income of the Company for the period from January 1, 2000 to November 30, 2000 and for the year-ended December 31, 1999, assuming that the acquisition of the Company occurred at the beginning of each period, would have been approximately $118.1 million and $123.5 million, respectively. The pro forma adjustments, which do not affect revenues, reflect primarily goodwill amortization, amortization of the favorable lease asset and the elimination of amortization of the deferred gain on sale associated with the life business. The Worksite Products segment includes annuity contracts that offer a variety of funding and payout options for employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408, and 457, nonqualified annuity contracts, and mutual funds. Annuity contracts may be deferred or immediate ("payout annuities"). These products also include programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options, including mutual funds (both ILIAC and nonaffiliated mutual funds), variable and fixed investment options. Worksite products also include investment advisory services and pension plan administrative services. The Individual Products segment includes both deferred and immediate annuity contracts, which may be qualified or nonqualified, that are sold to individuals. These contracts also offer a choice of fixed or variable investment options, including both ILIAC and nonaffiliated mutual funds. Investment Management Services provides: investment advisory services to affiliated and unaffiliated institutional and retail clients on a fee-for-service basis; underwriting services to the ING Series Fund, Inc. (formerly known as the Aetna Series Fund, Inc.), and the ING Variable F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Portfolios, Inc. (formerly known as the Aetna Variable Portfolios, Inc.); distribution services for other company products; and trustee, administrative, and other fiduciary services to retirement plans requiring or otherwise utilizing a trustee or custodian. Discontinued Operations include universal life, variable universal life, traditional whole life and term insurance. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include ILIAC and its wholly-owned subsidiaries, ING Insurance Company of America ("IICA"), Aetna Investment Adviser Holding Company, Inc. ("IA Holdco") and Aetna Investment Services, LLC ("AIS"). ILIAC is a wholly-owned subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"), which is a wholly- owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is ultimately owned by ING Groep N.V. (ING). HOLDCO contributed AIS to the Company on June 30, 2000 and contributed IA Holdco to the Company on July 1, 1999 (refer to Note 2). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The contributions of AIS and IA Holdco to the Company were accounted for in a manner similar to that of a pooling-of-interests and, accordingly, the Company's historical consolidated financial statements have been restated to include the accounts and results of operations of both companies. Certain reclassifications have been made to 2000 and 1999 financial information to conform to the 2001 presentation. NEW ACCOUNTING STANDARD ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted by FAS No. 137, Accounting for Derivative Instruments and Hedging Activites -- Deferral of the Effective Date of FASB Statement No. 133, FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an Amendment of FASB No. 133, and certain FAS No. 133 implementation issues. This standard, as amended, requires companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at fair value. The manner in which companies are to record gains or losses resulting from changes in the fair values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. FAS 133 was effective for the Company's financial statements beginning January 1, 2001. Adoption of FAS No. 133 did not have a material effect on the Company's financial position or results of operations given the Company's limited derivative and embedded derivative holdings. (Refer to Note 5). F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The Company utilizes options, interest rate floors and warrants in order to manage interest rate and price risk (collectively, market risk). These financial exposures are monitored and managed by the Company as an integral part of the its overall risk management program. (Refer to Note 5). Derivatives are recognized on the balance sheet at their fair value. The Company chose not to designate its derivative instruments as part of hedge transactions. Therefore, changes in the fair value of the Company's derivative instruments are recorded immediately in the consolidated statements of income as part of realized capital gains and losses. Warrants are carried at fair value and are recorded as either derivative instruments or FAS No. 115 available for sale securities. Warrants that are considered derivatives are carried at fair value if they are readily convertible to cash. The values of these warrants can fluctuate given that the companies which underlie the warrants are non-public companies. At December 31, 2001, the estimated value of these warrants was immaterial. These warrants will be revalued each quarter and the change in the value of the warrants will be included in the consolidated statements of income. The Company, at times, may own warrants on common stock which are not readily convertible to cash as they contain certain conditions which preclude their convertibility and therefore, will not be included in assets or liabilities as derivatives. If conditions are satisfied and the underlying stocks become marketable, the warrants would be reclassified as derivatives and recorded at fair value as an adjustment through current period results of operations. The Company occasionally purchases a financial instrument that contains a derivative that is "embedded" in the instrument. In addition, the Company's insurance products are reviewed to determine whether they contain an embedded derivative. The Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument or insurance product (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that the embedded derivative possesses economic characteristics that are clearly and closely related to the economic characteristics of the host contract and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and carried at fair value. However, in cases where the host contract is measured at fair value, with changes in fair value reported in current period earnings or the Company is unable to reliably identify and measure the embedded derivative for separation from its host contracts, the entire contract is carried on the balance sheet at fair value and is not designated as a hedging instrument (refer to Note 5). FUTURE ACCOUNTING STANDARD ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS In July 2001, the FASB issued FAS No. 142, Accounting for Goodwill and Intangible Assets. Under the new standard, goodwill and intangible assets deemed to have indefinite lives will no F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) longer be amortized but will be subject to annual impairment tests in accordance with the new standard. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on the accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the new standard is expected to result in an increase in net income; however, the Company is still assessing the impact of the new standard. During 2002, the Company will perform the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity of 90 days or less when purchased. INVESTMENTS All of the Company's fixed maturity and equity securities are currently designated as available-for-sale. Available-for-sale securities are reported at fair value. Securities determined to have a decline in value that is other than temporary are written down to estimated fair value which becomes the securities' new cost basis by a charge to realized losses in the accompanying consolidated statements of operations. Premiums and discounts are amortized/ accrued utilizing the scientific interest method which results in a constant yield over the securities' expected lives. Amortization/accrual of premiums and discounts on mortgage-related securities incorporates a prepayment assumption to estimate the securities expected lives. Included in available-for-sale securities are investments that support experience-rated products. Experience-rated products are products where the customer, not the Company, assumes investment (including realized capital gains and losses on the sale of invested assets) and other risks, subject to, among other things, principal and interest guarantees. Realized gains and losses on the sale of, as well as unrealized capital gains and losses on, investments supporting these products are reflected in policyholders' funds left with the Company. Realized capital gains and losses on all other investments are reflected on all other investments are reflected in the Company's results of operations. Unrealized capital gains and losses on all other investments are reflected in shareholder's equity, net of related income taxes. F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Purchases and sales of debt and equity securities (excluding private placements) are recorded on the trade date. Purchases and sales of private placements and mortgage loans are recorded on the closing date. Fair values for fixed maturity securities are obtained from independent pricing services or broker/ dealer quotations. Fair values for privately placed bonds are determined using a matrix-based model. The matrix-based model considers the level of risk-free interest rates, current corporate spreads, the credit quality of the issuer and cash flow characteristics of the security. The fair values for equity securities are based on quoted market prices. For equity securities not actively traded, estimated fair values are based upon values of issues of comparable yield and quality or conversion value where applicable. The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral, primarily cash, is required at a rate of 102% of the market value of the loaned domestic securities. The collateral is deposited by the borrower with a lending agent, and retained and invested by the lending agent according to the Company's guidelines to generate additional income. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. In September 2000, the FASB issued FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In accordance with this new standard, general account securities on loan are reflected on the Consolidated Balance Sheet as "Securities pledged to creditors", which includes the following:
Gross Gross December 31, 2001 Amortized Unrealized Unrealized Fair (Millions) Cost Gains Losses Value - ------------------------------------------------------------------------------------------ Total securities pledged to creditors $466.9 $1.1 $0.8 $467.2 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ Gross Gross December 31, 2000 Amortized Unrealized Unrealized Fair (Millions) Cost Gains Losses Value - ------------------------------------------------------------------------------------------ Debt securities $124.5 $5.3 $3.1 $126.7 Short-term investments 2.3 -- -- 2.3 - ------------------------------------------------------------------------------------------ Total securities pledged to creditors $126.8 $5.3 $3.1 $129.0 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
Total securities pledged to creditors at December 31, 2001 consisted entirely of debt securities. Dollar rolls and reverse repurchase agreement transactions are accounted for as collateral borrowings, where the amount borrowed is equal to the sales price of the underlying securities. These transactions are reported in "Other Liabilities." F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The investment in affiliated mutual funds represents an investment in funds managed by Aeltus Investment Management, Inc. ("Aeltus"), an indirect wholly owned subsidiary of HOLDCO. Funds managed by ILIAC and subadvised by outside investment advisers, and funds managed by ING Pilgrim Investments, LLC, and is carried at fair value. Mortgage loans on real estate are reported at amortized cost less a valuation allowance. If the value of any mortgage loan is determined to be impaired (i.e., when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to the present value of expected cash flows from the loan, discounted at the loan's effective interest rate, or to the loan's observable market price, or the fair value of the underlying collateral. The carrying value of the impaired loans is reduced by establishing a valuation allowance which is adjusted at each reporting date for significant changes in the calculated value of the loan. Changes in this valuation allowance are charged or credited to income. Policy loans are carried at unpaid principal balances, net of impairment reserves. Short-term investments, consisting primarily of money market instruments and other debt issues purchased with an original maturity of 91 days to one year, are considered available for sale and are carried at fair value, which approximates amortized cost. The Company's use of derivatives is limited to hedging purposes. The Company enters into interest rate and currency contracts, including swaps, caps, and floors to reduce and manage risks associated with changes in value, yield, price, cash flow or exchange rates of assets or liabilities held or intended to be held. Changes in the fair value of open derivative contracts are recorded in net realized capital gains and losses (Refer to Note 5). On occasion, the Company sells call options written on underlying securities which are carried at fair value. Changes in fair value of these options are recorded in net realized capital gains or losses. GOODWILL Goodwill, which represents the excess of cost over the fair value of net assets acquired, was amortized on a straight-line basis over 40 years. Refer to "Future Accounting Standard" within Note 1 for related information regarding the accounting for goodwill. DEFERRED POLICY ACQUISITION COSTS Certain costs of acquiring certain 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 certain annuity and pension 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 30 years for annuity and pension contracts). F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Periodically, modifications may be made to deferred annuity contract features, such as shortening the surrender charge period, waiving the surrender charge, or changing the mortality and expense fees. Unamortized deferred policy acquisition costs associated with these modified contracts are not written off, but rather, continue to be associated with the original block of business to which these costs were previously recorded. Such costs are amortized based on revised estimates of expected gross profits based upon the contract after the modification. 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 expenses. VALUE OF BUSINESS ACQUIRED VOBA is an asset and represents the present value of estimated net cash flows embedded in the Company's contracts acquired by ING. VOBA is amortized in proportion to estimated gross profits and adjusted to reflect actual gross profits over the contracts (up to 30 years for annuity contracts and pension contracts). VOBA is written off to the extent that it is determined that gross profits are not adequate to recover the asset. Activity for the year-ended December 31, 2001 within VOBA was as follows:
(Millions) - -------------------------------------------------------- Balance at December 31, 2000 $ 1,780.9 Adjustment of allocation of purchase price (165.3) Additions 90.0 Interest accrued at 7% 110.0 Amortization (213.8) - -------------------------------------------------------- Balance at December 31,2001 $ 1,601.8 - -------------------------------------------------------- - --------------------------------------------------------
The estimated amount of VOBA to be amortized, net of interest, over the next five years is $81.1 million, $95.5 million, $103.3 million, $96.6 million and $89.5 million for the years 2002, 2003, 2004, 2005 and 2006, respectively. Actual amortization incurred during these years may vary as assumptions are modified to incorporate actual results. 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 products are equal to cumulative deposits less withdrawals and charges plus credited interest thereon. Reserves for traditional life insurance contracts represent the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums. Reserves for immediate annuities with life contingent payout 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 F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) range from 2.0% to 9.5% for all years presented. Investment yield is based on the Company's experience. Mortality and withdrawal rate assumptions are based on relevant Company experience and are periodically reviewed against both industry standards and experience. Because the sale of the domestic individual life insurance business was substantially in the form of an indemnity reinsurance agreement, the Company reported an addition to its reinsurance recoverable approximating the Company's total individual life reserves at the sale date. Policyholders' funds left with the Company include reserves for deferred annuity investment contracts and immediate annuities without life contingent payouts. Reserves on such contracts are equal to cumulative deposits less charges and withdrawals plus credited interest thereon (rates range from 2.0% to 14.0% for all years presented) net of adjustments for investment experience that the Company is entitled to reflect in future credited interest. These reserves also include unrealized gains/losses related to FAS No. 115 for experience-rated contracts. 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. REVENUE RECOGNITION For certain annuity contracts, charges assessed against policyholders' funds for the cost of insurance, surrender charges, actuarial margin and other fees are recorded as revenue in charges assessed against policyholders. Other amounts received for these contracts are reflected as deposits and are not recorded as revenue. Related policy benefits are recorded in relation to the associated premiums or gross profit so that profits are recognized over the expected lives of the contracts. When annuity payments with life contingencies begin under contracts that were initially investment contracts, the accumulated balance in the account is treated as a single premium for the purchase of an annuity and reflected as an offsetting amount in both premiums and current and future benefits in the Consolidated Statements of Income. SEPARATE ACCOUNTS Separate Accounts assets and liabilities generally represent funds maintained to meet specific investment objectives of contractholders who bear the investment risk, subject, in some cases, to minimum guaranteed rates. Investment income and investment gains and losses generally accrue directly to such contractholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Separate Accounts assets supporting variable options under universal life and annuity contracts are invested, as designated by the contractholder or participant under a contract (who bears the investment risk subject, in limited cases, to minimum guaranteed rates) in shares of mutual funds F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) which are managed by the Company, or other selected mutual funds not managed by the Company. Separate Accounts assets are carried at fair value. At December 31, 2001 and 2000, unrealized gains of $10.8 million and of $9.5 million, respectively, after taxes, on assets supporting a guaranteed interest option are reflected in shareholder's equity. Separate Accounts liabilities are carried at fair value, except for those relating to the guaranteed interest option. Reserves relating to the guaranteed interest option are maintained at fund value and reflect interest credited at rates ranging from 3.0% to 14.0% in 2001 and 3.8% to 14.0% in 2000. Separate Accounts assets and liabilities are shown as separate captions in the Consolidated Balance Sheets. Deposits, investment income and net realized and unrealized capital gains and losses of the Separate Accounts are not reflected in the Consolidated Financial Statements (with the exception of realized and unrealized capital gains and losses on the assets supporting the guaranteed interest option). The Consolidated Statements of Cash Flows do not reflect investment activity of the Separate Accounts. 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 recoverable balances deemed probable of recovery are reflected as assets on the Company's Consolidated Balance Sheets. Of the reinsurance recoverable on the Consolidated Balance Sheets, $3.0 billion at both December 31, 2001 and 2000 is related to the reinsurance recoverable from Lincoln arising from the sale of the Company's domestic life insurance business (refer to Note 3). INCOME TAXES The Company files a consolidated federal income tax return with its subsidiary IICA. 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-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. RECENT DEVELOPMENTS CONTRIBUTIONS OF AIS AND IA HOLDCO FROM HOLDCO On June 30, 2000, HOLDCO contributed AIS to the Company. AIS is registered with the Securities and Exchange Commission as a broker/dealer and is a member of the National Association of Securities Dealers, Inc. It is also registered with the appropriate state securities authorities as a broker/dealer and is a Registered Investment Advisor. The principal operation of AIS is acting as underwriter for ILIAC's manufactured products, as well as the sale of fixed and variable annuities and mutual funds through its registered representatives. On July 1, 1999, HOLDCO contributed IA Holdco to the Company. The primary operating subsidiary of IA Holdco is Aeltus which has two wholly-owned operating subsidiaries: Aeltus Capital, Inc. ("ACI"), a broker dealer, and Aeltus Trust Company ("ATC"), a limited purpose banking entity. Aeltus is a registered investment advisor under the Investment Advisers Act of 1940 and provides investment advisory services to institutional and retail clients on a fee-for-service basis. In addition, Aeltus, through its ACI subsidiary, serves as underwriter to the ING Series Fund, Inc. (formerly known as the Aetna Series Fund, Inc.), and the ING Variable Portfolios, Inc. (formerly known as the Aetna Variable Portfolios, Inc.),and provides distribution services for other Company products. Aeltus' ATC subsidiary provides trustee, administrative, and other fiduciary services to retirement plans requiring or otherwise utilizing a trustee or custodian (refer to Note 16). 3. DISCONTINUED OPERATIONS--INDIVIDUAL LIFE INSURANCE On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1 billion in cash. The transaction was generally in the form of an indemnity reinsurance arrangement, under which Lincoln contractually assumed from the Company certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders. Assets related to and supporting the life policies were transferred to Lincoln and the Company recorded a reinsurance recoverable from Lincoln. The transaction resulted in an after-tax gain on the sale of approximately $117 million, of which $57.7 million was deferred and was being recognized over approximately 15 years. The remaining portion of the gain was recognized immediately in net income and was largely attributed to access to the agency sales force and brokerage distribution channel. Approximately $5.7 million (after tax) of amortization related to the deferred gain was recognized in both 2000 and 1999. During the fourth quarter of 1999, the Company refined certain accrual and tax estimates which had been established in connection with the recording of the deferred gain. As a result, the deferred gain was increased by $12.9 million (after tax) to $65.4 million at December 31, 1999. In conjunction with the accounting for the 2000 acquisition of the Aetna Financial Services business, of which the Company is a part, the deferred gain, which was previously part of other liabilities, was written off (Refer to Note 1). The operating results of the domestic individual life insurance business are presented as Discontinued Operations. Premiums ceded and reinsurance recoveries made for domestic individual life insurance in 2001 totaled $334.9 million and $363.7 million, in 2000 totaled F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. DISCONTINUED OPERATIONS--INDIVIDUAL LIFE INSURANCE (continued) $419.1 million and $416.1 million, and in 1999 totaled $476.5 million and $513.4 million, respectively. 4. INVESTMENTS Debt securities available for sale as of December 31 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair 2001 (Millions) Cost Gains Losses Value ------------------------------------------------------------------------------ U.S. government and government agencies and authorities $ 391.0 $ 11.0 $ 4.2 $ 397.8 States, municipalities and political subdivisions 173.7 7.7 -- 181.4 U.S. corporate securities: Public utilities 268.5 6.5 7.9 267.1 Other corporate securities 6,138.8 203.0 62.6 6,279.2 ------------------------------------------------------------------------------ Total U.S. corporate securities 6,407.3 209.5 70.5 6,546.3 ------------------------------------------------------------------------------ Foreign securities: Government 153.2 5.2 0.9 157.5 ------------------------------------------------------------------------------ Total foreign securities 153.2 5.2 0.9 157.5 ------------------------------------------------------------------------------ Mortgage-backed securities 4,513.3 90.1 15.9 4,587.5 Other asset-backed securities 2,077.6 67.1 8.1 2,136.6 ------------------------------------------------------------------------------ Total debt securities, including debt securities pledged to creditors 13,716.1 390.6 99.6 14,007.1 Less: Debt securities pledged to creditors 466.9 1.1 0.8 467.2 ------------------------------------------------------------------------------ Debt securities $13,249.2 $389.5 $98.8 $13,539.9 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------
F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. INVESTMENTS (continued)
Gross Gross Amortized Unrealized Unrealized Fair 2000 (Millions) Cost Gains Losses Value ----------------------------------------------------------------------------- U.S. government and government agencies and authorities $ 920.8 $ 34.3 $ 2.1 $ 953.0 States, municipalities and political subdivisions 0.3 -- -- 0.3 U.S. corporate securities: Public utilities 282.2 13.8 6.2 289.8 Other corporate securities 4,643.5 86.1 128.3 4,601.3 ----------------------------------------------------------------------------- Total U.S. corporate securities 4,925.7 99.9 134.5 4,891.1 ----------------------------------------------------------------------------- Foreign securities: Government, including political subdivisions 384.7 23.9 4.3 404.3 Utilities 122.9 18.6 -- 141.5 Other 31.2 -- 9.3 21.9 ----------------------------------------------------------------------------- Total foreign securities 538.8 42.5 13.6 567.7 ----------------------------------------------------------------------------- Mortgage-backed securities 4,105.2 125.8 35.4 4,195.6 Other asset-backed securities 753.7 13.4 3.4 763.7 ----------------------------------------------------------------------------- Total debt securities, including debt securities pledged to creditors 11,244.5 315.9 189.0 11,371.4 Less: Debt securities pledged to creditors 124.5 5.3 3.1 126.7 ----------------------------------------------------------------------------- Debt securities $11,120.0 $310.6 $185.9 $11,244.7 ----------------------------------------------------------------------------- -----------------------------------------------------------------------------
At December 31, 2001 and 2000, net unrealized appreciation of $291.0 million and $126.9 million, respectively, on available-for-sale debt securities including debt securities pledged to creditors included $233.0 million and $92.9 million, respectively, related to experience-rated contracts, which were not reflected in shareholder's equity but in policyholders' funds left with the Company. F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. INVESTMENTS (continued) The amortized cost and fair value of total debt securities for the year-ended December 31, 2001 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
Amortized Fair (Millions) Cost Value -------------------------------------------------------------- Due to mature: One year or less $ 160.0 $ 162.1 After one year through five years 2,333.1 2,387.5 After five years through ten years 2,374.7 2,398.8 After ten years 2,257.4 2,334.6 Mortgage-backed securities 4,513.3 4,587.5 Other asset-backed securities 2,077.6 2,136.6 Less: Debt securities pledged to creditors 466.9 467.2 -------------------------------------------------------------- Debt securities $13,249.2 $13,539.9 -------------------------------------------------------------- --------------------------------------------------------------
At December 31, 2001 and 2000, debt securities with carrying values of $9.0 million and $8.6 million, respectively, were on deposit as required by regulatory authorities. The Company did not have any investments in a single issuer, other than obligations of the U.S. government, with a carrying value in excess of 10% of the Company's shareholder's equity at December 31, 2001. Included in the Company's total debt securities were residential collateralized mortgage obligations ("CMOs") supporting the following:
2001 2000 ------------------- ------------------- Amortized Fair Amortized Fair (Millions) Cost Value Cost Value ------------------------------------------------------------------------ Total residential CMOs (1) $1,830.5 $1,891.7 $1,606.6 $1,660.7 ------------------------------------------------------------------------ ------------------------------------------------------------------------ Percentage of total: Supporting experience rated products 84.2% 80.6% Supporting remaining products 15.8% 19.4% ------------------------------------------------------------------------ 100.0% 100.0% ------------------------------------------------------------------------ ------------------------------------------------------------------------
(1) At December 31, 2001 and 2000, approximately 80% and 84%, respectively, of the Company's residential CMO holdings were backed by government agencies such as GNMA, FNMA, and FHLMC. There are various categories of CMOs which are subject to different degrees of risk from changes in interest rates and, for CMOs that are not agency-backed, 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, 2001 and 2000, approximately 3% and 2%, respectively, of the Company's CMO holdings were invested in types of CMOs F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. INVESTMENTS (continued) which are subject to more prepayment and extension risk than traditional CMOs (such as interest-only or principal-only strips). Investments in equity securities as of December 31 were as follows:
(Millions) 2001 2000 ------------------------------------------------------- Amortized Cost $52.2 $120.8 Gross unrealized gains 4.5 6.0 Gross unrealized losses 6.4 9.9 ------------------------------------------------------- Fair value $50.3 $116.9 ------------------------------------------------------- -------------------------------------------------------
Beginning in April 2001, the Company entered into dollar roll and reverse repurchase agreement transactions to increase its return on investments and improve liquidity. These transactions involve a sale of securities by the Company and an agreement to repurchase substantially the same securities as those sold, typically within one month. The dollar rolls and reverse repurchase agreements are accounted for as short-term collateralized financings and are reported within "Other Liabilities" on the Consolidated Balance Sheets. The repurchase obligation totaled $1.0 billion at December 31, 2001. Such borrowings averaged approximately $882.1 million from April through December 2001 and were collateralized by investment securities with fair values approximately equal to loan value. The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract. The Company's exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments, an amount that was not material at December 31, 2001. The Company believes the counterparties to the dollar roll and reverse repurchase agreements are financially responsible and that the counterparty risk is immaterial. 5. FINANCIAL INSTRUMENTS ESTIMATED FAIR VALUE The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 2001 and 2000 were as follows:
2001 2000 -------------------- ------------------- Carrying Fair Carrying Fair (Millions) Value Value Value Value ------------------------------------------------------------------------- Assets: Mortgage loans $ 241.3 $ 247.7 $ 4.6 $ 4.5 Liabilities: Investment contract liabilities: With a fixed maturity 1,021.7 846.5 1,041.0 982.3 Without a fixed maturity 11,114.1 10,624.3 10,084.6 9,549.9 -------------------------------------------------------------------------
F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. FINANCIAL INSTRUMENTS (continued) Fair value estimates are made at a specific point in time, based on available market information and judgments about various financial instruments, such as estimates of timing and amounts 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 instruments. 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: The fair values for commercial mortgages are estimated using a discounted cash flow approach. Commercial loans in good standing are discounted using interest rates determined by U.S. Treasury yields on each December 31 and spreads required on new loans with similar characteristics. The amortizing features of all loans are incorporated into the valuation. Where data on option features was available, option values were determined using a binomial valuation method and were incorporated into the mortgage valuation. 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. DERIVATIVE FINANCIAL INSTRUMENTS INTEREST RATE FLOORS Interest rate floors are used to manage the interest rate risk in the Company's bond portfolio. Interest rate floors are purchased contracts that provide the Company with an annuity in a declining interest rate environment. The Company had no open interest rate floors at December 31, 2001 or 2000. FOREIGN EXCHANGE SWAPS Foreign exchange swaps are used to reduce the risk of a change in the value, yield or cash flow with respect to invested assets. Foreign exchange swaps represent contracts that require the exchange of foreign currency cash flows for US dollar cash flows at regular interim periods, typically quarterly or semi-annually. The notional amount, carrying value and estimated fair value F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. FINANCIAL INSTRUMENTS (continued) of the Company's open foreign exchange rate swaps as of December 31, 2001 were $25.0 million, $0.7 and $0.7 million, respectively. WARRANTS Included in common stocks are warrants which are instruments giving the Company the right, but not the obligation to buy a security at a given price during a specified period. The carrying values and estimated fair values of the Company's warrants to purchase equity securities at December 31, 2001 and 2000 were both $0.3 million. OPTIONS The Company earned $1.1 million of investment income for writing call options on underlying securities for the year-ended December 31, 2000. For the year-ended December 31, 2001 the Company earned no investment income for writing call options on underlying securities. At December 31, 2001 and 2000, there were no option contracts outstanding. EMBEDDED DERIVATIVES The Company also had investments in certain debt instruments that contain embedded derivatives, 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 estimated fair value of the embedded derivatives within such securities as of December 31, 2001 was ($15.5) million. F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. NET INVESTMENT INCOME Sources of net investment income were as follows:
Preacquisition ------------------------------ One month Eleven months Year-ended ended ended Year-ended December 31, December 31, November 30, December 31, (Millions) 2001 2000 2000 1999 ------------------------------------------------------------------------------------------------ Debt securities $887.2 $70.3 $768.9 $823.3 Nonredeemable preferred stock 1.5 1.8 9.5 17.1 Investment in affiliated mutual funds 7.2 0.5 2.1 2.4 Mortgage loans 5.9 0.1 0.5 1.1 Policy loans 8.9 0.7 7.9 7.7 Cash equivalents 18.2 4.4 50.3 39.0 Other 15.9 2.6 13.1 15.3 ------------------------------------------------------------------------------------------------ Gross investment income 944.8 80.4 852.3 905.9 Less: investment expenses (56.4) (1.8) (18.5) (19.6) ------------------------------------------------------------------------------------------------ Net investment income $888.4 $78.6 $833.8 $886.3 ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------
Net investment income includes amounts allocable to experience-rated contractholders of $704.2 million for the year-ended December 31, 2001 and $55.9 million and $622.2 million for the one month and eleven month periods ended December 31, 2000 and November 30, 2000, respectively, and $659.6 million for the year-ended December 31, 1999. Interest credited to contractholders is included in current and future benefits. 7. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY The Company paid $10.1 million and $255.7 million in cash dividends to HOLDCO in 2000 and 1999, respectively. Of the $255.7 million paid in 1999, $206.0 million was accrued for in 1998. For the year-ended December 31, 2001, the Company did not pay any cash dividends to HOLDCO. The Company did not receive any capital contributions in 2001 and 1999. In 2000, the Company received capital contributions of $73.5 million in cash and $56.0 million in assets from HOLDCO. In conjunction with the sale of Aetna, Inc. to ING AIH, the Company was restricted from paying any dividends to the its parent in 2001 without prior approval by the Insurance Commissioner of the State of Connecticut. This restriction continues for a two year period from the date of the sale. The Insurance Department of the State of Connecticut (the "Department") recognizes as net income and capital and surplus those amounts determined in conformity with statutory F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY (continued) accounting practices prescribed or permitted by the Department, which differ in certain respects from generally accepted accounting principles. Statutory net (loss) income was $(92.3) million, $100.6 million and $133.9 million for the years-ended December 31, 2001, 2000, and 1999, respectively. Statutory capital and surplus was $826.2 million and $931.1 million as of December 31, 2001 and 2000, respectively. As of December 31, 2001, 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. For 2001, the Company was required to implement statutory accounting changes ("Codification") ratified by the National Association of Insurance Commissioners and state insurance departments. The cumulative effect of Codification to the Company's statutory surplus as of December 31, 2001 was a decrease of $12.5 million. 8. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS Realized capital gains or losses are the difference between the carrying value and sale proceeds of specific investments sold. Net realized capital (losses) gains on investments were as follows:
Preacquisition ------------------------------ One month Eleven months Year-ended ended ended Year-ended December 31, December 31, November 30, December 31, (Millions) 2001 2000 2000 1999 ------------------------------------------------------------------------------------------------ Debt securities $(20.6) $1.2 $(36.3) $(23.6) Equity securities (0.4) 0.6 (0.9) 2.1 ------------------------------------------------------------------------------------------------ Pretax realized capital (losses) gains $(21.0) $1.8 $(37.2) $(21.5) ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------ After-tax realized capital (losses) gains $(13.7) $1.3 $(24.3) $(14.0) ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------
Net realized capital gains (losses) of $117.0 million, $(16.8) million and $(36.7) million for 2001, 2000, and 1999, respectively, allocable to experience-rated contracts, were deducted from net realized capital gains and an offsetting amount was reflected in Policyholders' funds left with the Company. Net unamortized gains allocable to experienced-rated contractholders were $172.7 million and $45.1 million at December 31, 2001 and 2000, respectively. F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued) Proceeds from the sale of total debt securities and the related gross gains and losses were as follows:
Preacquisition ------------------------------ One month Eleven months Year-ended ended ended Year-ended December 31, December 31, November 30, December 31, (Millions) 2001 2000 2000 1999 ------------------------------------------------------------------------------------------------ Proceeds on sales $14,216.7 $233.0 $10,083.2 $5,890.1 Gross gains 57.0 1.2 2.5 10.5 Gross losses 77.6 -- 38.8 34.1 ------------------------------------------------------------------------------------------------
Changes in shareholder's equity related to changes in accumulated other comprehensive income (unrealized capital gains and losses on securities including securities pledged to creditors and excluding those related to experience-rated contractholders) were as follows:
(Millions) 2001 2000 1999 ----------------------------------------------------------- Debt securities $24.0 $ 92.1 $(199.2) Equity securities 2.0 (5.5) (3.4) Other 6.5 21.5 (27.6) ----------------------------------------------------------- Subtotal 32.5 108.1 (230.2) Increase (decrease) in deferred income taxes (Refer to Note 10) 11.3 37.9 (80.6) ----------------------------------------------------------- Net changes in accumulated other comprehensive income (loss) $21.2 $ 70.2 $(149.6) ----------------------------------------------------------- -----------------------------------------------------------
Net unrealized capital gains allocable to experience-rated contracts of $233.0 million and $92.9 million at December 31, 2001 and 2000, respectively, are reflected on the Consolidated Balance Sheets in Policyholders' funds left with the Company and are not included in shareholder's equity. Shareholder's equity included the following accumulated other comprehensive income (loss), which is net of amounts allocable to experience-rated contractholders, at December 31:
(Millions) 2001 2000 1999 --------------------------------------------------------- Net unrealized capital gains (losses): Debt securities $58.0 $34.0 $(58.1) Equity securities (1.9) (3.9) 1.6 Other 15.6 9.1 (12.4) --------------------------------------------------------- 71.7 39.2 (68.9) Deferred income taxes (Refer to Note 10) 25.1 13.8 (24.1) --------------------------------------------------------- Net accumulated other comprehensive income (loss) $46.6 $25.4 $(44.8) --------------------------------------------------------- ---------------------------------------------------------
F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued) Changes in accumulated other comprehensive income related to changes in unrealized gains (losses) on securities, including securities pledged to creditors (excluding those related to experience-rated contractholders) were as follows:
(Millions) 2001 2000 1999 ----------------------------------------------------------- Unrealized holding gains (losses) arising during the year (1) $ 8.3 $70.0 $(146.3) Less: reclassification adjustment for (losses) gains and other items included in net income (2) (12.9) (0.1) 3.3 ----------------------------------------------------------- Net unrealized gains (losses) on securities $ 21.2 $70.1 $(149.6) ----------------------------------------------------------- -----------------------------------------------------------
(1) Pretax unrealized holding gains (losses) arising during the year were $12.7 million, $108.0 million and $(225.2) million for 2001, 2000, and 1999, respectively. (2) Pretax reclassification adjustments for (losses) gains and other items included in net income were $(19.8) million, $(0.1) million and $5.0 million for 2001, 2000, and 1999, respectively. 9. SEVERANCE AND FACILITIES CHARGES In December 2001, ING announced its intentions to further integrate and streamline the U.S.-based operations of ING Americas, of which the Company is a part, in order to build a more customer-focused organization. In connection with these actions, the Company recorded a charge of $29.2 million pretax. The severance portion of this charge ($28.4 million pretax) is based on a plan to eliminate 580 positions (primarily operations, information technology and other administrative/staff support personnel). Severance actions are expected to be substantially complete by March 31, 2003. The facilities portion ($.8 million pretax) of the charge represents the amount to be incurred by the Company to terminate a contractual obligation. In December 2000, the Company, in accounting for its acquisition by ING, established a severance liability related to actions taken or expected to be taken with respect to the integration of the Company's and ING's businesses. Subsequent to the date of the acquisition, the Company completed a full review of severance actions related to individuals who were employed before or at the acquisition date and determined that certain refinements in the allocation of the purchase price to the severance liability were necessary. Activity for the year-ended December 31, 2001 within this severance liability and positions eliminated related to such actions were as follows:
(Millions) Severance Liability Positions ------------------------------------------------------------------------ Balance at December 31, 2000 $10.7 175 Actions taken (8.4) (101) Allocation of purchase price: Additions 5.2 58 Attrition (3.3) (101) Refinements 1.0 -- ------------------------------------------------------------------------ Balance at December 31, 2001 $ 5.2 31 ------------------------------------------------------------------------ ------------------------------------------------------------------------
F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. SEVERANCE AND FACILITIES CHARGES (continued) Severance actions related to the liability established in December 2000 are expected to be substantially complete by March 31, 2002. 10. INCOME TAXES The Company files a consolidated federal income tax return with IICA. The Company has a tax allocation agreement with IICA whereby the Company charges its subsidiary for taxes it would have incurred were it not a member of the consolidated group and credits the member for losses at the statutory tax rate. Income taxes from continuing operations consist of the following:
Preacquisition ------------------------------ One month Eleven months Year-ended ended ended Year-ended December 31, December 31, November 30, December 31, (Millions) 2001 2000 2000 1999 ------------------------------------------------------------------------------------------------ Current taxes (benefits): Federal $ 3.2 $ 9.4 $ 5.3 $ 64.3 State 2.2 0.2 2.6 2.5 Net realized capital gains (losses) 16.1 0.3 (11.5) (20.1) ------------------------------------------------------------------------------------------------ Total current taxes (benefits) 21.5 9.9 (3.6) 46.7 ------------------------------------------------------------------------------------------------ Deferred taxes (benefits): Federal 89.3 (4.3) 83.2 31.3 Net realized capital (losses) gains (23.4) 0.3 (1.5) 12.6 ------------------------------------------------------------------------------------------------ Total deferred taxes (benefits) 65.9 (4.0) 81.7 43.9 ------------------------------------------------------------------------------------------------ Total $ 87.4 $ 5.9 $ 78.1 $ 90.6 ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------
F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. INCOME TAXES (continued) Income taxes were different from the amount computed by applying the federal income tax rate to income from continuing operations before income taxes for the following reasons:
Preacquisition ------------------------------ One month Eleven months Year-ended ended ended Year-ended December 31, December 31, November 30, December 31, (Millions) 2001 2000 2000 1999 ------------------------------------------------------------------------------------------------ Income from continuing operations before income taxes $187.3 $18.5 $249.6 $272.5 Tax rate 35% 35% 35% 35% ------------------------------------------------------------------------------------------------ Application of the tax rate 65.6 6.4 87.4 95.4 Tax effect of: State income tax, net of federal benefit 1.4 0.1 1.7 1.6 Excludable dividends (1.8) (0.9) (12.6) (6.1) Goodwill amortization 21.6 -- -- -- Other, net 0.6 0.3 1.6 (0.3) ------------------------------------------------------------------------------------------------ Income taxes $ 87.4 $ 5.9 $ 78.1 $ 90.6 ------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------
F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. INCOME TAXES (continued) The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31 are presented below:
(Millions) 2001 2000 ---------------------------------------------------------- Deferred tax assets: Deferred policy acquisition costs $ 11.7 $ 44.8 Insurance reserves 286.9 306.3 Unrealized gains allocable to experience rated contracts 81.5 32.5 Investment losses 36.7 9.0 Postretirement benefits other than pensions 6.1 5.8 Deferred compensation 72.2 65.6 Other 29.1 21.1 ---------------------------------------------------------- Total gross assets 524.2 485.1 ---------------------------------------------------------- Deferred tax liabilities: Value of business acquired 558.5 623.3 Market discount 4.6 4.9 Net unrealized capital gains 106.6 46.3 Depreciation 5.1 4.4 Sale of individual life insurance business -- 15.1 Excludable dividends -- 5.0 Other 3.1 34.1 ---------------------------------------------------------- Total gross liabilities 677.9 733.1 ---------------------------------------------------------- Net deferred tax liability $(153.7) $(248.0) ---------------------------------------------------------- ----------------------------------------------------------
Net unrealized capital gains and losses are presented in shareholder's equity net of deferred taxes. As of December 31, 2001 and 2000, no valuation allowance was 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, 2001. This amount would be taxed only under certain conditions. No income taxes have been provided on this amount since management believes under current tax law the conditions under which such taxes would become payable are remote. The Internal Revenue Service (the "Service") has completed examinations of the federal income tax returns of the Company through 1997. 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 1998 through 2000. F-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. BENEFIT PLANS Prior to December 31, 2001, ILIAC, in conjunction with ING, had a qualified defined benefit pension plan covering substantially all employees ("Transition Pension Plan"). The Transition Pension Plan provided pension benefits based on a cash balance formula, which credited employees annually with an amount equal to a percentage of eligible pay based on age and years of service as well as an interest credit based on individual account balances. Contributions were determined using the Projected Unit Credit Method and were limited to the amounts that are tax-deductible. The accumulated benefit obligation and plan assets were recorded by ILIAC. As of the measurement date (i.e., January 1, 2001), fair value of plan assets exceeded projected benefit obligations. As of December 31, 2001, the Transition Pension Plan merged into the ING Americas Retirement Plan ("ING Pension Plan"), which is sponsored by ING North America Insurance Corporation ("ING North America"), an affiliate of ILIAC. The ING Pension Plan covers substantially all U.S. employees. Accordingly, the Company transferred $17.4 million of net assets ($11.3 million after tax) related to the movement of the Transition Pension Plan to ING North America. The Company reported this transfer of net assets as a $11.3 million reduction in paid in capital. The new plan's benefits are based on years of service and the employee's average annual compensation during the last five years of employment. Contributions are determined using the Projected Unit Credit Method and are limited to the amounts that are tax-deductible. Prior to December 31, 2001, ILIAC, in conjunction with ING, had a non-qualified defined benefit pension plan covering certain eligible employees. The plan provided pension benefits based on a cash balance formula, which credited employees annually with an amount equal to a percentage of eligible pay based on age and years of service as well as an interest credit based on individual account balances. As of December 31, 2001, ILIAC, in conjunction with ING, established a non-qualified defined benefit pension plan providing benefits to certain eligible employees based on years of service and the employee's average annual compensation during the last five years of employment. Contributions are determined using the Projected Unit Credit Method. The unfunded accumulated benefit obligation is recorded by ILIAC. In addition to providing pension benefits, ILIAC, in conjunction with ING, provides certain health care and life insurance benefits for retired employees. Retirees are generally required to contribute to the plans based on their years of service with the Company. The costs to the Company associated with the former Aetna postretirement plans for 2001, 2000, and 1999 were $0.6 million, $1.2 million and $2.1 million, respectively. ILIAC, in conjunction with ING, also 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. January 1, 2001), the unfunded projected benefit obligation is recorded by the Company. The costs to the Company associated with the agents non-qualified pension plan for 2001, 2000, and 1999 were $6.6 million, $3.5 million and $3.3 million, respectively. The Company, in conjunction with ING, also provides certain postretirement health care and life insurance benefits for certain agents. The costs to the Company associated with the agents' F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. BENEFIT PLANS (continued) postretirement plans for 2001, 2000, and 1999 were $0.5 million, $1.4 million and $2.1 million, respectively. ILIAC, in conjunction with ING, also has a Savings Plan. Substantially all employees are eligible to participate in the savings plan under which designated contributions, which may be invested in a variety of financial instruments, are matched up to 5% of compensation by ING. Pretax charges to operations for the former Aetna incentive savings plan were $11.0 million, $9.0 million and $7.7 million in 2001, 2000, and 1999, respectively. ILIAC, in conjunction with former Aetna, had a stock incentive plan that provided for stock options, deferred contingent common stock or equivalent cash awards or restricted stock to employees. Certain executive, middle management and non-management employees were granted options to purchase common stock of former Aetna at or above the market price on the date of grant. Options generally became 100% vested three years after the grant was made, with one-third of the options vesting each year. The former Aetna did 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 were, from time to time, granted incentive units which were rights to receive common stock or an equivalent value in cash. The sale of the Company to ING AIH by former Aetna caused all outstanding stock options to vest immediately. The costs to the Company associated with the former Aetna stock plans for 2001, 2000, and 1999, were $1.8 million, $2.7 million and $0.4 million, respectively. Effective January 1, 1998, Aeltus established an additional deferred incentive compensation plan, designed to attract, retain and incent key members of Aeltus. The plan had a five year vesting period. Payments under the plan were conditioned upon continued employment and were based upon an imputed share price of Aeltus at the end of the vesting period. The plan value was determined annually and the cost of the plan was expensed ratably over the vesting period. A change in control at Aeltus, as defined in the plan, would cause immediate full vesting of all outstanding shares. The purchase of Aetna Inc. by ING in 2000 met this definition. As a result, all outstanding shares became fully vested based on Aeltus's imputed value at the date of the sale and were subsequently paid out in early 2001. The appropriate annual share of the cost of the plan, including the additional cost in 2000 associated with this full vesting, has been reflected in salaries and related benefits in the Consolidated Statements of Income for each of the years-ended December 31, 1999 and 2000, respectively. In 2001, a new deferred compensation plan was developed with attributes similar to those in the previous plans. The costs reflected in the Consolidated Financial Statements associated with Aeltus' new deferred incentive compensation plan for 2001 was $4.1 million. The costs for its former deferred incentive compensation plan for 2000 and 1999 were, $42.2 million and $4.7 million, respectively. F-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. RELATED PARTY TRANSACTIONS INVESTMENT ADVISORY AND OTHER FEES ILIAC and Aeltus serve as investment advisors and administrators to the Company's mutual funds and variable funds (collectively, the Funds). Company mutual funds pay Aeltus or ILIAC, as investment advisor or administrator, a daily fee which, on an annual basis, ranged, depending on the fund, from 0.33% to 1.15% of their average daily net assets. All of the funds managed by ILIAC and certain of the funds managed by Aeltus are subadvised by investment advisors, in which case, Aeltus or ILIAC pays a subadvisory fee to the investment advisors. The Company is also compensated by the Separate Accounts (variable funds) for bearing mortality and expense risks pertaining to variable life and annuity contracts. Under the insurance and annuity contracts, the Separate Accounts pay the Company a daily fee, which, on an annual basis is, depending on the product, up to 3.40% of their average daily net assets. The amount of compensation and fees received from the Company mutual funds and Separate Accounts, included in charges assessed against policyholders and other income, amounted to $421.7 million, $506.3 million and $424.2 million in 2001, 2000, and 1999, respectively. RECIPROCAL LOAN AGREEMENT ILIAC maintains a reciprocal loan agreement with ING AIH, a Delaware corporation and affiliate, to facilitate the handling of unusual and/or unanticipated short-term cash requirements. Under this agreement, which became effective in June 2001 and expires in April, 2011, ILIAC and ING AIH can borrow up to 3% of ILIAC's statutory admitted assets as of the preceding December 31 from one another. Interest on any ILIAC borrowings is charged at the rate of ING AIH's cost of funds for the interest period plus 0.15%. Interest on any ING AIH borrowings is charged at a rate based on the prevailing interest rate of U.S. commercial paper available for purchase with a similar duration. Under this agreement, ILIAC incurred interest expense of $0.1 million and earned interest income of $3.3 million for the year-ended December 31, 2001. At December 31, 2001, ILIAC had $191.1 million of receivables and no outstanding borrowings from ING AIH under this agreement. CAPITAL TRANSACTIONS In 2000, the Company received capital contributions in the form of cash and assets of $73.5 million, and $56.0 million, respectively from HOLDCO. The Company received no capital contributions in 1999 or 2001. Refer to Note 7 for dividends paid to HOLDCO. Refer to Note 11 for a discussion related to a return of capital to ING AIH. OTHER Premiums due and other receivables include $1.0 million and $4.7 million due from affiliates in 2001 and 2000, respectively. Other liabilities include $0.6 million and $4.1 million due to affiliates for 2001 and 2000, respectively. F-34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. RELATED PARTY TRANSACTIONS (continued) Former Aetna transferred to the Company $0.4 million and $0.8 million for the years 2000 and 1999, respectively, based on former Aetna's decision not to settle state tax liabilities as permitted under the tax sharing arrangement, which is reported in other changes in retained earnings. There was no transfer of funds from former Aetna to the Company to settle state tax liabilities for the year 2001. Certain administrative and support functions of the Company are provided by former Aetna and its affiliates for a specified transition period. At the end of the transition period, these functions will be provided by ING affiliates. The financial statements reflect allocated charges for these services based upon measures appropriate for the type and nature of the service provided. 13. REINSURANCE On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1 billion in cash. The transaction is generally in the form of an indemnity reinsurance arrangement, under which Lincoln contractually assumed from the Company certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders (Refer to Note 3). Effective January 1, 1998, 90% of the mortality risk on substantially all individual universal life product business written from June 1, 1991 through October 31, 1997 was reinsured externally. Beginning November 1, 1997, 90% of new business written on these products was reinsured externally. Effective October 1, 1998 this agreement was assigned from the third party reinsurer to Lincoln. Effective December 31, 1988, the Company entered into a modified coinsurance reinsurance agreement ("MODCO") with Aetna Life Insurance Company ("Aetna Life"), (formerly an affiliate of the Company), 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 was amended to transition (based on underlying investment rollover in Aetna Life) from a modified coinsurance arrangement to a coinsurance agreement. As a result of this change, reserves were ceded to the Company from Aetna Life as investment rollover occurred. Effective October 1, 1998, this agreement was fully transitioned to a coinsurance arrangement and this business along with the Company's direct individual life insurance business, with the exception of certain supplemental contracts with reserves of $70.5 million and $74.9 million as of December 31, 2001 and 2000, respectively, was sold to Lincoln (refer to Note 3). On December 16, 1988, the Company assumed $25.0 million of premium revenue from Aetna Life, (formerly an affiliate of the Company) for the purchase and administration of a life contingent single premium variable payout annuity contract. In addition, the Company is also responsible for administering fixed annuity payments that are made to annuitants receiving variable payments. Reserves of $24.1 million and $29.2 million were maintained for this contract as of December 31, 2001 and 2000, respectively. F-35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. REINSURANCE (continued) The following table includes premium amounts ceded/assumed.
Ceded to Assumed Direct Other from Other Net (Millions) Amount Companies Companies Amount ----------------------------------------------------------------------- 2001 ------------------------------ Premiums: Discontinued Operations $301.2 $315.0 $13.8 -- Accident and Health Insurance 4.5 4.5 -- -- Annuities 112.3 (1.3) 0.6 $114.2 ----------------------------------------------------------------------- Total earned premiums $418.0 $318.2 $14.4 $114.2 ----------------------------------------------------------------------- ----------------------------------------------------------------------- 2000 ------------------------------ Premiums: Discontinued Operations $366.6 $382.4 $15.8 -- Accident and Health Insurance 15.2 15.2 -- -- Annuities 160.4 7.1 0.9 $154.2 ----------------------------------------------------------------------- Total earned premiums $542.2 $404.7 $16.7 $154.2 ----------------------------------------------------------------------- ----------------------------------------------------------------------- 1999 ------------------------------ Premiums: Discontinued Operations $460.1 $478.0 $17.9 -- Accident and Health Insurance 33.4 33.4 -- -- Annuities 111.5 4.9 0.9 $107.5 ----------------------------------------------------------------------- Total earned premiums $605.0 $516.3 $18.8 $107.5 ----------------------------------------------------------------------- -----------------------------------------------------------------------
The Company had $35.9 billion, $38.9 billion and $43.4 billion of life insurance in force at December 31, 2001, 2000 and 1999, respectively. Substantially all life insurance in force at December 31, 2001, 2000 and 1999 was ceded to Lincoln. F-36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. SEGMENT INFORMATION Summarized financial information for the Company's principal operations was as follows:
Investment Year-ended December 31, Worksite Individual Management 2001 (Millions) Products (1) Products (1) Services (1) Other (1) Total ----------------------------------------------------------------------------------------- Revenues from external customers $ 432.1 $ 151.1 $119.6 $ (35.2) $ 667.6 Net investment income 788.9 99.0 1.7 (1.2) 888.4 ----------------------------------------------------------------------------------------- Total revenue excluding net realized capital gains (losses) $ 1,221.0 $ 250.1 $121.3 $ (36.4) $ 1,556.0 ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- Amortization of deferred policy acquisition costs and value of business acquired $ 59.7 $ 41.4 -- $ 10.9 $ 112.0 ----------------------------------------------------------------------------------------- Income taxes (benefits) $ 70.1 $ 16.6 $ 15.7 $ (15.0) $ 87.4 ----------------------------------------------------------------------------------------- Operating earnings (2) $ 150.4 $ 24.3 $ 27.4 $ (88.5) $ 113.6 Net realized capital gains (losses), net of tax (20.2) 6.4 0.1 -- (13.7) ----------------------------------------------------------------------------------------- Income (loss) from continuing operations 130.2 30.7 27.5 (88.5) 99.9 ----------------------------------------------------------------------------------------- Net income (loss) $ 130.2 $ 30.7 $ 27.5 $ (88.5) $ 99.9 ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- Segment assets (3) $41,695.7 $8,432.0 $ 82.1 $2,983.3 $53,193.1 ----------------------------------------------------------------------------------------- Expenditures for long-lived assets (4) -- -- -- $ 6.3 $ 6.3 ----------------------------------------------------------------------------------------- Balance of long-lived assets -- -- -- $ 33.1 $ 33.1 -----------------------------------------------------------------------------------------
(1) Worksite Products include deferred annuity contracts that fund defined contribution and deferred compensation plans; immediate annuity contracts; mutual funds; distribution services for annuities and mutual funds; programs offered to defined contribution plans and deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options; wrapper agreements containing certain benefit response guarantees that are entered into with retirement plans, whose assets are not invested with the Company; investment advisory services and pension plan administrative services. Individual Products include deferred and immediate annuity contracts, both qualified and nonqualified, that are sold to individuals and provide variable or fixed investment options or a combination of both. Investment Management Services include: investment advisory services to affiliated and unaffiliated institutional and retail clients; underwriting; distribution for Company mutual funds and a former affiliate's separate accounts; and trustee, administrative and other services to retirement plans (Refer to Notes 1 and 2). Other includes consolidating adjustments, amortization of goodwill, ING corporate expense, restructuring charges, and taxes not allocated back to the segments. (2) Operating earnings is comprised of net income (loss) excluding net realized capital gains and losses. While operating earnings is the measure of profit or loss used by the Company's management when assessing performance or making operating decisions, it does not replace operating income or net income as a measure of profitability. (3) Segment assets exclude goodwill. (4) Expenditures of long-lived assets represent additions to property and equipment not allocable to business. F-37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. SEGMENT INFORMATION (continued)
Investment Year-ended December 31, Worksite Individual Management Discontinued 2000 (Millions) Products (1) Products (1) Services (1) Operations (1) Other (1) Total ------------------------------------------------------------------------------------------------------------- Revenues from external customers $ 576.7 $ 115.4 $138.2 -- $(53.0) $ 777.3 Net investment income 793.6 112.2 2.8 -- 3.8 912.4 ------------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital gains (losses) $ 1,370.3 $ 227.6 $141.0 -- $(49.2) $ 1,689.7 ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Amortization of deferred policy acquisition costs and value of business acquired $ 68.3 $ 47.3 $ -- -- $ 11.3 $ 126.9 ------------------------------------------------------------------------------------------------------------- Income taxes (benefits) $ 74.6 $ 16.6 $ 9.0 -- $(16.2) $ 84.0 ------------------------------------------------------------------------------------------------------------- Operating earnings (2) $ 159.4 $ 33.0 $ 9.7 -- $ 5.0 $ 207.1 Net realized capital (losses) gains, net of tax (20.8) (2.3) 0.1 -- -- (23.0) ------------------------------------------------------------------------------------------------------------- Income from continuing operations 138.6 30.7 9.8 -- 5.0 184.1 Discontinued operations, net of tax: Amortization of deferred gain on sale (3) -- -- -- $ 5.7 -- 5.7 ------------------------------------------------------------------------------------------------------------- Net income $ 138.6 $ 30.7 $ 9.8 $ 5.7 $ 5.0 $ 189.8 ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Segment assets (4) $42,955.7 $8,864.6 $ 44.1 $2,991.2 -- $54,855.6 ------------------------------------------------------------------------------------------------------------- Expenditures for long- lived assets (5) -- -- -- -- $ 3.4 $ 3.4 ------------------------------------------------------------------------------------------------------------- Balance of long-lived assets -- -- -- -- $ 54.3 $ 54.3 -------------------------------------------------------------------------------------------------------------
(1) Worksite Products include deferred annuity contracts that fund defined contribution and deferred compensation plans; immediate annuity contracts; mutual funds; distribution services for annuities and mutual funds; programs offered to defined contribution plans and deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options; wrapper agreements containing certain benefit response guarantees that are entered into with retirement plans, whose assets are not invested with the Company; investment advisory services and pension plan administrative services. Individual Products include deferred and immediate annuity contracts, both qualified and nonqualified, that are sold to individuals and provide variable or fixed investment options or a combination of both. Investment Management Services include the following services: investment advisory to affiliated and unaffiliated institutional and retail clients, underwriting, distribution for Company's mutual funds and affiliate's separate accounts; and trustee, administrative and other services to retirement plans (Refer to Notes 1 and 2). Discontinued operations include life insurance products (Refer to Note 3). Other includes consolidating adjustments, Year 2000 costs and taxes not allocated back to the segment. (2) Operating earnings is comprised of net income (loss) excluding net realized capital gains and losses. While operating earnings is the measure of profit or loss used by the Company's management when assessing performance or making operating decisions, it does not replace operating income or net income as a measure of profitability. (3) Taxes on the amortization of deferred gain on sale were $3.3 million. (4) Segment assets exclude goodwill. (5) Expenditures of long-lived assets represent additions to property and equipment not allocable to business segments. F-38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. SEGMENT INFORMATION (continued)
Investment Year-ended December 31, Worksite Individual Management Discontinued 1999 (Millions) Products (1) Products (1) Services (1) Operations (1) Other (1) Total ------------------------------------------------------------------------------------------------------------- Revenues from external customers $ 469.8 $ 81.3 $118.3 -- $(43.9) $ 625.5 Net investment income 784.6 96.9 1.5 -- 3.3 886.3 ------------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital gains $ 1,254.5 $ 178.1 $119.8 -- $(40.6) $ 1,511.8 ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Amortization of deferred policy acquisition costs and value of business acquired $ 63.0 $ 30.4 -- -- $ 11.5 $ 104.9 ------------------------------------------------------------------------------------------------------------- Income taxes (benefits) $ 82.0 $ 11.2 $ 16.5 -- $(19.1) $ 90.6 ------------------------------------------------------------------------------------------------------------- Operating earnings (2) $ 164.9 $ 22.2 28.1 -- $ (1.8) $ 213.4 Other Item (3) -- -- -- -- (17.5) (17.5) Net realized capital gains, net of tax (12.7) (1.3) -- -- -- (14.0) ------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations 152.2 20.9 28.1 -- (25.0) 181.9 Discontinued operations, net of tax: Amortization of deferred gain on sale (4) -- -- -- $ 5.7 -- 5.7 ------------------------------------------------------------------------------------------------------------- Net income (loss) $ 152.2 $ 20.9 $ 28.1 $ 5.7 $(25.0) $ 187.6 ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- Segment assets $44,484.9 $8,877.2 $ 36.6 $2,989.0 -- $56,387.7 ------------------------------------------------------------------------------------------------------------- Expenditures for long- lived assets (5) -- -- -- -- $ 3.9 $ 3.9 ------------------------------------------------------------------------------------------------------------- Balance of long-lived assets -- -- -- -- $ 12.2 $ 12.2 -------------------------------------------------------------------------------------------------------------
(1) Worksite Products include deferred annuity contracts that fund defined contribution and deferred compensation plans; immediate annuity contracts; mutual funds; distribution services for annuities and mutual funds; programs offered to defined contribution plans and deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options; wrapper agreements containing certain benefit response guarantees that are entered into with retirement plans, whose assets are not invested with the Company; investment advisory services and pension plan administrative services. Individual Products include deferred and immediate annuity contracts, both qualified and nonqualified, that are sold to individuals and provide variable or fixed investment options or a combination of both. Investment Management Services include the following services: investment advisory to affiliated and unaffiliated institutional and retail clients, underwriting, distribution for Company's mutual funds and affiliate's separate accounts; and trustee, administrative and other services to retirement plans (Refer to Notes 1 and 2). Discontinued operations include life insurance products (Refer to Note 3). Other includes consolidating adjustments, Year 2000 costs, and taxes not allocated back to the segment. (2) Operating earnings is comprised of net income (loss) excluding net realized capital gains and losses and Year 2000 costs. While operating earnings is the measure of profit or loss used by the Company's management when assessing performance or making operating decisions, it does not replace operating income or net income as a measure of profitability. (3) Represents after-tax Year 2000 costs. (4) Taxes on the amortization of deferred gain on sale were $3.2 million. (5) Expenditures of long-lived assets represent additions to property and equipment not allocable to business segments. F-39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. COMMITMENTS AND CONTINGENT LIABILITIES LEASES In conjunction with the acquisition by ING, the Company entered into or assumed from a former affiliate operating leases for office space. For the year-ended December 31, 2001, rent expense for these leases was $17.6 million. The future net minimum payments under noncancelable leases for 2002 through 2006 are estimated to be $24.8 million, $20.6 million, $17.6 million, $16.2 million and $14.4 million, respectively, and $15.6 million, thereafter. 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, 2001, the Company had off-balance sheet commitments to purchase investments of $4.8 million with an estimated fair value of $4.8 million. At December 31, 2000 and 1999, there were no off-balance sheet commitments. LITIGATION In recent years, life insurance companies have been named as defendants in class action lawsuits relating to life insurance sales practices. The Company is currently a defendant in one such lawsuit. A purported class action complaint was filed in the United States District Court for the Middle District of Florida on June 30, 2000, by Helen Reese, Richard Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese Complaint"). The Reese Complaint seeks compensatory and punitive damages and injunctive relief from ALIAC. The Reese Complaint claims that ALIAC engaged in unlawful sales practices in marketing life insurance policies. ALIAC has moved to dismiss the Reese Complaint for failure to state a claim upon which relief can be granted. Certain discovery is underway. The Company intends to defend the action vigorously. The Company is also involved in other lawsuits arising, for the most part, in the ordinary course of its business operations. While the outcome of these other lawsuits cannot be determined at this time, after consideration of the defenses available to the Company, applicable insurance coverage and any related reserves established, these other lawsuits are 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. 16. SUBSEQUENT EVENT Effective February 28, 2002, the Company distributed 100% of the stock of IA Holdco to HOLDCO. The transaction was accounted for as a dividend. Refer to Note 2 for further information about IA Holdco. F-40 QUARTERLY DATA (UNAUDITED)
2001 (Millions) First Second Third Fourth -------------------------------------------------------------- Total revenue $395.5 $411.9 $387.2 $340.4 -------------------------------------------------------------- Income (loss) from continuing operations before income taxes $ 64.3 $95.0 $ 68.9 $(40.9) Income taxes (benefit) 28.2 39.1 27.1 (7.0) -------------------------------------------------------------- Income (loss) from continuing operations $ 36.1 $55.9 $ 41.8 $(33.9) -------------------------------------------------------------- Net income (loss) $ 36.1 $55.9 $ 41.8 $(33.9) -------------------------------------------------------------- -------------------------------------------------------------- 2000 (Millions) First Second Third Fourth (1) ------------------------------------------------------------------ Total revenue $408.3 $409.3 $426.4 $410.3 ------------------------------------------------------------------ Income from continuing operations before income taxes $ 76.5 $85.0 $ 77.4 $ 29.2 Income taxes 25.1 28.1 22.7 8.1 ------------------------------------------------------------------ Income from continuing operations $ 51.4 $56.9 $ 54.7 $ 21.1 Income from discontinued operations 1.6 1.6 1.5 1.0 ------------------------------------------------------------------ Net income $ 53.0 $58.5 $ 56.2 $ 22.1 ------------------------------------------------------------------ ------------------------------------------------------------------
(1) Fourth quarter data reflects an aggregation of the pre-acquisition period of the two months ended November 30, 2000 and the post acquisition period of one month ended December 31, 2000. F-41 PART II INFORMATION NOT REQUIRED IN PROSPECTUS UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. UNDERTAKING PURSUANT TO RULE 484 Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. INDEMNIFICATION Section 33-779 of the Connecticut General Statutes (the "CGS") provides that a corporation may provide indemnification of or advance expenses to a director, officer, employee or agent only as permitted by Sections 33-770 to 33-778, inclusive, of the CGS. Reference is hereby made to Section 33-771(e) of the CGS regarding indemnification of directors and Section 33-776(d) of CGS regarding indemnification of officers, employees and agents of Connecticut corporations. These statutes provide in general that Connecticut corporations incorporated prior to January 1, 1997 shall, except to the extent that their certificate of incorporation expressly provides otherwise, indemnify their directors, officers, employees and agents against "liability" (defined as the obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding) when (1) a determination is made pursuant to Section 33-775 that the party seeking indemnification has met the standard of conduct set forth in Section 33-771 or (2) a court has determined that indemnification is appropriate pursuant to Section 33-774. Under Section 33-775, the determination of and the authorization for indemnification are made (a) by the disinterested directors, as defined in Section 33-770(3); (b) by special counsel; (c) by the shareholders; or (d) in the case of indemnification of an officer, agent or employee of the corporation, by the general counsel of the corporation or such other officer(s) as the board of directors may specify. Also, Section 33-772 provides that a corporation shall indemnify an individual who was wholly successful on the merits or otherwise against reasonable expenses incurred by him in connection with a proceeding to which he was a party because he was a director of the corporation. Pursuant to Section 33-771(d), in the case of a proceeding by or in the right of the corporation or with respect to conduct for which the director, officer, agent or employee was adjudged liable on the basis that he received a financial benefit to which he was not entitled, indemnification is limited to reasonable expenses incurred in connection with the proceeding against the corporation to which the individual was named a party. The statute does specifically authorize a corporation to procure indemnification insurance on behalf of an individual who was a director, officer, employee or agent of the corporation. Consistent with the statute, ING Groep N.V. has procured insurance from Lloyd's of London and several major United States and international excess insurers for its directors and officers and the directors and officers of its subsidiaries, including the Depositor. Section 20 of the ING Financial Advisers, LLC (IFA) (formerly Aetna Investment Services, LLC) Limited Liability Company Agreement provides that IFA will indemnify certain persons against any loss, damage claim or expenses (including legal fees) incurred by such person if he is made a party or is threatened to be made a party to a suit or proceeding because he was a member, officer, director, employee or agent of IFA, as long as he acted in good faith on behalf of IFA and in a manner reasonably believed to be within the scopes of his authority. An additional condition requires that no person shall be entitled to indemnity if his loss, damage, claim or expense was incurred by reason of his gross negligence or willful misconduct. This indemnity provision is authorized by and is consistent with Titled 8, Section 145 of the General Corporation Law of the State of Delaware. REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940 ING Life Insurance and Annuity Company represents that the fees and charges deducted under the policies covered by this registration statement, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the insurance company. CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 15 TO THE REGISTRATION STATEMENT This Post-Effective Amendment No. 15 to Registration Statement No. 33-76018 is comprised of the following papers and documents: o The facing sheet. o One Prospectus for the AetnaVest Plus Variable Life Insurance Policy consisting of 107 pages o The undertaking to file reports o The undertaking pursuant to Rule 484 o Indemnification o Representation pursuant to Section 26(e)(2)(A) of the Investment Company Act of 1940 o The signatures o Written consents of the following persons: A. Consent of Counsel (included as part of Exhibit No. 2 below) B. Actuarial Consent (included as part of Exhibit No. 6 below) C. Consents of Independent Auditors (included as Exhibit No. 7 below) The following Exhibits: 1. Exhibits required by paragraph A of instructions to exhibits for Form N-8B-2: (1) Resolution establishing Variable Life Account B(1) (2) Not applicable (3)(i) Master General Agent Agreement(1) (3)(ii) Life Insurance General Agent Agreement(1) (3)(iii) Broker Agreement(1) (3)(iv) Life Insurance Broker-Dealer Agreement(1) (3)(v) Principal Underwriter Agreement effective as of November 17, 2000 between Aetna Life Insurance and Annuity Company and Aetna Investment Services, LLC(2) (4) Not applicable (5)(i) AetnaVest Plus Policy (3889-93)(3) (5)(ii) Disability Benefit Rider (70174-93) to AetnaVest Plus Policy 38899-93(3) (5)(iii) Unisex Amendment rider (70211-95US) for use with AetnaVest Plus Policy 38899-93(3) (5)(iv) Endorsements L-ENMCHGI-02 and L-ENCMCHGG-02 (name change)(4) (6)(i) Restated Certificate of Incorporation (amended and restated as of January 1, 2002) of ING Life Insurance and Annuity Company (formerly Aetna Life Insurance and Annuity Company)(5) (6)(ii) By-Laws restated as of January 1, 2002 of ING Life Insurance and Annuity Company (formerly Aetna Life Insurance and Annuity Company)(5) (7) Not applicable (8)(i) Fund Participation Agreement dated as of May 1, 1998 by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series and Aeltus Investment Management, Inc.(6) (8)(ii) Amendment dated November 9, 1998 to Fund Participation Agreement dated as of May 1, 1998 by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series and Aeltus Investment Management, Inc.(7) (8)(iii) Second Amendment dated December 31, 1999 to Fund Participation Agreement dated as of May 1, 1998 and amended on November 9, 1998 by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series and Aeltus Investment Management, Inc.(8) (8)(iv) Third Amendment dated February 11, 2000 to Fund Participation Agreement dated as of May 1, 1998 and amended on November 9, 1998 and December 31, 1999 by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series and Aeltus Investment Management, Inc.(9) (8)(v) Fourth Amendment dated May 1, 2000 to Fund Participation Agreement dated as of May 1, 1998 and amended on November 9, 1998, December 31, 1999 and February 11, 2000 by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series and Aeltus Investment Management, Inc.(9) (8)(vi) Fifth Amendment dated February 27, 2001 to Fund Participation Agreement dated as of May 1, 1998 and amended on November 9, 1998, December 31, 1999, February 11, 2000 and May 1, 2000 by and among Aetna Life Insurance and Annuity Company and Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series, Aetna Variable Portfolios, Inc. on behalf of each of its series and Aeltus Investment Management, Inc.(10) (8)(vii) Service Agreement dated as of May 1, 1998 between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series and Aetna Variable Portfolios, Inc. on behalf of each of its series(6) (8)(viii) Amendment dated November 4, 1998 to Service Agreement dated as of May 1, 1998 between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series and Aetna Variable Portfolios, Inc. on behalf of each of its series(7) (8)(ix) Second Amendment dated February 11, 2000 to Service Agreement dated as of May 1, 1998 and amended on November 4, 1998 between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series and Aetna Variable Portfolios, Inc. on behalf of each of its series(9) (8)(x) Third Amendment dated May 1, 2000 to Service Agreement dated as of May 1, 1998 and amended on November 4, 1998 and February 11, 2000 between Aeltus Investment Management, Inc. and Aetna Life Insurance and Annuity Company in connection with the sale of shares of Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income Shares, Aetna Balanced VP, Inc., Aetna GET Fund on behalf of each of its series, Aetna Generation Portfolios, Inc. on behalf of each of its series and Aetna Variable Portfolios, Inc. on behalf of each of its series(9) (8)(xi) Fund Participation Agreement dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation(11) (8)(xii) Fifth Amendment dated as of May 1, 1997 to the Fund Participation Agreement dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation(12) (8)(xiii) Sixth Amendment dated November 6, 1997 to the Fund Participation Agreement dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996 and May 1, 1997 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation(13) (8)(xiv) Seventh Amendment dated as of May 1, 1998 to the Fund Participation Agreement dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997 and November 6, 1997 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation(6) (8)(xv) Eighth Amendment dated December 1, 1999 to Fund Participation Agreement dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997, November 6, 1997 and May 1, 1998 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund and Fidelity Distributors Corporation(9) (8)(xvi) Fund Participation Agreement dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996 and March 1, 1996 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation(11) (8)(xvii) Fifth Amendment, dated as of May 1, 1997 to the Fund Participation Agreement dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, and March 1, 1996 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation(12) (8)(xviii) Sixth Amendment dated as of January 20, 1998 to the Fund Participation Agreement dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996 and May 1, 1997 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation(14) (8)(xix) Seventh Amendment dated as of May 1, 1998 to the Fund Participation Agreement dated February 1, 1994 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997 and January 20, 1998 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation(6) (8)(xx) Eighth Amendment dated December 1, 1999 to Fund Participation Agreement dated February 1, 1999 and amended on December 15, 1994, February 1, 1995, May 1, 1995, January 1, 1996, March 1, 1996, May 1, 1997, January 20, 1998 and May 1, 1998 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation(8) (8)(xxi) Service Agreement dated as of November 1, 1995 between Aetna Life Insurance and Annuity Company and Fidelity Investments Institutional Operations Company(15) (8)(xxii) Amendment dated January 1, 1997 to Service Agreement dated as of November 1, 1995 between Aetna Life Insurance and Annuity Company and Fidelity Investments Institutional Operations Company(12) (8)(xxiii) Service Contract dated May 2, 1997 between Fidelity Distributors Corporation and Aetna Life Insurance and Annuity Company(7) (8)(xxiv) Fund Participation Agreement dated December 8, 1997 among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation(16) (8)(xxv) Amendment dated October 12, 1998 to Fund Participation Agreement dated December 8, 1997 among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation(7) (8)(xxvi) Second Amendment dated December 1, 1999 to Fund Participation Agreement dated December 8, 1997 and amended on October 12, 1998 among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation(8) (8)(xxvii) Amendment dated August 1, 2000 to Fund Participation Agreement dated December 8, 1997 and amended on October 12, 1998 and December 1, 1999 among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation(17) (8)(xxviii) Letter Agreement dated December 7, 2001 between Janus and Aetna Life Insurance and Annuity Company reflecting evidence of a new Fund Participation Agreement with the same terms as the current Fund Participation Agreement except with a new effective date of March 28, 2002(18) (8)(xxix) Service Agreement dated December 8, 1997 between Janus Capital Corporation and Aetna Life Insurance and Annuity Company(16) (8)(xxx) First Amendment dated as of August 1, 2000 to Service Agreement dated December 8, 1997 between Janus Capital Corporation and Aetna Life Insurance and Annuity Company(17) (8)(xxxi) Distribution and Shareholder Services Agreement - Service Shares of Janus Aspen Series (for Insurance Companies) dated August 1, 2000 between Janus Distributors, Inc. and Aetna Life Insurance and Annuity Company(17) (8)(xxxii) Letter Agreement dated October 19, 2001 between Janus and Aetna Life Insurance and Annuity Company reflecting evidence of a new Distribution and Shareholder Service Agreement with the same terms as the current Distribution and Shareholder Service Agreement except with a new effective date of March 28, 2002(18) (8)(xxxiii) Fund Participation Agreement dated March 11, 1997 between Aetna Life Insurance and Annuity Company and Oppenheimer Variable Annuity Account Funds and Oppenheimer Funds, Inc.(19) (8)(xxxiv) First Amendment dated December 1, 1999 to Fund Participation Agreement dated March 11, 1997 between Aetna Life Insurance and Annuity Company and Oppenheimer Variable Annuity Account Funds and Oppenheimer Funds, Inc.(7) (8)(xxxv) Service Agreement effective as of March 11, 1997 between Oppenheimer Funds, Inc. and Aetna Life Insurance and Annuity Company(19) (8)(xxxvi) Participation Agreement dated as of November 28, 2001 among Portfolio Partners, Inc., Aetna Life Insurance and Annuity Company and Aetna Investment Services, LLC(18) (8)(xxxvii) Amendment dated March 5, 2002 between Portfolio Partners, Inc. (to be renamed ING Partners, Inc. effective May 1, 2002), Aetna Life Insurance and Annuity Company (to be renamed ING Life Insurance and Annuity Company effective May 1, 2002) and Aetna Investment Services LLC (to be renamed ING Financial Advisers, LLC) to Participation Agreement dated November 28, 2001(18) (9) Not applicable (10)(i) Application (70059-96)(20) (10)(ii) Application (70059-96ZNY)(20) (10)(iii) Application Supplement (70268-97(3/98))(20) 2. Opinion and Consent of Counsel 3. Not Applicable 4. Not Applicable 5. Not Applicable 6. Actuarial Opinion and Consent 7. (a) Consent of Independent Auditors -- KPMG LLP (b) Consent of Independent Auditors -- Ernst & Young LLP (Hartford) (c) Consent of Independent Auditors -- Ernst & Young LLP (Fort Wayne) 8. (a) Copy of Power of Attorney(21) (b) Certificate of Resolution Authorizing Signature by Power of Attorney(22) 1. Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form S-6 (File No. 33-76004), as filed on February 16, 1996. 2. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 333-49176), as filed on November 30, 2000. 3. Incorporated by reference to Post-Effective Amendment No. 7 to Registration Statement on Form S-6 (File No. 33-76018), as filed on April 22, 1997. 4. Incorporated by reference to Post-Effective Amendment No. 15 to Registration Statement on Form S-6 (File No. 33-75248), as filed on April 26, 2002. 5. Incorporated by reference to ING Life Insurance and Annuity Company annual report on Form 10-K (File No. 33-23376), as filed on March 28, 2002. 6. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998. 7. Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form N-4 (File No. 333-56297), as filed electronically on December 14, 1998. 8. Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed electronically on February 16, 2000. 9. Incorporated by reference to Post-Effective Amendment No. 20 to Registration Statement on Form N-4 (File No. 333-01107), as filed electronically on April 4, 2000. 10. Incorporated by reference to Post-Effective Amendment No. 24 to Registration Statement on Form N-4 (File No. 333-01107), as filed electronically on April 13, 2001. 11. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75964), as filed on February 11, 1997. 12. Incorporated by reference to Post-Effective Amendment No. 30 to Registration Statement on Form N-4 (File No. 33-34370), as filed on September 29, 1997. 13. Incorporated by reference to Post-Effective Amendment No. 16 to Registration Statement on Form N-4 (File No. 33-75964), as filed on February 9, 1998. 14. Incorporated by reference to Post-Effective Amendment No. 7 to Registration Statement on Form S-6 (File No. 33-75248), as filed on February 24, 1998. 15. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-88720), as filed on June 28, 1996. 16. Incorporated by reference to Post-Effective Amendment No. 10 to Registration Statement on Form N-4 (File No. 33-75992), as filed on December 31, 1997. 17. Incorporated by reference to Post Effective Amendment No. 22 to Registration Statement on Form N-4 (File No. 333-01107), as filed on August 14, 2000. 18. Incorporated by reference to Post-Effective Amendment No. 30 to Registration Statement on Form N-4 (File No. 33-75962), as filed on April 8, 2002. 19. Incorporated by reference to Post-Effective Amendment No. 27 to Registration Statement on Form N-4 (File No. 33-34370), as filed on April 16, 1997. 20. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form S-6 (File No. 33-64277), as filed on February 25, 1998. 21. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form S-2 (File No. 333-60016), as filed on April 5, 2002. 22. Incorporated by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-4 (File No. 33-75986), as filed on April 12, 1996. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, Variable Life Account B of ING Life Insurance and Annuity Company, certifies that it meets the requirements of Securities Act Rule 485(b) for effectiveness of this Post-Effective Amendment to its Registration Statement on Form S-6 (File No. 33-76018) and has duly caused this Post-Effective Amendment No. 15 to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, and the seal of the Depositor to be hereunto affixed and attested, all in the City of Hartford, and State of Connecticut, on this 26th day of April, 2002. VARIABLE LIFE ACCOUNT B OF ING LIFE INSURANCE AND ANNUITY COMPANY (Registrant) (SEAL) ATTEST: /s/ Lena A. Rabbitt ___________________ ---------------------- Lena A. Rabbitt Assistant Secretary By: ING LIFE INSURANCE AND ANNUITY COMPANY (Depositor) Thomas J. McInerney* -------------------------------- Thomas J. McInerney President Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 15 to the Registration Statement has been signed below by the following persons in the capacities indicated and on the dates indicated. - --------------------------------------------------------------------------------
Signature Title Date --------- ----- ---- Thomas J. McInerney* Director and President ) - ------------------------------- (principal executive officer) ) Thomas J. McInerney ) ) ) Wayne R. Huneke* Director and Chief Financial Officer ) - ------------------------------- ) Wayne R. Huneke ) April ) 26, 2002 ) Randy Lowery* Director ) - ------------------------------- ) P. Randall Lowery ) ) ) Mark A. Tullis* Director ) - ------------------------------- ) Mark A. Tullis )
David Wheat* Director ) - ------------------------------- ) David Wheat ) ) By: /s/ J. Neil McMurdie ------------------------------- J. Neil McMurdie *Attorney-in-Fact
VARIABLE LIFE ACCOUNT B EXHIBIT INDEX EXHIBIT NO. EXHIBIT - ------------ ------- 99-2 Opinion and Consent of Counsel 99-6 Actuarial Opinion and Consent 99-7(a) Consent of Independent Auditors - KPMG LLP 99-7(b) Consent of Independent Auditors - Ernst & Young LLP (Hartford) 99-7(c) Consent of Independent Auditors - Ernst & Young LLP (Fort Wayne) EX-99.2 4 avplus53426-ex2.txt OPINION AND CONSENT OF COUNSEL Exhibit 99-2 Opinion and Consent of Counsel Exhibit 99-2 Opinion and Consent of Counsel [logo] ING AMERICAS US Legal Services Kimberly J. Smith Chief Counsel (610) 425-3427 Kim.Smith@ingva.com April 26, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Attention: Filing Desk RE: ING LIFE INSURANCE AND ANNUITY COMPANY (FORMERLY AETNA LIFE INSURANCE AND ANNUITY COMPANY) AND ITS VARIABLE LIFE ACCOUNT B POST-EFFECTIVE AMENDMENT NO. 15 TO THE REGISTRATION STATEMENT ON FROM S-6 PROSPECTUS TITLE: AETNAVEST PLUS SEC FILE NOS. 33-76018 AND 811-04536 Ladies and Gentlemen: The undersigned serves as counsel to ING Life Insurance and Annuity Company, a Connecticut life insurance company (the "Company"). It is my understanding that the Company, as depositor, has registered an indefinite amount of securities under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. In connection with this opinion, I have reviewed, or supervised the review of, this Post-Effective Amendment No. 15 to the Registration Statement on Form S-6 (File No. 33-76018). This filing describes the AetnaVest Plus Flexible Premium Variable Universal Life Insurance policies (the "Policies") offered by the Company through its Variable Life Account B (the "Account"). I have also examined, or supervised the examination of, originals or copies, certified or otherwise identified to my satisfaction, of such documents, trust records and other instruments I have deemed necessary or appropriate for the purpose of rendering this opinion. For purposes of such examination, I have assumed the genuineness of all signatures on original documents and the conformity to the original of all copies. On the basis of this examination, it is my opinion that: 1. The Company is a corporation duly organized and validly existing under the laws of the State of Connecticut. 2. The Account is a separate account of the Company duly created and validly existing pursuant to the laws of the State of Connecticut. 3. The assets of the Account will be owned by the Company. Under Connecticut law and the provisions of the Policies, the income, gains and losses, whether or not realized from assets allocated to the separate account, must be credited to or charged against such Account, without regard to other income, gains or losses of the Company. West Chester Site ING North America Insurance Company 1475 Dunwoody Drive West Chester, PA 19380-1478 4. The Policies provide that assets of the Account may not be charged with liabilities arising out of any other business the Company conducts, except to the extent that assets of the Account exceed its liabilities arising under the Policies. 5. The Policies, when issued in accordance with the Prospectus constituting a part of the Registration Statement and upon compliance with applicable local law, will be legal and binding obligations of the Company in accordance with their respective terms. I consent to the filing of this opinion as an exhibit to the Registration Statement. Sincerely, /s/ Kimberly J. Smith Kimberly J. Smith EX-99.6 5 avplus53426-ex6.txt ACTUARIAL CONSENT Exhibit 99.6 Actuarial Consent Exhibit 99.6 Actuarial Consent [LOGO] Lincoln Financial Group Lincoln Life THE LINCOLN NATIONAL LIFE INSURANCE COMPANY 350 CHURCH STREET HARTFORD, CT 06103-1106 April 26, 2002 U. S. Securities & Exchange Commission 450 Fifth Street, NW Washington, D.C. 20549-0506 Re: Variable Life Account B of ING Life Insurance and Annuity Company AetnaVest Plus (File No. 033-76018) Post Effective Amendment No. 15 Dear Sir or Madam: In my capacity as Actuary of The Lincoln National Life Insurance Company, administrator for the above-referenced ING Life Insurance and Annuity Company ("ING") policies, I have provided actuarial advice concerning ING's AetnaVest Plus Flexible Premium Variable Life Insurance Policy (the "Policies"). I also provided actuarial advice concerning the preparation of Post-Effective Amendment No. 15 to Registration Statement on Form S-6, File No. 033-76018 (the "Registration Statement") for filing with the Securities and Exchange Commission under the Securities Act of 1933 in connection with the Policy. In my opinion the illustrations of benefits under the Policies included in the prospectus under the caption "Illustrations of Death Benefit, Total Account Values and Surrender Values" are, based on the assumptions stated in the illustrations, consistent with the provisions of the Policies. Also, in my opinion the ages selected in the illustrations are representative of the manner in which the Policies operate. I hereby consent to the use of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Amber Miller Amber Miller, FSA, MAAA EX-99 6 avplus53426ex7a.txt EXHIBIT 7A INDEPENDENT AUDITOR'S CONSENT EXHIBIT 99.7(a) INDEPENDENT AUDITORS' CONSENT Exhibit 7(a) INDEPENDENT AUDITORS' CONSENT ----------------------------- The Shareholder and Board of Directors of ING Life Insurance and Annuity Company: We consent to the use of our report incorporated by reference herein. /s/ KPMG LLP Hartford, Connecticut April 25, 2002 EX-99 7 avplus53426ex7b.txt EXHIBIT 7B CONSENT OF INDEPENDENT AUDITORS EXHIBIT 99.7(b) CONSENT OF INDEPENDENT AUDITORS Exhibit 7(b) Consent of Independent Auditors The Board of Directors of ING Life Insurance and Annuity Company and Subsidiaries and the Contractholders of Variable Life Account B We consent to the use of our report dated January 31, 2002, with respect to the consolidated financial statements and schedules of ING Life Insurance and Annuity Company and Subsidiaries (formerly Aetna Life Insurance and Annuity Company and Subsidiaries and hereafter referred to as ILIAC) included in Post-Effective Amendment No. 15 to the Registration Statement (Form S-6 No. 33-76018) and related Prospectus of ING Life Insurance and Annuity Company and Subsidiaries. /s/Ernst & Young LLP Hartford, Connecticut April 26, 2002 EX-99 8 avplus53426ex7c.txt EXHIBIT 7C CONSENT OF ERNST & YOUNG LLP EXHIBIT 99.7(c) CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Exhibit 7(c) Consent of Ernst & Young LLP, Independent Auditors We consent to the reference to our firm under the caption "Independent Auditors" in the Post-Effective Amendment No. 15 to the Registration Statement (Form S-6 No. 33-76018) pertaining to Variable Life Account B of ING Life Insurance and Annuity Company, and to the use therein of our report dated March 1, 2002, with respect to the financial statements of Aetna Life Insurance and Annuity Company Variable Life Account B. /s/ Ernst & Young LLP Fort Wayne, Indiana April 19, 2002 -----END PRIVACY-ENHANCED MESSAGE-----