485BPOS 1 avplus_76041-485b.txt REGISTRATION STATEMENT
As filed with the Securities and Exchange Registration No. 33-76018 Commission on April 27, 2006 ----------------------------------------------------------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------------------------------------------------------------------------------------------------------- FORM S-6 POST-EFFECTIVE AMENDMENT NO. 19 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 ING Life Insurance and Annuity Company 151 Farmington Avenue, TS31, Hartford, Connecticut 06l56 Depositor's Telephone Number, including Area Code: (860) 723-2229 ----------------------------------------------------------------------------------------------------------------------------------- J. Neil McMurdie, Counsel cc: Lawrence A. Samplatsky, Esquire ING Life Insurance and Annuity Company The Lincoln National Life 151 Farmington Avenue, TS31, Hartford, Insurance Company Connecticut 06l56 350 Church Street-MLW1 (Name and Complete Address of Agent Hartford, CT 06103-1106 for Service) ----------------------------------------------------------------------------------------------------------------------------------- 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, 2005 was filed March 30, 2006. ----------------------------------------------------------------------------------------------------------------------------------- It is proposed that this filing will become effective: immediately upon filing pursuant to paragraph (b) of Rule 485 ------- X on May 1, 2006 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 Company 2 Cover Page; The Separate Account; The Company 3 Not Applicable 4 Cover Page; The Company The Separate Account; Additional Information--Distribution of the Policies 5 The Separate Account; The Company 6 The Separate 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 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
ING Life Insurance and Annuity Company Administrative Office: AETNAVEST PLUS 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: 1-(866)-723-4646 Telephone: (800) 334-7586 DATED: MAY 1, 2006
================================================================================ 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", "our"). In October 1998, the Company and life insurance affiliates of Lincoln Financial Group 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 available under the Policy, each of which invests in shares of a certain Fund. The Policy features Funds offered through the following fund families. Each Fund has its own investment objective. You should review each Fund's prospectus before making your decision. o ING VARIABLE PRODUCT FUNDS o ING PARTNERS, INC. o FIDELITY(R) VARIABLE INSURANCE PRODUCTS o JANUS ASPEN SERIES o OPPENHEIMER VARIABLE ACCOUNT FUNDS 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 BRANCH OR WRITING THE COMMISSION'S PUBLIC REFERENCE BRANCH, 100 F STREET, N.E. ROOM 1580, WASHINGTON, D.C. 20549 AND PAYING A DUPLICATING FEE. INFORMATION ON THE OPERATION OF THE COMMISSION'S PUBLIC REFERENCE BRANCH MAY BE OBTAINED BY CALLING 1-202-551-5850, 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 EXERCISING ELECTIONS UNDER A POLICY. YOU SHOULD ALSO KEEP THEM FOR FUTURE REFERENCE. TABLE OF CONTENTS Policy Summary ................................. 3 Replacements ................................ 3 Initial Choices to be Made .................. 3 Level or Varying Death Benefit .............. 3 Amount of Premium Payment ................... 4 Selection of Funding Vehicles ............... 4 Guaranteed Death Benefit Provision .......... 5 No-Lapse Coverage Provision ................. 5 Charges and Fees ............................ 5 Policy Loans ................................ 6 Changes in Specified Amount ................. 6 Factors to Consider Before Purchasing a Policy 6 The Company .................................... 7 The Separate Account ........................... 7 The General Account............................. 8 Allocation of Premiums ......................... 8 The Funds ................................... 9 Mixed and Shared Funding .................... 12 Fixed Account ............................... 12 Charges and Fees ............................... 13 Premium Charge .............................. 13 Charges and Fees Assessed Against the Total Account Value ............................. 13 Charges and Fees Assessed Against the Separate Account .......................... 14 Charges Assessed Against the Underlying Funds 14 Surrender Charge ............................ 17 Surrender Charges on Full and Partial Surrenders ........................ 18 Policy Choices ................................. 18 Death Benefit ............................... 18 Guaranteed Death Benefit Provision .......... 18 Premium Payments ............................ 19 Initial Allocations to Funding Options ...... 20 Transfers Between Funding Options ........... 20 Telephone Transfers ......................... 21 Market Timing ............................... 21 Limits Imposed by the Funds.................. 22 Automated Transfers (Dollar Cost Averaging).. 22 Policy Values .................................. 23 Total Account Value ......................... 23 Accumulation Unit Value ..................... 23 Maturity Value .............................. 24 Cash Surrender Value ........................ 24 Policy Rights .................................. 24 Full Surrenders.............................. 24 Partial Surrenders .......................... 24 Avoiding Loss of Coverage ................... 25 No-Lapse Coverage Provision ................. 25 Reinstatement of a Lapsed Policy ............ 25 Policy Loans: Preferred and Nonpreferred .... 26 Policy Changes for Increases, Decreases and Death Benefit Option....................... 27 Right to Examine the Policy ................. 28 Payment of Death Benefit ....................... 28 Policy Settlement .............................. 29 Settlement Options .......................... 29 Calculation of Settlement Payments on a Variable Basis ............................ 30 Special Plans .................................. 31 Directors and Officers ......................... 32 Additional Information ......................... 33 Reports to Policy Owners .................... 33 Right to Instruct Voting of Fund Shares ..... 33 Disregard of Voting Instructions ............ 33 State Regulation ............................ 34 Regulatory Developments -- The Company and the Industry.......................... 34 Investment Product Regulatory Issues......... 34 Insurance and Other Regulatory Matters....... 35 Legal Matters and Proceedings ............... 35 The Registration Statement .................. 35 Distribution of the Policies ................ 36 Records and Accounts ........................ 36 Independent Registered Public Accounting Firm 36 Tax Matters..................................... 37 Tax Status of the Company.................... 37 Tax Status of the Policy..................... 37 Diversification and Investor Control Requirements 37 Tax Treatment of Policy Death Benefits....... 38 Distributions Other than Death Benefits...... 38 Modified Endowment Contracts............... 38 Policies That Are Not Modified Endowment Contracts................................ 39 Investment in the Policy................... 39 Other Tax Matters............................ 39 Policy Loans............................... 39 Continuation of a Policy................... 40 Section 1035 Exchanges..................... 40 Tax-exempt Policy Owners................... 40 Tax Law Changes............................ 40 Policy Changes to Comply with the Law...... 40 Life Insurance Owned by Businesses......... 41 Income Tax Withholding..................... 41 Policy Transfers........................... 41 Miscellaneous Policy Provisions ................ 41 The Policy .................................. 41 Payment of Benefits ......................... 41 Age and Sex ................................. 41 Incontestability ............................ 42 Suicide ..................................... 42 Anti-Money Laundering........................ 42 Coverage Beyond Maturity .................... 43 Protection of Proceeds ...................... 43 Nonparticipation ............................ 43 Illustrations of Death Benefit, Total Account Values and Cash Surrender Values ............ 43 Financial Statements of the Separate Account ... B-1 Financial Statements of the Company ............ C-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. 2 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 3) a 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 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's specification page 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; and 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 3 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." 4 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 0.70%. We reserve the right to change this charge but it will never exceed 0.90% 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 0.30%. It will never exceed 0.50% 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. 5 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. 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; and 5) Sales Compensation - We pay compensation to firms for sales of the Policy. 6 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 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. In addition to serving as the depositor for the registrant, the Company is also the depositor of Variable Annuity Accounts B, C, G and I. (separate accounts of the Company registered as unit investment trusts). The Company's subsidiary, ING Financial Advisers, LLC, serves as the principal underwriter for the Policies and also acts as the principal underwriter for Variable Life Account B and Variable Annuity Accounts B, C, G and I of the Company. ING Financial Advisers, LLC, a Delaware limited liability company, is registered as a broker-dealer with the Commission. ING Financial Advisers, LLC is also a member of the National Association of Securities Dealers, Inc. (NASD) and the Securities Investor Protection Corporation. ING Financial Advisers, LLC's principal office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. The Lincoln National Life Insurance Company and its affiliates ("Lincoln") 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. 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 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. 7 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. We select the Funds offered through the policies based on several factors, including, without limitation, asset class coverage, the strength of the manager's reputation and tenure, brand recognition, performance, and the capability and qualification of each sponsoring investment firm. Another factor we consider during the initial selection process is whether the Fund or an affiliate of the Fund will compensate us for providing administrative marketing and/or support services that would otherwise be provided by the Fund, the Fund's investment advisor, or its distributor. We review each Fund periodically after it is selected. Upon review, we may remove a Fund or restrict allocation of additional purchase payments to a Fund if we determine the Fund no longer meets one or more of the factors and/or if the Fund has not attracted significant policy owner assets. 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. 8 THE FUNDS
----------------------------------------------------------------------------------------------------------------- FUND NAME INVESTMENT ADVISER/ INVESTMENT OBJECTIVE SUBADVISER ----------------------------------------------------------------------------------------------------------------- ING VP BALANCED PORTFOLIO, INC. ING Investments, LLC Seeks to maximize investment return, (CLASS I) consistent with reasonable safety of Subadviser: ING principal, by investing in a diversified Investment portfolio of one or more of the following Management Co. asset classes: stocks, bonds and cash equivalents, based on the judgment of the Portfolio's management, of which of those sectors or mix thereof offers the best investment prospects. ----------------------------------------------------------------------------------------------------------------- ING VP GROWTH AND INCOME PORTFOLIO ING Investments, LLC Seeks to maximize total return through (CLASS I) investments in a diversified portfolio of Subadviser: ING common stocks and securities convertible Investment to common stock. Management Co. ----------------------------------------------------------------------------------------------------------------- ING VP INDEX PLUS LARGE CAP PORTFOLIO ING Investments, LLC Seeks to outperform the total return (CLASS I) performance of the Standard & Poor's 500 Subadviser: ING Composite Stock Price Index (S&P 500), Investment while maintaining a market level of risk. Management Co. ----------------------------------------------------------------------------------------------------------------- ING VP INTERMEDIATE BOND PORTFOLIO ING Investments, LLC Seeks to maximize total return consistent (CLASS I) with reasonable risk, through investment Subadviser: ING in a diversified portfolio consisting Investment primarily of debt securities. Management Co. ----------------------------------------------------------------------------------------------------------------- ING VP MONEY MARKET PORTFOLIO ING Investments, LLC Seeks to provide high current return, (CLASS I) consistent with preservation of capital and liquidity, through investment in Subadviser: ING high-quality money market instruments. Investment There is no guarantee that this Management Co. sub-account will have a positive or level return. ----------------------------------------------------------------------------------------------------------------- ING VP STRATEGIC ALLOCATION MODERATE ING Investments, LLC Seeks to provide total return (i.e., PORTFOLIO income and capital appreciation, both (CLASS I) Subadviser: ING realized and unrealized). Managed for (formerly ING VP Strategic Allocation Investment investors seeking a balance between income Balanced Portfolio) Management Co. and capital appreciation who generally have an investment horizon exceeding ten years and a moderate level of risk tolerance. ----------------------------------------------------------------------------------------------------------------- ING VP STRATEGIC ALLOCATION GROWTH ING Investments, LLC Seeks to provide capital appreciation. PORTFOLIO Managed for investors seeking capital (CLASS I) Subadviser: ING appreciation who generally have an Investment investment horizon exceeding 15 years and Management Co. a high level of risk tolerance. -----------------------------------------------------------------------------------------------------------------
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----------------------------------------------------------------------------------------------------------------- FUND NAME INVESTMENT ADVISER/ INVESTMENT OBJECTIVE SUBADVISER ----------------------------------------------------------------------------------------------------------------- ING VP STRATEGIC ALLOCATION CONSERVATIVE ING Investments, LLC Seeks to provide total return consistent PORTFOLIO with preservation of capital. Managed for (CLASS I) Subadviser: ING investors primarily seeking total return (formerly ING VP Strategic Allocation Investment Management consistent with capital preservation who Income Portfolio) Co. generally have an investment horizon exceeding five years and a low level of risk tolerance. ----------------------------------------------------------------------------------------------------------------- ING JPMORGAN INTERNATIONAL PORTFOLIO ING Life Insurance and Seeks long-term growth of capital. (INITIAL CLASS) Annuity Company (formerly ING JPMorgan Fleming International Portfolio) Subadviser: JPMorgan Asset Management (London) Limited (JPMorgan London) ----------------------------------------------------------------------------------------------------------------- ING MFS CAPITAL OPPORTUNITIES PORTFOLIO ING Life Insurance and Seeks capital appreciation. (INITIAL CLASS) Annuity Company Subadviser: Massachusetts Financial Services Company (MFS) ----------------------------------------------------------------------------------------------------------------- ING LEGG MASON PARTNERS AGGRESSIVE ING Life Insurance and Seeks long-term growth of capital. GROWTH PORTFOLIO Annuity Company (INITIAL CLASS) (formerly ING Salomon Brothers Subadviser: Salomon Aggressive Growth Portfolio) Brothers Asset Management Inc. (SaBAM) ----------------------------------------------------------------------------------------------------------------- ING T. ROWE PRICE GROWTH EQUITY ING Life Insurance and Seeks long-term capital growth, and PORTFOLIO Annuity Company secondarily, increasing dividend income. (INITIAL CLASS) Subadviser: T. Rowe Price Associates, Inc. (T. Rowe Price) ----------------------------------------------------------------------------------------------------------------- ING UBS U.S. LARGE CAP EQUITY PORTFOLIO ING Life Insurance and Seeks long-term growth of capital and (INITIAL CLASS) Annuity Company future income. Subadviser: UBS Global Asset Management (Americas) Inc. (UBS Global AM) -----------------------------------------------------------------------------------------------------------------
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----------------------------------------------------------------------------------------------------------------- FUND NAME INVESTMENT ADVISER/ INVESTMENT OBJECTIVE SUBADVISER ----------------------------------------------------------------------------------------------------------------- FIDELITY VIP CONTRAFUND(R) PORTFOLIO Fidelity Management & Seeks long-term capital appreciation. (INITIAL CLASS) Research Company Subadvisers: Fidelity Management & Research (U.K.) Inc.; Fidelity Management & Research (Far East) Inc.; Fidelity Investments Japan Limited; FMR Co., Inc. ----------------------------------------------------------------------------------------------------------------- FIDELITY VIP EQUITY-INCOME PORTFOLIO Fidelity Management & Seeks reasonable income. Also considers (INITIAL CLASS) Research Company the potential for capital appreciation. Seeks to achieve a yield which exceeds the Subadviser: FMR Co., Inc. composite yield on the securities comprising the Standard & Poor's 500(SM) Index (S&P 500). ----------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES BALANCED PORTFOLIO Janus Capital Seeks long-term capital growth, consistent (INSTITUTIONAL SHARES) with preservation of capital and balanced by current income. ----------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES LARGE CAP GROWTH Janus Capital Seeks long-term growth of capital in a PORTFOLIO manner consistent with the preservation of (INSTITUTIONAL SHARES) capital. ----------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES MID CAP GROWTH Janus Capital Seeks long-term growth of capital. PORTFOLIO (INSTITUTIONAL SHARES) ----------------------------------------------------------------------------------------------------------------- JANUS ASPEN SERIES WORLDWIDE GROWTH Janus Capital Seeks long-term growth of capital in a PORTFOLIO manner consistent with the preservation of (INSTITUTIONAL SHARES) capital. ----------------------------------------------------------------------------------------------------------------- OPPENHEIMER GLOBAL SECURITIES FUND/VA OppenheimerFunds, Inc. Seeks long-term capital appreciation 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 into common stock in the U.S. and foreign countries. -----------------------------------------------------------------------------------------------------------------
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----------------------------------------------------------------------------------------------------------------- FUND NAME INVESTMENT ADVISER/ INVESTMENT OBJECTIVE SUBADVISER ----------------------------------------------------------------------------------------------------------------- OPPENHEIMER STRATEGIC BOND FUND/VA OppenheimerFunds, Inc. Seeks a high level of current 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. 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 12 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. CHARGES AND 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. 13 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. 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, 2005 unless otherwise indicated. Expenses of the Funds are not fixed or specified under the terms of the Policies, and actual expenses may vary. 14
FUND EXPENSE TABLE ------------------------------------------------------------------------------------------------------------------------- TOTAL FEES AND TOTAL NET MANAGEMENT FUND EXPENSES FUND (ADVISORY) OTHER ANNUAL WAIVED OR ANNUAL FUND NAME FEES EXPENSES EXPENSES REIMBURSED EXPENSES ------------------------------------------------------------------------------------------------------------------------- ING VP Balanced Portfolio, Inc. (Class I)(1)(2) 0.50% 0.10% 0.60% - 0.60% ------------------------------------------------------------------------------------------------------------------------- ING VP Growth and Income Portfolio (Class I)(1)(2) 0.50% 0.09% 0.59% - 0.59% ------------------------------------------------------------------------------------------------------------------------- ING VP Index Plus Large Cap Portfolio (Class I)(1)(2) 0.35% 0.10% 0.45% - 0.45% ------------------------------------------------------------------------------------------------------------------------- ING VP Intermediate Bond Portfolio (Class I)(1)(2) 0.40% 0.09% 0.49% - 0.49% ------------------------------------------------------------------------------------------------------------------------- ING VP Money Market Portfolio (Class I)(1)(2) 0.25% 0.10% 0.35% - 0.35% ------------------------------------------------------------------------------------------------------------------------- ING VP Strategic Allocation Moderate Portfolio (Class I)(1)(2)(3) (formerly ING VP Strategic Allocation Balanced Portfolio) 0.60% 0.14% 0.74% 0.04% 0.70% ------------------------------------------------------------------------------------------------------------------------- ING VP Strategic Allocation Growth Portfolio (Class I)(1)(2) 0.60% 0.13% 0.73% - 0.73% ------------------------------------------------------------------------------------------------------------------------- ING VP Strategic Allocation Conservative Portfolio (Class I)(1)(2)(3) (formerly ING VP Strategic Allocation Income Portfolio) 0.60% 0.15% 0.75% 0.10% 0.65% ------------------------------------------------------------------------------------------------------------------------- ING JPMorgan International Portfolio (Initial Class)(1)(4) (formerly ING JPMorgan Fleming International Portfolio) 0.80% 0.20% 1.00% - 1.00% ------------------------------------------------------------------------------------------------------------------------- ING MFS Capital Opportunities Portfolio (Initial Class)(1)(4) 0.65% 0.25% 0.90% - 0.90% ------------------------------------------------------------------------------------------------------------------------- ING Legg Mason Partners Aggressive Growth Portfolio (Initial Class)(1)(4) (formerly ING Salomon Brothers Aggressive Growth Portfolio) 0.68% 0.13% 0.81% - 0.81% ------------------------------------------------------------------------------------------------------------------------- ING T. Rowe Price Growth Equity Portfolio (Initial Class)(1)(4) 0.60% 0.15% 0.75% - 0.75% ------------------------------------------------------------------------------------------------------------------------- ING UBS U.S. Large Cap Equity Portfolio (Initial Class)(1)(4) 0.70% 0.15% 0.85% - 0.85% ------------------------------------------------------------------------------------------------------------------------- Fidelity(R) VIP Contrafund(R) Portfolio (Initial Class) (5) 0.57% 0.09% 0.66% - 0.66% ------------------------------------------------------------------------------------------------------------------------- Fidelity(R) VIP Equity-Income Portfolio (Initial Class) (6) 0.47% 0.09% 0.56% - 0.56% ------------------------------------------------------------------------------------------------------------------------- Janus Aspen Series Balanced Portfolio (Institutional Shares) 0.55% 0.02% 0.57% - 0.57% ------------------------------------------------------------------------------------------------------------------------- Janus Aspen Series Large Cap Growth Portfolio (Institutional Shares) 0.64% 0.02% 0.66% - 0.66% ------------------------------------------------------------------------------------------------------------------------- Janus Aspen Series Mid Cap Growth Portfolio (Institutional Shares) 0.64% 0.03% 0.67% - 0.67% ------------------------------------------------------------------------------------------------------------------------- Janus Aspen Series Worldwide Growth Portfolio (Institutional Shares) 0.60% 0.01% 0.61% - 0.61% ------------------------------------------------------------------------------------------------------------------------- Oppenheimer Global Securities Fund/VA(7) 0.63% 0.04% 0.67% - 0.67% ------------------------------------------------------------------------------------------------------------------------- Oppenheimer Strategic Bond Fund/VA(7) 0.69% 0.02% 0.71% - 0.71% -------------------------------------------------------------------------------------------------------------------------
15 (1) The amounts shown are estimated operating expenses for Class I shares of each Portfolio as a ratio of expenses to average net assets. These estimated expenses are based on each Portfolio's actual operating expenses for its most recently completed fiscal year, as adjusted for contractual changes, if any, and fee waivers, if any, to which the adviser has agreed. (2) ING Funds Services, LLC receives an annual administration fee equal to 0.055% on the first $5 billion of daily net assets and 0.03% of daily net assets thereafter. (3) ING Investments, LLC has entered into written expense limitation agreements with each Portfolio (except ING VP Balanced Portfolio, ING VP Growth and Income Portfolio, ING VP Intermediate Bond Portfolio, and ING VP Money Market Portfolio) under which it will limit expenses of the Portfolios, excluding interest, brokerage and extraordinary expenses, subject to possible recoupment by ING Investments, LLC within three years. The amount of each Portfolio's expenses waived, reimbursed or recouped during the last fiscal year by ING Investments, LLC is shown under the heading "Fees and Expenses Waived or Reimbursed". The expense limit for each Portfolio is shown as "Total Net Fund Annual Expenses". For each applicable Portfolio, the expense limits will continue through at least May 1, 2007. The expense limitation agreements are contractual and shall renew automatically for one-year terms unless ING Investments, LLC provides written notice of the termination of the expense limitation agreements within 90 days of the then-current term or upon termination of an investment management agreement. In addition, the expense limitation agreements may be terminated by the Company/Trust upon at least 90 days' prior written notice to ING Investments, LLC. (4) Under the Administrative Services Agreement between the Company and its administrator, ING Funds Services, LLC ("IFS"), IFS provides administrative services necessary for the Company's ordinary operation and is responsible for the supervision of the Company's other service providers. IFS also assumes all ordinary recurring costs of the Company, such as custodian fees, director's fees, transfer agency fees, and accounting fees. (5) A portion of the brokerage commissions that the fund pays may be reimbursed and 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 the fund's custodian expenses. Including these reductions, the "Net Operating Fund Operating Expenses" for the Fidelity(R) VIP Contrafund(R) Portfolio (Initial Class) would have been 0.64%. This offset may be discontinued at any time. (6) A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses. Including this reduction, the "Net Operating Fund Operating Expenses" for the Fidelity(R) VIP Equity-Income Portfolio (Initial Class) would have been 0.55%. This offset may be discontinued at any time. (7) The fees and expenses are based on the Fund's expenses during its fiscal year ended December 31, 2005. Expenses may vary in future years. "Other Expenses" include transfer agent fees, custodial fees, and accounting and legal expenses that the Fund pays. The fund's transfer agent has voluntarily agreed to limit transfer and shareholder servicing fees to 0.35% per fiscal year, for both classes. That undertaking may be amended or withdrawn at any time. The transfer agent fees did not exceed the expense limitation described above. Each Fund deducts management fees from the amounts allocated to the Funds. In addition, each Fund deducts other expenses which may include service fees which are used to compensate service providers, including the Company and its affiliates, for administrative and policy owner services provided on behalf of the Fund. Furthermore, certain Funds may deduct redemption fees as a result of withdrawals, transfers, or other Fund transactions you initiate. If applicable, we may deduct the amount of any redemption fees imposed by an underlying Fund. Fund redemption fees, if any, are separate and distinct from any transaction or periodic fees and charges deducted from your policy value. FOR A MORE COMPLETE DESCRIPTION OF THE FUNDS' FEES AND EXPENSES, REVIEW EACH FUND'S PROSPECTUS. The Company, or its U.S. affiliates, receives from each of the Funds or the Funds' affiliates varying levels and types of revenue with respect to each of the Funds available through the policy. In terms of the total dollar amounts received, the greatest amount of revenue comes from assets allocated to Funds managed by the 16 Company, ING Investments, LLC or other Company affiliates, which Funds may or may not be subadvised or are subadvised by another Company affiliate. Assets allocated to Funds managed by the Company or a Company affiliate but which are subadvised by unaffiliated third parties generate the next greatest amount of revenue. Finally, assets allocated to unaffiliated Funds generate the least amount of revenue. TYPES OF REVENUE RECEIVED FROM AFFILIATED FUNDS. Affiliated Funds are (a) Funds managed by the Company, ING Investments, LLC or other Company affiliates, which Funds are either not subadvised or are subadvised by another Company affiliate; and (b) Funds managed by the Company or a Company affiliate but which are subadvised by unaffiliated third parties. Revenues received by the Company from affiliated Funds and/or their affiliates may include: o Service fees that are deducted from Fund assets; and o Revenues which may be based either on an annual percentage of average net assets held in the Fund by the Company or a percentage of the management fees. These revenues may be received as cash payments or according to a variety of financial accounting techniques which are used to allocate revenue and profits across businesses. For Funds subadvised by unaffiliated third parties, once the subadviser has been paid, and affiliated adviser may share a portion of the remaining management fee with the Company. Because subadvisory fees vary by subadviser, varying amounts of revenue are retained by the affiliated investment adviser and ultimately shared with the Company. TYPES OF REVENUE RECEIVED FROM UNAFFILIATED FUNDS. Revenue received from each of the unaffiliated Funds or their affiliates are based on an annual percentage of the average net assets held in that fund by the Company. Some unaffiliated Funds or their affiliates pay us more than others and some of the amounts we receive may be significant. Revenues received by the Company from unaffiliated Funds and/or their affiliates may include: o For certain Funds, compensation paid service fees that are deducted from Fund assets; and o Additional payments for administrative, recordkeeping or other services which we provide to the Funds or their affiliates or as an incentive for us to make the Funds available through the policy. These additional payments may be used by us to finance distribution of the policy. 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 17 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.") 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. 18 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 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 19 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: 1) 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; 2) 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; 3) 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; 4) 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; and 5) 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 20 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. 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. MARKET TIMING Frequent, large, or short-term transfers among subaccounts and the fixed account, such as those associated with "market timing" transactions, can affect the Funds and their investment returns. Such transfers may dilute the value of the Fund shares, interfere with the efficient management of the Fund's portfolio, and increase brokerage and administrative costs of the Funds. As an effort to protect our Policy owners and the Funds from potentially harmful trading activity, we utilize certain market timing policies and procedures (the "Market Timing Procedures"). Our Market Timing Procedures are designed to detect and prevent such transfer activity among the subaccounts and the fixed account that may affect other Policy owners or Fund shareholders. We discourage frequent transfers, and we accommodate frequent transfers only if we lack a contractual basis to refuse those transfer requests. We discourage frequent trading by assessing transfer charges and enforcing limitations on transfers to the extent allowed by the Policies as described in the Transfers section of the prospectus. We apply these limitations 21 uniformly to all Policy owners. If we are unable to prevent market timing, certain Policy owners may engage in market timing activity which is harmful to other Policy owners. That harm may include the dilution of the value of Fund shares and increased expenses which negatively impact investment returns as described above. The Funds may have adopted their own policies and procedures with respect to frequent purchases and redemptions of their respective shares. The prospectuses for the Funds describe any such policies and procedures, which may be more or less restrictive than the frequent trading policies and procedures of other Funds and the Market Timing Procedures we have adopted to discourage frequent transfers among subaccounts. Policy owners and other persons with interests under the Policies should be aware that we may not have the contractual obligation or the operational capacity to apply the frequent trading policies and procedures of the Funds. In our sole discretion, we may impose revised Market Timing Procedures at any time without prior notice as necessary to better detect and deter frequent, large, or short-term transfer activity and/or to impose additional or alternate restrictions on market timers (such as dollar or percentage limits on transfers). We will apply these revised Market Timing Procedures uniformly to all Policy owners. In addition, we may impose other procedures or restrictions as required by law or court order, or to comply with state or federal regulatory requirements. We may be required to provide additional information about a Policy owner's account to government regulators. We also reserve the right to implement and administer redemption fees imposed by one or more of the Funds in the future. LIMITS IMPOSED BY THE FUNDS Most underlying Funds have their own excessive trading policies, and orders for the purchase of Fund shares may be subject to acceptance or rejection by the underlying Fund. We reserve the right to reject, without prior notice, any allocation or transfer to a sub-account if the sub-account's investment in its corresponding fund is not accepted by the Fund for any reason. 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 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. We do not offer any automated or on-demand transfer option to restore or rebalance your sub-accounts to certain percentages of your total account value. 22 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: 1) multiplying the total number of accumulation units credited to the Policy for each applicable Fund by its appropriate current AUV; 2) if you have elected a combination of Funds, totaling the resulting values; and 3) 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. 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: 1) the net assets of the Fund held in Variable Life Account B at the end of a valuation period; minus 23 2) the net assets of the Fund held in Variable Life Account B at the beginning of that valuation period; plus or minus 3) 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 4) the value of the accumulation units held by Variable Life Account B at the beginning of the valuation period; minus 5) 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. 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. 24 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. If you request lump sum surrender and the policy's surrender value is over $10,000, your surrender proceeds will be placed into a SECURELINE(R) account in your name. Refer to the description of the SECURELINE(R) account under the section headed "Protection of Proceeds" for more information. 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 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. 25 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. 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 26 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 FOR INCREASES, DECREASES AND DEATH BENEFIT OPTION 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: 1) Satisfactory evidence of insurability may be required; 2) 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; 3) An increase in the specified amount will increase the surrender charge; 4) 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; 5) Increases through the fifth year are limited to four times the initial specified amount; and 6) 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: 1) No decrease may reduce the specified amount to less than the minimum for this type of policy. (See Death Benefit); and 2) 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: 1) 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; 2) There will be no change in the surrender charge, and evidence of insurability may be required; 3) We will not allow a change in the death benefit option if the specified amount will be reduced below the minimum specified amount; 4) 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;* and 27 5) 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.") If the recipient of the death benefit proceeds has elected a lump sum settlement and the death benefit proceeds are over $10,000, the proceeds will be placed into an interest-bearing account in the recipient's name. The SECURELINE(R) account allows the recipient additional time to decide how to manage the proceeds with the balance earning interest from the day the account is opened. Refer to the description of the SECURELINE(R) account under the section headed "Protection of Proceeds" for more information. 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. 28 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. 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; or 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. 29 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. 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 3.5% 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 3.5% 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: 1) 4.75% on an annual basis, plus an annual return of up to 0.25% needed to offset the administrative charge in effect at the time settlement option payments start, if an assumed net investment rate of 3.5% is chosen; or 2) 6.25% on an annual basis, plus an annual return of up to 0.25% 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: 1) the portion of the proceeds applied to make payments on the variable basis; divided by 2) 1,000; times 3) the payment rate per $1000 of proceeds for the option chosen as shown in the policy. 30 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 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: 1) The settlement option unit value for the previous valuation period; times 2) The net return factor (as defined below) for the valuation period; times 3) 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. 31 DIRECTORS AND OFFICERS The following is a list of current directors and principal officers of the Company, their position with the Company and their business experience during the past five years.
NAME AND ADDRESS POSITION WITH COMPANY BUSINESS EXPERIENCE DURING PAST 5 YEARS ---------------- --------------------- --------------------------------------- Thomas J. McInerney* Director and Chairman Has held several directorships and various executive officer positions with various ING affiliated companies since 1997, including positions as Director, Chief Executive Officer, and President. Brian Comer** President Has held several directorships and various executive officer positions with various ING affiliated companies since 2000, including positions as Director and President. Jacques de Vaucleroy* Director and Has held several directorships and various executive Senior Vice President officer positions with various ING affiliated companies since 2001, including positions as Director and Senior Vice President. Kathleen A. Murphy* Director Has held several directorships and various executive officer positions with various ING affiliated companies since 1987, including positions as Director, Senior Vice President, General Counsel, Deputy General Counsel, Chief Compliance Officer. Catherine H. Smith** Director Has held several directorships and various executive officer positions with various ING affiliated companies since 1998, including positions as Director, Chairman, Senior Vice President, Chief Operations Officer. David Wheat* Director, Vice President Has held several directorships and various executive and Chief Financial officer positions with various ING affiliated Officer companies since 2001, including positions as Director, Senior Vice President and Chief Financial Officer of various ING affiliated companies since 2003. Chief Accounting Officer of various ING affiliated companies from 2001 to 2002. Joy M. Benner*** Secretary Has held several positions with various ING affiliated companies since 1999. Secretary since February 2006.
Directors, officers and employees of the Company are covered by a blanket fidelity bond in an amount in excess of $50 million. * 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 this Officer is 151 Farmington Avenue, Hartford, Connecticut 06156-8975. These individuals may also be directors and/or officers of other affiliates of the company. *** The address of this Officer is 20 Washington Avenue South, Minneapolis, Minnesota 55401. This individual may also be an officer of other affiliates of the Company. 32 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; and 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 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 33 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. REGULATORY DEVELOPMENTS - THE COMPANY AND THE INDUSTRY As with many financial services companies, the Company and its affiliates have received informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the financial services industry. In each case, the Company and its affiliates have been and are providing full cooperation. INVESTMENT PRODUCT REGULATORY ISSUES Since 2002, there has been increased governmental and regulatory activity relating to mutual funds and variable insurance products. This activity has primarily focused on inappropriate trading of Fund shares, revenue sharing and directed brokerage, compensation, sales practices and suitability, arrangements with service providers, pricing, compliance and controls, adequacy of disclosure and document retention. In addition to responding to governmental and trading requests on Fund trading issues, ING management, on its own initiative, conducted, through special counsel and a national accounting firm, an extensive internal review of mutual fund trading in the ING insurance, retirement, and mutual fund products. The goal of this review was to identify any instances of inappropriate trading in those products by third parties or by ING investment professionals and other ING personnel. The internal review identified several isolated arrangements allowing third parties to engage in frequent trading of mutual funds within the variable insurance and mutual fund products of ING, and identified other circumstances where frequent trading occurred despite measures taken by ING intended to combat market timing. Each of the arrangements has been terminated and disclosed to regulators, to the independent trustees of ING Funds (U.S.) and in Company reports previously filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended. In September 2005, an affiliate of the Company, ING and one of its registered persons settled an administrative proceeding with the National Association of Securities Dealers ("NASD") in connection with frequent trading arrangements. IFD neither admitted nor denied the allegations or findings and consented to certain monetary sanctions. IFD's settlement of this administrative proceeding is not material to the Company. Other regulators, including the SEC and the New York Attorney General, are also likely to take some action with respect to the Company or certain affiliates before concluding their investigation of ING relating to Fund trading. The potential outcome of such action is difficult to predict but could subject the Company or certain affiliates to 34 adverse consequences, including, but not limited to, settlement payments, penalties, and other financial liability. It is not currently anticipated, however, that the actual outcome of such action will have a material adverse effect on ING or ING's U.S.-based operations, including the Company. ING has agreed to indemnify and hold harmless the ING Funds from all damages resulting from wrongful conduct by ING or its employees or from ING's internal investigation, any investigations conducted by any governmental or self-regulatory agencies, litigation or other formal proceedings, including any proceedings by the SEC. Management reported to the ING Funds Board that ING management believes that the total amount of any indemnification obligations will not be material to ING or ING's U.S.-based operations, including the Company. INSURANCE AND OTHER REGULATORY MATTERS The New York Attorney General and other federal and state regulators are also conducting broad inquiries and investigations involving the insurance industry. These initiatives currently focus on, among other things, compensation and other sales incentives, potential conflicts of interest, potential anti-competitive activity, reinsurance, marketing practices, specific product types (including group annuities and indexed annuities), and disclosure. It is likely that the scope of these industry investigations will further broaden before they conclude. The Company and certain of its U.S. affiliates have received formal and informal requests in connection with such investigations, and are cooperating fully with each request for information. These initiatives may result in new legislation and regulation that could significantly affect the financial services industry, including businesses in which the Company is engaged. In light of these and other developments, U.S. affiliates of ING, including the Company, periodically review whether modifications to their business practices are appropriate. LEGAL MATTERS AND PROCEEDINGS We are not aware of any pending legal proceeding which involves the separate account as a party. The Company is involved in threatened or pending lawsuits/arbitrations arising from the normal conduct of business. Due to the climate in insurance and business litigation/arbitrations, suits against the Company sometimes include claims for substantial compensatory, consequential, or punitive damages and other types of relief. Moreover, certain claims are asserted as class actions, purporting to represent a group of similarly situated individuals. While it is not possible to forecast the outcome of such lawsuits/arbitrations, in light of existing insurance, reinsurance, and established reserves, it is the opinion of management that the disposition of such lawsuits/arbitrations will not have a materially adverse effect on the Company's operations or financial position. ING Financial Advisers, LLC, the principal underwriter and distributor of the contract, is a party to threatened or pending lawsuits/arbitration that generally arise from the normal conduct of business. Some of these suits may seek class action status and sometimes include claims for substantial compensatory, consequential or punitive damages and other types of relief. ING Financial Advisers, Inc. is not involved in any legal proceeding which, in the opinion of management, is likely to have a material adverse affect on its ability to distribute the policy. 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. 35 The Policies are no longer offered for sale. DISTRIBUTION OF THE POLICIES ING Financial Advisers, LLC serves as principal underwriter of the securities offered hereunder as defined by the federal securities laws. ING Financial Advisers, LLC is registered as a broker-dealer with the Commission and is a member of the National Association of Securities Dealers, Inc. ("NASD"). ING Financial Advisers, LLC has contracted with one or more registered broker-dealers including broker-dealers affiliated with it ("distributors") to service the Policies. All persons servicing 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. These additional types of compensation are not offered to all broker-dealers. The terms of any particular agreement governing compensation may vary among broker-dealers and the amount may be significant. The prospect of receiving, or the receipt of, additional compensation may provide broker-dealers and/or their registered representatives with an incentive to favor sales of the policies over other variable life insurance policies (or other investments) with respect to which a broker-dealer does not receive additional compensation, or lower levels of additional compensation. You may wish to take such payments into account when considering and evaluating any recommendation relating to the Policies. ING Financial Advisers, LLC may also contract with independent third party broker-dealers who will act as wholesalers. These parties may also provide training, marketing and other sales related functions for ING Financial Advisers, LLC 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 performs certain administrative functions relating to the Policies, and maintains books and records necessary to operate and administer the Policies. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Ernst & Young LLP, 2300 National City Center, 110 West Berry Street, Fort Wayne, Indiana 46802 is the independent registered public accounting firm for Variable Life Account B. Ernst & Young LLP, 600 Peachtree Street, Suite 2800, Atlanta, Georgia 30308-2215 is the independent registered public accounting firm for the Company. The independent registered public accounting firm provides 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. 36 TAX MATTERS The following summary provides a general description of the federal income tax considerations associated with the Policy and does not purport to be complete or to cover federal estate, gift and generation-skipping tax implications, state and local taxes or other tax situations. This discussion is not intended as tax advice. Counsel or other qualified tax advisers should be consulted for more complete information. This discussion is based upon our understanding of the present federal income tax laws. No representation is made as to the likelihood of continuation of the present federal income tax laws or as to how they may be interpreted by the Internal Revenue Service ("IRS"). The following discussion generally assumes that the Policy will qualify as a life insurance contract for federal tax purposes. TAX STATUS OF THE COMPANY We are taxed as a life insurance company under the Internal Revenue Code. The separate account is not a separate entity from us. Therefore, it is not taxed separately as a "regulated investment company," but is taxed as part of the Company. We automatically apply investment income and capital gains attributable to the separate account to increase reserves under the Policy. Because of this, under existing federal tax law we believe that any such income and gains will not be taxed to us. 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 some or all of the Policies) to set aside provisions to pay such taxes. TAX STATUS OF THE POLICY This Policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the Policy shall be construed in a manner which is consistent with that design. In order to qualify as a life insurance contract for federal income tax purposes and to receive the tax treatment normally accorded life insurance contracts under federal tax law, a Policy must satisfy certain requirements which are set forth in Section 7702 of the Internal Revenue Code. If your variable life Policy does not satisfy the requirements set forth in Section 7702 of the Internal Revenue Code, it will not be treated as life insurance under Internal Revenue Code 7702. You could then be subject to federal income tax on your Policy income as you earn it. While there is very little guidance as to how these requirements are applied, we believe it is reasonable to conclude that our policies satisfy the applicable requirements. If it is subsequently determined that a Policy does not satisfy the applicable requirements, we will take appropriate and reasonable steps to bring the Policy into compliance with such requirements and we reserve the right to restrict Policy transactions or modify your Policy in order to do so. (See Tax Treatment of Policy Death Benefits.) DIVERSIFICATION AND INVESTOR CONTROL REQUIREMENTS In addition to meeting the Internal Revenue Code Section 7702 tests, Internal Revenue Code Section 817(h) requires investments within a separate account, such as our separate account, to be adequately diversified. The Treasury has issued regulations which set the standards for measuring the adequacy of any diversification, and the Internal Revenue Service has published various revenue rulings and private letter rulings addressing diversification issues. To be adequately diversified, each subaccount and its corresponding Fund must meet certain tests. If these tests are not met, your variable life policy will not be adequately diversified and not treated 37 as life insurance under Internal Revenue Code Section 7702. You would then be subject to federal income tax on your policy income as you earn it. Each subaccount's corresponding Fund has represented that it will meet the diversification standards that apply to your policy. Accordingly, we believe it is reasonable to conclude that the diversification requirements have been satisfied. If it is determined, however, that your variable life policy does not satisfy the applicable diversification regulations, we will take appropriate and reasonable steps to bring your policy into compliance with such regulations and we reserve the right to modify your policy as necessary in order to do so. In certain circumstances, owners of a variable life insurance policy have been considered, for federal income tax purposes, to be the owners of the assets of the separate account supporting their policies, due to their ability to exercise investment control over such assets. When this is the case, the policy owners have been currently taxed on income and gains attributable to the separate account assets. Your ownership rights under your Policy are similar to, but different in some ways from those described by the IRS in rulings in which it determined that Policy owners are not owners of separate account assets. For example, you have additional flexibility in allocating your premium payments and in your Policy values. These differences could result in the IRS treating you as the owner of a pro rata share of the separate account assets. We do not know what standards will be set forth in the future, if any, in Treasury regulations or rulings. We reserve the right to modify your Policy, as necessary, to try to prevent you from being considered the owner of a pro rata share of the separate account assets, or to otherwise qualify your Policy for favorable tax treatment. TAX TREATMENT OF POLICY DEATH BENEFITS The death benefit under a Policy is generally excludable from the gross income of the beneficiary(ies) under Section 101(a)(1) of the Internal Revenue Code. However, there are exceptions to this general rule. Additionally, federal and local transfer, estate inheritance and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Policy owner or beneficiary(ies). A qualified tax adviser should be consulted about these consequences. DISTRIBUTIONS OTHER THAN DEATH BENEFITS Generally, the Policy owner will not be taxed on any of the Policy value until there is a distribution. When distributions from a Policy occur, or when loan amounts are taken from or secured by a Policy, the tax consequences depend on whether or not the Policy is a "modified endowment contract." Modified Endowment Contracts Under the Internal Revenue Code, certain life insurance contracts are classified as "modified endowment contracts" and are given less favorable tax treatment than other life insurance contracts. Due to the flexibility of the Policies as to premiums and benefits, the individual circumstances of each Policy will determine whether or not it is classified as a modified endowment contract. The rules are too complex to be summarized here, but generally depend on the amount of premiums we receive during the first seven Policy years. Certain changes in a Policy after it is issued, such as reduction or increase in benefits or Policy reinstatement, could also cause it to be classified as a modified endowment contract or increase the period during which the policy must be tested. A current or prospective Policy owner should consult with a qualified tax adviser to determine whether or not a Policy transaction will cause the Policy to be classified as a modified endowment contract. If a Policy becomes a modified endowment contract, distributions that occur during the Policy year will be taxed as distributions from a modified endowment contract. In addition, distributions from a Policy within two years before it becomes a modified endowment contract will be taxed in this manner. This means that a distribution made from a Policy that is not a modified endowment contract could later become taxable as a distribution from a modified endowment contract. 38 Additionally, all modified endowment contracts that are issued by us (or our affiliates) to the same Policy owner during any calendar year are treated as one modified endowment contract for purposes of determining the amount includible in the Policy owner's income when a taxable distribution occurs. Once a Policy is classified as a modified endowment contract, the following tax rules apply both prospectively and to any distributions made in the prior two years: 1) All distributions other than death benefits, including distributions upon surrender and withdrawals, from a modified endowment contract will be treated first as distributions of gain, if any, taxable as ordinary income. Amounts will be treated as tax-free recovery of the Policy owner's investment in the Policy only after all gain has been distributed. The amount of gain in the Policy will be equal to the difference between the Policy's value and the investment in the Policy; 2) Loan amounts taken from or secured by a Policy classified as a modified endowment contract, and also assignments or pledges of such a Policy (or agreements to assign or pledge such a Policy), are treated as distributions and taxed first as distributions of gain, if any, taxable as ordinary income and as tax-free recovery of the Policy owner's investment in the Policy only after all gain has been distributed; and 3) A 10% additional income tax penalty may be imposed on the distribution amount subject to income tax. This tax penalty generally does not apply to distributions (a) made on or after the date on which the taxpayer attains age 59 1/2, (b) which are attributable to the taxpayer's becoming disabled (as defined in the Internal Revenue Code), or (c) which are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of the taxpayer and his or her beneficiary. Consult a qualified tax adviser to determine whether or not you may be subject to this penalty tax. Policies That Are Not Modified Endowment Contracts Distributions other than death benefits from a Policy that is not classified as a modified endowment contract are generally treated first as a recovery of the Policy owner's investment in the Policy. Only after the recovery of all investment in the Policy is there taxable income. However, certain distributions made in connection with Policy benefit reductions during the first fifteen Policy years may be treated in whole or in part as ordinary income subject to tax. Consult a qualified tax adviser to determine whether or not any distributions made in connection with a reduction in Policy benefits will be subject to tax. Loan amounts from or secured by a Policy that is not a modified endowment contract are generally not taxed as distributions. However, the tax consequences of preferred loans are uncertain and a qualified tax adviser should be consulted about such loans. Finally, neither distributions from, nor loan amounts from or secured by, a Policy that is not a modified endowment contract are subject to the 10% additional income tax. Investment in the Policy Your investment in the Policy is generally the total of your aggregate premiums. When a distribution is taken from the Policy, your investment in the Policy is reduced by the amount of the distribution that is tax free. OTHER TAX MATTERS Policy Loans In general, interest on a loan will not be deductible. A limited exception to this rule exists for certain interest paid in connection with certain "key person" insurance. You should consult a qualified tax adviser to determine whether you qualify under this exception. 39 Moreover, the tax consequences associated with a preferred loan available in the Policy are uncertain. Before taking out a loan, you should consult a qualified tax adviser as to the tax consequences. If a loan from a Policy is outstanding when the Policy is surrendered or lapses, then the amount of the outstanding indebtedness will be added to the amount treated as a distribution from the Policy and will be taxed accordingly. Continuation of a Policy The tax consequences of continuing the Policy beyond maturity are unclear. For example, in certain situations it is possible that after the insured person reaches age 100, the IRS could treat you as being in constructive receipt of the account value if the account value becomes equal to the death benefit. If this happens, an amount equal to the excess of the account value over the investment in the Policy would be includible in your income at that time. Because we believe the Policy will continue to constitute life insurance at that time and the IRS has not issued any guidance on this issue, we do not intend to tax report any earnings due to the possibility of constructive receipt in this circumstance. You should consult a qualified tax adviser if you intend to keep the Policy in force after the maturity date. Section 1035 Exchanges Internal Revenue Code Section 1035 provides, in certain circumstances, that no gain or loss will be recognized on the exchange of one life insurance policy solely for another life insurance policy or an endowment or annuity contract. We accept 1035 exchanges with outstanding loans. Special rules and procedures apply to 1035 exchanges. These rules can be complex, and if you wish to take advantage of Section 1035, you should consult your qualified tax adviser. Tax-exempt Policy Owners Special rules may apply to a Policy that is owned by a tax-exempt entity. Tax-exempt entities should consult their qualified tax adviser regarding the consequences of purchasing and owning a Policy. These consequences could include an effect on the tax-exempt status of the entity and the possibility of the unrelated business income tax. Tax Law Changes Although the likelihood of legislative action or tax reform is uncertain, there is always the possibility that the tax treatment of the Policy could be changed by legislation or other means. It is also possible that any change may be retroactive (that is, effective before the date of the change). You should consult a qualified tax adviser with respect to legislative developments and their effect on the Policy. Policy Changes to Comply with the Law So that your Policy continues to qualify as life insurance under the Internal Revenue Code, we reserve the right to refuse to accept all or part of your premium payments or to change your death benefit. We may refuse to allow you to make partial withdrawals that would cause your Policy to fail to qualify as life insurance. We also may make changes to your Policy or its riders or make distributions from your Policy to the degree that we deem necessary to qualify your Policy as life insurance for tax purposes. If we make any change of this type, it applies the same way to all affected Policies. Any increase in your death benefit will cause an increase in your cost of insurance charges. 40 Life Insurance Owned by Businesses In recent years, Congress has adopted new rules relating to life insurance owned by businesses. For example, in the case of a Policy issued to a nonnatural taxpayer, or held for the benefit of such an entity, a portion of the taxpayer's otherwise deductible interest expenses may not be deductible as a result of ownership of a Policy even if no loans are taken under the Policy. (An exception to this rule is provided for certain life insurance contracts which cover the life of an individual who is a 20-percent owner, or an officer, director, or employee of a trade or business.) As another example, special rules apply if you are subject to the alternative minimum tax. Any business contemplating the purchase of a new Policy or a change in an existing Policy should consult a qualified tax adviser. Income Tax Withholding The IRS requires us to withhold income taxes from any portion of the amounts individuals receive in a taxable transaction. We generally do not withhold income taxes if you elect in writing not to have withholding apply. If the amount withheld for you is insufficient to cover income taxes, you will have to pay income taxes and possibly penalties later. Policy Transfers The transfer of the Policy or designation of a beneficiary may have federal, state and/or local transfer and inheritance tax consequences, including the imposition of gift, estate and generation-skipping transfer taxes. The individual situation of each Policy owner or beneficiary will determine the extent, if any, to which federal, state and local transfer and inheritance taxes may be imposed and how ownership or receipt of Policy proceeds will be treated for purposes of federal, state and local estate, inheritance, generation skipping and other taxes. YOU SHOULD CONSULT QUALIFIED LEGAL OR TAX ADVISERS FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS. 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. 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.) 41 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 1) plus 2) minus 3) where: 1) equals premiums paid less amounts allocated to the separate account; and 2) equals the separate account value on the date of suicide, plus the portion of the monthly deduction from the separate account value; and 3) equals 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 1) and 3) above will be calculated as of the date of death. ANTI-MONEY LAUNDERING In order to protect against the possible misuse of our products in money laundering or terrorist financing, we have adopted an anti-money laundering program satisfying the requirements of the USA PATRIOT Act. Among other things, this program requires us, our agents and customers to comply with certain procedures and standards that serve to assure that our customers' identities are properly verified and that premiums are not derived from improper sources. Under our anti-money laundering program, we may require Policy owners, insured persons and/or beneficiaries to provide sufficient evidence of identification, and we reserve the right to verify any information provided to us by accessing information databases maintained internally or by outside firms. When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We may also ask to see your driver's license, photo identification or other identifying documents. We may also refuse to accept certain forms of premium payments or loan repayments (travelers cheques, for example) or restrict the amount of certain forms of premium payments or loan repayments (money orders totaling more than $5,000, for example). In addition, we may require information as to why a particular form of payment was used (third party checks, for example) and the source of the funds of such payment in order to determine whether or not we will accept it. Use of an unacceptable form of payment may result in your policy lapsing or entering a 61-day grace period during which you must make a sufficient payment, in an acceptable form, to keep your Policy from lapsing. Applicable laws designed to prevent terrorist financing and money laundering might, in certain circumstances, require us to block certain transactions until authorization is received from the appropriate regulator. We may also be required to provide additional information about you and your Broker to government regulators. Our anti-money laundering program is subject to change without notice to take account of changes applicable in laws or regulations and our ongoing assessment of our exposure to illegal activity. 42 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. 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.") The coverage beyond maturity provision is only available in approving states. This provision is not available in New York. 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. For surrenders and death benefit settlements where the proceeds are over $10,000, the proceeds will be placed into a SECURELINE(R) account. The SECURELINE(R) account is a special service that we offer in which your death benefit or surrender proceeds are placed into an interest-bearing account. Instead of mailing you (or the recipient of the proceeds) a check, we will send a checkbook so that you (or the proceeds recipient) will have access to the account simply by writing a check for all or any part of the proceeds. The SECURELINE(R) account is part of Lincoln's general account. It is not a bank account and it is not insured by the FDIC or any other government agency. As part of Lincoln's general account, it is subject to the claims of Lincoln's creditors. Lincoln receives a benefit from all amounts left in the SECURELINE(R) account. NONPARTICIPATION The Policy is not entitled to share in the divisible surplus of the Company. No dividends are payable. 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. 43 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 0.35% to 1.00%. An arithmetic average of 0.68% 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. 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%. 44 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. 45 AETNAVEST PLUS POLICY TABLE II FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) 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 20 (Age 65) 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. 46 AETNAVEST PLUS POLICY TABLE III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) 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 20 (Age 65) 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. 47 AETNAVEST PLUS POLICY TABLE IV FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) 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. 48 AETNAVEST PLUS POLICY TABLE V FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) 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. 49 AETNAVEST PLUS POLICY TABLE VI FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) 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. 50 AETNAVEST PLUS POLICY TABLE VII FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) 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. 51 AETNAVEST PLUS POLICY TABLE VIII FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY(1) 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. 52 Variable Life B of ING Life Insurance and Annuity Company Statement of assets and liabilities December 31, 2005
Mortality & Expense Contract Contract Guarantee Purchases Redemptions Charges Due from Due to Payable to ING Life ING Life ING Life Insurance Insurance Insurance and Annuity and Annuity and Annuity Subaccount Investments Company Total Assets Company Company Net Assets ------------------------------------------------------------------------------------------------------------------------ Fidelity VIP Asset Manager $ 95,464 $ -- $ 95,464 $ -- $ 5 $ 95,459 Fidelity VIP Contrafund 27,305,491 8,392 27,313,883 -- 1,396 27,312,487 Fidelity VIP Equity-Income 24,208,993 184 24,209,177 -- 1,247 24,207,930 Fidelity VIP Growth 4,450,988 -- 4,450,988 -- 199 4,450,789 Fidelity VIP High Income 213,722 -- 213,722 -- 12 213,710 Fidelity VIP Overseas 1,285,513 -- 1,285,513 -- 71 1,285,442 ING Partners JPMorgan Fleming International 13,704,786 258 13,705,044 -- 732 13,704,312 ING Partners MFS Capital Opportunities 1,896,818 -- 1,896,818 -- 96 1,896,722 ING Partners Salomon Brothers Aggressive Growth 12,598,355 -- 12,598,355 152 650 12,597,553 ING Partners T.Rowe Price Growth Equity 5,370,095 -- 5,370,095 -- 268 5,369,827 ING Partners UBS U.S. Large Cap Equities 8,389,352 385 8,389,737 -- 436 8,389,301 ING VP Balanced 20,623,789 455 20,624,244 -- 1,101 20,623,143 ING VP Growth and Income 80,638,164 -- 80,638,164 11,063 4,308 80,622,793 ING VP Index Plus LargeCap 14,858,476 3,407 14,861,883 -- 739 14,861,144 ING VP Intermediate Bond 12,169,534 32 12,169,566 -- 631 12,168,935 ING VP Money Market 15,363,718 -- 15,363,718 944 811 15,361,963 ING VP Small Company 2,125,862 -- 2,125,862 -- 117 2,125,745 ING VP Strategic Allocation Balanced 1,737,106 -- 1,737,106 -- 92 1,737,014 ING VP Strategic Allocation Growth 4,009,532 32 4,009,564 -- 209 4,009,355 ING VP Strategic Allocation Income 2,088,276 -- 2,088,276 -- 104 2,088,172 ING VP Value Opportunity 28,967 -- 28,967 -- 2 28,965 Janus Aspen Series Balanced 13,598,407 10,804 13,609,211 -- 712 13,608,499 Janus Aspen Series Flexible Bond 4,070,406 -- 4,070,406 -- 223 4,070,183 Janus Aspen Series Large Cap Growth 13,075,450 112 13,075,562 -- 688 13,074,874 Janus Aspen Series Mid Cap Growth 19,085,932 213 19,086,145 -- 1,002 19,085,143 Janus Aspen Series Worldwide Growth 18,300,046 -- 18,300,046 134 975 18,298,937 MFS VIT Strategic Income 163,263 -- 163,263 -- 9 163,254 MFS VIT Total Return 165,619 -- 165,619 -- 9 165,610 Oppenheimer Aggressive Growth 310,876 -- 310,876 -- 10 310,866 Oppenheimer Global Securities 7,057,043 3,511 7,060,554 -- 361 7,060,193 Oppenheimer Main Street Growth & Income 20,596 -- 20,596 -- 1 20,595 Oppenheimer Strategic Bond 3,477,468 174 3,477,642 -- 177 3,477,465
See accompanying notes. B-1 Variable Life B of ING Life Insurance and Annuity Company Statement of operations Years Ended December 31, 2003, 2004 and 2005
Dividends from Mortality and Net Investment Expense Investment Subaccount Income Guarantee Charges Income (Loss) ------------------------------------------------------------------------------------------ Year Ended December 31, 2003 Fidelity VIP Asset Manager $ 33,745 $ (9,941) $ 23,804 Fidelity VIP Contrafund 87,272 (180,677) (93,405) Fidelity VIP Equity-Income 437,035 (233,019) 204,016 Fidelity VIP Growth 23,961 (76,597) (52,636) Fidelity VIP High Income 26,144 (3,503) 22,641 Fidelity VIP Overseas 12,326 (10,762) 1,564 ING Partners JPMorgan Fleming International 211,921 (132,976) 78,945 ING Partners MFS Capital Opportunities 3,099 (14,575) (11,476) ING Partners Salomon Brothers Aggressive Growth -- (104,136) (104,136) ING Partners T.Rowe Price Growth Equity 5,923 (31,305) (25,382) ING Partners MFS Research Equity 42,508 (68,670) (26,162) ING Balanced VP 392,435 (187,693) 204,742 ING Growth and Income VP -- (736,451) (736,451) ING Growth VP -- (81) (81) ING Index Plus LargeCap VP 158,150 (129,763) 28,387 ING Intermediate Bond VP 285,165 (159,303) 125,862 ING Money Market VP 907,463 (381,983) 525,480 ING Small Company VP 5,448 (14,830) (9,382) ING Strategic Allocation Balanced VP 19,731 (11,762) 7,969 ING Strategic Allocation Growth VP 28,115 (29,226) (1,111) ING Strategic Allocation Income VP 37,279 (14,170) 23,109 ING Value Opportunity VP 190 (1,774) (1,584) Janus Aspen Series Balanced 390,460 (166,112) 224,348 Janus Aspen Series Flexible Bond 214,668 (30,738) 183,930 Janus Aspen Series Large Cap Growth 14,000 (145,141) (131,141) Janus Aspen Series Mid Cap Growth -- (151,704) (151,704) Janus Aspen Series Worldwide Growth 284,230 (227,418) 56,812 MFS VIT Strategic Income 20,365 (3,866) 16,499 MFS VIT Total Return 4,423 (2,559) 1,864 Oppenheimer Aggressive Growth -- (5,007) (5,007) Oppenheimer Global Securities 20,572 (24,960) (4,388) Oppenheimer Main Street Growth & Income -- -- -- Oppenheimer Strategic Bond 160,881 (24,575) 136,306 Year Ended December 31, 2004 Fidelity VIP Asset Manager 26,797 (6,576) 20,221 Fidelity VIP Contrafund 76,499 (208,065) (131,566) Fidelity VIP Equity-Income 447,598 (248,924) 198,674 Fidelity VIP Growth 13,755 (49,897) (36,142) Fidelity VIP High Income 29,105 (3,410) 25,695 Fidelity VIP Overseas 24,431 (16,761) 7,670 ING Partners JPMorgan Fleming International 133,914 (116,575) 17,339 ING Partners MFS Capital Opportunities 8,229 (17,264) (9,035) ING Partners Salomon Brothers Aggressive Growth -- (116,744) (116,744) ING Partners T.Rowe Price Growth Equity 8,382 (49,185) (40,803) ING Partners UBS U.S. Large Cap Equities 59,344 (72,582) (13,238) ING VP Balanced 410,667 (198,542) 212,125 ING VP Growth and Income 1,941,383 (791,322) 1,150,061 ING VP Growth 11 (89) (78) ING VP Index Plus LargeCap 159,245 (142,115) 17,130 ING VP Intermediate Bond 1,081,100 (133,071) 948,029 ING VP Money Market 218,993 (193,728) 25,265 ING VP Small Company 6,844 (23,010) (16,166) ING VP Strategic Allocation Balanced 17,840 (13,756) 4,084 ING VP Strategic Allocation Growth 35,437 (32,162) 3,275 ING VP Strategic Allocation Income 35,137 (16,599) 18,538 ING VP Value Opportunity 773 (508) 265
See accompanying notes. B-2
Net Change in Net Increase Dividends from Unrealized (Decrease) In Net Realized Net Realized Total Net Realized Appreciation or Net Assets Gain (Loss) on Gain on Gain (Loss) on Depreciation on Resulting from Investments Investments Investments Investments Operations ------------------------------------------------------------------------------- $ (23,748) $ -- $ (23,748) $ 155,323 $ 155,379 307,375 -- 307,375 4,613,620 4,827,590 (1,983,484) -- (1,983,484) 8,321,496 6,542,028 (4,118,168) -- (4,118,168) 6,319,970 2,149,166 (40,295) -- (40,295) 98,108 80,454 (617,912) -- (617,912) 971,247 354,899 4,877,970 -- 4,877,970 948,980 5,905,895 (540,624) -- (540,624) 920,810 368,710 866,405 -- 866,405 2,976,072 3,738,341 (245,754) -- (245,754) 1,193,114 921,978 (321,040) -- (321,040) 1,874,086 1,526,884 (1,058,824) -- (1,058,824) 4,016,868 3,162,786 (14,847,045) -- (14,847,045) 32,816,962 17,233,466 (178) -- (178) 2,328 2,069 1,094,108 -- 1,094,108 2,021,566 3,144,061 741,395 -- 741,395 (19,045) 848,212 (551,196) -- (551,196) 7,196 (18,520) (34,160) -- (34,160) 530,789 487,247 (65,429) -- (65,429) 272,723 215,263 (84,297) -- (84,297) 743,466 658,058 (12,948) -- (12,948) 178,593 188,754 (193,084) -- (193,084) 225,281 30,613 (597,459) -- (597,459) 2,533,041 2,159,930 21,441 -- 21,441 (170,371) 35,000 (2,292,939) -- (2,292,939) 6,551,604 4,127,524 3,708,338 -- 3,708,338 1,189,429 4,746,063 2,836,418 -- 2,836,418 2,448,804 5,342,034 1,422 -- 1,422 16,396 34,317 (1,481) -- (1,481) 36,626 37,009 (265,951) -- (265,951) 380,276 109,318 35,930 -- 35,930 936,248 967,790 -- -- -- -- -- 143,931 -- 143,931 157,678 437,915 43,482 -- 43,482 (66,659) (2,956) 1,146,849 -- 1,146,849 1,996,541 3,011,824 1,959,974 106,926 2,066,900 213,269 2,478,843 (760,091) -- (760,091) 866,115 69,882 (31,195) -- (31,195) 32,716 27,216 (339,516) -- (339,516) 423,717 91,871 332,049 -- 332,049 1,679,417 2,028,805 163,376 -- 163,376 52,375 206,716 265,119 -- 265,119 837,799 986,174 143,407 -- 143,407 362,792 465,396 (23,726) -- (23,726) 1,009,818 972,854 (571,659) -- (571,659) 2,007,895 1,648,361 (7,333,784) -- (7,333,784) 11,924,607 5,740,884 (115) -- (115) 735 542 435,558 -- 435,558 951,711 1,404,399 227,903 552,603 780,506 (1,238,043) 490,492 (49,014) -- (49,014) 39,757 16,008 91,410 -- 91,410 188,647 263,891 (9,139) -- (9,139) 132,406 127,351 (51,106) -- (51,106) 393,265 345,434 (2,845) -- (2,845) 109,090 124,783 5,698 -- 5,698 (4,671) 1,292
B-3 Variable Life B of ING Life Insurance and Annuity Company Statement of operations (continued) Years Ended December 31, 2003, 2004 and 2005
Dividends from Mortality and Net Investment Expense Investment Subaccount Income Guarantee Charges Income (Loss) ------------------------------------------------------------------------------------------ Year Ended December 31, 2004 (continued) Janus Aspen Series Balanced $321,884 $(148,104) $ 173,780 Janus Aspen Series Flexible Bond 253,493 (44,285) 209,208 Janus Aspen Series Large Cap Growth 20,736 (144,856) (124,120) Janus Aspen Series Mid Cap Growth -- (161,026) (161,026) Janus Aspen Series Worldwide Growth 208,427 (204,946) 3,481 MFS VIT Strategic Income 18,799 (2,763) 16,036 MFS VIT Total Return 4,063 (2,044) 2,019 Oppenheimer Aggressive Growth -- (4,495) (4,495) Oppenheimer Global Securities 57,692 (45,515) 12,177 Oppenheimer Main Street Growth & Income -- (153) (153) Oppenheimer Strategic Bond 185,146 (24,398) 160,748 Year Ended December 31, 2005 Fidelity VIP Asset Manager 2,486 (936) 1,550 Fidelity VIP Contrafund 69,035 (228,191) (159,156) Fidelity VIP Equity-Income 398,198 (229,004) 169,194 Fidelity VIP Growth 20,900 (40,873) (19,973) Fidelity VIP High Income 35,594 (2,435) 33,159 Fidelity VIP Overseas 7,446 (11,464) (4,018) ING Partners JPMorgan Fleming International 97,915 (127,129) (29,214) ING Partners MFS Capital Opportunities 16,977 (17,353) (376) ING Partners Salomon Brothers Aggressive Growth -- (111,948) (111,948) ING Partners T.Rowe Price Growth Equity 27,631 (49,131) (21,500) ING Partners UBS U.S. Large Cap Equities 70,309 (75,305) (4,996) ING VP Balanced 508,230 (207,688) 300,542 ING VP Growth and Income 839,485 (777,198) 62,287 ING VP Growth -- (3) (3) ING VP Index Plus LargeCap 189,257 (138,605) 50,652 ING VP Intermediate Bond 453,473 (119,762) 333,711 ING VP Money Market 214,115 (164,194) 49,921 ING VP Small Company 3,104 (20,967) (17,863) ING VP Strategic Allocation Balanced 25,535 (15,991) 9,544 ING VP Strategic Allocation Growth 46,300 (35,730) 10,570 ING VP Strategic Allocation Income 42,412 (18,745) 23,667 ING VP Value Opportunity 523 (280) 243 Janus Aspen Series Balanced 302,206 (127,794) 174,412 Janus Aspen Series Flexible Bond 204,837 (41,757) 163,080 Janus Aspen Series Large Cap Growth 44,213 (127,163) (82,950) Janus Aspen Series Mid Cap Growth -- (170,890) (170,890) Janus Aspen Series Worldwide Growth 249,498 (177,426) 72,072 MFS VIT Strategic Income 11,083 (1,637) 9,446 MFS VIT Total Return 3,137 (1,634) 1,503 Oppenheimer Aggressive Growth -- (2,564) (2,564) Oppenheimer Global Securities 60,610 (56,027) 4,583 Oppenheimer Main Street Growth & Income 238 (187) 51 Oppenheimer Strategic Bond 104,161 (22,182) 81,979
See accompanying notes. B-4
Net Change in Net Increase Dividends from Unrealized (Decrease) In Net Realized Net Realized Total Net Realized Appreciation or Net Assets Gain (Loss) on Gain on Gain (Loss) on Depreciation on Resulting from Investments Investments Investments Investments Operations ------------------------------------------------------------------------------- $ (911,512) $ -- $ (911,512) $ 1,775,375 $1,037,643 26,954 34,421 61,375 (144,236) 126,347 1,246,093 -- 1,246,093 (672,339) 449,634 575,731 -- 575,731 2,602,279 3,016,984 559,804 -- 559,804 85,435 648,720 22,968 -- 22,968 (27,031) 11,973 7,105 -- 7,105 7,771 16,895 (11,003) -- (11,003) 79,471 63,973 663,889 -- 663,889 220,323 896,389 880 -- 880 1,185 1,912 85,014 -- 85,014 (70,576) 175,186 1,954 32 1,986 (1,841) 1,695 1,223,508 4,315 1,227,823 2,583,091 3,651,758 1,522,396 875,051 2,397,447 (1,429,106) 1,137,535 (355,494) -- (355,494) 569,078 193,611 (37,897) -- (37,897) 7,794 3,056 11,728 5,828 17,556 179,299 192,837 447,356 -- 447,356 715,592 1,133,734 154,138 -- 154,138 (132,058) 21,704 579,981 -- 579,981 661,473 1,129,506 409,854 -- 409,854 (114,593) 273,761 227,316 -- 227,316 407,204 629,524 (504,101) -- (504,101) 866,852 663,293 (6,478,005) -- (6,478,005) 11,821,983 5,406,265 (589) -- (589) 413 (179) 757,576 -- 757,576 (165,131) 643,097 (192,840) 64,457 (128,383) 59,892 265,220 181,405 -- 181,405 109,659 340,985 97,148 27,815 124,963 54,132 161,232 (532) -- (532) 53,416 62,428 13,705 -- 13,705 172,714 196,989 5,279 -- 5,279 32,505 61,451 80 -- 80 1,313 1,636 (22,807) -- (22,807) 730,002 881,607 (15,681) 146,891 131,210 (253,510) 40,780 916,704 -- 916,704 (422,984) 410,770 1,824,880 -- 1,824,880 226,494 1,880,484 562,945 -- 562,945 172,470 807,487 (344) 580 236 (8,286) 1,396 2,191 6,150 8,341 (6,752) 3,092 1,124 -- 1,124 33,139 31,699 331,217 -- 331,217 432,169 767,969 25 -- 25 880 956 40,174 -- 40,174 (65,660) 56,493
B-5 Variable Life B of ING Life Insurance and Annuity Company Statements of changes in net assets Years Ended December 31, 2003, 2004 and 2005
Fidelity VIP Fidelity VIP Fidelity VIP Equity- Fidelity VIP Asset Manager Contrafund Income Growth Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2003 $ 900,577 $17,587,208 $22,903,646 $ 8,076,288 Changes From Operations: . Net investment income (loss) 23,804 (93,405) 204,016 (52,636) . Net realized gain (loss) on investments (23,748) 307,375 (1,983,484) (4,118,168) . Net change in unrealized appreciation or depreciation on investments 155,323 4,613,620 8,321,496 6,319,970 ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 155,379 4,827,590 6,542,028 2,149,166 Change From Unit Transactions: . Contract purchases 99,037 2,959,437 2,639,801 99,147 . Contract withdrawals (51,080) (3,169,137) (3,615,371) (5,187,325) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS 47,957 (209,700) (975,570) (5,088,178) ------------ ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 203,336 4,617,890 5,566,458 (2,939,012) ------------ ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2003 1,103,913 22,205,098 28,470,104 5,137,276 Changes From Operations: . Net investment income (loss) 20,221 (131,566) 198,674 (36,142) . Net realized gain (loss) on investments 43,482 1,146,849 2,066,900 (760,091) . Net change in unrealized appreciation or depreciation on investments (66,659) 1,996,541 213,269 866,115 ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,956) 3,011,824 2,478,843 69,882 Change From Unit Transactions: . Contract purchases 44,172 3,340,913 3,772,370 441,338 . Contract withdrawals (962,323) (5,097,792) (9,550,849) (919,633) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (918,151) (1,756,879) (5,778,479) (478,295) ------------ ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (921,107) 1,254,945 (3,299,636) (408,413) ------------ ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2004 182,806 23,460,043 25,170,468 4,728,863 Changes From Operations: . Net investment income (loss) 1,550 (159,156) 169,194 (19,973) . Net realized gain (loss) on investments 1,986 1,227,823 2,397,447 (355,494) . Net change in unrealized appreciation or depreciation on investments (1,841) 2,583,091 (1,429,106) 569,078 ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,695 3,651,758 1,137,535 193,611 Change From Unit Transactions: . Contract purchases 612 4,043,184 1,740,174 63,890 . Contract withdrawals (89,654) (3,842,498) (3,840,247) (535,575) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (89,042) 200,686 (2,100,073) (471,685) ------------ ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (87,347) 3,852,444 (962,538) (278,074) ------------ ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2005 $ 95,459 $27,312,487 $24,207,930 $ 4,450,789 ============ =========== =========== =========== ING VP ING VP ING VP Growth and ING VP Index Plus Intermediate Income Growth LargeCap Bond Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------------------------------------------------------------------- NET ASSETS AT JANUARY 1, 2003 $ 75,218,737 $ 7,238 $12,162,700 $17,105,480 Changes From Operations: . Net investment income (loss) (736,451) (81) 28,387 125,862 . Net realized gain (loss) on investments (14,847,045) (178) 1,094,108 741,395 . Net change in unrealized appreciation or depreciation on investments 32,816,962 2,328 2,021,566 (19,045) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 17,233,466 2,069 3,144,061 848,212 Change From Unit Transactions: . Contract purchases 8,731,427 6 3,457,230 1,402,780 . Contract withdrawals (17,371,492) (212) (2,915,510) (4,172,911) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (8,640,065) (206) 541,720 (2,770,131) ------------ ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS 8,593,401 1,863 3,685,781 (1,921,919) ------------ ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2003 83,812,138 9,101 15,848,481 15,183,561 Changes From Operations: . Net investment income (loss) 1,150,061 (78) 17,130 948,029 . Net realized gain (loss) on investments (7,333,784) (115) 435,558 780,506 . Net change in unrealized appreciation or depreciation on investments 11,924,607 735 951,711 (1,238,043) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,740,884 542 1,404,399 490,492 Change From Unit Transactions: . Contract purchases 7,499,189 -- 1,261,747 1,237,641 . Contract withdrawals (14,093,868) (213) (2,923,640) (3,930,817) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (6,594,679) (213) (1,661,893) (2,693,176) ------------ ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (853,795) 329 (257,494) (2,202,684) ------------ ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2004 82,958,343 9,430 15,590,987 12,980,877 Changes From Operations: . Net investment income (loss) 62,287 (3) 50,652 333,711 . Net realized gain (loss) on investments (6,478,005) (589) 757,576 (128,383) . Net change in unrealized appreciation or depreciation on investments 11,821,983 413 (165,131) 59,892 ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,406,265 (179) 643,097 265,220 Change From Unit Transactions: . Contract purchases 6,709,390 101 1,036,519 1,002,271 . Contract withdrawals (14,451,205) (9,352) (2,409,459) (2,079,433) ------------ ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (7,741,815) (9,251) (1,372,940) (1,077,162) ------------ ----------- ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS (2,335,550) (9,430) (729,843) (811,942) ------------ ----------- ----------- ----------- NET ASSETS AT DECEMBER 31, 2005 $ 80,622,793 $ -- $14,861,144 $12,168,935 ============ =========== =========== ===========
See accompanying notes. B-6
ING Partners ING Partners ING Partners ING Partners ING Partners UBS U.S. Fidelity VIP Fidelity VIP JPMorgan Fleming MFS Capital Salomon Brothers T.Rowe Price Large Cap High Income Overseas International Opportunities Aggressive Growth Growth Equity Equities Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------------------------------------------------- $ 331,263 $ 1,365,110 $ 15,798,979 $1,548,018 $ 9,871,567 $2,455,533 $ 6,798,608 22,641 1,564 78,945 (11,476) (104,136) (25,382) (26,162) (40,295) (617,912) 4,877,970 (540,624) 866,405 (245,754) (321,040) 98,108 971,247 948,980 920,810 2,976,072 1,193,114 1,874,086 ------------ ----------- ------------ ---------- ----------- ---------- ----------- 80,454 354,899 5,905,895 368,710 3,738,341 921,978 1,526,884 5,707 -- 2,518,443 279,727 1,708,755 2,085,101 1,101,507 (52,688) (637,635) (11,302,747) (313,513) (3,056,483) (439,341) (1,501,620) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (46,981) (637,635) (8,784,304) (33,786) (1,347,728) 1,645,760 (400,113) ------------ ----------- ------------ ---------- ----------- ---------- ----------- 33,473 (282,736) (2,878,409) 334,924 2,390,613 2,567,738 1,126,771 ------------ ----------- ------------ ---------- ----------- ---------- ----------- 364,736 1,082,374 12,920,570 1,882,942 12,262,180 5,023,271 7,925,379 25,695 7,670 17,339 (9,035) (116,744) (40,803) (13,238) (31,195) (339,516) 332,049 163,376 265,119 143,407 (23,726) 32,716 423,717 1,679,417 52,375 837,799 362,792 1,009,818 ------------ ----------- ------------ ---------- ----------- ---------- ----------- 27,216 91,871 2,028,805 206,716 986,174 465,396 972,854 3 1,202,497 1,523,867 214,567 1,453,039 1,062,108 943,931 (58,951) (1,134,227) (3,011,084) (406,855) (2,305,568) (974,404) (1,859,345) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (58,948) 68,270 (1,487,217) (192,288) (852,529) 87,704 (915,414) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (31,732) 160,141 541,588 14,428 133,645 553,100 57,440 ------------ ----------- ------------ ---------- ----------- ---------- ----------- 333,004 1,242,515 13,462,158 1,897,370 12,395,825 5,576,371 7,982,819 33,159 (4,018) (29,214) (376) (111,948) (21,500) (4,996) (37,897) 17,556 447,356 154,138 579,981 409,854 227,316 7,794 179,299 715,592 (132,058) 661,473 (114,593) 407,204 ------------ ----------- ------------ ---------- ----------- ---------- ----------- 3,056 192,837 1,133,734 21,704 1,129,506 273,761 629,524 333 2,316 887,521 428,185 1,245,507 406,296 915,594 (122,683) (152,226) (1,779,101) (450,537) (2,173,285) (886,601) (1,138,636) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (122,350) (149,910) (891,580) (22,352) (927,778) (480,305) (223,042) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (119,294) 42,927 242,154 (648) 201,728 (206,544) 406,482 ------------ ----------- ------------ ---------- ----------- ---------- ----------- $ 213,710 $ 1,285,442 $ 13,704,312 $1,896,722 $12,597,553 $5,369,827 $ 8,389,301 ============ =========== ============ ========== =========== ========== =========== ING VP ING VP ING VP ING VP Janus Aspen ING VP ING VP Strategic Allocation Strategic Allocation Strategic Allocation Value Series Money Market Small Company Balanced Growth Income Opportunity Balanced Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount ---------------------------------------------------------------------------------------------------------------------- $ 43,090,106 $ 434,728 $ 1,083,591 $2,705,184 $ 1,375,623 $ 436,036 $17,326,921 525,480 (9,382) 7,969 (1,111) 23,109 (1,584) 224,348 (551,196) (34,160) (65,429) (84,297) (12,948) (193,084) (597,459) 7,196 530,789 272,723 743,466 178,593 225,281 2,533,041 ------------ ----------- ------------ ---------- ----------- ---------- ----------- (18,520) 487,247 215,263 658,058 188,754 30,613 2,159,930 3,263,183 1,538,395 295,327 634,442 327,885 48,300 1,579,917 (24,129,695) (63,267) (211,755) (421,551) (108,269) (487,695) (3,568,865) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (20,866,512) 1,475,128 83,572 212,891 219,616 (439,395) (1,988,948) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (20,885,032) 1,962,375 298,835 870,949 408,370 (408,782) 170,982 ------------ ----------- ------------ ---------- ----------- ---------- ----------- 22,205,074 2,397,103 1,382,426 3,576,133 1,783,993 27,254 17,497,903 25,265 (16,166) 4,084 3,275 18,538 265 173,780 (49,014) 91,410 (9,139) (51,106) (2,845) 5,698 (911,512) 39,757 188,647 132,406 393,265 109,090 (4,671) 1,775,375 ------------ ----------- ------------ ---------- ----------- ---------- ----------- 16,008 263,891 127,351 345,434 124,783 1,292 1,037,643 4,409,783 163,576 244,403 360,665 243,941 63,987 1,139,034 (7,704,280) (507,099) (229,497) (718,197) (197,736) (64,014) (5,724,480) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (3,294,497) (343,523) 14,906 (357,532) 46,205 (27) (4,585,446) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (3,278,489) (79,632) 142,257 (12,098) 170,988 1,265 (3,547,803) ------------ ----------- ------------ ---------- ----------- ---------- ----------- 18,926,585 2,317,471 1,524,683 3,564,035 1,954,981 28,519 13,950,100 49,921 (17,863) 9,544 10,570 23,667 243 174,412 181,405 124,963 (532) 13,705 5,279 80 (22,807) 109,659 54,132 53,416 172,714 32,505 1,313 730,002 ------------ ----------- ------------ ---------- ----------- ---------- ----------- 340,985 161,232 62,428 196,989 61,451 1,636 881,607 2,885,850 20,700 316,249 587,747 279,359 -- 937,264 (6,791,457) (373,658) (166,346) (339,416) (207,619) (1,190) (2,160,472) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (3,905,607) (352,958) 149,903 248,331 71,740 (1,190) (1,223,208) ------------ ----------- ------------ ---------- ----------- ---------- ----------- (3,564,622) (191,726) 212,331 445,320 133,191 446 (341,601) ------------ ----------- ------------ ---------- ----------- ---------- ----------- $ 15,361,963 $ 2,125,745 $ 1,737,014 $4,009,355 $ 2,088,172 $ 28,965 $13,608,499 ============ =========== ============ ========== =========== ========== ===========
ING VP Balanced Subaccount ------------- $18,220,112 204,742 (1,058,824) 4,016,868 ----------- 3,162,786 2,523,378 (4,030,688) ----------- (1,507,310) ----------- 1,655,476 ----------- 19,875,588 212,125 (571,659) 2,007,895 ----------- 1,648,361 3,521,486 (2,920,714) ----------- 600,772 ----------- 2,249,133 ----------- 22,124,721 300,542 (504,101) 866,852 ----------- 663,293 1,769,133 (3,934,004) ----------- (2,164,871) ----------- (1,501,578) ----------- $20,623,143 =========== Janus Aspen Series Flexible Bond Subaccount ------------- $ 992,154 183,930 21,441 (170,371) ----------- 35,000 3,784,522 (209,603) ----------- 3,574,919 ----------- 3,609,919 ----------- 4,602,073 209,208 61,375 (144,236) ----------- 126,347 10,804 (403,149) ----------- (392,345) ----------- (265,998) ----------- 4,336,075 163,080 131,210 (253,510) ----------- 40,780 21 (306,693) ----------- (306,672) ----------- (265,892) ----------- $ 4,070,183 ===========
B-7 Variable Life B of ING Life Insurance and Annuity Company Statements of changes in net assets (continued) Years Ended December 31, 2003, 2004 and 2005
Janus Aspen Janus Aspen Janus Aspen MFS VIT Series Large Series Mid Series Worldwide Strategic Cap Growth Cap Growth Growth Income Subaccount Subaccount Subaccount Subaccount ------------------------------------------------------------------------------------------------------------------------------ NET ASSETS AT JANUARY 1, 2003 $13,960,310 $13,884,822 $ 27,309,336 $ 332,619 Changes From Operations: . Net investment income (loss) (131,141) (151,704) 56,812 16,499 . Net realized gain (loss) on investments (2,292,939) 3,708,338 2,836,418 1,422 . Net change in unrealized appreciation or depreciation on investments 6,551,604 1,189,429 2,448,804 16,396 ----------- ----------- ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 4,127,524 4,746,063 5,342,034 34,317 Change From Unit Transactions: . Contract purchases 1,942,545 1,957,888 2,547,970 69,977 . Contract withdrawals (3,079,052) (3,708,859) (10,591,126) (16,306) ----------- ----------- ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,136,507) (1,750,971) (8,043,156) 53,671 ----------- ----------- ------------ --------- TOTAL INCREASE (DECREASE) IN NET ASSETS 2,991,017 2,995,092 (2,701,122) 87,988 ----------- ----------- ------------ --------- NET ASSETS AT DECEMBER 31, 2003 16,951,327 16,879,914 24,608,214 420,607 Changes From Operations: . Net investment income (loss) (124,120) (161,026) 3,481 16,036 . Net realized gain (loss) on investments 1,246,093 575,731 559,804 22,968 . Net change in unrealized appreciation or depreciation on investments (672,339) 2,602,279 85,435 (27,031) ----------- ----------- ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 449,634 3,016,984 648,720 11,973 Change From Unit Transactions: . Contract purchases 1,587,826 2,162,750 1,929,915 15,175 . Contract withdrawals (4,741,848) (3,588,156) (7,093,658) (281,936) ----------- ----------- ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (3,154,022) (1,425,406) (5,163,743) (266,761) ----------- ----------- ------------ --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (2,704,388) 1,591,578 (4,515,023) (254,788) ----------- ----------- ------------ --------- NET ASSETS AT DECEMBER 31, 2004 14,246,939 18,471,492 20,093,191 165,819 Changes From Operations: . Net investment income (loss) (82,950) (170,890) 72,072 9,446 . Net realized gain (loss) on investments 916,704 1,824,880 562,945 236 . Net change in unrealized appreciation or depreciation on investments (422,984) 226,494 172,470 (8,286) ----------- ----------- ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 410,770 1,880,484 807,487 1,396 Change From Unit Transactions: . Contract purchases 1,262,727 1,553,566 1,569,598 2,131 . Contract withdrawals (2,845,562) (2,820,399) (4,171,339) (6,092) ----------- ----------- ------------ --------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM UNIT TRANSACTIONS (1,582,835) (1,266,833) (2,601,741) (3,961) ----------- ----------- ------------ --------- TOTAL INCREASE (DECREASE) IN NET ASSETS (1,172,065) 613,651 (1,794,254) (2,565) ----------- ----------- ------------ --------- NET ASSETS AT DECEMBER 31, 2005 $13,074,874 $19,085,143 $ 18,298,937 $ 163,254 =========== =========== ============ =========
See accompanying notes. B-8
Oppenheimer Oppenheimer Oppenheimer Oppenheimer MFS VIT Aggressive Global Main Street Strategic Total Return Growth Securities Growth & Income Bond Subaccount Subaccount Subaccount Subaccount Subaccount ----------------------------------------------------------------- $ 235,942 $ 452,862 $2,320,337 $ -- $ 2,109,252 1,864 (5,007) (4,388) -- 136,306 (1,481) (265,951) 35,930 -- 143,931 36,626 380,276 936,248 -- 157,678 --------- --------- ---------- -------- ----------- 37,009 109,318 967,790 -- 437,915 25,661 13,415 857,966 -- 2,136,299 (9,821) (173,707) (521,654) -- (733,296) --------- --------- ---------- -------- ----------- 15,840 (160,292) 336,312 -- 1,403,003 --------- --------- ---------- -------- ----------- 52,849 (50,974) 1,304,102 -- 1,840,918 --------- --------- ---------- -------- ----------- 288,791 401,888 3,624,439 -- 3,950,170 2,019 (4,495) 12,177 (153) 160,748 7,105 (11,003) 663,889 880 85,014 7,771 79,471 220,323 1,185 (70,576) --------- --------- ---------- -------- ----------- 16,895 63,973 896,389 1,912 175,186 5,244 222,026 2,190,833 77,481 200,012 (144,012) (407,515) (817,535) (61,430) (1,675,913) --------- --------- ---------- -------- ----------- (138,768) (185,489) 1,373,298 16,051 (1,475,901) --------- --------- ---------- -------- ----------- (121,873) (121,516) 2,269,687 17,963 (1,300,715) --------- --------- ---------- -------- ----------- 166,918 280,372 5,894,126 17,963 2,649,455 1,503 (2,564) 4,583 51 81,979 8,341 1,124 331,217 25 40,174 (6,752) 33,139 432,169 880 (65,660) --------- --------- ---------- -------- ----------- 3,092 31,699 767,969 956 56,493 1,775 1,764 1,324,370 1,906 1,254,553 (6,175) (2,969) (926,272) (230) (483,036) --------- --------- ---------- -------- ----------- (4,400) (1,205) 398,098 1,676 771,517 --------- --------- ---------- -------- ----------- (1,308) 30,494 1,166,067 2,632 828,010 --------- --------- ---------- -------- ----------- $ 165,610 $ 310,866 $7,060,193 $ 20,595 $ 3,477,465 ========= ========= ========== ======== ===========
B-9 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements December 31, 2005 1. Summary of Significant Accounting Policies and Account Information Variable Life B of ING Life Insurance and Annuity Company (the "Account"), formerly known as Variable Life B of Aetna Life Insurance and Annuity Company, is a separate account established by ING Life Insurance and Annuity Company (the "Company"), formerly known as Aetna Life Insurance and Annuity Company, and is registered under the Investment Company Act of 1940 as a unit investment trust. The Account is sold exclusively for use with variable life insurance product contracts as defined under the Internal Revenue Code of 1986, as amended. The Account consists of seven products which are listed below. Aetna Vest Aetna Vest Estate Protector II Aetna Vest II Corporate Specialty Market Aetna Vest Plus Corporate Specialty Market II Aetna Vest Estate Protector
Effective October 1, 1998, the Company contracted the administrative servicing obligations of its individual variable life business to the 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. Basis of Presentation: The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for unit investment trusts. Investments: The assets of the Variable Account are divided into variable subaccounts each of which is invested in shares of one of thirty three mutual funds (the Funds) of six diversified open-end management investment companies, each Fund with its own investment objective. The Funds are: Fidelity Variable Insurance Products Fund (Fidelity VIP): Fidelity VIP Asset Manager Portfolio Fidelity VIP Contrafund Portfolio Fidelity VIP Equity-Income Portfolio Fidelity VIP Growth Portfolio Fidelity VIP High Income Portfolio Fidelity VIP Overseas Portfolio ING Partners Inc. (ING Partners)* : ING Partners JPMorgan Fleming International Portfolio ING Partners MFS Capital Opportunities Portfolio ING Partners Salomon Brothers Aggressive Growth Portfolio ING Partners T. Rowe Price Growth Equity Portfolio ING Partners UBS U.S. Large Cap Equities Portfolio ING Funds (ING VP)*: ING VP Balanced Portfolio ING VP Growth and Income Portfolio ING VP Growth Portfolio** ING VP Index Plus LargeCap Portfolio ING VP Intermediate Bond Portfolio ING VP Money Market Portfolio ING VP Small Company Portfolio ING VP Strategic Allocation Balanced Portfolio ING VP Strategic Allocation Growth Portfolio ING VP Strategic Allocation Income Portfolio ING VP Value Opportunity Portfolio Janus Aspen Series: Janus Aspen Series Balanced Portfolio Janus Aspen Series Flexible Bond Portfolio Janus Aspen Series Large Cap Growth Portfolio Janus Aspen Series Mid Cap Growth Portfolio Janus Aspen Series Worldwide Growth Portfolio MFS Variable Insurance Trust (MFS VIT): MFS VIT Strategic Income Series MFS VIT Total Return Series Oppenheimer Variable Account Funds (Oppenheimer): Oppenheimer Aggressive Growth Fund Oppenheimer Global Securities Fund Oppenheimer Main Street Growth & Income Fund Oppenheimer Strategic Bond Fund * Denotes an affiliate of ING Life Insurance and Annuity Company. ** Available fund with no money invested at December 31, 2005. Investments in the Funds are stated at the closing net asset value per share on December 31, 2005, which approximates fair value. The difference between cost and fair value is reflected as unrealized appreciation or depreciation of investments. Investment transactions are accounted for on a trade-date basis. The cost of investments sold is determined by the average-cost method. Dividends: Dividends paid to the Variable Account are automatically reinvested in shares of the Funds on the payable date. Dividend income is recorded on the ex-dividend date. B-10 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 1. Summary of Significant Accounting Policies and Account Information (continued) 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. Fund Name Changes: During 2003, the ING Partners MFS Research Portfolio changed its name to the ING Partners MFS Research Equity Portfolio and the Janus Aspen Series Aggressive Growth Portfolio changed its name to the Janus Aspen Series Mid Cap Growth Portfolio. During 2004, the ING Partners MFS Research Equity Portfolio changed its name to the ING Partners UBS U.S. Large Cap Equities Portfolio and the ING VP Bond Portfolio changed its name to the ING Intermediate Bond VP Portfolio. During 2005, the Janus Aspen Series Flexible Income Portfolio changed its name to the Janus Aspen Series Flexible Bond Portfolio and the Janus Aspen Series Growth Portfolio changed its name to the Janus Aspen Series Large Cap Growth Portfolio. 2. Mortality and Expense Guarantees and 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 its 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. B-11 .Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 3. Financial Highlights A summary of the fee rates, unit values, units outstanding, net assets and total return and investment income ratios for variable life contracts as of and for each year or period in the five years ended December 31, 2005 follows.
Minimum Maximum Minimum Maximum Minimum Maximum Investment Commencement Fee Fee Unit Unit Units Total Total Income Subaccount Year Date(1) Rate(2) Rate(2) Value(3) Value(3) Outstanding Net Assets Return(4) Return(4) Ratio(5) ------------------------------------------------------------------------------------------------------------------------ Fidelity VIP Asset Manager 2005 1.00% 1.00% $18.44 $18.44 5,175 $ 95,459 3.01% 3.01% 2.66% 2004 1.00% 1.00% 17.90 17.90 10,209 182,806 4.42% 4.42% 4.08% 2003 1.00% 1.00% 17.15 17.15 64,379 1,103,913 16.80% 16.80% 3.39% 2002 1.00% 1.00% 14.68 14.68 61,346 900,577 (9.64)% (9.64)% 2.32% 2001 0.70% 1.00% 11.10 16.25 32,118 521,375 (5.06)% (4.78)% 3.56% Fidelity VIP Contrafund 2005 0.65% 1.00% 19.00 29.27 1,069,893 27,312,487 15.77% 16.18% 0.28% 2004 0.65% 1.00% 16.30 25.28 1,053,177 23,460,043 14.33% 14.73% 0.34% 2003 0.65% 1.00% 14.21 22.12 1,136,703 22,205,098 27.19% 27.63% 0.45% 2002 0.65% 1.00% 11.14 17.39 1,145,478 17,587,208 (10.25)% (9.94)% 0.81% 2001 0.65% 1.00% 12.37 19.37 1,171,481 20,334,978 (13.12)% (12.81)% 0.81% Fidelity VIP Equity-Income 2005 0.65% 1.00% 14.36 22.90 1,245,804 24,207,930 4.81% 5.18% 1.64% 2004 0.65% 1.00% 13.65 21.84 1,353,096 25,170,468 10.42% 10.81% 1.71% 2003 0.65% 1.00% 12.32 19.78 1,632,649 28,470,104 29.03% 29.49% 1.80% 2002 0.65% 1.00% 9.52 15.33 1,694,060 22,903,646 (17.77)% (17.49)% 1.70% 2001 0.65% 1.00% 11.51 18.65 1,928,779 31,855,446 (5.91)% (5.57)% 1.70% Fidelity VIP Growth 2005 0.50% 1.00% 18.13 18.13 309,853 4,450,789 4.75% 4.75% 0.49% 2004 1.00% 1.00% 17.31 17.31 273,213 4,728,863 2.35% 2.35% 0.28% 2003 1.00% 1.00% 16.91 16.91 303,784 5,137,276 31.53% 31.53% 0.31% 2002 1.00% 1.00% 12.86 12.86 628,147 8,076,288 (30.80)% (30.80)% 0.25% 2001 0.70% 1.00% 12.96 18.58 610,286 11,339,028 (18.47)% (18.23)% 0.08% Fidelity VIP High Income 2005 1.00% 1.00% 9.80 9.80 21,803 213,710 1.68% 1.68% 14.63% 2004 1.00% 1.00% 9.64 9.64 34,545 333,004 8.50% 8.50% 8.54% 2003 1.00% 1.00% 8.88 8.88 41,053 364,736 26.00% 26.00% 7.46% 2002 1.00% 1.00% 7.05 7.05 46,981 331,263 2.41% 2.41% 11.16% 2001 0.70% 1.00% 6.68 6.88 53,891 371,018 (12.66)% (12.31)% 12.73% Fidelity VIP Overseas 2005 1.00% 1.00% 18.17 18.17 70,747 1,285,442 17.86% 17.86% 0.65% 2004 1.00% 1.00% 15.42 15.42 80,599 1,242,515 12.51% 12.51% 1.46% 2003 1.00% 1.00% 13.70 13.70 78,991 1,082,374 41.94% 41.94% 1.14% 2002 1.00% 1.00% 9.65 9.65 141,412 1,365,110 (21.07)% (21.07)% 0.84% 2001 0.70% 1.00% 9.50 12.23 169,055 2,067,505 (21.95)% (21.70)% 5.43% ING Partners JPMorgan Fleming International 2005 0.65% 1.00% 13.86 22.34 677,437 13,704,312 8.95% 9.33% 0.74% 2004 0.65% 1.00% 12.68 20.51 721,307 13,462,158 17.71% 18.12% 1.11% 2003 0.65% 1.00% 10.73 17.42 819,071 12,920,570 28.16% 28.61% 1.50% 2002 0.65% 1.00% 8.34 13.59 1,228,777 15,798,979 (18.65)% (18.37)% 0.69% 2001 0.65% 1.00% 10.20 16.71 782,407 12,120,828 (27.66)% (27.40)% 0.32% ING Partners MFS Capital Opportunities 2005 0.65% 1.00% 11.51 12.10 160,817 1,896,722 0.55% 0.90% 0.90% 2004 0.65% 1.00% 11.45 11.99 164,065 1,897,370 11.75% 12.15% 0.44% 2003 0.65% 1.00% 10.24 10.69 182,164 1,882,942 26.80% 27.24% 0.19% 2002 0.65% 1.00% 8.08 8.40 189,971 1,548,018 (30.86)% (30.62)% 0.00% 2001 0.65% 1.00% 11.69 12.77 237,401 2,803,112 (25.50)% (25.24)% 0.00% ING Partners Salomon Brothers Aggressive Growth 2005 0.50% 1.00% 9.72 18.25 796,621 12,597,553 10.33% 10.88% 0.00% 2004 0.50% 1.00% 8.78 16.54 845,583 12,395,825 8.63% 9.01% 0.00% 2003 0.65% 1.00% 8.05 15.23 895,385 12,262,180 36.81% 37.28% 0.00% 2002 0.65% 1.00% 5.86 11.13 980,338 9,871,567 (35.95)% (35.73)% 0.00% 2001 0.65% 1.00% 9.11 17.38 1,223,892 18,964,841 (25.95)% (25.69)% 0.00%
B-12 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 3. Financial Highlights (continued)
Minimum Maximum Minimum Maximum Minimum Maximum Investment Commencement Fee Fee Unit Unit Units Total Total Income Subaccount Year Date(1) Rate(2) Rate(2) Value(3) Value(3) Outstanding Net Assets Return(4) Return(4) Ratio(5) ------------------------------------------------------------------------------------------------------------------------ ING Partners T.Rowe Price Growth Equity 2005 0.65% 1.00% $13.86 $15.08 379,369 $ 5,369,827 5.12% 5.49% 0.51% 2004 0.65% 1.00% 13.18 14.34 415,140 5,576,371 8.92% 9.30% 0.15% 2003 0.65% 1.00% 12.10 13.17 406,614 5,023,271 29.63% 30.08% 0.17% 2002 0.65% 1.00% 9.34 10.16 259,306 2,455,533 (24.06)% (23.79)% 0.20% 2001 0.65% 1.00% 12.29 13.37 235,655 2,927,699 (11.12)% (10.80)% 0.14% ING Partners UBS U.S. Large Cap Equities 2005 0.50% 1.00% 11.18 15.17 589,948 8,389,301 8.29% 8.83% 0.89% 2004 0.50% 1.00% 10.71 14.00 602,854 7,982,819 13.62% 14.02% 0.79% 2003 0.65% 1.00% 9.41 12.33 679,284 7,925,379 23.71% 24.15% 0.60% 2002 0.65% 1.00% 7.60 9.96 718,581 6,798,608 (25.64)% (25.38)% 0.18% 2001 0.65% 1.00% 10.20 13.40 1,013,066 12,709,331 (21.67)% (21.40)% 0.00% ING VP Balanced 2005 0.50% 1.00% 10.50 30.56 838,370 20,623,143 3.21% 3.72% 2.38% 2004 0.50% 1.00% 13.64 29.61 911,833 22,124,721 8.33% 8.71% 2.02% 2003 0.65% 1.00% 12.54 27.34 887,958 19,875,588 17.69% 18.10% 2.04% 2002 0.65% 1.00% 10.62 23.23 955,502 18,220,112 (11.20)% (10.89)% 1.02% 2001 0.65% 1.00% 11.89 26.16 1,026,320 22,055,858 (5.16)% (4.83)% 2.16% ING VP Growth and Income 2005 0.50% 1.00% 9.91 45.08 3,202,077 80,622,793 7.06% 7.60% 1.05% 2004 0.50% 1.00% 9.19 42.09 3,482,591 82,958,343 7.31% 7.69% 2.39% 2003 0.65% 1.00% 8.54 39.20 3,780,258 83,812,138 24.82% 25.25% 0.00% 2002 0.65% 1.00% 6.82 31.39 4,241,832 75,218,737 (25.74)% (25.48)% 0.89% 2001 0.65% 1.00% 9.16 42.25 4,628,600 111,047,650 (19.21)% (18.93)% 0.65% ING VP Growth 2004 1.00% 1.00% 10.70 10.70 880 9,430 6.13% 6.13% 0.12% 2003 1.00% 1.00% 10.09 10.09 901 9,101 29.08% 29.08% 0.00% 2002 1.00% 1.00% 7.81 7.81 925 7,238 (29.50)% (29.50)% 0.00% 2001 0.70% 1.00% 10.91 11.08 1,011 11,230 (27.80)% (27.59)% 0.07% ING VP Index Plus LargeCap 2005 0.50% 1.00% 13.29 18.07 912,102 14,861,144 4.33% 4.70% 1.26% 2004 0.65% 1.00% 12.65 17.30 963,882 15,590,987 9.48% 9.86% 1.03% 2003 0.65% 1.00% 11.52 15.78 1,082,202 15,848,481 24.89% 25.32% 1.12% 2002 0.65% 1.00% 9.20 12.61 1,041,247 12,162,700 (22.31)% (22.04)% 0.23% 2001 0.65% 1.00% 11.80 16.21 975,312 14,673,953 (14.49)% (14.18)% 0.91% ING VP Intermediate Bond 2005 0.50% 1.00% 10.27 34.48 602,415 12,168,935 2.12% 2.63% 3.63% 2004 0.50% 1.00% 14.59 33.76 637,532 12,980,877 3.83% 4.20% 7.96% 2003 0.65% 1.00% 14.01 32.52 773,411 15,183,561 5.24% 5.61% 1.73% 2002 0.65% 1.00% 13.26 30.90 900,906 17,105,480 7.26% 7.63% 2.88% 2001 0.65% 1.00% 12.25 28.81 1,246,661 21,651,762 7.56% 8.04% 4.92% ING VP Money Market 2005 0.50% 1.00% 12.34 20.90 1,056,879 15,361,963 1.97% 2.33% 1.25% 2004 0.65% 1.00% 12.02 20.49 1,340,449 18,926,585 0.06% 0.41% 1.09% 2003 0.65% 1.00% 11.97 20.48 1,584,351 22,205,074 (0.10)% 0.25% 2.36% 2002 0.65% 1.00% 11.95 20.50 3,119,752 43,090,106 0.61% 0.96% 3.49% 2001 0.65% 1.00% 11.84 20.38 3,209,629 44,284,559 2.90% 3.26% 5.48% ING VP Small Company 2005 1.00% 1.00% 18.18 18.18 116,927 2,125,745 9.18% 9.18% 0.15% 2004 1.00% 1.00% 16.65 16.65 139,169 2,317,471 13.25% 13.25% 0.30% 2003 1.00% 1.00% 14.70 14.70 163,027 2,397,103 36.10% 36.10% 0.37% 2002 1.00% 1.00% 10.80 10.80 40,240 434,728 (23.99)% (23.99)% 0.46% 2001 0.70% 1.00% 13.60 14.21 38,789 551,296 2.96% 3.30% 0.65% ING VP Strategic Allocation Balanced 2005 0.65% 1.00% 12.57 17.01 106,106 1,737,014 3.66% 4.03% 1.54% 2004 0.65% 1.00% 12.08 16.39 96,688 1,524,683 9.13% 9.51% 1.25% 2003 0.65% 1.00% 11.03 14.99 96,582 1,382,426 18.28% 18.70% 1.59% 2002 0.65% 1.00% 9.29 12.66 90,856 1,083,591 (10.44)% (10.12)% 2.47% 2001 0.65% 1.00% 10.34 14.11 97,676 1,314,561 (7.92)% (7.60)% 2.65%
B-13 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 3. Financial Highlights (continued)
Minimum Maximum Minimum Maximum Minimum Maximum Investment Commencement Fee Fee Unit Unit Units Total Total Income Subaccount Year Date(1) Rate(2) Rate(2) Value(3) Value(3) Outstanding Net Assets Return(4) Return(4) Ratio(5) ------------------------------------------------------------------------------------------------------------------------ ING VP Strategic Allocation Growth 2005 0.65% 1.00% $12.29 $17.58 237,353 $ 4,009,355 5.14% 5.51% 1.23% 2004 0.65% 1.00% 11.65 16.70 221,835 3,564,035 10.89% 11.28% 1.05% 2003 0.65% 1.00% 10.47 15.03 245,867 3,576,133 23.10% 23.54% 0.92% 2002 0.65% 1.00% 8.47 12.19 229,479 2,705,184 (14.62)% (14.32)% 1.78% 2001 0.65% 1.00% 9.89 14.26 207,776 2,889,082 (12.42)% (12.12)% 1.68% ING VP Strategic Allocation Income 2005 0.65% 1.00% 13.25 16.86 131,660 2,088,172 2.79% 3.16% 2.05% 2004 0.65% 1.00% 12.84 16.38 127,730 1,954,981 6.91% 7.29% 1.91% 2003 0.65% 1.00% 11.97 15.30 124,446 1,783,993 12.52% 12.91% 2.39% 2002 0.65% 1.00% 10.60 13.58 108,517 1,375,623 (5.30)% (4.97)% 3.23% 2001 0.65% 1.00% 11.15 14.31 115,269 1,552,707 (3.34)% (3.00)% 3.87% ING VP Value Opportunity 2005 1.00% 1.00% 14.81 14.81 1,955 28,965 5.97% 5.97% 1.87% 2004 1.00% 1.00% 13.98 13.98 2,040 28,519 9.05% 9.05% 1.52% 2003 1.00% 1.00% 12.82 12.82 2,126 27,254 23.36% 23.36% 0.11% 2002 1.00% 1.00% 10.39 10.39 41,966 436,036 (26.70)% (26.70)% 0.44% 2001 0.70% 1.00% 13.41 14.18 38,688 548,365 (10.52)% (10.25)% 0.40% Janus Aspen Series Balanced 2005 0.65% 1.00% 17.80 31.14 484,256 13,608,499 6.88% 7.25% 2.26% 2004 0.65% 1.00% 16.54 29.13 529,637 13,950,100 7.45% 7.82% 2.07% 2003 0.65% 1.00% 15.35 27.11 731,894 17,497,903 12.92% 13.31% 2.21% 2002 0.65% 1.00% 13.55 24.01 825,563 17,326,921 (7.38)% (7.05)% 2.37% 2001 0.65% 1.00% 14.59 25.92 898,280 20,447,656 (5.64)% (5.28)% 2.65% Janus Aspen Series Flexible Bond 2005 1.00% 1.00% 14.81 14.81 274,871 4,070,183 0.99% 0.99% 4.91% 2004 1.00% 1.00% 14.66 14.66 295,724 4,336,075 2.93% 2.93% 5.72% 2003 1.00% 1.00% 14.24 14.24 323,068 4,602,073 5.33% 5.33% 6.99% 2002 1.00% 1.00% 13.52 13.52 73,366 992,154 9.38% 9.38% 4.60% 2001 0.70% 1.00% 12.05 12.36 79,804 986,677 6.67% 6.99% 6.43% Janus Aspen Series Large Cap Growth 2005 0.65% 1.00% 11.73 22.15 659,744 13,074,874 3.25% 3.61% 0.33% 2004 0.65% 1.00% 11.32 21.46 737,217 14,246,939 3.48% 3.84% 0.14% 2003 0.65% 1.00% 10.90 20.74 916,579 16,951,327 30.42% 30.88% 0.09% 2002 0.65% 1.00% 8.33 15.90 984,811 13,960,310 (27.24)% (26.99)% 0.00% 2001 0.65% 1.00% 11.41 21.85 1,081,794 21,033,541 (25.48)% (22.48)% 0.07% Janus Aspen Series Mid Cap Growth 2005 0.65% 1.00% 15.10 27.44 808,447 19,085,143 11.19% 11.58% 0.00% 2004 0.65% 1.00% 13.48 24.68 864,355 18,471,492 19.55% 19.97% 0.00% 2003 0.65% 1.00% 11.25 20.65 942,193 16,879,914 33.76% 34.23% 0.00% 2002 0.65% 1.00% 8.38 15.43 1,045,717 13,884,822 (28.65)% (28.40)% 0.00% 2001 0.65% 1.00% 11.71 21.63 1,112,567 20,927,309 (40.05)% (39.84)% 0.00% Janus Aspen Series Worldwide Growth 2005 0.65% 1.00% 12.66 25.96 778,935 18,298,937 4.81% 5.18% 1.36% 2004 0.65% 1.00% 11.99 24.77 890,473 20,093,191 3.74% 4.10% 0.98% 2003 0.65% 1.00% 11.52 23.88 1,179,351 24,608,214 22.76% 23.19% 1.19% 2002 0.65% 1.00% 9.36 19.45 1,606,876 27,309,336 (26.24)% (25.98)% 0.89% 2001 0.65% 1.00% 12.65 26.37 1,793,143 41,263,014 (23.21)% (22.94)% 0.49% MFS VIT Strategic Income 2005 1.00% 1.00% 13.86 13.86 11,782 163,254 0.87% 0.87% 6.77% 2004 1.00% 1.00% 13.74 13.74 12,071 165,819 6.66% 6.66% 6.81% 2003 1.00% 1.00% 12.88 12.88 32,659 420,607 9.28% 9.28% 5.27% 2002 1.00% 1.00% 11.78 11.78 28,225 332,619 7.33% 7.33% 3.02% 2001 0.70% 1.00% 10.98 11.14 18,692 205,283 3.76% 4.10% 0.00% MFS VIT Total Return 2005 1.00% 1.00% 15.93 15.93 10,396 165,610 1.80% 1.80% 1.92% 2004 1.00% 1.00% 15.65 15.65 10,667 166,918 10.21% 10.21% 1.99% 2003 1.00% 1.00% 14.20 14.20 20,341 288,791 15.17% 15.17% 1.73% 2002 1.00% 1.00% 12.33 12.33 19,137 235,942 (6.11)% (6.11)% 1.46% 2001 0.70% 1.00% 12.81 13.13 11,047 145,044 (0.75)% (0.43)% 1.75%
B-14 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 3. Financial Highlights (continued)
Minimum Maximum Minimum Maximum Minimum Maximum Investment Commencement Fee Fee Unit Unit Units Total Total Income Subaccount Year Date(1) Rate(2) Rate(2) Value(3) Value(3) Outstanding Net Assets Return(4) Return(4) Ratio(5) ------------------------------------------------------------------------------------------------------------------------ Oppenheimer Aggressive Growth 2005 0.50% 1.00% $13.73 $13.73 26,383 $ 310,866 11.21% 11.21% 0.00% 2004 1.00% 1.00% 12.34 12.34 22,716 280,372 18.59% 18.59% 0.00% 2003 1.00% 1.00% 10.41 10.41 38,612 401,888 24.34% 24.34% 0.00% 2002 1.00% 1.00% 8.37 8.37 54,102 452,862 (28.51)% (28.51)% 0.56% 2001 0.70% 1.00% 11.71 11.71 36,661 429,259 (31.95)% (31.71)% 1.02% Oppenheimer Global Securities 2005 0.65% 1.00% 22.44 23.74 311,330 7,060,193 13.17% 13.57% 1.01% 2004 0.65% 1.00% 19.83 20.97 294,509 5,894,126 17.98% 18.39% 1.16% 2003 0.65% 1.00% 16.80 17.78 213,821 3,624,439 41.60% 42.10% 0.78% 2002 0.65% 1.00% 11.87 12.56 193,943 2,320,337 (22.91)% (22.64)% 0.47% 2001 0.65% 1.00% 15.39 16.29 130,059 2,022,064 (12.91)% (12.61)% 0.62% Oppenheimer Main Street Growth & Income 2005 1.00% 1.00% 11.72 11.72 1,757 20,595 4.93% 4.93% 1.27% 2004 5/11/2004 1.00% 1.00% 11.17 11.17 1,608 17,963 9.98% 9.98% 0.00% 2002 0.00% 0.00% -- -- -- -- 0.00% 0.00% 0.75% 2001 0.70% 1.00% 9.73 10.22 183 1,827 (11.02)% (10.76)% 1.08% Oppenheimer Strategic Bond 2005 0.65% 1.00% 14.64 15.02 236,303 3,477,465 1.65% 2.00% 4.20% 2004 0.65% 1.00% 14.40 14.72 182,238 2,649,455 7.59% 7.97% 6.83% 2003 0.65% 1.00% 13.39 13.64 293,819 3,950,170 16.90% 17.31% 5.83% 2002 0.65% 1.00% 11.45 11.76 182,998 2,109,252 6.35% 6.75% 7.50% 2001 0.65% 1.00% 10.77 11.05 166,566 1,802,919 3.80% 4.17% 2.45%
(1) Reflects less than a full year of activity. Funds were first received in this option on the commencement date noted or the option was inactive at the date funds were received. (2) These amounts represent the annualized minimum and maximum contract expenses of the separate account, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying funds have been excluded. (3) As the unit value is presented as a range of minimum to maximum values, for only those subaccounts which existed for the entire year, some individual contract unit values may not be within the ranges presented as a result of partial year activity. (4) These amounts represent the total return, including changes in value of mutual funds, 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. The total return is not annualized. As the total return is presented as a range of minimum to maximum values, for only those subaccounts which existed for the entire year, some individual contract total returns may not be within the ranges presented as a result of partial year activity. (5) These amounts represent the dividends, excluding distributions of capital gains, 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 guarantee 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. Investment income ratios are not annualized. Note: Fee rate, unit value and total return minimum and maximum are the same where there is only one active contract level charge for the subaccount. B-15 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 4. Purchases and Sales of Investments The aggregate cost of investments purchased and the aggregate proceeds from investments sold were as follows for 2005.
Aggregate Aggregate Cost of Proceeds Subaccount Purchases from Sales ----------------------------------------------------------------------- Fidelity VIP Asset Manager $ 9,183 $ 96,643 Fidelity VIP Contrafund 4,404,046 4,393,605 Fidelity VIP Equity-Income 4,407,046 5,481,163 Fidelity VIP Growth 1,725,639 2,217,228 Fidelity VIP High Income 35,571 124,759 Fidelity VIP Overseas 23,540 171,603 ING Partners JPMorgan Fleming International 1,274,119 2,218,070 ING Partners MFS Capital Opportunities 1,443,719 1,466,399 ING Partners Salomon Brothers Aggressive Growth 3,348,949 4,397,648 ING Partners T.Rowe Price Growth Equity 966,514 1,467,813 ING Partners UBS U.S. Large Cap Equities 2,329,773 2,570,381 ING VP Balanced 1,998,073 3,862,227 ING VP Growth and Income 3,954,614 11,648,197 ING VP Growth -- 9,254 ING VP Index Plus LargeCap 3,670,707 5,019,806 ING VP Intermediate Bond 10,361,882 10,886,168 ING VP Money Market 27,998,466 31,824,319 ING VP Small Company 47,375 390,327 ING VP Strategic Allocation Balanced 357,410 197,856 ING VP Strategic Allocation Growth 1,261,403 999,880 ING VP Strategic Allocation Income 301,318 205,800 ING VP Value Opportunity 422 1,368 Janus Aspen Series Balanced 977,981 2,033,941 Janus Aspen Series Flexible Bond 351,500 348,097 Janus Aspen Series Large Cap Growth 1,578,602 3,263,384 Janus Aspen Series Mid Cap Growth 6,947,340 8,703,603 Janus Aspen Series Worldwide Growth 2,316,768 4,869,034 MFS VIT Strategic Income 14,243 8,174 MFS VIT Total Return 19,202 15,945 Oppenheimer Aggressive Growth 251,577 255,344 Oppenheimer Global Securities 2,123,047 1,711,797 Oppenheimer Main Street Growth & Income 2,162 434 Oppenheimer Strategic Bond 3,995,810 2,962,358
B-16 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 5. Investments The following is a summary of investments owned at December 31, 2005.
Net Shares Asset Fair Value of Subaccount Owned Value Shares Cost of Shares --------------------------------------------------------------------------------------------- Fidelity VIP Asset Manager 6,347 $15.04 $ 95,464 $ 89,660 Fidelity VIP Contrafund 879,971 31.03 27,305,491 18,075,736 Fidelity VIP Equity-Income 949,745 25.49 24,208,993 19,653,092 Fidelity VIP Growth 132,077 33.70 4,450,988 4,672,814 Fidelity VIP High Income 34,639 6.17 213,722 222,813 Fidelity VIP Overseas 62,373 20.61 1,285,513 1,005,005 ING Partners JPMorgan Fleming International 1,020,461 13.43 13,704,786 10,244,416 ING Partners MFS Capital Opportunities 69,227 27.40 1,896,818 1,839,562 ING Partners Salomon Brothers Aggressive Growth 282,982 44.52 12,598,355 10,286,605 ING Partners T.Rowe Price Growth Equity 102,054 52.62 5,370,095 4,452,712 ING Partners UBS U.S. Large Cap Equities 902,081 9.30 8,389,352 6,892,584 ING VP Balanced 1,512,008 13.64 20,623,789 19,672,975 ING VP Growth and Income 3,893,682 20.71 80,638,164 102,031,985 ING VP Index Plus LargeCap 963,585 15.42 14,858,476 12,213,979 ING VP Intermediate Bond 938,283 12.97 12,169,534 12,522,428 ING VP Money Market 1,166,534 13.17 15,363,718 15,173,687 ING VP Small Company 98,192 21.65 2,125,862 1,490,216 ING VP Strategic Allocation Balanced 121,053 14.35 1,737,106 1,521,975 ING VP Strategic Allocation Growth 259,014 15.48 4,009,532 3,402,440 ING VP Strategic Allocation Income 157,368 13.27 2,088,276 1,920,782 ING VP Value Opportunity 2,091 13.85 28,967 25,950 Janus Aspen Series Balanced 528,299 25.74 13,598,407 11,910,992 Janus Aspen Series Flexible Bond 358,310 11.36 4,070,406 4,596,209 Janus Aspen Series Large Cap Growth 626,819 20.86 13,075,450 9,631,242 Janus Aspen Series Mid Cap Growth 657,682 29.02 19,085,932 15,186,137 Janus Aspen Series Worldwide Growth 654,508 27.96 18,300,046 16,133,797 MFS VIT Strategic Income 15,344 10.64 163,263 168,626 MFS VIT Total Return 8,005 20.69 165,619 143,269 Oppenheimer Aggressive Growth 6,294 49.39 310,876 233,150 Oppenheimer Global Securities 211,415 33.38 7,057,043 5,770,417 Oppenheimer Main Street Growth & Income 945 21.79 20,596 18,531 Oppenheimer Strategic Bond 680,522 5.11 3,477,468 3,421,786
B-17 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 6. Changes in Units Outstanding The change in units outstanding for the year ended December 31, 2005 is as follows:
Units Units Net Increase Subaccount Issued Redeemed (Decrease) ---------------------------------------------------------------------------------- Fidelity VIP Asset Manager 377 (5,411) (5,034) Fidelity VIP Contrafund 271,729 (255,013) 16,716 Fidelity VIP Equity-Income 252,010 (359,302) (107,292) Fidelity VIP Growth 161,518 (124,878) 36,640 Fidelity VIP High Income -- (12,742) (12,742) Fidelity VIP Overseas 676 (10,528) (9,852) ING Partners JPMorgan Fleming International 105,635 (149,505) (43,870) ING Partners MFS Capital Opportunities 122,669 (125,917) (3,248) ING Partners Salomon Brothers Aggressive Growth 372,106 (421,068) (48,962) ING Partners T.Rowe Price Growth Equity 88,182 (123,953) (35,771) ING Partners UBS U.S. Large Cap Equities 229,307 (242,213) (12,906) ING VP Balanced 112,605 (186,068) (73,463) ING VP Growth and Income 453,680 (734,194) (280,514) ING VP Growth -- (880) (880) ING VP Index Plus LargeCap 305,327 (357,107) (51,780) ING VP Intermediate Bond 697,593 (732,710) (35,117) ING VP Money Market 2,328,991 (2,612,561) (283,570) ING VP Small Company 1,472 (23,714) (22,242) ING VP Strategic Allocation Balanced 24,333 (14,915) 9,418 ING VP Strategic Allocation Growth 100,830 (85,312) 15,518 ING VP Strategic Allocation Income 19,192 (15,262) 3,930 ING VP Value Opportunity -- (85) (85) Janus Aspen Series Balanced 53,588 (98,969) (45,381) Janus Aspen Series Flexible Bond -- (20,853) (20,853) Janus Aspen Series Large Cap Growth 157,260 (234,733) (77,473) Janus Aspen Series Mid Cap Growth 492,365 (548,273) (55,908) Janus Aspen Series Worldwide Growth 144,060 (255,598) (111,538) MFS VIT Strategic Income 194 (483) (289) MFS VIT Total Return 679 (950) (271) Oppenheimer Aggressive Growth 22,792 (19,125) 3,667 Oppenheimer Global Securities 117,175 (100,354) 16,821 Oppenheimer Main Street Growth & Income 178 (29) 149 Oppenheimer Strategic Bond 260,116 (206,051) 54,065
B-18 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 6. Changes in Units Outstanding (continued) The change in units outstanding for the year ended December 31, 2004 is as follows:
Units Units Net Increase Subaccount Issued Redeemed (Decrease) ---------------------------------------------------------------------------------- Fidelity VIP Asset Manager 14,859 (69,029) (54,170) Fidelity VIP Contrafund 237,525 (321,051) (83,526) Fidelity VIP Equity-Income 352,360 (631,913) (279,553) Fidelity VIP Growth 29,381 (59,952) (30,571) Fidelity VIP High Income -- (6,508) (6,508) Fidelity VIP Overseas 90,247 (88,639) 1,608 ING Partners JPMorgan Fleming International 127,239 (225,003) (97,764) ING Partners MFS Capital Opportunities 102,667 (120,766) (18,099) ING Partners Salomon Brothers Aggressive Growth 302,767 (352,569) (49,802) ING Partners T.Rowe Price Growth Equity 154,528 (146,002) 8,526 ING Partners UBS U.S. Large Cap Equities 162,116 (238,546) (76,430) ING VP Balanced 194,907 (171,032) 23,875 ING VP Growth and Income 510,163 (807,830) (297,667) ING VP Growth -- (21) (21) ING VP Index Plus LargeCap 174,501 (292,821) (118,320) ING VP Intermediate Bond 211,347 (347,226) (135,879) ING VP Money Market 1,346,263 (1,590,165) (243,902) ING VP Small Company 15,526 (39,384) (23,858) ING VP Strategic Allocation Balanced 17,903 (17,797) 106 ING VP Strategic Allocation Growth 39,852 (63,884) (24,032) ING VP Strategic Allocation Income 22,327 (19,043) 3,284 ING VP Value Opportunity 4,935 (5,021) (86) Janus Aspen Series Balanced 72,664 (274,921) (202,257) Janus Aspen Series Flexible Bond 4,443 (31,787) (27,344) Janus Aspen Series Large Cap Growth 148,783 (328,145) (179,362) Janus Aspen Series Mid Cap Growth 287,269 (365,107) (77,838) Janus Aspen Series Worldwide Growth 161,984 (450,862) (288,878) MFS VIT Strategic Income 14,097 (34,685) (20,588) MFS VIT Total Return 527 (10,201) (9,674) Oppenheimer Aggressive Growth 23,136 (39,032) (15,896) Oppenheimer Global Securities 225,398 (144,710) 80,688 Oppenheimer Main Street Growth & Income 7,608 (6,000) 1,608 Oppenheimer Strategic Bond 93,353 (204,934) (111,581)
B-19 Variable Life B of ING Life Insurance and Annuity Company Notes to financial statements (continued) 6. Changes in Units Outstanding (continued) The change in units outstanding for the year ended December 31, 2003 is as follows:
Units Units Net Increase Subaccount Issued Redeemed (Decrease) ------------------------------------------------------------------------------------ Fidelity VIP Asset Manager 18,834 (15,800) 3,034 Fidelity VIP Contrafund 529,709 (538,484) (8,776) Fidelity VIP Equity-Income 1,138,671 (1,200,082) (61,411) Fidelity VIP Growth 11,217 (335,581) (324,363) Fidelity VIP High Income 717 (6,645) (5,928) Fidelity VIP Overseas 4,173 (66,594) (62,421) ING Partners JPMorgan Fleming International 34,275,388 (34,685,094) (409,706) ING Partners MFS Capital Opportunities 125,001 (132,808) (7,808) ING Partners UBS U.S. Large Cap Equities 176,004 (215,301) (39,297) ING Partners Salomon Brothers Aggressive Growth 5,592,752 (5,677,705) (84,953) ING Partners T.Rowe Price Growth Equity 252,451 (105,142) 147,308 ING VP Balanced 149,608 (217,152) (67,545) ING VP Intermediate Bond 415,399 (542,894) (127,495) ING VP Growth and Income 842,011 (1,303,585) (461,574) ING VP Growth -- (24) (24) ING VP Index Plus LargeCap 4,099,600 (4,058,645) 40,955 ING VP Money Market 46,560,266 (48,095,666) (1,535,400) ING VP Small Company 135,985 (13,197) 122,788 ING VP Strategic Allocation Balanced 31,590 (25,864) 5,726 ING VP Strategic Allocation Growth 80,380 (63,993) 16,388 ING VP Strategic Allocation Income 27,121 (11,193) 15,928 ING VP Value Opportunity 4,821 (44,661) (39,840) Janus Aspen Series Balanced 152,435 (246,105) (93,670) Janus Aspen Series Flexible Bond 269,761 (20,058) 249,703 Janus Aspen Series Large Cap Growth 1,168,080 (1,236,312) (68,232) Janus Aspen Series Mid Cap Growth 5,589,276 (5,692,800) (103,524) Janus Aspen Series Worldwide Growth 9,144,226 (9,571,751) (427,525) MFS VIT Strategic Income 7,560 (3,126) 4,434 MFS VIT Total Return 3,439 (2,236) 1,203 Oppenheimer Aggressive Growth 7,823 (23,313) (15,490) Oppenheimer Global Securities 266,811 (246,933) 19,878 Oppenheimer Strategic Bond 480,638 (369,818) 110,820
B-20 Report of Independent Registered Public Accounting Firm Board of Directors of The Lincoln National Life Insurance Company and Contract Owners of Variable Life B of ING Life Insurance and Annuity Company We have audited the accompanying statement of assets and liabilities of Variable Life B of ING Life Insurance and Annuity Company ("Variable Account"), comprised of the subaccounts described in Note 1, as of December 31, 2005, and the related statements of operations and changes in net assets for each of the three years 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 the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Variable Account's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Variable Account's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of investments owned as of December 31, 2005, by correspondence with the custodian. 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 Variable Life B of ING Life Insurance and Annuity Company as of December 31, 2005 and the results of their operations and changes in their net assets for each of the three years 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, 2006 B-21 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Registered Public Accounting Firm C-2 Consolidated Financial Statements: Consolidated Statements of Operations for the years ended December 31, 2005, 2004, and 2003 C-3 Consolidated Balance Sheets as of December 31, 2005 and 2004 C-4 Consolidated Statements of Changes in Shareholder's Equity for the years ended December 31, 2005, 2004, and 2003 C-6 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, and 2003 C-7 Notes to Consolidated Financial Statements C-9
C-1 Report of Independent Registered Public Accounting Firm The Board of Directors ING Life Insurance and Annuity Company We have audited the accompanying consolidated balance sheets of ING Life Insurance and Annuity Company and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in shareholder's equity, and cash flows for each of the three years in the period ended December 31, 2005. 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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 consolidated financial position of ING Life Insurance and Annuity Company and subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP Atlanta, Georgia March 24, 2006 C-2 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) CONSOLIDATED STATEMENTS OF OPERATIONS (In millions)
YEAR ENDED DECEMBER 31, 2005 2004 2003 ------------------- -------------------- -------------------- REVENUE: Net investment income $ 1,035.7 $ 998.2 $ 980.9 Fee income 481.4 453.7 396.7 Premiums 43.2 38.5 50.1 Net realized capital gains 22.0 10.8 50.6 Other income 7.7 1.9 (0.9) ------------------- -------------------- -------------------- Total revenue 1,590.0 1,503.1 1,477.4 ------------------- -------------------- -------------------- BENEFITS AND EXPENSES: Interest credited and other benefits to contractowners 739.6 739.4 770.1 Operating expenses 443.0 394.0 383.9 Amortization of deferred policy acquisition cost and value of business acquired 159.9 127.4 106.5 Interest expense 1.6 0.6 1.2 ------------------- -------------------- -------------------- Total benefits and expenses 1,344.1 1,261.4 1,261.7 ------------------- -------------------- -------------------- Income before income taxes 245.9 241.7 215.7 Income tax expense 1.4 42.4 61.1 ------------------- -------------------- -------------------- Net income $ 244.5 $ 199.3 $ 154.6 =================== ==================== ====================
The accompanying notes are an integral part of these consolidated financial statements. C-3 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) CONSOLIDATED BALANCE SHEETS (In millions, except share data)
AS OF DECEMBER 31, 2005 2004 -------------------- ------------------- ASSETS Investments: Fixed maturities, available-for-sale, at fair value (amortized cost of $16,749.5 at 2005 and $16,684.7 at 2004) $ 16,740.5 $ 17,151.3 Equity securities, available-for-sale, at fair value (cost of $166.9 at 2005 and $153.9 at 2004) 170.1 162.6 Mortgage loans on real estate 1,396.0 1,090.2 Policy loans 262.4 262.7 Other investments 144.6 86.3 Securities pledged (amortized cost of $1,260.8 at 2005 and $1,258.8 at 2004) 1,247.6 1,274.3 --------------------- ------------------ Total investments 19,961.2 20,027.4 Cash and cash equivalents 212.5 187.1 Short-term investments under securities loan agreement 318.1 219.5 Accrued investment income 203.6 182.0 Reinsurance recoverable 2,796.7 2,901.3 Deferred policy acquisition costs 512.4 414.5 Value of business acquired 1,294.4 1,365.2 Notes receivable from affiliate 175.0 175.0 Due from affiliates 149.6 38.3 Other assets 66.5 69.8 Assets held in separate accounts 35,899.8 33,310.5 --------------------- ------------------ Total assets $ 61,589.8 $ 58,890.6 ===================== ==================
The accompanying notes are an integral part of these consolidated financial statements. C-4 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) CONSOLIDATED BALANCE SHEETS (In millions, except share data)
AS OF DECEMBER 31, 2005 2004 ------------------- -------------------- LIABILITIES AND SHAREHOLDER'S EQUITY Future policy benefits and claims reserves $ 20,932.8 $ 20,885.3 Payables for securities purchased 3.1 25.1 Payables under securities loan agreement 318.1 219.5 Borrowed money 941.1 1,057.4 Due to affiliates 63.8 61.8 Current income taxes 46.9 82.6 Deferred income taxes 183.3 209.3 Other liabilities 301.5 314.9 Liabilities related to separate accounts 35,899.8 33,310.5 ------------------- -------------------- Total liabilities 58,690.4 56,166.4 ------------------- -------------------- Shareholder's equity Common stock (100,000 shares authorized; 55,000 shares issued and outstanding, $50 per share value) 2.8 2.8 Additional paid-in capital 4,579.6 4,576.5 Accumulated other comprehensive (loss) income (5.3) 67.1 Retained earnings (deficit) (1,677.7) (1,922.2) ------------------- -------------------- Total shareholder's equity 2,899.4 2,724.2 ------------------- -------------------- Total liabilities and shareholder's equity $ 61,589.8 $ 58,890.6 =================== ====================
The accompanying notes are an integral part of these consolidated financial statements. C-5 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (In millions)
ACCUMULATED ADDITIONAL OTHER RETAINED TOTAL COMMON PAID-IN COMPREHENSIVE EARNINGS SHAREHOLDER'S STOCK CAPITAL INCOME (LOSS) (DEFICIT) EQUITY --------------- --------------- ----------------- --------------- ---------------- Balance at December 31, 2002 $ 2.8 $ 4,416.5 $ 117.5 $ (2,274.0) $ 2,262.8 Comprehensive income: Net income - - - 154.6 154.6 Other comprehensive loss, net of tax: Change in net unrealized gain (loss) on securities ($(2.3) pretax) - - (1.5) - (1.5) ---------------- Total comprehensive income 153.1 ---------------- Contribution of capital - 230.0 - - 230.0 --------------- --------------- ----------------- --------------- ---------------- Balance at December 31, 2003 2.8 4,646.5 116.0 (2,119.4) 2,645.9 Comprehensive income: Net income - - - 199.3 199.3 Other comprehensive loss, net of tax: Change in net unrealized gain (loss) on securities ($(53.8) pretax) - - (32.2) - (32.2) Minimum pension liability - - (16.7) - (16.7) ---------------- Total comprehensive income 150.4 ---------------- Dividends paid - (70.0) - - (70.0) Other - - - (2.1) (2.1) --------------- --------------- ----------------- --------------- ---------------- Balance at December 31, 2004 2.8 4,576.5 67.1 (1,922.2) 2,724.2 Comprehensive income: Net income - - - 244.5 244.5 Other comprehensive loss net of tax: Change in net unrealized gain (loss) on securities ($(108.4) pretax) - - (77.5) - (77.5) Minimum pension liability ($(1.1) pretax) - - 5.1 - 5.1 ---------------- Total comprehensive income 172.1 ---------------- Employee share-based payments - 3.1 - - 3.1 --------------- --------------- ----------------- --------------- ---------------- Balance at December 31, 2005 $ 2.8 $ 4,579.6 $ (5.3) $ (1,677.7) $ 2,899.4 =============== =============== ================= =============== ================
The accompanying notes are an integral part of these consolidated financial statements. C-6 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
YEAR ENDED DECEMBER 31, 2005 2004 2003 ---------------- ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 244.5 $ 199.3 $ 154.6 Adjustments to reconcile net income to net cash provided by operating activities: Capitalization of deferred policy acquisition costs, value of business acquired and sales inducements (174.0) (168.0) (159.7) Amortization of deferred policy acquisition costs, value of business acquired and sales inducements 165.8 134.3 106.5 Net accretion/decretion of discount/premium 115.5 155.9 198.9 Future policy benefits, claims reserves, and interest credited 634.2 621.7 706.1 Provision for deferred income taxes 11.1 46.2 22.1 Net realized capital gains (22.0) (10.8) (50.6) Depreciation 12.0 12.4 23.3 Change in: Accrued investment income (21.6) (3.1) 1.8 Reinsurance recoverable 104.6 51.0 31.0 Other receivable and assets accruals 6.0 34.1 (28.9) Due to/from affiliates (3.3) (49.2) 88.8 Other payables and accruals (47.4) (12.1) 20.3 Other 3.1 (12.4) - ---------------- ----------------- ----------------- Net cash provided by operating activities 1,028.5 999.3 1,114.2 ---------------- ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale, maturity, or redemption of: Fixed maturities, available-for-sale 19,232.3 26,791.6 29,981.6 Equity securities, available-for-sale 119.8 85.7 130.2 Mortgage loans on real estate 179.0 71.0 16.3 Acquisition of: Fixed maturities, available-for-sale (19,435.9) (26,789.3) (31,955.4) Equity securities, available-for-sale (120.4) (81.6) (34.8) Mortgage loans on real estate (484.8) (406.7) (194.2) Policy loans 0.3 7.6 26.0 Other investments (43.6) (28.9) (22.4) (Purchase)/sales of property and equipment, net (14.2) (11.7) (5.2) Loans to affiliates - (175.0) - ---------------- ----------------- ----------------- Net cash used in investing activities (567.5) (537.3) (2,057.9) ---------------- ----------------- -----------------
The accompanying notes are an integral part of these consolidated financial statements. C-7 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions)
YEAR ENDED DECEMBER 31, 2005 2004 2003 ----------------- ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Deposits received for investment contracts 2,024.2 2,089.9 2,296.6 Maturities and withdrawals from investment contracts (2,237.5) (1,910.4) (1,745.5) Short-term loans with affiliates (106.0) 16.4 (41.4) Short-term loans (116.3) (458.5) 196.5 Dividends paid to Parent - (70.0) - Contribution of capital from Parent - - 230.0 ----------------- ------------------ ------------------ Net cash (used in) provided by financing activities (435.6) (332.6) 936.2 ----------------- ------------------ ------------------ Net increase (decrease) in cash and cash equivalents 25.4 129.4 (7.5) Cash and cash equivalents, beginning of year 187.1 57.7 65.2 ----------------- ------------------ ------------------ Cash and cash equivalents, end of year $ 212.5 $ 187.1 $ 57.7 ================= ================== ================== Supplemental cash flow information: Income taxes paid, net $ 27.7 $ 3.2 $ 29.8 ================= ================== ================== Interest paid $ 32.0 $ 22.8 $ 32.6 ================= ================== ==================
The accompanying notes are an integral part of these consolidated financial statements. C-8 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION ING Life Insurance and Annuity Company ("ILIAC") is a stock life insurance company domiciled in the state of Connecticut. ILIAC and its wholly-owned subsidiary (collectively, the "Company") are providers of financial products and services in the United States. ILIAC is authorized to conduct its insurance business in the District of Columbia and all states. The consolidated financial statements include ILIAC and its wholly-owned subsidiary, ING Financial Advisers, LLC ("IFA"). ILIAC is a direct, wholly-owned subsidiary of Lion Connecticut Holdings Inc. ("Lion" or "Parent"), which is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING"). ING is a global financial services holding company based in The Netherlands, with American Depository Shares listed on the New York Stock Exchange under the symbol "ING." On December 31, 2005, ILIAC's subsidiary, ING Insurance Company of America ("IICA"), merged with and into ILIAC. As of the merger date, IICA ceased to exist and ILIAC became the surviving corporation. The merger did not have an impact on ILIAC, as IICA was a wholly-owned subsidiary and already included in the consolidated financial statements for all periods presented. DESCRIPTION OF BUSINESS The Company offers qualified and nonqualified annuity contracts that include a variety of funding and payout options for individuals and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408, and 457, as well as nonqualified deferred compensation plans. The Company's products are offered primarily to individuals, pension plans, small businesses, and employer-sponsored groups in the health care, government, education (collectively "not-for-profit" organizations), and corporate markets. The Company's products generally are distributed through pension professionals, independent agents and brokers, third party administrators, banks, dedicated career agents, and financial planners. The Company offers deferred and immediate (payout annuities) annuity contracts. These products include programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and record-keeping services along with a variety of investment options, including affiliated and nonaffiliated mutual funds, and variable and fixed investment options. In addition, the Company offers wrapper agreements entered into with retirement plans which contain certain benefit responsive guarantees (i.e. liquidity guarantees of principal and previously accrued interest for benefits paid under the terms of the plan) with respect to portfolios of plan-owned assets C-9 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- not invested with the Company. The Company also offers investment advisory services and pension plan administrative services. The Company has one operating segment, ING U.S. Financial Services, which offers the products described above. RECENTLY ADOPTED ACCOUNTING STANDARDS The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF Issue No. 03-1 ("EITF-03-1"), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," requiring that a three-step impairment model be applied to securities within its scope. The three-step model is applied on a security-by-security basis as follows: Step 1: Determine whether an investment is impaired. An investment is impaired if the fair value of the investment is less than its cost basis. Step 2: Evaluate whether an impairment is other-than-temporary. Step 3: If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment's cost and its fair value. On September 30, 2004, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. EITF Issue 03-1-1 ("FSP EITF 03-1-1"), "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, `The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,'" which delayed the EITF Issue No. 03-1 original effective date of July 1, 2004 for steps two and three of the impairment model introduced. On November 3, 2005, the FASB issued FSP Statement of Financial Accounting Standard ("FAS") No. 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP FAS No. 115-1"). FSP FAS No. 115-1 replaces the impairment evaluation guidance of EITF 03-1. FSP FAS No. 115-1 addresses the determination of when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. In addition, it includes considerations for accounting subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporarily impaired. FSP FAS No. 115-1 further clarifies that an impairment loss should be recognized no later than when the impairment is deemed other-than-temporary, even if a decision to sell an C-10 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- impaired security has not been made. FSP FAS No. 115-1 references existing guidance on other-than-temporary impairments. FSP FAS No. 115-1 is effective for reporting periods beginning after December 15, 2005, and was implemented by the Company during the fourth quarter of 2005. The Company recognized impairment losses of $5.7 for the year ended December 31, 2005, related to investments that the Company does not have the intent and ability to retain for a period of time sufficient to allow for recovery in fair value. The required disclosures are included in the Investments footnote. Investor's Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights In June 2005, the EITF reached a consensus on EITF Issue 04-5, "Investor's Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights" ("EITF 04-5"), which states that the general partner in a limited partnership should presume that it controls and, thus, should consolidate the limited partnership, unless the limited partners have either (a) substantive ability to dissolve the limited partnership or otherwise remove the general partner without cause or (b) substantive participating rights. EITF 04-5 applies to limited partnerships that are not variable interest entities under FASB Interpretation No. 46(R): "Consolidation of Variable Interest Entities" ("FIN 46(R)"). EITF 04-5 was effective immediately for all new limited partnerships formed and for existing limited partnerships for which partnership agreements are modified after June 29, 2005, and is effective for all other limited partnerships at the commencement of the first reporting period beginning after December 15, 2005. EITF 04-5 had no impact on ILIAC as of December 31, 2005, as the Company's investments in limited partnerships are generally considered variable interest entities under FIN 46(R), and are accounted for using the cost or equity method of accounting since the Company is not the primary beneficiary. Investments in limited partnerships are included in Other investments on the Consolidated Balance Sheets. Share-Based Payment In December 2004, the FASB issued Statement of Financial Accounting Standards ("FAS") No. 123 (revised 2004), "Share-Based Payment" ("FAS No. 123R"), which requires all share-based payments to employees be recognized in the financial statements based upon the fair value. FAS No. 123R was effective at the beginning of the first annual period beginning after June 15, 2005 for registrants. FAS No. 123R provides two transition methods, modified-prospective and modified- retrospective. C-11 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- The modified-prospective method recognizes the grant-date fair value of compensation for new awards granted after the effective date and unvested awards beginning in the fiscal period in which the recognition provision are first applied. Prior periods are not restated. The modified-retrospective method permits entities to restate prior periods by recognizing the compensation cost based on amounts previously reported in the pro forma footnote disclosure as required under FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"). The Company early adopted the provisions of FAS No. 123R on January 1, 2005, using the modified-prospective method. Under the modified-prospective method, compensation cost recognized in 2005 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of FAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2005, based on the grant-date fair value in accordance with the provisions of FAS No. 123R. Results for prior periods are not restated. Prior to January 1, 2005, the Company applied the intrinsic value-based provisions set forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related Interpretations, as permitted by FAS No.123. No stock based employee compensation cost was recognized in the Consolidated Statement of Operations during 2004, as all options granted during the year had an exercise price equal to the market value of the underlying common stock on the date of grant. All shares granted during 2005 and 2004 were those of ING, the Company's ultimate parent. As a result of adopting FAS No. 123R, the Company's net income for the year ended December 31, 2005, is $2.0 lower than if it had continued to account for share-based payments under APB 25. The fair value of shares granted during 2005 was $2.6 as of December 31, 2005, and will be expensed over a vesting period of 3 years. Prior to the adoption of FAS No. 123R, no modifications were made to outstanding options, and there were no significant changes of valuation methodologies as a result of the adoption of FAS No. 123R. Accounting for Derivative Instruments and Hedging Activities The Derivative Implementation Group ("DIG"), responsible for issuing guidance on behalf of the FASB for implementation of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No. 133"), issued Statement No. 133 Implementation Issue No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Credit Worthiness of the Obligor under Those Instruments" ("DIG B36"). Under this interpretation, modified coinsurance and coinsurance with funds withheld reinsurance agreements, as well as other types of receivables and payables where interest is determined by reference to a pool of fixed maturity assets or a total return debt index, may be determined to contain embedded derivatives that are required to be bifurcated from the host instrument. The required date C-12 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- of adoption of DIG B36 for the Company was October 1, 2003. The adoption did not have an impact on the Company's financial position, results of operations, or cash flows. Variable Interest Entities In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). In December 2003, the FASB modified FIN 46 to make certain technical revisions and address certain implementation issues that had arisen. FIN 46 provides a new framework for identifying variable interest entities ("VIEs") and determining when a company should include the assets, liabilities, noncontrolling interests, and results of activities of a VIE in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. FIN 46R requires a VIE to be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE's activities, is entitled to receive a majority of the VIE's residual returns (if no party absorbs a majority of the VIE's losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE's assets, liabilities, and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN 46R also requires disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest. The adoption of FIN 46R had no impact on the Company's financial statements. The Company held investments in VIEs in the form of private placement securities, structured securities, securitization transactions, and limited partnerships with an aggregate fair value of $8.5 billion as of December 31, 2005 and 2004. These VIEs are held by the Company for investment purposes. Consolidation of these investments in the Company's financial statements is not required as the Company is not the primary beneficiary for any of these VIEs. Book value as of December 31, 2005 and 2004 of $8.6 billion and $8.4 billion, respectively, represents the maximum exposure to loss on the investments in VIEs. In addition, the Company may be exposed to the loss of asset management fees it receives for some of these structures. C-13 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- NEW ACCOUNTING PRONOUNCEMENTS Accounting for Certain Hybrid Financial Instruments In February 2006, the FASB issued FAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("FAS No. 155"), which permits the application of fair value accounting to certain hybrid financial instruments in their entirety if they contain embedded derivatives that would otherwise require bifurcation under FAS No. 133. Under this approach, changes in fair value would be recognized currently in earnings. In addition, FAS No. 155 does the following: o Clarifies which interest-only strips and principal-only strips are not subject to derivative accounting under FAS No. 133; o Requires that interests in securitized financial assets be analyzed to identify interests that are freestanding derivatives or that are hybrid instruments that contain embedded derivatives requiring bifurcation; o Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and o Allows a qualifying special-purpose entity to hold derivative financial instruments that pertain to beneficial interests, other than another derivative financial instrument. FAS No. 155 is effective for all instruments acquired, issued, or subject to a remeasurement event, occurring after the beginning of the first fiscal year that commences after September 15, 2006. The Company is in the process of determining the impact of FAS No. 155. Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts In September 2005, the American Institute of Certified Public Accountants issued Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"), which states that when an internal replacement transaction results in a substantially changed contract, the unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement assets, related to the replaced contract should not be deferred in connection with the new contract. Contract modifications that meet various conditions defined by SOP 05-1 and result in a new contract that is substantially unchanged from the replaced contract, however, should be accounted for as a continuation of the replaced contract. C-14 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverage, that occurs by the exchange of a contract for a new contract, by amendment, endorsement, or rider, to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 applies to internal replacements made primarily to contracts defined by FAS No. 60, "Accounting and Reporting by Insurance Enterprises" ("FAS No. 60"), as short-duration and long-duration insurance contracts, and by FAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments" ("FAS No. 97"), as investment contracts. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. The Company is in the process of determining the impact of adoption of SOP 05-1. USE OF ESTIMATES 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 the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior year financial information to conform to the current year classifications (see Reclassification and Changes to Prior Year Presentation footnote). During 2005, the Company revised the financial statement presentation for derivatives and certain revenues related to annuity contracts (see Derivatives and Revenue Recognition below). 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 and unrealized gains and losses on these securities are included directly in Shareholder's equity, after C-15 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- adjustment for related changes in experience-rated contract allocations, deferred policy acquisition costs ("DAC"), value of business acquired ("VOBA"), and deferred income taxes. Other-Than-Temporary Impairments The Company analyzes the general account investments to determine whether there has been an other-than-temporary decline in fair value below the amortized cost basis. Management considers the length of time and the extent to which fair value has been less than amortized cost, the issuer's financial condition and near-term prospects, future economic conditions and market forecasts, and the Company's intent and ability to retain the investment for a period of time sufficient to allow for recovery in fair value. If it is probable that all amounts due according to the contractual terms of a debt security will not be collected, an other-than-temporary impairment is considered to have occurred. In addition, the Company invests in structured securities that meet the criteria of EITF Issue No. 99-20 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"). Under EITF 99-20, a further determination of the required impairment is based on credit risk and the possibility of significant prepayment risk that restricts the Company's ability to recover the investment. When a decline in fair value is determined to be other-than-temporary, the individual security is written down to fair value, and the loss is accounted for as a change in Net realized capital gains (losses). Experience-Rated Products 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) and other risks, subject to, among other things, minimum principal and interest guarantees. Unamortized realized gains and losses on the sale of and unrealized capital gains and losses on investments supporting these products are included in Future policy benefits and claims reserves on the Consolidated Balance Sheets. Net realized capital gains (losses) on all other investments are reflected in the Consolidated Statements of Operations. Unrealized capital gains and losses on all other investments are reflected in Accumulated other comprehensive income (loss) in Shareholder's equity, net of deferred acquisition costs and related income taxes. C-16 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Purchases and Sales Purchases and sales of fixed maturities 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. Valuation Fair values for fixed maturities 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 actively traded 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. Mortgage loans on real estate are reported at amortized cost, less impairment write-downs. 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 fair value of the collateral. If the loan is in foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell. The carrying value of the impaired loans is reduced by establishing a permanent write-down recorded in net realized capital gains. At December 31, 2005 and 2004, the Company had no allowance for mortgage loan credit losses. Policy loans are carried at unpaid principal balances. Short-term investments, consisting primarily of money market instruments and other fixed maturity 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. Derivative instruments are reported at fair value and are obtained internally from the derivative accounting system. The system uses key financial data, such as yield curves exchange rates, Standard & Poor's ("S&P") 500 Index prices, and London Inter Bank Offering Rates, which are obtained from third party sources and uploaded into the system. Embedded derivative instruments are reported at fair value based upon internally established valuations that are consistent with external valuation models or market quotations. C-17 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Repurchase Agreements The Company engages in dollar repurchase agreements ("dollar rolls") and repurchase agreements to increase the return on investments and improve liquidity. These transactions involve a sale of securities and an agreement to repurchase substantially the same securities as those sold. Company policies require a minimum of 95% of the fair value of securities pledged under dollar rolls and repurchase agreement transactions to be maintained as collateral. Cash collateral received is invested in fixed maturities, the carrying value of the securities pledged in dollar rolls and repurchase agreement transactions is included in Securities pledged on the Consolidated Balance Sheets. The repurchase obligation related to dollar rolls and repurchase agreements is included in Borrowed money on the Consolidated Balance Sheets. The Company also engages in reverse repurchase agreements. Reverse repurchase agreements are included in cash and cash equivalent on the Balance Sheets. Securities Lending 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. Derivatives The Company's use of derivatives is limited mainly to hedging purposes to reduce the Company's exposure to cash flow variability of assets and liabilities, interest rate risk, credit risk, and market risk. Generally, derivatives are not accounted for using hedge accounting treatment under FAS No. 133, as the Company has not historically sought hedge accounting treatment. The Company enters into interest rate, equity market, credit market and currency contracts, including swaps, caps, floors, and options, 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, or to assume or reduce credit exposure associated with a referenced asset, index or pool. The Company also purchases options and futures on equity indexes to reduce and manage risks associated with its annuity products. Open derivative contracts are included in Other investments or Other liabilities, as appropriate, on the Consolidated Balance Sheets. Changes in the fair value of such derivatives are C-18 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- recorded in Net realized capital gains (losses) in the Consolidated Statements of Operations. During the fourth quarter of 2005, the Company revised the financial statement presentation of derivatives. Previously, asset balances and liability balances on open derivative contracts were netted and recorded in Other investments on the Balance Sheet. The Company now reports derivatives with asset balances in Other investments and derivatives with liability balances in Other liabilities. In addition, changes in the fair value of certain derivatives were previously recorded in Net investment income in the Statements of Operations. The total change in fair value of the derivatives is now reported in Net realized capital gains (losses). These revisions resulted in an increase in Other investments and Other liabilities of $29.5 and $27.2 at December 31, 2004 and 2003, respectively, as well as a reclassification of $(14.4) and $(11.9) from Net investment income to Net realized capital gains and losses at December 31, 2004 and 2003, respectively. The Company also had investments in certain fixed maturity instruments, and has issued certain retail annuity products, that contain embedded derivatives 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. Embedded derivatives within fixed maturity instruments are included in Fixed maturities on the Consolidated Balance Sheets, and changes in fair value are recorded in Net realized capital gains and losses in the Consolidated Statements of Operations. Embedded derivatives within retail annuity products are included in Future policy benefits and claims reserves on the Consolidated Balance Sheets, and changes in the fair value are recorded in Interest credited and benefits to contractowners in the Consolidated Statements of Operations. DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED DAC represents policy acquisition costs that have been capitalized and are subject to amortization. Such costs consist principally of certain commissions, underwriting, contract issuance, and certain agency expenses, related to the production of new and renewal business. VOBA represents the outstanding value of in force business capitalized in purchase accounting when the Company was acquired and is subject to amortization. The value is based on the present value of estimated net cash flows embedded in the Company's contracts. C-19 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- FAS No. 97 applies to universal life and investment-type products, such as fixed and variable deferred annuities. Under FAS No. 97, DAC and VOBA are amortized, with interest, over the life of the related contracts in relation to the present value of estimated future gross profits from investment, mortality, and expense margins, plus surrender charges. For FAS No. 97 products, changes in assumptions can have a significant impact on DAC and VOBA balances and amortization rates. Several assumptions are considered significant in the estimation of future gross profits associated with variable deferred annuity products. One of the most significant assumptions involved in the estimation of future gross profits is the assumed return associated with the variable account performance. To reflect the volatility in the equity markets, this assumption involves a combination of near-term expectations and long-term assumptions regarding market performance. The overall return on the variable account is dependent on multiple factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds, as well as equity sector weightings. Other significant assumptions include surrender and lapse rates, estimated interest spread, and estimated mortality. Due to the relative size and sensitivity to minor changes in underlying assumptions of DAC and VOBA balances, the Company performs quarterly and annual analyses of DAC and VOBA for the annuity and life businesses, respectively. The DAC and VOBA balances are evaluated for recoverability. At each evaluation date, actual historical gross profits are reflected and estimated future gross profits and related assumptions are evaluated for continued reasonableness. Any adjustment in estimated profit requires that the amortization rate be revised ("unlocking") retroactively to the date of the policy or contract issuance. The cumulative unlocking adjustment is recognized as a component of current period amortization. In general, sustained increases in investment, mortality, and expense margins, and thus estimated future profits, lower the rate of amortization. However, sustained decreases in investment, mortality, and expense margins, and thus estimated future profits, increase the rate of amortization. RESERVES The Company records as liabilities reserves to meet the Company's future obligations under its variable annuity and fixed annuity products. Changes in, or deviations from, the assumptions used can significantly affect the Company's reserve levels and related future operations. C-20 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Future policy benefits and claims reserves include reserves for deferred annuities and immediate annuities with and without life contingent payouts. Reserves for individual and group deferred annuity investment contracts and individual immediate annuities without life contingent payouts are equal to cumulative deposits less charges and withdrawals, plus credited interest thereon. Reserves interest rates vary by product and ranged from 1.5% to 7.8% for the years ended 2005, 2004, and 2003. Certain reserves also include unrealized gains and losses related to investments and unamortized realized gains and losses on investments for experience-rated contracts. Reserves on experienced rated contracts reflect the rights of contractowners, plan participants, and the Company. Reserves for group immediate annuities without life contingency payouts are equal to the discount value of the payment at the implied break-even rate. Reserves for individual immediate annuities with life contingent payout benefits are computed on the basis of assumed interest discount rates, mortality, and expenses, including a margin for adverse deviations. Such assumptions generally vary by plan, annuity type, year of issue, and policy duration. For the years 2005, 2004, and 2003, reserve interest rates ranged from 4.9% to 5.2%. The Company's domestic individual life insurance business was sold on October 1, 1998 via an indemnity reinsurance agreement. The Company includes an amount in Reinsurance recoverable on the Consolidated Balance Sheets, which equals the Company's total individual life reserves. Unpaid claims and claim expenses for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported. Certain variable annuity contracts offer guaranteed minimum death benefits ("GMDB"). The GMDB is provided in the event the customer's account value at death is below the guaranteed value and is included in reserves. REVENUE RECOGNITION For most annuity contracts, charges assessed against contractowner funds for the cost of insurance, surrenders, expenses, and other fees are recorded as revenue as charges are assessed. Other amounts received for these contracts are reflected as deposits and are not recorded as premiums or 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 in both Premiums and C-21 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Interest credited and other benefits to contractowners in the Consolidated Statements of Operations. During 2005, the Company revised the Statement of Operations for the year ended December 31, 2003 to reflect the proper presentation of revenue related to annuity contracts. This revision resulted in a reclassification of $46.7 from Net investment income to Interest credited and other benefits to contractowners. Premiums on the Consolidated Statements of Operations primarily represent amounts received for immediate annuities with life contingencies. SEPARATE ACCOUNTS Separate account assets and liabilities generally represent funds maintained to meet specific investment objectives of contractowners who bear the investment risk, subject, in limited cases, to certain minimum guaranteed rates. Investment income and investment gains and losses generally accrue directly to such contractowners. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company or its affiliates. Separate account assets supporting variable options under variable annuity contracts are invested, as designated by the contractowner or participant under a contract in shares of mutual funds that are managed by the Company or its affiliates, or in other selected mutual funds not managed by the Company or its affiliates. Separate account assets and liabilities are carried at fair value and 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, however, are not reflected in the Consolidated Statements of Operations (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. Assets and liabilities of separate account arrangements that do not meet the criteria for separate presentation in the Consolidated Balance Sheets (primarily the guaranteed interest option), and revenue and expenses related to such arrangements, are consolidated in the financial statements with the general account. At December 31, 2005 and 2004, unrealized gains of $8.3 and $7.3, respectively, after taxes, on assets supporting a guaranteed interest option are reflected in Shareholder's equity. C-22 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- REINSURANCE The Company utilizes indemnity reinsurance agreements to reduce its exposure to losses from its annuity insurance business. Reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the Company's primary liability as the direct insurer of the risks. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial strength and credit rating of its 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, $2.8 billion and $2.9 billion at December 31, 2005 and 2004, respectively, is related to the reinsurance recoverable from Lincoln National Corporation ("Lincoln") arising from the sale of the Company's domestic life insurance business in 1998 (see the Reinsurance footnote). INCOME TAXES 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. C-23 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- 2. INVESTMENTS FIXED MATURITIES AND EQUITY SECURITIES Fixed maturities and equity securities, available-for-sale, as of December 31, 2005, were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------------- -------------- --------------- --------------- Fixed maturities: U.S. government and government agencies and authorities $ 504.1 $ 0.6 $ 8.4 $ 496.3 State, municipalities, and political subdivision 40.0 0.5 0.9 39.6 U.S. corporate securities: Public utilities 1,260.3 24.1 16.8 1,267.6 Other corporate securities 5,981.9 109.8 89.7 6,002.0 -------------- -------------- --------------- --------------- Total U.S. corporate securities 7,242.2 133.9 106.5 7,269.6 -------------- -------------- --------------- --------------- Foreign securities: Government 704.4 30.0 7.7 726.7 Other 1,815.5 41.8 28.8 1,828.5 -------------- -------------- --------------- --------------- Total foreign securities 2,519.9 71.8 36.5 2,555.2 -------------- -------------- --------------- --------------- Residential mortgage-backed securities 4,453.7 33.6 98.9 4,388.4 Commercial mortgaged-backed securities 2,099.1 29.7 27.0 2,101.8 Other asset-backed securities 1,151.3 5.8 19.9 1,137.2 -------------- -------------- --------------- --------------- Total fixed maturities, including fixed maturities pledged 18,010.3 275.9 298.1 17,988.1 Less: fixed maturities pledged 1,260.8 5.2 18.4 1,247.6 -------------- -------------- --------------- --------------- Total fixed maturities 16,749.5 270.7 279.7 16,740.5 Equity securities 166.9 4.4 1.2 170.1 -------------- -------------- --------------- --------------- Total investments, available-for-sale $ 16,916.4 $ 275.1 $ 280.9 $ 16,910.6 ============== ============== =============== ===============
C-24 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Fixed maturities and equity securities, available-for-sale, as of December 31, 2004, were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------------- -------------- --------------- --------------- Fixed maturities: U.S. government and government agencies and authorities $ 197.3 $ 0.9 $ 0.9 $ 197.3 State, municipalities, and political subdivision 32.1 0.2 0.9 31.4 U.S. corporate securities: Public utilities 1,207.6 50.0 5.0 1,252.6 Other corporate securities 5,846.5 275.0 25.4 6,096.1 -------------- -------------- --------------- --------------- Total U.S. corporate securities 7,054.1 325.0 30.4 7,348.7 -------------- -------------- --------------- --------------- Foreign securities: Government 660.2 33.9 3.1 691.0 Other 1,656.4 78.4 6.1 1,728.7 -------------- -------------- --------------- --------------- Total foreign securities 2,316.6 112.3 9.2 2,419.7 -------------- -------------- --------------- --------------- Residential mortgage-backed securities 5,497.6 65.6 58.2 5,505.0 Commercial mortgaged-backed securities 1,491.2 73.2 4.4 1,560.0 Other asset-backed securities 1,354.6 22.6 13.7 1,363.5 -------------- -------------- --------------- --------------- Total fixed maturities, including fixed maturities pledged to creditors 17,943.5 599.8 117.7 18,425.6 Less: fixed maturities pledged 1,258.8 18.0 2.5 1,274.3 -------------- -------------- --------------- --------------- Total fixed maturities 16,684.7 581.8 115.2 17,151.3 Equity securities 153.9 9.2 0.5 162.6 -------------- -------------- --------------- --------------- Total investments, available-for-sale $ 16,838.6 $ 591.0 $ 115.7 $ 17,313.9 ============== ============== =============== ===============
At December 31, 2005 and 2004, net unrealized (depreciation) appreciation of $(19.0) and $490.8, respectively, on total fixed maturities, including fixed maturities pledged to creditors, and equity securities, included $(48.6) and $357.5, respectively, related to experience-rated contracts, which were not reflected in Shareholder's equity but in Future policy benefits and claim reserves. C-25 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Unrealized losses in fixed maturities at December 31, 2005, were primarily related to interest rate movement or spread widening and to mortgage and other asset-backed securities. Mortgage and other asset-backed securities include U.S. government backed securities, principal protected securities, and structured securities, which did not have an adverse change in cash flows. The following table summarizes the unrealized losses by duration and reason, along with the carrying amount of fixed maturities, including fixed maturities pledged to creditors in unrealized loss positions at December 31, 2005 and 2004.
MORE THAN SIX MONTHS LESS THAN AND LESS THAN MORE THAN 2005 SIX MONTHS TWELVE MONTHS TWELVE MONTHS TOTAL ---- ----------------- -------------------- -------------------- -------------- Interest rate or spread widening $ 55.7 $ 33.9 $ 62.7 $ 152.3 Mortgage and other asset-backed securities 46.7 43.1 56.0 145.8 ----------------- -------------------- -------------------- -------------- Total unrealized loss $ 102.4 $ 77.0 $ 118.7 $ 298.1 ================= ==================== ==================== ============== Fair value $ 5,936.2 $ 2,790.7 $ 2,643.6 $ 11,370.5 ================= ==================== ==================== ============== 2004 ---- Interest rate or spread widening $ 9.5 $ 16.3 $ 15.6 $ 41.4 Mortgage and other asset-backed securities 28.3 18.4 29.6 76.3 ----------------- -------------------- -------------------- -------------- Total unrealized loss $ 37.8 $ 34.7 $ 45.2 $ 117.7 ================= ==================== ==================== ============== Fair value $ 3,319.0 $ 1,795.0 $ 960.5 $ 6,074.5 ================= ==================== ==================== ==============
Of the unrealized losses aged more than twelve months, the average market value of the related fixed maturities is 96% of the average book value. In addition, this category includes 515 securities, which have an average quality rating of AA-. No other-than-temporary impairment loss was considered necessary for these fixed maturities as of December 31, 2005. Overall, there has been an increase in unrealized losses from December 31, 2004 to December 31, 2005. This increase is largely caused by an increase in interest rates, which tends to have a negative market value impact on fixed maturity securities. In accordance with FSP FAS No. 115-1, the Company considers the negative market impact of the interest rate changes, in addition to credit related items, when performing other-than-temporary impairment testing. As a part of this testing, the Company determines whether or not it has the ability and intent to retain the investments for a period of time sufficient to allow for recovery in fair value. C-26 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- The amortized cost and fair value of total fixed maturities as of December 31, 2005, are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
AMORTIZED FAIR COST VALUE -------------------- -------------------- Due to mature: One year or less $ 376.8 $ 376.3 After one year through five years 3,731.8 3,702.1 After five years through ten years 4,644.3 4,648.5 After ten years 1,553.3 1,633.8 Mortgage-backed securities 6,552.8 6,490.2 Other asset-backed securities 1,151.3 1,137.2 Less: fixed maturities pledged 1,260.8 1,247.6 -------------------- -------------------- Fixed maturities, excluding fixed maturities pledged $ 16,749.5 $ 16,740.5 ==================== ====================
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, 2005 or 2004. At December 31, 2005 and 2004, fixed maturities with fair values of $11.0 and $10.9, respectively, were on deposit as required by regulatory authorities. The Company has various categories of commercial mortgage obligations ("CMOs") that 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 prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. At December 31, 2005 and 2004, approximately 1.2% and 4.1%, respectively, of the Company's CMO holdings were invested in types of CMOs which are subject to more prepayment and extension risk than traditional CMOs, such as interest-only or principal-only strips. REPURCHASE AGREEMENTS The Company engages in dollar repurchase agreements ("dollar rolls") and repurchase agreements. At December 31, 2005 and 2004, the carrying value of the securities pledged in dollar rolls and repurchase agreement transactions was $1,247.6 and $1,274.3, respectively. The repurchase obligation related to dollar rolls and repurchase agreements totaled $941.1 and $1,057.4 at December 31, 2005 and 2004, respectively. C-27 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- The Company also engages in reverse repurchase agreements. At December 31, 2005, the carrying value of the securities in reverse repurchase agreements was $32.8. No amounts were engaged in reverse repurchase agreements during the year ended December 31, 2004. 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, 2005 and 2004. The Company believes the counterparties to the dollar rolls and repurchase agreements are financially responsible and that the counterparty risk is immaterial. OTHER-THAN-TEMPORARY IMPAIRMENTS The following table identifies the Company's other-than-temporary impairments by type for the years ended December 31, 2005, 2004, and 2003:
2005 2004 2003 ------------------------------ ----------------------------- ------------------------------ NO. OF NO. OF NO. OF IMPAIRMENT SECURITIES IMPAIRMENT SECURITIES IMPAIRMENT SECURITIES ----------------- ------------ ---------------- ------------ ---------------- ------------ U.S. corporate $ 3.9 15 $ - - $ 6.2 4 Residential mortgage- backed 44.7 82 13.5 53 88.2 83 Foreign 0.3 1 - - - - U.S. Treasuries/Agencies 0.1 2 - - - - Equity securities - - - - - * 2 Limited partnerships - - - - 2.0 1 ----------------- ------------ ---------------- ------------ ----------------- ----------- Total $ 49.0 100 $ 13.5 53 $ 96.4 90 ================= ============ ================ ============ ================= ===========
(1) Primarily U.S. denominated * Less than $0.1 C-28 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- The above schedule includes $5.7 in anticipated disposition write-downs related to investments that the Company does not have the intent and ability to retain for a period of time sufficient to allow for recovery in fair value, based upon the implementation of FSP FAS No. 115-1. The following table summarizes these write-downs recognized by type for the year ended December 31, 2005:
2005 ------------------------------------------------ NO. OF IMPAIRMENT SECURITIES ------------------------ ----------------------- U.S. corporate $ 2.3 13 Residential mortgaged-backed 3.3 2 U.S. Treasuries/Agencies 0.1 2 ------------------------ ----------------------- Total $ 5.7 $ 17 ======================== =======================
The remaining fair value of the fixed maturities with other-than-temporary impairments at December 31, 2005 and 2004 was $470.8 and $125.0, respectively. The Company may sell securities during the period in which fair value has declined below amortized cost for fixed income securities or cost for equity securities. In certain situations new factors such as negative developments and subsequent credit deterioration can subsequently change the Company's previous intent to continue holding a security. Because of rising interest rates, continued asset-liability management strategies and on-going comprehensive reviews of the Company's portfolios, changes were made in the fourth quarter of 2005 to the Company's strategic asset allocations. In addition, the Company also pursued yield enhancement strategies. These changes primarily resulted in anticipated disposition write-downs totaling $5.7 of certain securities with unrealized loss positions due to a change in intent as to whether to hold these securities until recovery. C-29 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- NET INVESTMENT INCOME Sources of Net investment income were as follows for the years ended December 31, 2005, 2004, and 2003:
2005 2004 2003 -------------------- ------------------- ------------------- Fixed maturities, available-for-sale $ 978.9 $ 999.4 $ 997.4 Equity securities, available-for-sale 9.7 7.1 9.9 Mortgage loans on real estate 73.0 56.0 42.7 Policy loans 30.0 8.1 9.0 Short-term investments and cash equivalents 2.7 2.4 1.8 Other 37.3 9.6 10.6 -------------------- ------------------- ------------------- Gross investment income 1,131.6 1,082.6 1,071.4 Less: investment expenses 95.9 84.4 90.5 -------------------- ------------------- ------------------- Net investment income $ 1,035.7 $ 998.2 $ 980.9 ==================== =================== ====================
NET REALIZED CAPITAL GAINS AND LOSSES Net realized capital gains (losses) are comprised of the difference between the carrying value of investments and proceeds from sale, maturity, and redemption, as well as losses incurred due to other-than-temporary impairment of investments and changes in fair value of derivatives. Net realized capital gains (losses) on investments for the years ended December 31, 2005, 2004, and 2003, were as follows:
2005 2004 2003 ----------------- ----------------- ----------------- Fixed maturities, available-for-sale $ 5.2 $ 51.8 $ 124.2 Equity securities, available-for-sale 12.4 9.9 3.4 Derivatives 13.7 (10.2) (31.1) Other (0.3) 1.3 (2.0) Less: allocation to experience-rated contracts 9.0 42.0 43.9 ----------------- ----------------- ----------------- Pretax net realized capital gains $ 22.0 $ 10.8 $ 50.6 ================= ================= ================= After-tax net realized capital gains $ 14.3 $ 7.0 $ 32.9 ================= ================= =================
Net realized capital gains (losses) allocated to experience-rated contracts were deducted from net realized capital gains and an offsetting amount was reflected in Future policy benefits and claim reserves on the Consolidated Balance Sheets. Net unamortized realized gains (losses) allocated to experienced-rated contractowners were $240.3, $233.4, and $213.7, at December 31, 2005, 2004, and 2003, respectively. C-30 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Proceeds from the sale of fixed maturities and equity securities, available-for-sale, and the related gross gains and losses, excluding those related to experience-related contracts, were as follows for the years ended December 31, 2005, 2004, and 2003.
2005 2004 2003 ------------------- ------------------ ------------------- Proceeds on sales $ 10,062.3 $ 10,236.3 $ 12,812.5 Gross gains 161.1 146.9 291.9 Gross losses 93.9 70.9 228.0
3. FINANCIAL INSTRUMENTS ESTIMATED FAIR VALUE The following disclosures are made in accordance with the requirements of FAS No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS No. 107"). FAS No. 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates, in many cases, could not be realized in immediate settlement of the instrument. FAS No. 107 excludes certain financial instruments, including insurance contracts, and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following valuation methods and assumptions were used by the Company in estimating the fair value of the following financial instruments: Fixed maturities, available-for-sale: The fair values for the actively traded marketable bonds are determined based upon the quoted market prices or dealer quotes. The fair values for marketable bonds without an active market are obtained through several commercial pricing services which provide the estimated fair values. Fair values of privately placed bonds are determined using a matrix-based pricing model. The model considers the current level of risk-free interest rates, current corporate spreads, the credit quality of the issuer, and cash flow characteristics of the security. Also considered are factors such as the net worth of the borrower, the value of collateral, the capital structure of the borrower, the presence of guarantees, and the Company's evaluation of the borrower's ability to compete in their relevant market. Using this data, the model generates estimated market values which the Company considers reflective of the fair value of each privately placed bond. C-31 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Equity securities, available-for-sale: Fair values of these securities are based upon quoted market price. For equity securities not actively traded, estimated fair values are based upon values of issues of comparable yield and quality or conversion price, where applicable. Mortgage loans on real estate: The fair values for mortgage loans on real estate are estimated using discounted cash flow analyses and rates currently being offered in the marketplace for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Cash and cash equivalents, Short-term investments under securities loan agreement, and Policy loans: The carrying amounts for these assets approximate the assets' fair values. Assets held in separate accounts: Assets held in separate accounts are reported at the quoted fair values of the individual securities in the separate accounts. Other financial instruments reported as assets: The carrying amounts for these financial instruments (primarily derivatives) approximates the fair values of the assets. Derivatives are carried at fair value on the Consolidated Balance Sheets. Investment contract liabilities (included in Future policy benefits and claim reserves): 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 contractowners 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. Liabilities related to separate accounts: Liabilities related to separate accounts are reported at full account value in the Company's Consolidated Balance Sheets. Estimated fair values of separate account liabilities are equal to their carrying amount. C-32 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 2005 and 2004, were as follows:
2005 2004 ----------------------------- ------------------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE --------------- ------------- ---------------- -------------- Assets: Fixed maturities, available-for-sale including securities pledged $ 17,988.1 $ 17,988.1 $ 18,425.6 $ 18,425.6 Equity securities, available-for-sale 170.1 170.1 162.6 162.6 Mortgage loans on real estate 1,396.0 1,386.2 1,090.2 1,119.8 Policy loans 262.4 262.4 262.7 262.7 Cash, cash equivalents and short-term investments under securities loan agreement 530.6 530.6 406.6 406.6 Other investments 144.6 144.6 86.3 86.3 Assets held in separate accounts 35,899.8 35,899.8 33,310.5 33,310.5 Liabilities: Investment contract liabilities: With a fixed maturity 1,772.7 1,886.3 2,106.0 2,028.2 Without a fixed maturity 14,936.4 14,896.0 13,884.9 13,845.6 Liabilities related to separate accounts 35,899.8 35,899.8 33,310.5 33,310.5
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. C-33 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- DERIVATIVE FINANCIAL INSTRUMENTS
NOTIONAL AMOUNT FAIR VALUE ------------------------ ----------------------- 2005 2004 2005 2004 ----------- ------------ ----------- ----------- Interest Rate Caps Interest rate caps are used to manage the interest rate risk in the Company's fixed maturities portfolio. Interest rate caps are purchased contracts that provide the Company with an annuity in an increasing interest rate environment. $ 519.6 $ 527.8 $ 6.2 $ 5.9 Interest Rate Swaps Interest rate swaps are used to manage the interest rate risk in the Company's fixed maturities portfolio, as well as the Company's liabilities. Interest rate swaps represent contracts that require the exchange of cash flows at regular interim periods, typically monthly or quarterly. 2,060.0 1,766.0 10.3 2.1 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 U.S. dollar cash flows at regular interim periods, typically quarterly or semi-annually. 126.5 126.5 (23.7) (28.4)
C-34 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) --------------------------------------------------------------------------------
NOTIONAL AMOUNT FAIR VALUE -------------------------- ------------------------ 2005 2004 2005 2004 ------------- ------------ ---------- ------------- Credit Default Swaps Credit default swaps are used to reduce the credit loss exposure with respect to certain assets that the Company owns, or to assume credit exposure to certain assets that the Company does not own. Payments are made to or received from the counterparty at specified intervals and amounts for the purchase or sale of credit protection. In the event of a default on the underlying credit exposure, the Company will either receive an additional payment (purchased credit protection) or will be required to make an additional payment (sold credit protection) equal to the notional value of the swap contract. $ 70.5 $ - $ (1.0) $ - Total Return Swaps Total return swaps are used to assume credit exposure to a referenced index or asset pool. The difference between different floating-rate interest amounts calculated by reference to an agreed upon notional principal amount is exchanged with other parties at specified intervals. 36.0 - 0.1 - Swaptions Swaptions are used to manage interest rate risk in the Company's CMOB portfolio. Swaptions are contracts that give the Company the option to enter into an interest rate swap at a specific future date. 175.0 - - - Embedded Derivatives The Company also has investments in certain fixed maturity instruments that contain embedded derivatives 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 rates, or credit ratings/spreads. NA* NA* (4.2) (0.9)
*NA - not applicable. C-35 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- 4. DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED Activity for the years ended December 31, 2005, 2004, and 2003, within DAC, was as follows: Balance at January 1, 2003 $ 229.8 Deferrals of commissions and expenses 98.1 Amortization: Amortization (34.3) Interest accrued at 5% - 7% 18.8 -------------------- Net amortization included in the Consolidated Statements of Operations (15.5) Change in unrealized gains and losses on available -for-sale securities (4.4) -------------------- Balance at December 31, 2003 308.0 Deferrals of commissions and expenses 123.5 Amortization: Amortization (43.5) Interest accrued at 5% - 7% 24.3 -------------------- Net amortization included in the Consolidated Statements of Operations (19.2) Change in unrealized gains and losses on available -for-sale securities 2.2 -------------------- Balance at December 31, 2004 414.5 Deferrals of commissions and expenses 123.1 Amortization: Amortization (59.6) Interest accrued at 5% - 7% 30.7 -------------------- Net amortization included in the Consolidated Statements of Operations (28.9) Change in unrealized gains and losses on available -for-sale securities 3.7 -------------------- Balance at December 31, 2005 $ 512.4 ====================
The estimated amount of DAC to be amortized, net of interest, is $33.2, $32.8, $30.1, $27.8, and $26.7, for the years 2006, 2007, 2008, 2009, and 2010, respectively. Actual amortization incurred during these years may vary as assumptions are modified to incorporate actual results. C-36 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Activity for the years ended December 31, 2005, 2004, and 2003, within VOBA, was as follows: Balance at January 1, 2003 $ 1,438.4 Deferrals of commissions and expenses 59.2 Amortization: Amortization (183.2) Interest accrued at 5% - 7% 92.2 -------------------- Net amortization included in the Consolidated Statements of Operations (91.0) Change in unrealized gains and losses on available -for-sale securities 8.8 -------------------- Balance at December 31, 2003 1,415.4 Deferrals of commissions and expenses 50.1 Amortization: Amortization (200.5) Interest accrued at 5% - 7% 92.3 -------------------- Net amortization included in the Consolidated Statements of Operations (108.2) Change in unrealized gains and losses on available -for-sale securities 7.9 -------------------- Balance at December 31, 2004 1,365.2 Deferrals of commissions and expenses 49.3 Amortization: Amortization (219.4) Interest accrued at 5% - 7% 88.4 -------------------- Net amortization included in the Consolidated Statements of Operations (131.0) Change in unrealized gains and losses on available -for-sale securities 10.9 -------------------- Balance at December 31, 2005 $ 1,294.4 ====================
The estimated amount of VOBA to be amortized, net of interest, is $120.4, $107.0, $100.0, $96.2, and $92.9 for the years 2006, 2007, 2008, 2009, and 2010, respectively. Actual amortization incurred during these years may vary as assumptions are modified to incorporate actual results. Analysis of DAC/VOBA Amortization of DAC and VOBA increased in 2005 primarily due to increased gross profits, which were driven by higher fixed and variable margins because of higher asset volume, partially offset by higher expenses. The Company revised long-term separate account return and certain contractholder withdrawal behavior assumptions, as well as reflected current experience during 2005, resulting in a deceleration of amortization of DAC and VOBA of $11.7. During 2004, DAC and VOBA amortization increased principally due to higher actual gross profits, as a result of the margins earned on higher fixed and variable assets and fewer other-than-temporary impairments. The Company revised certain contractholder C-37 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- withdrawal behavior assumptions for its products during 2004, resulting in a deceleration of amortization of DAC and VOBA of $5.7. In 2003, the Company reset long-term assumptions for the separate account returns. The Company recorded a deceleration of amortization of $3.7, primarily due to improved market performance compared to expected. 5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY The Company's ability to pay dividends to its parent is subject to the prior approval of insurance regulatory authorities of the State of Connecticut for payment of any dividend, which, when combined with other dividends paid within the preceding twelve months, exceeds the greater of (1) ten percent (10%) of ILIAC's statutory surplus at the prior year end or (2) ILIAC's prior year statutory net gain from operations. ILIAC paid a cash dividend of $70.0 to Lion in 2004 and did not pay any dividends to Lion in 2003 and 2005. In March 2006, ILIAC paid a cash dividend of $131.0 to Lion. ILIAC did not receive capital contributions from Lion in 2005 and 2004, and received $230.0 in capital contributions from Lion during 2003. 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 accounting practices prescribed or permitted by the Department, which differ in certain respects from accounting principles generally accepted in the United States. Statutory net income was $221.6, $217.2, and $67.5, for the years ended December 31, 2005, 2004, and 2003, respectively. Statutory capital and surplus was $1,539.1 and $1,347.0 as of December 31, 2005 and 2004, respectively. As of December 31, 2005, the Company did not utilize any statutory accounting practices that are not prescribed by state regulatory authorities that, individually or in the aggregate, materially affect statutory capital and surplus. C-38 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- 6. ADDITIONAL INSURANCE BENEFITS AND MINIMUM GUARANTEES The Company calculates an additional liability for certain GMDBs in order to recognize the expected value of death benefits in excess of the projected account balance over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used to adjust the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. As of December 31, 2005, the separate account liability for guaranteed minimum benefits and the additional liability recognized related to minimum guarantees was $3.7 billion and $0.8, respectively. As of December 31, 2004, the separate account liability for guaranteed minimum benefits and the additional liability recognized related to minimum guarantees was $4.4 billion and $0.7, respectively. The aggregate fair value of equity securities, including mutual funds, supporting separate accounts with additional insurance benefits and minimum investment return guarantees as of December 31, 2005 and 2004 was $3.7 billion and $4.4 billion, respectively. 7. INCOME TAXES For taxable year 2005, ILIAC will file a consolidated federal income tax return with its (former) subsidiary, IICA. ILIAC's consolidated group filings with IICA for taxable year 2005 and prior taxable periods is governed by a federal tax allocation agreement with IICA whereby ILIAC charges its subsidiary for federal taxes it would have incurred were it not a member of the consolidated group and credits IICA for losses at the statutory federal tax rate. Income tax expense (benefit) included in the financial statements are as follows for the years ended December 31, 2005, 2004, and 2003.
2005 2004 2003 ------------------- ------------------- -------------------- Current tax (benefit) expense: Federal $ (10.5) $ (3.8) $ 37.9 State - - 1.1 ------------------- ------------------- -------------------- Total current tax (benefit) expense (10.5) (3.8) 39.0 ------------------- ------------------- -------------------- Deferred tax expense: Federal 11.9 46.2 22.1 ------------------- ------------------- -------------------- Total deferred tax expense 11.9 46.2 22.1 ------------------- ------------------- -------------------- Total income tax expense $ 1.4 $ 42.4 $ 61.1 =================== =================== ====================
C-39 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Income taxes were different from the amount computed by applying the federal income tax rate to income before income taxes for the following reasons for the years ended December 31, 2005, 2004, and 2003.
2005 2004 2003 ------------------ ------------------ ------------------ Income before income taxes and cumulative effect of change in accounting principle $ 245.9 $ 241.7 $ 215.7 Tax rate 35.0% 35% 35% ------------------ ------------------ ------------------ Income tax at federal statutory rate 86.1 84.6 75.5 Tax effect of: State income tax, net of federal benefit - - 0.7 Dividend received deduction (25.8) (9.6) (14.0) IRS audit settlement (58.2) (33.0) - Transfer of mutual fund shares - - - Other (0.7) 0.4 (1.1) ------------------ ------------------ ------------------ Income tax expense $ 1.4 $ 42.4 $ 61.1 ================== ================== ==================
The tax effects of temporary differences that give rise to Deferred tax assets and Deferred tax liabilities at December 31, 2005 and 2004, are presented below:
2005 2004 --------------------- --------------------- Deferred tax assets: Insurance reserves $ 275.5 $ 286.4 Unrealized gains allocable to experience-rated contracts 17.0 125.1 Investments 23.3 - Postemployment benefits 57.7 60.5 Compensation 37.6 35.5 Other 14.1 23.4 --------------------- --------------------- Total gross assets 425.2 530.9 --------------------- --------------------- Deferred tax liabilities: Value of business acquired (453.0) (477.8) Net unrealized capital gains (31.8) (161.3) Deferred policy acquisition costs (123.6) (91.3) Other (0.1) (9.8) --------------------- --------------------- Total gross liabilities (608.5) (740.2) --------------------- --------------------- Net deferred income tax liability $ (183.3) $ (209.3) ===================== =====================
Net unrealized capital gains and losses are presented as a component of Other comprehensive income (loss) in Shareholder's equity, net of deferred taxes. C-40 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Under prior law, life insurance companies were allowed to defer from taxation a portion of income. The deferred income was accumulated in the Policyholders' Surplus Account and only becomes taxable under certain conditions, which management believes to be remote. Furthermore, the American Jobs Creation Act of 2004 allows certain tax-free distributions from the Policyholders' Surplus Account during 2005 and 2006. Therefore, based on currently available information, no federal income taxes have been provided on the Policyholders' Surplus Account accumulated balance of $17.2. Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. No valuation allowance has been established at this time, as management believes the above conditions presently do not exist. The Company establishes reserves for possible proposed adjustments by various taxing authorities. Management believes there are sufficient reserves provided for, or adequate defenses against any such adjustments. The Internal Revenue Service ("IRS") has completed its examination of the Company's returns through tax year 2001. The current and prior period provisions reflect non-recurring favorable adjustments resulting from a reduction in the tax liability that no longer needs to be provided based on the results of the current IRS examination, monitoring the activities of the IRS with respect to certain issues with other taxpayers, and the merits of the positions. The IRS has commenced examination of the Company's returns for tax years 2002 and 2003. There are also various state audits in progress. 8. BENEFIT PLANS DEFINED BENEFIT PLAN ING North America Insurance Corporation ("ING North America") sponsors the ING Americas Retirement Plan (the "Retirement Plan"), effective as of December 31, 2001. Substantially all employees of ING North America and its subsidiaries and affiliates (excluding certain employees) are eligible to participate, including the Company's employees other than Company agents. The Retirement Plan is a tax-qualified defined benefit plan, the benefits of which are guaranteed (within certain specified legal limits) by the Pension Benefit Guaranty Corporation ("PBGC"). As of January 1, 2002, each participant in the Retirement Plan (except for certain specified employees) earns a benefit under a final average compensation formula. Subsequent to December 31, 2001, ING North America is responsible for all Retirement Plan liabilities. The costs allocated to the Company for its employees' participation in the Retirement Plan were $21.4, $19.0, and $15.1, for 2005, 2004, and 2003, respectively, and are included in Operating expenses in the Statements of Operations. C-41 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- DEFINED CONTRIBUTION PLAN ING North America sponsors the ING Americas Savings Plan and ESOP (the "Savings Plan"). Substantially all employees of ING North America and its subsidiaries and affiliates (excluding certain employees, including but not limited to Career Agents) are eligible to participate, including the Company's employees other than Company agents. Career Agents are certain, full-time insurance salesmen who have entered into a career agent agreement with the Company and certain other individuals who meet specified eligibility criteria. The Savings Plan is a tax-qualified profit sharing and stock bonus plan, which includes an employee stock ownership plan ("ESOP") component. Savings Plan benefits are not guaranteed by the PBGC. The Savings Plan allows eligible participants to defer into the Savings Plan a specified percentage of eligible compensation on a pre-tax basis. ING North America matches such pre-tax contributions, up to a maximum of 6% of eligible compensation. All matching contributions are subject to a 4-year graded vesting schedule (although certain specified participants are subject to a 5-year graded vesting schedule). All contributions made to the Savings Plan are subject to certain limits imposed by applicable law. Pre-tax charges to operations of the Company for the Savings Plan were $8.5, $8.0, and $7.1, in 2005, 2004, and 2003, respectively, and are included in Operating expenses in the Statements of Operations. NON-QUALIFIED RETIREMENT PLANS Through December 31, 2001, the Company, in conjunction with ING North America, offered certain eligible employees (other than Career Agents) a Supplemental Executive Retirement Plan and an Excess Plan (collectively, the "SERPs"). Benefit accruals under the SERPs ceased, effective as of December 31, 2001. Benefits under the SERPs are determined based on an eligible employee's years of service and average annual compensation for the highest five years during the last ten years of employment. The Company, in conjunction with ING North America, sponsors the Pension Plan for Certain Producers of ING Life Insurance and Annuity Company (formerly the Pension Plan for Certain Producers of Aetna Life Insurance and Annuity Company) (the "Agents Non-Qualified Plan"). This plan covers certain full-time insurance salesmen who have entered into a career agent agreement with the Company and certain other individuals who meet the eligibility criteria specified in the plan ("Career Agents"). The Agents Non-Qualified Plan was terminated effective January 1, 2002. In connection with the termination, all benefit accruals ceased and all accrued benefits were frozen. C-42 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- The SERPs and Agents Non-Qualified Plan, are non-qualified defined benefit pension plans, which means all the SERPs benefits are payable from the general assets of the Company and Agents Non-Qualified Plan benefits are payable from the general assets of the Company and ING North America. These non-qualified defined benefit pension plans are not guaranteed by the PBGC. Obligations and Funded Status The following tables summarize the benefit obligations, fair value of plan assets, and funded status, for the SERPs and Agents Non-Qualified Plan, for the years ended December 31, 2005 and 2004.
2005 2004 -------------------- --------------------- Change in Benefit Obligation:` Defined benefit obligation, January 1 $ 104.1 $ 101.6 Service cost - - Interest cost 6.0 5.9 Benefits paid (9.7) (16.2) Plan amendment - 0.3 Actuarial loss on obligation 6.4 12.5 -------------------- --------------------- Defined benefit obligation, December 31 $ 106.8 $ 104.1 ==================== ===================== Fair Value of Plan Assets: Fair value of plan assets, December 31 $ - $ - ==================== ===================== Funded Status: Funded status at December 31 $ (106.8) $ (104.1) Unrecognized past service cost 0.4 0.6 Unrecognized net loss 22.8 15.6 -------------------- --------------------- Net amount recognized $ (83.6) $ (87.9) ==================== =====================
Amounts recognized in the Consolidated Balance Sheet consist of: Accrued benefit cost $ (101.8) $ (105.2) Intangible assets 0.4 0.6 Accumulated other comprehensive income 17.8 16.7 -------------------- --------------------- Net amount recognized $ (83.6) $ (87.9) ==================== =====================
C-43 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- At December 31, 2005 and 2004, the accumulated benefit obligation was $106.8 and $107.7, respectively. Assumptions The weighted-average assumptions used in the measurement of the December 31, 2005 and 2004 benefit obligation for the SERPs and Agents Non-Qualified Plan, were as follows:
2005 2004 ----------------- ----------------- Discount rate at beginning of period 6.00% 6.25% Rate of compensation increase 4.00% 4.00%
In determining the discount rate assumption, the Company utilizes current market information provided by its plan actuaries (particularly the Citigroup Pension Discount Curve), including a discounted cash flow analysis of the Company's pension obligation and general movements in the current market environment. The discount rate modeling process involves selecting a portfolio of high quality, noncallable bonds that will match the cash flows of ING Americas' Retirement Plan. Based upon all available information, it was determined that 5.50% was the appropriate discount rate as of December 31, 2005, to calculate the Company's accrued benefit liability. Accordingly, as prescribed by SFAS No. 87, "Employers' Accounting for Pensions", the 5.50% discount rate will also be used to determine the Company's 2006 pension expense. December 31 is the measurement date for the SERP's and Agents Non-Qualified Plan. The weighted-average assumptions used in calculating the net pension cost were as follows:
2005 2004 2003 --------------- --------------- -------------- Discount rate 6.00% 6.25% 6.75% Rate of increase in compensation levels 4.00% 3.75% 3.75%
The weighted average assumptions used in calculating the net pension cost for 2005 were as indicated above (6.00% discount rate, 4.00% rate of compensation increase). Since the benefit plans of the Company are unfunded, an assumption for return on plan assets is not required. C-44 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Net Periodic Benefit Costs Net periodic benefit costs for the SERPs and Agents Non-Qualified Plan, for the years ended December 31, 2005, 2004, and 2003, were as follows:
2005 2004 2003 -------------- --------------- -------------- Interest cost $ 6.0 $ 5.9 $ 6.9 Net actuarial loss recognized in the year 1.3 - 0.9 Unrecognized past service cost recognized in the year 0.2 0.2 0.2 The effect of any curtailment or settlement 0.3 0.1 - -------------- --------------- -------------- Net periodic benefit cost $ 7.8 $ 6.2 $ 8.0 ============== =============== ==============
Cashflows There are no 2006 employer expected contributions. Future expected benefit payments related to the SERPs, and Agents Non-Qualified Plan, for the years ended December 31, 2006 through 2010, and thereafter through 2015, are estimated to be $13.5, $13.6, $13.2, $9.8, $9.6, and $30.2, respectively. Other On October 4, 2004, the President signed into law The Jobs Creation Act ("Jobs Act"). The Jobs Act affects nonqualified deferred compensation plans, such as the Agents Nonqualified Plan. ING North America will make changes to impacted nonqualified deferred compensation plans, as necessary to comply with the requirements of the Jobs Act. C-45 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- OTHER BENEFIT PLANS In addition, the Company, in conjunction with ING North America, sponsors the following benefit plans: o The ING 401(k) Plan for ILIAC Agents, which allows participants to defer a specified percentage of eligible compensation on a pre-tax basis. The Company match equals 50% of a participant's pre-tax deferral contribution, with a maximum of 3% of the participant's pay. o The Producers' Incentive Savings Plan, which allows participants to defer up to a specified portion of their eligible compensation on a pre-tax basis. The Company matches such pre-tax contributions at specified amounts. o The Producers' Deferred Compensation Plan, which allows participants to defer up to a specified portion of their eligible compensation on a pre-tax basis. o Certain health care and life insurance benefits for retired employees and their eligible dependents. The post retirement health care plan is contributory, with retiree contribution levels adjusted annually. The life insurance plan provides a flat amount of noncontributory coverage and optional contributory coverage. The benefit charges allocated to the Company related to these plans for the years ended December 31, 2005, 2004, and 2003, were not significant. 9. RELATED PARTY TRANSACTIONS OPERATING AGREEMENTS ILIAC has certain agreements whereby it incurs expenses with affiliated entities. The agreements are as follows: o Investment Advisory agreement with ING Investment Management LLC ("IIM"), an affiliate, in which IIM provides asset management, administrative, and accounting services for ILIAC's general account. ILIAC records a fee, which is paid quarterly, based on the value of the general account AUM. For the years ended December 31, 2005, 2004, and 2003, expenses were incurred in the amounts of $61.7, $58.8, and $53.8, respectively. o Services agreement with ING North America for administrative, management, financial, and information technology services, dated January 1, 2001 and amended effective January 1, 2002. For the years ended December 31, 2005, 2004, and 2003, expenses were incurred in the amounts of $138.5, $132.9, and $136.4, respectively. C-46 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- o Services agreement between ILIAC and its U.S. insurance company affiliates dated January 1, 2001, and amended effective January 1, 2002. For the years ended December 31, 2005, 2004, and 2003, net expenses related to the agreement were incurred in the amount of $17.8, $8.6, and $19.2, respectively. Management and service contracts and all cost sharing arrangements with other affiliated companies are allocated in accordance with the Company's expense and cost allocation methods. INVESTMENT ADVISORY AND OTHER FEES ILIAC serves as investment advisor to certain variable funds used in Company products (collectively, the "Company Funds"). The Company Funds pay ILIAC, as investment advisor, a daily fee which, on an annual basis, ranged, depending on the Fund, from 0.5% to 1.0% of their average daily net assets. Each of the Company Funds managed by ILIAC are subadvised by investment advisors, in which case ILIAC pays a subadvisory fee to the investment advisors, which may include affiliates. ILIAC is also compensated by the separate accounts for bearing mortality and expense risks pertaining to variable life and annuity contracts. Under the insurance and annuity contracts, the separate accounts pay ILIAC a daily fee, which, on an annual basis is, depending on the product, up to 3.4% of their average daily net assets. The amount of compensation and fees received from affiliated mutual funds and separate accounts amounted to $263.0, $209.2, and $201.4 (excludes fees paid to Aeltus Investment Management, Inc., now known as ING Investment Management Co.) in 2005, 2004, and 2003, respectively. FINANCING AGREEMENTS ILIAC maintains a reciprocal loan agreement with ING America Insurance Holdings, Inc. ("ING AIH"), an affiliate, to facilitate the handling of unanticipated short-term cash requirements that arise in the ordinary course of business. Under this agreement, which became effective in June 2001 and expires on April 1, 2011, either party can borrow up to 3% of ILIAC's statutory admitted assets as of the preceding December 31 from the other. 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 $0.7, $0.2, and $0.1, for the years ended December 31, 2005, 2004, and 2003, respectively, and earned interest income of $1.0, $1.3, and $0.9, for the years ended December 31, 2005, 2004, and 2003, respectively. At December 31, 2005 and 2004, respectively, ILIAC had $131.0 and $25.0 receivable from ING AIH under this agreement. C-47 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Note with Affiliate On December 29, 2004, ING USA Annuity and Life Insurance Company ("ING USA") issued surplus notes in the aggregate principal amount of $400.0 (the "Notes") scheduled to mature on December 29, 2034, to its affiliates, ILIAC, ReliaStar Life Insurance Company ("ReliaStar Life"), and Security Life of Denver International Limited ("SLDI"), in an offering that was exempt from the registration requirements of the Securities Act of 1933. ILIAC's $175.0 notes receivable from ING USA bears interest at a rate of 6.26% per year. Any payment of principal and/or interest is subject to the prior approval of the Iowa Insurance Commissioner. Interest is scheduled to be paid semi-annually in arrears on June 29 and December 29 of each year, commencing on June 29, 2005. Interest income for the year ended December 31, 2005 was $11.1 and minimal for the year ended December 31, 2004. TAX SHARING AGREEMENT ILIAC has also entered into a state tax sharing agreement with ING AIH and each of the specific subsidiaries that are parties to the agreement. The state tax agreement applies to situations in which ING AIH and all or some of the subsidiaries join in the filing of a state or local franchise, income tax, or other tax return on a consolidated, combined, or unitary basis. CAPITAL TRANSACTIONS ILIAC paid a cash dividend of $70.0 to Lion in 2004 and did not pay any cash dividends to Lion in 2003 and 2005. In March 2006, ILIAC paid a cash dividend of $131.0 to Lion. ILIAC did not receive capital contributions from Lion in 2005 and 2004, and received $230.0 in capital contributions from Lion during 2003. 10. FINANCING AGREEMENTS ILIAC maintains a $100.0 uncommitted, perpetual revolving note facility with the Bank of New York ("BONY"). Interest on any of ILIAC's borrowing accrues at an annual rate equal to a rate quoted by BONY to ILIAC for the borrowing. Under this agreement, ILIAC incurred minimal interest expense for the years ended December 31, 2005, 2004, and 2003. At December 31, 2005 and 2004, ILIAC did not have any amounts outstanding under the revolving note facility. ILIAC also maintains a $75.0 uncommitted line-of-credit agreement with PNC Bank ("PNC"), effective December 19, 2005. Borrowings are guaranteed by ING AIH, with maximum aggregate borrowings outstanding at anytime to ING AIH and its affiliates of C-48 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- $75.0. Interest on any of ILIAC's borrowing accrues at an annual rate equal to a rate quoted by PNC to ILIAC for the borrowing. Under this agreement, ILIAC incurred no interest expense for the year ended December 31, 2005. As December 31, 2005, ILIAC did not have any amounts outstanding under the line-of-credit agreement. Prior to September 30, 2005, ILIAC also maintained a $125.0 uncommitted revolving note facility with SunTrust Bank, Atlanta. Under the agreement, ILIAC incurred minimal interest expense for the years ended December 31, 2005, 2004, and 2003. At December 31, 2004, ILIAC had no outstanding balances under this facility. Also see Financing Agreements in the Related Party Transactions footnote. 11. REINSURANCE At December 31, 2005, the Company had reinsurance treaties with 6 unaffiliated reinsurers and 1 affiliated reinsurer covering a significant portion of the mortality risks and guaranteed death benefits under its variable contracts. The Company remains liable to the extent its reinsurers do not meet their obligations under the reinsurance agreements. On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1.0 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 contractowners. 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. The Company has assumed $25.0 of premium revenue from Aetna Life, for the purchase and administration of a life contingent single premium variable payout annuity contract. In addition, the Company is also responsible for administering fixed annuity payments that are made to annuitants receiving variable payments. Reserves of $17.8 and $19.3 were maintained for this contract as of December 31, 2005 and 2004, respectively. Reinsurance ceded in force for life mortality risks were $24.2 and $26.1 at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, net receivables were comprised of the following: C-49 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) --------------------------------------------------------------------------------
2005 2004 -------------------- -------------------- Claims recoverable from reinsurers $ 2,806.6 $ 2,903.0 Payable for reinsurance premiums (1.7) (0.9) Reinsured amounts due to an unaffiliated reinsurer (0.3) 0.2 Reserve credits 1.1 1.5 Other (9.0) (2.5) -------------------- -------------------- Total $ 2,796.7 $ 2,901.3 ==================== ====================
Included in the accompanying financial statements are net policy benefit recoveries of $13.1, $19.3, and $22.5, for the years ended December 31, 2005, 2004, and 2003, respectively. Premiums and Interest credited and other benefits to contractowners included the following premiums ceded and reinsurance recoveries for the years ended December 31, 2005, 2004, and 2003.
2005 2004 2003 ----------------- ----------------- ------------------ Premiums ceded under reinsurance $ 215.7 $ 245.4 $ 265.2 Reinsurance recoveries 350.5 375.9 366.7
12. COMMITMENTS AND CONTINGENT LIABILITIES LEASES The Company leases its office space and certain other equipment under various operating leases, the latest term of which expires in 2011. For the years ended December 31, 2005, 2004, and 2003, rent expense for leases was $17.4, $17.2, and $18.1, respectively. The future net minimum payments under noncancelable leases for the years ended December 31, 2006 through 2009 are estimated to be $17.0, $15.6, $2.6, and $1.5, respectively, and $0.7 thereafter. The Company pays substantially all expenses associated with its leased and subleased office properties. Expenses not paid directly by the Company are paid for by an affiliate and allocated back to the Company. COMMITMENTS Through the normal course of investment operations, the Company commits to either purchase or sell securities, commercial mortgage loans, 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 a higher or lower replacement cost. Also, C-50 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- there is likely to be a change in the value of the securities underlying the commitments. At December 31, 2005, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $516.7, $398.0 of which was with related parties. At December 31, 2004, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $778.2, $440.4 of which was with related parties. During 2005 and 2004, $42.4 and $19.8, respectively, was funded to related parties under off-balance sheet commitments. LITIGATION The Company is involved in threatened or pending lawsuits/arbitrations arising from the normal conduct of business. Due to the climate in insurance and business litigation/arbitration, suits against the Company sometimes include claims for substantial compensatory, consequential, or punitive damages and other types of relief. Moreover, certain claims are asserted as class actions, purporting to represent a group of similarly situated individuals. While it is not possible to forecast the outcome of such lawsuits/arbitrations, in light of existing insurance, reinsurance and established reserves, it is the opinion of management that the disposition of such lawsuits/arbitrations will not have a materially adverse effect on the Company's operations or financial position. OTHER REGULATORY MATTERS Regulatory Matters As with many financial services companies, the Company and its affiliates have received informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the financial services industry. In each case, the Company and its affiliates have been and are providing full cooperation. Investment Product Regulatory Issues Since 2002, there has been increased governmental and regulatory activity relating to mutual funds and variable insurance products. This activity has primarily focused on inappropriate trading of fund shares; revenue sharing and directed brokerage; compensation; sales practices, suitability, and supervision; arrangements with service providers; pricing; compliance and controls; adequacy of disclosure; and document retention. In addition to responding to governmental and regulatory requests on fund trading issues, ING management, on its own initiative, conducted, through special counsel and a national accounting firm, an extensive internal review of mutual fund trading in ING C-51 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- insurance, retirement, and mutual fund products. The goal of this review was to identify any instances of inappropriate trading in those products by third parties or by ING investment professionals and other ING personnel. The internal review identified several isolated arrangements allowing third parties to engage in frequent trading of mutual funds within the variable insurance and mutual fund products of certain affiliates of the Company, and identified other circumstances where frequent trading occurred despite measures taken by ING intended to combat market timing. Each of the arrangements has been terminated and disclosed to regulators, to the independent trustees of ING Funds (U.S.) and in Company reports previously filed with the Securities and Exchange Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as amended. In September 2005, an affiliate of the Company, ING Fund Distributors, LLC ("IFD") and one of its registered persons settled an administrative proceeding with the National Association of Securities Dealers ("NASD") in connection with frequent trading arrangements. IFD neither admitted nor denied the allegations or findings and consented to certain monetary and non-monetary sanctions. IFD's settlement of this administrative proceeding is not material to the Company. Other regulators, including the SEC and the New York Attorney General, are also likely to take some action with respect to certain ING affiliates before concluding their investigations relating to fund trading. The potential outcome of such action is difficult to predict but could subject certain affiliates to adverse consequences, including, but not limited to, settlement payments, penalties, and other financial liability. It is not currently anticipated, however, that the actual outcome of any such action will have a material adverse effect on ING or ING's U.S.-based operations, including the Company. ING has agreed to indemnify and hold harmless the ING Funds from all damages resulting from wrongful conduct by ING or its employees or from ING's internal investigation, any investigations conducted by any governmental or self-regulatory agencies, litigation or other formal proceedings, including any proceedings by the SEC. Management reported to the ING Funds Board that ING management believes that the total amount of any indemnification obligations will not be material to ING or ING's U.S.-based operations, including the Company. Insurance and Other Regulatory Matters The New York Attorney General and other federal and state regulators are also conducting broad inquiries and investigations involving the insurance industry. These initiatives currently focus on, among other things, compensation and other sales incentives; potential conflicts of interest; potential anti-competitive activity; reinsurance; C-52 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- marketing practices; specific product types (including group annuities and indexed annuities); and disclosure. It is likely that the scope of these industry investigations will further broaden before they conclude. The Company and certain of its U.S. affiliates have received formal and informal requests in connection with such investigations, and are cooperating fully with each request for information. These initiatives may result in new legislation and regulation that could significantly affect the financial services industry, including businesses in which the Company is engaged. In light of these and other developments, U.S. affiliates of ING, including the Company, periodically review whether modifications to their business practices are appropriate. 13. ACCUMULATED OTHER COMPREHENSIVE INCOME Shareholder's equity included the following components of Accumulated other comprehensive income as of December 31, 2005 and 2004.
2005 2004 2003 ----------------- ---------------- ----------------- Net unrealized capital gains (losses): Fixed maturities, available-for-sale $ (22.2) $ 482.1 $ 615.1 Equity securities, available-for-sale 3.2 8.7 13.8 Derivatives 4.2 - 3.7 DAC/VOBA adjustment on available-for-sale securities 5.1 (9.5) (19.6) Sales inducements amortization adjustment on available-for-sale securities 0.1 (0.1) - Premium deficiency reserve adjustment (23.6) - - Other investments (primarily limited partnerships) 1.2 1.3 57.3 Less: allocation to experience-rated contracts (48.6) 357.5 491.5 ----------------- ---------------- ----------------- Subtotal 16.6 125.0 178.8 Less: deferred income taxes 10.3 41.2 62.8 ----------------- ---------------- ----------------- Net unrealized capital gains 6.3 83.8 116.0 Minimum pension liability, net of tax (11.6) (16.7) - ----------------- ---------------- ----------------- Accumulated other comprehensive (loss) income $ (5.3) $ 67.1 $ 116.0 ================= ================ =================
Net unrealized capital (losses) gains allocated to experience-rated contracts of $(48.6) and $357.5 at December 31, 2005 and 2004, respectively, are reflected on the C-53 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- Consolidated Balance Sheets in Future policy benefits and claims reserves and are not included in Shareholder's equity. Changes in Accumulated other comprehensive income related to changes in net unrealized capital gains and losses on securities, including securities pledged and excluding those related to experience-rated contracts, were as follows for the years ended December 31, 2005, 2004, and 2003.
2005 2004 2003 ----------------- ----------------- ----------------- Fixed maturities, available-for-sale $ (504.3) $ (133.0) $ (125.8) Equity securities, available-for-sale (5.5) (5.1) 17.9 Derivatives 4.2 (3.7) 3.7 DAC/VOBA adjustment on available-for-sale securities 14.6 10.1 4.4 Sales inducements amortization adjustment available-for-sale securities 0.2 (0.1) - Premium deficiency reserve adjustment (23.6) - - Other (0.1) (56.0) 25.9 Less: allocation to experience-rated contracts (406.1) (134.0) (71.6) ----------------- ----------------- ----------------- Subtotal (108.4) (53.8) (2.3) Deferred income taxes (30.9) (21.6) (0.8) ----------------- ----------------- ----------------- Net change in unrealized capital losses $ (77.5) $ (32.2) $ (1.5) ================= ================= =================
Changes in Accumulated other comprehensive income, net of DAC/VOBA and tax, related to changes in net unrealized gains and losses on securities, including securities pledged and excluding those related to experience-rated contracts, were as follows for the years ended December 31, 2005, 2004, and 2003:
2005 2004 2003 ----------------- ----------------- ----------------- Net unrealized holding losses arising during the year (1) $ (38.2) $ (1.8) $ (31.9) Less: reclassification adjustment for gains (losses) and other items included in net income(2) 39.3 30.4 (30.4) ----------------- ----------------- ----------------- Net unrealized losses on securities $ (77.5) $ (32.2) $ (1.5) ================= ================= =================
(1) Pretax unrealized holding losses arising during the period were $(53.4), $(3.0), and $(48.9), for the years ended December 31, 2005, 2004, and 2003, respectively. (2) Pretax reclassification adjustments for gains (losses) and other items included in net income were $55.0, $50.8, and $(46.6), for the years ended December 31, 2005, 2004, and 2003, respectively. C-54 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARY (A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amount in millions, unless otherwise stated) -------------------------------------------------------------------------------- 14. RECLASSIFICATIONS AND CHANGES TO PRIOR YEAR PRESENTATION STATEMENTS OF CASH FLOWS During 2005, certain changes were made to the Statements of Cash Flows for the year ended December 31, 2003 to reflect the correct balances, primarily related to short-term loans. As the Company has determined these changes as immaterial, the Statements of Cash Flows for the year ended December 31, 2003 has not been labeled as restated. The following table summarizes the adjustments:
PREVIOUSLY 2004 REPORTED ADJUSTMENT REVISED ---- ----------------- --------------- --------------- Net cash provided by operating activities $ 1,021.7 $ (22.4) $ 999.3 Net cash used in investing activities (543.2) 5.9 (537.3) Net cash used in financing activities (349.0) 16.4 (332.6) 2003 ---- Net cash provided by operating activities $ 1,058.3 $ 55.9 $ 1,114.2 Net cash used in investing activities (2,043.5) (14.4) (2,057.9) Net cash used in financing activities 977.6 (41.4) 936.2
C-55 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 two or more disinterested directors, as defined in Section 33-770(3); (b) by special legal 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 with Section 33-776 provide 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 is or was a director, officer, employee, or agent 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. Section 33-777 of 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. maintains an umbrella insurance policy with an international insurer. The policy covers ING Groep N.V. and any company in which ING Groep N.V. has controlling interest of 50% or more. This would encompass the principal underwriter as well as the depositor. The policy provides for the following types of coverage: errors and omissions, directors and officers, employment practices, fiduciary and fidelity. Section 20 of the ING Financial Advisers, LLC Limited Liability Company Agreement executed as of November 28, 2000 provides that ING Financial Advisers, LLC 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 ING Financial Advisers, LLC, as long as he acted in good faith on behalf of ING Financial Advisers, LLC and in a manner reasonably believed to be within the scope of his authority. An additional condition requires that no person shall be entitled to indemnify 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 Title 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. 19 TO THE REGISTRATION STATEMENT This Post-Effective Amendment No. 19 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 131 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. 11 below) B. Actuarial Consent (included as part of Exhibit No. 15 below) C. Consent of Independent Registered Public Accounting Firm (included as Exhibit No. 16 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 o 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) Not applicable (3.1) Master General Agent Agreement o 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. (3.2) Life Insurance General Agent Agreement o 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. (3.3) Broker Agreement o 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. (3.4) Life Insurance Broker-Dealer Agreement o 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. (3.5) Principal Underwriter Agreement effective as of November 17, 2000 between Aetna Life Insurance and Annuity Company and Aetna Investment Services, LLC o 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. (3.3) Confirmation of Underwriting Agreement o Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 11, 2006. (4) Not applicable (5.1) AetnaVest Plus Policy (38899-93) o 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. (5.2) Disability Benefit Rider (70174-93) to AetnaVest Plus Policy 38899-93 o 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. (5.3) Unisex Amendment rider (70211-95US) for use with AetnaVest Plus Policy 38899-93 o 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. (5.4) Endorsements L-ENMCHGI-02 and L-ENCMCHGG-02 (name change) o 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. (6.1) 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) o 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. (6.2) Amended and Restated By-Laws of ING Life Insurance and Annuity Company, effective January 1, 2005 o Incorporated by reference to the ILIAC 10-Q, as filed on May 13, 2005 (File No. 033-23376, Accession No. 0001047469-05-014783). (7) Not applicable (8.1) 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. o Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998. (8.2) 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. o Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form N-4 (File No. 333-56297), as filed on December 14, 1998. (8.3) 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. o Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 16, 2000. (8.4) 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. o Incorporated by reference to Post-Effective Amendment No. 20 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 4, 2000. (8.5) 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. o Incorporated by reference to Post-Effective Amendment No. 20 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 4, 2000. (8.6) 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 Variable Portfolios, Inc. on behalf of each of its series, and Aeltus Investment Management, Inc. o Incorporated by reference to Post-Effective Amendment No. 24 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 13, 2001. (8.7) Sixth Amendment dated as of June 19, 2001 to Fund Participation Agreement dated as of May 1, 1998 and amended on November 9, 1998, December 31, 1999, February 11, 2000, May 1, 2000 and February 27, 2001 among Aetna Life Insurance and Annuity Company, Aeltus Investment Management, Inc. 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 Generations Portfolios, Inc. on behalf of each of its series, and Aetna Variable Portfolios, Inc. on behalf of each of its series o Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-75988), as filed on April 13, 2004. (8.8) Service Agreement effective 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 o Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998. (8.9) Amendment dated November 4, 1998 and effective as of October 15, 1998 to Service Agreement effective 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 o Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form N-4 (File No. 333-56297), as filed on December 14, 1998. (8.10) Second Amendment dated February 11, 2000 to Service Agreement effective 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 o Incorporated by reference to Post-Effective Amendment No. 20 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 4, 2000. (8.11) Third Amendment dated May 1, 2000 to Service Agreement effective 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 o Incorporated by reference to Post-Effective Amendment No. 20 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 4, 2000. (8.12) Fourth Amendment dated as of June 26, 2001 to Service Agreement with Investment Advisor effective as of May 1, 1998, as amended on November 4, 1998, February 11, 2000 and May 1, 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 o Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-75988), as filed on April 13, 2004. (8.13) 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 o 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. (8.14) 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 o 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. (8.15) Sixth Amendment dated as of 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 o 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. (8.16) 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 o Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998. (8.17) 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 o Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 16, 2000. (8.18) 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 o 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. (8.19) 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 o 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. (8.20) 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 o 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. (8.21) 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 o Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998. (8.22) 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, January 20, 1998 and May 1, 1998 between Aetna Life Insurance and Annuity Company, Variable Insurance Products Fund II and Fidelity Distributors Corporation o Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 16, 2000. (8.23) Service Agreement effective as of June 1, 2002 by and between Fidelity Investments Institutional Operations Company, Inc. and ING Financial Advisers, LLC o Incorporated by reference to Post-Effective Amendment No. 33 to Registration Statement on Form N-4 (File No. 33-75988), as filed on August 5, 2004. (8.24) Service Contract effective as of June 1, 2002 by and between Directed Services, Inc., ING Financial Advisers, LLC, and Fidelity Distributors Corporation o Incorporated by reference to Post-Effective Amendment No. 33 to Registration Statement on Form N-4 (File No. 33-75988), as filed on August 5, 2004. (8.25) Fund Participation Agreement dated December 8, 1997 among Janus Aspen Series and Aetna Life Insurance and Annuity Company and Janus Capital Corporation o 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. (8.26) 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 o Incorporated by reference to Post-Effective Amendment No. 2 to Registration Statement on Form N-4 (File No. 333-56297), as filed on December 14, 1998. (8.27) 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 o Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 16, 2000. (8.28) 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 o 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. (8.29) 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 o 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. (8.30) Service Agreement effective December 8, 1997 between Janus Capital Corporation and Aetna Life Insurance and Annuity Company o 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. (8.31) 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 o 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. (8.32) 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 o 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. (8.33) Letter Agreement dated October 19, 2001 between Janus and ALIAC 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 o 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. (8.34) Fund Participation Agreement dated March 11, 1997 between Aetna Life Insurance and Annuity Company and Oppenheimer Variable Annuity Account Funds and Oppenheimer Funds, Inc. o 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. (8.35) 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. o Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 16, 2000. (8.36) Service Agreement effective as of March 11, 1997 between Oppenheimer Funds, Inc. and Aetna Life Insurance and Annuity Company o 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. (8.37) Participation Agreement dated as of November 28, 2001 among Portfolio Partners, Inc., Aetna Life Insurance and Annuity Company and Aetna Investment Services, LLC o 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. (8.38) 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 o 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. (8.39) Amendment dated May 1, 2003 between ING Partners, Inc., ING Life Insurance and Annuity Company and ING Financial Advisers, LLC to the Participation Agreement dated as of November 28, 2001 and subsequently amended on March 5, 2002 o Incorporated by reference to Post-Effective Amendment No. 28 to Registration Statement on Form N-4 (File No. 33-75988), as filed on April 10, 2003. (8.40) Amendment dated November 1, 2004 to the Participation Agreement between ING Partners, Inc., ING Life Insurance and Annuity Company and ING Financial Advisers, LLC dated as of November 28, 2001 and subsequently amended on March 5, 2002 and May 1, 2003 o Incorporated by reference to Post-Effective Amendment No. 20 to Registration Statement on Form N-1A (File No. 333-32575), as filed on April 1, 2005. (8.41) Amendment dated April 29, 2005 to the Participation Agreement between ING Partners, Inc., ING Life Insurance and Annuity Company and ING Financial Advisers, LLC dated as of November 28, 2001 and subsequently amended on March 5, 2002, May 1, 2003 and November 1, 2004 o Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 11, 2006. (8.42) Amendment dated August 31, 2005 to the Participation Agreement between ING Partners, Inc., ING Life Insurance and Annuity Company and ING Financial Advisers, LLC dated November 28, 2001 and subsequently amended on March 5, 2002, May 1, 2003, November 1, 2004 and April 29, 2005 o Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 11, 2006. (8.43) Amendment dated December 7, 2005 to the Participation Agreement between ING Partners, Inc., ING Life Insurance and Annuity Company and ING Financial Advisers, LLC dated as of November 28, 2001 and subsequently amended on March 5, 2002, May 1, 2003, November 1, 2004, April 29, 2005, and August 31, 2005 o Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 11, 2006. (8.44) Shareholder Servicing Agreement (Service Class Shares) dated as of November 27, 2001 between Portfolio Partners, Inc. and Aetna Life Insurance and Annuity Company o 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. (8.45) Amendment dated March 5, 2002 between Portfolio Partners, Inc. (to be renamed ING Partners, Inc. effective May 1, 2002) and Aetna Life Insurance and Annuity Company (to be renamed ING Life Insurance and Annuity Company effective May 1, 2002) to the Shareholder Servicing Agreement dated November 27, 2001 o 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. (8.46) Amendment dated May 1, 2003 by and between ING Partners, Inc. and ING Life Insurance and Annuity Company to the Shareholder Servicing Agreement (Service Class Shares) dated November 27, 2001, as amended on March 5, 2002 o Incorporated by reference to Post-Effective Amendment No. 28 to Registration Statement on Form N-4 (File No. 33-75988), as filed on April 10, 2003. (8.47) Form of Amendment dated November 1, 2004 to the Shareholder Servicing Agreement (Service Class Shares) by and between ING Partners, Inc. and ING Life Insurance and Annuity Company dated November 27, 2001, as amended on March 5, 2002 and May 1, 2003 o Incorporated by reference to Post-Effective Amendment No. 39 to Registration Statement on Form N-4 (File No. 33-75962), as filed on December 17, 2004. (8.48) Amendment dated April 29, 2005 to the Shareholder Servicing Agreement (Service Class Shares) by and between ING Partners, Inc. and ING Life Insurance and Annuity Company dated November 27, 2001, and amended on March 5, 2002, May 1, 2003 and November 1, 2004 o Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 11, 2006. (8.49) Form of Amendment dated December 7, 2005 to the Shareholder Servicing Agreement (Service Class Shares) by and between ING Partners, Inc. and ING Life Insurance and Annuity Company dated November 27, 2001, and amended on March 5, 2002, May 1, 2003, November 1, 2004 and April 29, 2005 o Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 11, 2006. (9) Not applicable (10.1) Application (70059-96) o 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. (10.2) Application (70059-96ZNY) o 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. (10.3) Application Supplement (70268-97(3/98)) o 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. (11) Opinion and Consent of Counsel (12) Not Applicable (13) Not Applicable (14) Not Applicable (15) Actuarial Opinion and Consent (16.1) Consent of Independent Registered Public Accounting Firm (Atlanta) (16.2) Consent of Independent Registered Public Accounting Firm (Fort Wayne) (17.1) Powers of Attorney o Incorporated herein by reference to Post-Effective Amendment No. 1 to Registration Statement on Form S-1 for ING Life Insurance and Annuity Company as filed with the Securities and Exchange Commission on April 10, 2006 (File No. 333-130833). (17.2) Certificate of Resolution Authorizing Signature by Power of Attorney o 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. 19 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 27th day of April, 2006. VARIABLE LIFE ACCOUNT B OF ING LIFE INSURANCE AND ANNUITY COMPANY (Registrant) By: ING LIFE INSURANCE AND ANNUITY COMPANY (Depositor) By: Brian D. Comer* -------------------------------------- Brian D. Comer President (principal executive officer) Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 19 to the Registration Statement has been signed below by the following persons in the capacities indicated and on the dates indicated. Signature Title Date Brian D. Comer* President ) ----------------------------------- (principal executive officer) ) Brian D. Comer ) ) Thomas J. McInerney* Director ) April ----------------------------------- ) 27, 2006 Thomas J. McInerney ) ) Kathleen A. Murphy* Director ) ----------------------------------- ) Kathleen A. Murphy ) ) Jacques de Vaucleroy* Director ) ----------------------------------- ) Jacques de Vaucleroy ) David Wheat* Director and Chief Financial ) ----------------------------------- Officer ) David Wheat ) Steven T. Pierson* Chief Accounting Officer ) ----------------------------------- ) Steven T. Pierson ) By: /s/J. Neil McMurdie --------------------------------------------------------- J. Neil McMurdie *Attorney-in-Fact VARIABLE LIFE ACCOUNT B EXHIBIT INDEX Exhibit No. Exhibit ----------- ------- 99-B.11 Opinion and Consent of Counsel ------------- 99-B.15 Actuarial Opinion and Consent ------------- 99-B.16.1 Consent of Independent Registered Public Accounting Firm - Ernst & Young LLP (Atlanta) ------------- 99-B.16.2 Consent of Independent Registered Public Accounting Firm - Ernst & Young LLP (Fort Wayne) -------------