SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to
Commission file number 333-57212, 333-104539, 333-104546, 333-104547,
333-104548
ING USA ANNUITY LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
Iowa 41-0991508
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(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
1475 Dunwoody Drive, West Chester, Pennsylvania 19380-1478
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (610) 425-3400
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Former name, former address and formal fiscal year, if changed since last report
Indicate by check ___ whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 14, 2004, 250,000
shares of Common Stock, $10 Par Value, are authorized, issued, and outstanding,
all of which were directly owned by Lion Connecticut Holdings Inc.
NOTE: WHEREAS ING USA ANNUITY AND LIFE INSURANCE COMPANY MEETS THE CONDITIONS
SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10Q, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
1
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Form 10Q for period ended March 31, 2004
INDEX
PAGE
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements:
Condensed Statements of Income 3
Condensed Balance Sheets 4
Condensed Statements of Changes in Shareholder's Equity 6
Condensed Statements of Cash Flows 7
Notes to Condensed Financial Statements 8
Item 2. Management's Narrative Analysis of the Results of
Operations and Financial Condition 42
Item 4. Controls and Procedures 54
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 55
Item 6. Exhibits and Reports on Form 8-K 55
Signatures 56
2
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Condensed Statements of Income
(Unaudited)
(Millions)
Three months ended March 31,
2004 2003
--------------- ---------------
Revenue:
Premiums $ 5.6 $ 7.4
Fee income 128.9 80.6
Net investment income 298.5 279.9
Net realized capital gains (losses) 0.5 (6.7)
Other income 2.2 3.8
--------------- ---------------
Total revenue 435.7 365.0
--------------- ---------------
Benefits, losses and expenses:
Benefits:
Interest credited and other benefits to policyholders 291.0 300.8
Underwriting, acquisition, and insurance expenses:
General expenses 51.8 52.3
Commissions 112.3 53.4
Policy acquisition costs deferred (122.6) (84.0)
Amortization of deferred policy acquisition costs and value
of business acquired 66.3 60.0
Other:
Expense and charges reimbursed under modified
coinsurance agreements 0.6 0.2
Interest expense 3.7 3.3
--------------- ---------------
Total benefits, losses and expenses 403.1 386.0
--------------- ---------------
Income (loss) before income taxes and cumulative effect
of change in accounting principle 32.6 (21.0)
Income tax expense (benefit) 10.0 (7.5)
--------------- ---------------
Net income (loss) before cumulative effect of change
in accounting principle 22.6 (13.5)
Cumulative effect of change in accounting principle (2.3) -
--------------- ---------------
Net income (loss) $ 20.3 $ (13.5)
=============== ===============
The accompanying notes are an integral part of these financial statements.
3
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Balance Sheets
(Unaudited)
(Millions, except share data)
March 31, December 31,
2004 2003
--------------- ---------------
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost of
$15,695.6 at 2004 and $15,558.3 at 2003) $ 16,441.5 $ 16,075.5
Equity securities, at fair value:
Common stock (cost of $13.5 at 2004 and 2003) 13.8 13.7
Preferred stock (cost of $5.2 at 2004 and $1.5 at 2003) 5.3 1.7
Investment in mutual funds (cost of $35.3 at 2004 and $100.5 at 2003) 36.9 104.8
Mortgage loans on real estate 3,475.6 3,388.7
Real estate 4.5 4.5
Policy loans 173.4 177.1
Short-term investments 10.0 0.3
Other investments 83.8 56.0
Securities pledged to creditors (amortized cost of
$357.8 at 2004 and $22.2 at 2003) 374.6 22.3
--------------- ---------------
Total investments 20,619.4 19,844.6
Cash and cash equivalents 168.1 65.1
Short-term investments under securities loan agreement 396.7 22.9
Accrued investment income 196.3 185.7
Reinsurance recoverable 20.8 15.4
Receivable for securities sold 288.2 11.7
Deferred policy acquisition costs 1,356.4 1,826.7
Value of business acquired 90.8 111.5
Sales inducements to Contractholders 467.3 -
Due from affiliates 367.5 117.7
Deferred income tax asset - 28.6
Other assets 21.8 20.1
Assets held in separate accounts 19,714.9 18,220.1
--------------- ---------------
Total assets $ 43,708.2 $ 40,470.1
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Balance Sheets
(Unaudited)
(Millions, except share data)
March 31, December 31,
2004 2003
--------------- ---------------
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims reserves $ 19,461.0 $ 18,781.1
Notes to affiliates 35.0 35.0
Due to affiliates 56.1 60.7
Payables for securities purchased 289.4 -
Borrowed money 1,206.0 607.1
Current income taxes 14.4 19.4
Deferred income taxes 32.2 -
Other liabilities 229.0 209.5
Liabilities related to separate accounts 19,714.9 18,220.1
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Total liabilities 41,038.0 37,932.9
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Shareholder's equity
Common stock (250,000 shares authorized, issued and outstanding;
$10.00 per share value) 2.5 2.5
Additional paid-in capital 3,812.7 3,812.7
Accumulated other comprehensive income 302.7 190.0
Retained deficit (1,447.7) (1,468.0)
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Total shareholder's equity 2,670.2 2,537.2
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Total liabilities and shareholder's equity $ 43,708.2 $ 40,470.1
=============== ===============
The accompanying notes are an integral part of these financial statements.
5
ING USA Annuity and Life Insurance Company,
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Statements of Changes in Shareholder's Equity
(Unaudited)
(Millions)
Accumulated
Additional Other Total
Common Paid-In Comprehensive Retained Shareholder's
Stock Capital Income Deficit Equity
-------------- --------------- --------------- --------------- ----------------
Balance at December 31, 2002 $ 2.5 $ 3,724.0 $ 135.1 $(1,512.9) $ 2,348.7
Contribution of capital - 88.7 - - 88.7
Comprehensive loss:
Net loss - - - (13.5) (13.5)
Other comprehensive loss net of tax:
Unrealized loss on securities
($154.5 pretax) - - (100.4) - (100.4)
----------------
Comprehensive loss (113.9)
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Balance at March 31, 2003 $ 2.5 $ 3,812.7 $ 34.7 $ (1,526.4) $ 2,323.5
============== =============== =============== =============== ================
$ 2.5 $ 3,812.7 $ 190.0 $ (1,468.0) $ 2,537.2
Balance at December 31, 2003
Comprehensive income:
Net income - - - 20.3 20.3
Other comprehensive income net of tax:
Unrealized gain on securities
($173.4 pretax) - - 112.7 - 112.7
----------------
Comprehensive income 133.0
-------------- --------------- --------------- --------------- ----------------
Balance at March 31, 2004 $ 2.5 $ 3,812.7 $ 302.7 $ (1,447.7) $ 2,670.2
============== =============== =============== =============== ================
The accompanying notes are an integral part of these financial statements.
6
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Statements of Cash Flows
(Unaudited)
(Millions)
Three months ended March 31,
2004 2003
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Net cash provided by operating activities $ 950.2 $ 887.6
Cash Flows from Investing Activities:
Proceeds from the sale, maturity, or repayment of:
Fixed maturities available for sale 4,919.8 5,332.7
Equity securities 69.0 -
Mortgage loans on real estate 67.2 128.2
Acquisition of investments:
Fixed maturities available for sale (5,381.5) (6,387.1)
Equity securities (3.8) -
Mortgage loans on real estate (154.1) (88.9)
Short-term and other investments (419.5) (654.8)
(Increase) decrease in policy loans 3.7 2.5
Proceeds from sale of real estate - 1.8
Purchase of property and equipment (0.4) -
Other invested assets - (28.1)
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Net cash used in investing activities (899.6) (1,693.7)
--------------- ---------------
Cash Flows from Financing Activities:
Deposits for investment contracts 646.7 419.4
Maturities and withdrawals from insurance and investment contracts (475.4) (328.2)
Cash received from reinsurance recapture - 134.4
Transfers from (to) separate accounts (118.9) (254.2)
Borrowed money - 698.9
Contribution of capital from parent - 88.7
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Net cash provided by financing activities 52.4 759.0
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Net increase (decrease) in cash and cash equivalents 103.0 (47.1)
Cash and cash equivalents, beginning of period 65.1 199.1
--------------- ---------------
Cash and cash equivalents, end of period $ 168.1 152.0
=============== ===============
Supplemental cash flow information:
Income taxes (received) paid, net $ 5.0 (2.4)
=============== ===============
Interest paid $ 2.0 $ 2.6
=============== ===============
The accompanying notes are an integral part of these financial statements.
7
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
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1. Significant Accounting Policies
Basis of Presentation
ING USA Annuity and Life Insurance Company ("ING USA" or the "Company"), a
wholly-owned subsidiary of Lion Connecticut Holdings Inc. ("Lion" or
"Parent"), is a stock life insurance company organized under the laws of
the State of Iowa. ING USA was originally incorporated under the laws of
the State of Minnesota on January 2, 1973, in the name of St. Paul Life
Insurance Company. On December 21, 1993, the Company redomesticated from
Minnesota to Delaware.
On January 1, 2004, the Company redomesticated from Delaware to Iowa. In
addition, on January 1, 2004 (the "merger date"), Equitable Life Insurance
Company of Iowa ("Equitable Life"), USG Annuity & Life Company ("USG") and
United Life & Annuity Insurance Company ("ULA") (the "Merger Companies"),
merged with and into Golden American Life Insurance Company ("Golden
American"). Immediately after the merger, Golden American changed its name
to ING USA Annuity and Life Insurance Company. As of the merger date, the
Merger Companies ceased to exist and were merged into ING USA. Lion is an
indirect, wholly-owned subsidiary of ING Groep N.V. ("ING"), a global
financial services holding company based in The Netherlands. ING USA is
authorized to do business in the District of Columbia and all states except
New York. ING USA is licensed as a life insurance company under the laws of
the State of Delaware until December 31, 2003 and Iowa since January 1,
2004.
Prior to the merger date, ING USA was a wholly-owned subsidiary of
Equitable Life from December 30, 2001 through December 31, 2003. Formerly,
from October 24, 1997, until December 30, 2001, Equitable of Iowa
Companies, Inc. ("EIC" or "Former Holding Company") directly owned 100% of
Golden American's stock.
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("FAS 141"), excludes transfers of net assets or exchanges of
shares between entities under common control, and notes that certain
provisions under Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"), provide a source of guidance for such
transactions. In accordance with APB 16, financial information of the
combined entity is presented as if the entities had been combined for the
full year, and all comparative financial statements are restated and
presented as if the entities had previously been combined, in a manner
similar to a pooling-of-interests.
The unaudited condensed financial statements have been prepared in a manner
similar to a pooling-of-interests, in accordance with the provisions of APB
16 in order to present the condensed financial position and results of
operations of the Company and the Merger Companies, as if the entities had
previously been combined. The unaudited condensed balance sheets and
statements of income give effect to the consolidation transaction as if it
had occurred on December 31, 2003 and January 1, 2003, respectively.
8
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
The financial statements and notes as of March 31, 2004 and December 31,
2003 and for the three-month periods ended March 31, 2004 and 2003
("interim periods"), have been prepared in accordance with accounting
principles generally accepted in the United States of America and are
unaudited. The condensed financial statements reflect all adjustments which
are in the opinion of management, necessary for the fair presentation of
the financial position, results of the operation and cash flows for the
interim periods.
Description of Business
The Company offers various insurance products including deferred and
immediate annuities, variable annuities, interest sensitive and traditional
life insurance, and health insurance. All health insurance is ceded to
other insurers. The Company's products are marketed by broker/dealers,
financial institutions, insurance agents, and a career agency force. The
Company's primary customers are consumers and corporations.
Recently Adopted Accounting Standards
Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
The Company adopted Statement of Position ("SOP") 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts," on January 1, 2004. SOP 03-1
establishes several new accounting and disclosure requirements for certain
nontraditional long-duration contracts and for separate accounts including,
among other things, a requirement that assets and liabilities of separate
account arrangements that do not meet certain criteria be accounted for as
general account assets and liabilities, and that the revenue and expenses
related to such arrangements be consolidated within the respective line
items in the Condensed Statements of Income. In addition, the SOP requires
additional liabilities be established for certain guaranteed death and
other benefits and for products with certain patterns of cost of insurance
charges, and that sales inducements provided to contractholders be
recognized on the balance sheet separately from deferred acquisition costs
and amortized as a component of benefits expense using methodology and
assumptions consistent with those used for amortization of deferred policy
acquisition costs.
The Company evaluated all requirements of SOP 03-1 and determined that it
is affected by the SOP's requirements to establish additional liabilities
for certain guaranteed benefits and products with patterns of cost
insurance charges resulting in losses in later policy durations from the
insurance benefit function and to defer, amortize, and recognize
separately, sales inducements to contractholders. Requirements for certain
separate account arrangements that do not meet the established criteria for
separate asset and liability recognition are applicable to the Company,
however, the Company's policies on separate account assets and liabilities
have historically been, and continue to be, in conformity with the
requirements newly established. Upon adoption of the SOP, the Company
9
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
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recognized a cumulative effect of a change in accounting principle of
$(2.3) million on January 1, 2004.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended and interpreted by FAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement 133," and FAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB 133, and certain FAS 133 implementation
issues." This standard, as amended, requires companies to record all
derivatives on the balance sheet as either assets or liabilities and
measure those instruments at fair value. The manner in which companies are
to record gains or losses resulting from changes in the fair values of
those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. FAS No. 133 was effective for the Company's
financial statements beginning January 1, 2001. Adoption of FAS No. 133 did
not have a material effect on the Company's financial position or results
of operations given the Company's limited derivative holdings and embedded
derivatives.
The Company occasionally purchases a financial instrument that contains a
derivative that is "embedded" in the instrument. In addition, the Company's
insurance products are reviewed to determine whether they contain an
embedded derivative. The Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related
to the economic characteristics of the remaining component of the financial
instrument or insurance product (i.e., the host contract) and whether a
separate instrument with the same terms as the embedded instrument would
meet the definition of a derivative instrument. When it is determined that
the embedded derivative possesses economic characteristics that are not
clearly and closely related to the economic characteristics of the host
contract and that a separate instrument with the same terms would qualify
as a derivative instrument, the embedded derivative is separated from the
host contract and carried at fair value. However, in cases where the host
contract is measured at fair value, with changes in fair value reported in
current period earnings or the Company is unable to reliably identify and
measure the embedded derivative for separation from its host contracts, the
entire contract is carried on the balance sheet at fair value and is not
designated as a hedging instrument.
In 2003, 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" issued
Statement 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 total return debt index may be determined to contain embedded
derivatives that are required to be bifurcated. The Company adopted DIG B36
10
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
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on October 1, 2003 and has modified coinsurance treaties that are
applicable to the guidance. The applicable contracts, however, were
determined to generate embedded derivatives with a fair value of zero.
Therefore, the guidance, while implemented, does not impact the Company's
financial position, results of operations, or cash flows.
Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 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 corrections 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 46 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 46 also requires
disclosures about VIEs that the variable interest holder is not required to
consolidate but in which it has a significant variable interest.
11
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
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At March 31, 2004, the Company held the following investments that, for
purposes of FIN 46, were evaluated and determined that the investments do
not require consolidation in the Company's financial statements:
(Millions)
Asset Type Purpose Book Value (1) Market Value
---------------------------------------- -------------------------- ---------------- ----------------
Private Corporate Securities - synthetic
leases; project financings; credit tenant
leases Investment Holdings $ 2,734.0 $ 2,929.5
Foreign Securities - US VIE subsidiaries
of foreign companies Investment Holdings 551.2 596.0
Commercial Mortgage Obligations (CMO) Investment Holdings 6,597.2 6,884.2
Collateralized Debt Obligations (CDO) Investment Holdings
and/or
Collateral Manager 61.6 56.7
Asset-Backed Securities (ABS) Investment Holdings 1,231.8 1,250.5
Commercial Mortgage Backed Securities
(CMBS) Investment Holdings 820.5 870.8
(1) Represents maximum exposure to loss except for those structures for which the Company also receives asset
management fees.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from reported results using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased.
Investments
All of the Company's fixed maturity and equity securities are currently
designated as available-for-sale. Available-for-sale securities are
reported at fair value and unrealized gains and losses on these securities
are included directly in shareholder's equity, after adjustment for related
charges in deferred policy acquisition costs, value of business acquired,
and deferred income taxes.
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 in accordance with FAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Management considers
the length of the time and the extent to which the market value has been
less than cost; the financial condition and near-term prospects of the
issuer; future economic conditions and market forecasts; and the Company's
intent and ability to retain the investment in the issuer for a period of
time sufficient to allow for recovery in market value. If it is probable
12
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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 Emerging Issues Task Force ("EITF") Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." Under Issue No. EITF
99-20, a 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. An impairment is recognized if
the fair value of the security is less than amortized cost and there has
been an adverse change in cash flow since the remeasurement date.
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 realized loss.
Realized capital gains and losses on all other investments are included in
the Condensed Statements of Income. Unrealized capital gains and losses on
all other investments are reflected in shareholder's equity, net of related
income taxes.
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.
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 equity securities are based on quoted market
prices. For equity securities not actively traded, estimated fair values
are based upon values of issues of comparable yield and quality or
conversion value where applicable.
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of the loaned domestic securities. The collateral is deposited
by the borrower with a lending agent, and retained and invested by the
lending agent according to the Company's guidelines to generate additional
income. The market value of the loaned securities is monitored on a daily
basis with additional collateral obtained or refunded as the market value
of the loaned securities fluctuates.
Reverse dollar repurchase agreement and reverse repurchase agreement
transactions are accounted for as collateralized borrowings, where the
amount borrowed is equal to the sales price of the underlying securities.
The investment in mutual funds represents an investment in mutual funds
managed by the Company, and is carried at fair value.
13
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Mortgage loans on real estate are reported at amortized cost less
impairment writedowns. If the value of any mortgage loan is determined to
be impaired (i.e., when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement), the carrying value of the mortgage loan is reduced to the
present value of expected cash flows from the loan, discounted at the
loan's effective interest rate, or to the loan's observable market price,
or the fair value of the underlying collateral. The carrying value of the
impaired loans is reduced by establishing a permanent writedown charged to
realized loss.
Investments in real estate are reported at historical cost, less
accumulated depreciation and impairment writedowns, with the exception of
land, which is not depreciated. If the value of any real estate is
determined to be impaired (i.e., when it is probable that the Company will
be unable to recover the carrying value of the real estate), the carrying
value of the real estate is reduced to the current fair value. The carrying
value of the impaired real estate is reduced by establishing a permanent
writedown charged to realized loss.
Policy loans are carried at unpaid principal balances, net of impairment
reserves.
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.
The Company's use of derivatives is limited to hedging purposes. The
Company enters into interest rate and currency contracts, including swaps,
caps, floors, options, futures, and embedded derivatives, to reduce and
manage risks associated with changes in value, yield, price, cash flow or
exchange rates of assets or liabilities held or intended to be held.
Changes in the fair value of open derivative contracts are recorded in net
realized capital gains and losses.
On occasion, the Company sells call options written on underlying
securities that are carried at fair value. Changes in fair value of these
options are recorded in net realized capital gains or losses.
Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred Policy Acquisition Costs ("DAC") is an asset, which represents
certain costs of acquiring certain insurance business, which are deferred
and amortized. These costs, all of which vary with and are primarily
related to the production of new and renewal business, consist principally
of commissions, certain underwriting and contract issuance expenses, and
certain agency expenses. Value of Business Acquired ("VOBA") is an asset,
which represents the present value of estimated net cash flows embedded in
the Company's contracts, which existed at the time the Company was acquired
by ING. DAC and VOBA are evaluated for recoverability at each balance sheet
14
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
date and these assets would be reduced to the extent that gross profits are
inadequate to recover the asset.
The amortization methodology varies by product type based upon two
accounting standards: FAS No. 60, "Accounting and Reporting by Insurance
Enterprises" ("FAS No. 60") and FAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and Realized
Gains and Losses from the Sale of Investments" ("FAS No. 97").
Under FAS No. 60, acquisition costs for traditional life insurance
products, which primarily include whole life and term life insurance
contracts, are amortized over the premium payment period in proportion to
the premium revenue recognition.
Under FAS No. 97, acquisition costs for universal life and investment-type
products, which include universal life policies and fixed and variable
deferred annuities, are amortized over the life of the blocks of policies
(usually 25 years) in relation to the emergence of estimated gross profits
from surrender charges, investment margins, mortality and expense margins,
asset-based fee income, and actual realized gains (losses) on investments.
Amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are revised.
DAC and VOBA are written off to the extent that it is determined that
future policy premiums and investment income or gross profits are not
adequate to cover related expenses.
Activity for the periods ended March 31, 2004 and 2003 within VOBA was as
follows:
(Millions)
Balance at December 31, 2002 $ 134.5
Adjustment for FAS No. 115 (2.5)
Interest accrued at 5% 1.8
Amortization (2.6)
--------------
Balance at March 31, 2003 $ 131.2
==============
Balance at December 31, 2003 $ 111.5
Adjustment for FAS No. 115 (16.4)
Interest accrued at 5% 1.4
Amortization (5.7)
--------------
Balance at March 31, 2004 $ 90.8
==============
The estimated amount of VOBA to be amortized, net of interest, over the
next five years is $13.3 million, $14.4 million, $13.7 million, $9.4
million and $9.5 million for the years 2004, 2005, 2006, 2007 and 2008,
respectively. Actual amortization incurred during these years may vary as
assumptions are modified to incorporate actual results.
15
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
As part of the regular analysis of DAC/VOBA, at the end of third quarter of
2002, the Company unlocked its long-term rate of return assumptions. The
Company reset long-term assumptions for the separate account returns to
9.0% (gross before fund management fees and mortality and expense and other
policy charges), as of December 31, 2002, reflecting a blended return of
equity and other sub-accounts. The initial unlocking adjustment in 2002 was
primarily driven by the sustained downturn in the equity markets and
revised expectations for future returns.
The Company remained unlocked during 2003 and has continued to remain
unlocked during the first quarter of 2004. In 2003, the Company reset
long-term assumptions for the separate account returns from 9.0% to 8.5%
(gross before fund management fees and mortality and expense and other
policy charges) maintaining a blended return of equity and other
sub-accounts. The 2003 unlocking adjustment from the previous year was
primarily driven by improved market performance. During the three months
ended March 31, 2004, the Company recorded a deceleration of DAC/VOBA
amortization of $2.7 million pretax, $1.8 million net of $0.9 million of
federal income tax expense.
Separate Accounts
Separate Account assets and liabilities generally represent funds
maintained to meet specific investment objectives of contractholders who
bear the investment risk, subject, in limited cases, to minimum guaranteed
rates. Investment income and investment gains and losses generally accrue
directly to such contractholders. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company.
Separate Account assets supporting variable options under universal life
and annuity contracts are invested, as designated by the policyholder or
participant (who bears the investment risk subject, in limited cases, to
minimum guaranteed rates) under a contract in shares of mutual funds which
are managed by the Company, or in other selected mutual funds not managed
by the Company.
Separate Account assets are carried at fair value. At March 31, 2004 and
2003, unrealized gains of $112.8 million and $153.6 million, respectively,
after taxes, on assets supporting a guaranteed interest option are
reflected in shareholder's equity.
Separate Account liabilities are carried at fair value, except for those
relating to the guaranteed interest option. Reserves relating to the
guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 2.4% to 7.5% in 2004 and 2003.
16
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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 are not reflected in the Consolidated Financial
Statements (with the exception of realized and unrealized capital gains and
losses on the assets supporting the guaranteed interest option). The
Consolidated Statements of Cash Flows do not reflect investment activity of
the Separate Accounts.
Assets and liabilities of separate account arrangements that do not meet
the criteria in SOP 03-1 for presentation in the separate caption in the
Condensed Balance Sheets, and revenue and expenses related to such
arrangements, are consolidated in the financial statements with the general
account.
Policy Liabilities and Accruals
Future policy benefits include reserves for universal life, immediate
annuities with life contingent payouts and traditional life insurance
contracts. Reserves for universal life products are equal to cumulative
deposits less withdrawals and charges plus credited interest thereon.
Reserves for traditional life insurance contracts represent the present
value of future benefits to be paid to or on behalf of policyholders and
related expenses less the present value of future net premiums.
Reserves for immediate annuities with life contingent payout contracts are
computed on the basis of assumed investment yield, mortality, and expenses,
including a margin for adverse deviations. Such assumptions generally vary
by plan, year of issue and policy duration. Reserve interest rates ranged
from 3.0% to 9.3% for all periods presented. Investment yield is based on
the Company's experience.
Mortality and withdrawal rate assumptions are based on relevant Company
experience and are periodically reviewed against both industry standards
and experience.
Other policyholders' fund include reserves for deferred annuity investment
contracts and immediate annuity without life contingent payouts. Reserves
on such contracts are equal to cumulative deposits less charges and
withdrawals plus credited interest thereon (rates range from 2.4% to 9.0%
for all periods presented) net of adjustments for investment experience
that the Company is entitled to reflect in future credited interest.
Sales Inducements
Sales inducements represent benefits paid to contractholders that are
incremental to the amounts the Company credits on similar contracts and are
higher than the contract's expected ongoing crediting rates for periods
after the inducement. As of January 1, 2004, such amounts are reported
separately on the balance sheet in accordance with SOP 03-1. Prior to 2004,
sales inducements were recorded as a component of DAC on the Condensed
17
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Balance Sheet. Sales inducements are amortized as a component of benefit
expense using methodology and assumptions consistent with those used for
amortization of DAC.
Revenue Recognition
For universal life and certain annuity contracts, charges assessed against
policyholders' funds for the cost of insurance, surrender, expenses,
actuarial margin and other fees are recorded as revenue as charges are
assessed against policyholders. Other amounts received for these contracts
are reflected as deposits and are not recorded as revenue. Related policy
benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the
contracts. When annuity payments with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity and reflected as an offsetting amount in both premiums and current
and future benefits in the Condensed Statement of Income.
Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverable balances deemed
probable of recovery are reflected as assets on the Company's Condensed
Balance Sheets.
Participating Insurance
Participating business approximates 10% of the Company's ordinary life
insurance in force and 25% of premium income. The amount of dividends to be
paid is determined annually by the Board of Directors. Amounts allocable to
participating policyholders are based on published dividend projections or
expected dividend scales. Dividends of $4.1 and $5.9 were incurred during
the three months ended March 31, 2004 and 2003, respectively.
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.
18
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
2. Investments
Fixed maturities available for sale as of March 31, 2004 were as follows:
(Millions)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
U.S. government and government
agencies and authorities $ 30.3 1.9 $ - $ 32.2
State, municipalities and political
subdivisions 31.2 - 0.8 30.4
U.S. corporate securities:
Public utilities 1,518.9 109.4 2.7 1,625.6
Other corporate securities 7,125.1 435.9 10.8 7,550.2
--------------- --------------- --------------- ---------------
Total U.S. corporate securities 8,644.0 545.3 13.5 9,175.8
--------------- --------------- --------------- ---------------
Foreign securities:
Government 415.6 27.7 2.1 441.2
Other 2,073.3 127.6 8.8 2,192.1
--------------- --------------- --------------- ---------------
Total foreign securities 2,488.9 155.3 10.9 2,633.3
--------------- --------------- --------------- ---------------
Mortgage-backed securities 3,490.4 85.4 12.4 3,563.4
Other asset-backed securities 1,368.6 27.2 14.8 1,381.0
Total fixed maturities, including fixed
maturities pledged to creditors 16,053.4 815.1 52.4 16,816.1
Less: fixed maturities pledged to
creditors 357.8 17.6 0.8 374.6
--------------- --------------- --------------- ---------------
Fixed maturities $ 15,695.6 $ 797.5 $ 51.6 $16,441.5
=============== =============== =============== ===============
19
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Fixed maturities available for sale as of December 31, 2003 were as
follows:
(Millions)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
U.S. government and government
agencies and authorities $ 195.5 $ 2.0 $ 0.1 $ 197.4
State, municipalities and political
subdivisions 31.7 - 2.5 29.2
U.S. corporate securities:
Public utilities 1,341.2 84.3 8.0 1,417.5
Other corporate securities 7,020.6 346.7 35.8 7,331.5
--------------- --------------- -------------- --------------
Total U.S. corporate securities 8,361.8 431.0 43.8 8,749.0
--------------- --------------- -------------- --------------
Foreign securities:
Government 487.1 21.7 3.9 504.9
Other 1,984.4 96.0 24.1 2,056.3
--------------- --------------- -------------- --------------
Total foreign securities 2,471.5 117.7 28.0 2,561.2
--------------- --------------- -------------- --------------
Mortgage-backed securities 3,247.0 66.7 21.8 3,291.9
Other asset-backed securities 1,273.0 17.2 21.1 1,269.1
Total fixed maturities, including fixed
maturities pledged to creditors 15,580.5 634.6 117.3 16,097.8
Less: fixed maturities pledged to
creditors 22.2 0.1 - 22.3
--------------- --------------- -------------- --------------
Fixed maturities $ 15,558.3 $ 634.5 $ 117.3 $ 16,075.5
=============== =============== ============== ==============
At March 31, 2004 and December 31, 2003, net unrealized appreciation is
$762.7 million and $517.3 million, respectively, on available-for-sale
fixed maturities, including fixed maturities pledged to creditors.
The aggregate unrealized losses and related fair values of investments with
unrealized losses as of March 31, 2004, are shown below by duration:
Unrealized Fair
Loss Value
------------------ ------------------
(Millions)
Duration category:
Less than six months below cost $ 11.8 $ 1,093.6
More than six months and less than twelve months below cost 24.2 998.0
More than twelve months below cost 16.4 100.6
------------------ ------------------
Fixed maturities $ 52.4 $ 2,192.2
================== ==================
20
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Of the losses more than 6 months and less than 12 months in duration of
$24.2 million, there were $17.5 million in unrealized losses that are
primarily related to interest rate movement or spread widening for other
than credit-related reasons. Business and operating fundamentals are
performing as expected. The remaining losses of $6.7 million as of March
31, 2004 included the following significant items:
$3.5 million of unrealized losses related to securities reviewed for
impairment under the guidance prescribed by EITF 99-20. This category
includes U.S. government-backed securities, principal protected
securities and structured securities which did not have an adverse
change in cash flows for which the carrying amount was $212.9 million.
$1.9 million of unrealized losses related to a foreign security, the
issuer of which is in the Dominican Republic, for which the carrying
amount was $5.2 million.
The remaining unrealized losses totaling $1.3 million related to a
carrying amount of $10.6 million.
Of the losses more than 12 months in duration of $16.4 million, there were
$13.4 million related to securities reviewed for impairment under the
guidance prescribed by EITF 99-20. This category includes U.S.
government-backed securities, principal protected securities and structured
securities which did not have an adverse change in cash flows for which the
carrying amount was $57.2 million.
The amortized cost and fair value of total fixed maturities as of March 31,
2004 are shown below by contractual maturity. Actual maturities may differ
from contractual maturities because securities may be restructured, called,
or prepaid.
Amortized Fair
Cost Value
------------------ ------------------
(Millions)
Due to mature:
One year or less $ 754.6 $ 788.8
After one year through five years 3,133.9 3,339.2
After five years through ten years 4,231.3 4,511.0
After ten years 2,254.2 2,361.8
Mortgage-backed securities 4,310.8 4,434.3
Other asset-backed securities 1,368.6 1,381.0
Less: fixed maturities pledged to creditors 357.8 374.6
------------------ ------------------
Fixed maturities $ 15,695.6 $ 16,441.5
================== ==================
At March 31, 2004 and December 31, 2003, fixed maturities with fair values
of $14.5 million and $20.1 million, respectively, were on deposit as
required by regulatory authorities.
21
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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 March 31, 2004.
The Company enters into reverse dollar repurchase agreement and reverse
repurchase agreement transactions to increase its 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.
The dollar rolls and reverse repurchase agreements are accounted for as
short-term collateralized financings and the repurchase obligation is
reported on the Condensed Balance Sheets in borrowed money. The repurchase
obligation totaled $758.3 and $534.2 million at March 31, 2004 and December
31, 2003, respectively.
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 March 31, 2004. The Company
believes the counterparties to the dollar roll and reverse repurchase
agreements are financially responsible and that the counterparty risk is
immaterial.
During the three months ended March 31, 2004, the Company determined that
76 fixed maturities had an other than temporary impairment. As a result,
for the three months ended March 31, 2004, the Company recognized a pre-tax
loss of $6.1 million to reduce the carrying value of the fixed maturities
to their fair value of $53.3 million. During the three months ended March
31, 2003, the Company determined that 153 fixed maturities had other than
temporary impairments. As a result, for the three months ended March 31,
2003, the Company recognized a pre-tax loss of $56.6 million to reduce the
carrying value of the fixed maturities to their combined fair value of
$209.4 million.
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 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 and all nonfinancial instruments from its
22
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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 above financial instruments:
Fixed maturities securities: The fair values for the actively traded
marketable bonds are determined based upon the quoted market prices. 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. Using this data,
the model generates estimated market values which the Company considers
reflective of the fair value of each privately placed bond. Fair values for
privately placed bonds are determined through consideration of 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.
Equity securities: Fair values of these securities are based upon quoted
market value.
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.
Real estate: The fair values for real estate are estimated using three
methods of review: a discounted cash flow analyses utilizing rates
currently being offered in the marketplace, market value/sales comparisons
of similar products in the subject property market, and cost to reproduce
the asset. These reviews are done periodically; however, a major event,
such as signing/loss of a tenant, physical change to the property, or local
governmental zoning or regulation changes, will trigger an immediate
valuation review.
Cash, short-term investments 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.
Notes to affiliates: Estimated fair value of the Company's notes to
affiliates are based upon discounted future cash flows using a discount
rate approximating the current market value.
23
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Investment contract liabilities (included in future policy benefits and
claims' 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 policyholder 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 historical
balance sheet. Estimated fair values of separate account liabilities are
equal to their carrying amount.
The carrying values and estimated fair values of certain of the Company's
financial instruments at March 31, 2004 and December 31, 2003 were as
follows:
2004 2003
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------------------ ------------------------------
(Millions)
Assets:
Fixed maturity, including securities
pledged to creditors $ 6,816.1 $ 16,816.1 $ 16,097.8 $ 16,097.8
Equity securities 56.0 56.0 120.2 120.2
Mortgage loans on real estate 3,475.6 3,732.8 3,388.7 3,581.4
Real estate 4.5 4.8 4.5 4.8
Policy loans 173.4 173.4 177.1 177.1
Cash and short-term investments 178.1 178.1 65.4 65.4
Other investments 83.8 83.8 56.0 56.0
Assets held in separate accounts 19,714.9 19,714.9 18,220.1 18,220.1
Liabilities:
Notes to affiliates 35.0 56.6 35.0 57.3
Investment contract liabilities:
Deferred annuities 16,852.2 16,138.8 16,020.5 15,067.9
Supplementary contracts and
immediate annuities 251.8 251.8 250.9 250.9
Liabilities related to separate accounts 19,714.9 19,714.9 18,220.1 18,220.1
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
24
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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.
Derivative Financial Instruments
Interest Rate Caps
Interest rate caps are used to manage the interest rate risk in the
Company's bond portfolio. Interest rate caps are purchased contracts
that provide the Company with an annuity in an increasing interest
rate environment. The notional amount, carrying value and estimated
fair value of the Company's open interest rate caps as of March 31,
2004 were $1,036.2 million, $1.0 thousand and $1.0 thousand,
respectively. The notional amount, carrying value and estimated fair
value (liabilities are denoted with parentheses) of the Company's open
interest rate caps as of December 31, 2003 were $1,036.2 million,
$20.0 thousand and $20.0 thousand, respectively.
Interest Rate Swaps
Interest rate swaps are used to manage the interest rate risk in the
Company's bond 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.
The notional amount, carrying value and estimated fair value of the
Company's open interest rate swaps as of March 31, 2004 were $1,294.4
million, $(58.1) million and $(58.1) million, respectively. The
notional amount, carrying value and estimated fair value of the
Company's open interest rate swaps as of December 31, 2003 were
$1,266.5 million, $(91.2) million and $(91.2) million, respectively.
Futures
Futures contracts are used to hedge against a decrease in certain
indexes. Such decrease results in increased reserve liabilities, and
the futures offset this increased expense. The underlying reserve
liabilities are carried at market value with the change in value
running through the statement of income, which is offset by the daily
cash movement of the futures. The notional amount, carrying value and
estimated fair value of the Company's open interest rate swaps as of
March 31, 2004, were $732.8 million, $(0.6) million and $(0.6)
million, respectively. The notional amount, carrying value and
estimated fair value of the Company's open interest rate swaps as of
December 31, 2003, were $491.3 million, $0.8 million and $0.8 million,
respectively.
Foreign Exchange Swaps
Foreign exchange swaps are used to reduce the risk of a change in the
value, yield or cash flow with respect to invested assets. Foreign
exchange swaps represent contracts that require the exchange of
foreign currency cash flows for US dollar cash flows at regular
interim periods, typically quarterly or semi-annually. The notional
amount, carrying value and estimated fair value of the Company's open
foreign exchange rate swaps as of March 31, 2004 were $146.7 million,
$(18.8) million and $(18.8) million, respectively. The notional
amount, carrying value and estimated fair value of the Company's open
25
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
foreign exchange rate swaps as of December 31, 2003 were $128.2
million, $(19.4) million and $(19.4) million, respectively.
Options
S&P Options are used to hedge against an increase in the S&P Index.
Such increase results in increased reserve liabilities, and the
options offset this increased expense. The options are accounted for
in a consistent manner with the underlying reserve liabilities, both
of which are carried at fair value with the change in value running
through the statement of income. If the options mature in the money,
the amount received is recorded in income to offset the increased
expense for the reserve liabilities. The notional amount, carrying
value and estimated fair value of the Company's open options as of
March 31, 2004 were $1,491.2 million, $103.0 million, and $103.0
million, respectively. The notional amount, carrying value and
estimated fair value of the Company's open options as of December 31,
2003 were $1,287.8 million, $100.9 million, and $100.9 million,
respectively.
Embedded Derivatives
The Company also had investments in certain fixed maturity instruments
and retail annuity products that contain embedded derivatives,
including those whose market value is at least partially determined
by, among other things, levels of or changes in domestic and/or
foreign interest rates (short- or long-term), exchange rates,
prepayment rates, equity markets or credit ratings/spreads. The
estimated fair value of the embedded derivatives within such
securities as of March 31, 2004 and December 31, 2003 was $(0.5)
million and $(1.1) million, respectively. The estimated fair value of
the embedded derivatives within retail annuity products as of March
31, 2004 and December 31, 2003, was $273.3 million and $238.9 million,
respectively.
26
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
4. Net Investment Income
Sources of net investment income were as follows:
Three months Three months
ended ended
March 31, March 31,
(Millions) 2004 2003
------------------ ------------------
Fixed maturities $ 231.3 $ 238.0
Equity securities 0.1 -
Mortgage loans 53.3 50.5
Real estate 0.1 0.5
Policy loans 2.9 2.4
Short-term investments and cash equivalents 0.2 0.7
Other 27.8 1.6
------------------ ------------------
Gross investment income 315.7 293.7
Less: investment expenses 17.2 13.8
------------------ ------------------
Net investment income $ 298.5 $ 279.9
================== ==================
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 for payment of
dividends, which exceed an annual limit. The Company did not pay common
stock dividends during the period ended March 31, 2004 or the year ended
December 31, 2003.
The Insurance Department of the State of Iowa (the "Department"), effective
January 1, 2004, 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 loss was $1.9 million and $68.9 million, for the three
months ended March 31, 2004 and 2003, respectively. Statutory capital and
surplus was $1,089.3 million and $969.6 million as of March 31, 2004 and
2003, respectively.
As of March 31, 2004, the Company does not utilize any statutory accounting
practices, which are not prescribed by state regulatory authorities that,
individually or in the aggregate, materially affect statutory capital and
surplus.
27
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
6. Capial Gains and Losses
Realized capital gains and 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 the impairment of
investments. Net realized capital gains (losses) on investments were as
follows:
Three months Three months
ended ended
March 31, March 31,
(Millions) 2004 2003
------------------ ------------------
Fixed maturities $ 49.1 $ (4.9)
Equity securities 3.5 -
Derivatives (52.1) (1.8)
------------------ ------------------
Pretax realized capital gains (losses) $ 0.5 $ (6.7)
================== ==================
After-tax realized capital gains (losses) $ 0.3 $ (4.4)
================== ==================
Proceeds from the sale of total fixed maturities and the related gross
gains and losses were as follows:
Three months Three months
ended ended
March 31, March 31,
(Millions) 2004 2003
------------------ ------------------
Proceeds on sales $ 2,971.7 $ 3,912.5
Gross gains 64.0 80.6
Gross losses 5.9 18.6
Changes in shareholder's equity related to changes in accumulated other
comprehensive income were as follows:
Three months Three months
ended ended
March 31, March 31,
(Millions) 2004 2003
------------------ ------------------
Fixed maturities $ 245.3 $ 62.4
Equity securities (2.6) -
DAC/VOBA (60.8) (50.2)
Derivatives 1.3 (0.6)
Sales inducements (18.4) -
Other - (1.1)
------------------ ------------------
Subtotal 164.8 10.5
Increase in deferred income taxes (52.1) (110.9)
------------------ ------------------
Net changes in accumulated other
comprehensive income (loss) $ 112.7 $ (100.4)
================== ==================
28
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Shareholder's equity included the following accumulated other comprehensive
income (loss):
March 31, March 31,
(Millions) 2004 2003
------------------- ------------------
Net unrealized capital gains (losses):
Fixed maturities $ 762.7 $ 670.2
Equity securities 2.5 (3.4)
DAC/VOBA (271.3) (439.7)
Derivatives (12.8) (0.6)
Sales inducements (18.4) -
Other - (0.8)
------------------- ------------------
Subtotal 462.7 225.7
Less: deferred income taxes 160.0 191.0
------------------- ------------------
Net accumulated other comprehensive
income $ 302.7 $ 34.7
=================== ==================
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities, were as follows:
Three months Three months
ended ended
March 31, March 31,
(Millions) 2004 2003
Unrealized holding gains (losses) arising ------------------ ------------------
during the year (1) $ 164.0 $ (100.5)
Less: reclassification adjustment for gains
(losses) and other items included in
net income(2) 51.3 (0.1)
------------------ -------------------
Net unrealized gains (losses) on securities $ 112.7 $ (100.4)
================== ===================
(1) Pretax unrealized holding gains (losses) arising during the
period were $106.6 million and $(65.3) million for the three
months ended March 31, 2004 and 2003, respectively.
(2) Pretax reclassification adjustments for gains (losses) and other
items included in net income were $33.3 million and $(0.1)
million for the three months ended March 31, 2004 and 2003,
respectively.
7. Additional Insurance Benefits and Minimum Guarantees
Under SOP 03-1, the Company calculates additional liabilities ("SOP
reserves") for certain guaranteed benefits and for Universal Life products
with certain patterns of cost of insurance charges. The SOP reserve
recognized for such products is in addition to the liability previously
held (the Account Value) and is to recognize the portion of contract
assessments received in early years used to compensate the insurer for
services provided in later years.
29
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
The SOP reserve for products with cost of insurance charges is calculated
as an estimate intended to represent a calculated reserve using the same
assumptions used in the determination of estimated gross profits, according
to which, deferred acquisition costs are amortized. ING USA calculates a
benefit ratio for each block of business subject to the SOP, and calculates
an SOP reserve by accumulating amounts equal to the benefit ratio
multiplied by the assessments for each period, reduced by excess death
benefits during the period. The SOP reserve is accumulated at interest
using the contract-credited rate for the period. The calculated reserve
includes a provision for Universal Life contracts with patterns of Cost of
Insurance Charges that produce expected gains from the insurance benefit
function followed by losses from that function in later years.
The SOP reserve for annuities with minimum guaranteed death benefits
("MGDB") is determined each period by estimating the expected value of
death benefits in excess of the projected account balance and recognizing
the excess ratably 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. The following assumptions and methodology
were used to determine the MGDB SOP reserve at March 31, 2004:
Area Assumptions/Basis for Assumptions
--------------------------------- -------------------------------------
Data used Based on 101 investment performance
scenarios stratified based on 10,000
random generated scenarios
Mean investment performance 8.5%
Volatility 20.0%
Mortality 60.0%, 60.0%, 75.0%, 75.0% of the
90-95 ultimate mortality table for
standard, rachet, rollup and
combination rollup and rachet,
respectively
Lapse rates Vary by contract type and duration;
range between 1.0% and 40.0%
Discount rates 6.5%, based on the portfolio earned
rate of the general account
The SOP reserve for annuities with guaranteed minimum accumulation benefits
("GMAB") and guaranteed minimum withdrawal benefits ("GMWB") are considered
to be derivatives under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and are recognized at fair value
through earnings.
The SOP reserve for the guaranteed minimum income benefits ("GMIB") is
determined each period by estimating the expected value of the annutization
benefits in excess of the projected account balance at the date of
annuitization and recognizing the excess ratably over the accumulation
period based on total expected assessments. The Company regularly evaluates
estimates used and adjusts the additional liability balance, with a related
charge or credit to benefit expense, if the actual experience or other
evidence suggests that earlier assumptions should be revised. The
assumptions used for calculating the additional GMIB liability at March 31,
2004, are consistent with those used for the calculating the additional
30
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
MGDB liability. In addition, the calculation of the GMIB liability assumes
dynamic lapses and dynamic annuitization reflecting the extent to which the
benefit, at the time of payment, has a positive value.
The separate account liabilities subject to SOP 03-1 for minimum guaranteed
benefits, and the additional liabilities recognized related to minimum
guarantees, by type, as of March 31, 2004, and the paid and incurred
amounts by type for the three months ended March 31, 2004 are as follows:
Minimum Guaranteed Guaranteed
Guaranteed Minimum Minimum
Death Accumulation/ Income
Benefit Withdrawal Benefit Benefit
(MGDB) (GMAB/GMWB) (GMIB)
---------------- ---------------------- --------------
Separate account liability
balance $ 20,898.6 $ 1,295.6 $ 5,489.8
Additional liability balance:
Balance at January 1, 2004 $ 56.5 14.5 13.6
Incurred guaranteed benefits 10.0 (6.2) 3.7
Paid guaranteed benefits (5.2) - -
---------------- ---------------------- --------------
Balance at March 31, 2004 $ 61.3 $ 8.3 $ 17.3
================ ====================== ==============
The net amount at risk (net of reinsurance) and the weighted average
attained age of contractholders by type of minimum guaranteed benefit, are
as follows as of March 31, 2004:
Minimum Guaranteed Guaranteed
Guaranteed Minimum Minimum
Death Accumulation/ Income
Benefit Withdrawal Benefit Benefit
(MGDB) (GMAB/GMWB) (GMIB)
-------------- ----------------------- ---------------
Net Amount at Risk (net of reinsurance) $ 462.0 $ 79.9 $ 223.3
Weighted Average Attained Age 64 59 59
The aggregate fair value of assets, by major investment asset category,
supporting separate accounts with additional insurance benefits, and
minimum investment return guarantees as of March 31, 2004 are:
(Millions)
-----------
Private corporate securities $ 5,404.4
Public corporate securities 8,167.6
Collateralized mortgage obligations 1,248.8
Commercial mortgage backed securities 2,409.1
Commercial mortgages 3,668.7
---------------
Total $ 20,898.6
===============
31
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
8. Sales Inducements
Sales inducements represent benefits paid to contractholders that are
incremental to the amounts the Company credits on similar contracts and are
higher than the contract's expected ongoing crediting rates for periods
after the inducement. Such amounts are reported separately on the balance
sheet as of January 1, 2004. Prior to 2004, these amounts were included in
DAC. Sales inducements are amortized as a component of benefit expense
using methodology and assumptions consistent with those used for
amortization of DAC. During the three months ended March 31, 2004, the
company capitalized and amortized $24.9 million and $25.2 million,
respectively, of sales inducements. The unamortized balance of capitalized
sales inducements, net of unrealized gains and losses, is $467.3 million as
of March 31, 2004.
9. Income Taxes
Effective January 1, 2004, the Company files a stand-alone federal income
tax return. Prior to that date, the Company and each of the Merger
Companies, filed federal income tax returns with their respective filing
groups.
At March 31, 2004, the Company has net operating loss carryforwards of
approximately $487.0 million for federal income tax purposes which are
available to offset future taxable income. If not used, these carryforwards
will expire between 2015 and 2017.
Income tax expense (benefit) from continuing operations included in the
condensed financial statements are as follows:
Three months Three months
ended ended
March 31, March 31,
(Millions) 2004 2003
------------------ -------------------
Current tax (benefit):
Federal $ - $ (2.1)
------------------ -------------------
Total current tax (benefit) - (2.1)
------------------ -------------------
Deferred tax (benefit):
Operations and capital loss carryforwards 6.2 -
Other federal deferred tax 3.8 (5.4)
------------------ -------------------
Total deferred tax (benefit) 10.0 (5.4)
------------------ -------------------
Total income tax expense (benefit) $ 10.0 $ (7.5)
================== ===================
32
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Income taxes were different from the amount computed by applying the
federal income tax rate to income from continuing operations before
income taxes for the following reasons:
Three months Three months
ended ended
March 31, March 31,
(Millions) 2004 2003
------------------ -------------------
Income before income taxes $ 32.6 $ (21.0)
Tax rate 35% 35%
------------------- ------------------
Income tax at federal statutory rate 11.4 (7.4)
Tax effect of:
Meals and entertainment 0.1 0.1
Dividend received deduction (1.5) (0.2)
------------------- ------------------
Income taxes $ 10.0 $ (7.5)
=================== ==================
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at March 31, 2004 and December 31,
2003 are presented below:
(Millions) 2004 2003
------------------ -------------------
Deferred tax assets:
Operations and capital loss carryforwards $ 170.4 $ 168.5
Future policy benefits 461.1 470.7
Goodwill 9.5 9.8
Investments 17.4 20.5
Employee compensation and benefits 17.9 16.8
Other 33.5 33.4
------------------- ------------------
Total gross assets 709.8 719.7
------------------- ------------------
Deferred tax liabilities:
Unrealized gains on investments (175.5) (123.4)
Deferred policy acquisition cost (527.5) (529.1)
Value of purchased insurance in force (38.7) (38.3)
Other (0.3) (0.3)
------------------- ------------------
Total gross liabilities (742.0) (691.1)
------------------- ------------------
Net deferred income tax asset (liability) $ (32.2) $ 28.6
=================== ==================
The Internal Revenue Service has commenced examinations for the years 2000
and 2001. Management does not believe adverse consequences will result from
those examinations.
33
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
10. 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 $2.8 million and $4.6 million for
the three-month periods ended March 31, 2004 and 2003, respectively.
Non-Qualified Retirement Plans
Through December 31, 2001, the Company, in conjunction with ING, offered
certain eligible employees a Supplemental Executive Retirement Plan and an
Excess Plan (collectively, the "SERPs"). The SERPs are non-qualified
defined benefit pension plans, which means all benefits are payable from
the general assets of the Company. SERP benefits are not guaranteed by the
PBGC. Benefit accruals under the SERPs ceased effective as of December 31,
2001. Benefits under the SERPs are determined based on an eligible
employees years of service and such employee's average annual compensation
for the highest five years during the last ten years of employment. Pre-tax
charges of operations of the Company for the SERPs were $0.1 million and
$(0.7) million for the three-month periods ended March 31, 2004 and 2004,
respectively.
34
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
The following tables summarize the benefit obligations and the funded
status for the SERP and the Excess Plan for the year ended December 31,
2003:
(Millions)
Change in Benefit Obligation:
Defined Benefit Obligation, January 1 $ 8.8
Interest cost 0.6
Benefits paid (0.4)
Actuarial (gain) loss on obligation 2.0
------------------
Defined Benefit Obligation, December 31 $ 11.0
==================
Funded status:
Funded status at December 31 $ (11.0)
Unrecognized past service cost (0.1)
Unrecognized net loss (1.8)
------------------
Net amount recognized $ (12.9)
==================
At December 31, 2003, the accumulated benefit obligation was $9.3 million.
The weighted-average assumptions used in the measurement of the benefit
obligation for the Retirement Plan were as follows:
2004 2003
------------------ ------------------
Discount rate at beginning of period 6.25 % 6.75 %
Rate of compensation increase 3.75 3.75
Net periodic benefit costs for the three-month periods ended March 31, 2004
and 2003 were as follows:
2004 2003
------------------ ------------------
(Millions)
Interest cost $ 0.2 $ 0.1
Unrecognized past service cost recognized in period (0.1) (0.1)
------------------ ------------------
Net periodic benefit cost $ 0.1 $ -
================== ==================
Contributions for the SERPs are expected to be $0.4 million during 2004.
Defined Contribution Plans
ING North America sponsors the ING 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 (as defined below)) are eligible to participate,
including the Company's employees other than Company agents. 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
35
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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 $0.9 million and $0.8 million for
the three-month periods ended March 31, 2004 and 2003, respectively.
Post-Retirement Benefits
In addition to providing pension benefits, the Company, in conjunction with
ING, provides certain health care and life insurance benefits for retired
employees and certain agents. Generally, retired employees and eligible
agents pay a portion of the cost of these post-retirement benefits, usually
based on their years of service with the Company. The amount a retiree or
eligible agent pays for such coverage is subject to change in the future.
The following tables summarize the benefit obligations and the funded
status for retired employees' and retired agents' post-retirement health
care benefits over the three-month periods ended March 31, 2004 and 2003:
2003
------------------
(Millions)
Change in Benefit Obligation:
Defined Benefit Obligation, January 1 $ 8.8
Service cost 0.5
Interest cost 0.6
Benefits paid (0.6)
Actuarial loss on obligation (0.7)
------------------
Defined Benefit Obligation, December 31 8.6
Funded status:
Funded status at December 31 (8.6)
Unrecognized losses (0.6)
Unrecognized past service cost 0.4
------------------
Net amount recognized $ (8.8)
==================
The medical health care trend rate was 10% for 2004, gradually decreasing
to 5.0% by 2009. Increasing the health care trend by 1% would increase the
benefit obligation by $0.5 million as of December 31, 2003. Decreasing the
health care trend rate by 1% would decrease the benefit obligation by $0.5
million as of December 31, 2003.
36
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Net periodic benefit costs for the three-month periods ended March 31, 2004
and 2003 were as follows:
2004 2003
------------------ ------------------
(Millions)
Service cost $ 0.2 $ 0.1
Interest cost 0.1 0.2
------------------ ------------------
Net periodic benefit cost $ 0.3 $ 0.3
================== ==================
Contributions for retired employees' and retired agents' post-retirement
health care benefits are expected to be $0.5 million during 2004.
Effect of Recently Enacted Legislation
On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug Improvement and Modernization Act of 2003. The act
expands Medicare, primarily by including a prescription drug benefit
starting in 2006. Employers currently sponsoring such prescription drug
programs will have a range of options to potentially reduce program costs.
Pursuant to guidance from the FASB under FSP FAS 106-1, ING has chosen to
defer recognition of the Act in these disclosures. Therefore, all measures
of the accumulated post retirement benefit obligation and the net periodic
post retirement benefit cost included in these disclosures do not reflect
the effects of the above named Act on the plans. Specific authoritative
guidance on the accounting for the federal subsidy possibly payable under
the Act is pending and that guidance, when issued, could require the
sponsor to change previously reported information.
11. Related Party Transactions
Operating Agreements
The Company has certain agreements whereby it generates revenues and incurs
expenses with affiliated entities. The agreements are as follows:
Underwriting and distribution agreement with Directed Services, Inc.
("DSI"), for the variable insurance products issued by the Company.
DSI is authorized to enter into agreements with broker/dealers to
distribute the Company's' variable products and appoint
representatives of the broker/dealers as agents. For the three months
ended March 31, 2004 and 2003, commission expenses were incurred in
the amounts of $90.8 million and $51.0 million, respectively.
Asset management agreement with ING Investment Management LLC ("IIM"),
in which IIM provides asset management and accounting services. The
Company records a fee, which is paid quarterly, based on the value of
the assets under management. For the three months ended March 31, 2004
and 2003, expenses were incurred in the amounts of $16.7 million and
$13.5 million, respectively.
37
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Expense sharing agreements with ING AIH for administrative,
management, financial, and information technology services, which were
approved in 2001. For the three months ended March 31, 2004 and 2003,
ING USA incurred expenses of $14.3 million and $6.6 million,
respectively.
Services agreement with ING Financial Advisors, LLC ("ING FA") to
provide certain administrative, management, professional advisory,
consulting and other services to the Company for the benefit of its
customers. Charges for these services are to be determined in
accordance with fair and reasonable standards with neither party
realizing a profit nor incurring a loss as a result of the services
provided to the Company. The Company will reimburse ING FA for direct
and indirect costs incurred on behalf of the Company.
Reinsurance Agreements
ING USA entered into a reinsurance agreement with Security Life of
Denver International, Ltd. ("SLDI"), an affiliate, covering variable
annuity minimum guaranteed death benefits and minimum guaranteed
living benefits of variable annuities issued after January 1, 2000. In
March 2003, the Company amended its reinsurance agreement with SLDI.
Under this amendment, the Company terminated the reinsurance agreement
for all inforce and new business and recaptured all inforce business
reinsured under the reinsurance agreement between the Company and SLDI
retroactive to January 1, 2003 and the Company reduced its reinsurance
recoverable related to these liabilities by $150.1 million. On March
28, 2003, SLDI transferred assets to the Company in the amount of
$185.6 million. The difference in amounts transferred on March 28,
2003 and the reduction of the reinsurance recoverables as of January
1, 2003, reflects adjustments on the investment of the reinsurance
recoverable as of January 1, 2003. It also reflects adjustments on the
investment income on the assets and letter of credit costs between
January 1, 2003 and the date of the asset transfer. It also
encompasses the net effect of a recapture fee paid in the amount of
$5.0 million offset by the receipt of a $24.1 million negative ceding
commission. The net impact of which was deferred in policy acquisition
costs and is being amortized over the period of estimated future
profits.
Reciprocal Loan Agreement
On January 1, 2004, the Company entered into a new reciprocal loan
agreement with ING AIH, a Delaware corporation and affiliate, to
facilitate the handling of unusual and/or unanticipated short-term
cash requirements. In accordance with this agreement, the maximum
outstanding amount to be borrowed or lent shall not exceed 3% of ING
USA's total admitted assets. This agreement supercedes the previous
reciprocal loan agreement with ING AIH, by which the Company and ING
AIH could borrowed up to $499 million from one another.
Under the previous reciprocal loan agreement, interest on any ING USA
borrowings was charged at the rate of ING AIH's cost of funds for the
interest period plus 0.15%. Interest on any ING AIH borrowings was
charged at a rate based on the prevailing interest rate of U.S.
commercial paper available for purchase with a similar duration. Under
38
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
this agreement, ING USA incurred interest expense of $2.7 thousand and
$96.4 thousand for the three months ended March 31, 2004 and 2003,
respectively. At March 31, 2004 and December 31, 2003, ING USA had
$366.4 million and $120.4 million receivable from ING AIH under this
agreement included in due from affiliates.
Notes to Affiliates
The Company has a promissory note in the amount of $50 million payable
to Lion Connecticut Holdings, Inc. The note was issued on April 15,
1997. Interest is charged at an annual rate of 8.75%, and the face
amount is due on demand. The Company incurred interest expense of $1.1
million on this note for the three months ended March 31, 2004 and
2003, respectively. There are no collateral requirements on this
promissory note. This note is reported on the balance sheets in
borrowed money.
ING USA issued a 30-year surplus note for $35 million with its
affiliate, Security Life of Denver, which matures on December 7, 2029.
Interest is charged at an annual rate of 7.98%. Payment of the notes
and related accrued interest is subordinate to payments due to
policyholders and claimant and beneficiary claims, as well as debts
owed to all other classes of debtors, other than surplus note holders,
of ING USA. Any payment of principal and/or interest made is subject
to the prior approval of the Iowa Insurance Commissioner. Interest
expense was $0.7 million for the three months ended March 31, 2004 and
2003, respectively.
Tax Sharing Agreements
The Company has 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
During the three months ended March 31, 2004, ING USA did not receive
capital contributions. During the three months ended March 31, 2003,
ING USA received capital contributions of $88.7 million.
39
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
12. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which expires July 30,
2004, the Company can borrow up to $125 million from the Bank.
Interest on any borrowing accrues at an annual rate equal to a rate
quoted by the Bank to the Company for the borrowing. Under the
agreement, the Company incurred interest expense of $3.8 thousand and
$28.3 thousand for the three months ended March 31, 2004 and 2003,
respectively. At March 31, 2004 and December 31, 2003, the Company did
not have any balances payable to the Bank.
The Company also maintains a revolving loan agreement with Bank of New
York, New York (the "BONY"). Under this agreement, the Company can
borrow up to $100 million from BONY. Interest on any of the Company
borrowing accrues at an annual rate equal to a rate quoted by BONY to
the Company for the borrowing. Under this agreement, the Company
incurred no interest expense for the three months ended March 31, 2004
and 2003. At March 31, 2004 and December 31, 2003, the Company did not
have any balances payable to BONY.
13. Reinsurance
At March 31, 2004, ING USA had reinsurance treaties with 19
unaffiliated reinsurers and 2 affiliated reinsurers covering a
significant portion of the mortality risks and guaranteed death and
living benefits under its variable contracts. ING USA remains liable
to the extent its reinsurers do not meet their obligations under the
reinsurance agreements.
Reinsurance ceded in force for life mortality risks were $1,171.1
million and $1,209.4 million at March 31, 2004 and December 31, 2003,
respectively. At March 31, 2004 and December 31, 2003, the Company had
net receivables of $20.8 million and $15.4 million, respectively for
reinsurance claims, reserve credits, or other receivables from these
reinsurers. At March 31, 2004 and December 31, 2003, respectively,
these net receivables were comprised of the following: $31.7 million
and $17.1 million for claims recoverable from reinsurers; $9.0 million
and $6.6 million payable for reinsurance premiums; $26.7 million and
$20.2 million for reserve credits; and $20.2 million and $21.1 million
for reinsured surrenders and allowances due from an unaffiliated
reinsurer. Included in the accompanying condensed financial
statements, excluding the modified coinsurance agreements, are net
considerations to reinsurers of $3.3 million and $3.1 million and net
policy benefits recoveries of $12.9 million and $12.7 million for the
three months ended March 31, 2004 and 2003, respectively.
Premiums ceded under reinsurance were $3.3 million and $3.1 million
for the three months ended March 31, 2004 and 2003, respectively.
Reinsurance recoveries were $0.7 million and $0.4 million for the
three months ended March 31, 2004 and 2003, respectively. Premiums
ceded and reinsurance recoveries are included in interest credited and
other benefits to policyholders.
40
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
ING USA participates in a modified coinsurance agreement with an
unaffiliated reinsurer. The accompanying condensed financial statements
are presented net of the effects of the treaty which increased
(decreased) income by $(0.3) million and $(0.1) million for the three
months ended March 31, 2004 and 2003, respectively.
14. Commitments and Contingent Liabilities
Leases
The Company leases its home office space and certain other equipment
under operation leases that expire through 2017.
For the three months ended March 31, 2004 and 2003, rent expense for
leases was $1.9 million and $1.8 million, respectively. The future net
minimum payments under noncancelable leases for the years ended
December 31, 2004 through 2008 are estimated to be $7.6 million, $7.7
million, $7.7 million, $7.5 million and $7.4 million, respectively,
and $42.9 million, 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 higher or lower replacement
cost. Also, there is likely to be a change in the value of the
securities underlying the commitments. At March 31, 2004 and December
31, 2003, the Company had off-balance sheet commitments to purchase
investments equal to their fair value of $369.9 million and $154.0
million, respectively.
Litigation
The Company is a party to threatened or pending lawsuits arising from
the normal conduct of business. Due to the climate in insurance and
business litigation, 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, in light of existing insurance, reinsurance and established
reserves, it is the opinion of management that the disposition of such
lawsuits will not have a materially adverse effect on the Company's
operations or financial position.
41
Item 2. Management's Narrative Analysis of the Results of Operations and
Financial Condition
Overview
The following narrative analysis of the results of operations and
financial condition presents a review of the Company as of March 31,
2004 and December 31, 2003 and for the three-month periods ended March
31, 2004 and 2003. This review should be read in conjunction with the
condensed financial statements and other data presented herein.
Basis of Presentation
On January 1, 2004, the Company redomesticated from Delaware to Iowa.
In addition, on January 1, 2004 (the "merger date"), Equitable Life
Insurance Company of Iowa ("Equitable Life"), USG Annuity & Life
Company ("USG") and United Life & Annuity Insurance Company ("ULA")
(the "Merger Companies"), merged with and into Golden American Life
Insurance Company ("Golden American"). Immediately after the merger,
Golden American changed its name to ING USA Annuity and Life Insurance
Company. As of the merger date, the Merger Companies ceased to exist
and were merged into ING USA. Lion is an indirect, wholly-owned
subsidiary of ING Groep N.V. ("ING"), a global financial services
holding company based in The Netherlands. ING USA is authorized to do
business in the District of Columbia and all states except New York.
ING USA is licensed as a life insurance company under the laws of the
State of Delaware until December 31, 2003 and Iowa since January 1,
2004.
Prior to the merger date, ING USA was a wholly-owned subsidiary of
Equitable Life from December 30, 2001 through December 31, 2003.
Formerly, from October 24, 1997, until December 30, 2001, Equitable of
Iowa Companies, Inc. ("EIC" or "Former Holding Company") directly
owned 100% of Golden American's stock.
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("FAS 141"), excludes transfers of net assets or
exchanges of shares between entities under common control, and notes
that certain provisions under Accounting Principles Board Opinion No.
16, "Business Combinations" ("APB 16"), provide a source of guidance
for such transactions. In accordance with APB 16, financial
information of the combined entity is presented as if the entities had
been combined for the full year, and all comparative financial
statements are restated and presented as if the entities had
previously been combined, in a manner similar to a
pooling-of-interests.
The unaudited condensed financial statements have been prepared in a
manner similar to a pooling-of-interests, in accordance with the
provisions of APB 16 in order to present the condensed financial
position and results of operations of the Company and the Merger
Companies, as if the entities had previously been combined. The
unaudited condensed balance sheets and statements of income give
42
effect to the consolidation transaction as if it had occurred on
December 31, 2003 and January 1, 2003, respectively.
Results of Operations
Premiums for the three months ended March 31, 2004 decreased by $1.8
million compared to the same period in 2003. This decrease in premium
is related to the closed block of participating life business.
Fee income and other income for the three months ended March 31, 2004
increased by $46.7 million compared to the same period in 2003,
primarily due to an increase in the average variable assets under
management by the Company. The increase in average variable assets
under administration reflects continued business growth in the
Company's variable annuity product lines.
Net investment income for the three months ended March 31, 2004
increased by $18.6 million compared to the same period in 2003. This
increase in net investment income is primarily due to increased fixed
assets under management.
Net realized capital gains (losses) for the three months ended March
31, 2004 increased by $7.2 million compared to the same period in
2003. Net realized gains result from sale of fixed maturity
investments having a fair value greater than book value primarily due
to declining interest rates.
Interest credited and other benefits to the policyholders for the
three months ended March 31, 2004 decreased by $9.8 million compared
to the same period in 2003. The decrease is primarily due to a
decrease in guaranty benefits reserve change offset by an increase to
interest credited and distributions to participating policyholders.
General expenses for the three months ended March 31, 2004 is
comparable to that for the same period in 2003.
Commissions for the three months ended March 31, 2004 increased by
$58.9 million compared to the same period in 2003. This increase is
primarily due to additional commissions on higher new sales of
variable and fixed annuity products during the quarter, as well as a
$24.1 million ceded commission adjustment in the first quarter of 2003
related to the recapture of an affiliate reinsurance agreement.
Policy acquisition costs deferred for the three months ended March 31,
2004 increased by $38.6 million compared to the same period in 2003.
This increase was primarily due to the deferral of increased
commissions and selling expense on higher annuity product sales, the
deferral of $19.1 million net gain in the first quarter 2003
attributed to the recapture of an affiliate reinsurance agreement,
partially offset by lower premium bonus deferrals on reduced sales of
company annuity premium credit products.
43
Amortization of deferred policy acquisition costs and value of
business acquired for the three months ended March 31, 2004, increased
by $6.3 million compared to the same period in 2003. Amortization of
long-duration products is reflected in proportion to actual and
estimated future gross profits. Estimated future gross profits are
computed based on underlying assumptions related to the underlying
contracts, including but not limited to interest margins, surrenders,
withdrawals, expenses, and asset growth. The increase in the
amortization of deferred policy acquisition costs and value of
insurance acquired reflects the impact of these variables on the
overall book of business.
Expense and charges reimbursed under modified coinsurance ("MODCO")
agreements for the three months ended March 31, 2004, increased by
$0.4 million compared to the same period in 2003. This balance
represents the net cash flows from the Paine Webber MODCO agreements.
As this MODCO agreement does not cover new business, the run-off of
the reserve credit and the product charge reimbursement to Paine
Webber exceed the commission and expense allowances that accrue to the
Company.
Interest expense for the three months ended March 31, 2004, increased
by $0.4 million compared to the same period in 2003. The increase is
primarily due to interest expense on dollar roll agreements.
The cumulative effect of the change in accounting principle for the
three months ended March 31, 2004, was a loss of $2.3 million, net of
tax, due to the implementation of SOP 03-1.
Net income, excluding change in accounting principle, increased by
$36.1 million for the three months ended March 31, 2004, as compared
to the three months ended March 31, 2003. The increase in net earnings
is primarily the result of increased fee income, reduced variable
product benefit guarantees related to improved equity market
performance in the quarter, partially offset by lower fixed margins
resulting from the depressed interest rate environment, and increased
amortization of deferred policy acquisition costs and value of new
business acquired.
Financial Condition
Investments
Fixed Maturities
Total fixed maturities reflected net unrealized capital gains of
$762.7 million and $517.3 million at March 31, 2004 and December 31,
2003, respectively.
It is management's objective that the portfolio of fixed maturities be
of high quality and be well diversified by market sector. The fixed
maturities in the Company's portfolio are generally rated by external
rating agencies and, if not externally rated, are rated by the Company
on a basis believed to be similar to that used by the rating agencies.
44
The average quality rating of the Company's fixed maturities portfolio
was A+ at March 31, 2004 and December 31, 2003.
Fixed maturities rated BBB and below may have speculative
characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of the
issuer to make principal and interest payments than is the case with
higher rated fixed maturities.
The percentage of total fixed maturities by quality rating category is
as follows:
March 31, December 31,
2004 2003
----------------- ---------------
AAA 34.3 % 35.3 %
AA 4.5 4.7
A 21.7 21.3
BBB 34.5 33.4
BB 3.9 4.0
B and below 1.1 1.3
----------------- ---------------
Total 100.0 % 100.0 %
================= ===============
The percentage of total fixed maturities by market sector is as
follows:
March 31, December 31,
2004 2003
----------------- ---------------
U.S. Corporate 48.9 % 48.9 %
Residential Mortgaged-backed 21.8 20.8
Commercial/Multifamily
Mortgage-backed 5.1 5.0
Foreign(1) 15.5 15.9
U.S. Treasuries/Agencies 0.2 1.3
Asset-backed 8.5 8.1
----------------- ---------------
Total 100.0 % 100.0 %
================= ===============
(1) Primarily U.S. dollar denominated
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 in accordance with FAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Management considers the length of the time and the extent to which
the market value has been less than cost; the financial condition and
near term prospects of the issuer; future economic conditions and
market forecasts; and the Company's intent and ability to retain the
investment in the issuer for a period of time sufficient to allow for
recovery in market 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.
45
In addition, the Company invests in structured securities that meet
the criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets." Under
EITF Issue No. 99-20, a 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.
An impairment is recognized if the fair value of the security is less
than book value and there has been an adverse change in cash flow
since the last remeasurement date.
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 realized loss.
Liquidity and Capital Resources
Liquidity is the ability of the Company to generate sufficient cash
flows to meet the cash requirements of operating, investing, and
financing activities. The Company's principal sources of liquidity are
annuity premiums and product charges, investment income, maturing
investments, proceeds from debt issuance, and capital contributions.
Primary uses of these funds are payments of commissions and operating
expenses, interest and premium credits, investment purchases,
repayment of debt, as well as withdrawals and surrenders.
The Company's liquidity position is managed by maintaining adequate
levels of liquid assets, such as cash or cash equivalents and
short-term investments. Additional sources of liquidity include
borrowing facilities to meet short-term cash requirements. The Company
maintains a $499 million revolving note facility with ING America
Insurance Holdings, Inc. ("ING AIH"), a perpetual $100 million
revolving note facility with Bank of New York and a $125 million
revolving note facility with SunTrust Bank which expires on July 30,
2004. Management believes that these sources of liquidity are adequate
to meet the Company's short-term cash obligations.
The National Association of Insurance Commissioners ("NAIC")
risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula.
These requirements are intended to allow insurance regulators to
monitor the capitalization of insurance companies based upon the type
and mixture of risks inherent in a Company's operations. The formula
includes components for asset risk, liability risk, interest rate
exposure, and other factors. The Company has complied with the NAIC's
risk-based capital reporting requirements. Amounts reported indicate
that the Company has total adjusted capital above all required capital
levels.
During the three months ended March 31, 2004, ING USA did not receive
capital contributions. During the three months ended March 31, 2003,
ING USA received capital contributions of $88.7 million.
46
Recently Adopted Accounting Standards
Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
The Company adopted Statement of Position ("SOP") 03-1, "Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts," on January 1,
2004. SOP 03-1 establishes several new accounting and disclosure
requirements for certain nontraditional long-duration contracts and
for separate accounts including, among other things, a requirement
that assets and liabilities of separate account arrangements that do
not meet certain criteria be accounted for as general account assets
and liabilities, and that the revenue and expenses related to such
arrangements be consolidated with the respective line items in the
Condensed Statements of Income. In addition, the SOP requires
additional liabilities be established for certain guaranteed death
benefits and for products with certain patterns of cost of insurance
charges, and that sales inducements provided to contractholders be
recognized on the balance sheet separately from deferred acquisition
costs and amortized as a component of benefits expense using
methodology and assumptions consistent with those used for
amortization of deferred policy acquisition costs.
The Company evaluated all requirements of SOP 03-1 and determined that
it is affected by the SOP's requirements to establish additional
liabilities for certain guaranteed benefits and products with patterns
of cost insurance charges resulting in losses in later policy
durations from the insurance benefit function and to defer, amortize,
and recognize separately, sales inducements to contractholders.
Requirements for certain separate account arrangements that do not
meet the established criteria for separate asset and liability
recognition are applicable to the Company, however, the Company's
policies on separate account assets and liabilities have historically
been, and continue to be, in conformity with the requirements newly
established. Upon adoption of the SOP, the Company recognized a
cumulative effect of a change in accounting principle of $(2.3)
million on January 1, 2004.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended and interpreted by FAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement 133," and FAS No.
138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FASB 133, and certain FAS 133
implementation issues." This standard, as amended, requires companies
to record all derivatives on the balance sheet as either assets or
liabilities and measure those instruments at fair value. The manner in
which companies are to record gains or losses resulting from changes
in the fair values of those derivatives depends on the use of the
derivative and whether it qualifies for hedge accounting. FAS No. 133
was effective for the Company's financial statements beginning January
1, 2001. Adoption of FAS No. 133 did not have a material effect on the
47
Company's financial position or results of operations given the
Company's limited derivative holdings and embedded derivatives.
The Company occasionally purchases a financial instrument that
contains a derivative that is "embedded" in the instrument. In
addition, the Company's insurance products are reviewed to determine
whether they contain an embedded derivative. The Company assesses
whether the economic characteristics of the embedded derivative are
clearly and closely related to the economic characteristics of the
remaining component of the financial instrument or insurance product
(i.e., the host contract) and whether a separate instrument with the
same terms as the embedded instrument would meet the definition of a
derivative instrument. When it is determined that the embedded
derivative possesses economic characteristics that are not clearly and
closely related to the economic characteristics of the host contract
and that a separate instrument with the same terms would qualify as a
derivative instrument, the embedded derivative is separated from the
host contract and carried at fair value. However, in cases where the
host contract is measured at fair value, with changes in fair value
reported in current period earnings or the Company is unable to
reliably identify and measure the embedded derivative for separation
from its host contracts, the entire contract is carried on the balance
sheet at fair value and is not designated as a hedging instrument.
In 2003, 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"
issued Statement 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 total
return debt index may be determined to contain embedded derivatives
that are required to be bifurcated. The Company adopted DIG B36 on
October 1, 2003 and has modified coinsurance treaties that are
applicable to the guidance. The applicable contracts, however, were
determined to generate embedded derivatives with a fair value of zero.
Therefore, the guidance, while implemented, does not impact the
Company's financial position, results of operations, or cash flows.
Off-Balance Sheet Arrangements
In January 2003, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation 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 corrections 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.
48
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 46 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 46 also requires disclosures about VIEs
that the variable interest holder is not required to consolidate but
in which it has a significant variable interest.
At March 31, 2004, the Company held the following investments that,
for purposes of FIN 46, were evaluated and determined that the
investments do not require consolidation in the Company's financial
statements:
(Millions)
Asset Type Purpose Book Value (1) Market Value
---------------------------------------- -------------------------- ---------------- ----------------
Private Corporate Securities - synthetic
leases; project financings; credit tenant
leases Investment Holdings $ 2,734.0 $ 2,929.5
Foreign Securities - US VIE subsidiaries
of foreign companies Investment Holdings 551.2 596.0
Commercial Mortgage Obligations (CMO) Investment Holdings 6,597.2 6,884.2
Collateralized Debt Obligations (CDO) Investment Holdings
and/or
Collateral Manager 61.6 56.7
Asset-Backed Securities (ABS) Investment Holdings 1,231.8 1,250.5
Commercial Mortgage Backed Securities
(CMBS) Investment Holdings 820.5 870.8
(1) Represents maximum exposure to loss except for those structures for which the Company also receives asset
management fees.
Critical Accounting Policies
General
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of
estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying condensed financial statements and
related footnotes. These estimates and assumptions are evaluated on an
on-going basis based on historical developments, market conditions,
49
industry trends and other information that is reasonable under the
circumstances. There can be no assurance that actual results will
conform to estimates and assumptions, and that reported results of
operations will not be affected in a materially adverse manner by the
need to make future accounting adjustments to reflect changes in these
estimates and assumptions from time to time.
The Company has identified the following estimates as critical in that
they involve a higher degree of judgment and are subject to a
significant degree of variability: investment impairment testing,
amortization of deferred acquisition costs and value of business
acquired and goodwill impairment testing. In developing these
estimates, management makes subjective and complex judgments that are
inherently uncertain and subject to material changes as facts and
circumstances develop. Although variability is inherent in these
estimates, management believes the amounts provided are appropriate
based upon the facts available upon compilation of the condensed
financial statements.
Investment Impairment Testing
The Company reviews the general account investments for impairments by
analyzing the amount and length of time amortized cost has exceeded
fair value, and by making certain estimates and assumptions regarding
the issuing companies' business prospects, future economic conditions
and market forecasts. Based on the facts and circumstances of each
case, management uses judgment in deciding whether any calculated
impairments are temporary or other than temporary. For those
impairments judged to be other than temporary, the Company reduces the
carrying value of those investments to the current fair value and
records impairment losses for the difference (refer to Note 2).
Amortization of Deferred Acquisition Costs and Value of Business
Acquired
Deferred policy acquisition costs ("DAC") and value of business
acquired ("VOBA") are amortized with interest over the life of the
contracts (usually 25 years) in relation to the present value of
estimated gross profits from projected interest margins, asset-based
fees, policy administration and surrender charges less policy
maintenance fees and non-capitalized commissions.
Changes in assumptions can have a significant impact on the
calculation of DAC/VOBA and its related amortization patterns. Due to
the relative size of DAC/VOBA balance and the sensitivity of the
calculation to minor changes in the underlying assumptions and the
related volatility that could result in the reported DAC/VOBA balance,
the Company performs a quarterly analysis of DAC/VOBA for the annuity
business (annually for the life business).
50
At each balance sheet date, actual historical gross profits are
reflected and expected future gross profits and related assumptions
are evaluated for continued reasonableness. Any adjustment in
estimated profit requires that the amortization rate be revised
retroactively to the date of policy or contract issuance
("unlocking"), which could be significant. The cumulative difference
related to prior periods is recognized as a component of current
period's amortization, along with amortization associated with the
actual gross profits of the period. In general, increases in estimated
returns result in increased expected future profitability and may
lower the rate of amortization, while increases in lapse/surrender and
mortality assumptions or decreases in returns reduce the expected
future profitability of the underlying business and may increase the
rate of amortization.
One of the most significant assumptions involved in the estimation of
future gross profits for variable universal life and variable deferred
annuity products is the assumed return associated with future variable
account performance. To reflect the near-term and long-term volatility
in the equity markets, this assumption involves a combination of
near-term expectations and a long-term assumption about market
performance. The overall return generated by the variable account is
dependent on several factors, including the relative mix of the
underlying sub-accounts among bond funds and equity funds as well as
equity sector weightings.
As part of the regular analysis of DAC/VOBA, at the end of third
quarter of 2002, the Company unlocked its long-term rate of return
assumptions. The Company reset long-term assumptions for the separate
account returns to 9.0% (gross before fund management fees and
mortality and expense and other policy charges), as of December 31,
2002, reflecting a blended return of equity and other sub-accounts.
The initial unlocking adjustment in 2002 was primarily driven by the
sustained downturn in the equity markets and revised expectations for
future returns.
The Company remained unlocked during 2003 and has continued to remain
unlocked during the first quarter of 2004. In 2003, the Company reset
long-term assumptions for the separate account returns from 9.0% to
8.5% (gross before fund management fees and mortality and expense and
other policy charges) maintaining a blended return of equity and other
sub-accounts. The 2003 unlocking adjustment from the previous year was
primarily driven by improved market performance. During the three
months ended March 31, 2004, the Company recorded a deceleration of
DAC/VOBA amortization of $2.7 million pretax, $1.8 million net of $0.9
million of federal income tax expense.
51
Sales Inducements
Sales inducements represent benefits paid to contractholders that are
incremental to the amounts the Company credits on similar contracts
and are higher than the contract's expected ongoing crediting rates
for periods after the inducement. Such amounts are reported separately
on the balance sheet and are amortized as a component of benefit
expense using methodology and assumptions consistent with those used
for amortization of DAC.
Contractual Obligations
As of March 31, 2004, the Company had certain contractual obligations
due over a period of time as summarized in the following table:
Payments due by Period (in millions)
-------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
---------------------------------- -------------------------------------------------------------------
Long-Term Debt $ 161.3 $ 57.2 $ 5.6 $ 5.6 $ 92.9
Operating Lease Obligations 80.8 7.6 15.4 14.9 42.9
Purchase Obligations 369.9 369.9 - - -
-------------------------------------------------------------------
Total $ 612.0 $ 434.7 $ 21.0 $ 20.5 $ 135.8
--=================================================================
The Company's long-term debt consists of notes to affiliates, and the
related interest payable, with Lion Connecticut Holdings, Inc. and
Security Life of Denver Insurance Company, respectively. As of March
31, 2004, the outstanding principal and interest rate related to the
promissory note are $50 million and 8.75%, respectively. The note is
due on demand. As of March 31, 2004, the outstanding principal,
interest rate, and maturity date of the surplus note are $35 million,
7.98%, and December 7, 2029, respectively.
Operating lease obligations relate to the rental of office space under
various non-cancelable operating lease agreements that expire through
May 2010.
Purchase obligations consist primarily of commitments to fund
additional limited partnerships and joint ventures and commitments to
enter into mortgage loan and private placement arrangements during
2004.
Legislative Initiatives
The Jobs and Growth Tax Relief Reconciliation Act of 2003, which was
enacted in the second quarter, may impact the Company. The Act's
provisions, which reduce the tax rates on long-term capital gains and
corporate dividends, impact the relative competitiveness of the
Company's products especially variable annuities.
Other legislative proposals under consideration include repealing the
estate tax, changing the taxation of products, changing life insurance
company taxation and making changes to nonqualified deferred
compensation arrangements. Some of these proposals, if enacted, could
52
have a material effect on life insurance, annuity and other retirement
savings product sales.
The impact on the tax position of the Company's products cannot be
predicted.
Forward-Looking Information/Risk Factors
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions readers
regarding certain forward-looking statements contained in this report
and in any other statements made by, or on behalf of, the Company,
whether or not in future filings with the SEC. Forward-looking
statements are statements not based on historical information and
which relate to future operations, strategies, financial results, or
other developments. Statements using verbs such as "expect,"
"anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the
Company's beliefs concerning future levels of sales and redemptions of
the Company's products, investment spreads and yields, or the earnings
and profitability of the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of
which are beyond the Company's control and many of which are subject
to change. These uncertainties and contingencies could cause actual
results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable
developments. Some may be national in scope, such as general economic
conditions, changes in tax law and changes in interest rates. Some may
be related to the insurance industry generally, such as pricing
competition, regulatory developments and industry consolidation.
Others may relate to the Company specifically, such as credit,
volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the
SEC. The Company disclaims any obligation to update forward-looking
information.
53
Item 4. Controls and Procedures
a) The Company carried out an evaluation, under the supervision and with
the participation of its management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934) as of
the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that the Company's current disclosure controls
and procedures are effective in ensuring that material information
relating to the Company required to be disclosed in the Company's
periodic SEC filings is made known to them in a timely manner.
b) There has not been any change in the internal controls over financial
reporting of the Company that occurred during the period covered by
this report that has materially affected or is reasonably likely to
materially affect these internal controls.
54
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to threatened or pending lawsuits arising from
the normal conduct of business. Due to the climate in insurance and
business litigation, 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, in light of existing insurance, reinsurance and established
reserves, it is the opinion of management that the disposition of such
lawsuits will not have a materially adverse effect on the Company's
operations or financial position.
As with many financial services companies, the Company and its
affiliates have received requests for information from various
governmental and self-regulatory agencies in connection with
investigations related to trading in investment company shares. In
each case, full cooperation and responses have been and are being
provided. The Company is also reviewing its policies and procedures in
this area.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
3.(a)(i) Bylaws, as restated February 25, 2004.
3.(a)(ii) Articles, as restated March 4, 2004.
10.A(a) Reciprocal Loan Agreement dated January 1, 2004, between
ING USA Annuity and Life Insurance Company and ING America
Insurance Holdings, Inc., dated 11/10/03; FDF: 11/10/03;
DOI Approval: 12/1/03, Effective 1/1/04.
31.1 Certificate of David A. Wheat pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Keith Gubbay pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certificate of David A. Wheat pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certificate of Keith Gubbay pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
55
4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ING USA ANNUITY AND LIFE INSURANCE COMPANY
(Registrant)
By /s/ David A. Wheat
May 14, 2004 ----------------------------------------------
- ------------ David A. Wheat
(Date) Director, Senior Vice President and
Chief Financial Officer
Duly Authorized Officer and Principal
Financial Officer)
Exhibit 3.(a)(i)
AMENDED BYLAWS OF
ING USA ANNUITY AND LIFE INSURANCE COMPANY
ARTICLE I
STOCKHOLDERS
Section 1. PLACE OF MEETINGS. All meetings of the stockholders of ING USA
Annuity and Life Insurance Company (the "Corporation" or "Company") shall be
held at such place or places within or without the State of Iowa, as may from
time to time be fixed by the Board of Directors (the "Board"), or as shall be
specified or fixed in the respective notices or waivers of notice thereof,
provided that any or all stockholders may participate in any such meeting by
means of conference telephone or similar communications.
Section 2. ANNUAL MEETING. The annual meeting of the stockholders shall be
held at the home office of the Company on or before the thirty-first day of May
of each year for the purpose of electing Directors and for the transaction of
such other business as may be brought before the meeting.
Section 3. SPECIAL MEETINGS. Special meetings of the stockholders may be
called at any time by the President, Secretary, the Board of Directors acting
upon majority vote, or the holders of not less than one-tenth of all the
outstanding shares of the Corporation entitled to vote at such meeting. No
business other than that specified in the notice of meeting shall be transacted
at a special meeting of the Shareholders.
Section 4. NOTICE OF MEETING. Written notice of each meeting of
stockholders, stating the place, date and hour of the meeting, and the purpose
or purposes thereof, shall be mailed to each stockholder entitled to vote at
such meeting not less than ten or more than fifty days before the date of the
meeting. Stockholders by written notice may waive notice of any meeting, and the
presence of a stockholder at any meeting, in person or by proxy, shall
constitute a waiver of notice of such meeting.
Section 5. QUORUM/VOTING. The presence at a meeting in person or by proxy
of stockholders of the Company representing a majority or issued and outstanding
shares of the Company shall be necessary to constitute a quorum for the purpose
of transacting business, except as otherwise provided by law, but a smaller
number may adjourn the meeting from time to time until a quorum shall be
obtained. Each stockholder shall be entitled to cast one vote in person or by
proxy for each share of stock of the Company held as of record in his or her
name on the books of the Company.
Section 6. PROXIES. A stockholder may vote at any meeting of the
stockholders, either in person or by proxy executed in writing by the
stockholder or by his duly authorized attorney-in-fact. All proxies shall be
filed with the Secretary of the Company before voting and entered on the record
in the minutes of the meeting. No special form of proxy shall be necessary.
1
Section 7. CONSENTS TO CORPORATE ACTION. Unless otherwise prohibited by the
applicable laws of the State of Iowa or the Company's Articles of Incorporation,
any action required to be taken or which may be taken at any annual or special
meeting of stockholders of the Company may be taken without a meeting and
without a vote if a consent in writing, setting forth the action so taken, shall
be signed by all of the stockholders entitled to vote with respect to the
subject matter thereof. The consents of stockholders shall be evidenced by one
or more written approvals, each which sets forth the action taken, and bears the
signature of one or more stockholders. All of the approvals evidencing the
consents shall be delivered to the Secretary of the Company to be filed in the
Company's records. The action shall be effective on the date the stockholder has
approved the consent unless the consent specifies a different effective date.
2
ARTICLE II
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by its Board of Directors. The Board of Directors shall have
the power to commit shares of the authorized but unissued capital stock of the
Corporation for acquisitions of other property of any and all kinds. Such stock
shall be issued at valuation placed thereon by the Board of Directors, but in no
event for a consideration less than the par value of such shares.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. The number of Directors of
the Corporation shall be not less than five (5) nor more than twenty-one (21)
persons elected by the shareholders at the annual meeting of the Corporation.
The number to be elected may be determined by a resolution of the shareholders,
but in the absence of such a resolution there shall be elected the number of
Directors that were elected at the previous annual meeting. Subject to the
Restated Articles of Incorporation, each Director shall hold office for the term
of which they are elected, and until their successors shall have been elected
and qualified.
Section 3. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw, immediately after, and at
the same place as the annual meeting of Shareholders. The Board of Directors may
provide by resolution, the time and place, either within or without the State of
Iowa, for the holding of additional regular meetings without other notice than
such resolution.
Section 4. SPECIAL MEETING. Special meetings of the Board of Directors may
be called by or at the request of the President or the Secretary, and shall be
called on written request of three (3) members of the Board of Directors.
Meetings of the Board shall be held at the principal office of the Corporation
unless a different place, either within or without the State of Iowa shall be
designated by the President or Board of Directors.
Section 5. NOTICE OF SPECIAL MEETINGS. Notice of each special meeting of
the Board of Directors shall be given by written notice mailed to or served upon
each Director at least twenty-four hours prior to such meetings, and such
special meeting shall be held at such time and place as shall be specified in
such written notice. Notice of a special meeting may be waived by any Director.
A special meeting of the Board of Directors may also be held without written
notice or call at such time and place as shall be fixed by the consent in
writing of all of the Directors given before, at or after such meeting.
Section 6. QUORUM. A majority of the Board of Directors shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors, provided that if less than a majority of the Directors are present
at such meeting, a majority of the Directors present may adjourn the meeting
from time to time without further notice. The act of a majority of the Directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
Members of the Board of Directors of the Corporation may participate in a
meeting of the Board of Directors by conference telephone or similar
3
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
provision shall constitute presence in person at such meeting.
Section 7. VACANCIES. Subject to the provisions of Section 3 of Article VI
of the Corporation's Restated Articles of Incorporation, any vacancy occurring
in the Board of Directors and any Directorship to be filled by reason of an
increase in the number of Directors may be filled by the affirmative vote of a
majority of the Directors then in office, even if less than a quorum of the
Board of Directors. A Director so elected shall be elected for the unexpired
term of his predecessor in office or the full term of such new Directorship.
Section 8. RESIGNATION. Any Director may resign at any time. Such
resignation shall be made in writing and shall take effect at the time specified
therein. If no time is specified, it shall take effect at the time of its
receipt by the Secretary. The acceptance of a resignation shall not be necessary
to make it effective.
Section 9. REMOVAL. The entire Board of Directors or any individual
Director may be removed from office, with or without cause, at a Shareholders'
meeting called expressly for that purpose by the vote of a majority of those who
actually vote. In case the entire Board or any one or more of the Directors are
so removed, new Directors may be elected at the same meeting for the unexpired
term of the Director or Directors so removed. A Director shall not be removed
without a meeting pursuant to written consents unless such consents are obtained
from the holders of all the outstanding shares of the Corporation. Failure to
elect Directors to fill the unexpired term of the Directors so removed shall be
deemed to create a vacancy or vacancies in the Board of Directors.
Section 10. ACTION BY BOARD OF DIRECTORS WITHOUT MEETING. Any action
required to be taken at a meeting of the Board of Directors by the Iowa Business
Corporation Act, may be taken without a meeting of the Board of Directors if
written consent setting forth the action so taken shall be signed by all of the
members of the Board of Directors and included in the minutes or filed with the
corporate records reflecting the action taken. Such written consent shall have
the same force and effect as a unanimous vote of the Board of Directors and may
be stated as such in any article or document filed with the Secretary of State
of the State of Iowa pursuant to the provisions of the Iowa Business Corporation
Act. The provisions of this Bylaw shall be applicable whether or not the Iowa
Business Corporation Act requires that such action be taken by resolution of the
Board of Directors.
4
ARTICLE III
COMMITTEES OF THE BOARD
Section 1. COMMITTEES. The Board shall elect from the Directors, by the
affirmative vote of a majority of the whole Board, such committees with such
duties as the Board may by resolution prescribe. Any such committee shall be
comprised of such persons and shall possess such authority as shall be set forth
in such resolution; except that no such committee shall have the authority of
the Board in reference to amending the Articles of Incorporation, approving a
plan of merger or consolidation, recommending to the stockholders the sale,
lease, or exchange of all or substantially all of the property and assets of the
Company otherwise than in the usual course of its business, recommending to the
stockholders a voluntary dissolution of the Company or a revocation thereof,
amending, altering or repealing any resolution of the Board that by its terms
provides that it shall not be so amendable or repealable in such manner; and,
unless such resolution or the Articles of Incorporation expressly so provide, no
such committee shall have the power or authority to declare a dividend or to
authorize the issuance of shares of the Company.
Section 2. PROCEDURE. Except as provided otherwise in these bylaws, each
committee may elect its own chairman and secretary, who shall keep minutes of
its proceedings, shall fix its own rules of procedure and shall meet where and
as provided by such rules. Unless otherwise stated in these bylaws, a majority
of the members of a committee shall constitute a quorum for the transaction of
its business.
Section 3. REPORTS TO THE BOARD. All completed actions by any committee
established by the Board shall be reported to the Board at the next succeeding
Board meeting and shall be subject to revision or alteration by the Board;
provided that no acts or rights of third parties shall be affected by any such
revision or alteration.
5
ARTICLE IV
OFFICERS
Section 1. GENERAL PROVISIONS. The corporate officers of the Company shall
consist of the following: a President; one or more Vice Presidents; a Treasurer;
a Secretary; and such other officers as the Board may from time to time
determine. The Board of Directors may also elect or, by resolution, delegate to
the President of the Company, the authority to appoint from time to time, one or
more business unit Presidents to act as the chief operating officers of the
various business units of the Company. The delegation of such authority to the
President or any business unit President shall in no way affect, diminish or
replace the authority of the Board of Directors to elect officers. The Board may
authorize the classification of certain Vice Presidents as Executive, Senior,
Second or Assistant, and may authorize Assistant Treasurers, Assistant
Secretaries and such other titles and designations as in its discretion seems
proper. Insofar as permitted by statute, the same person may hold two or more
offices.
The officers shall be elected by the Board. Each such officer shall hold
office until a successor is elected or appointed and qualified or until his or
her earlier death, resignation, removal or suspension.
Any officer or agent or member of a committee elected or appointed by the
Board may be removed, either with or without cause, by the Board whenever in its
judgment the best interests of the Company will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Election or appointment of an officer or agent or member of a
committee shall not of itself create contract rights.
Any vacancy occurring in any office of the Company may be filled by the
Board.
Section 2. POWERS AND DUTIES OF THE PRESIDENT. The President shall have
general charge and management of the affairs, property and business of the
Company, subject to the Board and the provisions of these bylaws. The President
shall be the chief executive officer, and, in the absence of the Chairman, shall
preside at meetings of the stockholders and the Board. In the absence of the
President, the Board shall appoint another of their number to preside.
The President shall perform all duties assigned that office by these bylaws
and such other duties as may from time to time be assigned by the Board.
The business unit Presidents of the Company shall be the chief operating
executives for and shall have supervisory authority over the business units for
which they are appointed. Powers and duties of the business unit Presidents of
the Company shall also include, but not be limited to, all of the authority,
powers and duties incident to the office of a Vice President.
Section 3. POWERS AND DUTIES OF THE VICE PRESIDENTS. Each Vice President
shall perform such duties as may from time to time be assigned by the Board of
Directors.
Section 4. POWERS AND DUTIES OF THE TREASURER. The Treasurer and Assistant
Treasurers shall have care and custody of all funds of the Company and disburse
and administer the same under direction of the Board or the President and shall
perform such other duties as the Board or President shall assign.
Section 5. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall act
under the direction of the Board and, with any Assistant Secretary, shall record
the proceedings of all the meetings of the stockholders and the Board in books
kept for that purpose. The Secretary shall be the custodian of the corporate
seal. The Secretary or Assistant Secretary shall fix the same to and countersign
papers requiring such acts; and the Secretary and Assistant Secretaries shall
perform other duties as may be required by the Board.
6
ARTICLE V
CAPITAL STOCK
All certificates of stock shall be signed by the President or a Vice
President and by the Secretary or an Assistant Secretary of the Company, but
when a certificate is signed by a transfer agent or registrar appointed by the
Board of Directors, the signature of any such corporate officer and the
corporate seal upon such certificate may be facsimiles, engraved or printed.
7
ARTICLE VI
MISCELLANEOUS
Section 1. WAIVER OF NOTICE. Notice of any meeting required by law or by
these bylaws may be waived in writing, signed by the person or persons entitled
to such notice, either before or after the time of such meeting.
Section 2. AMENDMENTS. The Board from time to time shall have the power to
make, alter, amend or repeal any and all of these bylaws, but any bylaws so
made, altered, amended, or repealed by the Board may be amended, altered, or
repealed by the stockholders.
Section 3. DIVIDENDS. The Board may, from time to time and in accordance
with the law, declare and cause to be paid dividends of cash, property, or
shares of stock or securities of, or owned by, the Company, as the Board may
deem proper.
Section 4. FISCAL YEAR. The fiscal year of the Company shall begin with
January first and end with December thirty-first.
Section 5. SEAL. The seal of the Company shall bear the corporate name of
the Company and the place of its home office.
Section 6. INVESTMENTS. The President, any Vice President, the Treasurer,
the Secretary, and such other officers or employees as may be designated by
resolution of the Board of Directors shall have authority to execute on behalf
of the Corporation any instruments, including but not limited to: Instruments
necessary in order to purchase, sell, assign, transfer, modify, exchange, or
convert bonds, notes or stocks and to assign or satisfy mortgages, and to
execute contracts, deeds, leases, or any and all other instruments relating in
any manner to bonds, notes, stocks, real estate or personal property or any
evidence of indebtedness owned by the Corporation.
Section 7. POLICY CONTRACTS. All policies of insurance or contracts for
annuities, guaranteed investment contracts ("GIC") or funding agreements and for
the disposition and for the disposition of the proceeds thereof may be executed
on behalf of the Corporation by any of the following officers: The President,
any Vice President, the Treasurer, the Secretary or an Assistant Secretary, an
Actuary, an Associate Actuary or an Assistant Actuary. The signature of any such
officer may be in facsimile.
8
Section 8. AGENCY AND OTHER CONTRACTS. The President, any Vice President,
the Secretary and any other officers or employees designated in writing by the
Board of Directors shall have authority to execute agency contracts and related
agreements on behalf of the Corporation, tax returns or reports and any reports
filed with governmental agencies.
Section 9. OTHER INSTRUMENTS. All other contracts and written instruments
of any kind not previously described shall be signed by one of the following
officers: The President, a Vice President, the Secretary or the Treasurer, or by
any other officer or employee of the Company as shall be so empowered by the
Board of Directors or by such other person or persons as may be designated from
time to time by the Board of Directors.
Section 10. STATUTORY AGENTS. The President, any Vice President and the
Secretary or an Assistant Secretary are authorized to appoint statutory agents
of the Corporation and to execute powers of attorney in evidence thereof,
authorizing such statutory agents to accept service of process against the
Corporation, to execute any and all papers to comply with all applicable
requirements of law in order to qualify the Corporation to do business in any
state, territory, district, country or jurisdiction and to take any other action
on behalf of the Corporation necessary or proper to be taken in compliance with
law or with rules or regulations of the supervisory authorities in order to
qualify the Corporation to do business.
ARTICLE VII
INDEMNIFICATION
Section 1. INDEMNIFICATION. (a) To the extent not prohibited by applicable
law, the Company shall indemnify and hold harmless any person who was or is a
party, or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that he is or was a Director, officer, employee or agent of the
Company, or who is or was serving at the request of the Company as a Director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise or entity, from and against any and all liability and
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the person did not act in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
(b) To the extent not prohibited by applicable law, the Company shall
indemnify and hold harmless any person who was or is a party, or is threatened
to be made a party to any threatened, pending or completed action or suit by or
in the right of the Company to procure a judgment in its favor by reason of the
fact that he is or was a Director, officer, employee, or agent of the Company,
or is or was serving at the request of the Company as Director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
9
other enterprise or entity, from and against any expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Company, and except that no indemnification shall be made in respect of any
claim, issue, or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
Company unless, and only to the extent that the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as the court shall
deem proper.
(c) To the extent that a Director, officer, employee, or agent of the
Company or a person who is or was serving at the request of the Company as a
Director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise or entity, has been successful, on the
merits or otherwise, in the defense of any action, suit or proceeding referred
to in paragraphs (a) or (b), or in defense of any claim, issue, or matter
therein, shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
Section 2. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification
under paragraphs (a) and (b) of Section 1, unless ordered by a court, shall be
made by the Company only as authorized in the specific case, upon a
determination that the indemnification of the Director, officer, employee, or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in paragraphs (a) and (b).
Such determination shall be made (1) by the Board by majority vote of a
quorum consisting of Directors who were not parties to such action, suit, or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable,
if a quorum of disinterested Directors so directs, by independent legal counsel
in a written opinion, or (3) by the stockholders.
Section 3. ADVANCES. To the extent not prohibited by applicable law,
expenses incurred in defending a civil or criminal action, suit or proceeding
may be paid by the Company in advance of the final disposition of such action,
suit or proceeding, as authorized by the Board in the specific case, upon
receipt of an undertaking by or on behalf of the Director, officer, employee or
agent or person who is or was serving at the request of the Company as Director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise or entity, to repay such amount, unless it shall
ultimately be determined that he is entitled to be indemnified by the Company as
authorized in this Article of the bylaws.
Section 4. EXCLUSIVITY. The indemnification provided by this Article shall
not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any agreement, resolution, vote of
stockholders or disinterested Directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a Director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise or entity, and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 5. INSURANCE. The Company may purchase and maintain insurance on
behalf of any person who is or was a Director, officer, employee, or agent of
10
the Company, or who is or was serving at the request of the Company as a
Director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise or entity, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Company would have the power to indemnify him
against such liability under the provisions of this Article of these bylaws or
otherwise.
These restated bylaws were duly adopted by the Board of Directors of the
Company on the 25th day of June, 2003, Article I was amended to reflect the name
change the 11th day of November 2003 and Article IV, Section 1 and 2 and Article
VI, Section 7 were amended the 25th day of February 2004.
/s/ Paula Cludray-Engelke
- --------------------------------------
Paula Cludray-Engelke, Secretary
11
Exhibit 3.(a)(ii)
AMENDMENT TO ARTICLES OF INCORPORATION
PROVIDING FOR THE CHANGE IN PURPOSE AND POWERS OF
ING USA ANNUITY AND LIFE INSURANCE COMPANY
TO THE SECRETARY OF STATE
OF THE STATE OF IOWA
AND
COMMISSIONER OF INSURANCE OF THE STATE OF IOWA:
Pursuant to the provisions of Section 490.1003, 490.1007 and 508.2 of the Code
of Iowa and to effect the name change of the undersigned Corporation, the
undersigned Corporation adopts the following amendment to its Amended Articles
of Incorporation:
I. The name of the Corporation is ING USA Annuity and Life Insurance Company.
II. The following amendment to Article III of the Amended Articles of
Incorporation of ING USA Annuity and Life Insurance Company replaces
Article III in its entirety.
ARTICLE III
Purpose and Powers
The kinds of business the Corporation proposes to transact shall be any
kinds, classes, types and forms of life, health and accident insurance and
guaranteed investment contracts ("GICs") and funding agreements, including, but
not limited to, annuity contracts and combinations of any two (2) or more of
such kinds of classes, types or forms of such insurance, annuity contracts, GICs
and funding agreements as such insurance business is now or hereafter permitted
and authorized under the laws of the State of Iowa or any other state, the
District of Columbia, nation, country, territory, possession, or principality in
which the Corporation is authorized to do business; and to reinsure any such
insurance risk or any part thereof ceded to it by other insurance companies.
III. The duly adopted Amended Articles of Incorporation, as hereby amended,
supersede the Article III of the Articles of Incorporation. The Amendment
to the Articles of Incorporation shall be effective on the date on which
the amendment to the Amended Articles of Incorporation is filed with the
Secretary of State of Iowa.
1
The amendment to the Amended Articles of Incorporation was duly approved by the
shareholders.
Dated at Atlanta and Minneapolis, this 3 & 4 day of March, 2004.
ING USA Annuity and Life Insurance Company
/s/ Keith Gubbay
---------------------------------------------------
Keith Gubbay, President
(SEAL) /s/ Paula ludray-Engelke
---------------------------------------------------
Paula Cludray-Engelke, Secretary
2
STATE OF GEORGIA)
) ss:
COUNTY OF FULTON )
On this 3 day of March, 2004, before me, the undersigned, a Notary Public in and
for the state of Georgia, personally appeared Keith Gubbay, to me personally
known, who, being by me duly sworn, did say that he is the President, of said
corporation executing the within and foregoing instrument to which this is
attached, that the seal affixed thereto is the seal of said corporation; that
said instrument was signed and sealed on behalf of said corporation by authority
of its Board of Directors; and that the said Keith Gubbay as such officer
acknowledged the execution of said instrument to be the voluntary act and deed
of said corporation, by it and by him voluntarily executed.
/s/ Dianne Glosson
--------------------------------------------------
Notary Public in and for said County and State
STATE OF MINNESOTA )
) ss:
COUNTY OF HENNEPIN )
On this 4 day of March, 2004, before me, the undersigned, a Notary Public in and
for the state of Minnesota, personally appeared Paula Cludray-Engelke, to me
personally known, who, being by me duly sworn, did say that she is the
Secretary, of said corporation executing the within and foregoing instrument to
which this is attached, that the seal affixed thereto is the seal of said
corporation; that said instrument was signed and sealed on behalf of said
corporation by authority of its Board of Directors; and that the said Paula
Cludray-Engelke as such officer acknowledged the execution of said instrument to
be the voluntary act and deed of said corporation, by it and by her voluntarily
executed.
/s/ Loralee A. Renelt
--------------------------------------------------
Notary Public in and for said County and State
3
The foregoing amendment to the Amended Articles of Incorporation of ING USA
Annuity and Life Insurance Company have been submitted to the undersigned each
thereof for examination and found by us to be in accordance with the provisions
of Chapter 490 and Chapter 508 of the Code of Iowa, as amended, and the
Constitution and laws of the United States and the Constitution and the laws of
the State of Iowa, and the same are hereby approved by the undersigned
Commissioner of Insurance of the State of Iowa, and the undersigned Attorney
General of the State of Iowa, on the dates set opposite our respective names.
CERTIFICATE OF APPROVAL
COMMISSIONER OF INSURANCE
Pursuant to the provisions of the Iowa Code, the undersigned approves the
amendment to the Amended Articles of Incorporation providing for the change in
purpose and powers of ING USA Annuity and Life Insurance Company (adopted
February 25, 2004).
THERESE M. VAUGHAN
Commissioner of Insurance
3/11/04 /s/ Jeanie Kunkle Vaudt
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Date By: JEANIE KUNKLE VAUDT
Assistant Attorney General
CERTIFICATE OF APPROVAL
ATTORNEY GENERAL
Pursuant to provisions of the Iowa Code, the undersigned approves the
amendment to the Amended Articles of Incorporation providing for the change in
purpose and powers of ING USA Annuity and Life Insurance Company (adopted
February 25, 2004) and finds the amendment in conformance with the laws of the
United States and with the laws and Constitution of the State of Iowa.
THOMAS J. MILLER
Attorney General of Iowa
3/11/04
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Date /s/ James N. Armstrong
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By: JAMES N. ARMSTRONG
Deputy Commissioner of Insurance
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Exhibit 10.A(a)
RECIPROCAL LOAN AGREEMENT
This RECIPROCAL LOAN AGREEMENT (this "Agreement"), dated as of January 1,
2004, between "ING USA Annuity and Life Insurance Company, an Iowa stock life
insurance company ("ING USA" or "Company") located at 909 Locust Street, Des
Moines, Iowa 50309 and ING America Insurance Holdings, Inc., a Delaware
corporation ("INGAIH" or "Company") located at 1105 North Market Street,
Wilmington, Delaware 19809 (collectively referred to as the "Companies").
WITNESSETH:
WHEREAS, each of the Companies may have, from time to time, a need to
borrow funds on a revolving basis; and
WHEREAS, each of the Companies may have, from time to time, excess cash
available to lend to the other on a revolving basis; and
WHEREAS, the Companies are affiliated entities and as such are willing to
extend financing to, and borrow from each other as provided herein; and
WHEREAS, each of the Companies desires to enter into this Agreement
providing for, among other things, the making of such Loans by and among each
other;
NOW, THEREFORE, for and in consideration of the foregoing and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Companies agree as follows:
ARTICLE 1
DEFINITIONS
Section 1.1. Defined Terms. For purposes of this Agreement:
"Agreement" shall have the meaning set forth in the preamble hereto.
"Authorized Person" shall mean the CFO, Treasurer, Senior Vice President,
Assistant Treasurer or Vice President of the Borrowing Company, or a person so
designated.
"Borrowing Company" shall mean each of the Companies to which a Loan is
outstanding or is to be made pursuant to a Request for Borrowing.
"Business Day" shall mean a day on which U.S. financial markets are open
for the transaction of business required for this Agreement.
"Companies" shall have the meaning set forth in the preamble hereto.
"Company" shall have the meaning set forth in the preamble hereto.
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"Default" shall mean any of the events specified in Section 6.1, regardless
of whether there shall have occurred any passage of time or giving of notice, or
both, that would be necessary in order to constitute such an Event of Default.
"Event of Default" shall mean any of the events specified in Section 6.1.
"INGAIH" shall have the meaning set forth in the preamble hereto.
"Interest Period" shall mean the number of days or months that a particular
interest rate applies to a particular Loan advanced hereunder.
"Lending Company" shall mean each of the Companies that has made, or is
obligated to make, in accordance with a Request for Borrowing one or more Loans
hereunder.
"Loans" shall mean the amounts advanced by a Lending Company to a Borrowing
Company under this Agreement.
"Notice of Borrowing" shall have the meaning set forth in Section 2.2(b) of
this Agreement.
"Obligations" shall mean all payment and performance obligations of every
kind, nature and description of each Borrowing Company to the Lending Company,
or either of them, under this Agreement (including any interest, fees and other
charges on the Loans or otherwise), whether such obligations are direct or
indirect, absolute or contingent, due or not due, contractual or tortious,
liquidated or unliquidated, arising by operation of law or otherwise, now
existing or hereafter arising.
"Regional Treasury Office" ("RTO") shall mean the Treasurer's office of
INGAmerica Insurance Holdings, Inc.
"Request for Borrowing" shall have the meaning set forth in Section 2.2(a)
of this Agreement.
"Revolving Loan Commitment" shall mean the maximum outstanding amount to be
funded by the Lending Company to the Borrowing Company. The aggregate sum shall
not exceed three percent of ING USA's admitted assets as of the thirty-first day
of December next preceding, provided that until ING USA files its Annual
Statement for the year ending December 31, 2004, the aggregate sum shall not
exceed three percent of the total of Golden American Life Insurance Company's,
Equitable Life Insurance Company of Iowa's, United Life & Annuity Insurance
Company's and USG Annuity & Life Company's admitted assets, each as of the
thirty-first day of December, 2003.
"Termination Date" shall mean January 14, 2014, or such earlier date as
payment of the Obligations shall be due (whether by acceleration or otherwise).
Section 1.2. Terminology. Each definition of a document in this Article 1
shall include such document as amended, modified, or supplemented from time to
time, and, except where the context otherwise requires, definitions imparting
the singular shall include the plural and visa versa. Except where specifically
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restricted, reference to a party shall include that party and its successors and
assigns. All personal pronouns used in this Agreement, whether used in the
masculine, feminine, or neuter gender, shall include all other genders. Titles
of articles and sections in this Agreement are for convenience only, and neither
limit nor amplify the provisions of this Agreement, and all references in this
Agreement to articles, sections, subsections, paragraphs, clauses, subclauses or
exhibits shall refer to the corresponding article, section, subsection,
paragraph, clause, subclause of, or exhibit attached to, this Agreement, unless
otherwise provided.
Section 1.3. Accounting Terms. Except as otherwise expressly provided
herein, all accounting terms used herein shall be interpreted in accordance with
generally accepted accounting principles consistently applied.
ARTICLE 2
TERMS OF THE LOANS
Section 2.1. Revolving Credit.
(a) Subject to and upon the terms and conditions set forth in this
Agreement, each Lending Company agrees to advance to the Borrowing Company, from
time to time prior to the Termination Date, Loans. Loans advanced under the
Revolving Loan Commitment shall be repaid in accordance with Section 2.4 and may
be reborrowed from time to time on a revolving basis.
(b) Each Borrowing Company's obligation to pay to the Lending Company the
principal of and interest on the Loans shall be evidenced by the records of the
RTO in lieu of a promissory note or notes.
Section 2.2. Notice and Manner of Borrowing.
(a) Whenever the Borrowing Company desires to borrow money hereunder, it
shall give the RTO prior written or facsimile request (or verbal request
promptly confirmed in writing or by facsimile) of such borrowing or reborrowing
(a "Request for Borrowing"). Such Request for Borrowing shall be given by an
Authorized Person, to the RTO prior to 10:00 a.m. (Wilmington, Delaware time).
Any Request for Borrowing received after 10:00 a.m. shall be deemed received on
the next Business Day.
(b) The RTO, upon its receipt of a Request for Borrowing, shall determine
if the requested funds are available and the interest rates in accordance with
Section 2.3(a) of this Agreement (and related Interest Periods, if any) at which
the Borrowing Company can borrow money in a principal amount equal to, and on
the date of, the proposed borrowing or reborrowing described in each such
Request for Borrowing, and shall notify the Lending Company of such interest
rates and the related Interest Periods, if any, and the principal amount of the
proposed borrowing or reborrowing (a "Notice of Borrowing") by telephone
(confirmed in writing) or by facsimile no later than 12:00 p.m. (Wilmington,
Delaware time) on the Business Day of the requested borrowing or reborrowing.
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The RTO shall promptly convey to the Borrowing Company the information contained
in the Notice of Borrowing by telephone (confirmed in writing) or by facsimile.
(c) On the date of each borrowing, the Lending Company will make available
the amount of such borrowing or reborrowing in immediately available funds to
the Borrowing Company by depositing such amount in the account of the Borrowing
Company by wire transfer via electronic funds transfer (EFT).
(d) The RTO shall maintain on its books a control account for each Company
in which shall be recorded (i) the amount of each Loan made hereunder to each
such Company, (ii) the interest rate applicable with respect to each Loan, (iii)
the amount of any principal, interest or fees due or to become due from each
Borrowing Company with respect to the Loans, and (iv) the amount of any sum
received by each Lending Company hereunder in respect of any such principal,
interest or fees due on such Loans. The entries made in the RTO's control
accounts shall be prima facie evidence, in the absence of manifest error, of the
existence and amounts of Obligations therein recorded and any payments thereon.
(e) The RTO shall account to each Company on a quarterly basis with a
statement of borrowings, interest rates, charges and payments made pursuant to
this Agreement with respect to the Loans and Revolving Loan Commitment. An
Authorized Person of the Companies shall review each quarterly accounting for
accuracy within thirty days of receipt thereof from the RTO. Each such account
rendered by the RTO shall be deemed final, binding and conclusive unless the RTO
is notified by the Lending Company or the Borrowing Company within thirty days
after the date the account is so rendered that either the Lending Company or the
Borrowing Company disputes any item thereof.
(f) The RTO shall be justified in assuming, for purposes of carrying out
its duties and obligations under this Agreement, including, without limitation,
its obligation to maintain accounts and provide accountings of the Loans
pursuant to Section 2.2(d) and (e) above, that (1) Loans are disbursed by the
Lending Company to the Borrowing Company in accordance with the terms of the
Notice of Borrowing, (2) payments on the Loans are made to the Lending Company
when due, and (3) no prepayments of any Loans prior to the date that they are
due and payable under Section 2.4(a) have occurred, unless the RTO is otherwise
notified by either Company within seven Business Days of any such delayed
disbursement, overdue payment, or receipt of a prepayment.
Section 2.3. Interest.
(a) The Borrowing Company agrees to pay interest in respect of all unpaid
principal amounts of the Loans from the respective dates such principal amounts
were advanced until the respective dates such principal amounts are repaid at a
rate per annum as determined by the RTO and agreed upon by the Companies
pursuant to Section 2.2(b) of this Agreement. ING USA shall pay interest on each
Loan at a per annum rate which is based on the cost of funds of INGAIH for the
interest period for such Loan plus .15%. INGAIH shall pay interest on each Loan
at a per annum rate which is based on the prevailing interest rate of U.S.
commercial paper available for purchase with a similar duration. The interest
rate shall be determined by the RTO in accordance with its usual practices.
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(b) Overdue principal and, to the extent not prohibited by applicable law,
overdue interest in respect of any of the Loans and all other overdue amounts
owing hereunder shall bear interest from each date that such amounts are overdue
at the rate otherwise applicable to such underlying Loans plus an additional 2%
per annum. Interest on each Loan shall accrue from and including the date of
such Loan to, but excluding, the date of any repayment thereof; provided,
however, that if a Loan is repaid on the same day it is made, one day's interest
shall be paid on such Loan. Interest shall be computed on the basis of a year of
360 days for the actual number of days elapsed.
(c) The Companies hereby agree that the only charges imposed or to be
imposed by the Lending Company hereunder for the use of money in connection with
the Loans is and will be the interest required to be paid under the provisions
of Sections 2.2(b). In no event shall the amount of interest due and payable
under this Agreement or any other documents executed in connection herewith
exceed the maximum rate of interest allowed by applicable law and, in the event
any such payment is made by the Borrowing Company or received by the Lending
Company, such excess sum shall be credited as a payment of principal. It is the
express intent hereof that the Borrowing Company not pay and the Lending Company
not receive, directly or indirectly in any manner, interest in excess of that
which may be lawfully paid under applicable law.
Section 2.4. Repayment of Principal and Interest.
(a) The entire outstanding principal balance of the Loans shall be due and
payable by no later than 5:00 p.m. (Eastern time) on the Business Day on which
the Loan is due, together with all remaining accrued and unpaid interest
thereon, unless an extension of no more than three additional days is authorized
by the Lending Company.
(b) Any of the Loans may be prepaid in whole or in part at any time without
premium or penalty. Any such prepayment made on any Loan shall be applied,
first, to interest accrued thereon through the date thereof and then to the
principal balance thereof.
(c) Each payment and prepayment of principal of any Loan and each payment
of interest on any Loan shall be made to the Lending Company and applied to
outstanding Loan balances in the following order; first, toward any Loan or
Loans then due and payable; and, second, towards the Loan or Loans which are
next due and payable at the time of such prepayment.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
Section 3.1. Representations and Warranties. In order to induce the Lending
Company to enter into this Agreement, the Borrowing Company hereby represents
and warrants as set forth below:
(a) Organization; Power; Qualification.The Borrowing Company is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation, has the power and authority to own or lease
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and operate its properties and to carry on its business as now being conducted,
and is duly qualified and in good standing as a foreign corporation, and
authorized to do business, in each jurisdiction in which the character of its
properties or the nature of its business require such qualification or
authorization.
(b) Authorization; Enforceability. The Borrowing Company has the power and
has taken all necessary action to authorize it to execute, deliver and perform
this Agreement in accordance with the terms hereof and to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by the Borrowing Company and is a legal, valid and binding obligation
of the Borrowing Company, enforceable in accordance with its respective terms,
(i) subject to limitations imposed by general principles of equity and (ii)
subject to applicable bankruptcy, reorganization, insolvency and other similar
laws affecting creditors' rights generally and to moratorium laws from time to
time in effect.
(c) No Conflict. The execution, delivery and performance of this Agreement
in accordance with its terms and the consummation of the transactions
contemplated hereby do not and will not (i) violate any applicable law or
regulation, (ii) conflict with, result in a breach of, or constitute a default
under the articles or certificate of incorporation or by-laws of the Borrowing
Company or under any indenture, agreement or other instrument to which the
Borrowing Company is a party or by which it or any of its properties may be
bound, or (iii) result in or require the creation or imposition of any lien upon
or with respect to any property now owned or hereafter acquired by the Borrowing
Company.
(d) Compliance with Law; Absence of Default. The Borrowing Company is in
compliance with all applicable laws the failure to comply with which has or
could reasonably be expected to have a materially adverse effect on the
business, assets, liabilities, financial condition or results of operations of
the Borrowing Company, and no event has occurred or has failed to occur which
has not been remedied or waived, the occurrence or non-occurrence of which
constitutes a Default.
Section 3.2. Survival of Representations and Warranties. All
representations and warranties made under this Agreement shall be deemed to be
made, and shall be true and correct, as of the date hereof and as of the date of
each Loan.
ARTICLE 4
AFFIRMATIVE COVENANTS
So long as this Agreement is in effect:
Section 4.1. Preservation of Existence.The Borrowing Company will (a)
preserve and maintain its existence, rights, franchises, licenses and privileges
in its jurisdiction of incorporation and (b) qualify and remain qualified and
authorized to do business in each jurisdiction in which the character of its
properties or the nature of its business requires such qualification or
authorization.
Section 4.2. Compliance with Applicable Laws and Regulations. The Borrowing
Company will comply with the requirements of all applicable laws and regulations
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the failure with which to comply could have a materially adverse effect on the
business, assets, liabilities, financial condition or results of operations of
the Borrowing Company.
Section 4.3. Visits and Inspections.
(a) Upon reasonable advance notice from the Lending Company, the Borrowing
Company will permit representatives of the Lending Company to (a) visit and
inspect the properties of the Borrowing Company during normal business hours,
(b) inspect and make extracts from and copies of its books and records, and (c)
discuss with its principal officers its businesses, assets, liabilities,
financial positions and results of operations.
(b) Each Company agrees that upon reasonable advance notice from an auditor
of either Company or any regulatory official employed by the Department of
Insurance of any state in which either Company is engaged in business, each
Company will prepare and deliver to such auditor or regulatory official, within
a reasonable time following such request, a written verification of all Loans
made to and by the relevant Company. Upon reasonable advance notice to each
Company, the books and records of the RTO and each Company relating to the
subject matter of this Agreement shall be available for inspection by any
auditor of either Company or any regulatory official during normal business
hours, and the RTO and each Company will cooperate with said auditor or
regulatory official in making any audit which requires inspection of said books
and records.
ARTICLE 5
NEGATIVE COVENANTS
So long as this Agreement is in effect:
Section 5.1. Liquidation; Merger; Sale of Assets; Change of Business. The
Borrowing Company shall not at any time, without proper notice to the Lending
Company:
(a) Liquidate or dissolve itself (or suffer any liquidation or dissolution)
or otherwise wind up;
(b) Merge or consolidate with any other person or entity;
(c) Sell, lease, abandon or otherwise dispose of or transfer all or
substantially all of its assets other than in the ordinary course of business;
or
(d) Make any substantial change in the type of business conducted by the
Borrowing Company as of the date hereof without the prior written consent of the
Lending Company if such action would have a material adverse effect on the
business, assets, liabilities, financial condition or results of operations of
the Borrowing Company.
Any corporation into which either Company may be merged, converted or with
which either Company may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which either Company shall be a party,
shall succeed to all either Company's rights, obligations and immunities
hereunder without the execution or filing of any paper or any further act on the
7
part of any of the parties hereto, anything herein to the contrary
notwithstanding.
ARTICLE 6
DEFAULT
Section 6.1 Events of Default. Each of the following shall constitute an
Event of Default:
(a) Any representation or warranty made by the Borrowing Company under this
Agreement shall prove incorrect or misleading in any material respect when made;
(b) The Borrowing Company shall default in the payment of (i) any interest
payable under this Agreement within five days of when due, or (ii) any principal
payable under this Agreement within three days of when due;
(c) The Borrowing Company shall default in the performance or observance of
any agreement or covenant contained in this Agreement, and such Default shall
not be cured within a period of thirty days from the occurrence of such Default;
(d) The Borrowing Company shall default under any other agreement or
instrument evidencing or relating to any indebtedness which Default shall not
have been cured within any applicable grace period set forth therein;
(e) There shall be entered a decree or order by a court having jurisdiction
in the premises constituting an order for relief in respect of the Borrowing
Company under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other applicable federal or state bankruptcy law or
similar law, or appointing a receiver, liquidator, assignee, trustee, custodian,
sequestrator, or similar official of the Borrowing Company or of any substantial
part of its properties, or ordering the winding-up or liquidation of the affairs
of the Borrowing Company and any such decree or order shall continue in effect
for a period of sixty consecutive days.
(f) The Borrowing Company shall file a petition, answer or consent seeking
relief under Title 11 of the United States Code, as now constituted or hereafter
amended, or any other applicable federal or state bankruptcy law or other
similar law, or the Borrowing Company shall consent to the institution of
proceedings thereunder or to the filing of any such petition or to the
appointment or taking of possession of a receiver, liquidator, assignee,
trustee, custodian, sequestrator, or other similar official of the Borrowing
Company or of any substantial part of its properties, or the Borrowing Company
shall fail generally to pay its debts as such debts become due, or the Borrowing
Company shall take any corporate action in furtherance of any such action; or
(g) This Agreement or any provision hereof shall at any time and for any
reason be declared by a court of competent jurisdiction to be null and void, or
a proceeding shall be commenced by the Borrowing Company or any other person or
entity seeking to establish the invalidity or unenforceability thereof, or the
8
Borrowing Company shall deny that it has any liability or any obligation for the
payment of principal or interest purported to be created under this Agreement.
Section 6.2. Remedies. If an Event of Default shall have occurred and shall
be continuing,
(a) The obligation of the Lending Company to make Loans hereunder shall
immediately cease;
(b) With the exception of an Event of Default specified in Section 6.1(e)
or (f), the Lending Company, shall declare the principal of and interest on the
Loans and all other amounts owed under this Agreement to be forthwith due and
payable, whereupon all such amounts shall immediately become absolute and due
and payable, without presentment, demand, protest, or notice of any kind, all of
which are hereby expressly waived, anything in this Agreement to the contrary
notwithstanding, and whereupon all such amounts shall be immediately due and
payable;
(c) Upon the occurrence and continuance of an Event of Default specified in
Section 6.1(e) or (f), such principal, interest and other amounts shall
thereupon and concurrently therewith become absolute and due and payable, all
without any action by the Lending Company, all of which are hereby expressly
waived, anything in this Agreement to the contrary notwithstanding;
(d) The Lending Company shall have the right and option to exercise all of
the post-default rights granted to them hereunder; and
(e) The Lending Company shall have the right and option to exercise all
rights and remedies available to them at law or in equity.
ARTICLE 7
MISCELLANEOUS
Section 7.1. Notices. Except as otherwise provided herein, all notices and
other communications required or permitted under this Agreement shall be in
writing and, if mailed, shall be deemed to have been received on the earlier of
the date shown on the receipt or three Business Days after the postmarked date
thereof and, if sent by facsimile, shall be followed forthwith by letter and
shall be deemed to have been received on the next Business Day following
dispatch and acknowledgment of receipt by the recipient's facsimile machine. In
addition, notices hereunder may be delivered by hand or overnight courier, in
which event the notice shall be deemed effective when delivered. All notices and
other communications under this Agreement shall be given to the parties at the
address or facsimile number listed below such party's signature line hereto, or
such other address or facsimile number as may be specified by any party in a
writing addressed to the other parties hereto.
Section 7.2. Waivers. The rights and remedies of the Lending Company under
this Agreement shall be cumulative and not exclusive of any rights or remedies
which they would otherwise have. No failure or delay by the Lending Company in
exercising any right shall operate as a waiver of it. The Lending Company
9
expressly reserves the right to require strict compliance with the terms of this
Agreement. In the event the Lending Company decides to fund a request for a Loan
at a time when the Borrowing Company is not in strict compliance with the terms
of this Agreement, such decision by the Lending Company shall not be deemed to
constitute an undertaking by the Lending Company to fund any further requests
for Loans or precluding the Lending Company from exercising any rights available
to it under the Agreement or at law or equity with respect to the Borrowing
Company. Any waiver or indulgence granted by the Lending Company shall not
constitute a modification of this Agreement, except to the extent expressly
provided in such waiver or indulgence, or constitute a course of dealing by the
Lending Company at variance with the terms of this Agreement such as to require
further notice by the Lending Company of its intent to require strict adherence
to the terms of this Agreement in the future. Any such actions shall not in any
way affect the ability of the Lending Company, in their respective sole
discretion, to exercise any of their respective rights under this Agreement or
under any other agreement.
Section7.3. Assignment; Successors.
(a) The Borrowing Company may not assign or transfer any of its rights or
obligations hereunder without notice to the Lending Company.
(b) The Lending Company may not at any time assign or participate its
interest under this Agreement without notice to the Borrowing Company. Any
holder of a participation in, and any assignee or transferee of, all or any
portion of any amount owed by the Borrowing Company under this Agreement may
exercise any and all rights provided in this Agreement with respect to any and
all amounts owed by the Borrowing Company to such assignee, transferee or holder
as fully as if such assignee, transferee or holder had made the Loans in the
amount of the obligation in which its holds a participation or which is assigned
or transferred to it.
(c) This Agreement shall be binding upon, and inure to the benefit of, the
Borrowing Company, the Lending Company, and the permitted successors and assigns
of each party hereto.
Section 7.4. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
Section 7.5. Severability. Any provision of this Agreement which is
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof in that jurisdiction or affecting the validity or enforceability of such
provision in any other jurisdiction.
Section 7.6. Entire Agreement; Amendments. This Agreement represents the
entire agreement among the parties hereto with respect to the subject matter of
this transaction. No amendment or modification of the terms and provisions of
this Agreement shall be effective unless in writing and signed by both
Companies.
Section 7.7. Payment on Non-Business Days. Whenever any payment to be made
hereunder shall be stated to be due on a non-Business Day, such payment may be
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made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of payment of interest hereunder.
Section 7.8. Termination. This Agreement may be terminated with respect to
any party hereto by such party upon its giving the other parties thirty days
notice of its intent to terminate. In the event of termination as provided in
this paragraph, the Lending Company's obligation to make Loans to the Borrowing
Company shall cease; provided, however, that the Borrowing Company shall
continue to be obligated to make all repayments of Loans and all other amounts
due and payable by it as provided under this Agreement.
Section 7.9. Governing Law. This agreement shall be construed in accordance
with and governed by the law of the State of Iowa, without regard to the
conflict of laws rules thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused it to be executed by their duly authorized officers, all as of the day
and year first above written.
ING USA ANNUITY AND LIFE INSURANCE
COMPANY
By: /s/ David S. Pendergrass
-----------------------------------------------
Title: _______________________________
Vice President and Treasurer
Address for notices:
909 Locust Street
Des Moines, Iowa 50309
Phone: 770/980-4837
Fax:
ING AMERICA INSURANCE HOLDINGS, INC.
By:/s/ David S. Pendergrass
----------------------------------------------
David S. Pendergrass
Title:
------------------------------
Vice President and Treasurer
Address for notices:
1105 N. Market Street
Wilmington, DE 19809
Phone: 770/980-3300
Fax: 770/980-4840
November 10, 2003
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Exhibit 31.1
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ING USA Annuity and
Life Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 14, 2004
By /s/ David A. Wheat
-----------------------------------------------------------
David A. Wheat
Director, Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Exhibit 31.2
CERTIFICATION
I, Keith Gubbay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ING USA Annuity and
Life Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date May 14, 2004
By /s/ Keith Gubbay
------------------------------------------------------------
Keith Gubbay
Director and President
(Duly Authorized Officer and Principal Executive Officer)
Exhibit 32.1
CERTIFICATION
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of ING USA Annuity and
Life Insurance Company (the "Company") hereby certifies that, to the officer's
knowledge, the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004 (the "Report") fully complies with the requirements of Section
13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
May 14, 2004 By /s/ David A. Wheat
- ------------ ----------------------------------------------
(Date) David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
Exhibit 32.2
CERTIFICATION
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of ING USA Annuity and
Life Insurance Company (the "Company") hereby certifies that, to the officer's
knowledge, the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004 (the "Report") fully complies with the requirements of Section
13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
May 14, 2004 By /s/ Keith Gubbay
- ------------ ----------------------------------------------
(Date) Keith Gubbay
Director and President