UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
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Commission file number: 333-57212, 333-104539, 333-104546,
333-104547, 333-104548, and 333-116137
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ING USA Annuity and 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 (IRS employer
of incorporation or organization) identification no.)
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 former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of Act: None
Securities registered pursuant to Section 12(g) of Act: None
Indicate by check mark 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
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: 250,000 shares of Common Stock
as of March 17, 2005, 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 I(1)(a) AND (b) OF FORM 10-K, THIS FORM IS
BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION
I(2).
ING USA Annuity and Life Insurance Company,
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Annual Report on Form 10-K
For the Year Ended December 31, 2004
TABLE OF CONTENTS
Form 10-K
Item No. Page
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PART I
Item 1. Business** 3
Item 2. Properties** 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders* 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data*** 18
Item 7. Management's Narrative Analysis of the Results of Operations and Financial Condition** 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 45
Item 8. Financial Statements and Supplementary Data 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 100
Item 9A. Controls and Procedures 100
Item 9B Other Information 100
PART III
Item 10. Directors and Executive Officers of the Registrant* 101
Item 11. Executive Compensation* 101
Item 12. Security Ownership of Certain Beneficial Owners and Management* 101
Item 13. Certain Relationships and Related Transactions* 101
Item 14. Principal Accountant Fees and Services 101
PART IV
Item 15. Exhibits and Financial Statement Schedules 104
Index on Financial Statement Schedules 110
Signatures 114
* Item omitted pursuant to General Instruction I(2) of Form 10-K, except as
to Part III, Item 10 with respect to compliance with Sections 406 and 407
of the Sarbanes Oxley Act of 2002.
** Item prepared in accordance with General Instruction I(2) of Form 10-K.
*** Although item may be omitted pursuant to Georgia Instruction I(2) of Form
10-K, the Company has provided certain disclosure under this Item.
PART I
Item 1. Business (Dollar amounts in millions, unless otherwise stated)
Organization of Business
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.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V.
("ING"), a global financial services holding company based in The
Netherlands, with American Depository Shares listed on the New York
Stock Exchange under the symbol "ING". ING USA is authorized to
conduct its insurance business in the District of Columbia and all
states except New York. ING USA was domiciled as a life insurance
company under the laws of the State of Delaware until December 31,
2003 and has been domiciled in Iowa since January 1, 2004.
On January 1, 2004 (the "Merger Date"), the Company simultaneously
redomesticated from Delaware to Iowa, changed its name from Golden
American Life Insurance Company ("Golden American") to ING USA Annuity
and Life Insurance Company, and merged the following affiliates into
the Company: Equitable Life Insurance Company of Iowa ("Equitable
Life"), USG Annuity & Life Company ("USG"), and United Life & Annuity
Insurance Company ("ULA") (collectively, the "Merger Companies").
Prior to the Merger Date, the Company was a wholly-owned subsidiary of
Equitable Life. Equitable Life merged its affiliate, Ameribest Life
Insurance Company ("AMB"), a life insurance company domiciled in
Georgia, into its operations on January 1, 2003.
Description of Business
ING's U.S.-based operations offer a broad range of life insurance,
annuities, mutual funds, employee benefit, defined contribution,
guaranteed investment contracts and funding agreements. For the year
ended December 31, 2004, ING's U.S.-based operations were ranked sixth
in sales of variable annuities according to data published by
Morningstar and sixth in sales of fixed annuities according to data
published by LIMRA International Inc. ("LIMRA"). The Company serves as
one of the primary vehicles through which ING's U.S.-based operations
write this fixed and variable annuity business. According to LIMRA's
fourth quarter 2004 sales report on Stable Value and Funding Agreement
products, ING's U.S.-based operations were ranked fifth in market
share for funding agreement contracts, and tenth for traditional
general account guaranteed investment contracts, in terms of total
assets.
The Company offers various insurance products including immediate and
deferred variable and fixed annuities. The Company's annuity products
are distributed by national wirehouses, regional securities firms,
independent National Association of Securities Dealers, Inc. ("NASD")
firms with licensed registered representatives, banks, life insurance
companies with captive agency sales forces, independent insurance
agents, independent marketing organizations, and the ING broker-dealer
network. The Company's primary annuity customers are retail consumers.
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The Company also offers guaranteed investment contracts and funding
agreements primarily to institutional investors and corporate benefit
plans. These products are directly sold by home office personnel or
through specialty insurance brokers to institutional purchasers.
The Company previously provided interest-sensitive, traditional and
variable life insurance, and health insurance products. The Company no
longer issues these products. The life insurance business is in
run-off and the Company has ceded to other insurers all health
insurance.
See "Reserves" for a discussion of the Company's reserves by product
type.
The Company has one operating segment, ING U.S. Financial Services
("USFS") which offers the products described below.
Products and Services
The Company offers a portfolio of immediate and deferred fixed and
variable annuities designed to address customer needs for
tax-advantaged savings, retirement needs, and wealth-protection
concerns.
The fixed annuities offered by the Company are General Account
products and include single premium immediate, multi-year guaranteed,
annual reset, and equity index annuities. For these contracts, the
principal amount is guaranteed, and for a specified time period, the
Company credits interest to the customer's account at a fixed interest
rate. The Company's major source of income from fixed annuities is the
spread between the investment income earned on the underlying General
Account assets and the interest rate credited to customers' accounts.
The Company bears the investment risk because, while the Company
credits customers' accounts with a stated interest rate, the Company
cannot be certain the investment income earned on the General Account
assets will exceed that rate. With respect to indexed annuities, the
Company hedges the equity risk exposure by purchasing derivative
instruments on the relevant equity index.
The variable annuities offered by the Company are savings vehicles in
which contract owner deposits are recorded and primarily maintained in
Separate Accounts established for the Company and registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust.
Separate Account assets and liabilities generally represent funds
maintained to meet specific investment objectives of contractowners
who bear the investment risk, subject, in limited cases, to certain
minimum guarantees. Investment income and investment gains and losses
generally accrue directly to such contractowners. The assets of each
account are legally segregated and are not subject to claims that
arise out of any other business of the Company. Separate Account
assets supporting variable options under variable annuity contracts
are invested, as designated by the contractowner or participant under
a contract, in shares of mutual funds which are managed by the Company
or its affiliates, or in other selected mutual funds not managed by
the Company or its affiliates. Variable annuity deposits are allocated
to various subaccounts established within the Separate Account. Each
subaccount represents a different investment option into which the
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contractowner may allocate deposits. The account value of a variable
annuity contract is equal to the aggregate value of the subaccounts
selected by the contractowner (including the value allocated to any
fixed account) less fees and expenses. The Company offers investment
options for its variable annuities covering a wide range of investment
styles, including large, mid and small cap equity funds, as well as
fixed income alternatives. Unlike fixed annuities, variable annuity
contract owners bear the risk of investment gains and losses
associated with the selected investment allocation. The Company,
however, offers certain guaranteed death and living benefits
(described below) under which it bears specific risks associated with
these products. Many of the variable annuities issued by ING USA are
combination variable and fixed deferred annuity contracts under which
some or all of the deposits may be allocated by the contract owner to
a fixed account available under the contract. The Company's major
source of income from variable annuities is the base contract
mortality fee and expense fees and guaranteed living and death benefit
rider fees charged to the customer, less the cost of administering the
product, as well as the cost of providing for the guaranteed living
and death benefits.
The Company sells variable annuity contracts that offer one or more of
the following guaranteed death benefits and living benefits:
Guaranteed Minimum Death Benefits ("GMDB"): The Company has offered
the following guaranteed death benefits:
- Standard - This guarantees that upon the death of the annuitant
the death benefit will be no less than the premiums paid by the
contractowner net of any contract withdrawals.
- Ratchet - This guarantees that upon the death of the annuitant
the death benefit will be no less than the greater of (1)
Standard or (2) the maximum anniversary (or quarterly) value of
the variable annuity.
- Rollup (7% or 5.5% Solution) - This guarantees that upon the
death of the annuitant the death benefit will be no less than the
aggregate premiums paid by the contractowner accruing interest at
7% or 5.5% per annum, subject to a maximum cap on the account
value. (The Company has discontinued this option for new sales.)
- Combo (Max 7) - This guarantees that upon the death of the
annuitant the death benefit will be no less than the greater of
(1) Ratchet or (2) Rollup.
At December 31, 2004, the guaranteed value of these death benefits in
excess of account values was estimated to be $2.5 billion, before
reinsurance, which was a $0.4 billion decrease from the estimated $2.9
billion at December 31, 2003. The decrease was primarily driven by the
improved equity markets in 2004. For contracts issued prior to January
1, 2000, most contracts with enhanced death benefit guarantees were
reinsured to third party reinsurers to mitigate the risk produced by
such guaranteed death benefits. For contracts issued after December
31, 1999, the Company has instituted an equity hedging program in lieu
of reinsurance, to mitigate the risk produced by the guaranteed death
benefits. The equity hedging program is based on the Company entering
into derivative positions to offset exposures to guaranteed minimum
death benefits due to adverse changes in the equity markets. At
December 31, 2004, the guaranteed value of minimum guaranteed death
benefits in excess of account values, net of reinsurance, was
estimated to be $1.4 billion, of which $748.7 is projected to be
covered by the Company's equity hedging program, consistent with the
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Company's exposure as of December 31, 2003. As of December 31, 2004,
the Company has recorded a liability of $66.9, net of reinsurance,
representing the estimated net present value of the Company's future
obligation for guaranteed minimum death benefits in excess of account
values. The liability increased $0.5 from $66.5 at December 31, 2003,
mainly due to the increase in fee income collected from customers used
to fund the reserve exceeding the decrease in the reserve, due to the
improved equity markets during 2004. The liability is recorded in
accordance with the provisions of the Financial Accounting Standards
Board ("FASB") Statement of Position 03-1, "Accounting and Reporting
by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" ("SOP 03-1").
Guaranteed Living Benefits: The Company offers the following
guaranteed living benefits:
- Guaranteed Minimum Income Benefit ("GMIB") - This guarantees a
minimum income payout, exercisable each contract anniversary on
or after the 10th rider anniversary. This type of living benefit
is the predominant selection in the Company's sales of variable
annuities.
- Guaranteed Minimum Withdrawal Benefit ("GMWB") - This guarantees
that annual withdrawals of up to 7% of eligible premiums may be
made until eligible premiums previously paid by the contractowner
are returned, regardless of account value performance. The new
2004 GMWB rider (ING Principal Guard) provides reset and step-up
features, which provide, in certain instances, for increases in
the amount available for withdrawal.
- Guaranteed Minimum Accumulation Benefit ("GMAB") - Guarantees
that the account value will be at least 100% of the premiums paid
by the contractowner after 10 years (GMAB10) or 200% after 20
years (GMAB20).
At December 31, 2004, the guaranteed value of these living benefits in
excess of account values was estimated to be $269.7, which is a
decrease of $38.5 from an estimated $308.2 at December 31, 2003. The
decrease was primarily driven by the improved equity markets during
2004. All living benefits are covered by the Company's equity hedging
program. As of December 31, 2004, the Company has recorded a liability
of $40.3 representing the estimated net present value of its future
obligation for living benefits in excess of account values. The
liability increased $26.4 from $13.9 at December 31, 2003, mainly due
to the increase in fee income collected from customers used to fund
the reserve exceeding the decrease in the reserve, due to the improved
equity market during 2004. For GMIBs, the liability is recorded in
accordance with the provisions of SOP 03-1. For GMABs and GMWBs, the
liability is held at fair value in accordance with Statement of
Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
Variable annuity contracts containing guaranteed death and living
benefits expose the Company to equity risk. An increase in the value
of the equity markets will increase account values for these
contracts, thereby decreasing the Company's risk associated with the
MGDBs, GMIBs, GMWBs, and GMABs. A decrease in the equity markets, that
causes a decrease in the account values, will increase the possibility
that the Company may be required to pay amounts to customers due to
guaranteed death and living benefits.
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The Company also is a provider of institutional investment products,
primarily guaranteed investment contracts and funding agreements,
collectively referred to as "GICs," issued to the stable value market
and other institutional customers. The Company intends to issue GICs
to one or more special purpose vehicles, which sell notes to
institutional and retail investors in order to fund the purchase of
those GICs. The Company profits from the sale of GICs by earning
income in excess of the amount credited to the customer accounts less
the cost of administering the product.
Historically, the Company has provided interest-sensitive, traditional
and variable life insurance, and health insurance. All health
insurance has been ceded to other insurers and new policies are no
longer written. The Company ceased the issuance of life insurance
policies in 2001, and all life insurance business is currently in
run-off. A certain portion of the assets held in the general account
are dedicated to funding this block of business.
Strategy, Method of Distribution, and Principal Markets
The Company believes longer life expectancies, an aging population,
and growing concern over the stability and availability of the Social
Security system have made retirement planning a priority for many
Americans. The target market for the Company's annuity products is
primarily individuals, while the target market for GICs is primarily
institutional investors and corporate benefit plans.
The principal distribution channels of the Company's variable and
fixed annuities include national wirehouses, regional securities
firms, independent NASD firms with licensed registered
representatives, banks, life insurance companies with captive agency
sales forces, independent insurance agents, independent marketing
organizations, and the ING broker-dealer network. GICs are distributed
primarily to institutional investors and corporate benefit plans
through direct sales by home office personnel or through specialty
insurance brokers.
The Company markets its variable annuities primarily on the underlying
guarantee features, positioning the product line as a risk management
tool for clients and advisors. Indexed annuities are marketed
primarily based on underlying guarantee features coupled with
consumer-friendly product designs offering the potential for equity
market upside potential. The Company also offers fixed annuities
offering a guaranteed interest rate or annuity payment suitable for
clients seeking a stable return.
The Company also utilizes sales inducements as part of its
distribution strategy for annuities. Sales inducements represent
benefits paid to contractowners for a specified period 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.
The Company continued to expand distribution systems during 2004 and 2003. The
Company believes that broad-based distribution networks are key to realizing a
growing share of the wealth accumulation marketplace. The Company plans to
establish new relationships and implement strategies to increase penetration
with key distributors in existing channels. Other than Morgan Stanley which
produced approximately 6% of annuity sales and ING Advisors Network (a group of
broker-dealers affiliated with the Company) which produced approxmiately 13% of
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annuity sales, no other broker or agency firm accounted for more than
5% of sales of the Company's annuity products in 2004.
The Company is not dependent upon any single customer and no single
customer accounted for 10% or more of revenue in 2004.
Assets Under Management
A substantial portion of the Company's fees or other charges and
margins are based on assets under management. Assets under management
are principally affected by net deposits (i.e., annuity premiums and
GIC deposits less surrenders), investment performance (i.e., interest
credited to customer accounts for fixed options or market performance
for variable options), and customer retention. The Company's customer
assets under management, that support fixed and variable annuities,
were as follows:
December 31,
2004 2003
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Variable annuities $ 25,847.0 $ 19,448.0
Fixed annuities 17,160.2 15,625.0
GICs 1,797.4 425.4
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Total $ 44,804.6 $ 35,498.4
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Competition
The annuity competitive environment remains intense and is dominated
by a number of large, highly-rated insurance companies. Increasing
competition within the retirement savings business from traditional
insurance carriers, as well as banks and mutual fund companies, offers
consumers many choices. The Company's annuity products compete in the
annuity market principally on the basis of investment performance,
product design, brand recognition, financial strength ratings,
distribution capabilities, levels of charges and credited rates,
reputation, and customer service.
The Company competes in the GIC market primarily on the basis of its
capital markets, product structuring, and risk management expertise,
as well as its brand recognition and financial strength ratings. Other
competitors in this market include other life insurance companies, as
well as banks and other financial institutions.
Reserves
The Company records as liabilities actuarially-determined reserves
that are calculated to meet the Company's future obligations under its
variable annuity, fixed annuity, GIC products, and other insurance
products.
Reserves for deferred annuity investment contracts and immediate
annuity without life contingent payouts equal cumulative deposits,
less charges and withdrawals, plus credited interest thereon (reserve
interest rates vary by product up to 10.0% for the years 2004, 2003,
and 2002).
Reserves for immediate annuities with life contingent payout benefits
are computed on the basis of assumed interest discount rates,
mortality, and expenses, including a margin for adverse deviations.
Such assumptions generally vary by plan, year of issue, and policy
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duration. For the years 2004, 2003, and 2002, reserve interest rates
ranged from 3.0% to 8.0%. Mortality and withdrawal rate assumptions
are based on relevant Company experience and are periodically reviewed
against both industry standards and experience.
As discussed above under "Products and Services," the Company has
established reserves for the guaranteed death and living benefits
included in variable annuities.
Reserves for GICs are calculated using the amount deposited with the
Company, less withdrawals, plus interest accrued to the ending
valuation date. Interest on these contracts is accrued by a
predetermined index plus a spread or a fixed rate, established at
contract issuance.
Reserves for universal life products are equal to cumulative deposits
less withdrawals and charges plus credited interest thereon. In
addition, the Company holds reserves as required for SOP 03-1 for
certain products with anticipated losses in later policy durations.
Reserves for traditional life insurance contracts represent the
present value of future benefits to be paid to or on behalf of
contractowners and related expenses less the present value of future
net premiums.
As of December 31, 2004, ING USA's $47,707.7 of life and annuity
insurance reserves (general and separate account), and deposit-type
funds were comprised of each type of the following products:
Reserves % of Total
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Variable and Fixed Annuity $ 43,271.9 90.7%
GICs 3,060.1 6.4%
Other 1,375.7 2.9%
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Total $ 47,707.7 100.0%
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The Other category primarily consists of relatively small closed
blocks of health insurance products and interest-sensitive, universal,
and traditional life insurance products.
Reinsurance Arrangements
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses from its life and annuity insurance
businesses. Reinsurance permits recovery of a portion of losses,
although it does not discharge the Company's liability as the direct
insurer of the risks. Reinsurance treaties are structured as yearly
renewable term, coinsurance, or modified coinsurance. All treaties are
closed for new business, including variable annuity guarantees and the
life business in force under those treaties is in run-off. Thus, the
Company is currently not selecting new reinsurers. If in a position to
select a reinsurer, the Company would primarily base its selection on
the financial strength of the reinsurer. The Company currently has no
significant concentration with reinsurers. The Company has $1.3
billion of reinsurance related to GICs with its affiliate, Security
Life of Denver Insurance Company ("Security Life"), and has a minimal
level of other affiliate reinsurance.
One of the main risks reinsured by the Company is the GMDB on its
variable annuity policies issued prior to January 1, 2000. For
contracts issued after December 31, 1999, the Company hedges its
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exposure due to these products. Other reinsurance contracts coinsure
life, accident and health, and annuity businesses. The Company
continually monitors and evaluates the financial strength and credit
ratings of its reinsurers. Only those reinsurance recoverable balances
deemed probable of recovery are reflected as assets on the Company's
Balance Sheets.
Investment Overview and Strategy
The Company's investment strategy involves diversification by asset
class, and seeks to add economic diversification and to reduce the
risks of credit, liquidity, and embedded options within certain
investment products, such as prepayment options and interest rate
options embedded in collateralized mortgage obligations and call
options embedded in corporate bonds. The investment management
function is centralized under ING Investment Management LLC ("IIM"),
an affiliate of the Company, pursuant to an investment advisory
agreement. Separate portfolios are established for each general type
of product within the Company.
The Company's general account invests primarily in fixed maturity
investments, including publicly issued bonds (including government
bonds), privately placed notes and bonds, mortgage-backed securities,
and asset-backed securities. The primary investment strategy is to
optimize the risk-adjusted return through superior asset selection
predicated on a developed relative value approach, credit research and
monitoring, superior management of interest rate risk, and active
exploration into new investment product opportunities. Investments are
purchased when market returns, adjusted for risk, and expenses, are
sufficient to profitably support growth of the liability block of
business. In addition, assets and liabilities are analyzed and
reported for internal management purposes on an option-adjusted basis.
The level of required capital of given transactions is a primary
factor in determining relative value among different investment and
liability alternatives, within the scope of each product type's
objective. An active review of existing holdings identifies specific
assets that could be effectively traded in order to enhance the
risk-adjusted returns of the portfolio, while minimizing adverse tax
and accounting impacts. The Company strives to maintain a portfolio
average asset quality rating of A, excluding mortgage loans, but
including mortgage-backed securities, which are reported with bonds,
based on Standard & Poor's ratings classifications.
The Company's use of derivatives is limited mainly to hedging purposes
to reduce the Company's exposure to cash flow variability of assets
and liabilities, interest rate risk, and market risk. See "Liquidity
and Capital Resources - Derivatives" for further discussion of the
Company's use of derivatives.
Ratings
On December 15, 2004, Standard & Poor's reaffirmed its AA (Very
Strong) counterparty credit and financial strength rating of ING's
primary U.S. insurance operating companies ("ING U.S."), including the
Company. Standard & Poor's also on this date revised the outlook on
the core insurance operating companies from negative to stable,
reflecting ING's commercial position and diversification, financial
flexibility, reduced capital leverage, and improved profitability. The
outlook revisions recognize ING's progress in setting a more focused
and decisive strategic direction and implementing more integrated
financial management across banking and insurance. On February 9,
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2005, Standard & Poor's assigned its A-1+ short-term counterparty
credit rating to the Company. Standard & Poor's noted that the ratings
are based on the Company's status as a core member of ING U.S.
On December 17, 2004, Moody's Investor's Service, Inc. ("Moody's")
issued a credit opinion affirming the financial strength rating of ING
U.S., including the Company, of Aa3 (Excellent) with a stable outlook.
The rating is based on the strong implicit support and financial
strength of the parent company, ING. Furthermore, Moody's noted that
ING U.S. has built a leading market share in the domestic individual
life insurance, annuity, and retirement plan businesses. ING U.S.
enjoys product diversity, further enhancing its credit profile through
the use of these multiple distribution channels.
On December 22, 2004, A.M. Best Company, Inc. ("A.M. Best") reaffirmed
the financial strength rating of A+ (Superior) of ING U.S., including
the Company, while maintaining its negative outlook for ING U.S. These
rating actions follow ING's announcement of its intention to sell Life
Insurance Company of Georgia ("LOG"), as well as the conclusion of
A.M. Best's review of ING's plan to exit the U.S. individual
reinsurance business. ING closed the transaction to exit the U.S.
individual life reinsurance business on December 31, 2004 and the sale
of LOG is expected to be completed during the second quarter of 2005,
subject to regulatory approval. Neither of these transactions directly
impact the Company.
Regulation
The Company's operations are subject to comprehensive regulation
throughout the United States. The laws of the various jurisdictions
establish supervisory agencies, including the state insurance
departments, with broad authority to grant licenses to transact
business and regulate many aspects of the products and services
offered by the Company, as well as solvency and reserve adequacy. Many
agencies also regulate the investment activities of insurance
companies on the basis of quality, diversification, and other
quantitative criteria. The Company's operations and accounts are
subject to examination at regular intervals by certain of these
regulators.
ING USA is subject to the insurance laws of the state in which it is
organized and of the other jurisdictions in which it transacts
business. The primary regulator of the Company's insurance operations
is the Division of Insurance for the State of Iowa. Among other
matters, these agencies may regulate premium rates, trade practices,
agent licensing, policy forms, underwriting and claims practices,
minimum interest rate to be credited to fixed annuity customer
accounts, and the maximum interest rates that can be charged on policy
loans.
The SEC, NASD and, to a lesser extent, the states, regulate sales and
investment management activities and operations of the Company.
Generally, the Company's variable annuity products and certain of its
fixed annuities are registered as securities with the SEC. Regulations
of the SEC, Department of Labor ("DOL") and Internal Revenue Service
also impact certain of the Company's annuity, life insurance, and
other investment products. These products may involve separate
accounts and mutual funds registered under the Investment Company Act
of 1940.
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Insurance Holding Company Laws
A number of states regulate affiliated groups of insurers such as the
Company under holding company statutes. These laws, among other
things, place certain restrictions on transactions between affiliates
such as dividends and other distributions that may be paid to the
Company's parent corporation.
Insurance Company Guaranty Fund Assessments
Insurance companies are assessed the costs of funding the insolvencies
of other insurance companies by the various state guaranty
associations, generally based on the amount of premiums companies
collect in that state.
The Company accrues the cost of future guaranty fund assessments based
on estimates of insurance company insolvencies provided by the
National Organization of Life and Health Insurance Guaranty
Associations (NOLHGA) and the amount of premiums written in each
state. The Company has estimated this liability to be $13.8 and $18.4
as of December 31, 2004 and 2003, respectively and has recorded a
reserve. The Company has also recorded an asset of $3.7 and $0.6 as of
December 31, 2004 and 2003, respectively, for future credits to
premium taxes for assessments already paid.
For information regarding certain other potential regulatory changes
relating to the Company's businesses, see "Risk Factors" in Item 1 -
Business.
Employees
The Company had 1,204 employees as of December 31, 2004, primarily
focused on managing the product distribution, marketing, customer
service, and product and financial management of the Company and
certain of its affiliates. The Company also makes use of other
services provided by ING North America Insurance Corporation and other
affiliates. These services include underwriting and new business
processing, actuarial, risk management, human resources, investment
management, finance, information technology, and legal and compliance
services. The affiliated companies are reimbursed for the Company's
use of various services and facilities under a variety of intercompany
agreements.
Risk Factors
In addition to the normal risks of business, the Company is subject to
significant risks and uncertainties, including those which are
discussed below.
The Company's efforts to reduce the impact of interest rate
changes on its profitability and financial condition may not be
effective
The Company attempts to reduce the impact of changes in interest rates
on the profitability and financial condition of its fixed annuity
operations. The Company accomplishes this reduction primarily by
managing the duration of its assets relative to the duration of its
liabilities. During a period of rising interest rates, annuity
contract surrenders and withdrawals may increase as customers seek to
achieve higher returns through other financial products. Despite its
efforts to reduce the impact of rising interest rates, the Company may
be required to sell assets to raise the cash necessary to respond to
12
such surrenders and withdrawals, thereby realizing capital losses on
the assets sold. An increase in policy surrenders and withdrawals may
also require the Company to accelerate amortization of policy
acquisition costs relating to these contracts, which would further
reduce its net income.
During periods of declining interest rates, borrowers may prepay or
redeem mortgages and bonds that the Company owns, which would force it
to reinvest the proceeds at lower interest rates. For some of its
products, such as guaranteed investment contracts and funding
agreements, the Company is unable to lower the rate it credits to
customers in response to the lower return it will earn on its
investments. In addition, certain of its products provide a minimum
rate which the Company must credit to its customers. Therefore, it may
be more difficult for the Company to maintain its desired spread
between the investment income it earns and the interest it credits to
its customers, thereby reducing its profitability.
Equity market volatility could negatively impact the Company's
profitability and financial condition
The sales and profitability of certain of the Company's annuity
products which provide returns based on equities or equity indices
could be impacted by declines in the equity markets. Generally, sales
of equity-linked annuity products, including variable annuities,
decrease when equity markets decline over an extended period of time.
The amount of fees the Company receives on its variable annuity
products is based on the account values of the separate accounts which
support such variable earnings. A decline in the equity markets will
likely result in a decrease in such account values and therefore a
decrease in the fees the Company receives on its variable annuities.
In addition, certain of its products provide guarantees which are
related to the equity markets. A sustained decline in the equity
markets will increase the Company's exposure to such guarantees, while
at the same time it is receiving less fees from such products. The
Company tries to minimize its exposure to these guarantees through
reinsurance and other risk management strategies, including the
Company's hedging program. The Company's future profitability may be
negatively impacted by its failure to successfully minimize these
risks, which could result from a number of efforts, including the
failure of a reinsurer or other counterparty to make payments due to
the Company, the unavailability or increase in costs of such
reinsurance or other risk management strategies, and the Company's
inability to implement an effective risk management strategy. To the
extent that the actual performance of the equity markets and the
Company's expectations of future performance decrease its future
profit expectations, the Company may be required to accelerate the
amount of deferred policy acquisition cost amortization in a given
period, potentially negatively impacting its net income in a period.
13
A downgrade in any of the Company's ratings may, among other
things, increase policy surrenders and withdrawals, reduce new
sales and terminate relationships with distributors, any of which
could adversely affect its profitability and financial condition
Ratings are important factors in establishing the competitive position
of insurance companies. A downgrade, or the potential for such a
downgrade, of any of the Company's ratings could, among other things:
|X| Materially increase the number of annuity contract surrenders and
withdrawals;
|X| Result in the termination of relationships with broker-dealers,
banks, agents, wholesalers, and other distributors of the
Company's products and services; and
|X| Reduce new sales of certain products including annuities, GICs
and other investment products.
Any of these consequences could adversely affect the Company's
profitability and financial condition.
Rating organizations assign ratings based upon several factors. While
most of the factors relate to the rated company, some of the factors
relate to the views of the rating organization, general economic
conditions, and circumstances outside the rated company's control. In
addition, rating organizations may employ different models and
formulas to assess financial strength of a rated company, and from
time to time rating organizations have, in their discretion, altered
the models. Changes to the models, general economic conditions, or
circumstances outside the Company's control could impact a rating
organizations' judgment of its rating and the subsequent rating it
assigns the Company. The Company cannot predict what actions rating
organizations may take, or what actions it may be required to take in
response to the actions of rating organizations, which could adversely
affect the Company.
The Company's ability to grow depends in large part upon the
continued availability of capital
Lion has recently contributed significant amounts of capital to the
Company to support its sales activities. The Company has also used
capital primarily to support sales growth and also to strengthen
reserves associated with its annuity products. Although the equity
markets have had positive performance recently, deterioration in these
markets could lead to further capital consumption from guaranteed
benefits related to policy liabilities. There is no formal obligation
or requirement for Lion to contribute capital to the Company.
Therefore, although the Company believes it has sufficient capital to
fund its immediate growth and capital needs, the amount of capital
required and the amount of capital available can vary from period to
period due to a variety of circumstances, some of which are neither
predictable nor foreseeable, nor necessarily within its control. A
lack of sufficient capital could hinder the Company's ability to grow.
14
The Company's investment portfolio is subject to several risks
that may diminish the value of its invested assets and adversely
affect its sales, profitability and the investment returns
credited to certain of its customers
The Company's investment portfolio is subject to several risks,
including, among other things:
|X| The Company may experience an increase in defaults or delinquency
in the investment portfolios, including the commercial mortgage
loan portfolio.
|X| The Company may have greater difficulty selling privately placed
fixed maturity securities, commercial mortgage loans, and real
estate investments at attractive prices, in a timely manner, or
both, because they are less liquid than its publicly traded fixed
maturity securities.
|X| During periods of declining interest rates, borrowers may prepay
or redeem prior to maturity (i) mortgages that back certain
mortgage backed securities and (ii) bonds with embedded call
options that the Company owns which would force it to reinvest
the proceeds received at lower interest rates.
|X| Environmental liability exposure may result from the Company's
commercial mortgage loan portfolio and real estate investments.
|X| The Company may experience losses in its commercial mortgage loan
portfolio as a result of economic downturns or losses
attributable to natural disasters in certain regions.
|X| The Company may experience volatility of earnings to the extent
that the derivative positions entered into by the Company do not
qualify for hedge accounting under GAAP.
Any of these consequences may diminish the value of the Company's
invested assets and adversely affect its sales, profitability, or the
investment returns credited to its customers.
Changes in regulation in the United States may reduce the
Company's profitability
The Company's insurance business is subject to comprehensive
regulation and supervision throughout the United States by both state
and federal regulators. The primary purpose of state regulation of the
insurance business is to protect contractowners, and not necessarily
to protect other constituencies such as creditors or investors. State
insurance regulators, state attorneys general, the National
Association of Insurance Commissioners, the SEC, and the NASD
continually reexamine existing laws and regulations and may impose
changes in the future. Changes in federal legislation and
administrative policies in areas such as employee benefit plan
regulation, financial services regulation, and federal taxation could
lessen the advantages of certain of the Company's products as compared
to competing products, or possibly result in the surrender of some
existing contracts and policies or reduced sales of new products and,
therefore, could reduce the Company's profitability.
The insurance industry has recently become the focus of greater
regulatory scrutiny due to questionable business practices relating to
trading and pricing within the mutual fund and variable annuity
industries, allegations related to improper special payments,
price-fixing, conflicts of interest and improper accounting practices,
and other misconduct alleged by and initiatives of the New York
Attorney General, state insurance departments, and in related
litigation. As a result, a large number of insurance companies,
15
including certain ING affiliatesand the Company, have been requested
to provide information to regulatory authorities. In some cases this
regulatory scrutiny has led to new proposed legislation regulating
insurance companies, regulatory penalties, and related litigation. At
this time, the Company does not believe that any such regulatory
scrutiny will materially impact it; however, the Company cannot
guarantee that new laws, regulations, or other regulatory action aimed
at the business practices under scrutiny would not adversely affect
its business. The adoption of new laws or regulations, enforcement
action or litigation, whether or not involving the Company, could
influence the manner in which it distributes its insurance products,
which could adversely impact the Company.
Item 2. Properties
The Company's principal office is located at 1475 Dunwoody Drive, West
Chester, Pennsylvania, 19380-1478. The Company's annuity operations
and customer service center are located at 909 Locust Street, Des
Moines, Iowa 50309. All Company office space is leased or subleased by
the Company or its other affiliates. The Company pays substantially
all expenses associated with its leased and subleased office
properties. Affiliates within ING's U.S. operations provide the
Company with various management, finance, investment management, and
other administrative services, from facilities located at 5780 Powers
Ferry Road, N.W., Atlanta, Georgia 30327-4390. The affiliated
companies are reimbursed for the Company's use of these services and
facilities under a variety of intercompany agreements.
Item 3. Legal Proceedings
The Company is a party to threatened or pending lawsuits/arbitrations
arising from the normal conduct of business. Due to the climate in
insurance and business litigation/arbitration, suits against the
Company sometimes include claims for substantial compensatory,
consequential or punitive damages and other types of relief. Moreover,
certain claims are asserted as class actions, purporting to represent
a group of similarly situated individuals. While it is not possible to
forecast the outcome of such lawsuits/arbitrations, in light of
existing insurance, reinsurance and established reserves, it is the
opinion of management that the disposition of such
lawsuits/arbitrations will not have a materially adverse effect on the
Company's operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(Dollar amounts in millions, unless otherwise stated)
There is no public trading market for the Company's common stock. As
of January 1, 2004, all of the Company's outstanding common stock was
owned by its parent, Lion, as a result of the affiliate mergers
described in Part I, Item 1. All of the outstanding common stock of
Lion is owned by ING AIH, whose ultimate parent is ING. As of December
31, 2003, prior to the merger, all of the Company's common stock was
owned by Equitable Life, a wholly owned subsidiary of Lion.
The Company's ability to pay dividends to its parent is subject to the
prior approval of the Iowa Division of Insurance for payment of any
dividend, which, when combined with other dividends paid within the
preceding twelve months, exceeds the greater of (1) ten percent (10%)
of the Company's statutory surplus at the prior year end or (2) the
Company's prior year statutory net gain from operations. The Company
did not pay any dividends on its common stock during 2004 or 2002.
During 2003, the Company paid $12.4 in dividends on its common stock
to its Parent.
During 2004, 2003, and 2002, ING USA received capital contributions of
$230.0, $88.7, and $456.3, respectively, from Lion. Lion has recently
contributed significant amounts of capital to the Company to support
its sales activities. The Company has also used capital primarily to
support sales growth and also to strengthen reserves associated with
its annuity products.
17
Item 6. Selected Financial Data
(Dollar amounts in millions unless otherwise stated)
ING USA ANNUITY AND LIFE INSURANCE COMPANY
3-YEAR SUMMARY OF SELECTED FINANCIAL DATA
2004 2003* 2002*
-----------------------------------------
OPERATING RESULTS
Net investment income $ 1,023.9 $ 974.6 $ 989.3
Fee income 566.7 397.7 295.7
Premiums 22.8 26.0 36.8
Net realized capital gains (losses) 57.6 106.9 (196.5)
Total revenue 1,673.8 1,509.0 1,141.6
Interest credited and other benefits to
contractowners 1,134.0 925.7 848.0
Amortization of deferred policy acquisition
costs and value of business acquired 186.8 347.9 302.0
Income (loss) before cumulative effect of
change in accounting principle 92.9 57.3 (116.1)
Cumulative effect of change in accounting
principle, net of tax (1.0) - (1,298.4)
Net income (loss) 91.9 57.3 (1,414.5)
FINANCIAL POSITION
Total investments $ 22,882.7 $ 19,844.6 $ 18,413.4
Assets held in separate accounts 24,746.7 18,220.1 12,052.4
Total assets 52,417.6 41,097.4 33,460.1
Future policy benefits and claims reserves 22,961.0 19,400.5 18,404.9
Liabilities related to separate accounts 24,746.7 18,220.1 12,052.4
Notes to affiliates 435.0 85.0 85.0
Total shareholder's equity 2,774.5 2,528.0 2,339.5
* These amounts have been restated due to the merger that occurred
on January 1, 2004, which was accounted for in a manner similar
to a pooling-of-interests.
18
Item 7. Management's Narrative Analysis of the Results of Operations and
Financial Condition
(Dollar amounts in millions, unless otherwise stated)
Overview
The following narrative analysis of the results of operations presents
a review of ING USA Annuity and Life Insurance Company ("ING USA" or
"the Company") for each of the three years ended December 31, 2004,
2003, and 2002 and financial condition as of December 31, 2004 versus
December 31, 2003. This item should be read in its entirety and in
conjunction with the selected financial data, financial statements and
related notes and other supplemental data which can be found under
Part II, Item 6 and Item 8 contained herein.
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 Securities and Exchange
Commission ("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 litigation,
regulatory action, and risks associated with the Company's investment
portfolio, such as changes in credit quality, price volatility and
liquidity. Investors are also directed to consider other risks and
uncertainties discussed in "Risk Factors" in Item 1 contained herein
and in other documents filed by the Company with the SEC. Except as
may be required by the federal securities laws, the Company disclaims
any obligation to update forward-looking information.
19
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.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V.
("ING"), a global financial services holding company based in The
Netherlands, with American Depository Shares on the New York Stock
Exchange under the symbol "ING". ING USA is authorized to do business
in the District of Columbia and all states except New York. ING USA
was domiciled as a life insurance company under the laws of the State
of Delaware until December 31, 2003 and has been domiciled as such in
Iowa since January 1, 2004.
On January 1, 2004 (the "Merger Date"), the Company simultaneously
redomesticated from Delaware to Iowa, changed its name from Golden
American Life Insurance Company to ING USA Annuity and Life Insurance
Company, and merged the following affiliates into the Company:
Equitable Life Insurance Company of Iowa ("Equitable Life"), USG
Annuity & Life Company ("USG"), and United Life & Annuity Insurance
Company ("ULA") (collectively, the "Merger Companies"). Prior to the
merger date, ING USA was a wholly-owned subsidiary of Equitable Life.
Equitable Life merged its affiliate, Ameribest Life Insurance Company
("AMB"), a life insurance company domiciled in Georgia, into its
operations on January 1, 2003.
Statement of Financial Accounting Standards ("FAS") No. 141, "Business
Combinations", excludes transfers of net assets or exchanges of shares
between entities under common control, and notes that certain
provisions under Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations", provide a source of guidance for such
transactions. In accordance with APB Opinion No. 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 Balance Sheets and Statements of Operations
give effect to the consolidation transactions as if they had occurred
on December 31, 2003 and January 1, 2002, respectively.
Critical Accounting Policies
General
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires
the use of estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying financial statements and
related footnotes. These estimates and assumptions are evaluated on an
on-going basis based on historical developments, market conditions,
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 materially adversely affected by the need to
make future accounting adjustments to reflect changes in these
estimates and assumptions from time to time.
20
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: reserves, other-than-temporary
impairment testing, amortization of deferred policy acquisition costs
and value of business acquired, and valuation of derivatives
instruments. 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 financial statements.
Reserves
The Company establishes and carries actuarially determined reserves
which are calculated to meet its future obligations. Reserves are
calculated using mortality and withdrawal rate assumptions based on
relevant Company experience and are periodically reviewed against both
industry standards and experience. Changes in or deviations from the
assumptions used can significantly affect the Company's reserve levels
and related future operations.
Future policy benefits and claims reserves include reserves for
universal life insurance contracts, traditional life insurance
contracts, immediate and deferred annuities with life contingent
payouts, and guaranteed investment contracts ("GICs").
Reserves for deferred annuity investment contracts and immediate
annuity without life contingent payouts are equal to cumulative
deposits less charges and withdrawals, plus credited interest thereon
(reserve interest rates vary by product up to 10.0% for 2004, 2003,
and 2002).
Reserves for immediate annuities with life contingent payout benefits
are computed on the basis of assumed interest discount rates,
mortality, and expenses, including a margin for adverse deviations.
Such assumptions generally vary by annuity plan type, year of issue,
and policy duration. For 2004, 2003, and 2002, reserve interest rates
ranged from 3.0% to 8.0%.
Certain variable annuity contracts offer guaranteed minimum death
benefits ("GMDB"), as well as guaranteed living benefits. The GMDB is
provided in the event the customer's account value at death is below
the guaranteed value. Guaranteed living benefits offered include
guaranteed minimum income benefits, guaranteed minimum withdrawal
benefits, and guaranteed minimum accumulation benefits. See Item I,
Business, "Products and Services", for a description of the guaranteed
living benefits. Although the Company reinsures or hedges a
significant portion of the death and living benefit guarantees
associated with its in force business, declines in the equity market
may increase the Company's net exposure to the death and living
benefits under these contracts.
Reserves for GICs are calculated using the amount deposited with the
Company, less withdrawals, plus interest accrued to the ending
valuation date. Interest on these contracts is accrued by a
predetermined index plus a spread or a fixed rate, established at the
issue date of the contract.
21
Reserves for universal life products are equal to cumulative deposits
less withdrawals and charges plus credited interest thereon. In
addition, the Company holds reserves as required for Statement of
Position ("SOP") 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Separate
Accounts", for certain products with anticipated losses in later
policy durations. Reserves for traditional life insurance contracts
represent the present value of future benefits to be paid to or on
behalf of contractowners and related expenses less the present value
of future net premiums.
Other-Than-Temporary Impairment Testing
The Company's accounting policy requires that a decline in the value
of an investment below its amortized cost basis be assessed to
determine if the decline is other-than-temporary. If so, the
investment is deemed to be other-than-temporarily impaired, and a
charge is recorded in net realized capital losses equal to the
difference between fair value and the amortized cost basis of the
investment. The fair value of the other-than-temporarily impaired
investment becomes its new cost basis.
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 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.
The evaluation of other-than-temporary impairments included in the
Company's general account is a quantitative and qualitative process,
which is subject to risks and uncertainties and is intended to
determine whether declines in the fair value of investments should be
recognized in current period earnings. The risks and uncertainties
include the length of time and extent to which the fair value has been
less than amortized cost, changes in general economic conditions, the
issuer's financial condition or near-term recovery prospects, and the
effects of changes in interest rates.
Amortization of Deferred Policy Acquisition Costs and Value of
Business Acquired
Deferred policy acquisition costs ("DAC") represent policy acquisition
costs that have been capitalized and are subject to amortization. Such
costs consist principally of certain commissions, underwriting,
contract issuance, and agency expenses, related to the production of
new and renewal business.
Value of business acquired ("VOBA") represents the outstanding value
of in force business capitalized and amortized in purchase accounting
when the Company was acquired. The value is based on the present value
of estimated net cash flows embedded in the Company's contracts.
22
The amortization methodology used for DAC and VOBA varies by product
type. Statement of Financial Accounting Standards ("FAS") No. 60,
"Accounting and Reporting by Insurance Enterprises," applies to
traditional life insurance products, primarily whole life and term
life insurance contracts. Under FAS No. 60, DAC and VOBA are amortized
over the premium payment period, in proportion to the premium revenue
recognized.
FAS No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from
the Sale of Investments" applies to universal life and investment-type
products, such as fixed and variable deferred annuities. Under FAS No.
97, DAC and VOBA are amortized, with interest, over the life of the
related contracts (usually 25 years) in relation to the present value
of estimated future gross profits from investment, mortality, and
expense margins; asset-based fees, policy administration, and
surrender charges; less policy maintenance fees and non-capitalized
commissions, as well as realized gains and losses on investments. DAC
related to guaranteed investment contracts, however, are amortized on
a straight-line basis over the life of the contract.
Changes in assumptions can have a significant impact on DAC and VOBA
balances and amortization rates. Several assumptions are considered
significant in the estimation of future gross profits associated with
variable universal life and variable deferred annuity products. One of
the most significant assumptions involved in the estimation of future
gross profits is the assumed return associated with the variable
account performance. To reflect the volatility in the equity markets,
this assumption involves a combination of near-term expectations and
long-term assumptions regarding market performance. The overall return
on the variable account is dependent on multiple factors, including
the relative mix of the underlying sub-accounts among bond funds and
equity funds, as well as equity sector weightings. Other significant
assumptions include surrender and lapse rates, estimated interest
spread, and estimated mortality.
Due to the relative size and sensitivity to minor changes in
underlying assumptions of DAC and VOBA balances, the Company performs
a quarterly and annual analysis of DAC and VOBA for the annuity and
life businesses, respectively. The DAC and VOBA balances are evaluated
for recoverability and are reduced to the extent that estimated future
gross profits are inadequate to recover the asset.
At each evaluation date, actual historical gross profits are
reflected, and estimated future gross profits and related assumptions
are evaluated for continued reasonableness. Any adjustment in
estimated profit requires that the amortization rate be revised
("unlocking"), retroactively to the date of the policy or contract
issuance. The cumulative unlocking is recognized as a component of
current period amortization. In general, increases in investment,
mortality, and expense margins, and thus estimated future profits,
lower the rate of amortization. However, decreases in investment,
mortality, and expense margins, and thus estimated future profits,
increase the rate of amortization.
23
Analysis of DAC/VOBA-Annuity
The variance in amortization expense in 2004 versus 2003 was impacted
by SOP 03-1. In prior years, amortization of inducements was included
in amortization of DAC and VOBA. Beginning in 2004, sales inducement
amortization is included as a component of benefit expense in
accordance with SOP 03-1. Therefore, the decrease in amortization of
DAC and VOBA is partially related to 2004 sales inducement
amortization being included in interest credited instead of
amortization of DAC and VOBA. Also contributing to the decrease is the
improved market performance during 2003, which lowered the
amortization rate for 2004. Amortization expense in 2003 was higher
than 2002 due in part to the poor equity market performance in 2002,
which increased the amortization rate in 2003, as well as to the
amortization of acquisition costs related to increased sales of fixed
annuities during 2002. 2003 was the first full year of amortization
for this block of acquisition costs. Also impacting amortization of
DAC and VOBA are unlocking adjustments discussed below.
The actual separate account market return exhibited by the variable
deposits invested in mutual funds associated with the Company's
liabilities in 2004 exceeded the long-term assumption, thereby
producing deceleration of DAC/VOBA amortization of $6.6, before tax.
As a part of the regular analysis of DAC/VOBA, at the end of the first
quarter of 2004, the Company modified its assumptions regarding the
future rate of spread income on some of its fixed annuity liabilities.
The assumption modification was in the direction of lower spread
income, and produced an acceleration of DAC/VOBA amortization of $5.0,
before tax. Similar regular analysis of DAC/VOBA at the end of the
third quarter of 2004 included unlocking of the Company's assumptions
regarding contractowner withdrawal behavior. Based on experience
studies, assumed rates of full surrender for both fixed and variable
annuities and rates of partial withdrawal of account balance for
variable annuities were all modified downward, producing a
deceleration of DAC/VOBA amortization of $4.2, before tax. The
combined effect of the three factors of actual variable return for
2004 exceeding long-term assumptions, modification of future spread
income expectations, and modification of expectations regarding future
withdrawal behavior was a deceleration of DAC/VOBA amortization
totaling $5.8, before tax, or $3.8, net of $2.0 of federal income tax
expense.
The Company reset long-term return assumptions for the separate
account to 8.5% from 9.0% (gross before fund management fees and
mortality and expense and other policy charges) as of December 31,
2003, reflecting a blended return of equity and other sub-accounts.
The largest component of the 2003 unlocking adjustment comprised a
deceleration of DAC/VOBA amortization totaling $41.3, before tax. This
component was primarily driven by improved market performance. The
Company also unlocked assumptions regarding future lapse rates for
fixed annuities during the analysis at the end of the third quarter of
2003, resulting in an acceleration of DAC/VOBA amortization of $6.0,
before tax. In each of the regular analyses of DAC/VOBA at the end of
the third and fourth quarters of 2003, expectations regarding yields
on assets backing fixed annuity liabilities were revised downward,
resulting in respective accelerations of DAC/VOBA amortization
measuring $2.1, before tax and $6.0, before tax. The combined effect
of all unlocking in 2003 was a deceleration of DAC/VOBA amortization
totaling $27.2, before tax, or $17.7, net of $9.5 of federal income
tax expense.
24
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 return 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 largest component of the 2002 unlocking adjustment comprised an
acceleration of DAC/VOBA amortization totaling $91.5, before tax. This
component was primarily driven by the sustained downturn in the equity
markets and revised expectations for future returns. The Company also
unlocked assumptions regarding future lapse and partial withdrawal
rates for fixed annuities during the analysis at the end of the third
quarter of 2002, resulting in an acceleration of DAC/VOBA amortization
measuring $2.0, before tax. During the regular analysis at the end of
the fourth quarter of 2002, expectations regarding the assets backing
the fixed annuity liabilities were revised to reflect higher
anticipated default rates. This fourth quarter adjustment resulted in
an acceleration of DAC/VOBA amortization of $8.0, before tax. The
combined effect of all unlocking adjustments in 2002 was an
acceleration of DAC/VOBA amortization totaling $101.5 before tax, or
$66.0, net of $35.5 of federal income tax benefit.
Analysis DAC/VOBA - Life
As part of the regular analysis of DAC/VOBA for the life insurance
block, at the end of each of the years ended December 31, 2004, 2003,
and 2002, the Company unlocked due to assumption changes related
primarily to mortality, lapse, expense, and interest amounts. The
impact of unlocking on the amortization of DAC/VOBA was a decrease of
$1.2 in 2004, an increase of $6.0 in 2003, and an increase of $5.2 in
2002.
Valuation of Derivative Instruments
Derivative instruments are reported at fair value and are obtained
internally from the derivative accounting system. Embedded derivative
instruments are reported at fair value based upon internally
established valuations that are consistent with external valuation
models or market quotations. Guaranteed minimum withdrawals benefits
("GMWBs") and guaranteed minimum accumulation benefits ("GMABs")
represent an embedded derivative liability in the variable annuity
contract that are required to be reported separately from the host
variable annuity contract. GMWBs and GMABs are carried at fair value
based on actuarial assumptions related to projected cash flows,
including benefits and related contract charges, over the lives of the
contracts, incorporating expectations concerning contractowner
behavior. Estimating cash flows involves numerous estimates and
subjective judgments including those regarding expected market rates
of return, market volatility, correlations of market returns, and
discount rates.
Results of Operations
Year ended December 31, 2004 compared to year ended December 31, 2003
Net Income: Net income increased by $34.6 to $91.9 for 2004 from $57.3
for 2003. The increase in income is primarily the result of higher fee
income and lower amortization of DAC and VOBA, partially offset by
higher benefits to contractowners, operating expenses, and taxes.
25
Net Investment Income: Net investment income from general account
assets increased by $49.3 to $1,023.9 for 2004 from $974.6 for 2003.
The increase in net investment income is partially due to higher fixed
assets under management due to higher net cash flows into fixed
products. Also contributing to the increase was a rise in income on
derivatives, specifically interest rates swaps and call options, which
are used to manage interest rate and equity risk. Partially offsetting
the increase in income is a rise in investment management fees and
decline in yields.
Fee Income: Fee income increased by $169.0 to $566.7 for 2004 from
$397.7 for 2003. The increase is primarily due to a $6.2 billion
increase in the average variable annuity assets under management by
the Company resulting from continued growth in sales related to the
Company's variable annuity product lines and equity market performance
in 2003 and 2004. Also contributing to the increase in fee income were
sales of products with higher charges for living benefits during 2004.
Premiums: Premiums, primarily related to traditional life insurance
products, decreased by $3.2 to $22.8 for 2004 from $26.0 for 2003.
This decrease in premium is primarily related to this line of business
being in run-off since 2001.
Net Realized Capital Gains (Losses): Net realized capital gains
decreased by $49.3 to $57.6 for 2004 from $106.9 for 2003. The
decrease in gains is primarily due to rising interest rates in 2004
and a decline in other-than-temporary impairments. In an increasing
rate environment, the market value of fixed maturities in the
portfolios decreases, which in turn, results in lower realized gains
upon sale.
Interest Credited and Other Benefits to Contractowners: Interest
credited and other benefits to contractowners increased by $208.3 to
$1,134.0 for 2004 from $925.7 for 2003. The increase is primarily
related to: (i) an increase in the cost of guaranteed benefits mainly
due to an increase in average variable assets under management in
2004; (ii) higher fixed annuity deposits and GICs which resulted in
higher interest credited to contractowner accounts; and (iii) the
amortization of deferred sales inducements are included in this line
item in 2004 in accordance with SOP 03-1. In 2003 and 2002, the
amortization of deferred sales inducements is included in the
amortization of DAC and VOBA.
Amortization of DAC and VOBA: Amortization of DAC and VOBA decreased
by $161.1 to $186.8 for 2004 from $347.9 for 2003. In prior years,
amortization of deferred sales inducements is included in amortization
of DAC and VOBA. Beginning in 2004, deferred sales inducement
amortization is included as a component of interest credited and other
benefits in accordance with SOP 03-1. Therefore, the decrease in
amortization of DAC and VOBA is partially related to 2004 deferred
sales inducement amortization of $65 being included in interest
credited and other benefits instead of amortization of DAC and VOBA.
Also contributing to the decrease is the improved market performance
during 2003, which lowered the amortization rate for 2004.
Income Tax Expense (Benefit): Income tax expense increased by $81.5 to
$80.7 for 2004 from a benefit of $(0.8) for 2003. The increase is
primarily due to the increase in pre-tax income in 2004 and the
establishment of a valuation allowance due to clarifying tax guidance.
Also contributing to the increase is a decrease in the dividend
received deduction.
26
Year ended December 31, 2003 compared to year ended December 31, 2002
Net Income (Loss): Net income (loss) increased by $1,471.8 to $57.3
for 2003 from a loss of $(1,414.5) for 2002. This increase is
primarily due to the 2003 cumulative effect of change in accounting
principle, an increase in fee income and net realized capital gains,
partially offset by an increase in interest credited and other
benefits to contractowners, amortization of DAC/VOBA, and a decrease
in the income tax benefit.
Net Investment Income: Net investment income from general account
assets decreased by $14.7 to $974.6 for 2003 from $989.3 for 2002.
This decrease was primarily due to a rise in losses on derivatives due
to a loss on futures trading in 2003 to mitigate exposure to GICs.
Partially offsetting this decrease is a rise in investment income
driven by increased assets under management, and a reduction in losses
related to other derivatives. Other derivative losses decreased
primarily due to an increase in gains on derivative products hedging
the Company's exposure in its indexed annuities, reflecting the
improved market environment in 2003 over 2002.
Fee Income: Fee income increased by $102.0 to $397.7 for 2003 from
$295.7 for 2002. The increase is mainly due to a $3.0 billion increase
in average variable annuity assets under management by the Company,
resulting from the growth in sales related to the Company's variable
annuity product lines, and growth in the percentage of customers
choosing products with higher charges for living benefits.
Premiums: Premiums decreased by $10.8 to $26.0 for 2003 from $36.8 for
2002. This decrease is related to the lapse, surrender, or pay-up of
policies in the closed block of participating life business, which was
closed to new sales during 2001.
Net Realized Capital Gains (Losses): Net realized capital gains
increased by $303.4 to $106.9 for 2003 from a loss of $(196.5) for
2002. The increase is primarily due to the declining interest rates in
2003. In a declining rate environment, the market value of fixed
maturities in the portfolios increases, which in turn, results in
higher realized gains upon sale. Also contributing to the increase is
a rise in realized gains on derivatives due to changes in the value of
open derivative contracts.
Interest Credited and Other Benefits to Contractowners: Interest
credited and other benefits to contractowners increased $77.7 to
$925.7 for 2003 from $848.0 for 2002. This increase is primarily due
to an increase in interest credited on higher average fixed annuity
assets under management due to increased sales of fixed annuity
products during 2002 and 2003.
Amortization of DAC and VOBA: The amortization of DAC and VOBA
increased by $45.9 to $347.9 for 2003 from $302.0 for 2002. This
increase is due in part to the poor equity market performance in 2002,
which increased the amortization rate in 2003, as well as to the
amortization of acquisition costs related to increased sales of fixed
annuities during 2002. 2003 was the first full year of amortization
for this block of acquisition costs.
27
Cumulative Effect of Change in Accounting Principle: The 2002
cumulative effect of the change in accounting principle reflects the
Company's adoption of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("FAS") No. 142, "Goodwill
and Other Intangible Assets". The adoption of this standard resulted
in a goodwill impairment loss of $1,298.4, net of $699.1 of income
taxes, related to prior acquisitions. This impairment loss represented
the entire carrying amount of goodwill, net of accumulated
amortization.
Income Tax Expense (Benefit): Income tax benefit decreased $59.4 to
$(0.8) for 2003 from $(60.2) for 2002. This decrease is primarily
driven by the change in pre-tax income and utilization of operations
and capital loss carryforwards in 2003. Offsetting those decreases is
an increase in the dividend received deduction and a benefit related
to refinement of the Company's method of calculating deferred tax
inventories.
Financial Condition
Investments
Investment Strategy
The Company's investment strategy for its general account investments
involves diversification by asset class, and seeks to add economic
diversification and to reduce the risks of credit, liquidity, and
embedded options within certain investment products, such as convexity
risk on collateralized mortgage obligations and call options. The
investment management function is centralized under ING Investment
Management LLC ("IIM"), an affiliate of the Companypursuant to an
investment advisory agreement. Separate portfolios are established for
each general type of product within the Company.
The Company invests its general account primarily in fixed maturity
investments, including publicly issued bonds (including government
bonds), privately placed notes and bonds, mortgage-backed securities,
and asset-backed securities. The primary investment strategy is to
optimize the risk-adjusted return through superior asset selection
predicated on a developed relative value approach, credit research and
monitoring, superior management of interest rate risk, and active
exploration into new investment product opportunities. Investments are
purchased when market returns, adjusted for risk, and expenses, are
sufficient to profitably support growth of the liability block of
business. In addition, assets and liabilities are analyzed and
reported for internal management purposes on an option-adjusted basis.
The level of required capital of given transactions is a primary
factor in determining relative value among different investment and
liability alternatives, within the scope of each product type's
objective. An active review of existing holdings identifies specific
assets that could be effectively traded in order to enhance the
risk-adjusted returns of the portfolio, while minimizing adverse tax
and accounting impacts. The Company strives to maintain a portfolio
average asset quality rating of A, excluding mortgage loans, but
including mortgage-backed securities that are reported with bonds,
based on Standard & Poor's ratings classifications.
For a discussion of the Company's use of derivatives, see "Liquidity
and Capital Resources - Derivatives."
28
Portfolio Composition
The following table presents the investment portfolio at December 31,
2004 and 2003.
2004 2003
---------------------------- ----------------------------
Fair Value % Fair Value %
----------------- --------- ----------------- ---------
Fixed maturities, including
securities pledged $ 18,597.8 81.3% $ 16,097.8 81.1%
Equity securities 35.3 0.2% 120.2 0.6%
Mortgage loans on real estate 3,851.8 16.8% 3,388.7 17.1%
Real estate 1.8 0.0% 4.5 0.0%
Policy loans 169.0 0.7% 177.1 0.9%
Short-term investments 6.9 0.0% 0.3 0.0%
Other investments 220.1 1.0% 56.0 0.3%
----------------- --------- ----------------- ---------
$ 22,882.7 100.0% $ 19,844.6 100.0%
================= ========= ================= =========
Fixed Maturities
Fixed maturities available-for-sale as of December 31, 2004 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ---------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 464.0 $ 1.8 $ 1.1 $ 464.7
State, municipalities and political
subdivisions 20.7 - 0.8 19.9
U.S. corporate securities:
Public utilities 1,796.9 78.4 8.9 1,866.4
Other corporate securities 6,292.4 243.5 22.7 6,513.2
--------------- -------------- -------------- ---------------
Total U.S. corporate securities 8,089.3 321.9 31.6 8,379.6
--------------- -------------- -------------- ---------------
Foreign securities:
Government 518.9 24.2 2.2 540.9
Other 2,571.2 97.7 11.5 2,657.4
--------------- -------------- -------------- ----------------
Total foreign securities 3,090.1 121.9 13.7 3,198.3
--------------- -------------- -------------- ----------------
Residential mortgage-backed securities 3,440.3 43.9 22.4 3,461.8
Commercial mortgaged-backed securities 1,107.8 34.9 3.0 1,139.7
Other asset-backed securities 1,934.2 14.3 14.7 1,933.8
--------------- -------------- -------------- ----------------
Total fixed maturities, including fixed
maturities pledged 18,146.4 538.7 87.3 18,597.8
Less: fixed maturities pledged 1,100.5 9.8 1.7 1,108.6
--------------- -------------- -------------- ----------------
Fixed maturities $ 17,045.9 $ 528.9 $ 85.6 $ 17,489.2
=============== ============== ============== ================
29
Fixed maturities available-for-sale as of December 31, 2003 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ---------------
Fixed maturities:
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 6,246.4 300.9 33.7 6,513.6
--------------- -------------- -------------- ----------------
Total U.S. corporate securities 7,587.6 385.2 41.7 7,931.1
--------------- -------------- -------------- ----------------
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
--------------- -------------- -------------- ----------------
Residential mortgage-backed securities 3,247.0 66.7 21.8 3,291.9
Commercial mortgaged-backed securities 774.2 45.8 2.1 817.9
Other asset-backed securities 1,273.0 17.2 21.1 1,269.1
Total fixed maturities, including fixed
maturities pledged 15,580.5 634.6 117.3 16,097.8
Less: fixed maturities pledged 555.5 6.4 2.8 559.1
--------------- -------------- -------------- ----------------
Total fixed maturities $ 15,025.0 $ 628.2 $ 114.5 $ 15,538.7
=============== ============== ============== ================
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.
The average quality rating of the Company's fixed maturities portfolio
was A+ at December 31, 2004 and December 31, 2003. Ratings are
calculated using a rating hierarchy that considers S&P, Moody's, and
internal ratings.
Total fixed maturities by quality rating category, including fixed
maturities pledged to creditors, were as follows at December 31, 2004
and 2003:
2004 2003
--------------------------- ---------------------------
Fair % of Fair % of
Value Total Value Total
--------------- ---------- -------------- -----------
AAA $ 6,542.5 35.2% $ 5,690.2 35.3%
AA 865.3 4.7% 760.8 4.7%
A 4,035.7 21.7% 3,427.4 21.3%
BBB 6,325.2 34.0% 5,369.8 33.4%
BB 710.7 3.8% 642.4 4.0%
B and below 118.4 0.6% 207.2 1.3%
--------------- ---------- -------------- -----------
Total $ 18,597.8 100.0% $ 16,097.8 100.0%
=============== ========== ============== ===========
30
95.6% and 94.7% of the fixed maturities were invested in securities
rated BBB and above (Investment Grade) at December 31, 2004 and 2003,
respectively.
Fixed maturities rated BB and below (Below Investment Grade) 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.
Total fixed maturities by market sector, including fixed maturities
pledged to creditors, were as follows at December 31, 2004 and 2003:
2004 2003
--------------------------- ---------------------------
Fair % of Fair % of
Value Total Value Total
--------------- ---------- -------------- -----------
U.S. Corporate $ 8,399.5 45.2% $ 7,960.3 49.5%
Residential mortgage-backed 3,461.8 18.6% 3,291.9 20.5%
Commercial/multifamily mortgage-backed 1,139.7 6.1% 817.9 5.0%
Foreign(1) 3,198.3 17.2% 2,561.2 15.9%
U.S. Treasuries/Agencies 464.7 2.5% 197.4 1.2%
Asset-backed 1,933.8 10.4% 1,269.1 7.9%
--------------- ---------- -------------- -----------
Total $ 18,597.8 100.0% $ 16,097.8 100.0%
=============== ========== ============== ===========
(1)Primarily U.S. dollar denominated
The amortized cost and fair value of fixed maturities as of December
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
--------------- ---------------
Due to mature:
One year or less $ 336.8 $ 341.5
After one year through five years 4,066.3 4,151.2
After five years through ten years 4,209.5 4,403.0
After ten years 3,051.6 3,166.9
Mortgage-backed securities 4,548.0 4,601.4
Other asset-backed securities 1,934.2 1,933.8
Less: fixed maturities pledged 1,100.5 1,108.6
--------------- ----------------
Fixed maturities, excluding
fixed maturities pledged $ 17,045.9 $ 17,489.2
=============== ================
The Company did not have any investments in a single issuer, other
than obligations of the U.S. government, with a carrying value in
excess of 10% of the Company's shareholder's equity at December 31,
2004.
At December 31, 2004 and 2003, fixed maturities with fair values of
$11.9 and $20.1, respectively, were on deposit as required by
regulatory authorities.
31
The Company is a member of the Federal Home Loan Bank of Des Moines
("FHLB") and is required to maintain a collateral deposit that backs
funding agreements issued to the FHLB. At December 31, 2004 and 2003,
respectively, the Company had $376.3 and $125.3 in non-putable funding
agreements issued to FHLB. At December 31, 2004 and 2003,
respectively, assets with a carrying value of approximately $422.0 and
$148.2 collateralized the funding agreements issued to the FHLB.
Collateralized assets are included in fixed maturities in the Balance
Sheets.
Mortgage Loans
Mortgage loans, primarily commercial mortgage loans, totaled $3,851.8
at December 31, 2004 and $3,388.7 at December 31, 2003. These loans
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 on all amounts
due according to the contractual terms of the loan agreement), the
carrying value of the mortgage loan is reduced to either the present
value of expected cash flows, cash flows from the loan (discounted at
the loan's effective interest rate), or fair value of the collateral.
If the loan is in foreclosure, the carrying value is reduced to the
fair value of the underlying collateral, net of estimated costs to
obtain and sell. The carrying value of the impaired loans is reduced
by establishing a permanent write down charged to realized loss. At
December 31, 2004 and 2003, the Company had no allowance for mortgage
loan credit losses.
Unrealized Losses
Fixed maturities, including securities pledged to creditors, comprise
81.3% and 81.1% of the Company's total investment portfolio at
December 31, 2004 and 2003, respectively. Unrealized losses related to
fixed maturities are analyzed in detail in the following tables.
Fixed maturities, including securities pledged to creditors, in
unrealized loss positions for Investment Grade ("IG") and Below
Investment Grade ("BIG") securities by duration were as follows at
December 31, 2004 and 2003:
2004 2003
---------------------------------------- ----------------------------------------
% of IG % of IG % of IG % of IG
IG and BIG BIG and BIG IG and BIG BIG and BIG
--------- --------- --------- --------- --------- --------- --------- ---------
Less than six months below
amortized cost $ 26.6 30.5% $ 0.6 0.7% $ 24.9 21.2% $ 1.3 1.1%
More than six months
and less than twelve months
below amortized cost 28.0 32.0% 1.9 2.2% 64.1 54.7% 5.3 4.5%
More than twelve months
below amortized cost 26.1 29.9% 4.1 4.7% 10.1 8.6% 11.6 9.9%
--------- --------- --------- --------- --------- --------- --------- ---------
Total unrealized loss $ 80.7 92.4% $ 6.6 7.6% $ 99.1 84.5% $ 18.2 15.5%
========= ========= ========= ========= ========= ========= ========= =========
Of the unrealized losses less than 6 months in duration of $27.2,
there were $12.3 in unrealized losses that are primarily related to
interest rate movement or spread widening for other than
credit-related reasons. The remaining unrealized losses of $14.9 as of
December 31, 2004, relates to securities under the guidance prescribed
by EITF Issue No. 99-20. This category includes U.S. government-backed
32
securities, principal protected securities, and structured securities,
which did not have an adverse change in cash flows for which the
carrying amount was $1,560.4.
Of the unrealized losses more than 6 months and less than 12 months in
duration of $29.9, there were $16.9 in unrealized losses that are
primarily related to interest rate movement or spread widening for
other than credit-related reasons. The remaining unrealized losses of
$13.0 as of December 31, 2004, relates to securities under the
guidance prescribed in EITF Issue No. 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 $768.8.
Of the unrealized losses more than 12 months in duration of $30.2,
there were $18.0, in unrealized losses that are primarily related to
interest rate movement or spread widening for other than
credit-related reasons. The remaining unrealized losses of $12.2 as of
December 31, 2004, relates to securities under the guidance prescribed
by EITF Issue No. 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 $222.8.
Fixed maturities, including securities pledged to creditors, in
unrealized loss positions by market sector and duration were as
follows at December 31, 2004:
Commercial/
Residential Multi-family U.S.
U.S. Mortgage- Mortgage- Treasuries/ Asset-
Corporate Backed Backed Foreign Agencies Backed Total
------------ ------------ ------------- --------- ---------- --------- -----------
Less than six months below
amortized cost $ 8.7 $ 11.4 $ 1.3 $ 2.6 $ 1.0 $ 2.2 $ 27.2
More than six month and less than
twelve months below
amortized cost 15.4 6.8 1.4 1.5 - 4.8 29.9
More than twelve months
below amortized cost 8.3 4.1 0.3 9.6 0.1 7.8 30.2
------------ ------------ ------------- --------- ---------- --------- -----------
Total unrealized loss $ 32.4 $ 22.3 $ 3.0 $ 13.7 $ 1.1 $ 14.8 $ 87.3
============ ============ ============= ========= ========== ========= ===========
Other-Than-Temporary Impairments
The Company analyzes the general account investments to determine
whether there has been an other-than-temporary decline in fair value
below amortized cost basis. 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 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 an investment will not be
collected, an other-than-temporary impairment is considered to have
occurred.
In addition, the Company invests in structured securities that meet
the criteria of EITF Issue No. 99-20 as described in "Critical
Accounting Policies - Other-Than-Temporary Impairment Testing". Under
EITF Issue No. 99-20, a determination of the required impairment is
33
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 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.
The following table identifies the Company's other-than-temporary
impairments by type as of December 31:
2004 2003 2002
---------------------------- ---------------------------- ---------------------------
No. of No. of No. of
Impairment Securities Impairment Securities Impairment Securities
--------------- ------------ --------------- ------------ -------------- ------------
U.S. Corporate $ - - $ 23.7 16 $ 0.1 1
Residential mortgage-backed 9.1 88 81.3 173 81.3 125
Foreign 8.5 4 11.5 2 8.5 3
Asset-backed 11.5 6 5.8 7 31.1 14
Equity - - - - - 1
Limited partnerships 2.2 1 - - - -
--------------- ------------ --------------- ------------ -------------- ------------
Total $ 31.3 99 $ 122.3 198 $ 121.0 144
=============== ============ =============== ============ ============== ============
Net Realized Capital Gains and Losses
Net realized capital gains (losses) are comprised of the difference
between the carrying value of investments and proceeds from sale,
maturity, and redemption, as well as losses incurred due to the
impairment of investments. Net realized capital gains (losses) on
investments were as follows:
Year ended December 31,
2004 2003 2002
----------------- ------------------ -----------------
Fixed maturities $ 44.0 $ 108.7 $ (105.9)
Equity securities 6.4 0.2 0.1
Derivatives 9.3 1.7 (92.0)
Real estate - (3.4) 1.7
Other (2.1) (0.3) (0.4)
----------------- ------------------ -----------------
Pretax net realized capital gains (losses) $ 57.6 $ 106.9 $ (196.5)
================= ================== =================
After-tax net realized capital gains (losses) $ 37.4 $ 69.5 $ (127.7)
================= ================== =================
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.
Sources and Uses of Liquidity
The Company's principal sources of liquidity are annuity premiums and
product charges, GIC deposits, investment income, proceeds from the
maturing and sale of investments, proceeds from debt issuance, and
capital contributions. Primary uses of these funds are payments of
commissions and operating expenses, interest and premium credits,
payments under guaranteed death and living benefits, investment
34
purchases, repayment of debt, as well as contract maturities,
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. For a description of the Company's
asset/liability management, see Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk."
Additional sources of liquidity include borrowing facilities to meet
short-term cash requirements. The Company maintains a reciprocal loan
agreement with ING America Insurance Holding Company, Inc. ("ING AIH")
whereby either party can borrow from the other up to 3% of the
Company's total admitted assets, a $100 revolving note facility with
Bank of New York, and a $125 revolving note facility with SunTrust
Bank, which expires on July 30, 2005. The Company has no outstanding
balance under any of these facilities as of December 31, 2004 and
2003. Management believes that these sources of liquidity are adequate
to meet the Company's short-term cash obligations.
The Company is a member of the FHLB and is required to maintain a
collateral deposit that backs funding agreements issued to the FHLB.
At December 31, 2004 and 2003, respectively, the Company had $376.3
and $125.3 in non-putable funding agreements issued to FHLB. At
December 31, 2004 and 2003, respectively, assets with a carrying value
of approximately $422.0 and $148.2 collateralized the funding
agreements issued to the FHLB. Assets pledged to the FHLB are included
in fixed maturities in the Balance Sheets.
Capital Contributions
During 2004, 2003 and 2002, ING USA received capital contributions of
$230.0, $88.7, and $456.3, respectively. Lion has recently contributed
significant amounts of capital to the Company to support its sales
activities. The Company has also used capital primarily to support
sales growth and also to strengthen reserves associated with its
annuity products.
Separate Accounts
Separate Account assets and liabilities generally represent funds
maintained to meet specific investment objectives of contractowners
who bear the investment risk, subject, in limited cases, to certain
minimum guarantees. Investment income and investment gains and losses
generally accrue directly to such contractowners. The assets of each
account are legally segregated and are not subject to claims that
arise out of any other business of the Company. Separate Account
assets supporting variable options under variable annuity contracts
are invested, as designated by the contractowner 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 its affiliates, or in other selected
mutual funds not managed by the Company or its affiliates. Variable
annuity premiums are allocated to various subaccounts established
within the separate account. Each subaccount represents a different
investment option into which the contract owner may allocate premiums.
The account value of a variable annuity contract is equal to the
aggregate value of the subaccounts selected by the contract owner
(including the value allocated to any fixed account) less fees and
35
expenses. The Company offers investment options for its variable
annuities covering a wide range of investment styles, including large,
mid and small cap equity funds, as well as fixed income alternatives.
Therefore, unlike fixed annuities, under variable annuities
contractowners bear the risk of investment gains and losses associated
with the selected investment allocation. The Company, however, offers
certain guaranteed death and living benefits (described below) under
which it bears specific risks associated with these products. Many of
the variable annuities issued by ING USA are combination variable and
fixed deferred annuity contracts under which some or all of the
premiums may be allocated by the contractowner to a fixed account
available under the contract. The Company's major source of income
from variable annuities is the base contract mortality fee and expense
fees and guaranteed living and death benefit rider fees charged to the
customer, less the cost of administering the product as well as the
cost of providing for the guaranteed living and death benefits.
Minimum Guarantees
The Company sells variable annuity contracts that offer one or more of
the following guaranteed death benefits and living benefits:
Guaranteed Minimum Death Benefits ("GMDB"): The Company has offered
the following guaranteed death benefits:
- Standard - This guarantees that upon the death of the annuitant
the death benefit will be no less than the premiums paid by the
contractowner net of any contract withdrawals.
- Ratchet - This guarantees that upon the death of the annuitant
the death benefit will be no less than the greater of (1)
Standard or (2) the maximum anniversary (or quarterly) value of
the variable annuity.
- Rollup (7% or 5.5% Solution) - This guarantees that upon the
death of the annuitant the death benefit will be no less than the
aggregate premiums paid by the contractowner accruing interest at
7% or 5.5% per annum, subject to a maximum cap on the account
value. (The Company has discontinued this option for new sales.)
- Combo (Max 7) - This guarantees that upon the death of the
annuitant the death benefit will be no less than the greater of
(1) Ratchet or (2) Rollup.
At December 31, 2004, the guaranteed value of these death benefits in
excess of account values was estimated to be $2.5 billion before
reinsurance, which was a $0.4 billion decrease from the estimated $2.9
billion at December 31, 2003. The decrease was primarily driven by the
improved equity markets in 2004. For contracts issued prior to January
1, 2000, most contracts with enhanced death benefit guarantees were
reinsured to third party reinsurers to mitigate the risk produced by
such guaranteed death benefits. For contracts issued after December
31, 1999, the Company has instituted an equity hedging program in lieu
of reinsurance, to mitigate the risk produced by the guaranteed death
benefits. The equity hedging program is based on the Company entering
into derivative positions to offset exposures to guaranteed minimum
death benefits due to adverse changes in the equity markets. At
December 31, 2004, the guaranteed value of minimum guaranteed death
benefits in excess of account values, net of reinsurance, was
estimated to be $1.4 billion, of which $748.7 is projected to be
36
covered by the Company's equity hedging program. These amounts are
consistent with December 31, 2003. As of December 31, 2004, the
Company has recorded a liability of $66.9, net of reinsurance,
representing the estimated net present value of the Company's future
obligation for guaranteed minimum death benefits in excess of account
values. The liability increased $0.5 from $66.5 at December 31, 2003,
mainly due to the increase in fees used to fund the reserve exceeding
the decrease in the reserve, due to the improved equity markets during
2004. The liability is recorded in accordance with the provisions of
SOP 03-1.
Guaranteed Living Benefits: The Company offers the following
guaranteed living benefits:
- Guaranteed Minimum Income Benefit ("GMIB") - This guarantees a
minimum income payout, exercisable each contract anniversary on
or after the 10th rider anniversary. This type of living benefit
is the predominant selection in the Company's sales of variable
annuities.
- Guaranteed Minimum Withdrawal Benefit - This guarantees that
annual withdrawals of up to 7% of eligible premiums may be made
until eligible premiums previously paid by the contractowner are
returned, regardless of account value performance. The new 2004
GMWB rider (ING Principal Guard) provides reset and step-up
features, which provide, in certain instances, for increases in
the amount available for withdrawal.
- Guaranteed Minimum Accumulation Benefit - Guarantees that the
account value will be at least 100% of the premiums paid by the
contractowner after 10 years (GMAB10) or 200% after 20 years
(GMAB20).
At December 31, 2004, the guaranteed value of these living benefits in
excess of account values was estimated to be $269.7, which is a
decrease of $38.5 from an estimated $308.2 at December 31, 2003. The
decrease was primarily driven by the improved equity markets during
2004. All living benefits are covered by the Company's equity hedging
program. As of December 31, 2004, the Company has recorded a liability
of $40.3 representing the estimated net present value of its future
obligation for living benefits in excess of account values. The
liability increased $26.4 from $13.9 at December 31, 2003, mainly due
to the increase in fees used to fund the reserve exceeding the
decrease in the reserve, due to the improved equity market in 2004.
For GMIBs, the liability is recorded in accordance with the provisions
of SOP 03-1. For GMABs and GMWBs, the liability is held at fair value
in accordance with FAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities".
Variable annuity contracts containing guaranteed death and living
benefits expose the Company to equity risk. An increase in the value
of the equity markets will increase account values for these
contracts, thereby decreasing the Company's risk associated with the
GMDBs, GMIBs, GMWBs, and GMABs. A decrease in the equity markets, that
causes a decrease in the account values, will increase the possibility
that the Company may be required to pay amounts to customers due to
guaranteed death or living benefits.
37
Derivatives
The Company's use of derivatives is limited mainly to hedging purposes
to reduce the Company's exposure to cash flow variability of assets
and liabilities, interest rate risk, and market risk. These
derivatives are not accounted for using hedge accounting treatment
under FAS No. 133, as the Company does not seek hedge accounting
treatment. The Company enters into interest rate and currency
contracts, including swaps, caps, floors, options, and futures, 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. The Company also purchases options on equity
indexes to reduce and manage risks associated with its equity-index
annuity products. Changes in the fair value of open derivative
contracts are recorded in net realized capital gains and losses.
Derivatives are included in other investments on the Balance Sheets.
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. Changes
in the fair value of embedded derivatives are recorded in net realized
capital gains (losses) in the Statements of Operations. Embedded
derivatives within securities are included in fixed maturities on the
Balance Sheets. Embedded derivatives within retail annuity products
are included in future policy benefits and claims reserves on the
Balance Sheets.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Through the normal course of investment operations, the Company
commits to either purchase or sell securities, commercial mortgage
loans, or money market instruments at a specified future date and at a
specified price or yield. The inability of counterparties to honor
these commitments may result in either a higher or lower replacement
cost. Also, there is likely to be a change in the value of the
securities underlying the commitments. At December 31, 2004 and 2003,
the Company had off-balance sheet commitments to purchase investments
equal to their fair value of $175.3 and $154.0, respectively.
As of December 31, 2004, the Company had certain contractual
obligations due over a period of time as summarized in the following
table:
Payments due by Period
----------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
------------------------------------- ------------ ------------ -------------- ------------ ------------
Long-Term Debt $ 1,266.4 $ 28.2 $ 56.3 $ 56.4 $ 1,125.5
Operating Lease Obligations 77.6 7.8 15.4 15.0 39.4
Purchase Obligations 175.3 175.3 - - -
Reserves for Insurance Obligations 55,581.9 6,332.4 10,978.8 10,201.3 28,069.4
------------ ------------ -------------- ------------ ------------
Total $57,101.2 $6,543.7 $ 11,050.5 $10,272.7 $29,234.3
============ ============ ============== ============ ============
38
The Company's long-term debt, including interest, consists of the
following:
|X| A surplus note in the principal amount of $35.0 and the related
interest payable, to its affiliate, Security Life of Denver
Insurance Company. As of December 31, 2004, the outstanding
principal, interest rate, and maturity date of the surplus note
are $35.0, 7.98%, and December 7, 2029, respectively.
|X| Surplus notes in the aggregate principal amount of $400.0 and the
related interest payable to its affiliates, ING Life Insurance
and Annuity Company ("ILIAC"), ReliaStar Life, and Security Life
of Denver International Limited ("SLDI"). As of December 31,
2004, the aggregate amount of outstanding principal, interest
rate, and maturity date of these surplus notes are $400.0, 6.26%,
and December 29, 2034, respectively.
Operating lease obligations relate to the rental of office space under
various non-cancelable operating lease agreements that expire through
May 2017.
Purchase obligations consist primarily of commitments to purchase
investments during 2005.
Reserves for insurance obligations consist of actuarially determined
amounts required for the Company to meet its future obligations under
its variable annuity, fixed annuity, GIC, and other insurance
products.
Reinsurance Recoverable
The reinsurance recoverable increased by $736.2 to $1,388.1 for the
year ended December 31, 2004, from $651.9 for the year ended December
31, 2003. The increase is primarily due to increased reinsurance of
GICs to an affiliate company, Security Life of Denver Insurance
Company, of approximately $762.2.
Repurchase Agreements
The Company engages in dollar repurchase agreements ("dollar rolls")
and repurchase agreements 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. Company policies require a minimum of 95% of the fair value of
securities pledged under dollar rolls and repurchase agreement
transactions to be maintained as collateral. Cash collateral received
is invested in fixed maturities and the offsetting collateral
liability is included in borrowed money on the Balance Sheets. At
December 31, 2004 and 2003, the carrying value of the securities
pledged in dollar rolls and repurchase agreement transactions was
$715.9 and $536.8, respectively. The carrying value of the securities
pledged in dollar rolls and repurchase agreement transactions is
included in pledged securities on the Balance Sheets. The repurchase
obligation related to dollar rolls and repurchase agreements totaled
$713.4 and $534.2 at December 31, 2004 and 2003, respectively. The
repurchase obligation related to dollar rolls and repurchase
agreements is included in borrowed money on the Balance Sheets.
39
The primary risk associated with short-term collateralized borrowings
is that the counterparty will be unable to perform under the terms of
the contract. The Company's exposure is limited to the excess of the
net replacement cost of the securities over the value of the
short-term investments, an amount that was not material at December
31, 2004. The Company believes the counterparties to the dollar roll
and reverse repurchase agreements are financially responsible and that
the counterparty risk is immaterial.
Securities Lending
The Company engages in securities lending whereby certain securities
from its portfolio are loaned to other institutions for short periods
of time. Initial collateral, primarily cash, is required at a rate of
102% of the market value of the loaned domestic securities. The
collateral is deposited by the borrower with a lending agent and
retained and invested by the lending agent according to the Company's
guidelines to generate additional income. The market value of the
loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market value of the loaned
securities fluctuates.
Risk-Based Capital
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, as of December 31, 2004, the Company has total adjusted capital
above all required capital levels.
Recently Adopted Accounting Standards
(See the Significant Accounting Policies Footnote to the Financial
Statements for further information.)
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
Statements of Operations. 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. In
addition, sales inducements provided to contractowners must be
40
recognized on the balance sheet separately from deferred policy
acquisition costs and amortized as a component of benefits expense
using methodologies 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 of insurance charges resulting in losses in later policy
durations from the insurance benefit function and to defer, amortize,
and recognize separately, sales inducements to contractowners. Upon
adoption of SOP 03-1 on January 1, 2004, the Company recognized a
cumulative effect of a change in accounting principle of $(3.6),
before tax or $(2.3), net of $1.3 of income taxes. 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.
In the fourth quarter of 2004, the cumulative effect of a change in
accounting principle was revised due to the Company's implementation
of Technical Practice Aid 6300.05-6300.08 "Q&As Related to the
Implementation of SOP 03-1, `Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts"' (the "TPA").
The TPA, which was approved in September 2004, provides additional
guidance regarding certain implicit assessments that may be used in
the testing of the base mortality function on contracts, which is
performed to determine whether additional liabilities are required in
conjunction with SOP 03-1. In addition, the TPA provides additional
guidance surrounding the allowed level of aggregation of additional
liabilities determined under SOP 03-1. While the TPA was implemented
during the fourth quarter of 2004, the TPA is retroactive to the
original implementation date of SOP 03-1, January 1, 2004 and is
reported as an adjustment to SOP 03-1's cumulative effect of a change
in accounting principle. The adoption of the TPA reduced the Company's
cumulative effect of a change in accounting principle by $2.0, before
tax and decreased quarterly 2004 net income approximately $0.6 in each
quarter, for a total decrease of $2.3.
The implementation of SOP 03-1 also raised questions regarding the
interpretation of the requirements of FAS No. 97 "Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration Contracts
and for Realized Gains and Losses from the Sale of Investments,"
concerning when it is appropriate to record an unearned revenue
liability related to the insurance benefit function. To clarify its
position, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. FAS 97-1 ("FSP FAS 97-1"), "Situations in
Which Paragraphs 17(b) and 20 of FASB Statement No. 97, `Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of
Investments,' Permit or Require Accrual of an Unearned Revenue
Liability," effective for fiscal periods beginning subsequent to the
date the guidance was issued, June 18, 2004. The Company adopted FSP
FAS 97-1 on July 1, 2004. The adoption of FSP FAS 97-1 did not have an
impact on the Company's financial position, results of operations or
cash flows.
41
New Accounting Pronouncements
In December 2004, the FASB issued FAS No. 123 (revised 2004),
"Shared-Based Payment" ("FAS 123R"), which requires all share-based
payments to employees be recognized in the financial statements based
upon the fair value. FAS 123R is effective at the beginning of the
first interim or annual period beginning after June 15, 2005. Earlier
adoption is encouraged. FAS 123R provides two transition methods,
modified-prospective and modified-retrospective.
The modified-prospective method recognizes the grant-date fair value
of compensation for new awards granted after the effective date and
unvested awards beginning in the fiscal period in which the
recognition provision are first applied. Prior periods are not
restated. The modified-retrospective method permits entities to
restate prior periods by recognizing the compensation cost based on
amounts previously reported in the pro forma footnote disclosure as
required under FAS No. 123, "Accounting for Stock-Based Compensation".
The Company intends to early adopt the provisions of FAS 123R on
January 1, 2005, using the modified-prospective method. Due to the
Company's few number of employees, the adoption of FAS 123R is not
expected to have a material impact on the Company's financial
position, results of operations, or cash flows. Prior to January 2005,
the Company applied the intrinsic value-based provisions set forth in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Under the intrinsic value method, compensation
expense is determined on the measurement date, which is the first date
on which both the number of shares the employee is entitled to receive
and the exercise price are known. Compensation expense, if any, is
measured based on the award's intrinsic value, which is the excess of
the market price of the stock over the exercise price on the
measurement date.
Legislative Initiatives
Certain elements of the Jobs and Growth Tax Relief Reconciliation Act
of 2003, in particular the reduction in tax rates on long-term capital
gains and corporate dividends could impact the relative
competitiveness of the Company's products, especially variable
annuities. While sales of the products do not appear to have been
reduced to date, the long-term effect of the Jobs and Growth Act of
2003 on the Company's financial condition or results of operations
cannot be reasonably estimated at this time.
The American Jobs Creation Act of 2004 allows tax-free distributions
to be made from the Company's Policyholders' Surplus Account in 2005
and 2006. Under prior law, the Company was allowed to defer from
taxation a portion of statutory income under certain circumstances.
The deferred income was accumulated in the Policyholders' Surplus
Account and is taxable only under conditions that management considers
to be remote. Therefore, no federal income taxes have been provided on
the accumulated balance of $14.4 as of December 31, 2004. Based on
currently available information, the Company anticipates that the new
law will permanently eliminate any potential tax on the accumulated
balance of $14.4.
42
Other legislative proposals under consideration include repealing the
estate tax, reducing the taxation on annuity benefits, changing the
taxation of products, and changing life insurance company taxation.
Some of these proposals, if enacted, could have a material effect on
life insurance, annuity, and other retirement savings product sales.
The impact on the Company's products cannot be predicted. Legislation
to restructure the Social Security System and expand private pension
plan incentives also may be considered. Prospects for enactment and
the ultimate effect of these proposals are uncertain.
Other Regulatory Matters
Regulatory Matters
As with many financial services companies, the Company and its
affiliates have received informal and formal requests for information
from various state and federal governmental agencies and
self-regulatory organizations in connection with inquiries and
investigations of the products and practices of the financial services
industry. In each case, the Company and its affiliates have been and
are providing full cooperation.
Fund Regulatory Issues
Since 2002, there has been increased governmental and regulatory
activity relating to mutual funds and variable insurance products.
This activity has primarily focused on inappropriate trading of fund
shares, revenue sharing and directed brokerage, compensation, sales
practices and suitability, arrangements with service providers,
pricing, compliance and controls, and adequacy of disclosure.
In addition to responding to governmental and regulatory requests on
fund regulatory issues, ING management, on its own initiative,
conducted, through special counsel and a national accounting firm, an
extensive internal review of mutual fund trading in ING insurance,
retirement, and mutual fund products. The goal of this review was to
identify any instances of inappropriate trading in those products by
third parties or by ING investment professionals and other ING
personnel.
The internal review identified several isolated arrangements allowing
third parties to engage in frequent trading of mutual funds within the
variable insurance and mutual fund products of ING, and identified
other circumstances where frequent trading occurred despite measures
taken by ING intended to combat market timing. Each of the
arrangements has been terminated and disclosed to regulators, to the
independent trustees of ING Funds (U.S.) and in Company reports
previously filed with the SEC pursuant to the Securities Exchange Act
of 1934, as amended.
An affiliate of the Company, ING Funds Distributors, LLC ("IFD") has
received notice from the staff of the National Association of
Securities Dealers ("NASD") that the staff has made a preliminary
determination to recommend that disciplinary action be brought against
IFD and one of its registered persons for violations of the NASD
Conduct Rules and federal securities laws in connection with frequent
trading arrangements.
43
Other regulators, including the SEC and the New York Attorney General,
are also likely to take some action with respect to the Company or
certain affiliates before concluding their investigation of ING
relating to fund trading. The potential outcome of such action is
difficult to predict but could subject the Company or certain
affiliates to adverse consequences, including, but not limited to,
settlement payments, penalties, and other financial liability. It is
not currently anticipated, however, that the actual outcome of such
action will have a material adverse effect on ING or ING's U.S.-based
operations, including the Company.
ING has agreed to indemnify and hold harmless the ING Funds from all
damages resulting from wrongful conduct by ING or its employees or
from ING's internal investigation, any investigations conducted by any
governmental or self-regulatory agencies, litigation or other formal
proceedings, including any proceedings by the Securities and Exchange
Commission ("SEC"). Management reported to the ING Funds Board that
ING management believes that the total amount of any indemnification
obligations will not be material to ING or ING's U.S.-based
operations, including the Company.
Other Regulatory Matters
The New York Attorney General and other regulators are also conducting
broad inquiries and investigations involving the insurance industry.
These initiatives currently focus on, among other things, compensation
and other sales incentives, potential conflicts of interest, potential
anti-competitive activity, marketing practices, certain financial
reinsurance arrangements, and disclosure. It is likely that the scope
of these investigations will further broaden before the investigations
are concluded. U.S. affiliates of ING have received formal and
informal requests in connection with such investigations, and are
cooperating fully with each request for information.
These initiatives may result in new legislation and regulation that
could significantly affect the financial services industry, including
businesses in which the Company is engaged.
In light of these and other developments, U.S. affiliates of ING,
including the Company, periodically review whether modifications to
our business practices are appropriate.
For further discussion of the Company's regulatory matters, see "Risk
Factors" in Part I, Item 1 "Business".
44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
(Dollar amounts in millions, unless otherwise stated)
Asset/liability management is integrated into many aspects of the
Company's operations, including investment decisions, product
development, and determination of crediting rates. As part of the risk
management process, different economic scenarios are modeled,
including cash flow testing required for insurance regulatory
purposes, to determine that existing assets are adequate to meet
projected liability cash flows. Key variables in the modeling process
include interest rates, anticipated contractowner behavior, and
variable separate account performance. Contractowners bear the
investment risk related to variable annuity products, subject to the
minimum guaranteed death and living benefits included in these
contracts.
The fixed account liabilities are supported by a general account
portfolio principally composed of fixed rate investments with matching
duration characteristics that can generate predictable, steady rates
of return. The portfolio management strategy for the fixed account
considers the assets available-for-sale. This enables the Company to
respond to changes in market interest rates, prepayment risk, relative
values of asset sectors and individual securities and loans, credit
quality outlook, and other relevant factors. The objective of
portfolio management is to maximize returns, taking into account
interest rate and credit risk, as well as other risks. The Company's
asset/liability management discipline includes strategies to minimize
exposure to loss as interest rates and economic and market conditions
change.
On the basis of these analyses, management believes there is currently
no material solvency risk to the Company.
Interest Rate Risk
The Company defines Interest Rate Risk as the risk of an economic loss
due to adverse changes in interest rates. This risk arises from the
Company's primary activity of investing fixed annuity premiums and GIC
deposits received in interest-sensitive assets and carrying these
funds as interest-sensitive liabilities. The Company manages the
interest rate risk in its assets relative to the interest rate risk in
its liabilities. A key measure used to quantify this exposure is
duration. Duration measures the sensitivity of the assets and
liabilities to changes in interest rates.
To calculate duration related to annuities, the Company projects asset
and liability cash flows under stochastic arbitrage free interest rate
scenarios and calculates their net present value using LIBOR/swap spot
rates. Duration is calculated by revaluing these cash flows given a
small change in interest rates and determining the percentage change
in the fair value. The cash flows used in this calculation include the
expected coupon and principal payments on the assets and all benefit
cash flows on the interest-sensitive liabilities. The projections
include assumptions that reflect the effect of changing interest rates
on the prepayment, lapse, leverage, and/or option features of
instruments, where applicable. Such assumptions relate primarily to
mortgage-backed securities, collateralized mortgage obligations,
callable corporate obligations, and fixed rate deferred and immediate
annuities.
45
Duration calculations related to annuities as of December 31, 2004
indicate that the Company is well matched. The asset duration was 4.3
and the liability duration was 4.2. Given the duration match and an
$18.5 billion general account annuity portfolio, a 100 basis point
immediate parallel increase in interest rates as of December 31, 2004
would decrease the market values of the annuity assets by
approximately $0.8 billion and would decrease the liabilities by
approximately $0.8 billion. Similarly, a 100 basis point parallel
decrease in interest rates as of December 31, 2004 would increase the
market value of the general account annuity assets by approximately
$0.8 billion and would increase the liabilities by approximately $0.8
billion.
To calculate duration related to GICs, the Company projects and values
asset and liability cash flows using arbitrage free interest rate
scenarios based on the swap curve's implied forward rates. Ten key
points on the curve are then increased by 10 basis points, arbitrage
free interest rate scenarios are regenerated based on the increased
implied forward rates for each increased point, and cash flows are
reprojected and re-valued. The Company's net duration for a key rate
increase of 10 basis points is 0.18.
Further, market value changes are also calculated after applying
parallel and increases and decreases of 100 basis points to all ten
key points on the curve. Arbitrage free interest rate scenarios are
regenerated based on the increased implied forward rates, and cash
flows are re-projected and revalued. The Company's $1.8 billion GIC
portfolio at December 31, 2004, would decrease by $4.8 due to a 100
basis point increase in interest rates, and decrease by $1.0 due to a
100 basis point decrease in interest rates.
For further discussion of the Company's interest rate risks, see "Risk
Factors" in Part 1, Item 1 "Business".
Market Risk
The Company's operations are significantly influenced by changes in
the equity markets. The Company's profitability depends largely on the
amount of assets under management, which is primarily driven by the
level of sales, equity market appreciation and depreciation, and the
persistency of the in force block of business. Prolonged and
precipitous declines in the equity markets can have a significant
impact on the Company's operations. As a result, sales of variable
products may decline and surrender activity may increase, as customer
sentiment towards the equity market turns negative. Lower assets under
management will have a negative impact on the Company's financial
results, primarily due to lower fee income on variable and indexed
annuities. Furthermore, the Company may experience a reduction in
profit margins if a significant portion of the assets held in the
variable annuity separate account move to the general account and the
Company is unable to earn an acceptable investment spread,
particularly in light of the low interest rate environment and the
presence of contractually guaranteed interest credited rates.
In addition, prolonged declines in the equity market may also decrease
the Company's expectations of future gross profits, which are utilized
to determine the amount of DAC/VOBA to be amortized in a given
financial statement period. A significant decrease in the Company's
46
estimated gross profits would require the Company to accelerate the
amount of DAC/VOBA amortization in a given period, potentially causing
a material adverse deviation in the period's net income. Although an
acceleration of DAC amortization would have a negative impact on the
Company's earnings, it would not affect the Company's cash flow or
liquidity position. For further discussion, see "Risk Factors" in Part
1, Item 1, "Business".
Hedging of Minimum Guarantees
The Company sells variable annuity contracts that offer various
guaranteed death and living benefits including GMDBs, GMIBs, GMWBs and
GMABs. See discussion above, "Minimum Guarantees".
The liability associated with GMDBs and GMIBs is recorded in
accordance with SOP 03-1. The GMWBs and GMABs represent an embedded
derivative liability in the variable annuity contract that is required
to be reported separately from the host variable annuity contract. It
is carried at fair value in accordance with FAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and is reported in
future policy benefits and claims reserves in the Balance Sheets. The
fair value of the GMWB and GMAB obligations are calculated based on
actuarial assumptions related to projected cash flows, including
benefits and related contract charges, over the lives of the
contracts, incorporating expectations concerning policyholder
behavior. Estimating cash flows involves numerous estimates and
subjective judgments including those regarding expected market rates
of return, market volatility, correlations of market returns, and
discount rates. The liability assumptions, such as lapses, partial
withdrawals and mortality, used by the Company to estimate the risk
exposures to GMDB are based on company experience and are consistent
with those used for DAC/VOBA, SOP 03-1 reserves.
Declines in the equity market may increase the Company's net exposure
to the various death benefit and living benefit guarantees offered
under these contracts. For a portion of the GMDBs issued prior to
2000, the Company mitigates market exposure with reinsurance. For most
other pre-2000 GMDBs, and for all death benefit and living benefits
guarantees issued after 1999, the Company mitigates equity market risk
with a Capital Market Hedging Program ("Hedging Program"). The Hedging
Program primarily uses exchange traded index futures contracts to
mitigate equity market fluctuations. In addition, the Hedging Program
uses interest rate swaps to mitigate certain interest rate exposures
associated with these guarantees. The change in value of the
derivatives used in the Hedging Program is recorded in net realized
capital gains (losses) in the Statement of Operations.
47
Hedging of Indexed Annuity Guarantees
The crediting mechanism for Indexed Annuities ("IAs") exposes the
company to increases in the equity market ("S&P 500"). The Company
mitigates this exposure by purchasing over-the-counter ("OTC") S&P 500
call options from broker-dealer derivative counterparties who
generally have a minimum credit rating of Aa3 from Moody's and AA-
from Standard & Poor's. For each broker-dealer counterparty, the
Company's derivative exposure to that counterparty is aggregated with
any fixed income exposure to the same counterparty and is maintained
within applicable state requirements and NAIC insurance regulatory
guidelines.
48
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm 50
Financial Statements:
Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 51
Balance Sheets as of December 31, 2004 and 2003 52
Statements of Changes in Shareholder's Equity for the years ended
December 31, 2004, 2003 and 2002 54
Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 55
Notes to Financial Statements 57
Report of Independent Registered Public Accounting Firm
The Board of Directors
ING USA Annuity and Life Insurance Company
We have audited the accompanying balance sheets of ING USA Annuity and Life
Insurance Company as of December 31, 2004 and 2003, and the related statements
of operations, statements of changes in shareholder's equity, and statements of
cash flows for each of the three years in the period ended December 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ING USA Annuity
and Life Insurance Company as of December 31, 2004 and 2003, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Company changed the
accounting principle for goodwill and other intangible assets effective January
1, 2002 and changed the accounting principle for certain non-traditional long
duration contracts and for separate accounts effective January 1, 2004.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 18, 2005
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Statements of Operations
(In millions)
Year ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
Revenue:
Net investment income $ 1,023.9 $ 974.6 $ 989.3
Fee income 566.7 397.7 295.7
Premiums 22.8 26.0 36.8
Net realized capital gains (losses) 57.6 106.9 (196.5)
Other income 2.8 3.8 16.3
----------------- ----------------- -----------------
Total revenue 1,673.8 1,509.0 1,141.6
----------------- ----------------- -----------------
Benefits and expenses:
Interest credited and other benefits to contractowners 1,134.0 925.7 848.0
Operating expenses 162.6 162.1 155.1
Amortization of deferred policy acquisition costs
and value of business acquired 186.8 347.9 302.0
Interest expense 14.6 15.8 16.9
Other 2.2 1.0 (4.1)
----------------- ----------------- -----------------
Total benefits and expenses 1,500.2 1,452.5 1,317.9
----------------- ----------------- -----------------
Income (loss) before income taxes and cumulative effect
of change in accounting principle 173.6 56.5 (176.3)
Income tax expense (benefit) 80.7 (0.8) (60.2)
----------------- ----------------- -----------------
Income (loss) before cumulative effect of change
in accounting principle 92.9 57.3 (116.1)
Cumulative effect of change in accounting
principle, net of tax (1.0) - (1,298.4)
----------------- ----------------- -----------------
Net income (loss) $ 91.9 $ 57.3 $ (1,414.5)
================= ================= =================
The accompanying notes are an integral part of these financial statements.
51
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Balance Sheets
(In millions, except share data)
As of December 31,
2004 2003
----------------- -----------------
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost of
$17,045.9 at 2004 and $15,025.0 at 2003) $ 17,489.2 $ 15,538.7
Equity securities, available-for-sale, at fair value
(cost of $34.8 at 2004 and $115.2 at 2003) 35.3 120.2
Mortgage loans on real estate 3,851.8 3,388.7
Policy loans 169.0 177.1
Other investments 228.8 60.8
Securities pledged (amortized cost of $1,100.5 at 2004 and $555.5 at 2003) 1,108.6 559.1
----------------- -----------------
Total investments 22,882.7 19,844.6
Cash and cash equivalents 209.0 65.1
Short-term investments under securities loan agreement 402.8 22.9
Accrued investment income 205.8 185.7
Receivable for securities sold 38.9 11.7
Reinsurance recoverable 1,388.1 651.9
Deferred policy acquisition costs 1,704.1 1,826.7
Value of business acquired 112.2 111.5
Sales inducements to contractowners 514.6 -
Due from affiliates 184.3 117.7
Deferred income taxes - 19.4
Other assets 28.4 20.1
Assets held in separate accounts 24,746.7 18,220.1
----------------- -----------------
Total assets $ 52,417.6 $ 41,097.4
================= =================
The accompanying notes are an integral part of these financial statements.
52
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Balance Sheets
(In millions, except share data)
As of December 31,
2004 2003
----------------- -----------------
Liabilities and Shareholder's Equity
Future policy benefits and claims reserves $ 22,961.0 $ 19,400.5
Notes to affiliates 435.0 85.0
Due to affiliates 43.6 60.7
Payables for securities purchased 35.9 -
Payables under securities loan agreement 402.8 22.9
Borrowed money 713.4 534.2
Current income taxes 15.7 19.4
Deferred income taxes 12.6 -
Other liabilities 276.4 226.6
Liabilities related to separate accounts 24,746.7 18,220.1
----------------- ----------------
Total liabilities 49,643.1 38,569.4
----------------- ----------------
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 4,041.1 3,811.1
Accumulated other comprehensive income 112.7 188.1
Retained earnings (deficit) (1,381.8) (1,473.7)
----------------- ----------------
Total shareholder's equity 2,774.5 2,528.0
----------------- ----------------
Total liabilities and shareholder's equity $ 52,417.6 $ 41,097.4
================= ================
The accompanying notes are an integral part of these financial statements.
53
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Statements of Changes in Shareholder's Equity
(In millions)
Accumulated
Additional Other Retained Total
Common Paid-In Comprehensive Earnings Shareholder's
Stock Capital Income (Deficit) Equity
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2001
Excluding impact of merger $ 2.5 $ 780.4 $ 3.8 $ 31.1 $ 817.8
Impact of merger - 2,493.9 (73.8) (135.2) 2,284.9
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2001
Including impact of merger 2.5 3,274.3 (70.0) (104.1) 3,102.7
Comprehensive loss:
Net loss - - - (1,414.5) (1,414.5)
Other comprehensive loss
net of tax:
Net unrealized gain on
securities ($202.3 pretax) - - 203.2 - 203.2
----------------
Comprehensive loss (1,211.3)
----------------
Contribution of capital - 456.3 - - 456.3
Other - (8.2) - - (8.2)
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2002 2.5 3,722.4 133.2 (1,518.6) 2,339.5
Comprehensive income:
Net income - - - 57.3 57.3
Other comprehensive income
net of tax:
Net unrealized gain on
securities ($82.8 pretax) - - 54.9 - 54.9
----------------
Comprehensive income 112.2
----------------
Dividends paid - - - (12.4) (12.4)
Contribution of capital - 88.7 - - 88.7
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2003 2.5 3,811.1 188.1 (1,473.7) 2,528.0
Comprehensive income:
Net income 91.9 91.9
Other comprehensive loss
net of tax:
Net unrealized loss on
securities (($113.9) pretax) (70.5) (70.5)
Minimum pension liability (4.9) (4.9)
----------------
Comprehensive income 16.5
----------------
Contribution of capital 230.0 230.0
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2004 $ 2.5 4 4,041.1 $ 112.7 $(1,381.8) $ 2,774.5
============= =============== ================ ============== ================
The accompanying notes are an integral part of these financial statements.
54
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Statements of Cash Flows
(In millions)
Year ended December 31,
2004 2003 2002
--------------- --------------- ----------------
Cash Flows from Operating Activities:
Net income (loss) $ 91.9 $ 57.3 $ (1,414.5)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Capitalization of deferred policy acquisition costs (688.3) (396.9) (469.5)
Amortization of deferred policy acquisition costs
and value of business acquired 241.0 252.9 210.8
Net accretion/decretion of discount/premium 139.6 218.2 173.3
Future policy benefits, claims reserves, and interest credited 916.7 1,196.8 926.6
Impairment of goodwill - - 1,314.4
Provision for deferred income taxes 75.5 (1.9) (43.5)
Net realized capital (gains) losses (57.3) (110.0) 151.5
Depreciation - - 0.2
Change in:
Accrued investment income (20.1) 9.3 (45.4)
Accounts receivables and asset accruals (35.5) (2.4) (2.3)
Due to/from affiliates (83.7) (68.4) 76.4
Other payables and accruals 77.1 73.1 (219.8)
--------------- --------------- ----------------
Net cash provided by operating activities 656.9 1,228.0 658.2
Cash Flows from Investing Activities:
Proceeds from the sale, maturity, or redemption of:
Fixed maturities, available-for-sale 17,903.6 20,179.8 20,419.3
Equity securities, available-for-sale 106.8 45.7 0.7
Mortgage loans on real estate originated 388.6 561.1 667.6
Short-term investments 2,854.0 15,364.1 8,638.3
Acquisition of:
Fixed maturities, available-for-sale (20,553.5) (21,223.3) (24,532.0)
Equity securities, available-for-sale (20.2) (16.2) (144.1)
Mortgage loans on real estate (856.4) (1,075.5) (782.1)
Short-term investments (2,860.6) (15,362.2) (8,580.9)
Proceeds from sale of interest in subsidiary - - 27.7
Other investments (152.9) (84.0) 74.1
Other, net 10.8 2.7 10.8
--------------- --------------- ----------------
Net cash used in investing activities (3,179.8) (1,607.8) (4,200.6)
The accompanying notes are an integral part of these financial statements.
55
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Statements of Cash Flows
(In millions)
Year ended December 31,
2004 2003 2002
--------------- --------------- ----------------
Cash Flows from Financing Activities:
Deposits received for investment contracts 5,474.7 1,475.3 4,826.1
Maturities and withdrawals from investment contracts (2,830.9) (1,676.5) (1,636.3)
Reinsurance recapture - 134.5 -
Change in reinsurance recoverable (736.2) 25.6 (211.3)
Net short-term loans 179.2 210.6 48.6
Intercompany dividends - (12.4) -
Intercompany loans 350.0 - -
Contribution of capital from Parent 230.0 88.7 456.3
Other - - (8.2)
--------------- --------------- ----------------
Net cash provided by financing activities 2,666.8 245.8 3,475.2
--------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents 143.9 (134.0) (67.2)
Cash and cash equivalents, beginning of year 65.1 199.1 266.3
--------------- --------------- ----------------
Cash and cash equivalents, end of year $ 209.0 $ 65.1 $ 199.1
=============== =============== ================
Supplemental cash flow information:
Income taxes paid (received), net $ 8.3 $ 53.0 $ (41.7)
=============== =============== ================
Interest paid $ 14.2 $ 10.8 $ 13.5
=============== =============== ================
The accompanying notes are an integral part of these financial statements.
56
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Basis of Presentation
ING USA Annuity and Life Insurance Company ("ING USA" or the "Company" as
appropriate), 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.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING"), a
global financial services holding company based in The Netherlands, with
American Depository Shares listed on the New York Stock Exchange under the
symbol "ING". ING USA is authorized to conduct its insurance business in
the District of Columbia and all states except New York. ING USA was
domiciled as a life insurance company under the laws of the State of
Delaware until December 31, 2003 and has been domiciled as such in Iowa
since January 1, 2004.
On January 1, 2004 (the "Merger Date"), the Company simultaneously
redomesticated from Delaware to Iowa, changed its name from Golden American
Life Insurance Company to ING USA Annuity and Life Insurance Company, and
merged the following affiliates into the Company: Equitable Life Insurance
Company of Iowa ("Equitable Life"), USG Annuity & Life Company ("USG"), and
United Life & Annuity Insurance Company ("ULA") (the collectively, "Merger
Companies"). Prior to the merger date, ING USA was a wholly-owned
subsidiary of Equitable Life. Equitable Life merged its affiliate,
Ameribest Life Insurance Company ("AMB"), a life insurance company
domiciled in Georgia, into its operations on January 1, 2003.
Statement of Financial Accounting Standards ("FAS") No. 141, "Business
Combinations", excludes transfers of net assets or exchanges of shares
between entities under common control, and notes that certain provisions
under Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations", provide a source of guidance for such transactions. In
accordance with APB Opinion No. 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 Balance Sheets and Statements of Operations give
effect to the consolidation transactions as if they had occurred on
December 31, 2003 and January 1, 2002, respectively.
As of April 1, 2002, ING USA sold First Golden American Life Insurance
Company of New York ("First Golden") to its sister company, ReliaStar Life
Insurance Company ("ReliaStar"). ReliaStar, the parent of
Security-Connecticut Life Insurance Company ("Security-Connecticut"), which
in turn is the parent of ReliaStar Life Insurance Company of New York
("RLNY"), merged the First Golden business into RLNY operations and
dissolved First Golden at book value for $27.7 in cash and a receivable
57
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
totaling $0.2 from RLNY. The receivable from RLNY was assumed by Equitable
Life, and ultimately by ING USA. The consideration was based on First
Golden's statutory-basis book value. RLNY's payable to the Company was
assumed by ING USA and subsequently forgiven. ING USA realized a loss of
$3.0 related to the sale of First Golden, which was recorded as a capital
transaction. Approval for the merger was obtained from the Insurance
Departments of the States of New York and Delaware. As of October 1, 2003,
RLNY's parent, Security-Connecticut merged with and into its parent,
ReliaStar.
In accordance with APB Opinion No. 16, RLNY presented combined results of
operations including First Golden activity as of the beginning of the year
ended December 31, 2002. The first three months of First Golden activity is
not reflected in the ING USA's Statement of Operations for the period ended
December 31, 2002, as the amounts were not material.
Description of Business
The Company offers various insurance products including immediate and
deferred variable and fixed annuities. The Company's annuity products are
distributed by national wirehouses, regional securities firms, independent
National Association of Securities Dealers, Inc. ("NASD") firms with
licensed registered representatives, banks, life insurance companies with
captive agency sales forces, independent insurance agents, independent
marketing organizations and the ING broker-dealer network. The Company also
offers guaranteed investment contracts ("GICs") and funding agreements
marketed by direct sale by home office personnel or through specialty
insurance brokers. Historically, the Company has provided
interest-sensitive, traditional and variable life insurance, and health
insurance. All health insurance is ceded to other insurers and new policies
are no longer written. The Company ceased the issuance of life insurance
policies in 2001, and all life insurance business is currently in run-off.
The Company's primary customers are retail 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 Statements of Operations. In addition, the SOP requires
58
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
additional liabilities be established for certain guaranteed death and
other benefits and for products with certain patterns of cost of insurance
charges. In addition, sales inducements provided to contractowners must be
recognized on the balance sheet separately from deferred policy acquisition
costs and amortized as a component of benefits expense using methodologies
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 of
insurance charges resulting in losses in later policy durations from the
insurance benefit function and to defer, amortize, and recognize
separately, sales inducements to contractowners. Upon adoption of SOP 03-1
on January 1, 2004, the Company recognized a cumulative effect of a change
in accounting principle of $(3.6), before tax or $(2.3), net of $1.3 of
income taxes. In addition, 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.
In the fourth quarter of 2004, the cumulative effect of a change in
accounting principle was revised due to the Company's implementation of
Technical Practice Aid 6300.05 - 6300.08, "Q&As Related to the
Implementation of SOP 03-1, `Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts"' (the "TPA").
The TPA, which was approved in September 2004, provides additional guidance
regarding certain implicit assessments that may be used in the testing of
the base mortality function on contracts, which is performed to determine
whether additional liabilities are required in conjunction with SOP 03-1.
In addition, the TPA provides additional guidance surrounding the allowed
level of aggregation of additional liabilities determined under SOP 03-1.
While the TPA was implemented during the fourth quarter of 2004, the TPA is
retroactive to the original implementation date of SOP 03-1, January 1,
2004 and is reported as an adjustment to the SOP 03-1 cumulative effect of
change in accounting principle. The adoption of the TPA reduced the
Company's cumulative effect of change in accounting principle by $2.0,
before tax and decreased quarterly 2004 net income approximately $0.6 in
each quarter, for a total decrease of $2.3.
The implementation of SOP 03-1 also raised questions regarding the
interpretation of the requirements of FAS No. 97 "Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments" ("FAS 97"),
concerning when it is appropriate to record an unearned revenue liability
related to the insurance benefit function. To clarify its position, the
59
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Financial Accounting Standards Board ("FASB") issued FASB Staff Position
No. FAS 97-1 ("FSP FAS 97-1"), "Situations in Which Paragraphs 17(b) and 20
of FASB Statement No. 97, `Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments,' Permit or Require Accrual of an
Unearned Revenue Liability," effective for fiscal periods beginning
subsequent to the date the guidance was issued, June 18, 2004. The Company
adopted FSP FAS 97-1 on July 1, 2004.
The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments
In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments," adopting a
three-step impairment model for securities within its scope. The three-step
model is applied on a security-by-security basis as follows:
Step 1: Determine whether an investment is impaired. An investment is
impaired if the fair value of the investment is less than its cost
basis.
Step 2: Evaluate whether an impairment is other-than-temporary.
Step 3: If the impairment is other-than-temporary, recognize an impairment
loss equal to the difference between the investment's cost and its
fair value.
On September 30, 2004, the FASB issued FASB Staff Position No. EITF Issue
03-1-1 ("FSP EITF 03-1-1"), "Effective Date of Paragraphs 10-20 of EITF
Issue No. 03-1, `The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,'" which delayed the EITF Issue No. 03-1
original effective date of July 1, 2004 related to steps two and three of
the impairment model introduced. The delay is in effect until a final
consensus can be reached on such guidance. Despite the delay of the
implementation of steps two and three, other-than-temporary impairments are
still to be recognized as required by existing guidance.
Earlier consensus reached by the EITF on this issue required that certain
quantitative and qualitative disclosures be made for unrealized losses on
debt and equity securities that have not been recognized as
other-than-temporary impairments. These disclosures were adopted by the
Company, effective December 31, 2003, and are included in the Investments
footnote.
Accounting for Derivative Instruments and Hedging Activities
In 2003, the Derivative Implementation Group ("DIG") who was responsible
for issuing guidance on behalf of the FASB for implementation of FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", issued
Statement No. 133 Implementation Issue No. B36, "Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments That Incorporate
60
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Credit Risk Exposures That Are Unrelated or Only Partially Related to the
Credit Worthiness of the Obligor Under Those Instruments" ("DIG B36").
Under this interpretation, modified coinsurance and coinsurance with funds
withheld reinsurance agreements as well as other types of receivables and
payables where interest is determined by reference to a pool of fixed
maturity assets or a total return debt index may be determined to contain
embedded derivatives that are required to be bifurcated from the host
instrument. The 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, implementation of DIG B36 did not impact the
Company's financial position, results of operations, or cash flows.
Variable Interest Entities
In January 2003, the 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.
61
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The Company holds investments in variable interest entities ("VIEs") in the
form of private placement securities, structured securities, securitization
transactions and limited partnerships with an aggregate fair value of $7.0
billion as of December 31, 2004. These VIEs are held by the Company for
investment purposes. Consolidation of these investments in the Company's
financial statements is not required as the Company is not the primary
beneficiary for any of these VIEs. Book value as of December 31, 2004 of
$6.9 billion represents the maximum exposure to loss except for those
structures for which the Company also receives asset management fees.
Goodwill Impairment
During 2002, the Company adopted FAS No. 142, "Goodwill and Other
Intangible Assets". The adoption of this standard resulted in the
recognition of an impairment loss of $1,298.4, net of $699.1 of income
taxes, related to a prior acquisition, recorded retroactive to the first
quarter of 2002. Prior quarters of 2002 were restated accordingly. This
impairment loss represented the entire carrying amount of goodwill, net of
accumulated amortization. This impairment charge is shown as a change in
accounting principle on the 2002 Statement of Operations.
Guarantees
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), to clarify accounting and
disclosure requirements relating to a guarantor's issuance of certain types
of guarantees, or groups of similar guarantees, even if the likelihood of
the guarantor's having to make any payments under the guarantee is remote.
The disclosure provisions are effective for financial statements for fiscal
years ending after December 15, 2002. For certain guarantees, the
interpretation also requires that guarantors recognize a liability equal to
the fair value of the guarantee upon its issuance. This initial recognition
and measurement provisions are to be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company has
performed an assessment of its guarantees and believes that all of its
guarantees are excluded from the scope of this interpretation.
New Accounting Pronouncements
In December 2004, the FASB issued FAS No. 123 (revised 2004), "Share-Based
Payment" ("FAS 123R"), which requires all share-based payments to employees
be recognized in the financial statements based upon the fair value. FAS
123R is effective at the beginning of the first interim or annual period
beginning after June 15, 2005. Earlier adoption is encouraged. FAS 123R
provides two transition methods, modified-prospective and
modified-retrospective.
62
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The modified-prospective method recognizes the grant-date fair value of
compensation for new awards granted after the effective date and unvested
awards beginning in the fiscal period in which the recognition provisions
are first applied. Prior periods are not restated. The
modified-retrospective method permits entities to restate prior periods by
recognizing the compensation cost based on the amount previously reported
in the pro forma footnote disclosures as required under FAS No. 123,
"Accounting for Stock-Based Compensation".
The Company intends to early adopt the provisions of FAS 123R on January 1,
2005, using the modified-prospective method. Due to the Company's few
number of employees, the adoption of FAS 123R is not expected to have a
material impact on the Company's financial position, results of operations,
or cash flows. Prior to January 2005, the Company applied the intrinsic
value-based provisions set forth in APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Under the intrinsic value method, compensation
expense is determined on the measurement date, which is the first date on
which both the number of shares the employee is entitled to receive and the
exercise price are known. Compensation expense, if any, is measured based
on the award's intrinsic value, which is the excess of the market price of
the stock over the exercise price on the measurement date.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from reported results using those estimates.
Reclassifications
Certain reclassifications have been made to prior year financial
information to conform to the current year classifications.
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
63
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
changes in deferred policy acquisition costs ("DAC"), value of business
acquired ("VOBA"), and deferred income taxes.
Other-Than-Temporary-Impairments
The Company analyzes the general account investments to determine whether
there has been an other-than-temporary decline in fair value below the
amortized cost basis. Management considers the length of 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.
In addition, the Company invests in structured securities that meet the
criteria of EITF Issue No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets." 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 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.
Purchases and Sales
Purchases and sales of fixed maturities and equity securities (excluding
private placements) are recorded on the trade date. Purchases and sales of
private placements and mortgage loans are recorded on the closing date.
Valuation
Fair values for fixed maturities are obtained from independent pricing
services or broker-dealer quotations. Fair values for privately placed
bonds are determined using a matrix-based model. The matrix-based model
considers the level of risk-free interest rates, current corporate spreads,
the credit quality of the issuer, and cash flow characteristics of the
security. The fair values for actively traded equity securities are based
on quoted market prices. For equity securities not actively traded,
estimated fair values are based upon values of issues of comparable yield
and quality or conversion value, where applicable.
64
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 either
the present value of expected cash flows from the loan (discounted at the
loan's effective interest rate), or fair value of the collateral. If the
loan is in foreclosure, the carrying value is reduced to the fair value of
the underlying collateral, net of estimated costs to obtain and sell. The
carrying value of the impaired loans is reduced by establishing a permanent
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.
Short-term investments, consisting primarily of money market instruments
and other fixed maturity issues purchased with an original maturity of 91
days to one year, are considered available-for-sale and are carried at fair
value, which approximates amortized cost.
Derivative instruments are reported at fair value and are obtained
internally from the derivative accounting system. Embedded derivative
instruments are reported at fair value based upon internally established
valuations that are consistent with external valuation models or market
quotations. Guaranteed minimum withdrawals benefits ("GMWBs") and
guaranteed minimum accumulation benefits ("GMABs") represent an embedded
derivative liability in the variable annuity contract that is required to
be reported separately from the host variable annuity contract. GMWBs and
GMABs are carried at fair value based on actuarial assumptions related to
projected cash flows, including benefits and related contract charges, over
the lives of the contracts, incorporating expectations concerning
contractowner behavior. Estimating cash flows involves numerous estimates
and subjective judgments including those regarding expected market rates of
return, market volatility, correlations of market returns, and discount
rates.
Securities Lending
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of the loaned domestic securities. The collateral is deposited
65
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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.
Repurchase Agreements
The Company engages in dollar repurchase agreements ("dollar rolls") and
repurchase agreements to increase the return on investments and improve
liquidity. These transactions involve a sale of securities and an agreement
to repurchase substantially the same securities as those sold. Company
policies require a minimum of 95% of the fair value of securities pledged
under dollar rolls and repurchase agreement transactions to be maintained
as collateral. Cash collateral received is invested in fixed maturities and
the offsetting collateral liability is included in borrowed money on the
Balance Sheets.
Derivatives
The Company's use of derivatives is limited mainly to hedging purposes.
However, these derivatives are not accounted for using hedge accounting
treatment under FAS No. 133, as the Company does not seek hedge accounting
treatment. The Company enters into interest rate, equity market, and
currency contracts, including swaps, caps, floors, options and futures, to
reduce and manage risks associated with changes in value, yield, price, or
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 in the Statements of Operations.
Derivatives are included in other investments on the Balance Sheets.
The Company also has investments in certain fixed maturity instruments and
has 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. Changes in the fair value of embedded derivatives
are recorded in net realized capital gains (losses) in the Statements of
Operations. Embedded derivatives within securities are included in fixed
maturities in the Balance Sheets. Embedded derivatives within retail
annuity products are included in future policy benefits and claims reserves
on the Balance Sheets.
Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred policy acquisition costs ("DAC") represent policy acquisition
costs that have been capitalized and are subject to amortization. Such
costs consist principally of certain commissions, underwriting, contract
issuance, and agency expenses, related to the production of new and renewal
business.
66
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Value of business acquired ("VOBA") represents the outstanding value of in
force business capitalized and are subject to amortization in purchase
accounting when the Company was acquired. The value is based on the present
value of estimated net cash flows embedded in the Company's contracts.
The amortization methodology used for DAC and VOBA varies by product type.
Statement of Financial Accounting Standards ("FAS") No. 60, "Accounting and
Reporting by Insurance Enterprises," applies to traditional life insurance
products, primarily traditional whole life and term life insurance
contracts. Under FAS No. 60, DAC and VOBA are amortized over the premium
payment period, in proportion to the premium revenue recognized.
FAS No. 97 applies to universal life and investment-type products, such as
fixed and variable deferred annuities. Under FAS No. 97, DAC and VOBA are
amortized, with interest, over the life of the related contracts (usually
25 years) in relation to the present value of estimated future gross
profits from investment, mortality, and expense margins; asset-based fees,
policy administration, and surrender charges; less policy maintenance fees
and non-capitalized commissions, as well as realized gains and losses on
investments. Guaranteed investment contracts, however, are amortized on a
straight-line basis over the life of the contract.
Changes in assumptions can have a significant impact on DAC and VOBA
balances and amortization rates. Several assumptions are considered
significant in the estimation of future gross profits associated with
variable universal life and variable deferred annuity products. One of the
most significant assumptions involved in the estimation of future gross
profits is the assumed return associated with the variable account
performance. To reflect the volatility in the equity markets, this
assumption involves a combination of near-term expectations and long-term
assumptions regarding market performance. The overall return on the
variable account is dependent on multiple factors, including the relative
mix of the underlying sub-accounts among bond funds and equity funds, as
well as equity sector weightings. Other significant assumptions include
surrender and lapse rates, estimated interest spread, and estimated
mortality.
Due to the relative size and sensitivity to minor changes in underlying
assumptions of DAC and VOBA balances, the Company performs a quarterly and
annual analysis of DAC and VOBA for the annuity and life businesses,
respectively. The DAC and VOBA balances are evaluated for recoverability
and are reduced to the extent that estimated future gross profits are
inadequate to recover the asset.
At each evaluation date, actual historical gross profits are reflected, and
estimated future gross profits and related assumptions are evaluated for
continued reasonableness. Any adjustment in estimated profit requires that
the amortization rate be revised ("unlocking"), retroactively to the date
of the policy or contract issuance. The cumulative prior period adjustment
is recognized as a component of current period amortization. In general,
67
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
increases in investment returns, and thus estimated profits, lower the rate
of amortization. Increases in surrender charges and mortality margins,
decreases in investment returns, and decreases in estimated profits,
increase the rate of amortization.
Reserves
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 contractowners and
related expenses less the present value of future net premiums.
Reserves for deferred annuity investment contracts and immediate annuity
without life contingent payouts are equal to cumulative deposits less
charges and withdrawals, plus credited interest thereon (reserve interest
rates vary by product up to 10.0% for all periods presented).
Reserves for immediate annuities with life contingent payout benefits are
computed on the basis of assumed interest discount rate, 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 8.0% for all periods presented. Mortality and
withdrawal rate assumptions are based on relevant Company experience and
are periodically reviewed against both industry standards and experience.
Certain variable annuity contracts offer guaranteed minimum death benefits
("GMDB"), as well as guaranteed living benefits. The GMDB is provided in
the event the customer's account value at death is below the guaranteed
value. Guaranteed living benefits offered include guaranteed minimum income
benefits, guaranteed minimum withdrawal benefits, and guaranteed minimum
accumulation benefits. Although the Company reinsures or hedges a
significant portion of the death and living benefit guarantees associated
with its in force business, declines in the equity market may increase the
Company's net exposure to the death and living benefits under these
contracts.
Reserves for GICs are calculated using the principal amount deposited with
the Company, less withdrawals, plus interest accrued to the ending
valuation date. Interest on these contracts is accrued by a predetermined
index plus a spread or a fixed rate, established at the issue date of the
contract.
Reserves for universal life products are equal to cumulative deposits less
withdrawals and charges plus credited interest thereon. In addition, the
Company holds reserves as required for SOP 03-1 for certain products with
anticipated losses in later policy durations. Reserves for traditional life
insurance contracts represent the present value of future benefits to be
68
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
paid to or on behalf of contractowners and related expenses less the
present value of future net premiums.
Sales Inducements
Sales inducements represent benefits paid to contractowners 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 Balance Sheet.
Beginning in 2004, sales inducements are amortized as a component of
interest credited and other benefits to contractowners using methodologies
and assumptions consistent with those used for amortization of DAC.
Revenue Recognition
For universal life and most annuity contracts, charges assessed against
contractowners' funds for the cost of insurance, surrender, expenses, and
other fees are recorded as revenue as charges are assessed against
contractowners. Other amounts received for these contracts are reflected as
deposits and are not recorded as premium or revenue. Related policy
benefits are recorded in relation to the associated premiums or gross
profit so that profits are recognized over the expected lives of the
contracts. When annuity payments with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity and reflected as an offsetting amount in both premiums and benefits
in the Statements of Operations.
Premiums on the Statements of Operations primarily represent amounts
received under traditional life insurance policies.
For GICs, deposits made to the Company are not recorded as revenue in the
Statements of Operations and are recorded directly to policy liabilities
and accruals on the Balance Sheet.
Separate Accounts
Separate Account assets and liabilities generally represent funds
maintained to meet specific investment objectives of contractowners who
bear the investment risk, subject, in limited cases, to certain minimum
guarantees. Investment income and investment gains and losses generally
accrue directly to such contractowners. The assets of each account are
legally segregated and are not subject to claims that arise out of any
other business of the Company.
69
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Separate Account assets supporting variable options under annuity and
universal life contracts are invested, as designated by the contractowner
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 its affiliates, or in other selected
mutual funds not managed by the Company or its affiliates.
Separate Account assets and liabilities are carried at fair value and shown
as separate captions in the Balance Sheets. Deposits, investment income and
net realized and unrealized capital gains and losses of the Separate
Accounts are not reflected in the Statement of Operations. The 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
Balance Sheets (primarily guaranteed interest options), and revenue and
expenses related to such arrangements, are consolidated in the financial
statements with the general account. At December 31, 2004 and 2003,
unrealized gains of $100.5 and $112.8, respectively, after taxes, on assets
supporting a guaranteed interest option are reflected in shareholder's
equity.
Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in certain 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 Balance
Sheets.
Participating Insurance
Participating business approximates 10% of the Company's ordinary life
insurance in force and 26% of premium income. The amount of dividends to be
paid is determined annually by the Board of Directors. Amounts allocable to
participating contractowners are based on published dividend projections or
expected dividend scales. Dividends to participating policyholders of
$16.2, $17.2, and $23.7, were incurred during the years ended December 31,
2004, 2003 and 2002, 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.
70
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
2. Investments
Fixed maturities and equity securities available-for-sale as of December
31, 2004 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- --------------- --------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 464.0 $ 1.8 $ 1.1 $ 464.7
State, municipalities and political
subdivisions 20.7 - 0.8 19.9
U.S. corporate securities:
Public utilities 1,796.9 78.4 8.9 1,866.4
Other corporate securities 6,292.4 243.5 22.7 6,513.2
-------------- -------------- --------------- --------------
Total U.S. corporate securities 8,089.3 321.9 31.6 8,379.6
-------------- -------------- --------------- --------------
Foreign securities:
Government 518.9 24.2 2.2 540.9
Other 2,571.2 97.7 11.5 2,657.4
-------------- -------------- --------------- --------------
Total foreign securities 3,090.1 121.9 13.7 3,198.3
-------------- -------------- --------------- --------------
Residential mortgage-backed securities 3,440.3 43.9 22.4 3,461.8
Commercial mortgaged-backed securities 1,107.8 34.9 3.0 1,139.7
Other asset-backed securities 1,934.2 14.3 14.7 1,933.8
-------------- -------------- --------------- --------------
Total fixed maturities, including fixed
maturities pledged 18,146.4 538.7 87.3 18,597.8
Less: fixed maturities pledged 1,100.5 9.8 1.7 1,108.6
-------------- -------------- --------------- --------------
Fixed maturities 17,045.9 528.9 85.6 17,489.2
Equity securities 34.8 0.5 - 35.3
-------------- -------------- --------------- --------------
Total investments available-for-sale $ 17,080.7 $ 529.4 $ $ 85.6 $ 17,524.5
============== ============== =============== ==============
71
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Fixed maturities and equity securities available-for-sale as of December
31, 2003 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- --------------- --------------
Fixed maturities:
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 6,246.4 300.9 33.7 6,513.6
-------------- -------------- --------------- --------------
Total U.S. corporate securities 7,587.6 385.2 41.7 7,931.1
-------------- -------------- --------------- --------------
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
-------------- -------------- --------------- --------------
Residential mortgage-backed securities 3,247.0 66.7 21.8 3,291.9
Commercial mortgage-backed securities 774.2 45.8 2.1 817.9
Other asset-backed securities 1,273.0 17.2 21.1 1,269.1
Total fixed maturities, including fixed
maturities pledged 15,580.5 634.6 117.3 16,097.8
Less: fixed maturities pledged 555.5 6.4 2.8 559.1
-------------- -------------- --------------- --------------
Fixed maturities 15,025.0 628.2 114.5 15,538.7
Equity securities 115.2 5.0 - 120.2
-------------- -------------- --------------- --------------
Total investments available-for-sale $ 15,140.2 $ 633.2 $ 114.5 $ 15,658.9
============== ============== =============== ==============
At December 31, 2004 and 2003, net unrealized appreciation is $451.9 and
$522.3, respectively, on total fixed maturities, including fixed maturities
pledged to creditors, and equity securities.
72
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The aggregate unrealized losses and related fair values of total fixed
maturities, including fixed maturities pledged to creditors, and equity
securities with unrealized losses as of December 31, 2004, are shown below
by duration:
Unrealized Fair
Loss Value
----------------- -----------------
Duration category:
Less than six months below cost $ 27.2 $ 3,199.9
More than six months and less
than twelve months below cost 29.9 1,710.7
More than twelve months below cost 30.2 709.1
----------------- -----------------
$ 87.3 $ 5,619.7
================= =================
Of the unrealized losses less than 6 months in duration of $27.2, there
were $12.3 in unrealized losses that are primarily related to interest rate
movement or spread widening for other than credit-related reasons. The
remaining unrealized losses of $14.9 as of December 31, 2004, relates to
securities under the guidance prescribed by EITF Issue No. 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 $1,560.4.
Of the unrealized losses more than 6 months and less than 12 months in
duration of $29.9, there were $16.9 in unrealized losses that are primarily
related to interest rate movement or spread widening for other than
credit-related reasons. The remaining unrealized losses of $13.0 as of
December 31, 2004, relates to securities under the guidance prescribed by
EITF Issue No. 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 $768.8.
Of the unrealized losses more than 12 months in duration of $30.2, there
were $18.0, in unrealized losses that are primarily related to interest
rate movement or spread widening for other than credit-related reasons. The
remaining unrealized losses of $12.2 as of December 31, 2004, relates to
securities under the guidance prescribed by EITF Issue No. 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 $222.8.
73
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The amortized cost and fair value of fixed maturities as of December 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
----------------- -----------------
Due to mature:
One year or less $ 336.8 $ 341.5
After one year through five years 4,066.3 4,151.2
After five years through ten years 4,209.5 4,403.0
After ten years 3,051.6 3,166.9
Mortgage-backed securities 4,548.0 4,601.4
Other asset-backed securities 1,934.2 1,933.8
Less: fixed maturities pledged 1,100.5 1,108.6
----------------- -----------------
Fixed maturities, excluding fixed
maturities pledged $ 17,045.9 $ 17,489.2
================= =================
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 2004.
At December 31, 2004 and 2003, fixed maturities with fair values of $11.9
and $20.1, respectively, were on deposit as required by regulatory
authorities.
The Company is a member of the Federal Home Loan Bank of Des Moines
("FHLB") and is required to maintain a collateral deposit that backs
funding agreements issued to the FHLB. At December 31, 2004 and 2003,
respectively, the Company had $376.3 and $125.3 in non-putable funding
agreements issued to the FHLB. At December 31, 2004 and 2003, respectively,
assets with a carrying value of approximately $422.0 and $148.2
collateralized the funding agreements to the FHLB. Collateralized assets
are included in fixed maturities in the Balance Sheets.
The Company enters into dollar repurchase agreements ("dollar rolls") and
repurchase agreements to increase its return on investments and improve
liquidity. At December 31, 2004 and 2003, the carrying value of the
securities pledged in dollar rolls and repurchase agreements was $715.9 and
$536.8, respectively. The carrying value of the securities pledged in
dollar rolls and repurchase agreements is included in pledged securities on
the Balance Sheets. The repurchase obligation related to dollar rolls and
repurchase agreements totaled $713.4 and $534.2 at December 31, 2004 and
2003, respectively. The repurchase obligation related to dollar rolls and
repurchase agreements is included in borrowed money on the Balance Sheets.
74
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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.
The primary risk associated with short-term collateralized borrowings is
that the counterparty will be unable to perform under the terms of the
contract. The Company's exposure is limited to the excess of the net
replacement cost of the securities over the value of the short-term
investments, an amount that was not material at December 31, 2004. The
Company believes the counterparties to the dollar rolls, repurchase
agreements, reverse repurchase agreements, and securities lending are
financially responsible and that the counterparty risk is immaterial.
Impairments
The following table identifies the Company's other-than-temporary
impairments by type as of December 31:
2004 2003 2002
---------------------------- ---------------------------- ---------------------------
No. of No. of No. of
Impairment Securities Impairment Securities Impairment Securities
--------------- ------------ --------------- ------------ -------------- ------------
U.S. Corporate $ - - $ 23.7 16 $ 0.1 1
Residential mortgage-backed 9.1 88 81.3 173 81.3 125
Foreign 8.5 4 11.5 2 8.5 3
Asset-backed 11.5 6 5.8 7 31.1 14
Equity - - - - - 1
Limited partnerships 2.2 1 - - - -
--------------- ------------ --------------- ------------ -------------- ------------
Total $ 31.3 99 $ 122.3 198 $ 121.0 144
=============== ============ =============== ============ ============== ============
The remaining fair value of the impaired fixed maturities at December 31,
2004 and 2003 is $168.7 and $192.0, respectively.
75
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Net Investment Income
Sources of net investment income were as follows:
Year ended December 31,
2004 2003 2002
----------------- ----------------- ------------------
Fixed maturities $ 960.5 $ 957.6 $ 946.1
Equity securities 0.3 0.2 -
Mortgage loans on real estate 221.8 208.5 202.2
Real estate 0.2 0.6 0.3
Policy loans 9.8 8.8 9.5
Short-term investments and cash equivalents 1.4 1.5 3.7
Other (98.4) (138.6) (127.9)
----------------- ----------------- ------------------
Gross investment income 1,095.6 1,038.6 1,033.9
Less: investment expenses 71.7 64.0 44.6
----------------- ----------------- ------------------
Net investment income $ 1,023.9 $ 974.6 $ 989.3
================= ================= ==================
Net Realized Capital Gains and Losses
Net realized capital gains (losses) are comprised of the difference between
the carrying value of investments and proceeds from sale, maturity, and
redemption, as well as losses incurred due to the impairment of
investments. Net realized capital gains (losses) on investments were as
follows:
Year ended December 31,
2004 2003 2002
----------------- ------------------ -----------------
Fixed maturities $ 44.0 $ 108.7 $ (105.9)
Equity securities 6.4 0.2 0.1
Derivatives 9.3 1.7 (92.0)
Real estate - (3.4) 1.7
Other (2.1) (0.3) (0.4)
----------------- ------------------ -----------------
Pretax net realized capital gains (losses) $ 57.6 $ 106.9 $ (196.5)
================= ================== =================
After-tax net realized capital gains (losses) $ 37.4 $ 69.5 $ (127.7)
================= ================== =================
Proceeds from the sale of fixed maturities and equity securities and the
related gross gains and losses were as follows:
Year ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
Proceeds on sales $ 9,916.3 $ 13,664.8 $ 15,027.8
Gross gains 145.5 297.6 253.3
Gross losses 59.3 60.4 224.2
76
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Changes in accumulated other comprehensive income related to changes in net
unrealized capital gains and losses on securities, including securities
pledged were as follows:
Year ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
Fixed maturities $ (65.9) $ (90.4) $ 556.5
Equity securities (4.5) 8.6 (3.9)
DAC/VOBA (48.1) 151.2 (353.1)
Sales inducements (6.7) - -
Other 11.3 13.4 2.8
----------------- ----------------- -----------------
Subtotal (113.9) 82.8 202.3
Deferred income taxes 43.4 (27.9) 0.9
----------------- ----------------- -----------------
Net unrealized capital gains (losses) $ (70.5) $ 54.9 $ 203.2
================= ================= =================
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, including insurance contracts, and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of the Company.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the following financial instruments:
Fixed maturity 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. Also considered
are factors such as the net worth of the borrower, the value of collateral,
the capital structure of the borrower, the presence of guarantees, and the
77
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Company's evaluation of the borrower's ability to compete in their relevant
market. Using this data, the model generates estimated market values which
the Company considers reflective of the fair value of each privately placed
bond.
Equity securities: Fair values of these securities are based upon quoted
market price.
Mortgage loans on real estate: The fair values for mortgage loans on real
estate are estimated using discounted cash flow analyses and rates
currently being offered in the marketplace for similar loans to borrowers
with similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations.
Cash, cash equivalents, short-term investments under securities loan
agreement and policy loans: The carrying amounts for these assets
approximate the assets' fair values. Derivatives are carried at fair value
on the Balance Sheets.
Assets held in separate accounts: Assets held in separate accounts are
reported at the quoted fair values of the individual securities in the
separate accounts.
Other financial instruments reported as assets: The carrying amounts for
these financial instruments (primarily derivatives) approximate those
assets' fair values. Derivatives are carried at fair value on the Balance
Sheets.
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.
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 contractowner 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 Balance
Sheets. Estimated fair values of separate account liabilities are equal to
their carrying amount.
78
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 2004 and 2003 were as follows:
2004 2003
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------- -------------- -------------- --------------
Assets:
Fixed maturity, including securities
pledged $ 18,597.8 $ 18,597.8 $ 16,097.8 $ 16,097.8
Equity securities 35.3 35.3 120.2 120.2
Mortgage loans on real estate 3,851.8 3,969.4 3,388.7 3,581.4
Policy loans 169.0 169.0 177.1 177.1
Cash, cash equivalents,
and short-term investments
under securities loan agreement 611.8 611.8 88.0 88.0
Other investments 228.8 229.0 60.8 61.1
Assets held in separate accounts 24,746.7 24,746.7 18,220.1 18,220.1
Liabilities:
Notes to affiliates 435.0 508.5 85.0 145.2
Investment contract liabilities:
Deferred annuities 17,525.9 16,344.6 16,072.4 15,069.0
Supplementary contracts and
immediate annuities 864.9 864.9 840.1 840.1
Liabilities related to separate accounts 24,746.7 24,746.7 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 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 of the Company's open interest rate caps
as of December 31, 2004 was $236.2. Carrying value and estimated fair value
of the open interest rate caps was minimal as of December 31, 2004. The
notional amount of the Company's open interest rate caps as of December 31,
79
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
2003 was $1,036.2. Carrying value and estimated fair value of the open
interest rate caps were minimal as of December 31, 2003.
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 December 31, 2004 were $2,832.8, $34.0 and $34.0,
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, $(91.2) and $(91.2), 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 recorded in the Statements
of Operations, 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 futures contracts as of December 31, 2004, were $1,177.9,
$(0.2) and $(0.2), respectively. The notional amount, carrying value and
estimated fair value of the Company's open futures contracts as of December
31, 2003, were $491.3, $0.8 and $0.8, 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 December 31, 2004 were $146.7, $(34.5) and $(34.5), respectively. The
notional amount, carrying value, and estimated fair value of the Company's
open foreign exchange rate swaps as of December 31, 2003 were $128.2,
$(19.4) and $(19.4), respectively.
Options
Standard & Poor's ("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
80
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
a consistent manner with the underlying reserve liabilities, both of which
are carried at fair value with the change in value recorded in the
Statements of Operations. 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 December 31, 2004 were $2,335.4,
$166.0, and $166.0, 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, $100.9, and $100.9, respectively.
Embedded Derivatives
The Company also has 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 securities as of December 31, 2004 and 2003 was $(4.6) and $(1.1),
respectively. The estimated fair value of the embedded derivatives within
retail annuity products as of December 31, 2004 and 2003, was $479.9 and
$238.9, respectively.
4. Deferred Policy Acquisition Costs and Value of Business Acquired
Activity for the years ended December 31, 2004, 2003 and 2002, within VOBA
was as follows:
Balance at December 31, 2001 $ 202.5
Adjustment for unrealized gains/losses (34.2)
Interest accrued at 4% - 5% 10.1
Amortization (43.9)
-----------------
Balance at December 31, 2002 134.5
Adjustment for unrealized gains/losses 7.0
Interest accrued at 4% - 5% 6.6
Amortization (36.6)
-----------------
Balance at December 31, 2003 111.5
Adjustment for unrealized gains/losses (0.5)
Interest accrued at 4% - 5% 6.8
Amortization (5.6)
-----------------
Balance at December 31, 2004 $ 112.2
=================
The estimated amount of VOBA to be amortized, net of interest, over the
next five years is $15.5, $13.6, $11.0, $10.1, and $12.3, for the years
2005, 2006, 2007, 2008 and 2009, respectively. Actual amortization incurred
during these years may vary as assumptions are modified to incorporate
actual results.
81
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Analysis of DAC/VOBA - Annuity
The variance in amortization expense in 2004 versus 2003 was impacted by
SOP 03-1. In prior years, amortization of inducements was included in
amortization of DAC and VOBA. Beginning in 2004, sales inducement
amortization is included as a component of benefit expense in accordance
with SOP 03-1. Therefore, the decrease in amortization of DAC and VOBA is
partially related to 2004 sales inducement amortization being included in
interest credited instead of amortization of DAC and VOBA. Also
contributing to the decrease is the improved market performance during
2003, which lowered the amortization rate for 2004. Amortization expense in
2003 was higher than 2002 due in part to the poor equity market performance
in 2002, which increased the amortization rate in 2003, as well as to the
amortization of acquisition costs related to increased sales of fixed
annuities during 2002. 2003 was the first full year of amortization for
this block of acquisition costs. Also impacting amortization of DAC and
VOBA are unlocking adjustments discussed below.
The actual separate account market return exhibited by the variable
deposits invested in mutual funds associated with the Company's liabilities
in 2004 exceeded the long-term assumption, thereby producing deceleration
of DAC/VOBA amortization of $6.6, before tax. As a part of the regular
analysis of DAC/VOBA, at the end of the first quarter of 2004, the Company
modified its assumptions regarding the future rate of spread income on some
of its fixed annuity liabilities. The assumption modification was in the
direction of lower spread income, and produced an acceleration of DAC/VOBA
amortization of $5.0, before tax. Similar regular analysis of DAC\VOBA at
the end of the third quarter of 2004 included unlocking of the Company's
assumptions regarding contractowner withdrawal behavior. Based on
experience studies, assumed rates of full surrender for both fixed and
variable annuities and rates of partial withdrawal of account balance for
variable annuities were all modified downward, producing a deceleration of
DAC/VOBA amortization of $4.2, before tax. The combined effect of the three
factors of actual variable return for 2004 exceeding long-term assumptions,
modification of future spread income expectations, and modification of
expectations regarding future withdrawal behavior was a deceleration of
DAC/VOBA amortization totaling $5.8, before tax, or $3.8, net of $2.0 of
federal income tax expense.
The Company reset long-term return assumptions for the separate account to
8.5% from 9.0% (gross before fund management fees and mortality, expense,
and other policy charges) as of December 31, 2003, reflecting a blended
return of equity and other sub-accounts. The largest component of the 2003
unlocking adjustment comprised a deceleration of DAC/VOBA amortization
totaling $41.3, before tax. This component was primarily driven by improved
market performance. The Company also unlocked assumptions regarding future
lapse rates for fixed annuities during the analysis at the end of 2003,
resulting in an acceleration of DAC/VOBA amortization of $6.0, before tax.
In each of the regular analyses of DAC/VOBA at the end of the third and
fourth quarters of 2003, expectations regarding yields on assets backing
82
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
fixed annuity liabilities were revised downward, resulting in respective
accelerations of DAC/VOBA amortization measuring $2.1, before tax and $6.0,
before tax. The combined effect of all unlocking in 2003 was a deceleration
of DAC/VOBA amortization totaling $27.2, before tax, or $17.7, net of $9.5
of federal income tax expense.
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 return to 9.0%
(gross before fund management fees and mortality, expense, and other policy
charges), as of December 31, 2002, reflecting a blended return of equity
and other sub-accounts. The largest component of the 2002 unlocking
adjustment comprised an acceleration of DAC/VOBA amortization totaling
$91.5, before tax. This component was primarily driven by the sustained
downturn in the equity markets and revised expectations for future returns.
The Company also unlocked assumptions regarding future lapse and partial
withdrawal rates for fixed annuities during the analysis at the end of the
third quarter of 2002, resulting in an acceleration of DAC/VOBA
amortization measuring $2.0, before tax. During the regular analysis at the
end of the fourth quarter of 2002, expectations regarding the assets
backing the fixed annuity liabilities were revised to reflect higher
anticipated default rates. This fourth quarter adjustment resulted in an
acceleration of DAC/VOBA amortization of $8.0, before tax. The combined
effect of all unlocking adjustments in 2002 was an acceleration of DAC/VOBA
amortization totaling $101.5 before tax, or $66.0, net of $35.5 of federal
income tax benefit.
Analysis DAC/VOBA - Life
As part of the regular analysis of DAC/VOBA for the life insurance block,
at the end of each of the years ended December 31, 2004, 2003, and 2002,
the Company unlocked due to assumption changes related primarily to
mortality, lapse, expense, and interest amounts. The impact of unlocking on
the amortization of DAC/VOBA was a decrease of $1.2 in 2004, an increase of
$6.0 in 2003, and an increase of $5.2 in 2002.
5. Dividend Restrictions and Shareholder's Equity
The Company's ability to pay dividends to its parent is subject to the
prior approval of the Iowa Division of Insurance for payment of any
dividend, which, when combined with other dividends paid within the
preceding twelve months, exceeds the greater of (1) ten percent (10%) of
the Company's statutory surplus at the prior year end or (2) the Company's
prior year statutory net gain from operations. The Company did not pay any
dividends on its common stock during 2004 or 2002. During 2003, the Company
paid $12.4 in dividends on its common stock to its Parent.
83
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The Insurance Division of the State of Iowa (the "Division"), 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 Division, which differ in certain respects
from accounting principles generally accepted in the United States.
Statutory net income (loss) was $96.1, $(85.1), and $(328.0), for the years
ended December 31, 2004, 2003 and 2002, respectively. Statutory capital and
surplus was $1,668.3 and $1,081.1 as of December 31, 2004 and 2003,
respectively.
As of December 31, 2004, the Company did not utilize any statutory
accounting practices, which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affected
statutory capital and surplus.
6. 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 and certain other fees.
The SOP reserve recognized for such products is in addition to the
liability previously held (the "Account Value") and recognizes the portion
of contract assessments received in early years used to compensate the
insurer for services provided in later years.
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 rates 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.
84
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The SOP reserve for annuities with GMDBs 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 GMDB SOP reserve at
December 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 18.0%
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 GMABs and GMWBs are considered to be
derivatives under FAS No. 133 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 December
31, 2004, are consistent with those used for the calculating the additional
GMDB liability. In addition, the calculation of the GMIB liability assumes
dynamic surrenders and dynamic annuitization reflecting the extent to which
the benefit, at the time of payment, has a positive value.
85
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 December 31, 2004, and the paid and incurred
amounts by type for the year ended December 31, 2004 were as follows:
Guaranteed Guaranteed Guaranteed
Minimum Minimum Minimum
Death Accumulation/ Income
Benefit Withdrawal Benefit Benefit
(GMDB) (GMAB/GMWB) (GMIB)
-------------- --------------------- --------------
Separate account liability
balance $ 25,843.4 $ 1,826.7 $ 9,079.6
============== ===================== ==============
Additional liability balance:
Balance at January 1, 2004 $ 56.5 $ 14.5 $ 13.6
Incurred guaranteed benefits 39.0 (4.9) 17.1
Paid guaranteed benefits (28.6) - -
-------------- --------------------- --------------
Balance at December 31, 2004 $ 66.9 $ 9.6 $ 30.7
============== ===================== ==============
The net amount at risk (net of reinsurance) and the weighted average
attained age of contractowners by type of minimum guaranteed benefit, were
as follows as of December 31, 2004:
Guaranteed Guaranteed Guaranteed
Minimum Minimum Minimum
Death Accumulation/ Income
Benefit Withdrawal Benefit Benefit
(GMDB) (GMAB/GMWB) (GMIB)
--------------- --------------------- ---------------
Net Amount at Risk (net of reinsurance) $ 1,365.7 $ 65.4 $ 204.3
Weighted Average Attained Age 63 61 61
The aggregate fair value of equity securities (including mutual funds),
supporting separate accounts with additional insurance benefits and minimum
investment return guarantees as of December 31, 2004 was $24,746.7.
7. Sales Inducements
Sales inducements represent benefits paid to contractowners 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 methodologies and assumptions consistent with those used for
amortization of DAC. During the year ended December 31, 2004, the Company
86
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
capitalized and amortized $100.9 and $65.5, respectively, of sales
inducements. The unamortized balance of capitalized sales inducements, net
of unrealized gains and losses, is $514.6 as of December 31, 2004.
8. 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.
Income tax expense (benefit) from continuing operations included in the
financial statements are as follows:
Year ended December 31,
2004 2003 2002
----------------- ----------------- ------------------
Current tax expense (benefit):
Federal $ 4.7 $ 1.2 $ (19.9)
----------------- ----------------- ------------------
Total current tax expense (benefit) 4.7 1.2 (19.9)
----------------- ----------------- ------------------
Deferred tax expense (benefit):
Operations and capital loss carryforwards 31.5 53.3 (3.9)
Other federal deferred tax 44.5 (55.3) (36.4)
----------------- ----------------- ------------------
Total deferred tax expense (benefit) 76.0 (2.0) (40.3)
----------------- ----------------- ------------------
Total income tax expense (benefit) $ 80.7 $ (0.8) $ (60.2)
================= ================= ==================
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:
Year ended December 31,
2004 2003 2002
----------------- ----------------- ------------------
Income before income taxes and cumulative
effect of change in accounting principle $ 173.6 $ 56.5 $ (176.3)
Tax rate 35% 35% 35%
----------------- ----------------- ------------------
Income tax at federal statutory rate 60.8 19.8 (61.7)
Tax effect of:
Meals and entertainment 0.5 0.4 0.6
Dividend received deduction 1.3 (11.5) 0.8
Product reserves 3.0 - -
Investments 15.0 - -
Refinement of deferred tax balances - (9.5) -
Other 0.1 - 0.1
----------------- ----------------- ------------------
Income tax expense (benefit) $ 80.7 $ (0.8) $ (60.2)
================= ================= ==================
87
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 2004 and 2003 are
presented below:
2004 2003
----------------- -----------------
Deferred tax assets:
Operations and capital loss carryforwards $ 133.5 $ 168.5
Future policy benefits 619.9 517.4
Goodwill 9.3 9.8
Investments 42.4 20.5
Employee compensation and benefits 19.9 16.8
Other 19.5 33.4
----------------- -----------------
Total gross assets 844.5 766.4
Deferred tax liabilities:
Unrealized gains on investments (157.1) (170.1)
Deferred policy acquisition cost (663.1) (529.1)
Value of purchased insurance in force (33.4) (38.3)
Other (3.5) (9.5)
----------------- -----------------
Total gross liabilities (857.1) (747.0)
----------------- -----------------
Net deferred income tax asset (liability) $ (12.6) $ 19.4
================= =================
Valuation allowances are provided when it is considered unlikely that
deferred tax assets will be realized. No valuation allowance has been
established at this time as management believes the above conditions
presently do not exist.
At December 31, 2004, the Company has operating loss carryforwards of
approximately $381.5, for federal income tax purposes, which are available
to offset future taxable income. If not used, these carryforwards will
expire between 2015 and 2019.
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes.
Under prior law, life insurance companies were allowed to defer from
taxation a portion of income. The deferred income was accumulated in the
Policyholders' Surplus Account. Equitable Life had a Policyholders' Surplus
Account prior to the merger, which carried over to the Company. This
deferred income only becomes taxable under certain conditions, which
management believes to be remote. Furthermore, the American Jobs Creation
Act of 2004 allows certain tax-free distributions from the Policyholders'
Surplus Account during 2005 and 2006. Therefore, based on currently
available information, no federal income taxes have been provided on the
Policyholders' Surplus Account accumulated balance of $14.4.
The Company establishes reserves for possible proposed adjustments by
various taxing authorities. Management believes there are sufficient
reserves provided for, or adequate defenses against any such adjustments.
88
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Currently, the Internal Revenue Service is conducting examinations for the
years 2000 and 2001 and various state tax audits are in process.
9. 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.
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 $11.4, $9.3, and $4.8, for the
years ended 2004, 2003 and 2002, respectively.
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) 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 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 $3.5, $2.8, and $3.0, for the
years ended December 31, 2004, 2003 and 2002, respectively.
89
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Other Benefit Plans
In addition to providing retirement plan benefits, the Company, in
conjunction with ING North America, provides certain supplemental
retirement benefits to eligible employees and health care and life
insurance benefits to retired employees and other eligible dependents. The
supplemental retirement plan includes a non-qualified defined benefit
pension plan, and a non-qualified defined contribution plan, which means
all benefits are payable from the general assets of the Company. The
post-retirement health care plan include contributory, with retiree
contribution levels adjusted annually. The life insurance plan provides a
flat amount of noncontributory coverage and optional contributory coverage.
The benefits charges allocated to the Company related to all of these plans
for the years ended December 31, 2004, 2003, and 2002 were not significant.
10. 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:
|X| 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 years ended December 31,
2004, 2003 and 2002, expenses were incurred in the amounts of $371.4,
$269.3, and $287.1, respectively.
|X| 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 years ended December 31, 2004,
2003 and 2002, expenses were incurred in the amounts of $69.8, $62.4,
and $43.4, respectively.
|X| Service agreement with DSI, in which the Company provides managerial
and supervisory services to DSI and earns a fee that is calculated as
a percentage of average assets in the variable separate accounts. For
the years ended December 31, 2004, 2003, and 2002, revenue for these
services was $36.4, $27.8, and $25.8 respectively.
|X| Expense sharing agreements with ING North America Insurance
Corporation ("NAC") for administrative, management, financial, and
information technology services, which were approved in 2001. For the
years ended December 31, 2004, 2003 and 2002, expenses were incurred
in the amounts of $65.0, $67.5, and $70.6, respectively.
|X| Services agreement between the Company and its affiliates dated
January 1, 2001, and amended effective January 1, 2002. For the years
ended December 31, 2004, 2003, and 2002, net expenses related to the
90
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
agreement were incurred in the amount of $5.1, $16.2, and $17.1,
respectively.
|X| ING Advisors Network, a group of broker-dealers affiliated with the
Company, distributes the Company's annuity products. For the years
ended December 31, 2004, 2003, and 2002, ING Advisors Network sold new
contracts of $1,121.8, $765.8, and $949.1, respectively.
Management and service contracts and all cost sharing arrangements with
other affiliated companies are allocated in accordance with the Company's
expense and cost allocation methods.
Reinsurance Agreements
ING USA entered into a reinsurance agreement with Security Life of Denver
International, Limited. ("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 in force and new
business and recaptured all in force 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. On March 28, 2003, SLDI transferred assets to
the Company in the amount of $185.6. 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 offset by the receipt
of a $24.1 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.
The Company is a party to a Facultative Reinsurance Agreement with its
affiliate, Security Life of Denver Insurance Company ("Security Life")
dated August 20, 1999. Under the terms of the Agreement, the Company
facultatively cedes certain GICs and funding agreements to Security Life on
a 100% coinsurance basis. As of December 31, 2004, the value of GIC and
funding agreement reserves ceded by the Company under this agreement was
$1,262.7.
Reciprocal Loan Agreement
On January 1, 2004, the Company entered into a new reciprocal loan
agreement with ING America Insurance Holding Company, Inc. ("ING AIH"), a
Delaware corporation and affiliate, to facilitate the handling of unusual
and/or unanticipated short-term cash requirements. In accordance with this
91
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
agreement, the maximum outstanding amount to be borrowed or lent shall not
exceed 3% of ING USA's total admitted assets as of the preceding December
31. This agreement supersedes previous reciprocal loan agreements between
each of the Merged Companies and ING AIH, which contained various terms and
maximum borrowing/lending limits.
Under the previous and current reciprocal loan agreements, 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 these
agreements, ING USA incurred interest expense of $0.2, $0.3, and $0.3, for
the years ended December 31, 2004, 2003, and 2002, respectively. ING USA
earned interest of $2.5, $1.0, and $1.3, for the years ended December 31,
2004, 2003 and 2002, respectively. At December 31, 2004 and 2003, ING USA
had $184.2 and $120.4 receivable from ING AIH under these agreements
included in due from affiliates.
Notes to Affiliates
The Company's promissory note in the amount of $50.0 payable to Lion was
repaid on May 17, 2004. The note was issued on April 15, 1997. Interest was
charged at an annual rate of 8.75% and the face amount was due on demand.
The Company incurred interest expense of $1.7, $4.4, and $4.4, for the
years ended December 31, 2004, 2003, and 2002, respectively.
ING USA issued a 30-year surplus note in the principal amount of $35.0 on
December 8, 1999, to its affiliate, Security Life of Denver Insurance
Company (successor-in-interest to First Columbine Life Insurance Company),
which matures on December 7, 2029. Interest is charged at an annual rate of
7.98%. Payment of the note and related accrued interest is subordinate to
payments due to contractowners 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 $2.8, $2.8, and $2.8, for the years ended December 31, 2004,
2003, and 2002, respectively.
On December 29, 2004, the Company issued surplus notes in the aggregate
principal amount of $400.0 (the "Notes"), scheduled to mature on December
29, 2034, to its affiliates, ING Life Insurance and Annuity Company
("ILIAC"), ReliaStar Life and SLDI, in an offering that was exempt from the
registration requirements of the Securities Act of 1933. The Notes bear
interest at a rate of 6.26% per year. Any payment of principle and/or
interest is subject to the prior approval of the Iowa Insurance
Commissioner. Interest is scheduled to be paid semi-annually in arrears on
June 29 and December 29 of each year, commencing on June 29, 2005. Interest
expense was $0.2 for the year ended December 31, 2004.
92
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 years ended December 31, 2004, 2003, and 2002, ING USA received
capital contributions of $230.0, $88.7, and $456.3, respectively.
11. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which is due on demand, the
Company can borrow up to $125 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 minimal
interest expense for the years ended December 31, 2004, 2003, and 2002,
respectively. At December 31, 2004 and 2003, the Company did not have any
balances payable to the Bank.
The Company also maintains a perpetual revolving loan agreement with Bank
of New York ("BONY"). Under this agreement, the Company can borrow up to
$100 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 minimal interest
expense for the years ended December 31, 2004, 2003, and 2002. At December
31, 2004 and 2003, the Company did not have any balances payable to BONY.
12. Reinsurance
At December 31, 2004, ING USA had reinsurance treaties with 17 unaffiliated
reinsurers and 1 affiliated reinsurer covering a 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.
93
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Reinsurance ceded in force for life mortality risks were $906.0 and
$1,209.4 at December 31, 2004 and 2003, respectively. At December 31, 2004
and 2003, net receivables were comprised of the following:
2004 2003
----------------- -----------------
Claims recoverable from reinsurers $ 13.4 $ 17.1
Payable for reinsurance premiums (3.2) (6.6)
Reinsured amounts due to an
unaffiliated reinsurer (3.2) (3.1)
Reserve credits 17.6 21.1
Reinsurance ceded 1,359.9 619.4
Other 3.6 4.0
------------------ -----------------
Total $ 1,388.1 $ 651.9
================== =================
Included in the accompanying financial statements are net policy benefit
recoveries of $48.4, $48.4, and $60.0, for the years ended December 31,
2004, 2003, and 2002, respectively.
Interest credited and other benefits to contractowners included the
following premiums ceded and reinsurance recoveries:
Year ended December 31,
2004 2003 2002
----------------- ----------------- ------------------
Premiums ceded under reinsurance $ 12.5 $ 16.4 $ 59.6
Reinsurance recoveries 0.8 2.2 2.7
13. Commitments and Contingent Liabilities
Leases
The Company leases its office space and certain other equipment under
operating leases that expire through 2017.
For the years ended December 31, 2004, 2003, and 2002, rent expense for
leases was $7.6, $7.4, and $6.6, respectively. The future net minimum
payments under noncancelable leases for the years ended December 31, 2005
through 2009 are estimated to be $7.8, $7.8, $7.6, $7.5, and $7.5,
respectively, and $39.4, 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.
94
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans, or money
market instruments at a specified future date and at a specified price or
yield. The inability of counterparties to honor these commitments may
result in either a higher or lower replacement cost. Also, there is likely
to be a change in the value of the securities underlying the commitments.
At December 31, 2004 and 2003, the Company had off-balance sheet
commitments to purchase investments equal to their fair value of $175.3 and
$154.0, respectively.
Litigation
The Company is a party to threatened or pending lawsuits/arbitrations
arising from the normal conduct of business. Due to the climate in
insurance and business litigation/arbitrations, suits against the Company
sometimes include claims for substantial compensatory, consequential or
punitive damages and other types of relief. Moreover, certain claims are
asserted as class actions, purporting to represent a group of similarly
situated individuals. While it is not possible to forecast the outcome of
such lawsuits/arbitrations, in light of existing insurance, reinsurance and
established reserves, it is the opinion of management that the disposition
of such lawsuits/arbitrations will not have a materially adverse effect on
the Company's operations or financial position.
Other Regulatory Matters
Regulatory Matters
As with many financial services companies, the Company and its affiliates
have received informal and formal requests for information from various
state and federal governmental agencies and self-regulatory organizations
in connection with inquiries and investigations of the products and
practices of the financial services industry. In each case, the Company and
its affiliates have been and are providing full cooperation.
Fund Regulatory Issues
Since 2002, there has been increased governmental and regulatory activity
relating to mutual funds and variable insurance products. This activity has
primarily focused on inappropriate trading of fund shares, revenue sharing
and directed brokerage, compensation, sales practices and suitability,
arrangements with service providers, pricing, compliance and controls, and
adequacy of disclosure.
In addition to responding to governmental and regulatory requests on fund
regulatory issues, ING management, on its own initiative, conducted,
through special counsel and a national accounting firm, an extensive
internal review of mutual fund trading in ING insurance, retirement, and
mutual fund products. The goal of this review was to identify any instances
95
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
of inappropriate trading in those products by third parties or by ING
investment professionals and other ING personnel.
The internal review identified several isolated arrangements allowing third
parties to engage in frequent trading of mutual funds within the variable
insurance and mutual fund products of ING, and identified other
circumstances where frequent trading occurred despite measures taken by ING
intended to combat market timing. Each of the arrangements has been
terminated and disclosed to regulators, to the independent trustees of ING
Funds (U.S.) and in Company reports previously filed with the SEC pursuant
to the Securities Exchange Act of 1934, as amended.
An affiliate of the Company, ING Funds Distributors, LLC ("IFD") has
received notice from the staff of the National Association of Securities
Dealers ("NASD") that the staff has made a preliminary determination to
recommend that disciplinary action be brought against IFD and one of its
registered persons for violations of the NASD Conduct Rules and federal
securities laws in connection with frequent trading arrangements.
Other regulators, including the SEC and the New York Attorney General, are
also likely to take some action with respect to the Company or certain
affiliates before concluding their investigation of ING relating to fund
trading. The potential outcome of such action is difficult to predict but
could subject the Company or certain affiliates to adverse consequences,
including, but not limited to, settlement payments, penalties, and other
financial liability. It is not currently anticipated, however, that the
actual outcome of such action will have a material adverse effect on ING or
ING's U.S.-based operations, including the Company.
ING has agreed to indemnify and hold harmless the ING Funds from all
damages resulting from wrongful conduct by ING or its employees or from
ING's internal investigation, any investigations conducted by any
governmental or self-regulatory agencies, litigation or other formal
proceedings, including any proceedings by the Securities and Exchange
Commission ("SEC"). Management reported to the ING Funds Board that ING
management believes that the total amount of any indemnification
obligations will not be material to ING or ING's U.S.-based operations ,
including the Company.
96
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Other Regulatory Matters
The New York Attorney General and other regulators are also conducting
broad inquiries and investigations involving the insurance industry. These
initiatives currently focus on, among other things, compensation and other
sales incentives, potential conflicts of interest, potential
anti-competitive activity, marketing practices, certain financial
reinsurance arrangements, and disclosure. It is likely that the scope of
these investigations will further broaden before the investigations are
concluded. U.S. affiliates of ING have received formal and informal
requests in connection with such investigations, and are cooperating fully
with each request for information.
These initiatives may result in new legislation and regulation that could
significantly affect the financial services industry, including businesses
in which the Company is engaged.
In light of these and other developments, U.S. affiliates of ING, including
the Company, periodically review whether modifications to our business
practices are appropriate.
14. Other Comprehensive Income
The components of other comprehensive income for the years ended December
31, 2004 and 2003 were as follows:
2004 2003
------------------ -----------------
Net unrealized capital gains (losses):
Fixed maturities $ 451.4 $ 517.3
Equity securities 0.5 5.0
DAC/VOBA (258.6) (210.5)
Sales inducements (6.7) -
Other (2.6) (13.9)
------------------ -----------------
Subtotal 184.0 297.9
Less: Deferred income taxes (66.4) (109.8)
------------------ -----------------
Net unrealized capital gains (losses) 117.6 188.1
Minimum pension liability (4.9) -
------------------ -----------------
Net accumulated other comprehensive income $ 112.7 $ 188.1
================== =================
97
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Changes in accumulated other comprehensive income related to changes in net
unrealized gains (losses) on securities, including securities pledged, were
as follows:
Year ended December 31,
2004 2003 2002
------------------ ----------------- -----------------
Unrealized holding gains (losses) arising
during the year (1) $ (26.8) $ 125.9 $ 152.6
Less: reclassification adjustment for gains
(losses) and other items included in
net income (2) 43.7 71.0 (50.6)
------------------ ----------------- -----------------
Net unrealized gains (losses) on securities $ (70.5) $ 54.9 $ 203.2
================== ================= =================
(1) Pretax unrealized holding gains (losses) were $(41.2), $193.7 and $234.8,
for the years ended December 31, 2004, 2003 and 2002, respectively.
(2) Pretax reclassification adjustments for gains (losses) and other items
included in net income were $67.2, $109.2 and $(77.8), for the years ended
December 31, 2004, 2003 and 2002, respectively.
98
QUARTERLY DATA (UNAUDITED)
2004 (In millions) First Second Third Fourth
- ----- ------------- ------------- ------------- -------------
Total revenue $ 435.7 $ 430.2 $ 435.8 $ 372.1
------------- ------------- ------------- -------------
Income before income taxes and
cumulative effect of change in accounting principle 32.0 ** 69.2 ** 39.7 ** 32.7
Income tax expense 9.8 ** 23.0 ** 37.0 ** 10.9
------------- ------------- ------------- -------------
Net income before cumulative effect of
change in accounting principle 22.2 ** 46.2 ** 2.7 ** 21.8
Cumulative effect of change in accounting principle (1.0)** - - -
------------- ------------- ------------- -------------
Net income $ 21.2 ** $ 46.2 ** $ 2.7 ** $ 21.8
============= ============= ============= =============
2003 (In millions) First* Second* Third* Fourth*
- ---- ------------- ------------- ------------- -------------
Total revenue $ 365.0 $ 392.0 $ 406.3 $ 345.7
------------- ------------- ------------- -------------
Income (loss) before income taxes (21.0) 46.5 32.6 (1.6)
Income tax expense (benefit) (7.5) 14.4 3.8 (11.5)
------------- ------------- ------------- -------------
Net income (loss) $ (13.5) $ 32.1 $ 28.8 $ 9.9
============= ============= ============= =============
* 2003 amounts have been restated due to the merger on January 1, 2004. See
the "Significant Accounting Policies" footnote for further information
regarding the merger.
** Income before cumulative effect of change in accounting principle for the
first, second, and third quarters of 2004 has been restated to include the
impact of the implementation of the TPA, effective January 1, 2004. The
quarterly adjustment was approximately $(0.6), resulting in a total 2004
reduction of $(2.3). Also, the cumulative effect of change in accounting
principal was reduced by $(2.0) before tax due to the implementation of the
TPA. See "Recently Adopted Accounting Standards" in the "Significant
Accounting Policies" footnote for further information.
99
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. 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.
Item 9B. Other Information
None.
100
PART III
Item 10. Directors and Executive Officers of the Registrant
Omitted pursuant to General Instruction I(2) of Form 10-K, except with
respect to compliance with Sections 406 and 407 of the Sarbanes-Oxley
Act of 2002:
a) Code of Ethics for Financial Professionals
The Company has approved and adopted a Code of Ethics for
Financial Professionals (which was filed as Exhibit 14 to the
Company's Form 10-K, as filed with the SEC on March 29, 2004,
File No. 033-87270), pursuant to the requirements of Section 406
of the Sarbanes-Oxley Act of 2002. Any waiver of the Code of
Ethics will be disclosed by the Company by way of a Form 8-K
filing.
b) Designation of Board Financial Expert
The Company has designated David A. Wheat, Director, Senior Vice
President, and Chief Financial Officer of the Company, as its
Board Financial Expert, pursuant to the requirements of Section
407 of the Sarbanes-Oxley Act of 2002. Because the Company is a
wholly-owned subsidiary of Lion, it does not have any outside
directors sitting on its board.
Item 11. Executive Compensation
Omitted pursuant to General Instruction I(2) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Omitted pursuant to General Instruction I(2) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
Omitted pursuant to General Instruction I(2) of Form 10-K.
Item 14. Principal Accountant Fees and Services
(Dollar amounts in millions, unless otherwise stated)
In 2004 and 2003, Ernst & Young LLP (Ernst & Young) served as the
principal external auditing firm for ING including ING USA. ING
subsidiaries, including ING USA, are allocated Ernst & Young fees
attributable to services rendered by Ernst & Young to each subsidiary.
Ernst & Young fees allocated to the Company for the years ended
December 31, 2004
101
and 2003 are detailed below along with a description of the services
rendered by Ernst & Young to the Company:
2004 2003
------------------- -------------------
Audit fees $ 2.6 $ 1.8
Audit-related fees 0.5 0.1
Tax fees -* 0.1
All other fees -* -
------------------- -------------------
$ 3.1 $ 2.0
=================== ===================
*Less than $0.1.
Audit fees
Fees for audit services include fees associated with professional
services rendered by the auditors for the audit of the annual
financial statements of the Company and review of the Company's
interim financial statements.
Audit-related fees
Audit-related fees were allocated to ING USA for assurance and related
services that are reasonably related to the performance of the audit
or review of the financial statements and are not reported under the
audit fee item above. These services consisted primarily of audit of
SEC product filings, advice on accounting matters, and progress review
on International Financial Reporting Standards and Sarbanes-Oxley
projects.
Tax Fees
Tax fees allocated to ING USA were for tax compliance, tax advice, and
tax planning professional services. These services consisted of: tax
compliance including the review of original and amended tax returns,
assistance with questions regarding tax audits, and tax planning and
advisory services relating to common forms of domestic taxation (i.e.
income tax and capital tax).
All other fees
There were minimal fees allocated to ING USA under the category "all
other fees" in 2004, and no amounts in 2003. This category typically
includes fees paid for products and services other than the audit
fees, audit-related fees, and tax fees described above, and consists
primarily of non-recurring support and advisory services.
Pre-approval policies and procedures
ING USA has adopted the pre-approval policies and procedures of ING.
Audit, audit-related, and non-audit services provided to the Company
by ING's independent auditors are pre-approved by ING's audit
committee. Pursuant to ING's pre-approval policies and procedures, the
102
ING audit committee is required to pre-approve all services provided
by ING's independent auditors to ING and its majority owned
legalentities, including the Company. The ING pre-approval policies
and procedures distinguish four types of services: (1) audit services,
(2) audit-related services, (3) non-audit services, and (4) prohibited
services (as described in the Sarbanes-Oxley Act).
The ING pre-approval procedures consist of a general pre-approval
procedure and a specific pre-approval procedure.
General pre-approval procedure
ING's audit committee pre-approves audit, audit-related, and non-audit
services to be provided by ING's external audit firms on an annual
basis, provided that the amount for such pre-approved service may not
be exceeded. ING's audit committee receives an overview of all
services provided, including related fees and supported by
sufficiently detailed information. ING's audit committee evaluates
this overview retrospectively on a semi-annual basis.
Specific pre-approval procedure
In addition to audit committee pre-approval, all audit-related and
non-audit engagements that are expected to generate fees in excess of
EUR 100,000 need specific approval of ING's Chief Financial Officer
("CFO"). These engagements are submitted in advance to the General
Manager of ING Corporate Audit Services, who will advise ING's CFO on
the compatibility of such services with the independence policy.
Further, in addition to audit committee pre-approval under the general
pre-approval procedures, the audit committee must approve on a
case-by-case basis:
(i) Each individual audit-related and non-audit engagement which is
expected to generate fees in excess of EUR 250,000;
(ii) All further audit-related and non-audit engagements over and
above the pre-approved amounts.
In 2004, 100% of each of the audit related services, tax services and
all other services were pre-approved by ING's audit committee.
103
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Financial statements. See Item 8 on Page 49
2. Financial statement schedules. See Index to Financial
Statement Schedules on Page 110
Exhibits
2. Agreement and Plan of Merger dated June 25, 2003, by and
between USG Annuity & Life Company, United Life & Annuity
Insurance Company, Equitable Life Insurance Company of Iowa
and Golden American, incorporated by reference in Exhibit
99-8 in the Company's Form 8K filed with the SEC on January
2, 2004 (File No. 333-87270).
3.(i)Restated Articles of Incorporation Providing for the
Redomestication of Golden American Life Insurance Company
dated July 2 and 3, 2003, effective January 1, 2004,
incorporated by reference to Company's 10-K, as filed with
the SEC on March 29, 2004 (File No. 033-87270).
Amendment to Articles of Incorporation Providing for the
Name Change of Golden American Life Insurance Company dated
November 20, 2003, effective January 1, 2004, incorporated
by reference to the Company's 10-K, as filed with the SEC on
March 29, 2004 (File No. 033-87270).
Amendment to Articles of Incorporation Providing for the
Change in Purpose and Powers of ING USA Annuity and Life
Insurance Company dated March 3 and 4, 2004, effective March
11, 2004, incorporated by reference to the Company's 10-Q,
as filed with the SEC on May 17, 2004 (File No. 033-87270).
(ii) Amended and Restated By-Laws of ING USA Annuity and Life
Insurance Company, adopted by the Board of Directors of the
Company on June 25, 2003, as amended November 11, 2003 and
February 25, 2004, incorporated by reference to the
Company's Form 10-Q, as filed with the SEC on May 17, 2004
(File No. 033-87270).
104
4. Instruments Defining the Rights of Security Holders,
including Indentures (Annuity Contracts).
(a) Single Premium Deferred Modified Guaranteed Annuity
Contract, Single Premium Deferred modified Guaranteed
Annuity Master Contract, and Single Premium Deferred
Modified Guaranteed Annuity Certificate - Incorporated
herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form S-1 for Golden American
Life Insurance Company as filed with the SEC on
February 8, 2002 (File No. 333-67660).
(b) Single Premium Deferred Modified Guaranteed Annuity
Contract - Incorporated herein by reference to the
initial Registration Statement on Form S-1 for Golden
American Life Insurance Company, as filed with the SEC
on June 30, 2000 (File No. 333-40596).
(b.1)Single Premium Deferred Modified Guaranteed Annuity
Master Contract and Single Premium Deferred Modified
guaranteed Annuity Certificate - Incorporated by
reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-1 for Golden American
Life Insurance Company, as filed with the SEC on
September 13, 2000 (File No. 333-40596).
(c) Individual Retirement Rider; Roth Individual Retirement
Annuity Rider; Individual Retirement Annuity Rider; and
Simple Retirement Account Rider - Incorporated herein
by reference to Post-Effective Amendment No. 34 to
Registration Statement on Form N-4 for Golden American
Life Insurance Company Separate Account B, as filed
with the SEC on April 15, 2003 (File No. 033-23351).
(c.1)403(b) Rider - Incorporated herein by reference to
Initial Registration Statement on Form S-2 for Golden
American Life Insurance Company, as filed with the SEC
on April 15, 2003 (File No. 333-104547).
(d) Single Premium Deferred Equity Indexed Modified
Guaranteed Annuity Contract; Single Premium Deferred
Modified Guaranteed Annuity Group Master Contract; and
Single Premium Deferred Equity Indexed Modified
Guaranteed Annuity Certificate, - Incorporated herein
by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form S-2, as filed with the
SEC on August 13, 2004 (File No. 333-116137).
(e) Interest in Fixed Account I under Variable Annuity
Contracts - Incorporated herein by reference to:
Post-Effective Amendment No. 12 to Registration
Statement on Form N-4 for Golden American Life
105
Insurance Company Separate Account B, as filed with the
Securities and Exchange Commission on April 23, 1999
(File Nos. 333-59261, 811-5626); Incorporated by
reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 for Golden American
life Insurance Company, as filed with the SEC on April
23, 1999 (File Nos. 333-28769, 811-5626); and
Incorporated by reference to Pre-Effective Amendment
No. 1 to Registration statement on Form N-4 for Golden
American Life Insurance Company Separate Account B, as
filed with the SEC on June 24, 2000 (File Nos.
333-33914, 811-5626).
(f) Interests in Fixed Account II under Variable Annuity
Contracts - Incorporated herein by reference to
Post-Effective Amendment No. 7 to Registration
Statement on Form N-4 for Separate Account B of Golden
American Life Insurance Company as filed with the SEC
on October 2, 2000 (File No. 333-28679, 811-5626),
Incorporated herein by reference to Post-Effective
Amendment No. 2 to Registration Statement on Form N-4
for Separate Account B of Golden American Life
Insurance Company as filed with the SEC on October 2,
2000 (File No. 333-30180, 811-5626), Incorporated
herein by reference to Post-Effective Amendment No. 5
to Registration Statement on Form N-4 for Separate
Account B of Golden American Life Insurance Company as
filed with the SEC on April 23, 1999 (File No.
333-28755, 811-5626), Incorporated herein by reference
to Post-Effective Amendment No. 1 to Registration
Statement on Form N-4 for Separate Account B of Golden
American Life Insurance Company as filed with the SEC
on April 23, 1999 (File No. 333-66757, 811-5626),
Incorporated herein by reference to Pre-Effective
Amendment No. 1 to Registration Statement on Form N-4
for Separate Account B of Golden American Life
Insurance Company as filed with the SEC on October 26,
2001 (File No. 333-63692, 811-5626), Incorporated
herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 for Separate Account
B of Golden American Life Insurance Company as filed
with the SEC on December 11, 2001 (File No.333-70600,
811-5626), and Incorporated by reference to
Post-Effective Amendment No. 1 to Registration
Statement on Form N-4 for Golden American Life
Insurance Company Separate Account B, as filed with the
SEC on April 16, 2003 (File No. 333-90516, 811-5626).
(g) Interest in the Guaranteed Account under Variable
Annuity Contracts - Incorporated herein by reference to
Pre-Effective Amendment No. 1 to Registration Statement
on Form S-2 for Golden American Life Insurance Company,
as filed with the SEC on June 29, 2001 (File No.
333-57212).
10. Material Contracts
(a) Service Agreement, dated as of January 1, 1994, between
Golden American and Directed Services, Inc.,
incorporated by reference from Exhibit 10(b) to a
Registration Statement on Form S-1 filed with the SEC
on April 29, 1998 (File No. 333-51353).
106
(b) Asset Management Agreement, dated January 20, 1998,
between Golden American and ING Investment Management
LLC, incorporated by reference from Exhibit 10(f) to
Golden American's Form 10-Q filed with the SEC on
August 14, 1998 (File No. 033-87270).
(c) Reciprocal Loan Agreement dated January 1, 2004,
between ING USA Annuity and Life Insurance Company and
ING America Insurance Holdings, Inc., incorporated by
reference from Exhibit 10.A(a) to ING USA Annuity and
Life Insurance Company's Form 10-Q filed with the SEC
on or about May 17, 2004 (File No. 333-87270).
(d) Surplus Note, dated December 8, 1999, between Golden
American and First Columbine Life Insurance Company,
incorporated by reference from Exhibit 10(g) to
Amendment No. 7 to a Registration Statement for Golden
American on Form S-1 filed with the SEC on or about
January 27, 2000 (File No. 333-28765).
(e) Services Agreement between Golden American and the
affiliated companies listed in Exhibit B to that
Agreement, dated as of January 1, 2001, as amended
effective January 1, 2002, incorporated by reference
from Exhibit 10.A (k) to ING USA Annuity and Life
Insurance Company's Form 10-K filed with the SEC on
March 29, 2004 (File No. 033-87270).
(f) Services Agreement between Golden American and ING
North America Insurance Corporation effective January
1, 2001, incorporated by reference from Exhibit 10.A
(g) to ING USA Annuity and Life Insurance Company's
Form 10-K filed with the SEC on March 29, 2004 (File
No. 033-87270).
(g) Form of Shared Services Center Services Agreement by
and among ING North America Insurance Corporation
("Service Provider") and Ameribest Life Insurance
Company, a Georgia corporation; Equitable Life
Insurance Company of Iowa, an Iowa corporation; USG
Annuity & Life Company, an Oklahoma corporation; Golden
American, a Delaware corporation; First Columbine Life
Insurance Company, a Colorado corporation; Life
Insurance Company of Georgia, a Georgia corporation;
Southland Life Insurance Company, a Texas corporation;
Security Life of Denver Insurance Company, a Colorado
corporation; Midwestern United Life Insurance Company,
an Indiana corporation; and United Life & Annuity
Insurance Company, a Texas corporation, incorporated by
reference from Exhibit 10(r) to Pre-Effective Amendment
No. 1 to a Registration Statement on Form S-1 filed by
Registrant with the SEC on or about December 11, 2001
(File No. 333-70602).
107
(h) Tax Sharing Agreement between Golden American, ING
America Insurance Holdings, Inc. and affiliated
companies, effective January 1, 2001, incorporated by
reference from Exhibit 10.A (j) to ING USA Annuity and
Life Insurance Company's Form 10-K filed with the SEC
on March 29, 2004 (File No. 033-87270).
(i) Administrative Services Agreement between Golden
American, ReliaStar Life Insurance Company of New York
and affiliated companies listed on Exhibit A to the
Agreement, effective March 1, 2003, incorporated by
reference from Exhibit 10.A (m) to ING USA Annuity and
Life Insurance Company's Form 10-K filed with the SEC
on March 29, 2004 (File No. 033-87270).
(j) First Amendment to the Administrative Services
Agreement between ING USA Annuity and Life Insurance
Company and its affiliates, effective as of August 1,
2004.
(k) Amendment to Asset Management Agreement between Golden
American and ING Investment Management LLC, effective
January 1, 2003, incorporated by reference from Exhibit
10.A (l) to ING USA Annuity and Life Insurance
Company's Form 10-K filed with the SEC on March 29,
2004 (File No. 033-87270).
(l) Third Amendment to the Asset Management Agreement,
between Golden American and ING Investment Management
LLC, effective August 18, 2003, incorporated by
reference from Exhibit 10.A (n) to ING USA Annuity and
Life Insurance Company's Form 10-K filed with the SEC
on March 29, 2004 (File No. 033-87270).
(m) Lease Agreement, dated as of April 16, 1998, by and
between Golden American and Dunwoody Associates,
incorporated by reference from Exhibit 10.A (o) to ING
USA Annuity and Life Insurance Company's Form 10-K
filed with the SEC on March 29, 2004 (File No.
033-87270).
(n) First Amendment to Lease Agreement, dated November 4,
1998, between Golden American and Dunwoody Associates,
incorporated by reference from Exhibit 10.A (p) to ING
USA Annuity and Life Insurance Company's Form 10-K
filed with the SEC on March 29, 2004 (File No.
033-87270).
(o) Second Amendment to Lease Agreement, dated June 1,
2000, between Golden American and Dunwoody Associates,
incorporated by reference from Exhibit 10.A (q) to ING
USA Annuity and Life Insurance Company's Form 10-K
filed with the SEC on March 29, 2004 (File No.
033-87270).
(p) Services Agreement with ING Financial Advisers, LLC
("INGFA"), entered into June 1, 2002 by Equitable Life
Insurance Company of Iowa, as subsumed by ING USA
pursuant to the January 1, 2004 merger.
108
(q) Surplus Note for $50,000,000 aggregate principal
amount, dated December 29, 2004, issued by ING USA
Annuity and Life Insurance Company to its affiliate,
Security Life of Denver International Limited.
(r) Surplus Note for $175,000,000 aggregate principal
amount, dated December 29, 2004, issued by ING USA
Annuity and Life Insurance Company to its affiliate,
ING Life Insurance and Annuity Company.
(s) Surplus Note for $175,000,000 aggregate principal
amount, dated December 29, 2004, issued by ING USA
Annuity and Life Insurance Company to its affiliate,
ReliaStar Life Insurance Company.
(t) Lease Agreement dated August 31, 1995, between The
Graham Group, Inc. and Equitable Life Insurance Company
of Iowa, as subsumed by ING USA Annuity and Life
Insurance Company pursuant to the January 1, 2004
merger.
(u) Underwriting Agreement between Golden American Life
Insurance Company ("Golden American" or "Registrant")
and Directed Services, Inc., incorporated by reference
from Exhibit 1 to Amendment No. 9 to Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission ("SEC") on or about
February 17, 1998 (File No. 333-87272).
14. ING Code of Ethics for Financial Professionals, incorporated
by reference from Exhibit 14 to ING USA Annuity and Life
Insurance Company's Form 10-K filed with the SEC on March
29, 2004 (File No. 033-87270).
31.1 Certificate of David A. Wheat pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Harry N. Stout 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 Harry N. Stout pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
109
Index to Financial Statement Schedules
Page
----
Report of Independent Registered Public Accounting Firm 111
I. Summary of Investments - Other than Investments in Affiliates as of
December 31, 2004 112
IV. Reinsurance Information as of and for the years ended
December 31, 2004, 2003 and 2002 113
Schedules other than those listed above are omitted because they are not
required or not applicable.
Report of Independent Registered Public Accounting Firm
The Board of Directors
ING USA Annuity and Life Insurance Company
We have audited the consolidated financial statements of ING USA Annuity and
Life Insurance Company as of December 31, 2004 and 2003, and for each of the
three years in the period ended December 31, 2004, and have issued our report
thereon dated March 18, 2005. Our audits also included the financial statement
schedules listed in Item 15. These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 18, 2005
ING USA Annuity and Life Insurance Company,
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Schedule I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 2004
(In Millions)
Amount
Shown on
Type of Investments Cost Value* Balance Sheet
--------------- --------------- ----------------
Fixed maturities:
U.S. government and government agencies and authorities $ 464.0 $ 464.7 $ 464.7
State, municipalities and political subdivisions 20.7 19.9 19.9
Public utilities securities 1,796.9 1,866.4 1,866.4
Other U.S. corporate securities 6,292.4 6,513.2 6,513.2
Foreign securities (1) 3,090.1 3,198.3 3,198.3
Residential mortgage-backed securities 3,440.3 3,461.8 3,461.8
jCommercial mortgage-backed securities 1,107.8 1,139.7 1,139.7
Other asset-backed securities 1,934.2 1,933.8 1,933.8
--------------- --------------- ----------------
Total fixed maturities, including fixed maturities pledged $ 18,146.4 $ 18,597.8 $ 18,597.8
=============== =============== ================
Total equity securities $ 34.8 $ 35.3 $ 35.3
=============== =============== ================
Mortgage loans $ 3,851.8 $ 3,969.4 $ 3,851.8
Policy loans 169.0 169.0 169.0
Other investments 228.8 229.0 228.8
--------------- --------------- ----------------
Total investments $ 22,430.8 $ 23,000.5 $ 22,882.7
=============== =============== ================
* See Notes 2 and 3 of Notes to Financial Statements.
(1) The term "foreign" includes foreign governments, foreign political
subdivisions, foreign public utilities and all other bonds of foreign
issuers. Substantially all of the Company's foreign securities are
denominated in U.S. dollars.
112
ING USA Annuity and Life Insurance Company,
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Schedule IV
Reinsurance Information
As of and for the years ended December 31, 2004, 2003 and 2002
(In Millions)
Percentage of
Gross Ceded Assumed Net assumed to net
------------- ------------- ------------- ------------- ---------------
Year ended December 31, 2004
Life insurance in force $ 7,405.6 $ 906.0 $ - $ 6,499.6 0.0%
Premiums:
Life insurance 25.0 2.2 - 22.8
Accident and health insurance 0.4 0.4 - -
------------- ------------- ------------- -------------
Total premiums $ 25.4 $ 2.6 $ - $ 22.8
============= ============= ============= =============
Year ended December 31, 2003
Life insurance in force $ 8,001.4 $ 1,209.4 $ - $ 6,792.0 0.0%
Premiums:
Life insurance 27.4 1.4 - 26.0
Accident and health insurance 0.2 0.2 - -
------------- ------------- ------------- -------------
Total premiums $ 27.6 $ 1.6 $ - $ 26.0
============= ============= ============= =============
Year ended December 31, 2002
Life insurance in force $ 8,722.9 $ 1,370.5 $ - $ 7,352.4 0.0%
Premiums:
Life insurance 38.4 1.6 - 36.8
Accident and health insurance 0.2 0.2 - -
------------- ------------- ------------- -------------
Total premiums $ 38.6 $ 1.8 $ - $ 36.8
============= ============= ============= =============
113
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
March 17, 2005 By /s/ David A. Wheat
- -------------- -----------------------------------------
(Date) David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on or before March 18, 2005.
Signatures Title
/s/ David A. Wheat
- ------------------------------------- Director, Senior Vice President and
David A. Wheat Chief Financial Officer
/s/ Jacques de Vaucleroy
- ------------------------------------- Director
Jacques de Vaucleroy
/s/ Thomas J. McInerney
- ------------------------------------- Director and Chairman
Thomas J. McInerney
/s/ Kathleen A. Murphy
- ------------------------------------- Director
Kathleen A. Murphy
/s/ Catherine H. Smith
- ------------------------------------- Director
Catherine H. Smith
/s/ Harry N. Stout
- ------------------------------------- President
Harry N. Stout
/s/ Roger W. Fisher
- ------------------------------------- Vice President and Director
Roger W. Fisher Chief Accounting Officer
114
Exhibit 10.(j)
FIRST AMENDMENT
TO THE
ADMINISTRATIVE SERVICES AGREEMENT
This First Amendment, effective as of August 1, 2004, is made to the
Administrative Services Agreement (the "Agreement"), dated as of March 1, 2003,
entered into by and between ReliaStar Life Insurance Company of New York, a New
York insurance company and the affiliated companies specified in Exhibit A to
the Agreement.
IN CONSIDERATION, of the mutual promises set forth herein, and intending to
be legally bound hereby, the parties agree to amend the Agreement as follows:
1. The Agreement shall be amended to add the following new section: TERM.
This Agreement shall be effective on the first day of March 2003, and shall end
of the 31st day of March, 2005. This Agreement shall be automatically renewed on
the first day of each calendar year thereafter for a twelve-month period under
the same terms and conditions, subject to the provisions for termination set
forth therein.
2. Except as specifically amended by this First Amendment, the Agreement
remains in full force and effect.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be duly
executed as of the date first written above.
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
By: /s/ Paula Cludray-Engelke
------------------------------------
Name: Paula Cludray-Engelke
Title: Secretary
ING USA ANNUITY AND LIFE INSURANCE COMPANY
By: /s/ Paula Cludray-Engelke
------------------------------------
Name: Paula Cludray-Engelke
Title: Secretary
ING FINANCIAL ADVISERS, LLC
By: /s/ John F. Todd
------------------------------------
Name: John F. Todd
Title: Assistant Secretary
ING LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Paula Cludray-Engelke
------------------------------------
Name: Paula Cludray-Engelke
Title: Secretary
ING NORTH AMERICA INSURANCE CORPORATION
By: /s/ John F. Todd
------------------------------------
Name: John F. Todd
Title: Assistant Secretary
RELIASTAR LIFE INSURANCE COMPANY
By: /s/ Paula Cludray-Engelke
------------------------------------
Name: Paula Cludray-Engelke
Title: Secretary
SECURITY LIFE OF DENVER INSURANCE COMPANY
By: /s/ Paula Cludray-Engelke
------------------------------------
Name: Paula Cludray-Engelke
Title: Secretary
SOUTHLAND LIFE INSURANCE COMPANY
By: /s/ Paula Cludray-Engelke
------------------------------------
Name: Paula Cludray-Engelke
Title: Secretary
Exhibit 10.(p)
SERVICES AGREEMENT
This Services Agreement ("Agreement") is made this first day of June, 2002,
("Effective Date") by and between Equitable Life Insurance Company of Iowa, an
insurance company organized and existing under the laws of the state of Iowa
("Company"), and ING Financial Advisers, LLC, a broker-dealer organized and
existing under the laws of the state of Delaware ("Service Provider").
RECITALS
WHEREAS, Service Provider is a broker-dealer registered with and a member
of the National Association of Securities Dealers and a investment advisor
registered with the Securities and Exchange Commission with experience and
expertise in broker-dealer and financial advisory services and investment; and
WHEREAS, Service Provider possesses certain resources, including
experienced personnel, facilities and equipment, which enables it to provide
certain administrative, management, professional, advisory, consulting and other
services to the others ("Services"); and
WHEREAS, each party desires from time to time to perform certain Services
on behalf of, and receive certain Services from, the others, as described with
particularity in Exhibit A attached hereto; and
WHEREAS, Company desires to obtain certain services from Service Provider
as described herein for the benefit if its customers;
WHEREAS, each party contemplates that such an arrangement will achieve
operating economies, synergies and expense savings, and improve services to the
benefit of its contractowners or contractowners; and
NOW, THEREFORE, in consideration of these premises and of the mutual promises
set forth herein, and intending to be legally bound hereby, the parties agree as
follows:
1. Services.
(a) Subject to the terms, conditions, and limitations of this Agreement,
the Service Provider will perform for the Company such of the Services described
in Exhibit A, attached hereto and incorporated herein by this reference, as the
Company may from time to time request.
(b) The Service Provider shall employ all operating and management
personnel necessary to provide the Services required by this Agreement. The
Service Provider shall also maintain such facilities and equipment and arrange
for provision of services by third parties as it deems reasonably necessary in
order to provide the Services required by the Agreement.
(c) The Service Provider shall keep and maintain or cause to be kept and
maintained full and complete documentation and records related to the Services
provided including the accounting necessary to support charges for Services. The
Service Provider shall maintain custody of said documentation and records and
shall make them available to the Company and the appropriate insurance regulator
of the Company upon request.
1
2. Charges for Services.
(a) It is the intention of the parties that the charges for the Services
provided under this Agreement be determined in accordance with fair and
reasonable standards and that no party realize a profit nor incur a loss as a
result of the Services rendered pursuant to this Agreement.
(b) The Company agrees to reimburse the Service Provider for all direct
costs incurred on behalf of the Company and for all indirect costs which may be
charged to the Company as follows:
(i) "Direct Costs" include costs incurred by the Service Provider for
Services provided directly to the Company, including but not limited to:
(a) All costs incident to any employee or employees who are employed in
rendering Services to the Company, such as salary, payroll taxes, and
benefits and (b) the cost of other reasonable and necessary business
expenses incurred by employees who are employed in rendering Services to
the Company such as training, travel and lodging. Direct Costs shall be
charged in accordance with reasonable functional cost studies and/or other
information and methodologies used by the Service Provider for internal
cost distribution including, where appropriate, an analysis of time spent
by each employee providing Services to the Company and/or the percentage of
administrative systems utilized. Data for this analysis will be collected
through tracking of unit costs of Services, through time studies conducted
periodically, or through other methods consistent with customary insurance
accounting practices consistently applied. Annually, the bases for
determining direct costs shall be modified and adjusted by mutual agreement
of the Service Provider and the Company, where necessary or appropriate, to
fairly and equitably reflect the actual cost incurred by the Service
Provider on behalf of the Company.
(ii) "Indirect Costs" include all other costs incurred by the Service
Provider in rendering Services to the Company, including but not limited to
the cost of rent or depreciation of office space, utilities, office
equipment, and supplies utilized by employees who are employed in rendering
Services to the Company. Indirect costs shall be charged to the Company
based on the proportion of total direct costs chargeable to the Company
under subparagraph (i), herein. In other words, if the direct costs
chargeable to the Company represents 20% of the Service Provider's total
direct costs, then 20% of the Service Provider's indirect costs will be
charged to the Company.
(c) The charges for Direct Costs and Indirect Costs referred to above shall
be made by the Service Provider on a monthly, quarterly or annual basis as
appropriate for the particular Service.
(d) In the event the Service Provider or the Company should discover upon
review of its accounting by its internal auditors, independent auditor, any
state insurance department, or other regulatory agency, that an amount charged
for Services provided hereunder was erroneous, the party discovering the error
will give prompt notice of such error to the affected party under this
Agreement. Such notice shall contain a description of the accounting error,
corrective action and supporting documentation. Any amounts owing as a result of
the correction shall be paid within sixty (60) days after notice has been given.
(e) The Company shall have the right to inspect and audit, upon reasonable
notice to the Service Provider, all books and records of the Service Provider
related to the provision of the Services so as to verify the accuracy of all
expenses reimbursed under this Agreement.
2
3. Term.
This Agreement shall be effective as of the Effective Date, and shall end
on the 31st day of December, 2002. This Agreement shall be automatically renewed
on the first day of each calendar year thereafter for a twelve-month period
under the same terms and conditions, subject to the provisions for termination
set forth herein.
4. Termination.
This Agreement may be terminated by the Service Provider or by the Company
by providing thirty (30) days' written notice to that effect addressed to the
other party. Any Services provided following the effective date of termination
which, by their nature, continue after termination shall be provided under the
same terms and conditions which prevailed at the time of such notice.
5. Standard of Service.
The Service Provider shall perform the Services in a competent and
professional manner according to standards agreed upon by the Service Provider
and the Company. The Service Provider agrees that it will exercise due diligence
to abide by and comply with all laws, statutes, rules, regulations, and orders
of any governmental authority in the performance of its Services under this
Agreement. The Service Provider will conduct its business and perform its
obligations in a manner which will not cause the possible revocation or
suspension of the Company's Certificate(s) of Authority or cause the Company to
sustain any fines, penalties, or other disciplinary action of any nature
whatsoever.
6. Limitation of Authority.
The Company shall retain ultimate control and responsibility for all
Services that it has delegated to the Service Provider under this Agreement. In
no event shall the Services involve control of the management of the business
and affairs of the Company. The Service Provider shall provide Services
hereunder as an independent contractor, and shall act hereunder so as to assure
the separate operating identity of the Company. While rendering Services to the
Company pursuant to this Agreement, the Service Provider, its officers and
employees shall not at any time or for any purpose be considered agents of the
Company unless otherwise expressly agreed to by the parties. Under no
circumstances shall the Services provided pursuant to this Agreement be deemed
to be those of a third party administrator pursuant to any applicable state
statutes.
7. Indemnification.
(a) The Company hereby agrees to indemnify, defend and hold harmless the
Service Provider, its officers, directors and employees, from and against any
and all claims, demands, losses, liabilities, actions, lawsuits and other
proceedings, judgements and awards, and costs and expenses (including reasonable
attorneys' fees), arising directly or indirectly, in whole or in part out of any
action taken by the Service Provider within the scope of its duties or authority
hereunder, excluding only such of the foregoing as result from the negligence or
willful acts or omissions of the Service Provider, its officers, directors,
agents and employees. The provisions of this section shall survive termination
of this Agreement.
3
(b) The Service Provider hereby agrees to indemnify, defend and hold
harmless the Company and its officers, directors and employees from and against
any and all claims, demands, losses, liabilities, action, lawsuits and other
proceedings, judgments and awards, fines and penalties, and costs and expenses
(including reasonable attorneys' fees), arising directly or indirectly, in whole
or in part, out of the negligence or any willful act or omission of the Service
Provider or of any of its officers, directors, agents or employees, in
connection with this Agreement or the performance of the Service Provider's
Services hereunder, or out of any action taken by the Service Provider beyond
the scope of the Service Provider's duties or authority hereunder. The
provisions of this section shall survive termination of this Agreement.
8. Notices.
All notices, requests, and communications required or permitted under this
Agreement shall be in writing and deemed given when addressed to the applicable
address set forth in Exhibit B attached hereto and (i) delivered by hand to an
officer of the other party, (ii) deposited with the U.S. Postal Service, as
first-class certified or registered mail, postage prepaid, or (iii) deposited
with an overnight courier. Any notice of a change of address shall be given in
the same manner.
9. Cooperation.
Each party to this Agreement shall cooperate with the other party, and with
appropriate governmental authorities (including, without limitation, the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
10. Arbitration.
Any controversy or claim arising out of or relating to this Agreement, or
the breach thereof, shall be settled by arbitration in accordance with the Rules
of the American Arbitration Association, and judgment upon the award may be
entered in any Court having jurisdiction thereof.
11. Waiver.
No waiver of any provision of this Agreement shall be deemed, or shall
constitute, waiver of any other provision, whether or not similar, nor shall any
waiver constitute a continuing waiver. No waiver shall be binding unless
executed in writing by the party making the waiver. Failure of any party to
exercise or delay in exercising any right or power granted under this Agreement
shall not operate as a waiver of any such right or power.
12. Miscellaneous.
This Agreement may not be assigned by either party without the prior
written consent of the other party. This Agreement constitutes the entire
agreement of the parties hereto. This Agreement may be amended only by a written
instrument executed by both parties. If any portion of this Agreement is invalid
under any applicable statute or rule of law, it shall not affect the remainder
of this Agreement which shall remain valid and binding. This Agreement shall be
binding on the parties, their legal representatives and successors. This
Agreement shall be construed in accordance with and governed by the laws of the
State of Connecticut, without regard to principles of conflict of laws.
4
13. Counterparts.
This Agreement may be executed in separate counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
ING Financial Advisers, LLC
By:/s/ Christina Lareau
-------------------------------------
Name: Christina Lareau
Title: Vice President
Equitable Life Insurance Company of Iowa
By:/s/ Paula Cludray-Engelke
-------------------------------------
Name Paula Cludray-Engelke
Title: Secretary
5
Exhibit A
o Financial counseling and related counseling and education services to
existing and potential policyholders, contractowners, certificate holders,
beneficiaries, and other customers of Company, including in connection with
payment of life benefit proceeds to beneficiaries of life insurance
policies and related products.
o Administrative services, including customer service, establishment and
maintenance of customer benefit accounts and information files, processing
account payments, and tax reporting.
o Preparation of sales promotional items, advertising materials and training
programs.
o Related financial and other reporting, information and data processing
services, and printing, record, file, mail and supply services.
Exhibit B
Addresses for Notice
ING Financial Advisers, LLC
151 Farmington Avenue
Hartford, CT 06156
Equitable Life Insurance Company of Iowa
919 Locust Street
Des Moines, Iowa 50309
Exhibit 10.(q)
THIS SURPLUS NOTE HAS BEEN ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY
NOT BE REOFFERED, RESOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. THE PURCHASER OF THIS SURPLUS
NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS SURPLUS NOTE MAY BE RELYING ON
THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144A
UNDER THE SECURITIES ACT.
6.257% SURPLUS NOTE
December 29, 2004 Amount: $50,000,000.00
For value received, ING USA Annuity and Life Insurance Company, an Iowa
corporation ("Borrower"), promises to pay to the order of Security Life of
Denver International Limited, a Bermuda corporation ("Lender"), the principal
sum of Fifty Million Dollars ($50,000,000.00) on December 29, 2034 (the
"Scheduled Maturity Date") and to pay interest thereon from the effective date
of this Surplus Note, semiannually in arrears on June 29 and December 29 in each
year, commencing June 29, 2005 (each a "Scheduled Interest Payment Date"), at
the rate of 6.257% per annum, until the principal hereof is paid. The date upon
which any state or federal agency or court obtains an order or grants approval
for the rehabilitation, liquidation, conservation, reorganization, receivership,
dissolution or the commencement of any bankruptcy, insolvency or similar
proceeding of Borrower shall also be deemed to be the Scheduled Maturity Date.
Principal and interest shall be payable on the terms and conditions set out
below.
1. Principal and interest payments shall be payable at the office of Lender
in the city of Hamilton, Bermuda, or such other place as Lender shall designate
in writing to Borrower. Payments shall be made in collected and immediately
available funds in lawful money of the United States of America.
1
2. Interest on this Surplus Note shall be computed on the basis of a year
of 360 days and for the actual number of days elapsed. In any event should a
Scheduled Interest Payment Date or Scheduled Maturity Date fall on a day other
than a Business Day (as hereinafter defined), then such payment of principal or
interest shall be due on the next following day that is a Business Day, with the
same force and effect as if made on the Scheduled Interest Payment Date or
Scheduled Maturity Date hereof, and no additional interest shall accrue as to
such payment for the period after such date; provided, however, that if such
next following day that is a Business Day shall fall in the next calendar month,
then such payment of principal or interest shall be due on the Business Day
immediately preceding such Scheduled Interest Payment Date or Scheduled Maturity
Date. For purposes of this Surplus Note, "Business Day" means any day other than
a Saturday, Sunday or other day on which commercial banks in New York City are
required by law to close, provided that banking institutions located at the
place of payment designated by Lender are carrying out transactions in U.S.
dollars.
3. (a) No principal payment shall be permitted on this Surplus Note unless
such payment has received the prior approval of the Commissioner of the Iowa
Insurance Division (the "Commissioner").
(b) Periodic interest payments shall be paid as required under the terms of
this Surplus Note, subject to the prior approval of the Commissioner.
(c) Borrower shall use its best efforts to obtain the approval of the
Commissioner for the payment by Borrower of interest on and principal of this
Surplus Note on the Scheduled Interest Payment Dates or Scheduled Maturity Date
hereof, and, in the event any such approval has not been obtained for any such
payment or any portion thereof at or prior to the Scheduled Interest Payment
Date or Scheduled Maturity Date hereof, as the case may be, to continue to use
its best efforts to obtain such approval promptly thereafter. Not less than
thirty (30) days prior to each Scheduled Interest Payment Date or Scheduled
Maturity Date hereof (excluding any such Scheduled Maturity Date which arises as
a result of the obtaining of an order or the granting of approval for the
rehabilitation, liquidation, conservation, reorganization, receivership,
dissolution or the commencement of any bankruptcy, insolvency or similar
proceeding of Borrower), Borrower will seek the approval of the Commissioner to
make each payment of interest on and the principal of this Surplus Note. In the
event the Commissioner does not approve Borrower's request to make an interest
or principal payment as scheduled herein, Borrower shall promptly notify Lender
or any subsequent holder of this Surplus Note thereof.
2
(d) If the Commissioner does not approve the making of any payment or
portion thereof of principal of or interest on this Surplus Note on the
Scheduled Interest Payment Date or Scheduled Maturity Date hereof, the Scheduled
Interest Payment Date or Scheduled Maturity Date as the case may be, shall be
extended and such payment or any unpaid portion thereof shall be made by
Borrower on the next following Business Day on which Borrower shall have the
approval of the Commissioner to make such payment or any unpaid portion thereof.
Interest will continue to accrue on any such unpaid principal through the actual
date of payment at the rate of interest stated on the face hereof. Interest will
not accrue on interest with respect to which the Scheduled Interest Payment Date
has been extended, during such period of extension.
(e) If the Commissioner approves the making of a payment of principal
and/or interest in an amount insufficient to satisfy Borrower's obligations
under this Surplus Note and other surplus notes issued on the Effective Date,
payment shall be made on this Surplus Note and each other surplus note issued on
the Effective Date on a pro-rata basis.
4. Subject to the prior approval of the Commissioner, Borrower may prepay
this Surplus Note in whole on, or within thirty (30) days after, the tenth
anniversary of the execution of this Surplus Note, upon thirty (30) days written
notice to Lender, without premium or penalty, at the principal amount so to be
prepaid, plus accrued interest thereon to the date of such prepayment.
5. In the event of the dissolution, liquidation, receivership, insolvency
or bankruptcy of Borrower, repayment of principal and payment of interest under
this Surplus Note shall be subordinated to the prior payment of, or provision
for, all liabilities (as reported in the statutory statement of assets and
liabilities) of Borrower, other than debts owed by Borrower to other holders of
surplus notes issued by Borrower, with which this Surplus Note shall rank pari
passu, but shall rank superior to the claim, interest, and equity of the shares
or shareholders of Borrower.
3
6. No act or failure on the part of Borrower with respect to any of the
terms or provisions hereof shall give Lender any right to declare the unpaid
principal or interest on this Surplus Note to be due and payable immediately or
otherwise than in accordance with the terms and conditions hereof. However, once
payment due hereunder has been approved by the Commissioner, the payment shall
be made when due. If Borrower fails to pay the full amount of such approved
payment on the date such amount is scheduled to be paid, such approved amount
will be immediately payable on such date without any action on the part of
Lender and, to the extent permitted by applicable law, interest will also accrue
on any such approved but unpaid interest through the actual date of payment at
the rate of interest stated on the face hereof. In the event that Borrower fails
to perform any of its other obligations hereunder, Lender may pursue any
available remedy to enforce the performance of any provision of this Surplus
Note, provided however, that such remedy shall in no event include the right to
declare this Surplus Note immediately payable. Borrower shall reimburse Lender,
in full, for any reasonable expense incurred by Lender in connection with
enforcing the performance of this Surplus Note, including, but not limited to,
reasonable attorneys' fees and expenses. A delay or omission by Lender in
exercising any right or remedy accruing as a result of Borrower's failure to
perform its obligations hereunder and the continuation thereof shall not impair
such right or remedy or constitute a waiver of or acquiescence in such
non-performance by Borrower. To the extent permitted by law, no remedy is
exclusive of any other remedy and all remedies are cumulative.
7. Borrower covenants that it shall not consolidate with, or merge into,
any other corporation or convey or transfer its properties, assets and in force
business substantially as an entirety to any person, unless (i) Borrower
provides the holder of the Surplus Note with advance written notice of such
consolidation, merger, conveyance or transfer and a certificate of an authorized
officer of Borrower stating that it has complied with all terms contained in
this Section 7; and (ii) the corporation formed by such consolidation or into
which Borrower is merged or the person which acquires by conveyance or transfer,
the properties, assets and in force business of Borrower substantially as an
entirety shall be a corporation organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
shall expressly assume, in a manner satisfactory to the holder of this Surplus
Note, the due and punctual payment of the principal of and interest on this
Surplus Note in accordance with its terms and the performance of every covenant
of this Surplus Note on the part of Borrower to be performed or observed. Upon
any consolidation of Borrower with, or merger of Borrower into, any other
corporation or any conveyance or transfer of the properties, assets and in force
business of Borrower substantially as an entirety to any person in accordance
with this Section 7, the successor corporation formed by such consolidation or
into which Borrower is merged or to which such conveyance or transfer is made
shall succeed to, and be substituted for, and may exercise every right and power
of, Borrower under this Surplus Note, with the same effect as if such successor
corporation had been named as Borrower herein.
4
8. Borrower covenants that, in the event Lender or any subsequent holder of
this Surplus Note desires to sell, transfer or convey its interest in this
Surplus Note, Borrower will fully cooperate and promptly take all reasonable
measures to facilitate such sale, transfer or conveyance, including, but not
limited to, providing the information referenced in Rule 144A(d)(4), as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. THIS SURPLUS NOTE HAS BEEN ISSUED IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT AND MAY NOT BE REOFFERED, RESOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. THE PURCHASER OF THIS SURPLUS NOTE IS HEREBY NOTIFIED THAT
THE SELLER OF THIS SURPLUS NOTE MAY BE RELYING ON THE EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES
ACT.
9. No amendments shall be made to this Surplus Note without the consent of
Borrower and Lender, and the prior approval of the Commissioner.
10. Except for the conditions described in subsections (a) and (b) of
Section 3 above, no provision of this Surplus Note shall alter or impair the
obligation of Borrower, which is absolute and unconditional, to pay the
principal of, and interest on, this Surplus Note at the times, place and rate,
and in the coin or currency, herein prescribed. No provision of this Surplus
Note shall extinguish the ultimate liability of Borrower for the payment of
principal and interest hereunder.
11. This Surplus Note shall be governed by the laws of the State of Iowa
and shall be effective as of December 29, 2004.
5
IN WITNESS WHEREOF, Borrower has caused this Surplus Note to be executed in
its name and attested to by its authorized officer and its corporate seal to be
hereunder affixed, all as of the date first written above.
ING USA Annuity and Life Insurance Company
By:/s/ David S. Pendergrass
---------------------------------------
David S. Pendergrass
Vice President and Treasurer
ATTEST: /s/ Spencer Shell
-----------------
6
Exhibit 10.(r)
THIS SURPLUS NOTE HAS BEEN ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") AND MAY NOT BE REOFFERED, RESOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. THE PURCHASER OF THIS
SURPLUS NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS SURPLUS NOTE MAY BE
RELYING ON THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY
RULE 144A UNDER THE SECURITIES ACT.
6.257 % SURPLUS NOTE
December 29, 2004 Amount: $175,000,000.00
For value received, ING USA Annuity and Life Insurance Company, an Iowa
corporation ("Borrower"), promises to pay to the order of ING Life Insurance and
Annuity Company, a Connecticut corporation ("Lender"), the principal sum of One
Hundred Seventy Five Million Dollars ($175,000,000.00) on December 29, 2034 (the
"Scheduled Maturity Date") and to pay interest thereon from the effective date
of this Surplus Note, semiannually in arrears on June 29 and December 29 in each
year, commencing June 29, 2005 (each a "Scheduled Interest Payment Date"), at
the rate of 6.257% per annum, until the principal hereof is paid. The date upon
which any state or federal agency or court obtains an order or grants approval
for the rehabilitation, liquidation, conservation, reorganization, receivership,
dissolution or the commencement of any bankruptcy, insolvency or similar
proceeding of Borrower shall also be deemed to be the Scheduled Maturity Date.
Principal and interest shall be payable on the terms and conditions set out
below.
1. Principal and interest payments shall be payable at the office of Lender
in the city of Hartford, Connecticut, or such other place as Lender shall
designate in writing to Borrower. Payments shall be made in collected and
immediately available funds in lawful money of the United States of America.
1
2. Interest on this Surplus Note shall be computed on the basis of a year
of 360 days and for the actual number of days elapsed. In any event should a
Scheduled Interest Payment Date or Scheduled Maturity Date fall on a day other
than a Business Day (as hereinafter defined), then such payment of principal or
interest shall be due on the next following day that is a Business Day, with the
same force and effect as if made on the Scheduled Interest Payment Date or
Scheduled Maturity Date hereof, and no additional interest shall accrue as to
such payment for the period after such date; provided, however, that if such
next following day that is a Business Day shall fall in the next calendar month,
then such payment of principal or interest shall be due on the Business Day
immediately preceding such Scheduled Interest Payment Date or Scheduled Maturity
Date. For purposes of this Surplus Note, "Business Day" means any day other than
a Saturday, Sunday or other day on which commercial banks in New York City are
required by law to close, provided that banking institutions located at the
place of payment designated by Lender are carrying out transactions in U.S.
dollars.
3. (a) No principal payment shall be permitted on this Surplus Note unless
such payment has received the prior approval of the Commissioner of the Iowa
Insurance Division (the "Commissioner").
(b) Periodic interest payments shall be paid as required under the terms of
this Surplus Note, subject to the prior approval of the Commissioner.
(c) Borrower shall use its best efforts to obtain the approval of the
Commissioner for the payment by Borrower of interest on and principal of this
Surplus Note on the Scheduled Interest Payment Dates or Scheduled Maturity Date
hereof, and, in the event any such approval has not been obtained for any such
payment or any portion thereof at or prior to the Scheduled Interest Payment
Date or Scheduled Maturity Date hereof, as the case may be, to continue to use
its best efforts to obtain such approval promptly thereafter. Not less than
thirty (30) days prior to each Scheduled Interest Payment Date or Scheduled
Maturity Date hereof (excluding any such Scheduled Maturity Date which arises as
a result of the obtaining of an order or the granting of approval for the
rehabilitation, liquidation, conservation, reorganization, receivership,
dissolution or the commencement of any bankruptcy, insolvency or similar
proceeding of Borrower), Borrower will seek the approval of the Commissioner to
make each payment of interest on and the principal of this Surplus Note. In the
event the Commissioner does not approve Borrower's request to make an interest
or principal payment as scheduled herein, Borrower shall promptly notify Lender
or any subsequent holder of this Surplus Note thereof.
2
(d) If the Commissioner does not approve the making of any payment or
portion thereof of principal of or interest on this Surplus Note on the
Scheduled Interest Payment Date or Scheduled Maturity Date hereof, the Scheduled
Interest Payment Date or Scheduled Maturity Date as the case may be, shall be
extended and such payment or any unpaid portion thereof shall be made by
Borrower on the next following Business Day on which Borrower shall have the
approval of the Commissioner to make such payment or any unpaid portion thereof.
Interest will continue to accrue on any such unpaid principal through the actual
date of payment at the rate of interest stated on the face hereof. Interest will
not accrue on interest with respect to which the Scheduled Interest Payment Date
has been extended, during such period of extension.
(e) If the Commissioner approves the making of a payment of principal
and/or interest in an amount insufficient to satisfy Borrower's obligations
under this Surplus Note and other surplus notes issued on the Effective Date,
payment shall be made on this Surplus Note and each other surplus note issued on
the Effective Date on a pro-rata basis.
4. Subject to the prior approval of the Commissioner, Borrower may prepay
this Surplus Note in whole on, or within thirty (30) days after, the tenth
anniversary of the execution of this Surplus Note, upon thirty (30) days written
notice to Lender, without premium or penalty, at the principal amount so to be
prepaid, plus accrued interest thereon to the date of such prepayment.
5. In the event of the dissolution, liquidation, receivership, insolvency
or bankruptcy of Borrower, repayment of principal and payment of interest under
this Surplus Note shall be subordinated to the prior payment of, or provision
for, all liabilities (as reported in the statutory statement of assets and
liabilities) of Borrower, other than debts owed by Borrower to other holders of
surplus notes issued by Borrower, with which this Surplus Note shall rank pari
passu, but shall rank superior to the claim, interest, and equity of the shares
or shareholders of Borrower.
3
6. No act or failure on the part of Borrower with respect to any of the
terms or provisions hereof shall give Lender any right to declare the unpaid
principal or interest on this Surplus Note to be due and payable immediately or
otherwise than in accordance with the terms and conditions hereof. However, once
payment due hereunder has been approved by the Commissioner, the payment shall
be made when due. If Borrower fails to pay the full amount of such approved
payment on the date such amount is scheduled to be paid, such approved amount
will be immediately payable on such date without any action on the part of
Lender and, to the extent permitted by applicable law, interest will also accrue
on any such approved but unpaid interest through the actual date of payment at
the rate of interest stated on the face hereof. In the event that Borrower fails
to perform any of its other obligations hereunder, Lender may pursue any
available remedy to enforce the performance of any provision of this Surplus
Note, provided however, that such remedy shall in no event include the right to
declare this Surplus Note immediately payable. Borrower shall reimburse Lender,
in full, for any reasonable expense incurred by Lender in connection with
enforcing the performance of this Surplus Note, including, but not limited to,
reasonable attorneys' fees and expenses. A delay or omission by Lender in
exercising any right or remedy accruing as a result of Borrower's failure to
perform its obligations hereunder and the continuation thereof shall not impair
such right or remedy or constitute a waiver of or acquiescence in such
non-performance by Borrower. To the extent permitted by law, no remedy is
exclusive of any other remedy and all remedies are cumulative.
7. Borrower covenants that it shall not consolidate with, or merge into,
any other corporation or convey or transfer its properties, assets and in force
business substantially as an entirety to any person, unless (i) Borrower
provides the holder of the Surplus Note with advance written notice of such
consolidation, merger, conveyance or transfer and a certificate of an authorized
officer of Borrower stating that it has complied with all terms contained in
this Section 7; and (ii) the corporation formed by such consolidation or into
which Borrower is merged or the person which acquires by conveyance or transfer,
the properties, assets and in force business of Borrower substantially as an
entirety shall be a corporation organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
shall expressly assume, in a manner satisfactory to the holder of this Surplus
Note, the due and punctual payment of the principal of and interest on this
Surplus Note in accordance with its terms and the performance of every covenant
of this Surplus Note on the part of Borrower to be performed or observed. Upon
any consolidation of Borrower with, or merger of Borrower into, any other
corporation or any conveyance or transfer of the properties, assets and in force
business of Borrower substantially as an entirety to any person in accordance
with this Section 7, the successor corporation formed by such consolidation or
into which Borrower is merged or to which such conveyance or transfer is made
shall succeed to, and be substituted for, and may exercise every right and power
of, Borrower under this Surplus Note, with the same effect as if such successor
corporation had been named as Borrower herein.
4
8. Borrower covenants that, in the event Lender or any subsequent holder of
this Surplus Note desires to sell, transfer or convey its interest in this
Surplus Note, Borrower will fully cooperate and promptly take all reasonable
measures to facilitate such sale, transfer or conveyance, including, but not
limited to, providing the information referenced in Rule 144A(d)(4), as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. THIS SURPLUS NOTE HAS BEEN ISSUED IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT AND MAY NOT BE REOFFERED, RESOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. THE PURCHASER OF THIS SURPLUS NOTE IS HEREBY NOTIFIED THAT
THE SELLER OF THIS SURPLUS NOTE MAY BE RELYING ON THE EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES
ACT.
9. No amendments shall be made to this Surplus Note without the consent of
Borrower and Lender, and the prior approval of the Commissioner.
10. Except for the conditions described in subsections (a) and (b) of
Section 3 above, no provision of this Surplus Note shall alter or impair the
obligation of Borrower, which is absolute and unconditional, to pay the
principal of, and interest on, this Surplus Note at the times, place and rate,
and in the coin or currency, herein prescribed. No provision of this Surplus
Note shall extinguish the ultimate liability of Borrower for the payment of
principal and interest hereunder.
11. This Surplus Note shall be governed by the laws of the State of Iowa
and shall be effective as of December 29, 2004.
5
WITNESS WHEREOF, Borrower has caused this Surplus Note to be executed in
its name and attested to by its authorized officer and its corporate seal to be
hereunder affixed, all as of the date first written above.
ING USA Annuity and Life Insurance Company
By:/s/ David S. Pendergrass
---------------------------------------
David S. Pendergrass
Vice President and Treasurer
ATTEST: /s/ Spencer Shell
-----------------
6
Exhibit 10.(s)
THIS SURPLUS NOTE HAS BEEN ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY
NOT BE REOFFERED, RESOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. THE PURCHASER OF THIS SURPLUS
NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS SURPLUS NOTE MAY BE RELYING ON
THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144A
UNDER THE SECURITIES ACT.
6.257% SURPLUS NOTE
December 29, 2004 Amount: $175,000,000.00
For value received, ING USA Annuity and Life Insurance Company, an Iowa
corporation ("Borrower"), promises to pay to the order of ReliaStar Life
Insurance Company, a Minnesota corporation ("Lender"), the principal sum of One
Hundred Seventy Five Million Dollars ($175,000,000.00) on December 29, 2034 (the
"Scheduled Maturity Date") and to pay interest thereon from the effective date
of this Surplus Note, semiannually in arrears on June 29 and December 29 in each
year, commencing June 29, 2005 (each a "Scheduled Interest Payment Date"), at
the rate of 6.257% per annum, until the principal hereof is paid. The date upon
which any state or federal agency or court obtains an order or grants approval
for the rehabilitation, liquidation, conservation, reorganization, receivership,
dissolution or the commencement of any bankruptcy, insolvency or similar
proceeding of Borrower shall also be deemed to be the Scheduled Maturity Date.
Principal and interest shall be payable on the terms and conditions set out
below.
1. Principal and interest payments shall be payable at the office of Lender
in the city of Minneapolis, Minnesota, or such other place as Lender shall
designate in writing to Borrower. Payments shall be made in collected and
immediately available funds in lawful money of the United States of America.
1
2. Interest on this Surplus Note shall be computed on the basis of a year
of 360 days and for the actual number of days elapsed. In any event should a
Scheduled Interest Payment Date or Scheduled Maturity Date fall on a day other
than a Business Day (as hereinafter defined), then such payment of principal or
interest shall be due on the next following day that is a Business Day, with the
same force and effect as if made on the Scheduled Interest Payment Date or
Scheduled Maturity Date hereof, and no additional interest shall accrue as to
such payment for the period after such date; provided, however, that if such
next following day that is a Business Day shall fall in the next calendar month,
then such payment of principal or interest shall be due on the Business Day
immediately preceding such Scheduled Interest Payment Date or Scheduled Maturity
Date.. For purposes of this Surplus Note, "Business Day" means any day other
than a Saturday, Sunday or other day on which commercial banks in New York City
are required by law to close, provided that banking institutions located at the
place of payment designated by Lender are carrying out transactions in U.S.
dollars.
3. (a) No principal payment shall be permitted on this Surplus Note unless
such payment has received the prior approval of the Commissioner of the Iowa
Insurance Division (the "Commissioner").
(b) Periodic interest payments shall be paid as required under the terms of
this Surplus Note, subject to the prior approval of the Commissioner.
(c) Borrower shall use its best efforts to obtain the approval of the
Commissioner for the payment by Borrower of interest on and principal of this
Surplus Note on the Scheduled Interest Payment Dates or Scheduled Maturity Date
hereof, and, in the event any such approval has not been obtained for any such
payment or any portion thereof at or prior to the Scheduled Interest Payment
Date or Scheduled Maturity Date hereof, as the case may be, to continue to use
its best efforts to obtain such approval promptly thereafter. Not less than
thirty (30) days prior to each Scheduled Interest Payment Date or Scheduled
Maturity Date hereof (excluding any such Scheduled Maturity Date which arises as
a result of the obtaining of an order or the granting of approval for the
rehabilitation, liquidation, conservation, reorganization, receivership,
dissolution or the commencement of any bankruptcy, insolvency or similar
proceeding of Borrower), Borrower will seek the approval of the Commissioner to
make each payment of interest on and the principal of this Surplus Note. In the
event the Commissioner does not approve Borrower's request to make an interest
or principal payment as scheduled herein, Borrower shall promptly notify Lender
or any subsequent holder of this Surplus Note thereof.
2
(d) If the Commissioner does not approve the making of any payment or
portion thereof of principal of or interest on this Surplus Note on the
Scheduled Interest Payment Date or Scheduled Maturity Date hereof, the Scheduled
Interest Payment Date or Scheduled Maturity Date as the case may be, shall be
extended and such payment or any unpaid portion thereof shall be made by
Borrower on the next following Business Day on which Borrower shall have the
approval of the Commissioner to make such payment or any unpaid portion thereof.
Interest will continue to accrue on any such unpaid principal through the actual
date of payment at the rate of interest stated on the face hereof. Interest will
not accrue on interest with respect to which the Scheduled Interest Payment Date
has been extended, during such period of extension.
(e) If the Commissioner approves the making of a payment of principal
and/or interest in an amount insufficient to satisfy Borrower's obligations
under this Surplus Note and other surplus notes issued on the Effective Date,
payment shall be made on this Surplus Note and each other surplus note issued on
the Effective Date on a pro-rata basis.
4. Subject to the prior approval of the Commissioner, Borrower may prepay
this Surplus Note in whole on, or within thirty (30) days after, the tenth
anniversary of the execution of this Surplus Note, upon thirty (30) days written
notice to Lender, without premium or penalty, at the principal amount so to be
prepaid, plus accrued interest thereon to the date of such prepayment.
5. In the event of the dissolution, liquidation, receivership, insolvency
or bankruptcy of Borrower, repayment of principal and payment of interest under
this Surplus Note shall be subordinated to the prior payment of, or provision
for, all liabilities (as reported in the statutory statement of assets and
liabilities) of Borrower, other than debts owed by Borrower to other holders of
surplus notes issued by Borrower, with which this Surplus Note shall rank pari
passu, but shall rank superior to the claim, interest, and equity of the shares
or shareholders of Borrower.
3
6. No act or failure on the part of Borrower with respect to any of the
terms or provisions hereof shall give Lender any right to declare the unpaid
principal or interest on this Surplus Note to be due and payable immediately or
otherwise than in accordance with the terms and conditions hereof. However, once
payment due hereunder has been approved by the Commissioner, the payment shall
be made when due. If Borrower fails to pay the full amount of such approved
payment on the date such amount is scheduled to be paid, such approved amount
will be immediately payable on such date without any action on the part of
Lender and, to the extent permitted by applicable law, interest will also accrue
on any such approved but unpaid interest through the actual date of payment at
the rate of interest stated on the face hereof. In the event that Borrower fails
to perform any of its other obligations hereunder, Lender may pursue any
available remedy to enforce the performance of any provision of this Surplus
Note, provided however, that such remedy shall in no event include the right to
declare this Surplus Note immediately payable. Borrower shall reimburse Lender,
in full, for any reasonable expense incurred by Lender in connection with
enforcing the performance of this Surplus Note, including, but not limited to,
reasonable attorneys' fees and expenses. A delay or omission by Lender in
exercising any right or remedy accruing as a result of Borrower's failure to
perform its obligations hereunder and the continuation thereof shall not impair
such right or remedy or constitute a waiver of or acquiescence in such
non-performance by Borrower. To the extent permitted by law, no remedy is
exclusive of any other remedy and all remedies are cumulative.
7. Borrower covenants that it shall not consolidate with, or merge into,
any other corporation or convey or transfer its properties, assets and in force
business substantially as an entirety to any person, unless (i) Borrower
provides the holder of the Surplus Note with advance written notice of such
consolidation, merger, conveyance or transfer and a certificate of an authorized
officer of Borrower stating that it has complied with all terms contained in
this Section 7; and (ii) the corporation formed by such consolidation or into
which Borrower is merged or the person which acquires by conveyance or transfer,
the properties, assets and in force business of Borrower substantially as an
entirety shall be a corporation organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
shall expressly assume, in a manner satisfactory to the holder of this Surplus
Note, the due and punctual payment of the principal of and interest on this
Surplus Note in accordance with its terms and the performance of every covenant
of this Surplus Note on the part of Borrower to be performed or observed. Upon
any consolidation of Borrower with, or merger of Borrower into, any other
corporation or any conveyance or transfer of the properties, assets and in force
business of Borrower substantially as an entirety to any person in accordance
with this Section 7, the successor corporation formed by such consolidation or
into which Borrower is merged or to which such conveyance or transfer is made
shall succeed to, and be substituted for, and may exercise every right and power
of, Borrower under this Surplus Note, with the same effect as if such successor
corporation had been named as Borrower herein.
4
8. Borrower covenants that, in the event Lender or any subsequent holder of
this Surplus Note desires to sell, transfer or convey its interest in this
Surplus Note, Borrower will fully cooperate and promptly take all reasonable
measures to facilitate such sale, transfer or conveyance, including, but not
limited to, providing the information referenced in Rule 144A(d)(4), as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. THIS SURPLUS NOTE HAS BEEN ISSUED IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT AND MAY NOT BE REOFFERED, RESOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE
EXEMPTION THEREFROM. THE PURCHASER OF THIS SURPLUS NOTE IS HEREBY NOTIFIED THAT
THE SELLER OF THIS SURPLUS NOTE MAY BE RELYING ON THE EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES
ACT.
9. No amendments shall be made to this Surplus Note without the consent of
Borrower and Lender, and the prior approval of the Commissioner.
10. Except for the conditions described in subsections (a) and (b) of
Section 3 above, no provision of this Surplus Note shall alter or impair the
obligation of Borrower, which is absolute and unconditional, to pay the
principal of, and interest on, this Surplus Note at the times, place and rate,
and in the coin or currency, herein prescribed. No provision of this Surplus
Note shall extinguish the ultimate liability of Borrower for the payment of
principal and interest hereunder.
5
11. This Surplus Note shall be governed by the laws of the State of Iowa
and shall be effective as of December 29, 2004.
IN WITNESS WHEREOF, Borrower has caused this Surplus Note to be executed in
its name and attested to by its authorized officer and its corporate seal to be
hereunder affixed, all as of the date first written above.
ING USA Annuity and Life Insurance Company
By:/s/ David S. Pendergrass
---------------------------------------
David S. Pendergrass
Vice President and Treasurer
ATTEST:/s/ Spencer Shell
-----------------
6
Exhibit 10.(t)
LEASE AGREEMENT
DATED AUGUST 31, 1995
BY AND BETWEEN
THE GRAHAM GROUP, INC., an Iowa corporation
LANDLORD
AND
EQUITABLE LIFE INSURANCE COMPANY OF IOWA, an Iowa corporation
TENANT
Des Moines, Iowa
LEASE AGREEMENT BY AND BETWEEN
THE GRAHAM GROUP, INC., AND
EQUITABLE LIFE INSURANCE COMPANY OF IOWA
TABLE OF CONTENTS
Article # Name Page
Article 1 Demised Premises, Building, Site and Project 1
Article 2 Term of Lease 1
Article 3 Use 2
Article 4 Base Rent 2
Article 5 Definitions 3
Article 6 Improvements and Possession 5
Article 7 Building Services 7
Article 8 Compliance With Laws 7
Article 9 Repairs 7
Article 10 Alterations and Additions 10
Article 11 Insurance 11
Article 12 Damage by Fire or Other Casualty 14
Article 13 Eminent Domain 15
Article 14 Bankruptcy 15
Article 15 Defaults 16
Article 16 Assignment and Subletting 17
Article 17 Surrender of Possession 18
Article 18 Priority of Lease
Certificate to Purchasers and Mortgage 18
Article 19 Rights Reserved by Landlord 19
Article 20 Name of Building 20
Article 21 Option to Extend Term 20
Article 22 Covenant of Quiet Enjoyment 22
Article 23 Notices 22
Article 24 Parking 23
Article 25 Phase 2 - Building 27
Article 26 Unperformed Covenants
May Be Performed by other Party 32
Article 27 Liens 33
Article 28 Landlord's Covenants; Title Insurance 33
Article 29 Indemnification 34
Article 30 Personal Property Taxes 34
Article 31 No Partnership 34
Article 32 Right of First Refusal 35
Article 33 Waiver 36
Article 34 Injunction 36
Article 35 Cumulative Rights 36
Article 36 Authority of Parties 36
Article 37 Cumulative Remedies 36
Article 38 Holding Over 36
Article 39 Structural Weakness 36
Article 40 Covenants Binding and Successor 37
Article 41 Short Form 37
Article 42 Costs and Fees 37
Article 43 Waiver 37
Article 44 Number and Gender 38
Article 45 Broker's Commission 38
Article 46 Headings 38
Article 47 Partial Invalidity 38
Article 48 Entire Agreement 38
Article 49 Counterparts 38
Article 50 Survival 38
Article 51 Time of Essence 39
Article 52 Applicable Law 39
Article 53 Accounting and Audit 39
Article 54 Skywalks 39
Article 55 Limitation of Mortgagee's Liability 39
EXHIBITS
Exhibit A - Legal Description (Demised Premises, Parcel One and Parcel Two)
Exhibit B - Legal Description (Principal Land, DMDC Land, 12th Street Parking
Land And Graham's Fine Arts Land)
Exhibit C - Methodology Letter
Exhibit D - Landlord Special Warranty Deed (North-half of the Site)
Exhibit E - Landlord Special Warranty Deed (DMDC Land)
Exhibit F - Tenant Special Warranty Deed (DMDC Land and DMDC Ramp)
LEASE AGREEMENT
THIS LEASE AGREEMENT (the Lease"), made and entered into as of the 31st day of
August, 1995, by and between THE GRAHAM GROUP, INC., an Iowa corporation, of Des
Moines, Iowa, (hereinafter called "Landlord"), and EQUITABLE LIFE INSURANCE
COMPANY OF IOWA, an Iowa corporation, of Des Moines, Iowa (hereinafter called
"Tenant"). WITNESSETH:
WHEREAS, Landlord and Tenant desire to enter into this Lease of the
"Demised Premises" as that term is hereinafter described;
NOW, THEREFORE, in consideration of the respective covenants and agreements
hereinafter set forth and other good and valuable consideration, the parties
hereto hereby covenant and agree as follows:
ARTICLE 1
DEMISED PREMISES, BUILDING, SITE AND PROJECT
Subject to and upon the terms, provisions and conditions hereinafter set forth,
Landlord does hereby lease unto Tenant and Tenant does hereby lease from
Landlord 205,330 square feet, more or less, of Usable Area, as hereinafter
defined, on six floors above grade, in addition to an underground parking garage
containing approximately 100 parking spaces (the "Demised Premises") in an
office building known as "The Equitable Building" (the "Building"), to be
constructed on a downtown block bordered by 9th Street on the East, 10th Street
on the West, Grand Avenue on the North and Locust Street on the South, in the
City of Des Moines, Iowa (the "Site") and more particularly described in Exhibit
"A" attached hereto and incorporated herein by this reference, together with all
rights, privileges, easements, rights of ingress and egress and appurtenances of
whatever kind and character, benefiting, belonging or appertaining thereto and
such other rights which are specifically created by this Lease. Hereinafter the
Demised Premises, the Building, and the Site are collectively referred to as the
"Project".
ARTICLE 2
TERM OF LEASE
2.1 The term of this Lease (hereinafter called the "Term") shall commence
sixty (60) days after the date the Landlord's architect and Tenant's architect
certify that the conditions set forth in Sections 6.1 and 6.2 have been
satisfied (hereinafter called the "Commencement Date"), and shall terminate at
the end of the twentieth (20th) full lease year (as hereinafter defined)
following the Term Commencement Date.
2.2 No later than fifteen (15) days prior to the Commencement Date,
Landlord and Tenant shall execute a "short form lease", in recordable form,
specifying, among other things, the precise amount of Usable Area in the Demised
Premises and the commencement and termination dates of this Lease. "Usable Area"
contained in the Demised Premises shall be computed from time to time and
certified to by Landlord's architect, and shall mean the total number of square
feet at the floor level of such space falling within the inside finish of the
exterior curtain wall, or from the glass line where at least fifty percent (50%)
of the outer wall of the Building is glass, excluding stairs and elevator
shafts, flues, stacks, pipe shafts and vertical ducts, together with their
enclosing walls, public areas (e.g. elevator lobbies on each floor), rest rooms,
air conditioning rooms, fan rooms and janitor's and electrical closets located
on and serving such floor, and receiving areas and other functional areas of the
Building, plus any areas of the Building which compose a part of the City of Des
Moines, Iowa (the "City") skywalk system (the "Skywalk System") and any other
municipal areas related to the operation of the Building. Upon substantial
completion of the construction of the Demised Premises, Landlord's architect
shall certify to Landlord and Tenant, and Tenant's architect shall confirm
within thirty (30) days thereafter, the exact Usable Area of the Demised
Premises. If Tenant's architect does not object to Landlord's certification of
1
the Usable Area of the Demised Premises within the thirty (30) day period as
hereinbefore set forth, then the certification of Landlord's architect shall be
deemed accepted by Tenant.
2.3 If there is a change in the size of the Building or Demised Premises
during the Term, the Usable Area in the Building or the Usable Area contained in
the Demised Premises shall be adjusted on a monthly average basis for the Tax
Year and Fiscal Year in question. The Usable Area contained in the Demised
Premises shall be determined on a monthly average basis.
ARTICLE 3
USE
3.1 Tenant may use and occupy the Demised Premises for any lawful purpose.
3.2 Tenant shall not use the Demised Premises for any unlawful purpose.
3.3 Tenant shall not use the Demised Premises for any extra-hazardous
activity.
3.4 Tenant shall use its best efforts to comply with and conform to all
requirements of governmental authorities having jurisdiction over the Demised
Premises and the Building with respect to the occupancy, use or manner of use of
the Demised Premises by Tenant. Landlord shall use its best efforts to comply
with or cause to be complied with, all requirements of governmental authorities
having jurisdiction over the Demised Premises and the Building with respect to
the public portions and common areas of the Building.
ARTICLE 4
BASE RENT
4.1 Tenant shall pay Landlord, or its assigns, at Landlord's office in the
City, or at such other place as Landlord may from time to time designate, in
lawful money of the United States, for the use of the Demised Premises, an
annual base rent per square foot of Usable Area contained in the Demised
Premises, payable in equal monthly installments, in advance on the first day of
the Term of this Lease, and on the first day of each month thereafter during the
continuance of this Lease as follows, to-wit:
1st through 10th lease year $11.95 per square foot per annum of Usable Area
11th through 20th lease year $13.15 per square foot per annum of Usable
Area
The above stated annual lease year base rent per square foot of Usable Area
contained in the Demised Premises for the lease year in question shall
hereinafter be referred to as "Base Rent". As used herein "lease year" shall
mean in the case of the first lease year, a consecutive period of twelve (12)
calendar months with the first calendar month commencing on the first day of
January occurring on or about the Term Commencement Date, or in the event the
Term Commencement Date is not on the 1st day of January, the "1st lease year"
shall be that portion of the first calendar year from the Term Commencement Date
to the last day of December, plus a consecutive period of twelve (12) calendar
months following such partial year; thereafter, lease year shall mean each
successive twelve (12) calendar month period following the expiration of the
first lease year.
4.2 If the Term Commencement Date of this Lease commences other than on the
first day of a month, the monthly installment of Base Rent payable for such
month shall be prorated.
4.3 All unpaid Base Rent and Additional Rent, as hereinafter defined, shall
bear interest at the money center prime rate as published in the Wall Street
Journal, its successor or a similar service, plus two percent (2%) per annum, or
at the maximum rate allowed by law, whichever is less, from its due date until
paid.
2
ARTICLE 5
DEFINITIONS
5.1 Definitions:
(a) "Fiscal Year" shall mean any twelve month period, beginning January 1
and ending the following December31, which contains any part of the Term of this
Lease.
(b) "Taxes" shall mean (i) all real estate taxes and special assessments
levied or assessed against the Project (less any credits allocable to such real
estate taxes or special assessments); (ii) any Taxes, assessments, charges or
fees hereafter substituted therefor and (iii) subject to the limitations set
forth below, the reasonable costs of disputing or protesting the amount of any
Taxes, including all reasonable attorneys' fee incurred by Landlord in
connection therewith. There shall be excluded from Taxes all federal, state and
local income taxes, federal excess profit taxes, franchise, capital stock and
federal or state estate or inheritance taxes of Landlord. The cost of disputing
or protesting the amount of any Taxes, shall not be included in the calculation
of Taxes for any Fiscal Year unless such costs are less than the savings
resulting from such dispute or protest. Landlord shall, after being requested to
do so by Tenant, use reasonable efforts to have the North half of the Site, as
hereinafter defined, separately assessed from the Site. Tenant shall have the
right to contest any Taxes.
(c) "Operating Expenses" shall mean all costs of management, operating or
maintenance of the Project, based on a calendar year period and determined in
accordance with generally accepted accounting principles consistently applied,
including by way of illustration, but not limitation, utilities, insurance
premiums, janitorial and cleaning services, licenses, permits, security and
inspection fees, heating and cooling, maintenance and repairs, general
administration costs and expenses, management fees, labor and supplies, and
amortized amounts (over the expected life of such item) of capital items
(exclusive of structural repairs or replacements) to the extent that any such
capital item constitutes, in the reasonable opinion of a qualified professional
a substantial labor or cost - saving device or operation; provided, however, for
the initial five (5) lease years of the Term, Operating Expenses shall be
reduced by Two Hundred Seventy Five Thousand and No/100 Dollars ($275,000.00).
Operating Expenses Shall not include the following: (i) costs of alterations,
improvements or additions to any tenant's premises; (ii) principal, interest or
other payments on loans or invested capital; (iii) costs of capital items,
except for capital items includable in Operating Expenses as aforesaid; (iv)
depreciation and amortization expenses; (v) legal and professional fees incurred
in connection with leases or the leasing or ownership (as opposed to operation)
of the Project or in connection with the Skywalk System; (vi) administrative
costs not specifically incurred in the management maintenance and operation of
the Project; (vii) executive salaries over the rank of building manager; (viii)
Taxes; (ix) management fees to the extent that they exceed amounts customarily
charged to manage first-class office buildings in downtown Des Moines, Iowa; (x)
repairs, restoration or other work to the Project occasioned by fire, windstorm
or other insured casualty; and (xi) any other expenses which under generally
accepted accounting principles consistently applied would not be considered
Operating Expenses as permitted herein.
(d) "Tenant's Proportionate Share of Taxes" shall be the percentage
determined by dividing the square feet of Usable Area contained in the Project
into the square feet of Usable Area contained in the Demised Premises. Tenants
Proportionate Share of Taxes shall be reduced by three (3) full years of
property tax abatement the Project has, or shall be, granted by the City
pursuant to Chapter 404, Code of Iowa (the "Tax Abatement Proceedings"), or, in
the event the City does not grant to the Project such property tax abatement,
Tenant's Proportionate Share of Taxes shall nevertheless be reduced in a manner
as such would have been done had such tax abatement been provided. Upon the Term
Commencement Date, Tenant's Proportionate Share of Taxes shall be deemed to be
one hundred percent (100%). Tenant shall be responsible for the payment of Taxes
on the Demised Premises which would become due, payable and delinquent if not
paid during the Term of this Lease. For example, if the Term Commencement Date
is after September 30, 1997 but before March 31, 1998, Tenant shall pay all
those Taxes which would become due, payable and delinquent if not paid by March
31, 1998. The last Taxes to be paid by Tenant during the Term of this Lease
3
shall be those Taxes which would become due, payable and delinquent if not paid
by September 30 of the twentieth (20th) lease year of the Lease.
(e) "Tax Year" shall mean any twelve month period designated by applicable
taxing authorities as the basis for payment of Taxes, which includes any part of
the Term of this Lease. Currently, the Tax Year begins on July 1 of each year
and ends on the following June 30.
(f) "Tenant' s Proportionate Share of Operating Expenses" shall be the
percentage determined by dividing the square feet of Usable Area contained in
the Building into the square feet of Usable Area contained in the Demised
Premises. Upon the Term Commencement Date, Tenant's Proportionate Share of
Operating Expenses shall be deemed to be one hundred percent (100%).
(g) "Additional Rent" shall hereinbefore and hereinafter mean the
additional amount of money to be paid by Tenant to Landlord as Tenant's
Proportionate Share of Taxes and Tenant's Proportionate Share of Operating
Expenses, as such terms are defined in Sections 5.1(d) and 5.1(f) above.
(h) "Toxic or Hazardous Substances" shall be interpreted broadly to
include, but not be limited to, any material or substance that is defined or
classified under federal, state or local laws as: (a) a "hazardous substance"
pursuant to Section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. ss.9601(14), Section 311 of the
Federal Water Pollution Contract Act, 33 U.S.C. ss.1321, as now or hereafter
amended; (b) a "hazardous waste" pursuant to Section 1004 or Section 3001 of the
Resource Conservation and Recovery Act, 42 U.S.C. ss. 6903, 42 U.S.C. ss.6921,
as now or hereafter amended; (c) a toxic pollutant under Section 307(l)(a) of
the Federal Water Pollution Control Act, 33 U.S.C. ss.1317(l)(a); (d) a
"hazardous air pollutant" under Section 112 of the Clean Air Act, 42 U.S.C.
ss.741 2, as now or hereafter amended; (e) a "hazardous material" under the
Hazardous Material Transportation Act, 49 U.S.C. ss.1802(2), as now or hereafter
amended; (f)toxic or hazardous pursuant to regulations promulgated now or
hereafter under the aforementioned laws; or (g) presenting a risk to human
health or the environment under other applicable federal, state or local laws,
ordinances, or regulations, as now or as may be passed or promulgated in the
future. "Toxic or Hazardous Substances" shall also mean any substance that after
release into the environment and upon exposure, ingestion, inhalation or
assimilation, either directly from the environment or directly by ingestion
through food chains, will or may reasonably be anticipated to cause death,
disease, behavior abnormalities, cancer or genetic abnormalities. "Toxic or
Hazardous Substances" specifically includes, but is not limited to, asbestos,
polychlorinated biphenyls (PCBs), petroleum and petroleum based derivatives, and
urea formaldehyde.
5.2 Landlord shall pay or cause to be paid, before due, payable and
delinquent, all Taxes. From the Term Commencement Date, and thereafter
throughout the Term, Tenant shall pay to Landlord as Additional Rent, in
addition to the Base Rent required in Article 4 of this Lease, an amount equal
to the Taxes payable in any Tax Year. Taxes shall be paid in monthly
installments, at the same time and place as Base Rent is to be paid, in an
amount estimated from time to time by Landlord by a written notice to Tenant.
Upon receipt by Landlord of a statement for Taxes payable in a Tax Year,
Landlord shall furnish Tenant with a written statement of the actual Taxes for
such Tax Year. If the total amount paid by Tenant, for any Tax Year during the
Term of this Lease, is less than the actual Taxes due from Tenant for such Tax
Year, as shown on such statement, Tenant shall pay the deficiency to Landlord
within fifteen (15) days after demand therefor by Landlord. If, on the other
hand, the total amount paid by Tenant for any Tax Year exceeds the actual Taxes
due from Tenant for such Tax Year, such excess shall be credited against
payments next due hereunder; and, if no such payments are next due, such excess
shall be refunded by Landlord. The amount of any refund of Taxes received by
Landlord shall be credited against Taxes for the Tax Year in which such refund
is received. In determining the amount of Taxes for any Tax Year, the amount of
special assessments to be included shall be limited to the amount of the
installment (plus any interest payable thereon) of such special assessment which
would have been required to have been paid during such Tax Year if Landlord had
elected to have such special assessment paid over the maximum period of time
permitted by law.
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5.3 Tenant shall also pay to Landlord as rent, in addition to the Base Rent
required in Article 4 of this Lease, an amount (the `Operating Expense Amount")
equal to the Tenant's Proportionate Share of Operating Expenses incurred by
Landlord, with respect to each Fiscal Year. The Operating Expense Amount shall
be paid in monthly installments, at the same time and place as Base Rent is to
be paid, in an amount reasonably estimated from time to time by Landlord by a
written notice to Tenant. Landlord shall cause to be kept books and records
showing Operating Expenses, in accordance with generally accepted accounting
principles consistently applied. As promptly as practicable following the close
of each Fiscal Year, Landlord shall cause the amount of the Operating Expense
Amount for such Fiscal Year to be computed, and shall deliver to Tenant a
statement of the Operating Expense Amount; and Tenant shall pay any deficiency
to Landlord as provided in Section 5.5 of this Lease. If the total amount paid
by Tenant during any Fiscal Year exceeds the actual Operating Expense Amount due
from Tenant for such Fiscal Year, such excess shall be credited against payments
next due hereunder; and, if no such payments are next due, such excess shall be
refunded by Landlord.
5.4 For any Fiscal Year which does not fall entirely within the Term of
this Lease, Tenant shall be obligated to pay only a pro rata share of the
Operating Expense Amount, as hereinabove determined, based upon the number of
days of the Term falling within the Fiscal Year in question.
5.5 Within one hundred twenty (120) days after the end of each Fiscal Year,
Landlord shall provide Tenant with detailed financial information and a written
statement explaining the computation of Additional Rent. In the event Tenant
desires additional information with respect to specific items of expense,
amortization or the amounts thereof, Landlord shall provide to Tenant all
information and documentation relevant to those specific expense items,
amortization or the amounts thereof, in order that such objections can be
satisfied or otherwise resolved. Any deficiency in the amount of Additional Rent
shall be due and payable by Tenant within fifteen (15) days after Tenant has
accepted such statement.
ARTICLE 6
IMPROVEMENTS AND POSSESSION
6.1 Landlord agrees at its sole expense to proceed with due diligence to
expediently perform all necessary on-site and off-site work in connection with
the development of the Site and construct or cause to be constructed the
Building, as anticipated by the Request for Proposal for Tenant submitted to
Landlord dated December 15, 1994 and the Development Proposal dated February 28,
1995 prepared for Tenant by Landlord, as such is supplemented by a Development
Presentation dated April 10, 1995 prepared for Tenant by Landlord and letter
dated March 21, 1995 to Tenant from Landlord (collectively the "Proposal"). The
Site and the Building (including the skywalk bridge to the Building) shall be
constructed in accordance with the terms and conditions of the Proposal, as
modified by the mutual agreement of Landlord and Tenant, and as further modified
by the terms and conditions of this Lease, in a good and workmanlike manner as
soon as reasonably possible (in accordance with a development schedule mutually
acceptable to Landlord and Tenant), but, subject to Section 6.7 hereof, in any
event complete the same prior to May 1, 1997.
6.2 Tenant's Improvements (hereinbefore and hereinafter referred to as
"Tenant's Improvements") shall include the construction of all improvements to
be made by Tenant to the Demised Premises pursuant to Tenant's plans and
specifications as hereinafter described. In order to facilitate the construction
of Tenant's Improvements, Landlord and Tenant will consult with each other and
use reasonable efforts to coordinate their activities. In this regard, Tenant
shall have its architect timely prepare and deliver plans and specifications
(hereinafter called "Tenant's Plans and Specifications") for Tenant's
Improvements to be constructed to the Demised Premises. Tenant's Plans and
Specifications shall be reasonably acceptable to Landlord. In the event Landlord
has not delivered reasonable objections to Tenant's Plans and Specifications to
Tenant within thirty (30) days of its receipt from Tenant of Tenant's Plans and
Specifications, Landlord shall be deemed to have approved Tenant's Plans and
Specifications and Tenant shall cause construction of Tenant's Improvements to
commence in accordance with a development schedule mutually acceptable to
Landlord and Tenant. Graham Construction Company, Des Moines, Iowa, shall be
5
given the non-exclusive right to bid Tenant's Improvements work; provided,
however, Tenant retains in its sole and absolute discretion the right to select
the party who shall construct Tenant's Improvements. The costs incurred by
Tenant for construction of the Tenant's Improvements shall be paid by Landlord
as a reimbursement to Tenant, provided that the total of such costs to be
reimbursed by Landlord to Tenant shall not exceed Thirty and No/100 Dollars
($30.00) per square foot of Usable Area in the Demised Premises ("Tenant's
Improvement Allowance"). Landlord shall reimburse Tenant (but no more than once
a month) for the direct arid actual costs and expenses incurred by Tenant in
connection with construction of Tenant's Improvements. Should Tenant not use all
of Tenant's Improvement Allowance as above provided, any unused portion of
Tenant's Improvement Allowance shall be paid to Tenant on the Term Commencement
Date of this Lease. Tenant shall proceed with due diligence to expediently
perform all of the work associated with the development of Tenant's
Improvements, but, subject to Section 6.7 hereof, in any event complete the same
prior to November 1, 1997.
6.3 Landlord and Tenant agree, as to their respective construction work to
be performed, to use reasonable efforts to perform or cause to be performed such
work so as not to (i) cause any increase in the cost of constructing the
Building or the Demised Premises (unless such cost is reasonably necessary),
(ii) unreasonably interfere with any construction work being performed on the
Building or the Demised Premises, or (iii) unreasonably interfere with the use,
occupancy or enjoyment of the Building or the Demised Premises.
6.4 Landlord and Tenant agree that all construction work to be performed
hereunder by either shall be done in a good and workmanlike manner, with
first-class materials and in accordance with all applicable laws, rules,
ordinances and regulations. Each shall pay all costs, expenses, and liabilities,
and remove all liens, arising out of or in any way connected with its own
construction, except as otherwise expressly provided in this Lease.
6.5 Landlord and Tenant as respects their respective construction, shall
use reasonable efforts to cause their respective architects and contractors to
cooperate and coordinate construction with the architects, contractors and
construction work of the other party to the extent reasonably practicable, to
achieve the objectives set forth in Section 6.3 above.
6.6 Tenant may take possession of any part of the Demised Premises prior to
the Commencement Date (which Tenant may do without the prior written consent of
Landlord) for purposes of preparing the Demised Premises for the operation of
its business, and in such event Tenant shall not be obligated to pay Landlord
Base Rent or Additional Rent for the period of such occupancy prior to the
Commencement Date for that portion of the Demised Premises so occupied.
6.7 Notwithstanding anything to the contrary contained in Article 6 of this
Lease, (a) if Landlord shall be delayed or hindered in or prevented from the
performance of any act required pursuant to this Article 6 by reason of acts of
God, strikes, lockouts, labor troubles, inability to procure labor or material,
failure of power, restrictive governmental laws or regulations, riots,
insurrection, war or other reason of a like nature not the fault of the party
delayed in performing work or doing ads required under this Lease (such reasons
referred to collectively as "Force Majeure"), the period of the performance of
any such act shall be extended for a period equivalent to the period of such
delay but in no event beyond August 1, 1997; (b) if Landlord shall be delayed or
hindered in or prevented from the performance of any act required pursuant to
this Article 6 because of Force Majeure, the time for Tenant to complete
Tenant's Improvements shall be extended by a like number of days; or (c) if
Tenant shall be delayed or hindered in or prevented from the performance of any
of Tenant's Improvements because of an act of Force Majeure, the time for Tenant
to complete Tenant's Improvements shall be extended for a period equivalent to
the period of such delay but in no event beyond the later of February 1, 1998 or
ninety (90) days following the date by which Landlord had to completes its acts
pursuant to tins section b. 1.
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ARTICLE 7
BUILDING SERVICES
7.1 Landlord shall provide the following services on all days during the
Term of this Lease, except as otherwise stated:
(a) Subject to all governmental rules, regulations and guidelines
applicable thereto, heating and air conditioning when necessary, in Tenant's
reasonable judgment, for normal comfort in the Demised Premises.
(b) Electricity for Tenant's office use shall be available at all times.
After the Term Commencement Date, Tenant shall furnish and install, or Landlord
shall furnish and install at Tenant's request, at Tenant's sole cost and
expense, all lighting, tubes, lamps, bulbs and ballasts required in the Demised
Premises. In the event Landlord is required to furnish and install, Tenant shall
pay Landlord's reasonable charges therefor on demand.
(c) City water from regular Building outlets for drinking, lavatory,
restroom and kitchen purposes.
(d) Janitor and security services in and about the Demised Premises,
comparable to the standard janitor and security service furnished by other first
class City office buildings similar in construction, general location, use and
occupancy. Notwithstanding the above, Tenant may elect, in its sole and absolute
discretion, to provide janitor and/or security services in and about the Demised
Premises.
(e) Passenger elevator service to be provided by operator less automatic
elevators.
(f) Freight elevator service.
7.2 No interruption in, or temporary stoppage of, any of the aforesaid
services for a period of three (3) days or less, caused by repairs, renewals,
improvements, alterations, strikes, lockouts, labor controversy, accidents,
inability to obtain fuel or supplies, or other causes beyond the reasonable
control of Landlord, shall be deemed an eviction or disturbance of Tenant's use
and possession, or render Landlord liable for damages, by abatement of rent or
otherwise, or relieve Tenant from any obligations under the terms of this Lease.
Notwithstanding the above, in the event of any interruption in, or temporary
stoppage of, any of the aforesaid services for a period of more than three (3)
days, Base Rent and Additional Kent snail be abated until such services have
been restored; provided, further, that in the event such condition shall
continue for a period of more than ninety (90) days, then Tenant may terminate
this Lease by giving written notice of such cancellation to Landlord.
7.3 In connection with the development of the Building, Landlord represents
that as of the Term Commencement Date the design of the Building is in
compliance with the Model Energy Code, Division 8 of the Iowa Building Code, as
adopted by the state building code commissioner pursuant to the Code of Iowa,
Chapter 103A.7(6)(1995).
ARTICLE 8
COMPLIANCE WITH LAWS
8.1 Landlord represents and warrants to Tenant that the Project, but for
Tenant's Improvements, and its use as anticipated under this Lease comply fully
with (and no notices of violation have been received in connection with)
environmental, air, quality, zoning, flood plain, planning, subdivision,
building, health, labor, discrimination, fire, traffic, safety, and other
governmental or regulatory rules, regulations, laws, ordinances, statutes, codes
and requirements applicable to the Project in which the Demised Premises are
located (collectively, the "Building Laws"), including, without limitation, the
Americans with Disabilities Act of 1990, 42 U.S.C. ss. -1 2213 (1991), as
amended. Landlord has received, or will receive, such final certificates as may
be required or customary and evidencing compliance with all building codes and
permits, and approval of full occupancy of the Demised Premises and of all
installations therein. Landlord shall cause the Project to be continuously in
compliance with all Building Laws (as the same may be amended from time to
time).
8.2 Landlord agrees to protect, defend, indemnify and hold Tenant harmless
from and against all liability threatened against or suffered by Tenant by
reason of a breach by Landlord of the foregoing representations and warranties
contained in the preceding Section 8.1. The foregoing indemnity shall include
7
the cost of all alterations to the Project (including architectural,
engineering, legal and accounting costs), all fines, fees and penalties, and all
legal and other expenses (including attorneys' fees), incurred by Tenant in
connection with the Project being in violation of any Building Laws and for the
cost of collection of the sums due under the indemnity.
8.3 Landlord represents and warrants to Tenant that: (i) Landlord is not in
violation of, or subject to, any existing, pending or threatened investigation
by any governmental authority under any applicable federal, state or local law,
regulation or ordinance pertaining to air and water quality, the handling,
transportation, storage, treatment, usage or disposal of Toxic or Hazardous
Substances, air emissions, other environmental matters and all zoning and other
land use matters; (ii) any handling, transportation, storage, treatment or use
of Toxic or Hazardous Substances that has occurred on the Site to date has been
in compliance with all applicable federal, state, and local laws, regulations
and ordinances; and (iii) no leak, spill, release, discharge, emission or
disposal of Toxic or Hazardous Substances has occurred on the Site to date and
the soil, groundwater, and soil vapor on or under the Site shall be free of
Toxic or Hazardous Substances as of the Term Commencement Date.
8.4 Landlord agrees to indemnify, defend (with counsel satisfactory to
Tenant) and hold Tenant and its officers, employees, contractors and agents
harmless from any claims, judgments, damages, penalties, fines, expenses,
liabilities or losses arising during or after the Lease Term out of or in any
way relating to the presence, release or disposal of Toxic or Hazardous
Substances on or from the Project or the Demised Premises, or to a breach of the
environmental warranties made by Landlord above, unless the Toxic or Hazardous
Substances are present solely as a result of the actions of Tenant, its
officers, employees, contractors or agents. Such indemnity shall include,
without limitation, costs incurred in connection with:
(a) Toxic or Hazardous Substances present or suspected to be present in the
soil, groundwater or soil vapor on or under the Project or the Demised Premises
before Tenant occupies the Project or the Demised Premises or the Lease Term
commences; or
(b) Toxic or Hazardous Substances that migrate, flow, percolate, diffuse,
or in any way move onto or under the Project or the Demised Premises, during
Tenant's occupancy of the Demised Premises after the Lease Term commences; or
(c) Toxic or Hazardous Substances present on or under the Demised Premises
as a result of any discharge, dumping, spilling (accidental or otherwise) onto
the Project or the Demised Premises during Tenant's occupancy of the Demised
Premises or after the Lease Term commences by any person, corporation,
partnership, or entity other than Tenant, its officers, employees, contractors
or agents.
The indemnification provided by this Article 8 shall also specifically
cover, without limitation, costs incurred in connection with any investigation
of Site conditions or any cleanup, remedial, removal or restoration work
required by any federal, state or local governmental agency or political
subdivision or other third party because of the presence or suspected presence
of Toxic or Hazardous Substances in the soil, groundwater, or soil vapor on or
under the Project or the Demised Premises, unless the Toxic or Hazardous
Substances are present solely as a result of the actions of Tenant, its
officers, employees, contractors or agents. Such costs may include, but not be
limited to, diminution in the value of the Demised Premises, damages for the
loss or restriction on use of Usable Area or of any amenity of the Demised
Premises, sums paid in settlements of claims, attorneys fees, consultants fees,
and expert fees.
8
The foregoing environmental indemnity shall survive the expiration or
termination of this Lease and/or any transfer of all or any portion of the
Demised Premises, or of any interest in this Lease. Notwithstanding any other
provision of this Lease, Landlord shall be personally liable without limitation
on recourse, for performance of its obligations under this Article 8.
Notwithstanding anything in this Section 8.4 to the contrary, the presence of
Toxic or Hazardous Substances on the Site or in the Building shall not give
Tenant the right to terminate this Lease or, subject to Article 26 hereof, hold
back, offset or fail to pay any amounts otherwise due under this Lease, un
Tenant cannot legally occupy the Site or the Building; provided, however, Tenant
can pursue any other right or remedy provided for under this Lease or as
otherwise provided at law or in equity.
8.5 Tenant represents and warrants that Tenant's Improvements comply with
Building Laws.
ARTICLE 9
REPAIRS
9.1 Tenant shall, during the entire Term of this Lease, and at Tenant's
sole cost and expense, keep the Demised Premises in as good order, condition and
repair as they were at the time Tenant took possession of the same, reasonable
wear and tear, damage from fire and other casualties and repairs which are the
obligation of Landlord excepted.
9.2 All repairs and replacements shall be of quality and class comparable
to the original work.
9.3 Landlord, its employees, agents, or contractors, after giving Tenant
reasonable notice, shall have the right to enter the Demised Premises, at
reasonable times, for the purpose of inspection, cleaning, repairing, altering
or improving the same; however, nothing contained in this Article 9 shall be
construed as imposing any duty on Landlord to make any repairs or replacements
which are the obligation of Tenant
9.4 Landlord shall make all necessary repairs and maintenance to the
exterior of the Building, doors, floors, lobby, windows, and all public areas of
the Building. Landlord agrees that the Building will be maintained as a first
class office building and that the Building and the balance of the Project will
be kept in a clean and neat condition. Landlord shall maintain and keep all
Building equipment such as elevators, plumbing, heating, air conditioning,
electrical systems, lighting, and similar equipment in the Demised Premises in
good operating condition and repair. The cost of such repairs and maintenance
incurred in connection with the proper management, maintenance and operation of
the Building (including any skywalks and municipal areas related to the
operation of the Building and which Landlord is required to operate and
maintain) shall be deemed Operating Expenses to the extent permitted under
Section 5.1 of this Lease.
9.5 Landlord shall make all reasonable repairs and replacements to the
Building, as necessary, to interior walls and floors and to items which result
from any deficiencies or defects in their initial construction. Such repairs and
replacements shall be at Landlord's sole cost and expense and shall not be
deemed as Operating Expenses under Section 5.1 of this Lease. In addition
Landlord shall provide for Tenant to be named as a third party beneficiary of
all contracts for construction of improvements to the Demised Premises and of
the representations and warranties contained therein.
9.6 Subject to the provisions of Section 11.3 of this Lease, all damage or
injury to the Demised Premises, to the furniture, fixtures or equipment of
Tenant, or to the Building caused by Landlord, its agents, employees,
contractors or other invitees, due to negligence, shall be repaired or replaced
promptly by Landlord, at its sole cost and expense, and such repairs or
replacements shall not be deemed as Operating Expenses under Section 5.1 of this
Lease.
9.7 Landlord shall make, at its sole cost and expense, any structural
repairs to the Building such as repairs to the roof, foundation or exterior
walls (structural repairs or repairs to exterior walls shall include windows and
doors) and any such repairs shall not be deemed as Operating Expenses under
Section 5.1 of this Lease.
9
9.8 If Landlord shall fail to have performed, or to have caused, any
maintenance or repairs to the Demised Premises required to be made by Landlord
under this Lease (i) within thirty (30) days after written notice thereof by
Tenant to Landlord, or (ii) if such repair cannot with all reasonable diligence
be completed within such thirty (30) day period, and Landlord has not commenced
repair within such thirty (30) day period and thereafter proceeded with all
reasonably diligence, Tenant may, but is not required to, make such repairs as
are necessary. In the event of an emergency which will cause damage to the
Demised Premises, and if it shall become necessary to promptly make such
emergency repairs before written notice can be given to Landlord, Tenant may,
but is not required to, make such emergency repairs as are necessary, provided
Tenant at the very least notify in person or by telephone the management office
of the Landlord prior to making such repairs. Tenant may recover the reasonable
cost of any repairs made by it.
9.9 Tenant may, at its sole cost and expense, make all repairs or
replacements to the interior of the Demised Premises as Tenant may deem
desirable or necessary in the conduct of its business; provided, however, that
without the prior written consent of Landlord, which shall not be unreasonably
withheld, Tenant shall have no right to make or cause to be made any repairs or
replacements which shall affect or impair the structural integrity or soundness
of the Building, including, without limitation, any repairs or replacements to
the floor slab, load bearing walls, entrances and showcase windows (except
repairs to such windows and entrances) of the Demised Premises, or any utility
systems running through the Demised Premises; and provided further, however,
that any alterations permitted hereunder and made by Tenant shall be in
accordance with the requirements of law and local regulations and performed in a
good and workmanlike manner.
ARTICLE 10
ALTERATIONS AND ADDITIONS
10.1 Tenant shall not make, as a single project, any alterations,
improvements or additions to the Demised Premises which will result in a cost of
more than Four Hundred Thousand and No/100 Dollars ($400,000.00) without the
prior written consent of Landlord, which consent shall not be unreasonably
withheld. In the event a single project is undertaken by Tenant where Landlord's
consent is required, Landlord may require Tenant to furnish it with plans and
specifications, names and addresses of contractors, copies of contracts,
necessary permits and licenses, and an indemnification in such form and amount
as may be reasonably required by Landlord to guarantee the full performance of
the work and the full payment of all labor and materials furnished for the work.
10.2 Tenant will carry and will cause its contractors and subcontractors to
carry such workmen's compensation, general liability, and personal and property
damage insurance as Landlord may reasonably require.
10.3 All such work shall be done in a good and workmanlike manner.
10.4 Tenant shall pay all costs and expenses of any such alterations,
improvements or additions, and upon completion shall furnish Landlord, at
Landlord's request, with evidence, satisfactory to Landlord, that full payment
has been made therefor, or Tenant may furnish Landlord with mechanic's lien
waivers for all labor and materials so furnished.
10.5 If any mechanic lien is filed against the Demised Premises or the
Building for labor or materials furnished to Tenant for any alterations,
improvements or additions, whether or not done pursuant to this Article 10, the
same shall be discharged by Tenant within thirty (30) days thereafter, at
Tenant's expense. If such lien is not discharged and removed by payment or the
filing of a bond, as provided by law, within said thirty (30) day period, then
Landlord shall have the right, but no obligation, to secure such discharge; and
Tenant shall reimburse Landlord, upon demand, for all costs and expenses
incurred by Landlord in connection with securing such discharge.
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10.6 At the termination of this Lease, by lapse of time or otherwise, all
alterations, improvements and additions to the Demised Premises shall belong to
Landlord, without any payment therefor. Tenant shall have the right at any time
or times while this Lease is in effect, to remove all of its trade fixtures and
equipment; however, Tenant shall be responsible for all damage to the Demised
Premises caused by such removal. Notwithstanding anything in this Lease to the
contrary, at the termination of this Lease, by lapse of time or otherwise,
Tenant may remove all plaques in the Building, plus other marks, emblems or
symbols containing the word "Equitable", "Hubbell", "USG", or any entity
affiliated with Tenant, which are attached to or a part of the Building;
however, Tenant shall be responsible for all damage to the Building caused by
such removal and the cost of refurbishment caused by such removal.
ARTICLE 11
INSURANCE
11.1 (a) Landlord shall carry public liability insurance on the Project,
naming the Tenant as an additional insured and providing coverage of not less
than $5,000,000.00 against liability for bodily injury, including death, and
personal injury for any one (1) occurrence, and $1,000,000.00 property damage
insurance, or combined single limit insurance in the amount of $5,000,000.00,
and will include contractual liability coverage recognizing this Lease, products
and/or completed operations liability. Any such policy will also provide that
Landlord and Tenant shall be given a minimum of ten (10) days written notice by
the insurance company prior to cancellation, termination or change in such
insurance.
(b) Prior to commencement of Landlord's work and until completion thereof,
Landlord shall effect and maintain Builders Risk Insurance covering Landlord,
Landlord's mortgagee, Tenant, and Landlord's contractors and subcontractors, as
their interest may appear, against loss or damage by fire, vandalism and
malicious mischief and such other risks as are customarily covered by a
so-called "All-Risk" policy of insurance (including but not limited to the
perils covered by standard Fire and Extended Coverage Insurance), of Landlord's
work and all materials, equipment, supplies and temporary structures of all
kinds incidental to Landlord's work and equipment, all while forming a part of
or contained in such improvements or temporary structures, or while on the
Demised Premises or within 100 feet thereof, or when adjacent thereto, while on
sidewalks, streets or alleys, all to the full 100% insurable value thereof at
all times on a completed value basis. Landlord further agrees to carry (1)
Workers' Compensation and Occupational Disease Insurance in accordance with the
laws of the State of Iowa, including Employers' Liability Insurance to the limit
of $500,000.00, and (2) Comprehensive Insurance, including "non-owned"
automobiles, against bodily injury, including death resulting therefrom, in the
limits of $1,000,000.00 for any one occurrence and $250,000.00 property damage
or a combined single limit of $1,000,000.00. In addition, Landlord agrees to
indemnify and hold Tenant harmless against any and all claims for injury to
persons or damage to property by reason of the use of the Demised Premises for
the performance of Landlord's work, and claims arising out of any failure of
Landlord or its agents, contractors and employees to comply with any law,
ordinance, code requirement, regulations or other requirement applicable to
Landlord's work, including reasonable attorneys' fees arising from all of the
foregoing claims. Landlord further agrees to require all contractors and
subcontractors engaged in the performance of Landlord's work to effect and
maintain existence of, and naming Tenant as an additional insured, prior to
commencement of Landlord's work and until completion thereof, the following
insurance coverages
(i) Workers' Compensation and Occupational Disease Insurance in
accordance with the laws of the State of Iowa, including Employer's Liability
Insurance to the limit of $500,000.00.
(ii) Comprehensive General Liability Insurance, excluding
"Automobile Liability" against bodily injury, including death resulting
therefrom, and personal injury in the limits of $5,000,000.00 for any one
occurrence and property damage in the limits of $1,000,000.00 for any one
occurrence or a combined single limit policy of $5,000,000.00 per occurrence.
(iii) Comprehensive Automobile Insurance, including "non-owned"
automobiles, against bodily injury, including death resulting therefrom, in
the limits of $1,000,000.00 for any one occurrence and $250,000.00 property
damage or a combined single limit of $1,000,000.00.
11
(c) Landlord shall carry insurance which covers the Building against fire
and such other risks as are from time to time included in all "All-Risk" or
so-called "All-Risk" policy of insurance, including but not limited to the
perils covered by standard Fire and Extended Coverage Insurance, for 100% of the
replacement cost, of the Building, and naming Tenant and Landlord's mortgagee as
additional insureds.
(d) Landlord shall provide Tenant with certificates or, at Tenant's
request, copies of the policies, evidencing that such insurance as required
herein is in full force and effect and stating the terms thereof. Landlord shall
deliver in every instance during the Lease Term a certificate of insurance to
Tenant at least thirty (30) days prior to the time it is obligated to effect and
maintain the insurance required herein and thereafter shall deliver a
certificate of insurance at least thirty (30) days prior to the expiration of
any said policy or policies.
11.2 (a) Tenant shall carry public liability insurance on the Demised
Premises, naming the Landlord as an additional insured and providing coverage of
not less than $5,000,000.00 for bodily injury, including death, and personal
injury for any one (1) occurrence, and $1,000,000.00 property damage insurance,
or a combined single limit in the amount of $5,000,000.00, and will include
contractual liability coverage recognizing this Lease, products and/or completed
operations liability. Any such policy will also provide that Landlord and Tenant
shall be given a minimum of thirty (30) days written notice by the insurance
company prior to cancellation, termination or change in such insurance.
(b) Prior to commencement of Tenant's work and until completion thereof,
Tenant shall effect and maintain Builder's Risk Insurance (if required in
writing by Landlord's mortgagee) covering Landlord, Landlord's mortgagee,
Tenant, Tenant's contractors and Tenant's subcontractors, as their interest may
appear, against loss or damage by fire, vandalism and malicious mischief and
such other risks as are customarily covered by a so-called "All-Risk" policy of
insurance (including but not limited to the perils covered by standard Fire and
Extended Coverage Insurance), of Tenant's work and Tenant's Improvements, and
all materials, equipment, supplies and temporary structures of all kinds
incidental to Tenant's work, Tenant's Improvements and equipment, all while
forming a part of or contained in such improvements or temporary structures, or
while on the Demised Premises or within 100 feet thereof, or when adjacent
hereto, while on sidewalks, streets or alleys, all to the full 100% insurable
value thereof at all times on a completed value basis. Tenant further agrees to
carry (1) Workers' Compensation and Occupational Disease Insurance in accordance
with the laws of the State of Iowa, including Employer's Liability Insurance of
the limit of $500,000.00, and (2) Comprehensive Insurance; including "non-owned"
automobiles, against bodily injury, including death resulting therefrom, in the
limits of $1,000,000.00 for any one occurrence and $250,000.00 property damage
or a combined single limit of $1,000,000.00, each such policy naming Landlord as
an additional insured. Tenant shall deliver in every instance during the Lease
Term a certificate of insurance to Landlord at least thirty (30) days prior to
the time it is obligated to effect and maintain the insurance required under
this grammatical paragraph and thereafter shall deliver a certificate of
insurance at least thirty (30) days prior to the expiration of any said policy
or policies. In addition, Tenant agrees to indemnify and hold Landlord harmless
against any and all claims for injury to persons or damage to property by reason
of the use of the Demised Premises for the performance of Tenant's work, and
claims arising out of any failure of Tenant or its agents, contractors and
employees to comply with any law, ordinance, code requirement, regulations or
other requirement applicable to Tenant's work and Tenant's Improvements,
including reasonable attorneys' fees arising from all of the foregoing claims.
Tenant further agrees to require all contractors and subcontractors engaged in
the performance of Tenant's work to effect and maintain existence of, and naming
Landlord as an additional insured, prior to commencement of Tenant's Work and
until completion thereof, the following insurance coverages:
(i) Workers' Compensation and Occupational Disease Insurance in
accordance with the laws of the State in which the property is located,
including Employer's Liability Insurance to the limit of $500,000.00.
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(ii) Comprehensive General Liability Insurance, excluding "Automobile
Liability" against bodily injury, including death resulting therefrom, and
personal injury in the limits of $3,000,000.00 for any one occurrence and
property damage in the limits of $1,000,000.00 for any one occurrence or a
combined single limit policy of $5,000,000.00 per occurrence.
(iii) Comprehensive Automobile Insurance, including "non-owned"
automobiles, against bodily injury, including death resulting therefrom, in
the limits of $1,000,000.00 for any one occurrence and $250,000.00 property
damage or a combined single limit of $1,000,000.00.
(c) Landlord shall have no liability to insure Tenant's personal property
and trade fixtures in the Demised Premises. Any such insurance policy or
policies carried by Tenant on its personal property and trade fixtures shall
contain an endorsement by which the insurer agrees to waive subrogation against
Landlord and its agents and employees with respect to any loss covered by such
insurance. Tenant hereby releases Landlord and its agents and employees, from
all liability for property damage from fire or other casualty to the Demised
Premises, whether the same is caused by negligence of Landlord or Tenant, and no
insurer shall be subrogated to any rights against Landlord or Tenant with
respect to such damage.
(d) Tenant shall provide Landlord with certificates or, at Landlord's
request, copies of the policies, evidencing that such insurance as required
herein is in full force and effect and stating the terms thereof. Tenant shall
deliver in every instance during the Lease Term a certificate of insurance to
Landlord at least thirty (30) days prior to the time it is obligated to effect
and maintain the insurance required herein and thereafter shall deliver a
certificate of insurance at least thirty (30) days prior to the expiration of
any said policy or policies. Any insurance coverage required of Tenant herein
may be provided under a blanket policy or policies maintained by Tenant covering
other premises, property or assureds, in addition to the Demised Premises.
11.3 Landlord and Tenant and all parties (including without limitation any
insurer issuing policies to Landlord and Tenant) claiming under them, mutually
release and discharge each other from all claims and liabilities arising from or
caused by any casualty or hazard covered or required hereunder to be covered in
whole or in part by insurance on the Building and Demised Premises,
respectively, or in connection with property on or activities conducted on the
Building or Demised Premises, respectively, and waive any right of subrogation
which might otherwise exist in or accrue to any person on account thereof,
provided that such release shall not operate in any case where the effect is to
invalidate or increase the cost of such insurance coverage; provided, that in
the case of increased cost, the other party shall have the right (but not the
obligation), within thirty (30) days following written notice, to pay such
increased cost, thereby keeping such release and waiver in full force and
effect.
11.4 Tenant and Landlord will not do or suffer to be done anything which
will contravene the others insurance policies or prevent the other from
procuring such policies, as such policies are required by the terms herein. If
anything done, omitted to be done or suffered to be done by Tenant in, upon or
about the Demised Premises shall cause the rates of any insurance effected or
carried by Landlord on the Demised Premises or other property to be increased
beyond the regular rate from time to time applicable to the Demised Premises for
use for the purpose permitted under this Lease, or such other property for the
use or uses made thereof, Tenant will pay the amount of such increase promptly
upon Landlord's demand. If anything done, omitted to be done or suffered to be
done by Landlord in, upon or about the Project shall cause the rates of any
insurance effected or carried by Tenant on the Demised Premises or other
property to be increased beyond the regular rate from time to time applicable to
the Demised Premises for use for the purpose permitted under this Lease, or such
other property for the use or uses made thereof, Landlord will pay the amount of
such increase promptly upon Tenant's demand.
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11.5 Tenant shall indemnify and hold Landlord harmless from any liability
for damages, claims, judgments, liabilities, loss, suits, interest, fines,
penalties, costs and expense, including reasonable attorneys' fees (herein
collectively "Claims") because of personal injury or death to any person or
damage or destruction to property arising out of the use, occupancy, management
and control of the Demised Premises or Tenant's operations, conduct or
activities in connection with the Project by Tenant or by any other person or
persons holding under Tenant or its agents, employees, contractors, tenants,
licensees and concessionaires, excepting, however, Claims as may result from
injuries or damage caused by act or neglect of Landlord, or its employees,
agents, licensees, contractors, subtenants, licensees and concessionaires.
Landlord shall indemnity, defend and hold Tenant harmless from any liability for
Claims because of personal injury or death to any person or damage or
destruction to property arising out of use, occupancy, management and control of
the Building or Landlord's operations, conduct or activities in connection with
the Project by Landlord or by any other person or persons holding under Landlord
or its agents, employees, contractors, tenants, licensees and concessionaires,
excepting, however, Claims as may result from injuries or damage caused by act
or neglect of Tenant, or its employees, agents, employees contractors,
subtenants, licensees and concessionaires.
ARTICLE 12
DAMAGE BY FIRE OR OTHER CASUALTY
12.1 Tenant shall give immediate written notice to Landlord of any material
damage to the Demised Premises caused by fire or other casualty; and, within
thirty (30) days after Landlord receives such written notice, Landlord shall
determine whether the Demised Premises is reasonably repairable within two
hundred seventy (270) days after the occurrence of such fire or other casualty.
In the event such rebuilding, restoration or repair of the Demised Premises
cannot reasonably be expected to be completed within two hundred seventy (270)
days after the occurrence of such fire or other casualty, then Tenant may
terminate this Lease by giving written notice of such cancellation to Landlord
within fifteen (15) days after Landlord has given Tenant the above described
notice with respect to how long it is anticipated to rebuild, restore or repair
the Demised Premises. Landlord shall, if Tenant does not elect to terminate this
Lease as above provided, proceed with reasonable diligence and at its sole cost
and expense to rebuild, restore and repair the Demised Premises to the extent
reasonably possible to their original condition. Landlord shall have no duty,
however, to rebuild, restore or repair any portion of the alterations, additions
or improvements made by Tenant to the Demised Premises pursuant to Article 10 of
this Lease. If Tenant wants any other or additional repairs or restoration, and
if Landlord consents thereto, which consent shall not be unreasonably withheld,
the same shall be done at Tenant's expense, subject to all the provisions of
Article 10 of this Lease. Notwithstanding the foregoing, if any such casualty
loss occurs within the last two (2) years of the Term or of any renewal term,
Landlord shall be under no obligation to rebuild, restore or repair the Demised
Premises, in which case this Lease shall terminate at Landlord's option, and
Landlord shall receive the proceeds of any insurance, exclusive of such
insurance proceeds assigned to that portion of the cost of Tenant's Improvements
and repairs or replacements to the Demised Premises which exceeded the Tenant's
Improvement Allowance provided by Landlord to Tenant pursuant to the terms of
this Lease, unless such casualty loss occurs at a time when Tenant possesses the
right or option to extend or renew the Term of this Lease for an additional
period so at least five (5) years remain on the Term and Tenant exercises said
option to extend the Term of this Lease within fifteen (15) days of its receipt
of notice from Landlord of Landlord's intention to terminate this Lease.
12.2 During the period from the occurrence of a casualty until Landlord's
repairs are completed or this Lease is terminated, Base Rent and Additional Rent
shall be reduced and abated in proportion to the amount of Usable Area of the
Demised Premises which is rendered untenantable as the result of such casualty.
Notwithstanding the above, if an occurrence of the character referred to in this
Article 12 shall affect all or a substantial portion of the Demised Premises and
in Tenant's reasonable discretion render the Demised Premises unsuitable for the
purposes leased, Base Rent and Additional Rent shall be fully abated during any
applicable rebuilding, restoration or repair of the Demised Premises.
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ARTICLE 13
EMINENT DOMAIN
13.1 If the whole of the Demised Premises or Building, or such portion
thereof as will make the Demised Premises in Tenant's reasonable discretion
unsuitable for the purposes leased, is condemned for any public use or purpose
by any legally constituted authority, then, in either of such events, this Lease
shall terminate as of the time of taking possession by such public authority and
all Base Rent and Additional Rent shall be accounted for between the Landlord
and Tenant as of the date of the surrender of possession; and Tenant shall have
no right to participate in any condemnation award or purchase price so received.
Nothing herein contained, however, shall prevent or bar Tenant from seeking its
own award or damages for loss of or damage to Tenant's business or its repairs
or replacements, improvements or additions made to the Demised Premises pursuant
to this Lease, resulting from such taking or purchase. If this Lease is not
terminated because only a portion of the Demised Premises is taken or otherwise
acquired, then the Base Rent and Additional Rent shall be adjusted according to
the nature and extent of the property taken or otherwise acquired, which shall
be Tenant's sole remedy for such taking; and Landlord shall make all alterations
and repairs to restore the Demised Premises to an extent reasonably possible to
their original condition. Notwithstanding the above, if an occurrence of the
character referred to in this Article 13 shall affect all or a substantial
portion of the Demised Premises and in Tenant's reasonable discretion render the
Demised Premises unsuitable for the purposes leased, Base Rent and Additional
Rent shall be fully abated during any applicable rebuilding, restoration or
repair of the Demised Premises. In addition to the above, Tenant shall be
entitled to the value assigned to that portion of the cost of Tenant's
Improvements and repairs or replacements to the Demised Premises which exceeded
the Tenant's Improvement Allowance provided by Landlord to Tenant pursuant to
the terms of this Lease.
13.2 Notwithstanding the foregoing, if this Lease is not terminated because
only a portion of the Demised Premises is taken, but such taking or acquisition
occurs within the last five (5) years of the Term or any renewal term, Landlord
shall be under no obligation to rebuild, restore or repair the Demised Premises,
in which case this Lease shall terminate at Landlord's option, unless such
taking or acquisition occurs at a time when Tenant possess the right or option
to renew the Term of this Lease for an additional period so at least five (5)
years remain on the Term and Tenant exercises said option to extend the Term of
this Lease within fifteen (15) days of the receipt of notice from Landlord of
Landlord's intention to terminate this Lease.
ARTICLE 14
BANKRUPTCY
14.1 Neither this Lease, nor any interest therein, nor any estate hereby
created shall pass to any trustee or receiver or assignee for the benefit of
creditors of Tenant or otherwise by operation of law. Notwithstanding anything
to the contrary contained in this Lease, if during the Lease Term (a) the estate
hereby created shall be taken in execution or otherwise by operation of law, or
(b) if Tenant shall make an assignment for the benefit of creditors, or shall
file a voluntary petition in bankruptcy, or shall be adjudged insolvent or
bankrupt pursuant to the provisions of any state or federal insolvency or
bankruptcy law, or if a receiver of the property of Tenant shall be appointed by
reason of Tenant's insolvency or inability to pay its debts, and such
proceeding, event or occurrence is not removed or dismissed within one hundred
twenty (120) days after it was begun, then in any of said events Landlord may,
at its option upon giving fifteen (15) days' written notice to Tenant, terminate
this Lease immediately and all rights to Tenant hereunder, and Tenant shall then
surrender the Demised Premises to Landlord. Notwithstanding anything contained
herein to the contrary, in the event Tenant or the trustee in bankruptcy assumes
the Lease under the Bankruptcy Code, as hereinafter defined, it is agreed that
for the purpose of assigning Tenant's interest hereunder to any other person or
entity, such interest may be assigned only after the trustee, Tenant or the
proposed assignee have complied with all of the terms, covenants and conditions
of this Lease, including, without limitation, those with respect to Base Rent
and Additional Rent and the use of the Demised Premises as permitted herein,
Landlord and Tenant acknowledge that such terms, covenants and conditions are
commercially reasonable in the context of a bankruptcy proceeding of Tenant. Any
person or entity to which the Lease is assigned pursuant to the provisions of
the Bankruptcy Code shall be deemed without further act or deed to have assumed
all of the obligations arising under this Lease on and after the date of such
assignment. Any such assignee shall upon request execute and deliver to Landlord
an instrument confirming such assignment.
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14.2 Landlord shall promptly after obtaining knowledge thereof notify
Tenant of any filing by or against Landlord of a petition under 11 U.S.C.
Section 101 et seq ("Bankruptcy Code"). If the Landlord, or a trustee appointed
under the Bankruptcy Code, rejects this Lease and (i) if the rejection by the
Landlord/trustee amounts to such a breach as would entitle Tenant to treat this
Lease as terminated by virtue of its terms, applicable nonbankruptcy law, or any
agreement made by the Tenant, then Tenant may treat this Lease as terminated by
the rejection; or (ii) if the Term of this Lease has commenced, Tenant may
retain its rights under this Lease (including but not limited to rights such as
those relating to the amount and timing of payment of Base Rent and Additional
Rent and other amounts payable by Tenant and any right of use, possession, quiet
enjoyment, subletting, assignment or hypothecation) that are in or appurtenant
to the Demised Premises for the balance of the Term of this Lease and for any
renewal or extension of such rights to the extent that such rights are
enforceable under applicable nonbankruptcy law. If the Tenant retains its
rights, Tenant may offset against the Base Rent and Additional Rent reserved
under this Lease for the balance of the Term after the date of the rejection of
this Lease and for the Term of any renewal or extension of this Lease, the value
of any damage caused by the nonperformance after the date of such rejection, of
any obligation of the Landlord under this Lease, but the Tenant shall not have
any other right against the Landlord or its estate on account of any damage
occurring after such date caused by such nonperformance. The rejection of this
Lease by the Landlord with respect to which the Tenant elects to retain its
rights does not affect the enforceability under applicable nonbankruptcy law of
any provision in this Lease pertaining to radius, location, use, exclusivity, or
tenant mix or balance. Tenant shall have all the rights of a Tenant under
applicable Iowa law and the Bankruptcy Code and the parties agree that after the
closing of the Bankruptcy Code case, the law for the State of Iowa and the
Bankruptcy Code shall continue to control.
ARTICLE 15
DEFAULTS
15.1 Tenant shall be in default under this Lease if (A)(i) default shall be
made in the payment of the Base Rent or Additional Rent or any installment
thereof or in the payment of any other sum required to be paid by Tenant under
this Lease and such default shall continue for five (5) days after written
notice from Landlord to Tenant, or (ii) except as otherwise provided in Article
14, if default shall be made in the observance or performance of any of the
other covenants or conditions in this Lease which Tenant is required to observe
and perform and such default shall continue for thirty (30) days after written
notice from Landlord to Tenant (or if such default does not involve the payment
of money and is not susceptible of cure within such thirty (30) day period but
is susceptible of cure within a reasonable time, such period of time shall be
extended for the length of time that Tenant takes to cure such default provided
that Tenant commences such cure within such thirty (30) day period and
prosecutes the same to completion with diligence), and (B) a court of competent
jurisdiction determines that Tenant failed to perform or observe such term,
condition, provision or agreement binding upon it under this Lease and after
such final determination Tenant fails to cure such default within the cure
period provided in (A)(i) or (ii) above. In such event Landlord may treat the
occurrence of any one or more of the foregoing events as a breach of this Lease,
and thereupon at its option may, with or without notice or demand of any kind to
Tenant or any other person, have any one or more of the following described
remedies in addition to all other rights and remedies provided at law or in
equity or elsewhere herein:
(i) Landlord may terminate this Lease and the Term created hereby,
in which event Landlord may forthwith repossess the Demised Premises and be
entitled to recover forthwith as damages a sum of money equal to the excess of
the present value of the Base Rent and Additional Rent provided to be paid by
Tenant for the balance of the Term of this Lease, over the present value of
the fair market rental value of the Demised Premises for said period, plus
any other sum of money and damages owed by Tenant to Landlord. Should the
fair market rental value exceed the value of the Base Rent and Additional
Rent provided to be paid by Tenant for the balance of the Term of this Lease,
Landlord shall have no obligation to pay Tenant the excess or any part thereof.
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(ii) Landlord may terminate Tenant's right of possession and may
repossess the Demised Premises by forcible entry and detainer suit, or by
taking peaceful possession or otherwise, without terminating this Lease, in
which event Landlord shall make reasonable efforts to relet the Demised
Premises for the account of Tenant, for such rent and upon such terms and
conditions as shall be reasonably satisfactory to Landlord. For the purpose
of such reletting, Landlord is authorized to redecorate and to make any
necessary alterations and repairs. For the period that Landlord is unable to
relet the Demised Premises, Tenant shall continue to pay to Landlord, as
damages, a sum equal to the amount of the Base Rent and Additional Rent
provided to be paid by Tenant for the balance of the Term of this Lease. If the
Demised Premises are relet and a sufficient sum shall not be realized from such
reletting, after paying all of the costs of any such redecoration, alterations
and repairs, and the expenses of such reletting, to satisfy the payment of the
Base Rent and Additional Rent provided to be paid by Tenant for the balance of
the Term of this Lease, Tenant shall satisfy and pay any such deficiency
upon written demand from Landlord to Tenant therefor from time to time. Tenant
agrees that Landlord may file suit to recover any sums falling due under the
terms of this Article 15 from time to time and that no suit or recovery of any
portion due Landlord hereunder shall be any defense to any subsequent action
brought for any amount not theretofore reduced to judgment in favor of Landlord.
15.2 Landlord shall be in default under this Lease if (A)(i) any sum
payable by Landlord to Tenant hereunder shall not be paid within five (5) days
after written notice from Tenant to Landlord, (ii) or except as otherwise
provided in Article 14, if default shall be made in the observance or
performance of any of the other covenants or conditions in this Lease which
Landlord is required to observe and perform and such default shall continue for
thirty (30) days after written notice from Tenant to Landlord (or if such
default does not involve the payment of money and is not susceptible of cure
within such thirty (30) day period but is susceptible of cure within a
reasonable time, such period of time shall be extended for the length of time
that Landlord takes to cure such default provided that Landlord commences such
cure within such thirty (30) day period and prosecutes the same to completion
with diligence), and (B) a court of competent jurisdiction determines that
Landlord failed to perform or observe such term, condition, provision or
agreement binding upon it under this Lease and after such final determination
Landlord fails to cure such default within the cure period provided in (A)(i) or
(ii) above. In such event Tenant may treat the occurrence of any one or more of
the foregoing events as a breach of this Lease, and thereupon at its option may,
with or without notice or demand of any kind to Landlord or any other person,
exercise any remedies available to Tenant at law or in equity. Notwithstanding
anything in this Lease to the contrary, in the event Landlord is in default
under the terms and conditions of Article 25 hereof, Tenant shall have no right
to hold back, offset or fail to pay any amounts otherwise due under this Lease
because of such default; however, Tenant at its option may, with or without
notice or demand of any kind to Landlord or any other person, exercise any other
remedies available to Tenant at law or in equity.
ARTICLE 16
ASSIGNMENT AND SUBLETTING
16.1 Tenant may transfer or assign this Lease or sublet the Demised
Premises, or any part thereof, by voluntary act, operation of law (subject to
Section 14.1), or otherwise, without the prior written consent of Landlord. No
such assignment or sublease shall relieve Tenant of any of Tenant's obligations
under this Lease without Landlord's written approval, which may be withheld by
Landlord in its sole and absolute discretion.
16.2 Subject to Article 32, Landlords rights to assign this Lease are and
shall remain unqualified.
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ARTICLE 17
SURRENDER OF POSSESSION
17.1 At the expiration of the Term of this Lease, by lapse of time or
otherwise, Tenant shall surrender possession of the Demised Premises to Landlord
in good order, condition and repair, reasonable wear and tear, damage from fire
and other casualties, repairs which are the obligation of Landlord and
conditions caused by Landlord's breach hereunder excepted.
17.2 If Tenant fails or refuses to remove its property from the Demised
Premises at the expiration of the Term of this Lease, Tenant shall be
conclusively presumed to have abandoned the same, and title thereto shall
thereupon pass to Landlord without any cost, either by set-off, credit,
allowance or otherwise; and Landlord, at its option, may (i) accept title to
such property, or (ii) at Tenant's expense, remove the same, or any part
thereof, in any manner that Landlord shall choose, and store, destroy or
otherwise dispose of the same without incurring any liability whatsoever to
Tenant or any other person.
ARTICLE 18
PRIORITY OF LEASE
CERTIFICATE TO PURCHASERS AND MORTGAGEE
18.1 Tenant agrees that, from time to time upon not less than ten (10) days
prior request by Landlord, Tenant will deliver to Landlord a statement, in
writing, certifying to the best of Tenant's knowledge (i) that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the Lease, as modified, is in full force and effect); (ii) the dates on
which Tenant began paying Base Rent, and that no Base Rent has been paid more
than one (1) month in advance; (iii) that, to the best of its knowledge, neither
Tenant nor Landlord is in default under any provision of this Lease, or, if in
default, the nature thereof in detail; (iv) that, to the best of its knowledge,
Tenant has no existing defenses or off-sets to the enforcement of this Lease,
or, if any, specifying the same; and (v) provided the Commencement Date has
occurred, that Tenant has accepted and occupied the Demised Premises, and that,
to the best of its knowledge, the Demised Premises have been completed in
accordance with the terms of this Lease subject to items which may be contained
on a punch list, it being intended that any such statement may be relied upon by
any prospective purchaser or tenant of the Building, any mortgagees or
prospective mortgagees thereof, or any prospective assignee of any mortgage
thereof.
18.2 This Lease shall be prior to all mortgages. 1 at the request of
Landlord, Tenant will, at any time and from time to time, subordinate this
Lease, but not terms and conditions relating to casualty, condemnation or
purchase options granted to Tenant under Article 24 or Article 25 hereof, to a
first mortgage placed against the Project provided that Landlord secures from
the lender and furnishes to Tenant a written agreement satisfactory to Tenant
providing that so long as there shall be no default on the part of Tenant under
this Lease (or if such default shall exist so long as Tenant's time to cure such
default, if any, shall not have expired), Tenant shall not be disturbed in its
occupancy and possession of the Demised Premises, Tenant agrees to attorn to any
such lender or its successors or assigns.
18.3 In the event of foreclosure or exercise of power of sale under any
such mortgage now or hereafter affecting the Building, the holder of any such
mortgage (or purchaser at any sale pursuant thereto) shall, in addition to such
rights it may have at law or in equity, have the option of (i) supplementing
this Article 18, so as to require Tenant, pursuant to a written agreement
satisfactory to Tenant, to attorn to such holder or purchaser, or to enter into
a new lease with such holder or purchaser (as landlord) for the balance of the
Term then remaining hereunder upon the same terms and conditions (including but
not limited to the priority of the new lease as required by Section 18.2) as
those herein provided, or (ii) notwithstanding this Article 18, to elect that
this Lease become or remain, as the case may be, superior to such mortgage. No
act or omission on the part of Landlord which would entitle Tenant under the
terms of this Lease, or by law to be relieved of Tenant's obligations hereunder
or to terminate this Lease, shall result in a release or termination of such
obligations or a termination of this Lease unless (a) Tenant shall have first
given written notice of Landlord's act or failure to act to any first mortgagee
whose name and address shall have thereafter been furnished to Tenant,
specifying the act or failure to act in violation of Tenant's rights and (b)
such mortgagee after receipt of such notice, has failed or refused to correct or
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cure the condition complained of within the time to cure such default, as such
is provided for in this Lease, but nothing contained in this Section 18.3 shall
impose any obligation on any such mortgagee to correct or cure any condition.
ARTICLE 19
RIGHTS RESERVED BY LANDLORD
19.1 Landlord shall have the following rights, each of which Landlord in
its reasonable discretion may exercise without notice to Tenant and without
liability to Tenant for damage or injury to property, person or business on
account of the exercise thereof, except as may otherwise be provided for under
the terms of this Lease; and the exercise of any such rights shall not be deemed
to constitute an eviction or disturbance of Tenant's use or possession of the
Demised Premises, and shall not give rise to any claim for set-off or abatement
of Base Rent or Additional Rent.
(a) In order to fulfill its obligations under this Lease, enter the
Building to decorate or to make repairs, alterations, additions; or
improvements, whether structural or otherwise, in and about the Building, or any
part thereof, and for such purposes to enter Upon the Demised Premises, and,
during the continuance of any of said work, to temporarily close doors, entry
ways, public space and corridors in the Building and to interrupt or temporarily
suspend services or use of facilities, all without affecting any of Tenant's
obligations under this Lease, so long as the Demised Premises are reasonably
accessible and Tenant's use thereof is not unreasonably disturbed.
(b) To furnish door keys or other entry devices for doors in the Demised
Premises at the commencement of this Lease. To retain at all times, and to use
in appropriate instances, keys or other entry devices to all doors within and
into the Demised Premises. Tenant agrees to purchase only from Landlord
additional duplicate keys or other entry devices as required, to change no
locks, and not to affix locks on doors without the prior written consent of
Landlord. Nothing herein contained shall prevent Tenant from locking its
computer room, or other areas containing confidential information, or require
Tenant to furnish Landlord, during the Term of this Lease, with keys to such
room or other areas, nor prevent Tenant from changing locks on such room or
other areas at will. Upon the expiration of the Term or of Tenant's right to
possession, Tenant shall return all keys or other entry devices to Landlord and
shall disclose to Landlord the combination of any safes, cabinets or vaults left
in the Demised Premises.
(c) To approve the weight, size and location of safes, vaults and other
heavy equipment and articles in and about the Demised Premises and the Building
(so as not to exceed the legal live load per square foot designated by the
structural engineers for the Building). Movements of Tenant's property into or
out of the Building and within the Building, are entirely at the risk and
responsibility of Tenant.
(d) To close the Building after Tenant's regular working hours, subject,
however to Tenant's right to admittance to the Demised Premises under such
reasonable regulations as Landlord and Tenant consent to in writing, which may
include, but shall not be limited to, a requirement that persons entering or
leaving the Building identify themselves to a watchman by registration or
otherwise and establish their right to enter or leave the Building. Such
regulations may include, but shall not be limited to, the requiring of
identification from Tenant's employees, agents, clients, customers, invitees,
visitors and guests.
(e) To establish controls consented to by Tenant in writing, for the
purpose of regulating all property and packages (both personal and otherwise) to
be moved into or out of the Building and the Demised Premises; provided,
however, that Landlord recognizes that Tenant shall have the unrestricted right
to transport files and other business documents in and out of the Building at
all times.
(f) To show the Demised Premises to prospective tenants at reasonable
hours and upon reasonable notice during the last twelve (12) months of the Term
and, if vacated or abandoned, to show the Demised Premises at any time to
prepare the Demised Premises for re-occupancy.
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19.2 Tenant shall keep and observe the rules and regulations mutually
agreed to in writing, from time to time and delivered by Landlord to Tenant, for
the use, entry, operation and management of the Demised Premises and the
Building, each of which rules and regulations shall become a part of this Lease.
No such rule or regulation, however, shall contradict or abrogate any right or
privilege herein expressly granted to Tenant.
ARTICLE 20
NAME OF BUILDING
20.1 During the Term of this Lease, the Building shall be named THE
EQUITABLE BUILDING, or if Tenant so requests, by such other name as requested by
Tenant provided that the effective date for any name change is not less than
ninety (90) days after the Landlord's receipt of Tenant's requesting the change.
Landlord shall at its expense, initially install and maintain signage or other
forms of identification, for the Building name, both on the interior and
exterior of the Building (but outside of the Demised Premises), containing the
name of the Building designated as above stated; provided, however, maintenance
and repair of such signage or other forms of identification shall be included
within the definition of Operating Expenses. In connection with any change of
the Building name requested by Tenant as aforesaid, Tenant shall be responsible
and pay for, and promptly commence and complete the changing of all of the
Building's then existing signage or other forms of identification for the
Building name and, prior to the commencement of any work with respect thereto,
shell submit to Landlord for Landlord's review and approval (which approval
shall not be unreasonably withheld) the proposed plans and specifications for
same. No such work shall commence prior to the date the name change can be
effective as aforesaid. The design and location of any additional signs or forms
of identification requested by Tenant shall not be subject to the approval of
Landlord. Landlord shall maintain the directories in the Building. Landlord
shall make available to Tenant all spaces on said Building directories. Landlord
covenants and agrees that it will not enter into any lease or other arrangement
respecting the use of any space of the Building during the Term of this Lease
without Tenant's written approval, which may be withheld by Tenant in its sole
and absolute discretion.
20.2 After the expiration of the Term of this Lease, Landlord shall change
the name of the Building and the Landlord agrees to never have the Building
named by the then name of Tenant, or any entity affiliated with Tenant. The
obligations created by the preceding sentence shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
and shall be deemed to be covenants which run with the land. Each party hereto
shall from time to time execute, acknowledge and deliver such further
instruments and perform such additional acts as the other party may reasonably
request to effectuate this Section 20.2.
ARTICLE 21
OPTION TO EXTEND TERM
21.1 Provided that Tenant is not in default in its performance of this
Lease, Landlord hereby grants to Tenant an option to extend the Term of this
Lease for five (5) successive additional periods of five (5) years each (herein
generally called the "renewal terms'). Base Rent during each applicable five (5)
year renewal term shall be the lesser of (i) the annual fair market rental value
per square foot of Usable Area contained in the Demised Premises as of the first
day of the third year preceding the expiration of the initial Term of this
Lease, or applicable extension thereof, or (ii) the following:
(a) first five year renewal term - an annual base rent of $15.12 per
square foot of Usable Area contained in the Demised Premises;
(b) second five year renewal term - an annual base rent of $17.39 per
square foot of Usable Area contained in the Demised Premises;
(c) third five year renewal term - an annual base rent of $19.99 per
square foot of Usable Area contained in the Demised Premises;
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(d) fourth five year renewal term - an annual base rent of $22.99 per
square foot of Usable Area contained in the Demised Premises; and
(e) fifth five year renewal term - an annual base rent of $26.44 per
square foot of Usable Area contained in the Demised Premises.
Each such renewal term shall be upon the same terms, agreements and conditions
as in this Lease set forth for the initial term hereof, except that Base Rent
during each such renewal term shall be as set forth above, and except further
that Tenant shall have no further election to extend the Term of this Lease
beyond the fifth additional five year renewal term. Tenant shall exercise an
option to extend the Term of this Lease by giving notice to Landlord on or
before the last day of the nineteenth (19th) year of the initial Term of this
Lease, or on or before the last day of the fourth (4th) year of any renewal term
of this Lease. In the event Landlord and Tenant have not agreed upon an annual
fair market rental value per square foot of Usable Area contained in the Demised
Premises (which shall take into account the creditworthiness of Tenant) on or
before March 1 of the eighteenth year of the initial Term of this Lease, or on
or before March 1 of the third year of any renewal term, as the case may be,
Landlord shall promptly thereafter select a disinterested person with at least
ten (10) years professional experience as a real estate appraiser licensed by
the State of Iowa, and Landlord shall give Tenant written notice of such
appointment. Within thirty (30) days thereafter, Tenant shall give Landlord
written notice of Tenant's designated appraiser having the same experience and
qualifications. The two appraisers so selected shall select a third
disinterested appraiser with the same experience and qualifications; and the
three appraisers shall promptly determine the annual fair market rental value
per square foot of Usable Area of the Demised Premises, exclusive of Tenant's
Improvement Allowance and all other leasehold improvements made upon the Demised
Premises by Tenant, for the applicable renewal term of this Lease. If a second
appraiser is not appointed and timely notice given thereof as herein provided,
then the first appraiser shall determine such annual fair market rental value
per square foot of Usable Area of the Demised Premises. If, within thirty (30)
days after the appointment of the second appraiser, the two appraisers appointed
by the parties are unable to agree upon the appointment of a third appraiser,
then the two appraisers shall be discharged and the appointment process repeated
until a third appraiser is duly selected. The determination of a majority of the
appraisers, or of the sole appraiser, as the case may be, shall be conclusive
and binding upon the parties, and shall be the annual fair market rental value
per square foot of Usable Area of the Demised Premises to be used in connection
with determining 21.1(i) above, for the applicable renewal term of this Lease.
If any appraiser fails or ceases to act, a substitute shall promptly be
appointed by the same person or persons authorized to make the initial
appointment. The parties shall bear the expenses of the appraisers selected by
each of them; and the expenses of the third appraiser shall be borne equally by
Landlord and Tenant.
If the Tenant elects to exercise any such option, upon and subject to the terms
and conditions stated above, the Term of this Lease shall be automatically
extended for the period of such additional term without necessity for the
execution of any instrument to effect the same, and in such event the phrases
"the Term of this Lease", "renewal term" and "the Term hereof' as used in this
Lease shall include such additional term. No exercise of any option under this
Lease shall be effective if any default occurs after the exercise and before the
commencement of the renewal term and such default is not cured within the full
and uninterrupted applicable grace period, if any. Notwithstanding anything to
the contrary contained in this Lease, the term "Term" whenever used in this
Lease shall be defined to include the original term and all renewals or
extensions thereof made pursuant to the terms and conditions hereof
21.2 Notwithstanding anything to the contrary contained in this Lease, if
Tenant shall fail to give notice to Landlord of Tenant's election to renew and
extend the Term of this Lease for any option period provided herein, within the
time period set forth herein, Landlord may not terminate this Lease unless
Landlord notifies Tenant in writing that the Landlord may, at its sole election,
terminate Tenant's option to renew and extend the Lease if Tenant does not send
written notice of Tenant's exercise of such option within thirty (30) days after
receipt of such notice from Landlord. If Landlord does not receive within said
thirty (30) day period written notice of the exercise by Tenant of such option,
Tenant's option shall thereafter terminate, and this Lease shall terminate upon
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the expiration of the original Term of this Lease or the then current renewal
Term, as the case may be, unless sooner terminated pursuant to the terms of this
Lease.
ARTICLE 22
COVENANT OF QUIET ENJOYMENT
Landlord covenants that Tenant, upon paying the Base Rent, Additional Rent,
charges for services and other payments herein reserved, and, upon keeping,
observing and performing all the other terms, covenants, conditions, provisions
and agreements herein contained on the part of the Tenant to be, kept, observed
and performed, shall, during the Term of this Lease, peaceably and quietly have,
hold and enjoy the Demised Premises, free from disturbance by Landlord, subject
to the terms, covenants, conditions, provisions and agreements of this Lease.
ARTICLE 23
NOTICES
23.1 All notices required or permitted to be given under the terms of
this Lease shall be in writing and delivered (i) personally, (ii) delivery by
overnight courier service or (iii) sending the same by U.S. certified mail,
return receipt requested. Until further notification, the addresses of the
parties shall be as follows:
Landlord: The Graham Group, Inc.
Attn: George D. Milligan
President
901 Grand Avenue
Des Moines, Iowa 50309
Tenant: Equitable Life Insurance Company of Iowa
Attn: Christopher R. Welp
Vice President - Tax and Support Services
700 Locust Street - Suite 201
Des Moines, Iowa 50309
With a copy to: President
Equitable Life Insurance Company of Iowa
604 Locust Street
Des Moines, Iowa 50309
or such other addresses not exceeding a total of two (2) as Landlord or Tenant
may from time to time designate in a written notice to the other party.
Notice given as aforesaid shall be sufficient service thereof and shall be
deemed given as of the date received as evidenced by the return receipt of the
registered or certified mail or the express mail delivery receipt as the case
may be.
23.2 Notwithstanding the foregoing, either party hereto may give the other
telephonic notice of the need for emergency repairs, immediately followed by a
confirming written notice delivered in the manner provided in Section 23.1
above.
23.3 If any party ("Mortgagee") shall notify Tenant that it is the holder
of a mortgage, deed of trust or other security instrument affecting the Project,
or the Phase 2 - Building, as hereinafter defined, no notice, request or demand
thereafter sent by Tenant to Landlord shall be effective unless and until a copy
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of the same shall also be sent to such Mortgagee in the manner prescribed in
Section 23.1 and to such address as such Mortgagee shall designate.
ARTICLE 24
PARKING
24.1 At all time times during the Term of this Lease, Landlord agrees to
furnish and Tenant agrees as hereinafter provided to pay for and lease, parking
rights for:
(i) All parking spaces for vehicles located in the underground parking
portion of the Project;
(ii) All parking spaces for vehicles located on the surface level of
the North half of the Site, as hereinafter defined, (such parking will be lost
in connection with the development of the Phase 2 - Building, as hereinafter
defined, but approximately 75 parking rights for vehicles are anticipated to be
located in the underground portion of the Phase 2 - Building for use in
connection with its operation);
(iii) 150 parking rights for vehicles in parking spaces designated by
Petula Associates, Ltd., an Iowa corporation ("Principal") in the parking garage
owned by Principal (the "Principal Garage") and located in the block bordered by
9th Street on the East, 10th Street on the West, High Street on the North and
Grand Avenue on the South, Des Moines, Iowa (the "Principal Land"), and more
particularly described in Exhibit "B" attached hereto and incorporated herein
by this reference, pursuant to the Parking Agreement (the "Principal Parking
Agreement") entered into between Principal, Landlord and Tenant on or about
even date herewith;
(iv) 100 parking spaces located on the surface level of land known as
the South half of the block bordered by 10th Street on the East, 11th street on
the West, Locust Street on the North and Walnut Street on the South, Des Moines,
Iowa (the "DMDC Land") and more particularly described in Exhibit "B" attached
hereto and incorporated herein by this reference (such 100 parking spaces will
be replaced by 100 parking spaces in the DMDC Ramp, as defined in Section 24.5,
which is to be constructed in connection with the development of the Phase 2 -
Building);
(v) 60 parking spaces located on the surface level of land known as the
Southwest quarter of the block bordered by 11th Street on the East, 12th Street
on the West, Locust Street on the North and Walnut Street on the South, Des
Moines, Iowa (the "12th Street Parking Land") and more particularly described
in Exhibit "B" attached hereto and incorporated herein by this reference; and
(vi) 65 parking spaces located on the surface level of land known as
the Northwest quarter of the block bordered by 10th Street on the East, 11th
Street on the West, Grand Avenue on the North and Locust Street on the South,
Des Moines, Iowa ("Graham's Fine Arts Land"), and more particularly described
in Exhibit "B" attached hereto and incorporated herein by this reference.
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No specific parking spaces in the Principal Garage are to be assigned to
Tenant but Principal will issue to Tenant the aforesaid number of parking
stickers and/or cards, each of which will authorize parking in the Principal
Garage of a vehicle on which the sticker is displayed, or Principal will provide
a reasonable alternative means of identifying and controlling vehicles
authorized to be parked in the Principal Garage. Principal may designate the
area in the Principal Garage within which each such vehicle may be parked, and
Principal may change such designations from time to time. "Parking Permits" as
used herein shall mean the parking rights for vehicles as such are described in
this Section 24.1 (i) through (vi) above. Notwithstanding anything in this
Article 24 to the contrary, Tenant shall only be required to pay for such
parking spaces described in (iv), (v) and (vi) above, to the extent Tenant, from
time to time, feels it has a need to use such spaces. Tenant may increase or
decrease, from time to time, its use of such designated spaces upon giving
Landlord at least thirty (30) days prior written notice of Tenant's desire to
use and pay for such additional or decreased spaces.
Subject to the terms and conditions of Section 24.2 hereof, Landlord at its
sole cost and expense, except as otherwise contractually obligated, shall keep,
or cause to be kept, the above described parking spaces in good order, condition
and repair.
24.2 As rental for the Parking Permits ("Parking Rental"), Tenant covenants
and agrees to pay Landlord (or Principal if the Principal Parking Agreement so
provides) during the Term of this Lease, as Additional Rent hereunder, the
following stated monthly parking rates (which rates include any operating
expenses associated with the Parking Permits); plus any applicable sales tax for
each of the parking stickers/cards to be issued by Landlord:
(a) The monthly parking rate for parking spaces located in the underground
parking portion of the Project shall be Sixty and No/100 Dollars
($60.00);
(b) The monthly parking rate for parking spaces on the surface level of
the North half of the Site shall be Thirty and No/100 Dollars
($30.00);
(c) The monthly parking rate for the 150 parking spaces for vehicles in
the Principal Garage shall be at the rate as provided for in the
Principal Parking Agreement;
(d) The monthly parking rate for the surface parking spaces being used on
the DMDC Land shall be Thirty and No/100 Dollars
($30.00);
(e) The monthly parking rate for the surface parking spaces being used on
the 12th Street Parking Land shall be Thirty and No/100 Dollars
($30.00); and
(f) The monthly parking rate for the surface parking spaces being used on
the Graham's Fine Arts Land shall be Thirty and No/100 Dollars
($30.00).
Notwithstanding the above, after the second lease year, Landlord may
increase or decrease parking rates for Parking Permits so as to reflect
reasonable increases in Landlord's expenses associated with such Parking
Permits; provided, however, any such annual increase shall not exceed any annual
increase in the Consumer Price Index (the "CPI") for such lease year; and,
provided, further, parking rates for the 150 parking spaces for vehicles in the
Principal Garage may be increased or decreased pursuant to the terms and
conditions of the Principal Parking Agreement. Parking Rental is to be payable
monthly in advance on the first day of each and every month during the Term of
this Lease and a pro rata portion of such sums shall be payable for any partial
calendar month in the event this Lease commences (or ends) on a date other than
the first (or last) day of a calendar month. For purposes of this Lease, CPI
shall mean the Consumer Price Index published by the Bureau of Labor Statistics
of the Unites States Department of Labor for urban consumer families based on
the all-cities average for all group commodities and items (1967 = 100) or
successor or substitute index appropriately adjusted.
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24.3 If the parking spaces covered by the Parking Permits are not available
to Tenant during any portion of the Term of this Lease as the result of a
casualty, condemnation, settlement in lieu of condemnation, or other similar
happening, this Lease shall continue without abatement of Base Rent and Landlord
shall within ninety (90) days make available to Tenant up to thirty (30)
substitute unassigned parking spaces in the City structured parking garage
located in the block bordered by 8th Street on the East, 9th Street oh the West,
Grand Avenue on the North and Locust Street on the South, Des Moines, Iowa with
the balance of substitute unassigned parking spaces being made available in the
Principal Garage or, if sufficient parking spaces are not available in the
Principal Garage, in the DMDC Ramp (if it exists), or in another comparable
downtown parking location in close proximity to the Demised Premises. The
substitute parking spaces shall be provided to Tenant at a rental rate not to
exceed the rate Tenant would have paid for the surface parking spaces covered by
the Parking Permits relating to the DMDC Land. Landlord represents and warrants
that the parking spaces as provided for herein shall be available to Tenant
throughout the Term of this Lease. Notwithstanding the above, the obligations
imposed by this Section 24.3 shall not apply to any Mortgagee who acquires title
to the Project through possession, foreclosure proceeding or delivery of a deed
in lieu of foreclosure; provided, such Mortgagee uses its best efforts to make
available sufficient substitute unassigned parking spaces as above provided and;
provided, further, that in the event such Mortgagee does not make available such
substitute unassigned parking spaces, Mortgagee in lieu thereof assigns to
Tenant any interest Mortgagee has in any insurance proceeds, condemnation award
or purchase price which results from the above described parking spaces covered
by the Parking Permits not being available due to casualty, condemnation,
settlement in lieu of condemnation or other similar happening.
24.4 Principal, or the operator of the Principal Garage, may make, modify
and enforce rules and regulations relating to the parking of vehicles in the
Principal Garage, and Tenant shall abide by such rules and regulations and shall
exercise reasonable efforts to cause its employees and invitees to abide by such
rules and regulations. Additionally, Principal reserves the right to alter the
size of the Principal Garage.
24.5 (i) If Tenant exercises its option as provided in Section 25 of this I
se to have Landlord construct the Phase 2 - Building, subject to the terms and
conditions of this Section 24.5, Landlord shall proceed with due diligence to
expediently construct and maintain at its sole cost and expense a structured
parking ramp (the "DMDC Ramp") which shall contain at least seven hundred
seventy five (775) parking spaces on the DMDC. Land. One hundred (100) parking
spaces for vehicles in the DMDC ramp shall replace Landlord's obligation to
supply the 100 parking spaces described in Section 24.1 (iv) above. Upon request
by Tenant, Landlord shall construct the DMDC Ramp in two phases. Landlord agrees
to furnish at least seven hundred seventy five (775) parking rights for vehicles
in parking spaces in the DMDC Ramp and Tenant agrees as hereinafter provided to
pay for and lease seven hundred seventy five (775) parking spaces at a rate per
month to be negotiated by the Landlord and Tenant in good faith, with the goal
being a monthly cost to Tenant which is as low as possible while still allowing
Landlord to structure an economically viable parking ramp project. Landlord will
take all action within its power to obtain the maximum benefits available from
the City for the DMDC Ramp, and such benefits will be fully reflected in the
monthly parking rate to be charged by Landlord to Tenant for parking spaces in
the DMDC Ramp. In the alternative to Landlord constructing the DMDC Ramp as
above provided, upon request by Tenant, Landlord shall within thirty (30) days
of such request, sell, close (at Tenant's executive office in the Building) and
convey to Tenant the unencumbered fee title to the DMDC Land by special warranty
deed in the form attached hereto as Exhibit E and incorporated herein by this
reference, for Two Hundred Fifty Thousand and No/I 00 Dollars ($250,000.00),
plus reasonable costs incurred by Landlord in preparing the DMDC Land for
surface parking as required by this Lease, and Tenant shall thereafter proceed
with due diligence to expediently construct and maintain the DMDC Ramp as above
provided. In the event Tenant acquires title to the DMDC Land pursuant to the
terms and conditions of this Section 24.5(i), the DMDC Land shall be free from
all conditions, covenants and restrictions except for such items to which Tenant
is a party of record, survey matters first appearing after the date hereof,
parties in possession and the lien of unpaid real estate taxes then due but not
payable and delinquent. In the event Tenant constructs the DMDC Ramp, Tenant
shall lease to Landlord an amount of parking spaces in the DMDC Ramp as is
necessary to fulfill Landlord's obligation to supply parking spaces to Tenant
pursuant to Section 24.1 (ii) and (iv) above and Landlord shall pay Tenant for
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such spaces at a rate per month to be negotiated by the Landlord and Tenant in
good faith, with the goal being a monthly cost to Landlord which is as low as
possible while still allowing Tenant to structure an economically viable parking
ramp project. The monthly parking cost Landlord is to pay Tenant for the above
described parking spaces in the DMDC Ramp which has been constructed by Tenant
in accordance with this Section 24.5 shall be the same monthly parking cost
Tenant is to pay Landlord for such spaces to be provided to Tenant in
fulfillment of Landlord's obligation to supply parking spaces to Tenant pursuant
to Section 24.1 (ii) and (iv) above. After Landlord has sold to Tenant the DMDC
Land, Landlord shall have no further obligation under this to construct the DMDC
Ramp. Prior to the construction of the DMDC Ramp, plans and specifications will
be developed by the party intending to construct the DMDC Ramp and such plans
and specifications will be circulated for the review and approval of the
non-constructing party, which approval shall not be unreasonably withheld.
Notwithstanding the above, if Tenant constructs the DMDC Ramp, the DMDC Ramp
shall not contain more than seven hundred seventy five (775) parking spaces for
vehicles without Landlord's prior written consent, which consent may be withheld
by Landlord in its sole and absolute discretion.
(ii) In the event any Mortgagee acquires the interest of Landlord in
the Demised Premises, it shall have no obligation to construct the DMDC Ramp as
provided for herein; provided, however, upon request by Tenant, Mortgagee shall
within thirty (30) days of such request, sell, close (at Tenant's executive
office in the Building) and convey to Tenant the unencumbered fee title to the
DMDC Land from such Mortgagee by special warranty deed in the form attached
hereto as Exhibit "E" for Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00) plus reasonable costs incurred by Landlord in preparing the DMDC
Land for surface parking required by this Lease, and Tenant shall thereafter
proceed with due diligence to expediently construct and maintain the DMDC Ramp
as provided in Section 24.5(i) above.
24.6 At the termination of this Lease if it is amended in lieu of Landlord
and Tenant entering into a new lease in connection with the development of the
Phase 2 - Building, as defined in Section 25.1, or at the termination of any new
lease entered into between Landlord and Tenant in connection with the
development of such Phase 2 - Building, assuming Tenant has not acquired the
DMDC Land pursuant to Section 25.14 hereof, Landlord shall purchase from Tenant
the DMDC Land and the DMDC Ramp for their combined fair market value. In the
event Landlord and Tenant cannot agree upon the combined fair market value of
the DMDC Land and the DMDC Ramp on or before November 1 of the last year of the
initial term of the lease affecting the Phase 2 - Building, or on or before
November 1 of the last year of any renewal period of the lease affecting the
Phase 2 - Building, as the case may be, Landlord shall promptly select a
disinterested person with at least ten (10) years professional experience as a
real estate appraiser licensed by the State of Iowa, and Landlord shall give
Tenant written notice of such appointment. Within thirty (30) days thereafter,
Tenant shall give Landlord written notice of Tenant's designated appraiser
having the same experience and qualifications. The two appraisers so selected
shall select a third disinterested appraiser with the same experience and
qualifications; and the three appraisers shall promptly determine the combined
fair market value of the DMDC Land and the DMDC Ramp. If a second appraiser is
not appointed and timely notice given thereof as herein provided, then the first
appraiser shall determine such combined fair market value of the DMDC Land and
the DMDC Ramp. If, within thirty (30) days after the appointment of the second
appraiser, the two appraisers appointed by the parties are unable to agree upon
the appointment of a third appraiser, then the two appraisers shall be
discharged and the appointment process repeated until a third appraiser is duly
selected. The determination of a majority of the appraisers, or of the sole
appraiser, as the case may be, shall be conclusive and binding upon the parties,
and shall be the combined fair market value of the DMDC Land and the DMDC Ramp.
If any appraiser fails or ceases to act, a substitute shall promptly be
appointed by the same person or persons authorized to make the initial
appointment. The parties shall bear the expenses of the appraisers selected by
each of them; and the expenses of the third appraiser shall be borne equally by
Landlord and Tenant. Within thirty (30) days after the combined market value of
the DMDC Land and the DMDC Ramp has been determined pursuant to the above
described process, Tenant shall sell, close (at Tenant's executive office in the
Building) and convey to Landlord the unencumbered fee title to the DMDC Land and
DMDC Ramp by special warranty deed in the form attached hereto as Exhibit "F"
and incorporated herein by this reference, for an amount of cash to be paid at
closing equal to the above described combined fair market value of the DMDC Land
and DMDC Ramp less Nine Hundred Thousand Dollars ($900,000.00) (i.e. the value
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of the Polk County, Iowa grant applied toward Landlord's original cost of the
DMDC Land). In the event Landlord acquires title to the DMDC Land and DMDC Ramp
pursuant to the terms and conditions of this Section 24.6, the DMDC Land and
DMDC Ramp shall be free from all conditions, covenants and restrictions except
for such items to which Tenant is a party of record, survey matters first
appearing after the date hereof, parties in possession and the lien of unpaid
real estate taxes now due but not payable and delinquent. In the event any
Mortgagee acquires the interest of Landlord in the Demised Premises, such
Mortgagee shall have no obligation to purchase from Tenant the DMDC Land and
DMDC Ramp for their combined fair market value pursuant to the terms and
conditions of this Section 24.6.
24.7 Landlord shall use reasonable efforts to assist Tenant's employees to
rent additional auto parking spaces in both publicly owned and privately owned
parking garages and lots; provided, however, this provision shall not be
applicable to any Mortgagee.
24.8 Notwithstanding anything in this Article 24 to the contrary, in the
event Tenant's right under Section 25.1 to request the construction of the
"Phase 2 - Building" has terminated and Landlord constructs the North Building,
as hereinafter defined, pursuant to Section 25.2 herein, Landlord may terminate
its obligation to supply the parking spaces described in Section 24.1(u) above
so long as a comparable number of parking spaces at comparable prices are made
available to Tenant in another comparable downtown location in close proximity
to the Demised Premises. In the event any Mortgagee acquires the interest of
Landlord in the Demised Premises, such Mortgagee shall have no obligation to
comply with the terms and conditions of this Section 24.8.
ARTICLE 25
PHASE 2 - BUILDING
25.1 Upon the written request by Tenant to Landlord, which request shall be
accompanied by the "request for proposal" described in Section 25.3 hereof,
Landlord has agreed to construct an additional office building to be leased to
Tenant, consisting of an unknown amount of square feet of Usable Area and floors
above grade, with approximately 75 underground parking stalls on the North half
of the Site (the "Phase 2- Building"). However, in the event Tenant elects to
make the above described request, it must advise Landlord of its desire on or
before September 30, 2014. Notwithstanding anything to the contrary contained in
this Lease, if Tenant shall fail to give notice to Landlord of Tenant's election
to construct the Phase 2 - Building in accordance with the terms of this Section
25.1, Tenant's right to make such election shall not terminate unless Landlord
notifies Tenant in writing that Tenant's right to make such election shall
terminate if Tenant does not send written notice of Tenant's exercise of such
election within thirty (30) days after receipt of such notice from Landlord. If
Landlord does not receive such notice of election within said thirty (30) day
period, Tenant's right to make such election shall thereafter terminate:
25.2 In the event Tenant does not request Landlord to construct the Phase 2
- - Building pursuant to Section 25.1 herein, Tenant acknowledges and agrees that
Landlord may develop the North half of the Site for a party or parties other
than Tenant (such building shall hereinafter be referred to as the "North
Building"); provided, however, that Landlord's development of the North Building
shall be subject to the following terms and conditions: (i) the North Building
shall be a single structure developed by Landlord on the North half of the Site;
(ii) Landlord shall preserve Tenant's unrestricted access to any entrance on the
North side of the Building; (iii) a reasonable courtyard will be built by
Landlord at no cost to Tenant which courtyard shall completely separate the
Building and the North Building, and such courtyard shall further enable Tenant
to preserve its corporate image, as well as preserving adequate light and
landscaping opportunities to the North side of the Building; (iv) the North
Building will be designed to preserve intact the structural integrity of the
Building; (v) there will be no skywalk bridge or skywalk corridor connection
from the North Building to the Building (the North Building reserves the right
to directly connect by skywalk bridge into the City parking ramp to the East);
(vi) the North Building will be a first class, "Class A" building composed of
construction materials which equal or exceed the quality of such materials used
for the Building; and (vii) the design of the North Building will compliment and
27
be architecturally compatible with (but not duplicate) the design of the
Building. The plans for the North Building will be submitted to Tenant for its
review and approval at least one hundred eighty (180) days prior to the North
Building's scheduled construction start so as to allow Tenant to confirm that
such plans and specifications satisfy the criteria for the North Building as
such are set forth above. Landlord and Tenant shall thereafter enter into an
amendment to this Lease providing for the deletion of the North half of the Site
from the Site, restating Tenant's Proportionate Share of Taxes and restating
Tenant's Proportionate Share of Operating Expenses.
25.3 This Lease may be amended in connection with the development of the
Phase 2 - Building, or either Landlord or Tenant may request that they enter
into a new lease in connection with the development of the Phase 2 - Building,
or Tenant may become the owner of the North half of the Site pursuant to the
terms and conditions of Section 25.14 herein. Leasing terms and conditions
applicable to the Phase 2 - Building shall be substantially the same as in this
Lease set forth, except that Base Rent for the Phase 2 - Building shall be the
fair market rental value per square foot of Usable Area for comparable new
property in the greater metropolitan Des Moines, Iowa area, with such
determination to be calculated pursuant to the same methodology which was used
to determine Base Rent for the Building. For a discussion of such methodology
see the April 21, 1995 letter from George D. Milligan, President of The Graham
Group, Inc., to Christopher R. Welp, Vice President - Tax and Support Services
of Equitable of Iowa Companies as clarified by the May 24, 1995 letter from
Russell F. Schrage, of the law firm of Nyemaster, Goode, McLaughlin, Voigts,
West, Hansell & O'Brien, a Professional Corporation, to Charles Taylor of The
Graham Group, Inc. (the "Methodology Letters"), copies of which are attached as
Exhibit "C" and incorporated herein by this reference. As is true in this Lease,
Tenant's Proportionate. Share of Taxes under any applicable lease shall be
reduced to the extent that the Phase 2 - Building and Site are entitled to any
property tax abatement; and Operating Expenses shall also be decreased to the
extent that any economic development grants are made available to either the
Landlord or Tenant (assuming Tenant would assign its interest in any such
benefits to Landlord). Landlord and Tenant shall in good faith diligently
proceed to amend this Lease or enter into a new lease, as herein anticipated. In
connection with the development of the Phase 2 - Building, upon the request of
either Landlord or Tenant, the parties hereto shall enter into a reciprocal
easement agreement reasonably acceptable to both parties which shall, by way of
illustration but not limitation, permit pedestrian traffic to flow back and
forth between the Building and the Phase 2 - Building.
25.4 Along with Tenant's written request as such is described in Section
25.1, Tenant shall provide to Landlord a "request for proposal" summarizing in
general terms Tenant's expectations for the Phase 2 - Building, and Landlord
shall thereafter be responsible for the preparation of all plans and
specifications for construction of all aspects of the Phase 2 - Building,
subject to Tenant's right of approval thereof as hereinafter described in
Section 25.6. Landlord may retain architects, designers, planners and
consultants, subject to the prior written consent of Tenant which shall not be
unreasonably withheld.
25.5 It is the intention of the parties hereto that the Phase 2 - Building
be designed, constructed and operated as a first-class facility. The parties
further acknowledge that the pricing methodology referred to in 25.3 above will
not vary with respect to the Phase 2 - Building regardless of the number of
floors or Usable Area contained in the Phase 2 - Building. The parties agree
that they will cooperate with one another in reviewing and approving plans and
specifications and estimated costs of construction as anticipated herein.
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25.6 Landlord acknowledges that Tenant's willingness to enter into this
Lease and undertake the obligations set forth herein is predicated upon Tenant's
receiving assurances as to the architectural and functional harmony of the
Project being able to be supplemented by the development of the Phase 2 -
Building. In order to provide Tenant with such assurances, where plans and
specifications are required hereunder to be approved by Tenant, the submission
and approval of plans and specifications which are to be accompanied by
estimated costs of construction associated therewith, shall be accomplished in
accordance with the following procedure:
(i) Within ninety (90) days of Landlord's receipt of the written
request described in Section 25.1 hereof and the request for proposal described
in Section 25.4 hereof, Landlord shall cause such plans and specifications and
estimated costs of construction associated therewith to be prepared and
submitted to Tenant.
(ii) Within forty-five (45) days after Tenant shall have received
such plans and specifications and estimated costs of construction associated
therewith, Tenant shall give Landlord notice of its approval or disapproval
thereof, specifying in the case of the latter its reasons therefor.
(iii) Landlord shall, within thirty (30) days of its receipt of a
notice of disapproval given pursuant to clause (ii) above, undertake promptly
to amend and modify the plans and specifications and estimated costs of
construction associated therewith so as to meet the reasons for Tenant's
disapproval specified in the notice of disapproval and, upon completion
thereof, the same shall be resubmitted to Tenant for its final approval
or revision which revision may be made by Tenant in its sole and absolute
discretion.
(iv) Tenant shall, within thirty (30) days of its receipt of the
resubmitted plans and specifications and estimated costs of construction given
pursuant to clause (iii) above, either approve such plans and specifications or
specify exactly how such plans and specifications are to be revised (hereinafter
such final plans and specifications are referred to as the "Approved Final
Plans").
(v) The Approved Final Plans shall not be modified or amended thereafter
without the approval of Tenant.
The parties recognize that Tenant may elect to "phase" construction of the
Phase 2 - Building or the components thereof (i.e., carry out construction of
the same as certain plans and specifications are being completed and without
Approved Final Plans, as hereinafter defined). The parties further recognize
that "phase" construction requires close cooperation, and Landlord and Tenant
will make their personnel available to each other and their architects and other
consultants on a reasonable schedule to assist in the flow of information and
the timely preparation of required construction documents. In order to
facilitate Tenant's review of plans and specifications submitted to it pursuant
to the provision of this Article, Tenant shall continuously informally review
and approve or comment upon plans and specifications as they are in the process
of being prepared and delivered to Tenant so that, to the extent possible, such
plans and specifications will have been informally reviewed and approved by
Tenant by the time that they are submitted to Tenant for formal approval in
final form; provided, that nothing herein shall affect or diminish Tenant's
right to review and approve, in its sole and absolute discretion, the final
plans and specifications in the context of a completed stage or unit thereof in
accordance with the procedures set forth herein.
Any document required to be submitted to Tenant for approval pursuant to
this Article 25 shall be accompanied by a letter from "Landlord's Designated
Representative" (as defined below) stating that such document is submitted for
approval pursuant to this Lease and the time within which such approval is
required to be given hereunder, and unless accompanied by such a letter, such
document shall not be deemed to have been submitted for approval. Any such
document shall be deemed to have been submitted on the date of receipt. All such
documents shall be sent to the following representative of Tenant ("Tenant's
Designated Representative") at the following address (unless or until some other
representative or address is specified for same by Tenant in a notice given
pursuant to Article 25 of this Lease):
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Tenant: Christopher R. Welp, Vice President - Tax and Support Services
Equitable Life Insurance Company of Iowa
700 Locust Street - Suite 201
Des Moines, Iowa 50309
With a copy to: President
Equitable Life Insurance Company of Iowa
604 Locust Street
Des Moines, Iowa 50309
The person listed below shall be "Landlord's Designated Representative" (unless
or until some other representative or address is specified for same by Landlord
in a notice given pursuant to Article 25 of this Lease):
Landlord: George D. Milligan, President
The Graham Group, Inc.
910 Grand Avenue
Des Moines, Iowa 50309
With a copy to: Charles Taylor, Esq.
The Graham Group, Inc.
910 Grand Avenue
Des Moines, Iowa 50309
Any notice of approval or disapproval required to be given by Tenant
pursuant to this Section 25.6 shall be accompanied by a letter from Tenant's
Designated Representative directed to Landlord's Designated Representative at
the address specified above, stating such notice is given pursuant to this Lease
and setting forth the time (if any) within which revised plans and
specifications must be submitted for approval hereunder, and unless accompanied
by such a letter, such notice shall not be deemed to have been given. Any such
document shall be deemed to have been submitted on the date of its receipt by
the Landlord's Designated Representative named herein.
Subject to the rights reserved by Tenant in this Article 25, Landlord shall
be solely and primarily responsible for the planning, design, construction and
inspection of the Phase 2 - Building (other than so much of the same as shall be
included in Tenant's Construction Obligations - which shall include a Thirty and
No/100 ($30.00) per square foot of Usable Area Tenant Improvement Allowance
being made available by Landlord to Tenant), and neither the reservation or the
exercise of such rights shall be deemed to relieve Landlord from such
responsibility or to create any liability by Tenant to third parties with
respect to the same. Landlord will and does hereby indemnify, defend and save
Tenant harmless from and against any and all claims, actions, damages, liability
and expense (including reasonable attorneys' fees) resulting from or based upon
the Approved Final Plans.
25.7 The Approved Final Plans for the Phase 2 - Building shall comply with
all applicable laws.
25.8 As promptly as is reasonably practicable following approval by
Landlord and Tenant of the Approved Final Plans, Landlord shall enter into
general contracts for the construction of all components of the Phase 2 -
Building with responsible contractors chosen by Landlord. Construction costs for
the Phase 2 - Building are to be a pass through of actual construction costs
resulting from a competitive bid process.
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25.9 After approval of the Approved Final Plans, Landlord shall commence
and prosecute with diligence and continuity to completion and in an orderly and
coordinated manner the construction of the Phase 2 - Building. Landlord shall
complete Landlord's Construction Obligations, as hereinafter defined, in
sufficient time to permit the respective components of the Phase 2 - Building to
be opened for business with the general public at times as set forth in the time
schedule mutually acceptable to Landlord and Tenant. Landlord's obligations
under this Article 25 are referred to herein as "Landlord's Construction
Obligations".
25.10 Upon completion and performance by Landlord of Landlord's
Construction Obligations with respect to the Phase 2 - Building, Tenant will
cause or construct and complete Tenant's Construction Obligations as promptly as
is reasonably possible. Tenant's obligations under this Article 25 are referred
to herein as "Tenant's Construction Obligations".
25.11 In order to facilitate the coordination of construction of the Phase
2 - Building, each party will consult with the other party from time to time and
will use reasonable efforts to coordinate its activities with those of the other
parties. The parties will agree upon a schedule which will provide among other
things for a timely exchange of information and approvals in order to enable
each party to meet its Construction Obligations under this Lease. The parties
recognize that it will be necessary for Landlord to be completing certain parts
of Landlord's Construction Obligations at the same time as Tenant shall be
performing Tenant's Construction Obligations. In order to facilitate the
coordination of such activities and to achieve the objective of opening the
Phase 2 - Building for business in the time period as stated above, the parties
will use reasonable efforts to develop such detailed construction schedules as
shall permit each of the parties to perform its respective construction work
without interference from the other.
Without limiting the generality of the foregoing, (i) Tenant will be
permitted to visit and have access to the Phase 2 - Building at all reasonable
times during construction and will be kept well informed as to construction
progress; and (ii) Tenant will be afforded an opportunity to make inspections of
the Phase 2 - Building at all reasonable times during construction in order to
determine progress and will be invited to attend all job meetings with
architects, engineers and contractors with respect to construction associated
with the completion of the Phase 2 - Building.
25.12 Landlord represents and warrants (i) that Building Laws permit the
construction of the Project contemplated by this Lease; and (ii) that the
parking as provided in Article 24 herein provides for a sufficient number of
parking spaces to comply with the requirements of applicable laws and of this
Lease with respect to the Project. Landlord shall attain, at its expense, all
governmental approvals, consents, authorizations, permits and certificates which
may be necessary to permit it to carry out and complete Landlord's Construction
Obligations and Tenant shall obtain all governmental approvals, consents,
authorizations, permits and certificates which may be necessary to permit the
performance of Tenant's Construction Obligations.
25.13 The obligations created by Section 25.1 through Section 25.13 shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns and shall further be deemed to be covenants
which run with the land; provided, however, the obligations created by Section
25.1 through Section 25.13 shall not create any personal or contractual
liability on any Mortgagee, or its successors a31nd assigns and; provided,
further, if Landlord violates the obligations created by Section 25.1 through
Section 25.13, Tenant may not terminate this Lease or holdback, offset or fail
to pay any amounts otherwise due under this Lease, but may pursue any other
right or remedy provided at law or in equity. Except as specifically provided
above with respect to any Mortgagee, the obligations created by this Article 25
shall be binding upon and inure to the benefit of the parties hereto and their
successors and assigns and shall further be deemed to be covenants which run
with the land.
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25.14 Notwithstanding anything in this Lease to the contrary, if within
four hundred eighty (480) days from the date Tenant provides Landlord with the
"request for proposal" referred to in Section 25.4, (i) Landlord and Tenant have
not agreed upon Approved Final Plans and modified this Lease as herein
anticipated, or entered into a new lease for the Phase 2 - Building as herein
anticipated; and (ii) Landlord has not commenced the construction of the Phase 2
- - Building on the North half of the Site as anticipated herein, Tenant shall
have the right to purchase for Two Million Seven Hundred Thousand and No/100
Dollars ($2,700,000.00) in cash, the unencumbered fee title to the land known as
the North half of the Site, as such is legally described as Parcel Two on
Exhibit A attached hereto and incorporated herein by this reference, and/or for
Two Hundred Fifty Thousand and No/I 00 Dollars ($250,000.00) in cash, the
unencumbered fee title to the land known as the DMDC Land, as legally described
as Parcel One on Exhibit B attached hereto and incorporated herein by this
reference. In the event Tenant elects to purchase the North half of the Site and
the DMDC Land pursuant to the terms and conditions of this Section 25.14, the
closing shall be at Tenant's executive office in the Building within thirty (30)
days after Tenant has given Landlord written notice of such election and at the
closing Landlord shall sell, close and convey to Tenant the unencumbered fee
title to the North half of the Site by special warranty deed in the form
attached hereto as Exhibit D and incorporated herein by this reference; and the
unencumbered fee title to the DMDC Land by special warranty deed in the form
attached hereto as Exhibit E and incorporated herein by this reference. In the
event Tenant acquires title to the North half of the Site and/or the DMDC Land
pursuant to the terms and conditions of this Section 25.14, the North half of
the Site and/or the DMDC Land shall be free from all conditions, covenants and
restrictions except for such items to which Tenant is a party of record, survey
matters first appearing after the date hereof, parties in possession and the
lien of unpaid real estate taxes then due but not payable and delinquent.
ARTICLE 26
UNPERFORMED COVENANTS
MAY BE PERFORMED BY OTHER PARTY
26.1 If Landlord shall fail to perform any of the terms, provisions,
covenants or conditions to be performed or complied with by Landlord pursuant to
this Lease, and any such failure shall, if it relates to a matter which is not
of an emergency nature, remain uncured for a period of thirty (30) consecutive
days after Tenant shall have served upon Landlord notice of such failure
(provided, however, if the failure is of such character as to reasonably require
more than thirty (30) days to cure, such thirty (30) day time period shall be
extended for a sufficient time to permit Landlord to cure such failure, so long
as Landlord has commenced to cure such failure within such thirty (30) day
period and is diligently curing such failure), or if appropriate corrective
measures are not initiated within twenty-four (24) hours after service of such
notice if, in Tenant's judgment reasonably exercised, such failure relates to a
matter which is of an emergency nature, then Tenant may at Tenant's option,
perform any such term, provision, covenant or condition and the full amount of
the cost and expense entailed shall immediately be owing by Landlord to Tenant,
and Tenant shall have the right to deduct the amount thereof, together with
interest at the rate of interest as provided in Section 4.3 of this Lease, from
any financial payments then due or thereafter coming due hereunder, and
irrespective of who may own or have an interest in the Demised Premises at the
time such deductions are made. The option given in this Section 26.1 is for the
protection of Tenant, and its existence shall not release Landlord from the
obligations herein provided to be performed by Landlord or deprive Tenant of any
legal rights which it may have by reason of any such default by Landlord.
32
26.2 If Tenant shall fail to perform any of the terms, provisions covenants
or conditions to be performed or complied with b Tenant pursuant to this Lease,
and any such failure shall, if it relates to a matter which is not of an
emergency nature, remain uncured for a period of thirty (30) consecutive days
after Landlord shall have served upon Tenant notice of such failure (provided,
however, if the failure is of such a character as to reasonably require more
than thirty (30) days to cure, such thirty (30) day time period shall be
extended for a sufficient time to permit Tenant to cure such failure so long as
Tenant has commenced to cure such failure within such thirty (30) day period and
is diligently curing such failure), or if appropriate corrective measures are
not initiated within twenty-four (24) hours after service of such notice if, in
Landlord's judgment reasonably exercised, such failure relates to a matter which
is of an emergency nature, then Landlord may, at Landlord's option, perform any
such term, provision, covenant or condition and the full amount of the cost and
expense entailed shall immediately be due and owing by Tenant to Landlord. The
option given in this Section 26.2 is for the protection of Landlord, and its
existence shall not release Tenant from the obligations herein provided to be
performed by Tenant or deprive Landlord of any legal rights which it may have by
reason of any such default by Tenant.
ARTICLE 27
LIENS
Tenant shall keep the Demised Premises free from any liens arising out of
any work performed, materials furnished on, in or to the Demised Premises, or
obligations incurred by Tenant. In the event that Tenant shall not, within ten
(10) days following the imposition of any such lien, cause the same to be
released of record by payment or posting of a proper bond, Landlord shall have,
in addition to all other remedies provided in this Lease and by law, the right,
but no obligation, to cause the same to be released by such means as it shall
deem proper, including payment of the claim giving rise to such lien. All such
sums paid by Landlord and all expenses incurred by it in connection therewith
shall be considered Additional Rent and shall be payable to it by Tenant on
demand with interest at the rate as set out in Section 4.3 above.
Notwithstanding the foregoing provisions of this Section 27, Tenant may in good
faith and with due diligence contest the validity of any lien and defer payment
and discharge thereof during the pendency of such contest provided: (i) that
such contest shall not have the effect of preventing the sale or forfeiture of
the Building, or any interest therein, to satisfy such lien; (ii) that, within
ten (10) days after Tenant has been notified of the filing of such lien, Tenant
shall have notified Landlord in writing of Tenant's intention to contest such
lien and posts with Landlord such security therefor as Landlord shall reasonably
request (for example, a bond or title indemnity); and (iii) Tenant shall
prosecute or cause such contest to be prosecuted with reasonable diligence and
shall pay or cause to be paid the amount of the lien plus any interest finally
determined to be due upon the conclusion of such contest.
ARTICLE 28
LANDLORDS COVENANTS; TITLE INSURANCE
Landlord covenants and warrants that: (i) Landlord is the fee owner of the
Site, DMDC Land, 12th Street Parking Land and Graham's Fine Arts Land; (ii) the
Demised Premises are free from any building, zoning or other restrictions that
would prevent or adversely affect the use of the Demised Premises as an office
building; and (iii) if Tenant pays the Base Rent and Additional Rent and other
amounts herein provided, and duly observes and performs all of the covenants,
terms and conditions hereof, Tenant shall peaceably and quietly hold, have and
enjoy the Demised Premises during the Lease Term without interruption by
Landlord or any person or persons claiming by, through or under Landlord,
subject to the terms and conditions of this Lease and future laws, ordinances,
orders, rules or regulations imposed by governmental or public authorities.
33
Landlord at its expense, has furnished Tenant, and Tenant has accepted and
approved, a Pro Forma Policy ("Commitment") for a policy of title insurance,
issued August 21, 1995, as revised as File No. T95-5721 by Security Land Title
Company, as agent for First American Title Insurance Company ("Title Company")
and insuring Tenant's interests in the Demised Premises, DMDC Land; 12th Street
Parking Land and the Graham's Fine Arts Land, together with the Principal
Parking Agreement and City Tax Abatement Proceedings, including identification
of any liens, tenancies, agreement, encumbrances and other matters of public
record. Landlord at its sole cost and expense shall cause a title policy, with
endorsements as required by Tenant, and in the amount of $20,000,000.00, to be
issued to Tenant pursuant to the Commitment and dated as of the date on which a
fully executed copy of this Lease shall have been delivered without conditions
by Tenant, or its agents, employees or contractors. Landlord shall within
forty-five (45) days after the request of Tenant and at no cost or expense to
Tenant, cause an ALTA 3.1 endorsement to be issued by the Title Company pursuant
to the Commitment; provided, however, any such request by. Tenant may not be
made until after Tenant's receipt of an "as built" survey which shall be
delivered by Landlord to Tenant within sixty (60) days following the Term
Commencement Date.
ARTICLE 29
INDEMNIFICATION
29.1 Subject to Section 11.3 above Tenant shall indemnify and hold harmless
Landlord and the management agent of the Building and said persons, agents,
employees and servants against any and all liabilities, obligations, claims,
demands, costs and expenses of every kind and nature, including reasonable
attorneys' fees resulting from any injury to or death to any person or damage to
any property caused by Tenant or any subtenant or their respective employees,
agents, guests, servants, invitees or customers.
29.2 Subject to Section 11.3 above, Landlord shall indemnify and hold
harmless Tenant and its agents, employees, servants and invitees against any and
all liabilities, obligations, claims, demands, costs and expenses of every kind
and nature, including reasonable attorneys' fees, resulting from any injury to
or death to any person or damage to any property caused by Landlord or its
employees, agents, guests, servants, invitees or customers.
ARTICLE 30
PERSONAL PROPERTY TAXES
Tenant shall pay or cause to be paid, before delinquency, any and all
taxes, assessments, license fees and other charges levied or assessed which
become payable during the Term hereof, upon all Tenant's equipment, furniture,
fixtures, and personal property located in the Demised Premises. On demand by
Landlord, Tenant shall furnish Landlord with evidence of any such payment.
ARTICLE 31
NO PARTNERSHIP
Nothing contained herein shall be deemed or construed by the parties
hereto, nor by any third party, as creating the relationship of principal and
agent or of partnership or of joint venture between the parties hereto. It being
understood and agreed that neither the method of computation of Base Rent or
Additional Rent, nor any other provision contained herein, nor any acts of the
parties herein, shall be deemed to create any relationship between the parties
hereto other than the relationship of landlord and tenant.
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ARTICLE 32
RIGHT OF FIRST REFUSAL
32.1 (a) In the event Landlord receives an offer for the purchase of the
Project, or the Phase 2 - Building, which Landlord is ready to accept, Landlord
shall in writing notify Tenant of such offer and all of the terms thereof
including with such notice a copy of such offer if in writing, and Tenant shall
have twenty (20) days from receipt of such offer to notify Landlord that it has
elected to purchase the Project and/or the Phase 2 - Building on the same terms
and conditions as contained in such offer. In such event the parties shall close
such purchase in the same manner and subject to the same terms and conditions as
provided in such offer except the time requirements may be extended for thirty
(30) days or as otherwise agreed upon by the parties. If Tenant does not elect
to purchase the Project and/or the Phase 2 - Building, the Landlord is free to
sell the same in accordance with the terms and conditions of such offer. In the
event such sale is not closed by Landlord and the offeror for any reason, the
terms and conditions of this Section 32.1 shall again be applied to any other
offers which Landlord is ready to accept.
(b) Notwithstanding anything contained in 32.1(a) above to the contrary, in
the event Mortgagee acquires title to the Project through possession,
foreclosure proceeding or delivery of a deed in lieu of foreclosure, and
thereafter receives an offer for the purchase of the Project, or the phase
2-Building, which Mortgagee is ready to accept, Mortgagee shall in writing
notify Tenant of such offer and all of the terms thereof, and Tenant shall have
seven (7) business days from receipt of such offer to notify Landlord that it
has elected to purchase the Project and/or the Phase 2-Building on the same
terms and conditions as contained in such offer. In such event the parties shall
close such purchase in the same manner and subject to the same terms and
conditions as provided in such offer. If Tenant does not elect to purchase the
Project and/or the Phase 2-Building from Mortgagee, the Mortgagee is free to
sell the same in accordance with the terms and conditions of such offer and
thereafter such offeror shall be free to further sell the Project and/or the
Phase 2- Building free of any restrictions under this Article 32. In the event
such sale is not closed by Mortgagee and the original offeror for any reason,
the terms and conditions of this Section 32.1(b) shall again be applied to any
other offers which Mortgagee is ready to accept.
32.2 Notwithstanding Section 32.1 above, Landlord may not transfer all or
any portion of its fee interest in the Project, DMDC Land, 12th Street Parking
Land or the Graham Fine Arts Land prior to the Term Commencement Date of this
Lease; provided, however, Landlord may sell or transfer all or any portion of
its interest in the Project, the DMDC Land, 12th Street Parking Land or the
Graham Fine Arts Land by way of a mortgage for purposes of financing the
development of the Project and the construction, development and operation of
the Site and the Building thereon, including both interim and permanent
financing and; provided, further, that after the Term Commencement Date,
Landlord may also assign or transfer its ownership interest in the Project, the
DMDC Land, 12th Street Parking Land or the Graham Fine Arts Land to an Iowa
limited partnership whose sole general partner is The Graham Group, Inc. and,
provided, further The Graham Group, Inc. owns more than fifty percent (50%) of
all ownership interests in such limited partnership and all remaining ownership
interests are held by (i) John G. Graham or Barbara H. Graham, husband and wife
and residents of Des Moines, Iowa, or their lineal descendants, and (ii)
officers or directors of The Graham Group, Inc. In no event shall any such
assignment or transfer cause Landlord to be released, relieved or discharged
from any of its covenants, obligations and liabilities under this Lease. Any
permitted transferee or assignee shall enter into an assumption agreement
reasonably satisfactory to Tenant, which assumption agreement provides for the
assumptor assuming all obligations of Landlord under this Lease. Landlord shall
notify Tenant of any such transfer or assignment and include with such notice a
copy of the transfer or assignment document, or other evidence or explanation of
the transfer or assignment. No sale or transfer of the Project, DMDC Land, 12th
Street Parking Land or Graham Fine Arts Land, or interests in the Landlord,
whether permitted or not, shall relieve Landlord from its obligations under this
Lease.
35
ARTICLE 33
WAIVER
All waivers hereunder must be in writing and specify the act, omission,
term, covenant or condition waived. The waiver by Landlord or Tenant of any
term, covenant or condition of this Lease shall not be deemed to be a waiver of
such term, covenant or condition on any subsequent breach of the same or any
other term, covenant or condition.
ARTICLE 34
INJUNCTION
In the event of a breach by Landlord or Tenant of any of the terms,
covenants, conditions, provisions or agreements of this Lease, Landlord and
Tenant shall additionally have the right of injunction.
ARTICLE 35
CUMULATIVE RIGHTS
All rights and remedies of Landlord and Tenant herein enumerated shall be
cumulative and none shall exclude any other right or remedy allowed by law.
ARTICLE 36
AUTHORITY OF PARTIES
Each individual executing this Lease on behalf of Landlord or Tenant, as
the case may be, represents and warrants that he or she is duly authorized to
execute and deliver this Lease on behalf of that entity, in accordance with a
duly adopted resolution of its board of directors and that this Lease is binding
upon Landlord or Tenant, as the case may be, in accordance with its terms.
ARTICLE 37
CUMULATIVE REMEDIES
No remedy or election hereunder by Landlord or Tenant shall be deemed
exclusive, but shall be cumulative with all other remedies at law or in equity.
ARTICLE 38
HOLDING OVER
Tenant shall not be entitled to hold over in the Demised Premises after the
expiration or sooner termination of the Term. Tenant shall indemnify Landlord
for, and hold Landlord harmless from and against, any and all loss, cost,
damage, liability, or expenses (including, without limitation, reasonable
attorneys' fees) arising out of or in connection with any delay by Tenant in
surrendering the Demised Premises, including, without limitation, any claims
made by any succeeding tenant which are founded on such delay. If Tenant does
holdover, Tenant shall be deemed to be a tenant-at-will and, in addition to all
other sums due under this Lease, shall pay to Landlord base rent plus additional
rent on a per diem basis in amount equal to one and one-half times the Base Rent
and Additional Rent payable during the last full calendar month of the Term.
ARTICLE 39
STRUCTURAL WEAKNESS
Landlord covenants and agrees that in the event that at any time during the
Lease Term, any excavation or building operation shall be conducted on any
property adjacent to or abutting the Project, or in the event that any operation
shall be commenced under or in connection with any adjoining street or alley, or
in the event it shall be necessary for any reason, other than due to overloading
by Tenant, to strengthen the foundations of the Building, then and in each such
36
event, Landlord shall, at no cost or expense to Tenant, cause to be done and
furnished, any and all necessary work, labor and material in connection with,
and for the purpose of shoring upon and protecting the walls and structural
members of the Building.
ARTICLE 40
COVENANTS BINDING AND SUCCESSORS
All covenants and agreements herein contained shall run with the land and
shall be binding upon and inure to the benefit of the successors and assigns of
the respective parties hereto whether or not expressly stated herein, and the
parties and their successors shall be bound jointly and severally by this Lease.
ARTICLE 41
SHORT FORM
Simultaneously with the execution of this Lease, Landlord and Tenant are
executing a short form instrument or memorandum of this Lease for recording in
the land records of Polk County, Iowa, to give notice of this Lease, and setting
forth a description of the Demised Premises, the Lease Term, Tenant's right of
first refusal to purchase the Project or the Phase 2 - Building, Tenant's right
to purchase the North half of the Site, Tenant's rights to purchase the DMDC
Land, Landlord's obligation to reacquire the DMDC Land, and other portions
hereof (except rental and other economic provisions) as either party may
reasonably request. Within thirty (30) days after the Tern Commencement Date, or
any time thereafter upon the reasonable request of either party, the parties
hereto shall execute in recordable form an instrument supplementing such
instrument or memorandum for the purpose of specifically designating in writing
the Term Commencement Date, and the date of expiration of the initial Lease
Term. The cost and expense of recording these instruments shall be divided
equally between Landlord and Tenant.
ARTICLE 42
COSTS AND FEES
If either party incurs any reasonable attorneys' fees or court costs as a
result of the other party's failure to perform any of the obligations hereunder,
the prevailing party shall be reimbursed by the non-prevailing party for such
reasonable expenses, and any such reasonable expenses that have not been paid or
reimbursed by such non- prevailing party, may be added to or included in any
judgment rendered in the prevailing party's favor in any lawsuit or other
proceeding.
ARTICLE 43
WAIVER
No waiver by Landlord or Tenant of any breach of any term, covenant or
condition hereof shall be deemed a waiver of the same or any subsequent breach
of the same or any other term, covenant or condition. The acceptance of Base
Rent or Additional Rent by Landlord, or the acceptance by Tenant of monies from
Landlord, shall not be deemed a waiver of any earlier breach by Tenant or
Landlord of any term, covenant or condition hereof, regardless of Landlord or
Tenant's knowledge of such breach when such rent or monies are accepted. No
covenant, term or condition of this Lease shall be deemed waived by Landlord or
Tenant unless waived in writing. The consent or approval by Landlord to or of
any act by Tenant requiring Landlord's consent or approval shall not be deemed
to waive or render unnecessary Landlord's consent or approval to or of any
subsequent similar or non-similar act by Tenant, and the consent or approval by
Tenant to or of any act by Landlord requiring Tenant's consent or approval shall
not be deemed to waive or render unnecessary Tenant's consent or approval to or
of any subsequent similar or non-similar act by Landlord.
37
ARTICLE 44
NUMBER AND GENDER
The use herein of a singular term shall include the plural and use of the
masculine, feminine or neuter genders shall include all others.
ARTICLE 45
BROKER'S COMMISSION
Each party represents and warrants that it has caused or incurred no claims
for brokerage commissions or finder's fees in connection with the execution of
this Lease, and each party shall indemnify and hold the other harmless against
and from all liabilities arising from any such claims caused or incurred by it
(including without limitation, the cost of reasonable attorneys' fees in
connection therewith).
ARTICLE 46
HEADINGS
The Section headings, Article headings, table of contents, index of
definitions and Section and Article numbers in this Lease are for the purposes
of convenience, reference and heading only, and the words contained therein and
division thereof shall in no way be held to explain, modify or aid in the
interpretation, construction or meaning of the provisions of this Lease.
ARTICLE 47
PARTIAL INVALIDITY
If any provision of this Lease or the application thereof to any person or
circumstance shall to any extent be invalid or unenforceable, the remainder of
this Lease, of the application of such provision to persons or circumstances
other than those as to which it is invalid or unenforceable, shall not be
affected thereby and each provision of this Lease shall be valid and enforceable
to the fullest extent permitted by law.
ARTICLE 48
ENTIRE AGREEMENT
There are no representations, covenants, warranties, promises, agreements,
conditions or undertakings, oral or written, between Landlord and Tenant other
than herein set forth. Except as herein otherwise provided, no subsequent
alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless in writing and signed by them.
ARTICLE 49
COUNTERPARTS
This Lease may be executed in several counterparts, each of which shall be
deemed an original.
ARTICLE 50
SURVIVAL
Notwithstanding anything to the contrary contained in this Lease, the
termination of this Lease shall not relieve Landlord from Landlord's, nor Tenant
from Tenant's, rights and obligations accruing and applicable to the period
prior to such termination. In addition to and notwithstanding anything contained
herein to the contrary, all provisions contained in this Lease relating to the
Phase 2 - Building (including, without limitation, all provisions relating to
the construction of the Phase 2 - Building by Landlord, the DMDC Land and the
construction of the DMDC Ramp) shall survive the termination of this Lease and
shall continue as the ongoing rights and obligations of The Graham Group, Inc.
and the Equitable Life Insurance Company of Iowa in accordance with their terms.
38
ARTICLE 51
TIME OF ESSENCE
Time is of the essence in this Lease and of all of the terms, provisions,
agreements and conditions contained herein.
ARTICLE 52
APPLICABLE LAW
This Lease shall be construed under the laws of the State of Iowa.
ARTICLE 53
ACCOUNTING AND AUDIT
Landlord shall keep complete and accurate books and records of the
Operating Expenses. Landlord shall preserve for a period of three (3) years
after the end of each Lease Year, all of such books and records for such lease
year. Such books of record and account shall be kept and maintained in
accordance with generally accepted accounting practices consistently applied.
Tenant shall have the right, at its sole cost and expense, during the aforesaid
period of three (3) years at reasonable times during business hours, upon notice
to Landlord and within sixty (60) days thereafter, but not more often than the
once each lease year, to examine and audit all such books and records for such
lease year.
ARTICLE 54
SKYWALKS
Landlord shall not enter into any contract which would permit a skywalk
bridge or skywalk corridor to be connected to the Building, or the Phase 2 -
Building, without the receipt of the prior written approval of Tenant, which
approval may be withheld by Tenant in its sole and absolute discretion.
ARTICLE 55
LIMITATION OF MORTGAGEE'S LIABILITY
Notwithstanding anything in this Lease to the contrary, the obligations
created hereby shall not create any personal liability on any Mortgagee who
acquires title to the Project through possession, foreclosure proceeding or
delivery of a deed in lieu of foreclosure. Tenant acknowledges and agrees that
it shall look solely to Mortgagee's interest in the Project for satisfaction of
any liability under or in respect of this Lease or for the satisfaction of
Tenant's remedies for the collection of a judgment (or other legal process)
requiring the payment of money by Mortgagee and no other property and assets of
Mortgagee shall be subject to levy, execution or other enforcement procedure for
the satisfaction of Tenant's remedies under or in respect of this Lease.
39
IN WITNESS WHEREOF, the parties have caused this Lease to be executed as of
the day and year first above written.
LANDLORD:
THE GRAHAM GROUP, INC.
an Iowa Corporation
By /s/ George D. Milligan
--------------------------------------
Name George D. Milligan
Title President
ATTEST:
By: /s/ Charles R. Taylor
----------------------
Name Charles R. Taylor
Title Secretary
TENANT:
EQUITABLE LIFE INSURANCE COMPANY
OF IOWA, an Iowa Corporation
By: /s/ Christopher R. Welp
-------------------------------------
Name Christopher R. Welp
Title Vice President - Tax & Support
Services
ATTEST:
By: /s/ Paul E. Larson
----------------------
Name Paul E. Larson
Title Executive Vice President &
Chief Financial Officer
40
FOR LANDLORD:
STATE OF IOWA )
) SS:
COUNTY OF POLK )
On this 31st day of August, 1995, before me a Notary Public in and for the
State of Iowa, personally appeared George D. Milligan and Charles R. Taylor, to
me personally known, who being by me duly sworn did say that they are the
President and Secretary, respectively, of THE GRAHAM GROUP, INC., an Iowa
corporation, and that the foregoing Lease was signed and sealed on behalf of
said corporation and the said George D. Milligan and Charles R. Taylor
acknowledged the execution of said instrument to be the voluntary act and deed
of s corporation for e uses and purposes therein set forth.
-------------------------------------------
Notary Public in and for the State of IOWA
My Commission Expires: 2-1-98
FOR TENANT:
STATE OF IOWA )
)SS:
COUNTY OF POLK )
On this 31st day of August, 1995, before me a Notary Public in and for the
State of Iowa, personally appeared Christopher R. Welp and Paul E. Larson, to me
personally known, who being by me duly sworn did say that they are the Vice
President - Tax & Support Services and Executive Vice President & Chief
Financial Officer, respectively, of EQUITABLE LIFE INSURANCE COMPANY OF IOWA, an
Iowa corporation, and that the foregoing Lease was signed and sealed on behalf
of said corporation and the said Christopher R. Welp and Paul E. Larson
acknowledged the execution of said instrument to be the voluntary act and deed
of said corporation for the uses and purposes therein set forth.
__________________________________________
Notary Public in and for the State of IOWA
My Commission Expires: 2-1-98
EXHIBIT "A"
LEGAL DESCRIPTION
Parcel One
(South half of Site identified as Parcels B and C
on the Survey prepared by LandTech Services, Inc.)
Lots 2 and 3 (except the North 8 feet thereof) of the OFFICIAL PLAT OF BLOCK 2
OF CAMPBELL AND McMULLEN ADDITION TO FORT DES MOINES; Also Lot 5 of the OFFICIAL
FLAT OF THE SOUTHWEST 1/4 OF SECTION 4, TOWNSHIP 78 NORTH, RANGE 24 WEST OF THE
5TH P.M., now included in and forming a part of the City of Des Moines, Folk
County, Iowa.
The South 8.0 feet of Lot 1 and the North 8.0 feet of Lots 2 and 3 of the
OFFICIAL PLAT OF BLOCK 2 OF CAMPBELL AND McMULLEN ADDm0N TO FORT DES MOINES; and
the South 16.0 feet of Lot 4 of the OFFICIAL PLAT OF THE SOUTHWEST 1/4 OF
SECTION 4, TOWNSHIP 78 NORTH, RANGE 24 WEST OF THE 5TH F.M., all now being in
and forming a part of the City of Des Moines, Polk County, Iowa.
Parcel Two
(North half of the Site identified as Parcel A
on the Survey prepared by LandTech Services, Inc.)
Lot 1 (except the South 8 feet thereof) of the OFFICIAL PLAT OF BLOCK 2 OF
CAMPBELL AND McMULLEN ADDITION TO FORT DES MOINES; Also Lot 4 (except the South
16 feet thereof) of the OFFICIAL PLAT OF THE SOUTHWEST 1/4 OF SECTION 4,
TOWNSHIP 78 NORTH, RANGE 24 WEST OF THE 5TH P.M., now included in and forming a
part of the City of Des Moines, Polk County, Iowa (except streets and alleys).
EXHIBIT "B"
LEGAL DESCRIPTION
DMDC LAND - PARCEL 1
- ---------
Lots 1, 2, 7 and 8 in Block 4 in WEST FORT DES MOINES SUBDIVISION, an Official
Hat included in and forming a part of the City of Des Moines, Iowa.
12TH STREET PARKING LAND - PARCEL 2
- ------------------------
Lots 5 and 6 in Block 25, in CAMPBELL AND MCMULLEN ADDITION, now included in and
forming a part of the City of Des Moines, Iowa.
GRAHAM'S FINE ARTS LAND - PARCEL 3
- -----------------------
Lot 6 (except the North 7 feet for street purposes) and all of Lot 5, Block 3 in
CAMPBELL AND McMULLEN ADDITION now included in and forming a part of the City of
Des Moines, Iowa.
PRINCIPAL LAND - PARCEL 4
- --------------
Lots 1,2, 3, 4 and 5 of the OFFICIAL FLAT OF LOTS 1,2 and 3 in Block 3 of
HOLCOMB'S ADDITION TO FORT DES MOINES; Lots 4, land 6 in Block 3 in HOLCOMB'S
ADDITION TO FORT DES MOINES; Lots 2, 3, 4 and 5 in Block 60 in CAMPBELL AND
MCMULLEN ADDITION TO TOWN OF FORT DES MOINES; Lot 3 of the OFFICIAL PLAT of the
Southwest Quarter (SW 1/4) of Section 4, Township 78 North, Range 24, West of
the St P and all of the Vacated North/South alley right-of-way lying East of and
adjoining said Lot 4 in Block 60 in Campbell and McMullen Addition to Town of
Fort Des Moines and lying East of and adjoining Lots 4 and 6 in Block 3 in
Holcomb's Addition to Fort Des Moines, all now included in and forming a part of
the City of Des Moines, Iowa.
EXHIBIT "C"
THE GRAHAM GROUP, INC.
910 GRAND AVENUE
DES MOINES, IOWA 50309
REAL ESTATE DEVELOPMENT
PROPERTY MANAGEMENT TELEPHONE
AND SALES (515)244-0387
INTERIOR DESIGN FAX
INVESTMENTS (515)244-6815
GENERAL C0NTRACTING
April 21, 1995
Christopher R Welp
Vice President - Tax and Support Services
Equitable of Iowa Companies
700 Locust Street, Suite 201
Des Moines, Iowa 50306-3700
RE: Phase 1 - Building comprising approximately 203,997 square feet of Usable
Area consisting of 6 floors above grade, in addition to an underground
parking garage containing 100 parking stalls, to be located on a downtown
block bordered by 9th Street on the East, 10th Street on the West, Grand
Avenue on the North, and Locust Street to the South, in Des Moines, Iowa
(the "Site")
Dear Mr. Welp:
In connection with the development of the above referenced Phase I - Building
and Site, a letter of intent dated April 21, 1995 (the "Letter of Intent") was
entered into by you, as Vice President - Tax and Support Services on behalf of
Equitable of Iowa Companies and the undersigned, as President on behalf of The
Graham Group, Inc. The Letter of Intent references to this letter for purposes
of explaining the methodology in determining initial Base Rent per square foot
of Usable Area for the Phase I - Building. Base Rent per square foot of Usable
Area for the Phase 2- Building, if applicable, shall be calculated pursuant to
the same methodology as was used for the Phase I - Building. The methodology for
establishing Base Rent per square foot of Usable Area for the Phase 1 - Building
was as follows:
Phase I Building Methodology for Calculating Base Rent
------------------------------------------------------
Debt $ 17,300,000
Equity (Cash) 3,400,000
Equity (Land) (1) 2,000,000
-------------
TOTAL SOURCES: $ 22,700,000
Christopher R. Welp
April 21, 1995
Page 2
Sitework/Parking 1,475,000
Architect Fees 530,000
Building Shell (2) 11,088,000
Tenant Improvements 5,100,000
Real Estate Commission 300,000
Loan Fees 173,000
Development Fee 300,000
Owner Contingency 231,000
Loan Closing Costs 60,000
Land (1) 2,000,000
Construction Period Interest 1,443,000
-------------
TOTAL USES $ 22,700,000
Base Rent $ 11.95
-------------
Rental income (168,024 x 11.95) 2,007,887
Parking Income (Estimated) 70,000
-------------
TOTAL INCOME $ 2,077,887
Annual Debt Service $ 1,636,822
(8.25% with 25 yr. amortization;
assumes approximate 115 spread
over 10-year Treasuries and
continued creditworthiness of
Equitable)
Possible Discretionary Cash $ 441,065
Debt Service Coverage: 1.25
Possible cash return if
construction and financing
assumptions are correct 8%
Christopher R. Welp
April 21, 1995
Page 3
(1) If the Phase 2- Building is developed, the North half of the Site shall be
assumed to have a land value of $2,000,000.
(2) Construction costs for the Phase 2 - Building, if applicable, are to be a
pass through of actual construction costs resulting from a competitive bid
process.
By way of illustration, based upon a loan of $17,300,000 (the "Loan") which is
assumed to be 76% of the value of the Total Uses, with an interest rate of 8
1/4% which is approximately 115 basis points over the most recently issued ten
year United States Treasury Security as determined in accordance with standard
United States Government securities practice and a 25 year amortization period,
annual payments of principal and interest would be $1,636,822. Since the Loan
requires annual payments of Base Rent, plus estimated parking income, to be at
least 1.25 (actual calculations for the Phase 1 - Building create debt service
coverage of 1.269) times the annual payments of principal and interest required
to be paid under the Loan, Base Rent plus parking income (estimated) must in the
aggregate be at least $2,077,887. Assuming parking income (estimated) of
$70,000, Base Rent must be $2,007,887. In addition, if the construction
financing assumptions are correct, it is to be assumed that the Landlord is
entitled to a cash return of 8% on its $5,400,000 equity position. Given the
above requirements and assumptions, Base Rent plus parking income (estimated)
must in the aggregate be $2,077,887 (annual debt service of $1,636,822 plus
possible discretionary cash return on equity of $441,065). Assuming parking
income (estimated) of $70,000, Base Rent must be $2,007,887 which results in
Base Rent per square foot of Usable Area of $11.95.
The above stated methodology was developed by us on the assumption that the
Phase 1 - Building would be composed of 168,024 square feet of Usable Area
consisting of five floors above grade, when in fad the Phase I - Building is to
be composed of approximately 203,997 square feet of Usable Area consisting of
six floors above grade. The addition of an additional floor of the Phase I -
Building does not affect the pricing methodology described herein. Likewise, the
methodology will not vary with respect to the Phase 2- Building regardless of
the number of floors contained in the Phase 2- Building.
The Phase 2- Building, if applicable, shall also assume that Landlord's equity
(land) value is $2,000,000. We are also assuming the creditworthiness of Tenant
on the date Landlord and Tenant enter into a lease providing the Phase 2-
Building will be equal to or better than that as of the date Landlord and Tenant
enter into the Lease providing for the development of the Phase 1 - Building, or
an appropriate adjustment shall be made to the 115 basis points spread as such
is described above.
It is understood that the above described methodology is to be employed in
computing the Base Rent for the Phase 2 - Building, if and when, such is built
in accordance with the terms of Paragraph 9 of the Letter of Intent.
Christopher R. Welp
April 21, 1995
Page 4
If the above methodology is acceptable to you, please so indicate by signing and
returning to me two copies of this letter.
Very truly yours,
THE GRAHAM GROUP, INC.
George D. Milligan, President
The undersigned hereby consents
and agrees to the foregoing.
EQUITABLE OF IOWA COMPANIES
By:/s/ Christopher R. Welp
-----------------------------
Name: Christopher R. Welp
Its: Vice President - Tax and Support Services
Date: April 27, 1995
--------------
EXHIBIT "C"
NYEMASTER, GOODE, MCLAUGHLIN, VOIGTS,
WEST, HANSELL & O'BRIEN
A PROFESSIONAL CORPORATION
ATTORNEYS AND COUNSELORS AT LAW
JOHN J. MCLAUGHLIN THOMAS N. ZUREK JAMES C. WINE NORBERT W. KAUT 1900 HUB TOWER
L.R. VOICTS CARLTON T. KING BRUCE W. BAKER KRISTIN DARNELL FYDA 699 WALNUT STREET
DREW R. TILLOTSON GREGORY P. PAGE THOMAS W. FOLEY ANDRE H. MERRETT DES MOINES IOWA 50309
JAMES B. WEST RANDALL G. HORSTMANN STEVEN H. LYTLE DARCI L. FRAHM (515)283-3100
EDGAR F. HAMSELL JAY EATON TERRY C. HANCOCK JASON P. THEIN
W. DON BRITTIM, JR. BURNS MOSSMAN ANTHONY A. LONGNECKER
R. CRAIG SHIVES PHYLLIS E. PEARSON JOHN E. LANDESS
DON MUYSKENS BRADFORD L. AUSTIN JOSEPH A. QUINN
ROGER L. FERRIS SARAJ. SERSLAND WADE H. SCHUT FACSIMILE (515) 283-3108
LAWRENCE E, MYERS HAYWARD L. DRAPER MARK 0. ALJETS OF COUNSEL
KEITH E. LUCHTEL JAMES E. GRITZNER G. THOMAS SULLIVAN RAY NYEMASTER WRITER'S DIRECT DIAL NUMBER
(515) 283-3105
GERALD J. NEWBROUGM MICHAEL W. THRALL KEVIN F. HOWE D.J. GOODE
ROBERTA. VAMORSOEL MARK C. DICKINSON JOAN FLETCHER SAMUEL 0. O'BRIEN
RICHARD J. SAPP GREGORY B. WILCOX THOMAS H. WALTON FRANK B. COMFORT
G.R. NEUMANN JOHN F. LORENTZEN WILLARD L. BOYD III LUTHER L. HILL, JR.
JAMES R. MUMFORD STEVEN J. ROY LISETTE SELL MILTON 0. RIEPE
RUSSELL E. SCHRAGE FRANK B. MARTY JOHN W. WETHERELL THOMAS H. MCCOLLUM
May 24, 1995
Charles Taylor, Esq.
The Graham Group, Inc.
910 Grand Avenue
Des Moines, Iowa 50309
RE: Phase 1-Building ("Phase I - Building') comprising approximately 203,997
square feet of Usable Area consisting of 6 floors above grade, in addition
to an underground parking garage containing 100 parking stalls, to be
located on a downtown block bordered by 9th Street on the East, 10th Street
on the West, Grand Avenue on the North, and Locust Street to the South, in
Des Moines, Iowa (the "Site")
Dear Charlie:
Enclosed you will find two "compared" and "clean" copies of the revised form of
Lease Agreement ("Lease') between The Graham Group, Inc. (`Landlord") and
Equitable of Iowa Companies ("Tenant"). To expedite the transaction I am sending
you the enclosures before Tenant has had an opportunity to review the same.
Accordingly, the enclosures are subject to Tenant's review and comment.
It is my understanding that you may be sending the Lease to Commerce Bank of
Kansas City for its review. Such procedure is fine with us. As stated before, in
the event you feel it is desirable for Commerce Bank, you and Ito get together
to "overview" the Lease, I am more than willing to do the same.
While there may be certain areas of the Lease with which both of us have
continuing concerns, the one major area of concern that I am left with deals
with the Exhibit "C" - Methodology Letter. In accordance with your request, the
sole references to the Methodology Letter appear in Section 25.2 of the Lease
and also as Exhibit "C" to the Lease. Jam still troubled by the absence in the
Methodology Letter of a clarification with respect to certain points which
include the following:
Charles Taylor, Esq.
May 24, 1995
Page 2
1. The Methodology Letter states that "Construction costs for the Phase 2 -
Building, if applicable, are to be a pass through of actual construction costs
resulting from a competitive bid process". The Landlord has indicated in prior
discussions with the Tenant that no "profit" is being taken by the Landlord, or
any of its affiliates, in connection with the development of the Phase I -
Building with the exception of a modest "Development Fee" of $300,000.00.
Notwithstanding, I assume that the above means that Landlord is taking out a
reasonable cost factor attributable to its "overhead" but is not taking out any
"profit". I assume this would also be the case in the construction of the Phase
2 - Building, if applicable. However, in connection with the Phase 2 - Building,
if neither the Landlord, nor one of its affiliates, is the contractor, I would
assume that a reasonable "overhead" and "profit" factor would have to be paid to
the contractor but neither the Landlord, nor one of its affiliates, would take a
"Development Fee", "overhead charge" or other payment.
2. I would assume that there would be no real estate commission paid in
connection with the development of the Phase 2 - Building.
3. I would assume the "Development Fee" would be a comparable percentage of
the "Total Uses" in connection with the development of the Phase 2 - Building,
as such would be modified by (I) above.
I am encouraged by your feeling the financing methodology works in a high,
medium or low interest rate market. In any event, assuming that the above fairly
states the positions of the Landlord, and its affiliates, I believe it is the
Tenant's present intentions to limit discussion regarding the Methodology Letter
to those in the Lease, the Methodology Letter and this letter.
Should your conclusions with respect to the above described points which appear
in the Methodology Letter be as described above, please so indicate by signing
and returning to me the enclosed copy of this letter. Thank you for giving the
above your attention.
Very truly yours,
Russell E. Schrage
RES/kkb
Enclosures
cc: Christopher R. Welp
The undersigned hereby agrees to the foregoing.
THE GRAHAM GROUP, INC.
By: /s/
----------------------------
Name:___________________________
Title:__________________________
Date:___________________________
THE IOWA STATE BAR ASSOCIATION I FOR THE LEGAL EFFECT OF THE USE OF
Official Form No. 105 THIS FORM. CONSULT YOUR LAWYER
EXHIBIT "D"
- --------------------------------------------------------------------------------
SPACE ABOVE THIS LINE
FOR RECORDER
SPECIAL WARRANTY DEED
For the Consideration of Ten ($10.00) ____________________________Dollar(s) and
other valuable consideration, THE GRAHAM GROUP, INC., do hereby Convey to
EQUITABLE LIFE INSURANCE COMPANY OF IOWA, an Iowa corporation the following
described real estate in ________ County, Iowa:
Lot 1 (except the South 8 feet thereof) of the OFFICIAL PLAT OF BLOCK 2 OF
CAMPBELL AND McMULLEN ADDITION TO FORT DES MOINES: also Lot 4 (except the South
16 feet thereof) of the OFFICIAL PLAT OF THE SOUTHWEST 1/4 OF SECTION 4,
TOWNSHIP 78 NORTH, RANGE 24 WEST OF THE 5TH P.M., now included in and forming a
part of the City of Des Moines, Polk County, Iowa (except streets and alleys).
Subject to all "Permitted Exceptions" as appear on Exhibit 1 attached hereto and
incorporated herein by this reference.
Grantors do Hereby Covenant with Grantees and successors in interest to
Warrant and Defend the real estate against the lawful Claims of all persons
claiming by, through or under them, except as may be above stated. Each of the
undersigned hereby relinquishes all rights of dower, homestead and distributive
share in and to the real estate.
Words and phrases herein, including acknowledgment hereof, shall be
construed as in the singular or plural number, and as masculine or feminine
gender, according to the context.
STATE OF Iowa) Dated:_____________
) ss
Polk COUNTY )
THE GRAHAM GROUP, INC.
By:
_______________________________
Name:____________________________
Title:___________________________
On this _______ day of _____________ 199__, before me, (Grantor) the
undersigned, a Notary Public in and for said State, personally appeared
____________________________________________________________ (Grantor) to me
known to be the identical persons named in and who executed the foregoing
instrument and acknowledged that they executed the same as
______________________ their voluntary act and deed.
(Grantor)
______________________
______________________ ________________________________
Notary Public
(Grantor)
(This form of acknowledgement for individual grantor(s) only)
STATE OF _____________
______________________ COUNTY, ss:
On this ______ day of ______________, 199___ before me, the undersigned, a
Notary Public in and for said State, personally appeared
__________________________________ to me known to be the identical persons named
in and who executed the foregoing instrument, and acknowledged that they
executed the same as their voluntary act and deed.
______________________________
Notary Public
EXHIBIT 1
Permitted Exceptions
--------------------
1. Items to which Equitable Life Insurance Company of Iowa is a party of
record.
2. Survey matters first appearing after the date hereof
3. Parties in possession.
4. Real Estate Taxes then due but not payable and delinquent.
THE IOWA STATE BAR ASSOCIATION I FOR THE LEGAL EFFECT OF THE USE OF
Official Form No. 105 THIS FORM. CONSULT YOUR LAWYER
EXHIBIT "E"
- --------------------------------------------------------------------------------
SPACE ABOVE THIS LINE
FOR RECORDER
SPECIAL WARRANTY DEED
For the Consideration of Ten ($10.00) Dollar(s) and other valuable
consideration, THE GRAHAM GROUP, INC., an Iowa corporation do hereby Convey to
EQUITABLE LIFE INSURANCE COMPANY OF IOWA, an Iowa corporation the following
described real estate in Polk County, Iowa:
Lots 1, 2, 7 and 8 in Block 4 in WEST FORT DES MOINES SUBDIVISION, and Official
Plat included in and forming a part of the City of Des Moines, Iowa.
Subject to all "Permitted Exceptions" as appear on Exhibit 1 attached hereto and
incorporated herein by this reference.
Grantors do Hereby Covenant with Grantees and successors in interest to
Warrant and Defend the real estate against the lawful Claims of all persons
claiming by, through or under them, except as may be above stated. Each of the
undersigned hereby relinquishes all rights of dower, homestead and distributive
share in and to the real estate.
Words and phrases herein, including acknowledgment hereof, shall be
construed as in the singular or plural number, and as masculine or feminine
gender, according to the context.
STATE OF Iowa) Dated:_____________
) ss
Polk COUNTY )
THE GRAHAM GROUP, INC.
By:______________________________
Name:____________________________
Title:___________________________
On this _______ day of _____________ 199__, before me, __________________
(Grantor) the undersigned, a Notary Public in and for said State, personally
appeared __________________ (Grantor) to me known to be the identical persons
named in and who executed the foregoing instrument and acknowledged that they
executed the same as __________________ their voluntary act and deed.
(Grantor)
______________________
______________________ ________________________________
Notary Public
(Grantor)
(This form of acknowledgement for individual grantor(s) only)
STATE OF _____________
______________________ COUNTY, ss:
On this ______ day of ______________, 199___ before me, the undersigned, a
Notary Public in and for said State, personally appeared
__________________________________ to me known to be the identical persons named
in and who executed the foregoing instrument, and acknowledged that they
executed the same as their voluntary act and deed.
______________________________
Notary Public
EXHIBIT I
Permitted Exceptions
--------------------
1. Items to which Equitable Life Insurance Company of Iowa is a party of
record.
2. Survey matters first appearing after the date hereof
3. Parties in possession (month to month agreements).
4. Real Estate Taxes then due but not payable and delinquent.
THE IOWA STATE BAR ASSOCIATION I FOR THE LEGAL EFFECT OF THE USE OF
Official Form No. 105 THIS FORM. CONSULT YOUR LAWYER
EXHIBIT "F"
- --------------------------------------------------------------------------------
SPACE ABOVE THIS LINE
FOR RECORDER
SPECIAL WARRANTY DEED
For the Consideration of Ten ($10.00) Dollar(s) and other valuable
consideration,THE EQUITABLE LIFE INSURANCE COMPANY OF IOWA., an Iowa corporation
do hereby Convey toTHE GRAHAM GROUP, INC., an Iowa corporation the following
described real estate in Polk County, Iowa:
Lots 1, 2, 7 and 8 in Block 4 in WEST FORT DES MOINES SUBDIVISION, an Official
Plat included in and forming a part of the city of Des Moines, Iowa.
Subject to all "Permitted Exceptions" as appear on Exhibit 1 attached hereto and
incorporated herein by this reference.
Grantors do Hereby Covenant with Grantees and successors in interest to
Warrant and Defend the real estate against the lawful Claims of all persons
claiming by, through or under them, except as may be above stated. Each of the
undersigned hereby relinquishes all rights of dower, homestead and distributive
share in and to the real estate.
Words and phrases herein, including acknowledgment hereof, shall be
construed as in the singular or plural number, and as masculine or feminine
gender, according to the context.
STATE OF Iowa) Dated:_____________
) ss
Polk COUNTY )
EQUITABLE LIFE INSURANCE COMPANY OF IOWA
By:_____________________________________
Name:________________________________
Title:_______________________________
On this _______ day of _____________ 199__, before me, __________________
(Grantor) the undersigned, a Notary Public in and for said State, personally
appeared __________________ (Grantor) to me known to be the identical persons
named in and who executed the foregoing instrument and acknowledged that they
executed the same as __________________ their voluntary act and deed.
(Grantor)
______________________
______________________ ________________________________
Notary Public
(Grantor)
(This form of acknowledgement for individual grantor(s) only)
EXHIBIT 1
Permitted Exceptions
--------------------
1. Items to which Equitable Life Insurance Company of Iowa is a party of
record.
2. Survey matters first appearing after the date hereof
3. Parties in possession (month to month agreements).
4. Real Estate Taxes then due but not payable and delinquent.
Exhibit 31.1
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this annual report on Form 10-K of ING USA Annuity and Life
Insurance Company and Subsidiary;
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: March 17, 2005
------------------
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, Harry N. Stout, certify that:
1. I have reviewed this annual report on Form 10-K of ING USA Annuity and Life
Insurance Company and Subsidiary;
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: March 17, 2005
---------------
By /s/ Harry N. Stout
--------------------------------------
Harry N. Stout
President
Duly Authorized Officer and Principal 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 Annual Report on Form 10-K for the year ended December
31, 2004 (the "Report") fully complies with the requirements of Section 13 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.
March 17, 2005 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 Annual Report on Form 10-K for the year ended December
31, 2004 (the "Report") fully complies with the requirements of Section 13 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.
March 17, 2005 By /s/ Harry N. Stout
- -------------- ----------------------------------
(Date) Harry N. Stout
President