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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-86276, 333-86278, 333-104456
ING Life Insurance and Annuity Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 71-0294708
- ------------------------------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
151 Farmington Avenue, Hartford, Connecticut 06156
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (866) 723-4646
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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 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: 55,000 shares of Common Stock
as of November 12, 2003, all of which were directly owned by Lion Connecticut
Holdings, Inc.
NOTE: WHEREAS ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10Q, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings, Inc.)
Form 10-Q for the period ended September 30, 2003
INDEX
Page
----
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements:
Condensed Consolidated Statements of
Income.................................. 3
Condensed Consolidated Balance Sheets... 4
Condensed Consolidated Statements of
Changes in Shareholder's Equity......... 5
Condensed Consolidated Statements of
Cash Flows.............................. 6
Notes to Condensed Consolidated
Financial Statements.................... 7
Item 2. Management's Narrative Analysis of the
Results of Operations and Financial
Condition............................. 13
Item 4. Controls and Procedures................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................... 23
Item 6. Exhibits and Reports on Form 8-K........ 23
Signatures.............................. 24
2
PART I. FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions)
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2003 2002 2003 2002
-------- -------- -------- ---------
Revenue:
Premiums $ 17.5 $ 28.1 $ 66.4 $ 79.8
Fee income 100.3 105.5 277.5 334.9
Net investment income 245.6 218.9 719.8 718.3
Net realized capital gains
(losses) (1.0) (2.7) 41.5 (68.4)
------ ------ -------- ---------
Total revenue 362.4 349.8 1,105.2 1,064.6
------ ------ -------- ---------
Benefits, losses and expenses:
Benefits:
Interest credited and
other benefits to
policyholders 196.9 194.7 568.4 570.8
Underwriting, acquisition,
and insurance expenses:
General expenses 100.9 84.1 308.5 291.1
Commissions 30.4 36.0 88.7 101.7
Policy acquisition costs
deferred (39.4) (29.9) (119.0) (116.3)
Amortization of deferred
policy acquisition costs
and value of business
acquired 40.4 88.0 96.4 157.0
------ ------ -------- ---------
Total benefits, losses
and expenses 329.2 372.9 943.0 1,004.3
------ ------ -------- ---------
Income (loss) before income
taxes and cumulative effect
of change in accounting
principle 33.2 (23.1) 162.2 60.3
Income tax expense (benefit) 3.3 (9.9) 44.6 18.2
------ ------ -------- ---------
Income (loss) before
cumulative effect of change
in accounting principle 29.9 (13.2) 117.6 42.1
Cumulative effect of change in
accounting principle -- -- -- (2,412.1)
------ ------ -------- ---------
Net income (loss) $ 29.9 $(13.2) $117.6 $(2,370.0)
====== ====== ======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
September 30, 2003 December 31,
(Unaudited) 2002
--------------------- ---------------
ASSETS
Investments:
Fixed maturities, available for sale,
at fair value (amortized cost of
$15,376.5 at 2003 and $15,041.2 at
2002) $16,064.6 $15,767.0
Equity securities, at fair value:
Nonredeemable preferred stock (cost
of $34.2 at 2003 and 2002) 34.2 34.2
Investment in affiliated mutual
funds (cost of $138.3 at 2003 and
$203.9 at 2002) 144.3 201.0
Common stock (cost of $0.2 at 2003
and 2002) 0.2 0.2
Mortgage loans on real estate 755.6 576.6
Policy loans 275.0 296.3
Short-term investments 5.9 6.2
Other investments 47.4 52.2
Securities pledged to creditors
(amortized cost of $1,360.9 at 2003
and $154.9 at 2002) 1,408.7 155.0
--------- ---------
Total investments 18,735.9 17,088.7
Cash and cash equivalents 97.6 65.4
Short-term investments under securities
loan agreement 1,610.4 164.3
Accrued investment income 174.8 170.9
Reinsurance recoverable 2,961.4 2,986.5
Deferred policy acquisition costs 283.9 229.8
Value of business acquired 1,399.1 1,438.4
Property, plant and equipment (net of
accumulated depreciation of $74.7 at
2003 and $56.0 at 2002) 33.8 49.8
Other assets 308.7 145.8
Assets held in separate accounts 31,440.5 28,071.1
--------- ---------
Total assets $57,046.1 $50,410.7
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits and claims
reserves $ 3,260.8 $ 3,305.2
Unpaid claims and claim expenses 31.2 30.0
Other policyholders' funds 15,890.1 14,756.0
--------- ---------
Total policy liabilities and
accruals 19,182.1 18,091.2
Payables for securities purchased 1,610.4 164.3
Current income taxes 84.3 84.5
Deferred income taxes 177.0 163.1
Other liabilities 1,960.5 1,573.7
Liabilities related to separate accounts 31,440.5 28,071.1
--------- ---------
Total liabilities 54,454.8 48,147.9
--------- ---------
Shareholder's equity
Common stock (100,000 shares
authorized, 55,000 shares issued and
outstanding, $50.00 per share par
value) 2.8 2.8
Additional paid-in capital 4,616.5 4,416.5
Accumulated other comprehensive income 119.2 108.3
Retained deficit (2,147.2) (2,264.8)
--------- ---------
Total shareholder's equity 2,591.3 2,262.8
--------- ---------
Total liabilities and
shareholder's equity $57,046.1 $50,410.7
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Unaudited)
(Millions)
Nine Months Ended
September 30,
-------------------
2003 2002
-------- ---------
Shareholder's equity, beginning of
period $2,262.8 $ 4,454.3
Comprehensive income (loss):
Net income (loss) 117.6 (2,370.0)
Other comprehensive income net of tax:
Unrealized gain on securities ($16.8
and $94.9, pretax year to date) 10.9 61.7
-------- ---------
Total comprehensive income (loss) 128.5 (2,308.3)
Contribution of IA Holdco -- (60.1)
Capital contribution 200.0 --
-------- ---------
Shareholder's equity, end of period $2,591.3 $ 2,085.9
======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
ITEM 1. FINANCIAL STATEMENTS (continued)
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions)
Nine months ended
September 30,
----------------------
2003 2002
---------- ----------
Net cash provided by (used for)
operating activities $ 1,363.2 $ (43.8)
Cash Flows from Investing Activities
Proceeds from the sale of:
Fixed maturities available for sale 19,417.6 10,809.5
Equity securities 92.3 9.2
Mortgages 12.7 245.5
Investment maturities and collections
of:
Fixed maturities available for sale 2,506.7 1,144.5
Short-term investments 0.3 6,536.1
Acquisition of investments:
Fixed maturities available for sale (23,516.4) (12,630.8)
Equity securities (23.3) (59.2)
Short-term investments -- (6,352.5)
Mortgages (191.6) (434.0)
Decrease in policy loans 21.3 25.2
Disposal (purchases) of property and
equipment (2.8) 11.4
Other, net (7.9) (42.9)
---------- ----------
Net cash used in investing activities (1,691.1) (738.0)
---------- ----------
Cash Flows from Financing Activities
Deposits and interest credited for
investment contracts 444.2 1,451.4
Maturities and withdrawals from
insurance and investment contracts (247.1) (789.7)
Capital contribution 200.0 --
Transfers (to) from separate accounts (37.0) 78.7
---------- ----------
Net cash provided by financing
activities 360.1 740.4
---------- ----------
Net increase (decrease) in cash and cash
equivalents 32.2 (41.4)
Cash and cash equivalents, beginning of
period 65.4 82.0
---------- ----------
Cash and cash equivalents, end of period $ 97.6 $ 40.6
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
ING Life Insurance and Annuity Company ("ILIAC"), and its wholly-owned
subsidiaries (collectively, the "Company") are providers of financial
products and services in the United States. These condensed consolidated
financial statements include ILIAC and its wholly-owned subsidiaries, ING
Insurance Company of America ("IICA"), ING Financial Advisers, LLC, and,
through February 28, 2002 Aetna Investment Adviser Holding Company, Inc.
("IA Holdco"). ILIAC is a wholly-owned subsidiary of ING Retirement
Holdings, Inc. ("HOLDCO"), which is a wholly-owned subsidiary of ING
Retirement Services, Inc. ("IRSI"). IRSI was a wholly owned subsidiary of
Lion Connecticut Holdings, Inc. ("Lion"), which in turn was ultimately owned
by ING Groep N.V. ("ING"), a financial services company based in The
Netherlands. However, on March 30, 2003 a series of mergers occurred in the
following order: IRSI merged into Lion, HOLDCO merged into Lion and IA
Holdco merged into Lion. As a result, ILIAC is now a direct wholly-owned
subsidiary of Lion.
On February 28, 2002, ILIAC contributed 100% of the stock of IA Holdco and
its subsidiaries to HOLDCO, (former ILIAC parent company), resulting in a
distribution totaling $60.1 million. As a result of this transaction, the
Investment Management Services segment is no longer reflected as an
operating segment of the Company.
The condensed consolidated financial statements and notes as of
September 30, 2003 and December 31, 2002 and for the three and nine-month
periods ended September 30, 2003 and 2002 ("interim periods") have been
prepared in accordance with accounting principles generally accepted in the
United States of America and are unaudited. The condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for
the fair presentation of the consolidated financial position, results of
operations and cash flows for the interim periods. These condensed
consolidated financial statements and notes should be read in conjunction
with the consolidated financial statements and related notes as presented in
the Company's 2002 Annual Report on Form 10-K. The results of operations for
the interim periods should not be considered indicative of results to be
expected for the full year. Certain reclassifications have been made to 2002
financial information to conform to the 2003 presentation.
The Company conducts its business through one reporting segment, U.S.
Financial Services ("USFS"), and revenue reported by the Company is
predominantly derived from external customers.
2. RECENTLY ADOPTED ACCOUNTING STANDARDS
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
During 2002, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("FAS") No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS ("FAS
7
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
2. RECENTLY ADOPTED ACCOUNTING STANDARDS (continued)
No. 142"). Effective January 1, 2002, the Company applied the
non-amortization provision of the new standard, therefore, the Company's net
income is comparable for all periods presented.
The adoption of this standard resulted in an impairment loss of
$2,412.1 million which was recorded by the Company in the fourth quarter of
2002. This impairment loss represented the entire carrying amount of
goodwill, net of accumulated amortization. This impairment charge was shown
as a change in accounting principle on the December 31, 2002 Consolidated
Income Statement.
In accordance with FAS No. 142, a transitional impairment loss for goodwill
should be recognized in the first interim period of the year of initial
adoption, regardless of the period in which it was measured. The aggregate
amount of the accounting change should be included in restated net income of
the first interim period, and each subsequent period of that year should be
presented on the restated basis. As such, net income for the nine months
ended September 30, 2002, has been restated to reflect the January 1, 2002
impairment charge, which was recorded in the fourth quarter of 2002.
3. NEW ACCOUNTING PRONOUNCEMENTS
In July 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 03-1, ACCOUNTING AND
REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION
CONTRACTS AND FOR SEPARATE ACCOUNTS, which the Company intends to adopt on
January 1, 2004. The impact on the financial statements is not known at this
time.
The Derivative Implementation Group ("DIG") responsible for issuing guidance
on behalf of the FASB for implementation of FAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES recently issued Statement
Implementation Issue No. B36, EMBEDDED DERIVATIVES: MODIFIED COINSURANCE
ARRANGEMENTS AND DEBT INSTRUMENTS THAT INCORPORATE CREDIT RISK EXPOSURES
THAT ARE UNRELATED OR ONLY PARTIALLY RELATED TO THE CREDIT WORTHINESS OF THE
OBLIGOR UNDER THOSE INSTRUMENTS ("DIG B36"). Under this interpretation,
modified coinsurance and coinsurance with funds withheld reinsurance
agreements as well as other types of receivables and payables where interest
is determined by reference to a pool of fixed maturity assets or total
return debt index may be determined to contain embedded derivatives that are
required to be bifurcated. The required date of adoption of DIG B36 for the
Company is October 1, 2003. The Company has completed its evaluation of DIG
B36 and determined that the Company has modified coinsurance treaties that
are applicable to require implementation of the guidance. The applicable
contracts, however, have been determined to generate embedded derivatives
with a fair value of zero. Therefore, the guidance, while implemented, will
have no impact on the Company's financial position, results of operations or
cash flows.
8
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
4. DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Deferred Policy Acquisition Costs ("DAC") is an asset, which represents
certain costs of acquiring certain insurance business, which are deferred
and amortized. These costs, all of which vary with and are primarily related
to the production of new and renewal business, consist principally of
commissions, certain underwriting and contract issuance expenses, and
certain agency expenses. Value of business acquired ("VOBA") is an asset,
which represents the present value of estimated net cash flows embedded in
the Company's contracts, which existed at the time the Company was acquired
by ING. DAC and VOBA are evaluated for recoverability at each balance sheet
date and these assets would be reduced to the extent that gross profits are
inadequate to recover the asset.
The amortization methodology varies by product type based upon two
accounting standards: FAS No. 60, ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES ("FAS No. 60") and FAS No. 97, ACCOUNTING AND REPORTING BY
INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION CONTRACTS AND REALIZED GAINS
AND LOSSES FROM THE SALE OF INVESTMENTS ("FAS No. 97").
Under FAS No. 60, acquisition costs for traditional life insurance products,
which primarily include whole life and term life insurance contracts, are
amortized over the premium payment period in proportion to the premium
revenue recognition.
Under FAS No. 97, acquisition costs for universal life and investment-type
products, which include universal life policies and fixed and variable
deferred annuities, are amortized over the life of the blocks of policies
(usually 25 years) in relation to the emergence of estimated gross profits
from surrender charges, investment margins, mortality and expense margins,
asset-based fee income, and actual realized gains (losses) on investments.
Amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of products are revised.
VOBA activity for the nine months ended September 30, 2003 was as follows:
(Millions)
Balance at December 31, 2002 $1,438.4
Adjustment for FAS No. 115 2.8
Additions 42.7
Interest accrued at 7% 71.8
Amortization (156.6)
-----------------------------------------------------------
Balance at September 30, 2003 $1,399.1
===========================================================
9
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
5. INVESTMENTS
IMPAIRMENTS
During the three months ended September 30, 2003, the Company determined
that five fixed maturities had other than temporary impairments. As a
result, for the three months ended September 30, 2003, the Company
recognized a pre-tax loss of $8.5 million to reduce the carrying value of
the fixed maturities to their fair value at the time of impairment. During
the three months ended September 30, 2002, the Company determined that
thirty-nine fixed maturities had other than temporary impairments. As a
result, for the three months ended September 30, 2002, the Company
recognized a pre-tax loss of $48.2 million to reduce the carrying value of
the fixed maturities to their fair value at the time of impairment.
During the first nine months of 2003, the Company determined that eighty
fixed maturities had other than temporary impairments. As a result, for the
nine months ended September 30, 2003, the Company recognized a pre-tax loss
of $74.7 million to reduce the carrying value of the fixed maturities to
their fair value at the time of impairment. During the first nine months of
2002, the Company determined that forty-seven fixed maturities had other
than temporary impairments. As a result, for the nine months ended
September 30, 2002, the Company recognized a pre-tax loss of $83.5 million
to reduce the carrying value of the fixed maturities to their fair value at
the time of impairment.
The fair value of the remaining impaired fixed maturities at September 30,
2003 and 2002 is $197.5 million and $36.3 million, respectively.
6. SEVERANCE
In December 2001, ING announced its intentions to further integrate and
streamline the U.S.-based operations of ING Americas (a business division of
ING which includes the Company) in order to build a more customer-focused
organization. During the first quarter 2003, the Company performed a
detailed analysis of its severance accrual. As part of this analysis, the
Company corrected the initial planned number of people to eliminate from 580
to 515 (corrected from the 2002 Annual Report on Form 10-K) and extended the
date of expected substantial completion for severance actions to June 30,
2003.
Activity for the nine months ended September 30, 2003 within the severance
liability and positions eliminated related to such actions were as follows:
(Millions, except positions data) Liability Positions
Balance at December 31, 2002 $ 9.2 75
Payments/terminations (5.6) (66)
--------------------------------------------------------------
Balance at September 30, 2003 $ 3.6 9
==============================================================
10
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
7. INCOME TAXES
The effective tax rates for the three months ended September 30, 2003 and
2002 were 9.9% and 42.9%, respectively. The Company's effective tax rates
for the nine months ended September 30, 2003 and 2002 were 27.5% and 30.2%,
respectively. The decreases in effective tax rates result primarily from an
increase in the deduction allowed for dividends received.
8. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans or money
market instruments at a specified future date and at a specified price or
yield. The inability of counterparties to honor these commitments may result
in either higher or lower replacement cost. Also, there is likely to be a
change in the value of the securities underlying the commitments. At
September 30, 2003 and December 31, 2002, the Company had off-balance sheet
commitments to purchase investments equal to the fair value of
$164.0 million and $236.7 million, respectively.
LITIGATION
The Company is a party to threatened or pending lawsuits arising from the
normal conduct of business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include claims for
substantial compensatory, consequential or punitive damages and other types
of relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated individuals. While it
is not possible to forecast the outcome of such lawsuits, in light of
existing insurance, reinsurance and established reserves, it is the opinion
of management that the disposition of such lawsuits will not have a
materially adverse effect on the Company's operations or financial position.
9. SEGMENT INFORMATION
The Company's realignment of Worksite Products and Individual Products
operating segments into one reporting segment (USFS) is reflected in the
restated summarized financial information for the period ended
September 30, 2002 in the table below. Effective with the third quarter of
2002, items that were previously not allocated to USFS but reported in the
Other segment are now allocated to USFS and reported in the restated
financial information for the period ended September 30, 2002.
11
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
9. SEGMENT INFORMATION (continued)
Summarized financial information for the Company's principal operations for
the nine months ended September 30, 2003 and 2002 is as follows:
Non-Operating
Segments
-----------------------
Investment
Management
(Millions) (Unaudited) USFS (1) Services (2) Other (3) Total
2003
Revenues from external
customers $ 343.9 $ -- $ -- $ 343.9
Net investment income 719.8 -- -- 719.8
------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains $1,063.7 $ -- $ -- $ 1,063.7
==============================================================================
Operating earnings (4) $ 90.6 $ -- $ -- $ 90.6
Net realized capital gains,
net of tax 27.0 -- -- 27.0
------------------------------------------------------------------------------
Net income $ 117.6 $ -- $ -- $ 117.6
==============================================================================
2002
Revenues (losses) from
external customers $ 405.0 $19.2 $(9.5) $ 414.7
Net investment income 718.0 0.2 0.1 718.3
------------------------------------------------------------------------------
Total revenue (loss) excluding
net realized capital gains $1,123.0 $19.4 $(9.4) $ 1,133.0
==============================================================================
Operating earnings (4) $ 81.9 $ 4.7 $ -- $ 86.6
Cumulative effect of
accounting change (2,412.1) -- -- (2,412.1)
Net realized capital losses,
net of tax (44.5) -- -- (44.5)
------------------------------------------------------------------------------
Net income (loss) $(2,374.7) $ 4.7 $ -- $(2,370.0)
==============================================================================
(1) USFS includes deferred annuity contracts that fund defined
contribution and deferred compensation plans, immediate annuity
contracts; mutual funds; distribution services for annuities and
mutual funds; programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and record-
keeping services along with a menu of investment options; wrapper
agreements containing certain benefit responsive guarantees that are
entered into with retirement plans whose assets are not invested with
the Company; investment advisory services and pension plan
administrative services. USFS also includes deferred and immediate
annuity contracts, both qualified and nonqualified, that are sold to
individuals and provide variable or fixed investment options or a
combination of both.
(2) Investment Management Services includes: investment advisory services
to affiliated and unaffiliated institutional and retail clients;
underwriting; distribution for Company mutual funds and a former
affiliate's separate accounts; and trustee, administrative and other
services to retirement plans. On February 28, 2002, IA Holdco and its
subsidiaries, which comprised this segment, were distributed to
HOLDCO.
(3) Other includes consolidating adjustments between USFS and Investment
Management Services.
(4) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses. While operating earnings is the
measure of profit or loss used by the Company's management when
assessing performance or making operating decisions, it does not
replace net income as a measure of profitability.
12
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
The following narrative analysis of the results of operations and financial
condition presents a review of the ING Life Insurance and Annuity Company and
its wholly-owned subsidiaries ("ILIAC", or the "Company") as of September 30,
2003 and December 31, 2002 and for the three and nine-month periods ended
September 30, 2003 and 2002. This review should be read in conjunction with the
condensed consolidated financial statements and other data presented herein, as
well as the "Management's Narrative Analysis of the Results of Operations and
Financial Condition" section contained in the Company's 2002 Annual Report on
Form 10-K.
NATURE OF BUSINESS
The Company offers qualified and nonqualified annuity contracts that include a
variety of funding and payout options for individuals and employer sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403 and
457, as well as nonqualified deferred compensation plans. Annuity contracts may
be deferred or immediate (payout annuities). These products also include
programs offered to qualified plans and nonqualified deferred compensation plans
that package administrative and record-keeping services along with a variety of
investment options, including affiliated and nonaffiliated mutual funds and
variable and fixed investment options. In addition, the Company also offers
wrapper agreements entered into with retirement plans which contain certain
benefit responsive guarantees (i.e. liquidity guarantees of principal and
previously accrued interest for benefits paid under the terms of the plan) with
respect to portfolios of plan-owned assets not invested with the Company. The
Company also offers investment advisory services and pension plan administrative
services.
RECENTLY ADOPTED ACCOUNTING STANDARDS
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
During 2002, the Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("FAS") No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS ("FAS No. 142"). Effective January 1, 2002, the Company
applied the non-amortization provision of the new standard, therefore, the
Company's net income is comparable for all periods presented.
The adoption of this standard resulted in an impairment loss of $2,412.1 million
which was recorded by the Company in the fourth quarter of 2002. This impairment
loss represented the entire carrying amount of goodwill, net of accumulated
amortization. This impairment charge was shown as a change in accounting
principle on the December 31, 2002 Consolidated Income Statement.
In accordance with FAS No. 142, a transitional impairment loss for goodwill
should be recognized in the first interim period of the year of initial
adoption, regardless of the period in which it was measured. The aggregate
amount of the accounting change should be included in restated net income of the
first interim period, and each subsequent period of that year should be
presented on the restated basis. As such, net income for the nine months ended
September 30, 2002, has been restated to reflect the January 1, 2002 impairment
charge, which was recorded in the fourth quarter of 2002.
13
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION (continued)
NEW ACCOUNTING PRONOUNCEMENTS
In July 2003, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 03-1, ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS, which the Company intends to adopt on January 1, 2004. The impact on
the consolidated financial statements is not known at this time.
The Derivative Implementation Group ("DIG") responsible for issuing guidance on
behalf of the FASB for implementation of FAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES recently issued Statement Implementation
Issue No. B36, EMBEDDED DERIVATIVES: MODIFIED COINSURANCE ARRANGEMENTS AND DEBT
INSTRUMENTS THAT INCORPORATE CREDIT RISK EXPOSURES THAT ARE UNRELATED OR ONLY
PARTIALLY RELATED TO THE CREDIT WORTHINESS OF THE OBLIGOR UNDER THOSE
INSTRUMENTS ("DIG B36"). Under this interpretation, modified coinsurance and
coinsurance with funds withheld reinsurance agreements as well as other types of
receivables and payables where interest is determined by reference to a pool of
fixed maturity assets or total return debt index may be determined to contain
embedded derivatives that are required to be bifurcated. The required date of
adoption of DIG B36 for the Company is October 1, 2003. The Company has
completed its evaluation of DIG B36 and determined that the Company has modified
coinsurance treaties that are applicable to require implementation of the
guidance. The applicable contracts, however, have been determined to generate
embedded derivatives with a fair value of zero. Therefore, the guidance, while
implemented, will have no impact on the Company's financial position, results of
operations or cash flows.
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions in certain circumstances. 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
affected in a materially adverse manner by the need to make future accounting
adjustments to reflect changes in these estimates and assumptions from time to
time.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability. In developing these estimates management makes subjective and
complex judgments that are inherently uncertain and subject to material change
as facts and circumstances develop. Although variability is inherent in these
estimates, management believes the amounts provided are appropriate based upon
the facts available upon compilation of the condensed consolidated financial
statements.
INVESTMENT IMPAIRMENT TESTING
The Company reviews the general account investments for impairments by
considering the length of time and the extent to which the fair value has been
less than amortized cost; the financial condition
14
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION (continued)
CRITICAL ACCOUNTING POLICIES (continued)
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 fair value.
Based on the facts and circumstances of each case, management uses judgment in
deciding whether any calculated impairments are temporary or other than
temporary. For those impairments judged to be other than temporary, the Company
reduces the carrying value of those investments to the current fair value and
records impairment losses for the difference.
AMORTIZATION OF DEFERRED ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Deferred policy acquisition costs ("DAC") and value of business acquired
("VOBA") are amortized with interest over the life of the contracts (usually 25
years) in relation to the present value of estimated gross profits from
projected interest margins, asset-based fees, policy administration and
surrender charges less policy maintenance fees.
Changes in assumptions can have a significant impact on the calculation of
DAC/VOBA and its related amortization patterns. Due to the relative size of the
DAC/VOBA balance and the sensitivity of the calculation to minor changes in the
underlying assumptions and the related volatility that could result in the
reported DAC/VOBA balance, the Company performs a quarterly analysis of DAC/
VOBA. At each balance sheet date, actual historical gross profits are reflected
and expected future gross profits and related assumptions are evaluated for
continued reasonableness.
Any adjustment in estimated profit requires that the amortization rate be
revised retroactively to the date of policy or contract issuance ("unlocking"),
which could be significant. The cumulative difference related to prior periods
is recognized as a component of the current period's amortization, along with
amortization associated with the actual gross profits of the period. In general,
increases in estimated returns result in increased expected future profitability
and may lower the rate of amortization, while increases in lapse/surrender and
mortality assumptions or decreases in returns reduce the expected future
profitability of the underlying business and may increase the rate of
amortization.
One of the most significant assumptions involved in the estimation of future
gross profits for variable universal life and deferred annuity products is the
assumed return associated with future separate account performance. To reflect
the near-term and long-term volatility in the equity markets this assumption
involves a combination of near-term expectations and a long-term assumption
about market performance. The overall return generated by the separate account
is dependent on several factors, including the relative mix of the underlying
sub-accounts among bond funds and equity funds as well as equity sector
weightings.
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
15
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION (continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (continued)
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 (for additional information, see the Legislative
Initiatives section below). Some may relate to the insurance industry generally,
such as pricing competition, regulatory developments and industry consolidation.
Others may relate to the Company specifically, such as credit, volatility and
other risks associated with the Company's investment portfolio. Investors are
also directed to consider other risks and uncertainties discussed in documents
filed by the Company with the SEC. The Company disclaims any obligation to
update forward-looking information.
16
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION (continued)
RESULTS OF OPERATIONS
USFS
Three months ended Nine months ended
September 30, September 30,
------------------ --------------------
(Millions) (Unaudited) 2003 2002 2003 2002
- ------------------------------------------------------------------------
Premiums $ 17.5 $ 28.1 $ 66.4 $ 89.0
Fee income 100.3 105.5 277.5 316.0
Net investment income 245.6 218.9 719.8 718.0
Net realized capital gains
(losses) (1.0) (2.7) 41.5 (68.4)
-------- -------- --------- ---------
Total revenue 362.4 349.8 1,105.2 1,054.6
-------- -------- --------- ---------
Interest credited and other
benefits to contractholders 196.9 194.7 568.4 570.8
Underwriting, acquisition
and insurance expenses:
General expenses 100.9 84.3 308.5 288.5
Commissions 30.4 36.0 88.7 101.7
Policy acquisition costs
deferred (39.4) (29.9) (119.0) (116.3)
Amortization of deferred
policy acquisition costs
and value of business
acquired 40.4 88.0 96.4 157.0
-------- -------- --------- ---------
Total benefits and expenses 329.2 373.1 943.0 1,001.7
-------- -------- --------- ---------
Income (loss) from operations
before income taxes 33.2 (23.3) 162.2 52.9
Income tax expense (benefit) 3.3 (10.1) 44.6 15.5
-------- -------- --------- ---------
Income (loss) before
cumulative effect of change
in accounting principle 29.9 (13.2) 117.6 37.4
Cumulative effect of change in
accounting principle -- -- -- (2,412.1)
-------- -------- --------- ---------
Net income (loss) $ 29.9 $ (13.2) $ 117.6 $(2,374.7)
======== ======== ========= =========
Deposits (not included in
premiums above):
Annuities--fixed options $ 453.7 $ 186.6 $ 1,292.4 $ 842.2
Annuities--variable options 966.8 948.8 2,926.6 3,388.4
-------- -------- --------- ---------
Total deposits $1,420.5 $1,135.4 $ 4,219.0 $ 4,230.6
======== ======== ========= =========
Assets under management:
Annuities--fixed options (1) $15,863.9 $14,514.7
Annuities--variable options
(2) 25,999.4 22,611.3
--------- ---------
Subtotal--annuities 41,863.3 37,126.0
Plan sponsored and other 6,887.7 7,911.6
--------- ---------
Total--assets under management 48,751.0 45,037.6
Assets under administration
(3) 19,837.5 12,631.5
--------- ---------
Total assets under management
and administration $68,588.5 $57,669.1
========= =========
(1) Excludes net unrealized capital gains of $735.9 million and $588.8 million
at September 30, 2003 and 2002, respectively.
(2) Includes $11,191.3 million at September 30, 2003 and $8,899.5 million at
September 30, 2002 related to deposits into the Company's products and
invested in unaffiliated mutual funds.
(3) Represents assets for which the Company provides administrative services
only.
17
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION (continued)
USFS (continued)
Premiums for the three and nine month periods ended September 30, 2003 decreased
by $10.6 million and $22.6, respectively, compared to the same periods in 2002,
primarily due to a decrease in immediate annuities with life contingencies.
Fee income for the three months ended September 30, 2003 decreased by $5.2
million compared to the same period in 2002. During the nine month period ended
September 30, 2003, fee income decreased by $38.5 million compared to same
period in 2002. Substantially all of the fee income on variable assets is
calculated based on assets under management. The decrease in fee income during
the comparative periods was principally due to the Company's lower average
variable assets under management. The decrease in average variable assets under
management resulted from two factors: (1) during the first three months of 2003
the equity markets suffered a decline compared to the same period in 2002, the
markets started to rebound during the second quarter; and (2) during the market
decline policyholders transferred assets from variable to fixed options.
Net investment income during the three months ended September 30, 2003 increased
by $26.7 million compared to the same period in 2002. Net investment income for
the nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002, increased $1.8 million. The increase in net investment
income for the three and nine month periods is primarily due to an increase in
average assets under management with fixed options; due to the poor performing
equity markets in the first three months of 2003 customers transferred assets
from variable to fixed options. The increase in net investment income resulting
from an increase in average assets under management for the nine months ended
September 30, 2003, was substantially offset by lower investments yields.
Net realized capital gains, including the effect of impairments, for the three
months ended September 30, 2003 decreased by $38.0 million compared to the same
period in 2002, primarily due to an increasing treasury rate during the three
months ended September 30, 2003, versus a decreasing treasury rate during the
same period in 2002. The 10-year treasury yield (constant maturities) decreased
from 4.8% to 3.6% during the three months ended September 30, 2002 and increased
from 3.5% to 3.9% during the three months ended September 30, 2003. Net realized
capital gains for the nine months ended September 30, 2003 increased by $101.1
million compared to the same period in 2002 primarily due to a decrease in the
year-to-date average interest rate. A year-to-date average interest rate
measurement is used when interest rates do not show either a steady increase or
decrease over time. In a declining rate environment, the market value of fixed
maturities held in the Company's portfolio increases, assuming no credit
deterioration. In a rising rate environment, the market value of fixed
maturities held decreases. The fluctuations in net realized gains reflect the
impact of the interest rate environment on the overall sale of fixed maturities
during the respective time periods.
Interest credited and other benefits to the policyholders for the three months
ended September 30, 2003, compared to the same period in 2002, increased by $2.2
million. Interest credited and other benefits to the policyholders decreased
$2.4 million for the nine months ended September 30, 2003, compared to the same
period in 2002. The increase in the balance in the recent quarter was due to an
increase in average assets under management with fixed options partially offset
by a decrease in credited rates to policyholders. The overall trend year to date
was due to a decrease in credited rates
18
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION (continued)
USFS (continued)
to policyholders partially offset by an increase in average assets under
management with fixed options.
Underwriting, acquisition, and insurance expenses were higher by $1.5 million
and $4.3 million for the three and nine months ended September 30, 2003,
respectively, as compared to the same periods in 2002. An increase in general
expenses was partially offset by an increase in policy acquisition costs
deferred and by a decrease in commissions resulting in the net increase in the
overall underwriting, acquisition, and insurance expenses. General expenses
increased primarily due to an increase in expense allocations from the Company's
parent. Commissions decreased during the period as a result of a decrease in new
and renewal business generated during the three and nine months ended
September 30, 2003 as compared to the same periods in 2002.
Amortization of deferred policy acquisition costs and value of business acquired
for the three and nine month periods ended September 30, 2003, decreased by
$47.6 million and $60.6 million, respectively, compared to the same periods in
2002. Decreased amortization during the three and nine month periods ended
September 30, 2003 was primarily due to improved market and fund performance.
Amortization of long-duration products is recorded in proportion to actual and
estimated future gross profits. Estimated gross profits are computed based on
underlying assumptions related to the underlying contracts, including but not
limited to interest margins, mortality, lapse, premium persistency, expenses,
and asset growth. The decrease in the amortization of deferred policy
acquisition costs and value of insurance acquired reflects the impact of these
variables on the overall book of business.
The cumulative effect of the change in accounting principle for the nine months
ended September 30, 2002, was a loss of $2,412.1 million. As noted in the
Recently Adopted Accounting Standards section, this write down is related to FAS
No. 142, which addresses the value of goodwill and other intangible assets.
Net income, excluding change in accounting principle, increased by $43.1 million
and $80.2 million for the three and nine months ended September 30, 2003, as
compared to the three and nine months ended September 30, 2002. Higher earnings
are the result of increased net realized capital gains, improved net investment
income, lower amortization of deferred policy acquisition costs and value of
business acquired and lower interest credited and other benefits to customers,
partially offset by a reduction in fee income and premiums and an increase in
underwriting, acquisition and insurance expenses.
NON-OPERATING SEGMENT
The non-operating segment of the Company relates to Investment Management
Services, which is comprised of IA Holdco and its subsidiaries, which were
distributed to HOLDCO on February 28, 2002 (refer to Note 1 of the Condensed
Consolidated Notes to the Financial Statements).
Investment Management Services' net income for the nine months ended
September 30, 2002 was $4.7 million. The 2002 results reflect operating results
through February 28, 2002 only.
19
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION (continued)
FINANCIAL CONDITION
INVESTMENTS
FIXED MATURITIES
At September 30, 2003 and December 31, 2002, the Company's carrying value of
available for sale fixed maturities including securities pledged to creditors
(hereinafter referred to as "total fixed maturities") represented 93.3% and
93.2% of the total general account invested assets, respectively. For the same
periods, $13,721.2 million, or 78.5% of total fixed maturities, and $11,808.4
million, or 74.2% of total fixed maturities, respectively, supported
experience-rated products. Total fixed maturities reflected net unrealized
capital gains of $735.9 million and $725.9 million at September 30, 2003 and
December 31, 2002, respectively.
It is management's objective that the portfolio of fixed maturities be of high
quality and be well diversified by market sector. The fixed maturities in the
Company's portfolio are generally rated by external rating agencies and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
fixed maturities portfolio was AA- at September 30, 2003 and December 31, 2002.
Fixed maturities rated BBB and below may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturities.
The percentage of total fixed maturities by quality rating category is as
follows:
September 30, 2003 December 31, 2002
- -------------------------------------------------------------------------------------
AAA 51.0% 51.9%
AA 4.4 5.0
A 19.8 20.2
BBB 20.6 19.2
BB 2.8 2.5
B and below 1.4 1.2
- -------------------------------------------------------------------------------------
Total 100.0% 100.0%
=====================================================================================
20
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION (continued)
INVESTMENTS (continued)
The percentage of total fixed maturities by market sector is as follows:
September 30, 2003 December 31, 2003
- -------------------------------------------------------------------------------------
U.S. Corporate 39.1% 40.7%
Residential Mortgaged-backed 34.1 34.9
Foreign (1) 12.1 9.4
Commercial/Multifamily Mortgage-backed 8.5 8.7
Asset-backed 4.8 5.8
U.S. Treasuries/Agencies 1.4 0.5
- -------------------------------------------------------------------------------------
Total 100.0% 100.0%
=====================================================================================
(1) Primarily U.S. dollar denominated
The Company analyzes the general account investments to determine whether there
has been an other than temporary decline in fair value below the amortized cost
basis in accordance with FAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES. Management considers the length of time and the extent to
which the fair value has been less than amortized 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 fair value. If
it is probable that all amounts due according to the contractual terms of a
fixed maturity 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 Emerging Issues Task Force ("EITF") Issue No. 99-20 "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." Under EITF Issue No. 99-20, a determination of
the required impairment is based on credit risk and the possibility of
significant prepayment risk that restricts the Company's ability to recover the
investment. An impairment is recognized if the fair value of the security is
less than book value and there has been an adverse change in cash flow since the
last remeasurement date.
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss is accounted for
as a realized loss.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of the Company to generate sufficient cash flows to
meet the cash requirements of operating, investing, and financing activities.
The Company's principal sources of liquidity are deposits on contracts, product
charges, investment income, maturing investments, and capital contributions.
Primary uses of liquidity are payments of commissions and operating expenses,
interest and premium credits, investment purchases, as well as withdrawals and
surrenders.
The Company's liquidity position is managed by maintaining adequate levels of
liquid assets, such as cash or cash equivalents and short-term investments.
Additional sources of liquidity include a borrowing facility to meet short-term
cash requirements. The Company maintains a reciprocal loan agreement with ING
America Insurance Holdings, Inc. ("ING AIH"), a Delaware corporation and
21
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OFOPERATIONS AND
FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
affiliate. Under this agreement, which became effective in June 2001 and expires
in April 2011, the Company and ING AIH can borrow up to 3% of the Company's
statutory admitted assets as of the preceding December 31 from one another.
Management believes that its sources of liquidity are adequate to meet the
Company's short-term cash obligations.
The National Association of Insurance Commissioners' ("NAIC") risk-based capital
requirements require insurance companies to calculate and report information
under a risk-based capital formula. These requirements are intended to allow
insurance regulators to monitor the capitalization of insurance companies based
upon the type and mixture of risks inherent in a Company's operations. The
formula includes components for asset risk, liability risk, interest rate
exposure, and other factors. The Company has complied with the NAIC's risk-based
capital reporting requirements. Amounts reported indicate that the Company has
total adjusted capital above all required capital levels.
In the first nine months of 2003, the Company received a capital contribution of
$200.0 million from Lion Connecticut Holdings, Inc.
LEGISLATIVE INITIATIVES
The Jobs and Growth Tax Relief Reconciliation Act of 2003, which was enacted in
the second quarter, may impact the Company. The Act's provisions, which reduce
the tax rates on long-term capital gains and corporate dividends, impact the
relative competitiveness of the Company's products especially variable
annuities.
Other legislative proposals under consideration include repealing the estate
tax, changing the taxation of products, changing life insurance company taxation
and making changes to nonqualified deferred compensation arrangements. Some of
these proposals, if enacted, could have a material effect on life insurance,
annuity and other retirement savings product sales.
The impact on the Company's tax position and products cannot be predicted.
ITEM 4. CONTROLS AND PROCEDURES
a) The Company carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)) of the
Securities Exchange Act of 1934) as of the end of the period covered by
this report. Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that the Company's current
disclosure controls and procedures are effective in ensuring that material
information relating to the Company required to be disclosed in the
Company's periodic SEC filings is made known to them in a timely manner.
b) There has not been any change in the internal controls over financial
reporting of the Company that occurred during the period covered by this
report that has materially affected or is reasonably likely to materially
affect these internal controls.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to threatened or pending lawsuits arising from the normal
conduct of business. Due to the climate in insurance and business litigation,
suits against the Company sometimes include claims for substantial compensatory,
consequential or punitive damages and other types of relief. Moreover, certain
claims are asserted as class actions, purporting to represent a group of
similarly situated individuals. While it is not possible to forecast the outcome
of such lawsuits, in light of existing insurance, reinsurance and established
reserves, it is the opinion of management that the disposition of such lawsuits
will not have a materially adverse effect on the Company's operations or
financial position.
As with many financial services companies, the Company and affiliates of the
Company have received requests for information from various governmental and
self-regulatory agencies in connection with investigations related to trading in
investment company shares. In each case, full cooperation and responses are
being provided. The Company is also reviewing its policies and procedures in
this area.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certificate of David A. Wheat pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Keith Gubbay pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certificate of David A. Wheat pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certificate of Keith Gubbay pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on form 8-K.
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ING LIFE INSURANCE AND ANNUITY COMPANY
----------------------------------------------------------
(Registrant)
November 12, 2003 By /s/ David A. Wheat
- ------------------- ----------------------------------------
(Date) David A. Wheat
Senior Vice President and Chief
Financial Officer
24