Attached files
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EX-31.EX-31 - CFOCERT_31 - VOYA RETIREMENT INSURANCE & ANNUITY Co | cfocert_31.htm |
EX-32.EX-32 - CEOCERT_32 - VOYA RETIREMENT INSURANCE & ANNUITY Co | ceocert_32.htm |
EX-32.EX-32 - CFOCERT_32 - VOYA RETIREMENT INSURANCE & ANNUITY Co | cfocert_32.htm |
EX-31.EX-31 - CEOCERT_31 - VOYA RETIREMENT INSURANCE & ANNUITY Co | ceocert_31.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
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FORM
10-Q
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(Mark
One)
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x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended March 31,
2010
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ___________________ to
____________________
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Commission
File Number: 333-164981,
333-133157, 333-133158, 333-130833, 333-130827
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ING LIFE INSURANCE AND ANNUITY
COMPANY
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Connecticut
(State
or other jurisdiction of incorporation or organization)
One
Orange Way
Windsor, Connecticut
(Address
of principal executive offices)
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71-0294708
(IRS
Employer Identification No.)
06095-4774
(Zip
Code)
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(860) 580-4646
(Registrant's
telephone number, including area code)
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(Former name, former address and
former fiscal year, if changed since last report)
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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 ¨
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Indicate
by check mark whether the registrant (1) has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). Yes ¨ No ¨
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Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer”,
“accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer £
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Accelerated
filer £
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Non-accelerated
filer x
(Do
not check if a smaller
reporting
company)
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Smaller
reporting company £
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ¨ No x
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APPLICABLE
ONLY TO CORPORATE ISSUERS:
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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,
$50 par value, as of May 7, 2010, are issued and outstanding, all of which
were directly owned by Lion Connecticut Holdings Inc.
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NOTE: WHEREAS
ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q, THIS FORM IS BEING FILED
WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION
H(2).
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1
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Form
10-Q for the period ended March 31,
2010
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INDEX
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PAGE
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3
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4
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6
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7
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8
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51
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83
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84
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84
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87
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88
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89
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2
ING Life Insurance and Annuity Company and Subsidiaries
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(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
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PART I.
FINANCIAL INFORMATION (UNAUDITED)
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Item 1. Financial Statements
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Condensed Consolidated Statements of Operations
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(Unaudited)
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(In millions)
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Three Months Ended March 31,
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2010
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2009
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Revenues:
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Net investment income
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$ | 297.3 | $ | 320.4 | |||
Fee income
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141.1 | 111.4 | |||||
Premiums
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8.1 | 4.8 | |||||
Broker-dealer commission revenue
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58.6 | 95.7 | |||||
Net realized capital gains:
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Total other-than-temporary impairment losses
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(34.9 | ) | (159.4 | ) | |||
Portion of other-than-temporary impairment
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losses recognized in Other comprehensive
income (loss)
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7.7 | - | |||||
Net other-than-temporary impairments
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recognized in earnings
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(27.2) | (159.4 | ) | ||||
Other net realized capital gains
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40.2 | 211.9 | |||||
Total net realized capital gains
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13.0 | 52.5 | |||||
Other income
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2.5 | 4.1 | |||||
Total revenue
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520.6 | 588.9 | |||||
Benefits and expenses:
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Interest credited and other benefits
to contractowners
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172.5 | 165.0 | |||||
Operating expenses
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165.5 | 144.8 | |||||
Broker-dealer commission expense
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58.6 | 95.7 | |||||
Net amortization of deferred policy acquisition costs and value of business acquired
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18.3 | 146.8 | |||||
Interest expense
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0.8 | 0.3 | |||||
Total benefits and expenses
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415.7 | 552.6 | |||||
Income before income taxes
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104.9 | 36.3 | |||||
Income tax expense (benefit)
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14.0 | (4.0 | ) | ||||
Net income
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$ | 90.9 | $ | 40.3 |
The
accompanying notes are an integral part of these consolidated financial
statements.
3
ING Life Insurance and Annuity Company and Subsidiaries
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(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
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Condensed Consolidated Balance Sheets
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(In millions, except share data)
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As of
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As of
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March 31,
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December 31,
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2010
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2009
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(Unaudited)
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Assets
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Investments:
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Fixed maturities, available-for-sale, at fair value
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(amortized cost of $14,822.5 at 2010 and $15,038.2 at 2009)
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$ | 15,240.0 | $ | 15,185.5 | |
Equity securities, available-for-sale, at fair value
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(cost of $184.9 at 2010 and $175.1 at 2009)
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200.8 | 187.9 | |||
Short-term investments
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292.4 | 535.5 | |||
Mortgage loans on real estate
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1,834.0 | 1,874.5 | |||
Loan - Dutch State obligation
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630.8 | 674.1 | |||
Policy loans
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252.1 | 254.7 | |||
Limited partnerships/corporations
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417.4 | 426.2 | |||
Derivatives
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157.0 | 129.0 | |||
Securities pledged (amortized cost of $360.7 at 2010 and $483.7 at 2009)
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363.4 | 469.8 | |||
Total investments
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19,387.9 | 19,737.2 | |||
Cash and cash equivalents
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219.3 | 243.3 | |||
Short-term investments under securities loan agreement,
including collateral delivered
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280.1 | 351.0 | |||
Accrued investment income
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236.4 | 217.2 | |||
Receivable for securities sold
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36.5 | 3.1 | |||
Reinsurance recoverable
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2,405.8 | 2,426.3 | |||
Deferred policy acquisition costs
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932.6 | 901.8 | |||
Value of business acquired
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894.4 | 991.5 | |||
Notes receivable from affiliate
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175.0 | 175.0 | |||
Short-term loan to affiliate
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510.8 | 287.2 | |||
Due from affiliates
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29.7 | 49.1 | |||
Current income tax recoverable
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- | 23.9 | |||
Property and equipment
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89.9 | 90.8 | |||
Other assets
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100.7 | 100.8 | |||
Assets held in separate accounts
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43,283.8 | 41,369.8 | |||
Total assets
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$ | 68,582.9 | $ | 66,968.0 |
The
accompanying notes are an integral part of these consolidated financial
statements.
4
ING Life Insurance and Annuity Company and Subsidiaries
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(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
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Condensed Consolidated Balance Sheets
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(In millions, except share data)
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As of
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As of
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March 31,
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December 31,
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2010
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2009
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(Unaudited)
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Liabilities and Shareholder's Equity
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Future policy benefits and claims reserves
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$ | 20,899.7 | $ | 21,115.0 | ||
Payable for securities purchased
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87.3 | 18.4 | ||||
Payables under securities loan agreement, including collateral held
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285.4 | 351.0 | ||||
Notes payable
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4.9 | 4.9 | ||||
Due to affiliates
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147.6 | 159.9 | ||||
Current income taxes
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17.7 | - | ||||
Deferred income taxes
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362.0 | 351.2 | ||||
Other liabilities
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587.2 | 693.7 | ||||
Liabilities related to separate accounts
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43,283.8 | 41,369.8 | ||||
Total liabilities
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65,675.6 | 64,063.9 | ||||
Shareholder's equity:
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Common stock (100,000 shares authorized, 55,000
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issued and outstanding; $50 per share value)
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2.8 | 2.8 | ||||
Additional paid-in capital
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4,325.5 | 4,528.2 | ||||
Accumulated other comprehensive income (loss)
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100.0 | (15.0 | ) | |||
Retained earnings (deficit)
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(1,521.0) | (1,611.9 | ) | |||
Total shareholder's equity
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2,907.3 | 2,904.1 | ||||
Total liabilities and shareholder's equity
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$ | 68,582.9 | $ | 66,968.0 | ||
The
accompanying notes are an integral part of these consolidated financial
statements.
5
ING Life Insurance and Annuity Company and Subsidiaries
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(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
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Condensed Consolidated Statements of Changes in Shareholder’s Equity
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(Unaudited)
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(In millions)
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Accumulated
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Additional
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Other
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Retained
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Total
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Common
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Paid-In
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Comprehensive
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Earnings
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Shareholder's
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Stock
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Capital
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Income (Loss)
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(Deficit)
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Equity
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Balance at December 31, 2008
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$ | 2.8 | $ | 4,161.3 | $ | (482.1 | ) | $ | (2,117.5 | ) | $ | 1,564.5 | ||||||
Comprehensive income:
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Net income
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- | - | - | 40.3 | 40.3 | |||||||||||||
Other comprehensive income, net of tax:
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Change in net unrealized capital gains
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(losses) on securities ($38.3 pretax)
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- | - | 29.9 | - | 29.9 | |||||||||||||
Pension liability ($0.4 pretax)
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- | - | 0.3 | - | 0.3 | |||||||||||||
Total comprehensive income
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70.5 | |||||||||||||||||
Contribution of capital
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- | 365.0 | - | - | 365.0 | |||||||||||||
Employee share-based payments
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- | 0.5 | - | - | 0.5 | |||||||||||||
Balance at March 31, 2009
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$ | 2.8 | $ | 4,526.8 | $ | (451.9 | ) | $ | (2,077.2 | ) | $ | 2,000.5 | ||||||
Balance at December 31, 2009
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$ | 2.8 | $ | 4,528.2 | $ | (15.0 | ) | $ | (1,611.9 | ) | $ | 2,904.1 | ||||||
Comprehensive income:
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Net income
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- | - | - | 90.9 | 90.9 | |||||||||||||
Other comprehensive income, net of tax:
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Change in net unrealized capital gains (losses)
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on securities ($112.7 pretax), including
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decrease in tax valuation allowance of $(40.1)
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- | - | 117.4 | - | 117.4 | |||||||||||||
Portion of other-than-temporary impairment
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losses recognized in other comprehensive
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income (loss) ($(7.7) pretax), including
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increase in tax valuation allowance
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of $2.5
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- | - | (7.7 | ) | - | (7.7 | ) | |||||||||||
Change in other-than-temporary impairment
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losses recognized in other comprehensive
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income (loss) ($5.3 pretax), including
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decrease in tax valuation allowance
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of $(1.9)
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- | - | 5.3 | - | 5.3 | |||||||||||||
Total comprehensive income
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205.9 | |||||||||||||||||
Dividends paid
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- | (203.0 | ) | - | - | (203.0 | ) | |||||||||||
Employee share-based payments
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- | 0.3 | - | - | 0.3 | |||||||||||||
Balance at March 31, 2010
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$ | 2.8 | $ | 4,325.5 | $ | 100.0 | $ | (1,521.0 | ) | $ | 2,907.3 | |||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
6
ING Life Insurance and Annuity Company and Subsidiaries
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(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
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Condensed Consolidated Statements of Cash Flows
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(Unaudited)
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(In millions)
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Three Months Ended March 31,
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2010
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2009
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Net cash provided by operating activities
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$ | 211.1 | $ | 369.9 | ||
Cash Flows from Investing Activities:
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Proceeds from the sale, maturity, disposal or redemption of:
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Fixed maturities, available-for-sale
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1,838.2 | 1,864.7 | ||||
Equity securities, available-for-sale
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5.8 | 23.6 | ||||
Mortgage loans on real estate
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66.0 | 31.8 | ||||
Limited partnerships/corporations
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12.6 | 12.6 | ||||
Derivatives
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(22.8) | 22.6 | ||||
Acquisition of:
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Fixed maturities, available-for-sale
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(1,486.6) | (2,092.6 | ) | |||
Equity securities, available-for-sale
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(13.3) | (12.2 | ) | |||
Mortgage loans on real estate
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(24.9) | (6.9 | ) | |||
Limited partnerships/corporations
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(13.1) | (7.4 | ) | |||
Derivatives
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(28.0) | (9.5 | ) | |||
Policy loans, net
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2.6 | 9.2 | ||||
Short-term investments, net
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243.1 | (319.1 | ) | |||
Loan-Dutch State obligation, net
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43.3 | - | ||||
Collateral (delivered) received
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5.3 | 0.5 | ||||
Purchases of fixed assets, net
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- | (2.1 | ) | |||
Net cash used in investing activities
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628.2 | (484.8 | ) | |||
Cash Flows from Financing Activities:
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Deposits received for investment contracts
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429.3 | 949.5 | ||||
Maturities and withdrawals from investment contracts
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(866.0) | (585.2 | ) | |||
Short-term loans to affiliates
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(223.6) | (623.4 | ) | |||
Short-term repayments of repurchase agreements, net
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- | (53.1 | ) | |||
Dividends to parent
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(203.0) | - | ||||
Contribution of capital
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- | 365.0 | ||||
Net cash (used in) provided by financing activities
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(863.3) | 52.8 | ||||
Net decrease in cash and cash equivalents
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(24.0) | (62.1 | ) | |||
Cash and cash equivalents, beginning of period
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243.3 | 203.5 | ||||
Cash and cash equivalents, end of period
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$ | 219.3 | $ | 141.4 | ||
The
accompanying notes are an integral part of these consolidated financial
statements.
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)
(Dollar
amounts in millions, unless otherwise stated)
1.
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Organization
and Significant Accounting Policies
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Basis
of Presentation
ING Life
Insurance and Annuity Company (“ILIAC”) is a stock life insurance company
domiciled in the state of Connecticut. ILIAC and its wholly-owned
subsidiaries (collectively, the “Company”) are providers of financial products
and services in the United States. ILIAC is authorized to conduct its
insurance business in all states and in the District of Columbia.
The
condensed consolidated financial statements for the three months ended
March 31, 2010, include ILIAC and its wholly-owned subsidiaries, ING
Financial Advisers, LLC (“IFA”) and Directed Services LLC
(“DSL”). ILIAC is a direct, wholly-owned subsidiary of Lion
Connecticut Holdings Inc. (“Lion” or “Parent”), which is an indirect,
wholly-owned subsidiary of ING Groep N.V. (“ING”). ING is a global
financial services holding company based in the Netherlands, with American
Depository Shares listed on the New York Stock Exchange under the symbol
“ING.”
As part
of a restructuring plan approved by the European Commission (“EC”), ING has
agreed to separate its banking and insurance businesses by 2013. ING
intends to achieve this separation by divestment of its insurance and investment
management operations, including the Company. ING has announced that
it will explore all options for implementing the separation including initial
public offerings, sales, or a combination thereof.
The
condensed consolidated financial statements and notes as of March 31, 2010, and
for the three months ended March 31, 2010 and 2009, have been prepared in
accordance with accounting principles generally accepted in the United States
("US GAAP") 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 2009 Annual Report on Form 10-K/A. The
results of operations for the interim periods may not be considered indicative
of results to be expected for the full year.
Description
of Business
The
Company offers qualified and nonqualified annuity contracts that include a
variety of funding and payout options for individuals and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403, 408,
and 457, as well as nonqualified deferred compensation plans. The
Company’s products are offered primarily to individuals, pension plans, small
businesses, and employer-sponsored groups in the health care, government, and
education markets (collectively “not-for-profit” organizations) and corporate
markets. The Company’s products are generally distributed through
pension professionals, independent agents and brokers, third party
administrators, banks, dedicated career agents, and financial
planners.
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)
(Dollar
amounts in millions, unless otherwise stated)
The
preparation of financial statements in conformity with US GAAP 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.
Subsequent
Events
The
Company has evaluated subsequent events for recognition and disclosure through
the date the condensed consolidated financial statements, as of March 31, 2010
and for the three months ended, were issued.
Significant
Accounting Policies
For a
description of significant accounting policies, see the Organization and
Significant Accounting Policies footnote to the Consolidated Financial
Statements included in the Company’s 2009 Annual Report on Form
10-K/A. There have been no material changes to the Company’s
significant accounting policies since the filing of the Company’s 2009 Annual
Report on Form 10-K/A, except as noted in the Recently Adopted Accounting
Standards footnote.
2.
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Recently
Adopted Accounting Standards
|
Improving
Disclosures about Fair Value Measurements
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and
Disclosure (ASC Topic 820): Improving Disclosures about Fair Value
Measurements,” (“ASU 2010-06”), which requires several new disclosures, as well
as clarification to existing disclosures, as follows:
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)
(Dollar
amounts in millions, unless otherwise stated)
§
|
Significant
transfers in and out of Level 1 and Level 2 fair value measurements and
the reason for the transfers;
|
§
|
Purchases,
sales, issuances, and settlement, in the Level 3 fair value measurements
reconciliation on a gross basis;
|
§
|
Fair
value measurement disclosures for each class of assets and liabilities
(i.e., disaggregated); and
|
§
|
Valuation
techniques and inputs for both recurring and nonrecurring fair value
measurements that fall in either Level 2 or Level 3 fair value
measurements.
|
The
provisions of ASU 2010-06 were adopted by the Company on January 1, 2010, and
are included in the Financial Instruments footnote, except for the disclosures
related to the Level 3 reconciliation, which are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal
years. As the pronouncement only pertains to additional disclosure,
the adoption had no effect on the Company’s financial condition, results of
operations, or cash flows.
Accounting
and Reporting Decreases in Ownership of a Subsidiary
In
January 2010, the FASB issued ASU 2010-02 “Consolidations (ASC Topic 810):
Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope
Clarification,” (“ASU 2010-02”), which clarifies that the scope of the decrease
in ownership provisions applies to the following:
§
|
A
subsidiary or group of assets that is a business or nonprofit
activity;
|
§
|
A
subsidiary that is a business or nonprofit activity that is transferred to
an equity method investee or joint venture;
and
|
§
|
An
exchange of a group of assets that constitutes a business or nonprofit
activity for a noncontrolling interest in an entity (including an equity
method investee or joint venture).
|
ASU
2010-02 also notes that the decrease in ownership guidance does not apply to
sales of in substance real estate and expands disclosure
requirements.
The
provisions of ASU 2010-02 were adopted by the Company on January 1, 2010, and
were required to be applied retrospectively to January 1, 2009. The
Company determined, however, that there was no effect on the Company’s financial
condition, results of operations, or cash flows for the three months ended March
31, 2010, or the year ended December 31, 2009, as there were no decreases in
ownership of a subsidiary during those periods.
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)
(Dollar
amounts in millions, unless otherwise stated)
Improvements
to Financial Reporting by Enterprises Involved in Variable Interest
Entities
In
December 2009, the FASB issued ASU 2009-17, “Consolidations (ASC Topic 810):
Improvements to Financial Reporting by Enterprises Involved in Variable Interest
Entities,” (“ASU 2009-17”), which eliminates the exemption for qualifying
special-purpose entities (“QSPEs”), as well as amends the consolidation guidance
for variable interest entities (“VIEs”), as follows:
§
|
Removes
the quantitative-based assessment for consolidation of VIEs and, instead,
requires a qualitative assessment of whether an entity has the power to
direct the VIE’s activities, and whether the entity has the obligation to
absorb losses or the right to reserve benefits that could be significant
to the VIE; and
|
§
|
Requires
an ongoing reassessment of whether an entity is the primary beneficiary of
a VIE.
|
In
addition, in February 2010, the FASB issued ASU 2010-10, “Consolidation (ASC
Topic 810): Amendments for Certain Investment Funds” (ASU 2010-10), which
primarily defers ASU 2009-17 for an investment in an entity that is accounted
for as an investment company.
The
provisions of ASU 2009-17 and ASU 2010-10 were adopted on January 1, 2010. The
Company determined, however, that there was no effect on the Company’s financial
condition, results of operations, or cash flows upon adoption, as the
consolidation conclusions were consistent with those under previous US GAAP. The
disclosure provisions required by ASU 2009-17 are presented in the Financial
Instruments footnote.
Accounting
for Transfers of Financial Assets
In
December 2009, the FASB issued ASU 2009-16 “Transfers & Servicing (ASC Topic
860): Accounting for Transfers of Financial Assets” (“ASU 2009-16”), which
eliminates the QSPE concept and requires a transferor of financial assets
to:
§
|
Consider
the transferor’s continuing involvement in assets, limiting the
circumstances in which a financial asset should be derecognized when the
transferor has not transferred the entire asset to an entity that is not
consolidated;
|
§
|
Account
for the transfer as a sale only if an entity transfers an entire financial
asset and surrenders controls, unless the transfer meets the conditions
for a participating interest; and
|
§
|
Recognize
and initially measure at fair value all assets obtained and liabilities
incurred as a result of a transfer of financial assets accounted for as a
sale.
|
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)
(Dollar
amounts in millions, unless otherwise stated)
The
provisions of ASU 2009-16 were adopted on January 1, 2010. The Company
determined, however, that there was no effect on the Company’s financial
condition, results of operations, or cash flows upon adoption, as the Company
did not have any QSPEs under previous US GAAP, and the requirements for sale
accounting treatment are consistent with those previously applied by the Company
under US GAAP.
Measuring
the Fair Value of Certain Alternative Investments
In
September 2009, the FASB issued ASU 2009-12, “Fair Value Measurements and
Disclosures (ASC Topic 820): Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent)” (“ASU 2009-12”), which allows the use
of net asset value to estimate the fair value of certain alternative
investments, such as interests in hedge funds, private equity funds, real estate
funds, venture capital funds, offshore fund vehicles, and funds of
funds. In addition, ASU 2009-12 requires disclosures about the
attributes of such investments.
The
provisions of ASU 2009-12 were adopted by the Company on December 31,
2009. The Company determined, however, that there was no effect on
the Company’s financial condition, results of operations, or cash flows upon
adoption, as its guidance is consistent with that previously applied by the
Company under US GAAP. The disclosure provisions required by ASU
2009-12 are presented in the Investments footnote to these financial
statements.
FASB
Accounting Standards Codification
In June
2009, the FASB issued ASU 2009-01, “Topic 105 – Generally Accepted Accounting
Principles: amendments based on Statement of Financial Accounting Standards No.
168, The FASB Accounting Standards CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles” (“ASU 2009-01”),
which confirms that as of July 1, 2009, the “FASB Accounting Standards
CodificationTM”
(“the Codification” or “ASC”) is the single official source of authoritative,
nongovernmental US GAAP. All existing accounting standard documents
are superseded, and all other accounting literature not included in the
Codification is considered nonauthoritative.
The
Company adopted the Codification as of July 1, 2009. There was no
effect on the Company’s financial condition, results of operations, or cash
flows. The Company has revised its disclosures to incorporate
references to the Codification topics.
Subsequent
Events
In May
2009, the FASB issued new guidance on subsequent events, included in ASC Topic
855, “Subsequent Events,” which establishes:
12
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
§
|
The
period after the balance sheet date during which an entity should evaluate
events or transactions for potential recognition or disclosure in the
financial statements;
|
§
|
The
circumstances under which an entity should recognize such events or
transactions in its financial statements;
and
|
§
|
Disclosures
regarding such events or transactions and the date through which an entity
has evaluated subsequent events.
|
These
provisions, as included in ASC Topic 855, were adopted by the Company on June
30, 2009. In addition, in February 2010, the FASB issued ASU 2010-09,
“Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements”, which clarifies that an SEC filer should evaluate subsequent
events through the date the financial statements are issued and eliminates the
requirement for an SEC filer to disclose that date, effective upon issuance. The
Company determined that there was no effect on the Company’s financial
condition, results of operations, or cash flows upon adoption, as the guidance
is consistent with that previously applied by the Company under U.S. auditing
standards. The disclosure provisions included in ASC Topic 855, as amended, are
presented in the Organization and Significant Accounting Policies footnote to
these financial statements.
Recognition
and Presentation of Other-Than-Temporary Impairments
In April
2009, the FASB issued new guidance on recognition and presentation of
other-than-temporary impairments, included in ASC Topic 320, “Investments-Debt
and Equity Securities,” which requires:
§
|
Noncredit
related impairments to be recognized in other comprehensive income (loss),
if management asserts that it does not have the intent to sell the
security and that it is more likely than not that the entity will not have
to sell the security before recovery of the amortized cost
basis;
|
§
|
Total
other-than-temporary impairments (“OTTI”) to be presented in the Statement
of Operations with an offset recognized in Accumulated other comprehensive
income (loss) for the noncredit related
impairments;
|
§
|
A
cumulative effect adjustment as of the beginning of the period of adoption
to reclassify the noncredit component of a previously recognized
other-than-temporary impairment from Retained earnings (deficit) to
Accumulated other comprehensive income (loss);
and
|
§
|
Additional
interim disclosures for debt and equity securities regarding types of
securities held, unrealized losses, and other-than-temporary
impairments.
|
These
provisions, as included in ASC Topic 320, were adopted by the Company on
April 1, 2009. As a result of implementation, the Company
recognized a cumulative effect of change in accounting principle of $151.7 after
considering the effects of deferred policy acquisition costs (“DAC”) and income
taxes of $(134.0) and $46.9, respectively, as an increase to April 1, 2009
Retained earnings (deficit) with a corresponding decrease to Accumulated other
comprehensive income (loss).
13
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
In
addition, the Company recognized an increase in amortized cost for previously
impaired securities due to the recognition of the cumulative effect of change in
accounting principle as of April 1, 2009, as follows:
Change in
|
||
Amortized Cost
|
||
Fixed maturities:
|
||
U.S. corporate, state and municipalities
|
$ | 47.0 |
Foreign
|
45.0 | |
Residential mortgage-backed
|
14.3 | |
Commercial mortgage-backed
|
88.5 | |
Other asset-backed
|
44.0 | |
Total investments, available-for-sale
|
$ | 238.8 |
The
disclosure provisions, as included in ASC Topic 320, are presented in the
Investments footnote to these financial statements.
Interim
Disclosures about Fair Value of Financial Instruments
In April
2009, the FASB issued new guidance on interim disclosures about fair value of
financial instruments, included in ASC Topic 825, “Financial Instruments,” which
requires that the fair value of financial instruments be disclosed in an
entity’s interim financial statements, as well as in annual financial
statements. The provisions included in ASC Topic 825 also require that fair
value information be presented with the related carrying value and that the
method and significant assumptions used to estimate fair value, as well as
changes in method and significant assumptions, be disclosed.
These
provisions, as included in ASC Topic 825, were adopted by the Company on
April 1, 2009 and are presented in the Financial Instruments footnote to
these financial statements. As the pronouncement only pertains to
additional disclosure, the adoption had no effect on the Company’s financial
condition, results of operations, or cash flows.
Disclosures
about Derivative Instruments and Hedging Activities
In March
2008, the FASB issued new guidance on disclosures about derivative instruments
and hedging activities, included in ASC Topic 815, “Derivatives and Hedging,”
which requires enhanced disclosures about objectives and strategies for using
derivatives, fair value amounts of, and gains and losses on, derivative
instruments, and credit-risk-related contingent features in derivative
agreements, including:
14
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
§
|
How
and why derivative instruments are
used;
|
§
|
How
derivative instruments and related hedged items are accounted for under US
GAAP for derivative and hedging activities;
and
|
§
|
How
derivative instruments and related hedged items affect an entity’s
financial statements.
|
These
provisions, as included in ASC Topic 815, were adopted by the Company on January
1, 2009 and are included in the Financial Instruments footnote to these
financial statements. As the pronouncement only pertains to additional
disclosure, the adoption had no effect on the Company’s financial condition,
results of operations, or cash flows. In addition, the Company’s derivatives are
generally not accounted for using hedge accounting treatment under ASC Topic
815, as the Company has not historically sought hedge accounting
treatment.
3.
|
New
Accounting Pronouncements
|
Consolidation
Analysis of Investments Held through Separate Accounts
In April
2010, the FASB issued ASU 2010-15, “Financial Services—Insurance (ASC Topic
944): How Investments Held through Separate Accounts Affect an Insurer’s
Consolidation Analysis of Those Investments” (“ASU 2010-15”), which clarifies
that an insurance entity generally should not consider any separate account
interests held for the benefit of policy holders in an investment to be the
insurer's interests, and should not combine those interests with its general
account interest in the same investment when assessing the investment for
consolidation. The provisions of ASU 2010-15 are effective for fiscal
years and interim periods beginning after December 15, 2010. The amendments are
to be applied retrospectively to all prior periods as of the date of
adoption. The Company does not expect any effect on its financial
condition, results of operations, or cash flows upon adoption, as the guidance
is consistent with that previously applied by the Company under ASC Topic
944.
Scope
Exception Related to Embedded Credit Derivatives
In March
2010, the FASB issued ASU 2010-11, “Derivatives and Hedging (ASC Topic 815):
Scope Exception Related to Embedded Credit Derivatives” (“ASU 2010-11”), which
clarifies that the only type of embedded credit derivatives that are exempt from
bifurcation requirements are those that relate to the subordination of one
financial instrument to another. The provisions of ASU 2010-11 are
effective as of the beginning of the first fiscal quarter after June 15, 2010,
with early adoption permitted. The Company does not expect any effect
on its financial condition, results of operations, or cash flows upon adoption,
as the guidance is consistent with that previously applied by the Company under
ASC Topic 815.
15
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
4.
|
Financial
Instruments
|
Fair
Value Measurements
ASC Topic
820, “Fair Value Measurements and Disclosures”, defines fair value, establishes
a framework for measuring fair value, establishes a fair value hierarchy based
on the quality of inputs used to measure fair value, and enhances disclosure
requirements for fair value measurements.
Fair
Value Hierarchy
The
Company has categorized its financial instruments into a three level hierarchy
based on the priority of the inputs to the valuation technique.
The fair
value hierarchy gives the highest priority to quoted prices in active markets
for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). If the inputs used to measure fair value fall
within different levels of the hierarchy, the category level is based on the
lowest priority level input that is significant to the fair value measurement of
the instrument.
Financial
assets and liabilities recorded at fair value on the Condensed Consolidated
Balance Sheets are categorized as follows:
§
|
Level
1 - Unadjusted quoted prices for identical assets or liabilities in an
active market.
|
§
|
Level
2 - Quoted prices in markets that are not active or inputs that are
observable either directly or indirectly for substantially the full term
of the asset or liability. Level 2 inputs include the
following:
|
a)
|
Quoted
prices for similar assets or liabilities in active
markets;
|
b)
|
Quoted
prices for identical or similar assets or liabilities in non-active
markets;
|
c)
|
Inputs
other than quoted market prices that are observable;
and
|
d)
|
Inputs
that are derived principally from or corroborated by observable market
data through correlation or other
means.
|
§
|
Level
3 - Prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value
measurement. These valuations, whether derived internally or
obtained from a third party, use critical assumptions that are not widely
available to estimate market participant expectations in valuing the asset
or liability.
|
16
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
The
following tables present the Company’s hierarchy for its assets and liabilities
measured at fair value on a recurring basis as of March 31, 2010 and December
31, 2009.
2010
|
|||||||||||
Level 1
|
Level 2
|
Level 3(1)
|
Total
|
||||||||
Assets:
|
|||||||||||
Fixed maturities, available-for-sale,
|
|||||||||||
including securities pledged:
|
|||||||||||
U.S. Treasuries | $ | 964.5 | $ | 53.7 | $ | - | $ | 1,018.2 | |||
U.S. government agencies and authorities
|
- | 666.3 | - | 666.3 | |||||||
U.S. corporate, state and municipalities
|
- | 6,355.0 | 44.7 | 6,399.7 | |||||||
Foreign
|
- | 3,761.8 | 29.8 | 3,791.6 | |||||||
Residential mortgage-backed securities
|
- | 1,960.6 | 63.3 | 2,023.9 | |||||||
Commercial mortgage-backed securities
|
- | 1,196.8 | 5.7 | 1,202.5 | |||||||
Other asset-backed securities
|
- | 257.9 | 243.3 | 501.2 | |||||||
Equity securities, available-for-sale
|
149.4 | - | 51.4 | 200.8 | |||||||
Derivatives:
|
|||||||||||
Interest rate contracts
|
0.3 | 153.9 | - | 154.2 | |||||||
Foreign exchange contracts
|
- | 1.5 | - | 1.5 | |||||||
Credit contracts
|
- | 1.3 | - | 1.3 | |||||||
Cash and cash equivalents, short-term
|
|||||||||||
investments, and short-term investments
|
|||||||||||
under securities loan agreement
|
791.8 | - | - | 791.8 | |||||||
Product guarantees
|
- | - | 7.5 | 7.5 | |||||||
Assets held in separate accounts
|
36,904.8 | 6,379.0 | - | 43,283.8 | |||||||
Total
|
$ | 38,810.8 | $ | 20,787.8 | $ | 445.7 | $ | 60,044.3 | |||
Liabilities:
|
|||||||||||
Derivatives:
|
|||||||||||
Interest rate contracts
|
$ | - | $ | 215.5 | $ | - | $ | 215.5 | |||
Foreign exchange contracts
|
- | 37.3 | - | 37.3 | |||||||
Credit contracts
|
- | 4.1 | 41.0 | 45.1 | |||||||
Total
|
$ | - | $ | 256.9 | $ | 41.0 | $ | 297.9 | |||
(1)
Level 3 net assets and liabilities accounted for 0.7% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for
|
|||||||||||
which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled 2.5%. |
17
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
2009
|
|||||||||||
Level 1
|
Level 2
|
Level 3(1)
|
Total
|
||||||||
Assets:
|
|||||||||||
Fixed maturities, available-for-sale,
|
|||||||||||
including securities pledged
|
$ | 1,861.8 | $ | 12,320.6 | $ | 1,472.9 | $ | 15,655.3 | |||
Equity securities, available-for-sale
|
148.1 | - | 39.8 | 187.9 | |||||||
Derivatives
|
- | 129.0 | - | 129.0 | |||||||
Cash and cash equivalents, short-term
|
|||||||||||
investments, and short-term investments
|
|||||||||||
under securities loan agreement
|
1,128.0 | 1.8 | - | 1,129.8 | |||||||
Assets held in separate accounts
|
34,936.7 | 6,433.1 | - | 41,369.8 | |||||||
Total
|
$ | 38,074.6 | $ | 18,884.5 | $ | 1,512.7 | $ | 58,471.8 | |||
Liabilities:
|
|||||||||||
Product guarantees
|
$ | - | $ | - | $ | 6.0 | $ | 6.0 | |||
Derivatives
|
- | 283.4 | 48.3 | 331.7 | |||||||
Total
|
$ | - | $ | 283.4 | $ | 54.3 | $ | 337.7 | |||
(1) Level net assets and liabilities accounted for 2.5% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net
|
|||||||||||
assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled 8.7%. |
Transfers
in and out of Level 1 and 2
Certain
US Treasury securities valued by commercial pricing services where prices are
derived using market observable inputs have been transferred from Level 1 to
Level 2. These securities for the three months ended March 31, 2010,
include US Treasury strips of $52.8 in which prices are modeled incorporating a
variety of market observable information in their valuation techniques,
including benchmark yields, broker-dealer quotes, credit quality, issuer
spreads, bids, offers and other reference data. The Company’s policy is to
recognize transfers in and transfers out as of the beginning of the
period.
Valuation
of Financial Assets and Liabilities
As
described below, certain assets and liabilities are measured at estimated fair
value on the Company’s Condensed Consolidated Balance Sheets. In addition,
further disclosure of estimated fair values is included in this Financial
Instruments footnote. The Company defines fair value as the price that would be
received to sell an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. The exit price
and the transaction (or entry) price will be the same at initial recognition in
many circumstances. However, in certain cases, the transaction price may not
represent fair value. The fair value of a liability is based on the amount that
would be paid to transfer a liability to a third-party with an equal credit
standing. Fair value is required to be a market-based measurement in which the
fair value is determined based on a hypothetical transaction at the measurement
date, from a market participant’s perspective. The Company considers three broad
valuation techniques when a quoted price is unavailable: (i) the market
approach, (ii) the income approach and (iii) the cost approach. The Company
determines the most appropriate valuation technique to use, given the instrument
being measured and the availability of sufficient inputs. The Company
prioritizes the inputs to fair valuation techniques and allows for the use of
unobservable inputs to the extent that observable inputs are not
available.
18
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
The
Company utilizes a number of valuation methodologies to determine the fair
values of its financial assets and liabilities in conformity with the concepts
of “exit price” and the fair value hierarchy as prescribed in ASC Topic
820. Valuations are obtained from third party commercial pricing
services, brokers, and industry-standard, vendor-provided software that models
the value based on market observable inputs. The valuations obtained
from brokers and third party commercial pricing services are
non-binding. The valuations are reviewed and validated monthly
through the internal valuation committee price variance review, comparisons to
internal pricing models, back testing to recent trades, or monitoring of trading
volumes.
All
valuation methods and assumptions are validated at least quarterly to ensure the
accuracy and relevance of the fair values. There were no material
changes to the valuation methods or assumptions used to determine fair values
except for the Company’s use of commercial pricing services to value certain
collateralized mortgage obligations (“CMO-Bs”) in the first quarter of 2010.
CMO-Bs were previously valued using an average of broker quotes when more than
one broker quote is provided.
The
following valuation methods and assumptions were used by the Company in
estimating the fair value of the following financial instruments:
Fixed maturities,
available-for-sale: The fair values for the actively traded marketable
bonds are determined based upon the quoted market prices and are classified as
Level 1 assets. Assets in this category would primarily include
certain US Treasury securities. The fair values for marketable bonds
without an active market, excluding subprime residential mortgage-backed
securities, are obtained through several commercial pricing services, which
provide the estimated fair values, and are classified as Level 2 assets. These services
incorporate a variety of market observable information in their valuation
techniques, including benchmark yields, broker-dealer quotes, credit quality,
issuer spreads, bids, offers and other reference data. This category
includes US & foreign corporate bonds, Asset-backed Securities (“ABS”), US
agency and government guaranteed securities, Commercial Mortgage-backed
Securities (“CMBS”), and Residential Mortgage-backed Securities (“RMBS”),
including certain CMO-Bs.
19
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Generally,
the Company does not obtain more than one vendor price from pricing services per
instrument. The Company uses a hierarchy process in which prices are
obtained from a primary vendor, and, if that vendor is unable to provide the
price, the next vendor in the hierarchy is contacted until a price is obtained
or it is determined that a price cannot be obtained from a commercial pricing
service. When a price cannot be obtained from a commercial pricing
service, independent broker quotes are solicited. Securities priced
using independent broker quotes are classified as Level 3.
Broker
quotes and prices obtained from pricing services are reviewed and validated
monthly through an internal valuation committee price variance review,
comparisons to internal pricing models, back testing to recent trades, or
monitoring of trading volumes. At March 31, 2010, $140.6 and $12.1
billion of a total of $15.6 billion in fixed maturities were valued using
unadjusted broker quotes and unadjusted prices obtained from pricing services,
respectively, and verified through the review process. The remaining
balance in fixed maturities consisted primarily of privately placed bonds valued
using a matrix-based pricing.
All
prices and broker quotes obtained go through the review process described above
including valuations for which only one broker quote is
obtained. After review, for those instruments where the price is
determined to be appropriate, the unadjusted price provided is used for
financial statement valuation. If it is determined that the price is
questionable, another price may be requested from a different
vendor. The internal valuation committee then reviews all prices for
the instrument again, along with information from the review, to determine which
price best represents “exit price” for the instrument.
Fair
values of privately placed bonds are determined using a matrix-based pricing
model and are classified as Level 2 assets. The model considers the
current level of risk-free interest rates, current corporate spreads, the credit
quality of the issuer, and cash flow characteristics of the
security. Also considered are factors such as the net worth of the
borrower, the value of collateral, the capital structure of the borrower, the
presence of guarantees, and the Company’s evaluation of the borrower’s ability
to compete in its 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.
Trading
activity for the RMBS, particularly subprime and Alt-A RMBS, declined during
2008 as a result of the dislocation of the credit markets. The
Company continued to obtain pricing information from commercial pricing services
and brokers. However, the pricing for subprime and Alt-A RMBS did not represent
regularly occurring market transactions since the trading activity declined
significantly in the second half of 2008. As a result, the Company
concluded in the second half of 2008 that the market for subprime and Alt-A RMBS
was inactive and classified these securities as Level 3 assets. The
Company did not change its valuation procedures, which are consistent with those
used for Level 2 marketable bonds without an active market, as a result of
determining that the market was inactive. Due to increased trade activity of
Alt-A RMBS during the second half of 2009, the Company determined that the Alt-A
RMBS should be transferred to Level 2 of the valuation hierarchy as its overall
assessment of the market was that it was active. The market for subprime RMBS
remains largely inactive, and as such these securities remain in Level 3 of
the valuation hierarchy. The Company continues to monitor market activity for
RMBS to determine proper classification in the valuation hierarchy.
20
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Equity securities,
available-for-sale: Fair values of publicly traded equity securities are
based upon quoted market price and are classified as Level 1 assets. Other
equity securities, typically private equities or equity securities not traded on
an exchange, are valued by other sources such as analytics or brokers and are
classified as Level 3 assets.
Cash and cash equivalents, Short-term investments, and Short-term investments under securities loan agreement: The carrying amounts for cash reflect the assets’ fair values. The fair values for cash equivalents and short-term investments are determined based on quoted market prices. These assets are classified as Level 1. Other short-term investments are valued and classified in the fair value hierarchy consistent with the policies described herein, depending on investment type.
Assets held in separate
accounts: Assets held in separate accounts are reported at the quoted
fair values of the underlying investments in the separate
accounts. The underlying investments include mutual funds, short-term
investments and cash, the valuations of which are based upon a quoted market
price and are included in Level 1. Bond valuations are obtained from
third party commercial pricing services and brokers and are classified in the
fair value hierarchy consistent with the policies described above for Fixed
maturities.
Derivatives: The carrying
amounts for these financial instruments, which can be assets or liabilities,
reflect the fair value of the assets and liabilities. Derivatives are
carried at fair value (on the Condensed Consolidated Balance Sheets), which is
determined using the Company’s derivative accounting system in conjunction with
observable key financial data from third party sources, such as yield curves,
exchange rates, Standard & Poor’s (“S&P”) 500 Index prices, and London
Inter Bank Offered Rates (“LIBOR”), or through values established by third party
brokers. Counterparty credit risk is considered and incorporated in the
Company’s valuation process through counterparty credit rating requirements and
monitoring of overall exposure. It is the Company’s policy to
transact only with investment grade counterparties with a credit rating of A- or
better. Valuations for the Company’s futures contracts are based on unadjusted
quoted prices from an active exchange and, therefore, are classified as Level 1.
The Company also has certain credit default swaps that are priced using models
that primarily use market observable inputs, but contain inputs that are not
observable to market participants, which have been classified as Level 3.
However, all other derivative instruments are valued based on market observable
inputs and are classified as Level 2.
21
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Product guarantees: The Company records
product guarantees, which can be either assets or liabilities, for annuity
contracts containing guaranteed credited rates in accordance with ASC
815. The guarantee is treated as an embedded derivative or a
stand-alone derivative (depending on the underlying product) and is required to
be reported at fair value. The fair value of the obligation is
calculated based on the income approach as described in ASC 820. The
income associated with the contracts is projected using actuarial and capital
market assumptions, including benefits and related contract charges, over the
anticipated life of the related contracts. The cash flow estimates
are produced by using stochastic techniques under a variety of risk neutral
scenarios and other best estimate assumptions. These derivatives are
classified as Level 3 liabilities or assets. Explicit risk margins in the
actuarial assumptions underlying valuations are included, as well as an explicit
recognition of all nonperformance risks as required by US
GAAP. Nonperformance risk for product guarantees contains adjustments
to the fair values of these contract liabilities related to the current credit
standing of ING and the Company based on credit default swaps with similar term
to maturity and priority of payment. The ING credit default spread is
applied to the discount factors for product guarantees in the Company’s
valuation model in order to incorporate credit risk into the fair values of
these product guarantees. As of March 31, 2010, the credit
spread of ING and the Company changed in relation to prior periods, which
contributed to an increase in the value of the derivatives for product
guarantees.
The
following disclosures are made in accordance with the requirements of ASC 825
which 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.
ASC 825
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 which are not
carried at fair value on the Condensed Consolidated Balance Sheets, and
therefore not categorized in the fair value hierarchy:
22
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Limited
partnerships/corporations: The fair value for these investments,
primarily private equities and hedge funds, is estimated based on the Net Asset
Value (“NAV”) as provided by the investee.
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.
Loan - Dutch State
obligation: The fair value of the Dutch State loan obligation is
estimated utilizing discounted cash flows at market risk-free rates adjusted for
credit spreads.
Policy loans: The
fair value of policy loans is equal to the carrying, or cash surrender, value of
the loans. Policy loans are fully collateralized by the account value
of the associated insurance contracts.
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.
Notes receivable from
affiliates: Estimated fair value of the Company’s notes receivable from
affiliates is based upon discounted future cash flows using a discount rate
approximating the current market rate.
23
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
The
carrying values and estimated fair values of certain of the Company’s financial
instruments were as follows at March 31, 2010 and December 31,
2009.
2010
|
2009
|
||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||||
Value
|
Value
|
Value
|
Value
|
||||||||||||
Assets:
|
|||||||||||||||
Fixed maturities, available-for-sale,
|
|||||||||||||||
including securities pledged
|
$ | 15,603.4 | $ | 15,603.4 | $ | 15,655.3 | $ | 15,655.3 | |||||||
Equity securities, available-for-sale
|
200.8 | 200.8 | 187.9 | 187.9 | |||||||||||
Mortgage loans on real estate
|
1,834.0 | 1,785.0 | 1,874.5 | 1,792.8 | |||||||||||
Loan-Dutch State obligation
|
630.8 | 615.1 | 674.1 | 645.5 | |||||||||||
Policy loans
|
252.1 | 252.1 | 254.7 | 254.7 | |||||||||||
Cash, cash equivalents, short-term
|
|||||||||||||||
investments, and short-term
|
|||||||||||||||
investments under securities
|
|||||||||||||||
loan agreement
|
791.8 | 791.8 | 1,129.8 | 1,129.8 | |||||||||||
Derivatives
|
157.0 | 157.0 | 129.0 | 129.0 | |||||||||||
Notes receivable from affiliates
|
175.0 | 171.1 | 175.0 | 169.6 | |||||||||||
Product guarantees
|
7.5 | 7.5 | - | - | |||||||||||
Assets held in separate accounts
|
43,283.8 | 43,283.8 | 41,369.8 | 41,369.8 | |||||||||||
Liabilities:
|
|||||||||||||||
Investment contract liabilities:
|
|||||||||||||||
With a fixed maturity
|
1,271.6 | 1,390.2 | 1,359.0 | 1,450.4 | |||||||||||
Without a fixed maturity
|
16,206.2 | 17,587.1 | 16,441.2 | 17,688.4 | |||||||||||
Product guarantees
|
- | - | 6.0 | 6.0 | |||||||||||
Derivatives
|
297.9 | 297.9 | 331.7 | 331.7 |
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 capital gains
(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.
24
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Level
3 Financial Instruments
The fair
values of certain assets and liabilities are determined using prices or
valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement (i.e., Level 3 as defined by
ASC 820), including but not limited to liquidity spreads for investments within
markets deemed not currently active. These valuations, whether
derived internally or obtained from a third party, use critical assumptions that
are not widely available to estimate market participant expectations in valuing
the asset or liability. In addition, the Company has determined, for certain
financial instruments, an active market is such a significant input to determine
fair value that the presence of an inactive market may lead to classification in
Level 3. In light of the methodologies employed to obtain the fair value of
financial assets and liabilities classified as Level 3, additional information
is presented below, with particular attention addressed to the reserves for
product guarantees due to the impact on the Company’s results of
operations.
25
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
The
following tables summarize the changes in fair value of the Company’s
Level 3 assets and liabilities for the three months ended March 31,
2010.
Three Months Ended March 31, 2010
|
|||||||||||||||
Fair Value
|
Total realized/unrealized |
Purchases,
|
|||||||||||||
as of
|
gains (losses) included in: | issuances, and | |||||||||||||
January 1
|
Net income
|
OCI
|
settlements
|
||||||||||||
Fixed maturities, available for sale,
|
|||||||||||||||
including securities pledged:
|
|||||||||||||||
U.S. corporate, state and municipalities
|
$ | - | $ | - | $ | 0.2 | $ | 37.4 | |||||||
Foreign
|
- | - | - | 24.1 | |||||||||||
Residential mortgage-backed securities
|
1,284.1 | (6.3) | 1.0 | 10.2 | |||||||||||
Commercial mortgage-backed securities
|
- | - | - | - | |||||||||||
Other asset-backed securities
|
188.8 | (6.9) | 19.7 | (10.6 | ) | ||||||||||
Total Fixed maturities, available for sale,
|
|||||||||||||||
including securities pledged
|
1,472.9 | (13.2) | 20.9 | 61.1 | |||||||||||
Equity securities, available for sale
|
39.8 | - | (0.2 | ) | 11.8 | ||||||||||
Derivatives
|
(48.3) | 0.6 | - | 6.7 | |||||||||||
Product guarantees
|
(6.0) | 15.1 |
(1)
|
- | (1.6 | ) |
Change in
|
||||||||||||||||
Transfers
|
Transfers
|
Fair Value
|
unrealized gains
|
|||||||||||||
in to
|
out of
|
as of
|
(losses) included
|
|||||||||||||
Level 3(2)
|
Level 3(2)
|
March 31
|
in earnings(3)
|
|||||||||||||
Fixed maturities, available for sale,
|
||||||||||||||||
including securities pledged:
|
||||||||||||||||
U.S. corporate, state and municipalities
|
$ | 7.1 | $ | - | $ | 44.7 | $ | - | ||||||||
Foreign
|
5.7 | - | 29.8 | - | ||||||||||||
Residential mortgage-backed securities
|
0.8 | (1,226.5 | ) | 63.3 | (7.1 | ) | ||||||||||
Commercial mortgage-backed securities
|
5.7 | - | 5.7 | - | ||||||||||||
Other asset-backed securities
|
52.3 | - | 243.3 | (6.3 | ) | |||||||||||
Total Fixed maturities, available for sale,
|
||||||||||||||||
including securities pledged
|
71.6 | (1,226.5 | ) | 386.8 | (13.4 | ) | ||||||||||
Equity securities, available for sale
|
- | - | 51.4 | - | ||||||||||||
Derivatives
|
- | - | (41.0 | ) | - | |||||||||||
Product guarantees
|
- | - | 7.5 | - |
(1)
|
This amount is included in Interest credited and other benefits to contractowners on the Condensed Consolidated Statements of Operations.All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses)
|
separately on a contract-by-contract basis.
|
|
(2)
|
The Company's policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
|
(3)
|
For financial instruments still held as of March 31.
|
26
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
The
following table summarizes the changes in fair value of the Company’s
Level 3 assets and liabilities for the three months ended March 31,
2009.
Three Months Ended March 31, 2009
|
|||||||||||||||||||||
Fair Value
|
Total realized/
|
unrealized
|
Purchases,
|
Transfers
|
Fair Value
|
||||||||||||||||
as of
|
gains (losses)
|
included in:
|
issuances, and
|
in to
|
as of
|
||||||||||||||||
January 1
|
Net income
|
OCI
|
settlements
|
Level 3(2)
|
March 31
|
||||||||||||||||
Fixed
maturities, available for sale,
including securities pledged
|
$ | 2,291.6 | $ | 196.1 | $ | 243.0 | $ | (1,106.2 | ) | $ | 316.2 | $ | 1,940.7 | ||||||||
Derivatives
|
(73.6 | ) | (1.2) | - | (0.2 | ) | - | (75.0 | ) | ||||||||||||
Product guarantees
|
(220.0 | ) | 26.2 | (1) | - | (1.2 | ) | - | (195.0 | ) |
(1)
|
This amount is included in Interest credited and other benefits to contractowners on the Condensed Consolidated Statements of Operations.All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses)
|
gains (losses) separately on a contract-by-contract basis.
|
|
(2)
|
The Company's policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
|
Changes
in Level 3 fair value balances are discussed below by investment
type.
Fixed Maturities,
available-for-sale, including securities pledged: The transfers out of
Level 3 for the three months ended March 31, 2010, are due to the Company’s use
of commercial pricing services to value CMO-Bs. These services incorporate a
variety of market observable information in their valuation techniques,
including benchmark yields, broker-dealer quotes, credit quality, issuer
spreads, bids, offers and other reference data and have been classified as Level
2. The CMO-Bs had previously been valued by using the average of broker quotes
when more than one broker quote is provided.
The
transfers into level 3 for the three months ended March 31, 2010, are securities
that are primarily valued using independent broker quotes when prices are not
available from one of the commercial pricing services. These securities are
generally less liquid with very limited trading activity or where less
transparency exists corroborating the inputs to the valuation
methodologies.
Equity securities,
available-for-sale: The increase in Level 3 for these securities is
primarily due to an increase in net purchases.
27
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Derivatives: The increase in
Level 3 for these securities is primarily due to net settlements of derivative
liabilities.
Product guarantees: The fair
value of Level 3 product guarantees increased primarily due to lower expected
claims related to market improvements.
Derivative
Financial Instruments
See the
Organization & Significant Accounting Policies footnote to the Consolidated
Financial Statements included in the Company’s 2009 Annual Report on Form 10-K/A
for disclosure regarding the Company’s purpose for entering into derivatives and
the policies on valuation and classification of derivatives. In addition, the
Company’s derivatives are generally not accounted for using hedge accounting
treatment under US GAAP, as the Company has not historically sought hedge
accounting treatment. The Company enters into the following
derivatives:
Interest rate caps: Interest
rate caps are used to manage the interest rate risk in the Company’s fixed
maturity portfolio. Interest rate caps are purchased contracts that
are used by the Company to hedge annuity products in an increasing interest rate
environment.
Interest rate swaps: Interest
rate swaps are used to manage the interest rate risk in the Company’s fixed
maturity 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.
Foreign exchange swaps:
Foreign exchange swaps are used to reduce the risk of a change in the value,
yield, or cash flow with respect to invested assets. Foreign exchange
swaps represent contracts that require the exchange of foreign currency cash
flows for U.S. dollar cash flows at regular interim periods, typically quarterly
or semi-annually.
Credit default swaps: Credit
default swaps are used to reduce the credit loss exposure with respect to
certain assets that the Company owns, or to assume credit exposure on certain
assets that the Company does not own. Payments are made to or
received from the counterparty at specified intervals and amounts for the
purchase or sale of credit protection. In the event of a default on the
underlying credit exposure, the Company will either receive an additional
payment (purchased credit protection) or will be required to make an additional
payment (sold credit protection) equal to par minus recovery value of the swap
contract.
Forwards: Forwards are
acquired to hedge the Company’s CMO-B portfolio against movements in interest
rates, particularly mortgage rates. On the settlement date, the
Company will either receive a payment (interest rate drops on owned forwards or
interest rate rises on purchased forwards) or will be required to make a payment
(interest rate rises on owned forwards or interest rate drops on purchased
forwards).
Swaptions: Swaptions are used
to manage interest rate risk in the Company’s collateralized mortgage
obligations portfolio. Swaptions are contracts that give the Company
the option to enter into an interest rate swap at a specific future
date.
28
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Managed Custody Guarantees:
The Company issued certain credited rate guarantees on externally managed
variable bond funds that represent stand alone derivatives. The
market value is partially determined by, among other things, levels of or
changes in interest rates, prepayment rates, and credit
ratings/spreads.
Embedded derivatives: The
Company also has investments in certain fixed maturity instruments, and has
issued certain retail annuity products, that contain embedded derivatives whose
market value is at least partially determined by, among other things, levels of
or changes in domestic and/or foreign interest rates (short-term or long-term),
exchange rates, prepayment rates, equity rates, or credit
ratings/spreads.
The
notional amounts and fair values of derivatives were as follows as of March 31,
2010 and December 31, 2009.
2010
|
2009
|
||||||||||||||||||||||
Notional
|
Asset
|
Liability
|
Notional
|
Asset
|
Liability
|
||||||||||||||||||
Amount
|
Fair Value
|
Fair Value
|
Amount
|
Fair Value
|
Fair Value
|
||||||||||||||||||
Interest rate caps(1)
|
7,690.0 | $ | 53.2 | $ | (4.1 | ) | 3,750.0 | $ | 41.5 | $ | (6.0 | ) | |||||||||||
Interest rate swaps(1)
|
5,835.6 | 100.4 | (211.4 | ) | 5,909.4 | 86.8 | (228.8 | ) | |||||||||||||||
Foreign exchange swaps(1)
|
224.0 | 1.5 | (37.3 | ) | 199.5 | - | (43.3 | ) | |||||||||||||||
Credit default swaps(1)
|
250.5 | 1.3 | (45.1 | ) | 243.9 | 0.2 | (53.6 | ) | |||||||||||||||
Forwards(1)
|
68.4 | 0.3 | - | - | - | - | |||||||||||||||||
Swaptions(1)
|
90.7 | 0.3 | - | 90.7 | 0.5 | - | |||||||||||||||||
Managed custody guarantees(3)
|
N/A | - | (2.5 | ) | N/A | - | (6.0 | ) | |||||||||||||||
Embedded derivatives:
|
|||||||||||||||||||||||
Within securities(2)
|
N/A | 49.4 | (0.2 | ) | N/A | 46.4 | (0.1 | ) | |||||||||||||||
Within retail annuity products(3)
|
N/A | 10.0 | - | N/A | - | - | |||||||||||||||||
Total | 14,159.2 | $ | 216.4 | $ | (300.6 | ) | 10,193.5 | $ | 175.4 | $ | (337.8 | ) | |||||||||||
N/A - Not applicable.
|
|||||||||||||||||||||||
(1) The fair values of these derivatives are reported in Derivatives or Other liabilities on the Condensed Consolidated Balance Sheets. | |||||||||||||||||||||||
(2)
The fair values of embedded derivatives within securities are reported in Fixed maturities, available-for-sale, on the Condensed Consolidated Balance Sheets with the underlying instrument.
|
|||||||||||||||||||||||
(3) Thefair values of embedded derivatives within retail annuity products and managed custody guarantees are reported in Futurepolicy benefits and claim reserves on the Condensed Consolidated Balance Sheets.
|
29
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Net
realized gains (losses) on derivatives were as follows for the three months
ended March 31, 2010 and 2009.
For the Three Months Ended March 31,
|
|||||||||
2010
|
2009
|
||||||||
Interest rate swaps(1)
|
$ | (9.8 | ) | $ | (25.3 | ) | |||
Foreign exchange swaps(1)
|
7.4 | 5.5 | |||||||
Credit default swaps(1)
|
1.2 | 3.0 | |||||||
Forwards(1)
|
0.3 | 4.9 | |||||||
Futures(1)
|
- | 60.1 | |||||||
Swaptions(1)
|
(0.2 | ) | (3.1 | ) | |||||
Interest rate caps(1)
|
(13.5 | ) | - | ||||||
Managed custody guarantees(2)
|
3.5 | - | |||||||
Embedded derivatives:
|
|||||||||
Within securities(2)
|
3.1 | (59.0 | ) | ||||||
Within retail annuity products(2)
|
11.6 | 26.2 | |||||||
Total
|
$ | 3.6 | $ | 12.3 | |||||
(1) Changes in value are included in Net realized capital losses on the Condensed Consolidated Statements of Operations. | |||||||||
)(2) Changes in value are included in Interest credited and other benefits to contractowners on the Condensed Consolidated Statements of Operations. |
Credit Default Swaps
The
Company has entered into various credit default swaps. When credit default swaps
are sold, the Company assumes credit exposure to certain assets that it does not
own. Credit default swaps may also be purchased to reduce credit
exposure in the Company’s portfolio. Credit default swaps involve a transfer of
credit risk from one party to another in exchange for periodic
payments. These instruments are typically written for a maturity
period of five years and do not contain recourse provisions, which would enable
the seller to recover from third parties. The Company has
International Swaps and Derivatives Associations, Inc. (“ISDA”) agreements with
each counterparty with which it conducts business and tracks the collateral
positions for each counterparty. To the extent cash collateral is
received, it is included in Payables under securities loan agreement, including
collateral held, on the Condensed Consolidated Balance Sheets and is reinvested
in short-term investments. Collateral held is used in accordance with
the Credit Support Annex (“CSA”) to satisfy any obligations. Investment grade
bonds owned by the Company are the source of noncash collateral posted, which is
reported in Securities pledged on the Condensed Consolidated Balance Sheets. In
the event of a default on the underlying credit exposure, the Company will
either receive an additional payment (purchased credit protection) or will be
required to make an additional payment (sold credit protection) equal to par
minus recovery value of the swap contract. At March 31, 2010, the
fair value of credit default swaps of $1.3 and $45.1 was included in Derivatives
and Other liabilities, respectively, on the Condensed Consolidated Balance
Sheets. At December 31, 2009, the fair value of credit default
swaps of $0.2 and $53.6 was included in Derivatives and Other liabilities,
respectively, on the Consolidated Balance Sheets. As of March 31,
2010 and December 31, 2009, the maximum potential future exposure to the
Company on the sale of credit protection under credit default swaps was $167.8
and $84.4, respectively.
30
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
5.
|
Investments
|
Fixed
Maturities and Equity Securities
Fixed
maturities and equity securities, available-for-sale, were as follows as of
March 31, 2010.
Gross
|
Gross
|
|||||||||||||||||
Unrealized
|
Unrealized
|
|||||||||||||||||
Amortized
|
Capital
|
Capital
|
Fair
|
|||||||||||||||
Cost
|
Gains
|
Losses
|
OTTI(2)
|
Value
|
||||||||||||||
Fixed maturities:
|
||||||||||||||||||
U.S. Treasuries
|
$ | 1,050.8 | $ | 3.2 | $ | 35.8 | $ | - | $ | 1,018.2 | ||||||||
U.S. government agencies and
authorities
|
622.5 | 43.8 | - | - | 666.3 | |||||||||||||
State, municipalities, and political
|
||||||||||||||||||
subdivisions
|
112.2 | 3.5 | 6.9 | - | 108.8 | |||||||||||||
U.S. corporate securities:
|
||||||||||||||||||
Public utilities
|
1,196.3 | 45.6 | 9.9 | - | 1,232.0 | |||||||||||||
Other corporate securities
|
4,787.4 | 310.2 | 38.1 | 0.6 | 5,058.9 | |||||||||||||
Total U.S. corporate securities
|
5,983.7 | 355.8 | 48.0 | 0.6 | 6,290.9 | |||||||||||||
Foreign securities(1):
|
||||||||||||||||||
Government
|
459.8 | 32.2 | 6.3 | - | 485.7 | |||||||||||||
Other
|
3,177.3 | 160.5 | 31.8 | 0.1 | 3,305.9 | |||||||||||||
Total foreign securities
|
3,637.1 | 192.7 | 38.1 | 0.1 | 3,791.6 | |||||||||||||
Residential mortgage-backed securities
|
1,858.1 | 264.7 | 81.3 | 17.6 | 2,023.9 | |||||||||||||
Commercial mortgage-backed securities
|
1,315.5 | 30.9 | 143.9 | - | 1,202.5 | |||||||||||||
Other asset-backed securities
|
603.3 | 13.1 | 84.4 | 30.8 | 501.2 | |||||||||||||
Total fixed maturities, including
|
||||||||||||||||||
securities pledged
|
15,183.2 | 907.7 | 438.4 | 49.1 | 15,603.4 | |||||||||||||
Less: securities pledged
|
360.7 | 12.2 | 9.5 | - | 363.4 | |||||||||||||
Total fixed maturities
|
14,822.5 | 895.5 | 428.9 | 49.1 | 15,240.0 | |||||||||||||
Equity securities
|
184.9 | 16.3 | 0.4 | - | 200.8 | |||||||||||||
Total investments, available-for-sale
|
$ | 15,007.4 | $ | 911.8 | $ | 429.3 | $ | 49.1 | $ | 15,440.8 | ||||||||
(1) Primarily U.S. dollar denominated. | ||||||||||||||||||
(2) Represents other-than-temporary impairments reported as a component of Other comprehensive income ("noncredit impairments”). |
31
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Fixed
maturities and equity securities, available-for-sale, were as follows as of
December 31, 2009.
Gross
|
Gross
|
||||||||||||||
Unrealized
|
Unrealized
|
||||||||||||||
Amortized
|
Capital
|
Capital
|
Fair
|
||||||||||||
Cost
|
Gains
|
Losses
|
OTTI(2)
|
Value
|
|||||||||||
Fixed maturities:
|
|||||||||||||||
U.S. Treasuries
|
$ | 1,897.2 | $ | 3.0 | $ | 38.3 | $ | - | $ | 1,861.9 | |||||
U.S. government agencies and
|
|||||||||||||||
authorities
|
632.5 | 41.1 | - | - | 673.6 | ||||||||||
State, municipalities, and political
|
|||||||||||||||
subdivisions
|
112.5 | 2.5 | 7.8 | - | 107.2 | ||||||||||
U.S. corporate securities:
|
|||||||||||||||
Public utilities
|
1,138.7 | 40.8 | 14.3 | - | 1,165.2 | ||||||||||
Other corporate securities
|
4,366.5 | 267.4 | 63.2 | 0.6 | 4,570.1 | ||||||||||
Total U.S. corporate securities
|
5,505.2 | 308.2 | 77.5 | 0.6 | 5,735.3 | ||||||||||
Foreign securities(1):
|
|||||||||||||||
Government
|
343.0 | 29.2 | 8.7 | - | 363.5 | ||||||||||
Other
|
2,922.5 | 129.0 | 56.6 | 0.1 | 2,994.8 | ||||||||||
Total foreign securities
|
3,265.5 | 158.2 | 65.3 | 0.1 | 3,358.3 | ||||||||||
Residential mortgage-backed securities
|
1,916.6 | 268.3 | 111.9 | 16.8 | 2,056.2 | ||||||||||
Commercial mortgage-backed securities
|
1,535.0 | 10.4 | 214.3 | - | 1,331.1 | ||||||||||
Other asset-backed securities
|
657.4 | 9.8 | 106.3 | 29.2 | 531.7 | ||||||||||
Total fixed maturities, including
|
|||||||||||||||
securities pledged
|
15,521.9 | 801.5 | 621.4 | 46.7 | 15,655.3 | ||||||||||
Less: securities pledged
|
483.7 | 4.3 | 18.2 | - | 469.8 | ||||||||||
Total fixed maturities
|
15,038.2 | 797.2 | 603.2 | 46.7 | 15,185.5 | ||||||||||
Equity securities
|
175.1 | 13.4 | 0.6 | - | 187.9 | ||||||||||
Total investments, available-for-sale
|
$ | 15,213.3 | $ | 810.6 | $ | 603.8 | $ | 46.7 | $ | 15,373.4 | |||||
(1) Primarily U.S. dollar denominated.
|
|||||||||||||||
(2) Represents other-than-temporary impairments reported as a component of Other comprehensive income ("noncredit impairments”).
|
At March
31, 2010 and December 31, 2009, net unrealized gains were $436.1 and $146.2,
respectively, on total fixed maturities, including securities pledged to
creditors, and equity securities. During 2009, as a result of the
economic environment, which resulted in significant losses on investments
supporting experience-rated contracts, the Company reflected all unrealized
losses in Shareholder’s equity rather than Future policy benefits and claims
reserves. At March 31, 2010, net unrealized capital gains allocated to
experience-rated contracts were $82.2, as reflected in Future policy benefits
and claims reserves on the Condensed Consolidated Balance Sheets.
32
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
The
amortized cost and fair value of total fixed maturities, excluding securities
pledged, as of March 31, 2010, are shown below by contractual
maturity. Actual maturities may differ from contractual maturities as
securities may be restructured, called, or prepaid.
Amortized
|
Fair
|
||||||
Cost
|
Value
|
||||||
Due to mature:
|
|||||||
One year or less
|
$ | 214.2 | $ | 216.1 | |||
After one year through five years
|
3,861.4 | 4,094.4 | |||||
After five years through ten years
|
3,938.7 | 4,140.7 | |||||
After ten years
|
3,392.0 | 3,424.6 | |||||
Mortgage-backed securities
|
3,173.6 | 3,226.4 | |||||
Other asset-backed securities
|
603.3 | 501.2 | |||||
Less: securities pledged
|
360.7 | 363.4 | |||||
Fixed maturities, excluding securities pledged
|
$ | 14,822.5 | $ | 15,240.0 |
The
Company did not have any investments in a single issuer, other than obligations
of the U.S. government and government agencies and the Dutch State loan
obligation, with a carrying value in excess of 10% of the Company’s
Shareholder’s equity at March 31, 2010 and December 31, 2009.
The
Company invests in various categories of collateralized mortgage obligations
(“CMOs”), including CMOs that are not agency-backed, that are subject to
different degrees of risk from changes in interest rates and
defaults. The principal risks inherent in holding CMOs are prepayment
and extension risks related to dramatic decreases and increases in interest
rates resulting in the prepayment of principal from the underlying mortgages,
either earlier or later than originally anticipated. At March 31,
2010 and December 31, 2009, approximately 33.9% and 29.4%, respectively, of
the Company’s CMO holdings were invested in those types of CMOs which are
subject to more prepayment and extension risk than traditional CMOs, such as
interest-only or principal-only strips.
Certain
CMOs, primarily interest-only and principal-only strips, are accounted for as
hybrid instruments and valued at fair value. The fair value of these
instruments at March 31, 2010 and December 31, 2009 was $363.3 and $233.5,
respectively, and is included in Fixed maturities, available for sale, on the
Condensed Consolidated Balance Sheets. The impact to Other net
realized capital gains (losses) on the Condensed Consolidated Statements of
Operations related to these hybrid instruments was $2.1 and $23.4 for the three
months ended March 31, 2010 and 2009, respectively.
33
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
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. At March 31, 2010 and
December 31, 2009, the fair value of loaned securities was $274.8 and $339.5,
respectively, and is included in Securities pledged on the Condensed
Consolidated Balance Sheets.
Variable
Interest Entities
The
Company holds certain VIEs for investment purposes. VIEs may be in
the form of private placement securities, structured securities, securitization
transactions, or limited partnerships. The Company has reviewed each of its
holdings and determined that consolidation of these investments in the Company’s
financial statements is not required, as the Company is not the primary
beneficiary, because the Company does not have both the power to direct the
activities that most significantly impact the entity’s economic performance and
the obligation or right to potentially significant losses or benefits, for any
of its investments in VIEs. Rather, the VIEs are accounted for using the cost or
equity method of accounting. The Company provided no non-contractual financial
support and its carrying value represents the Company’s exposure to loss. The
carrying value of collateralized loan obligations (“CLOs”) of $0.1 at March 31,
2010 is included in Limited partnerships/corporations on the Condensed
Consolidated Balance Sheets. Income and losses recognized on these investments
are reported in Net investment income on the Condensed Consolidated Statements
of Operations.
34
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Unrealized
Capital Losses
Unrealized
capital losses (including non-credit impairments) in fixed maturities, including
securities pledged to creditors, for Investment Grade (“IG”) and Below
Investment Grade (“BIG”) securities by duration were as follows as of March 31,
2010 and December 31, 2009.
2010
|
2009
|
||||||||||||||||||
% of IG
|
% of IG
|
% of IG
|
% of IG
|
||||||||||||||||
IG
|
and BIG
|
BIG
|
and BIG
|
IG
|
and BIG
|
BIG
|
and BIG
|
||||||||||||
Six months or less
|
|||||||||||||||||||
below amortized cost
|
$
|
72.8
|
15.0%
|
$
|
6.5
|
1.3%
|
$
|
105.5
|
15.7%
|
$
|
18.5
|
2.8%
|
|||||||
More than six months and
|
|||||||||||||||||||
twelve months or less
|
|||||||||||||||||||
below amortized cost
|
44.5
|
9.1%
|
44.8
|
9.2%
|
44.0
|
6.6%
|
37.9
|
5.7%
|
|||||||||||
More than twelve months
|
|||||||||||||||||||
below amortized cost
|
168.4
|
34.5%
|
150.5
|
30.9%
|
300.8
|
45.0%
|
161.4
|
24.2%
|
|||||||||||
Total unrealized capital loss
|
$
|
285.7
|
58.6%
|
$
|
201.8
|
41.4%
|
$
|
450.3
|
67.3%
|
$
|
217.8
|
32.7%
|
The
following table summarizes the unrealized capital losses (including non-credit
impairments) by duration and reason, along with the fair value of fixed
maturities, including securities pledged to creditors, in unrealized capital
loss positions as of March 31, 2010 and December 31,
2009.
More than
|
|||||||||||
Six Months
|
Six Months and
|
||||||||||
or Less
|
Twelve Months
|
More than
|
Total
|
||||||||
Below
|
or Less Below
|
Twelve Months
|
Unrealized
|
||||||||
Amortized
|
Amortized
|
Below
|
Capital
|
||||||||
2010
|
Cost
|
Cost
|
Cost
|
Losses
|
|||||||
Interest rate or spread widening
|
$ | 70.6 | $ | 16.3 | $ | 42.6 | $ | 129.5 | |||
Mortgage and other asset-backed
|
|||||||||||
securities
|
8.7 | 73.0 | 276.3 | 358.0 | |||||||
Total unrealized capital losses
|
$ | 79.3 | $ | 89.3 | $ | 318.9 | $ | 487.5 | |||
Fair value
|
$ | 2,481.8 | $ | 290.7 | $ | 1,479.2 | $ | 4,251.7 | |||
2009
|
|||||||||||
Interest rate or spread widening
|
$ | 75.9 | $ | 35.2 | $ | 78.5 | $ | 189.6 | |||
Mortgage and other asset-backed
|
|||||||||||
securities
|
48.1 | 46.7 | 383.7 | 478.5 | |||||||
Total unrealized capital losses
|
$ | 124.0 | $ | 81.9 | $ | 462.2 | $ | 668.1 | |||
Fair value
|
$ | 2,901.8 | $ | 212.6 | $ | 2,127.2 | $ | 5,241.6 |
35
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Unrealized
capital losses (including non-credit impairments), along with the fair value of
fixed maturities, including securities pledged to creditors, by market sector
and duration were as follows as of March 31, 2010 and December 31,
2009.
More Than Six
|
||||||||||||||||||||||||||||||
Months and Twelve
|
More Than Twelve
|
|||||||||||||||||||||||||||||
Six Months or Less
|
Months or Less
|
Months Below
|
||||||||||||||||||||||||||||
Below Amortized Cost
|
Below Amortized Cost
|
Amortized Cost
|
Total
|
|||||||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
Unrealized
|
|||||||||||||||||||||||||||
Fair Value
|
Capital Loss
|
Fair Value
|
Capital Loss
|
Fair Value
|
Capital Loss
|
Fair Value
|
Capital Loss
|
|||||||||||||||||||||||
2010
|
||||||||||||||||||||||||||||||
U.S. Treasuries
|
$ | 727.0 | $ | 35.8 | $ | - | $ | - | $ | - | $ | - | $ | 727.0 | $ | 35.8 | ||||||||||||||
U.S. corporate,state, and
municipalities
|
1,053.5 | 17.4 | 119.3 | 8.5 | 290.4 | 29.6 | 1,463.2 | 55.5 | ||||||||||||||||||||||
Government agencies and authorities | 4.2 | - | - | - | - | - | 4.2 | - | ||||||||||||||||||||||
Foreign
|
623.2 | 17.4 | 36.6 | 7.8 | 196.2 | 13.0 | 856.0 | 38.2 | ||||||||||||||||||||||
Residential mortgage-backed | 47.7 | 6.8 | 94.0 | 35.5 | 329.6 | 56.6 | 471.3 | 98.9 | ||||||||||||||||||||||
Commercial
mortgage-backed
|
20.6 | 0.7 | 31.2 | 33.2 | 410.8 | 110.0 | 462.6 | 143.9 | ||||||||||||||||||||||
Other asset-backed
|
5.6 | 1.2 | 9.6 | 4.3 | 252.2 | 109.7 | 267.4 | 115.2 | ||||||||||||||||||||||
Total
|
$ | 2,481.8 | $ | 79.3 | $ | 290.7 | $ | 89.3 | $ | 1,479.2 | $ | 318.9 | $ | 4,251.7 | $ | 487.5 | ||||||||||||||
2009 | ||||||||||||||||||||||||||||||
U.S. Treasuries
|
$ | 1,002.1 | $ | 38.3 | $ | - | $ | - | $ | - | $ | - | $ | 1,002.1 | $ | 38.3 | ||||||||||||||
U.S. corporate, state, and municipalities | 1,097.0 | 22.7 | 86.1 | 14.9 | 381.2 | 48.3 | 1,564.3 | 85.9 | ||||||||||||||||||||||
Foreign
|
528.6 | 14.8 | 40.0 | 20.4 | 301.8 | 30.2 | 870.4 | 65.4 | ||||||||||||||||||||||
Residential mortgage-backed | 141.1 | 45.4 | 47.7 | 4.2 | 425.3 | 79.1 | 614.1 | 128.7 | ||||||||||||||||||||||
Commercial mortgage-backed | 105.8 | 1.2 | 27.2 | 35.7 | 757.1 | 177.4 | 890.1 | 214.3 | ||||||||||||||||||||||
Other asset-backed
|
27.2 | 1.6 | 11.6 | 6.7 | 261.8 | 127.2 | 300.6 | 135.5 | ||||||||||||||||||||||
Total
|
$ | 2,901.8 | $ | 124.0 | $ | 212.6 | $ | 81.9 | $ | 2,127.2 | $ | 462.2 | $ | 5,241.6 | $ | 668.1 |
Of the
unrealized capital losses aged more than twelve months, the average market value
of the related fixed maturities was 82.3% of the average book value as of March
31, 2010. In addition, this category includes 361 securities, which
have an average quality rating of A-.
36
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Unrealized
capital losses (including non-credit impairments) in fixed maturities, including
securities pledged to creditors, for instances in which fair value declined
below amortized cost by greater than or less than 20% for consecutive periods as
indicated in the tables below, were as follows for March 31, 2010 and December
31, 2009.
Amortized Cost
|
Unrealized Capital Loss
|
Number of Securities
|
|||||||||||||||||
< 20%
|
> 20%
|
< 20%
|
> 20%
|
< 20%
|
> 20%
|
||||||||||||||
2010 | |||||||||||||||||||
Six months or less
|
|||||||||||||||||||
below amortized cost
|
$ | 1,725.9 | $ | 39.1 | $ | 70.3 | $ | 9.9 | 244 | 8 | |||||||||
More than six months and
|
|||||||||||||||||||
twelve months or less
|
|||||||||||||||||||
below amortized cost
|
1,018.8 | 254.4 | 47.9 | 122.3 | 178 | 82 | |||||||||||||
More than twelve months
|
|||||||||||||||||||
below amortized cost
|
1,205.3 | 495.7 | 52.9 | 184.2 | 106 | 110 | |||||||||||||
Total | $ | 3,950.0 | $ | 789.2 | $ | 171.1 | $ | 316.4 | 528 | 200 | |||||||||
2009 | |||||||||||||||||||
Six months or less
|
|||||||||||||||||||
below amortized cost
|
$ | 3,652.0 | $ | 185.0 | $ | 168.0 | $ | 60.7 | 377 | 98 | |||||||||
More than six months and
|
|||||||||||||||||||
Twelve months or less
|
|||||||||||||||||||
below amortized cost
|
734.5 | 247.0 | 40.2 | 124.3 | 120 | 48 | |||||||||||||
More than twelve months
|
|||||||||||||||||||
below amortized cost
|
431.1 | 660.1 | 28.2 | 246.7 | 90 | 129 | |||||||||||||
Total
|
$ | 4,817.6 | $ | 1,092.1 | $ | 236.4 | $ | 431.7 | 587 | 275 |
37
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Unrealized
capital losses (including non-credit impairments) in fixed maturities, including
securities pledged to creditors, by market sector for instances in which fair
value declined below amortized cost by greater than or less than 20% for
consecutive periods as indicated in the tables below, were as follows for March
31, 2010 and December 31, 2009.
Amortized Cost
|
Unrealized Capital Loss
|
Number of Securities
|
|||||||||||||
< 20%
|
> 20%
|
< 20%
|
> 20%
|
< 20%
|
> 20%
|
||||||||||
2010
|
|||||||||||||||
U.S. Treasuries
|
$ | 762.8 | $ | - | $ | 35.8 | $ | - | 7 | - | |||||
U.S. corporate, state and
|
|||||||||||||||
municipalities
|
1,465.8 | 52.9 | 42.2 | 13.3 | 228 | 9 | |||||||||
Government agencies
|
|||||||||||||||
and authorities
|
4.2 | - | - | - | 1 | - | |||||||||
Foreign
|
866.4 | 27.8 | 29.6 | 8.6 | 108 | 10 | |||||||||
Residential mortgage-backed
|
361.5 | 208.7 | 33.2 | 65.7 | 114 | 80 | |||||||||
Commercial mortgage-backed
|
356.9 | 249.6 | 23.3 | 120.6 | 36 | 27 | |||||||||
Other asset-backed
|
132.4 | 250.2 | 7.0 | 108.2 | 34 | 74 | |||||||||
Total
|
$ | 3,950.0 | $ | 789.2 | $ | 171.1 | $ | 316.4 | 528 | 200 | |||||
2009
|
|||||||||||||||
U.S. Treasuries
|
$ | 1,040.5 | $ | - | $ | 38.3 | $ | - | 9 | - | |||||
U.S. corporate, state and
|
|||||||||||||||
municipalities
|
1,532.2 | 118.0 | 53.5 | 32.4 | 256 | 23 | |||||||||
Foreign
|
830.0 | 105.8 | 31.7 | 33.7 | 111 | 22 | |||||||||
Residential mortgage-backed
|
522.0 | 220.8 | 55.1 | 73.6 | 115 | 109 | |||||||||
Commercial mortgage-backed
|
732.4 | 372.0 | 49.3 | 165.0 | 59 | 39 | |||||||||
Other asset-backed
|
160.5 | 275.5 | 8.5 | 127.0 | 37 | 82 | |||||||||
Total
|
$ | 4,817.6 | $ | 1,092.1 | $ | 236.4 | $ | 431.7 | 587 | 275 |
During the three months ended March 31, 2010, unrealized capital losses on fixed maturities decreased by $180.6. Lower unrealized losses are due to improved economic conditions and the tightening of credit spreads leading to the increased value of fixed maturities.
At March
31, 2010, the Company held 4 fixed maturities with unrealized capital losses in
excess of $10.0. The unrealized capital losses on these fixed
maturities equaled $72.6, or 14.9% of the total unrealized capital losses, as of
March 31, 2010. At December 31, 2009, the Company held 8 fixed
maturities with unrealized capital losses in excess of $10.0. The
unrealized capital losses on these fixed maturities equaled $118.2, or 17.7% of
the total unrealized capital losses, as of December 31, 2009.
All
securities with fair values less than amortized cost are included in the
Company’s other-than-temporary impairment analysis, and impairments were
recognized as disclosed in “Other-Than-Temporary Impairments,” which follows
this section. Management determined that no additional recognition of the
unrealized loss as an other-than-temporary impairment was
necessary.
38
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Other-Than-Temporary
Impairments
The
Company analyzes its general account investments to determine whether there has
been an other-than-temporary decline in fair value below the amortized cost
basis. Factors considered in this analysis include, but are not limited to, the
length of time and the extent to which the fair value has been less than
amortized cost, the issuer’s financial condition and near-term prospects, future
economic conditions and market forecasts, interest rate changes, and changes in
ratings of the security.
When
assessing the Company’s intent to sell a security or if it is more likely than
not it will be required to sell a security before recovery of its cost basis,
management evaluates facts and circumstances such as, but not limited to,
decisions to rebalance the investment portfolio and sales of investments to meet
cash flow needs.
When the
Company has determined it has the intent to sell or if it is more likely than
not that it will be required to sell a security before recovery of its amortized
cost basis and the fair value has declined below amortized cost (“intent
impairment”) the individual security is written down from amortized cost to fair
value and a corresponding charge is recorded in Net realized capital gains
(losses) on the Condensed Consolidated Statements of Operations as an
other-than-temporary impairment (“OTTI”). If the Company does not
intend to sell the security nor is it more likely than not it will be required
to sell the security before recovery of its amortized cost basis, but the
Company has determined that there has been an other-than-temporary decline in
fair value below the amortized cost basis, the OTTI is bifurcated into the
amount representing the present value of the decrease in cash flows expected to
be collected (“credit impairment”) and the amount related to other factors
(“noncredit impairment”). The credit impairment is recorded in Net realized
capital gains (losses) on the Condensed Consolidated Statements of
Operations. The noncredit impairment is recorded in Other
comprehensive income (loss) on the Condensed Consolidated Balance Sheets in
accordance with the requirements of ASC Topic 320.
In order
to determine the amount of the OTTI that is considered a credit impairment, the
Company estimates the recovery value by performing a discounted cash flow
analysis based upon the best estimate of expected future cash flows, discounted
at the effective interest rate implicit in the underlying debt
security. The effective interest rate is the current yield prior to
impairment for a fixed rate security or current coupon yield for a floating rate
security.
39
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
The
following table identifies the Company’s credit-related and intent-related
impairments included in the Condensed Consolidated Statements of Operations,
excluding noncredit impairments included in Other comprehensive income (loss),
by type for the three months ended March 31, 2010 and 2009.
Three Months Ended March 31,
|
|||||||||
2010
|
2009
|
||||||||
No. of
|
No. of
|
||||||||
Impairment
|
Securities
|
Impairment
|
Securities
|
||||||
U.S. Treasuries
|
$ | 1.7 | 1 | $ | 33.1 | 5 | |||
Public utilities
|
0.7 | 3 | - | - | |||||
Other U.S. corporate
|
3.3 | 7 | 23.5 | 38 | |||||
Foreign(1)
|
13.2 | 6 | 26.3 | 22 | |||||
Residential mortgage-backed
|
1.2 | 16 | 35.8 | 43 | |||||
Other asset-backed
|
6.1 | 14 | 14.5 | 15 | |||||
Limited partnerships
|
- | - | 10.7 | 14 | |||||
Equity securities
|
- | - | 15.5 | 6 | |||||
Mortgage loans on real estate
|
1.0 | 1 | - | - | |||||
Total
|
$ | 27.2 | 48 | $ | 159.4 | 143 | |||
(1)
Primarily U.S. dollar denominated.
|
The above
schedules include $15.6 and $47.2 for the three months ended March 31, 2010 and
2009, respectively, in other-than-temporary write-downs related to credit
impairments, which are recognized in earnings. The remaining
write-downs reflected in the schedules above are related to intent
impairments.
The
following table summarizes these intent impairments, which are also recognized
in earnings, by type for the three months ended March 31, 2010 and
2009.
Three Months Ended March 31,
|
|||||||||
2010
|
2009
|
||||||||
No. of
|
No. of
|
||||||||
Impairment
|
Securities
|
Impairment
|
Securities
|
||||||
U.S. Treasuries
|
$ | 1.7 | 1 | $ | 33.1 | 5 | |||
Public utilities
|
0.7 | 3 | - | - | |||||
Other U.S. corporate
|
3.0 | 6 | 16.5 | 23 | |||||
Foreign(1)
|
6.2 | 3 | 26.3 | 22 | |||||
Residential mortgage-backed
|
- | - | 22.5 | 8 | |||||
Other asset-backed
|
- | - | 13.8 | 6 | |||||
Total
|
$ | 11.6 | 13 | $ | 112.2 | 64 | |||
(1)
Primarily U.S. dollar denominated.
|
40
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
The
Company may sell securities during the period in which fair value has declined
below amortized cost for fixed maturities or cost for equity
securities. In certain situations, new factors, including changes in
the business environment, can change the Company’s previous intent to continue
holding a security.
The
following table identifies the noncredit impairments recognized in Other
comprehensive income (loss) by type for the three months ended March 31,
2010.
Three Months Ended
|
|||||||
March 31, 2010*
|
|||||||
No. of
|
|||||||
Impairment
|
Securities
|
||||||
Residential mortgage-backed
|
$ | 2.3 | 6 | ||||
Other asset-backed
|
5.4 | 5 | |||||
Total
|
$ | 7.7 | 11 | ||||
*
|
No amounts disclosed for three months ended March 31, 2009, as new guidance on OTTI, included in ASC Topic 320,
was adopted on April 1, 2009.
|
The fair
value of fixed maturities with other-than-temporary impairments as of
March 31, 2010 and 2009 was $2,208.9 and $2,031.2,
respectively.
The
following table identifies the amount of credit impairments on fixed maturities
for the three months ended March 31, 2010, for which a portion of the OTTI was
recognized in Other comprehensive income (loss), and the corresponding changes
in such amounts.
Three Months Ended
|
|||||
March 31, 2010*
|
|||||
Balance at January 1, 2010
|
$ | 46.0 | |||
Additional credit impairments:
|
|||||
On securities not previously impaired
|
2.1 | ||||
On securities previously impaired
|
1.2 | ||||
Reductions:
|
|||||
Securities sold, matured, prepaid or paid down
|
(0.2 | ) | |||
Balance at March 31, 2010
|
$ | 49.1 | |||
* No amounts disclosed for three months ended March 31, 2009, as new guidance on OTTI, included in ASC Topic 320, was adopted on April 1, 2009. |
41
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Net
Realized Capital Gains (Losses)
Net
realized capital gains (losses) are comprised of the difference between the
amortized cost of investments and proceeds from sale and redemption, as well as
losses incurred due to credit-related and intent-related other-than-temporary
impairment of investments and changes in fair value of
derivatives. The cost of the investments on disposal is determined
based on specific identification of securities. Net realized capital
gains (losses) on investments were as follows for the three months ended March
31, 2010 and 2009.
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Fixed maturities, available-for-sale, including net OTTI
|
||||||||
of $(26.2) and $(133.2) in 2010 and 2009, respectively
|
$ | 13.5 | $ | 23.1 | ||||
Equity securities, available-for-sale, including net OTTI
|
||||||||
of $0 and $(15.5) in 2010 and 2009, respectively
|
1.7 | (15.3 | ) | |||||
Derivatives
|
(14.6 | ) | 45.1 | |||||
Other investments, including net OTTI of $(1.0) and $(10.7)
|
||||||||
in 2010 and 2009, respectively
|
2.4 | (13.2 | ) | |||||
Less: allocation to experience-rated contracts, including
|
||||||||
net OTTI of $(8.5) and $(76.4) in 2010 and 2009, respectively
|
(10.0 | ) | (12.8 | ) | ||||
Net realized capital gains
|
$ | 13.0 | $ | 52.5 | ||||
After-tax net realized capital gains (losses) including tax valuation
|
||||||||
allowance of $20.8 and $13.0 for 2010 and 2009, respectively
|
$ | 29.3 | $ | 47.1 |
The
decline in Total net realized capital gains for the three months ended
March 31, 2010, was primarily due to lower gains on derivatives, driven by
the unwinding of futures in the derivatives portfolio. In the first quarter of
2009, the Company recognized gains on futures used to hedge fee income from
variable annuity products. However, with the improvement in equity markets, the
Company unwound its holdings in futures during the last quarter of 2009. In
addition, the decline was also due to lower gains on fixed maturities
attributable to a gain of $206.2 recognized in the first quarter of 2009 on the
transfer of an 80% interest in the Company’s Alt-A residential mortgage-backed
securities to the Dutch State, as well as a large hedge gain in the first
quarter of 2009. Higher gains on sales of fixed maturities and equity securities
as well as lower impairments in the first quarter of 2010, driven by higher
market values, served to partially offset these losses.
Net
realized capital gains (losses) allocated to experience-rated contracts are
deducted from Net realized capital gains (losses), with an offsetting amount
reflected in Future policy benefits and claims reserves on the Condensed
Consolidated Balance Sheets. During 2009 and continuing in 2010, as a
result of the economic environment, which resulted in significant realized
losses associated with experience-rated contracts, the Company accelerated
amortization of realized losses rather than reflecting these losses in Future
policy benefits and claims reserves. For the three months ended March
31, 2010 and 2009, the Company fully amortized $10.0 and $12.8, respectively, of
net unamortized realized capital losses allocated to experience-rated
contractowners, which are reflected in Interest credited and other benefits to
contractowners in the Condensed Consolidated Statements of
Operations.
42
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
2010
|
2009
|
||||||
Proceeds on sales
|
$ | 1,589.2 | $ | 1,157.4 | |||
Gross gains
|
44.5 | 40.2 | |||||
Gross losses
|
8.5 | 55.9 |
6.
|
Deferred
Policy Acquisition Costs and Value of Business
Acquired
|
Activity
within DAC was as follows for the three months ended March 31, 2010 and
2009.
2010
|
2009
|
||||
Balance at January 1
|
$ | 901.8 | $ | 865.5 | |
Deferrals of commissions and expenses
|
35.6 | 30.5 | |||
Amortization:
|
|||||
Amortization
|
(18.2 | ) | (52.5) | ||
Interest accrued at 5% to 7%
|
15.9 | 13.9 | |||
Net amortization included in Condensed Consolidated
|
|||||
Statements of Operations
|
(2.3 | ) | (38.6) | ||
Change in unrealized capital gains/losses on
|
|||||
available-for-sale securities
|
(2.5 | ) | (16.3) | ||
Balance at March 31
|
$ | 932.6 | $ | 841.1 |
43
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Activity
within value of business acquired (“VOBA”) was as follows for the three months
ended March 31, 2010 and 2009.
2010
|
2009
|
||||||
Balance at January 1
|
$ | 991.5 | $ | 1,832.5 | |||
Deferrals of commissions and expenses
|
5.2 | 7.5 | |||||
Amortization:
|
|||||||
Amortization
|
(34.8 | ) | (126.5) | ||||
Interest accrued at 5% to 7%
|
18.8 | 18.3 | |||||
Net amortization included in Condensed Consolidated
|
|||||||
Statements of Operations
|
(16.0 | ) | (108.2) | ||||
Change in unrealized capital gains/losses on
|
|||||||
available-for-sale securities
|
(86.3 | ) | (15.5) | ||||
Balance at March 31
|
$ | 894.4 | $ | 1,716.3 |
During
the first quarter of 2010, the Company revised and unlocked the assumptions
related to future mortality and expense charges and mutual fund revenue, leading
to higher estimated future gross profits. These revisions resulted in
a $2.7 decrease in amortization of DAC and VOBA.
During
the first quarter of 2009, the Company recognized an increase in amortization of
DAC and VOBA of $48.9 due to the unlocking resulting from the revisions of
certain assumptions used in the estimation of gross profits.
7.
|
Capital
Contributions and Dividends
|
During
the three months ended March 31, 2010, ILIAC did not receive any capital
contributions from its parent. During the three months ended March 31, 2009,
ILIAC received a $365.0 capital contribution from its Parent.
During
the three months ended March 31, 2010, ILIAC paid a $203.0 dividend on its
common stock to its Parent. During the three months ended March 31, 2009, ILIAC
did not pay any dividends on its common stock to its Parent.
44
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
8.
|
Income
Taxes
|
The
Company’s effective tax rates for the three months ended March 31, 2010 and 2009
were 13.3% and (11.0)%, respectively. The effective tax rates differ
from the expected rate primarily due to the following items:
Three Months Ended March 31,
|
|||||||||||
2010
|
2009
|
||||||||||
Statutory rate
|
35.0%
|
35.0%
|
|||||||||
Dividend received deduction
|
(1.9)%
|
(10.4)%
|
|||||||||
Valuation allowance
|
(19.9)%
|
(35.9)%
|
|||||||||
Other
|
0.1%
|
0.3%
|
|||||||||
Effective rate at March 31
|
13.3%
|
(11.0)%
|
Valuation
allowances are provided when it is considered unlikely that deferred tax assets
will be realized. As of March 31, 2010 and December 31, 2009, the
Company had a tax valuation allowance of $137.7 and $158.5, respectively,
related to realized capital losses. The change from December 31,
2009 to March 31, 2010 in tax valuation allowance of $(20.8) is included in Net
income (loss). Additionally, at March 31, 2010 and December 31,
2009, the Company had a tax valuation allowance of $(0.5) and $39.0,
respectively, which is included in Other comprehensive income
(loss). At March 31, 2010, the Company had a $5.0 tax valuation
allowance against foreign tax credits, the benefit of which is
uncertain.
Unrecognized
Tax Benefits
As of
March 31, 2010, the Company’s gross unrecognized tax benefit was $13.0 of which
$25.0 would affect the Company’s effective tax rate, if
recognized. As of December 31, 2009, the Company’s gross cumulative
unrecognized tax benefit was $12.8. Additionally, the Company
recognized a gross liability of $3.3 for interest related to its unrecognized
tax benefits as of March 31, 2010 and December 31, 2009. The Company
continually evaluates its uncertain tax positions. It is reasonably
possible that the total unrecognized tax benefits could decrease during the next
12 months by up to $10.1 due to completion of tax authority
examinations.
45
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
9.
|
Financing
Agreements
|
Reciprocal
Loan Agreement
The
Company maintains a reciprocal loan agreement with ING America Insurance
Holdings, Inc. (“ING AIH”), an affiliate, to facilitate the handling of
unanticipated short-term cash requirements that arise in the ordinary course of
business. Under this agreement, which became effective in June 2001
and expires on April 1, 2011, either party can borrow from the other up to 3% of
the Company’s statutory admitted assets as of the preceding
December 31. Interest on any Company borrowing is charged at the
rate of ING AIH’s cost of funds for the interest period, plus
0.15%. Interest on any ING AIH borrowing is charged at a rate based
on the prevailing interest rate of U.S. commercial paper available for purchase
with a similar duration.
Under
this agreement, the Company incurred an immaterial amount of interest expense
for the three months ended March 31, 2010 and 2009, respectively. The
Company earned interest income of $0.2 and $0.1 for the three months ended March
31, 2010 and 2009, respectively. Interest expense and income are
included in Interest expense and Net investment income, respectively, on the
Condensed Consolidated Statements of Operations. As of March 31, 2010
and December 31, 2009, the Company had an outstanding receivable of $510.8 and
$287.2, respectively, from ING AIH under the reciprocal loan
agreement.
For
information on the Company’s additional financing agreements, see the Financing
Agreements footnote to the Consolidated Financial Statements included in the
Company’s 2009 Annual Report on Form 10-K/A.
10.
|
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 a higher or lower replacement cost. Also, there is
likely to be a change in the value of the securities underlying the
commitments.
At March
31, 2010, the Company had off-balance sheet commitments to purchase investments
equal to their fair value of $458.6, of which $208.0 was with related
parties. At December 31, 2009, the Company had off-balance sheet
commitments to purchase investments equal to their fair value of $305.1, of
which $218.5 was with related parties. During the three months ended
March 31, 2010, $9.8 was funded to related parties under these
commitments.
46
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Collateral
Under the
terms of the Company’s Over-The-Counter Derivative ISDA Agreements (“ISDA
Agreements”), the Company may receive from, or deliver to, counterparties,
collateral to assure that all terms of the ISDA Agreements will be met with
regard to the CSA. The terms of the CSA call for the Company to pay
interest on any cash received equal to the Federal Funds rate. As of
March 31, 2010, the Company held $5.3, of cash collateral, which was included in
Payables under securities loan agreement, including collateral held, on the
Condensed Consolidated Balance Sheets. As of December 31, 2009, the Company did
not hold any cash collateral. In addition, as of March 31, 2010 and
December 31, 2009, the Company delivered collateral of $88.5 and $130.3,
respectively, in fixed maturities pledged under derivatives contracts, which was
included in Securities pledged on the Condensed Consolidated Balance
Sheets.
Litigation
The
Company is involved in threatened or pending lawsuits/arbitrations arising from
the normal conduct of business. Due to the climate in insurance and
business litigation/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.
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 Company and of
the financial services industry. In each case, the Company and its
affiliates have been and are providing full cooperation. For
information on the focus of such regulatory inquiries and the actions undertaken
by ING in connection therewith, see the Other Regulatory Matters section of the
Commitments and Contingent Liabilities footnote to the Consolidated Financial
Statements included in the Company’s 2009 Annual Report on Form
10-K/A.
47
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
11.
|
Restructuring
Charges
|
2008
CitiStreet Integration and Expense and Staff Reductions
During
the third quarter of 2008, integration initiatives related to the acquisition of
CitiStreet LLC, now known as ING Institutional Plan Services, LLC, by Lion,
which provided significant operational and information technology efficiencies
to ING’s U.S. retirement services businesses, including the Company, resulted in
the recognition of integration and restructuring costs. In addition,
the Company implemented an expense reduction program for the purpose of
streamlining its overall operations. The restructuring charges
related to these expense reduction and integration initiatives include severance
and other employee benefits and lease abandonment costs, which are included in
Operating Expenses on the Condensed Consolidated Statements of
Operations.
On
January 12, 2009, ING announced expense and staff reductions across all U.S.
operations, which resulted in the elimination of 87 current and open positions
in the Company. Due to the staff reductions, curtailment of pension
benefits occurred during the first quarter of 2009, which resulted in the
recognition of an immaterial loss related to unrecognized prior service costs.
For the three months ended March 31, 2010, the Company incurred immaterial
severance costs. For the three months ended March 31, 2009, the Company incurred
$7.2 in charges related to employee severance and termination benefits and
pension curtailment charges. For the three months ended March 31, 2010 and
2009, the Company made payments of $0.9 and $4.9, respectively, related to
employee severance and termination. The total restructuring reserve outstanding
was $1.8 at March 31, 2010.
48
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
12.
|
Accumulated
Other Comprehensive Income (Loss)
|
Shareholder’s
equity included the following components of Accumulated other comprehensive
income (loss) as of March 31, 2010 and 2009.
2010
|
2009
|
|||||||
Net unrealized capital gains (losses):
|
||||||||
Fixed maturities, available-for-sale; including OTTI of
|
||||||||
$(49.1) in 2010
|
$ | 420.2 | $ | (1,252.2 | ) | |||
Equity securities, available-for-sale
|
15.9 | 0.4 | ||||||
DAC/VOBA adjustment on available-for-sale securities
|
(177.5 | ) | 619.1 | |||||
Sales inducements adjustment on available-for-sale securities
|
- | 1.4 | ||||||
Policy loans
|
(8.5 | ) | - | |||||
Other investments
|
- | (0.3 | ) | |||||
Less: allocation to experience-rated contracts
|
(82.2 | ) | - | |||||
Unrealized capital gains (losses), before tax
|
167.9 | (631.6 | ) | |||||
Deferred income tax (liability) asset
|
(59.7 | ) | 197.4 | |||||
Deferred tax asset valuation allowance
|
0.5 | - | ||||||
Net unrealized capital gains (losses)
|
108.7 | (434.2 | ) | |||||
Pension liability, net of tax
|
(8.7 | ) | (17.7 | ) | ||||
Accumulated other comprehensive income (loss)
|
$ | 100.0 | $ | (451.9 | ) |
On April
1, 2009, the Company adopted new US GAAP guidance on impairments, included in
ASC Topic 320. As prescribed by this accounting guidance, noncredit impairments,
reflecting the portion of the impairment between the present value of future
cash flows and fair value, were recognized in Other comprehensive income
(loss). As of March 31, 2010, net unrealized capital gains on
available-for-sale fixed maturities included $49.1 of noncredit
impairments.
As of
March 31, 2010, the Company had $82.2 in net unrealized gains allocated to
experience-rated contracts, which are reflected in Future policy benefits and
claims reserves on the Condensed Consolidated Balance Sheets. In 2008 and 2009,
as a result of the unfavorable market conditions, net unrealized capital gains
(losses) were not allocated to experience-rated contracts. Rather, the Company
reflected net unrealized capital losses in Shareholder’s equity on the Condensed
Consolidated Balance Sheets.
49
ING
Life Insurance and Annuity Company and Subsidiaries
(A
wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes
to Condensed Consolidated Financial Statements (Unaudited)
(Dollar
amounts in millions, unless otherwise stated)
Changes
in unrealized capital gains (losses) on securities, including securities pledged
and noncredit impairments, as recognized in Accumulated other comprehensive
income (loss), reported net of DAC, VOBA, and income taxes, were as follows for
the three months ended March 31, 2010 and 2009.
2010
|
2009
|
||||||
Net unrealized capital holding gains arising during the period(1)
|
$ | 82.3 | $ | 75.0 | |||
Less: reclassification adjustment for gains and other
|
|||||||
items included in Net income (loss)(2)
|
6.8 | 45.1 | |||||
Net change in unrealized capital gains on securities
|
$ | 75.5 | $ | 29.9 | |||
(1) Pretax net unrealized capital holding gains arising during the period were $120.3 and $96.1 for the three months | |||||||
ended March 31, 2010 and 2009, respectively.
|
|||||||
(2)Pretax reclassification adjustments for gains and other items included in Net income (loss) were $10.0 and $57.8 | |||||||
for the three months ended March 31, 2010 and 2009, respectively.
|
The reclassification adjustments for gains (losses) and other items included in Net income (loss) in the above table are determined by specific identification of each security sold during the period.
The
following table identifies the amount of noncredit impairments on fixed
maturities recognized in Other comprehensive income (loss) as of the dates
indicated.
2010
|
|||
Balance at January 1, 2010
|
$ | 46.7 | |
Additional noncredit impairments:
|
|||
On securities not previously impaired
|
7.6 | ||
On securities previously impaired
|
0.1 | ||
Reductions: | |||
Securities sold, matured, prepaid or paid down(1)
|
(0.8 | ) | |
Securities with additional credit impairments(1)
|
(4.5 | ) | |
Balance at March 31, 2010
|
$ | 49.1 | |
(1) Represents realization of noncredit impairments to Net income (loss). |
50
Item
2.
|
Management’s
Narrative Analysis of the Results of Operations and Financial
Condition
|
(Dollar
amounts in millions, unless otherwise stated)
Overview
The
following narrative analysis presents a review of the consolidated results of
operations of ING Life Insurance and Annuity Company (“ILIAC”) and its
wholly-owned subsidiaries (collectively, the “Company”) for each of the three
months ended March 31, 2010 and 2009, and financial condition as of March 31,
2010 and December 31, 2009. This item should be read in its entirety
and in conjunction with the condensed consolidated financial statements and
related notes, which can be found under Part I, Item 1. contained herein, as
well as the “Management’s Narrative Analysis of the Results of Operations and
Financial Condition” section contained in the Company’s 2009 Annual Report on
Form 10-K/A.
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 that
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, including, but not limited to the following:
(1)
|
While
the United States is slowly emerging from the recent financial crisis
after substantial governmental intervention, significant risks still
remain for the United States and other world economies. Recent concerns
regarding certain sovereign credit risks and the threat of contagion could
increase U.S. market uncertainty and volatility. These global
market conditions have affected and may continue to affect the Company’s
results of operations;
|
51
(2)
|
Adverse
financial market conditions, changes in rating agency standards and
practices and/or actions taken by ratings agencies may significantly
affect the Company’s ability to meet liquidity needs, access to capital
and cost of capital;
|
(3)
|
Circumstances
associated with implementation of ING Groep’s recently announced global
business strategy and the final restructuring plan submitted to the
European Commission in connection with its review of ING Groep’s receipt
of state aid from the Dutch State could adversely affect the Company’s
results of operations and financial
condition;
|
(4)
|
The
amount of statutory capital that the Company holds can vary significantly
from time to time and is sensitive to a number of factors outside of the
Company’s control and influences its financial strength and credit
ratings;
|
(5)
|
The
Company has experienced ratings downgrades recently and may experience
additional future downgrades in the Company’s ratings which may negatively
affect profitability, financial condition, and access to
liquidity;
|
(6)
|
Recent
federal actions taken to alleviate the financial crisis may not be
effective and state and federal financial regulatory reform initiatives,
including new laws and regulations, could have unintended consequences for
the financial services industry, including the Company and/or materially
affect the Company’s results of operations, financial condition and
liquidity;
|
(7)
|
The
valuation of many of the Company’s financial instruments include
methodologies, estimations and assumptions that are subject to differing
interpretations and could result in changes to investment valuations that
may materially adversely affect results of operations and financial
condition;
|
(8)
|
The
determination of the amount of impairments taken on the Company’s
investments is subjective and could materially impact results of
operations;
|
(9)
|
If
assumptions used in estimating future gross profits differ from actual
experience or if an estimation technique used to estimate future gross
profits is modified, the Company may be required to accelerate the
amortization of Deferred Acquisition Costs (“DAC”), which could have a
material adverse effect on results of operations and financial
condition;
|
(10)
|
If
the Company’s business does not generate sufficient taxable income, the
Company may be required to establish an additional valuation allowance
against the deferred income tax asset, which could have a material adverse
effect on results of operations and financial
condition;
|
(11)
|
Reinsurance
subjects the Company to the credit risk of reinsurers and may not be
adequate to protect against losses arising from ceded
reinsurance;
|
(12)
|
The
inability of counterparties to meet their financial obligations could have
an adverse effect on the Company's results of
operations;
|
(13)
|
Changes
in underwriting and actual experience could materially affect
profitability;
|
(14)
|
A
loss of key product distribution relationships could materially affect
sales;
|
(15)
|
Competition
could negatively affect the ability to maintain or increase
profitability;
|
(16)
|
Changes
in federal income tax law or interpretations of existing tax law could
affect profitability and financial condition by making some products less
attractive to contractowners and increasing tax costs of contractowners or
the Company;
|
52
(17)
|
The
Company may be adversely affected by increased governmental and regulatory
scrutiny or negative publicity;
|
(18)
|
A
loss of key employees could increase the Company’s operational risks and
could adversely affect the effectiveness of internal controls over
financial reporting;
|
(19)
|
Litigation
may adversely affect profitability and financial
condition;
|
(20)
|
Changes
in regulation in the United States and recent regulatory investigations
may reduce profitability;
|
(21)
|
The
Company’s products are subject to extensive regulation and failure to meet
any of the complex product requirements may reduce
profitability;
|
(22)
|
Failure
of a Company operating or information system or a compromise of security
with respect to an operating or information system or portable electronic
device or a failure to implement system modifications or a new accounting,
actuarial or other operating system effectively could adversely
affect the Company’s results of operations and financial condition or the
effectiveness of internal controls over financial
reporting;
|
(23)
|
The
occurrence of natural or man-made disasters may adversely affect the
Company’s results of operations and financial condition;
and
|
(24)
|
The
occurrence of unidentified or unanticipated risks could negatively affect
the Company’s business or result in
losses.
|
Investors
are also directed to consider the risks and uncertainties discussed in this Item
2. and in Item 1A. of Part II contained herein, as well as 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.
Basis
of Presentation
ILIAC is
a stock life insurance company domiciled in the state of
Connecticut. ILIAC and its wholly-owned subsidiaries are providers of
financial products and services in the United States. ILIAC is
authorized to conduct its insurance business in all states and in the District
of Columbia.
ILIAC is
a direct, wholly-owned subsidiary of Lion Connecticut Holdings Inc. (“Lion” or
“Parent”), which is an indirect, wholly-owned subsidiary of ING Groep N.V.
(“ING”). ING is a global financial services holding company based in
the Netherlands, with American Depository Shares listed on the New York Stock
Exchange under the symbol “ING”.
As part
of a restructuring plan approved by the European Commission (“EC”), ING has
agreed to separate its banking and insurance businesses by 2013. ING
intends to achieve this separation by divestment of its insurance and investment
management operations, including the Company. ING has announced that
it will explore all options for implementing the separation including initial
public offerings, sales, or a combination thereof.
The
Company has one operating segment.
53
Critical
Accounting Policies
There
have been no material changes to the Company’s critical accounting policies
since the filing of the Company’s 2009 Annual Report on Form 10-K/A, except as
noted in the Recently Adopted Accounting Standards footnote.
Results
of Operations
Overview
Products
offered by the Company include qualified and nonqualified annuity contracts that
include a variety of funding and payout options for individuals and
employer-sponsored retirement plans qualified under Internal Revenue Code
Sections 401, 403, 408, and 457, as well as nonqualified deferred compensation
plans.
On April
9, 2009, the Company’s ultimate parent, ING, announced a global business
strategy which identified certain core and non-core businesses and geographies,
stated ING’s intention to explore divestiture of non-core businesses over time,
withdraw from certain non-core geographies, limit future acquisitions and
implement enterprise-wide expense reduction. In particular, with
respect to ING’s U.S. insurance operations, ING is seeking to further reduce its
risk by focusing on individual life products, retirement services and a new
suite of simpler, lower risk annuity products which the Company has commenced
selling during the first quarter of 2010.
The
Company derives its revenue mainly from (a) fee income generated from separate
account assets supporting variable options under variable annuity contract
investments, as designated by contractowners, (b) investment income earned on
assets supporting fixed assets under management (“AUM”), mainly generated from
annuity products with fixed investment options, and (c) certain other
fees. The Company’s expenses primarily consist of (a) interest
credited and other benefits to contractowners, (b) amortization of DAC and value
of business acquired (“VOBA”), (c) expenses related to the selling and servicing
of the various products offered by the Company, and (d) other general business
expenses. In addition, the Company collects broker-dealer commissions
through its subsidiary, Directed Services LLC (“DSL”), which are, in turn, paid
to broker-dealers and expensed.
Economic
Analysis
The U.S.
economic environment in 2010 has continued to show improvement from the extreme
volatility and disruption experienced since the latter part of 2008 and
throughout 2009, due largely to the stresses affecting the global financial
systems. It appears the United States is slowly emerging from a
severe recession and although some improvement in the economic environment began
to materialize in the latter part of the first quarter of 2009, a mostly
sluggish economy has persisted into 2010 and significant risks still remain for
the United States and other world economies. These economic
conditions present challenges to the Company and the entire insurance
industry.
54
Equity
markets improved for the three months ended March 31, 2010, that favorably
impacted AUM and corresponding fee revenue related to variable annuity products.
In addition, variable product demand often mirrors consumer demand for equity
market investments.
The
market continued to show signs of recovery from the credit and liquidity crisis
that impacted short-term, London InterBank Offered Rates (“LIBOR”) and U.S.
Treasury rates, including the narrowing of credit spreads during the latter part
of 2009 and the first quarter of 2010, although they remained wide compared to
average credit spreads over the past 20 years. The long-term U.S. Treasury rates
in the first quarter of 2010 decreased from the year-end of 2009, which had a
positive effect on the fixed maturities portfolio and resulted in unrealized
capital gains. However, the average interest rates for the first quarter of 2010
remained higher in comparison with the same period of 2009 that lead to lower
realized capital gains on sales of fixed maturities.
55
Quarter
ended March 31, 2010 compared to quarter ended March 31, 2009
The
Company’s results of operations for the three months ended March 31, 2010, and
changes therein, were primarily impacted by lower amortization of DAC and VOBA
due to improved equity markets and higher fee income due to increase in average
variable AUM levels. These favorable items were partially offset by lower net
realized capital gains, lower net investment income due to lower yields on fixed
maturities and higher operating expenses.
Three Months Ended March 31,
|
$ Increase
|
% Increase
|
||||||||||||
2010
|
2009
|
(Decrease)
|
(Decrease)
|
|||||||||||
Revenues:
|
||||||||||||||
Net investment income
|
$ | 297.3 | $ | 320.4 | $ | (23.1 | ) | (7.2 | )% | |||||
Fee income
|
141.1 | 111.4 | 29.7 | 26.7 | % | |||||||||
Premiums
|
8.1 | 4.8 | 3.3 | 68.8 | % | |||||||||
Broker-dealer commission revenue
|
58.6 | 95.7 | (37.1 | ) | (38.8 | )% | ||||||||
Net realized capital gains:
|
||||||||||||||
Total other-than-temporary
|
||||||||||||||
impairment losses
|
(34.9 | ) | (159.4 | ) | 124.5 | 78.1 | % | |||||||
Portion of other-than-temporary
|
||||||||||||||
impairment losses recognized in
|
||||||||||||||
Other comprehensive income (loss)
|
7.7 | - | 7.7 |
NM
|
||||||||||
Net other-than-temporary impairments
|
||||||||||||||
recognized in earnings
|
(27.2 | ) | (159.4 | ) | 132.2 | 82.9 | % | |||||||
Other net realized capital gains
|
40.2 | 211.9 | (171.7 | ) | (81.0 | )% | ||||||||
Total net realized capital gains
|
13.0 | 52.5 | (39.5 | ) | (75.2 | )% | ||||||||
Other income
|
2.5 | 4.1 | (1.6 | ) | (39.0 | )% | ||||||||
Total revenue
|
520.6 | 588.9 | (68.3 | ) | (11.6 | )% | ||||||||
Benefits and expenses:
|
||||||||||||||
Interest credited and other
|
||||||||||||||
benefits to contractowners
|
172.5 | 165.0 | 7.5 | 4.5 | % | |||||||||
Operating expenses
|
165.5 | 144.8 | 20.7 | 14.3 | % | |||||||||
Broker-dealer commission expense
|
58.6 | 95.7 | (37.1 | ) | (38.8 | )% | ||||||||
Net amortization of deferred policy
|
||||||||||||||
acquisition costs and value
|
||||||||||||||
of business acquired
|
18.3 | 146.8 | (128.5 | ) | (87.5 | )% | ||||||||
Interest expense
|
0.8 | 0.3 | 0.5 |
NM
|
||||||||||
Total benefits and expenses
|
415.7 | 552.6 | (136.9 | ) | (24.8 | )% | ||||||||
Income before income taxes
|
104.9 | 36.3 | 68.6 |
NM
|
||||||||||
Income tax expense (benefit)
|
14.0 | (4.0 | ) | 18.0 |
NM
|
|||||||||
Net income
|
$ | 90.9 | $ | 40.3 | $ | 50.6 |
NM
|
|||||||
Effective tax rate
|
13.3 | % | (11.0 | )% | ||||||||||
NM - Not meaningful.
|
Revenues
Total revenue decreased for
the three months ended March 31, 2010, primarily due to lower Net investment
income, lower Net realized capital gains, and lower Broker-dealer commission
revenue, partially offset by higher Fee income.
56
The
decrease in Net investment
income for the three months ended March 31, 2010, was mainly due to lower
yields on certain fixed maturities which produce lower yields in a rising
interest rate environment. This decrease was partially offset by lower
investment management fees charged by the Company’s affiliate, ING Investment
Management, LLC, for management of the Company’s general account assets in
2010.
Fee income increased for the
three months ended March 31, 2010, as overall average variable AUM increased,
driven by favorable equity market performance late in 2009 and the first quarter
of 2010.
Broker-dealer commission
revenue decreased for the three months ended March 31, 2010, due to lower
sales of variable annuity products. The decrease in commission revenue is offset
by the corresponding decrease in Broker-dealer commission expense.
The
decline in Total net realized
capital gains for the three months ended March 31, 2010, was primarily
due to lower gains on derivatives, driven by the unwinding of futures in the
derivatives portfolio. In the first quarter of 2009, the Company recognized
gains on futures used to hedge fee income from variable annuity products.
However, with the improvement in equity markets, the Company unwound its
holdings in futures during the last quarter of 2009. In addition, the decline
was also due to lower gains on fixed maturities attributable to a gain of $206.2
recognized in the first quarter of 2009 on the transfer of an 80% interest in
the Company’s Alt-A residential mortgage-backed securities to the Dutch State,
as well as a large hedge gain in the first quarter of 2009. Higher gains on
sales of fixed maturities and equity securities as well as lower impairments in
the first quarter of 2010 driven by higher market values, served to partially
offset these losses.
Benefits
and Expenses
Total benefits and expenses
decreased for the three months ended March 31, 2010, primarily due to a decline
in Net amortization of DAC and VOBA and lower Broker-dealer commission expense,
partially offset by an increase in Operating expenses.
Operating expenses increased
for the three months ended March 31, 2010, reflecting higher commission expenses
due to the increase in average variable annuity AUM, as well as development
costs related to the Company’s new products.
Broker-dealer commission
expense decreased for the three months ended March 31, 2010, due to lower
sales of variable annuity products. The decrease in commission expense is offset
by the corresponding decrease in Broker-dealer commission revenue.
The
decrease in Net amortization
of DAC and VOBA for the three months ended March 31, 2010 was primarily
due to reduced amortization rates driven by an increase in estimated future
gross profits due to the improvement in equity markets in 2010. This decline was
partially offset by the impact of higher current year gross profits, primarily
due to lower expenses, which resulted in an increase in
amortization.
57
Income
Taxes
Income tax expense increased
for the quarter ended March 31, 2010, primarily due to an increase in income
before taxes, partially offset by a reduction in the tax valuation allowance
related to realized capital gains.
Financial
Condition
Investments
Investment
Strategy
The
Company’s investment strategy focuses on diversification by asset
class. The Company seeks to achieve economic diversification, while
reducing overall credit risk and liquidity risks. In addition, the
Company seeks to mitigate the impact of cash flow variability from embedded
options within certain investment products, such as prepayment options, 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, an affiliate, pursuant to an
investment advisory agreement. Separate portfolios are established
for groups of products with similar liability characteristics within the
Company.
Portfolio
Composition
The
following tables present the investment portfolio at March 31, 2010 and
December 31, 2009.
2010
|
2009
|
|||||||||||||||
Carrying Value
|
%
|
Carrying Value
|
%
|
|||||||||||||
Fixed maturities, available-for-sale,
|
||||||||||||||||
including securities pledged
|
$ | 15,603.4 | 80.4 | % | $ | 15,655.3 | 79.2 | % | ||||||||
Equity securities, available-for-sale
|
200.8 | 1.0 | % | 187.9 | 1.0 | % | ||||||||||
Short-term investments
|
292.4 | 1.5 | % | 535.5 | 2.7 | % | ||||||||||
Mortgage loans on real estate
|
1,834.0 | 9.5 | % | 1,874.5 | 9.5 | % | ||||||||||
Policy loans
|
252.1 | 1.3 | % | 254.7 | 1.3 | % | ||||||||||
Loan-Dutch State obligation
|
630.8 | 3.3 | % | 674.1 | 3.4 | % | ||||||||||
Limited partnerships/corporations
|
417.4 | 2.2 | % | 426.2 | 2.2 | % | ||||||||||
Derivatives
|
157.0 | 0.8 | % | 129.0 | 0.7 | % | ||||||||||
Total investments
|
$ | 19,387.9 | 100.0 | % | $ | 19,737.2 | 100.0 | % |
58
Fixed
Maturities
Fixed
maturities, available-for-sale, were as follows as of March 31,
2010.
Gross
|
Gross
|
|||||||||||||||||
Unrealized
|
Unrealized
|
|||||||||||||||||
Amortized
|
Capital
|
Capital
|
Fair
|
|||||||||||||||
Cost
|
Gains
|
Losses
|
OTTI(2)
|
Value
|
||||||||||||||
Fixed maturities:
|
||||||||||||||||||
U.S. Treasuries
|
$ | 1,050.8 | $ | 3.2 | $ | 35.8 | $ | - | $ | 1,018.2 | ||||||||
U.S. government agencies and
authorities
|
622.5 | 43.8 | - | - | 666.3 | |||||||||||||
State, municipalities, and political
|
||||||||||||||||||
subdivisions
|
112.2 | 3.5 | 6.9 | - | 108.8 | |||||||||||||
U.S. corporate securities:
|
||||||||||||||||||
Public utilities
|
1,196.3 | 45.6 | 9.9 | - | 1,232.0 | |||||||||||||
Other corporate securities
|
4,787.4 | 310.2 | 38.1 | 0.6 | 5,058.9 | |||||||||||||
Total U.S. corporate securities
|
5,983.7 | 355.8 | 48.0 | 0.6 | 6,290.9 | |||||||||||||
Foreign securities(1):
|
||||||||||||||||||
Government
|
459.8 | 32.2 | 6.3 | - | 485.7 | |||||||||||||
Other
|
3,177.3 | 160.5 | 31.8 | 0.1 | 3,305.9 | |||||||||||||
Total foreign securities
|
3,637.1 | 192.7 | 38.1 | 0.1 | 3,791.6 | |||||||||||||
Residential mortgage-backed securities
|
1,858.1 | 264.7 | 81.3 | 17.6 | 2,023.9 | |||||||||||||
Commercial mortgage-backed securities
|
1,315.5 | 30.9 | 143.9 | - | 1,202.5 | |||||||||||||
Other asset-backed securities
|
603.3 | 13.1 | 84.4 | 30.8 | 501.2 | |||||||||||||
Total fixed maturities, including
|
||||||||||||||||||
securities pledged
|
15,183.2 | 907.7 | 438.4 | 49.1 | 15,603.4 | |||||||||||||
Less: securities pledged
|
360.7 | 12.2 | 9.5 | - | 363.4 | |||||||||||||
Total fixed maturities
|
$ | 14,822.5 | $ | 895.5 | $ | 428.9 | $ | 49.1 | $ | 15,240.0 | ||||||||
(1) Primarily U.S. dollar denominated. | ||||||||||||||||||
(2) Represents other-than-temporary impairments reported as a component of Other comprehensive income ("noncredit impairments”). |
59
Fixed
maturities, available-for-sale, were as follows as of December 31,
2009.
Gross
|
Gross
|
||||||||||||||
Unrealized
|
Unrealized
|
||||||||||||||
Amortized
|
Capital
|
Capital
|
Fair
|
||||||||||||
Cost
|
Gains
|
Losses
|
OTTI(2)
|
Value
|
|||||||||||
Fixed maturities:
|
|||||||||||||||
U.S. Treasuries
|
$ | 1,897.2 | $ | 3.0 | $ | 38.3 | $ | - | $ | 1,861.9 | |||||
U.S. government agencies and
|
|||||||||||||||
authorities
|
632.5 | 41.1 | - | - | 673.6 | ||||||||||
State, municipalities, and political
|
|||||||||||||||
subdivisions
|
112.5 | 2.5 | 7.8 | - | 107.2 | ||||||||||
U.S. corporate securities:
|
|||||||||||||||
Public utilities
|
1,138.7 | 40.8 | 14.3 | - | 1,165.2 | ||||||||||
Other corporate securities
|
4,366.5 | 267.4 | 63.2 | 0.6 | 4,570.1 | ||||||||||
Total U.S. corporate securities
|
5,505.2 | 308.2 | 77.5 | 0.6 | 5,735.3 | ||||||||||
Foreign securities(1):
|
|||||||||||||||
Government
|
343.0 | 29.2 | 8.7 | - | 363.5 | ||||||||||
Other
|
2,922.5 | 129.0 | 56.6 | 0.1 | 2,994.8 | ||||||||||
Total foreign securities
|
3,265.5 | 158.2 | 65.3 | 0.1 | 3,358.3 | ||||||||||
Residential mortgage-backed securities
|
1,916.6 | 268.3 | 111.9 | 16.8 | 2,056.2 | ||||||||||
Commercial mortgage-backed securities
|
1,535.0 | 10.4 | 214.3 | - | 1,331.1 | ||||||||||
Other asset-backed securities
|
657.4 | 9.8 | 106.3 | 29.2 | 531.7 | ||||||||||
Total fixed maturities, including
|
|||||||||||||||
securities pledged
|
15,521.9 | 801.5 | 621.4 | 46.7 | 15,655.3 | ||||||||||
Less: securities pledged
|
483.7 | 4.3 | 18.2 | - | 469.8 | ||||||||||
Total fixed maturities
|
$ | 15,038.2 | $ | 797.2 | $ | 603.2 | $ | 46.7 | $ | 15,185.5 | |||||
(1) Primarily U.S. dollar denominated.
|
|||||||||||||||
(2) Represents other-than-temporary impairments reported as a component of Other comprehensive income ("noncredit impairments”).
|
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. At March 31, 2010 and December 31,
2009, the average quality rating of the Company’s fixed maturities portfolio was
A+. Ratings are calculated using a rating hierarchy that considers
Standard & Poor’s (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”),
and internal ratings.
60
Total
fixed maturities, including securities pledged to creditors, by quality rating
category were as follows as of March 31, 2010 and December 31,
2009.
2010
|
||||||||||||||||
Fair
|
% of
|
Amortized
|
% of
|
|||||||||||||
Value
|
Total
|
Cost
|
Total
|
|||||||||||||
AAA
|
$ | 4,544.4 | 29.2 | % | $ | 4,324.7 | 28.5 | % | ||||||||
AA
|
962.1 | 6.2 | % | 953.6 | 6.3 | % | ||||||||||
A
|
3,946.4 | 25.3 | % | 3,829.9 | 25.2 | % | ||||||||||
BBB
|
5,123.9 | 32.8 | % | 4,935.2 | 32.5 | % | ||||||||||
BB
|
598.8 | 3.8 | % | 624.2 | 4.1 | % | ||||||||||
B and below
|
427.8 | 2.7 | % | 515.6 | 3.4 | % | ||||||||||
Total
|
$ | 15,603.4 | 100.0 | % | $ | 15,183.2 | 100.0 | % | ||||||||
2009 | ||||||||||||||||
Fair
|
% of
|
Amortized
|
% of
|
|||||||||||||
Value
|
Total
|
Cost
|
Total
|
|||||||||||||
AAA
|
$ | 5,626.6 | 35.9 | % | $ | 5,488.6 | 35.3 | % | ||||||||
AA
|
961.9 | 6.1 | % | 987.2 | 6.4 | % | ||||||||||
A
|
3,514.8 | 22.5 | % | 3,458.7 | 22.3 | % | ||||||||||
BBB
|
4,606.1 | 29.4 | % | 4,493.6 | 29.0 | % | ||||||||||
BB
|
558.6 | 3.6 | % | 613.5 | 4.0 | % | ||||||||||
B and below
|
387.3 | 2.5 | % | 480.3 | 3.0 | % | ||||||||||
Total
|
$ | 15,655.3 | 100.0 | % | $ | 15,521.9 | 100.0 | % |
93.5% and
93.9% of fixed maturities were invested in securities rated BBB and above
(Investment Grade) as of March 31, 2010 and December 31, 2009,
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 securities pledged to creditors,
were as follows at March 31, 2010 and December 31, 2009.
2010
|
||||||||||||||||
Fair
|
% of
|
Amortized
|
% of
|
|||||||||||||
Value
|
Total
|
Cost
|
Total
|
|||||||||||||
U.S. Treasuries
|
$ | 1,018.2 | 6.5 | % | $ | 1,050.8 | 6.9 | % | ||||||||
U.S. government agencies and authorities
|
666.3 | 4.3 | % | 622.5 | 4.1 | % | ||||||||||
U.S. corporate, state, and municipalities
|
6,399.7 | 41.0 | % | 6,095.9 | 40.1 | % | ||||||||||
Foreign
|
3,791.6 | 24.3 | % | 3,637.1 | 24.0 | % | ||||||||||
Residential mortgage-backed
|
2,023.9 | 13.0 | % | 1,858.1 | 12.2 | % | ||||||||||
Commercial mortgage-backed
|
1,202.5 | 7.7 | % | 1,315.5 | 8.7 | % | ||||||||||
Other asset-backed
|
501.2 | 3.2 | % | 603.3 | 4.0 | % | ||||||||||
Total
|
$ | 15,603.4 | 100.0 | % | $ | 15,183.2 | 100.0 | % |
61
2009
|
||||||||||||||||
Fair
|
% of
|
Amortized
|
% of
|
|||||||||||||
Value
|
Total
|
Cost
|
Total
|
|||||||||||||
U.S. Treasuries
|
$ | 1,861.9 | 11.9 | % | $ | 1,897.2 | 12.2 | % | ||||||||
U.S. government agencies and authorities
|
673.6 | 4.3 | % | 632.5 | 4.1 | % | ||||||||||
U.S. corporate, state, and municipalities
|
5,842.5 | 37.3 | % | 5,617.7 | 36.3 | % | ||||||||||
Foreign
|
3,358.3 | 21.5 | % | 3,265.5 | 21.0 | % | ||||||||||
Residential mortgage-backed
|
2,056.2 | 13.1 | % | 1,916.6 | 12.3 | % | ||||||||||
Commercial mortgage-backed
|
1,331.1 | 8.5 | % | 1,535.0 | 9.9 | % | ||||||||||
Other asset-backed
|
531.7 | 3.4 | % | 657.4 | 4.2 | % | ||||||||||
Total
|
$ | 15,655.3 | 100.0 | % | $ | 15,521.9 | 100.0 | % |
The
amortized cost and fair value of fixed maturities, excluding securities pledged,
as of March 31, 2010, are shown below by contractual maturity. Actual
maturities may differ from contractual maturities as securities may be
restructured, called, or prepaid.
Amortized
|
Fair
|
||||||
Cost
|
Value
|
||||||
One year or less
|
$ | 214.2 | $ | 216.1 | |||
After one year through five years
|
3,861.4 | 4,094.4 | |||||
After five years through ten years
|
3,938.7 | 4,140.7 | |||||
After ten years
|
3,392.0 | 3,424.6 | |||||
Mortgage-backed securities
|
3,173.6 | 3,226.4 | |||||
Other asset-backed securities
|
603.3 | 501.2 | |||||
Less: securities pledged
|
360.7 | 363.4 | |||||
Fixed maturities, excluding securities pledged
|
$ | 14,822.5 | $ | 15,240.0 |
Subprime
and Alt-A Mortgage Exposure
Since the
third quarter of 2007, credit markets have become more turbulent amid concerns
about subprime and Alt-A mortgages and collateralized debt obligations
(“CDOs”). This resulted in a general widening of credit spreads,
reduced price transparency, reduced liquidity, increased rating agency
downgrades and increased volatility across certain markets. Although some
improvement in credit markets occurred in 2009, these challenging conditions
largely remain through the first quarter of 2010.
The
Company does not originate or purchase subprime or Alt-A whole-loan mortgages.
The Company does have exposure to Residential mortgage-backed securities
(“RMBS”) and Asset-backed Securities (“ABS”). Subprime lending is the
origination of loans to customers with weaker credit profiles. The
Company defines Alt-A Loans to include residential mortgage loans to customers
who have strong credit profiles but lack some element(s), such as documentation
to substantiate income; residential mortgage loans to borrowers that would
otherwise be classified as prime but whose loan structure provides repayment
options to the borrower that increase the risk of default; and any securities
backed by residential mortgage collateral not clearly identifiable as prime or
subprime.
62
Trading
activity for the Company’s RMBS, particularly subprime and Alt-A mortgage-backed
securities, declined during 2008 as a result of the dislocation of the credit
markets. The Company continued to obtain pricing information from commercial
pricing services and brokers. However, the pricing for subprime and
Alt-A RMBS did not represent regularly occurring market transactions since the
trading activity declined significantly in the second half of
2008. As a result, the Company concluded in the second half of 2008
that the market for subprime and Alt-A RMBS was inactive. The Company
did not change its valuation procedures as a result of determining that the
market was inactive. Due to increased trade activity of Alt-A RMBS during the
second half of 2009, the Company determined that the Alt-A RMBS market is now
active.
The
following summarizes the Company’s exposure to subprime and Alt-A mortgages as
of March 31, 2010 and December 31, 2009.
The
Company’s exposure to subprime mortgages was primarily in the form of ABS
structures collateralized by subprime residential mortgages, and the majority of
these holdings were included in other asset-backed securities in the fixed
maturities by market sector table above. As of March 31, 2010, the
fair value and gross unrealized losses related to the Company’s exposure to
subprime mortgages were $210.7 and $109.5, respectively, representing 1.4% of
total fixed maturities. As of December 31, 2009, the fair value
and gross unrealized losses related to the Company’s exposure to subprime
mortgages were $205.2 and $125.4, respectively, representing 1.3% of total fixed
maturities.
The
following tables summarize the Company’s exposure to subprime mortgage-backed
holdings by credit quality and vintage year as of March 31, 2010 and
December 31, 2009:
2010
|
2009
|
|||||||||||||
% of Total Subprime
|
% of Total Subprime
|
|||||||||||||
Mortgage-backed
|
Mortgage-backed
|
|||||||||||||
Securities
|
Vintage
|
Securities
|
Vintage
|
|||||||||||
AAA
|
39.4%
|
2007
|
27.6%
|
AAA
|
42.2%
|
2007
|
28.3%
|
|||||||
AA
|
14.2%
|
2006
|
23.9%
|
AA
|
16.0%
|
2006
|
24.4%
|
|||||||
A
|
2.3%
|
2005 and prior
|
48.5%
|
A
|
4.6%
|
2005 and prior
|
47.3%
|
|||||||
BBB
|
3.7%
|
100.0%
|
BBB
|
1.7%
|
100.0%
|
|||||||||
BB and below
|
40.4%
|
BB and below
|
35.5%
|
|||||||||||
100.0%
|
100.0%
|
The
Company’s exposure to Alt-A mortgages was included in residential
mortgage-backed securities in the fixed maturities by market sector table
above. As of March 31, 2010, the fair value and gross unrealized
losses aggregated to $134.5 and $38.2, respectively, representing 0.9% of total
fixed maturities. As of December 31, 2009, the fair value and
gross unrealized losses related to the Company’s exposure to Alt-A mortgages
were $138.8 and $41.2, respectively, representing 0.9% of total fixed
maturities.
63
The
following tables summarize the Company’s exposure to Alt-A mortgage-backed
holdings by credit quality and vintage year as of March 31, 2010 and
December 31, 2009:
2010
|
2009
|
|||||||||||||
% of Total Alt-A
|
% of Total Alt-A
|
|||||||||||||
Mortgage-backed
|
Mortgage-backed
|
|||||||||||||
Securities
|
Vintage
|
Securities
|
Vintage
|
|||||||||||
AAA
|
33.2%
|
2007
|
10.5%
|
AAA
|
37.5%
|
2007
|
11.3%
|
|||||||
AA
|
3.4%
|
2006
|
28.5%
|
AA
|
1.4%
|
2006
|
29.1%
|
|||||||
A
|
0.4%
|
2005 and prior
|
61.0%
|
A
|
1.7%
|
2005 and prior
|
59.6%
|
|||||||
BBB
|
5.0%
|
100.0%
|
BBB
|
8.0%
|
100.0%
|
|||||||||
BB and below
|
58.0%
|
BB and below
|
51.4%
|
|||||||||||
100.0%
|
100.0%
|
Commercial
Mortgage-backed and Other Asset-backed Securities
While the
delinquency rates on commercial mortgages have been stable in recent years,
commercial real estate rents and property values have recently become more
volatile. In addition, there are growing concerns with consumer loans
as a result of the current economic environment, which includes lower family
income and higher unemployment rates.
As of
March 31, 2010 and December 31, 2009, the fair value of the Company’s commercial
mortgage-backed securities (“CMBS”) totaled $1.2 billion and $1.3 billion,
respectively, and other ABS, excluding subprime exposure, totaled $307.6 and
$343.0, respectively. CMBS investments represent pools of commercial
mortgages that are broadly diversified across property types and geographical
areas.
As of
March 31, 2010, the other ABS was also broadly diversified both by type and
issuer with credit card receivables, collateralized loan obligations and
automobile receivables, comprising 40.6%, 12.6%, and 11.2%, respectively, of
total other ABS, excluding subprime exposure. As of December 31,
2009, the other ABS was also broadly diversified both by type and issuer with
credit card receivables, automobile receivables, public utility, and
collateralized loan obligations comprising 39.9%, 11.4%, and 13.0%,
respectively, of total other ABS, excluding subprime exposure.
64
The
following tables summarize the Company’s exposure to CMBS holdings, excluding
subprime exposure, by credit quality and vintage year as of March 31, 2010 and
December 31, 2009:
2010
|
2009
|
|||||||||||||
% of Total CMBS
|
Vintage
|
% of Total CMBS
|
Vintage
|
|||||||||||
AAA
|
69.2%
|
2008
|
0.4%
|
AAA
|
73.6%
|
2008
|
0.4%
|
|||||||
AA
|
1.8%
|
2007
|
22.7%
|
AA
|
2.3%
|
2007
|
21.9%
|
|||||||
A
|
19.3%
|
2006
|
15.6%
|
A
|
16.6%
|
2006
|
16.5%
|
|||||||
BBB
|
6.0%
|
2005 and prior
|
61.3%
|
BBB
|
3.8%
|
2005 and prior
|
61.2%
|
|||||||
BB and below
|
3.7%
|
100.0%
|
3.7%
|
100.0%
|
||||||||||
100.0%
|
100.0%
|
The
following tables summarize the Company’s exposure to other ABS holdings by
credit quality and vintage year as of March 31, 2010 and December 31,
2009:
2010
|
2009
|
|||||||||||||
% of Total other ABS
|
Vintage
|
% of Total other ABS
|
Vintage
|
|||||||||||
AAA
|
54.5%
|
2008
|
6.6%
|
AAA
|
56.3%
|
2008
|
5.9%
|
|||||||
AA
|
0.7%
|
2007
|
11.3%
|
AA
|
7.2%
|
2007
|
13.9%
|
|||||||
A
|
18.9%
|
2006
|
31.0%
|
A
|
18.0%
|
2006
|
29.8%
|
|||||||
BBB
|
24.3%
|
2005 and prior
|
51.1%
|
BBB
|
17.0%
|
2005 and prior
|
50.4%
|
|||||||
BB and below
|
1.6%
|
100.0%
|
BB and below
|
1.5%
|
100.0%
|
|||||||||
100.0%
|
100.0%
|
Mortgage
Loans on Real Estate
The
Company’s mortgage loans on real estate are all commercial mortgage loans, which
totaled $1.8 billion and $1.9 billion as of March 31, 2010 and December 31,
2009, respectively. These loans are reported at amortized cost, less
impairment write-downs and allowance for losses.
All
mortgage loans are evaluated by seasoned underwriters, including an appraisal of
loan-specific credit quality, property characteristics, and market trends, and
assigned a quality rating using the Company’s internally developed quality
rating system. Loan performance is continuously monitored on a loan-specific
basis through the review of borrower submitted appraisals, operating statements,
rent revenues and annual inspection reports, among other items. This
review ensures properties are performing at a consistent and acceptable level to
secure the debt.
All
commercial mortgages are rated for the purpose of quantifying the level of
risk. Those loans with higher risk are placed on a watch list and are
closely monitored for collateral deficiency or other credit events that may lead
to a potential loss of principal or interest. 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 from the
loan, discounted at the loan’s effective interest rate, or fair value of the
collateral. Impairments taken on the mortgage loan portfolio were
$1.0 for the three months ended March 31, 2010. There were no impairments taken
on the mortgage portfolio for the three months ended March 31, 2009. For those
mortgages that are determined to require foreclosure, the carrying value is
reduced to the fair value of the underlying collateral, net of estimated costs
to obtain and sell at the point of foreclosure. All mortgage loans in
the Company’s portfolio were current with respect to principal and interest at
March 31, 2010 and December 31, 2009. Due to challenges that the
current economy presents to the commercial mortgage market, effective with the
third quarter of 2009, the Company recorded an allowance for probable incurred,
but not specifically identified, losses related to factors inherent in the
lending process. At March 31, 2010 and December 31, 2009, the Company
had a $1.7 and $2.0 allowance for mortgage loan credit losses,
respectively.
65
Loan-to-value
(“LTV”) and debt service coverage (“DSC”) ratios are measures commonly used to
assess the risk and quality of commercial mortgage loans. The LTV
ratio, calculated at time of origination, is expressed as a percentage of the
amount of the loan relative to the value of the underlying
property. The DSC ratio, based upon the most recently received
financial statements, is expressed as a percentage of the amount of a property’s
net income to its debt service payments. These ratios are utilized as
part of the review process described above. LTV and DSC ratios as of
March 31, 2010 and December 31, 2009, are as follows:
2010(1)
|
2009(1)
|
|||||||||
Loan to Value Ratio:
|
||||||||||
0% - 50%
|
$
|
530.3
|
$
|
569.0
|
||||||
50% - 60%
|
567.2
|
562.9
|
||||||||
60% - 70%
|
589.1
|
593.6
|
||||||||
70% - 80%
|
128.9
|
130.4
|
||||||||
80% - 90%
|
20.2
|
20.6
|
||||||||
Total Commercial Mortgage Loans
|
$
|
1,835.7
|
$
|
1,876.5
|
||||||
(1) Balances do not include allowance for mortgage loan credit losses. |
2010(1)(2)
|
2009(1)(2)
|
|||||||||
Debt Service Coverage Ratio:
|
||||||||||
Greater than 1.5x
|
$
|
1,225.0
|
$
|
1,233.9
|
||||||
1.25x - 1.5x
|
212.8
|
229.6
|
||||||||
1.0x - 1.25x
|
150.9
|
152.6
|
||||||||
Less than 1.0x
|
190.5
|
195.4
|
||||||||
Total Commercial Mortgage Loans
|
$
|
1,779.2
|
$
|
1,811.5
|
||||||
(1)
|
Balances do not include allowance for mortgage loan credit losses.
|
|||||||||
(2)
|
Excludes mortgages that are secured by loans on land or construction deals.
|
66
Properties
collateralizing mortgage loans are geographically dispersed throughout the
United States, as well as diversified by property type, as reflected in the
following tables as of March 31, 2010 and December 31, 2009.
2010(1)
|
2009(1)
|
|||||||||||||||
Gross
|
% of
|
Gross
|
% of
|
|||||||||||||
Carrying Value
|
Total
|
Carrying Value
|
Total
|
|||||||||||||
Commercial Mortgage Loans
|
||||||||||||||||
by US Region:
|
||||||||||||||||
Pacific
|
$ | 377.3 | 20.7 | % | $ | 372.2 | 19.8 | % | ||||||||
South Atlantic
|
303.2 | 16.5 | % | 308.3 | 16.5 | % | ||||||||||
Middle Atlantic
|
360.2 | 19.6 | % | 394.1 | 21.0 | % | ||||||||||
East North Central
|
142.0 | 7.7 | % | 143.0 | 7.6 | % | ||||||||||
West South Central
|
281.7 | 15.3 | % | 283.5 | 15.1 | % | ||||||||||
Mountain
|
155.6 | 8.5 | % | 158.0 | 8.4 | % | ||||||||||
New England
|
95.9 | 5.2 | % | 96.3 | 5.1 | % | ||||||||||
West North Central
|
52.1 | 2.8 | % | 52.6 | 2.8 | % | ||||||||||
East South Central
|
67.7 | 3.7 | % | 68.5 | 3.7 | % | ||||||||||
Total Commercial Mortgage Loans
|
$ | 1,835.7 | 100.0 | % | $ | 1,876.5 | 100.0 | % | ||||||||
(1) Balances do not include allowance for mortgage loan credit losses. |
2010(1)
|
2009(1)
|
|||||||||||||||
Gross
|
% of
|
Gross
|
% of
|
|||||||||||||
Carrying Value
|
Total
|
Carrying Value
|
Total
|
|||||||||||||
Commercial Mortgage Loans
|
||||||||||||||||
by Property Type:
|
||||||||||||||||
Industrial
|
$ | 623.5 | 34.0 | % | $ | 628.1 | 33.5 | % | ||||||||
Retail
|
381.8 | 20.8 | % | 378.1 | 20.1 | % | ||||||||||
Office
|
306.0 | 16.7 | % | 325.0 | 17.3 | % | ||||||||||
Apartments
|
259.7 | 14.1 | % | 261.2 | 13.9 | % | ||||||||||
Hotel/Motel
|
154.8 | 8.4 | % | 156.1 | 8.3 | % | ||||||||||
Other
|
109.9 | 6.0 | % | 128.0 | 6.9 | % | ||||||||||
Total Commercial Mortgage Loans
|
$ | 1,835.7 | 100.0 | % | $ | 1,876.5 | 100.0 | % | ||||||||
(1) Balances do not include allowance for mortgage loan credit losses. |
The
following table sets forth the breakdown of commercial mortgages by year of
origination as of March 31, 2010 and December 31, 2009.
2010(1)
|
2009(1)
|
|||||||
Year of Origination:
|
||||||||
2010
|
$ | 24.9 | $ | - | ||||
2009
|
66.6 | 69.2 | ||||||
2008
|
154.3 | 155.3 | ||||||
2007
|
225.4 | 241.3 | ||||||
2006
|
600.7 | 639.8 | ||||||
2005
|
287.5 | 291.1 | ||||||
2004 and prior
|
476.3 | 479.8 | ||||||
Total Commercial Mortgage Loans
|
$ | 1,835.7 | $ | 1,876.5 | ||||
(1) Balances do not include allowance for mortgage loan credit losses. |
67
Unrealized
Capital Losses
Unrealized
capital losses (including non-credit impairments) in fixed maturities, including
securities pledged to creditors, for Investment Grade (“IG”) and Below
Investment Grade (“BIG”) securities by duration were as follows as of March 31,
2010 and December 31, 2009.
2010
|
2009
|
||||||||||||||||||
% of IG
|
% of IG
|
% of IG
|
% of IG
|
||||||||||||||||
IG
|
and BIG
|
BIG
|
and BIG
|
IG
|
and BIG
|
BIG
|
and BIG
|
||||||||||||
Six months or less
|
|||||||||||||||||||
below amortized cost
|
$
|
72.8
|
15.0%
|
$
|
6.5
|
1.3%
|
$
|
105.5
|
15.7%
|
$
|
18.5
|
2.8%
|
|||||||
More than six months and
|
|||||||||||||||||||
twelve months or less
|
|||||||||||||||||||
below amortized cost
|
44.5
|
9.1%
|
44.8
|
9.2%
|
44.0
|
6.6%
|
37.9
|
5.7%
|
|||||||||||
More than twelve months
|
|||||||||||||||||||
below amortized cost
|
168.4
|
34.5%
|
150.5
|
30.9%
|
300.8
|
45.0%
|
161.4
|
24.2%
|
|||||||||||
Total unrealized capital loss
|
$
|
285.7
|
58.6%
|
$
|
201.8
|
41.4%
|
$
|
450.3
|
67.3%
|
$
|
217.8
|
32.7%
|
The following table summarizes the unrealized capital losses (including non-credit impairments) by duration and reason, along with the fair value of fixed maturities, including securities pledged to creditors, in unrealized capital loss positions as of March 31, 2010 and December 31, 2009.
More than
|
|||||||||||
Six Months
|
Six Months and
|
||||||||||
or Less
|
Twelve Months
|
More than
|
Total
|
||||||||
Below
|
or Less Below
|
Twelve Months
|
Unrealized
|
||||||||
Amortized
|
Amortized
|
Below
|
Capital
|
||||||||
2010
|
Cost
|
Cost
|
Cost
|
Losses
|
|||||||
Interest rate or spread widening
|
$ | 70.6 | $ | 16.3 | $ | 42.6 | $ | 129.5 | |||
Mortgage and other asset-backed
|
|||||||||||
securities
|
8.7 | 73.0 | 276.3 | 358.0 | |||||||
Total unrealized capital losses
|
$ | 79.3 | $ | 89.3 | $ | 318.9 | $ | 487.5 | |||
Fair value
|
$ | 2,481.8 | $ | 290.7 | $ | 1,479.2 | $ | 4,251.7 | |||
2009
|
|||||||||||
Interest rate or spread widening
|
$ | 75.9 | $ | 35.2 | $ | 78.5 | $ | 189.6 | |||
Mortgage and other asset-backed
|
|||||||||||
securities
|
48.1 | 46.7 | 383.7 | 478.5 | |||||||
Total unrealized capital losses
|
$ | 124.0 | $ | 81.9 | $ | 462.2 | $ | 668.1 | |||
Fair value
|
$ | 2,901.8 | $ | 212.6 | $ | 2,127.2 | $ | 5,241.6 |
68
Unrealized
capital losses (including non-credit impairments), along with the fair value of
fixed maturities, including securities pledged to creditors, by market sector
and duration were as follows as of March 31, 2010 and December 31,
2009.
More Than Six
|
||||||||||||||||||||||||||||||
Months and Twelve
|
More Than Twelve
|
|||||||||||||||||||||||||||||
Six Months or Less
|
Months or Less
|
Months Below
|
||||||||||||||||||||||||||||
Below Amortized Cost
|
Below Amortized Cost
|
Amortized Cost
|
Total
|
|||||||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
Unrealized
|
|||||||||||||||||||||||||||
Fair Value
|
Capital Loss
|
Fair Value
|
Capital Loss
|
Fair Value
|
Capital Loss
|
Fair Value
|
Capital Loss
|
|||||||||||||||||||||||
2010
|
||||||||||||||||||||||||||||||
U.S. Treasuries
|
$ | 727.0 | $ | 35.8 | $ | - | $ | - | $ | - | $ | - | $ | 727.0 | $ | 35.8 | ||||||||||||||
U.S. corporate,state, and
municipalities
|
1,053.5 | 17.4 | 119.3 | 8.5 | 290.4 | 29.6 | 1,463.2 | 55.5 | ||||||||||||||||||||||
Government agencies and authorities | 4.2 | - | - | - | - | - | 4.2 | - | ||||||||||||||||||||||
Foreign
|
623.2 | 17.4 | 36.6 | 7.8 | 196.2 | 13.0 | 856.0 | 38.2 | ||||||||||||||||||||||
Residential mortgage-backed | 47.7 | 6.8 | 94.0 | 35.5 | 329.6 | 56.6 | 471.3 | 98.9 | ||||||||||||||||||||||
Commercial
mortgage-backed
|
20.6 | 0.7 | 31.2 | 33.2 | 410.8 | 110.0 | 462.6 | 143.9 | ||||||||||||||||||||||
Other asset-backed
|
5.6 | 1.2 | 9.6 | 4.3 | 252.2 | 109.7 | 267.4 | 115.2 | ||||||||||||||||||||||
Total
|
$ | 2,481.8 | $ | 79.3 | $ | 290.7 | $ | 89.3 | $ | 1,479.2 | $ | 318.9 | $ | 4,251.7 | $ | 487.5 | ||||||||||||||
2009 | ||||||||||||||||||||||||||||||
U.S. Treasuries
|
$ | 1,002.1 | $ | 38.3 | $ | - | $ | - | $ | - | $ | - | $ | 1,002.1 | $ | 38.3 | ||||||||||||||
U.S. corporate, state, and municipalities | 1,097.0 | 22.7 | 86.1 | 14.9 | 381.2 | 48.3 | 1,564.3 | 85.9 | ||||||||||||||||||||||
Foreign
|
528.6 | 14.8 | 40.0 | 20.4 | 301.8 | 30.2 | 870.4 | 65.4 | ||||||||||||||||||||||
Residential mortgage-backed | 141.1 | 45.4 | 47.7 | 4.2 | 425.3 | 79.1 | 614.1 | 128.7 | ||||||||||||||||||||||
Commercial mortgage-backed | 105.8 | 1.2 | 27.2 | 35.7 | 757.1 | 177.4 | 890.1 | 214.3 | ||||||||||||||||||||||
Other asset-backed
|
27.2 | 1.6 | 11.6 | 6.7 | 261.8 | 127.2 | 300.6 | 135.5 | ||||||||||||||||||||||
Total
|
$ | 2,901.8 | $ | 124.0 | $ | 212.6 | $ | 81.9 | $ | 2,127.2 | $ | 462.2 | $ | 5,241.6 | $ | 668.1 |
Of the
unrealized capital losses aged more than twelve months, the average market value
of the related fixed maturities was 82.3% of the average book value as of
March 31, 2010. In addition, this category includes 361
securities, which have an average quality rating of A-.
69
Unrealized
capital losses (including non-credit impairments) in fixed maturities, including
securities pledged to creditors, for instances in which fair value declined
below amortized cost by greater than or less than 20% for consecutive periods as
indicated in the tables below, were as follows for March 31, 2010 and December
31, 2009.
Amortized Cost
|
Unrealized Capital Loss
|
Number of Securities
|
|||||||||||||||||
< 20%
|
> 20%
|
< 20%
|
> 20%
|
< 20%
|
> 20%
|
||||||||||||||
2010 | |||||||||||||||||||
Six months or less
|
|||||||||||||||||||
below amortized cost
|
$ | 1,725.9 | $ | 39.1 | $ | 70.3 | $ | 9.9 | 244 | 8 | |||||||||
More than six months and
|
|||||||||||||||||||
twelve months or less
|
|||||||||||||||||||
below amortized cost
|
1,018.8 | 254.4 | 47.9 | 122.3 | 178 | 82 | |||||||||||||
More than twelve months
|
|||||||||||||||||||
below amortized cost
|
1,205.3 | 495.7 | 52.9 | 184.2 | 106 | 110 | |||||||||||||
Total | $ | 3,950.0 | $ | 789.2 | $ | 171.1 | $ | 316.4 | 528 | 200 | |||||||||
2009 | |||||||||||||||||||
Six months or less
|
|||||||||||||||||||
below amortized cost
|
$ | 3,652.0 | $ | 185.0 | $ | 168.0 | $ | 60.7 | 377 | 98 | |||||||||
More than six months and
|
|||||||||||||||||||
Twelve months or less
|
|||||||||||||||||||
below amortized cost
|
734.5 | 247.0 | 40.2 | 124.3 | 120 | 48 | |||||||||||||
More than twelve months
|
|||||||||||||||||||
below amortized cost
|
431.1 | 660.1 | 28.2 | 246.7 | 90 | 129 | |||||||||||||
Total
|
$ | 4,817.6 | $ | 1,092.1 | $ | 236.4 | $ | 431.7 | 587 | 275 |
70
Unrealized
capital losses (including non-credit impairments) in fixed maturities, including
securities pledged to creditors, by market sector for instances in which fair
value declined below amortized cost by greater than or less than 20% for
consecutive periods as indicated in the tables below, were as follows for March
31, 2010 and December 31, 2009.
Amortized Cost
|
Unrealized Capital Loss
|
Number of Securities
|
|||||||||||||
< 20%
|
> 20%
|
< 20%
|
> 20%
|
< 20%
|
> 20%
|
||||||||||
2010
|
|||||||||||||||
U.S. Treasuries
|
$ | 762.8 | $ | - | $ | 35.8 | $ | - | 7 | - | |||||
U.S. corporate, state and
|
|||||||||||||||
municipalities
|
1,465.8 | 52.9 | 42.2 | 13.3 | 228 | 9 | |||||||||
Government agencies
|
|||||||||||||||
and authorities
|
4.2 | - | - | - | 1 | - | |||||||||
Foreign
|
866.4 | 27.8 | 29.6 | 8.6 | 108 | 10 | |||||||||
Residential mortgage-backed
|
361.5 | 208.7 | 33.2 | 65.7 | 114 | 80 | |||||||||
Commercial mortgage-backed
|
356.9 | 249.6 | 23.3 | 120.6 | 36 | 27 | |||||||||
Other asset-backed
|
132.4 | 250.2 | 7.0 | 108.2 | 34 | 74 | |||||||||
Total
|
$ | 3,950.0 | $ | 789.2 | $ | 171.1 | $ | 316.4 | 528 | 200 | |||||
2009
|
|||||||||||||||
U.S. Treasuries
|
$ | 1,040.5 | $ | - | $ | 38.3 | $ | - | 9 | - | |||||
U.S. corporate, state and
|
|||||||||||||||
municipalities
|
1,532.2 | 118.0 | 53.5 | 32.4 | 256 | 23 | |||||||||
Foreign
|
830.0 | 105.8 | 31.7 | 33.7 | 111 | 22 | |||||||||
Residential mortgage-backed
|
522.0 | 220.8 | 55.1 | 73.6 | 115 | 109 | |||||||||
Commercial mortgage-backed
|
732.4 | 372.0 | 49.3 | 165.0 | 59 | 39 | |||||||||
Other asset-backed
|
160.5 | 275.5 | 8.5 | 127.0 | 37 | 82 | |||||||||
Total
|
$ | 4,817.6 | $ | 1,092.1 | $ | 236.4 | $ | 431.7 | 587 | 275 |
During
the three months ended March 31, 2010, unrealized capital losses on fixed
maturities decreased by $180.6. Lower unrealized losses are due to improved
economic conditions and the tightening of credit spreads leading to the
increased value of fixed maturities.
All
securities with fair values less than amortized cost are included in the
Company’s other-than-temporary impairment analysis, and impairments were
recognized as disclosed in “Other-Than-Temporary Impairments,” which follows
this section. Management determined that no additional recognition of the
unrealized loss as an other-than-temporary impairment was
necessary.
71
Other-Than-Temporary
Impairments
The
Company analyzes its general account investments to determine whether there has
been an other-than-temporary decline in fair value below the amortized cost
basis. Factors considered in this analysis include, but are not limited to, the
length of time and the extent to which the fair value has been less than
amortized cost, the issuer’s financial condition and near-term prospects, future
economic conditions and market forecasts, interest rate changes, and changes in
ratings of the security.
When
assessing the Company’s intent to sell a security or if it is more likely than
not it will be required to sell a security before recovery of its cost basis,
management evaluates facts and circumstances such as, but not limited to,
decisions to rebalance the investment portfolio and sales of investments to meet
cash flow needs.
When the
Company has determined it has the intent to sell or if it is more likely than
not that it will be required to sell a security before recovery of its amortized
cost basis and the fair value has declined below amortized cost (“intent
impairment”) the individual security is written down from amortized cost to fair
value and a corresponding charge is recorded in Net realized capital gains
(losses) on the Condensed Consolidated Statements of Operations as an
other-than-temporary impairment (“OTTI”). If the Company does not
intend to sell the security nor is it more likely than not it will be required
to sell the security before recovery of its amortized cost basis, but the
Company has determined that there has been an other-than-temporary decline in
fair value below the amortized cost basis, the OTTI is bifurcated into the
amount representing the present value of the decrease in cash flows expected to
be collected (“credit impairment”) and the amount related to other factors
(“noncredit impairment”). The credit impairment is recorded in Net
realized capital gains (losses) on the Condensed Consolidated Statements of
Operations. The noncredit impairment is recorded in Other comprehensive income
(loss) on the Condensed Consolidated Balance Sheets in accordance with the
requirements of Accounting Standards Codification (“ASC”) Topic 320,
“Investments - Debt and Equity Securities”.
In order
to determine the amount of the OTTI that is considered a credit impairment, the
Company estimates the recovery value by performing a discounted cash flow
analysis based upon the best estimates of expected future cash flows, discounted
at the effective interest rate implicit in the underlying debt security. The
effective interest rate is the current yield prior to impairment for a fixed
rate security or current coupon yield for a floating rate security.
72
The
following table identifies the Company’s credit-related and intent-related
other-than-temporary impairments included in the Condensed Consolidated
Statements of Operations, excluding impairments included in Other comprehensive
income (loss), by type for the three months ended March 31, 2010 and
2009.
Three Months Ended March 31,
|
|||||||||
2010
|
2009
|
||||||||
No. of
|
No. of
|
||||||||
Impairment
|
Securities
|
Impairment
|
Securities
|
||||||
U.S. Treasuries
|
$ | 1.7 | 1 | $ | 33.1 | 5 | |||
Public utilities
|
0.7 | 3 | - | - | |||||
Other U.S. corporate
|
3.3 | 7 | 23.5 | 38 | |||||
Foreign(1)
|
13.2 | 6 | 26.3 | 22 | |||||
Residential mortgage-backed
|
1.2 | 16 | 35.8 | 43 | |||||
Other asset-backed
|
6.1 | 14 | 14.5 | 15 | |||||
Limited partnerships
|
- | - | 10.7 | 14 | |||||
Equity securities
|
- | - | 15.5 | 6 | |||||
Mortgage loans on real estate
|
1.0 | 1 | - | - | |||||
Total
|
$ | 27.2 | 48 | $ | 159.4 | 143 | |||
(1) Primarily U.S. dollar denominated.
|
The above
schedules include $15.6 and $47.2 for the three months ended March 31, 2010 and
2009, respectively, in other-than-temporary write-downs related to credit
impairments, which are recognized in earnings. The remaining
write-downs reflected in the schedules above are related to intent
impairments.
The
following table summarizes these intent impairments, which are also recognized
in earnings, by type for the three months ended March 31, 2010 and
2009.
Three Months Ended March 31,
|
|||||||||
2010
|
2009
|
||||||||
No. of
|
No. of
|
||||||||
Impairment
|
Securities
|
Impairment
|
Securities
|
||||||
U.S. Treasuries
|
$ | 1.7 | 1 | $ | 33.1 | 5 | |||
Public utilities
|
0.7 | 3 | - | - | |||||
Other U.S. corporate
|
3.0 | 6 | 16.5 | 23 | |||||
Foreign(1)
|
6.2 | 3 | 26.3 | 22 | |||||
Residential mortgage-backed
|
- | - | 22.5 | 8 | |||||
Other asset-backed
|
- | - | 13.8 | 6 | |||||
Total
|
$ | 11.6 | 13 | $ | 112.2 | 64 | |||
(1) Primarily U.S. dollar denominated.
|
The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturities or cost for equity securities. In certain situations, new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security.
73
The
following table identifies the noncredit impairments recognized in Other
comprehensive income (loss) by type for the three months ended March 31,
2010.
Three Months Ended
|
|||||||
March 31, 2010*
|
|||||||
No. of
|
|||||||
Impairment
|
Securities
|
||||||
Residential mortgage-backed
|
$ | 2.3 | 6 | ||||
Other asset-backed
|
5.4 | 5 | |||||
Total
|
$ | 7.7 | 11 | ||||
*
|
No amounts disclosed for three months ended March 31, 2009, as new guidance on OTTI, included in ASC Topic 320,
was adopted on April 1, 2009.
|
Net Realized Capital Gains (Losses)
Net
realized capital gains (losses) are comprised of the difference between the
amortized cost of investments and proceeds from sale and redemption, as well as
losses incurred due to credit-related and intent-related other-than-temporary
impairment of investments and changes in fair value of
derivatives. The cost of the investments on disposal is determined
based on specific identification of securities. Net realized capital
gains (losses) on investments were as follows for the three months ended March
31, 2010 and 2009.
Three Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Fixed maturities, available-for-sale, including net OTTI
|
||||||||
of $(26.2) and $(133.2) in 2010 and 2009, respectively
|
$ | 13.5 | $ | 23.1 | ||||
Equity securities, available-for-sale, including net OTTI
|
||||||||
of $0 and $(15.5) in 2010 and 2009, respectively
|
1.7 | (15.3 | ) | |||||
Derivatives
|
(14.6 | ) | 45.1 | |||||
Other investments, including net OTTI of $(1.0) and $(10.7)
|
||||||||
in 2010 and 2009, respectively
|
2.4 | (13.2 | ) | |||||
Less: allocation to experience-rated contracts, including
|
||||||||
net OTTI of $(8.5) and $(76.4) in 2010 and 2009 respectively
|
(10.0 | ) | (12.8 | ) | ||||
Net realized capital gains
|
$ | 13.0 | $ | 52.5 | ||||
After-tax net realized capital gains (losses) including tax valuation
|
||||||||
allowance of $20.8 and $13.0 for 2010 and 2009, respectively
|
$ | 29.3 | $ | 47.1 |
The
decline in Total net realized capital gains for the three months ended March 31,
2010, was primarily due to lower gains on derivatives, driven by the unwinding
of futures in the derivatives portfolio. In the first quarter of 2009, the
Company recognized gains on futures used to hedge fee income from variable
annuity products. However, with the improvement in equity markets, the Company
unwound its holdings in futures during the last quarter of 2009. In addition,
the decline was also due to lower gains on fixed maturities attributable to a
gain of $206.2 recognized in the first quarter of 2009 on the transfer of an 80%
interest in the Company’s Alt-A residential mortgage-backed securities to the
Dutch State, as well as a large hedge gain in the first quarter of 2009. Higher
gains on sales of fixed maturities and equity securities as well as lower
impairments in the first quarter of 2010, driven by higher market values, served
to partially offset these losses.
Net
realized capital gains (losses) allocated to experience-rated contracts are
deducted from Net realized capital gains (losses), with an offsetting amount
reflected in Future policy benefits and claims reserves on the Condensed
Consolidated Balance Sheets. During 2009 and continuing in 2010, as a
result of the economic environment, which resulted in significant realized
losses associated with experience-rated contracts, the Company accelerated
amortization of realized losses rather than reflecting these losses in Future
policy benefits and claims reserves. For the three months ended March
31, 2010 and 2009, the Company fully amortized $10.0 and $12.8, respectively, of
net unamortized realized capital losses allocated to experience-rated
contractowners, which are reflected in Interest credited and other benefits to
contractowners in the Condensed Consolidated Statements of Operations.
75
Fair
Value Hierarchy
The
following tables present the Company’s hierarchy for its assets and liabilities
measured at fair value on a recurring basis as of March 31, 2010 and December
31, 2009.
2010
|
|||||||||||
Level 1
|
Level 2
|
Level 3(1)
|
Total
|
||||||||
Assets:
|
|||||||||||
Fixed maturities, available-for-sale,
|
|||||||||||
including securities pledged:
|
|||||||||||
U.S. Treasuries | $ | 964.5 | $ | 53.7 | $ | - | $ | 1,018.2 | |||
U.S. government agencies and authorities
|
- | 666.3 | - | 666.3 | |||||||
U.S. corporate, state and municipalities
|
- | 6,355.0 | 44.7 | 6,399.7 | |||||||
Foreign
|
- | 3,761.8 | 29.8 | 3,791.6 | |||||||
Residential mortgage-backed securities
|
- | 1,960.6 | 63.3 | 2,023.9 | |||||||
Commercial mortgage-backed securities
|
- | 1,196.8 | 5.7 | 1,202.5 | |||||||
Other asset-backed securities
|
- | 257.9 | 243.3 | 501.2 | |||||||
Equity securities, available-for-sale
|
149.4 | - | 51.4 | 200.8 | |||||||
Derivatives:
|
|||||||||||
Interest rate contracts
|
0.3 | 153.9 | - | 154.2 | |||||||
Foreign exchange contracts
|
- | 1.5 | - | 1.5 | |||||||
Credit contracts
|
- | 1.3 | - | 1.3 | |||||||
Cash and cash equivalents, short-term
|
|||||||||||
investments, and short-term investments
|
|||||||||||
under securities loan agreement
|
791.8 | - | - | 791.8 | |||||||
Product guarantees
|
- | - | 7.5 | 7.5 | |||||||
Assets held in separate accounts
|
36,904.8 | 6,379.0 | - | 43,283.8 | |||||||
Total
|
$ | 38,810.8 | $ | 20,787.8 | $ | 445.7 | $ | 60,044.3 | |||
Liabilities:
|
|||||||||||
Derivatives:
|
|||||||||||
Interest rate contracts
|
$ | - | $ | 215.5 | $ | - | $ | 215.5 | |||
Foreign exchange contracts
|
- | 37.3 | - | 37.3 | |||||||
Credit contracts
|
- | 4.1 | 41.0 | 45.1 | |||||||
Total
|
$ | - | $ | 256.9 | $ | 41.0 | $ | 297.9 | |||
(1) Level 3 net assets and liabilities accounted for 0.7% of total net assets and liabilities measured at fair value on a recurringbasis. Excluding separate accounts
|
|||||||||||
assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities | |||||||||||
measured at fair value on a recurring basis totaled 2.5%. |
76
2009
|
||||||||||||
Level 1
|
Level 2
|
Level 3(1)
|
Total
|
|||||||||
Assets:
|
||||||||||||
Fixed maturities, available-for-sale,
|
||||||||||||
including securities pledged
|
$ | 1,861.8 | $ | 12,320.6 | $ | 1,472.9 | $ | 15,655.3 | ||||
Equity securities, available-for-sale
|
148.1 | - | 39.8 | 187.9 | ||||||||
Derivatives
|
- | 129.0 | - | 129.0 | ||||||||
Cash and cash equivalents, short-term
|
||||||||||||
investments, and short-term investments
|
||||||||||||
under securities loan agreement
|
1,128.0 | 1.8 | - | 1,129.8 | ||||||||
Assets held in separate accounts
|
34,936.7 | 6,433.1 | - | 41,369.8 | ||||||||
Total
|
$ | 38,074.6 | $ | 18,884.5 | $ | 1,512.7 | $ | 58,471.8 | ||||
Liabilities:
|
||||||||||||
Product guarantees
|
$ | - | $ | - | $ | 6.0 | $ | 6.0 | ||||
Derivatives
|
- | 283.4 | 48.3 | 331.7 | ||||||||
Total
|
$ | - | $ | 283.4 | $ | 54.3 | $ | 337.7 | ||||
(1) Level
3 net assets and liabilities accounted for 2.5% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts
|
||||||||||||
assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair | ||||||||||||
value on a recurring basis totaled 8.7%. |
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.
Liquidity
Management
The
Company’s principal available sources of liquidity are product charges,
investment income, proceeds from the maturity and sale of investments, proceeds
from debt issuance and borrowing facilities, repurchase agreements, securities
lending, and capital contributions. Primary uses of these funds are
payments of commissions and operating expenses, interest credits, investment
purchases, and contract maturities, withdrawals, and surrenders.
The
Company’s liquidity position is managed by maintaining adequate levels of liquid
assets, such as cash, cash equivalents, and short-term
investments. As part of the liquidity management process, different
scenarios are modeled to determine that existing assets are adequate to meet
projected cash flows. Key variables in the modeling process include
interest rates, equity market movements, quantity and type of interest and
equity market hedges, anticipated contractowner behavior, market value of
general account assets, variable separate account performance, and implications
of rating agency actions.
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 strategy 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. In executing this strategy, the Company uses
derivative instruments to manage these risks. The Company’s derivative
counterparties are of high credit quality. As of March 31, 2010, the Company
held net derivative liabilities with a fair value of $140.9.
77
Recent
Initiatives
In the
first half of 2009, the Company took certain actions to reduce its exposure to
interest rate and market risks. These actions included reducing
guaranteed interest rates for new business, reducing credited rates on existing
business, curtailing sales of some products, reassessment of the investment
strategy, as well as continuing a short-term program to hedge certain equity
market risks associated with variable fee income. While the short-term hedge
program was terminated in June 2009, the Company continues to use the remaining
initiatives, which will be monitored, along with their financial impacts, to
determine whether further actions are necessary.
The
Company is evaluating its assumptions and estimation techniques for determining
estimated gross profits in its amortization of DAC and VOBA. As a part of this
evaluation, the Company is assessing whether to implement a reversion to the
mean technique of estimating its short-term equity market return assumptions in
the second quarter of 2010. The reversion to the mean technique is a common
industry practice in which DAC and VOBA unlocking for short-term equity returns
only occurs if equity market performance falls outside established
parameters.
On April
9, 2009, the Company’s ultimate parent, ING, announced a global business
strategy which identified certain core and non-core businesses and geographies,
stated ING’s intention to explore divestiture of non-core businesses over time,
withdraw from certain non-core geographies, limit future acquisitions and
implement enterprise-wide expense reductions. In particular, with
respect to ING’s U.S. insurance operations, ING is seeking to further reduce its
risk by focusing on individual life products, retirement services and a new
suite of simpler, lower risk annuity products which the Company has commenced
selling during the first quarter of 2010.
On
October 26, 2009, ING announced the key components of the final Restructuring
Plan ING submitted to the EC as part of the process to receive EC approval for
the state aid granted to ING by the State of the Netherlands (the “Dutch State”)
in the form of EUR 10 billion Core Tier 1 securities issued on November 12, 2008
and the full credit risk transfer to the Dutch State of 80% of ING’s Alt-A RMBS
on March 31, 2009 (the “ING-Dutch State Transaction”). As part of the
Restructuring Plan, ING has agreed to separate its banking and insurance
business by 2013. ING intends to achieve this separation by divestment of its
insurance and investment management operations, including the Company. ING has
announced that it will explore all options for implementing the separation
including initial public offerings, sales or combinations thereof.
78
On
January 28, 2010, ING announced the filing of its appeal with the General Court
of the European Union against specific elements of the EC’s decision regarding
the ING Restructuring Plan. Despite the appeal, ING is committed to
executing the formal separation of banking and insurance and the divestment of
the latter. In its appeal, ING contests the state aid calculation the
EC applied to the reduction in repayment premium agreed upon by ING and the
Dutch State in connection with ING’s December 2009 repayment of the first EUR 5
billion of Core Tier 1 securities. ING is also appealing the
disproportionality of the price leadership restrictions imposed on ING with
respect to the European financial sector.
Liquidity
and Capital Resources
Additional
sources of liquidity include borrowing facilities to meet short-term cash
requirements that arise in the ordinary course of business. ILIAC
maintains the following agreements:
§
|
A
reciprocal loan agreement with ING America Insurance Holdings, Inc. (“ING
AIH”), an affiliate, whereby either party can borrow from the other up to
3.0% of ILIAC’s statutory admitted assets as of the prior
December 31. As of March 31, 2010 and December 31,
2009, the Company had a $510.8 and $287.2 receivable, including interest,
from ING AIH, respectively.
|
§
|
A
$50.0 uncommitted, perpetual revolving note facility with the Bank of New
York. As of March 31, 2010 and December 31, 2009, ILIAC
had no amounts outstanding under the revolving note
facility.
|
Management
believes that its sources of liquidity are adequate to meet the Company’s
short-term cash obligations.
Capital
Contributions and Dividends
During
the three months ended March 31, 2010, ILIAC did not receive any capital
contributions from its parent. During the three months ended March 31, 2009,
ILIAC received a $365.0 capital contribution from its Parent.
During
the three months ended March 31, 2010, ILIAC paid a $203.0 dividend on its
common stock to its Parent. During the three months ended March 31,
2009, ILIAC did not pay any dividends on its common stock to its
Parent.
Collateral
Under the
terms of the Company’s Over-The-Counter Derivative International Swaps and
Derivatives Association, Inc. Agreements (“ISDA Agreements”), the Company may
receive from, or deliver to, counterparties, collateral to assure that all terms
of the ISDA Agreements will be met with regard to the Credit Support Annex
(“CSA”). The terms of the CSA call for the Company to pay interest on
any cash received equal to the Federal Funds rate. As of March 31,
2010, the Company held $5.3 of cash collateral, which was included in Payables
under securities loan agreement, including collateral held, on the Condensed
Consolidated Balance Sheets. As of December 31, 2009, the Company did not
hold any cash collateral. In addition, as of March 31, 2010 and December
31, 2009, the Company delivered collateral of $88.5 and $130.3, respectively, in
fixed maturities pledged under derivatives contracts, which was included in
Securities pledged on the Condensed Consolidated Balance Sheets.
79
Ratings
On
October 27, 2009, Moody's downgraded the insurance financial strength ratings of
ING’s primary U.S. insurance operating companies (“ING U.S.”), including the
Company, to A2 from A1. Moody's also, on that date downgraded the
short-term financial strength rating to Prime-2 (P-2) from Prime-1
(P-1). These actions concluded the review for possible downgrade
initiated on September 21, 2009 and the ratings now carry a developing
outlook.
On
October 27, 2009, Fitch Ratings Ltd. (“Fitch”) downgraded its ratings for ING
U.S., including the Company, from A to A- and maintained its outlook at
Negative.
On
December 1, 2009, S&P affirmed is financial strength rating of ING U.S.,
including the Company, at A+ with a negative outlook. On July 9, 2009, S&P
downgraded the financial strength rating of ING U.S., including the Company, to
A+ from AA- and removed the ratings from CreditWatch with negative implications,
where they were placed on April 16, 2009. S&P maintained a negative outlook
on the rating of ING U.S., including the Company. In April 2009, S&P
announced that it had placed ING U.S., including the Company, on
CreditWatch-negative until completion of its evaluation of the effects of ING’s
strategic changes on each of its subsidiaries.
On April
24, 2009, A.M. Best Company, Inc. (“A.M. Best”) downgraded the financial
strength rating to A (Excellent) from A+ (Superior) and issuer credit ratings to
a+ from aa- for ING U.S., including the Company. The outlook for ILIAC had been
revised to negative.
In
response to weakening global markets, the rating agencies have been continuously
re-evaluating their ratings of banks and insurance companies around the world.
Over the past several quarters, the rating agencies have maintained a negative
outlook of the financial services industry, while reviewing the individual
ratings they give to specific entities. The downgrades of the Company
by S&P, Fitch, A.M. Best and Moody’s reflect a broader view of how the
financial services industry is being challenged by the current economic
environment, but also are based on the rating agencies’ specific views of the
Company’s financial strength. In making their ratings decisions the
agencies consider past and expected future capital and earnings, asset quality
and risk, profitability and risk of existing liabilities and current products,
market share and product distribution capabilities, and direct or implied
support from parent companies, including implications of the ING restructuring
plan, among other factors.
80
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. At March 31, 2010 and
December 31, 2009, the fair value of loaned securities was $274.8 and $339.5,
respectively, and is included in Securities pledged on the Condensed
Consolidated Balance Sheets.
Income
Taxes
Estimated
liabilities have been provided for uncertain tax benefits related to Internal
Revenue Service (“IRS”) tax audits and state tax exams that have not been
completed. The current payable of $12.2 may be reduced in less than
one year, upon completion of such audits and exams. The timing of the
payment of the remaining allowance of $2.9 cannot be reliably
estimated.
Recently
Adopted Accounting Standards
(See the
Recently Adopted Accounting Standards and New Accounting Pronouncements
footnotes to the condensed consolidated financial statements.)
Recently
Enacted Legislation
In March
2010, President Obama signed the Patient Protection and Affordable Care Act
(“PPACA”) into law, as well as signed the Health Care and Education
Reconciliation Act of 2010 (“HCERA”), which amends certain aspects of the PPACA
(collectively, the “Act”). The Act will require employers to make
certain conforming changes to retiree health benefits provided in order to
comply with the new legislation. Significant provisions of the Act
include expanded benefit mandates, an excise tax on health insurance coverage
exceeding a threshold amount, and a temporary reinsurance program for eligible
employment-based plans. The effect of the Act on the Company's
projected benefit obligation and cost depends on finalization of related
regulatory requirements; however, the impact is not expected to be
material. The Company will continue to monitor and assess the effect
of the Act as the regulatory requirements are finalized.
81
Legislative
and Regulatory Initiatives
Legislative
proposals, which have been or may again be considered by Congress, include
changing the taxation of annuity benefits, changing the tax treatment of
insurance products relative to other financial products, and changing life
insurance company taxation. Some of these proposals, if enacted,
could have a material adverse effect on life insurance, annuity, and other
retirement savings product sales, while others could have a material beneficial
effect. The Administration’s recent proposal to facilitate “partial
annuitizations,” if enacted, could encourage use of annuity products, while its
proposal to disallow insurance companies a portion of the dividends received
deduction in connection with variable product separate accounts could increase
the cost of such products to policyholders. Regarding company taxes,
the Administration’s recently proposed “Financial Crisis Responsibility Fee”, to
be imposed on large financial institutions, possibly including life insurers,
could increase costs if enacted. Legislation has been reintroduced to
increase disclosure of 401(k) and other defined contribution plan fees charged
by plan investment and service providers, and the Department of Labor is
reproposing regulations concerning the fee disclosure obligations of defined
contribution service providers. Legislative or regulatory action to
change fee disclosure requirements could adversely impact the market for certain
of the Company’s defined contribution retirement services products.
In
connection with the March 31, 2009 transfer by ING of an economic interest
in 80% of its Alt-A RMBS portfolio to the Dutch State, the EC had a six month
period to review and assess the competitive impact of the
transaction. On October 26, 2009, ING announced the key components of
the final Restructuring Plan ING submitted to the EC as part of the process to
receive EC approval for the state aid granted to ING by the Dutch State in the
form of EUR 10 billion Core Tier 1 securities issued on November 12, 2008 and
the ING-Dutch State Transaction. As part of the Restructuring Plan, ING has
agreed to separate its banking and insurance businesses by 2013. ING intends to
achieve this separation over the next four years by the divestment of all
insurance and investment management operations, including the
Company. In 2009, the Restructuring Plan received formal EC approval
and the separation of insurance and banking operations and other components of
the Restructuring Plan were approved by ING shareholders. On January
28, 2010, ING announced the filing of its appeal with the General Court of the
European Union against specific elements of the EC’s decision regarding the ING
Restructuring Plan. Despite the appeal, ING is committed to executing
the formal separation of banking and insurance and the divestment of the
latter. In its appeal, ING contests the state aid calculation the EC
applied to the reduction in repayment premium agreed upon by ING and the Dutch
State in connection with ING’s December 2009 repayment of the first EUR 5
billion of Core Tier 1 securities. ING is also appealing the
disproportionality of the price leadership restrictions imposed on ING with
respect to the European financial sector.
82
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 design and operation
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.
|
83
PART
II.
|
OTHER
INFORMATION
|
Item
1.
|
ING Life
Insurance and Annuity Company (“ILIAC”) and its wholly-owned subsidiaries
(collectively, the “Company”) are involved in threatened or pending
lawsuits/arbitrations arising from the normal conduct of
business. Due to the climate in insurance and business
litigation/arbitrations, suits against the Company sometimes include claims for
substantial compensatory, consequential, or punitive damages, and other types of
relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated
individuals. While it is not possible to forecast the outcome of such
lawsuits/arbitrations, in light of existing insurance, reinsurance, and
established reserves, it is the opinion of management that the disposition of
such lawsuits/arbitrations will not have a materially adverse effect on the
Company’s operations or financial position.
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 Company and of
the financial services industry. In each case, the Company and its
affiliates have been and are providing full cooperation. For
information on the focus of such regulatory inquiries and the actions undertaken
by ING in connection therewith, see the “Other Regulatory Matters” section of
“Management’s Narrative Analysis of the Results of Operations and Financial
Condition” included in the Company’s 2009 Annual Report on Form 10-K/A filed on
April 5, 2010 (SEC File No. 033-23376).
Item
1A. Risk Factors
The
following should be read in conjunction with and supplements and amends the risk
factors that may affect the Company’s business or operations described under
“Risk Factors” in Part I, Item 1A. of the 2009 Annual Report on Form
10-K/A.
Circumstances
associated with implementation of ING Groep’s recently announced global business
strategy and the final restructuring plan submitted to the European Commission
in connection with its review of ING Groep’s receipt of state aid from the Dutch
State could adversely affect the Company’s results of operations and financial
condition
On April
9, 2009, the Company's ultimate parent, ING Groep N.V. (“ING”) announced a
global business strategy which identified certain core and non-core businesses
and geographies, stated ING's intention to explore divestiture of non-core
businesses over time, withdraw from certain non-core geographies, limit future
acquisitions and implement enterprise-wide expense reductions. In addition,
ING’s issuance of EUR 10 billion Core Tier 1 securities to the Dutch State and
the transfer by ING of an economic interest in 80% of its Alt-A RMBS portfolio
to the Dutch State in the first quarter of 2009 were subject to review by the
European Commission (the “EC”), under its state aid rules.
84
On
October 26, 2009, ING announced the key components of the final restructuring
plan (the “Restructuring Plan”) ING submitted to the EC as part of the EC state
aid review and approval process. As part of the Restructuring Plan, ING has
agreed to separate its banking and insurance businesses by 2013. This separation
will be achieved over the next four years by ING’s divestment of its insurance
and investment management operations, including the Company. ING has announced
that it will explore all options for implementing the separation, including
initial public offerings, sales or combinations thereof. In November 2009, the
Restructuring Plan received formal EC approval and the separation of insurance
and banking operations and other components of the Restructuring Plan were
approved by ING shareholders. ING also reached an agreement with the Dutch State
to alter the repayment terms of the Core Tier 1 securities in order to
facilitate early repayment and ING repurchased in December 2009 EUR 5 billion of
the total EUR 10 billion issued to the Dutch State. On January 28, 2010, ING
announced the filing of an appeal with the General Court of the European Union
against specific elements of the EC's decision regarding the Restructuring Plan.
Despite the appeal, ING is committed to executing the formal separation of
banking and insurance and the divestment of the latter.
Various
uncertainties and risks are associated with the implementation of various
aspects of ING's global business strategy, and with the implementation of the
Restructuring Plan's commitment to separate its insurance and banking
businesses, any of which could have an adverse impact on the Company’s business
opportunities, results of operations and financial condition. Those
uncertainties and risks include, but are not limited to: diversion of
management’s attention; difficulty in retaining or attracting employees;
negative impact on relationships with distributors and customers; policyholder
retention; rating agency downgrades; unforeseen difficulties in transitioning or
divesting non-core businesses and geographies; uncertainties regarding the
structure and composition of Restructuring Plan separation strategies; and
potential implementation challenges or execution risks, and possible increased
operating costs related to the Restructuring Plan separation strategies
including development of corporate center and other functions previously
provided by ING; potential rebranding initiatives; limitations on access to
credit and potential increases in the cost of credit for the insurance
businesses undergoing such separation from ING’s banking
businesses.
Lastly,
the capital infusion of EUR 10 billion by the Dutch State resulted in a
cumulative change of ownership of ING of approximately 42%. Future increases in
capital or other changes of ownership under the Restructuring Plan may trigger
Section 382 of the United States Internal Revenue Code which is a loss
limitation rule the general purpose of which is to prevent trafficking in tax
losses. If applicable, this limitation rule would restrict ING’s
ability to use its losses. The rule is triggered when the ownership
of a company changes by more than 50% (measured by value) on a cumulative basis
in any three year period. If triggered, restrictions may be imposed on the
future use of net operating losses as well as certain losses that are built into
the assets of the impacted company at the time of the ownership change and that
are realized within the next five years. If this should occur, it may adversely
affect the net results or equity of ING.
85
Recent
federal actions taken to alleviate the financial crisis may not be effective and
state and federal financial regulatory reform initiatives, including new laws
and regulations, could have unintended consequences for the financial services
industry, including the Company and/or materially affect the Company’s results
of operations, financial condition and liquidity
In
response to the financial crisis affecting the banking system and financial
markets, the U.S. federal government has passed new legislation in an effort to
stabilize the financial markets, including the American Recovery and
Reinvestment Act of 2009 and the Emergency Economic Stabilization Act of 2008.
The Company cannot predict with any certainty the effect these actions or any
other legislative initiatives will have on the financial markets or on the
Company’s business, results of operations, financial condition, and liquidity.
This legislation and other proposals or actions may also have other
consequences, including material effects on interest rates, which could
materially affect the Company’s investments, results of operations and liquidity
in ways that are not predictable. The failure to effectively implement this
legislation and related proposals or actions could also result in material
adverse effects, notably increased constraints on the liquidity available in the
banking system and financial markets and increased pressure on stock prices, any
of which could materially and adversely affect the Company’s results of
operations, financial condition and liquidity. In the event of future material
deterioration in business conditions, the Company may need to raise additional
capital or consider other transactions to manage its capital position or
liquidity.
The Obama
Administration and Congress have made various proposals for financial services
regulatory reform. While the final form of this legislation is still
unknown, the various proposals under consideration include a federal insurance
office within the Treasury Department to monitor all aspects of the insurance
industry. The proposals under consideration in Congress also include
special regulatory and insolvency regimes, including the possibility for higher
capital, prudential and liquidity standards for financial institutions that are
deemed to be systemically significant. If ING were determined to be a
systemically important company, ING and its subsidiaries could become subject to
such enhanced supervision and prudential regulatory standards to be developed by
systemic regulators in consultation with primary functional regulators. Although
existing state insurance regulators would remain the primary regulators of the
Company and its U.S. insurance company affiliates, federal regulators could be
granted the authority to provide its own level of oversight, including
subjecting ING, the Company and other ING subsidiaries to: increased capital and
liquidity requirements and risk management standards; regulatory reporting to,
and supervision and examination by, a specifically denominated federal
regulator; and a prompt corrective action regime in the event of
undercapitalization. The Obama Administration, members of Congress and Federal
Banking regulators have also suggested new or increased taxes or assessments on
banks and financial firms to mitigate the costs to taxpayers of various
government programs established to address the financial crisis and to offset
the costs of potential future crises. In addition, the proposed legislation also
includes new conditions on the writing and trading of certain standardized and
non-standardized derivatives. Although no financial services regulatory
reform legislation has yet been enacted or regulations promulgated, any such
requirements if adopted in the future could have unintended consequences for the
financial services industry, including the Company; make it more expensive for
the Company to conduct its business; subject the Company to greater regulatory
scrutiny and have a material effect on the Company’s results of operations or
financial condition.
86
In
addition, the Company is subject to extensive laws and regulations that are
administered and/or enforced by a number of different governmental authorities
and non-governmental self-regulatory bodies, including state insurance
regulators, state securities administrators, the NAIC, the SEC, FINRA, Financial
Accounting Standards Board, and state attorneys general. In light of the current
financial crisis, some of these authorities are or may in the future consider
enhanced or new requirements intended to prevent future crises or otherwise
assure the stability of institutions under their supervision. These authorities
may also seek to exercise their supervisory or enforcement authority in new or
more robust ways. All of these possibilities, if they occurred, could affect the
way the Company conducts its business and manages capital, and may require the
Company to satisfy increased capital requirements, any of which in turn could
materially affect the Company’s results of operations, financial condition and
liquidity.
Item
6. Exhibits
See
Exhibit Index on pages 89-92 hereof.
87
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.
May 7, 2010
(Date)
|
ING Life Insurance and Annuity Company
(Registrant)
|
||
By: /s/
|
Ewout L. Steenbergen
|
||
Ewout L. Steenbergen
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
|
88
ING LIFE INSURANCE AND ANNUITY COMPANY
(“ILIAC”)
|
|
Exhibit Index
|
|
Exhibit Number
|
Description of Exhibit
|
3.1
|
Certificate
of Incorporation as amended and restated October 1, 2007, incorporated by
reference to the ILIAC Form 10-K, as filed with the SEC on March 31, 2008
(File No. 33-23376).
|
3.2
|
Amended
and Restated ING Life Insurance and Annuity Company By-Laws, effective
October 1, 2007, incorporated by reference to the ILIAC Form 10-K, as
filed with the SEC on March 31, 2008 (File No.
33-23376).
|
4.1
|
Single
Premium Deferred Modified Guaranteed Annuity Contract (IU-IA-3096) –
Incorporated herein by reference to Initial Registration Statement on Form
S-1 for ING Life Insurance and Annuity Company as filed with the SEC on
September 25, 2009 (File No. 333-162140).
|
4.2
|
IRA
Endorsement (IU-RA-4021) and Roth IRA Endorsement (IU-RA-4022) –
Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form S-1 for ING Life Insurance and Annuity
Company, as filed with the SEC on December 31, 2009
(333-162140).
|
4.3
|
Incorporated
by reference to Post-Effective Amendment No. 14 to Registration Statement
on Form N-4 (File No. 33-75964), as filed on July 29,
1997.
|
4.4
|
Incorporated
by reference to Post-Effective Amendment No. 6 to Registration Statement
on Form N-4 (File No. 33-75980), as filed on February 12,
1997.
|
4.5
|
Incorporated
by reference to Post-Effective Amendment No. 12 to Registration Statement
on Form N-4 (File No. 33-75964), as filed on February 11,
1997.
|
4.6
|
Incorporated
by reference to Post-Effective Amendment No. 5 to Registration Statement
on Form N-4 (File No. 33-75986), as filed on April 12,
1996.
|
4.7
|
Incorporated
by reference to Post-Effective Amendment No. 12 to Registration Statement
on Form N-4 (File No. 333-01107), as filed on February 4,
1999.
|
4.8
|
Incorporated
by reference to Post-Effective Amendment No. 4 to Registration Statement
on Form N-4 (File No. 33-75988), as filed on April 15,
1996.
|
4.9
|
Incorporated
by reference to Post-Effective Amendment No. 3 to Registration Statement
on Form N-4 (File No. 33-81216), as filed on April 17,
1996.
|
4.10
|
Incorporated
by reference to Post-Effective Amendment No. 3 to Registration Statement
on Form N-4 (File No. 33-91846), as filed on April 15,
1996.
|
4.11
|
Incorporated
by reference to Post-Effective Amendment No. 6 to Registration Statement
on Form N-4 (File No. 33-91846), as filed on August 6,
1996.
|
4.12
|
Incorporated
by reference to Registration Statement on Form N-4 (File No. 333-01107),
as filed on February 21, 1996.
|
4.13
|
Incorporated
by reference to Post-Effective Amendment No. 12 to Registration Statement
on Form N-4 (File No. 33-75982), as filed on February 20,
1997.
|
4.14
|
Incorporated
by reference to Post-Effective Amendment No. 7 to Registration Statement
on Form N-4 (File No. 33-75992), as filed on February 13,
1997.
|
4.15
|
Incorporated
by reference to Post-Effective Amendment No. 6 to Registration Statement
on Form N-4 (File No. 33-75974), as filed on February 28,
1997.
|
89
4.16
|
Incorporated
by reference to Post-Effective Amendment No. 6 to Registration Statement
on Form N-4 (File No. 33-75962), as filed on April 17,
1996.
|
4.17
|
Incorporated
by reference to Post-Effective Amendment No. 14 to Registration Statement
on Form N-4 (File No. 33-75962), as filed on April 17,
1998.
|
4.18
|
Incorporated
by reference to Post-Effective Amendment No. 6 to Registration Statement
on Form N-4 (File No. 33-75982), as filed on April 22,
1996.
|
4.19
|
Incorporated
by reference to Post-Effective Amendment No. 8 to Registration Statement
on Form N-4 (File No. 33-75980), as filed on August 19,
1997.
|
4.20
|
Incorporated
by reference to Registration Statement on Form N-4 (File No. 333-56297),
as filed on June 8, 1998.
|
4.21
|
Incorporated
by reference to Post-Effective Amendment No. 3 to Registration Statement
on Form N-4 (File No. 33-79122), as filed on August 16,
1995.
|
4.22
|
Incorporated
by reference to Post-Effective Amendment No. 32 to Registration Statement
on Form N-4 (File No. 33-34370), as filed on December 16,
1997.
|
4.23
|
Incorporated
by reference to Post-Effective Amendment No. 30 to Registration Statement
on Form N-4 (File No. 33-34370), as filed on September 29,
1997.
|
4.24
|
Incorporated
by reference to Post-Effective Amendment No. 26 to Registration Statement
on Form N-4 (File No. 33-34370), as filed on February 21,
1997.
|
4.25
|
Incorporated
by reference to Post-Effective Amendment No. 35 to Registration Statement
on Form N-4 (File No. 33-34370), as filed on April 17,
1998.
|
4.26
|
Incorporated
by reference to Post-Effective Amendment No. 1 to Registration Statement
on Form N-4 (File No. 33-87932), as filed on September 19,
1995.
|
4.27
|
Incorporated
by reference to Post-Effective Amendment No. 8 to Registration Statement
on Form N-4 (File No. 33-79122), as filed on April 17,
1998.
|
4.28
|
Incorporated
by reference to Post-Effective Amendment No. 7 to Registration Statement
on Form N-4 (File No. 33-79122), as filed on April 22,
1997.
|
4.29
|
Incorporated
by reference to Post-Effective Amendment No. 21 to Registration Statement
on Form N-4 (File No. 33-75996), as filed on February 16,
2000.
|
4.30
|
Incorporated
by reference to Post-Effective Amendment No. 13 to Registration Statement
on Form N-4 (File No. 333-01107), as filed on April 7,
1999.
|
4.31
|
Incorporated
by reference to Post-Effective Amendment No. 37 to Registration Statement
on Form N-4 (File No. 33-34370), as filed on April 9,
1999.
|
4.32
|
Incorporated
by reference to Post-Effective Amendment No. 1 to Registration Statement
on Form N-4 (File No. 333-87305), as filed on December 13,
1999.
|
4.33
|
Incorporated
by reference to Post-Effective Amendment No. 18 to Registration Statement
on Form N-4 (File No. 33-56297), as filed on August 30,
2000.
|
4.34
|
Incorporated
by reference to Post-Effective Amendment No.17 to Registration Statement
on Form N-4 (File No. 33-75996), as filed on April 7,
1999.
|
4.35
|
Incorporated
by reference to Post-Effective Amendment No. 19 to Registration Statement
on From N-4 (File No. 333-01107), as filed on February 16,
2000.
|
90
4.36
|
Incorporated
by reference to the Registration Statement on Form S-2 (File No. 33-
64331), as filed on November 16, 1995.
|
4.37
|
Incorporated
by reference to Pre-Effective Amendment No. 2 to the Registration
Statement on Form S-2 (File No. 33-64331), as filed on January 17,
1996.
|
4.38
|
Incorporated
by reference to Post-Effective Amendment No. 30 to Registration Statement
on Form N-4 (File No. 33-75988), as filed on December 30,
2003.
|
4.39
|
Incorporated
by reference to Post-Effective Amendment No. 18 to Registration Statement
on Form N-4 (File No. 33-75980), as filed on April 16,
2003.
|
4.40
|
Incorporated
by reference to Post-Effective Amendment No. 30 to Registration Statement
on Form N-4 (File No. 333-01107), as filed on April 10,
2002.
|
4.41
|
Incorporated
by reference to Post-Effective Amendment No. 24 to Registration Statement
on Form N-4 (File No. 33-81216), as filed on April 11,
2003.
|
4.42
|
Incorporated
by reference to Registration Statement on Form N-4 (File No. 333-109860),
as filed on October 21, 2003.
|
4.43
|
Incorporated
by reference to Post-Effective Amendment No. 39 to Registration Statement
on Form N-4 (File No. 33-75962), as filed on December 17,
2004.
|
4.44
|
Incorporated
by reference to Initial Registration Statement on Form N-4 (File No.
333-130822), as filed on January 3, 2006.
|
4.45
|
Incorporated
by reference to Post-Effective Amendment No. 1 to Registration Statement
on Form N-4 (File No. 333-87131), as filed on December 15,
1999.
|
4.46
|
Incorporated
by reference to Registration Statement on Form N-4 (File No. 33-59749), as
filed on June 1, 1995.
|
4.47
|
Incorporated
by reference to Post-Effective Amendment No. 4 to Registration Statement
on Form N-4 (File No. 33-59749), as filed on April 16,
1997.
|
4.48
|
Incorporated
by reference to Post-Effective Amendment No. 9 to Registration Statement
on Form N-4 (File No. 33-80750), as filed on April 17,
1998.
|
4.49
|
Incorporated
by reference to Post-Effective Amendment No. 8 to Registration Statement
on Form N-4 (File No. 33-80750), as filed on April 23,
1997.
|
4.50
|
Incorporated
by reference to Post-Effective Amendment No. 6 to Registration Statement
on Form N-4 (File No. 33-59749), as filed on November 26,
1997.
|
4.51
|
Incorporated
by reference to Registration Statement on Form S-2 (File No. 33-63657), as
filed on October 25, 1995.
|
4.52
|
Incorporated
by reference to Pre-Effective Amendment No. 3 to Registration Statement on
Form S-2 (File No. 33-63657), as filed on January 17,
1996.
|
4.53
|
Incorporated
by reference to Post-Effective Amendment No. 3 to Registration Statement
on Form S-2 (File No. 33-63657), as filed on November 24,
1997.
|
4.54
|
Incorporated
by reference to Post-Effective Amendment No. 3 to Registration Statement
on Form S-2 (File No. 33-64331), as filed on November 24,
1997.
|
4.55
|
Incorporated
by reference to Post-Effective Amendment No. 6 to Registration Statement
on Form N-4 (File No. 33-59749), as filed on November 26,
1997.
|
91
4.56
|
Incorporated
by reference to Registration Statement on Form N-4 (File No. 33-59749), as
filed on June 1, 1995.
|
4.57
|
Incorporated
by reference to Post-Effective Amendment No. 4 to Registration Statement
on Form N-4 (File No. 33-59749), as filed on April 16,
1997.
|
31.1+
|
Certificate
of Ewout L. Steenbergen pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
31.2+
|
Certificate
of Catherine H. Smith pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32.1+
|
Certificate
of Ewout L. Steenbergen pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
32.2+
|
Certificate
of Catherine H. Smith pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
+ Filed
herewith.
92