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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
FORM 10-Q
 
   
(Mark One)
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2010
 
                                                                                                                                            OR
 
   
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________________ to ____________________
 
 
 
Commission File Number:        333-164981, 333-133157, 333-133158, 333-130833, 333-130827
 
 
 
 
ING LIFE INSURANCE AND ANNUITY COMPANY

(Exact name of registrant as specified in its charter)
 
 
Connecticut
(State or other jurisdiction of incorporation or organization)
 
One Orange Way
Windsor, Connecticut
(Address of principal executive offices)
 
71-0294708
(IRS Employer Identification No.)
 
06095-4774
(Zip Code)
 
(860) 580-4646
(Registrant's telephone number, including area code)
 
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes     x       No    ¨
 
Indicate by check mark whether the registrant (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    ¨
 
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):
 
Large accelerated filer            £
Accelerated filer           £
Non-accelerated filer     x
(Do not check if a smaller
reporting company)
Smaller reporting company     £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes    ¨       No    x
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 55,000 shares of Common Stock, $50 par value, as of May 7, 2010, are issued and outstanding, all of which were directly owned by Lion Connecticut Holdings Inc.
 
NOTE:  WHEREAS ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q, THIS FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).


 
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



 
INDEX
 
     
PAGE
   
     
 
     
 
3
     
 
4
     
 
6
     
 
7
     
 
8
     
     
51
     
     
83
     
     
     
 
     
     
84
     
     
84
     
     
87
     
     
 
88
     
     
 
89
     



 
2

 




ING Life Insurance and Annuity Company and Subsidiaries
 
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
 
   
   
   
PART I.  FINANCIAL INFORMATION (UNAUDITED)
 
   
Item 1. Financial Statements
 
   
Condensed Consolidated Statements of Operations
 
(Unaudited)
 
(In millions)
 
   
   
Three Months Ended March 31,
 
   
2010
 
2009
 
               
Revenues:
             
   Net investment income
  $ 297.3   $ 320.4  
   Fee income
    141.1     111.4  
   Premiums
    8.1     4.8  
   Broker-dealer commission revenue
    58.6     95.7  
   Net realized capital gains:
             
       Total other-than-temporary impairment losses
    (34.9   (159.4 )
       Portion of other-than-temporary impairment
             
           losses recognized in Other comprehensive income (loss)
    7.7     -  
       Net other-than-temporary impairments
             
           recognized in earnings
    (27.2)     (159.4 )
       Other net realized capital gains
    40.2     211.9  
       Total net realized capital gains
    13.0     52.5  
   Other income
    2.5     4.1  
Total revenue
    520.6     588.9  
Benefits and expenses:
             
    Interest credited and other benefits  to contractowners
    172.5     165.0  
    Operating expenses
    165.5     144.8  
    Broker-dealer commission expense
    58.6     95.7  
    Net amortization of deferred policy acquisition costs and value of business acquired
    18.3     146.8  
    Interest expense
    0.8     0.3  
Total benefits and expenses
    415.7     552.6  
Income before income taxes
    104.9     36.3  
Income tax expense (benefit)
    14.0     (4.0 )
Net income
  $ 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
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
 
Condensed Consolidated Balance Sheets
(In millions, except share data)
 
 
 
As of
 
As of
 
March 31,
 
December 31,
 
2010
 
2009
 
(Unaudited)
     
Assets
         
Investments:
         
    Fixed maturities, available-for-sale, at fair value 
         
   (amortized cost of $14,822.5 at 2010 and $15,038.2 at 2009)
$ 15,240.0   $ 15,185.5
    Equity securities, available-for-sale, at fair value
         
   (cost of $184.9 at 2010 and $175.1 at 2009)
  200.8     187.9
    Short-term investments
  292.4     535.5
    Mortgage loans on real estate
  1,834.0     1,874.5
    Loan - Dutch State obligation
  630.8     674.1
    Policy loans
  252.1     254.7
    Limited partnerships/corporations
  417.4     426.2
    Derivatives
  157.0     129.0
    Securities pledged (amortized cost of $360.7 at 2010 and $483.7 at 2009)
  363.4     469.8
Total investments
  19,387.9     19,737.2
Cash and cash equivalents
  219.3     243.3
Short-term investments under securities loan agreement, including collateral delivered
  280.1     351.0
Accrued investment income
  236.4     217.2
Receivable for securities sold
  36.5     3.1
Reinsurance recoverable
  2,405.8     2,426.3
Deferred policy acquisition costs
  932.6     901.8
Value of business acquired
  894.4     991.5
Notes receivable from affiliate
  175.0     175.0
Short-term loan to affiliate
  510.8     287.2
Due from affiliates
  29.7     49.1
Current income tax recoverable
  -     23.9
Property and equipment
  89.9     90.8
Other assets
  100.7     100.8
Assets held in separate accounts
  43,283.8     41,369.8
Total assets
$ 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
 
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
 
   
Condensed Consolidated Balance Sheets
 
(In millions, except share data)
 
   
 
As of
 
As of
 
 
March 31,
 
December 31,
 
 
2010
 
2009
 
 
(Unaudited)
     
Liabilities and Shareholder's Equity
       
Future policy benefits and claims reserves
$ 20,899.7   $ 21,115.0  
Payable for securities purchased
  87.3     18.4  
Payables under securities loan agreement, including collateral held
  285.4     351.0  
Notes payable
  4.9     4.9  
Due to affiliates
  147.6     159.9  
Current income taxes
  17.7     -  
Deferred income taxes
  362.0     351.2  
Other liabilities
  587.2     693.7  
Liabilities related to separate accounts
  43,283.8     41,369.8  
Total liabilities
  65,675.6     64,063.9  
             
Shareholder's equity:
           
    Common stock (100,000 shares authorized, 55,000  
           
   issued and outstanding; $50 per share value)
  2.8     2.8  
    Additional paid-in capital
  4,325.5     4,528.2  
    Accumulated other comprehensive income (loss)
  100.0     (15.0 )
    Retained earnings (deficit)
  (1,521.0)     (1,611.9 )
Total shareholder's equity
  2,907.3     2,904.1  
Total liabilities and shareholder's equity
$ 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
 
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
 
   
Condensed Consolidated Statements of Changes in Shareholder’s Equity
 
(Unaudited)
 
(In millions)
 
   
   
           
Accumulated
             
     
Additional
   
Other
   
Retained
   
Total
 
 
Common
 
Paid-In
   
Comprehensive
   
Earnings
   
Shareholder's
 
 
Stock
 
Capital
   
Income (Loss)
   
(Deficit)
   
Equity
 
Balance at December 31, 2008
$ 2.8   $ 4,161.3     $ (482.1 )   $ (2,117.5 )   $ 1,564.5  
    Comprehensive income:
                                   
        Net income
  -     -       -       40.3       40.3  
        Other comprehensive income, net of tax:
                                   
            Change in net unrealized capital gains
                                   
                (losses) on securities ($38.3 pretax)
  -     -       29.9       -       29.9  
            Pension liability ($0.4 pretax)
  -     -       0.3       -       0.3  
    Total comprehensive income
                                70.5  
    Contribution of capital
  -     365.0       -       -       365.0  
    Employee share-based payments
  -     0.5       -       -       0.5  
Balance at March 31, 2009
$ 2.8   $ 4,526.8     $ (451.9 )   $ (2,077.2 )   $ 2,000.5  
                                     
Balance at December 31, 2009
$ 2.8   $ 4,528.2     $ (15.0 )   $ (1,611.9 )   $ 2,904.1  
    Comprehensive income:
                                   
        Net income
  -     -       -       90.9       90.9  
        Other comprehensive income, net of tax:
                                   
            Change in net unrealized capital gains (losses)
                                   
                on securities ($112.7 pretax), including 
                                   
                decrease in tax valuation allowance of $(40.1)
  -     -       117.4       -       117.4  
            Portion of other-than-temporary impairment
                                   
                losses recognized in other comprehensive
                                   
                income (loss) ($(7.7) pretax), including
                                   
                increase in tax valuation allowance 
                                   
                of $2.5
  -     -       (7.7 )     -       (7.7 )
           Change in other-than-temporary impairment
                                   
                losses recognized in other comprehensive
                                   
                income (loss) ($5.3 pretax), including
                                   
                decrease in tax valuation allowance 
                                   
                of $(1.9)
  -     -       5.3       -       5.3  
    Total comprehensive income
                                205.9  
    Dividends paid
  -     (203.0 )     -       -       (203.0 )
    Employee share-based payments
  -     0.3       -       -       0.3  
Balance at March 31, 2010
$ 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.

 
 

 



ING Life Insurance and Annuity Company and Subsidiaries
 
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
 
   
Condensed Consolidated Statements of Cash Flows
 
(Unaudited)
 
(In millions)
 
   
 
Three Months Ended March 31,
 
 
2010
 
2009
 
Net cash provided by operating activities
$ 211.1   $ 369.9  
             
Cash Flows from Investing Activities:
           
    Proceeds from the sale, maturity, disposal or redemption of:
           
       Fixed maturities, available-for-sale
  1,838.2     1,864.7  
       Equity securities, available-for-sale
  5.8     23.6  
       Mortgage loans on real estate
  66.0     31.8  
       Limited partnerships/corporations
  12.6     12.6  
       Derivatives
  (22.8)     22.6  
   Acquisition of:
           
       Fixed maturities, available-for-sale
  (1,486.6)     (2,092.6 )
       Equity securities, available-for-sale
  (13.3)     (12.2 )
       Mortgage loans on real estate
  (24.9)     (6.9 )
       Limited partnerships/corporations
  (13.1)     (7.4 )
       Derivatives
  (28.0)     (9.5 )
    Policy loans, net
  2.6     9.2  
    Short-term investments, net
  243.1     (319.1 )
    Loan-Dutch State obligation, net
  43.3     -  
    Collateral (delivered) received 
  5.3     0.5  
    Purchases of fixed assets, net
  -     (2.1 )
Net cash used in investing activities
  628.2     (484.8 )
             
Cash Flows from Financing Activities:
           
    Deposits received for investment contracts
  429.3     949.5  
    Maturities and withdrawals from investment contracts
  (866.0)     (585.2 )
    Short-term loans to affiliates
  (223.6)     (623.4 )
    Short-term repayments of repurchase agreements, net
  -     (53.1 )
    Dividends to parent
  (203.0)     -  
    Contribution of capital
  -     365.0  
Net cash (used in) provided by financing activities
  (863.3)     52.8  
Net decrease in cash and cash equivalents
  (24.0)     (62.1 )
Cash and cash equivalents, beginning of period
  243.3     203.5  
Cash and cash equivalents, end of period
$ 219.3   $ 141.4  
             

 
The accompanying notes are an integral part of these consolidated financial statements.

 

 
 
 
 
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.  
Organization and Significant Accounting Policies
 
Basis of Presentation

ING Life Insurance and Annuity Company (“ILIAC”) is a stock life insurance company domiciled in the state of Connecticut.  ILIAC and its wholly-owned 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)
 

 
Use of Estimates

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.  
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)

 
 
Proceeds from the sale of fixed maturities and equity securities, available-for-sale, and the related gross realized gains and losses, including those related to experience-rated contracts, were as follows for the three months ended March 31, 2010 and 2009.

   
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.

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.

 
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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.
 

 
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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.


 
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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.
 


 
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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.


 
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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.

 
 
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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.

 
 
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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.


 
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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