Voya Insurance & Annuity 10-Q 2008 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________
FORM 10-Q
(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2008 OR
o	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:333-133154, 333-133076, 333-151031, 333-133153, 333-133155, 333-133152
ING USA ANNUITY AND LIFE INSURANCE COMPANY (Exact name of registrant as specified in its charter)
Iowa (State or other jurisdiction of incorporation or organization) 1475 Dunwoody Drive West Chester, Pennsylvania (Address of principal executive offices)		41-0991508 (IRS Employer Identification No.) 19380-1478 (Zip Code)
(610) 425-3400 (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     o
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 the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer            o	Accelerated filer           o	Non-accelerated filer             x (Do not check if a smaller reporting company)	Smaller reporting company     o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o       No     x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 250,000 shares of Common Stock, $10 par value, as of November 12, 2008, are authorized, issued, and outstanding, all of which were directly owned by Lion Connecticut Holdings Inc.
NOTE: WHEREAS ING USA ANNUITY AND LIFE INSURANCE COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q, THIS FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).

1

ING USA Annuity and Life Insurance Company (A wholly-owned subsidiary of Lion Connecticut Holdings Inc.) Form 10-Q for the period ended September 30, 2008
	INDEX
PART I.	FINANCIAL INFORMATION (UNAUDITED)	PAGE
Item 1.	Financial Statements:
	Condensed Statements of Operations	3
	Condensed Balance Sheets	4
	Condensed Statements of Changes in Shareholder's Equity	6
	Condensed Statements of Cash Flows	7
	Notes to Condensed Financial Statements	8
Item 2.	Management’s Narrative Analysis of the Results of Operations andFinancial Condition	30
Item 4.	Controls and Procedures	56
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 6.	Exhibits	69
Signature		70
Exhibit Index		71

2

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

PART I.FINANCIAL INFORMATION (UNAUDITED)

Item 1.Financial Statements

Condensed Statements of Operations

(Unaudited)

(In millions)

				ThreeMonthsEndedSeptember30,				NineMonthsEndedSeptember30,
				2008		2007		2008		2007
Revenues:
	Net investment income		$	336.2	$	340.4	$	1,100.2	$	962.1
	Fee income			284.5		311.1		950.3		865.3
	Premiums			5.0		4.9		14.3		14.8
	Net realized capital losses			(395.8)		(121.8)		(765.0)		(162.6)
	Other income			(0.1)		0.1		0.1		0.2
Total revenue				229.8		534.7		1,299.9		1,679.8
Benefitsandexpenses:
	Interest credited and other
		benefits to contractowners		426.9		364.6		974.7		926.5
	Operating expenses			75.1		64.2		224.7		189.1
	Net amortization of deferred
		policy acquisition costs and
		value of business acquired		171.5		53.3		493.2		248.0
	Interest expense			8.0		9.7		23.1		24.7
	Other expense			13.8		5.8		25.4		19.7
Total benefits and expenses				695.3		497.6		1,741.1		1,408.0
(Loss) income before income taxes				(465.5)		37.1		(441.2)		271.8
Income tax (benefit) expense				(35.7)		(11.1)		(52.4)		56.8
Net (loss) income			$	(429.8)	$	48.2	$	(388.8)	$	215.0

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

3

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Condensed Balance Sheets

(In millions, except share data)

				Asof		Asof
				September30,		December31,
				2008		2007
				(Unaudited)
Assets
Investments:
	Fixed maturities, available-for-sale, at fair value
		(amortized cost of $20,502.8 at 2008 and $21,945.0 at 2007)	$	18,508.8	$	21,833.4
	Equity securities, available-for-sale, at fair value
		(cost of $265.9 at 2008 and $216.6 at 2007)		246.1		211.1
	Short-term investments			66.9		188.0
	Mortgage loans on real estate			3,939.0		3,701.7
	Policy loans			145.8		155.8
	Limited partnerships/corporations			601.4		454.5
	Other investments			273.4		394.1
	Securities pledged (amortized cost of $904.4 at 2008 and $953.3 at 2007)			853.1		942.6
Total investments				24,634.5		27,881.2
Cash and cash equivalents				383.9		204.4
Short-term investments under securities loan agreement,
	including collateral delivered			215.6		128.5
Accrued investment income				236.3		216.9
Receivable for securities sold				131.5		4.6
Deposits and reinsurance recoverable from affiliates				5,410.8		4,616.1
Deferred policy acquisition costs				3,527.6		2,908.4
Value of business acquired				239.5		128.7
Sales inducements to contractowners				675.1		645.4
Short-term loan to affiliate				50.0		-
Due from affiliates				18.2		22.9
Current income tax recoverable				162.9		-
Deferred tax asset				54.2		-
Other assets				372.3		41.3
Assets held in separate accounts				40,314.0		44,477.8
Total assets			$	76,426.4	$	81,276.2

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

4

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Condensed Balance Sheets

(In millions, except share data)

				Asof		Asof
				September30,		December31,
				2008		2007
				(Unaudited)
LiabilitiesandShareholder'sEquity
Future policy benefits and claims reserves			$	31,974.2	$	31,461.6
Payable for securities purchased				65.9		-
Collateral held, including payables under securities loan agreement				150.7		140.0
Borrowed money				590.5		715.5
Notes to affiliates				435.0		435.0
Due to affiliates				112.5		95.6
Current income taxes				-		40.7
Deferred income taxes				-		184.5
Other liabilities				762.8		606.5
Liabilities related to separate accounts				40,314.0		44,477.8
Total liabilities				74,405.6		78,157.2
Shareholder's equity:
	Common stock (250,000 shares authorized, issued,
		and outstanding; $10 per share value)		2.5		2.5
	Additional paid-in capital			4,334.5		4,132.7
	Accumulated other comprehensive loss			(1,071.9)		(160.7)
	Retained earnings (deficit)			(1,244.3)		(855.5)
Total shareholder's equity				2,020.8		3,119.0
Total liabilities and shareholder's equity			$	76,426.4	$	81,276.2

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

5

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Condensed Statements of Changes in Shareholder’s Equity

(Unaudited)

(In millions)

									Accumulated
								Additional	Other			Retained	Total
						Common		Paid-In	Comprehensive			Earnings	Shareholder's
						Stock		Capital	Income(Loss)			(Deficit)	Equity
Balance at December 31, 2006					$	2.5	$	3,978.4	$	(12.1)	$	(979.7)	$	2,989.1
	Cumulative effect of changes in
		accounting principles				-		-		-		(4.8)		(4.8)
Balance at January 1, 2007						2.5		3,978.4		(12.1)		(984.5)		2,984.3
	Comprehensive income:
		Net income				-		-		-		215.0		215.0
		Other comprehensive income,
			net of tax:
			Change in net unrealized capital
				gains (losses) on securities
				($(92.7) pretax), including tax
				valuation allowance of $(57.9)		-		-		(118.2)		-		(118.2)
			Pension liability ($0.2 pretax)			-		-		0.1		-		0.1
	Total comprehensive income													96.9
		Contribution of capital				-		150.0		-		-		150.0
	Employee share-based payments					-		3.5		-		-		3.5
Balance at September 30, 2007					$	2.5	$	4,131.9	$	(130.2)	$	(769.5)	$	3,234.7
Balance at December 31, 2007					$	2.5	$	4,132.7	$	(160.7)	$	(855.5)	$	3,119.0
	Comprehensive loss:
		Net loss				-		-		-		(388.8)		(388.8)
		Other comprehensive loss, net of tax:
			Change in net unrealized capital
				gains (losses) on securities
				($(1,415.4) pretax), including
				tax valuation allowance of $8.6		-		-		(911.4)		-		(911.4)
		Pension liability ($0.3 pretax)				-		-		0.2		-		0.2
	Total comprehensive loss													(1,300.0)
		Contribution of capital				-		1,100.0		-		-		1,100.0
		Capital distributions paid				-		(900.0)		-		-		(900.0)
	Employee share-based payments					-		1.8		-		-		1.8
Balance at September 30, 2008					$	2.5	$	4,334.5	$	(1,071.9)	$	(1,244.3)	$	2,020.8

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

6

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Condensed Statements of Cash Flows

(Unaudited)

(In millions)

				NineMonthsEndedSeptember30,
				2008		2007
Net cash provided by operating activities			$	451.1	$	1,205.7
Cash Flows from Investing Activities:
	Proceeds from the sale, maturity, or redemption of:
		Fixed maturities, available-for-sale		5,597.9		8,440.4
		Equity securities, available-for-sale		156.1		13.9
		Mortgage loans on real estate		364.8		551.9
		Limited partnerships/corporations		12.8		11.2
		Derivatives		193.0		262.5
	Acquisition of:
		Fixed maturities, available-for-sale		(4,768.9)		(12,185.3)
		Equity securities, available-for-sale		(221.0)		(147.2)
		Mortgage loans on real estate		(606.5)		(624.6)
		Limited partnerships/corporations		(202.9)		(295.0)
		Derivatives		(77.8)		(328.6)
	Short-term investments, net			122.4		(15.9)
	Collateral (delivered) held			(76.5)		72.5
	Other investments, net			1.3		0.5
	Other, net			10.2		0.3
Net cash provided by (used in) investing activities				504.9		(4,243.4)
Cash Flows from Financing Activities:
	Deposits received for investment contracts			6,018.2		6,393.4
	Maturities and withdrawals from investment contracts			(6,520.4)		(4,197.8)
	Block of deposits coinsured to affiliate			165.9		281.6
	Reinsurance recoverable on investment contracts			(465.2)		(125.7)
	Short-term repayments			(125.0)		(22.9)
	Short-term loans (to) from affiliate			(50.0)		12.0
	Capital contribution from Parent			1,100.0		150.0
	Capital distribution to Parent			(900.0)		-
Net cash (used in) provided by financing activities				(776.5)		2,490.6
Net increase (decrease) in cash and cash equivalents				179.5		(547.1)
Cash and cash equivalents, beginning of period				204.4		608.6
Cash and cash equivalents, end of period			$	383.9	$	61.5

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

7

 

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

1. Organization and Significant Accounting Policies

Basis of Presentation

ING USA Annuity and Life Insurance Company (“ING USA” or the “Company,” as appropriate) is a stock life insurance company domiciled in the State of Iowa and provides financial products and services in the United States. ING USA is authorized to conduct its insurance business in all states, except New York, and the District of Columbia.

ING USA 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”.

The condensed financial statements and notes as of September 30, 2008, and for the three and nine months ended September 30, 2008 and 2007, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and are unaudited.

The condensed 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 financial position, results of operations, and cash flows, for the interim periods. These condensed financial statements and notes should be read in conjunction with the financial statements and related notes as presented in the Company’s 2007 Annual Report on Form 10-K. 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 various insurance products, including immediate and deferred variable and fixed annuities. The Company’s annuity products are distributed by national wirehouses, regional securities firms, independent broker-dealers, banks, life insurance companies with captive agency sales forces, independent insurance agents, independent marketing organizations, and an affiliated broker-dealer network. The Company’s primary annuity customers are individual consumers.

The Company also offers guaranteed investment contracts and funding agreements (collectively referred to as “GICs”), sold primarily to institutional investors and corporate benefit plans. These products are marketed by home office personnel or through specialty insurance brokers.

8

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed 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 condensed 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.

Significant Accounting Policies

For a description of significant accounting policies, see the Organization and Significant Accounting Policies footnote to the Financial Statements included in the Company’s 2007 Annual Report on Form 10-K. There have been no material changes to the Company’s significant accounting policies since the filing of the Company’s 2007 Annual Report on Form 10-K, except as noted in the Recently Adopted Accounting Standards footnote.

2. Recently Adopted Accounting Standards

Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides guidance for using fair value to measure assets and liabilities whenever other standards require (or permit) assets or liabilities to be measured at fair value. FAS 157 does not expand the use of fair value to any new circumstances.

Under FAS 157, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, FAS 157 establishes a fair value hierarchy that prioritizes the information used to develop such assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. FAS 157 also requires separate disclosure of fair value measurements by level within the hierarchy and expanded disclosure of the effect on earnings for items measured using unobservable data.

9

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

FAS 157 was adopted by the Company on January 1, 2008. As a result of implementing FAS 157, the Company recognized $69.6, before tax, as an increase to Net income on the date of adoption related to the fair value measurements of investment contract guarantees. The impact of implementation was included in Interest credited and other benefits to contractholders on the Condensed Statements of Operations.

In October 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”), which provides clarifying guidance on the application of FAS 157 to financial assets in a market that is not active and was effective upon issuance. FSP FAS 157-3 had no effect on the Company’s financial condition, results of operations, or cash flows upon adoption, as its guidance is consistent with that applied by the Company upon adoption of FAS 157.

The Company recognized no other adjustments to its financial statements related to the adoption of FAS 157, and new disclosures are included in the Financial Instruments footnote.

The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”), which allows a company to make an irrevocable election, on specific election dates, to measure eligible items at fair value with unrealized gains and losses recognized in earnings at each subsequent reporting date. The election to measure an item at fair value may be determined on an instrument by instrument basis, with certain exceptions. If the fair value option is elected, any upfront costs and fees related to the item will be recognized in earnings as incurred. Items eligible for the fair value option include:

§ Certain recognized financial assets and liabilities;

§ Rights and obligations under certain insurance contracts that are not financial instruments;

§ Host financial instruments resulting from the separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument; and

§ Certain commitments.

FAS 159 was adopted by the Company on January 1, 2008. In implementing FAS 159, the Company elected not to take the fair value option for any eligible assets or liabilities in existence on January 1, 2008, or in existence at the date of these Condensed Financial Statements.

10

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

Offsetting of Amounts Related to Certain Contracts

On April 30, 2007, the FASB issued a FSP on FASB Interpretation (“FIN”) No. 39, “Offsetting of Amounts Related to Certain Contracts” (“FSP FIN 39-1”), which permits a reporting entity to offset fair value amounts recognized for the right to reclaim or the obligation to return cash collateral against fair value amounts recognized for derivative instruments under master netting arrangements. FSP FIN 39-1 had no effect on the financial condition, results of operations, or cash flows upon adoption by the Company on January 1, 2008, as it is the Company’s accounting policy not to offset such fair value amounts.

Accounting for Uncertainty in Income Taxes

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), which creates a single model to address the accounting for the uncertainty in income tax positions recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold and measurement criteria that must be satisfied to recognize a financial statement benefit of tax positions taken, or expected to be taken, on an income tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

FIN 48 was adopted by the Company on January 1, 2007. As a result of implementing FIN 48, the Company recognized a cumulative effect of change in accounting principle of $1.7 as a reduction to January 1, 2007 Retained earnings (deficit).

Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts

In September 2005, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”), which states that when an internal replacement transaction results in a substantially changed contract, the unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement assets, related to the replaced contract should not be deferred in connection with the new contract. Contract modifications that meet various conditions defined by SOP 05-1 and result in a new contract that is substantially unchanged from the replaced contract, however, should be accounted for as a continuation of the replaced contract.

11

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverage, that occurs by the exchange of a contract for a new contract, by amendment, endorsement, or rider, to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 applies to internal replacements made primarily to contracts defined by FAS No. 60, “Accounting and Reporting by Insurance Enterprises” (“FAS 60”), as short-duration and long-duration insurance contracts, and by FAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments” (“FAS 97”), as investment contracts.

SOP 05-1 was adopted by the Company on January 1, 2007, and is effective for internal replacements occurring on or after that date. As a result of implementing SOP 05-1, the Company recognized a cumulative effect of change in accounting principle of $4.8, before tax, or $3.1, net of $1.7 of income taxes, as a reduction to January 1, 2007 Retained earnings (deficit). In addition, the Company revised its accounting policy on the amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”) to include internal replacements.

3. New Accounting Pronouncements

Disclosures about Credit Derivatives and Certain Guarantees

In September 2008, the FASB issued FSP FAS No. 133-1 and FIN No. 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (“FSP FAS 133-1 and FIN 45-4” or “the FSP”), which does the following:

§ Amends FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”), requiring additional disclosures by sellers of credit derivatives;

§ Amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), requiring additional disclosure about the current status of the payment/performance risk of a guarantee; and

§ Clarifies the effective date of FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS 161”).

12

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

The provisions of FSP FAS 133-1 and FIN 45-4 that amend FAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008, with early application encouraged. The Company is currently in the process of determining the impact of adoption of the FSP on its disclosures; however, as the pronouncement only pertains to additional disclosure, the Company has determined that the adoption of the FSP will have no financial statement impact.

The clarification in the FSP of the effective date of FAS 161 is consistent with the guidance in FAS 161 and the Company’s disclosure provided herein.

Disclosures about Derivative Instruments and Hedging Activities

In March 2008, the FASB issued FAS 161, 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:

§ How and why derivative instruments are used;

§ How derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations; and

§ How derivative instruments and related hedged items affect an entity’s financial statements.

The provisions of FAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently in the process of determining the impact of adoption of FAS 161 on its disclosures; however, as the pronouncement only pertains to additional disclosure, the Company has determined that the adoption of FAS 161 will have no financial statement impact. In addition, the Company’s derivatives are generally not accounted for using hedge accounting treatment under FAS 133, as the Company has not historically sought hedge accounting treatment.

Business Combinations

In December 2007, the FASB issued FAS No. 141 (revised 2007), “Business Combinations” (“FAS 141R”), which replaces FAS No. 141, “Business Combinations,” as issued in 2001. FAS 141R requires most identifiable assets, liabilities, noncontrolling interest, and goodwill, acquired in a business combination to be recorded at full fair value as of the acquisition date, even for acquisitions achieved in stages. In addition, the statement requires:

13

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

§ Acquisition-related costs to be recognized separately and generally expensed;

§ Non-obligatory restructuring costs to be recognized separately when the liability is incurred;

§ Contractual contingencies acquired to be recorded at acquisition-date fair values;

§ A bargain purchase, which occurs when the fair value of net assets acquired exceeds the consideration transferred plus any non-controlling interest in the acquiree, to be recognized as a gain; and

§ The nature and financial effects of the business combination to be disclosed.

FAS 141R also amends or eliminates various other authoritative literature.

The provisions of FAS 141R are effective for fiscal years beginning on or after December 15, 2008 for all business combinations occurring on or after that date. As such, this standard will impact any Company acquisitions that occur on or after January 1, 2009. Also, the Company will consider transition costs related to any acquisitions that may occur prior to January 1, 2009.

4. Financial Instruments

Fair Value Measurements

FAS 157 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 Balance Sheets are categorized as follows:

§ Level 1 - Unadjusted quoted prices for identical assets or liabilities in an active market.

14

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

§ 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.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2008.

					Level1		Level2		Level3(1)		Total
Assets:
	Fixed maturities, available-for-sale, including
		securities pledged		$	141.9	$	16,015.2	$	3,204.8	$	19,361.9
	Equity securities, available-for-sale				246.1		-		-		246.1
	Other investments (primarily derivatives)				-		156.3		91.9		248.2
	Cash and cash equivalents, short-term
		investments, and short-term investments
		under securities loan agreement			666.4		-		-		666.4
	Assets held in separate accounts				40,314.0		-		-		40,314.0
Total				$	41,368.4	$	16,171.5	$	3,296.7	$	60,836.6
Liabilities:
	Investment contract guarantees:
		Fixed Indexed Annuities ("FIA")			-		-		700.0		700.0
		Guaranteed Minimum Withdrawal and
			Accumulation Benefits ("GMWB"
			and "GMAB")		-		-		41.4		41.4
		Other liabilities (primarily derivatives)			-		411.5		-		411.5
Total				$	-	$	411.5	$	741.4	$	1,152.9
(1)	Level 3 net assets and liabilities accounted for 4.3% 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 13.2%.

15

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

Valuations of Financial Assets and Liabilities

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 FAS 157. 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 the brokers are non-binding. The valuations are reviewed and validated monthly through comparisons to internal pricing models, back testing to recent trades, and monitoring of trading volumes.

All valuation methods and assumptions are validated at least quarterly to ensure the accuracy and relevance of the fair values. No material changes to the valuation methods or assumptions used to determine fair values were made during the third quarter.

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 or dealer quotes and are classified as Level 1 assets. The fair values for marketable bonds without an active market, excluding subprime and Alt-A 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. Valuations obtained from third party commercial pricing services are non-binding and are validated monthly through comparisons to internal pricing models, back testing to recent trades, and monitoring of trading volumes.

Fair values of privately placed bonds are determined using a matrix-based pricing model and are classified as Level 3 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 their relevant market. Using this data, the model generates estimated market values which the Company considers reflective of the fair value of each privately placed bond.

16

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

Trading activity for the Company’s Residential Mortgage-backed Securities (“RMBS”), particularly subprime and Alt-A mortgage-backed securities, has been declining during 2008 as a result of the dislocation of the credit markets. During the third quarter of 2008, the Company continued to obtain pricing information from commercial pricing services and brokers. However, the pricing for subprime and Alt-A mortgage-backed securities did not represent regularly occurring market transactions since the trading activity declined significantly in the third quarter. As a result, the Company concluded that the market for subprime and Alt-A mortgage-backed securities was inactive. The Company did not change its valuation procedures as a result of determining that the market was inactive. However, the Company determined that the classification within the valuation hierarchy should be transferred to Level 3 due to market inactivity.

At September 30, 2008, the fixed maturities valued using unadjusted broker quotes totaled $11,986.8.

Equity securities, available-for-sale: Fair values of these securities are based upon quoted market price and are classified as Level 1 assets.ing@insight.com

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.

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. Mutual funds, short-term investments and cash are based upon a quoted market price and are classified as Level 1.

Other financial instruments reported as assets and liabilities: The carrying amounts for these financial instruments (primarily derivatives) reflect the fair value of the assets and liabilities. Derivatives are carried at fair value (on the Condensed Balance Sheets), which is determined using the Company’s derivative accounting system in conjunction with observable key financial data from third party sources 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 deal only with investment grade counterparties with a credit rating of A- or better. The Company obtains a key input into the valuation model for puts, calls, and futures from one third party broker. Because the input is not received from multiple brokers, these fair values are not deemed to be calculated based on market observable inputs, and, therefore, these instruments are classified as Level 3. However, all other derivative instruments are valued based on market observable inputs and are classified as Level 2.

17

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

Investment contract guarantees: The Company records liabilities, which can be either positive or negative, for annuity contracts containing guaranteed riders for GMABs and GMWBs without life contingencies in accordance with FAS 133. The guarantee is treated as an embedded derivative and is required to be reported separately from the host variable annuity contract. The fair value of the obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, 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 market return scenarios and other best estimate assumptions.

The Company also records for its FIA contracts an embedded derivative liability for interest payments to contractholders above the minimum guaranteed interest rate, in accordance with FAS 133. The guarantee is treated as an embedded derivative and is required to be reported separately from the host contract. The fair value of the obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow estimates are produced by best estimate assumptions.

Nonperformance risk for investment contract guarantees contains adjustments to the fair values of these contract liabilities related to the current credit standing of ING and the Company based on publicly-traded bonds with similar term to maturity and priority of payment. The ING bond spread is applied to the discount factors for FIAs and the risk free rates for GMABs and GMWBs in the Company’s valuation models in order to incorporate credit risk into the fair values of these investment contract guarantees. As of September 30, 2008, the credit ratings of ING and the Company remained relatively stable in relation to prior periods, which resulted in a minimal impact on the valuation of the reserves for all investment contract guarantees.

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 FAS 157). 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 light of the methodologies employed to obtain the fair values of financial assets and liabilities classified as Level 3, additional information is presented below, with particular attention addressed to changes in derivatives, FIAs, and GMWBs and GMABs due to their impacts on the Company's results of operations.

18

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed 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 and nine months ended September 30, 2008.

					Fixedmaturities,						Investment
					available-for-sale						ContractGuarantees
					including									GMWB/
					securitiespledged			Derivatives			FIA			GMAB
Balance at June 30, 2008				$	1,328.8		$	124.5		$	(737.1)		$	(16.1)
	Capital gains (losses):
		Net realized capital gains (losses)			(1.1)	(1)		(18.3)	(3)		58.2	(4)		(23.1)	(4)
		Net unrealized capital gains (losses)(2)			(37.3)			-			-			-
	Total net realized and unrealized
		capital gains (losses)			(38.4)			(18.3)			58.2			(23.1)
		Purchases, sales, issuances, and
			settlements, net		49.1			(14.3)			(21.1)			(2.2)
		Transfer in (out) of Level 3			1,865.3			-			-			-
Balance at September 30, 2008				$	3,204.8		$	91.9		$	(700.0)		$	(41.4)

					Fixedmaturities,						Investment
					available-for-sale						ContractGuarantees
					including									GMWB/
					securitiespledged			Derivatives			FIA			GMAB
Balance at January 1, 2008				$	1,396.3		$	298.2		$	(925.6)		$	(2.7)
	Capital gains (losses):
		Net realized capital gains (losses)			0.7	(1)		(131.0)	(3)		258.9	(4)		(32.0)	(4)
		Net unrealized capital
			gains (losses)(2)		(85.4)			-			-			-
	Total net realized and unrealized
			capital gains (losses)		(84.7)			(131.0)			258.9			(32.0)
		Purchases, sales, issuances, and
			settlements, net		27.9			(75.3)			(33.3)			(6.7)
		Transfer in (out) of Level 3			1,865.3			-			-			-
Balance at September 30, 2008				$	3,204.8		$	91.9		$	(700.0)		$	(41.4)
(1)	This amount is included in Net realized capital gains (losses) on the Condensed Statements of Operations.
(2)	The amounts in this line are included in Accumulated other comprehensive income (loss) on the Condensed Balance Sheets.
(3)	This amount is included in Net realized capital gains (losses) on the Condensed Statements of Operations and contains
	unrealized gains (losses) on Level 3 derivatives held at September 30, 2008.  All gains and losses on Level 3 assets are
	classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized
	gains (losses) separately by security.
(4)	These amounts are included in Interest credited and other benefits to contractowners on the Condensed 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.

19

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

For the three and nine months ended September 30, 2008, the decline in the fair values of the FIA reserves was partially offset by a decline in the value of Level 3 derivatives that hedge the FIA exposure and the increase in the reserves for GMWBs and GMABs. The gains on the FIA embedded derivatives and the losses on the GMWBs ad GMABs were primarily driven by unfavorable equity market performance and changes in interest rates during the three and nine months ended September 30, 2008. In addition, derivatives experienced losses related to unfavorable equity market performance, resulting in a decline in the fair values of these assets. For the nine months ended September 30, 2008, the net realized gains attributable to credit risk were $11.3. The net unrealized capital losses related to fixed maturities were driven by the widening of credit spreads.

At September 30, 2008, the Company determined that the classification within the valuation hierarchy related to the subprime and Alt-A mortgage-backed securities within the RMBS portfolio should be changed due to market inactivity. This change is presented as transfers into Level 3 in the table above and discussed in more detail in the previous disclosure regarding RMBS.

5. Investments

Other-Than-Temporary Impairments

The following tables identify the Company’s other-than-temporary impairments by type for the three and nine months ended September 30, 2008 and 2007.

		ThreeMonthsEndedSeptember30,
		2008			2007
			No.of			No.of
		Impairment	Securities		Impairment	Securities
U.S. corporate	$	159.5	81	$	24.2	46
Foreign(1)		76.6	33		9.3	25
Residential mortgage-backed		87.1	17		0.1	8
Other asset-backed		18.4	15		4.7	18
Equity securities		6.2	2		-	-
Mortgage loans on real estate		1.8	1		-	-
Total	$	349.6	149	$	38.3	97
(1) Primarily U.S. dollars denominated.

20

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

		NineMonthsEndedSeptember30,
		2008			2007
			No.of				No.of
		Impairment	Securities		Impairment		Securities
U.S. Treasuries	$	-	-	$	-	*	1
U.S. corporate		203.9	168		37.6		103
Foreign(1)		133.7	68		18.1		62
Residential mortgage-backed		128.9	35		1.0		12
Other asset-backed		60.0	57		15.4		61
Equity securities		9.0	3		-		-
Mortgage loans on real estate		4.8	1		-		-
Limited partnerships		0.5	1		-		-
Total	$	540.8	333	$	72.1		239
(1) Primarily U.S. dollars denominated.
*Less than $0.1.

The above schedules include $139.3 and $201.2 in other-than-temporary write-downs for the three and nine months ended September 30, 2008, respectively, and $1.5 and $5.9 for the three and nine months ended September 30, 2007, respectively, in other-than-temporary write-downs related to the analysis of credit risk and the possibility of significant prepayment risk. The remaining write-downs are related to investments that the Company does not have the intent to retain for a period of time sufficient to allow for recovery in fair value. The following tables summarize these write-downs by type for the three and nine months ended September 30, 2008 and 2007.

		ThreeMonthsEndedSeptember30,
		2008			2007
			No.of			No.of
		Impairment	Securities		Impairment	Securities
U.S. corporate	$	98.2	63	$	22.8	43
Foreign(1)		29.0	28		9.4	25
Residential mortgage-backed		67.9	10		-	-
Other asset-backed		15.2	5		4.6	18
Total	$	210.3	106	$	36.8	86
(1)Primarily U.S. dollar denominated.

21

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

		NineMonthsEndedSeptember30,
		2008			2007
			No.of				No.of
		Impairment	Securities		Impairment		Securities
U.S. Treasuries	$	-	-	$	-	*	1
U.S. corporate		132.4	137		36.2		100
Foreign(1)		74.5	59		15.0		59
Residential mortgage-backed		85.9	15		-		-
Other asset-backed		46.8	25		15.0		60
Total	$	339.6	236	$	66.2		220
(1)Primarily U.S. dollar denominated.
* Less than $0.1.

The remaining fair value of fixed maturities with other-than-temporary impairments as of September 30, 2008 and 2007 was $2,428.4 and $2,075.3, respectively.

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.

6. Deferred Policy Acquisition Costs and Value of Business Acquired

Activity within DAC was as follows for the nine months ended September 30, 2008 and 2007.

				2008		2007
Balance at January 1			$	2,908.4	$	2,669.9
	Deferrals of commissions and expenses			619.0		486.3
	Amortization:
		Amortization		(595.7)		(359.1)
		Interest accrued at 3% to 6%		110.8		115.9
	Net amortization included in the Condensed
		Statements of Operations		(484.9)		(243.2)
	Change in unrealized capital (gains) losses on
		available-for-sale securities		399.4		28.1
	Effect of variable annuity guaranteed living
		benefits reinsurance		85.7		-
	Implementation of SOP 05-1			-		(4.8)
Balance at September 30			$	3,527.6	$	2,936.3

Activity within VOBA was as follows for the nine months ended September 30, 2008 and 2007.

22

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

				2008		2007
Balance at January 1			$	128.7	$	110.1
	Amortization:
		Amortization		(13.5)		(8.5)
		Interest accrued at 3% to 5%		5.2		3.7
	Net amortization included in the Condensed
		Statements of Operations		(8.3)		(4.8)
	Change in unrealized capital (gains) losses on
		available-for-sale securities		119.1		8.0
Balance at September 30			$	239.5	$	113.3

During the nine months ended September 30, 2008, the Company revised and unlocked the assumptions related to mutual fund revenue, persistency and lapse for its annuity products, resulting in a $55.7 decrease in amortization of DAC and VOBA. The Company also recognized an $85.7 offset related to variable annuity guaranteed living benefits reinsurance during the second quarter of 2008. See the Related Party Transactions footnote for more information on the variable annuity guaranteed living benefits reinsurance agreement.

During the nine months ended September 30, 2007, the Company revised and unlocked the assumptions related to mutual fund revenue, separate account returns, and persistency for its annuity products, resulting in a $47.2 reduction in amortization of DAC and VOBA.

7. Capital Contributions and Distributions

During the nine months ended September 30, 2008, the Company received a $1.1 billion capital contribution from its Parent. During the nine months ended September 30, 2007, the Company received a $150.0 capital contribution from its Parent.

On September 30, 2008, the Company paid its Parent a cash return of capital distribution in the amount of $900.0. During the nine months ended September 30, 2007, the Company did not pay any dividends or return of capital distributions to its Parent.

8. Income Taxes

The Company’s effective tax rates for the three months ended September 30, 2008 and 2007 were 7.7% and (29.9)%, respectively. The Company’s effective tax rates for the nine months ended September 30, 2008 and 2007 were 11.9% and 20.9%, respectively. The effective rates differ from the statutory rate due to the following items:

23

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

	ThreeMonthsEndedSeptember30,		NineMonthsEndedSeptember30,
	2008	2007	2008	2007
Statutory rate	35.0%	35.0%	35.0%	35.0%
Dividends received deduction	3.3%	(65.9)%	8.5%	(14.5)%
Valuation allowance	(31.1)%	-	(32.8)%	-
Interest	-	1.2%	-	0.3%
Other	0.5%	(0.2)%	1.2%	0.1%
Balance at September 30	7.7%	(29.9)%	11.9%	20.9%

Temporary Differences

Valuation allowances are provided when it is considered unlikely that deferred tax assets will be realized. At September 30, 2008 and 2007, the Company had a tax valuation allowance of $144.2 and $0, respectively, related to realized capital losses, which is included in Net (loss) income. Additionally, at September 30, 2008 and December 31, 2007, the Company had a tax valuation allowance of $38.3 and $46.9, respectively, related to unrealized capital losses, which is included in Accumulated other comprehensive income (loss).

Unrecognized Tax Benefits

In the first quarter of 2008, the Internal Revenue Service (“IRS”) finalized the audit of tax year 2003. The 2003 settlement did not have a material impact on the Company’s financial position. The IRS is currently examining tax years 2002, 2004, 2005 and 2006. In addition, the Company and the IRS have agreed to enter the Compliance Assurance Program (“CAP”) for tax year 2008.

A reconciliation of the change in unrecognized income tax benefits for the third quarter of 2008 is as follows:

Balance at January 1, 2008	$	66.4
Additions for tax positions related to current year		5.3
Additions for tax positions related to prior years		0.7
Reductions for tax positions related to prior years		(13.9)
Reductions for settlements with taxing authorities		(0.4)
Balance at September 30, 2008	$	58.1

The Company had $42.3 of unrecognized tax benefits as of September 30, 2008 and $43.2 of unrecognized tax benefits as of December 31, 2007 that would affect the Company’s effective tax rate if recognized.

24

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

Interest and Penalties

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in Current income taxes and Income tax expense on the Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Operations, respectively. The Company had accrued interest of $3.6 as of September 30, 2008 and $4.7 as of December 31, 2007. The decrease in accrued interest during the nine months ended September 30, 2008 primarily relates to the settlement of the 2003 IRS audit.

9. Related Party Transactions

Proprietary Alpha Fund

The ING Proprietary Alpha Fund, LLC (“PAF”) is a multi-strategy investment fund established in 2007 as a U.S. domiciled limited liability company managed by ING Alternative Asset Management LLC (“IAAM”), an affiliate. The investment strategies within PAF include both long and short exposures to various investments and utilize various fixed income, equity, and derivative financial instruments. In September 2007, ING USA invested $125.0 into PAF.

In September 2008, the Company recognized $18.0 in losses related to financial instruments held by the PAF in the Lehman Liquidity Fund in response to the bankruptcy proceedings of Lehman Brothers, Inc. (“Lehman”).

ING Multi-Strategy Opportunity Fund

On September 30, 2008, the Company’s affiliate, Security Life of Denver Insurance Company, transferred 51.9% of its interest in the ING Multi-Strategy Opportunity Fund (the “Fund”) to the Company. The purchase price of the transfer was $68.9, based on the Fund’s net asset value as of September 30, 2008, and is included in Limited partnerships/ corporations on the Condensed Balance Sheets.

Reinsurance Agreements

Effective June 30, 2008, ING USA entered into an automatic reinsurance agreement with its affiliate, Security Life of Denver International Limited (“SLDI”). Under the terms of the agreement, ING USA ceded to SLDI 100% of the benefits guaranteed under specific variable annuity guaranteed living benefit riders (the “Covered Benefits”) attached to certain variable annuity contracts issued by ING USA on or after January 1, 2000 (the “Contracts”). ING USA paid SLDI initial consideration of $665.8. Thereafter, ING USA will pay (i) new business consideration equal to 1.62% of premiums received from

25

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

contractholders on the Contracts and (ii) a base premium equal to the actual fees paid by contractholders for the Covered Benefits. Under the terms of the agreement, SLDI is required to provide ING USA full reserve credit for reinsurance by providing a letter of credit to ING USA or establishing a trust for its benefit, or a combination of a letter of credit and assets in trust. SLDI has provided ING USA with letters of credit in the aggregate amount of $368.0, with $217.0 issued under a letter of credit facility with its affiliate, ING Bank N.V. and the balance issued under a third party letter of credit facility. SLDI has also established a trust with The Bank of New York as trustee and ING USA as beneficiary in which SLDI assets totaling $483.0 have been deposited.

The value of reserves ceded by the Company under this agreement and the accompanying impact on DAC were $426.1 and $85.7, respectively, at September 30, 2008. In addition, a deferred loss on the transaction in the amount of $331.8 is presented in Other Assets on the Condensed Balance Sheets and is amortized over the period of benefit.

Effective June 30, 2008, ING USA also entered into a services agreement with SLDI pursuant to which ING USA will provide certain actuarial risk modeling consulting services to SLDI with respect to hedge positions undertaken by SLDI in connection with the Covered Benefits reinsured by SLDI under the automatic reinsurance agreement.

10. 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 January 2004 and expires on January 14, 2014, either party can borrow from the other up to 3.0% of the Company's statutory admitted assets as of the preceding December 31. Interest on any ING USA 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 interest expense of $0.6 and $1.2 for the three and nine months ended September 30, 2008, respectively and $2.4 and $3.0 for the three and nine months ended September 30, 2007, respectively. The Company earned interest income of $0.4 and $1.9 for the three and nine months ended September 30, 2008, respectively and $1.3 and $5.3 for the three and nine months ended September 30, 2007, respectively. Interest expense and income are included in Interest expense and Net investment income, respectively, on the Condensed Statements of Operations. As of September 30, 2008, the Company had an outstanding receivableof $50.0 from ING AIH under the reciprocal loan agreement. As of December 31, 2007, the Company had no amounts due to or due from ING AIH under the reciprocal loan agreement.

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ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

For information on the Company’s additional financing agreements, see the Financing Agreements footnote to the Financial Statements included in the Company’s 2007 Annual Report on Form 10-K.

11. 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.

As of September 30, 2008, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $609.3, $215.7 of which was with related parties. At December 31, 2007, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $616.3, $156.5 of which was with related parties. During the three and nine months ended September 30, 2008, $89.5 and $168.2, respectively, were funded to related parties under these commitments.

Financial Guarantees

The Company owns a 3-year credit-linked note arrangement, whereby the Company will reimburse the guaranteed party upon payment default of the referenced obligation. Upon such default, the Company will reimburse the guaranteed party for the loss under the reference obligation, and the Company receives that reference obligation in settlement. The Company can seek recovery of any losses under the agreement by sale or collection of the received reference obligation. As of September 30, 2008, the maximum liability of the Company under the guarantee was $32.5.

Cash 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 September 30, 2008, the Company delivered $65.0 of cash collateral,

27

ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

which was included in Short-term investments under securities loan agreement, including collateral delivered, on the Condensed Balance Sheets. As of December 31, 2007, the Company held $11.5 of cash collateral, which was included in Collateral held, including payables under securities loan agreement on the Balance Sheets and was reinvested in short-term investments.

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 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 Financial Statements included in the Company’s 2007 Annual Report on Form 10-K.

12. Accumulated Other Comprehensive Income (Loss)

Shareholder’s equity included the following components of Accumulated other comprehensive income (loss) as of September 30, 2008 and 2007.

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ING USA Annuity and Life Insurance Company

(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)

Notes to Condensed Financial Statements (Unaudited)

(Dollar amounts in millions, unless otherwise stated)

				2008		2007
Net unrealized capital gains (losses):
	Fixed maturities, available-for-sale		$	(2,045.3)	$	(155.7)
	Equity securities, available-for-sale			(19.8)		(3.9)
	DAC/VOBA adjustment on available-for-sale
		securities		481.6		58.2
	Sales inducements adjustment on available-for-sale			3.4		3.8
		securities
	Other investments			(5.9)		(5.9)
Unrealized capital (losses) gains, before tax				(1,586.0)		(103.5)
Deferred income tax asset (liability)				555.1		36.2
Deferred tax asset valuation allowance				(38.3)		(57.9)
Net unrealized capital (losses) gains				(1,069.2)		(125.2)
Pension liability, net of tax				(2.7)		(5.0)
Accumulated other comprehensive (loss) income			$	(1,071.9)	$	(130.2)

Changes in Accumulated other comprehensive income (loss), net of DAC, VOBA, and tax (excluding the tax valuation allowance), related to changes in unrealized capital gains (losses) on securities, including securities pledged, were as follows for the nine months ended September 30, 2008 and 2007.

			2008		2007
Net unrealized capital holding gains (losses) arising
	during the period(1)	$	(1,205.6)	$	(113.1)
Less: reclassification adjustment for gains (losses) and
	other items included in Net income (loss)(2)		(285.6)		(52.8)
Net change in unrealized capital gains (losses) on securities		$	(920.0)	$	(60.3)

 

⁽¹⁾ Pretax net unrealized capital holding gains (losses) arising during the period were $(1,854.8) and $(173.9) for the nine months ended September 30, 2008 and 2007, respectively.

⁽²⁾ Pretax reclassification adjustments for gains (losses) and other items included in Net income (loss) were $(439.4) and $(81.2) for the nine months ended September 30, 2008 and 2007, respectively.

 

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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 results of operations of ING USA Annuity and Life Insurance Company (“ING USA” or the “Company”, as appropriate) for each of the three and nine months ended September 30, 2008 and 2007, and financial condition as of September 30, 2008 and December 31, 2007. This item should be read in its entirety and in conjunction with the condensed 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 2007 Annual Report on Form 10-K.

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:

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(1) The current financial crisis has reached unprecedented levels of market volatility and may materially adversely affect the Company’s business and results of operations;

(2) Regulatory initiatives intended to alleviate the current financial crisis that have been adopted may not be effective and, in any event, may be accompanied by other initiatives, including new capital requirements or other regulations, that could materially affect the Company’s results of operations, financial condition and liquidity;

(3) Continuing adverse financial market conditions may significantly affect the Company’s ability to meet liquidity needs, access to capital and cost of capital;

(4) The amount of statutory capital that the Company must hold to maintain its financial strength and credit ratings can vary significantly from time to time and is sensitive to a number of factors outside of the Company’s control;

(5) Equity market volatility could negatively impact profitability and financial condition;

(6) Changes in interest rates could have a negative impact on profitability and financial condition;

(7) The Company’s investment portfolio is subject to risks that may reduce the value of invested assets and adversely affect sales, profitability, and investment returns credited to contractowners;

(8) Changes in underwriting and actual experience could materially affect profitability;

(9) Changes in reserve estimates may reduce profitability;

(10) A downgrade in the Company’s ratings may negatively affect profitability and financial condition;

(11) The continued availability of capital may affect the ability to grow;

(12) A loss of key product distribution relationships could materially affect sales;

(13) Competition could negatively affect the ability to maintain or increase profitability;

(14) 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;

(15) Litigation may adversely affect profitability and financial condition;

(16) Changes in regulation in the United States and recent regulatory investigations may reduce profitability;

(17) The Company’s products are subject to extensive regulation and failure to meet any of the complex product requirements may reduce profitability;

(18) A failure of the Company’s operating systems or a compromise of security with respect to operating systems or portable electronic devices could adversely affect the Company’s results of operations and financial condition;

(19) Reinsurance subjects the Company to the credit risk of reinsurers and may not be adequate to protect against losses arising from ceded reinsurance;

(20) The occurrence of natural or man-made disasters may adversely affect the Company’s results of operations and financial condition; and

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(21) 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

The Company is a stock life insurance company domiciled in the State of Iowa and provides financial products and services in the United States. ING USA is authorized to conduct its insurance business in all states, except New York, and in the District of Columbia.

ING USA 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”.

The Company has one operating segment.

Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies since the filing of the Company’s 2007 Annual Report on Form 10-K.

Results of Operations

Overview

Products offered by the Company include immediate and deferred variable and fixed annuities, designed to address individual customer needs for tax-advantaged savings, retirement needs, and wealth-protection concerns, and guaranteed investment contracts and funding agreements (collectively referred to as “GICs”), sold primarily to institutional investors and corporate benefit plans.

The Company derives its revenue mainly from (a) fee income generated on variable assets under management (“AUM”), (b) investment income earned on fixed AUM, and (c) certain other management fees. Fee income is primarily generated from separate account assets supporting variable options under variable annuity contract investments, as designated by contractowners. Investment income is generated by fixed AUM, which is mainly funded by annuity products with fixed investment options and GIC deposits. The Company’s expenses primarily consist of (a) interest credited and other benefits to contractowners,

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(b) amortization of deferred policy acquisition costs (“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.

Economic Analysis

The financial market crisis of 2008 presents challenges for the Company and the insurance industry. The Company’s financial results continue to be affected by economic trends.

The credit and liquidity crisis caused turmoil in the financial markets in the third quarter of 2008 impacting short-term, LIBOR and U.S. Treasury rates. Although U.S. Treasury market rates declined in the third quarter, the unrealized and realized losses on fixed maturities increased due to the continued widening of credit spreads that is driven by the higher perceived risk related to investment grade securities.

LIBOR rates rose during the third quarter of 2008 with most of the increase occurring during September. As a result, any favorable effects of the increase on floating rate instruments will be felt primarily in the fourth quarter of 2008.

In the third quarter of 2008, short-term Treasury rates fell more than long-term rates. The rate declines were driven by investor “flight to quality”, which is the trend of investors selecting U.S. Treasuries as opposed to higher yielding, potentially riskier investments.

The credit crisis also negatively impacted equity markets, as investor confidence in the economy diminished. As a result, the Company experienced higher realized and unrealized losses on equity securities. The Company’s fee revenue from variable AUM is generally impacted by equity market performance as well as other factors. While the decline in equity market performance resulted in the reduction of fair values of variable assets, the increase in sales during 2007 and the first nine months of 2008 favorably impacted variable AUM in 2008, relative to the same period in 2007.

Results of Operations

The Company’s results of operations for the three and nine months ended September 30, 2008, and changes therein, reflected higher realized capital losses and higher Net amortization of DAC and VOBA driven by unfavorable market conditions, as well as higher interest credited and other benefits to contractowners. These losses were partially offset for the nine months ended September 30, 2008, by the impact of the adoption of Statement of Financial Accounting Standards (“FAS”) No. 157, “Fair Value Measurements” (“FAS 157”), and favorable fee and investment income as a result of increased average AUM, primarily driven by higher sales of variable annuity products during 2007 and 2008, and a higher block of business in force.

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				ThreeMonthsEndedSeptember30,				$Increase	%Increase
				2008		2007		(Decrease)	(Decrease)
Revenues:
	Net investment income		$	336.2	$	340.4	$	(4.2)	(1.2)%
	Fee income			284.5		311.1		(26.6)	(8.6)%
	Premiums			5.0		4.9		0.1	2.0%
	Net realized capital losses			(395.8)		(121.8)		(274.0)	NM
	Other income			(0.1)		0.1		(0.2)	NM
Total revenue				229.8		534.7		(304.9)	(57.0)%
Benefitsandexpenses:
	Interest credited and other
		benefits to contractowners		426.9		364.6		62.3	17.1%
	Operating expenses			75.1		64.2		10.9	17.0%
	Net amortization of deferred
		policy acquisition costs and
		value of business acquired		171.5		53.3		118.2	NM
	Interest expense			8.0		9.7		(1.7)	(17.5)%
	Other expense			13.8		5.8		8.0	NM
Total benefits and expenses				695.3		497.6		197.7	39.7%
(Loss) income before
	income taxes			(465.5)		37.1		(502.6)	NM
Income tax benefit				(35.7)		(11.1)		(24.6)	NM
Net (loss) income			$	(429.8)	$	48.2	$	(478.0)	NM
Effective tax rate				7.7%		(29.9)%
NM - Not meaningful.

				NineMonthsEndedSeptember30,				$Increase	%Increase
				2008		2007		(Decrease)	(Decrease)
Revenues:
	Net investment income		$	1,100.2	$	962.1	$	138.1	14.4%
	Fee income			950.3		865.3		85.0	9.8%
	Premiums			14.3		14.8		(0.5)	(3.4)%
	Net realized capital losses			(765.0)		(162.6)		(602.4)	NM
	Other income			0.1		0.2		(0.1)	(50.0)%
Total revenue				1,299.9		1,679.8		(379.9)	(22.6)%
Benefitsandexpenses:
	Interest credited and other
		benefits to contractowners		974.7		926.5		48.2	5.2%
	Operating expenses			224.7		189.1		35.6	18.8%
	Net amortization of deferred
		policy acquisition costs and
		value of business acquired		493.2		248.0		245.2	98.9%
	Interest expense			23.1		24.7		(1.6)	(6.5)%
	Other expense			25.4		19.7		5.7	28.9%
Total benefits and expenses				1,741.1		1,408.0		333.1	23.7%
(Loss) income before income taxes				(441.2)		271.8		(713.0)	NM
Income tax (benefit) expense				(52.4)		56.8		(109.2)	NM
Net (loss) income			$	(388.8)	$	215.0	$	(603.8)	NM
Effective tax rate				11.9%		20.9%
NM - Not meaningful.

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Revenues

Total revenue for the three and nine months ended September 30, 2008, was mainly impacted by increases in Net realized capital losses. The year-to-date losses were partially offset by increases in Net investment income and Fee income.

Net realized capital losses increased for the three and nine months ended September 30, 2008, primarily due to higher losses on fixed maturities as a result of other-than-temporary impairments driven by the widening of credit spreads. In addition, derivative realized losses increased for the nine months ended September 30, 2008, driven by poor equity market performance that resulted in losses on call options, partially offset by gains on futures.

For the three months ended September 30, 2008, the Company experienced lower losses on interest rate swaps due to the slight increase in LIBOR rates and larger notional outstanding.

The increase in Fee income for the nine months ended September 30, 2008, reflected an increase in average variable AUM, primarily driven by higher sales of variable annuities in 2007 and the first nine months of 2008, offset in part by a decline in equity market performance. However, fee income decreased for the three months ended September 30, 2008, primarily due to ceded fees in the amount of $53.4 related to the reinsurance agreement with Security Life of Denver International Limited (“SLDI”), an affiliate.

Net investment income for the nine months ended September 30, 2008, increased as the result of higher average assets supporting fixed AUM and surplus, which reflects a larger block of GICs, and fixed indexed annuities in force.

Benefits and Expenses

Total benefits and expenses for the three and nine months ended September 30, 2008, increased primarily due to higher Net amortization of DAC and VOBA and Interest credited and other benefits to contractowners.

The Net amortization of DAC and VOBA increased for the three and nine months ended September 30, 2008, reflecting lower estimated future gross profits driven by the decline in equity market performance.

Interest credited and other benefitsto contractowners increased for the three and nine months ended September 30, 2008, primarily driven by the rise in interest credited on GICs mainly attributable to higher reserves on GICs added in the last half of 2007, as well as an increase in reserves for variable annuity guarantees, which was primarily due to the decline in equity market performance. These increases were partially offset by a decrease in reserves on fixed annuities also due to the decline in equity market performance.

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Operating expenses increased for the three and nine months ended September 30, 2008, primarily due to higher non-deferred asset-based commissions and marketing expenses, as well as the continued growth of the business.

Income Taxes

Income tax (benefit) expense increased for the three and nine months ended September 30, 2008, primarily due to higher losses before taxes relative to the deduction allowed for dividends received, partially offset by the tax valuation allowance related to realized capital losses.

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 and interest rate options embedded in collateralized mortgage obligations and call options embedded in corporate bonds. The investment management function is centralized under ING Investment Management LLC, 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 table presents the investment portfolio at September 30, 2008 and December 31, 2007.

			2008			2007
			Carrying	%of		Carrying	%of
			Value	Total		Value	Total
Fixed maturities, available-for-sale,
	including securities pledged	$	19,361.9	78.6%	$	22,776.0	81.7%
Equity securities, available-for-sale			246.1	1.0%		211.1	0.8%
Short-term investments			66.9	0.3%		188.0	0.7%
Mortgage loans on real estate			3,939.0	16.0%		3,701.7	13.3%
Policy loans			145.8	0.6%		155.8	0.5%
Other investments			874.8	3.5%		848.6	3.0%
Total investments		$	24,634.5	100.0%	$	27,881.2	100.0%

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Fixed Maturities

Fixed maturities, available-for-sale, were as follows as of September 30, 2008.

						Gross		Gross
						Unrealized		Unrealized
				Amortized		Capital		Capital		Fair
				Cost		Gains		Losses		Value
Fixed maturities:
	U.S. Treasuries		$	140.0	$	2.1	$	0.1	$	142.0
	U.S. government agencies
		and authorities		110.2		0.8		0.6		110.4
	State, municipalities, and
		political subdivisions		54.0		-		5.2		48.8
	U.S. corporate securities:
		Public utilities		1,458.4		5.5		76.6		1,387.3
		Other corporate securities		6,258.4		21.0		455.4		5,824.0
	Total U.S. corporate securities			7,716.8		26.5		532.0		7,211.3
	Foreign securities(1):
		Government		441.7		2.1		33.1		410.7
		Other		3,153.6		9.3		259.9		2,903.0
	Total foreign securities			3,595.3		11.4		293.0		3,313.7
	Residential mortgage-backed securities			4,464.3		65.2		561.9		3,967.6
	Commercial mortgage-backed securities			3,706.7		0.6		481.1		3,226.2
	Other asset-backed securities			1,619.9		2.0		280.0		1,341.9
	Total fixed maturities, including
		securities pledged		21,407.2		108.6		2,153.9		19,361.9
	Less: securities pledged			904.4		3.3		54.6		853.1
Total fixed maturities			$	20,502.8	$	105.3	$	2,099.3	$	18,508.8
(1) Primarily U.S. dollar denominated.

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Fixed maturities, available-for-sale, were as follows as of December 31, 2007.

						Gross		Gross
						Unrealized		Unrealized
				Amortized		Capital		Capital		Fair
				Cost		Gains		Losses		Value
Fixed maturities:
	U.S. Treasuries		$	18.4	$	1.0	$	-	$	19.4
	U.S. government agencies and authorities			86.1		1.0		0.3		86.8
	State, municipalities, and
		political subdivisions		49.7		-		2.5		47.2
	U.S. corporate securities:
		Public utilities		1,417.5		22.8		13.4		1,426.9
		Other corporate securities		6,742.7		81.1		67.0		6,756.8
	Total U.S. corporate securities			8,160.2		103.9		80.4		8,183.7
	Foreign securities(1):
		Government		525.2		14.9		7.1		533.0
		Other		3,280.6		40.5		59.4		3,261.7
	Total foreign securities			3,805.8		55.4		66.5		3,794.7
	Residential mortgage-backed securities			4,988.4		53.3		85.8		4,955.9
	Commercial mortgage-backed securities			3,842.2		37.6		36.4		3,843.4
	Other asset-backed securities			1,947.5		5.7		108.3		1,844.9
	Total fixed maturities, including
		securities pledged		22,898.3		257.9		380.2		22,776.0
	Less: securities pledged			953.3		6.1		16.8		942.6
Total fixed maturities			$	21,945.0	$	251.8	$	363.4	$	21,833.4
(1) Primarily U.S. dollar denominated.

It is management’s objective that the portfolio of fixed maturities be of high quality and be well diversified by market sector. The fixed maturities in the Company’s portfolio are generally rated by external rating agencies and, if not externally rated, are rated by the Company on a basis believed to be similar to that used by the rating agencies. The average quality rating of the Company's fixed maturities portfolio was AA- at September 30, 2008 and December 31, 2007, respectively. Ratings are calculated using a rating hierarchy that considers Standard and Poor’s (“S&P”), Moody’s Investor’s Service, Inc. (“Moody’s”), and internal ratings.

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Total fixed maturities by quality rating category, including securities pledged to creditors, were as follows at September 30, 2008 and December 31, 2007.

		2008			2007
		Fair	%of		Fair	%of
		Value	Total		Value	Total
AAA	$	8,118.7	41.9%	$	10,023.0	43.9%
AA		1,278.2	6.6%		1,743.6	7.7%
A		3,578.1	18.5%		4,112.4	18.1%
BBB		5,458.4	28.2%		5,945.3	26.1%
BB		663.3	3.4%		676.0	3.0%
B and below		265.2	1.4%		275.7	1.2%
Total	$	19,361.9	100.0%	$	22,776.0	100.0%

95.2% and 95.8% of the fixed maturities were invested in securities rated BBB and above (Investment Grade) at September 30, 2008 and December 31, 2007, 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, including securities pledged to creditors, by market sector were as follows at September 30, 2008 and December 31, 2007.

		2008			2007
		Fair	%of		Fair	%of
		Value	Total		Value	Total
U.S. Treasuries	$	142.0	0.7%	$	19.4	0.1%
U.S. government agencies and authorities		110.4	0.6%		86.8	0.4%
U.S. corporate, state, and municipalities		7,260.1	37.5%		8,230.9	36.0%
Foreign		3,313.7	17.1%		3,794.7	16.7%
Residential mortgage-backed		3,967.6	20.5%		4,955.9	21.8%
Commercial mortgage-backed		3,226.2	16.7%		3,843.4	16.9%
Other asset-backed		1,341.9	6.9%		1,844.9	8.1%
Total	$	19,361.9	100.0%	$	22,776.0	100.0%

39

The amortized cost and fair value of fixed maturities, excluding securities pledged, as of September 30, 2008, 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	$	485.4	$	486.1
	After one year through five years		5,439.8		5,242.4
	After five years through ten years		3,505.3		3,211.4
	After ten years		2,185.8		1,886.3
	Mortgage-backed securities		8,171.0		7,193.8
	Other asset-backed securities		1,619.9		1,341.9
Less: securities pledged			904.4		853.1
Fixed maturities, excluding securities pledged		$	20,502.8	$	18,508.8

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 in turn has resulted in a general widening of credit spreads, reduced price transparency, reduced liquidity, increased rating agency downgrades and increased volatility across certain markets.

The Company does not originate or purchase subprime or Alt-A whole-loan mortgages. 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. Commencing in the fourth quarter of 2007, the Company expanded its definition of Alt-A loans to include 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. Further, during the fourth quarter, the industry coalesced around classifying any securities backed by residential mortgage collateral not clearly identifiable as prime or subprime into the Alt-A category, and the Company is following that lead. The following summarizes the Company’s exposure to subprime and Alt-A mortgages as of September 30, 2008 and December 31, 2007.

Trading activity for the Company’s Residential Mortgage-backed Securities (“RMBS”), particularly subprime and Alt-A mortgage-backed securities, has been declining during 2008 as a result of the dislocation of the credit markets. During the third quarter of 2008, the Company continued to obtain pricing information from commercial pricing services and brokers. However, the pricing for subprime and Alt-a mortgage-backed securities did not represent regularly occurring market transactions since the trading activity declined significantly in the third quarter. As a result, the Company concluded that the market for subprime and Alt-A mortgage-backed securities was inactive. The Company did not change its valuation procedures as a result of determining that the market was inactive.

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The Company’s exposure to subprime mortgages was primarily in the form of asset-backed securities (“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 September 30, 2008, the fair value and gross unrealized losses related to the Company’s exposure to subprime mortgages were $654.2 and $204.3, respectively, representing 3.4% of total fixed maturities. As of December 31, 2007, the fair value and gross unrealized losses related to the Company’s exposure to subprime mortgages were $879.3 and $86.4, respectively, representing 3.9% 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 September 30, 2008 and December 31, 2007:

2008				2007
% of Total				% of Total
Subprime				Subprime
Mortgage-backed				Mortgage-backed
Securities		Vintage		Securities		Vintage
AAA	56.6%	2007	37.2%	AAA	60.7%	2007	28.0%
AA	27.2%	2006	10.5%	AA	28.8%	2006	11.5%
A	8.4%	2005 and prior	52.3%	A	9.9%	2005 and prior	60.5%
BBB	3.2%		100.0%	BBB	0.6%		100.0%
BB and below	4.6%				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 September 30, 2008, the fair value and gross unrealized losses aggregated to $1.2 billion and $423.4, respectively, representing 6.3% of total fixed maturities. As of December 31, 2007, the fair value and gross unrealized losses related to the Company’s exposure to Alt-A mortgages were $1.9 billion and $69.9, respectively, representing 8.3% of total fixed maturities.

The following tables summarize the Company’s exposure to Alt-A mortgage-backed holdings by credit quality and vintage year as of September 30, 2008 and December 31, 2007:

2008				2007
%ofTotalAlt-A				%ofTotalAlt-A
Mortgage-backedSecurities		Vintage		Mortgage-backedSecurities		Vintage
AAA	94.9%	2007	32.7%	AAA	99.9%	2007	36.2%
AA	2.0%	2006	22.7%	AA	0.1%	2006	24.0%
A	1.5%	2005 and prior	44.6%		100.0%	2005 and prior	39.8%
BBB	0.2%		100.0%				100.0%
BB and below	1.4%
	100.0%

41

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 September 30, 2008, and December 31, 2007, the fair value of the Company’s commercial mortgage-backed securities (“CMBS”) totaled $3.2 billion and $3.8 billion, respectively, and other ABS, excluding subprime exposure, totaled $694.4 and $984.1, respectively. CMBS investments represent pools of commercial mortgages that are broadly diversified across property types and geographical areas.

As of September 30, 2008, the other ABS was also broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations, and automobile receivables comprising 42.1%, 35.7%, and 9.5%, respectively, of total other ABS, excluding subprime exposure. As of December 31, 2007, the other ABS was broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations, and automobile receivables comprising 41.3%, 29.7%, and 14.3%, respectively, of total other ABS, excluding subprime exposure.

The following tables summarize the Company’s exposure to CMBS holdings by credit quality and vintage year as of September 30, 2008 and December 31, 2007:

2008				2007
%ofTotalCMBS		Vintage		%ofTotalCMBS		Vintage
AAA	96.2%	2008	0.4%	AAA	95.1%	2007	39.4%
AA	2.1%	2007	30.7%	AA	2.5%	2006	13.2%
A	0.8%	2006	29.0%	A	1.2%	2005 and prior	47.4%
BBB	0.7%	2005 and prior	39.9%	BBB	1.0%		100.0%
BB and below	0.2%		100.0%	BB and below	0.2%
	100.0%				100.0%

The following tables summarize the Company’s exposure to Other ABS holdings, excluding subprime exposure, by credit quality and vintage year as of September 30, 2008 and December 31, 2007:

2008				2007
%ofTotalOtherABS		Vintage		%ofTotalOtherABS		Vintage
AAA	55.4%	2008	1.2%	AAA	59.3%	2007	30.5%
AA	17.8%	2007	21.2%	AA	5.9%	2006	11.8%
A	8.7%	2006	18.8%	A	10.1%	2005 and prior	57.7%
BBB	15.8%	2005 and prior	58.8%	BBB	24.5%		100.0%
BB and below	2.3%		100.0%	BB and below	0.2%
	100.0%				100.0%

42

Mortgage Loans on Real Estate

Mortgage loans on real estate, primarily commercial mortgage loans, totaled $3,939.0 and $3,701.7 at September 30, 2008 and December 31, 2007, respectively. These loans are reported at amortized cost, less impairment write-downs. 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. If the loan is in foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell. At September 30, 2008 and December 31, 2007, the Company had no allowance for mortgage loan credit losses. The properties collateralizing mortgage loans are geographically dispersed throughout the United States, with the largest concentration of 25.1% and 24.5% of properties in California at September 30, 2008 and December 31, 2007, respectively.

Unrealized Capital Losses

Unrealized capital losses in fixed maturities, including securities pledged to creditors, for Investment Grade (“IG”) and Below Investment Grade (“BIG”) securities by duration were as follows at September 30, 2008 and December 31, 2007.

			2008						2007
				%ofIG			%ofIG			%ofIG			%ofIG
			IG	andBIG		BIG	andBIG		IG	andBIG		BIG	andBIG
Less than six months
	below amortized cost	$	348.9	16.1%	$	37.7	1.8%	$	106.1	27.9%	$	5.0	1.3%
More than six months
	and less than twelve
	months below
	amortized cost		762.0	35.4%		23.6	1.1%		171.3	45.1%		12.7	3.3%
More than twelve months
	below amortized cost		931.6	43.3%		50.1	2.3%		81.6	21.5%		3.5	0.9%
Total unrealized capital loss		$	2,042.5	94.8%	$	111.4	5.2%	$	359.0	94.5%	$	21.2	5.5%

Unrealized losses in fixed maturities at September 30, 2008 and December 31, 2007, were primarily related to the effects of interest rate movement or changes in credit spreads on mortgage and other asset-backed securities. Mortgage and other asset-backed securities include U.S. government-backed securities, principal protected securities, and structured securities, which did not have an adverse change in cash flows. The following table summarizes the unrealized capital losses by duration and reason, along with the fair value of fixed maturities, including securities pledged to creditors, in unrealized capital loss positions at September 30, 2008 and December 31, 2007.

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				MoreThan
		LessThan		SixMonths		MoreThan
		SixMonths		andLessThan		TwelveMonths
		Below		TwelveMonths		Below
		Amortized		Below		Amortized
2008		Cost		AmortizedCost		Cost		Total
Interest rate or spread widening	$	235.3	$	333.2	$	262.4	$	830.9
Mortgage and other asset-backed securities		151.3		452.4		719.3		1,323.0
Total unrealized capital loss	$	386.6	$	785.6	$	981.7	$	2,153.9
Fair value	$	5,715.4	$	5,831.1	$	4,182.8	$	15,729.3

				MoreThan
		LessThan		SixMonths		MoreThan
		SixMonths		andLessThan		TwelveMonths
		Below		TwelveMonths		Below
		Amortized		Below		Amortized
2007		Cost		AmortizedCost		Cost		Total
Interest rate or spread widening	$	37.8	$	49.2	$	62.7	$	149.7
Mortgage and other asset-backed securities		73.3		134.8		22.4		230.5
Total unrealized capital loss	$	111.1	$	184.0	$	85.1	$	380.2
Fair value		5,322.0	$	3,248.4	$	3,300.6	$	11,871.0

Unrealized capital losses in fixed maturities, including securities pledged to creditors, by market sector and duration were as follows at September 30, 2008 and December 31, 2007.

					MoreThan
			LessThan		SixMonths		MoreThan
			SixMonths		andLessThan		TwelveMonths		Total
			Below		TwelveMonths		Below		Unrealized
			Amortized		Below		Amortized		Capital
2008			Cost		AmortizedCost		Cost		Loss
U.S. Treasuries		$	-	$	0.1	$	-	$	0.1
U.S. government agencies
	and authorities		0.1		0.5		-		0.6
U.S. corporate, state, and
	municipalities		164.6		217.7		154.9		537.2
Foreign			70.6		114.9		107.5		293.0
Residential mortgage-backed			64.5		176.2		321.2		561.9
Commercial mortgage-backed			70.6		239.9		170.6		481.1
Other asset-backed			16.2		36.3		227.5		280.0
Total unrealized capital loss		$	386.6	$	785.6	$	981.7	$	2,153.9

44

					MoreThan
			LessThan		SixMonths		MoreThan
			SixMonths		andLessThan		TwelveMonths		Total
			Below		TwelveMonths		Below		Unrealized
			Amortized		Below		Amortized		Capital
2007			Cost		AmortizedCost		Cost		Loss
U.S. government agencies
	and authorities	$	-	$	-	$	0.3	$	0.3
U.S. corporate, state,
	and municipalities		16.6		31.4		34.9		82.9
Foreign			21.2		17.8		27.5		66.5
Residential mortgage-backed			51.1		29.3		5.4		85.8
Commercial mortgage-backed			3.8		27.0		5.6		36.4
Other asset-backed			18.4		78.5		11.4		108.3
Total unrealized capital loss		$	111.1	$	184.0	$	85.1	$	380.2

Of the unrealized losses aged more than twelve months, the average market value of the related fixed maturities was 81.6% of the average book value as of September 30, 2008. In addition, this category includes 1,315 securities, which have an average quality rating of AA-. No other-than-temporary impairment loss was considered necessary for these fixed maturities as of September 30, 2008.

Other-Than-Temporary Impairments

The Company analyzes the general account investments to determine whether there has been an other-than-temporary decline in fair value below amortized cost basis. Management considers the length of 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 the Company’s intent to retain the investment for a period of time sufficient to allow for recovery in fair value. If it is probable that all amounts due according to the contractual terms of an investment will not be collected, an other-than-temporary impairment is considered to have occurred.

In addition, the Company invests in asset-backed securities. Determination of the required impairment is based on the analysis discussed in the preceding paragraph, as well as credit risk and the possibility of significant prepayment risk that restricts the Company’s ability to recover the investment. An impairment is recognized if the fair value of the security is less than book value and there has been an adverse change in cash flow since the last remeasurement date.

When a decline in fair value is determined to be other-than-temporary, the individual security is written down to fair value, and the loss is recorded in Net realized capital gains (losses).

45

The following tables identify the Company’s other-than-temporary impairments by type for the three and nine months ended September 30, 2008 and 2007.

		ThreeMonthsEndedSeptember30,
		2008			2007
			No.of			No.of
		Impairment	Securities		Impairment	Securities
U.S. corporate	$	159.5	81	$	24.2	46
Foreign(1)		76.6	33		9.3	25
Residential mortgage-backed		87.1	17		0.1	8
Other asset-backed		18.4	15		4.7	18
Equity securities		6.2	2		-	-
Mortgage loans on real estate		1.8	1		-	-
Total	$	349.6	149	$	38.3	97
(1)Primarily U.S. dollar denominated.

		NineMonthsEndedSeptember30,
		2008				2007
				No.of				No.of
		Impairment		Securities		Impairment		Securities
U.S. Treasuries	$	-		-	$	-	*	1
U.S. corporate		203.9		168		37.6		103
Foreign(1)		133.7	��	68		18.1		62
Residential mortgage-backed		128.9		35		1.0		12
Other asset-backed		60.0		57		15.4		61
Equity securities		9.0		3		-		-
Mortgage loans on real estate		4.8		1		-		-
Limited partnerships		0.5		1		-		-
Total	$	540.8		333	$	72.1		239
(1)Primarily U.S. dollar denominated.
* Less than $0.1.

The above schedules include $139.3 and $201.2 for the three and nine months ended September 30, 2008, respectively, and $1.5 and $5.9 for the three and nine months ended September 30, 2007, respectively, in other-than-temporary write-downs related to the analysis of credit risk and the possibility of significant prepayment risk. The remaining write-downs are related to investments that the Company does not have the intent to retain for a period of time sufficient to allow for recovery in fair value. The following tables summarize these write-downs by type for the three and nine months ended September 30, 2008 and 2007.

46

		ThreeMonthsEndedSeptember30,
		2008			2007
			No.of			No.of
		Impairment	Securities		Impairment	Securities
U.S. corporate	$	98.2	63	$	22.8	43
Foreign(1)		29.0	28		9.4	25
Residential mortgage-backed		67.9	10		-	-
Other asset-backed		15.2	5		4.6	18
Total	$	210.3	106	$	36.8	86
(1)Primarily U.S. dollar denominated.

		NineMonthsEndedSeptember30,
		2008			2007
			No.of				No.of
		Impairment	Securities		Impairment		Securities
U.S. Treasuries	$	-	-	$	-	*	1
U.S. corporate		132.4	137		36.2		100
Foreign(1)		74.5	59		15.0		59
Residential mortgage-backed		85.9	15		-		-
Other asset-backed		46.8	25		15.0		60
Total	$	339.6	236	$	66.2		220
(1)Primarily U.S. dollar denominated.
* Less than $0.1.

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.

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 the 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 and nine months ended September 30, 2008 and 2007.

		ThreeMonthsEndedSeptember30,
		2008		2007
Fixed maturities, available-for-sale	$	(377.8)	$	(4.4)
Equity securities, available-for-sale		(6.6)		0.2
Derivatives		(9.8)		(117.6)
Other		(1.6)		-
Net realized capital (losses) gains	$	(395.8)	$	(121.8)
After-tax net realized capital (losses) gains	$	(257.3)	$	(79.2)

47

		NineMonthsEndedSeptember30,
		2008		2007
Fixed maturities, available-for-sale	$	(526.4)	$	(61.1)
Equity securities, available-for-sale		(15.4)		0.5
Derivatives		(217.7)		(102.0)
Other		(5.5)		-
Net realized capital losses	$	(765.0)	$	(162.6)
After-tax net realized capital losses	$	(497.3)	$	(105.7)

Net realized capital losses increased for the three and nine months ended September 30, 2008, primarily due to higher losses on fixed maturities as a result of other-than-temporary impairments driven by the widening of credit spreads. In addition, derivative realized losses increased for the nine months ended September 30, 2008, driven by poor equity market performance that resulted in losses on call options, partially offset by gains on futures.

For the three months ended September 30, 2008, the Company experienced lower losses on interest rate swaps due to the slight increase in LIBOR rates and larger notional outstanding.

Liquidity and Capital Resources

Liquidity is the ability of the Company to generate sufficient cash flows to meet the cash requirements of operating, investing, and financing activities.

Sources and Uses of Liquidity

The Company’s principal sources of liquidity are annuity product charges, GIC deposits, investment income, proceeds from the maturing and sale of investments, proceeds from debt issuance, and capital contributions. Primary uses of these funds are payments of commissions and operating expenses, interest and premium credits, payments under guaranteed death and living benefits, investment purchases, repayment of debt, 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. Asset/liability management is integrated into many aspects of the Company’s operations, including investment decisions, product development, and determination of crediting rates. As part of the risk management process, different economic scenarios are modeled, including cash flow testing required for insurance regulatory purposes, to determine that existing assets are adequate to meet projected liability cash flows. Key variables in the modeling process include interest rates, anticipated contractowner behavior, and variable separate account performance. Contractowners bear the investment risk related to variable annuity products, subject to the minimum guaranteed death and living benefits included in these contracts.

48

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 September 30, 2008, the Company had derivative assets with a fair value of $247.8.

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. The Company 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 the Company’s statutory admitted assets as of the prior December 31. As of September 30, 2008, the Company had an outstanding receivable of $50.0 from ING AIH under the reciprocal loan agreement. As of December 31, 2007, the Company had no amounts due to or due from ING AIH under the reciprocal loan agreement.

§ A $100.0 uncommitted, perpetual revolving note facility with the Bank of New York. As of September 30, 2008 and December 31, 2007, the Company had no amounts outstanding under the revolving note facility.

§ A $100.0 uncommitted line-of-credit agreement with PNC Bank. Borrowings are guaranteed by ING AIH, with maximum aggregate borrowings outstanding at anytime to ING AIH and its affiliates of $100.0. As of September 30, 2008 and December 31, 2007, the Company had no amounts outstanding under the line-of-credit agreement.

§ A $100.0 uncommitted line-of-credit agreement with Svenska Handelsbanken AB (Publ.), effective June 2, 2006. Borrowings are guaranteed by ING AIH, with maximum aggregate borrowings outstanding at anytime to ING AIH and its affiliates of $100.0. As of September 30, 2008 and December 31, 2007, the Company had no amounts outstanding under the line-of-credit agreement.

Management believes that these sources of liquidity are adequate to meet the Company’s short-term cash obligations.

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The Company is a member of the Federal Home Loan Bank of Des Moines (“FHLB”) and is required to maintain a collateral deposit that backs funding agreements issued to the FHLB. As of September 30, 2008 and December 31, 2007, the Company had $2,165.1 and $2,898.7, respectively, in non-putable funding agreements, including accrued interest, issued to FHLB. As of September 30, 2008 and December 31, 2007, assets with a carrying value of approximately $2,890.3 and $3,270.1, respectively, collateralized the funding agreements issued to the FHLB. Assets pledged to the FHLB are included in Fixed maturities, available-for-sale, on the Condensed Balance Sheets.

Capital Contributions and Distributions

During the nine months ended September 30, 2008, the Company received a $1.1 billion capital contribution from its Parent. During the nine months ended September 30, 2007, the Company received a $150.0 capital contribution from its Parent.

On September 30, 2008, the Company paid its Parent a cash return of capital distribution in the amount of $900.0. During the nine months ended September 30, 2007, the Company did not pay any dividends or return of capital distributions to its Parent.

ING reached an agreement with the Dutch government to strengthen its capital position. On November 12, 2008, ING issued to the Dutch State non-voting Tier 1 securities for a total consideration of Euro 10 billion. $1.1 billion will be contributed to the various ING U.S. insurance companies and is comprised of the proceeds from the investment by the Dutch government and the redistribution of currently existing capital within ING. The portion to be contributed to the Company, if any, has not yet been determined.

Financial Guarantees

The Company owns a 3-year credit-linked note arrangement, whereby the Company will reimburse the guaranteed party upon payment default of the referenced obligation. Upon such default, the Company will reimburse the guaranteed party for the loss under the reference obligation, and the Company receives that reference obligation in settlement. The Company can seek recovery of any losses under the agreement by sale or collection of the received reference obligation. As of September 30, 2008, the maximum liability of the Company under the guarantee was $32.5.

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Cash 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 September 30, 2008, the Company delivered $65.0 of cash collateral, which was included in Short-term investments under securities loan agreement, including collateral delivered, on the Condensed Balance Sheets. As of December 31, 2007, the Company held $11.5 of cash collateral, which was included in Collateral held, including payables under securities loan agreement on the Balance Sheets and was reinvested in short-term investments.

Reinsurance Agreements

The Company is a party to a Facultative Coinsurance Agreement with its affiliate, Security Life of Denver Insurance Company (“Security Life”) effective August 20, 1999. Under the terms of this agreement, the Company facultatively cedes to Security Life, from time to time, certain GICs on a 100% coinsurance basis. The value of GIC reserves ceded by the Company under this agreement was $2.9 billion and $2.3 billion at September 30, 2008 and December 31, 2007, respectively. The Company utilizes this reinsurance facility primarily for diversification and asset-liability management purposes in connection with this business, which is facilitated by the fact that Security Life is also a major GIC issuer. Senior management of the Company has established a current maximum of $4.0 billion for GIC reserves ceded under this agreement.

The Company entered into an automatic reinsurance agreement with SLDI, an affiliate, dated June 30, 2008, covering 100% of the benefits guaranteed under specific variable annuity guaranteed living benefit riders attached to certain variable annuity contracts, which had been issued and in force as of, as well as any such policies issued after, the effective date of the agreement. The value of reserves ceded by the Company under this agreement was $426.1 at September 30, 2008. In addition, a deferred loss on the transaction in the amount of $331.8 is presented in Other Assets on the Condensed Balance Sheets and is amortized over the period of benefit.

During 2007, the Company entered into reinsurance agreements to provide 100% coverage for the net mortality risk associated with policies written by Security Life and Reliastar Life Insurance Company (“Reliastar”), an affiliate. As of September 30, 2008, the Company recognized losses related to assumed death benefits in the amount of $6.7.

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Ratings

On August 23, 2005, S&P reaffirmed its AA (Very Strong) counterparty credit and financial strength rating of ING’s primary U.S. insurance operating companies (“ING U.S.”), including the Company. S&P also, on that date, affirmed the stable outlook on the core insurance operating companies. On February 9, 2005, S&P assigned its A-1+ short-term counterparty credit rating to the Company. S&P noted that the ratings are based on the Company’s status as a core member of ING U.S. There has been no change in S&P’s rating of ING U.S., including the Company, since that date.

On July 25, 2007, Moody’s affirmed the financial strength rating of ING U.S., including the Company, of Aa3 (Excellent) with a stable outlook. The rating is based on the strong implicit support and financial strength of the parent company, ING. On October 21, 2008, Moody's placed the Aa3 insurance financial strength rating on review for possible downgrade.

On June 18, 2008, A.M. Best Company, Inc. (“A.M. Best”) reaffirmed the financial strength rating of A+ (Superior) of ING U.S., including the Company, with a stable outlook. A.M. Best also affirmed and assigned issuer credit ratings of aa- to the same entities. Concurrently, A.M. Best affirmed the debt ratings of aa- on the two funding agreement backed securities programs sponsored by ING USA and the notes issued thereunder.

Minimum Guarantees

Variable annuity contracts containing minimum guaranteed death and living benefits expose the Company to equity risk. A decrease in the equity markets may cause a decrease in the account values, thereby increasing the possibility that the Company may be required to pay amounts to contractowners due to guaranteed death and living benefits. An increase in the value of the equity markets may increase account values for these contracts, thereby decreasing the Company’s risk associated with guaranteed death and living benefits.

The Company’s variable annuities offer one or more of the following guaranteed death and living benefits:

Guaranteed Minimum Death Benefits (“GMDBs”):

§ Standard - Guarantees that, upon death, the death benefit will be no less than the premiums paid by the contractowner, adjusted for any contract withdrawals.

§ Ratchet - Guarantees that, upon death, the death benefit will be no less than the greater of (1) Standard or (2) the maximum contract anniversary (or quarterly) value of the variable annuity, adjusted for contract withdrawals.

§ Rollup (7.0% or 5.5% Solution) - Guarantees that, upon death, the death benefit will be no less than the aggregate premiums paid by the contractowner accruing interest at 7.0% or 5.5% per annum, adjusted for contract withdrawals, which may be subject to a maximum cap on the rolled up amount. (The Company has discontinued this option for new sales.)

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§ Combo (Max 7) - Guarantees that, upon death, the death benefit will be no less than the greater of (1) Ratchet or (2) Rollup.

For contracts issued prior to January 1, 2000, most contracts with enhanced death benefit guarantees were reinsured to third party reinsurers to mitigate the risk produced by such guaranteed death benefits. For contracts issued after December 31, 1999, the Company instituted an equity hedging program in lieu of reinsurance. The equity hedging program is based on the Company entering into derivative positions to offset exposures to guaranteed minimum death benefits due to adverse changes in the equity markets.

As of September 30, 2008 and December 31, 2007, the guaranteed value of these death benefits in excess of account values was estimated to be $9.8 billion and $2.7 billion, respectively, before reinsurance. The increase was primarily driven by the decrease in the account values of contractowners due to unfavorable equity market performance in the first nine months of 2008.

As of September 30, 2008, the guaranteed value of minimum guaranteed death benefits in excess of account values, net of reinsurance, was estimated to be $8.5 billion, of which $4.9 billion was projected to be covered by the Company’s equity hedging program. At December 31, 2007, the guaranteed value of minimum guaranteed death benefits in excess of account values, net of reinsurance, was estimated to be $1.8 billion, of which $537.6 was projected to be covered by the Company’s equity hedging program. As of September 30, 2008 and December 31, 2007, the Company recorded a liability of $361.2 and $209.4, respectively, net of reinsurance, representing the estimated net present value of the Company’s future obligation for guaranteed minimum death benefits in excess of account values. The liability increased mainly due to the accumulation of fees used to fund the reserve in the first nine months of 2008, and higher future projected benefits in excess of account values.

Guaranteed Living Benefits:

§ Guaranteed Minimum Income Benefit - Guarantees a minimum income payout, exercisable each contract anniversary on or after a specified date, in most cases the 10th rider anniversary.

§ Guaranteed Minimum Withdrawal Benefit (“GMWB”) - Guarantees lifetime annual withdrawals, after certain ages are reached, of a percentage of premiums paid. The percentage may vary by age at first withdrawal and depending on the base annuity contract. For certain (more recent) versions, there are annual step-up (for up to 10 years) and quarterly ratchet features that may increase the amount to which the percentage is applied for the annual withdrawal amount calculation. Other versions have a quarterly ratchet feature only. A joint life-time withdrawal benefit option is available to include coverage for spouses. Most versions of the withdrawal benefit have reset and/or step up features that may increase the guaranteed withdrawal amount in certain conditions. Earlier versions of the withdrawal benefit guarantee that annual withdrawals of up to 7.0% of eligible premiums may be made until eligible premiums previously

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paid by the contractowner are returned, regardless of account value performance. Asset allocation requirements apply at all times where withdrawals are guaranteed for life.

§ Guaranteed Minimum Accumulation Benefit - Guarantees that the account value will be at least 100% of the eligible premiums paid by the contractowner after 10 years, net of any contract withdrawals (GMAB 10). In the past, the Company offered an alternative design that guaranteed the account value to be at least 200% of the eligible premiums paid by contractowners after 20 years (GMAB 20). The Company has discontinued both of these options for new sales.

Effective June 30, 2008, the Company reinsured most of its living benefit guarantees to an affiliated reinsurer to mitigate the risk produced by such benefits. Prior to June 30, 2008, the Company utilized an equity hedging program to mitigate these risks. Certain relatively smaller blocks of living benefit guarantees (GMABs and certain older versions of GMWBs) are still covered by the Company’s equity hedging program.

As of September 30, 2008 and December 31, 2007, the guaranteed value of these living benefits in excess of account values was estimated to be $6.3 billion and $506.5, respectively, before reinsurance. The increase was primarily driven by the decrease in the account values of contractowners due to unfavorable equity market performance in the first nine months of 2008.

As of September 30, 2008, the guaranteed value of these living benefits in excess of account values, net of the living benefit reinsurance agreement, was $93.3.

The Company recorded a liability representing the estimated net present value of its future obligation for living benefits in excess of account values, net of reinsurance, as of September 30, 2008 and December 31, 2007, of $70.2 and $149.3, respectively. The increase in the reserves due to the unfavorable equity market performance was more than offset by the reserves ceded under the new living benefit reinsurance agreement.

Equity Hedging Program: In order to hedge equity risk associated with non-reinsured GMDBs and guaranteed living benefits, the Company enters into futures positions or put options on various public market equity indices chosen to closely replicate contractowner variable fund returns. The Company uses market consistent valuation techniques to establish its derivative position and to rebalance the derivative positions in response to market fluctuations. One aspect of the hedging program is designed to offset changes related to equity experience in the liability and to pay excess claims not covered by the contractowner account value. The Company also administers a hedging program that mitigates both equity risk and equity volatility risk associated with its Principal Guard GMWB product issued in 2005 and beyond. This hedge strategy primarily involves entering into put options.

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Other risks posed by market conditions, such as interest rate risk and the majority of the Company’s equity volatility risk, and risks posed by contractowner experience, such as surrender and mortality experience deviations, are not explicitly mitigated by this program. In addition, certain funds, where there is no replicating market index and where hedging is not appropriate, are excluded from the program.

For those risks addressed by the equity hedging program, the Company is exposed to the risk that the market indices will not adequately replicate actual contractowner variable fund growth. Any differences between actual results and the market indices result in income volatility.

Recently Adopted Accounting Standards

(See the Recently Adopted Accounting Standards and New Accounting Pronouncements footnotes to the condensed financial statements.)

Legislative and Regulatory Initiatives

Legislative proposals, which have been or may, in the future, be considered by Congress, include repealing/modifying the estate tax, reducing the taxation on 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. It is unlikely that Congress will enact tax changes that will adversely affect the Company’s products in 2008. The SEC has a regulatory initiative underway to improve fee disclosure in financial products and has proposed regulations that would require registration of certain index annuity products offered by the Company. However, the timing and content of these regulatory actions are uncertain at this time. The IRS and the Treasury have published final regulations, effective in 2009, that update and consolidate the rules applicable to 403(b) tax deferred annuity arrangements. As a result of these final regulations, the Company is no longer offering new 403(b) contracts; however, 403(b) products will continue to be offered by the Company’s affiliates, including ING Life Insurance and Annuity Company.

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Item 4. Controls and Procedures

a) The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the 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. Legal Proceedings

ING USA Annuity and Life Insurance Company ("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.

As with many financial services companies, the Company and its affiliates have received informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the financial services industry. In each case, the Company and its affiliates have been and are providing full cooperation. 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 2007 Annual Report on Form 10-K filed on March 28, 2008 (SEC File No. 001-32625).

 

Item 1A. Risk Factors

In addition to the normal risks of business, the Company is subject to significant risks and uncertainties, including those which are described below.

The current financial crisis has reached unprecedented levels of market volatility and may materially adversely affect the Company’s business and results of operations

Markets in the United States and elsewhere have been experiencing extreme volatility and disruption, due in part to the financial stresses affecting the liquidity of the banking system and the financial markets generally. In recent weeks, this volatility and disruption have reached unprecedented levels. These circumstances have also exerted downward pressure on stock prices and the availability of credit. These market conditions may continue to affect the Company’s results of operations and investment portfolio since the Company is exposed to significant financial and capital markets risk, including changes in interest rates, credit spreads and equity prices.

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The Company’s exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates will increase the net unrealized loss position of the Company’s investment portfolio and, if long-term interest rates rise dramatically within a six to twelve month time period, certain contractowners may surrender their contracts, requiring the Company to liquidate assets in an unrealized loss position. Due to the long-term nature of the liabilities associated with certain of the Company’s products, sustained declines in long term interest rates may subject us to reinvestment risks and increased hedging costs. In other situations, declines in interest rates or changes in credit spreads may result in reducing the duration of certain liabilities, creating asset liability duration mismatches and possibly lower spread income due to minimum interest rate guarantees on certain liabilities.

This market environment has also reduced the liquidity of institutional investors, which has limited their ability to purchase guaranteed investment contracts and funding agreements (collectively “GICs”). These adverse market conditions may constrain the Company’s ability to issue GICs in the near term and may result in a reluctance of clients to renew their contracts.

With the recent widening of credit spreads, the net unrealized loss position of the Company’s investment portfolio has increased, as have other-than-temporary impairments. If issuer credit spreads continue to widen or increase significantly over an extended period of time, it would likely exacerbate these effects, resulting in greater and additional other-than-temporary impairments.

One important primary exposure to equity risk relates to the potential for lower earnings associated with variable annuities where fee income is earned based upon the fair value of the assets under management. During the course of 2008, the declines in equity markets have negatively impacted assets under management. As a result, fee income earned on the value of those assets under management has also been negatively impacted.

In addition, certain of the Company’s products offer guaranteed benefits which increase the potential benefit exposure should equity markets decline. Due to declines in equity markets during 2008, the liability for these guaranteed benefits has increased. While the Company uses reinsurance in combination with derivative instruments to minimize the risk associated with these guaranteed benefits, the Company is liable for the guaranteed benefits in the event that reinsurers or derivative counterparties are unable or unwilling to pay, and are subject to the risk that other management procedures prove ineffective or that unanticipated policyholder behavior, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed, which individually or collectively may have a material adverse effect on the Company’s results of operations, financial condition or cash flows.

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Regulatory initiatives intended to alleviate the current financial crisis that have been adopted may not be effective and, in any event, may be accompanied by other initiatives, including new capital requirements or other regulations, that could 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, on October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 (the “EESA”) into law. Pursuant to the EESA, the U.S. Treasury has the authority to, among other things, make equity investments in certain financial institutions and purchase mortgage-backed and other securities from financial institutions, for an aggregate amount of up to $700 billion, for the purpose of stabilizing the financial markets. The U.S. federal government, the Federal Reserve Board and comparable authorities in other countries have taken or are considering taking other actions to address the financial crisis that could further impact our business. The Company cannot predict with any certainty the effect these actions will have on the financial markets or on the Company’s business, results of operations, cash flows and financial condition. This legislation and other proposals or actions may also have other consequences, including material effects on interest rates and foreign exchange 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 our capital position or our liquidity.

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 National Association of Insurance Commissioners (“NAIC”), the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“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.

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Continuing adverse financial market conditions may significantly affect the Company’s ability to meet liquidity needs, access to capital and cost of capital

Adverse capital market conditions may affect the availability and cost of borrowed funds, including commercial paper, thereby ultimately impacting profitability and ability to support or grow the businesses. While the Company has various sources of liquidity available, adverse market conditions could impact the cost and availability of these borrowing sources. Without sufficient liquidity, the Company could be forced to curtail certain operations, and the business could suffer.

The amount of statutory capital that the Company must hold to maintain its financial strength and credit ratings can vary significantly from time to time and is sensitive to a number of factors outside of the Company’s control

The NAIC has established regulations that provide minimum capitalization requirements based on risk-based capital (“RBC”) formulas for insurance companies. The RBC formula for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities and group annuities that contain death benefits or certain living benefits.

In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors – the amount of statutory income or losses generated by the Company (which itself is sensitive to equity market and credit market conditions), the amount of additional capital the Company must hold to support business growth, changes in equity market levels, the value of certain fixed-income and equity securities in its investment portfolio, the value of certain derivative instruments that do not receive hedge accounting, changes in interest rates, as well as changes to the NAIC RBC formulas. Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by its statutory surplus amounts and RBC. In addition, rating agencies may implement changes to internal models that have the effect of increasing or decreasing the amount of statutory capital the Company must hold in order to maintain our current ratings. In addition, in extreme scenarios of equity market declines, the amount of additional statutory reserves that the Company is required to hold for variable annuity guarantees increases at a greater than linear rate. This reduces the statutory surplus used in calculating the Company’s RBC ratios. To the extent that the Company’s statutory capital resources are deemed to be insufficient to maintain a particular rating by one or more rating agencies, the Company may seek to raise additional capital. Alternatively, if the Company were unable to raise additional capital in such a scenario, the Company’s financial strength and credit ratings might be downgraded by one or more rating agencies.

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Equity market volatility could negatively impact profitability and financial condition

The decline of the United States and international equity markets over an extended period of time may reduce the profitability and negatively affect the financial condition of the Company due to the following:

§ Sales of new contracts and profitability of in force variable annuity products that provide returns based on equities or equity indices may decrease, which results in a decrease in fees and profits earned on the accounts. The amount of fees the Company earns on variable annuity products is based on such account values.

§ The Company’s exposure under certain guarantees related to the equity markets may increase due to equity markets decline. As a result, the Company may need to increase reserves through a charge to earnings while at the same time receiving lower fees from such products.

§ The Company tries to minimize its exposure to variable annuity and fixed index annuity guaranteed benefits by using reinsurance and other risk management strategies, including a hedging program. If the Company is not successful in minimizing these risks, the Company’s future profitability may be negatively impacted. The factors that could cause the Company to be unsuccessful in minimizing these risks would include, though not be limited to, the risk that reinsurers or derivative counterparties would be unable or unwilling to meet their contractual obligations; the risk that the Company is not able to enter into derivative contracts used for hedging at a reasonable cost or in sufficient volumes; the risk that other risk management strategies would not be effective; the risk that a long-term decline in interest rates would result in higher than anticipated costs of guarantees; the risk that policyholder behavior (e.g., lapses, annuitizations and withdrawals) deviates significantly from assumed, causing higher than expected costs of guarantees; and the risk that unfavorable market changes would produce losses beyond what is covered by the Company’s risk management strategies.

§ If the Company’s expectations of future performance and profits decrease, it may be required to limit capitalization of certain policy acquisition costs, accelerate the amortization of deferred policy acquisition costs, and strengthen reserves, decreasing profits.

Changes in interest rates could have a negative impact on profitability and financial condition

Changes in interest rates may be caused by either changes in the underlying risk free rates or changes in the credit spreads required for various levels of risk within the market. Changes in interest rates may negatively affect the Company’s attempts to maintain profitable margins between the amounts earned on its general account investments and the amounts paid under its annuity and insurance contracts.

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As interest rates rise, fixed annuity contract surrenders and withdrawals may increase as contractowners seek higher returns. To raise the cash necessary to fund such surrenders and withdrawals, the Company may need to sell assets at capital losses. An increase in contract surrenders and withdrawals may also require the Company to accelerate amortization of deferred policy acquisition costs relating to such contracts, further reducing profits. In addition, rising interest rates increase unrealized losses for fixed maturities and certain derivatives where the Company assumes credit exposure. Significant or sustained increases in interest rates may result in increased other-than-temporary impairments.

As interest rates decline, borrowers may prepay or redeem mortgages and bonds with embedded call options that are owned as investments by the Company. This may force the Company to reinvest the proceeds at lower interest rates. In addition, many of the Company’s annuity products contain minimum interest rate guarantees that limit the Company’s ability to lower interest rates credited to contractowners in response to lower investment returns. A decrease in the difference between earned investment income and the interest credited to contractowners further reduces profits. This decrease in profits may also require the Company to limit capitalization of certain policy acquisition costs, accelerate amortization of deferred policy acquisition costs, and strengthen reserves, decreasing profits.

The Company’sinvestment portfolio is subject to risks that may reduce the value of invested assets and adversely affect sales, profitability, and investment returns credited to contractowners

The Company’s investment portfolio is subject to several risks, including the following:

§ An increase in defaults or delinquency in investment portfolios, including derivative contracts;

§ Greater difficulty selling privately placed and certain asset-backed fixed maturity securities and commercial mortgage loans at attractive prices and in a timely manner, as all are less liquid than publicly traded fixed maturity securities;

§ Borrower prepayment or redemption, prior to maturity, of mortgages that back mortgage-backed securities and bonds with embedded call options could force the Company to reinvest proceeds at lower interest rates;

§ An increase in environmental liability exposure from the Company’s commercial mortgage loan portfolio; and

§ Losses in the commercial mortgage loan portfolio as a result of economic downturns or natural disasters.

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Changes in underwriting and actual experience could materially affect profitability

The Company prices its products based on long-term assumptions regarding investment returns, mortality, morbidity, persistency, and operating costs. Management establishes target returns for each product based upon these factors and the average amount of regulatory and rating agency capital that the Company must hold to support in-force contracts. The Company monitors and manages pricing and sales mix to achieve target returns. Profitability from a new business emerges over a period of years, depending on the nature and life of the product, and is subject to variability, either positive or negative, as actual results may differ from pricing assumptions.

The Company’s profitability depends on the following:

§ Adequacy of investment margins;

§ Management of market and credit risks associated with investments;

§ Ability to maintain premiums and contract charges at a level adequate to cover mortality and morbidity benefits and contract administration expenses;

§ Adequacy of contract charges on variable contracts to cover the cost of product features;

§ Persistency of policies to ensure recovery of acquisition expenses; and

§ Management of operating costs and expenses within anticipated pricing allowances.

Changes in reserve estimates may reduce profitability

The Company establishes reserves based upon estimates of how much the Company will pay for future benefits and claims. The Company calculates reserves based on many assumptions and estimates including future investment yields, mortality, morbidity, policy terminations, and expenses. The assumptions and estimates used in connection with the reserve estimation process are inherently uncertain. The Company periodically reviews the adequacy of reserves. The Company cannot, however, determine with precision the amounts that the Company will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level assumed prior to payment of benefits or claims. If actual experience differs significantly from assumptions or estimates, reserves may not be adequate. As a result, the Company would incur a charge to earnings in the quarter in which the reserves are increased.

A downgrade in the Company’s ratings may negatively affect profitability and financial condition

Ratings are an important factor in establishing the competitive position of insurance companies. A downgrade, or the potential for a downgrade, of any of the Company’s ratings may lead to lower margins and fee income as follows:

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§ Increase in contract surrenders and withdrawals;

§ Termination of relationships with broker-dealers, banks, agents, wholesalers, and other distributors of products and services; and

§ Reduction of new annuity contract and guaranteed investment contract and funding agreement sales.

The Company cannot predict what actions rating organizations may take, or what actions it may be required to take in response to the actions of rating organizations, which could adversely affect the Company. Rating organizations assign ratings based upon several factors, including the following:

§ Statutory capital;

§ Risk of investment portfolio;

§ Economic trends affecting the financial services industry;

§ Changes in models and formulas used by rating organizations to assess the financial strength of a rated company;

§ Enterprise risk management; and

§ Other circumstances outside the rated company’s control.

On September 18, September 29, October 2, 2008 and October 10, 2008, A.M. Best Company, Inc., Fitch Ratings Ltd., Moody’s Investors Service (“Moody’s”) and Standard & Poor’s, respectively, each revised its outlook for the U.S. life insurance sector to negative from stable, citing, among other things, the significant deterioration and volatility in the credit and equity markets, economic and political uncertainty, and the expected impact of realized and unrealized investment losses on life insurers’ capital levels and profitability.

In view of the difficulties experienced recently by many financial institutions, including insurance companies, it is possible that rating organizations will heighten the level of scrutiny that they apply to such institutions, will increase the frequency and scope of their credit reviews, will request additional information from the companies that they rate, and may adjust upward the capital and other requirements employed in the rating organization models for maintenance of certain ratings levels. It is possible that the outcome of such reviews of the Company will have adverse ratings consequences, which could have a material adverse effect on results of operation and financial condition.

The continued availability of capital may affect the ability to grow

The Company has, from time to time, required capital to increase its reserves associated with growth from product sales. Although the Company believes it has sufficient capital to fund its immediate growth and capital needs, the amount of capital required and available can vary due to a variety of circumstances that may not be predictable, foreseeable, or within its control. A lack of sufficient capital could hinder the Company’s ability to grow.

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A loss of key product distribution relationships could materially affect sales

TheCompanydistributescertainproductsunderagreementswithothermembersofthefinancialservicesindustrythatarenotaffiliatedwiththeCompany.Terminationofoneormoreoftheseagreementsdueto,forexample,achangeincontrolofoneofthedistributors,couldreducesales.

Competition could negatively affect the ability to maintain or increase profitability

Theinsuranceindustryisintenselycompetitive.TheCompanycompetesbasedonfactorsincludingthefollowing:

 

§ Name recognition and reputation;

§ Service;

§ Investment performance;

§ Product features;

§ Price;

§ Perceived financial strength; and

§ Claims paying and credit ratings.

TheCompany’scompetitorsincludeinsurers,broker-dealers,financialadvisors,assetmanagers,andotherfinancialinstitutions,whichmay,forexample,havegreatermarketshare,offerabroaderrangeofproducts,orhavehigherclaims-payingorcreditratingsthantheCompany.

Inrecentyears,therehasbeensubstantialconsolidationamongcompaniesinthefinancialservicesindustryresultinginincreasedcompetitionfromlarge,well-capitalizedfinancialservicesfirms.Manyofthesefirmsalsohavebeenabletoincreasetheirdistributionsystemsthroughmergersorcontractualarrangements.Furthermore,largercompetitorsmayloweroperatingcostsandhaveanabilitytoabsorbgreaterrisk,whilemaintainingfinancialstrengthratings,allowingthemtopriceproductsmorecompetitively.WhiletheCompanycannotpredictthefuturelevelofconsolidation,theCompanyexpectsconsolidationtocontinueandperhapsaccelerateinthefuture,increasingcompetitivepressure.

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

AnnuityproductsthattheCompanysellscurrentlybenefitfromoneormoreformsoftaxfavoredstatusundercurrentfederaltaxlaw.TheEconomicGrowthandTaxReliefReconciliationActof2001andtheJobsandGrowthTaxReliefReconciliationActof2003containprovisionsthatwill,overtime,significantlylowerindividualtax

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rates.Thisdecreasewillreducethebenefitsofdeferralonthebuild-upofvalueofannuities.Manyoftheseprovisionsexpirein2008and2010.TheBushAdministration,however,hasproposedthatmanyoftheratereductionsandtax-favoredsavingsinitiativesbemadepermanent.AlthoughtheCompanycannotpredicttheoveralleffectonproductsales,someofthesetaxlawchangescouldhindersalesandresultintheincreasedsurrenderofannuitycontracts.

Additionally, the Company is subject to federal corporation income tax, and benefits from certain federal tax provisions, including but not limited to, dividends received deductions, various tax credits, and insurance reserve deductions. There is risk that changes to federal tax law or in Internal Revenue Service (“IRS”) interpretation of existing tax law may be enacted or adopted, and could result in materially higher corporate taxes than would be incurred under existing tax law or interpretation and adversely impact profitability.

Litigation may adversely affect profitability and financial condition

The Company is, and may be in the future, subject to legal actions in the ordinary course of insurance, investment management, and other business operations. These legal actions may include proceedings relating to aspects of businesses and operations that are specific to the Company and proceedings that are typical of the businesses in which the Company operates. Some of these proceedings may be brought on behalf of a class. Plaintiffs may seek large or indeterminate amounts of damage, including compensatory, liquidated, treble, and/or punitive damages. Given the large or indeterminate amounts sometimes sought, and the inherent unpredictability of litigation, it is possible that an adverse outcome could, from time to time, have an adverse effect on the Company’s reputation, results of operations, or cash flows, in particular quarterly or annual periods.

Changes in regulation in the United States and recent regulatory investigations may reduce profitability

The Company’s insurance and securities business is subject to comprehensive state and federal regulation and supervision throughout the United States. The primary purpose of state regulation is to protect contractowners, and not necessarily to protect creditors and investors. State insurance and securities regulators, state attorneys general, the NAIC, the SEC, FINRA, the Department of Labor (“DOL”) and the IRS continually reexamine existing laws and regulations and may impose changes in the future. Changes in legislation and administrative policies, or new interpretations of existing laws, in areas such as employee benefit plan regulation, financial services regulation, and federal taxation, could lessen the competitive advantages of certain of the Company’s products, result in the surrender of existing contracts and policies, increase costs, reduce new product sales, or result in higher taxes affecting the Company, thus reducing the Company’s profitability.

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Since 2002, the insurance industry has become the focus of increased regulatory scrutiny as various state and federal governmental agencies and self-regulatory organizations conduct inquiries and investigations into the products and practices of the financial services industries. These initiatives currently focus on areas such as:

§ Inappropriate trading of fund shares;

§ Revenue sharing and directed brokerage;

§ Sales and marketing practices (including sales to seniors);

§ Suitability;

§ Arrangements with service providers;

§ Pricing;

§ Product cost and fees;

§ Compensation and sales incentives;

§ Potential conflicts of interest;

§ Potential anti-competitive activity;

§ Reinsurance;

§ Specific product types, including group annuities and indexed annuities; and

§ Adequacy of disclosure.

It is likely that the scope of these industry investigations will become broader before they conclude.

In some cases, this regulatory scrutiny has led to new proposed legislation and regulation that could significantly affect the financial services industry, including businesses in which the Company is engaged, or has resulted in regulatory penalties, and litigation. At this time, the Company does not believe that any of this regulatory scrutiny will have a material adverse affect on it. The Company cannot, however, guarantee that new laws, regulations, and other regulatory action aimed at the business practices under scrutiny would not adversely affect its business. The adoption of new laws and regulations, enforcement actions, or litigation, whether or not involving the Company, could influence the manner in which the Company distributes its products, result in negative coverage of the industry by the media, cause significant harm to the Company’s reputation, and adversely impact profitability.

The Company’s products are subject to extensive regulation and failure to meet any of the complex product requirements may reduce profitability

The Company’s insurance and annuity products are subject to a complex and extensive array of state and federal tax, securities and insurance laws, and regulations, which are administered and enforced by a number of different governmental and self-regulatory authorities, including state insurance regulators, state securities administrators, the SEC, the FINRA, the DOL, and the IRS.

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For example, U.S. federal income tax law imposes requirements relating to insurance and annuity product design, administration, and investments that are conditions for beneficial tax treatment of such products under the Internal Revenue Code. Failure to administer certain contract features (for example, contractual annuity start dates in nonqualified annuities) could affect such beneficial tax treatment. Additionally, state and federal securities and insurance laws impose requirements relating to insurance and annuity product design, offering and distribution, and administration. Failure to meet any of these complex tax, securities, or insurance requirements could subject the Company to administrative penalties imposed by a particular governmental or self-regulatory authority, unanticipated costs associated with remedying such failure or other claims, harm to the Company's reputation, interruption of the Company's operations, or adversely impact profitability.

A failure of the Company’s operating systems or a compromise of security with respect to operating systems or portable electronic devices could adversely affect the Company’s results of operations and financial condition

The Company is highly dependent on automated systems to record and process Company and contractowner transactions. The Company may experience a failure of its operating systems or a compromise of security due to technical system flaws, clerical or record-keeping errors, or tampering or manipulation of those systems by employees or unauthorized third parties. Information security risks also exist with respect to the use of portable electronic devices, such as laptops, which are particularly vulnerable to loss and theft. The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, natural disasters, acts of terrorism, epidemics, computer viruses, and electrical/telecommunications outages). All of these risks are also applicable where the Company relies on outside vendors to provide services to it and its contractowners. Operating system failures or disruptions or the compromise of security with respect to operating systems or portable electronic devices could subject the Company to regulatory sanctions, or other claims, harm the Company’s reputation, interrupt the Company’s operations, and adversely affect the Company’s business, results of operations, or financial condition.

Reinsurance subjects the Company to the credit risk of reinsurers and may not be adequate to protect against losses arising from ceded reinsurance

Thecollectibilityofreinsurancerecoverablesissubjecttouncertaintyarisingfromanumberoffactors,includingwhethertheinsuredlossesmeetthequalifyingconditionsofthereinsurancecontractandwhetherreinsurers,ortheiraffiliates,havethefinancialcapacityandwillingnesstomakepaymentsunderthetermsofthereinsurancetreatyorcontract.TheCompany’sinabilitytocollectamaterialrecoveryfromareinsurercouldhaveamaterialadverseeffectonprofitabilityandfinancialcondition.

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The occurrence of natural or man-made disasters may adversely affect the Company’s results of operations and financial condition

The Company is exposed to various risks arising from natural disasters, including hurricanes, global warming, floods, earthquakes, tornadoes, and pandemic disease, caused by a virus such as H5N1 (the “Avian flu” virus), as well as man-made disasters, including acts of terrorism and military actions, which may adversely affect assets under management, results of operations and financial condition, as follows:

§ Losses in the Company’s investment portfolio due to significant volatility in global financial markets or the failure of counterparties to perform.

§ Changes in the rate of mortality lapses and surrenders of existing policies/contracts, as well as sales of new policies/contracts.

§ Reduced collectibility of reinsurance.

§ Disruption of the Company’s normal business operations due to catastrophic property damage, loss of life, or disruption of public and private infrastructure, including communications and financial services.

While the Company has a business continuation and crisis management plan, there can be no assurance that the Company’s plan and insurance coverages would be effective in mitigating any negative effects on operations or profitability in the event of a disaster.

The occurrence of unidentified or unanticipated risks could negatively affect the Company’s business or result in losses

The Company has developed risk management policies and procedures and expects to continue to do so in the future. Nonetheless, the Company's policies and procedures to identify, monitor, and manage risks may not be fully effective. Many of the Company's methods of managing risk and exposures are based upon observed historical market behavior or statistics based on historical models. As a result, these methods may not predict future exposures, which could be significantly greater than historical measures indicate. Other risk management methods depend on the evaluation of information regarding markets, clients, catastrophe occurrence, or other matters, that is publicly available or otherwise accessible to the Company. This information may not always be accurate, complete, up-to-date, or properly evaluated. Management of operational, legal, and regulatory risks requires, among other things, policies and procedures to record and verify large numbers of transactions and events. These policies and procedures may not be fully effective.

Item 6. Exhibits

See Exhibit Index on pages 71-73 hereof.

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SIGNATURE

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.

November 12, 2008 (Date)	ING USA Annuity and Life Insurance Company (Registrant)
	By: /s/	David A. Wheat
		David A. Wheat Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

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	Exhibit Index
Exhibit Number	Description of Exhibit
2.1	Agreement and Plan of Merger dated June 25, 2003, by and between USG Annuity & Life Company, United Life & Annuity Insurance Company, Equitable Life Insurance Company of Iowa and Golden American Life Insurance Company, incorporated by reference in Exhibit 99-8 in the Company’s Form 8K filed with the SEC on January 2, 2004 (File No. 333-87270).
3.1	Restated Articles of Incorporation Providing for the Redomestication of Golden American Life Insurance Company dated July 2 and 3, 2003, effective January 1, 2004, incorporated by reference to Company’s 10-K, as filed with the SEC on March 29, 2004 (File No. 033-87270).
3.2	Amendment to Articles of Incorporation Providing for the Name Change of Golden American Life Insurance Company dated November 20, 2003, effective January 1, 2004, incorporated by reference to the Company’s 10-K, as filed with the SEC on March 29, 2004 (File No. 033-87270).
3.3	Amendment to Articles of Incorporation Providing for the Change in Purpose and Powers of ING USA Annuity and Life Insurance Company dated March 3 and 4, 2004, effective March 11, 2004, incorporated by reference to the Company’s 10-Q, as filed with the SEC on May 17, 2004 (File No. 033-87270).
3.4	Amended and Restated By-Laws of ING USA Annuity and Life Insurance Company effective January 1, 2005, incorporated by reference to the Company’s Form 10-Q, as filed with the SEC on May 13, 2005 (File No. 033-87270).
4.1	Single Premium Deferred Modified Guaranteed Annuity Contract, Single Premium Deferred modified Guaranteed Annuity Master Contract, and Single Premium Deferred Modified Guaranteed Annuity Certificate - Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form S-1 for Golden American Life Insurance Company as filed with the SEC on February 8, 2002 (File No. 333-67660).
4.2	Single Premium Deferred Modified Guaranteed Annuity Master Contract and Single Premium Deferred Modified guaranteed Annuity Certificate – Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form S-1 for Golden American Life Insurance Company, as filed with the SEC on September 13, 2000 (File No. 333-40596).

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4.3	Individual Retirement Annuity Rider; Roth Individual Retirement Annuity Rider; Simple Retirement Account Rider; and 403(b) Rider - Incorporated herein by reference to Post-Effective Amendment No. 34 to Registration Statement on Form N-4 for Golden American Life Insurance Company Separate Account B, as filed with the SEC on April 15, 2003 (File No. 033-23351).
4.4	403(b) Rider - Incorporated herein by reference to Initial Registration Statement on Form S-2 for Golden American Life Insurance Company, as filed with the SEC on April 15, 2003 (File No. 333-104547).
4.5	Single Premium Deferred Equity Indexed Modified Guaranteed Annuity Contract; Single Premium Deferred Modified Guaranteed Annuity Group Master Contract; and Single Premium Deferred Equity Indexed Modified Guaranteed Annuity Certificate, - Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form S-2 for ING USA Annuity and Life Insurance Company, as filed with the SEC on August 13, 2004 (File No. 333-116137).
4.6	Interest in Fixed Account I under Variable Annuity Contracts - Incorporated herein by reference to: Post-Effective Amendment No. 12 to Registration Statement on Form N-4 for Golden American Life Insurance Company Separate Account B, as filed with the SEC on April 23, 1999 (File Nos. 033-59261, 811-5626); Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 for Golden American Life Insurance Company Separate Account B, as filed with the SEC on April 23, 1999 (File Nos. 333-28769, 811-5626); and Incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 for Golden American Life Insurance Company Separate Account B, as filed with the SEC on June 24, 2000 (File Nos. 333-33914, 811-5626).

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4.7	Interests in Fixed Account II under Variable Annuity Contracts - Incorporated herein by reference to Post-Effective Amendment No. 7 to Registration Statement on Form N-4 for Separate Account B of Golden American Life Insurance Company as filed with the SEC on October 2, 2000 (File Nos. 333-28679, 811-5626), Incorporated herein by reference to Post-Effective Amendment No. 2 to Registration Statement on Form N-4 for Separate Account B of Golden American Life Insurance Company as filed with the SEC on February 26, 2001 (File Nos. 333-30180, 811-5626), Incorporated herein by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-4 for Separate Account B of Golden American Life Insurance Company as filed with the SEC on April 23, 1999 (File Nos. 333-28755, 811-5626), Incorporated herein by reference to Post-Effective Amendment No. 1 to Registration Statement on Form N-4 for Separate Account B of Golden American Life Insurance Company as filed with the SEC on April 23, 1999 (File Nos. 333-66757, 811-5626), Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 for Separate Account B of Golden American Life Insurance Company as filed with the SEC on October 26, 2001 (File Nos. 333-63692, 811-5626), Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 for Separate Account B of Golden American Life Insurance Company as filed with the SEC on December 11, 2001 (File Nos. 333-70600, 811-5626), Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form N-4 for Golden American Life Insurance Company Separate Account B, as filed with the SEC on April 16, 2003 (File Nos. 333-90516, 811-5626) and Incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 for Golden American Life Insurance Company Separate Account B, as filed with the SEC on July 3, 2003 (File Nos. 333-101481, 811-5626).
4.8	Interest in the Guaranteed Account under Variable Annuity Contracts - Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form S-2 for Golden American Life Insurance Company, as filed with the SEC on June 29, 2001 (File No. 333-57212).
12.+	Computation of Ratio of Earnings to Fixed Charges, filed herewith.
31.1+	Certificate of David A. Wheat pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+	Certificate of Valerie G. Brown pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+	Certificate of David A. Wheat pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+	Certificate of Valerie G. Brown pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
+ Filed herewith.

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