As filed with the Securities and Exchange Registration No. 333-86276
Commission on April 7, 2005
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ING Life Insurance and Annuity Company
Connecticut
71-0294708
151 Farmington Avenue, Hartford, Connecticut 06156, (860) 723-2239
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Linda E. Senker, Esq. James A. Shuchart, Esq.
ING ING
1475 Dunwoody Drive 1475 Dunwood Drive
West Chester, PA 19380-1478 West Chester, PA 19380-1478
(610) 425-4139 (610) 425-3563
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: It is proposed
that the public offering will commence as soon as practicable after
effectiveness of this filing.
If any of the securities being registered to this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. [XX]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [XX]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
PART I
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ING LIFE INSURANCE AND ANNUITY COMPANY
SINGLE PREMIUM DEFERRED MODIFIED GUARANTEED ANNUITY CONTRACT
ING MULTI-RATE ANNUITY
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APRIL 29, 2005
THE CONTRACT. The contract described in this prospectus is a group or
individual, single purchase payment, modified guaranteed deferred annuity
contract issued by ING Life Insurance and Annuity Company (the "Company," "we,"
"us," "our"). The contract is available as a nonqualified deferred annuity.
Additionally, the contract is available as a rollover to a traditional
Individual Retirement Annuity ("IRA") under section 408(b) of the Internal
Revenue Code of 1986, as amended ("Tax Code") or a rollover to a Roth IRA under
Tax Code section 408A. See "Purchase" in this prospectus for additional
information.
WHY READING THIS PROSPECTUS IS IMPORTANT. This prospectus contains facts about
the contract that you should know before investing. The information will help
you determine if the contract is right for you. Read this prospectus carefully.
If you do invest in the contract, retain this document for future reference.
HOW IT WORKS. Upon purchase, you may direct your purchase payment to different
guaranteed terms ranging up to and including ten years. Each guaranteed term has
its own guaranteed interest rate. When the guaranteed term(s) end, you can
reinvest in another guaranteed term, begin receiving income phase payments, or
withdraw your full account value.
WITHDRAWALS. You may withdraw all or part of your accumulated funds at any time.
WITHDRAWALS PRIOR TO THE END OF A GUARANTEED TERM MAY BE SUBJECT TO A MARKET
VALUE ADJUSTMENT AND CERTAIN FEES. UPON A FULL WITHDRAWAL, YOU COULD, THEREFORE,
RECEIVE LESS THAN YOUR PURCHASE PAYMENT. SEE THE "MARKET VALUE ADJUSTMENT"
SECTION AND "FEES" SECTION IN THIS PROSPECTUS FOR ADDITIONAL INFORMATION.
ADDITIONAL DISCLOSURE INFORMATION. Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
these securities or passed on the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense. We do not intend for this
prospectus to be an offer to sell or a solicitation of an offer to buy these
securities in any state that does not permit their sale. We have not authorized
anyone to provide you with information different from that contained in this
prospectus. The contract is not a deposit with, obligation of, or guaranteed or
endorsed by any bank, nor is it insured by the FDIC.
Our Home Office: Our Customer Service Center:
ING Life Insurance and Annuity ING
Company P.O. Box 9271
151 Farmington Avenue Des Moines, IA 50306-9271
Hartford, Connecticut 06156 1-800-531-4547
1-800-262-3862
ILIAC Multi-Rate Annuity - 134786
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TABLE OF CONTENTS
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PAGE
CONTRACT OVERVIEW .......................................................
GUARANTEED TERMS AND GUARANTEED INTEREST RATES ..........................
YOUR CHOICES AT THE END OF A GUARANTEED TERM ............................
PURCHASE ................................................................
RIGHT TO CANCEL .........................................................
FEES ....................................................................
WITHDRAWALS .............................................................
SYSTEMATIC DISTRIBUTION OPTIONS .........................................
MARKET VALUE ADJUSTMENT (MVA) ...........................................
DEATH BENEFIT ...........................................................
INCOME PHASE ............................................................
INVESTMENTS .............................................................
TAXATION ................................................................
OTHER TOPICS ............................................................
The Company -- Contract Distribution -- Contract Modifications
-- Transfer of Ownership; Assignment -- Involuntary Terminations
-- Legal Matters -- Experts -- Getting Further Information --
Incorporation of Certain Documents by Reference -- Inquiries
APPENDIX I -- CALCULATING A MARKET VALUE ADJUSTMENT (MVA) ............... I-1
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CONTRACT OVERVIEW
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The following is intended as a summary. Please read each section of this
prospectus for additional detail.
QUESTIONS: CONTACTING THE COMPANY. To answer your questions, contact your sales
representative or write or call our Customer Service Center:
ING
P.O. Box 9271
Des Moines, Iowa 50306-92711
1-800-531-4547
CONTRACT DESIGN:
The contract described in this prospectus is a group or individual, single
purchase payment, modified guaranteed deferred annuity contract issued by ING
Life Insurance and Annuity Company. It is intended to be used as a retirement
savings vehicle that allows you to invest in fixed interest options in order to
help meet long-term financial goals.
WHO'S WHO:
The contract holder (you): The person to whom we issue an individual contract or
a certificate under a group contract.
The Company (we, us, our): ING Life Insurance and Annuity Company. We issue the
contract.
The contract: Both individual contracts and certificates under a group contract
are referred to in this prospectus as the contract.
CONTRACT PHASES:
THE ACCUMULATION PHASE
o AT INVESTMENT. Upon purchase, you may direct your purchase payment
to different guaranteed terms ranging up to and including ten years.
Each guaranteed term has its own guaranteed interest rate.
Generally, your purchase payment will earn interest at the
guaranteed interest rate(s) for the duration of the guaranteed
term(s) you select. If you withdraw or transfer amounts prior to the
end of a guaranteed term, those amounts may be subject to a market
value adjustment and certain fees. See "Market Value Adjustment" and
"Fees."
o AT MATURITY. We will notify you at least 18 days before the
guaranteed term ends. If you do not make any election before the
guaranteed term ends, we will automatically renew the contract for a
guaranteed term of the same or similar duration. If you do not want
to automatically renew, contact us before the guaranteed term ends.
Prior to the end of a guaranteed term, you can elect to reinvest in
a different guaranteed term, begin income phase payments, or
withdraw the full amount available at maturity.
THE INCOME PHASE
You may start receiving income phase payments any time after the first year of
the contract. Several payment options are available. See "Income Phase." In
general, you may receive payments for a specified period of time or for life;
receive payments monthly, quarterly, semi-annually or annually; and select an
option that provides a death benefit to beneficiaries.
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CONTRACT FACTS:
FREE LOOK/RIGHT TO CANCEL: You may cancel the contract within ten days of
receipt (or as otherwise provided by state law). See "Right to Cancel."
DEATH BENEFIT: A beneficiary may receive a benefit in the event of your death
prior to the income phase. Benefits during the income phase depend upon the
payment option selected. See "Death Benefit" and "Income Phase."
WITHDRAWALS: During the accumulation phase, you may withdraw all or part of your
account value. Amounts withdrawn may be subject to a market value adjustment,
early withdrawal charge, maintenance fee, tax withholding and taxation. See
"Market Value Adjustment," "Withdrawals," "Fees" and "Taxation."
SYSTEMATIC DISTRIBUTION OPTIONS: You may elect to receive regular payments from
your account, while retaining the account in the accumulation phase. See
"Systematic Distribution Options."
FEES: Certain fees may be deducted from your account value. See "Fees."
TAXATION: You will not generally pay taxes on any earnings from the annuity
contract described in this prospectus until they are withdrawn. Tax-qualified
retirement arrangements (e.g., IRAs) also defer payment of taxes on earnings
until they are withdrawn. If you are considering funding a tax-qualified
retirement arrangement with an annuity contract, you should know that the
annuity contract does not provide any additional tax deferral of earnings beyond
the tax deferral provided by the tax-qualified retirement arrangement. However,
annuities do provide other features and benefits which may be valuable to you.
You should discuss your alternatives with your financial representative.
Taxes will generally be due when you receive a distribution. Tax penalties may
apply in some circumstances. See "Taxation."
MARKET VALUE ADJUSTMENT (MVA): If you withdraw all or part of your account value
before a guaranteed term is completed, an MVA may apply. The MVA reflects the
change in the value of the investment due to changes in interest rates since the
date of investment, and may be positive or negative. See "Market Value
Adjustment."
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GUARANTEED TERMS AND GUARANTEED INTEREST RATES
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The contract offers fixed interest options called guaranteed terms. On the
application or enrollment form, you select the guaranteed term(s) you want to
invest in from among the guaranteed terms we offer at that time. Your purchase
payment earns interest at the guaranteed interest rate applicable to that
guaranteed term.
GUARANTEED TERMS
START DATE. Guaranteed terms always start on the first business day of the
month.
LENGTH. Guaranteed terms are offered at our discretion for various lengths of
time ranging up to and including ten years.
MINIMUM PAYMENTS. Your single purchase payment must be at least $10,000. You may
divide your single purchase payment among any of the various guaranteed terms we
offer, but you must invest at least $1,000 in any single guaranteed term.
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GUARANTEED INTEREST RATES
We state the guaranteed interest rates as an effective annual rate of return. In
other words, we credit the interest you earn on your purchase payment at a rate
that provides the guaranteed rate of return over a one-year period, assuming you
make no withdrawals. Guaranteed interest rates will never be less than the
minimum guaranteed interest rate stated in the contract. We reserve the right to
offer, from time to time, guaranteed interest rates to prospective investors
that are higher than those offered to current contract holders with respect to
guaranteed terms of the same duration.
ONE GUARANTEED TERM/MULTIPLE GUARANTEED INTEREST RATES. More than one guaranteed
interest rate may be applicable during a guaranteed term greater than one year.
For example, a guaranteed term of five years may apply one guaranteed interest
rate for the first year, a different guaranteed interest rate for the next two
years, and a third guaranteed interest rate for the last two years. You may not
select a guaranteed term with multiple guaranteed interest rates if your
contract is issued in the State of New York.
EXAMPLE OF INTEREST CREDITING AT THE GUARANTEED INTEREST RATE. The example below
shows how interest is credited during a guaranteed term. The hypothetical
guaranteed interest rate used in this example is illustrative only and is not
intended to predict future guaranteed interest rates to be offered under the
contract. Actual guaranteed interest rates offered may be more or less than
those shown. The example assumes no withdrawals of any amount during the entire
seven-year guaranteed term illustrated. The example does not reflect any market
value adjustment, federal income taxes, possible tax penalties, or deductions of
any early withdrawal charge, premium taxes, or maintenance fees. See
"Withdrawals," "Market Value Adjustment," "Fees" and "Taxation."
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EXAMPLE:
Purchase payment: $20,000
Guaranteed term: 7 years
Guaranteed interest rate: 6.00% per year
The guaranteed interest rate is applied in this example by using the
formula:
1 + the guaranteed interest rate = 1.06
ACCOUNT VALUE AT END INTEREST EARNED AT END
OF EACH CONTRACT YEAR OF EACH CONTRACT YEAR
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Contract year 1 = $21,200.00 Interest at end of contract year
($20,000.00 x 1.06) 1 = $1,200.00
Contract year 2 = $22,472.00 Interest at end of contract year
($21,200.00 x 1.06) 2 = $1,272.00
Contract year 3 = $23,820.32 Interest at end of contract year
($22,472.00 x 1.06) 3 = $1,348.32
Contract year 4 = $25,249.54 Interest at end of contract year
($23,820.32 x 1.06) 4 = $1,429.22
Contract year 5 = $26,764.51 Interest at end of contract year
($25,249.54 x 1.06) 5 = $1,514.97
Contract year 6 = $28,370.38 Interest at end of contract year
($26,764.51 x 1.06) 6 = $1,605.87
End of guaranteed term = $30,072.61 Interest at end of contract year
($28,370.38 x 1.06) 7 = $1,702.23
Total interest credited in guaranteed term =
$10,072.61 ($30,072.61 - $20,000)
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DETERMINATION OF GUARANTEED INTEREST RATES. We will periodically determine the
guaranteed interest rates we offer at our sole discretion. We have no specific
formula for determining the rate of interest we will declare as future
guaranteed interest rates. Our determination of guaranteed interest rates is
influenced by, but does not necessarily correspond to, interest rates available
on the types of debt instruments in which we intend to invest the amounts
attributable to the contract. See "Investments." The Company's management will
also consider various factors in determining guaranteed interest rates for a
given guaranteed term, including some or all of the following:
o Regulatory and tax requirements;
o Sales commissions;
o Administrative expenses;
o General economic trends; and
o Competitive factors.
THE COMPANY'S MANAGEMENT DETERMINES THE GUARANTEED INTEREST RATES WE WILL OFFER.
WE CANNOT PREDICT NOR GUARANTEE FUTURE LEVELS OF GUARANTEED INTEREST RATES ABOVE
THE CONTRACTUALLY GUARANTEED MINIMUM RATE NOR GUARANTEE WHAT RATES WILL BE
OFFERED IN THE FUTURE.
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YOUR CHOICES AT THE END OF A GUARANTEED TERM
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At least 18 calendar days prior to the end of a guaranteed term, we will notify
you that the guaranteed term is about to end. At the end of a guaranteed term,
you can do three things with the amount you have accumulated for that guaranteed
term:
o Reinvest all or part of it in another guaranteed term;
o Withdraw all or part of it; or
o Use all or part of it to start your income phase payments.
These choices can also be combined. For example, you can withdraw part of the
amount you have accumulated and reinvest the balance or reinvest part and use
the balance to start income phase payments. Each of these choices has certain
consequences, which you should consider carefully. See "Withdrawals," "Income
Phase" and "Taxation."
REQUESTING YOUR CHOICE. Once you decide what you want to do with your account
value for that guaranteed term, you must advise us of your decision by
completing an election form. We must receive your completed election form at
least five days prior to the end of the guaranteed term to which it applies.
If we do not receive your properly completed election form in time, or you do
not submit an election form, your account value at the end of the guaranteed
term will be automatically reinvested in the following manner:
o For a guaranteed term equal to the guaranteed term just ended;
o If no such guaranteed term is available, for the guaranteed term
with the next shortest duration; or
o If no such shorter guaranteed term is available, for the guaranteed
term with the next longest duration.
Your account value will then earn interest at the guaranteed interest rate
applicable to the guaranteed term automatically selected for you. We will mail a
confirmation statement to you the next business day after the completion of the
just-ended guaranteed term advising you of the new guaranteed term and
guaranteed interest rate.
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ILIAC Multi-Rate Annuity - 134786
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PURCHASE
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CONTRACT TYPE. The contract may be purchased as one of the following:
(1) A nonqualified deferred annuity;
(2) A rollover to a traditional individual retirement annuity (IRA)
under Tax Code section 408(b) (limitations apply, see "Purchasing a
Traditional IRA" in this section); or
(3) A rollover to a Roth IRA under Tax Code section 408A (limitations
apply, see "Purchasing a Roth IRA" in this section).
HOW TO PURCHASE. To purchase a contract, complete an application or enrollment
form and submit it to the Company along with your purchase payment.
PAYMENT METHODS. The following purchase payment methods are allowed:
o One lump-sum payment; or
o Transfer or rollover from a pre-existing plan or account.
We reserve the right to reject any payments without advance notice.
PAYMENT AMOUNT. The minimum purchase payment is $10,000. We may limit the amount
of the maximum purchase payment. All purchase payments over $1,000,000 will be
allowed only with our consent. You may not make any additional purchase payments
under an existing contract. However, eligible persons may purchase additional
contracts at the then prevailing guaranteed interest rates and guaranteed terms.
PURCHASING A TRADITIONAL IRA. To purchase the contract as a traditional IRA,
your purchase payment must be a transfer of amounts held in one of the
following:
o A traditional individual retirement account under Tax Code section
408(a);
o A traditional individual retirement annuity under Tax Code section
408(b); or
o A retirement plan qualified under Tax Code section 401 or 403.
PURCHASING A ROTH IRA. A contract may be purchased as a Roth IRA under Tax Code
section 408A, by transferring amounts previously accumulated under another Roth
IRA or from a traditional individual retirement annuity or individual retirement
account, provided certain conditions are met. See "Taxation."
ACCEPTANCE OR REJECTION OF APPLICATIONS OR ENROLLMENT FORMS. We must accept or
reject your application or enrollment form within two business days of receipt.
If the application or enrollment form is incomplete, we may hold it and any
accompanying purchase payment for five days. Payments may be held for longer
periods only with your consent, pending acceptance of the application or
enrollment form. If the application or enrollment form is accepted, a contract
will be issued to you. If the application or enrollment form is rejected, we
will return it and any payments to you, without interest.
We may also refuse to accept certain forms of premium payments or loan
repayments, if applicable, (traveler's checks, for example) or restrict the
amount of certain forms of premium payments or loan repayments (money orders
totaling more than $5,000, for example). In addition, we may require information
as to why a particular form of payment was used (third party checks, for
example) and the source of the funds of such payment in order to determine
whether or not we will accept it. Use of an unacceptable form of payment may
result in us returning your premium payment and not issuing the contract.
WHAT HAPPENS TO YOUR PURCHASE PAYMENT? If we accept your application or
enrollment form, your purchase payment becomes part of our general assets and is
credited to an account established for you. We will confirm the crediting of
your purchase payment within five business days of receipt of your properly
completed application or enrollment form. You start earning interest on your
purchase payment beginning on the effective date of the contract, which is the
date your purchase payment is credited. During the period of time between the
date your purchase payment is credited and the start of the guaranteed term you
selected, your purchase payment earns interest at the guaranteed interest rate
applicable to the guaranteed term you selected.
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ILIAC Multi-Rate Annuity - 134786
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RIGHT TO CANCEL
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You may cancel the contract within ten days of receiving it (or as otherwise
provided by state law) by returning it to our Service Center along with a
written notice of cancellation. We will issue a refund within seven days of our
receipt of the contract and written notice of cancellation. The refund will
equal the amount of your purchase payment.
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FEES
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The following fees and other deductions may impact your account value:
o Early Withdrawal Charge (see below);
o Maintenance Fee (see below);
o Premium Taxes (see below);
o Market Value Adjustment (see "Market Value Adjustment"); and
o Taxation (see "Taxation").
EARLY WITHDRAWAL CHARGE
Withdrawals of all or a portion of your account value may be subject to a
charge. In the case of a partial withdrawal where you request a specified dollar
amount, the amount withdrawn from your account will be the amount you specified
plus adjustment for any applicable early withdrawal charge.
AMOUNT. The amount is a percentage of the purchase payment you withdraw. The
percentage will be determined by the early withdrawal charge schedule below.
PURPOSE. This is a deferred sales charge. It reimburses some of our sales and
administrative expenses associated with the contract.
EARLY WITHDRAWAL CHARGE SCHEDULE:
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Years since purchase payment credited: 0 1 2 3 4 5 6 7
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Fee as a percentage of payment withdrawn: 7% 7% 6% 6% 5% 4% 2% 0%
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HOW WE APPLY THE SCHEDULE. For purposes of applying the early withdrawal charge,
all time periods are measured from the date your purchase payment is credited,
even if you reinvest all or part of your account value in another guaranteed
term. Once the early withdrawal charge declines to 0%, it no longer applies,
regardless of how long you own the contract.
The early withdrawal charge applies only to withdrawals of your purchase
payment. However, for the purposes of this charge, we assume you are withdrawing
all or part of your purchase payment first (not your earnings). This assumption
is not made for tax purposes. See "Taxation."
EXAMPLE. Assume the first guaranteed term you select is for five years. Further
assume that at the end of this five-year guaranteed term, you decide to reinvest
your account value for another guaranteed term of four years. Assume you then
make a withdrawal (but not a special withdrawal, as described below) during the
second year of the new guaranteed term. Because six years have passed since your
purchase payment was credited, you would pay a 2% early withdrawal charge, even
though you could have withdrawn all or part of your account value at the end of
the first five-year guaranteed term without paying an early withdrawal charge.
See "Waiver of Charge," below. However, if you make a withdrawal during the
third year of the new guaranteed term, or anytime thereafter, you would pay no
early withdrawal charge, because seven years would have passed since your
purchase payment was credited.
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SPECIAL WITHDRAWALS. After 12 months from the contract effective date, you may
make one withdrawal equal to 10% or less of your account value during any
calendar year, valued at the time we receive your withdrawal request in writing,
and we will not deduct any early withdrawal charge. This special withdrawal is
subject to the following restrictions:
o It applies only to the first withdrawal each calendar year;
o All subsequent withdrawals that calendar year are subject to an
early withdrawal charge, even if you did not withdraw the full 10%
with your first withdrawal; and
o If your first withdrawal of the calendar year is in excess of 10% of
your account value, the excess amount is subject to an early
withdrawal charge.
WAIVER OF CHARGE. The early withdrawal charge is waived for amounts that are:
o Withdrawn at the end of a guaranteed term, provided that at least
five days prior to the end of that guaranteed term we receive your
withdrawal request in writing. (If you reinvest those amounts in
another guaranteed term, future withdrawals will be subject to an
early withdrawal charge as described above); or
o $2,500 or less, provided that no withdrawal has been made from your
account during the prior 12 months; or
o Withdrawn due to your election of a systematic distribution option
(see "Systematic Distribution Options"); or
o Withdrawn due to an involuntary termination. This may occur if your
account value is less than $2,500. See "Other Topics--Involuntary
Terminations."
NURSING HOME WAIVER. If approved in your state, you may withdraw all or a
portion of your account value without an early withdrawal charge if all of the
following conditions are met:
o More than one account year has elapsed since the date your purchase
payment was credited;
o The annuitant, designated under the contract, has spent at least 45
consecutive days in a licensed nursing facility (in New Hampshire,
the facility may be non-licensed); and
o The withdrawal is requested within three years of the designated
annuitant's admission to a licensed nursing facility (in Oregon
there is no three year limitation and in New Hampshire, the facility
may be non-licensed).
We will not waive the early withdrawal charge if the annuitant was in a licensed
nursing care facility at the time you purchased the contract. The nursing home
waiver may not be available in all states.
MARKET VALUE ADJUSTMENT AND TAXATION. Except for withdrawals at the end of a
guaranteed term as noted above, and withdrawals under a systematic distribution
option, a market value adjustment is applicable to any amounts you withdraw.
Regardless of when or how withdrawals are taken, you may also be required to pay
taxes and tax penalties. See "Market Value Adjustment" and "Taxation."
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ANNUAL MAINTENANCE FEE
Currently we do not charge a maintenance fee. However, prior to the time you
enter the income phase, an annual maintenance fee may be deducted from your
account value on each anniversary of the contract's effective date and if you
make a full withdrawal from the contract. The terms and conditions under which
the maintenance fee may be deducted are stated in the contract. A maintenance
fee would be used to reimburse us for our administrative expenses relating to
establishing and maintaining the contract.
PREMIUM TAXES
MAXIMUM AMOUNT. Some states and municipalities charge a premium tax on
annuities. These taxes currently range from 0% to 4%, depending upon the
jurisdiction.
WHEN/HOW. We reserve the right to deduct a charge for premium taxes from your
account value or from your payment to the account at any time, but not before
there is a tax liability under state law. For example, we may deduct a charge
for premium taxes at the time of a complete withdrawal or we may reflect the
cost of premium taxes in our income phase payment rates when you commence income
phase payments. If, at your death, your beneficiary elects to receive a lump-sum
distribution, a charge may be deducted for any premium taxes paid on your behalf
for which we have not been reimbursed. If we deduct premium taxes from your
purchase payment, the amount invested in a guaranteed term will be equal to the
amount of your purchase payment reduced by any applicable premium tax.
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WITHDRAWALS
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You may withdraw all or part of your account value at any time during the
accumulation phase. Amounts are withdrawn on a pro-rata basis from each of the
guaranteed terms under the contract. You may request that we inform you in
advance of the amount payable upon a withdrawal.
STEPS FOR MAKING A WITHDRAWAL.
o Select the withdrawal amount.
1) Full withdrawal: You will receive, reduced by any required
withholding tax, your account value, plus or minus any
applicable market value adjustment, and minus any applicable
early withdrawal charge and annual maintenance fee.
2) Partial Withdrawal (Percentage or Specified Dollar Amount):
You will receive, reduced by any required withholding tax, the
amount you specify, subject to the value available in your
account. However, the amount actually withdrawn from your
account will be adjusted for any applicable early withdrawal
charge and any positive or negative market value adjustment,
and accordingly, may be more or less than the amount
requested.
o Properly complete a disbursement form and submit it to our Service
Center.
DELIVERY OF PAYMENT. Payment of withdrawal requests will be made in accordance
with the SEC's requirements. Normally, payment will be sent not later than seven
days following our receipt of the disbursement form in good order. Generally, a
request is considered to be in "good order" when it is signed, dated and made
with such clarity and completeness that we are not required to exercise any
discretion in carrying it out. However, under certain emergency situations, we
may defer payment of any withdrawal for a period not exceeding six months from
the date we receive your withdrawal request.
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TAXES, FEES AND DEDUCTIONS. Amounts withdrawn may be subject to one or more of
the following:
o Early Withdrawal Charge: Withdrawals of all or a portion of your
account may be subject to an early withdrawal charge. This is a
deferred sales charge that reimburses us for some of the sales and
administrative expenses associated with the contract. See "Fees --
Early Withdrawal Charge."
o Annual Maintenance Fee: If you make a full withdrawal from the
contract, we may deduct any applicable annual maintenance fee. See
"Fees -- Annual Maintenance Fee."
o Market Value Adjustment (MVA): The MVA reflects changes in interest
rates since the deposit period. The MVA may be positive or negative.
If you make a withdrawal before the end of a guaranteed term, we
will calculate an MVA and the amount withdrawn will be adjusted for
any applicable positive or negative MVA. See "Market Value
Adjustment."
o Tax Penalty: If you make a withdrawal before you attain age 59 1/2,
the amount withdrawn may be subject to a 10% penalty tax. See
"Taxation."
o Tax Withholding: Amounts withdrawn may be subject to withholding for
federal income taxes. See "Taxation."
All applicable fees and deductions are deducted from the amount of your
withdrawal in accordance with the terms of the contract. Any market value
adjustment applicable to your withdrawal, taxes, fees and deductions may either
increase or decrease the amount paid to you. To determine which may apply, refer
to the appropriate sections of this prospectus, contact your sales
representative or call our Service Center at the number listed in "Contract
Overview."
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SYSTEMATIC DISTRIBUTION OPTIONS
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FEATURES OF A SYSTEMATIC DISTRIBUTION OPTION
A systematic distribution option allows you to receive regular payments from the
contract without moving into the income phase. By remaining in the accumulation
phase, certain rights and flexibility not available during the income phase are
retained.
These options may be exercised at any time during the accumulation phase of the
contract.
The following systematic distribution options may be available:
o SWO--SYSTEMATIC WITHDRAWAL OPTION. SWO is a series of automatic
partial withdrawals from your account based on a payment method you
select. It is designed for those who want a periodic income while
retaining investment flexibility for amounts accumulated under the
contract.
SWO allows you to withdraw either a specified amount or a specified
percentage of the contract's value, or to withdraw amounts over a
specified time period that you determine, within certain limits
described in the contract. SWO payments can be made on a monthly or
quarterly basis, and the amount of each payment is determined by
dividing the designated annual amount by the number of payments due
each calendar year. SWO payments are withdrawn pro-rata from each of
the guaranteed terms under the contract.
Under a contract purchased as a traditional IRA, if the SWO payment
for any year is less than the required minimum distribution under
the Tax Code, the SWO payment will be increased to an amount equal
to the minimum distribution amount.
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ILIAC Multi-Rate Annuity - 134786
If you participate in SWO, you may not utilize a special withdrawal
to make additional withdrawals from the contract. See "Withdrawals
-- Special Withdrawals."
o ECO--ESTATE CONSERVATION OPTION. ECO offers the same investment
flexibility as SWO, but is designed for those who want to receive
only the minimum distribution the Tax Code requires each year.
Under ECO, we calculate the minimum distribution amount required by
law, and pay you that amount once a year. ECO is not available under
nonqualified contracts or under Roth IRA contracts. ECO payments are
withdrawn pro-rata from each of the guaranteed terms under the
contract.
We will, upon request, inform you in advance of the amount payable
under ECO.
If you participate in ECO, you may not utilize a special withdrawal
to make additional withdrawals from the contract. See "Withdrawals
-- Special Withdrawals."
o OTHER SYSTEMATIC DISTRIBUTION OPTIONS. We may add additional
systematic distribution options from time to time. You may obtain
additional information relating to any of the systematic
distribution options from your sales representative or from our
Service Center.
AVAILABILITY. If allowed by applicable law, we reserve the right to discontinue
the availability of one or all of the systematic distribution options for new
elections at any time and to change the terms of future elections.
ELIGIBILITY. To exercise one of these options you must meet certain age criteria
and your account value must meet certain minimum requirements. To determine if
you meet the age and account value criteria and to assess terms and conditions
that may apply, contact your sales representative or our Service Center.
TERMINATION. You may revoke a systematic distribution option at any time by
submitting a written request to our Service Center. However, once cancelled, you
or your spousal beneficiary may not elect SWO again. In addition, once
cancelled, ECO may not be elected again until 36 months have elapsed.
DEDUCTIONS AND TAXATION. When you elect a systematic distribution option, your
account value remains in the accumulation phase and subject to the applicable
charges and deductions described in "Fees." However, we will not apply an early
withdrawal charge or market value adjustment to any part of your account value
paid under SWO or ECO. Taking a withdrawal through a systematic distribution
option may have tax consequences. If you are concerned about tax implications
consult a tax adviser before one of these options is elected. See "Taxation."
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MARKET VALUE ADJUSTMENT (MVA)
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PURPOSE OF THE MVA. If you make an early withdrawal from the contract, we may
need to liquidate certain assets or use existing cash flow that would otherwise
be available to invest at current interest rates. The assets we may liquidate to
provide your withdrawal amount may be sold at a profit or a loss, depending upon
market conditions. To lessen this impact, certain withdrawals are subject to an
MVA.
WHAT IS AN MVA? In certain situations described below, including when you make a
withdrawal before the end of a guaranteed term, we will calculate an MVA and
either add or deduct that value from the amount withdrawn. The calculation we
use to determine the MVA reflects the change in the value of your investment due
to changes in interest rates since the start of the guaranteed term under the
contract. When these interest rates increase, the value of the investment
decreases, and the MVA amount may be negative and cause a deduction from your
withdrawal amount. Conversely, when these interest rates decrease, the value of
the investment increases, and the MVA amount may be positive and cause an
increase in your withdrawal amount.
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ILIAC Multi-Rate Annuity - 134786
CALCULATION OF THE MVA. For a further explanation of how the MVA is calculated,
see Appendix I.
WHEN DOES AN MVA APPLY? An MVA may apply when:
o You request a withdrawal before the end of a guaranteed term. In
this case the withdrawal amount may be increased or decreased by the
application of the MVA.
o You initiate income phase payments before the end of your guaranteed
term. In this case an MVA may be applied to any amounts used to
start income phase payments. While either a positive or negative MVA
may apply to amounts used to start a nonlifetime payment option,
only a positive MVA will apply to amounts used to start a lifetime
payment option. See "Income Phase."
o We terminate the contract because your account value is less than
$2,500.
o You cancel the contract.
o A death benefit is paid upon the death of the annuitant, more than
six months after the annuitant's death. See "Death Benefit."
o A death benefit is paid upon the death of a person other than the
annuitant.
WHEN DOES AN MVA NOT APPLY? An MVA will not be applied to:
o Withdrawals under the Systematic Withdrawal Option or Estate
Conservation Option as described in "Systematic Distribution
Options."
o A death benefit payable upon death of an annuitant, if paid within
six months of the annuitant's death. See "Death Benefit."
o Amounts withdrawn at the end of a guaranteed term, provided that at
least five days prior to the end of that guaranteed term we receive
your withdrawal request in writing. The MVA, however, remains
applicable to any amount you reinvest for another guaranteed term.
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DEATH BENEFIT
- --------------------------------------------------------------------------------
DURING THE ACCUMULATION PHASE
WHO RECEIVES THE BENEFIT? If you or the annuitant die during the accumulation
phase, a death benefit will be paid to your beneficiary in accordance with the
terms of the contract subject to the following:
o Upon the death of a joint contract holder, the surviving joint
contract holder will be deemed the designated beneficiary, and any
other beneficiary on record will be treated as the beneficiary at
the death of the surviving joint contract holder.
o If you are not a natural person, the death benefit will be payable
at the death of the annuitant designated under the contract or upon
any change of the annuitant.
o If you die and no beneficiary exists, the death benefit will be paid
in a lump sum to your estate.
DESIGNATING A BENEFICIARY(IES). You may designate a beneficiary on your
application or enrollment form, or by providing a written request in good order
to our Service Center. Generally, a request is considered to be in "good order"
when it is signed, dated and made with such clarity and completeness that we are
not required to exercise any discretion in carrying it out.
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ILIAC Multi-Rate Annuity - 134786
CALCULATION OF THE BENEFIT. The death benefit is calculated as of the date proof
of death and the beneficiary's right to receive the death benefit are received
in good order at our Service Center. The amount of the death benefit is
determined as follows:
o If the death benefit is paid within six months of the death of the
annuitant, the amount equals your account value.
o If the death benefit is paid more than six months after the date of
death of the annuitant, or if paid upon your death and you are not
the annuitant, it equals your account value as adjusted by any
applicable market value adjustment.
o If you are not the annuitant, the death benefit payable may be
subject to an early withdrawal charge.
BENEFIT PAYMENT OPTIONS. If you are the annuitant and you die before income
phase payments begin, or if you are not a natural person and the annuitant dies
before income phase payments begin, any beneficiary under the contract who is an
individual has several options for receiving payment of the death benefit. The
death benefit may be paid:
o In one lump-sum payment;
o In accordance with any of the available income phase payment
options. See "Income Phase --Payment Options;" or
o In certain circumstances, your beneficiary, spousal beneficiary or
joint contract holder may have the option to continue the contract
rather than receive the death benefit.
Unless your beneficiary elects otherwise, the distribution will be made into an
interest bearing account, backed by our general account, that is accessed by the
beneficiary through a checkbook feature. The beneficiary may access death
benefit proceeds at any time without penalty. Interest earned on this account
may be less than interest paid on other settlement options.
TAXATION. The Tax Code requires distribution of death benefit proceeds within a
certain period of time. Failure to begin receiving death benefit payments within
those time periods can result in tax penalties. Regardless of the method of
payment, death benefit proceeds will generally be taxed to the beneficiary in
the same manner as if you had received those payments. See "Taxation" for
additional information.
CHANGE OF BENEFICIARY. You may change the beneficiary previously designated at
any time by submitting notice in writing to our Service Center. The change will
not be effective until we receive and record it.
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INCOME PHASE
- --------------------------------------------------------------------------------
During the income phase you receive payments from your accumulated account
value. You may apply all or a portion of your account value to provide these
payments. Income phase payments are made to you or you can, subject to
availability, request that payments be deposited directly to your bank account.
After your death, we will send your designated beneficiary any income phase
payments still due. You may be required to pay taxes on all or a portion of the
income phase payments you receive. See "Taxation."
PARTIAL ENTRY INTO THE INCOME PHASE. You may elect a payment option for a
portion of your account value, while leaving the remaining portion in a
guaranteed term(s). Whether the Tax Code considers such payments taxable as
annuity payments or as withdrawals is currently unclear; therefore, you should
consult with a qualified tax adviser before electing this option.
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ILIAC Multi-Rate Annuity - 134786
INITIATING INCOME PHASE PAYMENTS. At least 30 days prior to the date you want to
start receiving income phase payments, you must notify us in writing of the
following:
o Start date;
o Payment option (see the payment options table in this section); and
o Payment frequency (i.e., monthly, quarterly, semi-annually or
annually).
The account will continue in the accumulation phase until you properly initiate
income phase payments. You may change your payment option election up to 30 days
before income phase payments begin. Once you elect for income phase payments to
begin, you may not elect a different payment option or elect to receive a
lump-sum payment.
WHAT AFFECTS INCOME PHASE PAYMENT AMOUNTS? Some of the factors that may affect
payment amounts include your age, your gender, your account value, the payment
option selected and number of guaranteed payments (if any) selected.
MINIMUM INCOME PHASE PAYMENT AMOUNTS. The payment option you select must result
in one or both of the following:
o A first payment of at least $50.
o Total yearly payments of at least $250.
If your account value is too low to meet these minimum payment amounts, you must
elect a lump-sum payment. We reserve the right to increase the minimum payment
amount based upon increases in the Consumer Price Index--Urban.
PAYMENT START DATE. Income phase payments may start any time after the first
year of the contract, and will start the later of the annuitant's 85th birthday
or the tenth anniversary of your purchase payment, unless you elect otherwise.
Regardless of your income phase payment start date, your income phase payments
will not begin until you have selected an income phase payment option. Failure
to select a payment option by your payment start date, or postponement of the
start date past the later of the annuitant's 85th birthday or the tenth
anniversary of your purchase payment, may have adverse tax consequences. You
should consult with a qualified tax adviser if you are considering either of
these courses of action.
PAYMENT LENGTH. If you choose a lifetime income phase payment option with
guaranteed payments, the age of the annuitant plus the number of years for which
payments are guaranteed must not exceed 95 at the time payments begin.
Additionally, federal income tax requirements currently applicable to
traditional IRAs provide that the period of years guaranteed may not be greater
than the joint life expectancies of the payee and his or her designated
beneficiary.
CHARGES DEDUCTED. No early withdrawal charge will be applied to amounts used to
start income phase payments, although a market value adjustment may be
applicable.
MARKET VALUE ADJUSTMENT. If your income phase payments start before the end of
your guaranteed term, a market value adjustment will be applied to any amounts
used to start income phase payments. If you select a lifetime payment option,
only a positive market value adjustment will be applied. See "Market Value
Adjustment."
DEATH BENEFIT DURING THE INCOME PHASE. Upon the death of either the annuitant or
the surviving joint annuitant, the amount payable, if any, to your beneficiary
depends on the payment option currently in force. Any amounts payable must be
paid at least as rapidly as under the method of distribution in effect at the
annuitant's death. If you die and you are not the annuitant, any remaining
payments will continue to be made to your beneficiary at least as rapidly as
under the method of distribution in effect at your death.
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ILIAC Multi-Rate Annuity - 134786
TAXATION. To avoid certain tax penalties, you or your beneficiary must meet the
distribution rules imposed by the Tax Code. See "Taxation."
INCOME PHASE PAYMENT OPTIONS
The following table lists the income phase payment options and accompanying
death benefits that may be available during the income phase. We may offer
additional payment options under the contract from time to time.
TERMS USED IN THE TABLES:
ANNUITANT: The person(s) on whose life expectancy the income phase payments are
calculated.
BENEFICIARY: The person designated to receive the death benefit payable under
the contract.
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LIFETIME INCOME PHASE PAYMENT OPTIONS
- --------------------------------------------------------------------------------
Life Income LENGTH OF PAYMENTS: For as long as the annuitant lives. It is
possible only one payment will be made should the annuitant
die prior to the second payment's due date.
DEATH BENEFIT--NONE: All payments end upon the annuitant's
death.
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Life Income-- LENGTH OF PAYMENTS: For as long as the annuitant lives, with
Guaranteed payments guaranteed for your choice of 5, 10, 15, or 20 years,
Payments or other periods specified in the contract.
DEATH BENEFIT: If the annuitant dies before we have made all
the guaranteed payments, payments will continue to the
beneficiary.
- --------------------------------------------------------------------------------
Life Income-- LENGTH OF PAYMENTS: For as long as either annuitant lives. It
Two Lives is possible only one payment will be made should both the
annuitant and joint annuitant die before the second payment's
due date.
CONTINUING PAYMENTS: When you select this option, you will
also choose either:
(A) 100%, 66 2/3%, or 50% of the payment to continue to the
surviving annuitant after the first death; or
(B) 100% of the payment to continue to the first annuitant on
the second annuitant's death, and 50% of the payment to
continue to the second annuitant on the first annuitant's
death.
DEATH BENEFIT--NONE: Payments cease upon the death of both
annuitants.
- --------------------------------------------------------------------------------
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ILIAC Multi-Rate Annuity - 134786
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LIFETIME INCOME PHASE PAYMENT OPTIONS (CONT.)
- --------------------------------------------------------------------------------
Life Income-- LENGTH OF PAYMENTS: For as long as either annuitant lives,
Two Lives-- with payments guaranteed for a minimum of 120 months, or other
Guaranteed periods specified in the contract.
Payments
CONTINUING PAYMENTS: 100% of the payment will continue to the
surviving annuitant after the first death.
DEATH BENEFIT: If both annuitants die before the guaranteed
payments have all been paid, payments will continue to the
beneficiary.
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NONLIFETIME INCOME PHASE PAYMENT OPTIONS
- --------------------------------------------------------------------------------
Nonlifetime-- LENGTH OF PAYMENTS: Payments will continue for your choice of
Guaranteed 10 through 30 years (or other periods specified in the
Payments contract).
DEATH BENEFIT: If the annuitant dies before we make all the
guaranteed payments, payment will continue to the beneficiary.
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INVESTMENTS
- --------------------------------------------------------------------------------
SEPARATE ACCOUNT. Purchase Payments received under the contract and allocated to
guaranteed terms will be deposited to and accounted for in a nonunitized
separate account that we established under Connecticut law. A nonunitized
separate account is a separate account in which you do not participate in the
performance of the assets through unit values or any other interest.
Persons allocating amounts to the nonunitized separate account do not receive a
unit value of ownership of assets accounted for in the separate account. The
assets accrue solely to our benefit and we bear the entire risk of investment
gain or loss. All of our obligations due to allocations to the nonunitized
separate account are contractual guarantees we have made and are accounted for
in the separate account. All of our general assets are available to meet the
guarantees under the contracts. However, to the extent provided for in the
applicable contracts, assets of the nonunitized separate account are not
chargeable with liabilities arising out of any other business we conduct.
Income, gains or losses of the separate account are credited to or charged
against the assets of the separate account without regard to other income, gains
or losses of the Company.
SETTING GUARANTEED INTEREST RATES. We do not have any specific formula for
setting guaranteed interest rates for the guaranteed terms. We expect the
guaranteed interest rates to be influenced by, but not necessarily correspond
to, yields on fixed income securities we acquire with amounts allocated to the
guaranteed terms when the guaranteed interest rates are set.
TYPES OF INVESTMENTS. Our assets will be invested in accordance with the
requirements established by applicable state laws regarding the nature and
quality of investments that may be made by life insurance companies and the
percentage of their assets that may be committed to any particular type of
investment. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state, and municipal
obligations, corporate bonds, preferred and common stocks, real estate
mortgages, and certain other investments.
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ILIAC Multi-Rate Annuity - 134786
We intend to invest in assets which, in the aggregate, have characteristics,
especially cash flow patterns, reasonably related to the characteristics of the
liabilities. Various immunization techniques will be used to achieve the
objective of close aggregate matching of assets and liabilities. We will
primarily invest in investment-grade fixed income securities including:
o Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the
United States Government;
o Debt securities that are rated, at the time of purchase, within the
four highest grades assigned by Moody's Investors Services, Inc.
(Aaa, Aa, A or Baa) or Standard & Poor's Corporation (AAA, AA, A or
BBB) or any other nationally recognized rating organizations;
o Other debt instruments including those issued or guaranteed by banks
or bank holding companies and of corporations, which although not
rated by Moody's, Standard & Poor's, or other nationally recognized
rating organizations, are deemed by the Company's management to have
an investment quality comparable to securities which may be
purchased as stated above; and
o Commercial paper, cash or cash equivalents, and other short-term
investments having a maturity of less than one year which are
considered by the Company's management to have investment quality
comparable to securities which may be purchased as stated above.
In addition, we may invest in futures and options. We purchase financial futures
and related options and options on securities solely for nonspeculative hedging
purposes. In the event securities prices are anticipated to decline, we may sell
a futures contract or purchase a put option on futures or securities to protect
the value of securities held in or to be sold for the nonunitized separate
account. Similarly, if securities prices are expected to rise, we may purchase a
futures contract or a call option against anticipated positive cash flow or we
may purchase options on securities.
WHILE THIS SECTION GENERALLY DESCRIBES OUR INVESTMENT STRATEGY, WE ARE NOT
OBLIGATED TO INVEST THE ASSETS ATTRIBUTABLE TO THE CONTRACT ACCORDING TO ANY
PARTICULAR STRATEGY, EXCEPT AS MAY BE REQUIRED BY CONNECTICUT AND OTHER STATE
INSURANCE LAWS. THE GUARANTEED INTEREST RATES WE ESTABLISH NEED NOT RELATE TO
THE INVESTMENT PERFORMANCE OF THE NONUNITIZED SEPARATE ACCOUNT.
- --------------------------------------------------------------------------------
TAXATION
- --------------------------------------------------------------------------------
INTRODUCTION
This section discusses our understanding of current federal income tax laws
affecting the contract. You should keep the following in mind when reading it:
o Your tax position (or the tax position of the designated
beneficiary, as applicable) determines federal taxation of amounts
held or paid out under the contract;
o Tax laws change. It is possible that a change in the future could
affect contracts issued in the past;
o This section addresses federal income tax rules and does not discuss
federal estate and gift tax implications, state and local taxes,
foreign taxes or any other tax provisions; and
o We do not make any guarantee about the tax treatment of the contract
or transactions involving the contract.
We do not intend this information to be tax advice. For advice about the effect
of federal income taxes or any other taxes on amounts held or paid out under the
contract, consult a tax adviser. For more comprehensive information, contact the
Internal Revenue Service ("IRS").
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ILIAC Multi-Rate Annuity - 134786
TYPES OF CONTRACTS: NON-QUALIFIED OR QUALIFIED
The Contract may be purchased on a non-tax-qualified basis or purchased on a
tax-qualified basis. Non-qualified contracts are purchased with after tax
contributions and are not related to retirement plans that receive special
income tax treatment under the Code.
Qualified Contracts are designed for use by individuals whose premium payments
are comprised solely of proceeds from and/or contributions under retirement
plans that are intended to qualify as plans entitled to special income tax
treatment under Sections 401(a), 403(a), 403(b), 408, 408A or 457 of the Code.
The ultimate effect of federal income taxes on the amounts held under a
Contract, or annuity payments, depends on the type of retirement plan, on the
tax and employment status of the individual concerned, and on your tax status.
In addition, certain requirements must be satisfied in purchasing a qualified
Contract with proceeds from a tax-qualified plan in order to continue receiving
favorable tax treatment. Some retirement plans are subject to additional
distribution and other requirements that are not incorporated into our Contract.
Because the Plan is not part of the Contract, we are not bound by any Plan's
terms or conditions. Contract owners, participants and beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the Contract comply with applicable law. Therefore,
you should seek competent legal and tax advice regarding the suitability of a
Contract for your particular situation. The following discussion assumes that
qualified Contracts are purchased with proceeds from and/or contributions under
retirement plans that qualify for the intended special federal income tax
treatment.
TAXATION OF NON-QUALIFIED CONTRACTS
TAXATION PRIOR TO DISTRIBUTION
We believe that if you are a natural person you will generally not be
taxed on increases in the value of a non-qualified Contract until a distribution
occurs or until annuity payments begin. This assumes that the Contract will
qualify as an annuity contract for federal income tax purposes. For these
purposes, the agreement to assign or pledge any portion of the contract value
generally will be treated as a distribution. In order to receive deferral of
taxation, the following requirements must be satisfied:
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity
contract for federal income tax purposes, the Code requires any non-qualified
Contract to contain certain provisions specifying how your interest in the
Contract will be distributed in the event of your death. The non-qualified
Contracts contain provisions that are intended to comply with these Code
requirements, although no regulations interpreting these requirements have yet
been issued. We intend to review such distribution provisions and modify them if
necessary to assure that they comply with the applicable requirements when such
requirements are clarified by regulation or otherwise. See "Death Benefit "for
additional information on required distributions from non-qualified contracts.
NON-NATURAL PERSONS. The owner of any annuity contract who is not a
natural person generally must include in income any increase in the excess of
the contract value over the "investment in the contract" (generally, the
premiums or other consideration you paid for the contract less any nontaxable
withdrawals) during the taxable year. There are some exceptions to this rule and
a prospective contract owner that is not a natural person may wish to discuss
these with a tax adviser.
DELAYED ANNUITY STARTING DATE. If the Contract's annuity starting
date occurs (or is scheduled to occur) at a time when the annuitant has reached
an advanced age (e.g., age 85), it is possible that the Contract would not be
treated as an annuity for federal income tax purposes. In that event, the income
and gains under the Contract could be currently includible in your income.
TAXATION OF DISTRIBUTIONS
GENERAL. When a withdrawal from a non-qualified Contract occurs, the
amount received will be treated as ordinary income subject to tax up to an
amount equal to the excess (if any) of the contract value (unreduced by the
amount of any surrender charge) immediately before the distribution over the
contract owner's investment in the contract at that time. Investment in the
contract is generally equal to the amount of all contributions to the contract,
plus amounts previously included in your gross income as the result of certain
assignments or gifts, less the aggregate amount of non-taxable distributions
previously made. The contract value that applies for this purpose is unclear in
some respects. For example, the market value adjustment could increase the
contract value that applies. Thus, the income on the Contracts could be higher
than the amount of income that would be determined without regard to such
benefits. As a result, you could have higher amounts of income than will be
reported to you.
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ILIAC Multi-Rate Annuity - 134786
In the case of a surrender under a non-qualified Contract, the amount received
generally will be taxable only to the extent it exceeds the contract owner's
cost basis in the contract.
10% PENALTY TAX. A distribution from a non-qualified Contract may be
subject to a federal tax penalty equal to 10% of the amount treated as income.
In general, however, there is no penalty on distributions:
o made on or after the taxpayer reaches age 59 1/2;
o made on or after the death of a contract owner;
o attributable to the taxpayer's becoming disabled; or
o made as part of a series of substantially equal periodic
payments for the life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special rules
may be applicable in connection with the exceptions enumerated above. A tax
adviser should be consulted with regard to exceptions from the penalty tax.
TAX-FREE EXCHANGES. Section 1035 of the Tax Code permits the
exchange of a life insurance, endowment or annuity contract for an annuity
contract on a tax-free basis. In such instance, the "investment in the contract"
in the old contract will carry over to the new contract. You should consult with
your tax advisor regarding procedures for making Section 1035 exchanges.
If your Contract is purchased through a tax-free exchange of a life insurance,
endowment or annuity contract that was purchased prior to August 14, 1982, then
any distributions other than annuity payments will be treated, for tax purposes,
as coming:
o First, from any remaining "investment in the contract" made
prior to August 14, 1982 and exchanged into the Contract;
o Next, from any "income on the contract" attributable to the
investment made prior to August 14, 1982;
o Then, from any remaining "income on the contract"; and
o Lastly, from any remaining "investment in the contract".
The IRS has concluded that in certain instances, the partial exchange of a
portion of one annuity contract for another contract will be tax-free. However,
the IRS has reserved the right to treat transactions it considers abusive as
ineligible for favorable partial 1035 tax-free exchange treatment. It is not
certain whether the IRS would treat an immediate withdrawal or annuitization
after a partial exchange as abusive. In addition, it is unclear how the IRS will
treat a partial exchange from a life insurance, endowment, or annuity contract
directly into an immediate annuity. Currently, we will accept a partial 1035
exchange from a non-qualified annuity into a deferred annuity or an immediate
annuity as a tax-free transaction unless we believe that we would be expected to
treat the transaction as abusive. We are not responsible for the manner in which
any other insurance company, for tax reporting purposes, or the IRS, with
respect to the ultimate tax treatment, recognizes or reports a partial exchange.
We strongly advise you to discuss any proposed 1035 exchange with your tax
advisor prior to proceeding with the transaction.
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ILIAC Multi-Rate Annuity - 134786
TAXATION OF ANNUITY PAYMENTS. Although tax consequences may vary
depending on the payment option elected under an annuity contract, a portion of
each annuity payment is generally not taxed and the remainder is taxed as
ordinary income. The non-taxable portion of an annuity payment is generally
determined in a manner that is designed to allow you to recover your investment
in the contract ratably on a tax-free basis over the expected stream of annuity
payments, as determined when annuity payments start. Once your investment in the
contract has been fully recovered, however, the full amount of each annuity
payment is subject to tax as ordinary income. The tax treatment of partial
annuitizations is unclear. We currently treat any partial annuitizations, as
withdrawals rather than as annuity payments. Please consult your tax adviser
before electing a partial annuitization.
DEATH BENEFITS. Amounts may be distributed from a Contract because
of your death or the death of the annuitant. Generally, such amounts are
includible in the income of the recipient as follows: (i) if distributed in a
lump sum, they are taxed in the same manner as a surrender of the Contract, or
(ii) if distributed under a payment option, they are taxed in the same way as
annuity payments. Special rules may apply to amounts distributed after a
Beneficiary has elected to maintain Contract value and receive payments
ASSIGNMENTS AND OTHER TRANSFERS. A transfer, pledge or assignment of
ownership of a Contract, or the designation of an annuitant or payee other than
an owner, may result in certain tax consequences to you that are not discussed
herein. A contract owner contemplating any such transfer, pledge, assignment, or
designation or exchange, should consult a tax adviser as to the tax
consequences.
IMMEDIATE ANNUITIES. Under section 72 of the Tax Code, an immediate
annuity means an annuity (1) which is purchased with a single premium, (2) with
annuity payments starting within one year from the date of purchase, and (3)
which provides a series of substantially equal periodic payments made annually
or more frequently. Treatment as an immediate annuity will have significance
with respect to exceptions from the 10% early withdrawal penalty, to contracts
owned by non-natural persons, and for certain policy exchanges.
MULTIPLE CONTRACTS. The tax law requires that all non-qualified
deferred annuity contracts that are issued by a company or its affiliates to the
same contract owner during any calendar year be treated as one non-qualified
deferred annuity contract for purposes of determining the amount includible in
such contract owner's income when a taxable distribution occurs.
WITHHOLDING. We will withhold and remit to the U.S. government a
part of the taxable portion of each distribution made under a Contract unless
the distributee notifies us at or before the time of the distribution that he or
she elects not to have any amounts withheld. Withholding will be mandatory,
however, if the distributee fails to provide a valid taxpayer identification
number or if we are notified by the IRS that the taxpayer identification number
we have on file is incorrect. The withholding rates applicable to the taxable
portion of periodic annuity payments are the same as the withholding rates
generally applicable to payments of wages. In addition, a 10% withholding rate
applies to the taxable portion of non-periodic payments. Regardless of whether
you elect not to have federal income tax withheld, you are still liable for
payment of federal income tax on the taxable portion of the payment.
TAXATION OF QUALIFIED CONTRACTS
GENERAL
The Contracts are designed for use with several types of qualified
plans. The tax rules applicable to participants in these qualified plans vary
according to the type of plan and the terms and conditions of the plan itself.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from:
contributions in excess of specified limits; distributions before age 59 1/2
(subject to certain exceptions); distributions that do not conform to specified
commencement and minimum distribution rules; and in other specified
circumstances. Therefore, no attempt is made to provide more than general
information about the use of the Contracts with the various types of qualified
retirement plans. Contract owners, annuitants, and beneficiaries are cautioned
that the rights of any person to any benefits under these qualified retirement
plans may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract, but we shall not be
bound by the terms and conditions of such plans to the extent such terms
contradict the Contract, unless the Company consents.
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ILIAC Multi-Rate Annuity - 134786
You will not generally pay taxes on earnings from the annuity contract described
in this prospectus until they are withdrawn. When an annuity contract is used to
fund one of these tax qualified retirement arrangements, you should know that
the annuity contract does not provide any additional tax deferral of earnings
beyond the tax deferral provided by the tax-qualified retirement arrangement.
Tax-qualified retirement arrangements under Tax Code sections 401(a), 401(k),
403(a), 403(b) or governmental 457 plans also generally defer payment of taxes
on earnings until they are withdrawn (or in the case of a non-governmental 457
plan, paid or made available to you or a designated beneficiary). However,
annuities do provide other features and benefits which may be valuable to you.
You should discuss your alternatives with your local representative.
DISTRIBUTIONS - GENERAL
For qualified plans under Section 401(a) and 403(b), the Code
requires that distributions generally must commence no later than the later of
April 1 of the calendar year following the calendar year in which the plan
participant for whose benefit the contract is purchased (i) reaches age 70 1/2
or (ii) retires, and must be made in a specified form or manner. If the plan
participant is a "5 percent owner" (as defined in the Code), distributions
generally must begin no later than April 1 of the calendar year following the
calendar year in which the plan participant reaches age 70 1/2. For IRAs
described in Section 408, distributions generally must commence no later than by
April 1 of the calendar year following the calendar year in which the individual
contract owner reaches age 70 1/2. Roth IRAs under Section 408A do not require
distributions at any time before the contract owner's death. Please note that
required minimum distributions under qualified Contracts may be subject to
surrender charges and/or market value adjustment, in accordance with the terms
of the Contract. This could affect the amount that must be taken from the
Contract in order to satisfy required minimum distributions.
DIRECT ROLLOVERS
If the Contract is used in connection with a pension,
profit-sharing, or annuity plan qualified under sections 401(a) or 403(a) of the
Code, or is a tax-sheltered annuity under section 403(b) of the Code, or is used
with an eligible deferred compensation plan that has a government sponsor and
that is qualified under section 457(b), any "eligible rollover distribution"
from the Contract will be subject to the direct rollover and mandatory
withholding requirements. An eligible rollover distribution generally is any
taxable distribution from a qualified pension plan under section 401(a) of the
Code, qualified annuity plan under section 403(a) of the Code, section 403(b)
annuity or custodial account, or an eligible section 457(b) deferred
compensation plan that has a government sponsor, excluding certain amounts (such
as minimum distributions required under section 401(a)(9) of the Code,
distributions which are part of a "series of substantially equal periodic
payments" made for life or a specified period of 10 years or more, or hardship
distributions as defined in the tax law).
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, you cannot elect out of withholding with respect to an eligible
rollover distribution. However, this 20% withholding will not apply if, instead
of receiving the eligible rollover distribution, you elect to have it directly
transferred to certain qualified plans. Prior to receiving an eligible rollover
distribution, you will receive a notice (from the plan administrator or us)
explaining generally the direct rollover and mandatory withholding requirements
and how to avoid the 20% withholding by electing a direct rollover.
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS
Section 401(a) of the Code permits corporate employers to establish
various types of retirement plans for employees, and permits self-employed
individuals to establish these plans for themselves and their employees. These
retirement plans may permit the purchase of the Contracts to accumulate
retirement savings under the plans. Adverse tax or other legal consequences to
the plan, to the participant, or to both may result if this Contract is assigned
or transferred to any individual as a means to provide benefit payments, unless
the plan complies with all legal requirements applicable to such benefits before
transfer of the Contract. Employers intending to use the Contract with such
plans should seek competent advice.
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INDIVIDUAL RETIREMENT ANNUITIES - GENERAL
Section 408 of the Code permits eligible individuals to contribute
to an individual retirement program known as an "Individual Retirement Annuity"
or "IRA." These IRAs are subject to limits on the amount that can be
contributed, the deductible amount of the contribution, the persons who may be
eligible, and the time when distributions commence. Also, distributions from
certain other types of qualified retirement plans may be "rolled over" on a
tax-deferred basis into an IRA. Also, amounts in another IRA or individual
retirement account can be rolled over or transferred tax-free to an IRA. There
are significant restrictions on rollover or transfer contributions from Savings
Incentive Match Plans for Employees (SIMPLE), under which certain employers may
provide contributions to IRAs on behalf of their employees, subject to special
restrictions. Employers may establish Simplified Employee Pension (SEP) Plans to
provide IRA contributions on behalf of their employees. If you make a tax-free
rollover of a distribution from any of these IRAs, you may not make another
tax-free rollover from the IRA within a 1-year period. Sales of the Contract for
use with IRAs may be subject to special requirements of the IRS.
INDIVIDUAL RETIREMENT ANNUITIES - DISTRIBUTIONS
All distributions from a traditional IRA are taxed as received
unless either one of the following is true:
o The distribution is rolled over to a plan eligible to receive
rollovers or to another traditional IRA or certain qualified
plans in accordance with the Tax Code; or
o You made after-tax contributions to the IRA. In this case, the
distribution will be taxed according to rules detailed in the
Tax Code.
To avoid certain tax penalties, you and any designated beneficiary must also
meet the minimum distribution requirements imposed by the Tax Code. The
requirements do not apply to Roth IRA contracts while the owner is living. These
rules may dictate the following:
o Start date for distributions;
o The time period in which all amounts in your account(s) must
be distributed; and
o Distribution amounts.
Generally, you must begin receiving distributions from a traditional IRA by
April 1 of the calendar year following the calendar year in which you attain age
70 1/2. We must pay out distributions from the contract over a period not
extending beyond one of the following time periods:
o Over your life or the joint lives of you and your designated
beneficiary; or
o Over a period not greater than your life expectancy or the
joint life expectancies of you and your designated
beneficiary.
The amount of each periodic distribution must be calculated in accordance with
IRS regulations. If you fail to receive the minimum required distribution for
any tax year, a 50% excise tax may be imposed on the required amount that was
not distributed.
The following applies to the distribution of death proceeds under 408(b) and
408A (Roth IRA - See below) plans. Different distribution requirements apply
after your death.
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ILIAC Multi-Rate Annuity - 134786
If your death occurs on or after you begin receiving minimum distributions under
the contract, distributions must be made at least as rapidly as under the method
in effect at the time of your death. Code section 401(a)(9) provides specific
rules for calculating the required minimum distributions at your death. The
death benefit under the contract and also certain other contract benefits, such
as living benefits, may affect the amount of the required minimum distribution
that must be taken.
If your death occurs before you begin receiving minimum distributions under the
contract, your entire balance must be distributed by December 31 of the calendar
year containing the fifth anniversary of the date of your death. For example, if
you die on September 1, 2005, your entire balance must be distributed to the
designated beneficiary by December 31, 2010. However, if distributions begin by
December 31 of the calendar year following the calendar year of your death, and
you have named a designated beneficiary, then payments may be made over either
of the following time-frames:
o Over the life of the designated beneficiary; or
o Over a period not extending beyond the life expectancy of the
designated beneficiary.
If the designated beneficiary is your spouse, distributions must begin on or
before the later of the following:
o December 31 of the calendar year following the calendar year
of your death; or
o December 31 of the calendar year in which you would have
attained age 70 1/2.
ROTH IRAS - GENERAL
Section 408A of the Code permits certain eligible individuals to
contribute to a Roth IRA. Contributions to a Roth IRA, which are subject to
limits on the amount of the contributions and the persons who may be eligible to
contribute, are not deductible, and must be made in cash or as a rollover or
transfer from another Roth IRA or other IRA. Certain qualifying individuals may
convert an IRA, SEP, or SIMPLE IRA, to a Roth IRA. Such rollovers and
conversions are subject to tax, and other special rules may apply. If you make a
tax-free rollover of a distribution from a Roth IRA to another Roth IRA, you may
not make another tax-free rollover from the Roth IRA from which the rollover was
made within a 1-year period. A 10% penalty may apply to amounts attributable to
a conversion to a Roth IRA if the amounts are distributed during the five
taxable years beginning with the year in which the conversion was made.
ROTH IRAS - DISTRIBUTIONS
A qualified distribution from a Roth IRA is not taxed when it is
received. A qualified distribution is a distribution:
o Made after the five-taxable year period beginning with the
first taxable year for which a contribution was made to a Roth
IRA of the owner; and
o Made after you attain age 59 1/2, die, become disabled as
defined in the Tax Code, or for a qualified first-time home
purchase.
If a distribution is not qualified, it will be taxable to the extent of the
accumulated earnings. Under special ordering rules, a partial distribution will
first be treated generally as a return of contributions which is not taxable and
then as taxable accumulated earnings.
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ILIAC Multi-Rate Annuity - 134786
TAX SHELTERED ANNUITIES - GENERAL
The Contracts may be used by individuals whose premium payments are
comprised solely of proceeds from and/or contributions under retirement plans
that are intended to qualify as plans entitled to special income tax treatment
under Code section 403(b) plans. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from their
gross income the premium payments made, within certain limits, to a Contract
that will provide an annuity for the employee's retirement. Special favorable
tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from: contributions in excess
of specified limits; distributions before age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; and other specified circumstances. 403(b) plans may
be subject to additional distribution and other requirements that are not
incorporated into our Contract.
In addition, the Treasury proposed 403(b) regulations in November, 2004 which,
if finalized, do not take effect until after 2005. These proposed regulations
may not be relied upon until they become final. The proposed regulations include
rules governing the ability of a 403(b) plan to be terminated which would
entitle a participant to a distribution, a revocation of IRS Revenue Ruling
90-204 which would increase restrictions on a participant's right to transfer
his or her 403(b) account, the imposition of withdrawal restrictions on
non-salary reduction amounts, as well as other changes. As a result, no attempt
is made to provide more than general information about the use of the Contracts
with 403(b) plans. Contract owners, annuitants, and beneficiaries are cautioned
that the rights of any person to any benefits under these 403(b) plans may be
subject to the terms and conditions of the plans themselves, regardless of the
terms and conditions of the Contract, but we are not bound by the terms and
conditions of such plans to the extent such terms contradict the Contract.
Contract owners, participants and beneficiaries are responsible for determining
that contributions, distributions and other transactions with respect to the
Contract comply with applicable law. You should seek competent legal and tax
advice regarding the suitability of a Contract for your particular situation.
The following discussion assumes that Contracts are purchased with proceeds from
and/or contributions under 403(b) plans that qualify for the intended special
federal income tax treatment.
TAX SHELTERED ANNUITIES - DISTRIBUTIONS
All distributions from Section 403(b) plans are taxed as received
unless either of the following is true:
o The distribution is rolled over to another plan eligible to
receive rollovers or to a traditional individual retirement
annuity/account (IRA) in accordance with the Tax Code; or
o You made after-tax contributions to the plan. In this case,
the amount will be taxed according to rules detailed in the
Tax Code.
Generally, you must begin receiving distributions by April 1 of the calendar
year following the calendar year in which you attain age 70 1/2 or retire,
whichever occurs later, unless you had amounts under the contract as of December
31, 1986. In this case, distribution of these amounts generally must begin by
the end of the calendar year in which you attain age 75 or retire, if later. The
death benefit under the contract and also certain other contract benefits, such
as the living benefits, may affect the amount of the required minimum
distribution that must be taken. If you take any distributions in excess of the
required minimum amount, then special rules require that some or all of the
December 31, 1986 balance be distributed earlier.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the federal tax
consequences under the Contracts are not exhaustive, and special rules are
provided with respect to other tax situations not discussed in this prospectus.
Further, the federal income tax consequences discussed herein reflect our
understanding of current law, and the law may change. Federal estate and state
and local estate, inheritance and other tax consequences of ownership or receipt
of distributions under a Contract depend on the individual circumstances of each
contract owner or recipient of the distribution. A competent tax adviser should
be consulted for further information.
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POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is
always the possibility that the tax treatment of the Contracts could change by
legislation or other means. It is also possible that any change could be
retroactive (that is, effective before the date of the change). You should
consult a tax adviser with respect to legislative developments and their effect
on the Contract.
FEDERAL INCOME TAX WITHHOLDING
We will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Contract unless the
distributee notifies us at or before the time of the distribution that he or she
elects not to have any amounts withheld. In certain circumstances, we may be
required to withhold tax, as explained above. The withholding rates applicable
to the taxable portion of periodic annuity payments (other than eligible
rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. In addition, a 10% withholding rate applies to
the taxable portion of non-periodic payments (including withdrawals prior to the
annuity starting date) and conversions of, and rollovers from, non-Roth IRAs to
Roth IRAs. Regardless of whether you elect not to have federal income tax
withheld, you are still liable for payment of federal income tax on the taxable
portion of the payment. As discussed above, the withholding rate applicable to
eligible rollover distributions is 20%.
ASSIGNMENTS
Adverse tax consequences to the plan and/or to you may result if
your beneficial interest in the contract is assigned or transferred to persons
other than: a plan participant as a means to provide benefit payments; an
alternate payee under a qualified domestic relations order in accordance with
code section 414(p); or to the Company as collateral for a loan.
TAXATION OF COMPANY
We are taxed as a life insurance company under the Tax Code. The
Separate Account is not a separate entity from us. Therefore, it is not taxed
separately as a "regulated investment company," but is taxed as part of the
Company.
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OTHER TOPICS
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THE COMPANY
We are a stock life insurance company organized under the insurance laws of the
State of Connecticut in 1976 and an indirect wholly-owned subsidiary of ING
Groep, N.V., a global financial institution active in the fields of insurance,
banking and asset management.
Our principal executive offices are located at:
151 Farmington Avenue
Hartford, Connecticut 06156
CONTRACT DISTRIBUTION
The Company's subsidiary, ING Financial Advisers, LLC, serves as the principal
underwriter for the contracts. ING Financial Advisers, LLC, a Delaware limited
liability Company, is registered as a broker-dealer with the SEC. ING Financial
Advisers, LLC is also a member of the National Association of Securities
Dealers, Inc. (NASD) and the Securities Investor Protection Corporation. ING
Financial Advisers, LLC's principal office is located at 151 Farmington Avenue,
Hartford, Connecticut 06156.
The contracts are offered to the public by individuals who are registered
representatives of ING Financial Advisers, LLC or of other broker-dealers which
have entered into a selling arrangement with ING Financial Advisers, LLC. We
refer to ING Financial Advisers, LLC and the other broker-dealers selling the
contracts as "distributors." All registered representatives selling the
contracts must also be licensed as insurance agents for the Company.
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ILIAC Multi-Rate Annuity - 134786
Broker-dealers which have or may enter into selling agreements with ING
Financial Advisers, LLC include the following broker-dealers which are
affiliated with the Company:
Bancnorth Investment Group, Inc.
Baring Investment Services, Inc.
Directed Services, Inc.
Financial Network Investment Corporation
Guaranty Brokerage Services, Inc.
ING America Equities, Inc.
ING DIRECT Securities, Inc.
ING Financial Markets, LLC
ING Financial Partners, Inc.
ING Funds Distributor, LLC
ING Investment Management Services, LLC
Multi-Financial Securities Corporation
PrimeVest Financial Services, Inc.
Systematized Benefits Administrators, Inc.
Registered representatives of distributors who solicit sales of the contracts
typically receive a portion of the compensation paid to the distributor in the
form of commissions or other compensation, depending upon the agreement between
the distributor and the registered representative. This compensation, as well as
other incentives or payments, is not paid directly by contract owners or the
separate account. We intend to recoup this compensation and other sales expenses
paid to distributors through fees and charges imposed under the contracts.
COMMISSION PAYMENTS. Persons who offer and sell the contracts may be paid a
commission. The maximum percentage amount that may be paid with respect to a
given purchase payment is the first-year percentage which ranges from 0% to a
maximum of 6% of the first year of payments to an account. Renewal commissions
paid on payments made after the first year and asset-based service fees may also
be paid. In addition, we may also pay ongoing annual compensation of up to 40%
of the commissions paid during the year in connection with certain premium
received during that year, if the registered representative attains a certain
threshold of sales of Company contracts. Individual registered representatives
may receive all or a portion of compensation paid to their distributor,
depending upon the firm's practices. Commissions and annual payments, when
combined, could exceed 6% of total premium payments. To the extent permitted by
SEC and NASD rules and other applicable laws and regulations, we may also pay or
allow other promotional incentives or payments in the form of cash payments or
other compensation to distributors, which may require the registered
representative to attain a certain threshold of sales of Company products.
We may also enter into special compensation arrangements with certain
distributors based on those firms' aggregate or anticipated sales of the
contracts or other criteria. These special compensation arrangements will not be
offered to all distributors, and the terms of such arrangements may differ among
distributors based on various factors. Any such compensation payable to a
distributor will not result in any additional direct charge to you by us.
Some sales personnel may receive various types of non-cash compensation as
special sales incentives, including trips, and we may also pay for some sales
personnel to attend educational and/or business seminars. Any such compensation
will be paid in accordance with SEC and NASD rules. Management personnel of the
Company, and of its affiliated broker-dealers, may receive additional
compensation if the overall amount of investments in funds advised by the
Company or its affiliates meets certain target levels or increases over time.
Compensation for certain management personnel, including sales management
personnel, may be enhanced if the overall amount of investments in the contracts
and other products issued or advised by the Company or its affiliates increases
over time. Certain sales management personnel may also receive compensation that
is a specific percentage of the commissions paid to distributors or of purchase
payments received under the contracts.
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ILIAC Multi-Rate Annuity - 134786
In addition to direct cash compensation for sales of contracts described above,
distributors may also be paid additional compensation or reimbursement of
expenses for their efforts in selling contracts to you and other customers.
These amounts may include:
o Wholesaling fees calculated as a percentage of the commissions paid
to distributors or of purchase payments received under the
contracts;
o Marketing allowances;
o Education and training allowances to facilitate our attendance at
certain educational and training meetings to provide information and
training about our products, including holding training programs at
our expense;
o Sponsorship payments to support attendance at meetings by registered
representatives who sell our products;
o Reimbursement for the cost of attendance by registered
representatives at conventions that we sponsor;
o Loans or advances of commissions in anticipation of future receipt
of premiums (a form of lending to registered representatives). These
loans may have advantageous terms, such as reduction or elimination
of the interest charged on the loan and/or forgiveness of the
principal amount of the loan, which may be conditioned on contract
sales.
We pay dealer concessions, wholesaling fees, overrides, bonuses, other
allowances and benefits and the costs of all other incentives or training
programs from our resources, which include the fees and charges imposed under
the contracts.
The following is a list of the top 25 selling firms that, during 2004, received
the most compensation, in the aggregate, from us in connection with the sale of
registered variable annuity contracts issued by the Company, ranked by total
dollars received.
1. Lincoln Investment Planning Inc
2. Symetra Investment Services, Inc.
3. SunAmerica Securities, Inc.
4. Edward D. Jones & Co LP
5. Securities America Inc.
6. ING Financial Partners, Inc.
7. Financial Network Investment Corp/FN
8. Valor Insurance Agency Inc
9. Huckin Financial Group, Inc.
10. National Planning Corporation
11. Walnut Street Securities Inc.
12. NIA Securities
13. MML Investors Services, Inc.
14. Cadaret Grant & Co. Inc
15. ProEquities Inc
16. Investment Professionals Inc
17. Jefferson Pilot Securities Corporation
18. McGinn Smith & Co., Inc.
19. Linsco Private Ledger Corp
20. Queens Road Securities
21. A G Edwards & Sons
22. Horan Securities Inc
23. Lincoln Financial Advisors Corporation
24. Securities Service Network Inc
25. Woodbury Financial Services Inc.
If the amounts paid to ING Financial Advisers, LLC, were included in the table
above, the amounts paid to ING Financial Advisers, LLC would be at the top of
the list.
This is a general discussion of the types and levels of compensation paid by us
for the sale of our variable annuity contracts. It is important for you to know
that the payment of volume or sales-based compensation to a distributor or
registered representative may provide that registered representative a financial
incentive to promote our contracts over those of another Company, and may also
provide a financial incentive to promote one of our contracts over another.
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ILIAC Multi-Rate Annuity - 134786
The names of the distributor and the registered representative responsible for
your account are stated in your enrollment materials.
THIRD PARTY COMPENSATION ARRANGEMENTS. Occasionally:
o Commissions and fees may be paid to distributors affiliated or
associated with the contract holder, you and/or other contract
participants; and/or
o The Company may enter into agreements with entities associated with
the contract holder, you and/or other participants. Through such
agreements, we may pay the entities for certain services in
connection with administering the contract.
In both these circumstances there may be an understanding that the distributor
or entities would endorse us as a provider of the contract. You will be notified
if you are purchasing a contract that is subject to these arrangements.
CONTRACT MODIFICATION
Only an authorized officer of the Company may change the terms of the contract.
We may change the contract as required by federal or state law. In addition, we
may, upon 30 days' written notice to the contract holder, make other changes to
group contracts that would apply only to individuals who become participants
under that contract after the effective date of such changes. If the group
contract holder does not agree to a change, we reserve the right to refuse to
establish new accounts under the contract. Certain changes will require the
approval of appropriate state or federal regulatory authorities.
TRANSFER OF OWNERSHIP; ASSIGNMENT
Your rights under a nonqualified contract may be assigned or transferred. An
assignment of a contract will only be binding on us if it is made in writing and
sent to and accepted by us at our Service Center. We will use reasonable
procedures to confirm the assignment is authentic, including verification of
signature. If we fail to follow our own procedures, we will be liable for any
losses to you directly resulting from the failure. Otherwise, we are not
responsible for the validity of any assignment. The rights of the contract
holder and the interest of the annuitant and any beneficiary will be subject to
the rights of any assignee we have on our records. We reserve the right not to
accept any assignment or transfer to a non-natural person. In some cases, an
assignment may have adverse tax consequences. You should consult a tax adviser.
INVOLUNTARY TERMINATIONS
We reserve the right to terminate any account with a value of $2,500 or less
immediately following a partial withdrawal. However, an IRA may only be closed
out when payments to the contract have not been received for a 24-month period
and the paid-up annuity benefit at maturity would be less than $20 per month. If
such right is exercised, you will be given 90 days' advance written notice. No
early withdrawal charge will be deducted for involuntary terminations. We do not
intend to exercise this right in cases where the account value is reduced to
$2,500 or less solely due to investment performance.
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 2004 and 2003, and for each of the three years in the period
ended December 31, 2004 appearing in the Company's Annual Report on Form 10-K
for the year ended December 31, 2004, have been audited by Ernst & Young LLP,
independent registered public accounting firm, as set forth in their reports
thereon are included and incorporated herein by reference. Such consolidated
financial statements and schedules referred to above are incorporated herein
by reference in reliance upon such reports given on the authority of such
firm as experts in accounting and auditing.
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ILIAC Multi-Rate Annuity - 134786
LEGAL MATTERS
We are, or may be in the future, a defendant in various legal proceedings in
connection with the normal conduct of our insurance operations. Some of these
cases may seek class action status and may include a demand for punitive damages
as well as for compensatory damages. In the opinion of management, the ultimate
resolution of any existing legal proceeding is not likely to have a material
adverse effect on our ability to meet our obligations under the contract.
ING Financial Advisers, LLC, the principal underwriter and distributor of the
contract, (the "distributor"), is a party to threatened or pending
lawsuits/arbitration that generally arise from the normal conduct of business.
Suits against the distributor sometimes include claims for substantial
compensatory, consequential or punitive damages and other types of relief. In a
number of pending cases, claims have been made that a former registered
representative of the distributor converted client funds to the representative's
personal use. ING Financial Advisers, LLC is not involved in any legal
proceeding which, in the opinion of management, is likely to have material
adverse effect on its ability to distribute the contract.
FURTHER INFORMATION
This prospectus does not contain all of the information contained in the
registration statement of which this prospectus is a part. Portions of the
registration statement have been omitted from this prospectus as allowed by the
Securities and Exchange Commission ("SEC"). You may obtain the omitted
information from the offices of the SEC, as described below. We are required by
the Securities Exchange Act of 1934 to file periodic reports and other
information with the SEC. You may inspect or copy information concerning the
Company at the Public Reference Room of the SEC at:
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
You may also obtain copies of these materials at prescribed rates from the
Public Reference Room of the above office. You may obtain information on the
operation of the Public Reference Room by calling the SEC at either
1-800-SEC-0330 or 1-202-942-8090. You may also find more information about the
Company by visiting the Company's homepage on the internet at
www.ingretirementplans.com.
A copy of the Company's annual report on Form 10-K for the year ended December
31, 2004 accompanies this prospectus. We refer to Form 10-K for a description of
the Company and its business, including financial statements. We intend to send
contract holders annual account statements and other such legally-required
reports. We do not anticipate such reports will include periodic financial
statements or information concerning the Company.
You can find this prospectus and other information the Company files
electronically with the SEC on the SEC's web site at www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We have incorporated by reference the Company's latest Annual Report on Form
10-K, as filed with the SEC and in accordance with the Securities and Exchange
Act of 1934. The Annual Report must accompany this prospectus. Form 10-K
contains additional information about the Company including certified financial
statements for the latest fiscal year. We were not required to file any other
reports pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act
since the end of the fiscal year covered by that Form 10-K. The registration
statement for this prospectus incorporates some documents by reference. We will
provide a free copy of any such documents upon the written or oral request of
anyone who has received this prospectus. We will not include exhibits to those
documents unless they are specifically incorporated by reference into the
document. Direct requests to:
28
ILIAC Multi-Rate Annuity - 134786
ING
Customer Service Center
P.O. Box 9271
Des Moines, Iowa 50306-9271
1-800-531-4547
INQUIRIES
You may contact us directly by writing or calling us at the address or phone
number shown above.
ILIAC Multi-Rate Annuity - 134786
- --------------------------------------------------------------------------------
APPENDIX I
- --------------------------------------------------------------------------------
CALCULATING A MARKET VALUE ADJUSTMENT (MVA)
MARKET VALUE ADJUSTMENT FORMULA
The mathematical formula used to determine the MVA is:
{(1+i)/(1+j)}^(x/365)
Where:
o i is the deposit period yield;
o j is the current yield; and
o x is the number of days remaining (computed from Wednesday of the
week of withdrawal) in the guaranteed term.
We make an adjustment in the formula of the MVA to reflect the period of time
remaining in the guaranteed term from the Wednesday of the week of a withdrawal.
EXPLANATION OF THE MARKET VALUE ADJUSTMENT FORMULA
The MVA essentially involves a comparison of two yields: the yield available at
the start of the current guaranteed term of the contract (the deposit period
yield) and the yield currently available (the current yield).
The MVA depends on the relationship between the following:
o The deposit period yield of U.S. Treasury Notes that mature in the
last quarter of the guaranteed term; and
o The current yield of these U.S. Treasury Notes at the time of
withdrawal.
If the current yield is the lesser of the two, the MVA will decrease the amount
withdrawn from the contract to satisfy the withdrawal request (the MVA will be
positive). If the current yield is the higher of the two, the MVA will increase
the amount withdrawn from the contract to satisfy the withdrawal request (the
MVA will be negative, or detrimental to the investor). As a result of the MVA
imposed, the amount withdrawn from the contract prior to the maturity date may
be less than the amount paid into the contract.
To determine the deposit period yield and the current yield, certain information
must be obtained about the prices of outstanding U.S. Treasury Notes. This
information may be found each business day in publications such as the Wall
Street Journal, which publishes the yield-to-maturity percentages for all
Treasury Notes as of the preceding business day. These percentages are used in
determining the deposit period yield and the current yield for the MVA
calculation.
DEPOSIT PERIOD YIELD
Determining the deposit period yield in the MVA calculation involves
consideration of interest rates prevailing at the start of the guaranteed term
from which the withdrawal will be made, as follows:
o We identify the Treasury Notes that mature in the last three months
of the guaranteed term; and
o We determine the yield-to-maturity percentages of these Treasury
Notes for the last business day of each week in the deposit period.
I-1
ILIAC Multi-Rate Annuity - 134786
The resulting percentages are then averaged to determine the deposit period
yield. The deposit period is the period of time during which the purchase
payment or any reinvestment may be made to available guaranteed terms. A deposit
period may be a month, a calendar quarter, or any other period of time we
specify.
CURRENT YIELD
To determine the current yield, we use the same Treasury Notes identified for
the deposit period yield --Treasury Notes that mature in the last three months
of the guaranteed term. However, the yield-to-maturity percentages used are
those for the last business day of the week preceding the withdrawal. We average
these percentages to determine the current yield.
EXAMPLES OF MVA CALCULATIONS
The following are examples of MVA calculations using several hypothetical
deposit period yields and current yields. These examples do not include the
effect of any early withdrawal charge that may be assessed under the contract
upon withdrawal.
EXAMPLE I
Assumptions: Assumptions:
i, the deposit period yield, is 4% i, the deposit period yield, is 5%
j, the current yield, is 6% j, the current yield, is 6%
x, the number of days remaining x, the number of days remaining
(computed from Wednesday of the (computed from Wednesday of the
week of withdrawal) in the week of withdrawal) in the
guaranteed term, is 927. guaranteed term, is 927.
MVA = {(1+i)/(1+j)}^(x/365) MVA = {(1+i)/(1+j)}^(x/365)
= {(1.04)/(1.06)}^(927/365) = {(1.05)/(1.06)}^(927/365)
=.9528 =.9762
In this example, the deposit period In this example, the deposit period
yield of 4% is less than the yield of 5% is less than the
current yield of 6%; therefore, the current yield of 6%; therefore, the
MVA is less than one. The amount MVA is less than one. The amount
withdrawn from the guaranteed term withdrawn from the guaranteed term
is multiplied by this MVA. is multiplied by this MVA.
If a withdrawal or transfer of a If a withdrawal or transfer of a
specific dollar amount is specific dollar amount is
requested, the amount withdrawn requested, the amount withdrawn
from a guaranteed term will be from a guaranteed term will be
increased to compensate for the increased to compensate for the
negative MVA amount. For example, a negative MVA amount. For example, a
withdrawal request to receive a withdrawal request to receive a
check for $2,000 would result in a check for $2,000 would result in a
$2,099.08 withdrawal from the $2,048.76 withdrawal from the
guaranteed term. guaranteed term.
I-2
ILIAC Multi-Rate Annuity - 134786
EXAMPLE II
Assumptions: Assumptions:
I, the deposit period yield, is 6% I, the deposit period yield, is 5%
j, the current yield, is 4% j, the current yield, is 4%
x, the number of days remaining x, the number of days remaining
(computed from Wednesday of the (computed from Wednesday of the
week of withdrawal) in the week of withdrawal) in the
guaranteed term, is 927. guaranteed term, is 927.
MVA = {(1+i)/((1+j)}^(x/365) MVA = {(1+i)/((1+j)}^(x/365)
= {(1.06)/((1.04)}^(927/365) = {(1.05)/((1.04)}^(927/365)
=1.0496 =1.0246
In this example, the deposit period In this example, the deposit period
yield of 6% is greater than the yield of 5% is greater than the
current yield of 4%; therefore, the current yield of 4%; therefore, the
MVA is greater than one. The amount MVA is greater than one. The amount
withdrawn from the guaranteed term withdrawn from the guaranteed term
is multiplied by this MVA. is multiplied by this MVA.
If a withdrawal or transfer of a If a withdrawal or transfer of a
specific dollar amount is specific dollar amount is
requested, the amount withdrawn requested, the amount withdrawn
from a guaranteed term will be from a guaranteed term will be
decreased to compensate for the decreased to compensate for the
positive MVA amount. For example, a positive MVA amount. For example, a
withdrawal request to receive a withdrawal request to receive a
check for $2,000 would result in a check for $2,000 would result in a
$1,905.49 withdrawal from the $1,951.98 withdrawal from the
guaranteed term. guaranteed term.
I-3
ILIAC Multi-Rate Annuity - 134786
<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
<Table>
For the fiscal year ended December 31, 2004 Commission file number: 333-86276, 333-86278, 333-104456
----------------- --------------------------------
</Table>
ING LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 71-0294708
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization identification no.)
151 Farmington Avenue, Hartford, Connecticut 06156
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (866) 723-4646
--------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of Act: None
Securities registered pursuant to Section 12(g) of Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K.
Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes / / No /X/
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 55,000 shares of Common Stock
as of March 28, 2005, all of which were directly owned by Lion Connecticut
Holdings Inc.
NOTE: WHEREAS ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION I(2).
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Annual Report on Form 10-K
For the Year Ended December 31, 2004
TABLE OF CONTENTS
<Table>
<Caption>
FORM 10-K
ITEM NO. PAGE
- --------- ----
PART I
Item 1. Business* 3
Item 2. Properties* 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders** 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6. Selected Financial Data*** 12
Item 7. Management's Narrative Analysis of the Results of Operations and
Financial Condition* 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 72
Item 9A. Controls and Procedures 72
Item 9B. Other Information 72
PART III
Item 10. Directors and Executive Officers of the Registrant** 73
Item 11. Executive Compensation** 73
Item 12. Security Ownership of Certain Beneficial Owners and Management** 73
Item 13. Certain Relationships and Related Transactions** 73
Item 14. Principal Accountant Fees and Services 73
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules 76
Index to Consolidated Financial Statement Schedules 81
Signatures 85
</Table>
* Item prepared in accordance with General Instruction I(2) of Form 10-K.
** Item omitted pursuant to General Instruction I(2) of Form 10-K, except as
to Part III, Item 10 with respect to compliance with Sections 406 and 407
of the Sarbanes-Oxley Act of 2002.
*** Although item may be omitted pursuant to General Instruction I(2) of Form
10-K, the Company has provided certain disclosures under this item.
2
<Page>
PART I
ITEM 1. BUSINESS
(Dollar amounts in millions, unless otherwise stated)
ORGANIZATION OF BUSINESS
ING Life Insurance and Annuity Company ("ILIAC"), a stock life insurance company
domiciled in the state of Connecticut, and its wholly-owned subsidiaries
(collectively, the "Company") are providers of financial products and services
in the United States. The consolidated financial statements found in Part II,
Item 8 of this Annual Report include ILIAC and its wholly-owned subsidiaries,
ING Insurance Company of America ("IICA"), ING Financial Advisers, LLC ("IFA"),
and, through February 28, 2002, ING Investment Adviser Holding, Inc. ("IA
Holdco"). Until March 30, 2003, ILIAC was a wholly-owned subsidiary of ING
Retirement Holdings, Inc. ("HOLDCO"), which was a wholly-owned subsidiary of ING
Retirement Services, Inc. ("IRSI"). Until March 30, 2003, IRSI was a
wholly-owned subsidiary of Lion Connecticut Holdings Inc. ("Lion"), which in
turn was ultimately owned by ING Groep N.V. ("ING"). On March 30, 2003, a series
of mergers occurred in the following order: IRSI merged into Lion and HOLDCO
merged into Lion. As a result, ILIAC is now a direct wholly-owned subsidiary of
Lion, which in turn, is an indirect, wholly-owned subsidiary of ING. ING is a
global financial services company based in The Netherlands, with American
Depository Shares listed on the New York Stock Exchange under the symbol "ING."
DESCRIPTION OF BUSINESS
The Company offers qualified and nonqualified annuity contracts that include a
variety of funding and payout options for individuals and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403, 408,
and 457, as well as nonqualified deferred compensation plans.
The Company has one operating segment, ING U.S. Financial Services ("USFS"),
which offers the products described below.
PRODUCTS AND SERVICES
Annuity contracts may be deferred or immediate (payout annuities). These
products also include programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and record-keeping
services along with a variety of investment options, including affiliated and
non-affiliated mutual funds and variable and fixed investment options. In
addition, the Company also offers wrapper agreements entered into with
retirement plans which contain certain benefit responsive guarantees (i.e.,
liquidity guarantees of principal and previously accrued interest for benefits
paid under the terms of the plan) with respect to portfolios of plan-owned
assets not invested with the Company. The Company also offers investment
advisory services and pension plan administrative services.
Annuity contracts offered by the Company contain variable and/or fixed
investment options. Variable options generally provide for full assumption (and,
in limited cases, provide for partial assumption) by the customer of investment
risks. Assets supporting variable annuity options are held in Separate Accounts
that invest in mutual funds managed and/or distributed by ILIAC or its
affiliates, or managed and/or distributed by unaffiliated entities. Variable
Separate Account investment income and realized capital gains and losses are not
reflected in the Consolidated Statements of Operations.
3
<Page>
ITEM 1. BUSINESS (continued)
Fixed options are either "fully-guaranteed" or "experience-rated".
Fully-guaranteed fixed options provide guarantees on investment returns,
maturity values and, if applicable, benefit payments. Experience-rated fixed
options require the customer to assume investment risks (including realized
capital gains and losses on the sale of invested assets) and other risks subject
to, among other things, principal and interest guarantees.
FEES AND MARGINS
Insurance and expense charges, investment management fees, and other fees earned
by the Company vary by product and depend on, among other factors, the funding
option selected by the customer under the product. For annuity products where
assets are allocated to variable funding options, the Company may charge the
Separate Account asset-based insurance and expense fees.
In addition, where the customer selects a variable funding option, ILIAC may
receive compensation from the fund's adviser, administrator, or other
affiliated entity for the performance of certain shareholder services. ILIAC
and/or IFA may also receive administrative service, distribution (12b-1),
and/or service plan fees from the funds in which customers invest, in addition
to compensation from the fund's adviser, administrator, or other affiliated
entity for the performance of certain shareholder services. For variable
option mutual funds managed by ILIAC, ILIAC receives an investment advisory
fee, from which it pays a subadvisory fee to an affiliated or unaffiliated
investment manager.
In connection with programs offered to qualified plans and nonqualified deferred
compensation plans that package administrative and recordkeeping services along
with a menu of investment options, ILIAC and/or IFA may receive 12b-1 and
service plan fees, as well as compensation, from the affiliated or unaffiliated
fund's adviser, administrator, or other affiliated entity for the performance of
certain shareholder services. For fixed funding options, ILIAC earns a margin,
which is based on the difference between income earned on the investments
supporting the liability and interest credited to customers. The Company may
also receive other fees or charges depending on the nature of the products.
PRINCIPAL MARKETS AND METHOD OF DISTRIBUTION
The Company's products are offered primarily to individuals, pension plans,
small businesses, and employer-sponsored groups in the health care, government,
education (collectively "not-for-profit" organizations), and corporate markets.
The Company's products generally are sold through pension professionals,
independent agents and brokers, third party administrators, banks, dedicated
career agents, and financial planners.
The Company is not dependent upon any single customer and no single customer
accounted for more than 10% of consolidated revenue in 2004. In addition, the
loss of business from any one, or a few, independent brokers or agents would not
have a material adverse effect on the earnings of the Company.
ASSETS UNDER MANAGEMENT AND ADMINISTRATION
A substantial portion of the Company's fees or other charges and margins are
based on assets under management. Assets under management are principally
affected by net deposits (i.e., new deposits less surrenders), investment
performance (i.e., interest credited to customer accounts for fixed options
or market performance for variable options), and customer retention. A
portion of the Company's fee income is also based
4
<Page>
ITEM 1. BUSINESS (continued)
on assets under administration which are assets that are not on the Company's
Balance Sheets and for which the Company provides administrative services
only. The Company's customer assets under management and administration and
deposits were as follows at December 31:
<Table>
<Caption>
2004 2003
- -------------------------------------------------------------------------------------------------------------
New deposits
Annuities--variable options $ 4,471.6 $ 4,051.7
Annuities--fixed options 1,646.2 1,704.8
- -------------------------------------------------------------------------------------------------------------
Total deposits $ 6,117.8 $ 5,756.5
=============================================================================================================
Customer assets under management
Annuities--variable options $ 32,003.5 $ 28,657.3
Annuities--fixed options 16,903.5 16,044.4
Subtotal--annuities 48,907.0 44,701.7
Plan sponsored and other 5,577.4 7,049.8
- -------------------------------------------------------------------------------------------------------------
Total customer assets under management 54,484.4 51,751.5
Assets under administration 24,419.8 21,102.5
- -------------------------------------------------------------------------------------------------------------
Total customer assets under management and administration $ 78,904.2 $ 72,854.0
=============================================================================================================
</Table>
Assets under management are generally available for contractowners withdrawal
and are generally subject to market value adjustments and/or deferred
surrender charges. To encourage customer retention and recover acquisition
expenses, contracts typically impose a surrender charge on contractowner
balances withdrawn within a period of time after the contract's inception.
The period of time and level of the charge vary by product. In addition, an
approach incorporated into certain recent variable annuity contracts with
fixed funding options allows contractholders to receive an incremental
interest rate if withdrawals from the fixed account are spread over a period
of five years. Further, more favorable credited rates may be offered after
policies have been in force for a period of time. Existing tax penalties on
annuity and certain custodial account distributions prior to age 59-1/2
provide further disincentive to customers for premature surrenders of account
balances, but generally do not impede transfers of those balances to products
of competitors.
COMPETITION
Increasing competition within the retirement savings business from traditional
insurance carriers, as well as banks, mutual fund companies, and other
investment managers, offers consumers many choices. Principal competitive
factors are reputation for investment performance, product features, service,
cost, and the perceived financial strength of the investment manager or sponsor.
Competition may affect, among other matters, both business growth and the
pricing of the Company's products and services.
INVESTMENT OVERVIEW AND STRATEGY
The Company's investment strategy involves diversification by asset class,
and seeks to add economic diversification and to reduce the risks of credit,
liquidity, and embedded options within certain investment products, such as
convexity risk on collateralized mortgage obligations and call options. The
investment management function is centralized under ING Investment Management
LLC ("IIM"), an affiliate of the Company, pursuant to an investment advisory
agreement. Separate portfolios are established for each general type of
product within the Company.
5
<Page>
ITEM 1. BUSINESS (continued)
The Company's General Account invests primarily in fixed maturity investments,
including publicly issued bonds (including government bonds), privately placed
notes and bonds, mortgage-backed securities, and asset-backed securities. The
primary investment strategy is to optimize the risk-adjusted return through
superior asset selection predicated on a developed relative value approach,
credit research and monitoring, superior management of interest rate risk,
and active exploration into new investment product opportunities. Investments
are purchased when market returns, adjusted for risk and expenses, are
sufficient to profitably support growth of the liability block of business. In
addition, assets and liabilities are analyzed and reported for internal
management purposes on an option-adjusted basis. The level of required capital
of given transactions is a primary factor in determining relative value among
different investment and liability alternatives, within the scope of each
product type's objective. An active review of existing holdings identifies
specific assets that could be effectively traded in order to enhance the
risk-adjusted returns of the portfolio, while minimizing adverse tax and
accounting impacts. The Company strives to maintain a portfolio average asset
quality rating of A, excluding mortgage loans, but including mortgage-backed
securities, which are reported with bonds, based on Standard & Poor's ("S&P")
ratings classifications.
The Company's use of derivatives is limited mainly to hedging purposes to reduce
the Company's exposure to cash flow variability of assets and liabilities,
interest rate risk, and market risk.
RATINGS
On December 15, 2004, 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 this date revised the
outlook on the core insurance operating companies from negative to stable,
reflecting ING's commercial position and diversification, financial flexibility,
reduced capital leverage, and improved profitability. The outlook revisions
recognize ING's progress in setting a more focused and decisive strategic
direction and implementing more integrated financial management across banking
and insurance.
On December 17, 2004, Moody's Investor's Service, Inc. ("Moody's") issued a
credit opinion affirming the financial strength rating of ING U.S., including
the Company, of Aa3 (Excellent) with a stable outlook. The rating is based on
the strong implicit support and financial strength of the parent company, ING.
Furthermore, Moody's noted that ING U.S. has built a leading market share in the
domestic individual life insurance, annuity, and retirement plan businesses. ING
U.S. enjoys product diversity, further enhancing its credit profile through the
use of these multiple distribution channels.
On December 22, 2004, A.M. Best Company, Inc. ("A.M. Best") reaffirmed the
financial strength rating of A+ (Superior) of ING U.S., including the
Company, while maintaining its negative outlook for ING U.S. These rating
actions follow ING's announcement of its intention to sell Life Insurance
Company of Georgia ("LOG"), as well as the conclusion of A.M. Best's review
of ING's plan to exit the U.S. individual reinsurance business. ING closed
the transaction to exit the U.S. individual life reinsurance business on
December 31, 2004, and the sale of LOG is expected to be completed during the
second quarter of 2005, subject to regulatory approval. Neither of these
transactions directly impact the Company.
6
<Page>
ITEM 1. BUSINESS (continued)
REGULATION
The Company's operations are subject to comprehensive regulation throughout the
United States. The laws of the various jurisdictions establish supervisory
agencies, including the state insurance departments, with broad authority to
grant licenses to transact business and regulate many aspects of the products
and services offered by the Company, as well as solvency and reserve adequacy.
Many agencies also regulate the investment activities of insurance companies on
the basis of quality, diversification, and other quantitative criteria. The
Company's operations and accounts are subject to examination at regular
intervals by certain of these regulators.
ILIAC is subject to the insurance laws of the State of Connecticut, where it is
domiciled, and other jurisdictions in which it transacts business. The primary
regulators of the Company's insurance operations are the insurance departments
of Connecticut, Florida, and New York. Among other matters, these agencies may
regulate premium rates, trade practices, agent licensing, policy forms,
underwriting and claims practices, minimum interest rates to be credited to
fixed annuity customer accounts, and the maximum interest rates that can be
charged on policy loans.
The Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD") and, to a lesser extent, the states regulate the
sales and investment management activities and operations of the Company.
Generally, the Company's variable annuity products and certain of its fixed
annuities are registered as securities with the SEC. Regulations of the SEC,
Department of Labor ("DOL"), and Internal Revenue Service ("IRS") also impact
certain of the Company's annuity, life insurance and other investment and
retirement products. These products may involve Separate Accounts and mutual
funds registered under the Investment Company Act of 1940. The Company also
provides a variety of products and services to employee benefit plans that are
covered by the Employee Retirement Income Security Act of 1974 ("ERISA").
INSURANCE HOLDING COMPANY LAWS
A number of states regulate affiliated groups of insurers such as the Company
under holding company statutes. These laws, among other things, place certain
restrictions on transactions between affiliates such as dividends and other
distributions that may be paid to the Company's parent corporation.
INSURANCE COMPANY GUARANTY FUND ASSESSMENTS
Insurance companies are assessed the costs of funding the insolvencies of other
insurance companies by the various state guaranty associations, generally based
on the amount of premiums companies collect in that state.
The Company accrues the cost of future guaranty fund assessments based on
estimates of insurance company insolvencies provided by the National
Organization of Life and Health Insurance Guaranty Associations ("NOLHGA") and
the amount of premiums written in each state. The Company has estimated this
liability to be $8.5 and $9.3 as of December 31, 2004 and 2003, respectively,
and has recorded a reserve. The Company has also recorded an asset of $5.5 and
$2.5 as of December 31, 2004 and 2003, respectively, for future credits to
premium taxes for assessments already paid.
7
<Page>
ITEM 1. BUSINESS (continued)
For information regarding certain other potential regulatory changes relating to
the Company's businesses, see "Risk Factors" in Part 1, Item 1 "Business."
EMPLOYEES
ILIAC had 1,954 employees as of December 31, 2004, primarily focused on managing
the product distribution, marketing, customer service, and product and financial
management of the Company. The Company also utilizes services provided by ING
North America Insurance Corporation, Inc. and other affiliates. These services
include new business processing, actuarial, risk management, human resources,
investment management, finance, information technology, and legal and compliance
services. The affiliated companies are reimbursed for the Company's use of
various services and facilities under a variety of intercompany agreements.
RISK FACTORS
In addition to the normal risks of business, the Company is subject to
significant risks and uncertainties, including those which are described below.
EQUITY MARKET VOLATILITY COULD NEGATIVELY IMPACT THE COMPANY'S
PROFITABILITY AND FINANCIAL CONDITION
The sales and profitability of the Company's variable annuity products could be
impacted by declines in the equity markets. Generally, sales of variable
annuities decrease when equity markets decline over an extended period of time.
The amount of fees the Company receives on its variable annuity products is
based on the account values of the Separate Accounts which support such variable
earnings. A decline in the equity markets will likely result in a decrease in
such account values and therefore a decrease in the fees the Company receives on
its variable annuities. To the extent that the actual performance of the equity
markets and the Company's expectations of future performance decrease its future
profit expectations, the Company may be required to accelerate the amount of
deferred acquisition cost amortization in a given period, potentially negatively
impacting its net income in a period.
THE COMPANY'S EFFORTS TO REDUCE THE IMPACT OF INTEREST RATE CHANGES ON ITS
PROFITABILITY AND FINANCIAL CONDITION MAY NOT BE EFFECTIVE
The Company attempts to reduce the impact of changes in interest rates on the
profitability and financial condition of its fixed annuity operations. The
Company accomplishes this reduction primarily by managing the duration of its
assets relative to the duration of its liabilities. During a period of rising
interest rates, annuity contract surrenders and withdrawals may increase as
customers seek to achieve higher returns. Despite its efforts to reduce the
impact of rising interest rates, the Company may be required to sell assets to
raise the cash necessary to respond to such surrenders and withdrawals, thereby
realizing capital losses on the assets sold. An increase in policy surrenders
and withdrawals may also require the Company to accelerate amortization of
policy acquisition costs relating to these contracts, which would further reduce
its net income.
During periods of declining interest rates, borrowers may prepay or redeem
mortgages and bonds that the Company owns, which would force it to reinvest the
proceeds at lower interest rates. The Company's General Account products
generally contain minimum interest rate guarantees. These minimum guarantees may
8
<Page>
ITEM 1. BUSINESS (continued)
constrain the Company's ability to lower credited rates in response to lower
investment returns. Therefore, it may be more difficult for the Company to
maintain its desired spread between the investment income it earns and the
interest it credits to its customers, thereby reducing its profitability.
A DOWNGRADE IN ANY OF THE RATINGS FOR THE COMPANY MAY, AMONG OTHER THINGS,
INCREASE POLICY SURRENDERS AND WITHDRAWALS, REDUCE NEW SALES, AND TERMINATE
RELATIONSHIPS WITH DISTRIBUTORS, ANY OF WHICH COULD ADVERSELY AFFECT ITS
PROFITABILITY AND FINANCIAL CONDITION
Ratings are important factors in establishing the competitive position of
insurance companies. A downgrade, or the potential for such a downgrade, of any
of the ratings for the Company could, among other things:
- - Materially increase the number of annuity contract surrenders and
withdrawals;
- - Result in the termination of relationships with broker-dealers, banks,
agents, wholesalers, and other distributors of the Company's products and
services; and
- - Reduce new sales of annuity contracts.
Any of these consequences could adversely affect the Company's profitability and
financial condition.
Rating organizations assign ratings based upon several factors. While most of
the factors relate to the rated company, some of the factors relate to the views
of the rating organization, general economic conditions, and circumstances
outside the rated company's control. In addition, rating organizations may
employ different models and formulas to assess financial strength of a rated
company, and from time to time rating organizations have, in their discretion,
altered the models. Changes to the models, general economic conditions, or
circumstances outside the Company's control could impact a rating organization's
judgment of its rating and the subsequent rating it assigns the Company. The
Company cannot predict what actions rating organizations may take, or what
actions it may be required to take in response to the actions of rating
organizations, which could adversely affect the Company.
THE COMPANY'S ABILITY TO GROW DEPENDS IN PART UPON THE CONTINUED
AVAILABILITY OF CAPITAL.
The Company has, in the past, required capital as it increased its reserves
associated with its growth from sales of products although no capital
contributions were needed in 2004. Although the Company believes it has
sufficient capital to fund its immediate growth and capital needs, the amount of
capital required and the amount of capital available can vary from period to
period due to a variety of circumstances, some of which are neither predictable
nor foreseeable, nor necessarily within its control. A lack of sufficient
capital could hinder the Company's ability to grow.
THE COMPANY'S INVESTMENT PORTFOLIO IS SUBJECT TO SEVERAL RISKS THAT MAY
DIMINISH THE VALUE OF ITS INVESTED ASSETS AND ADVERSELY AFFECT ITS SALES,
PROFITABILITY AND THE INVESTMENT RETURNS CREDITED TO CERTAIN OF ITS
CUSTOMERS
The Company's investment portfolio is subject to several risks, including, among
other things:
- - The Company may experience an increase in defaults or delinquency in the
investment portfolios, including the commercial mortgage loan portfolio.
9
<Page>
ITEM 1. BUSINESS (continued)
- - The Company may have greater difficulty selling privately placed fixed
maturity securities and commercial mortgage loans at attractive prices, in a
timely manner, or both, because they are less liquid than its publicly traded
fixed maturity securities.
- - During periods of declining interest rates, borrowers may prepay or redeem
prior to maturity (i) mortgages that back certain mortgage-backed securities
and (ii) bonds with embedded call options that the Company owns which would
force it to reinvest the proceeds received at lower interest rates.
- - Environmental liability exposure may result from the Company's commercial
mortgage loan portfolio.
- - The Company may experience losses in its commercial mortgage loan portfolio
as a result of economic downturns or losses attributable to natural disasters
in certain regions.
Any of these consequences may diminish the value of the Company's invested
assets and adversely affect its sales, profitability, or the investment returns
credited to its customers.
CHANGES IN REGULATION IN THE UNITED STATES MAY REDUCE THE COMPANY'S
PROFITABILITY
The Company's insurance business is subject to comprehensive regulation and
supervision throughout the United States by both state and federal regulators.
The primary purpose of state regulation of the insurance business is to protect
contractowners, and not necessarily to protect other constituencies such as
creditors or investors. State insurance regulators, state attorneys general, the
National Association of Insurance Commissioners, the SEC, and the NASD
continually reexamine existing laws and regulations and may impose changes in
the future. Changes in federal legislation and administrative policies in areas
such as employee benefit plan regulation, financial services regulation, and
federal taxation could lessen the advantages of certain of the Company's
products as compared to competing products, or possibly result in the surrender
of some existing contracts and policies or reduced sales of new products and,
therefore, could reduce the Company's profitability.
The insurance industry has recently become the focus of greater regulatory
scrutiny due to questionable business practices relating to trading and pricing
within the mutual fund and variable annuity industries, allegations related to
improper special payments, price-fixing, conflicts of interest and improper
accounting practices, and other misconduct alleged by and initiatives of the New
York Attorney General, state insurance departments, and in related litigation.
As a result, a large number of insurance companies, including certain ING
affiliates, have been requested to provide information to regulatory
authorities. In some cases, this regulatory scrutiny has led to new proposed
legislation regulating insurance companies, regulatory penalties and related
litigation. At this time, the Company does not believe that any such regulatory
scrutiny will materially impact it; however, the Company cannot guarantee that
new laws, regulations, or other regulatory action aimed at the business
practices under scrutiny would not adversely affect its business. The adoption
of new laws or regulations, enforcement action or litigation, whether or not
involving the Company, could influence the manner in which it distributes its
insurance products, which could adversely impact the Company.
ITEM 2. PROPERTIES
The Company's home office is located at 151 Farmington Avenue, Hartford,
Connecticut, 06156. All Company office space is leased or subleased by the
Company or its other affiliates. The Company pays substantially all
10
<Page>
ITEM 2. PROPERTIES (continued)
expenses associated with its leased and subleased office properties. Affiliates
within ING's U.S. operations provide the Company with various management,
finance, investment management and other administrative services, from
facilities located at 5780 Powers Ferry Road, N.W., Atlanta, Georgia 30327-4390.
The affiliated companies are reimbursed for the Company's use of these services
and facilities under a variety of intercompany agreements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to threatened or pending lawsuits/arbitrations arising
from the normal conduct of business. Due to the climate in insurance and
business litigation/arbitration, suits against the Company sometimes include
claims for substantial compensatory, consequential or punitive damages and other
types of relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated individuals. While it is
not possible to forecast the outcome of such lawsuits/arbitrations, in light of
existing insurance, reinsurance and established reserves, it is the opinion of
management that the disposition of such lawsuits/arbitrations will not have a
materially adverse effect on the Company's operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
11
<Page>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for ILIAC common stock. All of ILIAC's
outstanding common stock is owned by Lion, a Connecticut holding and management
company which is ultimately owned by ING.
The Company's ability to pay dividends to its parent is subject to the prior
approval of insurance regulatory authorities of the State of Connecticut for
payment of any dividend, which, when combined with other dividends paid within
the preceding 12 months, exceeds the greater of (1) 10% of statutory surplus at
the prior year end or (2) ILIAC's prior year statutory net gain from operations.
ILIAC paid a cash dividend of $70.0 to Lion in 2004 and did not pay cash
dividends to Lion in 2003 or 2002. However, on February 28, 2002, ILIAC
contributed 100% of the stock of IA Holdco to HOLDCO in the form of a $60.1
dividend distribution.
ILIAC did not receive capital contributions from its parent in 2004 and received
$230.0 and $164.3 in capital contributions from its parent during 2003 and 2002,
respectively.
ITEM 6. SELECTED FINANCIAL DATA
(Dollar amounts in millions, unless otherwise stated)
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
3-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<Table>
<Caption>
2004 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
Net investment income $ 983.1 $ 919.1 $ 959.5
Fee income 455.7 395.8 423.9
Premiums 38.5 50.1 53.9
Net realized capital gains (losses) 25.2 64.5 (101.0)
Total revenue 1,502.5 1,429.5 1,336.3
Interest credited and other benefits to contractowners 739.4 723.4 707.3
Amortization of deferred policy acquisition costs and value of business acquired 127.4 106.5 181.5
Income before cumulative effect of change in accounting principle 199.3 154.6 67.5
Cumulative effect of change in accounting principle, net of tax -- -- (2,412.1)
Net income (loss) 199.3 154.6 (2,344.6)
CONSOLIDATED FINANCIAL POSITION
Total investments $ 19,998.1 $ 18,934.8 $ 17,088.7
Assets held in separate accounts 33,310.5 33,014.7 28,071.1
Total assets 58,840.0 57,225.0 50,410.7
Future policy benefits and claims reserves 20,886.4 19,276.6 18,091.2
Liabilities related to separate accounts 33,310.5 33,014.7 28,071.1
Total shareholder's equity 2,724.2 2,645.9 2,262.8
</Table>
12
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(Dollar amounts in millions, unless otherwise stated)
OVERVIEW
The following narrative analysis of the consolidated results of operations
presents a review of ING Life Insurance and Annuity Company ("ILIAC") and its
wholly-owned subsidiaries (collectively, the "Company") for each of the two
years ended December 31, 2004 and 2003 and financial condition as of December
31, 2004 versus December 31, 2003. This item should be read in its entirety and
in conjunction with the selected financial data, consolidated financial
statements and related notes, and other supplemental data, which can be found
under Part II, Item 6 and Item 8 contained herein.
FORWARD-LOOKING INFORMATION/RISK FACTORS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in any other
statements made by, or on behalf of, the Company, whether or not in future
filings with the Securities Exchange Commission ("SEC"). Forward-looking
statements are statements not based on historical information and which
relate to future operations, strategies, financial results, or other
developments. Statements using verbs such as "expect," "anticipate,"
"believe," or words of similar import generally involve forward-looking
statements. Without limiting the foregoing, forward-looking statements
include statements which represent the Company's beliefs concerning future
levels of sales and redemptions of the Company's products, investment spreads
and yields, or the earnings and profitability of the Company's activities.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic, and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or not
actual results differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable developments. Some may be national in
scope, such as general economic conditions, changes in tax law, and changes in
interest rates. Some may be related to the insurance industry generally, such as
pricing competition, regulatory developments, and industry consolidation. Others
may relate to the Company specifically, such as litigation, regulatory action,
and risks associated with the Company's investment portfolio such as changes in
credit quality, price volatility, and liquidity. Investors are also directed to
consider other risks and uncertainties discussed in "Risk Factors" in Item 1
contained herein and in other documents filed by the Company with the SEC.
Except as may be required by the federal securities laws, the Company disclaims
any obligation to update forward-looking information.
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements and related footnotes. These
estimates and assumptions are evaluated on an on-going basis based on historical
developments, market conditions, industry trends, and other information that is
reasonable under the circumstances. There can be no assurance that actual
results will conform to estimates and assumptions, and that reported results of
operations will not be materially
13
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
CRITICAL ACCOUNTING POLICIES (continued)
adversely affected by the need to make future accounting adjustments to
reflect changes in these estimates and assumptions from time to time.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: reserves, other-than-temporary impairment testing, and amortization
of deferred acquisition costs ("DAC") and value of business acquired ("VOBA").
In developing these estimates, management makes subjective and complex judgments
that are inherently uncertain and subject to material changes as facts and
circumstances develop. Although variability is inherent in these estimates,
management believes the amounts provided are appropriate based upon the facts
available upon compilation of the consolidated financial statements.
RESERVES
The Company establishes and carries actuarially determined reserve liabilities
which are calculated to meet its future obligations. Changes in or deviations
from the assumptions used can significantly affect the Company's reserve levels
and related future operations.
Reserves for deferred annuity investment contracts and immediate annuities
without life contingent benefits are equal to cumulative deposits less charges
and withdrawals plus credited interest thereon (rates range from 1.5% to 11.9%
for all years presented), net of adjustments for investment experience that the
Company is entitled to reflect in future credited interest. These reserves also
include unrealized gains/losses related to investments and unamortized realized
gains/losses on investments for experience-rated contracts. Reserves on
experience-rated contracts reflect the rights of contractholders, plan
participants, and the Company.
Reserves for immediate annuities with life contingent benefits are computed on
the basis of assumed interest discount rates, mortality, and expenses, including
a margin for adverse deviations. Such assumptions generally vary by plan, year
of issue and policy duration. Reserve interest rates range from 4.9% to 9.5% for
all years presented.
Because the sale of the domestic individual life insurance business on October
1, 1998 was substantially in the form of an indemnity reinsurance agreement, the
Company includes an amount in reinsurance recoverable on the Consolidated
Balance Sheets, which approximates the Company's total individual life reserves.
Unpaid claims and claim expenses for all lines of insurance include benefits for
reported losses and estimates of benefits for losses incurred but not reported.
OTHER-THAN-TEMPORARY IMPAIRMENT TESTING
The Company's accounting policy requires that a decline in the value of an
investment below its amortized cost basis be assessed to determine if the
decline is other-than-temporary. If so, the investment is deemed to be
other-than-temporarily impaired, and a charge is recorded in net realized
capital losses equal to the difference between fair value and the amortized cost
basis of the investment. The fair value of the other-than-temporarily impaired
investment becomes its new cost basis.
14
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
CRITICAL ACCOUNTING POLICIES (continued)
In addition, the Company invests in structured securities that meet the criteria
of Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." Under EITF Issue No. 99-20, a determination of
the required impairment is based on credit risk and the possibility of
significant prepayment risk that restricts the Company's ability to recover the
investment. An impairment is recognized if the fair value of the security is
less than amortized cost and there has been an adverse change in cash flow since
the remeasurement date. When a decline in fair value is determined to be
other-than-temporary, the individual security is written down to fair value and
the loss is accounted for as a realized loss.
The evaluation of other-than-temporary impairments included in the General
Account is a quantitative and qualitative process, which is subject to risks and
uncertainties and is intended to determine whether declines in the fair value of
investments should be recognized in current period earnings. The risks and
uncertainties include the length of time and extent to which the fair value has
been less than amortized cost, changes in general economic conditions, the
issuer's financial condition or near-term recovery prospects, and the effects of
changes in interest rates.
AMORTIZATION OF DEFERRED ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
DAC represents policy acquisition costs that have been capitalized and are
subject to amortization. Such costs consist principally of certain
commissions, underwriting, contract issuance, and certain agency expenses,
related to the production of new and renewal business.
VOBA represents the outstanding value of in force business capitalized and is
subject to amortization in purchase accounting when the Company was acquired.
The value is based on the present value of estimated net cash flows embedded
in the Company's contracts.
The amortization methodology used for DAC and VOBA varies by product type.
Statement of Financial Accounting Standards ("FAS") No. 60, "Accounting and
Reporting by Insurance Enterprises," applies to traditional life insurance
products, primarily whole life and term life insurance contracts. Under FAS No.
60, DAC and VOBA are amortized over the premium payment period, in proportion to
the premium revenue recognized.
FAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments," applies to universal life and investment-type products, such as
fixed and variable deferred annuities. Under FAS No. 97, DAC and VOBA are
amortized, with interest, over the life of the related contracts (usually 25
years) in relation to the present value of estimated future gross profits from
investment, mortality, and expense margins; asset-based fees, policy
administration, and surrender charges; less policy maintenance fees and
non-capitalized commissions, as well as realized gains and losses on
investments.
Changes in assumptions can have a significant impact on DAC and VOBA balances
and amortization rates. Several assumptions are considered significant in the
estimation of future gross profits associated with variable deferred annuity
products. One of the most significant assumptions involved in the estimation of
future gross profits is the assumed return associated with the variable account
performance. To reflect the volatility in the equity markets, this assumption
involves a combination of near-term expectations and long-term assumptions
regarding market performance. The overall return on the variable account is
dependent on multiple factors,
15
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
CRITICAL ACCOUNTING POLICIES (continued)
including the relative mix of the underlying sub-accounts among bond funds
and equity funds, as well as equity sector weightings. Other significant
assumptions include surrender and lapse rates, estimated interest spread, and
estimated mortality.
Due to the relative size and sensitivity to minor changes in underlying
assumptions of DAC and VOBA balances, the Company performs a quarterly and
annual analysis of DAC and VOBA for the annuity and life businesses,
respectively. The DAC and VOBA balances are evaluated for recoverability and are
reduced to the extent that estimated future gross profits are inadequate to
recover the asset.
At each evaluation date, actual historical gross profits are reflected, and
estimated future gross profits and related assumptions are evaluated for
continued reasonableness. Any adjustment in estimated profit requires that the
amortization rate be revised ("unlocking"), retroactively to the date of the
policy or contract issuance. The cumulative prior period adjustment is
recognized as a component of current period amortization. In general, increases
in investment, mortality, and expense margins, and thus estimated future
profits, lower the rate of amortization. However, decreases in investment,
mortality, and expense margins, and thus estimated future profits, increase the
rate of amortization.
ANALYSIS OF DAC/VOBA
During 2004, VOBA amortization increased principally due to higher actual
gross profits, as a result of the margins earned on higher fixed and variable
assets and fewer other-than-temporary impairments. Also, surrenders increased,
which resulted in higher amortization for certain business.
The actual Separate Account return in 2004 exceeded the long-term assumption,
thereby producing deceleration of DAC/VOBA amortization of $2.6 before tax. As a
part of the regular analysis of DAC/VOBA, at the end of 2004, the Company
unlocked its assumptions regarding policyholder withdrawal behavior. Based on
experience studies, assumed rates of full surrender for variable annuities were
modified downward, producing a deceleration of DAC/VOBA amortization of $1.2
before tax. The combined effect of the actual variable return for 2004 exceeding
long-term assumptions and modification of expectations regarding future
withdrawal behavior was a deceleration of DAC/VOBA amortization totaling $3.8
before tax, or $2.5, net of $1.3 million of federal income tax expense.
During 2003 the Company reset long-term assumptions for the Separate Account
returns from 9.0% to 8.5% (gross before rate of return management fees and
mortality, expense, and other policy charges), reflecting a blended return of
equity and other sub-accounts. The 2003 unlocking adjustment was primarily
driven by improved market performance compared to expected performance during
2003. For the year ended December 31, 2003, the Company recorded a deceleration
of DAC/VOBA amortization totaling $3.7 before tax, or $2.4, net of $1.3 of
federal income tax expense.
As part of the regular analysis of DAC/VOBA, at the end of 2002, the Company
unlocked its long-term rate of return assumptions. The Company reset
long-term return assumptions for the Separate Account returns to 9.0% (gross
before fund management fees and mortality, expense, and other policy
charges), as of December 31, 2002, reflecting a blended return of equity and
other sub-accounts. The unlocking adjustment in 2002 was primarily driven by
the sustained downturn in the equity markets and revised expectations for
future returns. Dring 2002, the Company recorded an acceleration of DAC/VOBA
amortization totaling $45.6 before tax, or $29.7, net of $15.9 of federal
income tax benefit.
16
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
CRITICAL ACCOUNTING POLICIES (continued)
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
NET INCOME: Net income increased by $44.7 to $199.3 for 2004, from $154.6 for
2003. Higher net income is the result of higher fee income and higher investment
income and margins, partially offset by an increase in interest credited and
other benefits to contractholders, operating expenses, and the amortization of
VOBA.
NET INVESTMENT INCOME: Net investment income from General Account assets
increased $64.0 to $983.1 for 2004 from $919.1 for 2003. The increase is
primarily related to higher fixed assets under management in 2004, as well as to
the inclusion of interest income on the guaranteed portion of the separate
accounts beginning in 2004 as required with the adoption of Statement of
Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts."
FEE INCOME: Fee income increased $59.9 to $455.7 for 2004 from $395.8 for 2003.
A substantial portion of fee income is calculated based on variable assets under
management. The increase in fee income was primarily related to an increase in
the Company's average variable assets under management due to strong sales and
positive equity market performance in 2004 and 2003.
PREMIUMS: Premiums for 2004 decreased by $11.6 to $38.5 from $50.1 for 2003,
primarily due to a decrease in sales of immediate annuities with life
contingencies.
NET REALIZED CAPITAL GAINS: Net realized capital gains for 2004 decreased by
$39.3 to $25.2 from $64.5 for 2003. The decrease in gains is primarily due to
rising interest rates in 2004 partially offset by a decrease in
other-than-temporary impairments. In an increasing rate environment, the market
value of fixed maturities in the portfolios decreases, which in turn results in
lower realized gains upon sale.
INTEREST CREDITED AND OTHER BENEFITS TO CONTRACTOWNERS: Interest credited and
other benefits to contractowners increased $16.0 to $739.4 for 2004 from
$723.4 for 2003. The increase in the balance in the year was primarily due to
an increase in average assets under management with fixed options, as well as to
the inclusion of interest credited to contractowners on the guaranteed portion
of the separate accounts, as required by SOP 03-1, partially offset by a
decrease in credited interest rates to contractowners resulting from a
management decision to lower credited rates to contractowners.
OPERATING EXPENSES: Operating expenses increased by $10.1 to $394.0 for 2004
from $383.9 for 2003. The increase is primarily related to the growth of the
business.
AMORTIZATION OF DAC AND VOBA: Amortization of DAC and VOBA increased $20.9 to
$127.4 for 2004, from $106.5 for 2003. The increase is primarily related to
higher VOBA amortization of $17.2. Amortization of long-duration products is
recorded in proportion to actual and estimated future gross profits.
Estimated gross profits are computed based on assumptions related to the
underlying contracts, including but not limited to interest margins,
surrenders, withdrawals, expenses, and asset growth. VOBA amortization
increased principally due to higher actual gross profits, as a result of the
margins earned on higher fixed and variable assets and fewer
other-than-temporary impairments.
17
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
FINANCIAL CONDITION
INVESTMENTS
INVESTMENT STRATEGY
The Company's investment strategy for its General Account investments
involves diversification by asset class, and seeks to add economic
diversification and to reduce the risks of credit, liquidity, and embedded
options within certain investment products, such as convexity risk on
collateralized mortgage obligations and call options. The investment
management function is centralized under ING Investment Management LLC
("IIM"), an affiliate of the Company, pursuant to an investment advisory
agreement. Separate portfolios are established for each general type of
product within the Company.
The Company invests its General Account primarily in fixed maturity
investments, including publicly issued bonds (including government bonds),
privately placed notes and bonds, mortgage-backed securities, and
asset-backed securities. The primary investment strategy is to optimize the
risk-adjusted return through superior asset selection predicated on a
developed relative value approach, credit research and monitoring, superior
management of interest rate risk, and active exploration into new investment
product opportunities. Investments are purchased when market returns,
adjusted for risk and expenses, are sufficient to profitably support growth
of the liability block of business. In addition, assets and liabilities are
analyzed and reported for internal management purposes on an option-adjusted
basis. The level of required capital of given transactions is a primary
factor in determining relative value among different investment and liability
alternatives, within the scope of each product type's objective. An active
review of existing holdings identifies specific assets that could be
effectively traded in order to enhance the risk-adjusted returns of the
portfolio, while minimizing adverse tax and accounting impacts. The Company
strives to maintain a portfolio average asset quality rating of A, excluding
mortgage loans, but including mortgage-backed securities, which are reported
with bonds, based on Standard & Poor's ("S&P") ratings classifications.
The Company's use of derivatives is limited mainly to hedging purposes to reduce
the Company's exposure to cash flow variability of assets and liabilities,
interest rate risk, and market risk.
PORTFOLIO COMPOSITION
The following table presents the investment portfolio at December 31, 2004 and
2003.
<Table>
<Caption>
2004 2003
---------------------------- ----------------------------
CARRYING VALUE % CARRYING VALUE %
- -----------------------------------------------------------------------------------------------------------------
Fixed maturities, including securities pledged $ 18,425.6 92.1% $ 17,694.5 93.4%
Equity securities 162.6 0.8% 161.9 0.9%
Mortgage loans on real estate 1,090.2 5.5% 754.5 4.0%
Policy loans 262.7 1.3% 270.3 1.4%
Other investments 57.0 0.3% 53.6 0.3%
- -----------------------------------------------------------------------------------------------------------------
$ 19,998.1 100.0% $ 18,934.8 100.0%
=================================================================================================================
</Table>
18
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
FINANCIAL CONDITION (continued)
FIXED MATURITIES
Fixed maturities available-for-sale as of December 31, 2004, were as follows:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
Fixed maturities:
U.S. government and government agencies
and authorities $ 197.3 $ 0.9 $ 0.9 $ 197.3
States, municipalities and political
subdivisions 32.1 0.2 0.9 31.4
U.S. corporate securities:
Public utilities 1,207.6 50.0 5.0 1,252.6
Other corporate securities 5,846.5 275.0 25.4 6,096.1
- --------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 7,054.1 325.0 30.4 7,348.7
- --------------------------------------------------------------------------------------------------------------
Foreign securities:
Government 660.2 33.9 3.1 691.0
Other 1,656.4 78.4 6.1 1,728.7
- --------------------------------------------------------------------------------------------------------------
Total foreign securities 2,316.6 112.3 9.2 2,419.7
- --------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities 5,497.6 65.6 58.2 5,505.0
Commercial mortgage-backed securities 1,491.2 73.2 4.4 1,560.0
Other asset-backed securities 1,354.6 22.6 13.7 1,363.5
- --------------------------------------------------------------------------------------------------------------
Total fixed maturities, including fixed maturities
pledged 17,943.5 599.8 117.7 18,425.6
Less: fixed maturities pledged to creditors 1,258.8 18.0 2.5 1,274.3
- --------------------------------------------------------------------------------------------------------------
Fixed maturities $ 16,684.7 $ 581.8 $ 115.2 $ 17,151.3
==============================================================================================================
</Table>
19
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
FINANCIAL CONDITION (continued)
Fixed maturities available-for-sale as of December 31, 2003, were as follows:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------------------------
Fixed maturities:
U.S. government and government agencies
and authorities $ 350.0 $ 1.7 $ 0.3 $ 351.4
States, municipalities and political
subdivisions 2.1 0.1 -- 2.2
U.S. corporate securities:
Public utilities 970.7 48.9 11.4 1,008.2
Other corporate securities 5,568.1 327.9 29.1 5,866.9
- --------------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 6,538.8 376.8 40.5 6,875.1
- --------------------------------------------------------------------------------------------------------------
Foreign securities:
Government 605.2 33.7 2.8 636.1
Other 1,364.7 74.5 11.0 1,428.2
- --------------------------------------------------------------------------------------------------------------
Total foreign securities 1,969.9 108.2 13.8 2,064.3
- --------------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities 5,903.7 91.8 35.1 5,960.4
Commercial mortgage-backed securities 1,278.5 105.0 3.3 1,380.2
Other asset-backed securities 1,036.4 34.0 9.5 1,060.9
- --------------------------------------------------------------------------------------------------------------
Total fixed maturities, including fixed
maturities pledged 17,079.4 717.6 102.5 17,694.5
Less: fixed maturities pledged to creditors 1,624.4 23.8 3.4 1,644.8
- --------------------------------------------------------------------------------------------------------------
Fixed maturities $ 15,455.0 $ 693.8 $ 99.1 $ 16,049.7
==============================================================================================================
</Table>
At December 31, 2004 and 2003, the Company's carrying value of
available-for-sale fixed maturities, including fixed maturities pledged to
creditors, (hereinafter referred to as "total fixed maturities") represented
92.1% and 93.4% of the total General Account invested assets, respectively. For
the same periods, $13,714.0, or 74.4% of total fixed maturities and $13,744.9,
or 77.7% of total fixed maturities, respectively, supported experience-rated
products. Total fixed maturities reflected net unrealized capital gains of
$482.1 and $615.1 at December 31, 2004 and 2003, respectively.
It is management's objective that the portfolio of fixed maturities be of high
quality and be well diversified by market sector. The fixed maturities in the
Company's portfolio are generally rated by external rating agencies and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating
20
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
FINANCIAL CONDITION (continued)
agencies. The average quality rating of the Company's fixed maturities
portfolio was AA- at December 31, 2004 and 2003. Ratings are calculated using
a rating hierarchy that considers S&P, Moody's, and internal ratings.
Total fixed maturities by quality rating category, including fixed maturities
pledged to creditors, were as follows at December 31:
<Table>
<Caption>
2004 2003
--------------------------- ---------------------------
FAIR % OF FAIR % OF
VALUE TOTAL VALUE TOTAL
- --------------------------------------------------------------------------------------------------------------
AAA $ 8,675.4 47.1% $ 9,036.6 51.1%
AA 910.4 4.9% 756.2 4.3%
A 3,754.3 20.4% 3,374.7 19.1%
BBB 4,311.4 23.4% 3,774.4 21.3%
BB 698.9 3.8% 567.3 3.2%
B and below 75.2 0.4% 185.3 1.0%
- --------------------------------------------------------------------------------------------------------------
Total $ 18,425.6 100.0% $ 17,694.5 100.0%
==============================================================================================================
</Table>
95.8% of fixed maturities were invested in securities rated BBB and above
(Investment Grade) at December 31, 2004 and 2003.
Fixed maturities rated BB and below (Below Investment Grade) may have
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of the issuer to
make principal and interest payments than is the case with higher rated fixed
maturities.
Total fixed maturities by market sector, including fixed maturities pledged to
creditors, were as follows, at December 31:
<Table>
<Caption>
2004 2003
--------------------------- ---------------------------
FAIR % OF FAIR % OF
VALUE TOTAL VALUE TOTAL
- --------------------------------------------------------------------------------------------------------------
U.S. Corporate $ 7,380.1 40.1% $ 6,877.3 38.9%
Residential Mortgage-backed 5,505.0 29.9% 5,960.4 33.7%
Foreign (1) 2,419.7 13.1% 2,064.3 11.6%
Commercial/Multifamily Mortgage-backed 1,560.0 8.5% 1,380.2 7.8%
Asset-backed 1,363.5 7.4% 1,060.9 6.0%
U.S. Treasuries/Agencies 197.3 1.0% 351.4 2.0%
- --------------------------------------------------------------------------------------------------------------
Total $ 18,425.6 100.0% $ 17,694.5 100.0%
==============================================================================================================
</Table>
(1) Primarily U.S. dollar denominated
The amortized cost and fair value of total fixed maturities as of December
31, 2004 are shown below by contractual maturity. Actual maturities may
differ from contractual maturities because securities may be restructured,
called, or prepaid.
21
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
FINANCIAL CONDITION (continued)
<Table>
<Caption>
AMORTIZED FAIR
COST VALUE
- -------------------------------------------------------------------------------------------------------------
Due to mature:
One year or less $ 395.8 $ 400.0
After one year through five years 3,650.0 3,727.4
After five years through ten years 3,128.8 3,256.4
After ten years 2,425.5 2,613.3
Mortgage-backed securities 6,988.8 7,065.0
Other asset-backed securities 1,354.6 1,363.5
Less: fixed maturities pledged to creditors 1,258.8 1,274.3
- -------------------------------------------------------------------------------------------------------------
Fixed maturities $ 16,684.7 $ 17,151.3
=============================================================================================================
</Table>
At December 31, 2004 and 2003, fixed maturities with carrying values of $10.9
and $11.2, respectively, were on deposit as required by regulatory authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10% of
the Company's shareholder's equity at December 31, 2004 or 2003.
MORTGAGE LOANS
Mortgage loans, primarily commercial mortgage loans, totaled $1,090.2 at
December 31, 2004 and $754.5 at December 31, 2003. These loans are reported at
amortized cost less impairment writedowns. If the value of any mortgage loan is
determined to be impaired (i.e., when it is probable that the Company will be
unable to collect on all amounts due according to the contractual terms of the
loan agreement), the carrying value of the mortgage loan is reduced to either
the present value of expected cash flows, cash flows from the loan (discounted
at the loan's effective interest rate), or fair value of the collateral. If the
loan is in foreclosure, the carrying value is reduced to the fair value of the
underlying collateral, net of estimated costs to obtain and sell. The carrying
value of the impaired loans is reduced by establishing a permanent write down
charged to realized loss. At December 31, 2004 and 2003, the Company had no
allowance for mortgage loan credit losses.
OTHER-THAN-TEMPORARY IMPAIRMENTS
The Company analyzes the General Account investments to determine whether there
has been an other-than-temporary decline in fair value below the amortized cost
basis. Management considers the length of time and the extent to which the fair
value has been less than amortized cost; the financial condition and near-term
prospects of the issuer; future economic conditions and market forecasts; and
the Company's intent and ability to retain the investment in the issuer for a
period of time sufficient to allow for recovery in fair value. If it is probable
that all amounts due according to the contractual terms of an investment will
not be collected, an other-than-temporary impairment is considered to have
occurred.
In addition, the Company invests in structured securities that meet the criteria
of Emerging Issues Task Force ("EITF") Issue No. 99-20 "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." Under EITF Issue No. 99-20, a determination of
the required impairment is based on credit risk and the possibility of
significant prepayment risk that restricts the
22
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
FINANCIAL CONDITION (continued)
Company's ability to recover the investment. An impairment is recognized if the
fair value of the security is less than book value and there has been an adverse
change in cash flow since the last remeasurement date.
When a decline in fair value is determined to be other-than-temporary, the
individual security is written down to fair value and the loss is accounted for
as a realized loss.
The following table identifies the Company's other-than-temporary impairments by
type as of December 31:
<Table>
<Caption>
2004 2003 2002
----------------------- ----------------------- -----------------------
NO. OF NO. OF NO. OF
IMPAIRMENT SECURITIES IMPAIRMENT SECURITIES IMPAIRMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------
U.S. Corporate $ -- -- $ 6.2 4 $ 0.1 2
Residential mortgage-backed 13.5 53 88.2 83 40.0 33
Equities -- -- -- 2 0.1 2
Limited partnership -- -- 2.0 1 -- --
- ------------------------------------------------------------------------------------------------------------
Total $ 13.5 53 $ 96.4 90 $ 40.2 37
============================================================================================================
</Table>
NET REALIZED CAPITAL GAINS AND LOSSES
Net realized capital gains (losses) are comprised of the difference between the
carrying value of investments and proceeds from sale, maturity, and redemption,
as well as losses incurred due to impairment of investments. Net realized
capital gains (losses) on investments were as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
- ------------------------------------------------------------------------------------
Fixed maturities $ 24.7 $ 63.9 $ (97.5)
Equity securities 0.5 0.6 (3.5)
Pretax net realized capital gains (losses) $ 25.2 $ 64.5 $ (101.0)
- ------------------------------------------------------------------------------------
After-tax net realized capital gains (losses) $ 16.4 $ 41.9 $ (65.7)
====================================================================================
</Table>
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 product charges, investment
income, proceeds from the maturing and sale of investments, and capital
contributions. Primary uses of funds are payments of commissions and operating
expenses, interest and premium credits, investment purchases, contract
maturities, withdrawals and surrenders.
23
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
The Company's liquidity position is managed by maintaining adequate levels of
liquid assets, such as cash or cash equivalents and short-term investments. For
a description of the Company's asset/liability management strategy, see Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk."
Additional sources of liquidity include borrowing facilities to meet
short-term cash requirements. ILIAC maintains 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% of ILIAC's statutory admitted
assets as of the prior December 31 from one another. ILIAC also maintains a
$125.0 revolving loan agreement with SunTrust Bank and a $100.0 revolving
loan agreement with the Bank of New York. The Company had no outstanding
balance under any of these facilities as of December 31, 2004 and 2003.
Management believes that these sources of liquidity are adequate to meet the
Company's short-term cash obligations.
CAPITAL CONTRIBUTIONS AND DIVIDENDS
ILIAC did not receive capital contributions from its parent in 2004 and received
$230.0 and $164.3 in capital contributions during 2003 and 2002, respectively.
ILIAC has entered into agreements with IICA under which ILIAC has agreed to
cause IICA to have sufficient capital to meet certain capital and surplus
levels. ILIAC did not make capital contributions to IICA in 2004, 2003, or 2002.
The Company's ability to pay dividends to its parent is subject to the prior
approval of insurance regulatory authorities of the State of Connecticut for
payment of any dividend, which, when combined with other dividends paid within
the preceding 12 months, exceeds the greater of (1) 10% of statutory surplus at
prior year end or (2) ILIAC's prior year statutory net gain from operations.
ILIAC paid a cash dividend of $70.0 to Lion in 2004 and did not pay cash
dividends to Lion in 2003 or 2002. However, on February 28, 2002, ILIAC
contributed 100% of the stock of IA Holdco to HOLDCO in the form of a $60.1
dividend distribution.
SEPARATE ACCOUNTS
Separate Account assets and liabilities generally represent funds maintained to
meet specific investment objectives of contractowners who bear the investment
risk, subject, in limited cases, to certain minimum guaranteed rates. Investment
income and investment gains and losses generally accrue directly to such
contractowners. The assets of each account are legally segregated and are not
subject to claims that arise out of any other business of the Company or its
affiliates.
Separate Account assets supporting variable options under annuity contracts are
invested, as designated by the contractowner or participant (who bears the
investment risk subject, in limited cases, to certain minimum guarantees) under
a contract, in shares of mutual funds which are managed by the Company or its
affiliates, or other selected mutual funds not managed by the Company or its
affiliates.
24
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
Separate Account assets and liabilities are carried at fair value and shown as
separate captions in the Consolidated Balance Sheets. Deposits, investment
income and net realized and unrealized capital gains and losses of the Separate
Accounts are not reflected in the Consolidated Financial Statements (with the
exception of realized and unrealized capital gains and losses on the assets
supporting the guaranteed interest option). The Consolidated Statements of Cash
Flows do not reflect investment activity of the Separate Accounts.
Assets and liabilities of separate account arrangements that do not meet the
criteria in Statement of Position 03-1, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and
for Separate Accounts," ("SOP 03-1") for presentation in the separate caption
in the Consolidated Balance Sheets (primarily guaranteed interest options)
and revenue and expenses related to such arrangements, are consolidated in
the financial statements in the General Account. At December 31, 2004 and
2003, unrealized gains of $7.3 and $55.7, respectively, on assets supporting
a guaranteed interest option are reflected in shareholder's equity.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans, or money market
instruments at a specified future date and at a specified price or yield. The
inability of counterparties to honor these commitments may result in either a
higher or lower replacement cost. Also, there is likely to be a change in the
value of the securities underlying the commitments. At December 31, 2004 and
2003, the Company had off-balance sheet commitments to purchase investments
equal to their fair value of $778.2 and $154.3, respectively.
As of December 31, 2004, the Company had certain contractual obligations due
over a period of time as summarized in the following table:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- ---------------------------------------------------------------------------------------------------
Operating Lease Obligations $ 48.0 $ 16.7 $ 29.5 $ 1.8 $ --
Purchase Obligations 778.2 778.2 -- -- --
Reserves for Insurance Obligations 28,754.6 3,187.9 5,660.3 4,554.9 15,351.5
- ---------------------------------------------------------------------------------------------------
Total $ 29,580.8 $ 3,982.8 $ 5,689.8 $ 4,556.7 $ 15,351.5
===================================================================================================
</Table>
Operating lease obligations relate to the rental of office space under various
non-cancelable operating lease agreements that expire through January 2009.
Purchase obligations consist primarily of commitments to purchase investments
during 2005.
Reserves for insurance contract obligations consist of actuarially determined
liabilities for the Company to meet its further obligations under its variable
annuity, fixed annuity, and other investment and retirement products.
25
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
REINSURANCE
The Company utilizes indemnity reinsurance agreements to reduce its exposure to
large losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
the primary liability of the Company as direct insurer of the risks reinsured.
The Company evaluates the financial strength of potential reinsurers and
continually monitors the financial condition of reinsurers. Only those
reinsurance recoverable balances deemed probable of recovery are reflected as
assets on the Consolidated Balance Sheets.
SECURITIES LENDING
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral, primarily cash, is required at a rate of 102% of the market value of
the loaned domestic securities. The collateral is deposited by the borrower with
a lending agent, and retained and invested by the lending agent according to the
Company's guidelines to generate additional income. The market value of the
loaned securities is monitored on a daily basis with additional collateral
obtained or refunded as the market value of the loaned securities fluctuates.
REPURCHASE AGREEMENTS
The Company engages in dollar repurchase agreements ("dollar rolls") and
repurchase agreements to increase the return on investments and improve
liquidity. These transactions involve a sale of securities and an agreement to
repurchase substantially the same securities as those sold. Company policies
require a minimum of 95% of the fair value of securities pledged under dollar
rolls and repurchase agreement transactions to be maintained as collateral. Cash
collateral received is invested in fixed maturities and the offsetting
collateral liability is included in borrowed money on the Consolidated Balance
Sheets. At December 31, 2004 and 2003, the carrying value of the securities
pledged in dollar rolls and repurchase agreements was $1,274.3 and $1,644.8,
respectively. The carrying value of the securities pledged in dollar rolls and
repurchase agreements is included in pledged securities on the Balance Sheets.
The repurchase obligation related to dollar rolls and repurchase agreements
totaled $1,057.4 and $1,519.3 at December 31, 2004 and 2003, respectively. The
repurchase obligation related to dollar rolls and repurchase agreements is
included in borrowed money on the Consolidated Balance Sheets.
The primary risk associated with short-term collateralized borrowings is that
the counterparty will be unable to perform under the terms of the contract. The
Company's exposure is limited to the excess of the net replacement cost of the
securities over the value of the short-term investments, an amount that was not
material at December 31, 2004. The Company believes the counterparties to the
dollar roll and repurchase agreements are financially responsible and that the
counterparty risk is immaterial.
RISK-BASED CAPITAL
The National Association of Insurance Commissioners' ("NAIC") risk-based capital
requirements require insurance companies to calculate and report information
under a risk-based capital formula. These requirements are intended to allow
insurance regulators to monitor the capitalization of insurance companies based
upon the type and mixture of risks inherent in a company's operations. The
formula includes components
26
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
for asset risk, liability risk, interest rate exposure, and other factors. ILIAC
has complied with the NAIC's risk-based capital reporting requirements. Amounts
reported indicate that ILIAC has total adjusted capital above all required
capital levels.
RECENTLY ADOPTED ACCOUNTING STANDARDS
(See Significant Accounting Policies in Notes to the Consolidated Financial
Statements for further information.)
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL
LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
The Company adopted SOP 03-1 on January 1, 2004. SOP 03-1 establishes several
new accounting and disclosure requirements for certain nontraditional
long-duration contracts and for separate accounts including, among other things,
a requirement that assets and liabilities of separate account arrangements that
do not meet certain criteria be accounted for as general account assets and
liabilities, and that revenues and expenses related to such arrangements be
consolidated with the respective lines in the Consolidated Statements of
Operations. In addition, SOP 03-1 requires that additional liabilities be
established for certain guaranteed death and other benefits and for products
with certain patterns of cost of insurance charges. In addition, sales
inducements provided to contractholders must be recognized on the Consolidated
Balance Sheets separately from deferred acquisition costs and amortized as a
component of benefits expense using methodologies and assumptions consistent
with those used for amortization of deferred policy acquisition costs.
The Company evaluated all requirements of SOP 03-1 which resulted in the
consolidation of the Separate Account supporting the guarantee option into the
General Account and deferring, amortizing, and recognizing separately, sales
inducements to contractholders. Requirements to establish additional liabilities
for minimum guaranteed benefits are also applicable to the Company, however, the
Company's policies on contract liabilities have historically been, and continue
to be, in conformity with the newly established requirements. Requirements for
recognition of additional liabilities for products with certain patterns of cost
of insurance charges are not applicable to the Company. The adoption of SOP 03-1
did not have a significant effect on the Company's financial position, results
of operations, or cash flows.
In the fourth quarter of 2004, the Company implemented Technical Practice Aid
6300.05 - 6300.08, "Q&As Related to the Implementation of SOP 03-1, Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounting" (the "TPA").
The TPA, which was approved in September 2004, provides additional guidance
regarding certain implicit assessments that may be used in the testing of the
base mortality function on contracts, which is performed to determine whether
additional liabilities are required in conjunction with SOP 03-1. In
addition, the TPA provides additional guidance surrounding the allowed level
of aggregation of additional liabilities determined under SOP 03-1. The
adoption of the TPA did not have an impact on the Company's financial
position, results of operations, or cash flows.
The implementation of SOP 03-1 also raised questions regarding the
interpretation of the requirements of FAS No. 97, "Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments," concerning when it is
appropriate to record an
27
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
RECENTLY ADOPTED ACCOUNTING STANDARDS (continued)
unearned revenue liability related to the insurance benefit function. To
clarify its position, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position No. FAS 97-1 ("FSP FAS 97-1"), "Situations in
Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Permit or Require
Accrual of an Unearned Revenue Liability," effective for fiscal periods
beginning subsequent to the date the guidance was issued, June 18, 2004. The
Company adopted FSP FAS 97-1 on July 1, 2004. The adoption of FSP FAS 97-1
did not have an impact on the Company's financial position, results of
operations, or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FAS No. 123 (revised 2004), "Share-Based
Payment" ("FAS 123R"), which requires that all share-based payments be
recognized in the financial statements based upon the fair value. FAS 123R is
effective at the beginning of the first interim or annual period beginning after
June 15, 2005. Earlier adoption is encouraged. FAS 123R provides two transition
methods, modified-prospective and modified-retrospective.
The modified-prospective method recognizes the grant-date fair value of
compensation for new awards granted after the effective date and unvested awards
beginning in the fiscal period in which the recognition provisions are first
applied. Prior periods are not restated. The modified-retrospective method
permits entities to restate prior periods by recognizing the compensation cost
based on amounts previously reported in the pro forma footnote disclosures as
required under FAS No. 123, "Accounting for Stock-Based Compensation."
The Company intends to early adopt the provisions of FAS 123R on January 1, 2005
using the modified-prospective method. The adoption of FAS 123R is not expected
to have a material impact on the Company's financial position, results of
operations or cash flows. Prior to January 2005, the Company applied the
intrinsic value-based provisions set forth in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Under the intrinsic
value method, compensation expense is determined on the measurement date, which
is the first date on which both the number of shares the employee is entitled to
receive and the exercise price are known. Compensation expense, if any, is
measured based on the award's intrinsic value, which is the excess of the market
price of the stock over the exercise price on the measurement date.
LEGISLATIVE INITIATIVES
Certain elements of the Jobs and Growth Tax Relief Reconciliation Act of
2003, in particular the reduction in the tax rates on long-term capital gains
and corporate dividends, could impact the relative competitiveness of the
Company's products, especially variable annuities. While sales of products do
not appear to have been reduced to date, the long term effect of the Job and
Growth Act of 2003 on the Company's financial condition or results of
operations cannot be reasonably estimated at this time.
The American Jobs Creation Act of 2004 allows tax-free distributions to be
made from the Company's Policyholders' Surplus Account in 2005 and 2006.
Under prior law, the Company was allowed to defer from taxation a portion of
statutory income under certain circumstances. The deferred income was
accumulated in the Policyholders' Surplus Account and is taxable only under
conditions that management considers to be remote. Therefore, no federal
income taxes have been provided on the accumulated balance of $17.2 as of
December 31, 2004. Based on currently available information, the Company
anticipates that the new law will permanently eliminate any potential tax on
the accumulated balance of $17.2.
28
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
LEGISLATIVE INITIATIVES (continued)
Other legislative proposals under consideration include repealing the estate
tax, reducing the taxation on annuity benefits, changing the taxation of
products, and changing life insurance company taxation. Some of these
proposals, if enacted, could have a material effect on life insurance,
annuity and other retirement savings product sales. The impact on the
Company's products cannot be predicted.
Legislation to restructure the Social Security System and expand private
pension plan incentives also may be considered. Prospects for enactment and
the ultimate effect of these proposals are uncertain.
REGULATORY MATTERS
As with many financial services companies, the Company and its affiliates have
received informal and formal requests for information from various state and
federal governmental agencies and self-regulatory organizations in connection
with inquiries and investigations of the products and practices of the financial
services industry. In each case, the Company and its affiliates have been and
are providing full cooperation.
FUND REGULATORY ISSUES
Since 2002, there has been increased governmental and regulatory activity
relating to mutual funds and variable insurance products. This activity has
primarily focused on inappropriate trading of fund shares, revenue sharing and
directed brokerage, compensation, sales practices and suitability, arrangements
with service providers, pricing, compliance and controls, and adequacy of
disclosure.
In addition to responding to governmental and regulatory requests on fund
regulatory issues, ING management, on its own initiative, conducted, through
special counsel and a national accounting firm, an extensive internal review of
mutual fund trading in ING insurance, retirement, and mutual fund products. The
goal of this review was to identify any instances of inappropriate trading in
those products by third parties or by ING investment professionals and other ING
personnel.
The internal review identified several isolated arrangements allowing third
parties to engage in frequent trading of mutual funds within the variable
insurance and mutual fund products of certain affiliates of the Company, and
identified other circumstances where frequent trading occurred despite measures
taken by ING intended to combat market timing. Each of the arrangements has been
terminated and disclosed to regulators, to the independent trustees of ING Funds
(U.S.) and in Company reports previously filed with the Securities and Exchange
Commission ("SEC") pursuant to the Securities Exchange Act of 1934, as
amended.
An affiliate of the Company, ING Funds Distributors, LLC ("IFD") has received
notice from the staff of the National Association of Securities Dealers ("NASD")
that the staff has made a preliminary determination to recommend that
disciplinary action be brought against IFD and one of its registered persons for
violations of the NASD Conduct Rules and federal securities laws in connection
with frequent trading arrangements.
Other regulators, including the SEC and the New York Attorney General, are
also likely to take some action with respect to certain ING affiliates before
concluding their investigation of ING relating to fund trading. The potential
outcome of such action is difficult to predict but could subject certain
affiliates to adverse consequences, including, but not limited to, settlement
payments, penalties, and other financial liability. It is
29
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE CONSOLIDATED RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
REGULATORY MATTERS (continued)
not currently anticipated, however, that the actual outcome of such action
will have a material adverse effect on ING or ING's U.S.-based operations,
including the Company.
ING has agreed to indemnify and hold harmless the ING Funds from all damages
resulting from wrongful conduct by ING or its employees or from ING's
internal investigation, any investigations conducted by any governmental or
self-regulatory agencies, litigation or other formal proceedings, including
any proceedings by the SEC. Management reported to the ING Funds Board that
ING management believes that the total amount of any indemnification
obligations will not be material to ING or ING's U.S.-based operations,
including the Company.
OTHER REGULATORY MATTERS
The New York Attorney General and other regulators are also conducting broad
inquiries and investigations involving the insurance industry. These initiatives
currently focus on, among other things, compensation and other sales incentives,
potential conflicts of interest, potential anti-competitive activity, marketing
practices, certain financial reinsurance arrangements, and disclosure. It is
likely that the scope of these investigations will further broaden before the
investigations are concluded. U.S. affiliates of ING have received formal and
informal requests in connection with such investigations, and are cooperating
fully with each request for information.
These initiatives may result in new legislation and regulation that could
significantly affect the financial services industry, including businesses in
which the Company is engaged.
In light of these and other developments, U.S. affiliates of ING, including the
Company, periodically review whether modifications to their business practices
are appropriate.
For further discussion of the Company's regulatory matters, see "Risk Factors"
in Part 1, Item 1 "Business."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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, in limited cases, to certain minimum
guaranteed rates.
The fixed account liabilities are supported by a portfolio principally
composed of fixed rate investments that can generate predictable, steady
rates of return. The portfolio management strategy for the fixed account
considers the assets available-for-sale. This enables the Company to respond
to changes in market interest rates, changes in prepayment risk, changes in
relative values of asset sectors and individual securities and loans, changes
in 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.
30
<Page>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK (continued)
On the basis of these analyses, management believes there is currently no
material solvency risk to the Company.
INTEREST RATE RISK
The Company defines interest rate risk as the risk of an economic loss due to
adverse changes in interest rates. This risk arises from the Company's primary
activity of investing fixed annuity premiums received in interest-sensitive
assets and carrying these funds as interest-sensitive liabilities. The Company
manages the interest rate risk in its assets relative to the interest rate risk
in its liabilities. A key measure used to quantify this exposure is duration.
Duration measures the sensitivity of the assets and liabilities to changes in
interest rates.
To calculate duration related to annuities, the Company projects asset and
liability cash flows under stochastic arbitrage free interest rate scenarios and
calculates their net present value using LIBOR/swap spot rates. Duration is
calculated by revaluing these cash flows given a small change in interest rates
and determining the percentage change in the fair value. The cash flows used in
this calculation include the expected coupon and principal payments on the
assets and all benefit cash flows on the interest-sensitive liabilities. The
projections include assumptions that reflect the effect of changing interest
rates on the prepayment, lapse, leverage, and/or option features of instruments,
where applicable. Such assumptions relate primarily to mortgage-backed
securities, collateralized mortgage obligations, callable corporate obligations,
and fixed rate deferred and immediate annuities.
For further discussion of the Company's interest rate risks, see "Risk
Factors" in Part 1, Item 1 "Business."
MARKET RISK
The Company's operations are significantly influenced by changes in the
equity markets. The Company's profitability depends largely on the amount of
assets under management, which is primarily driven by the level of sales,
equity market appreciation and depreciation, and the persistency of the in
force block of business. Prolonged and precipitous declines in the equity
markets can have a significant impact on the Company's operations. As a
result, sales of variable products may decline and surrender activity may
increase, as customer sentiment towards the equity market turns negative.
Lower assets under management will have a negative impact on the Company's
financial results, primarily due to lower fee income on variable annuities.
Furthermore, the Company may experience a reduction in profit margins if a
significant portion of the assets held in the variable annuity separate
account move to the general account and the Company is unable to earn an
acceptable investment spread, particularly in light of the low interest rate
environment and the presence of contractually guaranteed interest credited
rates.
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of DAC/VOBA to be amortized in a given financial statement period. A
significant decrease in the Company's estimated gross profits would require the
Company to accelerate the amount of DAC/VOBA amortization in a given period,
potentially causing a material adverse deviation in the period's net income.
Although an acceleration of DAC/VOBA amortization would have a negative impact
on the Company's earnings, it would not affect the Company's cash flow or
liquidity position. For further discussion, see "Risk Factors" in Part 1, Item 1
"Business."
31
<Page>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
Report of Independent Registered Public Accounting Firm 33
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 34
Consolidated Balance Sheets as of December 31, 2004 and 2003 35
Consolidated Statements of Changes in Shareholder's Equity for the years ended
December 31, 2004, 2003 and 2002 36
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 (Restated) and 2002 (Restated) 37
Notes to Consolidated Financial Statements 38
</Table>
32
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
ING Life Insurance and Annuity Company
We have audited the accompanying consolidated balance sheets of ING Life
Insurance and Annuity Company as of December 31, 2004 and 2003, and the
related consolidated statements of operations, changes in shareholder's
equity, and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Company's internal control over
financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of an opinion on
the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ING Life Insurance
and Annuity Company as of December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Company changed the
accounting principle for goodwill and other intangible assets effective
January 1, 2002. As discussed in the Note 14 to the financial statements, the
Company restated certain amounts presented in the statements of cash flows
related to its payables for securities purchased, short-term borrowings, and
investment contracts for the years ended December 31, 2003 and 2002.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 31, 2005
33
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------
2004 2003 2002
------------ ------------ ------------
Revenues:
Net investment income $ 983.1 $ 919.1 $ 959.5
Fee income 455.7 395.8 423.9
Premiums 38.5 50.1 53.9
Net realized capital gains (losses) 25.2 64.5 (101.0)
------------ ------------ ------------
Total revenue 1,502.5 1,429.5 1,336.3
------------ ------------ ------------
Benefits and expenses:
Interest credited and other benefits
to contractowners 739.4 723.4 707.3
Operating expenses 394.0 383.9 361.4
Amortization of deferred policy acquisition costs
and value of business acquired 127.4 106.5 181.5
------------ ------------ ------------
Total benefits and expenses 1,260.8 1,213.8 1,250.2
------------ ------------ ------------
Income before income taxes and cumulative effect of
change in accounting principle 241.7 215.7 86.1
Income tax expense 42.4 61.1 18.6
------------ ------------ ------------
Income before cumulative effect of change
in accounting principle 199.3 154.6 67.5
Cumulative effect of change in accounting principle,
net of tax -- -- (2,412.1)
------------ ------------ ------------
Net income (loss) $ 199.3 $ 154.6 $ (2,344.6)
============ ============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
34
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
<Table>
<Caption>
DECEMBER 31,
----------------------------
2004 2003
------------ ------------
ASSETS:
Investments:
Fixed maturities, available-for-sale, at fair value
(amortized cost of $16,684.7 at 2004 and $15,455.0 at 2003) $ 17,151.3 $ 16,049.7
Equity securities, available-for-sale, at fair value
(cost of $153.9 at 2004 and $146.5 at 2003) 162.6 161.9
Mortgage loans on real estate 1,090.2 754.5
Policy loans 262.7 270.3
Other investments 57.0 53.6
Securities pledged (amortized cost of $1,258.8 at 2004
and $1,624.4 at 2003) 1,274.3 1,644.8
------------ ------------
Total investments 19,998.1 18,934.8
Cash and cash equivalents 187.3 57.8
Short-term investments under securities loan agreement 219.5 123.9
Accrued investment income 181.7 169.6
Notes receivable from affiliate 175.0 --
Reinsurance recoverable 2,902.7 2,953.2
Deferred policy acquisition costs 414.5 307.9
Value of business acquired 1,365.2 1,415.4
Due from affiliates 25.9 41.5
Other assets 59.6 206.2
Assets held in separate accounts 33,310.5 33,014.7
------------ ------------
Total assets $ 58,840.0 $ 57,225.0
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Future policy benefits and claims reserves $ 20,886.4 $ 19,276.6
Due to affiliates 49.4 92.4
Payables for securities purchased 25.1 5.4
Payables under securities loan agreement 219.5 123.9
Borrowed money 1,057.4 1,519.3
Current income taxes 82.6 85.6
Deferred income taxes 209.3 184.7
Other liabilities 275.6 276.5
Liabilities related to separate accounts 33,310.5 33,014.7
------------ ------------
Total liabilities 56,115.8 54,579.1
------------ ------------
Shareholder's equity:
Common stock (100,000 shares authorized; 55,000 shares issued and
outstanding, $50.0 per share value) 2.8 2.8
Additional paid-in capital 4,576.5 4,646.5
Accumulated other comprehensive income 67.1 116.0
Retained earnings (deficit) (1,922.2) (2,119.4)
------------ ------------
Total shareholder's equity 2,724.2 2,645.9
------------ ------------
Total liabilities and shareholder's equity $ 58,840.0 $ 57,225.0
============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
35
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(In Millions)
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER RETAINED TOTAL
COMMON PAID-IN COMPREHENSIVE EARNINGS SHAREHOLDER'S
STOCK CAPITAL INCOME (DEFICIT) EQUITY
------------ ------------ ------------- ------------ -------------
Balance at December 31, 2001 $ 2.8 $ 4,292.4 $ 55.8 $ 103.3 $ 4,454.3
Comprehensive loss:
Net loss -- -- -- (2,344.6) (2,344.6)
Other comprehensive income,
net of tax:
Net unrealized gain on
securities ($94.9 pretax) -- -- 61.7 -- 61.7
-------------
Comprehensive loss (2,282.9)
-------------
Distribution of IA Holdco -- (27.4) -- (32.7) (60.1)
Capital contributions -- 164.3 -- -- 164.3
SERP -- transfer -- (15.1) -- -- (15.1)
Other changes -- 2.3 -- -- 2.3
------------ ------------ ------------- ------------ -------------
Balance at December 31, 2002 2.8 4,416.5 117.5 (2,274.0) 2,262.8
Comprehensive income:
Net income -- -- -- 154.6 154.6
Other comprehensive loss,
net of tax:
Net unrealized loss on
securities (($2.4) pretax) -- -- (1.5) -- (1.5)
-------------
Comprehensive income 153.1
-------------
Capital contributions -- 230.0 -- -- 230.0
------------ ------------ ------------- ------------ -------------
Balance at December 31, 2003 2.8 4,646.5 116.0 (2,119.4) 2,645.9
Comprehensive income:
Net income -- -- -- 199.3 199.3
Other comprehensive loss,
net of tax:
Net unrealized loss on
securities (($49.5) pretax) -- -- (32.2) -- (32.2)
Minimum pension liability -- -- (16.7) -- (16.7)
-------------
Comprehensive income 150.4
-------------
Dividends paid -- (70.0) -- -- (70.0)
Other -- -- -- (2.1) (2.1)
------------ ------------ ------------- ------------ -------------
Balance at December 31, 2004 $ 2.8 $ 4,576.5 $ 67.1 $ (1,922.2) $ 2,724.2
============ ============ ============= ============ =============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
36
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
(Restated) (Restated)
Cash Flows from Operating Activities:
Net income (loss) $ 199.3 $ 154.6 $ (2,344.6)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Capitalization of deferred policy acquisition costs (168.0) (159.7) (127.6)
Amortization of deferred policy acquisition costs and
value of business acquired 134.3 106.5 158.5
Net accretion/decretion of discount/premium 155.9 198.9 115.5
Future policy benefits, claims reserves,
and interest credited 620.4 705.9 953.7
Impairment of goodwill -- -- 2,412.1
Provision for deferred income taxes 41.0 22.1 23.6
Net realized capital (gains) losses (25.1) (64.5) 101.0
Depreciation 12.4 23.3 20.9
Change in:
Accrued investment income (2.3) 1.3 (10.0)
Reinsurance recoverable 50.5 33.3 172.7
Accounts receivable and assets accruals 18.2 (25.2) (5.8)
Due to/from affiliates (32.8) 47.4 8.1
Other payables and accruals 17.9 14.4 (82.8)
------------ ------------ ------------
Net cash provided by operating activities 1,021.7 1,058.3 1,395.3
------------ ------------ ------------
Cash Flows from Investing Activities:
Proceeds from the sale, maturity, or redemption of:
Fixed maturities, available-for-sale 26,791.8 29,977.9 26,315.3
Equity securities, available-for-sale 85.7 130.2 57.2
Mortgage loans on real estate 71.0 16.3 2.0
Acquisition of:
Fixed maturities, available-for-sale (26,809.0) (31,951.6) (28,272.8)
Equity securities, available-for-sale (81.6) (34.8) (81.8)
Mortgage loans on real estate (406.7) (194.2) (343.7)
Increase in policy loans 7.6 26.0 32.7
Purchases/sales of property and
equipment, net (11.7) (5.2) (5.8)
Change in other investments (15.3) (8.1) (22.4)
Loans to affiliates (175.0) -- --
------------ ------------ ------------
Net cash used in investing activities (543.2) (2,043.5) (2,319.3)
------------ ------------ ------------
Cash Flows from Financing Activities:
Deposits for investment contracts $ 2,089.9 $ 2,296.6 $ 1,349.1
Maturities and withdrawals from investment contracts (1,910.4) (1,745.5) (741.4)
Short-term borrowings, net (458.5) 196.5 299.7
Dividends paid to Parent (70.0) -- --
Capital contributions -- 230.0 --
------------ ------------ ------------
Net cash provided by (used in) financing activities (349.0) 977.6 907.4
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 129.5 (7.6) (16.6)
Cash and cash equivalents, beginning of year 57.8 65.4 82.0
------------ ------------ ------------
Cash and cash equivalents, end of year $ 187.3 $ 57.8 $ 65.4
============ ============ ============
Supplemental cash flow information:
Income taxes paid, net $ 3.2 $ 29.8 $ 6.7
============ ============ ============
Interest paid $ 22.8 $ 32.6 $ 20.6
============ ============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
37
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
ING Life Insurance and Annuity Company ("ILIAC"), a stock life insurance
company domiciled in the state of Connecticut, and its wholly-owned
subsidiaries (collectively, the "Company") are providers of financial
products and services in the United States. These consolidated financial
statements include ILIAC and its wholly-owned subsidiaries, ING Insurance
Company of America ("IICA"), ING Financial Advisers, LLC ("IFA") and,
through February 28, 2002, ING Investment Adviser Holding, Inc. ("IA
Holdco"). Until March 30, 2003, ILIAC was a wholly-owned subsidiary of ING
Retirement Holdings, Inc. ("HOLDCO"), which was a wholly-owned subsidiary
of ING Retirement Services, Inc. ("IRSI"). Until March 30, 2003, IRSI was a
wholly-owned subsidiary of Lion Connecticut Holdings Inc. ("Lion"), which
in turn was ultimately owned by ING Groep N.V. ("ING"). On March 30, 2003,
a series of mergers occurred in the following order: IRSI merged into Lion
and HOLDCO merged into Lion. As a result, ILIAC is now a direct,
wholly-owned subsidiary of Lion, which in turn is an indirect, wholly-owned
subsidiary of ING. ING is a global financial services company based in The
Netherlands, with American Depository Shares listed on the New York Stock
Exchange under the symbol "ING."
DESCRIPTION OF BUSINESS
The Company offers qualified and nonqualified annuity contracts that
include a variety of funding and payout options for individuals and
employer-sponsored retirement plans qualified under Internal Revenue Code
Sections 401, 403, 408 and 457, as well as nonqualified deferred
compensation plans. The Company's products are offered primarily to
individuals, pension plans, small businesses and employer-sponsored groups
in the health care, government, education (collectively "not-for-profit"
organizations), and corporate markets. The Company's products generally are
distributed through pension professionals, independent agents and brokers,
third party administrators, banks, dedicated career agents, and financial
planners.
Annuity contracts may be deferred or immediate (payout annuities). These
products also include programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and record-keeping
services along with a variety of investment options, including affiliated
and nonaffiliated mutual funds, and variable and fixed investment options.
In addition, the Company offers wrapper agreements entered into with
retirement plans which contain certain benefit responsive guarantees (i.e.
liquidity guarantees of principal and previously accrued interest for
benefits paid under the terms of the plan) with respect to portfolios of
plan-owned assets not invested with the Company. The Company also offers
investment advisory services and pension plan administrative services.
RECENTLY ADOPTED ACCOUNTING STANDARDS
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
The Company adopted Statement of Position ("SOP") 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts," on January 1, 2004. SOP 03-1
establishes several new accounting and disclosure requirements for certain
nontraditional long-duration contracts and for separate accounts including,
among other things, a requirement that assets
38
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
and liabilities of separate account arrangements that do not meet certain
criteria be accounted for as general account assets and liabilities, and
that revenues and expenses related to such arrangements, be consolidated
with the respective lines in the Consolidated Statements of Operations. In
addition, the SOP requires that additional liabilities be established for
certain guaranteed death and other benefits and for products with certain
patterns of cost of insurance charges. In addition, sales inducements
provided to contractowners must be recognized on the Consolidated Balance
Sheets separately from deferred acquisition costs and amortized as a
component of benefits expense using methodology and assumptions consistent
with those used for amortization of deferred policy acquisition costs
("DAC").
The Company evaluated all requirements of SOP 03-1 which resulted in the
consolidation of the Separate Account supporting the guarantee option into
the General Account. Requirements to establish additional liabilities for
minimum guarantee benefits are applicable to the Company; however, the
Company's policies on contract liabilities have historically been, and
continue to be, in conformity with the newly established requirements.
Requirements for recognition of additional liabilities for products with
certain patterns of cost of insurance charges are not applicable to the
Company. The adoption of SOP 03-1 had no significant effect on the
Company's financial position, results of operations, or cash flows.
In the fourth quarter of 2004, the Company implemented Technical Practice
Aid 6300.05 - 6300.08, "Q&As Related to the Implementation of SOP 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (the
"TPA").
The TPA, which was approved in September 2004, provides additional guidance
regarding certain implicit assessments that may be used in testing of the
base mortality function on contracts, which is performed to determine
whether additional liabilities are required in conjunction with SOP 03-1.
In addition, the TPA provides additional guidance surrounding the allowed
level of aggregation of additional liabilities determined under SOP 03-1.
The adoption of the TPA did not have an impact on the Company's financial
position, results of operations, or cash flows.
The implementation of SOP 03-1 also raised questions regarding the
interpretation of the requirements of Statement of Financial Accounting
Standards ("FAS") No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments," concerning when it is appropriate to
record an unearned revenue liability related to the insurance benefit
function. To clarify its position, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position No. FAS 97-1 ("FSP FAS 97-1"),
"Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97
Permit or Require Accrual of an Unearned Revenue Liability," effective for
fiscal periods beginning subsequent to the date the guidance was issued,
June 18, 2004. The Company adopted FSP FAS 97-1 on July 1, 2004 which did
not have an impact on the Company's financial position, results of
operations, or cash flows.
THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO
CERTAIN INVESTMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue No. 03-1 ("EITF-03-1"), "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
39
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Investments," requiring that a three-step impairment model be applied to
securities within its scope. The three-step model is applied on a
security-by-security basis as follows:
Step 1: Determine whether an investment is impaired. An investment is
impaired if the fair value of the investment is less than its cost
basis.
Step 2: Evaluate whether an impairment is other-than-temporary.
Step 3: If the impairment is other-than-temporary, recognize an
impairment loss equal to the difference between the investment's
cost and its fair value.
On September 30, 2004, the FASB issued FASB Staff Position No. EITF Issue
03-1-1 ("FSP EITF 03-1-1"), "Effective Date of Paragraphs 10-20 of EITF
Issue No. 03-1, `The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments,'" which delayed the EITF Issue No.
03-1 original effective date of July 1, 2004 related to steps two and three
of the impairment model introduced. The delay is in effect until a final
consensus can be reached on such guidance. Despite the delay of the
implementation of steps two and three, other-than-temporary impairments are
still to be recognized as required by existing guidance.
Earlier consensus reached by the EITF on this issue required that certain
quantitative and qualitative disclosures be made for unrealized losses on
debt and equity securities that have not been recognized as
other-than-temporary impairments. These disclosures were adopted by the
Company, effective December 31, 2003, and are included in the Investments
footnote.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Derivative Implementation Group ("DIG"), responsible for issuing
guidance on behalf of the FASB for implementation of FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," issued
Statement No. 133 Implementation Issue No. B36, "Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments That Incorporate
Credit Risk Exposures That Are Unrelated or Only Partially Related to the
Credit Worthiness of the Obligor under Those Instruments" ("DIG B36").
Under this interpretation, modified coinsurance and coinsurance with funds
withheld reinsurance agreements as well as other types of receivables and
payables where interest is determined by reference to a pool of fixed
maturity assets or a total return debt index may be determined to contain
embedded derivatives that are required to be bifurcated from the host
instrument. The required date of adoption of DIG B36 for the Company was
October 1, 2003. The adoption did not have an impact on the Company's
financial position, results of operations, or cash flows.
VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46").
In December 2003, the FASB modified FIN 46 to make certain technical
revisions and address certain implementation issues that had arisen. FIN 46
provides a new framework for identifying variable interest entities
("VIEs") and determining when a company should include the assets,
liabilities, noncontrolling interests and results of activities of a VIE in
its consolidated financial statements.
40
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
In general, a VIE is a corporation, partnership, limited-liability
corporation, trust, or any other legal structure used to conduct activities
or hold assets that either (1) has an insufficient amount of equity to
carry out its principal activities without additional subordinated
financial support, (2) has a group of equity owners that are unable to make
significant decisions about its activities, or (3) has a group of equity
owners that do not have the obligation to absorb losses or the right to
receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest
holder) is obligated to absorb a majority of the risk of loss from the
VIE's activities, is entitled to receive a majority of the VIE's residual
returns (if no party absorbs a majority of the VIE's losses), or both. A
variable interest holder that consolidates the VIE is called the primary
beneficiary. Upon consolidation, the primary beneficiary generally must
initially record all of the VIE's assets, liabilities, and noncontrolling
interests at fair value and subsequently account for the VIE as if it were
consolidated based on majority voting interest. FIN 46 also requires
disclosures about VIEs that the variable interest holder is required to
consolidate and those VIEs it is not required to consolidate but in which
it has a significant variable interest.
The Company holds investments in VIEs in the form of private placement
securities, structured securities, securitization transactions, and limited
partnerships with an aggregate fair value of $8,489.3 as of December 31,
2004. These VIEs are held by the Company for investment purposes.
Consolidation of these investments in the Company's financial statements is
not required as the Company is not the primary beneficiary for any of these
VIEs. Book value as of December 31, 2004 of $8,396.1 represents the maximum
exposure to loss except for those structures for which the Company also
receives asset management fees.
GUARANTEES
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"), to clarify accounting and
disclosure requirements relating to a guarantor's issuance of certain types
of guarantees, or groups of similar guarantees, even if the likelihood of
the guarantor's having to make any payments under the guarantee is remote.
The disclosure provisions are effective for financial statements for fiscal
years ended after December 15, 2002. For certain guarantees, the
interpretation also requires that guarantors recognize a liability equal to
the fair value of the guarantee upon its issuance. This initial recognition
and measurement provision is to be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company has
performed an assessment of its guarantees and believes that all of its
guarantees are excluded from the scope of this interpretation.
GOODWILL IMPAIRMENT
During 2002, the Company adopted FAS No. 142, "Goodwill and Other
Intangible Assets." The adoption of this standard resulted in the
recognition of an impairment loss of $2,412.1, net of taxes of $1,298.8,
related to prior acquisitions, recorded retroactive to the first quarter of
2002. Prior quarters of 2002 were restated accordingly. This impairment
loss represented the entire carrying amount of goodwill, net of accumulated
amortization. This impairment charge is shown as a change in accounting
principle on the December 31, 2002 Consolidated Statement of Operations.
41
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FAS No. 123 (revised 2004), "Share-Based
Payment" ("FAS 123R"), which requires all share-based payments be
recognized in the financial statements based upon the fair value. FAS 123R
is effective at the beginning of the first interim or annual period
beginning after June 15, 2005. Earlier adoption is encouraged. FAS 123R
provides two transition methods, modified-prospective and
modified-retrospective.
The modified-prospective method recognizes the grant-date fair value of
compensation for new and unvested awards beginning in the fiscal period in
which the recognition provisions are first applied. Prior periods are not
restated. The modified-retrospective method, entities are allowed to
restate prior periods by recognizing the compensation cost in the amount
previously reported in the pro forma footnote disclosures as required under
FAS No. 123, "Accounting for Stock-Based Compensation."
The Company intends to early adopt the provisions of FAS 123R on January 1,
2005 using the modified-prospective method. The adoption of FAS 123R is not
expected to have a material impact on the Company's financial position,
results of operations or cash flows. Prior to January 2005, the Company
applied the intrinsic value-based provisions set forth in APB Opinion No.
25, "Accounting for Stock Issued to Employees". Under the intrinsic value
method, compensation expense is determined on the measurement date, which
is the first date on which both the number of shares the employee is
entitled to receive and the exercise price are known. Compensation expense,
if any, is measured based on the award's intrinsic value, which is the
excess of the market price of the stock over the exercise price on the
measurement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from reported results using those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years financial
information to conform to the current year presentation, including a
reclassification in the amount of $9.2, net of tax, from retained earnings
to accumulated other comprehensive income as of December 31, 2001 (see
footnote 14).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased.
INVESTMENTS
All of the Company's fixed maturity and equity securities are currently
designated as available-for-sale. Available-for-sale securities are
reported at fair value and unrealized gains and losses on these securities
42
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
are included directly in shareholder's equity, after adjustment for related
changes in deferred policy acquisition costs ("DAC"), value of business
acquired ("VOBA"), and deferred income taxes.
OTHER-THAN-TEMPORARY IMPAIRMENTS
The Company analyzes the General Account investments to determine whether
there has been an other-than-temporary decline in fair value below the
amortized cost basis in accordance with FAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Management considers
the length of time and the extent to which fair value has been less than
amortized cost; the financial condition and near-term prospects of the
issuer; future economic conditions and market forecasts; and the Company's
intent and ability to retain the investment in the issuer for a period of
time sufficient to allow for recovery in fair value. If it is probable that
all amounts due according to the contractual terms of a debt security will
not be collected, an other-than-temporary impairment is considered to have
occurred.
In addition, the Company invests in structured securities that meet the
criteria of EITF Issue No. 99-20 "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets." Under Issue No. EITF 99-20, a determination of the
required impairment is based on credit risk and the possibility of
significant prepayment risk that restricts the Company's ability to recover
the investment. An impairment is recognized if the fair value of the
security is less than amortized cost and there has been an adverse change
in cash flow since the last remeasurement date.
When a decline in fair value is determined to be other-than-temporary, the
individual security is written down to fair value and the loss is accounted
for as a realized loss.
EXPERIENCE-RATED PRODUCTS
Included in available-for-sale securities are investments that support
experience-rated products. Experience-rated products are products where the
customer, not the Company, assumes investment (including realized capital
gains and losses) and other risks, subject to, among other things, minimum
principal and interest guarantees. Unamortized realized gains and losses on
the sale of and unrealized capital gains and losses on investments
supporting these products are included in future policy benefits and claims
reserves on the Consolidated Balance Sheets. Realized capital gains and
losses on all other investments are reflected in the Consolidated
Statements of Operations. Unrealized capital gains and losses on all other
investments are reflected in shareholder's equity, net of related income
taxes.
PURCHASES AND SALES
Purchases and sales of fixed maturities and equity securities (excluding
private placements) are recorded on the trade date. Purchases and sales of
private placements and mortgage loans are recorded on the closing date.
VALUATION
Fair values for fixed maturities are obtained from independent pricing
services or broker/dealer quotations. Fair values for privately placed
bonds are determined using a matrix-based model. The matrix-based model
considers the level of risk-free interest rates, current corporate spreads,
the credit quality of the issuer, and
43
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
cash flow characteristics of the security. The fair values for actively
traded equity securities are based on quoted market prices. For equity
securities not actively traded, estimated fair values are based upon values
of issues of comparable yield and quality or conversion value where
applicable.
Mortgage loans on real estate are reported at amortized cost less
impairment writedowns. If the value of any mortgage loan is determined to
be impaired (i.e., when it is probable the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement), the carrying value of the mortgage loan is reduced to the
present value of expected cash flows from the loan, discounted at the
loan's effective interest rate, or to the loan's observable market price,
or the fair value of the collateral. If the loan is in foreclosure, the
carrying value is reduced to the fair value of the underlying collateral,
net of estimated costs to obtain and sell. The carrying value of the
impaired loans is reduced by establishing a permanent writedown charged to
realized loss.
Policy loans are carried at unpaid principal balances.
Short-term investments, consisting primarily of money market instruments
and other fixed maturities issues purchased with an original maturity of 91
days to one year, are considered available-for-sale and are carried at fair
value, which approximates amortized cost.
SECURITIES LENDING
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of the loaned domestic securities. The collateral is deposited
by the borrower with a lending agent, and retained and invested by the
lending agent according to the Company's guidelines to generate additional
income. The market value of the loaned securities is monitored on a daily
basis with additional collateral obtained or refunded as the market value
of the loaned securities fluctuates.
REPURCHASE AGREEMENTS
The Company engages in dollar repurchase agreements ("dollar rolls") and
repurchase agreements to increase the return on investments and improve
liquidity. These transactions involve a sale of securities and an agreement
to repurchase substantially the same securities as those sold. Company
policies require a minimum of 95% of the fair value of securities pledged
under dollar rolls and repurchase agreement transactions to be maintained
as collateral. Cash collateral received is invested in fixed maturities and
the offsetting collateral liability is included in borrowed money on the
Consolidated Balance Sheets.
DERIVATIVES
The Company's use of derivatives is limited mainly to hedging purposes.
However, these derivatives are not accounted for using hedge accounting
treatment under FAS No. 133 and the Company does not seek hedge accounting
treatment. The Company enters into interest rate, equity market, and
currency contracts, including swaps, caps, and floors to reduce and manage
risks associated with changes in value, yield, price or cash flow or
exchange rates of assets or liabilities held or intended to be held.
Changes in the fair value of open derivative contracts are recorded in net
realized capital gains and losses. Derivatives are included in other
investments on the Consolidated Balance Sheets.
44
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company also has investments in certain fixed maturity instruments and
has retail annuity products that contain embedded derivatives, including
those whose market value is at least partially determined by, among other
things, levels of or changes in domestic and/or foreign interest rates
(short- or long-term), exchange rates, prepayment rates, equity markets, or
credit ratings/spreads. Changes in the fair value of embedded derivatives
are recorded in net realized capital gains (losses) in the Consolidated
Statements of Operations. Embedded derivatives are included in fixed
maturities.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
DAC represents policy acquisition costs that have been capitalized and
are subject to amortization. Such costs consist principally of certain
commissions, underwriting, contract issuance, and certain agency
expenses, related to the production of new and renewal business.
VOBA represents the outstanding value of in force business capitalized
and is subject to amortization in purchase accounting when the Company was
acquired. The value is based on the present value of estimated net cash
flows embedded in the Company's contracts.
The amortization methodology used for DAC and VOBA varies by product type.
FAS No. 60, "Accounting and Reporting by Insurance Enterprises," applies to
traditional life insurance products, primarily whole life and term life
insurance contracts. Under FAS No. 60, DAC and VOBA are amortized over the
premium payment period, in proportion to the premium revenue recognized.
FAS No. 97 applies to universal life and investment-type products, such as
fixed and variable deferred annuities. Under FAS No. 97, DAC and VOBA are
amortized, with interest, over the life of the related contracts (usually
25 years) in relation to the present value of estimated future gross
profits from investment, mortality, and expense margins; asset-based fees,
policy administration, and surrender charges; less policy maintenance fees
and non-capitalized commissions, as well as realized gains and losses on
investments.
Changes in assumptions can have a significant impact on DAC and VOBA
balances and amortization rates. Several assumptions are considered
significant in the estimation of future gross profits associated with
variable deferred annuity products. One of the most significant assumptions
involved in the estimation of future gross profits is the assumed return
associated with the variable account performance. To reflect the volatility
in the equity markets, this assumption involves a combination of near-term
expectations and long-term assumptions regarding market performance. The
overall return on the variable account is dependent on multiple factors,
including the relative mix of the underlying sub-accounts among bond funds
and equity funds, as well as equity sector weightings. Other significant
assumptions include surrender and lapse rates, estimated interest spread,
and estimated mortality.
Due to the relative size and sensitivity to minor changes in underlying
assumptions of DAC and VOBA balances, the Company performs a quarterly and
annual analysis of DAC and VOBA for the annuity and life businesses,
respectively. The DAC and VOBA balances are evaluated for recoverability
and are reduced to the extent that estimated future gross profits are
inadequate to recover the asset.
45
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
At each evaluation date, actual historical gross profits are reflected, and
estimated future gross profits and related assumptions are evaluated for
continued reasonableness. Any adjustment in estimated profit requires that
the amortization rate be revised ("unlocking"), retroactively to the date
of the policy or contract issuance. The cumulative prior period adjustment
is recognized as a component of current period amortization. In general,
increases in investment, mortality, and expense margins, and thus estimated
future profits, lower the rate of amortization. However, decreases in
investment, mortality, and expense margins, and thus estimated future
profits, increase the rate of amortization.
RESERVES
The Company establishes and carries actuarially determined reserve
liabilities which are calculated to meet its future obligations. Changes in
or deviations from the assumptions used can significantly affect the
Company's reserve levels and related future operations.
Reserves for deferred annuity investment contracts and immediate annuities
without life contingent benefits are equal to cumulative deposits less
charges and withdrawals plus credited interest thereon (rates range from
1.5% to 11.9% for all years presented) net of adjustments for investment
experience that the Company is entitled to reflect in future credited
interest. These reserves also include unrealized gains/losses related to
investments and unamortized realized gains/losses on investments for
experience-rated contracts. Reserves on experience-rated contracts reflect
the rights of contractholders, plan participants, and the Company.
Reserves for immediate annuities with life contingent benefits are computed
on the basis of assumed interest discount rates, mortality, and expenses,
including a margin for adverse deviations. Such assumptions generally vary
by plan, year of issue and policy duration. Reserve interest rates range
from 4.9% to 9.5% for all years presented.
Because the sale of the domestic individual life insurance business on
October 1, 1998 was substantially in the form of an indemnity reinsurance
agreement, the Company includes an amount in reinsurance recoverable on the
Consolidated Balance Sheet, which approximates the Company's total
individual life reserves. See Note 11 to the Consolidated Balance Sheets.
Unpaid claims and claim expenses for all lines of insurance include
benefits for reported losses and estimates of benefits for losses incurred
but not reported.
SALES INDUCEMENTS
Sales inducements represent benefits paid to contractowners that are
incremental to the amounts the Company credits on similar contracts and are
higher than the contract's expected ongoing crediting rates for periods
after the inducement. As of January 1, 2004, such amounts are reported
separately and included in Other Assets on the Consolidated Balance Sheet
in accordance with SOP 03-1. Prior to 2004, sales inducements were recorded
as a component of DAC on the Consolidated Balance Sheet. Beginning in 2004,
sales inducements are amortized as a component of interest credited and
other benefits to contractowners using methodologies and assumptions
consistent with those used for amortization of DAC.
46
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION
For most annuity contracts, fee income for the cost of insurance,
surrenders, expenses, and other fees are recorded as revenue as charges are
assessed against contractowners. Other amounts received for these contracts
are reflected as deposits and are not recorded as premiums or revenue.
Related policy benefits are recorded in relation to the associated premiums
or gross profit so that profits are recognized over the expected lives of
the contracts. When annuity payments with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance
in the account is treated as a single premium for the purchase of an
annuity and reflected as an offsetting amount in both premiums and current
and future benefits on the Consolidated Statements of Operations. Premiums
on the Consolidated Statements of Operations primarily represent amounts
received for immediate annuities with life contingencies.
SEPARATE ACCOUNTS
Separate Account assets and liabilities generally represent funds
maintained to meet specific investment objectives of contractowners who
bear the investment risk, subject, in limited cases, to certain minimum
guaranteed rates. Investment income and investment gains and losses
generally accrue directly to such contractowners. The assets of each
account are legally segregated and are not subject to claims that arise out
of any other business of the Company or its affiliates.
Separate Account assets supporting variable options under annuity contracts
are invested, as designated by the contractowner or participant (who bears
the investment risk subject, in limited cases, to minimum guaranteed rates)
under a contract in shares of mutual funds which are managed by the Company
or its affiliates, or other selected mutual funds not managed by the
Company or its affiliates.
Separate Account assets and liabilities are carried at fair value and shown
as separate captions in the Consolidated Balance Sheets. Deposits,
investment income and net realized and unrealized capital gains and losses
of the Separate Accounts are not reflected in the Consolidated Financial
Statements (with the exception of realized and unrealized capital gains and
losses on the assets supporting the guaranteed interest option). The
Consolidated Statements of Cash Flows do not reflect investment activity of
the Separate Accounts.
Assets and liabilities of separate account arrangements that do not meet
the criteria in SOP 03-1 for presentation in the separate caption in the
Consolidated Balance Sheets (primarily guaranteed interest options), and
revenue and expenses related to such arrangements, are consolidated in the
financial statements with the general account. At December 31, 2004 and
2003, unrealized gains of $7.3 and $55.7, respectively, on assets
supporting a guaranteed interest option are reflected in shareholder's
equity.
REINSURANCE
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverable balances deemed
probable of recovery are reflected as assets on the Consolidated Balance
Sheets. Of the reinsurance recoverable on the Consolidated
47
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)
Balance Sheets, $2.9 billion and $3.0 billion at December 31, 2004 and
2003, respectively, is related to the reinsurance recoverable from Lincoln
National Corporation ("Lincoln") arising from the sale of the Company's
domestic life insurance business in 1998 (See Note 11).
INCOME TAXES
The Company is taxed at regular corporate rates after adjusting income
reported for financial statement purposes for certain items. Deferred
income tax expenses/benefits result from changes during the year in
cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
2. INVESTMENTS
Fixed maturities and equity securities available-for-sale as of December
31, 2004, were as follows:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 197.3 $ 0.9 $ 0.9 $ 197.3
States, municipalities and political
subdivisions 32.1 0.2 0.9 31.4
U.S. corporate securities:
Public utilities 1,207.6 50.0 5.0 1,252.6
Other corporate securities 5,846.5 275.0 25.4 6,096.1
---------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 7,054.1 325.0 30.4 7,348.7
---------------------------------------------------------------------------------------------------------
Foreign securities:
Government 660.2 33.9 3.1 691.0
Other 1,656.4 78.4 6.1 1,728.7
---------------------------------------------------------------------------------------------------------
Total foreign securities 2,316.6 112.3 9.2 2,419.7
---------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities 5,497.6 65.6 58.2 5,505.0
Commercial mortgage-backed securities 1,491.2 73.2 4.4 1,560.0
Other asset-backed securities 1,354.6 22.6 13.7 1,363.5
---------------------------------------------------------------------------------------------------------
Total fixed maturities, including
fixed maturities pledged 17,943.5 599.8 117.7 18,425.6
Less: fixed maturities pledged to creditors 1,258.8 18.0 2.5 1,274.3
---------------------------------------------------------------------------------------------------------
Fixed maturities 16,684.7 581.8 115.2 17,151.3
Equity securities 153.9 9.2 0.5 162.6
---------------------------------------------------------------------------------------------------------
Total investments available-for-sale $ 16,838.6 $ 591.0 $ 115.7 $ 17,313.9
=========================================================================================================
</Table>
48
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
2. INVESTMENTS (continued)
Fixed maturities and equity securities available-for-sale as of December
31, 2003, were as follows:
<Table>
<Caption>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------------------------------------------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 350.0 $ 1.7 $ 0.3 $ 351.4
States, municipalities and political
subdivisions 2.1 0.1 -- 2.2
U.S. corporate securities:
Public utilities 970.7 48.9 11.4 1,008.2
Other corporate securities 5,568.1 327.9 29.1 5,866.9
---------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 6,538.8 376.8 40.5 6,875.1
---------------------------------------------------------------------------------------------------------
Foreign securities:
Government 605.2 33.7 2.8 636.1
Other 1,364.7 74.5 11.0 1,428.2
---------------------------------------------------------------------------------------------------------
Total foreign securities 1,969.9 108.2 13.8 2,064.3
---------------------------------------------------------------------------------------------------------
Residential mortgage-backed securities 5,903.7 91.8 35.1 5,960.4
Commercial mortgage-backed securities 1,278.5 105.0 3.3 1,380.2
Other asset-backed securities 1,036.4 34.0 9.5 1,060.9
---------------------------------------------------------------------------------------------------------
Total fixed maturities, including
fixed maturities pledged to creditors 17,079.4 717.6 102.5 17,694.5
Less: fixed maturities pledged to creditors 1,624.4 23.8 3.4 1,644.8
---------------------------------------------------------------------------------------------------------
Fixed maturities 15,455.0 693.8 99.1 16,049.7
Equity securities 146.5 15.5 0.1 161.9
---------------------------------------------------------------------------------------------------------
Total investments available-for-sale $ 15,601.5 $ 709.3 $ 99.2 $ 16,211.6
=========================================================================================================
</Table>
At December 31, 2004 and 2003, net unrealized appreciation of $490.8 and
$630.5, respectively, on total fixed maturities, including fixed
maturities pledged to creditors, and equity securities, included $357.5
and $491.5, respectively, related to experience-rated contracts, which
were not reflected in shareholder's equity but in future policy benefits
and claim reserves.
49
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
2. INVESTMENTS (continued)
The aggregate unrealized losses and related fair values of investments with
unrealized losses as of December 31, 2004, are shown below by duration:
<Table>
<Caption>
UNREALIZED FAIR
LOSS VALUE
-----------------------------------------------------------------------------
Duration category:
Less than six months below amortized cost $ 37.7 $ 3,319.0
More than six months and less than
twelve months below cost 34.9 1,795.0
More than twelve months below amortized cost 45.6 960.5
-----------------------------------------------------------------------------
Total investments available-for-sale $ 118.2 $ 6,074.5
=============================================================================
</Table>
Of the unrealized losses, less than 6 months in duration of $37.7, there
were $9.5 in unrealized losses that are primarily related to interest rate
movement or spread widening for other than credit-related reasons. The
remaining unrealized losses of $28.2, as of December 31, 2004, related to
securities reviewed for impairment under the guidance proscribed by EITF
Issue No. 99-20. This category includes U.S. government-backed securities,
principal protected securities, and structured securities which did not
have an adverse change in cash flows for which the carrying amount was
$1,746.2.
Of the unrealized losses, more than 6 months and less than 12 months in
duration, of $34.9, there were $16.4 in unrealized losses that are
primarily related to interest rate movement or spread widening for other
than credit-related reasons. The remaining unrealized losses of $18.5, as
of December 31, 2004, related to securities reviewed for impairment under
the guidance proscribed by EITF Issue No. 99-20. This category includes
U.S. government-backed securities, principal protected securities, and
structured securities which did not have an adverse change in cash flows
for which the carrying amount was $829.2.
An analysis of the unrealized losses, more than 12 months in duration, of
$45.6 follows. There were $15.9 in unrealized losses that are primarily
related to interest rate movement or spread widening for other than
credit-related reasons. The remaining unrealized losses of $29.7, as of
December 31, 2004, related to securities reviewed for impairment under the
guidance proscribed by EITF Issue No. 99-20. This category includes U.S.
government-backed securities, principal protected securities, and
structured securities which did not have an adverse change in cash flows
for which the carrying amount was $505.6.
The amortized cost and fair value of total fixed maturities for the year
ended December 31, 2004 are shown below by contractual maturity. Actual
maturities may differ from contractual maturities because securities may be
restructured, called, or prepaid.
<Table>
<Caption> AMORTIZED FAIR
COST VALUE
-----------------------------------------------------------------------------
Due to mature:
One year or less $ 395.8 $ 400.0
After one year through five years 3,650.0 3,727.4
After five years through ten years 3,128.8 3,256.4
After ten years 2,425.5 2,613.3
Mortgage-backed securities 6,988.8 7,065.0
Other asset-backed securities 1,354.6 1,363.5
Less: fixed maturities pledged to creditors 1,258.8 1,274.3
-----------------------------------------------------------------------------
Fixed maturities $ 16,684.7 $ 17,151.3
=============================================================================
</Table>
50
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
2. INVESTMENTS (continued)
At December 31, 2004 and 2003, fixed maturities with carrying values of
$10.9 and $11.2, respectively, were on deposit as required by regulatory
authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 2004 or 2003.
The Company has various categories of CMOs that are subject to different
degrees of risk from changes in interest rates and, for CMOs that are not
agency-backed, defaults. The principal risks inherent in holding CMOs are
prepayment and extension risks related to dramatic decreases and increases
in interest rates resulting in the repayment of principal from the
underlying mortgages either earlier or later than originally anticipated.
At December 31, 2004 and 2003, approximately 4.1% and 2.8%, respectively,
of the Company's CMO holdings were invested in types of CMOs which are
subject to more prepayment and extension risk than traditional CMOs (such
as interest-only or principal-only strips).
The Company enters into dollar repurchase agreements ("dollar rolls") and
repurchase agreements to increase its return on investments and improve
liquidity. At December 31, 2004 and 2003, the carrying value of the
securities pledged in dollar rolls and repurchase agreements was $1,274.3
and $1,644.8, respectively. The carrying value of the securities pledged in
dollar rolls and repurchase agreements is included in pledged securities on
the Balance Sheets. The repurchase obligation related to dollar rolls and
repurchase agreements totaled $1,057.4 and $1,519.3 at December 31, 2004
and 2003, respectively. The repurchase obligation related to dollar rolls
and repurchase agreements is included in borrowed money on the Consolidated
Balance Sheets.
IMPAIRMENTS
The following table identifies the Company's other-than-temporary
impairments by type as of December 31:
<Table>
<Caption>
2004 2003 2002
----------------------- ----------------------- -----------------------
NO. OF NO. OF NO. OF
IMPAIRMENT SECURITIES IMPAIRMENT SECURITIES IMPAIRMENT SECURITIES
------------------------------------------------------------------------------------------------------------
U.S. Corporate $ -- -- $ 6.2 4 $ 0.1 2
Residential mortgage-backed 13.5 53 88.2 83 40.0 33
Limited partnership -- -- 2.0 1
Equities -- -- -- 2 0.1 2
------------------------------------------------------------------------------------------------------------
Total $ 13.5 53 $ 96.4 90 $ 40.2 37
============================================================================================================
</Table>
The remaining fair value of the fixed maturities with other-than-temporary
impairments at December 31, 2004 and 2003 is $125.0 and $123.1,
respectively.
51
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
2. INVESTMENTS (continued)
NET INVESTMENT INCOME
Sources of net investment income were as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
-----------------------------------------------------------------------------------
Fixed maturities $ 980.5 $ 946.2 $ 964.1
Preferred stock -- 9.9 3.9
Mortgage loans on real estate 56.0 42.7 23.3
Policy loans 8.1 9.0 8.7
Cash equivalents 2.4 1.7 1.7
Other (2.1) (1.0) 23.4
-----------------------------------------------------------------------------------
Gross investment income 1,044.9 1,008.5 1,025.1
Less: investment expenses 61.8 89.4 65.6
-----------------------------------------------------------------------------------
Net investment income $ 983.1 $ 919.1 $ 959.5
===================================================================================
</Table>
NET REALIZED CAPITAL GAINS AND LOSSES
Net realized capital gains (losses) are comprised of the difference between
the carrying value of investments and proceeds from sale, maturity, and
redemption, as well as losses incurred due to impairment of investments.
Net realized capital gains (losses) on investments were as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
-----------------------------------------------------------------------------------------------------
Fixed maturities $ 24.7 $ 63.9 $ (97.5)
Equity securities 0.5 0.6 (3.5)
-----------------------------------------------------------------------------------------------------
Pretax net realized capital gains (losses) $ 25.2 $ 64.5 $ (101.0)
=====================================================================================================
After-tax net realized capital gains (losses) $ 16.4 $ 41.9 $ (65.7)
=====================================================================================================
</Table>
Net realized capital gains allocated to experience-rated contracts of
$42.0, $43.9, and $63.6 for the years ended December 31, 2004, 2003 and
2002, respectively, were deducted from net realized capital gains and an
offsetting amount was reflected in future policy benefits and claim
reserves on the Consolidated Balance Sheets. Net unamortized realized gains
(losses) allocated to experienced-rated contractholders were $233.4,
$213.7, and $199.3 at December 31, 2004, 2003 and 2002, respectively.
52
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
2. INVESTMENTS (continued)
Proceeds from the sale of fixed maturities and equity securities and the
related gross gains and losses, excluding those related to
experience-related contractholders, were as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
-----------------------------------------------------------------------------------------------------
Proceeds on sales $ 10,236.3 $ 12,812.5 $ 13,265.2
Gross gains 146.9 291.9 276.7
Gross losses 70.9 228.0 374.2
</Table>
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (net unrealized capital gains and losses on
securities, including securities pledged excluding those related to
experience-rated contractholders) were as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
-------------------------------------------------------------------------------------------------------
Fixed maturities $ 16.1 $ (54.3) $ 104.8
Equity securities (5.7) 17.9 (1.6)
Sales inducements (0.1) -- --
Other (59.8) 34.0 (8.3)
-------------------------------------------------------------------------------------------------------
Subtotal (49.5) (2.4) 94.9
Less: (Increase) decrease in deferred income taxes (17.3) (0.9) 33.2
-------------------------------------------------------------------------------------------------------
Net increase (decrease) in accumulated other
comprehensive (loss) income $ (32.2) $ (1.5) $ 61.7
=======================================================================================================
</Table>
3. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The following disclosures are made in accordance with the requirements of
FAS No. 107, "Disclosures about Fair Value of Financial Instruments." FAS
No. 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it
is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates, in
many cases, could not be realized in immediate settlement of the
instrument.
FAS No. 107 excludes certain financial instruments, including insurance
contracts, and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Company.
53
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
3. FINANCIAL INSTRUMENTS (continued)
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the following financial instruments:
FIXED MATURITIES: The fair values for the actively traded marketable bonds
are determined based upon the quoted market prices. The fair values for
marketable bonds without an active market are obtained through several
commercial pricing services which provide the estimated fair values. Fair
values of privately placed bonds are determined using a matrix-based
pricing model. The model considers the current level of risk-free interest
rates, current corporate spreads, the credit quality of the issuer, and
cash flow characteristics of the security. Also considered are factors such
as the net worth of the borrower, the value of collateral, the capital
structure of the borrower, the presence of guarantees, and the Company's
evaluation of the borrower's ability to compete in their relevant market.
Using this data, the model generates estimated market values which the
Company considers reflective of the fair value of each privately placed
bond.
EQUITY SECURITIES: Fair values of these securities are based upon quoted
market price.
MORTGAGE LOANS ON REAL ESTATE: The fair values for mortgage loans on real
estate are estimated using discounted cash flow analyses and rates
currently being offered in the marketplace for similar loans to borrowers
with similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations.
CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND POLICY LOANS: The
carrying amounts for these assets approximate the assets' fair values.
ASSETS HELD IN SEPARATE ACCOUNTS: Assets held in separate accounts are
reported at the quoted fair values of the individual securities in the
separate accounts.
INVESTMENT CONTRACT LIABILITIES (INCLUDED IN FUTURE POLICY BENEFITS AND
CLAIM RESERVES):
WITH A FIXED MATURITY: Fair value is estimated by discounting cash
flows at interest rates currently being offered by, or available to,
the Company for similar contracts.
WITHOUT A FIXED MATURITY: Fair value is estimated as the amount payable
to the contractowners upon demand. However, the Company has the right
under such contracts to delay payment of withdrawals which may
ultimately result in paying an amount different than that determined to
be payable on demand.
LIABILITIES RELATED TO SEPARATE ACCOUNTS: The carrying amounts for these
liabilities approximate their fair value.
54
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
3. FINANCIAL INSTRUMENTS (continued)
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 2004 and 2003 were as follows:
<Table>
<Caption>
2004 2003
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------------------------------------------------------------------------------------------------
Assets:
Fixed maturity securities, including
securities pledged $ 18,425.6 $ 18,425.6 $ 17,694.5 $ 17,694.5
Equity securities 162.6 162.6 161.9 161.9
Mortgage loans on real estate 1,090.2 1,119.8 754.5 798.5
Policy loans 262.7 262.7 270.3 270.3
Cash and cash equivalents 187.3 187.3 57.8 57.8
Assets held in Separate Accounts 33,310.5 33,310.5 33,014.7 33,014.7
Liabilities:
Investment contract liabilities:
With a fixed maturity 2,106.0 2,028.2 2,282.9 2,259.4
Without a fixed maturity 13,884.9 13,845.6 12,936.9 12,892.0
Liabilities related to Separate Accounts 33,310.5 33,310.5 33,014.7 33,014.7
</Table>
Fair value estimates are made at a specific point in time, based on
available market information and judgments about various financial
instruments, such as estimates of timing and amounts of future cash flows.
Such estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument, nor do they consider the tax impact of the
realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent markets, nor
can the disclosed value be realized in immediate settlement of the
instruments. In evaluating the Company's management of interest rate, price
and liquidity risks, the fair values of all assets and liabilities should
be taken into consideration, not only those presented above.
DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE FLOORS
Interest rate floors are used to manage the interest rate risk in the
Company's bond portfolio. Interest rate floors are purchased contracts that
provide the Company with an annuity in a declining interest rate
environment. The Company had no open interest rate floors at December 31,
2004 or 2003.
INTEREST RATE CAPS
Interest rate caps are used to manage the interest rate risk in the
Company's bond portfolio. Interest rate caps are purchased contracts that
provide the Company with an annuity in an increasing interest rate
environment. The notional amount, carrying value and estimated fair value
of the Company's open interest rate caps as of December 31, 2004 were
$527.8, $5.9, and $5.9, respectively. The notional amount,
55
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
3. FINANCIAL INSTRUMENTS (continued)
carrying value and estimated fair value of the Company's open interest rate
caps as of December 31, 2003 were $739.6, $8.2, and $8.2, respectively.
INTEREST RATE SWAPS
Interest rate swaps are used to manage the interest rate risk in the
Company's bond portfolio and well as the Company's liabilities. Interest
rate swaps represent contracts that require the exchange of cash flows at
regular interim periods, typically monthly or quarterly. The notional
amount, carrying value and estimated fair value of the Company's open
interest rate swaps as of December 31, 2004 were $1,766.0, $2.1, and $2.1,
respectively. The notional amount, carrying value and estimated fair value
of the Company's open interest rate swaps as of December 31, 2003 were
$950.0, $(14.4), and $(14.4), respectively.
FOREIGN EXCHANGE SWAPS
Foreign exchange swaps are used to reduce the risk of a change in the
value, yield, or cash flow with respect to invested assets. Foreign
exchange swaps represent contracts that require the exchange of foreign
currency cash flows for US dollar cash flows at regular interim periods,
typically quarterly or semi-annually. The notional amount, carrying value,
and estimated fair value of the Company's open foreign exchange rate swaps
as of December 31, 2004 were $126.5, $(28.4), and $(28.4), respectively.
The notional amount, carrying value and estimated fair value of the
Company's open foreign exchange rate swaps as of December 31, 2003 were
$78.1, $(12.8), and $(12.8), respectively.
4. DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Activity for the year-ended December 31, 2004, 2003 and 2002 within VOBA
was as follows:
<Table>
Balance at December 31, 2001 $ 1,601.8
Adjustment for unrealized gain (loss) (21.9)
Additions 25.0
Interest accrued at 7% 86.8
Amortization (253.3)
---------------------------------------------------------------------------
Balance at December 31, 2002 1,438.4
Adjustment for unrealized gain (loss) 6.2
Additions 59.1
Interest accrued at 7% 92.2
Amortization (180.5)
---------------------------------------------------------------------------
Balance at December 31, 2003 1,415.4
Adjustment for unrealized gain (loss) 7.9
Additions 50.1
Interest accrued at 6% 92.3
Amortization (200.5)
---------------------------------------------------------------------------
Balance at December 31, 2004 $ 1,365.2
===========================================================================
</Table>
56
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
4. DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
(continued)
The estimated amount of VOBA to be amortized, net of interest, over the
next five years is $112.2, $105.8, $97.4, $92.4, and $90.6 for the years
2005, 2006, 2007, 2008 and 2009, respectively. Actual amortization incurred
during these years may vary as assumptions are modified to incorporate
actual results.
During 2004, VOBA amortization increased principally due to higher actual
gross profits, a result of the margins earned on higher fixed and variable
assets and fewer other-than-temporary impairments. Also, surrenders
increased, which resulted in higher amortization for certain business.
During 2003 the Company reset long-term assumptions for the Separate
Account returns from 9.0% to 8.5% (gross before fund management fees and
mortality, expense, and other policy charges), reflecting a blended return
of equity and other sub-accounts. The 2003 unlocking adjustment was
primarily driven by improved market performance compared to expected during
2003. For the year ended December 31, 2003, the Company recorded a
deceleration of DAC/VOBA amortization totaling $3.7 before tax, or $2.4,
net of $1.3 of federal income tax expense.
As part of the regular analysis of DAC/VOBA, at the end of third quarter of
2002, the Company unlocked its long-term rate of return assumptions. The
Company reset long-term return assumptions for the Separate Account returns
to 9.0% (gross before fund management fees and mortality, expense, and
other policy charges), as of December 31, 2002, reflecting a blended return
of equity and other sub-accounts. The unlocking adjustment in 2002 was
primarily driven by the sustained downturn in the equity markets and
revised expectations for future returns. During 2002, the Company recorded
an acceleration of DAC/VOBA amortization totaling $45.6 before tax, or
$29.7, net of $15.9 of federal income tax benefit.
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The Company's ability to pay dividends to its parent is subject to the
prior approval of insurance regulatory authorities of the State of
Connecticut for payment of any dividend, which, when combined with other
dividends paid within the preceding 12 months, exceeds the greater of (1)
10% of statutory surplus at prior year end or (2) ILIAC's prior year
statutory net gain from operations.
ILIAC paid a cash dividend of $70.0 to Lion in 2004 and did not pay cash
dividends to Lion in 2003 or 2002. However, on February 28, 2002, ILIAC
contributed 100% of the stock of IA Holdco to HOLDCO in the form of a $60.1
dividend distribution. ILIAC did not receive capital contributions from its
parent in 2004 and received $230.0 and $164.3 in capital contributions
during 2003 and 2002, respectively.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and capital and surplus those amounts determined
in conformity with statutory accounting practices prescribed or permitted
by the Department, which differ in certain respects from accounting
principles generally accepted in the United States. Statutory net income
(loss) was $217.2, $67.5, and $148.8 for the years ended December 31, 2004,
2003, and 2002, respectively. Statutory capital and surplus was $1,344.5
and $1,230.7 as of December 31, 2004 and 2003, respectively.
57
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
(continued)
As of December 31, 2004, the Company did not utilize any statutory
accounting practices, which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
6. ADDITIONAL INSURANCE BENEFITS AND MINIMUM GUARANTEES
Under SOP 03-1, the Company calculates an additional liability ("SOP
reserves") for certain guaranteed minimum death benefits ("GMDBs") in order
to recognize the expected value of death benefits in excess of the
projected account balance over the accumulation period based on total
expected assessments.
The Company regularly evaluates estimates used to adjust the additional
liability balance, with a related charge or credit to benefit expense, if
actual experience or other evidence suggests that earlier assumptions
should be revised.
As of December 31, 2004, the Separate Account liability subject to SOP 03-1
for guaranteed minimum benefits and the additional liability recognized
related to minimum guarantees was $4,396.0 and $0.7, respectively.
The aggregate fair value of equity securities (including mutual funds)
supporting separate accounts with additional insurance benefits and minimum
investment return guarantees as of December 31, 2004 was $4,396.0.
7. INCOME TAXES
ILIAC files a consolidated federal income tax return with its subsidiary,
IICA. ILIAC has a federal tax allocation agreement with IICA whereby ILIAC
charges its subsidiary for federal taxes it would have incurred were it not
a member of the consolidated group and credits IICA for losses at the
statutory federal tax rate.
58
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
7. INCOME TAXES (continued)
Income taxes (benefits) from continuing operations consist of the
following:
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
--------------------------------------------------------------------------------------------
Current tax (benefit) expense:
Federal $ (3.8) $ 37.9 $ 40.4
State -- 1.1 1.8
--------------------------------------------------------------------------------------------
Total current tax (benefit) expense (3.8) 39.0 42.2
--------------------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal 46.2 22.1 (23.6)
--------------------------------------------------------------------------------------------
Total deferred tax expense (benefit) 46.2 22.1 (23.6)
--------------------------------------------------------------------------------------------
Total income tax expense $ 42.4 $ 61.1 $ 18.6
============================================================================================
</Table>
Income taxes were different from the amount computed by applying the
federal income tax rate to income from continuing operations before income
taxes for the following reasons:
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
--------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle $ 241.7 $ 215.7 $ 86.1
Tax rate 35% 35% 35%
--------------------------------------------------------------------------------------------
Income tax at federal statutory rate 84.6 75.5 30.1
Tax effect of:
State income tax, net of federal benefit - 0.7 1.2
Dividends received deduction (9.6) (14.0) (5.3)
IRS audit settlement (33.0)
Transfer of mutual fund shares - - (6.7)
Other, net 0.4 (1.1) (0.7)
--------------------------------------------------------------------------------------------
Income tax expense $ 42.4 $ 61.1 $ 18.6
============================================================================================
</Table>
59
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
7. INCOME TAXES (continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, are presented below:
<Table>
<Caption>
2004 2003
-------------------------------------------------------------------------------------------
Deferred tax assets:
Insurance reserves $ 286.4 $ 263.7
Unrealized gains allocable to experience-rated contracts 125.1 172.0
Investments -- 69.7
Postemployment benefits 60.5 30.2
Compensation 35.5 56.0
Other, net 23.4 19.7
-------------------------------------------------------------------------------------------
Total gross assets 530.9 611.3
-------------------------------------------------------------------------------------------
Deferred tax liabilities:
Value of business acquired 477.8 495.4
Net unrealized capital gains 161.3 236.4
Deferred policy acquisition costs 91.3 59.2
Other, net 9.8 5.0
-------------------------------------------------------------------------------------------
Total gross liabilities 740.2 796.0
-------------------------------------------------------------------------------------------
Net deferred tax liability $ 209.3 $ 184.7
===========================================================================================
</Table>
Net unrealized capital gains and losses are presented as a component of
Other Comprehensive Income in shareholder's equity, net of deferred taxes.
Under prior law, the Company was allowed to defer from taxation a portion
of income. The deferred income was accumulated in the Policyholders'
Surplus Account and only becomes taxable under certain conditions, which
management believes to be remote. Furthermore, the American Jobs Creation
Act of 2004 allows certain tax-free distributions from the Policyholders'
Surplus Account during 2005 and 2006. Therefore, based on currently
available information, no federal income taxes have been provided on the
Policyholders' Surplus Account accumulated balance of $17.2 million.
Valuation allowances are provided when it is considered more likely than
not that deferred tax assets will not be realized. No valuation allowance
has been established at this time, as management believes the above
conditions presently do not exist.
The Company establishes reserves for probable proposed adjustments by
various taxing authorities. Management believes there are sufficient
reserves provided for, or adequate defenses against any such adjustments.
The Internal Revenue Service (the "Service") has completed examinations of
the federal income tax returns of the Company for all years through the
December 13, 2000 short period. The tax benefit associated with the
settlement of the most recent audit is included in the 2004 financial
statements. The Service has commenced its examination for the tax years
ended December 31, 2000 and 2001. Additionally, various state tax audits
are in process.
60
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
8. BENEFIT PLANS
DEFINED BENEFIT PLAN
ING North America Insurance Corporation ("ING North America") sponsors the
ING Americas Retirement Plan (the "Retirement Plan"), effective as of
December 31, 2001. Substantially all employees of ING North America and its
subsidiaries and affiliates (excluding certain employees) are eligible to
participate, including the Company's employees other than Company agents.
The Retirement Plan is a tax-qualified defined benefit plan, the benefits
of which are guaranteed (within certain specified legal limits) by the
Pension Benefit Guaranty Corporation ("PBGC"). As of January 1, 2002, each
participant in the Retirement Plan (except for certain specified employees)
earns a benefit under a final average compensation formula. Subsequent to
December 31, 2001, ING North America is responsible for all Retirement Plan
liabilities. The costs allocated to the Company for its employees'
participation in the Retirement Plan were $19.0 for 2004, $15.1 for 2003,
and $6.4 for 2002, respectively.
DEFINED CONTRIBUTION PLAN
ING North America sponsors the ING Savings Plan and ESOP (the "Savings
Plan"). Substantially all employees of ING North America and its
subsidiaries and affiliates (excluding certain employees, including but not
limited to Career Agents) are eligible to participate, including the
Company's employees other than Company agents. Career Agents are certain,
full-time insurance salesmen who have entered into a career agent agreement
with the Company and certain other individuals who meet specified
eligibility criteria. The Savings Plan is a tax-qualified profit sharing
and stock bonus plan, which includes an employee stock ownership plan
("ESOP") component. Savings Plan benefits are not guaranteed by the PBGC.
The Savings Plan allows eligible participants to defer into the Savings
Plan a specified percentage of eligible compensation on a pre-tax basis.
ING North America matches such pre-tax contributions, up to a maximum of 6%
of eligible compensation. All matching contributions are subject to a
4-year graded vesting schedule (although certain specified participants are
subject to a 5-year graded vesting schedule). All contributions made to the
Savings Plan are subject to certain limits imposed by applicable law.
Pre-tax charges of operations of the Company for the Savings Plan were
$8.0, $7.1 and $7.1 in 2004, 2003, and 2002, respectively.
OTHER BENEFIT PLANS
The Company also sponsors a tax-qualified profit sharing plan for Career
Agents that is intended to satisfy the requirements of Code Section 401(K).
In addition to providing retirement plan benefits, the Company, in
conjunction with ING North America, provides certain supplemental
retirement benefits to eligible employees; defined benefit pension plans
for insurance salesmen who have entered into a career agent agreement and
certain other individuals; and health care and life insurance benefits to
retired employees and their eligible dependents. The supplemental
retirement plan and defined benefit pension plan are non-qualified defined
benefit pension plans, which means all benefits are payable from the
general assets of the Company. The post-retirement health care plan is
contributory, with retiree contribution levels adjusted annually. The
defined benefit plan for salesmen was terminated effective January 1, 2002,
and all benefit accruals ceased. The life insurance plan
61
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
8. BENEFIT PLANS (continued)
provides a flat amount of noncontributory coverage and optional
contributory coverage. The benefit charges allocated to the Company related
to all of these plans for the years ended December 31, 2004, 2003, and
2002, were not significant.
9. RELATED PARTY TRANSACTIONS
OPERATING AGREEMENTS
ILIAC has certain agreements whereby it incurs expenses with affiliated
entities. The agreements are as follows:
- Investment advisory agreement with ING Investment Management LLC
("IIM"), in which IIM provides asset management and accounting
services. The Company records a fee, which is paid quarterly, based on
the value of the assets under management. For the years ended December
31, 2004, 2003, and 2002, expenses were incurred in the amounts of
$58.8, $53.8, and $46.5, respectively.
- Services agreement between the Company and its affiliates effective
January 2001, and amended effective January 1, 2002. For the years
ended December 31, 2004, 2003, and 2002, net expenses related to the
agreement where incurred in the amount of $8.6, $19.2, and $13.4,
respectively.
- Expense sharing agreement with ING North America Insurance
Corporation, Inc., dated as of January 1, 2001, as amended effective
January 1, 2002, for administrative, management, financial, and
information technology services. For the years ended December 31,
2004, 2003, and 2002, expenses were incurred in the amounts of $132.9,
$136.4, and $126.0, respectively.
Management and service contracts and all cost sharing arrangements with
other affiliated companies are allocated in accordance with the Company's
expense and cost allocation methods.
INVESTMENT ADVISORY AND OTHER FEES
ILIAC serves as investment advisor to certain variable funds used in
Company products (collectively, the "Company Funds"). The Company Funds pay
ILIAC, as investment advisor, a daily fee which, on an annual basis,
ranged, depending on the Fund, from 0.5% to 1.0% of their average daily net
assets. Each of the Company Funds managed by ILIAC are subadvised by
investment advisors, in which case ILIAC pays a subadvisory fee to the
investment advisors, which may include affiliates. ILIAC is also
compensated by the Separate Accounts for bearing mortality and expense
risks pertaining to variable life and annuity contracts. Under the
insurance and annuity contracts, the Separate Accounts pay ILIAC a daily
fee, which, on an annual basis is, depending on the product, up to 3.4% of
their average daily net assets. The amount of compensation and fees
received from affiliated mutual funds and separate accounts, amounted to
$209.2, $201.4 (excludes fees paid to Aeltus Investment Management, Inc.,
now known as ING Investment Management LLP ("Aeltus")), and $391.8
(includes fees paid to Aeltus through February 28, 2002, when IA Holdco,
Aeltus' parent, ceased to be a subsidiary of ILIAC) in 2004, 2003, and
2002, respectively.
RECIPROCAL LOAN AGREEMENT
ILIAC maintains a reciprocal loan agreement with ING AIH, an indirect
wholly-owned subsidiary of ING and affiliate to ILIAC, to facilitate the
handling of unusual and/or unanticipated short-term cash
62
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
9. RELATED PARTY TRANSACTIONS (continued)
requirements. Under this agreement, which became effective in June 2001
and expires on April 1, 2011, ILIAC and ING AIH can borrow up to 3% of
ILIAC's statutory admitted assets as of the preceding December 31 from one
another. Interest on any ILIAC borrowings is charged at the rate of ING
AIH's cost of funds for the interest period plus 0.15%. Interest on any
ING AIH borrowings 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, ILIAC incurred interest expense of $0.2,
0.1, and $0.1, for the years ended December 31, 2004, 2003, and 2002,
respectively, and earned interest income of $1.3, $0.9, and $2.1 for the
years ended December 31, 2004, 2003, and 2002, respectively. At December
31, 2004 and 2003, respectively, ILIAC had a $25.0 and $41.4 receivable
from ING AIH under this agreement.
NOTES FROM AFFILIATE
On December 29, 2004, ING USA Annuity and Life Insurance Company ("ING
USA") issued surplus notes in the aggregate principal amount of $400.0 (the
"Notes") scheduled to mature on December 29, 2034, to its affiliates,
ILIAC, ReliaStar Life Insurance Company ("ReliaStar Life"), and Security
Life of Denver International Limited ("SLDI"), in an offering that was
exempt from the registration requirements of the Securities Act of 1933.
The Company's $175.0 Notes Receivable from ING USA bears interest at a rate
of 6.257% per year. Any payment of principal and/or interest is subject to
the prior approval of the Insurance Commissioner of the state of Iowa.
Interest is scheduled to be paid semi-annually in arrears on June 29 and
December 29 of each year, commencing on June 29, 2005.
TAX SHARING AGREEMENTS
ILIAC has a federal tax sharing agreement with IICA, whereby ILIAC charges
its subsidiary for federal taxes it would have incurred were it not a
member of the consolidated group and credits the member for losses at the
statutory federal tax rate.
ILIAC has also entered into a state tax sharing agreement with ING AIH and
each of the specific subsidiaries that are parties to the agreement. The
state tax agreement applies to situations in which ING AIH and all or some
of the subsidiaries join in the filing of a state or local franchise,
income tax, or other tax return on a consolidated, combined, or unitary
basis.
CAPITAL TRANSACTIONS AND DIVIDENDS
In 2004, ILIAC did not receive any capital contributions. In 2003, ILIAC
received $230.0 in cash capital contributions from Lion. In addition,
ILIAC received capital contributions in the form of investments in
affiliated mutual funds of $164.3 from HOLDCO.
ILIAC paid a cash dividend of $70.0 to Lion in 2004 and did not pay any
cash dividends to Lion in 2003 or 2002. However, on February 28, 2002,
ILIAC contributed 100% of the stock of IA Holdco to HOLDCO in the form of a
$60.1 dividend distribution.
63
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
10. FINANCING AGREEMENTS
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which is due on demand, the
Company can borrow up to $125.0 from the Bank. Interest on any borrowing
accrues at an annual rate equal to (1) the cost of funds for the Bank for
the period applicable for the advance plus .225% or (2) a rate quoted by
the Bank to the Company for the borrowing. Under the agreement, the Company
incurred minimal interest expense for the years ended December 31, 2004,
2003, and 2002, respectively. At December 31, 2004 and 2003, the Company
did not have any balances payable to the Bank.
The Company also maintains a perpetual revolving loan agreement with Bank
of New York ("BONY"). Under this agreement, the Company can borrow up to
$100.0 from BONY. Interest on any of the Company borrowing accrues at an
annual rate equal to (1) the cost of funds for BONY for the period
applicable for the advance plus .35% or (2) a rate quoted by BONY to the
Company for the borrowing. Under this agreement, the Company incurred
minimal interest expense for the years ended December 31, 2004, 2003, and
2002. At December 31, 2004 and 2003, the Company did not have any balances
payable to BONY.
Also see Reciprocal Loan Agreement in Note 9.
11. REINSURANCE
At December 31, 2004, the Company had reinsurance treaties with six
unaffiliated reinsurers and one affiliated reinsurer covering a significant
portion of the mortality risks and guaranteed death and living benefits
under its variable contracts. The Company remains liable to the extent its
reinsurers do not meet their obligations under the reinsurance agreements.
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1.0 billion in cash. The transaction is generally
in the form of an indemnity reinsurance arrangement, under which Lincoln
contractually assumed from the Company certain policyholder liabilities and
obligations, although the Company remains directly obligated to
contractowners.
Effective January 1, 1998, 90% of the mortality risk on substantially all
individual universal life product business written from June 1, 1991
through October 31, 1997 was reinsured externally. Beginning November 1,
1997, 90% of new business written on these products was reinsured
externally. Effective October 1, 1998 this agreement was assigned from the
third party reinsurer to Lincoln.
Effective December 31, 1988, the Company entered into a modified
coinsurance reinsurance agreement ("MODCO") with Aetna Life Insurance
Company ("Aetna Life"), (formerly an affiliate of the Company),
in which substantially all of the nonparticipating individual life and
annuity business written by Aetna Life prior to 1981 was assumed by the
Company. Effective January 1, 1997, this agreement was amended to
transition (based on underlying investment rollover in Aetna Life) from a
modified coinsurance arrangement to a coinsurance agreement. As a result of
this change, reserves were ceded to the Company from Aetna Life as
investment rollover occurred. Effective October 1, 1998, this agreement was
fully transitioned to a coinsurance arrangement and this business along
with the Company's direct individual life insurance business, with the
exception of certain supplemental contracts with reserves of $61.1 and
$63.8 as of December 31, 2004 and 2003, respectively, was sold to Lincoln.
64
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
11. REINSURANCE (continued)
On December 16, 1988, the Company assumed $25.0 of premium revenue from
Aetna Life, for the purchase and administration of a life contingent single
premium variable payout annuity contract. In addition, the Company is also
responsible for administering fixed annuity payments that are made to
annuitants receiving variable payments. Reserves of $19.3 and $20.4 were
maintained for this contract as of December 31, 2004 and 2003,
respectively.
The effect of reinsurance on premiums and recoveries for the years ended
December 31, 2004, 2003 and 2002, were as follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
--------------------------------------------------------------------------------------------
Direct premiums $ 39.0 $ 51.1 $ 55.9
Reinsurance assumed -- 0.1 --
Reinsurance ceded (0.5) (1.1) (2.0)
--------------------------------------------------------------------------------------------
Net premiums $ 38.5 $ 50.1 $ 53.9
============================================================================================
</Table>
12. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
The Company leases its office space and certain other equipment under
operating leases that expire through 2009.
For the years ended December 31, 2004, 2003, and 2002, rent expense for
leases was $18.1, $20.8 and $18.1, respectively. The future net minimum
payments under noncancelable leases for the years ended December 31, 2005
through 2009 are estimated to be $16.7, $15.4, $14.0, $1.3, and $0.5,
respectively, and $0.1 thereafter. The Company pays substantially all
expenses associated with its leased and subleased office properties.
Expenses not paid directly by the Company are paid for by an affiliate and
allocated back to the Company.
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans or money
market instruments at a specified future date and at a specified price or
yield. The inability of counterparties to honor these commitments may
result in either a higher or lower replacement cost. Also, there is likely
to be a change in the value of the securities underlying the commitments.
At December 31, 2004, the Company had off-balance sheet commitments to
purchase investments of $778.2 with an estimated fair value of $778.2.
65
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
LITIGATION
The Company is a party to threatened or pending lawsuits/arbitrations
arising from the normal conduct of business. Due to the climate in
insurance and business litigation/arbitration, suits against the Company
sometimes include claims for substantial compensatory, consequential or
punitive damages and other types of relief. Moreover, certain claims are
asserted as class actions, purporting to represent a group of similarly
situated individuals. While it is not possible to forecast the outcome of
such lawsuits/arbitrations, in light of existing insurance, reinsurance and
established reserves, it is the opinion of management that the disposition
of such lawsuits/arbitrations will not have a materially adverse effect on
the Company's operations or financial position.
REGULATORY MATTERS
As with many financial services companies, the Company and its affiliates
have received informal and formal requests for information from various
state and federal governmental agencies and self-regulatory organizations
in connection with inquiries and investigations of the products and
practices of the financial services industry. In each case, the Company and
its affiliates have been and are providing full cooperation.
FUND REGULATORY ISSUES
Since 2002, there has been increased governmental and regulatory activity
relating to mutual funds and variable insurance products. This activity has
primarily focused on inappropriate trading of fund shares, revenue sharing
and directed brokerage, compensation, sales practices and suitability,
arrangements with service providers, pricing, compliance and controls, and
adequacy of disclosure.
In addition to responding to governmental and regulatory requests on fund
regulatory issues, ING management, on its own initiative, conducted,
through special counsel and a national accounting firm, an extensive
internal review of mutual fund trading in ING insurance, retirement, and
mutual fund products. The goal of this review was to identify any instances
of inappropriate trading in those products by third parties or by ING
investment professionals and other ING personnel.
The internal review identified several isolated arrangements allowing third
parties to engage in frequent trading of mutual funds within the variable
insurance and mutual fund products of certain affiliates of the Company,
and identified other circumstances where frequent trading occurred despite
measures taken by ING intended to combat market timing. Each of the
arrangements has been terminated and disclosed to regulators, to the
independent trustees of ING Funds (U.S.) and in Company reports previously
filed with the Securities and Exchange Commission ("SEC") pursuant to the
Securities Exchange Act of 1934, as amended.
An affiliate of the Company, ING Funds Distributors, LLC ("IFD") has
received notice from the staff of the National Association of Securities
Dealers ("NASD") that the staff has made a preliminary determination to
recommend that disciplinary action be brought against IFD and one of its
registered persons for violations of the NASD Conduct Rules and federal
securities laws in connection with frequent trading arrangements.
66
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Other regulators, including the SEC and the New York Attorney General, are
also likely to take some action with respect to certain ING affiliates
before concluding their investigation of ING relating to fund trading. The
potential outcome of such action is difficult to predict but could subject
certain affiliates to adverse consequences, including, but not limited to,
settlement payments, penalties, and other financial liability. It is not
currently anticipated, however, that the actual outcome of such action will
have a material adverse effect on ING or ING's U.S.-based operations,
including the Company.
ING has agreed to indemnify and hold harmless the ING Funds from all
damages resulting from wrongful conduct by ING or its employees or from
ING's internal investigation, any investigations conducted by any
governmental or self-regulatory agencies, litigation or other formal
proceedings, including any proceedings by the SEC. Management reported to
the ING Funds Board that ING management believes that the total amount of
any indemnification obligations will not be material to ING or ING's U.S.-
based operations, including the Company.
OTHER REGULATORY MATTERS
The New York Attorney General and other regulators are also conducting
broad inquiries and investigations involving the insurance industry. These
initiatives currently focus on, among other things, compensation and other
sales incentives, potential conflicts of interest, potential
anti-competitive activity, marketing practices, certain financial
reinsurance arrangements, and disclosure. It is likely that the scope of
these investigations will further broaden before the investigations are
concluded. U.S. affiliates of ING have received formal and informal
requests in connection with such investigations, and are cooperating fully
with each request for information.
These initiatives may result in new legislation and regulation that could
significantly affect the financial services industry, including businesses
in which the Company is engaged.
In light of these and other developments, U.S. affiliates of ING, including
the Company, periodically review whether modifications to their business
practices are appropriate.
67
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
13. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income for the years ended December
31, 2004 and 2003 were as follows:
<Table>
<Caption>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
2004 2003
-------------------------------------------------------------------------------------------
Net unrealized capital gains (losses):
Fixed maturities $ 124.6 $ 108.5
Equity securities 8.7 14.4
Sales inducements (0.1) -
Other (8.2) 51.6
-------------------------------------------------------------------------------------------
Subtotal 125.0 174.5
Less: Deferred income taxes 41.2 58.5
-------------------------------------------------------------------------------------------
Net unrealized capital gains 83.8 116.0
Minimum pension liability (16.7) --
-------------------------------------------------------------------------------------------
Net accumulated other comprehensive income $ 67.1 $ 116.0
===========================================================================================
</Table>
Net unrealized capital gains allocated to experience-rated contracts of
$357.5 and $491.5 at December 31, 2004 and 2003, respectively, are
reflected on the Consolidated Balance Sheets in future policy benefits and
claims reserves and are not included in shareholder's equity.
Changes in accumulated other comprehensive income related to changes in net
unrealized gains (losses) on securities, including securities pledged,
excluding those related to experience-rated contractholders, were as
follows:
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2002
--------------------------------------------------------------------------------------------
Unrealized holding (losses) gains arising
during the year (1) $ 18.6 $ (48.1) $ 127.4
Less: reclassification adjustment for gains
(losses) and other items included in
net income (2) 50.8 (46.6) 65.7
--------------------------------------------------------------------------------------------
Net unrealized (losses) gains on securities $ (32.2) $ (1.5) $ 61.7
============================================================================================
</Table>
(1) Pretax net unrealized holding gains (losses) were $28.6, $(74.0), and
$196.0, for the years ended December 31, 2004, 2003, and 2002,
respectively.
(2) Pretax reclassification adjustments for gains (losses) and other items
included in net income were $78.1, $(71.6), and $101.1, for the years
ended December 31, 2004, 2003, and 2002, respectively.
68
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
14. RECLASSIFICATIONS AND CHANGES TO PRIOR YEAR PRESENTATION
During 2004, certain changes were made to the 2003 and 2002 Statements of
Operations to reflect the correct balances, as follows:
- Certain changes were made to the classification of reinsurance ceded
related to certain products, which were included as a reduction to
premiums.
- Certain changes were made to the classification of certain annuity and
other products, which were included in premium income.
- Certain changes were made to the classification of certain benefits to
contractowners, which were included as a reduction to premiums.
In addition, certain reclassifications have been made to conform to the
current year presentation.
These changes had no impact on net income or shareholder's equity of the
Company. We deemed these changes to the Statement of Operations as
immaterial, and, as such, have not labeled the Statement of Operations as
restated. The following summarizes the corrections to to each financial
statement line item:
<Table>
<Caption>
PREVIOUSLY REVISED
YEAR ENDED 12/31/2003 REPORTED 2003 ADJUSTMENT 2003
------------- ---------- --------
Fee income $ 384.3 $ 11.5 $ 395.8
Premiums 95.8 (45.7) 50.1
Total revenue 1,463.7 (34.2) 1,429.5
Interest credited and other benefits
to contractowners 757.6 (34.2) 723.4
Total expense 1,248.0 (34.2) 1,213.8
</Table>
<Table>
<Caption>
PREVIOUSLY REVISED
YEAR ENDED 12/31/2002 REPORTED 2002 ADJUSTMENT 2002
------------- ---------- --------
Fee income $ 418.2 $ 5.7 $ 423.9
Premiums 98.7 (44.8) 53.9
Total revenue 1,375.4 (39.1) 1,336.3
Interest credited and other benefits
to contractowners 746.4 (39.1) 707.3
Total expense 1,289.3 (39.1) 1,250.2
</Table>
69
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in millions, unless otherwise stated)
14. RECLASSIFICATIONS AND CHANGES TO PRIOR YEAR PRESENTATION (continued)
Also, during 2004, certain changes were made to the 2003 and 2002
Statements of Cash Flows to restate the correct balances, primarily
related to payables for securities purchased, short-term borrowings, and
investment contracts. As a result of these adjustments, we have
labeled the Statements of Cash Flows for 2003 and 2002 as restated. The
following summarizes the adjustments:
<Table>
<Caption>
PREVIOUSLY
REPORTED ADJUSTMENT RESTATED
------------- ---------- ----------
YEAR ENDED 12/31/2003
Net cash provided by (used for) operating activities $ 1,254.8 $ (196.5) $ 1,058.3
Net cash provided by (used for) financing activities 781.1 196.5 977.6
PREVIOUSLY
REPORTED ADJUSTMENT RESTATED
------------- ---------- ----------
YEAR ENDED 12/31/2002
Net cash provided by (used for) operating activities $ 1,527.7 $ (132.4) $ 1,395.3
Net cash used for investing activities (2,152.0) (167.3) (2,319.3)
Net cash provided by (used for) financing activities 607.7 299.7 907.4
</Table>
70
<Page>
QUARTERLY DATA (UNAUDITED)
Restatement of Financial Information: During the quarterly period ended
June 30, 2003, the Company incorrectly recorded investment income and
realized capital gains related to Separate Accounts. The Company noted the
effect of this error during the compilation of the December 31, 2003
financial statements and made the appropriate changes to the quarterly
periods ended June 30, 2003 and September 30, 2003.
The following tables show the previously reported and restated for each of
the periods affected in 2003.
<Table>
<Caption>
AS RESTATED
2004 (IN MILLIONS) FIRST SECOND THIRD FOURTH
------------------------------------------------------------------------------------------------------------
Total revenue $384.5 $362.1 $376.7 $379.2
------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 64.4 54.7 61.3 61.3
Income tax expense 20.4 17.0 (14.3) 19.3
------------------------------------------------------------------------------------------------------------
Net income $ 44.0 $ 37.7 $ 75.6 $ 42.0
============================================================================================================
</Table>
<Table>
<Caption>
AS REPORTED
2004 (IN MILLIONS) FIRST SECOND THIRD
-----------------------------------------------------------------------------------------
Total revenue $387.3 $364.4 $379.0
-----------------------------------------------------------------------------------------
Income (loss) before income taxes 64.4 54.7 61.3
Income tax expense (benefit) 20.4 17.0 (14.3)
-----------------------------------------------------------------------------------------
Net income $ 44.0 $ 37.7 $ 75.6
=========================================================================================
</Table>
<Table>
<Caption>
AS RESTATED
2003 (IN MILLIONS) FIRST SECOND* THIRD* FOURTH*
------------------------------------------------------------------------------------------------------------
Total revenue $351.6 $374.5 $353.9 $349.5
------------------------------------------------------------------------------------------------------------
Income before income taxes 17.5 109.2 25.5 63.5
Income tax expense 5.1 35.4 0.6 20.0
------------------------------------------------------------------------------------------------------------
Net income $ 12.4 $ 73.8 $ 24.9 $ 43.5
============================================================================================================
</Table>
<Table>
<Caption>
AS REPORTED
2003 (IN MILLIONS) FIRST SECOND THIRD FOURTH
------------------------------------------------------------------------------------------------------------
Total revenue $359.2 $383.6 $362.4 $358.5
------------------------------------------------------------------------------------------------------------
Income before income taxes 17.5 111.5 33.2 53.5
Income tax expense 5.1 36.2 3.3 16.5
------------------------------------------------------------------------------------------------------------
Net income $ 12.4 $ 75.3 $ 29.9 $ 37.0
============================================================================================================
</Table>
* Restated
71
<Page>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) The Company carried out an evaluation, under the supervision and
with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the 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.
ITEM 9B. OTHER INFORMATION
None
72
<Page>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I(2) of Form 10-K, except with
respect to compliance with Sections 406 and 407 of the Sarbanes-Oxley
Act of 2002.
(a) CODE OF ETHICS FOR FINANCIAL PROFESSIONALS
The Company has approved and adopted a Code of Ethics for
Financial Professionals, pursuant to the requirements of Section
406 of the Sarbanes-Oxley Act of 2002 (which was filed as Exhibit
14 to the Form 10-K, as filed with the SEC on March 29, 2004,
File No. 033-23376). Any waiver of the Code of Ethics will be
disclosed by the Company by way of a Form 8-K filing.
(b) DESIGNATION OF BOARD FINANCIAL EXPERT
The Company has designated David A. Wheat, Director, Senior Vice
President and Chief Financial Officer of the Company, as its
Board Financial Expert, pursuant to the requirements of Section
407 of the Sarbanes-Oxley Act of 2002. Because the Company is a
wholly-owned subsidiary of Lion, it does not have any outside
directors sitting on its board.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(Dollar amounts in millions, unless otherwise stated)
In 2004 and 2003, Ernst & Young LLP ("Ernst & Young") served as the
principal external auditing firm for ING including ILIAC. ING
subsidiaries, including ILIAC, are allocated Ernst & Young fees
attributable to services rendered by Ernst & Young to each subsidiary.
Ernst & Young fees allocated to the Company for the years ended
December 31, 2004 and 2003 are detailed below, along with a
description of the services rendered by Ernst & Young to the Company:
<Table>
<Caption>
2004 2003
-------------------------------------------------------------------------------------------
Audit fees $ 1.2 $ 2.4
Audit-related fees 0.2 0.2
Tax fees --* --*
All other fees --* --
------------ ------------
$ 1.4 $ 2.6
============ ============
</Table>
* Less than $0.1.
73
<Page>
AUDIT FEES
Fees for audit services include fees associated with professional
services rendered by the auditors for the audit of the annual
financial statements of the Company and review of the Company's
interim financial statements.
AUDIT-RELATED FEES
Audit-related fees were allocated to ILIAC for assurance and related
services that are reasonably related to the performance of the audit
or review of the financial statements and are not reported under the
audit fee item above. These services consisted primarily of audits of
SEC product filings, advice on accounting matters, and progress
review on International Financial Reporting Standards and Sarbanes-
Oxley projects.
TAX FEES
There were minimal tax fees allocated to ILIAC in 2004 and 2003. This
category typically includes tax compliance, tax advice, and tax
planning professional services. These services typically consist of:
tax compliance including the review of original and amended tax
returns, assistance with questions regarding tax audits, and tax
planning and advisory services relating to common forms of domestic
taxation (i.e., income tax and capital tax).
ALL OTHER FEES
There were minimal fees allocated to ILIAC in 2004 and no fees in 2003
under the category of "all other fees." This category typically
includes fees paid for products and services other than the audit
fees, audit-related fees and tax fees, described above, and consists
primarily of non-recurring support and advisory services.
PRE-APPROVAL POLICIES AND PROCEDURES
ILIAC has adopted the pre-approval policies and procedures of ING.
Audit, audit-related, and non-audit services provided to the Company
by ING's independent auditors are pre-approved by ING's audit
committee. Pursuant to ING's pre-approval policies and procedures, the
ING audit committee is required to pre-approve all services provided
by ING's independent auditors to ING and its majority owned legal
entities, including the Company. The ING pre-approval policies and
procedures distinguish four types of services: (1) audit services, (2)
audit-related services, (3) non-audit services, and (4) prohibited
services (as described in the Sarbanes-Oxley Act).
The ING pre-approval procedures consist of a general pre-approval
procedure and a specific pre-approval procedure.
GENERAL PRE-APPROVAL PROCEDURE
ING's audit committee pre-approves audit, audit-related, and non-audit
services to be provided by ING's external audit firms on an annual
basis, provided that the amount for such pre-approved service may not
be exceeded. ING's audit committee receives an overview of all
services provided,
74
<Page>
including related fees and supported by sufficiently detailed
information. ING's audit committee evaluates this overview
retrospectively on a semi-annual basis.
SPECIFIC PRE-APPROVAL PROCEDURE
In addition to audit committee pre-approval, all audit-related and
non-audit engagements that are expected to generate fees in excess of
EUR 100,000 need specific approval of ING's Chief Financial Officer
("CFO"). These engagements are submitted in advance to the General
Manager of ING Corporate Audit Services, who will advise ING's CFO on
the compatibility of such services with the independence policy.
Further, in addition to audit committee pre-approval under the general
pre-approval procedures, the audit committee must approve on a
case-by-case basis:
(i) Each individual audit-related and non-audit engagement which is
expected to generate fees in excess of EUR 250,000;
(ii) All further audit-related and non-audit engagements over and
above the pre-approved amounts.
In 2004, 100% of each of the audit-related services, tax services and
all other services were pre-approved by ING's audit committee.
75
<Page>
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial statements. See Item 8 on Page 32.
2. Financial statement schedules. See Index to Consolidated Financial
Statement Schedules on Page 80.
EXHIBITS
3.(i) Certificate of Incorporation as amended and restated January 1,
2002, incorporated by reference to the ILIAC on Form 10-K, as filed
with the SEC on March 28, 2002 (File No. 33-23376).
3.(ii) By-Laws, as restated January 1, 2002, incorporated by reference to
the ILIAC on Form 10-K, as filed on March 28, 2002 (File No.
33-23376).
4.(a) Instruments Defining the Rights of Security Holders, Including
Indentures (Annuity Contracts)
Incorporated by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-4 (File No. 33-75964), as filed on
July 29, 1997.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75980), as filed on
February 12, 1997.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-75964), as filed on
February 11, 1997.
Incorporated by reference to Post-Effective Amendment No. 5 to
Registration Statement on Form N-4 (File No. 33-75986), as filed on
April 12, 1996.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 333-01107), as filed on
February 4, 1999.
Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (File No. 33-75988), as filed on
April 15, 1996.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-81216), as filed on
April 17, 1996.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-91846), as filed on
April 15, 1996.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-91846), as filed on
August 6, 1996.
Incorporated by reference to Registration Statement on Form N-4
(File No. 333-01107), as filed on February 21, 1996.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-75982), as filed on
February 20, 1997.
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<Page>
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES (continued)
Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-4 (File No. 33-75992), as filed on
February 13, 1997.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75974), as filed on
February 28, 1997.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75962), as filed on
April 17, 1996.
Incorporated by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-4 (File No. 33-75962), as filed on
April 17, 1998.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75982), as filed on
April 22, 1996.
Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-4 (File No. 33-75980), as filed on
August 19, 1997.
Incorporated by reference to Registration Statement on Form N-4
(File No. 333-56297), as filed on June 8, 1998.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-79122), as filed on
August 16, 1995.
Incorporated by reference to Post-Effective Amendment No. 32 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
December 16, 1997.
Incorporated by reference to Post-Effective Amendment No. 30 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
September 29, 1997.
Incorporated by reference to Post-Effective Amendment No. 26 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
February 21, 1997.
Incorporated by reference to Post-Effective Amendment No. 35 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
April 17, 1998.
Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 33-87932), as filed on
September 19, 1995.
Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-4 (File No. 33-79122), as filed on
April 17, 1998.
Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-4 (File No. 33-79122), as filed on
April 22, 1997.
Incorporated by reference to Post-Effective Amendment No. 21 to
Registration Statement on Form N-4 (File No. 33-75996), as filed on
February 16, 2000.
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<Page>
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES (continued)
Incorporated by reference to Post-Effective Amendment No. 13 to
Registration Statement on Form N-4 (File No. 333-01107), as filed on
April 7, 1999.
Incorporated by reference to Post-Effective Amendment No. 37 to
Registration Statement on Form N-4 (File No. 33-34370), as filed on
April 9, 1999.
Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 333-87305), as filed on
December 13, 1999.
Incorporated by reference to Post-Effective Amendment No. 18 to
Registration Statement on Form N-4 (File No. 33-56297), as filed on
August 30, 2000.
Incorporated by reference to Post-Effective Amendment No.17 to
Registration Statement on Form N-4 (File No. 33-75996), as filed on
April 7, 1999.
Incorporated by reference to Post-Effective Amendment No. 19 to
Registration Statement on From N-4 (File No. 333-01107), as filed on
February 16, 2000.
Incorporated by reference to the Registration Statement on Form S-2
(File No. 33- 64331), as filed on November 16, 1995.
Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-2 (File No. 33-64331), as filed on
January 17, 1996.
Incorporated by reference to Post-Effective Amendment No. 30 to
Registration Statement on Form N-4 (File No. 33-75988), as filed on
December 30, 2003
Incorporated by reference to Post-Effective Amendment No. 18 to
Registration Statement on Form N-4 (File No. 33-75980), as filed on
April 16, 2003.
Incorporated by reference to Post-Effective Amendment No. 24 to
Registration Statement on Form N-4 (File No. 33-81216), as filed on
April 11, 2003.
Incorporated by reference to Registration Statement on Form N-4
(File No. 333-109860), as filed on October 21, 2003.
Incorporated by reference to Post-Effective Amendment No. 39 to
Registration Statement on Form N-4 (File No. 33-75962), as filed on
December 17, 2004.
10. MATERIAL CONTRACTS
10.(a) Distribution Agreement, dated as of December 13, 2000, between Aetna
Inc., renamed Lion Connecticut Holdings Inc. ("Lion"), and Aetna U.S.
Healthcare Inc., renamed Aetna Inc., incorporated by reference to
ILIAC's Form 10-K filed on March 30, 2001 (File No. 33-23376).
(b) Employee Benefits Agreement, dated as of December 13, 2000, between
Aetna Inc, renamed Lion, and Aetna U.S. Healthcare, renamed Aetna
Inc., incorporated by reference to the Company's Form 10-K filed on
March 30, 2001 (File No. 33-23376).
78
<Page>
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES (continued)
(c) Tax Sharing Agreement, dated as of December 13, 2000, among Aetna Inc.
renamed Lion, Aetna U.S. Healthcare, Inc. renamed Aetna Inc. and ING
America Insurance Holdings, Inc., incorporated by reference to the
Company's Form 10-K filed on March 30, 2001 (File No. 33-23376).
(d) Lease Agreement, dated as of December 13, 2000, by and between Aetna
Life Insurance Company and ILIAC, incorporated by reference to the
Company's Form 10-K filed on March 30, 2001 (File No. 33-23376).
(e) Real Estate Services Agreement, dated as of December 13, 2000, between
Aetna Inc. and ILIAC, incorporated by reference to the Company's Form
10-K filed on March 30, 2001 (File No. 33-23376).
(f) Tax Sharing Agreement between ILIAC and ING Insurance Company of
America, effective January 1, 2001, incorporated by reference to the
Company's Form 10-K filed on March 29, 2004 (File No. 033-23376).
(g) Tax Sharing Agreement between ILIAC, ING America Insurance Holding,
Inc. and affiliated companies, effective January 1, 2001, incorporated
by reference to the Company's Form 10-K filed on March 29, 2004 (File
No. 033-23376).
(h) Investment Advisory Agreement between ILIAC and ING Investment
Management LLC, dated March 31, 2001, as amended effective January 1,
2003, incorporated by reference to the Company's Form 10-K filed on
March 29, 2004 (File No. 033-23376).
(i) Reciprocal Loan Agreement between ILIAC and ING America Insurance
Holdings, Inc., effective June 1, 2001, incorporated by reference to
the Company's Form 10-K filed on March 29, 2004 (File No. 033-23376).
(j) Services Agreement between ILIAC and the affiliated companies listed
in Exhibit B to the Agreement, dated as of January 1, 2001, as amended
effective January 1, 2002, incorporated by reference to the Company's
Form 10-K filed on March 29, 2004 (File No. 033-23376).
(k) Services Agreement between ILIAC and ING North America Insurance
Corporation, dated as of January 1, 2001, as amended effective January
1, 2002, incorporated by reference to the Company's Form 10-K filed on
March 29, 2004 (File No. 033-23376).
(l) Services Agreement between ILIAC and ING Financial Advisers, LLC.,
effective June 1, 2002, incorporated by reference to the Company's
Form 10-K filed on March 29, 2004 (File No. 033-23376).
(m) Administrative Services Agreement between ILIAC, ReliaStar Life
Insurance Company of New York and the affiliated companies specified
in Exhibit A to the Agreement, effective March 1, 2003, incorporated
by reference to the Company's Form 10-K filed on March 29, 2004 (File
No. 033-23376).
(n) First Amendment to the Administrative Services Agreement between
ILIAC, RLNY and the affiliated companies specified in Exhibit A to the
Agreement, effective as of August 1, 2004.
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<Page>
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES (continued)
(o) Amendment to Investment Advisory Agreement between ILIAC and ING
Investment Management LLC, effective October 14, 2003, incorporated by
reference to the Company's Form 10-K filed on March 29, 2004 (File No.
033-23376).
(p) Surplus Note for $175,000,000 aggregate principal amount, dated
December 29, 2004 issued by ING USA Annuity and Life Insurance Company
to its affiliate, ILIAC.
(q) Underwriting Agreement dated November 17, 2000 between Aetna Life
Insurance and Annuity Company (now ING Life Insurance and Annuity
Company ("ILIAC" or "Registrant") and Aetna Investment Services, LLC
(now ING Financial Advisers, LLC), incorporated by reference to
Pre-Effective Amendment No. 1 to Registration Statement on Form N-4,
as filed with the Securities and Exchange Commission ("SEC") on
November 30, 2000 (File No. 333-49176).
14. ING Code of Ethics for Financial Professionals, incorporated by
reference to the Company's Form 10-K filed on March 29, 2004 (File No.
033-23376).
31.1 Certificate of David A. Wheat pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Brian D. Comer 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 Brian D. Comer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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<Page>
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
PAGE
----
Report of Independent Registered Public Accounting Firm 82
I. Summary of Investments -- Other than Investments in Affiliates as of
December 31, 2004 83
IV. Reinsurance Information as of and for the years ended
December 31, 2004, 2003 and 2002 84
Schedules other than those listed above are omitted because they are not
required or not applicable.
</Table>
81
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
ING Life Insurance and Annuity Company
We have audited the consolidated financial statements of ING Life Insurance
and Annuity Company as of December 31, 2004 and 2003, and for each of the
three years in the period ended December 31, 2004, and have issued our report
thereon dated March 31, 2005. Our audits also included the financial
statement schedules listed in Item 15. These schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion
based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 31, 2005
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<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.)
SCHEDULE I
Summary of Investments--Other than Investments in Affiliates
As of December 31, 2004
(In millions)
<Table>
<Caption>
AMOUNT
SHOWN ON
TYPE OF INVESTMENTS COST VALUE* BALANCE SHEET
------------------- ------------- ------------- -------------
Fixed maturities:
U.S. government and government agencies
and authorities $ 197.3 $ 197.3 $ 197.3
States, municipalities and political subdivisions 32.1 31.4 31.4
U.S. corporate securities 7,054.1 7,348.7 7,348.7
Foreign securities(1) 2,316.6 2,419.7 2,419.7
Mortgage-backed securities 5,497.6 5,505.0 5,505.0
Commercial mortgage-backed securities 1,491.2 1,560.0 1,560.0
Other asset-backed securities 1,354.6 1,363.5 1,363.5
Less: Fixed maturities pledged to creditors 1,258.8 1,274.3 1,274.3
------------- ------------- -------------
Total fixed maturities securities 16,684.7 17,151.3 17,151.3
------------- ------------- -------------
Equity securities 153.9 162.6 162.6
Mortgage loans 1,090.2 1,119.8 1,090.2
Policy loans 262.7 262.7 262.7
Other investments 57.0 57.0 57.0
Securities pledged to creditors 1,258.8 1,274.3 1,274.3
------------- ------------- -------------
Total investments $ 19,507.3 $ 20,027.7 $ 19,998.1
============= ============= =============
</Table>
* See Notes 2 and 3 of Notes to Consolidated Financial Statements.
(1) The term "foreign" includes foreign governments, foreign political
subdivisions, foreign public utilities and all other bonds of foreign
issuers. Substantially all of the Company's foreign securities are
denominated in U.S. dollars.
83
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
SCHEDULE IV
Reinsurance Information
As of and for the years ended December 31, 2004, 2003, and 2002
(In millions)
<Table>
<Caption>
PERCENTAGE OF
GROSS CEDED ASSUMED NET ASSUMED TO NET
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004
Life insurance in Force $ 26,179.5 $ 26,179.5 $ -- $ --
Premiums:
Discontinued operations 210.0 220.9 10.9 --
Accident and Health insurance 0.5 0.5 -- --
Annuities 38.5 -- -- 38.5 0.0%
- ---------------------------------------------------------------------------------------------------------
Total Premiums $ 249.0 $ 221.4 $ 10.9 $ 38.5
=========================================================================================================
YEAR ENDED DECEMBER 31, 2003
Life insurance in Force $ 28,254.7 $ 29,254.7 $ 778.9 $ --
Premiums:*
Discontinued operations 227.5 239.5 12.0 --
Accident and Health insurance 1.0 1.0 -- --
Annuities 50.1 0.1 0.1 50.1 0.0%
- ---------------------------------------------------------------------------------------------------------
Total Premiums $ 278.6 $ 240.6 $ 12.1 $ 50.1
=========================================================================================================
YEAR ENDED DECEMBER 31, 2002
Life insurance in Force $ 31,068.3 $ 31,853.2 $ 995.7 $ 210.8
Premiums:*
Discontinued operations 255.7 272.7 17.0 --
Accident and Health insurance 2.0 2.0 -- --
Annuities 53.9 -- -- 53.9 0.0%
- ---------------------------------------------------------------------------------------------------------
Total Premiums $ 311.6 $ 274.7 $ 17.0 $ 53.9
=========================================================================================================
</Table>
* Certain amounts related to the prior year have been revised.
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<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ING LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
(Date) March 28, 2005 By /s/ David A. Wheat
------------- ------------------------------------------------
David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on or before March 28, 2005.
<Table>
<Caption>
SIGNATURES TITLE
/s/ David A. Wheat
- ------------------------------------------------
David A. Wheat Director, Senior Vice President and
Chief Financial Officer
/s/ Catherine H. Smith
- ------------------------------------------------
Catherine H. Smith Director
/s/ Thomas J. McInerney
- ------------------------------------------------
Thomas J. McInerney Director and Chairman
/s/ Jacques de Vaucleroy
- ------------------------------------------------
Jacques de Vaucleroy Director and Senior Vice President
/s/ Kathleen A. Murphy
- ------------------------------------------------
Kathleen A. Murphy Director
/s/ Brian D. Comer
- ------------------------------------------------
Brian D. Comer President
/s/ Roger W. Fisher
- ------------------------------------------------
Roger W. Fisher Vice President and
Chief Accounting Officer
</Table>
85
<Page>
EXHIBIT 10.(n)
FIRST AMENDMENT
TO THE
ADMINISTRATIVE SERVICES AGREEMENT
This First Amendment, effective as of August 1, 2004, is made to the
Administrative Services Agreement (the "Agreement"), dated as of March 1, 2003,
entered into by and between ReliaStar Life Insurance Company of New York, a New
York insurance company and the affiliated companies specified in Exhibit A to
the Agreement.
IN CONSIDERATION, of the mutual promises set forth herein, and intending to be
legally bound hereby, the parties agree to amend the Agreement as follows:
1. THE AGREEMENT SHALL BE AMENDED TO ADD THE FOLLOWING NEW SECTION: TERM. This
Agreement shall be effective on the first day of March 2003, and shall end
of the 31st day of March, 2005. This Agreement shall be automatically
renewed on the first day of each calendar year thereafter for a
twelve-month period under the same terms and conditions, subject to the
provisions for termination set forth therein.
2. Except as specifically amended by this First Amendment, the Agreement
remains in full force and effect.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be duly
executed as of the date first written above.
RELIASTAR LIFE INSURANCE COMPANY
OF NEW YORK
By /s/ Paula Cludray-Engelke
-------------------------------------------
Paula Cludray-Engelke
Secretary
ING USA ANNUITY AND LIFE INSURANCE
COMPANY
By /s/ Paula Cludray-Engelke
-------------------------------------------
Paula Cludray-Engelke
Secretary
ING FINANCIAL ADVISERS, LLC
By /s/ John F. Todd
-------------------------------------------
John F. Todd
Assistant Secretary
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<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY
By /s/ Paula Cludray-Engelke
-------------------------------------------
Paula Cludray-Engelke
Secretary
ING NORTH AMERICA INSURANCE CORPORATION
By /s/ John F. Todd
-------------------------------------------
John F. Todd
Assistant Secretary
RELIASTAR LIFE INSURANCE COMPANY
By /s/ Paula Cludray-Engelke
-------------------------------------------
Paula Cludray-Engelke
Secretary
SECURITY LIFE OF DENVER INSURANCE COMPANY
By /s/ Paula Cludray-Engelke
-------------------------------------------
Paula Cludray-Engelke
Secretary
SOUTHLAND LIFE INSURANCE COMPANY
By /s/ Paula Cludray-Engelke
-------------------------------------------
Paula Cludray-Engelke
Secretary
87
<Page>
EXHIBIT 10.(p)
THIS SURPLUS NOTE HAS BEEN ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") AND MAY NOT BE REOFFERED, RESOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. THE PURCHASER OF THIS
SURPLUS NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS SURPLUS NOTE MAY BE
RELYING ON THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY
RULE 144A UNDER THE SECURITIES ACT.
6.257% SURPLUS NOTE
December 29, 2004 Amount: $175,000,000.00
For value received, ING USA Annuity and Life Insurance Company, an Iowa
corporation ("Borrower"), promises to pay to the order of ING Life Insurance and
Annuity Company, a Connecticut corporation ("Lender"), the principal sum of One
Hundred Seventy Five Million Dollars ($175,000,000.00) on December 29, 2034 (the
"Scheduled Maturity Date") and to pay interest thereon from the effective date
of this Surplus Note, semiannually in arrears on June 29 and December 29 in each
year, commencing June 29, 2005 (each a "Scheduled Interest Payment Date"), at
the rate of 6.257% per annum, until the principal hereof is paid. The date upon
which any state or federal agency or court obtains an order or grants approval
for the rehabilitation, liquidation, conservation, reorganization, receivership,
dissolution or the commencement of any bankruptcy, insolvency or similar
proceeding of Borrower shall also be deemed to be the Scheduled Maturity Date.
Principal and interest shall be payable on the terms and conditions set out
below.
1. Principal and interest payments shall be payable at the office of Lender in
the city of Hartford, Connecticut, or such other place as Lender shall
designate in writing to Borrower. Payments shall be made in collected and
immediately available funds in lawful money of the United States of
America.
2. Interest on this Surplus Note shall be computed on the basis of a year of
360 days and for the actual number of days elapsed. In any event should a
Scheduled Interest Payment Date or Scheduled Maturity Date fall on a day
other than a Business Day (as hereinafter defined), then such payment of
principal or interest shall be due on the next following day that is a
Business Day, with the same force and effect as if made on the Scheduled
Interest Payment Date or Scheduled Maturity Date hereof, and no additional
interest shall accrue as to such payment for the period after such date;
provided, however, that if such next following day that is a Business Day
shall fall in the next calendar month, then such payment of principal or
interest shall be due on the Business Day immediately preceding such
Scheduled Interest Payment Date or Scheduled Maturity Date. For purposes of
this Surplus Note, "Business Day" means any day other than a Saturday,
Sunday or other day on which commercial banks in New York City are required
by law to close, provided that banking institutions located at the place of
payment designated by Lender are carrying out transactions in U.S. dollars.
3. (a) No principal payment shall be permitted on this Surplus Note unless
such payment has received the prior approval of the Commissioner of
the Iowa Insurance Division (the "Commissioner").
(b) Periodic interest payments shall be paid as required under the terms
of this Surplus Note, subject to the prior approval of the
Commissioner.
88
<Page>
(c) Borrower shall use its best efforts to obtain the approval of the
Commissioner for the payment by Borrower of interest on and principal
of this Surplus Note on the Scheduled Interest Payment Dates or
Scheduled Maturity Date hereof, and, in the event any such approval
has not been obtained for any such payment or any portion thereof at
or prior to the Scheduled Interest Payment Date or Scheduled Maturity
Date hereof, as the case may be, to continue to use its best efforts
to obtain such approval promptly thereafter. Not less than thirty (30)
days prior to each Scheduled Interest Payment Date or Scheduled
Maturity Date hereof (excluding any such Scheduled Maturity Date which
arises as a result of the obtaining of an order or the granting of
approval for the rehabilitation, liquidation, conservation,
reorganization, receivership, dissolution or the commencement of any
bankruptcy, insolvency or similar proceeding of Borrower), Borrower
will seek the approval of the Commissioner to make each payment of
interest on and the principal of this Surplus Note. In the event the
Commissioner does not approve Borrower's request to make an interest
or principal payment as scheduled herein, Borrower shall promptly
notify Lender or any subsequent holder of this Surplus Note thereof.
(d) If the Commissioner does not approve the making of any payment or
portion thereof of principal of or interest on this Surplus Note on
the Scheduled Interest Payment Date or Scheduled Maturity Date hereof,
the Scheduled Interest Payment Date or Scheduled Maturity Date as the
case may be, shall be extended and such payment or any unpaid portion
thereof shall be made by Borrower on the next following Business Day
on which Borrower shall have the approval of the Commissioner to make
such payment or any unpaid portion thereof. Interest will continue to
accrue on any such unpaid principal through the actual date of payment
at the rate of interest stated on the face hereof. Interest will not
accrue on interest with respect to which the Scheduled Interest
Payment Date has been extended, during such period of extension.
(e) If the Commissioner approves the making of a payment of principal
and/or interest in an amount insufficient to satisfy Borrower's
obligations under this Surplus Note and other surplus notes issued on
the Effective Date, payment shall be made on this Surplus Note and
each other surplus note issued on the Effective Date on a pro-rata
basis.
4. Subject to the prior approval of the Commissioner, Borrower may prepay this
Surplus Note in whole on, or within thirty (30) days after, the tenth
anniversary of the execution of this Surplus Note, upon thirty (30) days
written notice to Lender, without premium or penalty, at the principal
amount so to be prepaid, plus accrued interest thereon to the date of such
prepayment.
5. In the event of the dissolution, liquidation, receivership, insolvency or
bankruptcy of Borrower, repayment of principal and payment of interest
under this Surplus Note shall be subordinated to the prior payment of, or
provision for, all liabilities (as reported in the statutory statement of
assets and liabilities) of Borrower, other than debts owed by Borrower to
other holders of surplus notes issued by Borrower, with which this Surplus
Note shall rank pari passu, but shall rank superior to the claim, interest,
and equity of the shares or shareholders of Borrower.
6. No act or failure on the part of Borrower with respect to any of the terms
or provisions hereof shall give Lender any right to declare the unpaid
principal or interest on this Surplus Note to be due and payable
immediately or otherwise than in accordance with the terms and conditions
hereof. However, once payment due hereunder has been approved by the
Commissioner, the payment shall be made when due. If Borrower fails to pay
the full amount of such approved payment on the date such amount is
scheduled to be paid, such approved amount will be immediately payable on
such date without any action on the part of Lender and, to the extent
permitted by applicable law, interest will also accrue on any such approved
but unpaid interest through the actual date of payment at the rate of
interest stated on the face hereof. In the event that Borrower fails to
perform any of its other obligations hereunder, Lender may pursue any
available remedy
89
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to enforce the performance of any provision of this Surplus Note, provided
however, that such remedy shall in no event include the right to declare
this Surplus Note immediately payable. Borrower shall reimburse Lender, in
full, for any reasonable expense incurred by Lender in connection with
enforcing the performance of this Surplus Note, including, but not limited
to, reasonable attorneys' fees and expenses. A delay or omission by Lender
in exercising any right or remedy accruing as a result of Borrower's
failure to perform its obligations hereunder and the continuation thereof
shall not impair such right or remedy or constitute a waiver of or
acquiescence in such non-performance by Borrower. To the extent permitted
by law, no remedy is exclusive of any other remedy and all remedies are
cumulative.
7. Borrower covenants that it shall not consolidate with, or merge into, any
other corporation or convey or transfer its properties, assets and in force
business substantially as an entirety to any person, unless (i) Borrower
provides the holder of the Surplus Note with advance written notice of such
consolidation, merger, conveyance or transfer and a certificate of an
authorized officer of Borrower stating that it has complied with all terms
contained in this Section 7; and (ii) the corporation formed by such
consolidation or into which Borrower is merged or the person which acquires
by conveyance or transfer, the properties, assets and in force business of
Borrower substantially as an entirety shall be a corporation organized and
existing under the laws of the United States of America, any State thereof
or the District of Columbia and shall expressly assume, in a manner
satisfactory to the holder of this Surplus Note, the due and punctual
payment of the principal of and interest on this Surplus Note in accordance
with its terms and the performance of every covenant of this Surplus Note
on the part of Borrower to be performed or observed. Upon any consolidation
of Borrower with, or merger of Borrower into, any other corporation or any
conveyance or transfer of the properties, assets and in force business of
Borrower substantially as an entirety to any person in accordance with this
Section 7, the successor corporation formed by such consolidation or into
which Borrower is merged or to which such conveyance or transfer is made
shall succeed to, and be substituted for, and may exercise every right and
power of, Borrower under this Surplus Note, with the same effect as if such
successor corporation had been named as Borrower herein.
8. Borrower covenants that, in the event Lender or any subsequent holder of
this Surplus Note desires to sell, transfer or convey its interest in this
Surplus Note, Borrower will fully cooperate and promptly take all
reasonable measures to facilitate such sale, transfer or conveyance,
including, but not limited to, providing the information referenced in Rule
144A(d)(4), as promulgated by the Securities and Exchange Commission under
the Securities Act of 1933, as amended. THIS SURPLUS NOTE HAS BEEN ISSUED
IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND MAY
NOT BE REOFFERED, RESOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. THE PURCHASER OF THIS
SURPLUS NOTE IS HEREBY NOTIFIED THAT THE SELLER OF THIS SURPLUS NOTE MAY BE
RELYING ON THE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.
9. No amendments shall be made to this Surplus Note without the consent of
Borrower and Lender, and the prior approval of the Commissioner.
10. Except for the conditions described in subsections (a) and (b) of Section 3
above, no provision of this Surplus Note shall alter or impair the
obligation of Borrower, which is absolute and unconditional, to pay the
principal of, and interest on, this Surplus Note at the times, place and
rate, and in the coin or currency, herein prescribed. No provision of this
Surplus Note shall extinguish the ultimate liability of Borrower for the
payment of principal and interest hereunder.
11. This Surplus Note shall be governed by the laws of the State of Iowa and
shall be effective as of December 29, 2004.
90
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IN WITNESS WHEREOF, Borrower has caused this Surplus Note to be executed in its
name and attested to by its authorized officer and its corporate seal to be
hereunder affixed, all as of the date first written above.
ING USA Annuity and Life Insurance Company
By: /s/ David S. Pendergrass
------------------------
David S. Pendergrass
Vice President and Treasurer
ATTEST:/s/ Spencer Shell
-----------------
91
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EXHIBIT 31.1 Cert
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this annual report on Form 10-K of ING Life Insurance and
Annuity Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 28, 2005
---------------------------
By /s/ David A. Wheat
----------------------------------------------
David A. Wheat
Director, Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
92
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EXHIBIT 31.2 Cert
CERTIFICATION
I, Brian D. Comer, certify that:
2. I have reviewed this annual report on Form 10-K of ING Life Insurance and
Annuity Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 28, 2005
---------------------------
By /s/ Brian D. Comer
---------------------------------------------------
Brian D. Comer
President
(Duly Authorized Officer and Principal Officer)
93
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EXHIBIT 32.1 Cert
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of ING Life
Insurance and Annuity Company (the "Company") hereby certifies that, to the
officer's knowledge, the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 (the "Report") fully complies with the requirements of Section
13 or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date March 28, 2005 By /s/ David A. Wheat
-------------- ------------------
David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
94
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EXHIBIT 32.2 Cert
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of ING Life
Insurance and Annuity Company (the "Company") hereby certifies that, to the
officer's knowledge, the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 (the "Report") fully complies with the requirements of Section
13 or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
Date March 28, 2005 By /s/ Brian D. Comer
-------------- ------------------
Brian D. Comer
President
95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
Not Applicable
Item 15. Indemnification of Directors and Officers
Section 33-779 of the Connecticut General Statutes ("CGS") provides that a
corporation may provide indemnification of or advance expenses to a director,
officer, employee or agent only as permitted by Sections 33-770 to 33-778,
inclusive, of the Connecticut General Statutes, as amended by Sections 12 to 20,
inclusive, of the CGS. Reference is hereby made to Section 33-771(e) of the CGS
regarding indemnification of directors and Section 33-776(d) of CGS regarding
indemnification of officers, employees and agents of Connecticut corporations.
These statutes provide in general that Connecticut corporations incorporated
prior to January 1, 1997 shall, except to the extent that their certificate of
incorporation expressly provides otherwise, indemnify their directors, officers,
employees and agents against "liability" (defined as the obligation to pay a
judgment, settlement, penalty, fine, including an excise tax assessed with
respect to an employee benefit plan, or reasonable expenses incurred with
respect to a proceeding) when (1) a determination is made pursuant to Section
33-775 that the party seeking indemnification has met the standard of conduct
set forth in Section 33-771 or (2) a court has determined that indemnification
is appropriate pursuant to Section 33-774. Under Section 33-775, the
determination of and the authorization for indemnification are made (a) by the
disinterested directors, as defined in Section 33-770(3); (b) by special
counsel; (c) by the shareholders; or (d) in the case of indemnification of an
officer, agent or employee of the corporation, by the general counsel of the
corporation or such other officer(s) as the board of directors may specify.
Also, Section 33-772 with Section 33-776 provide that a corporation shall
indemnify an individual who was wholly successful on the merits or otherwise
against reasonable expenses incurred by him in connection with a proceeding to
which he was a party because he is or was a director, officer, employee, or
agent of the corporation. Pursuant to Section 33-771(d), in the case of a
proceeding by or in the right of the corporation or with respect to conduct for
which the director, officer, agent or employee was adjudged liable on the basis
that he received a financial benefit to which he was not entitled,
indemnification is limited to reasonable expenses incurred in connection with
the proceeding against the corporation to which the individual was named a
party.
The statute does specifically authorize a corporation to procure indemnification
insurance on behalf of an individual who was a director, officer, employee or
agent of the corporation. Consistent with the statute, ING Groep N.V. maintains
an umbrella insurance policy with an international insurer to cover errors and
omissions, directors and officers, employment practices, fiduciary and fidelity.
The policy covers ING Groep N.V. and any company in which ING Groep N.V. has
controlling interest of 50% or more. This would encompass the principal
underwriter as well as the depositor.
Section 20 of the ING Financial Advisers, LLC Limited Liability Company
Agreement provides that ING Financial Advisers, LLC will indemnify certain
persons against any loss, damage, claim or expenses (including legal fees)
incurred by such person if he is made a party or is threatened to be made a
party to a suit or proceeding because he was a member, officer, director,
employee or agent of ING Financial Advisers, LLC, as long as he acted in good
faith on behalf of ING Financial Advisers, LLC and in a manner reasonably
believed to be within the scope of his authority. An additional condition
requires that no person shall be entitled to indemnity if his loss, damage,
claim or expense was incurred by reason of his gross negligence or willful
misconduct. This indemnity provision is authorized by and is consistent with
Title 8, Section 145 of the General Corporation Law of the State of Delaware.
Item 16. Exhibits
Exhibits:
(1) Underwriting Agreement dated November 17, 2000 between Aetna
Life Insurance and Annuity Company and Aetna Investment
Services, LLC o Incorporated by reference to Pre-Effective
Amendment No. 1 to Registration Statement on Form N-4 (File No.
33-49176), as filed on November 30, 2000.
(4)(a) Group Annuity Contract (Form No. G1-MGA-95) o Incorporated
by reference to the Registration Statement on Form S-2
(File No. 33-64331), as filed on November 16, 1995.
(4)(b) Individual Annuity Contract (Form No. I1-MGA-95) o
Incorporated by reference to Pre-Effective Amendment No. 2
to Registration Statement on Form S-2 (File No. 33-64331),
as filed on January 17, 1996.
(4)(c) Certificate (G1CC-MGA-95) to Group Annuity Contract Form
No. G1-MGA-95 o Incorporated by reference to Post-Effective
Amendment No. 3 to Registration Statement on Form S-2
(File No. 33-64331), as filed on November 24, 1997.
(4)(d) Endorsement (E1-MGAIRA-95-2) to Group Annuity Contract Form
No. G1-MGA-95 and Certificate No. G1CC-MGA-95 o Incorporated
by reference to Post-Effective Amendment No. 3 to Registration
Statement on Form S-2 (File No. 33-64331), as filed on November
24, 1997.
(4)(e) Endorsement (E1-MGAROTH-97) to Group Annuity Contract Form No.
G1-MGA-95 and Certificate No. G1CC-MGA-95 o Incorporated by
reference to Post-Effective Amendment No. 3 to Registration
Statement on Form S-2 (File No. 33-64331), as filed on November
24, 1997.
(4)(f) Endorsement ENMCHGI(5/02) (Name Change) o Incorporated by
reference to the Registration Statement on Form S-2 (File
No. 333-86276), as filed on April 15, 2002.
(5) Opinion as to Legality
(10) Material contracts are listed under Item 14(a)10 in the
Company's Form 10-K for the fiscal year ended December 31,
2004 (File No. 33-23376), as filed with the commission on
March 31, 2005. Each of the Exhibits so listed is
incorporated by reference as indicated in the Form 10-K
(13) ING Life Insurance and Annuity Company Form 10-K for the fiscal
year ended December 31, 2004
(23)(a) Consent of Independent Registered Public Accounting Firm
(23)(b) Consent of Legal Counsel (included in Exhibit (5) above)
(24)(a) Powers of Attorney o Incorporated herein by reference to
Registration Statement on Form S-2 for ING Insurance Company
of America Guaranteed Account, as filed with the Securities
and Exchange Commission on April 7, 2005 (File No. 333-49581).
(24)(b) Certificate of Resolution Authorizing Signature by Power
of Attorney o Incorporated by reference to Post-Effective
Amendment No. 5 to Registration Statement on Form N-4
(File No. 33-75986), as filed on April 12, 1996.
Exhibits other than these listed are omitted because they are not required or
are not applicable.
Item 17. Undertakings
The undersigned registrant hereby undertakes as follows, pursuant to Item 512 of
Regulation S-K:
(a) Rule 415 offerings:
(1) To file, during any period in which offers or sales of the
registered securities are being made, a post-effective
amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material changes to
such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(h) Request for Acceleration of Effective Date:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
Item 18. Financial Statements and Schedules
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Post-Effective
Amendment No. 3 to the Registration Statement on Form S-2 (File No. 333-86276)
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of West Chester, Commonwealth of Pennsylvania, on this 7th day of April,
2005.
By: ING LIFE INSURANCE AND ANNUITY COMPANY
(REGISTRANT)
By: Brian D. Comer*
---------------------
Brian D. Comer
President
By: /s/ Linda E. Senker
----------------------
Linda E. Senker
Counsel of Registrant
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
Brian D. Comer* Director and President )
Brian D. Comer (principal executive officer) )
)
Thomas J. McInerney* Director ) April
Thomas J. McInerney ) 7, 2005
)
Kathleen A. Murphy* Director )
Kathleen A. Murphy )
)
Jacques de Vaucleroy* Director )
Jacques de Vaucleroy )
)
David A Wheat* Director and Chief Financial Officer )
David A. Wheat )
)
Roger W. Fisher* Chief Accounting Officer )
Roger W. Fisher )
By: /s/ Linda E. Senker
---------------------
Linda E. Senker
Counsel of Registrant
* Executed by Linda E. Senker on behalf of those indicated pursuant to
Power of Attorney.
EXHIBIT INDEX
Exhibit No. Exhibit
16(5) Opinion re: Legality EX-5
16(13) ING Life Insurance and Annuity Company Form 10-K
for the fiscal year ended December 31, 2004 **
16(23)(a) Consent of Independent Registered Public Accounting Firm EX-23.A
16(23)(b) Consent of Legal Counsel *
*Included in Exhibit 16(5) above
**Module reference ILIAC_10K-1204